Month: February 2014

Interesting Week

Just went to Latvia for a short getaway since it’s reading week in London. I was planning to post an article about economic moats but I have shelved it for the time being given that I have discovered an interesting company to look at. As of now, I would say that it is looking pretty promising and might be the next “Silverlake” in the fund.

One interesting read would be Amcor outlining $2 billion plans of M&As: Click Here. Given their interest in M&As with companies that does packagings, it would serve as a good catalyst for an undervalued company like New Toyo to actually realise its true value. It is actually the main reason that I have not looked at New Toyo, despite it being undervalued would be because of the lack of catalyst. Given the trading volumes in the Singapore Markets, it is really hard for undervalued companies to realise true value without a catalyst.

Investment Indicators – For a sell

In investing, I have always found it much easier to buy a stock than determine when to sell it. When buying, it is just determining if the stock is undervalued, whether you like the business, whether you believe in the management. However, when it comes to selling, it’s always much more difficult. You ask yourself if it is the correct timing, if the company is really at its fair value, whether it will still continue climbing and there are the emotions of having to cut it off (especially if that was one of your first stocks). By deriving an intrinsic value for the company, I believe it is a good way to put a marker to indicate that it is time to actually sell the company. It also makes it more emotionless in some ways. Of course, everyone have various methodologies in coming up with an intrinsic value with all sorts of models. However, what I wanted to share is a list of reasons indicating a time to sell (even if it has yet to reach fair value) from a business school in USA. Over the course of my investing experience, I have added my own comments to it.

1) When the FCF has been negative for a couple of quarters. Having constant negative FCF for quite some time is a huge drain on cash reserves and we all know that cash is king. One example would be like QAF, a stock I owned previously but sold it off due to a couple of quarters constantly showing negative FCF.

2) A stock’s price rising so quickly in a short period of time, however, at the same time we have to evaluate the reasons for the increase in stock price. I would say an increase in 10% – 20% over a matter of days is a good time to sell. Some case studies:

  • King Wan’s initial spike in prices was due to a report by DMG with regards to the sale of the Thai Associates. (No reason to sell)
  • ComfortDelgro’s spike of 10% because of the purchase of a bus company in Australia. (I did not sell then when prices shot to $2.19, partly due to greed. On hindsight, I guess I should have evaluate exactly how much the acquisition would have improved ComfortDelGro’s bottom line profits)

  • Guocoleisure spike of approximately 10% due to the Quek family planning to take GuocoGroup (listed in HK) private. (Reason to sell. There is no explanation for why the parent company being taken private would actually affect its subsidiary in Singapore)

3) When you can improve your profits substantially. Such as if we are able to replace a stock that only has 10% upside to reach its fair value as compared to a company which still has 50% upside before hitting fair value. However, I feel this is subjected to the amount of cash available.

4) When the core business model of a company has changed. If the company we initially bought it for has started to deviate from its core business, it’s definitely time to evaluate the company again especially since they may not have the proper expertise in that area. One good way of evaluating would be talking to people within the industry, to understand the economic moats, barriers to entries, their opinions of the switch etc.

5) Stock has risen so much that it represents a high proportion of your portfolio and is well past its limit positions one sets for their portfolio. In my opinion this is something more relevant to portfolio management (asset allocation) something that I am not that knowledgeable yet as of now. Hence, I’m just listing it as a point here but do not have my comments about it.

These listed reasons are not hard and fast rules but just a form of guideline I have found it useful for myself. There possibly could be more reasons one can come up with, but I feel these would suffice. In my opinion, investing is really a simple art, just that some try too hard and overcomplicate it. 

King Wan Corporation (3Q Update)

With the recent release in King Wan’s 3Q results, I thought I pen some thoughts down. With regards to King Wan, it is a strong company for the following few reasons:

  • Strong balance sheet, with minimal short term debt of approximately 50% of their current cash & cash equivalents and no long term debts
  • Strong core business with an healthy order book of $166mil with completion dates lasting until 2017
  • Strong management shown by how they are able to take advantages of opportunities that comes they way. (e.g. purchase of the vessel chartering business, which has actually offset some of the negative contributions from the Group’s property development segment)
  • While many might disagree, I like it when a company is still controlled by family members

However, what resulted in the initial spike in prices in 2013 would be due to the sale of the Thai Associates to KTIS. With the recent situation in Thailand, it has resulted in KingWan’s price to be slight depressed within the range of $0.27 to $0.285. Nearing the contracted deadline in August, I believe that if the listing of KTIS does not go through, KingWan’s price might take quite a hit. I have emailed their IR of what the company plans to do if such an event occurs, the reply is as shown below.

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Nothing really new to gleam from this email, more of just an update of what we already know.

Overall, KingWan is definitely a good company to have on our portfolios with a good dividend yield. Furthermore, with the strong relations they have with KTIS, I believe that even if the sale does fall through, a new one might be drafted. The only question I guess would be how long does it take, translating to the opportunity costs incurred from waiting. Being a value investor I would continue holding onto the company afterall the value of the company is indeed there. However, it might just be my own thinking and might be biased having invested in the company when it was just trading at $0.19. Would love to hear the views of fellow investors out there.

ComfortDelGro Corporation

Recently, with the share run up to the highs of approximately $2, I have decided it was time to fully divest from ComfortDelGro. The divestment was around early February at $2.01. Here’s the reason for divestment:

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Looking at the P&L, we can see that the company has been able to grow its revenue steadily for the past 5 years. However, we should note that the operating expenses have been growing steadily as well. Following the news on ComfortDelGro, we would notice that the increase in staff cost is most significant. Recently, this has increased by 11.3%, or $123.4 million. Furthermore, looking at the net profit margins, we can see that over the past 5 years, it has been declining. Going forward, with the challenges faced net profit margins may take another dip or stay relatively constant.

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With the financial ratios, we can see that management has been able to constantly increase the EPS every year, increasing shareholder’s returns yearly. However, there has not been growth in the net earnings year on year. Furthermore, looking at both ROA and ROE figures, it has declined slightly despite the increase in EPS, showing that the growth in EPS is slower than that of growth in assets and equity.

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Valuations wise, we see that the FCF/EV or FCF/Market Cap is roughly 4%. This yield compared to the US Treasury 30Y and US Corporate Bond Index yield of 3.70% and 3.07% respectively, shows that ComfortDelGro is nearing its fair value. Doing backwards calculation, with the range of yields, it places the fair value within $2.21 to $2.73. ComfortDelGro compared to its peers in Singapore namely SMRT is definitely a much stronger player, with its approximately 50% market share of the taxis and exposure to transport systems overseas. However, given foreseeable challenges in the near future and the company trading near fair value, I have decided that it was time to divest from ComfortDelGro.

SG Value Fund 2013 Full Year Review

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Initial Net Asset Value (per unit): $10,000

Net Asset Value as of January 2014 (per unit): $11,920

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For the Financial Year 2013, the fund returned 10.25%. While over the past two years, a theoretical $10,000 investment would have grown to $11,920, a 2-year annualised return rate of 9.6%, a cumulative return of 19.2%.

Despite the increase in value of the fund, the fund today remains undervalued. Going forward, repositioning of the fund is necessary – cashing out on stocks which have reached fair value.

Overall, 2013 has been an eventful year where we see markets improving from the Global Financial Crisis (Dow Jones/S&P500/NASDAQ reaching new highs). However, looking at PMI figures and other indicators, it does not truly support an economy that has fully recovered. Furthermore, with the recent gradual tapering by the FEDs and growth contraction in the China economy, we see money leaving emerging markets, moving back to the developed countries and into bonds, where investors are seeking safe haven. Going forward, I still see potential in the Asia market, however, I am in no hurry of deploying cash unless I find an attractive stock.

Free Cash Flow Yield

In value investing, everyone has their own methodology in deriving an intrinsic value for a company from DCF analysis to NAV calculations. What I personally use is FCF yield and will be talking about how one can use it. Moreover, if one analyses many of the superinvestors (Warren Buffett, Peter Lynch, Ken Fisher etc.) methodologies, many uses FCF yield as a key factor in analyzing a stock.

FCF is simply Net Cash Provided by Operating Activities minus Capital Expenditures. Theoretically, FCF is the amount of money a shareholder can take out of the company after paying for the essentials of the core business. Hence, FCF yield essentially is the yield for every dollar invested in the company

There are two ways of calculating FCF yield,

  1. FCF/Market Cap
  2. FCF/Enterprise Value

Personally, I prefer using the latter as Enterprise Value (EV) as it is a more accurate representation of a firm’s value (the theoretical takeover price). Furthermore, using EV, it punishes companies which takes on huge amounts of debt and rewards companies that are in a net cash position.

There are many ways of calculating EV, but I would just be focusing on the following two,

  1. Market Cap + Total Debt – Total Cash & Cash Equivalents
  2. Market Cap + Total Debt – Excess Cash

The first equation is pretty straightforward to understand. While for the latter, the key point would be excess cash. By deducting for the total cash & cash equivalents, it can lead to miscalculations as it is not realistic to assume that the company does not require to hold any cash to operate its core business. To calculate excess cash is as such,

  1. If Total Current Assets minus Total Cash & Cash Equivalents > Total Current Liabilities, it means that the amount of non-cash current assets is sufficient in settling for the current liabilities. Hence, excess cash in this scenario would be the total cash & cash equivalents.
  2. If Total Current Assets minus Total Cash & Cash Equivalents < Total Current Liabilities, it means that the amount of non-cash current assets is insufficient in settling for the current liabilities. Hence, excess cash in this scenario would be the total cash & cash equivalents minus the difference between the current liabilities and non-cash current assets.

Whether one uses the first or second method of calculating EV, is subjected to one’s discretion. This is because there are some companies (e.g. construction industry) that need to have a bonding company that requires them to hold a certain amount of cash on their balance sheets, whereas some might not. One could drop an email to the company’s IR to request for more information. Hence, the calculation of EV is pretty subjective.

After calculating the FCF yield, we compare it with the US corporate bond yield or 30-year treasury yield (data is all retrievable from Bloomberg markets website). The two bond yields represents what is the fair yield in the economy if we were to consider investing in assets deemed as almost no risk. FCF yield is comparable to how one uses the P/E ratio in valuing a company – difference is that FCF yield provides a better measure of a company’s performance.

Note: Using FCF yield alone to determine if a company is undervalued to invest in is insufficient. One still has to do the fundamental and qualitative analysis of a company to determine if the company is healthy and assess any potential risk it faces. FCF yield is only used as one of the indicators and a way in determining the fair value for a marker to selling.

Hope this is useful 🙂

Welcome to SG Value Fund

I started this blog as a platform to not only allow me to chronicle my investing journey, how it has evolved over the years – allowing me to reflect on my investment’s philosophy and mistakes. But more importantly, create a platform to share such experiences with others, which would definitely help prevent others from committing the same mistakes. After all, failure is a better teacher than success. Hence, what better way to expedite our learning through the mistakes of others.

Going forward, I will be posting up articles about the following topics:

  • Updates to my personal fund
  • Equity Research
  • Company Analysis
  • Quotes/Personal experiences etc.

Some really useful links I use (I owe a huge amount of my success to these sites).