Using the DCF

Dedicated to farnaway:

Using the same stimulation done by Wallstraits on GHL.

First of all here is Wallstraits table again.



And here is their interpretation of the table:

• Given these assumptions (you may want to recalculate this simulation using your own cash flow, growth and discount rate assumptions), GHL’s intrinsic business value based on discounted cash flow expected to be produced from 2003 to 2012 is RM 74.5, which is approximately a 72% discount to the current market share price of around RM 0.21.

The total discounted value is calculated by adding all the sum of the DV from 2003 to 2012. Which they get a value of 74.5 sen per share. And when one compare this value to the market price of GHL in May 2003 of 21 sen, one would see that it is trading at a discount of 72%.

And from a Price earnings perspective, this is what Wallstraits had to say...

• If GHL does achieve cash flow per share of 8.3 sen in 2007 (5-years forward), and at that time GHL is valued by the market at 10-times cash flow, the share price would need to appreciate from 21 sen today to 83 sen, or an appreciation of nearly 300% in 5-years. Of course, GHL has only been listed on Mesdaq for a month, so our assumptions will likely need refinement as the quarters and years pass.

Sounds fair, right?

now GHL latest quarterly earnings announced in Feb saw it reporting a net profit of 11.656 million. Depreciation was reported to be 6.368 million. Giving GHL a free cash flow of 18.024 million. And if one continued to use Wallstrait numbers, ie number of GHL shares at 250 million, this would equate to a free cash flow of 7.2 sen. And what was Wallstraits numbers? 5.8 sen. How?

And to complicate matters, GHL had a series of 1 for 4 bonus issue and also a 3 for 5 rights issue. All in which bloated the current number of shares to 551.480 million shares. And based on the enlarged share base, GHL free cash flow should be 3.3 sen for its fiscal year 2005.

Now, if i redo the whole table... using 10 million as the starting total cash flow and based on 551.480 million shares, the starting cash flow should be 1.8 sen.

And here is how the table should look like.



Let's look at the 2005 results. The stimulation showed cash flow per share to be at 2.59 sen. Actual? 3.3 sen.

Here's more intresting stuff... create a same table under Excel and play with some numbers...

The above was set using the initial cash flow at 5 sen. End result? total discounted cash flow f rom 2003 to 2012 would work out to 91.85 sen. (compare to 74.5). And at 2007, total cash flow is at 10.4 sen. (compare to wallstraits 8.3 sen).

Now let me change the starting point to 3 sen. And the below is the end result.

Total cash flow from 2003 to 2012 equals 55.11 (compare t0 74.5 sen) and 2007 cash flow per share is at 6.22 sen (compare to 8,3 sen). See how much difference it makes by changing the starting terminal point?

Ok. How about changing the annual growth rate? remember Wallstraits used 20% per annum.

Here is how the table would look like using a 25% growth rate and using 4 sen as the intial starting point.

The total discounted cash flow from 2003 to 2012 would now total 92.74 (compare to 74.5) and 2007 cash flow would equal 9.77 sen (compare to 8.3 sen)

Or how about just a 12% per annum growth rate instead of 20%?

End result? Total discounted cash flow would now total 51.03 sen (compare to 74.5) and 2007 cash flow per share is only 6.29 sen (compare to 8.3 sen)

See how complicated things get?

Ahhh... I could continue by changing the discounted factor... and the end result would differ greatly.

Hope this posting helps!

Cheers!

DCF (Discounted Cash Flow) example

Dedicated to Anon who asked about DCF.

I remembered this Wallstraits write-up on GHL Systems way back in May 2003.

Here is a snippet of what they wrote back then.

• Valuation Simulation This is not a forecast or recommendation
  GHL is likely to experience close to 100% growth again in the current year, 2003, and then growth will slow, we will assume to a sustainable 20% annual rate over the next nine years in this simulation. Current year (2003) full-year net cash flow from operations is estimated at RM 0.04 per share (adding RM 3.5m depreciation back to RM 6.5m net earnings-- RM 10m CF / 250m shares = RM 0.04). We will also assume a 5% discount rate (US Treasury risk free rate) and no terminal value of the business after year 10.

• Given these assumptions (you may want to recalculate this simulation using your own cash flow, growth and discount rate assumptions), GHL’s intrinsic business value based on discounted cash flow expected to be produced from 2003 to 2012 is RM 74.5, which is approximately a 72% discount to the current market share price of around RM 0.21.
  
  PE check: If GHL does achieve cash flow per share of 8.3 sen in 2007 (5-years forward), and at that time GHL is valued by the market at 10-times cash flow, the share price would need to appreciate from 21 sen today to 83 sen, or an appreciation of nearly 300% in 5-years. Of course, GHL has only been listed on Mesdaq for a month, so our assumptions will likely need refinement as the quarters and years pass.

Firstly, do remember that this was a stimulation only done by Wallstraits.com.

Anyway, I reckon that what interests you is how they did the cash flow table. Below is their table again:

Ok let me share with you my understanding of what is being done by Wallstraits.

1. Cash Flow.

First of all, for 2003, that 4.0 sen cash flow is derived from the following manner according to Wallstraits.

• Current year (2003) full-year net cash flow from operations is estimated at RM 0.04 per share (adding RM 3.5m depreciation back to RM 6.5m net earnings-- RM 10m CF / 250m shares = RM 0.04).

So they added the 3.5 million depreciation back to their projected earnings of 6.5 million. Which will equal to 10 million. Divide that by 250 million shares, you would get a cash flow per share of 4 sen for 2003.

(What could go wrong here? The projected earnings of 6.5 million. Just for the record GHL did about 6.0 million (see here ))

2. DF or Discount Factor is assumed at 5%.

So a 5% discount of 1 would equal 0.95

(So far, a 5% discount factor still seems to be fair... but if the interest rates were to increase some more... it would disrupt the whole table)

3. DV or Discounted value

The discounted Value = 4.0 x 0.95 = 3.80

Next column. We need to remember the next assumption made by Wallstraits.

• we will assume to a sustainable 20% annual rate over the next nine years in this simulation.

1. Cash Flow.

In 2003, the calculated cash flow is at 4 sen. A 20% annual growth rate would see the cash flow increase by 4.0 x 20% = 4.8 sen.

2. DF

The discount factor was set at 5%. So the discount factor for 2004 = 0.95 less 5% = 0.91 (rounded up)

3. DV

The DV equals 4.8 * 0.91 = 4.36 (or 4.4 rounded up).

and so on... and so on...

So what could go wrong in these series of calculations?

the starting point of course. The staring point or the initial projected cash flow is utmost important. Put in an optimistic starting value, and you would get a rather optmistic end result.

the annual growth rate. Here Wallstraits assumes a 20% annual growth rate. Try a different growth rate, and you would get a total different value.

the discount rate. here it is assumed to be 5%. what if there is a drastic change in the midst of this time frame?

hope this helps...

cheers!

Reminiscences of a Stock Mumbler: III

The wonders of the press!

Flashback. Aug 19th 2003.

There was this nice little article written on the Edge: Rohas-Euco starts second stage of water project

Now the picture below depcits what happened. The circle dentoes the time of the article. See how the stock went zoom, zooming after the article was written?

And the following picture also...

Which only prompted the stock getting ze UMA (UNUSUAL MARKET ACTIVITY) thingy!

• We draw your attention to the sharp increase in price in your Company's shares today.In accordance with paragraph 9.11 of the Exchange's Corporate Disclosure Policy on Response To Unusual Market Activity, you are requested to furnish the Exchange with an announcement for public release after a due enquiry seeking the cause of the unusual market activity in the Company's securities. When considering your response and when making the required announcement, your attention is particularly drawn to the continuing disclosure requirements set out in Chapter 9 of the KLSE's Listing Requirements.

Now what was interesting was the following comments...

• However, there was an article published by The Edge Online on 20th August 2003 titled "Rohas-Euco starts second stage of water project" whereby the content of which is confirmed correct and that the transactions mentioned therein have been disclosed or announced earlier save and except for some clarifications as follows:
  
  (i) the Sungai Selangor Phase 3 (SSP3) project involved the design, engineering, procurement, construction, installation, testing and commissioning of mechanical and electrical works and associated civil works as well as the operations and maintenance as was disclosed and announced earlier on 7th December 2000 and not project management as stated in the article mentioned above,
  
  (ii) as previously announced on 15th August 2003, the formation of the joint-venture with Downer Engineering (M) Sdn. Bhd. ("Downer") is pending finalisation of the terms and conditions of the joint-venture and the execution of the joint-venture agreement by the Parties. It was incorrectly stated in the article that REI has formed a joint-venture with Downer last week.
  
  Save as disclosed herein, the Company is not aware of any rumour or report which contains information which might likely to have an effect on the trading of the Company's securities.

See how nicely the stock profited from the error made in the news article?

And here are some more interesting stuff...

Rohas-Euco was not performing that well... as can be seen in the following two earnings report...

• 28/05/2003 Quarterly rpt 31/3/2003
  14/08/2003 Quarterly rpt 30/6/2003

So in Aug 2003, the Edge comes out with that write-up....

And viola.... here comes the improvement in earnings...

19/11/2003 Quarterly rpt 30/9/2003

However, if one opens the earnings notes, one would notice the following...

Rohas-Euco's turnaround in fortunes was due to profit recognition..... !

• The Company's and Group's revenue for the current quarter have increased by 86% and 151% respectively compared to the preceding quarter. The increase in Company's revenue was mainly attributed to additional orders received for tower supply and the increase in the Group's revenue was mainly attributed to the profit recognition from the water treatment project carried out at Bukit Badong upon completion of Stage 1 works during the quarter.

And needless to say, a couple of quarters later, Rohas loses money again...

4/08/2004 Quarterly rpt 30/6/2004

Company lost 1.356 million for the quarter, and amazingly, if one opens the earnings notes in the above link, one would find this comment, which gives one the impression as if nothing (no losses) had happened....

• During the current quarter under review, the Group recognised a revenue of RM39 million, mainly attributed to the sales of steel lattice tower structures and the revenue recognition from the water treatment plant project carried out at Bukit Badong.

A couple of months later, in Feb 2005, Rohas reported the following earnings.

28/02/2005 Quarterly rpt 31/12/2004

Rohas current quarter showed an incredible good showing!!!! A net profit of 6.870 million was recorded by the company. (WOW... dat's an eps of roughly 10 sen for da quarter!)

And again, if one reads the companies notes, one would find the company's explaination of what is happening is kinda lacking.!

• During the current quarter under review, the Group recognised a revenue of RM52 million, mainly attributed to the sales of steel lattice tower structures and the revenue recognition from the water treatment plant project carried out at Bukit Badong.

Now, despite the good earnings, one gets a mix reaction from them insiders... cos they were selling!

• 22/02/2005 NOTIFICATION PURSUANT TO PARAGRAPH 14.08 OF THE BURSA MALAYSIA SECURITIES BERHAD LISTING REQUIREMENTS ON DEALING IN SECURITIES DURING THE CLOSED PERIOD.
  22/02/2005 NOTIFICATION PURSUANT TO PARAGRAPH 14.08 OF THE BURSA MALAYSIA SECURITIES BERHAD LISTING REQUIREMENTS ON DEALING IN SECURITIES DURING THE CLOSED PERIOD.
  21/02/2005 NOTIFICATION PURSUANT TO PARAGRAPH 14.08 OF THE BURSA MALAYSIA SECURITIES BERHAD LISTING REQUIREMENTS ON DEALING IN SECURITIES DURING THE CLOSED PERIOD.

Company announced huge jump in earnings... but them insiders were selling... makes one wonder what is happening, doesn't it?

Well.. the answer was kinda answered on May 2005 when Rohas reported its next Quarterly earnings.

Rohas managed only a net profit of 1.512 million, which was down significantly from the net profit of its questionable 6.87 million announced on Feb 2005. Ahem! Isn't it a wonder why them insiders were disposing their shares?

Anyway on June 14th 2005, there was another article written on the Edge: Rohas-Euco to boost exports

• Rohas-Euco Industries Bhd, a giant local provider of transmission tower steel lattice structures and telecommunication industry, targets to boost its contribution from exports to 60% this year from 50%.

Hmmm... another optimistic write-up on Rohas....

And the picture below shows the market reaction to the news... the lower circle indicating when the stock was written ... and the upper circle showed how high the stock went zoom, zooming....

how nice, eh?

perhaps I should forward my portfolio to our daily financial news... :p

Where Did Maggie get her Sauce?

Here is a snippet from a news posted on the Star newspaper yesterday.

• KUALA LUMPUR: Former Singapore prime minister Goh Chok Tong had, in 2002, expressed his support for a bridge to replace the Causeway.
  
  In a letter to Tun Dr Mahathir Mohamad on April 11, he said:
  
  “Between the new bridge to replace the entire Causeway, and one to replace just the Malaysian side of the Causeway, I like the former better.

Just imagine if that news report was made in the following.

• KUALA LUMPUR: It is believed that Former Singapore prime minister Goh Chok Tong had, in 2002, expressed his support for a bridge to replace the Causeway.
  
  According to sources, a letter was send to Tun Dr Mahathir Mohamad on April 11, and it was understood that he said:
  
  “Between the new bridge to replace the entire Causeway, and one to replace just the Malaysian side of the Causeway, I like the former better.

How?

Do you reckon that such news reporting is acceptable?

It is believed.

Yeah dude.... just who is believing what?

And according to sources. What sources? The Ah Pek could be a source. The Ah So could also be a source. The Mak Cik at the cafeteria could also be a source. The guy in the toilet could also be a source. So could the jaga kereta boy, he too could be a source!

How? If it is not acceptable in our daily news, why is it then acceptable in our financial news?

Now when we reads in the financial news the phrase according to sources, shouldn't we realise that such financial reporting simply isn't acceptable. And worse still, there are some who are willing to take a punt in the market based on such reporting.

Yup, does it make sense to put money at risk based on reports when the sources could be anyone?!

So who is them sources?

Do they really exist or....

Or perhaps it could even be Ms. Maggie and her famous sauces.

Now is it logical that the market is made and dictated by this infamous Ms.Maggie?

Flashback...... Feb 12 2005.

• Tradewinds breaks six-year losing streak
  
  BY JOSE BARROCK
  TRADEWINDS Corp Bhd (formerly known as Pernas International Holdings Bhd), it is believed, will report profits of about RM100mil for FY04. This represents a marked improvement, breaking a six-year losing streak.
  
  ( it is believed?? Hmm.. is this wonderful financial reporting or what??? )
  
  The company is expected to announce its results at the end of the month.
  
  “Tradewinds (Corp) has turned around significantly. It made about RM100mil profit after incurring losses last year. Debt too has been slashed considerably,” says a source.
  
  (Ahhh.... ladies and gentleman... pak cik and mak cik.... ah pek and ah so.... introducing...... Ms.Maggie and her Sauce!!!...... now Tradewinds in only expected to announce its earnings at the end of the month.... soooooo.... why and how can this Ms.Maggie is so resourceful that she knew that Tradewinds MADE ABOUT rm100 mil profit? Ahemm... either way... how can? If it is true... then issit insider info ka? If false... then... pure financial gossiping??? )
  
  For the financial year ended December 2003, Tradewinds Corp suffered a net loss of RM73.7mil from RM1.1bil in sales. But the signs of improvement were already evident from the first nine months performance of the company. For the nine months ended September 2004, the company - largely involved in the hotel business, property development and plantations - posted a net profit of RM54.2mil on the back of RM938.5mil in revenue.
  
  Sources say both the plantations and sugar businesses have lent a boost to the company’s earnings. (This one chili sauce kah or sweet sour sauce?)
  
  Tradewinds Corp controls as much as 53% of Tradewinds (Malaysia) Bhd, a company that owns Central Sugar Refinery Sdn Bhd, which controls as much as 40% of Malaysia’s RM1.5bil sugar market.
  
  In the future, more can be expected from Tradewinds Malaysia as the company just strengthened its position in the sugar business via the acquisition of Gula Padang Terap Sdn Bhd, from among others Tan Sri Robert Kuok Hock Nien’s PPB Group Bhd, for RM188mil.
  
  Tradewinds Corp’s hotel business, it is understood has just about broken even, but the prospects seem promising. “There are a lot of improvements ... some of the loss-making hotels have turned around. The Mutiara Pedu (Golf and Lake Resort) in Kedah and the Hilton Batang Ai (Longhouse Resort in Sarawak) have also made progress, things are looking better for the group,” the source adds. The two hotels were previously up for sale with a price tag of around RM100mil. (Elo world... what is being understood here? huh? .... and gee.... I wonder what sauce did Ms. Maggie add? Black sauce kah? Or issit oyster sauce?)
  
  Tradewinds Corp has managed to cut its debt from RM2.5bil in 2003 to the region of RM1.2bil now which will undoubtedly reduce its finance cost burden.
  
  Year to date, Tradewinds shares have gained 11 sen, having reached a 52-week high of 78.5 sen in late January this year. The counter ended trading on Tuesday at 76 sen.

Let's do some digging. Tradewinds last reported quarterly earnings was on 30th Nov 2004. And this is what the company management said in its notes.

• But the signs of improvement were already evident from the first nine months performance of the company. For the nine months ended September 2004, the company - largely involved in the hotel business, property development and plantations - posted a net profit of RM54.2mil on the back of RM938.5mil in revenue.

Hmm... so TWSCorp has indeed managed to post a net profit of 54.2 mil, but this is not that accurate as this earnings performance was aided by an extra-ordinary gain of 25.991 mil as stated in TWS financial report.

Anyway.... one just gotta wonder.... Tradewinds first 3 quarters net profit only totals 54.2 million.

So this incredible Ms. Maggie is suggesting that Tradewinds makes a whopping net profit of 100 million for its current fiscal year.... which means Tradewinds will make a whopping 45.8 million (100 -54.2 ) for the last quarter of the year. (ahhh... would it be wrong for me to suggest that ze whopping huge profit is used as a catalyst to seduce punters to whack this bugger stock up?)

Well.... that's pretty optimistic if you ask me!

• Tradewinds Corp has managed to cut its debt from RM2.5bil in 2003 to the region of RM1.2bil now which will undoubtedly reduce its finance cost burden.

Debts only 1.2 billion? Errr.... correct ka? Here is the snapshot of Tradewinds balance sheet then.

Hmmm.... if my eyes do not fail me...it states that Tradewinds short term borrowings is some 873 million. Bonds and Long term borrowings is at 1.021 billion. Which means total debts totals some 1.894 million.

So I really wonder if this is a simple innocent reporting mistake.

Or perhaps this is ze handywork of Ms. Maggie?!

Doesn't one wonder how and what sauce Ms. Maggie used to cook the following statement: Tradewinds Corp has managed to cut its debt from RM2.5bil in 2003 to the region of RM1.2bil now which will undoubtedly reduce its finance cost burden.

How?

Anywayyyyy....... Tradewinds announced its 2004 Q4 quarterly earnings on 25th Feb 2005...

And how did Tradewinds do? It lost 1.746 million for its 2004 Q4 earnings. Ahem!!

And only ended its fiscal year making some 52.504 million.

And 52.504 million is a huge cry from a profit of 100 million as suggested by the reporter and Ms. Maggie!!!!!

And now comes the very interesting point.

AHem....

On 25th Feb 2006, the Star had a news clip stating the following:

• Tradewinds shares have been trading below par value of RM1 for almost three years. The company’s stock hit a 52-week high of 80.5 sen on Feb 14 this year, after touching its low of 43 sen on Aug 20, 2004. It closed at 63 sen on Thursday.

Do you know what is so interesting about that above statement in red?

Well Jose Barrock wrote that article on Saturday, Feb 12th... now check this out.... before that incredible Ms.Maggie and her sauce article was written... TWSCorp (Tradewinds) was a stock trading around the 77 sen.. and the minute Ms. Maggie showed up... TWSCorp went zoom, zooming up some 4.8% on Feb 14th.

What an incredible lovely Valentine present from Ms. Maggie to the market!!!

Anywayyyyyyyyyyyyyyyy....... after TWScorp hitting a 52-week high on the next trading day, Feb 14th 2005...... 8 trading days later... on Feb 24th, TWSCorp closed at 63 sen!!!!

Well... doesn't it sound like Jack went up the hill sooooo fast that Jack came tumbling down there after?!

Sooooo...... see how great and POWDERful Ms.Maggie and her sauce is?

Just splatter the business news article with all the according to Ms.Maggie or her sauces.... and watch the wonderful chain effect(s) on the stock!

(ahh... sometimes.... this Ms.Maggie is soooooo unpredictable.... sometimes she gives ze market sweet sauce... but sometimes... it is sweet and sour.... and sometimes it is red hot chili sauce!... ho ho ho!!!)

Now..... aren't we soooooooooooooooo proud of our financial news?

I am!

But then... there are many who just would not agree and could not even be bothered with what I am saying here... most important... the report says no bad about their vested stocks! Sad isn't it?

Investing based on NTA

As an investor, I find it extremely dangerous to ass-u-me it is 'safe' to invest in a stock if the stock is trading at a hefty discount to its Net Tangible Assets (NTA).

Why? Face the reality. As an investor, we are always going to be the minority shareholder in a company and we are not the elite corporate raiders of the financial world. Hence to ass-u-me that we will be rewarded handsomely when a corporate takeover happens is nothing but pure speculation in which the investor is faced with two main issue.

1. What's the probability of it happening?
2. How rewarding will it be?

Probability of it happening. How does one rate our chances? And most important when will it happen? For it takes too long, will our bet ever be justifiable?

How rewarding it is?
Ah.. saw this newsclip on the Edge Daily: Samling extends takeover offer for 59% of Lingui

Now Lingui is one stock featured by Dynaquest in their Sunday write-up on 30th june 2003.

• Nevertheless with timber product prices having recovered (plywood prices have surged from US$240 per cu m in February to US$330 per cu m), we expect Lingui to perform well in FY03. Although the US economic recovery appears to be faltering currently, we are confident that the good demand from China and the export ban on logs and plywood by Indonesia will see higher average prices for timber products in FY03 as compared to FY02. Besides benefiting from the rise in timber prices, Lingui will also benefit, albeit to a lesser extent, from the current surge in palm oil prices through Glenealy. We are hence forecasting Lingui to achieve an EPS of 15 sen for FY03. Based on this forecast, Lingui is thus selling at a very undemanding PER of only 7.2 times at the current price of RM1.08. Its valuation is also very low when compared to its past 5 years' average PER of 18.7 times. Furthermore, its current price is 39% below its Net Tangible Asset per share of RM1.77.
  
  As we bought our first tranche of 3,000 shares only a few weeks ago on 7.11.02, we shall only give a brief highlight of the group and update on its developments here. One of the top five timber groupings in Sarawak, Lingui is currently backed by 650,216 hectares of licensed forests in Malaysia, which will further increase to about 800,000 hectares on completion of the proposed acquisition of 60% of Samling Plywood (Miri). The group presently has an annual manufacturing capacity of over 360,000 cu m of plywood, 100,000 cu m of medium-density fibreboard and 8 million pieces of doorskins. Besides this, it also owns 27,348 ha of radiata pine plantation in New Zealand. Through its 36.0% ownership of Glenealy, Lingui is also indirectly involved in the oil palm business.
  
  We bought Lingui earlier because it is a recovery stock. The group performed to our expectations in its 1Q03 ended 30/9/02 with a PBT of RM30.1m, a significant turnaround when compared to the RM4.6m loss of 1Q02, and was 71% higher than the RM17.6m PBT made in 4Q02. The improved performance was due to the improvement in timber prices, with increased volumes harvested also contributing to the better showing. The results have produced a 1Q03 EPS of 4.1 sen. Although the upward trend in timber prices appeared to have peaked and prices have softened somewhat, we are confident that the better global economic growth expected for 2003 and the good demand from China will see higher average prices for timber products in FY03 as compared to FY02. Besides this, Lingui will continue to benefit from the current high prices of palm products from its 36.0% stake in Glenealy. We are thus maintaining our full-year FY03 EPS forecast of 15 sen.
  
  Based on our forecast and using Thursday's closing price of RM1.01, Lingui is currently selling at a PER of only 6.7 times. Besides this, the closing price of RM1.01 is 6.5% lower than the price of RM1.08 when we bought our first tranche of 3,000 shares. We are thus buying another 2,000 shares at RM1.01 to average down our holding to RM1.05. (A company related to the Chairman of Dynaquest Sdn Bhd has been buying the shares of Lingui.) ( Ahh... do note the disclaimer...)

See how Dynaquest argued that Lingui's current price is 39% below its Net Tangible Asset per share of RM1.77.

Last July 2005, Samling announced its takeover offer for Lingui and there was an interesting write on the Edge also. No gains for minorities in Samling Global's plan

• The timber-rich Yaw family of Sarawak has laid out a grand scheme to create one of the world's largest wood product companies. But while the plans may seem grand on paper, it is likely that the minority shareholders of Lingui Developments Bhd — where the Yaws are majority shareholders — are nonchalant about the deal. This is because it is difficult to see how the deal will benefit minorities.
  
  Last Wednesday, the Yaws said they planned to combine their listed and unlisted timber and timber-related businesses in Malaysia, China, Guyana, New Zealand and the US under one entity. This plan includes the Yaws selling their 39.87% stake in Lingui to Samling Global Ltd, the new entity. This newco will then be listed on the Hong Kong stock exchange.
  
  Under the proposed share sale agreement, the Yaws will sell their stake in Lingui for RM265.61 million cash or RM1.01 per share to Samling Global. The Yaws will end up as the controlling shareholders of Samling Global, which means that they will not lose control of Lingui. It is, however, unclear what the exact stake the Yaws will have in Samling Global.
  
  ....
  
  The selling price's discount to Lingui's net tangible assets (NTA) is even larger because as at end-2004, its NTA was at RM1.72 per share. And at RM1.01 per share, Lingui is being valued at RM666.23 million, which is 42% less than its shareholders' funds of RM1.13 billion.

Now, if you are an investor and had invested in Lingui at a price of 1.01 in June 2003 based on the huge discount over its NTA of 1.77 hoping for a rewarding takeover offer... look at the end results. An offer did happened but the offer made was never rewarding for the minority investor at all!

Reminiscences of a Stock Mumbler: II

Flashback. April 20th 2005.

Dynaquest iniated research coverage on steel-based products maker, Yung Kong Galavnising Industries Bhd on the Bursa eresearch website (click here for the article). (ps. Dynaquest has been a staunch supporter of Yung Kong since 2003, featuring it on its Sunday Mail write-ups)

Here is a snippet from the report.

• 3. Valuation:
  
  Attractive valuation & well-managed company. There are no local listed comparables for YUNKONG, as the other four major players in the galvanising sector are not listed. However, at the current (as at 15.04.05) price of RM1.29, YUNKONG is trading at a prospective P/E multiple of only 8.1 times and a DY of 2.33% nett. Its current price is also near its 3-year low of RM1.25. Based on both fundamental yardsticks, the current valuation of YUNKONG is considered cheap in view of its relative high EPS growth rate over the long-term (5-Yr: 5.31% & 10-Yr: 11.25%). In addition, YUNKONG is a relatively well-managed company and its long-term prospects remain favourable.
  
  FY2004 in Review
  
  Unable to fully passed on the higher costs to its customers. For FY04, YUNKONG recorded a 9.5% increase in earnings to RM10.11m on the back of almost 23% rise in sales to RM269.19m. The improved sales and earnings performance for FY04 was due to higher selling price of its steel products. However, due to higher cost of raw materials and other inputs which could not be fully passed on to its customers as well as an increase in administrative expenses (+28.4%), the EBITDA margin for FY04 fell to 11.04% from 12.52% in FY03. The FY04 EPS rose to 15.65 sen (1Q: 5.84 sen, 2Q: 4.28 sen, & 3Q: 3.30 sen & 4Q: 2.23 sen) from 14.55 sen (1Q: 5.22 sen, 2Q: 4.51 sen & 3Q: 3.22 sen & 4Q: 1.60 sen) in FY03.
  
  FY2005 Prospects
  
  Double-digit sales growth anticipated. YUNKONG is expected to record double-digit sales growth in the current FY (FY05) as a result of increased selling price of its products as well as increased production following the recent commissioning of its NOF-CGL at its Klang factory.
  
  However, with higher depreciation and continuous pressure on profit margin from the high CRC prices, the bottomline profit of YUNKONG is likely to show only a small improvement. In addition, start-up losses from the new galvanising line are also expected to affect its bottomline profit for the current FY. Hence, we are forecasting only a slightly higher EPS of 16.0 sen for FY05.
  
  Longer-term Prospects
  
  Growth will come from capacity expansion. In spite of the short-term pain, the longer-term outlook of YUNKONG remains bright as its expanded to become an integrated manufacturer of galvanising products. The profit margin of YUNKONG is expected to improve once the prices of its raw materials, particularly CRC, stabilise. It’s the volatile movement of the raw material prices and NOT the high prices that put the pressure on YUNKONG’s profit margin.
  
  During an upswing, there will always be a time lag before YUNKONG can fully passes on the higher cost. On the other hand, during a downswing, the selling price of YUNKONG’s products will be immediately adjusted downward due to competition but it will be a while before its stock of raw materials at relatively higher prices is cleared.
  
  7. Balance Sheet:
  
  Rising net gearing. The aggressive capacity expansion by YUNKONG over the last few years had weakened its balance sheet. The net borrowings of YUNKONG have risen from RM44.89m at the end of FY01 to RM194.08m at the end of FY04. As a result, its net gearing soared from 0.6x at the end of FY01 to 1.9x at the end of FY04. Net gearing will be reduced after proposed Rights & Special Issues. YUNKONG’s current net gearing of 1.91x at the end of FY04 will be reduced to about 1.77x after the proposed Rights and Restricted Issues.
  
  8. Recommendation:
  
  We are initiating our coverage of the Company with a "LONG-TERM BUY" recommendation at the current market price of RM1.29.

Look at some of the reasonings made by Dynaquest to justify their buy recommendation...

1. Low PE multiple 8.1x.
2. DIY of 2.33% nett
3. Current price of 1.29 at 3-year low
4. Growth stock: (5-Yr: 5.31% & 10-Yr: 11.25%).

* Some reasons not to buy?

1. Ze debt issue. See how Dynaquest analyst IGNORED the issue about the massive build-up in debts... debts went from 44.89million to rm194 million? Ah.. remember how some argued that borrowings is needed to finance growth? And that in order to stay on top of the game, further capital expansion and continued spending on research is needed.

On the other hand, the arguement is simply on how prudent the management is. No one has said that capital expansion is bad or said that borrowing is bad... but... there should a limit on how much a company should spend. By being too aggressive capital expansion could be deemed reckless. One cannot use capital expansion as an excuse. There is a saying that one should only buy a hat that fits their head.

Ahh... such classical arguements... anyway... Dynaquest argued that the proposed rights issue by Yung Kong would help lessen this debt issue in the near future.

2. Low PE. I have always argued that the PE only reflects how the stock is trading in the market when gauged against its earnings. It states NOT about the quality of the stock. Simply put.. not all low PE stocks would equate to a great investment.

3. DIY of 2.33%... err.... not terribly exciting isn't it?

4. Trading at a 3 year low? Waahh... does that justifies an investment?

5. Growth stock? The following table highlights Yung Kong track record. Where is the growth? All I see is a very inconsistent company.

6. The inability to pass the cost down to its customers as mentioned by Dynaquest is a worry!

Article was written on April 15th. Few days later Yung Kong announced its quarterly earnings. Yung Kong a net earnings of 1.683 million or an eps of 2.6 sen. It's quarterly earnings improved by some 17% but its year-to-year net earnings dropped an alarming 55%. (see snapshot of Dynaquest's write-up on Yung Kong's earnings )

And the debt issue? Did it improve? Ahem... net borrowings has risen further to rm230.46 million!

And what did Dynaquest conclude in their write-up?

• We are maintaining our "LONG-TERM BUY" recommendation for YUNKONG at the current market price of RM1.27.

Still a buy wor... Incredible!

Never mind, let's give it a benefit of a doubt for this quarter. Anyway, 3 months later, Yung Kong announced its next quarterly earnings.

Yung Kong announced it made 1.665 million for the quarter or 3.348 million for its first 2 quarters of the year or an eps of 5.15 sen. (ahem.. dynaquest's projected eps was some 16 sen for this fiscal year!)

And here is Dynaquest write-up:

Ahh... Dynaquest is forced to lower the EPS forecast from 16 sen to only 12 sen.

• In view of the weaker-than-expected 1H, we are revising downward our full-year EPS forecast to 12.0 sen from 16.0 sen previously. However, DPS for CY05 is projected to be maintained at 3.00 sen nett.

Discounting the debt issue... which now has grown to RM258.52m!... and the fact that Yung Kong's first half earnings has now plunged 49% compared to a year ago.. Dynaquest gave the following recommendation:

• We are maintaining our "LONG-TERM BUY" recommendation for YUNKONG at the current market price of RM1.06.

Ahem.. previously... 1.29 buy, 1.27 buy and now 1.06.. it's still a buy for the long-term!

Shocking? When Dynaquest lowered their earnings forecast for Yung Kong from an eps of 16 sen to 12 sen, Dynaquest is effectively downgrading Yung Kong's earnings by some 25%. Now after such a hefty downgrade in earnings, how could Yung Kong still be worth a buy?

3 months later in Nov 2005, Yung Kong announced its 2005 q3 quarterly earnings.

How did Yung Kong do? Well it reported a loss of 1.214 million!

And here is Dynaquest following write-up.

And again, Dynaquest defended the poor result and again it ignored the debt issue.


And what was Dynaquest recommendation?

• The current price of YUNKONG had factored in the bearish outlook for the short term. Hence, we are maintaining our "LONG-TERM BUY" recommendation for YUNKONG at the current market price of 86 sen.

My oh my, still a long term buy at 86 sen? 86 sen??? WOW!!... and Yung Kong was just trading at some 1.29 some 9 months ago!

How?

Current poor price of 86 sen had been factored in the bearish outlook?

Huh?

And the following picture says it all...

Oh.. and a couple of days later... Yung Kong announced the following announcement.

That rights issue thingy that Dynaquest had mentioned so many times b4..

• On behalf of the Board of YKGI, Malaysian International Merchant Bankers Berhad ("MIMB") is pleased to announce that the Securities Commission ("SC") had, via its letter dated 24 November 2005, approved an extension of time of six (6) months from 29 November 2005 up to 29 May 2006 for the implementation of the abovementioned Proposals, subject to the terms and conditions as earlier stipulated in SC's approval letter, dated 30 May 2005.

Hmmm.... seeking extension? Why? Would it be wrong for one to speculate that perhaps Yung Kong is seeking an extension because they could not find a buyer and that perhaps their shares is NOT LAKU?

And the latest development? Yung Kong announced their 2005 Q4 quarterly earnings on Feb 2006.

Yung Kong posted a loss of 1.513 million for the quarter and ended their 2005 fiscal year with a mere profit of 620k.

And this is what Dynaquest had to say in their research write-up and the following is their recommendation:

• The current share price of YUNKONG had factored in the bearish outlook for the short to medium term. While the worse for YUNKONG may be over, earnings recovery to the pre-FY05 level may still be several quarters away. Hence, we are downgrading YUNKONG to a "HOLD" from a "LONGTERM BUY" at the current market price of 83.5 sen.

ahem!

Reminiscences of a Stock Mumbler.

Date: June 28th 2003.

The Star Biz published a news article on this company called AE Multi.



The above is the news clip. Do note what was stated in red (see below).

• AEM recorded revenue of RM68.7mil last year. Its profit after taxation was RM7mil, exceeding its forecast of RM6.9mil or an improvement of 1.4%.

And below is AE Multi's quarterly earnings around that period of time.



The period concerned is highlighted in yellow.

Here are some very interesting stuff for me... :D

1. When a company has a news write-up on it and somehow the article only mention the previous quarter, one better be cautious. Why is the company focusing on OLD news? Doesn't it makes sense to find out why?

In AEM's case.

• Sales 13.105 mil vs 18.319 mil (q-q)
  Net profit 0.383 mil vs 1.683 mil (q-q)

These facts were announced on 26th May 2003. Star article came out June 28th 2003. The Net profit dropped so much, but yet the company decided NOT to mention this in their press conference and instead only talked about the previous quarter earnings.

How? Don't you find it STRANGE that AE Multi decided to use the previous quarter earnings? Earnings which showed AE Multi made 1.63 million. Why didn't AEM use it's current earnings of a mere 0.383 million as reference?

Why?

2. Profit after Tax (PAT) does not necessary equate to net earnings. Taxes do need to be paid, right? And in the case of a newly listed companies, one has got to be very prudent since the earnings could include profits derived from the IPO listing exercise of the company.

In AEM case, pre-acquisition profit totalled 1.486 million. If you minus this out from the earnings announced, AEM actually did much worse than its previous year.

So perhaps one should ask if this was a slip-up by the company or was the company trying to dress up and glorify its earnings?

Here is the company statement again:

• AEM recorded revenue of RM68.7mil last year. Its profit after taxation was RM7mil, exceeding its forecast of RM6.9mil or an improvement of 1.4%.

3. Whenever there is a drastic fall in the earnings, shouldn't an investor be worried?

Or shall one say that ze red flags should be raised, and one should be on the very alert to call it quits on a company whose business fundamentals are deteriorating drastically.

Look at the table again. By fy 03 q2 earnings release on 28th Aug 2003, one should have made up their minds to EXIT. This was a bad stock selection, time to move on.

What would have been the exit price?

Now it is very interesting to note that the day after it announced the second consecutive rotten results, AEM moved UP higher by 5 sen.

Logical? Investors/FundsManagers loving such rotten result, that they decided to push the stock up? Logical? and the stock continued moving higher to about 1.78, a couple of days later. Fishy and Smelly? or Smelly and Fishy?

The logical question one should ask is what if they knew that the company result is poor and that the future is bleak?

Doesn't it then make sense for them to push it up higher, so that they can sellout their holdings?

Well, all said, one should have exited this bugger in the 1.70 range...

(of course it would probably looked REALLY BAD ADVICE cos AEM peaked at 2.44 a couple of months later!!.... LOL!!!!...... yup... yup.... see the chart below..... but do wait.... and see the end result today!)

4. That tracking of shareholding issue. See compilation made here: AE Multi. Look at all those transactions.

I see nothing but disposal of shares.

Now again a simple reasoning should be made.

If them majority shareholders do not want their shares then why should you want to buy or even hold such a share?

Surely these majority shareholders know something much more of the company than you because just look at what they are doing.

Selling, selling and selling.... non stop SELLING!!

Isn't this the most decisive reason for one to sell and not even buy this stock?

Ah... for fy 2003 q3, the earnings turned around a lot. Net profit increased from 0.477 mil to 1.371 million. Fantastic improvement. This was announced by the company on 18th Nov 2003. Such a turnaround, did the majority shareholders/oweners vote with their money? Did they take the opportunity to buy more shares backed by such strong recovery in the company's earnings?

Sadly no... the company directors instead sold more shares in Dec 2003! Again what does this suggest to you? Doesn't it suggests that these buggers knew that perhaps the turnaround was not sustainable and that the company future ain't so good? Simple reasonings... no?

5. In our local market, the investing technique of Follow You, Follow Me is not a safe idea at all.

In AEM example, look who is one of star name owners.

If one invest in this stock just because of him, look at the end result.

AE Multi announced a NET LOSS of 13.024 million for its fiscal year 2004. (See how valid the arguement that when them insiders repeatedly SELL the stock as if there was no tomorrow, then it is quite likely that they know that something is wrong?)

AE Multi unaudited NET LOSS for fy 2005 was at 4.189 million.

So how much is AE Multi trading now? Well, yesterday it closed at 0.415. (now that 1.70 selling price... it's looking not too shabby eh?) (ps AE Multi traded lowest traded price was at 0.22!!)

ps.. AEM was offered at a price of 0.80 to the public and it was listed on 15th July 2002.

Now credit to Surf 88. This is what they posted one week after the AEM listing. They give it a big fat SELL rating on it!!!

• AE Multi – Bucking trend?**
  By: Surf88
  Date: Tuesday, July 23, 2002
  Time: 8:28:02 AM
  
  Largest shareholder, Dato’ Azman Yahya, reduces stake from 20% to 18%
  Fundamental valuation expensive against regional peers and in view of industry dynamics and challenges
  Reiterate SELL as 13.4x Jun 2003 PER is unlikely to be sustained
  
  What sets it apart? AE Multi (RM1.17, stock code 7146) was a refreshing change from recent IPOs. Against our fair value of 91 sen per share and its IPO price of 80 sen per share, the stock opened at RM1.17 per share on its debut day of 15 July before hitting a high of RM1.50 per share. That marked the peak for the stock, which has been sliding since, as shown below :
  
  (RM) Closing price
  
  15 Jul 1.36
  
  16 Jul 1.33
  
  17 Jul 1.28
  
  18 Jul 1.26
  
  19 Jul 1.19
  
  22 Jul 1.17
  
  
  Is it time to buy? We think not and besides fundamental valuation, the latest development as reported last night also lends support to our view. At the time of listing, we mentioned that two factors may buoy share price to above fair value. First, its affordability at the RM1 region, and second, the sentiment boost stemming from the reputation of its non-executive chairman and largest shareholder, Dato’ Azman Yahya.
  
  Dato’ Azman Yahya reducing stake. Based on latest filings to the KLSE, Dato’ Azman Yahya has sold 1.6M shares or a 2% stake in AE Multi at RM1.25 on 17 Jul. This reduces his stake from 20% to 18%. While he is still the largest shareholder with a substantial stake, that he chooses to sell at the RM1.25 level may be seen as an indication of his expectations relative to stock fundamentals and the current environment. We believe minority shareholders should also take the cue from here, especially considering industry dynamics and valuation.
  
  PCB player with concentrated customer base. To recap, AE Multi is mainly involved in the production of PCBs (printed circuit boards). The company has a concentrated customer base with its top five customers accounting for nearly half of group sales. While track record has been reasonable, AE Multi does not seem to have a particularly strong competitive edge in the industry while there seems to be more challenges ahead. Firstly, PCB is increasingly commodity in nature which points to rising price pressures. Secondly, the emergence of low cost and technology-advanced competitors in China is another concern.
  
  AE Multi at 13.4x 2003 PER. Overall, we expect AE Multi to achieve its prospectus forecast of 18% pretax growth on improved contribution from its Thai plant (its only overseas plant at one quarter the size of the Malaysian plant) in 2002. Going forward, growth is expected to moderate in the absence of new expansion. EPS wise, due to enlarged capital following the listing, we forecast 11% growth in 2002, before a 5% decline in 2003. At the current price of RM1.17, AE Multi is trading at 12.9x 2002 PER, rising to 13.4x in 2003.
  
  Industry giant at 8.4x Jun 2003 PER. In our IPO note on AE Multi, we benchmark AE Multi to Singapore-listed PCB industry giant Elec & Eltek in view of the lack of meaningful domestic comparisons. Due to the global stockmarket decline, Elec & Eltek’s share price has fallen 7% since then and its PER as a result fell to 8.4x for the financial year ending Jun 2003. Considering that Elec & Eltek is almost 20x the size of AE, it seems difficult to justify and sustain AE Multi’s PER at 13.4x 2003 earnings. At RM1.17, the net dividend yield of 2.1% for AE Multi is also not particularly attractive.
  
  Reiterate SELL. In all, the latest developments serve to reinforce our SELL call on AE Multi. In this case, disposal by the major shareholder may well be a telling sign. SELL.

How does one value a company one cannot trust?

Here's ze trick question that I asked the other day again...

How does one value a company one cannot trust?

Remember this past blog posting on MTD Capital's flip-flopping of its business?

• ACPI to buy MTD Capital's construction arm for over RM80m
  
  What a shocker!
  
  What we have here is MTD Capital, a construction company, selling out its construction business to ACPI, a subsidiary company of MTD Capital for 80 million. And MTD Capital will then become a holding company!
  
  What the...!!!!!
  
  From an investor point of view, isn't MTD Capital simply moving away the 'cheese' from its minority investors???
  
  Isn't there a lack of respect from MTD Capital towards their minority shareholders?
  
  Put it this way.. if one had invested in MTD Capital because one believed in the potential of its construction business, this sale of the construction business has effectively taken out the very justification why one should have invested in the stock. How on earth is this possible? How can they allow such flip-flopping of business between subsidies?

I just realised that there is more!

Yup... more!

Malaysia's Metacorp Acquires 40 PCT Stake in Modal Ehsan

Two things strikes me from that news clip..

1. Metacorp Berhad (KLSE:8389) has agreed to acquire a 40 per cent stake in property developer Modal Ehsan Sdn Bhd for RM10.4 million (US$2.8 million
2. Modal Ehsan is a 60 per cent subsidiary of ACP Industries Berhad (ACPI) (KLSE:5924) which in turn is an associate company of Metacorp.

Ahem... when will all these ever end? Left hand selling to the right hand, right hand selling to the back hand, back hand selling to the under hand!!!

And to add extra icing to ze cake... there is this other news thingy: Malaysia's MTD Grants Granion Option to Buy MTD Infra Shares

Ahem!!!

Goodness me... what great corporate governance from this group!

So... how does one value a company one cannot trust?

When there is no corporare governance, how can the investing public expects to be given a fair chance to be adequetly compensated for taking all the risks in investing in their company?

How?

Remember the old adage...

Fool me once, shame on you.
Fool me twice, shame on me!!

to be continued... :p

It's the calculations that counts.. !!

Hmmm ... remember this blog posting: It's the business.. Part IV

Let me show something really interesting...

• Remember I mentioned that if an investor made an investment into Yi-Lai at a cost of 1050 back in 2003, the investor would have received 450.00 in dividends and I went on to calculate in the following manner.
  
  So from an investment outlay of 1050, the investor would have gotten a 450.00 in dividends or 43% back of their investment outlay. Which means that the investor current holding cost of Yi-Lai is 600.00.
  
  Currently Yi-Lai last traded at a share price of 1.30. Which means the investor is holding on to an investment gain of 117%!!!
  
  Which works to an annual compounded return of 29.4% for holding this investment for 3 years!!!

Did everyone realise that I am really cheating here?!

LOL!!!!!

Ah... let me show why. The invested capital is 1050. The return in dividends is 450.

Current market price = 1.30.

Current market price + dividends received = 1300 + 450 = 1750. Or a 'current' gain of 67%. (and not 117%!!!)

Which works out to a mere 18.56% compounded annual return for holding the stock for 3 years.. and not 29.4%.

See how I managed to glorified everything when I deducted the dividend received from my investment cost?

Ahh.... do you notice that Insider Asia write-ups... and do you notice how they deduct the dividends received from their investment cost?

The below is the snapshot of their portfolio published...

See how they have their 5,000 shares of Yi-Lai 'purchased' in 2003 has an average cost of a mere 61.5 sen?

And by doing so.... lol.... it just makes everything look so much nicer.... :p

Ahem.... it'sthe calculations that counts.. !!!

Elsoft Research

• And i would like to share with you my finding on elsoft. I know u dont like MESSdaq but it looks appealing to me. The best thing is no research house ever notice it yet. PLs comment.

There's not a whole lot of info I have on Elsoft and yes i dun see any research report on it. The best I can gather is via their website

• Elsoft is principally involved in research, design and development of test and burn-in systems and application specific embedded systems. Elsoft mainly provides cost effective ATE solutions to the semiconductor, optoelectronic and automation industries. The Group’s key product i.e. test and burn-in systems are used by its customers who manufacture optoelectronic devices such as LED, image sensors and automotive lightings to test their products before launching into the market. The name “Elsoft” consists of two elements i.e. Electronics and Software, symbolising the Group’s core competency in advanced electronics design and software technology innovation.

And here is some company historical background and here is what they do.

• Elsoft offers the industry’s most comprehensive portfolio of design, validation and production test solutions from a single ATE supplier. Utilizing our unique Source and Measurement Unit (SMU) solutions, we enable customers to customize test flows that significantly reduce their design-to-volume-production test time and costs, while improving overall performance, quality and functionality. As a test and burn-in solution provider, in-house developers of the Group can improve an existing test system or design new test solutions to meet a specified test strategy required by its customers. The switching trend of the industry’s evolution from high cost test and burn-in solutions towards cost effective test and burn-in solutions has bridged the Group to the stage of the global ATE arena. Elsoft offers its customers a new paradigm of alternative test solutions which aims to provide high performance and cost effective application solutions.

Elsoft was listed on 27th July 2005 and it would appear that Elsoft is generous with their dividends. In the short time they are listed, Elsoft had already rewarded their shareholders with two set of dividends. (Interim Dividend and Second interim dividend) (Dude.. it's not too bad, huh?)

Here is a snapshot from osk/klsetracker.com on Elsoft quarterly earnings.

And again I have to say it is pretty impressive. It appears it has growth and the margins are really solid.

And this is what Elsoft has to say in their research report posted on Bursa website.

• Turnover and profit before taxation
  
  Elsoft Research was listed on the Mesdaq Market of Bursa Securities on 2 August 2005. Hence, no comparative number was available for the preceding year corresponding quarter.
  
  For the fourth quarter ended 31 December 2005, the Group achieved a turnover of RM8.119 million. Compared to the RM10.968 million achieved in the third quarter ended 30 September 2005, turnover was 26% lower. In spite of lower revenue recorded mainly due to lower contribution from the Group’s subsidiaries, the Group’s fourth quarter profit before taxation rose 20% to RM5.662 million from RM4.734 million achieved in the preceding quarter. The growth in profit before taxation was mainly attributable to higher distribution from short-term investments, the writing back of overprovision for bonus and higher contribution from significant increase in repeat orders of test-systems that boosted profit margin.
  
  For the twelve months ended 31 December 2005, the Group recorded turnover and profit before taxation of RM33.307 million and RM17.032 million, respectively. The group’s effective tax rate of 1% for the period under review was lower than the statutory rate due to Elsoft’s pioneer status.
  
  Prospects
  
  Management is optimistic about the Group’s performance for the financial year ending 31 December 2006. The Group foresees LED test instrument growth to be driven by ramp-up in the use of High-Brightness LEDs in mobile appliances, automotive lighting, signals, signs and displays, illumination and electronic equipment.
  
  The newly developed test system catering for the Display/Intelligent Display market should contribute positively to the Group's financial performance.
  
  In addition, management is expected to streamline the Group’s operations to minimise duplication of tasks to save costs. The Group is putting more effort in the development of electronics instrument for the test and measurement market.

(Did you see the reason for the growth? - The growth in profit before taxation was mainly attributable to higher distribution from short-term investments, the writing back of overprovision for bonus and higher contribution from significant increase in repeat orders of test-systems that boosted profit margin. )

Here is a snapshot of its balance sheet.

Clean net cash... no debts... except the worry is the size of its short term investments..

If we look under notes b7.. this is what it states...



It's cash flows is ok..but we really cannot conclude anything much from it... too early days yet.

I have to admit that Elsofts operating profits are pretty darn impressive...

And here is how Elsoft did since listing...

how dude?

I guess i can understand why you have said that it looks appealing for you.. ur only worries are.. lack of demand of the stock (ahh... me sure u know how deep this issue is.. :p), the size of its short term investments and it's still too new to past any real judgement on it...

cheers dude!

It's the business.. Part IV

In the previous post, Its the business.. Part III the example discussed was based on a stock which contniued to pay great dividends despite its slumping business. And if one had purchased the stock in 2002 for the sake of the dividends despite the fact the business was slumping, the end result was pretty poor.

Now let's look at another stock which pays good dividends. Click on the Map of Mumblings and look at the series of blog postings on Yi-Lai , Yi-Lai: ROI Part II , Yi-Lai: ROI Part III , Yi-Lai: ROI Part IV and
Yi-Lai: ROI Part V

Firstly how is Yi-lai's business?

From the first post Yi-Lai ,

Earnings since fy 2001: 21.7 mil -> 26.8 mil -> 25.6 mil -> 29 mil -> 27.8 mil

Ahh... Yi-lai's business wasn't too happening for its latest fiscal year. Latest fiscal year showed that earnings dropped from 29 mil to 27.8 mil.

Not too happening right? And doesn't it reflect in the charts?



If one had purchased this stock last year at around 1.80, one would have been left holding some paper losses..

however...

there would be some who would argue that the correction in the stock price is not justifiable given the fact that Yi-Lai's business earnings performance wasn't really all that bad... since one is talking about a 4% slump in yearly earnings...

anyway... let's look at the end-result if one had purchased Yilai way back in 2003 at a price of around 1.05.



Not too shabby isn't it?

Let's ass-u-me that one had invested in 1000 shares of Yi-Lai at a cost of 1.05. Cost of investment 1050.

Now let's look at the dividends received by the investor. Here's a snapshot of the dividends paid by Yi-Lai since 2003.

The investor would have received a total gross dividend of 450 or an after tax dividend of 361.80. (but since one can claim these taxes back, I would use 450.00 as reference for the total dividends paid)

So from an investment outlay of 1050, the investor would have gotten a 450.00 in dividends or 43% back of their investment outlay. Which means that the investor current holding cost of Yi-Lai is 600.00.

Currently Yi-Lai last traded at a share price of 1.30. Which means the investor is holding on to an investment gain of 117%!!!

Which works to an annual compounded return of 29.4% for holding this investment for 3 years!!!

Fantastic?

Yup... now compare it with Multicode.

Why the huge disparity?

Ah.. all I can say is compare Multicode's fy 2001 results with current. Back in fy 2001, Multicode earned some 10.122 million and was operating with a net profit margin of 15.43%. Now? Multicode latest net earnings is only some 4.137 million. See the huge slump in business earnings?

Do you believe that ultimately it's the business that counts?

Déjà vu..?

Here is an interesting snippet from AIM's (Apollo Investment Management) 1st Quarter 2006 report.

• The most irritating of the three duds was until recently a small-company gem, with ROE and EPS growth both over 20%, supplying services to the offshore oil and gas sector... déjà vu? remember the Pirates?... and once again we were mugged by Malaysians. This was an unpleasant surprise, since the company, Total Automation, was Singapore-based, excellently run by its founder-managers, and they were reporting no interference from their Malaysian shareholders - until the latter decided to sell the whole business to Wartsila of Finland. They did so on a PE of 11 for the year just ended, and on our estimates 8-9 for the current year, a strangely low valuation. The disposal announcement made no mention of distributing the cash proceeds: it said the board would ponder other businesses in which to invest. All executive directors resigned immediately, with no apparent thought of fiduciary duty to minorities. As startled investors who had bought the shares for its niche engineering business studied the diverse interests and dismal track record of listed companies in the controlling Melewar group, Total Automation shares slid to a discount of 25-30% to the expected cash. Seven weeks after the initial disposal announcement, having cancelled the routine analysts' briefing after the results and been parsimonious with access meanwhile, the company did announce an intention to distribute 75% of the proceeds, which may be sufficient to reduce protest - most investors will just curse and move on - but remains unfair, since the share price remains well below the level at which we believe it would have been trading if continuing with its existing business (7 times EPS for '06?), and the implied value attributed to the 25% balance implies no confidence in the directors. The pattern of trading and disclosure has been no credit to Singapore (nor of course to the Melewar group), and we were surprised to be told that minority shareholders would have no effective say. For the controlling shareholders to vote on the sale is fair enough, since unconnected, but we would have thought the decision should require a 75% majority, and/or that there should be a requirement for an immediate unconnected-shareholder vote on distribution of proceeds.

Well, I have blogged on Melewar before. (see Melewar and Melewar: Part II ).

Remember the blog posting Philip Fisher: Management Integrity.

Let me repeat here again.

• On the issue of integrity, this is a simple no-brainer. Does it make sense to go into a business-partnership with someone you do not trust? It is hard to imagine why anyone would want to go into a business partnership with someone who would most likely cheat us the minute we turn our back.
  
  According to Fisher, the management of a company is always for closer to its assets than its shareholders. And without even breaking any laws, there are number of ways that the management can benefit themselves and their families at the expense of the minority shareholders, for example employing their relatives, buy-and-selling of properties between relatives at above market rates or the issuing common stock options.
  
  It's not only the dislike for dealing with unscrupulous people but Fisher believes that companies managed by people of dubious integrity will definitely meet with failure. (Don't you agree?) For those in control would attempt to make money at the expense of the minority shareholders for these minority means nothing to them but mere other people's money who are there for them to abuse!

ps...

How does one value a company one cannot trust?