I must admit I didn't monitor the stock market yesterday afternoon - I was too occupied writing the article on OSKVI besides other things. So, my eyes nearly popped out when I saw HEXZA price after market closing - HEXZA had made a nice price gain, closing at $0.76, up 7.5 sen or 10.9%. That's decent for a stock that is normally quiet with relatively lowish volume traded ... :-)
Naturally, I was curious as to why. Then today, I happened to visit Moola's blog, and noted his posting on HEXZA this morning. Reading it, there was a Star Article published this morning with Buy Call for HEXZA. Aha ... the light bulb lits ...
So, here's my usual highlighting of the full article (courtesy of biznewsdb.com) with my comments. As usual, use your own judgement, and invest at your own risk.
___________
Hexza at one-month high
Updated : 12-05-2007
Media : The Star
Story By : YVONNE TAN via www.biznewsdb.com
PETALING JAYA: Hexza Corp Bhd shares hit a one-month high of 77 sen yesterday after a local brokerage initiated a "buy" call [1] on the counter, on prospects of the company's profits escalating [2] and a higher dividend [3].
In a report released yesterday, SBB Securities Sdn Bhd senior analyst Ng Jun Sheng said he regarded Hexza as a "hidden gem" [4], given its stable growth and abundant net cash.
The adhesive resins division, which is one of Hexza's two main divisions, is targeted at timber-related industries.
Its ethanol division is the largest ethanol products manufacturer in the country, with more than 60% market share.
For the financial year ended Jan 31, Hexza's turnover jumped 22.7% to RM159.6mil, thanks to expanded production capacity in its ethanol division and rising demand for adhesive resins.
Despite higher raw material prices, the company's bottomline expanded 42.2% to RM14.8mil, spurred by earnings before interest and tax margins of 11.7% on efficiency gains and economies of scale¨ Ng said.
He is targeting a compounded annual growth rate (CAGR) of 21.8% in net earnings from 2006 to 2008 [5] on higher sales from both divisions, buoyed by increased production capacity and recovery in timber-related sectors.
Earnings before interest and tax margins were likely to improve to above 11%, Ng said.
This would be driven mainly by economies of scale and production efficiency, selling price adjustments, stringent cost control and stabilising raw material prices [6], he added.
Ng said Hexza's competitive advantage was its technology and innovativeness.
Its focus on using material science to help customers attain their goals has established Hexza as one of the top leaders in the ethanol and adhesive resins business.
Going forward, Hexza is expected to continue to invest in state-of-the-art equipment to stay ahead of its competitors,¨ he added.
Ng said shareholders could look forward to higher dividends, given Hexza's strong net cash of RM35mil (or 27.2 sen per share), healthy net cashflow of RM10mil to RM13mil every year and low capital expenditure requirements.
Ng does not discount the possibility of Hexza being taken private in future if its share price does not reflect its true potential¨, and its strong intrinsic value.
To this, however, a senior management staff told StarBiz: "Not in the near-term¨,[7] but added that the company's future remained bright.
Hexza shares closed 7.5 sen higher at 76 sen yesterday.
Ng values the company at RM1, ascribing a price-earnings ratio of 8.3 times [8] on earnings per share for the year ending June 30, 2008 of 12 sen.
________
My quick comments:
[1] Newspaper journalists tend to sensationalize. Technically, SBB did not just "initiated" but has made Buy Calls on HEXZA in the past. It is a shame the Star editors didn't pick this up. Nevertheless, it is comforting to note SBB still thinks it is a Buy, despite the recent price increases.
[2] Just bear in mind that the last 2 month earnings for "Q5/07" is proportionately worse, not better. Something to watch out for for next quarter earnings report.
[3] It is important to mention that the prospect of higher dividends is just that - a prospect. There are no guarantees, and they are probably just odds at this stage. Nevertheless, I take comfort that HEXZA has a nice cash hoard, dividend increase history in last 3 years, good earnings and cashflow well in excess of what's need to pay say a 50% dividend increase (despite the recent 2 month drop in earnings). So, I lean towards SBB here - the odds are good, despite the proportionately worse earnings (unless there is continued drastic drop, which I'm not expecting).
[4] As this will be my 7th posting on HEXZA, I guess it should not be "hidden" to regular visitors here ... :-)
[5] This is a rather strange period, given that HEXZA has already completed 2007 FY (ending 31 Jan, although this is now changed to 30 June). During FY 2006-2007 (which I define as starting from 1 Feb 2005 - 31 Jan 2007), HEXZA earnings already grew nearly 80%, or 21.6% p.a. if compound over 3 year period. If so, then, it implies that HEXZA earnings will not grow in FY 2008, which is possible. However, it is also possible that my reading of the article could be wrong. Suggest better to continue to monitor HEXZA earnings.
[6] Stabilizing raw material prices ... hmmnn ... perhaps more knowledgeable readers on HEXZA's business model may comment more intelligently here. Superficially, it seems to contradict the most recent earnings report, although the earnings report is only up-to-date to 31 March.
[7] I tend to lean towards with HEXZA management, that they are unlikely to privatise in the near term, especially given the recent price increase.
[8] It looks like both SBB and myself agreed that HEXZA is probably still under-valued at $0.765, although the degree (and margin of safety) has clearly lessened when I first made the call at $0.65-$0.67. Technically, yesterday was a bullish signal, with support zones at $0.72-$0.74, and second support at $0.70. Previous 12m high of $0.78-$0.80 might be a resistance, but if it breaks through that, then, $0.85 might be the next resistance.
Disclaimer: As usual, use your own judgement and invest at your own risk. Remember that chart signals can potentially change very quickly (depending on your trading time-frames), so, trade at your own risk too.
Saturday, May 12, 2007
Friday, May 11, 2007
OSKVI - A hidden gem
Introduction
To a fundamental investor, OSKVI is a stock that is easy to overlook. Why? Well, take a look at its latest quarterly earnings, and see if it makes sense ... Revenue = $4.4M ... PBT = $7.2M ... PAT = $7.7M. Huh??? Revenue smaller than PBT??? PBT smaller than PAT??? (... next stock please ...)
Or maybe it's just 1 quarter abberation. So, let's take a look at the entire 2006 year. Revenue = $42M. PBT = $55M. PAT = $47M. Okay ... at least PAT is smaller than PBT, but that still doesn't explain why Revenue is smaller than Profit, and it's not just 1 quarter aberration ...
I suppose if one is busy, it is only natural to dismiss this company as "strange", and move on to other companies with more reasonable numbers ... In fact, I nearly dismissed this little gem myself, if it wasn't for its 2006 annual report which was also published in Bursa on 28 March. As someone who is naturally curious and likes reading, I downloaded the annual report from Bursa's website, got myself comfortable and started reading.
Well, I'm glad I did that, as well as other digging around, because it explained a lot of things. It gave me a much better understanding of why the accounts got reported that way. It gave me a good understanding of OSKVI business, and its main source of profits. And it led me to personally conclude that the quarterly earnings reports and the Balance Sheet reports - in their current format - is deficient. In summary form, they would not present a true and fair picture of the company. Here is one case where they clearly must be read in conjunction with the annual report, to get a true picture of OSKVI.
Ok. Let's start with the questions - how can OSKVI revenue be smaller than its PBT? What is OSKVI business, and how do they make money? More importantly, as a potential investor, why should I buy OSKVI? Is current price ($2.42) cheap or expensive?
Let's start with OSKVI business. OSKVI is a small cap Mesdaq stock which operates a venture capital and private equity business. Simply put, OSKVI helps other businesses to list on the stock exchange. OSKVI puts up the venture capital (to cover cost of listing, etc.), and in return they may receive either some fee income and/or more importantly, a certain % of the shares of the newly listed companies for free. If the listing turns out to be successful and the share price shoots up, OSKVI strikes gold. If the listing is unsuccessful, the venture capital is lost.
On the surface, this might seem risky. Monies put up, once spent, is gone. The returns uncertain. So, why invest in OSKVI? Well, OSKVI is managed by professionals, and they've been around in this business for over 6 years now. Their track record is good. To date, they have invested in 20 companies, of which 12 are now listed. Some of the more important companies are Green Packet Bhd (GPACKET), mTouche Technology Bhd (MTOUCHE), eBworx Bhd (EBWORX), MNC Wireless Bhd (MNC), Willowglen MSC Bhd (WILLOW), INS Bioscience Bhd (INSBIO), all of these listed on Mesdaq. More importantly, GPACKET is by far the largest stock by market cap in Mesdaq, so, it's clear that at least in terms of getting a listing on the Mesdaq exchange, there's no venture capital firm that is more successful than OSKVI. At least not yet.
Also, they have successfully ventured overseas. GMO Limited is their successful listing in London Stock Exchange Alternative Investment Market (LSE AIM). From various news, they intend to continue their activities around the region, particularly China, Vietnam, Singapore, etc. This seems promising, since the stock markets in China, Vietnam and Singapore provides a much better valuation of companies than Malaysia, and the chances of a successful listing there seems better.
OSKVI REVENUE
As mentioned previously, 2006 Revenue was reported as $42M. In the annual report, it provided a breakdown as follows:
Quick observations:
1. It's clear that more than half of the so-called "revenue" is made up of gain on disposals.
2. If OSKVI did not dispose their paper gains, then, the accounting standards would only count revenue as "interest income" and "fee income".
3. As I described above, the main bulk of OSKVI's true revenue is not the fee income charged, but the gain in value in the shares owned. And they receive significant shares and for successful listing, the price can easily exceed the IPO price and continue growing. Unfortunately, these are not reflected under "Revenue".
OSKVI EARNINGS
Ok. How does the Earnings get reported? Well, take a look at below.
Quick comments:
1. Mathematically, PBT = Revenue - Admin Expense + Share of Profits.
2. The Share of Profits figure is really share of profits of its associates. However, under present accounting rules, Share of Profits for holdings less than 20% (or non-associates) don't get counted at all. Further, the major source of OSKVI's value is in its shares, which are only counted if OSKVI makes a disposal (i.e. realized gains). So, it doesn't really present a true picture.
BALANCE SHEET
Quick Comments:
1. Absolute no debts. No short term debt. No long term debt.
2. Total liability only a measly $0.8M. In other words, nearly all the assets belong to shareholders.
3. Cash $27M is nice.
4. Most of the assets are in Associated Companies ($226M) and "Other Investments" ($75M). This means, you must read Notes 12 and 13 carefully, and try to understand them.
NOTES 12 - ASSOCIATE COMPANIES
Quick comments:
1. Now we get to the interesting part. We note that OSKVI owns free shares in many of these institutions - e.g. 17% Green Packet, 20% MNC, 20% eBworx, 20% mTouche, 15% GMO, etc.
2. Not all the associates are listed companies. Finexasia and Eco Industrial are not listed.
3. So, with this information, we can actually calculate the current market value of the listed companies, to get an idea of how much OSKVI Net worth truly is, as opposed to Book Value (which is an out-dated value of the holdings). At 31/12/2006, I obtained a market value of $490M approximately. Already, this figure is much greater than the Book Value stated in the Balance Sheet of $226M, a difference of over $260M. Since 31/12/06, to date, the market value has risen even further (but let's not count that). According to current accounting standards, this difference is not stated in the Balance Sheet, and so, the Shareholder Equity is understated by at least $260M.
NOTES 13 - OTHER INVESTMENTS
Quick comments:
1. The amount stated in the Balance Sheet is $75M.
2. There is actually some gain in the quoted shares in Malaysia ($9.1M market vs $6.9M book).
3. There may be additional hidden assets in its unquoted shares outside Malaysia, but I have not bothered to investigate deeper since the margin of safety is already quite large from Notes 12 alone.
INTRINSIC VALUE - FIRST ESTIMATE
Ok, I think we have enough information now to do a first estimate of OSKVI's Intrinsic Value. Recall the company has no debt, and the bulk of its assets are free shares in the companies that they help to list. So, at first cut, it is clear that its Net Assets should be around $331M (as reported in the Balance Sheet) + $260M = $590 or say $600 M approximately.
Interestingly, this is roughly the same as the fund size managed by OSKVI, which is nearly $600M.
However, if one looks at OSKVI Capital Structure, it has 150M shares outstanding. At current market price of $2.42, it would value OSKVI at $363M, well below $600M. It suggests that at $2.42, an investor could buy OSKVI for $0.60 for every $1 net worth. By any standards, this is a steal.
ANOTHER PERSPECTIVE - CHEAPER ENTRY TO GREEN PACKET WITH FREEBIES
It is worth noting that OSKVI owns approximately $348M worth of GPACKET alone (assuming GPACKET price of $4.52 at 31/12/06). Last look at GPACKET shows it's trading higher, albeit marginally. This alone is nearly the same as OSKVI Market Cap. In other words, just its current ownership of GPACKET is already worth its entire market capitalization. So, instead of buying GPACKET, why not buy OSKVI and get FOR FREE all the other holdings that OSKVI owns, such as mTouche, MNC, eBworx, etc. plus its cash plus its future prospects?
Or put another way, if all the other assets are valued at market value, take 100% cash, and put a zero value on its future prospects, then, at current OSKVI price of $2.42, one could buy GPACKET at only a quarter of its current price approximately ... (psstt ... don't tell the recent buyers of GPACKET - they might cry ...)
OSKVI FUTURE PROSPECTS
Notwithstanding the above mispricing, what I am extremely excited about is 2 of OSKVI's future prospects.
FUTURE PROSPECT #1 - CHINA
Here, I will quote the Chairman's Statement in the 2006 Annual Report.
"... the Group has also invested in a company involved in the outdoor advertising business in China. The company holds all the economic rights and benefits to the existing bicycle shelter and public service bulletin board advertising business via an exclusive concession granted by the Ministry of Public Security in China. To date, the company is the only exclusive provider to carry out this type of advertisements for the whole of China. Our investee company is poised to become the market leader in the outdoor advertising business in China..."
Quick comments:
1. This company is not yet listed in China.
2. How much would this company with exclusive concession be worth, when it is listed?
3. Is it worth nil? Obviously not. In fact, I am personally very bullish, that it will be worth at least hundreds of millions. Yet, the market is valuing OSKVI as if it is worth nothing (actually, at $2.42, it is technically a negative value, which is a laugh ... :-) ).
FUTURE PROSPECT #2 - SINGAPORE
Again, I quote Chairman's Statement:
"...We invested in a Singapore based company involved in providing comprehensive waste management solutions from environmental laboratory testing to treatment of disposal for both hazardous and non-hazardous wastes. The company focusses mostly on industrial waste that is generated from petrochemical and pharmaceutical companies. ..."
Quick comments:
1. This company is not yet listed in Singapore.
2. How much would this company be worth, when it is listed?
3. Is it worth nil? Obviously not. In fact, I am personally quite bullish, that it will be worth quite a lot to OSKVI. Again, the market is valuing OSKVI as if it carries a negative net worth to the company.
It should be noted that for both Prospects, OSKVI spends $53M in venture capital. In a separate press article, it is stated that OSKVI intends to grow its fund to $1B (from approximately $600M currently) within 2 years. In other words, besides paying $0.60 for OSKVI (to get a value of $1 worth today), it seems OSKVI is quite likely to grow to $1.67 in 2 years time (for every $1 worth of value). Seems to me like this is not just a value investment, but also a growth investment at the same time!
OSKVI DISTRIBUTION OF SHAREHOLDERS
There are 5,058 shareholders at 31/12/06, the distribution can be found in the Annual Report.
OSKVI MAJOR SHAREHOLDINGS
It should be no surprise that nearly 2/3rd of OSKVI is owned by OSK, its parent company. I can count only 3 funds in Top 30 holdings - #17 SBB Emerging Companies Growth Fund, # 19 - UBB Common Fund, and #30 - DBS Malaysia Equity Fund. The rest of the Top 30 owners are largely high net worth individuals.
It should be noted that it had been reported in the news before, that OSKVI is a significant contributor to OSK earnings. So, I would not be surprised if one day, OSK were to launch a VG Offer to remaining shareholders. It is easy to think of a scenario where as both the China outdoor advertising business and the Singapore waste management company gets closer to a successful listing stage, that OSK might decide to get all the free shares for itself (instead of sharing with the rest of the shareholders), by launching a VGO.
OSKVI DIVIDENDS
For 2006 year, OSKVI paid a total of 20 sen dividend. At $2.42, this translates to a gross dividend yield of 8.3%! Net of tax dividend yield is closer to 6%, well above F.D. rate of 3.7%.
RISKS
Potentially, there are risks in owning OSKVI.
1. The stocks that OSKVI holds might be viewed as over-valued stocks.
2. There may be fears that OSKVI, even though it owns the 6 Mesdaq stocks, might never dispose its holdings.
3. There may be fears that OSKVI won't be able to dispose its holdings, since they are significant holdings, without depressing prices.
4. As its underlying holdings are shares which fluctuates daily, it's Intrinsic Value also fluctuates daily.
5. ? (you tell me)
To me, these risks are manageable.
1. Someone might think that GPACKET is overvalued at today's prices and vice versa, but there is an open market out there, and there is such a large safety margin (an entry equivalent to just a quarter of current market price).
2. & 3. There are many ways to dispose significant holdings with minimal impact on share price. A normal method is via professional private placements. If the timing is done correctly (e.g. during a bull run where there is inherently large volume traded) and done by professionals, it might not even have a noticeable price impact. As OSK and OSKVI are in the securities industry, I have confidence that they will be able to dispose their holdings in a manner that maximizes value to shareholders, especially when OSK owns 2/3rds of OSKVI. The only question is when, and for me, I will leave it to the professionals. So far, they haven't completely dissappointed me yet ...
4. That's a normal stock market risk. Every stock price fluctuates daily.
CONCLUSION
I believe this is a steal, at $2.42. Ignoring its bright future prospects in China and Singapore, its Intrinsic Value is already around $4. If you believe the company that it's share fund will grow to $1B in 2 years time (and by then, I expect both its China and Singapore prospects to be listed), then, its Intrinsic Value will be worth over $6 in 2 years time. To me, it has a high level of believability.
Recommendation: As this is not an easy company to understand (unless one wants to study its annual report carefully), and as the quarterly earnings reports don't actually present a true and fair picture of OSKVI net worth, it might take some time before the market appreciates the true value of OSKVI. My strong recommendation is not to invest more than 5% of your stock portfolio in it, as it has the potential to tie up your capital. Still, the downside risks seem low, and upside gains potential seem high, and the stock pays a nice dividend.
Disclaimer: I own OSKVI, and naturally, my opinion can be biased. Comments welcomed. As usual, use your own judgement and invest at your own risk.
Acknowledgement: Special thanks to "kiddy" in investssmart chatbox who first highlighted OSKVI to me. I won't be able to always analyze all stocks recommended to me, but do keep them coming. Thanks!
To a fundamental investor, OSKVI is a stock that is easy to overlook. Why? Well, take a look at its latest quarterly earnings, and see if it makes sense ... Revenue = $4.4M ... PBT = $7.2M ... PAT = $7.7M. Huh??? Revenue smaller than PBT??? PBT smaller than PAT??? (... next stock please ...)
Or maybe it's just 1 quarter abberation. So, let's take a look at the entire 2006 year. Revenue = $42M. PBT = $55M. PAT = $47M. Okay ... at least PAT is smaller than PBT, but that still doesn't explain why Revenue is smaller than Profit, and it's not just 1 quarter aberration ...
I suppose if one is busy, it is only natural to dismiss this company as "strange", and move on to other companies with more reasonable numbers ... In fact, I nearly dismissed this little gem myself, if it wasn't for its 2006 annual report which was also published in Bursa on 28 March. As someone who is naturally curious and likes reading, I downloaded the annual report from Bursa's website, got myself comfortable and started reading.
Well, I'm glad I did that, as well as other digging around, because it explained a lot of things. It gave me a much better understanding of why the accounts got reported that way. It gave me a good understanding of OSKVI business, and its main source of profits. And it led me to personally conclude that the quarterly earnings reports and the Balance Sheet reports - in their current format - is deficient. In summary form, they would not present a true and fair picture of the company. Here is one case where they clearly must be read in conjunction with the annual report, to get a true picture of OSKVI.
Ok. Let's start with the questions - how can OSKVI revenue be smaller than its PBT? What is OSKVI business, and how do they make money? More importantly, as a potential investor, why should I buy OSKVI? Is current price ($2.42) cheap or expensive?
Let's start with OSKVI business. OSKVI is a small cap Mesdaq stock which operates a venture capital and private equity business. Simply put, OSKVI helps other businesses to list on the stock exchange. OSKVI puts up the venture capital (to cover cost of listing, etc.), and in return they may receive either some fee income and/or more importantly, a certain % of the shares of the newly listed companies for free. If the listing turns out to be successful and the share price shoots up, OSKVI strikes gold. If the listing is unsuccessful, the venture capital is lost.
On the surface, this might seem risky. Monies put up, once spent, is gone. The returns uncertain. So, why invest in OSKVI? Well, OSKVI is managed by professionals, and they've been around in this business for over 6 years now. Their track record is good. To date, they have invested in 20 companies, of which 12 are now listed. Some of the more important companies are Green Packet Bhd (GPACKET), mTouche Technology Bhd (MTOUCHE), eBworx Bhd (EBWORX), MNC Wireless Bhd (MNC), Willowglen MSC Bhd (WILLOW), INS Bioscience Bhd (INSBIO), all of these listed on Mesdaq. More importantly, GPACKET is by far the largest stock by market cap in Mesdaq, so, it's clear that at least in terms of getting a listing on the Mesdaq exchange, there's no venture capital firm that is more successful than OSKVI. At least not yet.
Also, they have successfully ventured overseas. GMO Limited is their successful listing in London Stock Exchange Alternative Investment Market (LSE AIM). From various news, they intend to continue their activities around the region, particularly China, Vietnam, Singapore, etc. This seems promising, since the stock markets in China, Vietnam and Singapore provides a much better valuation of companies than Malaysia, and the chances of a successful listing there seems better.
OSKVI REVENUE
As mentioned previously, 2006 Revenue was reported as $42M. In the annual report, it provided a breakdown as follows:
Quick observations:
1. It's clear that more than half of the so-called "revenue" is made up of gain on disposals.
2. If OSKVI did not dispose their paper gains, then, the accounting standards would only count revenue as "interest income" and "fee income".
3. As I described above, the main bulk of OSKVI's true revenue is not the fee income charged, but the gain in value in the shares owned. And they receive significant shares and for successful listing, the price can easily exceed the IPO price and continue growing. Unfortunately, these are not reflected under "Revenue".
OSKVI EARNINGS
Ok. How does the Earnings get reported? Well, take a look at below.
Quick comments:
1. Mathematically, PBT = Revenue - Admin Expense + Share of Profits.
2. The Share of Profits figure is really share of profits of its associates. However, under present accounting rules, Share of Profits for holdings less than 20% (or non-associates) don't get counted at all. Further, the major source of OSKVI's value is in its shares, which are only counted if OSKVI makes a disposal (i.e. realized gains). So, it doesn't really present a true picture.
BALANCE SHEET
Quick Comments:
1. Absolute no debts. No short term debt. No long term debt.
2. Total liability only a measly $0.8M. In other words, nearly all the assets belong to shareholders.
3. Cash $27M is nice.
4. Most of the assets are in Associated Companies ($226M) and "Other Investments" ($75M). This means, you must read Notes 12 and 13 carefully, and try to understand them.
NOTES 12 - ASSOCIATE COMPANIES
Quick comments:
1. Now we get to the interesting part. We note that OSKVI owns free shares in many of these institutions - e.g. 17% Green Packet, 20% MNC, 20% eBworx, 20% mTouche, 15% GMO, etc.
2. Not all the associates are listed companies. Finexasia and Eco Industrial are not listed.
3. So, with this information, we can actually calculate the current market value of the listed companies, to get an idea of how much OSKVI Net worth truly is, as opposed to Book Value (which is an out-dated value of the holdings). At 31/12/2006, I obtained a market value of $490M approximately. Already, this figure is much greater than the Book Value stated in the Balance Sheet of $226M, a difference of over $260M. Since 31/12/06, to date, the market value has risen even further (but let's not count that). According to current accounting standards, this difference is not stated in the Balance Sheet, and so, the Shareholder Equity is understated by at least $260M.
NOTES 13 - OTHER INVESTMENTS
Quick comments:
1. The amount stated in the Balance Sheet is $75M.
2. There is actually some gain in the quoted shares in Malaysia ($9.1M market vs $6.9M book).
3. There may be additional hidden assets in its unquoted shares outside Malaysia, but I have not bothered to investigate deeper since the margin of safety is already quite large from Notes 12 alone.
INTRINSIC VALUE - FIRST ESTIMATE
Ok, I think we have enough information now to do a first estimate of OSKVI's Intrinsic Value. Recall the company has no debt, and the bulk of its assets are free shares in the companies that they help to list. So, at first cut, it is clear that its Net Assets should be around $331M (as reported in the Balance Sheet) + $260M = $590 or say $600 M approximately.
Interestingly, this is roughly the same as the fund size managed by OSKVI, which is nearly $600M.
However, if one looks at OSKVI Capital Structure, it has 150M shares outstanding. At current market price of $2.42, it would value OSKVI at $363M, well below $600M. It suggests that at $2.42, an investor could buy OSKVI for $0.60 for every $1 net worth. By any standards, this is a steal.
ANOTHER PERSPECTIVE - CHEAPER ENTRY TO GREEN PACKET WITH FREEBIES
It is worth noting that OSKVI owns approximately $348M worth of GPACKET alone (assuming GPACKET price of $4.52 at 31/12/06). Last look at GPACKET shows it's trading higher, albeit marginally. This alone is nearly the same as OSKVI Market Cap. In other words, just its current ownership of GPACKET is already worth its entire market capitalization. So, instead of buying GPACKET, why not buy OSKVI and get FOR FREE all the other holdings that OSKVI owns, such as mTouche, MNC, eBworx, etc. plus its cash plus its future prospects?
Or put another way, if all the other assets are valued at market value, take 100% cash, and put a zero value on its future prospects, then, at current OSKVI price of $2.42, one could buy GPACKET at only a quarter of its current price approximately ... (psstt ... don't tell the recent buyers of GPACKET - they might cry ...)
OSKVI FUTURE PROSPECTS
Notwithstanding the above mispricing, what I am extremely excited about is 2 of OSKVI's future prospects.
FUTURE PROSPECT #1 - CHINA
Here, I will quote the Chairman's Statement in the 2006 Annual Report.
"... the Group has also invested in a company involved in the outdoor advertising business in China. The company holds all the economic rights and benefits to the existing bicycle shelter and public service bulletin board advertising business via an exclusive concession granted by the Ministry of Public Security in China. To date, the company is the only exclusive provider to carry out this type of advertisements for the whole of China. Our investee company is poised to become the market leader in the outdoor advertising business in China..."
Quick comments:
1. This company is not yet listed in China.
2. How much would this company with exclusive concession be worth, when it is listed?
3. Is it worth nil? Obviously not. In fact, I am personally very bullish, that it will be worth at least hundreds of millions. Yet, the market is valuing OSKVI as if it is worth nothing (actually, at $2.42, it is technically a negative value, which is a laugh ... :-) ).
FUTURE PROSPECT #2 - SINGAPORE
Again, I quote Chairman's Statement:
"...We invested in a Singapore based company involved in providing comprehensive waste management solutions from environmental laboratory testing to treatment of disposal for both hazardous and non-hazardous wastes. The company focusses mostly on industrial waste that is generated from petrochemical and pharmaceutical companies. ..."
Quick comments:
1. This company is not yet listed in Singapore.
2. How much would this company be worth, when it is listed?
3. Is it worth nil? Obviously not. In fact, I am personally quite bullish, that it will be worth quite a lot to OSKVI. Again, the market is valuing OSKVI as if it carries a negative net worth to the company.
It should be noted that for both Prospects, OSKVI spends $53M in venture capital. In a separate press article, it is stated that OSKVI intends to grow its fund to $1B (from approximately $600M currently) within 2 years. In other words, besides paying $0.60 for OSKVI (to get a value of $1 worth today), it seems OSKVI is quite likely to grow to $1.67 in 2 years time (for every $1 worth of value). Seems to me like this is not just a value investment, but also a growth investment at the same time!
OSKVI DISTRIBUTION OF SHAREHOLDERS
There are 5,058 shareholders at 31/12/06, the distribution can be found in the Annual Report.
OSKVI MAJOR SHAREHOLDINGS
It should be no surprise that nearly 2/3rd of OSKVI is owned by OSK, its parent company. I can count only 3 funds in Top 30 holdings - #17 SBB Emerging Companies Growth Fund, # 19 - UBB Common Fund, and #30 - DBS Malaysia Equity Fund. The rest of the Top 30 owners are largely high net worth individuals.
It should be noted that it had been reported in the news before, that OSKVI is a significant contributor to OSK earnings. So, I would not be surprised if one day, OSK were to launch a VG Offer to remaining shareholders. It is easy to think of a scenario where as both the China outdoor advertising business and the Singapore waste management company gets closer to a successful listing stage, that OSK might decide to get all the free shares for itself (instead of sharing with the rest of the shareholders), by launching a VGO.
OSKVI DIVIDENDS
For 2006 year, OSKVI paid a total of 20 sen dividend. At $2.42, this translates to a gross dividend yield of 8.3%! Net of tax dividend yield is closer to 6%, well above F.D. rate of 3.7%.
RISKS
Potentially, there are risks in owning OSKVI.
1. The stocks that OSKVI holds might be viewed as over-valued stocks.
2. There may be fears that OSKVI, even though it owns the 6 Mesdaq stocks, might never dispose its holdings.
3. There may be fears that OSKVI won't be able to dispose its holdings, since they are significant holdings, without depressing prices.
4. As its underlying holdings are shares which fluctuates daily, it's Intrinsic Value also fluctuates daily.
5. ? (you tell me)
To me, these risks are manageable.
1. Someone might think that GPACKET is overvalued at today's prices and vice versa, but there is an open market out there, and there is such a large safety margin (an entry equivalent to just a quarter of current market price).
2. & 3. There are many ways to dispose significant holdings with minimal impact on share price. A normal method is via professional private placements. If the timing is done correctly (e.g. during a bull run where there is inherently large volume traded) and done by professionals, it might not even have a noticeable price impact. As OSK and OSKVI are in the securities industry, I have confidence that they will be able to dispose their holdings in a manner that maximizes value to shareholders, especially when OSK owns 2/3rds of OSKVI. The only question is when, and for me, I will leave it to the professionals. So far, they haven't completely dissappointed me yet ...
4. That's a normal stock market risk. Every stock price fluctuates daily.
CONCLUSION
I believe this is a steal, at $2.42. Ignoring its bright future prospects in China and Singapore, its Intrinsic Value is already around $4. If you believe the company that it's share fund will grow to $1B in 2 years time (and by then, I expect both its China and Singapore prospects to be listed), then, its Intrinsic Value will be worth over $6 in 2 years time. To me, it has a high level of believability.
Recommendation: As this is not an easy company to understand (unless one wants to study its annual report carefully), and as the quarterly earnings reports don't actually present a true and fair picture of OSKVI net worth, it might take some time before the market appreciates the true value of OSKVI. My strong recommendation is not to invest more than 5% of your stock portfolio in it, as it has the potential to tie up your capital. Still, the downside risks seem low, and upside gains potential seem high, and the stock pays a nice dividend.
Disclaimer: I own OSKVI, and naturally, my opinion can be biased. Comments welcomed. As usual, use your own judgement and invest at your own risk.
Acknowledgement: Special thanks to "kiddy" in investssmart chatbox who first highlighted OSKVI to me. I won't be able to always analyze all stocks recommended to me, but do keep them coming. Thanks!
Tuesday, May 8, 2007
Master and Novice - Investor, Trader, Speculator ...
In the context of stock investing in Bursa, we frequently hear terms like "investor", "trader", "speculator" and even "gambler". Expand a little, and we might hear terms like "value investor", "growth investor", "momentum investor", "business analyst", "market analyst", "fundamental investor", "technical investor", "actuary investor", "intelligent investor", etc. I am sure some of you will even hear terms like "stock operator" (it sounds old-fashion, like a telephone operator - vague but neutral). And most likely we all have our own understanding of what these various terms mean.
I believe there is no one single right understanding of these terms. But sometimes, it's good to reflect on the differences, only to better understand the different methods used in search of better investment returns. It is also important to understand that with each method, there are "masters" and there are "novices". You'll know who the masters are only when they consistently generate above average returns over the long term. (I would regard someone like Buffett as a "grandmaster").
And naturally, because there is no one "master reference" that is agreed and accepted by everyone, most people tend to call themselves "investors" or "traders" (even when some of them might actually be just gambling).
I thought it might be worthwhile to set out my own understanding on these terms. Why? Well, mainly to clarify my own thought, but also to stimulate discussions on similarities and differences, who might be the master in each category, and perhaps better understand ourselves in the process. You might have heard of another term which I might not have mentioned here or simply have forgotten - if so, please feel free to comment. As this is my own understanding, I understand that it might be different to yours.
So, here's my own understanding so far.
1. Investor
- an investor might invest in the same way as a typical parent might "invest" in their child's education - spend some money today (say, to send their child to overseas universities to acquire better skills/knowledge/experience), in the hope that in future, the child would be able to secure a higher paying job and earn more than the cost of the original investment.
- there is the belief that the future will bring better things, and patience is generally a virtue.
- the selection criteria tend to be based more on the underlying business fundamentals, rather than the stock price & volume technicals.
- believes that in the short run, the stock market might be a voting machine (supply and demand), but in the long run, the market invariably is a weighing machine (earnings).
- an example of a Master Investor = Buffett.
- an example of a novice investor might be someone who invest based on say just one fundamental ratio (e.g. P/NTA< 1) indiscrimately. The difference between him and Buffett is probably in the level of understanding of the business behind the counter (e.g. economics, valuation, earnings, future prospects, management, etc), the differences in intrinsic value and margin of safety assessment. He might blindly follow Buffett's idea of concentration, but instead of getting superior returns, he might get an opposite or inconsistent result over time.
2. Trader
- the basic idea is to sell at a higher price than the original buy price.
- operates a bit like a commodity trader or a retail shop. Doesn't really care which stock or what type of product, so long as they are confident that they can sell at a higher price than they bought. Especially during speculative bubbles when the game becomes focussed on finding the greater fool (buy very high, sell even higher).
- there are many different types of traders, but probably most would use technical analysis (based on historical prices and volume) .
- an example of a Master Trader = Jesse Livermore or Charles Darvas.
- an example of a novice trader might be someone who buys a stock because today's price is higher than yesterday, without regard to other technical considerations. The novice would differ from the Master in many ways - e.g. the novice might have applied an incorrect "reading of the tape" (or candlesticks charts, technical indicators, etc.), the novice might not have set or execute the stop loss correctly (to keep losses small and letting the winners ride), the novice might not stick long enough to his trading plan for the laws of average to work, the novice might have over/under-traded (e.g. bet large when odds are merely 51/49, bet small when odds are 80/20), etc.
3. Speculator
- A speculator (or someone who "speculates") frequently have a hypothesis (or a set of hypothesis) about what's going to drive the price up / down, and that hypothesis frequently determines the buying/selling decision.
- For example, they might think that CPO prices will go up due to some fundamental reasons, and when they do, it will drive future earnings of CPO stocks up and so, they buy CPO stocks now. Nothing wrong right?
- An example of a Master Speculator would be Soros (cf. famous for his large Sterling bet in 1992 that broke the Bank of England).
- An example of novice speculator? Well, there are probably too many in Bursa Malaysia, with below average results. There are many differences, but the average speculator might not realize that George Soros don't take risks. Yes - you've heard me right. Even when Soros took on a highly leveraged position of $10B, backed by an entire fund size of $7B against the Sterling (this is definitely not Graham style of diversification), he has already done his calculations and has set his plans already such that in the worst case scenario, he would lose only 4% ... Yes, only 4% of his capital ... Interesting isn't it? You can see that this is in stark contrast to the average speculator, some of whom might even consider betting their house and car and if it didn't turn out as expected, they then lose their house and car ... Naturally, there are many other differences between Soros and the average speculator besides limiting risks and give due consideration to both upside and downside. Some differences that comes into mind are superior understanding and superior quality of hypothesis, always testing the hypothesis against the facts as they evolve for confirmation or otherwise, extreme flexibility (not having a fixed mind or a fixed position, definitely not stubborn), willingness to quickly admit mistakes and cut loss, position sizing, margin of safety, objectivity, etc. Generally, a master of his craft.
4. Gambler
- I suppose there are many "investors" out there in Bursa who would buy a stock based on a stock tip, without knowing either the fundamentals nor the technicals of the stock (nor the tip adviser). To me, that would seem like gambling.
- Novice gamblers might differ from Master gamblers in the source and reliability of their tips. E.g. a novice gambler might have heard from his neighbour that so-and-so a stock will go up through the roof, without checking whether the neighbour (or his source) has a good and successful long-term track record, and whether he/she is reliable or trustworthy. A Master gambler might be someone with close personal & business connections on the inside, and have checked and make sure that the source is completely trustworthy and reliable before considering any actions. The Master might even apply other methods to supplement his decision, to increase his margin of safety (e.g. have other independent and highly trusted source to verify, have personal copies of certain key or sensitive earnings information not yet released, etc.). Of course, insider trading is illegal, so, we won't point fingers at anybody right?
5. Value vs Growth investor
- A value investor might be looking for an investment where he can buy $1 worth of business for $0.50, and a growth investor might be looking for an investment where he can buy $1 worth of business today for $1 because he believes that the $1 today will grow to $2 in future.
- In other words, both value and growth investors could still be fundamental investors. They are not pure technicians, since both investors assess intrinsic values. My own belief resonates with Buffett, who believes that there is really no distinction between the two - in my experience one can sometimes find both value and growth in Bursa, i.e. it's possible to buy $2 worth of business in future selling for less than $1 today :-). Also, a business that is almost certain to be worth $2 tomorrow and selling at $1 today is good value isn't it (even if the accountants calculate its NTA to be $1 on the last balance sheet date)?
6. Momentum investor
- The momentum part typically refers to price momentum, i.e. suggestive of a technician rather than a fundamental investor.
- Jesse Livermore is an example of a Master momentum investor since he discourages trying to buy at the absolute bottom, and selling at the absolute top. Some of his most famous quotes are "the trend is your friend", "the lowest eights and highest eights are the most expensive eights", etc.
7. Business Analyst
- Buffett is clearly the master here, with an excellent understanding of the underlying business behind the stock ticker.
- The business analysts typically takes a "bottom up" approach to investing (i.e. start from the individual company first, and then work yourself up to the industry, country, global economy), although strictly speaking a "top-down" approach could generate specific company ideas that would enable a more efficient "bottom up" analysis. To a master Business Analyst, I believe all these would probably happen on the subconscious level, without conscious awareness. Contrast the novice who might spend a lot of time debating with himself whether to adopt a "top-down" or "bottom-up" approach, instead of actually analyzing a specific company and forming his own business conclusions.
8. Market analyst
- The difference between Business analyst and a Market analyst is that a Market analyst focuses on the Market. The definition of the market might be either the stock market itself, or the market/industry in which the company operates in (e.g. instead of focussing on MASTEEL say, the market analyst focuses on the steel market in general).
- Buffett himself doesn't think too highly of market analysts and I believe he meant that it's better to be a good business analyst first, since a good business analyst needs to know something about the competitor and the market in general (e.g. steel market), but a good market analysts might not need to know anything about the valuation of a specific company (e.g. MASTEEL debts).
9. Actuarial investor
- Mark Tier, in his book "The Winning Investment habits of Warren Buffett & George Soros" has a good definition of the Actuary on page 126.
- "Actuary deals in numbers and probabilities. Like an insurance company, he is focused on the overall outcome, totally unconcerned with any single event."
- To me, one of the earliest Master Actuary investor would be Graham. He would hold hundreds of stocks that meets his criteria (e.g. low P/E, low P/NTA, etc.). He frequently doesn't know which stock will rise. He also doesn't know which stock will fall and go bankrupt. But he knows that as a group, provided he bought all such stocks at a low enough price, a few might go bankrupt, a few might not move, and the rest will move up in such a way that overall, he is almost certain to make a profit on his entire account, a profit that could beat or match the market index. The idea is similar to insurance companies writing life insurance for a pool of diversified lives (spread across the entire country is better than concentrated in a single building). Insurance companies don't know who exactly is going to die next, but they will know, with quite a high degree of certainty, how many lives in the pool of insured lives are expected to die in a year, based on statistical investigations conducted by the Actuary. Hence the phrase "Actuarial investor" (or "The Actuary").
10. Fundamental vs technical investor
- Hopefully, self explanatory by now ...
11. Intelligent investor
- This doesn't necessarily refer to IQ or intelligence.
- Graham's famous summary quote (on Chapter 20, page 523 in his Intelligent Investor book) says it best: "Investment is most intelligent when it is most businesslike".
- There are many levels of understanding to the bold phrase.
- At one level is to imagine as if you are running a trading shop. What would you do to be financially successful? A successful operator would ensure that in the long run, the cost of buying all his goods is at a lower price than what he could sell to ensure a profit (after tax, expenses and other costs) that is not just positive, but is also higher than what he could obtain by merely investing his capital passively. So must an intelligent stock operator do the same thing. Only sell shares at a high enough price to make sure that it covers original buy cost, expenses and tax, so that at the end of the day, it provides a high enough profit on the total account that is higher than what he could obtain from a passively investing in either Fixed Deposits or a broadly representative Mutual Fund. Of course, the difficulty with stocks is that its buy and sell price are not predetermined in advance, and can fluctuates daily.
- Another level of understanding is to buy a stock like as if one approaches the task of buying a business. This is fundamental investing. If you buy a business from the private market, you would naturally evaluate the business economics carefully, assess its assets and liabilities carefully, study its past and evaluate its future earnings prospects carefully, its management, staff, competitors, the degree of economic moat, etc. Similarly, when you sell a stock, in the same manner as to whether you would sell your own private business to a 3rd party.
12. A stock operator
- From "Reminiscence of a Stock Operator", a biography on Jesse Livermore. A fairly neutral term, although perhaps old fashion, vague, and can make one wonder what exactly does an operator do. (cf. telephone operator?). In the book, the author was obviously referring to the process of buying and selling stocks.
Some concluding comments
- There is clearly more than one method and path to riches in the stock market, just as there are many different ways to become poor in the stock market.
- I believe for most people, it is practically more important to understand the differences between a Master vs a Novice in their chosen investment methods (including understanding where they've gone wrong and what they could do better), than debating various terminologies and minor differences in understanding.
- Nevertheless, different methods do exist, and I believe it is important to understand what investment style or method one is currently using, to make sure that it fits within one's broader and unique personality. For example, someone who can't sit still patiently and needs everyday action would do better as a trader than a value investor, although this of course can only be a generalization.
- For someone beginning to invest, I believe that it is more important to learn and thoroughly understand one method first, and to master that, before one can make money consistently and even before considering other methods.
- I also have a suspicion, that different methods might work better at different stages of the market. For example, in a bear market, value investors who are able to pick good value stocks will tend to do better, whereas in a long boom market that last years, value investors might tend to sell off their holdings too soon (especially when it's above any reasonable measure of intrinsic value), whereas momentum players who don't see a weakness yet tend to be more successful to ride the long upside and churn out a better performance.
- Having said that, one clearly does not need to master more than one method to accumulate huge wealth - Buffett is the clearest example of someone who has created an amazing amount of wealth by using largely one (i.e. his) method of investing.
- Personally, I find myself continually learning new skills and find my investment style evolving from a value investor to what I called a "fusion investor" (so now you know why I called this blog "Fusion Investor"), someone who applies more than a single technique to investing. Currently, I'm probably still 80% value, although I suspect this % might change in future. Also, I sense that Bursa Malaysia has its own set of characteristics that is quite different from say, the NYSE. I "feel" Bursa might be more news based than fundamental based (e.g. certain stocks tend to rise much more upon announcement of certain news, than what a prudent and rational business analysis would indicate, especially if the transactions are conducted in the private market). It also seems like it's more speculative based (just witness the huge proportion of retailers and syndicates playing the active stocks). But these are just my own impression, and naturally, can be biased.
As usual, the above are just merely my views. Use your own judgement and invest at your own risks.
I believe there is no one single right understanding of these terms. But sometimes, it's good to reflect on the differences, only to better understand the different methods used in search of better investment returns. It is also important to understand that with each method, there are "masters" and there are "novices". You'll know who the masters are only when they consistently generate above average returns over the long term. (I would regard someone like Buffett as a "grandmaster").
And naturally, because there is no one "master reference" that is agreed and accepted by everyone, most people tend to call themselves "investors" or "traders" (even when some of them might actually be just gambling).
I thought it might be worthwhile to set out my own understanding on these terms. Why? Well, mainly to clarify my own thought, but also to stimulate discussions on similarities and differences, who might be the master in each category, and perhaps better understand ourselves in the process. You might have heard of another term which I might not have mentioned here or simply have forgotten - if so, please feel free to comment. As this is my own understanding, I understand that it might be different to yours.
So, here's my own understanding so far.
1. Investor
- an investor might invest in the same way as a typical parent might "invest" in their child's education - spend some money today (say, to send their child to overseas universities to acquire better skills/knowledge/experience), in the hope that in future, the child would be able to secure a higher paying job and earn more than the cost of the original investment.
- there is the belief that the future will bring better things, and patience is generally a virtue.
- the selection criteria tend to be based more on the underlying business fundamentals, rather than the stock price & volume technicals.
- believes that in the short run, the stock market might be a voting machine (supply and demand), but in the long run, the market invariably is a weighing machine (earnings).
- an example of a Master Investor = Buffett.
- an example of a novice investor might be someone who invest based on say just one fundamental ratio (e.g. P/NTA< 1) indiscrimately. The difference between him and Buffett is probably in the level of understanding of the business behind the counter (e.g. economics, valuation, earnings, future prospects, management, etc), the differences in intrinsic value and margin of safety assessment. He might blindly follow Buffett's idea of concentration, but instead of getting superior returns, he might get an opposite or inconsistent result over time.
2. Trader
- the basic idea is to sell at a higher price than the original buy price.
- operates a bit like a commodity trader or a retail shop. Doesn't really care which stock or what type of product, so long as they are confident that they can sell at a higher price than they bought. Especially during speculative bubbles when the game becomes focussed on finding the greater fool (buy very high, sell even higher).
- there are many different types of traders, but probably most would use technical analysis (based on historical prices and volume) .
- an example of a Master Trader = Jesse Livermore or Charles Darvas.
- an example of a novice trader might be someone who buys a stock because today's price is higher than yesterday, without regard to other technical considerations. The novice would differ from the Master in many ways - e.g. the novice might have applied an incorrect "reading of the tape" (or candlesticks charts, technical indicators, etc.), the novice might not have set or execute the stop loss correctly (to keep losses small and letting the winners ride), the novice might not stick long enough to his trading plan for the laws of average to work, the novice might have over/under-traded (e.g. bet large when odds are merely 51/49, bet small when odds are 80/20), etc.
3. Speculator
- A speculator (or someone who "speculates") frequently have a hypothesis (or a set of hypothesis) about what's going to drive the price up / down, and that hypothesis frequently determines the buying/selling decision.
- For example, they might think that CPO prices will go up due to some fundamental reasons, and when they do, it will drive future earnings of CPO stocks up and so, they buy CPO stocks now. Nothing wrong right?
- An example of a Master Speculator would be Soros (cf. famous for his large Sterling bet in 1992 that broke the Bank of England).
- An example of novice speculator? Well, there are probably too many in Bursa Malaysia, with below average results. There are many differences, but the average speculator might not realize that George Soros don't take risks. Yes - you've heard me right. Even when Soros took on a highly leveraged position of $10B, backed by an entire fund size of $7B against the Sterling (this is definitely not Graham style of diversification), he has already done his calculations and has set his plans already such that in the worst case scenario, he would lose only 4% ... Yes, only 4% of his capital ... Interesting isn't it? You can see that this is in stark contrast to the average speculator, some of whom might even consider betting their house and car and if it didn't turn out as expected, they then lose their house and car ... Naturally, there are many other differences between Soros and the average speculator besides limiting risks and give due consideration to both upside and downside. Some differences that comes into mind are superior understanding and superior quality of hypothesis, always testing the hypothesis against the facts as they evolve for confirmation or otherwise, extreme flexibility (not having a fixed mind or a fixed position, definitely not stubborn), willingness to quickly admit mistakes and cut loss, position sizing, margin of safety, objectivity, etc. Generally, a master of his craft.
4. Gambler
- I suppose there are many "investors" out there in Bursa who would buy a stock based on a stock tip, without knowing either the fundamentals nor the technicals of the stock (nor the tip adviser). To me, that would seem like gambling.
- Novice gamblers might differ from Master gamblers in the source and reliability of their tips. E.g. a novice gambler might have heard from his neighbour that so-and-so a stock will go up through the roof, without checking whether the neighbour (or his source) has a good and successful long-term track record, and whether he/she is reliable or trustworthy. A Master gambler might be someone with close personal & business connections on the inside, and have checked and make sure that the source is completely trustworthy and reliable before considering any actions. The Master might even apply other methods to supplement his decision, to increase his margin of safety (e.g. have other independent and highly trusted source to verify, have personal copies of certain key or sensitive earnings information not yet released, etc.). Of course, insider trading is illegal, so, we won't point fingers at anybody right?
5. Value vs Growth investor
- A value investor might be looking for an investment where he can buy $1 worth of business for $0.50, and a growth investor might be looking for an investment where he can buy $1 worth of business today for $1 because he believes that the $1 today will grow to $2 in future.
- In other words, both value and growth investors could still be fundamental investors. They are not pure technicians, since both investors assess intrinsic values. My own belief resonates with Buffett, who believes that there is really no distinction between the two - in my experience one can sometimes find both value and growth in Bursa, i.e. it's possible to buy $2 worth of business in future selling for less than $1 today :-). Also, a business that is almost certain to be worth $2 tomorrow and selling at $1 today is good value isn't it (even if the accountants calculate its NTA to be $1 on the last balance sheet date)?
6. Momentum investor
- The momentum part typically refers to price momentum, i.e. suggestive of a technician rather than a fundamental investor.
- Jesse Livermore is an example of a Master momentum investor since he discourages trying to buy at the absolute bottom, and selling at the absolute top. Some of his most famous quotes are "the trend is your friend", "the lowest eights and highest eights are the most expensive eights", etc.
7. Business Analyst
- Buffett is clearly the master here, with an excellent understanding of the underlying business behind the stock ticker.
- The business analysts typically takes a "bottom up" approach to investing (i.e. start from the individual company first, and then work yourself up to the industry, country, global economy), although strictly speaking a "top-down" approach could generate specific company ideas that would enable a more efficient "bottom up" analysis. To a master Business Analyst, I believe all these would probably happen on the subconscious level, without conscious awareness. Contrast the novice who might spend a lot of time debating with himself whether to adopt a "top-down" or "bottom-up" approach, instead of actually analyzing a specific company and forming his own business conclusions.
8. Market analyst
- The difference between Business analyst and a Market analyst is that a Market analyst focuses on the Market. The definition of the market might be either the stock market itself, or the market/industry in which the company operates in (e.g. instead of focussing on MASTEEL say, the market analyst focuses on the steel market in general).
- Buffett himself doesn't think too highly of market analysts and I believe he meant that it's better to be a good business analyst first, since a good business analyst needs to know something about the competitor and the market in general (e.g. steel market), but a good market analysts might not need to know anything about the valuation of a specific company (e.g. MASTEEL debts).
9. Actuarial investor
- Mark Tier, in his book "The Winning Investment habits of Warren Buffett & George Soros" has a good definition of the Actuary on page 126.
- "Actuary deals in numbers and probabilities. Like an insurance company, he is focused on the overall outcome, totally unconcerned with any single event."
- To me, one of the earliest Master Actuary investor would be Graham. He would hold hundreds of stocks that meets his criteria (e.g. low P/E, low P/NTA, etc.). He frequently doesn't know which stock will rise. He also doesn't know which stock will fall and go bankrupt. But he knows that as a group, provided he bought all such stocks at a low enough price, a few might go bankrupt, a few might not move, and the rest will move up in such a way that overall, he is almost certain to make a profit on his entire account, a profit that could beat or match the market index. The idea is similar to insurance companies writing life insurance for a pool of diversified lives (spread across the entire country is better than concentrated in a single building). Insurance companies don't know who exactly is going to die next, but they will know, with quite a high degree of certainty, how many lives in the pool of insured lives are expected to die in a year, based on statistical investigations conducted by the Actuary. Hence the phrase "Actuarial investor" (or "The Actuary").
10. Fundamental vs technical investor
- Hopefully, self explanatory by now ...
11. Intelligent investor
- This doesn't necessarily refer to IQ or intelligence.
- Graham's famous summary quote (on Chapter 20, page 523 in his Intelligent Investor book) says it best: "Investment is most intelligent when it is most businesslike".
- There are many levels of understanding to the bold phrase.
- At one level is to imagine as if you are running a trading shop. What would you do to be financially successful? A successful operator would ensure that in the long run, the cost of buying all his goods is at a lower price than what he could sell to ensure a profit (after tax, expenses and other costs) that is not just positive, but is also higher than what he could obtain by merely investing his capital passively. So must an intelligent stock operator do the same thing. Only sell shares at a high enough price to make sure that it covers original buy cost, expenses and tax, so that at the end of the day, it provides a high enough profit on the total account that is higher than what he could obtain from a passively investing in either Fixed Deposits or a broadly representative Mutual Fund. Of course, the difficulty with stocks is that its buy and sell price are not predetermined in advance, and can fluctuates daily.
- Another level of understanding is to buy a stock like as if one approaches the task of buying a business. This is fundamental investing. If you buy a business from the private market, you would naturally evaluate the business economics carefully, assess its assets and liabilities carefully, study its past and evaluate its future earnings prospects carefully, its management, staff, competitors, the degree of economic moat, etc. Similarly, when you sell a stock, in the same manner as to whether you would sell your own private business to a 3rd party.
12. A stock operator
- From "Reminiscence of a Stock Operator", a biography on Jesse Livermore. A fairly neutral term, although perhaps old fashion, vague, and can make one wonder what exactly does an operator do. (cf. telephone operator?). In the book, the author was obviously referring to the process of buying and selling stocks.
Some concluding comments
- There is clearly more than one method and path to riches in the stock market, just as there are many different ways to become poor in the stock market.
- I believe for most people, it is practically more important to understand the differences between a Master vs a Novice in their chosen investment methods (including understanding where they've gone wrong and what they could do better), than debating various terminologies and minor differences in understanding.
- Nevertheless, different methods do exist, and I believe it is important to understand what investment style or method one is currently using, to make sure that it fits within one's broader and unique personality. For example, someone who can't sit still patiently and needs everyday action would do better as a trader than a value investor, although this of course can only be a generalization.
- For someone beginning to invest, I believe that it is more important to learn and thoroughly understand one method first, and to master that, before one can make money consistently and even before considering other methods.
- I also have a suspicion, that different methods might work better at different stages of the market. For example, in a bear market, value investors who are able to pick good value stocks will tend to do better, whereas in a long boom market that last years, value investors might tend to sell off their holdings too soon (especially when it's above any reasonable measure of intrinsic value), whereas momentum players who don't see a weakness yet tend to be more successful to ride the long upside and churn out a better performance.
- Having said that, one clearly does not need to master more than one method to accumulate huge wealth - Buffett is the clearest example of someone who has created an amazing amount of wealth by using largely one (i.e. his) method of investing.
- Personally, I find myself continually learning new skills and find my investment style evolving from a value investor to what I called a "fusion investor" (so now you know why I called this blog "Fusion Investor"), someone who applies more than a single technique to investing. Currently, I'm probably still 80% value, although I suspect this % might change in future. Also, I sense that Bursa Malaysia has its own set of characteristics that is quite different from say, the NYSE. I "feel" Bursa might be more news based than fundamental based (e.g. certain stocks tend to rise much more upon announcement of certain news, than what a prudent and rational business analysis would indicate, especially if the transactions are conducted in the private market). It also seems like it's more speculative based (just witness the huge proportion of retailers and syndicates playing the active stocks). But these are just my own impression, and naturally, can be biased.
As usual, the above are just merely my views. Use your own judgement and invest at your own risks.
Saturday, May 5, 2007
HEXZA - Financial Results Update
HEXZA posted its "quarterly" financial results last night. It might be surprising since it has just posted its previous earnings results just over a month ago (27 Mar). The reason is due to the change in the company's financial year-end (from 31 January to 30 June) - the company has therefore announced the results for 31 March 07 (14 months), and there should be another one for 30 June 2007 to complete its new financial year end. For convenience, I have labelled the 2 month period from 1 Feb-31Mar as "Q5/07", but note that this is only 2/3rd of a traditional quarter.
QUARTERLY EARNINGS
Quick comments:
1. Q1/07 relates to the 3 month period from 1 Feb 06-30 Apr 06. We can compare Q5/07 with 2/3rds of Q1/07.
2. Revenue for Q5/07 is proportionately better than Q1/07, despite Q1/07 being a traditionally slower quarter.
3. PBT and PAT however is proportionately worse.
4. In the notes, the company attributed the reduced earnings to a rise in raw material costs. Whilst the company does not try to hide and instead draws shareholder's attention to the proportionately worse earnings results, they have also not elaborated further. My feeling is that two months may be too short a period to judge, as final product price rises & fall tend to lag costs rise & fall.
BALANCE SHEET
Quick Comments:
1. Total borrowings continue to inch downwards - ok.
2. Long term debt continues to inch downwards - ok, since long term debts typically carries higher finance costs, and I take comfort that the traditional company strength and culture is still intact.
3. Inventory and Receivables - ok.
4. Cash inch upwards - good.
5. Net Assets continue to grow albeit slowly, from $1.26 to $1.27.
6. Liquidation price (same basis as before) continues to grow, from $0.63 to $0.65. (Note that number of shares outstanding has grown slightly due to ESOS).
7. Balance sheet is still strong overall and improving slightly.
REVISED P/E AND MARGIN OF SAFETY
REVISED P/E AND MARGIN OF SAFETY
If we assume Q1/07 revenue and earnings are uniformly distributed over the 3 month period (even though we know they are not), then, the TTM PAT = $14.2M, representing a slight reduction from $14.8M previously. At yesterday's closing price of $0.69, the company is capitalized at $89.2M. Net cash is $34.9M. The business is effectively capitalized at $89.2 - $34.9 = $54.3M. This gives a net of cash P/E of 3.7, which is still undemanding. With NTA/share at $1.27, and liquidation price of $0.65, current price of $0.69 still affords quite a significant amount of margin of safety.
TECHNICAL
(courtesy of tradesignum.com)
TECHNICAL
(courtesy of tradesignum.com)
Since my first posting on HEXZA (Mar 28), the stock price has generally advanced up to Apr 10 with a "doji". Note the long upper shadow and the relatively high volume (which is slightly different from past false dojis). The next day (coincided with the irrationally bearish 10 April news article on Pioneer, Nipah Palm and Ethanol - see my 30 April posting) provided confirmation that the bulls have lost and the price starts its downward trend up to Apr 19. On Apr 20, the green candle provided confirmation that the bears has lost. Apr 27 - red candle, lower volume - potential reversal. Apr 30 - undecided, but May 3 confirmed downtrend. May 4 - slowing down, increased volume. Downtrend is still possible next week. I will be looking to accumulate on further weakness, after trading some of my HEXZA holdings earlier this week. However, I don't expect to make significant gains from trading since it's quite clear that there are more exciting "trading stocks" around that affords much higher potential gains. For me, it is largely to gain more trading experience, as well as earning extra interest whilst waiting for the catalyst to emerge (if any), not to mention always having a position in a fundamentally sound stock.
DIRECTOR UPDATES
In addition to his earlier filing on 7 March, the M.D. has filed his intention to deal in shares during the closed period again on 6 April. So far no activity has been reported to Bursa. It pays to continue to watch the M.D.'s movements closely.
DIRECTOR UPDATES
In addition to his earlier filing on 7 March, the M.D. has filed his intention to deal in shares during the closed period again on 6 April. So far no activity has been reported to Bursa. It pays to continue to watch the M.D.'s movements closely.
CONCLUSION
Whilst the proportionately lower Q5/07 earnings and the rise in raw material costs is something to watch out for, it is too early to make a definitive conclusion that future earnings will be permanently impaired. Balance sheet is still strong and solid, the company still continue to manage its business well, so, at this stage, I would say the results are still well within reasonable parameters. At $0.69, I believe it is still trading at a rather undemanding valuation.
Wednesday, May 2, 2007
Rule No. 1
Recently, a number of stock market blogs and websites (e.g. Malaysia Finance, nexttrade, tradesignum weekly CI analysis) have advised their readers to exercise greater caution in May (or short to intermediate term). It may be timely to remind the readers here of Rule No. 1. What do I mean by Rule No. 1?
1. A clearly, very important investing principle. "Rule No 1: Never lose money. Rule No 2: Never forget Rule No 1". (Buffett).
2. It is not necessarily a single activity, but more often, a collection of activities that are continually practiced and designed to reduce the odds of losing money on the entire cash+stock account, whilst maximizing the odds of making money.
3. It doesn't mean never lose a single cent. No one can guarantee that in the stock market. But it does mean to focus on the right decision and activities that has a higher reward/risk ratio, and to avoid those with lower reward/risk ratio. We may not be able to control the end result, but certainly, we can control our investing decisions and activities.
4. Prevention is better than cure. It is better to sit on cash, than to make a hasty buy that results in a 50% loss, which then requires a 100% return in order to break even. The odds of making a loss is much too easy, whereas the odds of finding 100% gains are much harder.
5. Watch your stock%/cash% allocation. As a general rule, avoid leveraging, unless you are 100% sure (and not 100% "hope") of your investment. Graham suggests 50/50 (50% in stocks, 50% in cash/fixed income) in the Intelligent Investor. Personally, I think it's not so simple, and would depend on the individual circumstances (e.g. whether he is still in savings mode, or has retired, his risk tolerance, etc.). Find the balance that is suitable for you. (for me, it is now around 60%-65% stocks, as a result of LITRAK). Imagine the worst (e.g. a 10%-20%+ market correction), and ask whether you are still comfortable with your stock/cash allocation. If not, consider reducing the stock% down to your sleeping point.
6. Select stocks carefully. Whatever your criteria for selecting stocks (whether you are a value investor, trader, speculator, etc.), re-evaluate your criteria to make sure that you are selecting stocks that offers the best reward/risk ratio. If it doesn't meet your criteria, do nothing.
7. Always insist on a sufficient margin of safety. Even better, invests in stocks with higher potential upside, and limited downside.
8. Be patient and wait for the "fat pitch". Buffett always say "When there is nothing to do, do nothing". The "fat pitch" applies to both buying and selling.
9. Review existing stocks carefully. Especially for your more "speculative stocks" (e.g. stocks that appears to offer "easy money" in the past, but might not have fully met your full selection criteria). Especially for warrants and other highly leveraged instruments.
10. If unsure, take some profits to reduce your average cost, unless you are confident that stock still has higher potential upside and limited downside. This is a favorite method of mine where in cases where the stock has run up quite a lot (beyond my initial expectations), and at the high price, my certainty of further upside has reduced significantly, but might still meet my requirements. At that point, I would sell some to bring my average cost down to a level where I can sleep comfortably. Typically, it is at a level where it is just slightly below the 52 week low price, but sometimes, even lower, making my original cost to become nil. But as a class, I stay invested in equity 100% of the time (with around 50%-70% equity allocation), because I believe that we are in a long-term bull run.
11. Sell completely stocks that you have the least confidence. Consider rotating into stocks with highest confidence. For me, I have been reducing my more speculative (but small) holdings, and swap them over to LITRAK over the past 2-3 weeks (taking the opportunity to advertise LITRAK whilst the price is still around 3.6x :-) ).
12. For traders, never play without a stop loss. Ideally, the stop loss should be a trailing stop loss that gets higher ("trailing the rising price"), but just slightly below support levels. The legendary Nicolas Darvas is a stickler for stop loss, and refused to invest when the NYSE took away the stop loss facility for one of his stocks. For Bursa, unfortunately, there is no stop loss facility yet, so, one must constantly keep an eye on the screen. For HLEbroking players, beware that sometimes, there is a delay in the prices. As Soros would say: "Survive first, make profit later". For investors who are sitting on a paper loss and the business fundamentals appear to be changing for the worse, cut your loss immediately to avoid further bleeding.
13. Don't over-trade. If one were to practice Graham's investment approach using 10 stocks, it would be prudent to limit a single stock investment to be no more than say 15%-20% of the entire stock portfolio. For warrants, it may also prudent to reduce that by the gearing factor. E.g. if the gearing is 3 times, and the limit is 20%, then, the maximum purchase might be 20%/3 = 6.7%. Whilst this reduces the downside risk, it also reduces the upside gain, since the pure Graham's approach does not promise returns that are substantially more than the index. Naturally, if a stock like LITRAK (where I have the highest confidence) is included in the 10 stocks, I would not hesitate to make it say 5 times larger than the average value stock (or as much as I can get at a reasonable price). This is just one possible approach of course, and detailed discussion on "position sizing" is beyond the scope of this short article.
14. Should the stock market crash / correct significantly, be prepared to act quickly and decisively. The best bargains are usually found at the bottom of a crash / correction, just after the major panic selling ends and the market starts to pick up again. If unsure, spread out the buying to test the market, value investors included. E.g. if you intend to buy $50,000, you might want to spread out the buying into say 5 lots of $10k each, depending on the price action. Similarly, if one is unsure where the top of the bull market is, spread out the selling to test the market.
14. Focus on protecting the total cash+stock account, not protecting individual securities. My goal in investing is more on maximizing my total account value, rather than having 100% success record in 100% of the stocks that I invest. So, I have no qualms shedding stocks that I believe will continue to head south at a small loss, into stocks that I believe will head north.
15. In essence, one controls the overall portfolio risk at all times. This is not something one only does only in May, but something a prudent investor/trader/speculator would do throughout the year.
16. I am a strong believer that when ones controls one's investment risks rationally, one will not get a bad investment result over the long term. Naturally, I don't expect to cover all the forms of risk controls in stock investing. The above are just some of the ones I've used in the past, that I can remember on top of my head at the time of writing. It's possible I might have missed others. Hopefully, this list is sufficiently useful. If you are not sure, better to be safe than sorry and seek the advice of someone whose judgement you respect and has a good investment track record. If it could be rewritten better, don't hesitate to let me know.
As usual, comments welcomed. Use your own judgement, and invest at your own risk.
1. A clearly, very important investing principle. "Rule No 1: Never lose money. Rule No 2: Never forget Rule No 1". (Buffett).
2. It is not necessarily a single activity, but more often, a collection of activities that are continually practiced and designed to reduce the odds of losing money on the entire cash+stock account, whilst maximizing the odds of making money.
3. It doesn't mean never lose a single cent. No one can guarantee that in the stock market. But it does mean to focus on the right decision and activities that has a higher reward/risk ratio, and to avoid those with lower reward/risk ratio. We may not be able to control the end result, but certainly, we can control our investing decisions and activities.
4. Prevention is better than cure. It is better to sit on cash, than to make a hasty buy that results in a 50% loss, which then requires a 100% return in order to break even. The odds of making a loss is much too easy, whereas the odds of finding 100% gains are much harder.
5. Watch your stock%/cash% allocation. As a general rule, avoid leveraging, unless you are 100% sure (and not 100% "hope") of your investment. Graham suggests 50/50 (50% in stocks, 50% in cash/fixed income) in the Intelligent Investor. Personally, I think it's not so simple, and would depend on the individual circumstances (e.g. whether he is still in savings mode, or has retired, his risk tolerance, etc.). Find the balance that is suitable for you. (for me, it is now around 60%-65% stocks, as a result of LITRAK). Imagine the worst (e.g. a 10%-20%+ market correction), and ask whether you are still comfortable with your stock/cash allocation. If not, consider reducing the stock% down to your sleeping point.
6. Select stocks carefully. Whatever your criteria for selecting stocks (whether you are a value investor, trader, speculator, etc.), re-evaluate your criteria to make sure that you are selecting stocks that offers the best reward/risk ratio. If it doesn't meet your criteria, do nothing.
7. Always insist on a sufficient margin of safety. Even better, invests in stocks with higher potential upside, and limited downside.
8. Be patient and wait for the "fat pitch". Buffett always say "When there is nothing to do, do nothing". The "fat pitch" applies to both buying and selling.
9. Review existing stocks carefully. Especially for your more "speculative stocks" (e.g. stocks that appears to offer "easy money" in the past, but might not have fully met your full selection criteria). Especially for warrants and other highly leveraged instruments.
10. If unsure, take some profits to reduce your average cost, unless you are confident that stock still has higher potential upside and limited downside. This is a favorite method of mine where in cases where the stock has run up quite a lot (beyond my initial expectations), and at the high price, my certainty of further upside has reduced significantly, but might still meet my requirements. At that point, I would sell some to bring my average cost down to a level where I can sleep comfortably. Typically, it is at a level where it is just slightly below the 52 week low price, but sometimes, even lower, making my original cost to become nil. But as a class, I stay invested in equity 100% of the time (with around 50%-70% equity allocation), because I believe that we are in a long-term bull run.
11. Sell completely stocks that you have the least confidence. Consider rotating into stocks with highest confidence. For me, I have been reducing my more speculative (but small) holdings, and swap them over to LITRAK over the past 2-3 weeks (taking the opportunity to advertise LITRAK whilst the price is still around 3.6x :-) ).
12. For traders, never play without a stop loss. Ideally, the stop loss should be a trailing stop loss that gets higher ("trailing the rising price"), but just slightly below support levels. The legendary Nicolas Darvas is a stickler for stop loss, and refused to invest when the NYSE took away the stop loss facility for one of his stocks. For Bursa, unfortunately, there is no stop loss facility yet, so, one must constantly keep an eye on the screen. For HLEbroking players, beware that sometimes, there is a delay in the prices. As Soros would say: "Survive first, make profit later". For investors who are sitting on a paper loss and the business fundamentals appear to be changing for the worse, cut your loss immediately to avoid further bleeding.
13. Don't over-trade. If one were to practice Graham's investment approach using 10 stocks, it would be prudent to limit a single stock investment to be no more than say 15%-20% of the entire stock portfolio. For warrants, it may also prudent to reduce that by the gearing factor. E.g. if the gearing is 3 times, and the limit is 20%, then, the maximum purchase might be 20%/3 = 6.7%. Whilst this reduces the downside risk, it also reduces the upside gain, since the pure Graham's approach does not promise returns that are substantially more than the index. Naturally, if a stock like LITRAK (where I have the highest confidence) is included in the 10 stocks, I would not hesitate to make it say 5 times larger than the average value stock (or as much as I can get at a reasonable price). This is just one possible approach of course, and detailed discussion on "position sizing" is beyond the scope of this short article.
14. Should the stock market crash / correct significantly, be prepared to act quickly and decisively. The best bargains are usually found at the bottom of a crash / correction, just after the major panic selling ends and the market starts to pick up again. If unsure, spread out the buying to test the market, value investors included. E.g. if you intend to buy $50,000, you might want to spread out the buying into say 5 lots of $10k each, depending on the price action. Similarly, if one is unsure where the top of the bull market is, spread out the selling to test the market.
14. Focus on protecting the total cash+stock account, not protecting individual securities. My goal in investing is more on maximizing my total account value, rather than having 100% success record in 100% of the stocks that I invest. So, I have no qualms shedding stocks that I believe will continue to head south at a small loss, into stocks that I believe will head north.
15. In essence, one controls the overall portfolio risk at all times. This is not something one only does only in May, but something a prudent investor/trader/speculator would do throughout the year.
16. I am a strong believer that when ones controls one's investment risks rationally, one will not get a bad investment result over the long term. Naturally, I don't expect to cover all the forms of risk controls in stock investing. The above are just some of the ones I've used in the past, that I can remember on top of my head at the time of writing. It's possible I might have missed others. Hopefully, this list is sufficiently useful. If you are not sure, better to be safe than sorry and seek the advice of someone whose judgement you respect and has a good investment track record. If it could be rewritten better, don't hesitate to let me know.
As usual, comments welcomed. Use your own judgement, and invest at your own risk.
Monday, April 30, 2007
HEXZA, Ethanol, Nipah Palm
Reader "kent" sent an interesting comment yesterday that:
"A few weeks ago star newspaper published an article that a Malaysian Company with the Perak State Government has patented a procedure to make ethanol from Nipah Palm. They apparently have commenced construction of the production plants and are aiming for a target production of 8 to 9 billion litres of ethanol in 2009.Surely this is bearish for Hexza?"
Actually, I'm not so sure if it should rationally be bearish, although interestingly, the share price did drop from $0.695 on Apr 10, to $0.655 on Apr 19, before recovering. I found an article from Star Online dated 10 April, which might shed more light. As usual, I will highlight a few key words/phrases with my comments below.
_____________
Tuesday April 10, 2007
Malaysian company says bio-fuel from nipah can help halt global warming
KUALA LUMPUR: A Malaysian government-backed company claimed Tuesday it has found a new source of energy to replace fossil fuels - ethanol from nipah palm trees that it believes can help stop global warming.
Pioneer Bio Industries Corp. said it is building the world's first refinery to commercially produce ethanol from the short palm trees, found in equatorial countries, that could fuel everything from automobiles to power plants.
Pioneer says the nipah palm sap will be used in a patented process to make ethanol, which produces virtually none of the carbon emissions blamed for the climate-changing greenhouse effect and ozone depletion.
"This is a new energy source to save the world, to tackle global warming,'' Pioneer Chairman Badrul Shah Mohamad Noor told reporters.
The company envisions a fuel of the future that would be 85 percent nipah ethanol and 15 percent gasoline, he said, thereby greatly reducing dependence on fossil fuels.
With a production capacity of 100 million imperial gallons (450 million liters), the refinery in the northern state of Perak will go on stream by the end of 2008, Badrul Shah said. Pioneer plans to build 15 such refineries across Malaysia.
Badrul Shah said nipah ethanol is an better alternative to ethanol produced from palm trees, sugarcane, corn, cassava and other plants because ethanol from those sources eats into food production and raises their prices.
Nipah palm trees are not a food source and its sap can be drained every day without the need to harvest the plants.
"The plant will live for 50 years. We just have to collect its sap,'' he said.
He said Pioneer has received an order worth more than US$66 billion (euro50 billion) from one of the biggest trading companies in the world to buy its ethanol from 2009 to 2013.
Badrul Shah refused to identify the company, saying details would be announced at a later date.
The size of the order could not be independently confirmed.
The Malaysian government has given Pioneer the right to harvest nipah palm trees on 10,000 hectares (24,710 acres) of land in Perak.
That is enough to run 15 refineries for five years, and there are millions of hectares of nipah palm trees growing in the wild in the wetlands along the coast and on Borneo island that can produce enough fuel to "replace the entire fossil fuel needs of the world,'' Badrul Shah said.
Pioneer has taken an international patent on the process of producing ethanol from nipah palm tree, which was perfected over five years by 16 Malaysian scientists commissioned by Badrul Shah, a businessman with interests in construction and services.
Currently, ethanol accounts for only 2 percent of the total global fuel consumption.
Also, the demand for food-based ethanol has been blamed for deforestation as trees are being cut down for plantations. - AP
Quick Comments:
1. My impression from the above is that Pioneer's new product seems quite different than HEXZA's, even though both are "ethanol".
2. HEXZA's ethanol seems to be for non-biofuel uses (e.g. Kaoling wine, or food), whereas Pioneer's ethanol seem to be totally "biofuel based".
3. Apparently, Pioneer has already found a buyer for the years 2009-2013 in Europe. The demand for HEXZA's ethanol seems to be brought on more from China. So, the 2 target markets seems different to me.
4. From investor's perspective, it is more important to assess the impact on HEXZA's future earnings. To me, it is not clear if Pioneer will impact HEXZA's earnings over the next 6 years (2007 to 2013). I am inclined to dismiss it as "nil/negligible".
5. Also, HEXZA (at $0.715 closing last week) only trades at a P/E of 3.9. The margin of safety is still quite large (even in the present competitive market).
6. At this point in time, I think it is premature to be concerned about Pioneer. My advice would be to continue to monitor HEXZA's quarterly results.
"A few weeks ago star newspaper published an article that a Malaysian Company with the Perak State Government has patented a procedure to make ethanol from Nipah Palm. They apparently have commenced construction of the production plants and are aiming for a target production of 8 to 9 billion litres of ethanol in 2009.Surely this is bearish for Hexza?"
Actually, I'm not so sure if it should rationally be bearish, although interestingly, the share price did drop from $0.695 on Apr 10, to $0.655 on Apr 19, before recovering. I found an article from Star Online dated 10 April, which might shed more light. As usual, I will highlight a few key words/phrases with my comments below.
_____________
Tuesday April 10, 2007
Malaysian company says bio-fuel from nipah can help halt global warming
KUALA LUMPUR: A Malaysian government-backed company claimed Tuesday it has found a new source of energy to replace fossil fuels - ethanol from nipah palm trees that it believes can help stop global warming.
Pioneer Bio Industries Corp. said it is building the world's first refinery to commercially produce ethanol from the short palm trees, found in equatorial countries, that could fuel everything from automobiles to power plants.
Pioneer says the nipah palm sap will be used in a patented process to make ethanol, which produces virtually none of the carbon emissions blamed for the climate-changing greenhouse effect and ozone depletion.
"This is a new energy source to save the world, to tackle global warming,'' Pioneer Chairman Badrul Shah Mohamad Noor told reporters.
The company envisions a fuel of the future that would be 85 percent nipah ethanol and 15 percent gasoline, he said, thereby greatly reducing dependence on fossil fuels.
With a production capacity of 100 million imperial gallons (450 million liters), the refinery in the northern state of Perak will go on stream by the end of 2008, Badrul Shah said. Pioneer plans to build 15 such refineries across Malaysia.
Badrul Shah said nipah ethanol is an better alternative to ethanol produced from palm trees, sugarcane, corn, cassava and other plants because ethanol from those sources eats into food production and raises their prices.
Nipah palm trees are not a food source and its sap can be drained every day without the need to harvest the plants.
"The plant will live for 50 years. We just have to collect its sap,'' he said.
He said Pioneer has received an order worth more than US$66 billion (euro50 billion) from one of the biggest trading companies in the world to buy its ethanol from 2009 to 2013.
Badrul Shah refused to identify the company, saying details would be announced at a later date.
The size of the order could not be independently confirmed.
The Malaysian government has given Pioneer the right to harvest nipah palm trees on 10,000 hectares (24,710 acres) of land in Perak.
That is enough to run 15 refineries for five years, and there are millions of hectares of nipah palm trees growing in the wild in the wetlands along the coast and on Borneo island that can produce enough fuel to "replace the entire fossil fuel needs of the world,'' Badrul Shah said.
Pioneer has taken an international patent on the process of producing ethanol from nipah palm tree, which was perfected over five years by 16 Malaysian scientists commissioned by Badrul Shah, a businessman with interests in construction and services.
Currently, ethanol accounts for only 2 percent of the total global fuel consumption.
Also, the demand for food-based ethanol has been blamed for deforestation as trees are being cut down for plantations. - AP
Quick Comments:
1. My impression from the above is that Pioneer's new product seems quite different than HEXZA's, even though both are "ethanol".
2. HEXZA's ethanol seems to be for non-biofuel uses (e.g. Kaoling wine, or food), whereas Pioneer's ethanol seem to be totally "biofuel based".
3. Apparently, Pioneer has already found a buyer for the years 2009-2013 in Europe. The demand for HEXZA's ethanol seems to be brought on more from China. So, the 2 target markets seems different to me.
4. From investor's perspective, it is more important to assess the impact on HEXZA's future earnings. To me, it is not clear if Pioneer will impact HEXZA's earnings over the next 6 years (2007 to 2013). I am inclined to dismiss it as "nil/negligible".
5. Also, HEXZA (at $0.715 closing last week) only trades at a P/E of 3.9. The margin of safety is still quite large (even in the present competitive market).
6. At this point in time, I think it is premature to be concerned about Pioneer. My advice would be to continue to monitor HEXZA's quarterly results.
Sunday, April 29, 2007
EUROSP - Business Proposition
Imagine you are a business analyst, and your neighbour came over to your house on a Sunday afternoon to seek your advice on a private business matter. Your neighbour is the sole owner of a private business, and is thinking of selling his business in its entirity. The business manufactures and sells a tangible product that is commonly found in most homes, including your own home. He would like to know how much he should sell his business in its entirity.
Since private owners own 100% of the business profits, you naturally enquired about that. Last year the business made $5.8M in after tax profits. This year, for the first 9 months (FYE 31 May), the business made $5M, and if Q4/07 follows Q4/06, then, the business can be reasonably expected to make $7.2M this year, or 24% profit growth. Ok, that’s not a bad growth result.
You further enquired about its balance sheet. Inventory low, receivables low. The company has from time to time made the necessary capital expenditure to maintain and upgrade its plant and equipments, but nothing fancy and kept capex tight. It also continuously kept tight control on costs. The company has no problems paying its suppliers. The company has no debts (neither short term overdrafts, nor long term loans). The business generates strong cash-flows, which nearly all goes to the cash till.
You learnt its management is fairly conservative and prudent. Whilst they have been consistently expanding their business, they have done so at a measured pace. According to your neighbour, the key management staff has been with the company for a very long time, and they are not expected to change.
You were informed that company revenue last year was $64M, and this year, is projected to grow to $74M, or approximately 16% growth.
What about future profit growth prospects? Well, according to your neighbour, the company thinks that whilst the costs of their raw materials are rising, they are continuously looking at ways to reduce usage of the more expensive material, and using cheaper alternatives that do not compromise quality and still meet their customer needs. They intend to spend more money on marketing, research and development to mitigate the effects of the rise in raw material costs. So far, their results have been encouraging, but no guarantees. Last quarter, profit after tax increased to $2.1M, up from $1.02M the same quarter prior year. This represents nearly 100% increase in after-tax profits.
So, the neighbour then asked you how much he should be asking if he wants to sell his private business.
Well, it might surprise you that this imagined “private” company is actually listed in the 2nd Board with the above characteristics. The Company is EUROSP, which is in the timber-furniture based business largely for exports. At last Friday’s closing price, the market is only valuing the company at a measly 2.3 times 2007 earnings. That’s right. EUROSP’s market cap is $39M, the company reported a net cash balance of $22.2M (28 Feb), i.e. EUROSP’s business is available for sale for only $16.8M. In a private market, that would clearly be a steal.
What is even more interesting is the fact that if one does a liquidation valuation for EUROSP, one could come to the conclusion that EUROSP is worth more dead than alive! Don’t believe me? Well, if one assumes only a conservative fraction of EUROSP’s assets in the balance sheet – say 50%, 50%, 80%, 100% of Plant Property Equipment, Inventory, Receivables and Cash – and subtract all stated liabilities in the Balance Sheet at 100% of the values stated, it would give a liquidation price of $0.99! Yes, that’s right. At $0.975, the market is valuing EUROSP lower than its liquidation value! Amazing isn’t it?
So, why does the stock market values EUROSP at such a low multiple? To me, I believe it’s due to several reasons:
1. Inefficient market in Bursa Malaysia, especially for micro-cap stocks and especially 2nd Board counters. Perhaps, there is a fear that micro-cap stocks earnings are rather volatile, although from a private business perspective, EUROSP is clearly much larger than most if not all “Mum and Dad” type private business. Even better, it is listed, its results audited by professional auditing firms such as KPMG and passed Bursa’s listing requirements (which private companies don’t need to comply), so, it should be safer than private investments.
2. No stock coverage by Bursa eResearch, nor any other stock brokerages that I am aware of. Investssmart covered EUROSP last year, and I recalled at least another blog also covered EUROSP. So, this makes it the 3rd blog, and I doubt I will be the last blog to cover it in future.
3. Absence of EPF, foreign investors, and mutual fund ownership, leaving the traded stock portfolio done by less informed retail investors. The Directors (the 3 Guan Brothers) collectively owns 55% of the outstanding shares. They didn’t sell, and interestingly acquired some more shares in 2006. So, management clearly eats their own cake. Institutions with long-term holdings like Ministry of Finance (#5, 3.3%), Lembaga Tabung Angkatan Tentera (#7, 2.4%), Lembaga Tabung Haji (#8, 1.9%), Koperasi Tanah Negeri Johor Berhad (#23, 0.4%) collectively holds 8%. This leaves around 37% of the outstanding shares owned by approximately 2,500 retail (less informed?) investors. It is my personal belief that as more retail investors become better informed, they should have greater appreciation for this stock.
4. It’s a generally thinly traded stock, with low liquidity on most days throughout the year, except the month before and after the ex-dividend date, during the bull run at the start of this year and the recent 228 correction.
5. Up till 2005, the stock paid a paltry dividend or no dividend (in the 2 loss years), causing it to acquire perhaps a boring reputation. However, this looks to be changing in recent years. The company has been steadily increasing dividends in the last 3 years, from 2.1% to 3.1% to 5.9% net of tax dividend yield (based on latest price of $0.975). I am speculating/ expecting the company to continue to pay a higher dividend in 2007, due to its higher earnings results this year compared to last year and its growing cash hoard. Potentially, there might be a lot of room to improve, since the last dividend payment only took 32% of earnings. If the company adopts a 50% dividend payout ratio, 2007 dividends could increase by 50%, potentially causing a fairly large jump in prices. However, it might be safer (albeit potentially lower returns) to look at the Director’s stock movements, to see if they acquire more shares in 2007. If they do, it may be a positive sign that the directors will increase dividends further in 2007, although this is not a guarantee.
CONCLUSION
It is clear that EUROSP is clearly an under-valued stock. There seems to be some appreciation for the stock, since the stock price jumped more than 7% to close at $0.975, as a result of an excellent earnings announcement. Despite closing at $0.975, it is still trading below its liquidation valuation of $0.99.
Putting on my value investing hat, it is very hard for me to contain my enthusiasm, when I see a stock like EUROSP. Initially, there were some doubts that the appreciating RM and the higher timber prices may cut into EUROSP’s margins. However, the latest earnings results showed that instead of cutting its margins, EUROSP superb management has managed to improved profits by 100%. In a sense, this is not surprising, because EUROSP controls its costs well. Compared to its high debt competitors, its margins are not burdened by high finance costs, giving it a competitive advantage. Further, it’s operations in northern Malaysia probably carries lower wages. It’s high cash position gives it considerable business flexibility. In this sense, I believe EUROSP has some economic moat over most of its Malaysian competitors. As EUROSP’s underlying business and earnings continues to improve, I get more and more excited about the future prospects of this stock, notwithstanding its price action. I will also not be surprised if like ROHAS, one day, the substantial shareholders decide to take the company private, due to its consistently poor valuation by the stock market, and the large cash hoard in the company.
Whilst there is clearly a much higher upside, I believe its downside is rather limited for a long-term investor who is quite content to collect a net of tax dividend yield of 6% per annum.
Mark Tier, in the book “Winning Investment Habits of Warren Buffett & George Soros” describes 3 different successful investor types on page 126. The Analyst (personified by Buffett), the Trader (epitomized by Soros) and the Actuary (who invests similar to insurance companies, such as Graham buying a basket of under-valued stocks. He often doesn’t know which stock will go up (like insurance companies not know who is going to die), but he is quite certain that provided he buys a pool of undervalued stocks – e.g. below liquidation value –then, the stock as a group is almost certain to go up, just like the way insurance companies makes a profit by underwriting a pool of lives at correct prices.). I believe EUROSP is very suitable for either the Analyst, or the Actuary. Either way, I would not recommend anyone to hold more than 5% of their stock holding in EUROSP, not because the downside risk is limited, but because it might take some time for the stock price to appreciate.
As usual, comments welcomed. Use your own judgement, and invests at your own risk.
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