Sunday, November 28, 2010

ReValuation - Entry and Exit Strategy

Some of the valuation on The List has been dated. With so many earning reports passed by, lets do some re-valuation on some of the businesses.

Note: All valuations are done by having 10% discount on free cash flow with 20% margin of error

Let's start with JobStreet Corp [JOBST]. Quarterly revenues are recovering as expected and is on track to return to its heights in 2008. Q4 should should be an active hiring seasons for most corporates as employees tend to leave in Q1 after...well if you know what I mean. Taking the industrial average growth at 12% and 20% growth this year, it'll gives its value to:
Max Entry Price: RM2.80
Exit Price: RM3.15 (30% growth this year)

As for Freight Management Holdings (FREIGHT), the management has announce their intention to expand their business abroad especially in the Asean region through JV and acquisition to diversify its earnings. Currently, 78% of its earnings still comes from Malaysia so we should expect the expansion plan will happen in the next few years to come. Historically, everytime FREIGHT involves in an expansion plan, its revenue grows by more than 15%. Given to this I'll be using 12% growth:
Max Entry Price: RM1.23
Exit Price: RM1.95 (15% average growth)

Hai-O Enterprise (HAIO), has a challenging year this year and is expected to drag on in near future. MLM division has been disappointing this year. I can see they are having 2 problems. 1 is the new amendment made on the direct sales act, which will give them a temporary hiccup. 2nd is their products which they have not admitted.This is very much evident from their Q1 result. The massive drops shows how unsustainable their MLM revenues are. They need to come out with a more sustainable products sales strategy and they can't rely on big ticket items anymore. Their venture from the energy division to a new thermal technology is promising but their decision to manufacture the products itself has create some uncertainties to me. Recent announcement that they would like to venture into property development sector has made my decision to sell even easier. That's is one sector that I normally avoid for many reasons. The timing of their entry to property development sector is pretty much the same as they did before 1998 crash.So,
Valuation: Uncertain

NTPM Holdings (NTPM), one of my favourtie. This is one competing in a competitive industry and playing second fiddle to Kimberly-Clark as fas as products pricing are concern. Their products are seen as "greener" as compared to Kimberly-Clark which may provide some competitive advantage. Sales growth have seem to slow down. So I'll be using industrial average of 2% for its growth.
Max Entry Price: RM0.30 
Exit Price: RM0.75 (13% growth rate)

As for the rest, I'll do it next time as it is bit late now. From the list, there doesn't seem too much upside we have here. And with the bull run in KLSE this year, it is more difficult to find good value business than we have previous years. Evidently, Tan Teng Boo's (ICAP) has seem to increase its cash position recently. Yea...ICAP. There is still an interesting choice here. ICAP applies value interesting strategy in its fund. If they are still holding the equities in there, chances are they are still undervalued. Even if they were to cash out all of'll probably buying RM1.20 of cash for RM1.00 since it is still selling at a discount to its NAV. Yea I know...they do made losses at times but who doesn't. So if I don't feel comfortable holding some idling cash and don't know where to put my money, I'll leave it to Uncle Tan to manage.

Thursday, November 11, 2010

Money Creation - Simplified

Well, I'm not here to talk about history of the invention of money but to talk about how money is created today. Yes, money creation. Perhaps some of you might have know this, for those who doesn't, you probably should continue reading this. No, this is not quantitative easing or 'money printing', this is different.

Money creation?...Today?....What?
Yes, today, everyday. When? Every time you swipe your credit cards, every time you take loan from banks to buy car or house, just about every loan you just help to create money in the economy.

That's how the economy works today - partly.

It is quite simple. Ever heard of Fractional Reserve Ratio? You can find the explanation from wikipedia if you interested in the details, if not this is the simplified one. Basically what it means is that the minimum amount ratio of deposit  the bank must hold in order to lend money to its borrowers. Lets say if the minimum amount ratio is 10%, 90% of the deposited amount can be lend out. Take for example:

Bank A, a car seller and a car buyer. 
Imagine both car seller and car buyer has an account in Bank A. The car buyer deposited RM100,000 in bank A. Somehow he decided to borrow money from the bank to buy a car worth RM90K. So he borrows from bank A. With the fractional reserve ratio of 10%, Bank A is allow to lend out RM90K which is 90% of the amount of cash it has in its deposit. When the car buyer pays the car seller RM90K, Bank A will key in that amount of money to the car seller account which happens to in Bank A. See here, no real cash movement are involved and the bank has now RM190K in its deposit and thus RM90K has been created. Now the bank has RM100K in cash and RM190K in liabilities.

Now, when the bank key in RM90K into the the car seller's account it also means the car seller has deposited  RM90K into its account. This will give the chance for Bank A to lend out another RM81K (90% of RM90K). If this cycle continues, Bank A can expand its reserve to the maximum amount of RM1mil or create RM900K (RM100K + RM90K + RM81K + RM72.9K +.......= RM1mil). The multiplier can be calculated by this simple equation:

multiplier = 1/ratio = 1/10% = 10

Means if the ratio is 10%, 10 times of the amount deposited can be created, 20% means 5 times and so on. The ratio differs from country to country. Of course in the real world, it would not be just one bank, but this is regulated by the central bank. Even if the money is deposited in Bank B, Bank A could still loan out 90% of it as long as the total for both does not exceed 90%.

Does Malaysia has this?
Yes, of course. The only difference is that we call it Statutory Reserve Policy (SRP). What is the ratio then? Erm....1% as of the day I wrote this. This would mean, every RM1 deposited in our banks RM100 can be created. From 2008 till today, our statutory reserve requirement has been cut from 4% to 1%. Well, normally when a central reduce the requirement it is to increase money supply to the market or in other words to get the economy going. If the economy is improving, why is there a need to increase money supply? Or is it? Hmmm..... I don't know. But....GDP can be improved by incurring more debt. How? Maybe next time.

Well that is how it works for now. Unless any reform takes place which is still in discussion now. We'll see.

Tuesday, November 2, 2010

Financially Stupid?

Normally I use harsher words than that and I'm even harsher if I were to talk about personal finances verbally. So I don't think that is a harsh question that everyone should ask themselves. 

I am halfway reading this book by Jason Kelly "Financially Stupid People are Everywhere.....Don't Be One of Them". Well, the first 2 chapters of the book basically covers personal finances stuff (i'll mention later), and the rest are pretty much about the mess in the US which are more relevant if you are living there...or if you are interested.

Okay, I'm not going to do a book review on this of course I haven't finish the book yet. But I gonna share with you some of those personal finances tips and disaster from the book - plus some of my thoughts.

He mentions about the 3 Cs: Credit cards, cars and castles. 

Credit Cards:
What he suggests is pretty simple, leave NO balance. Pay your statement balance on time and not just minimum payment but ALL of them. With this it'll help you stay out of credit cards problem that most of us had. The reason for this is plain simple, NO balance equals NO interest charge.

My thoughts: He has his points, 1.**% per month is a lot of money. That is at least 12% pa. If you are into investment, you would have probably see "magical" of 12% growth to your money is. But if that is know the math. He also mention about installment payment. Those who had done that 0% installment charge aren't really 0% at all. They charge some 3-5% initially. Does that mean installment payment aren't good. Not really. There is this thing call bad debt and good debt. The book uses a business example, but I'll use an investment simple example. Say you have RM5000 in cash but you purchase something worth RM5000 with a 12months installment and the bank charge you 5% services charge for it which make your total credit balance RM5250. What this mean is that the bank will pay the RM5000 amount to the seller and charge you RM250 for that. So instead of using the RM5000 of cash to pay for your product, you invest it in an income fund (which probably gives you about 5-6%pa in return). What does this mean? 

You get what you need in advance and have the service charge covered and in possible earning position. 
Bank: 0 vs You: 1. 
If you put them in M-REITS for example which yield about 8-9%, you'll be in positive position. 
Bank: 0 vs You: 2.  
But if you miss all your installment
Bank: 12 vs You: 0

Get the idea? He actually went on to explain how disastrous for those to purchase goods after goods believing they "own" them and the danger of balance transfer. But I'll keep this post short, if you can understand the example above, you'll why people go bankrupt for doing that.

He suggests buy cars with cash. I know most you will shout WTH? or even WTF? He says ask yourself this simple question if you plan to purchase your car by 5 or 7 years installment, will your car still be cool after 5 or 7 years? We all know the car you drive belongs to the bank until you services all your loan. Will it still be cool then?

My thoughts: Well, actually I agree with unless UNLESS there is a real need for a car. I understand in Malaysia, we NEED a car. Public transports are as if they weren't there and it is safer to swim in Taiping Lake than to drive in Malaysia road so bike is not a good idea. It would be great if we can afford a car with cash. So for me, buy a car if you need one. If I were to get a better car (upgrade), wait till I can afford it with cash not when I'm Polo enough. Simple.

Kelly suggests a 20:80 rules. That means, pay with AT LEAST 20% down payment and 80% on loan. Buys only when you can afford and really comfortable with the installments. There is nothing wrong staying in a rented property.

My thoughts: Castles here aren't the property for investment. This is your home where you stay. So in Kiyosaki's definition this is a liabilities where cash flows out from your pocket. All these make sense. Yes, your house does appraise in value over time. Question is, in order to capitalize on the gain, you would have to sell the house. Are you going to do that to buy a cheaper or probably smaller house? With the property price goes soaring over the past few months, affordability has become an issue among many of us. This book did mention on not to get tricked by banks' fancy package. I mean those flexi interest rate type of package. Yes, the installment does look really cheap the first 3 years or so but what really matters is when the interest rate eventually increase. Can you afford it it with your current pay? Is it still 1/3 of your take home income? Some of the working class claim that their salary will increase over time. Well, that's for me a gamble a person can ill-afford. And when decide to purchase a home, do take into account, the renovations, insurance and maintenance for the house.

So are you financially stupid?