Tuesday, November 30, 2010

Practical Significance of Book Value

.
The book value of a common stock was originally the most important element in its financial exhibit. It was supposed to show "the value" of the shares in the same way as a merchant's balance sheet shows him the value of his business. This idea has almost completely disappeared from the financial horizon. The value of a company's assets as carried in its balance sheet has lost practically all its significance.
.
This change arose from the fact,
~first, that the value of the fixed assets, as stated,
frequently bore no relationship to the actual cost and,
~secondly that in an even larger proportion of cases
these values bore no relationship to the figure at which they would be sold
or the figure which would be justified by the earnings.
.
The practice of inflating the book value of the fixed property is giving way to the opposite artifice of cutting it down to nothing in order to avoid depreciation charges, but both have the same consequence of depriving the book-value figures of any real significance.
.
It is a bit strange, like quaint survival from the past, that the leading statistical services still maintain the old procedure of calculating the book value per share of common stock from many, perhaps most, balance sheets that they publish.
.
Before we discard completely this time-honored conception of book value, let us ask if it may ever have practical significance for the analyst. In the ordinary case, probably not. But what of the extraordinary or extreme case ?
.

Insas ~ 2011 Q3 report



01 Dec 2010 ~ current price 52.5 sen


Insas cash RM 595 million (87 sen per share)
Total Liabilities RM 447 million (65 sen per share)
Therefore just "net Cash" alone stand at = 595-447 = RM 148 million (22 sen per share)
Very STRONG balance sheet.
.
Next, is to identified the "Cash equavalent" elements and group them together.


Berkshire Chairman's Letter ~ 1978

.
We confess considerable optimism regarding our insurance
equity investments. Of course, our enthusiasm for stocks is not
unconditional. Under some circumstances, common stock
investments by insurers make very little sense.

We get excited enough to commit a big percentage of
insurance company net worth to equities only when we find
(1) businesses we can understand,
(2) with favorable long-term prospects,
(3) operated by honest and competent people, and
(4) priced very attractively.

We usually can identify a small number
of potential investments meeting requirements (1), (2) and (3),
but (4) often prevents action.
For example, in 1971 our total common stock position
at Berkshire’s insurance subsidiaries amounted to only $10.7 million at cost,
and $11.7 million at market.

There were equities of identifiably excellent companies
available - but very few at interesting prices.
(An irresistible footnote: in 1971, pension fund managers invested a record 122%
of net funds available in equities - at full prices they couldn’t buy enough of them.
In 1974, after the bottom had fallen out,
they committed a then record low of 21% to stocks.)

The past few years have been a different story for us.
At the end of 1975 our insurance subsidiaries held common equities
with a market value exactly equal to cost of $39.3 million.
At the end of 1978 this position had been increased to equities
(including a convertible preferred) with a cost of $129.1 million
and a market value of $216.5 million.

During the intervening three years we also had realized pre-tax gains
from common equities of approximately $24.7 million.
Therefore, our overall unrealized and realized pre-tax gains in equities
for the three year period came to approximately $112 million.
During this same interval the Dow-Jones Industrial Average
declined from 852 to 805.
It was a marvelous period for the value-oriented equity buyer.

We continue to find for our insurance portfolios small
portions of really outstanding businesses that are available,
through the auction pricing mechanism of security markets,
at prices dramatically cheaper than the valuations inferior
businesses command on negotiated sales.

This program of acquisition of small fractions of businesses
(common stocks) at bargain prices, for which little enthusiasm exists,
contrasts sharply with general corporate acquisition activity,
for which much enthusiasm exists.

It seems quite clear to us that either corporations are making
very significant mistakes in purchasing entire businesses at prices
prevailing in negotiated transactions and takeover bids,
or that we eventually are going to make considerable sums of money buying
small portions of such businesses at the greatly discounted valuations
prevailing in the stock market.
(A second footnote: in 1978 pension managers,
a group that logically should maintain the longest of investment perspectives,
put only 9% of net available funds into equities
- breaking the record low figure set in 1974 and tied in 1977.)

We are not concerned with whether the market quickly
revalues upward securities that we believe are selling at bargain
prices. In fact, we prefer just the opposite since, in most
years, we expect to have funds available to be a net buyer of
securities. And consistent attractive purchasing is likely to
prove to be of more eventual benefit to us than any selling
opportunities provided by a short-term run up in stock prices to
levels at which we are unwilling to continue buying.

Our policy is to concentrate holdings. We try to avoid
buying a little of this or that when we are only lukewarm about
the business or its price. When we are convinced as to
attractiveness, we believe in buying worthwhile amounts.
.

Insas ~ Annual Report 2010



For financial year end 30 june 2010, the Group achieved profits of 54 million compared to RM 57 million for the precious year.
.
The business environment was volatile last year, dominated by China and other international events, The financial year began quite favorably in July last year as financial markets appeared to be recovering well from the financial crash of October 2008 when Lehman Brothers (a major Wall Street firm) collapsed. However, at the end of November 2009, Dubai World defaulted on its loans to a consortioum of international banks. In December, the Greek Sovereign debt crisis became contagion and triggered a crisis of confidence in the stability of the European Union, and caused the Euro to drop sharply by about 21% in 5 months. This affected global investors' confidence badly, and financial and stock markets declined. Despite the recent recovery in stock markets, the US goverment just announced another round of "quantitative easing" to prevent a double dip recession.
.
In terms of operations, our investment management, project finance and IT divisions were the main earners, contributing profits of RM 24 million, RM 16 million and RM 14 million respectively.
.
Our stock brocking division's performance was satisfactory in light of low trading volumes on Bursa. We are trying to increase our presence and market share by opening branches in other states as a long term strategy. However, I am pleased to report that our corporate finace division was profitable in its first year of operations as it managed to to secure several advisory mandates for capital raising and initial public offerings.
.
Our high fashion retail business under Melium has rebounded quite strongly and we expect next year's performance to return to almost pre-crisis level. With the recent announcement of abolition of taxes on luxury goods, Malaysis will become as competitive as Singapore and Hong Kong for luxury goods. The goverment has also allocated increased budget to the Ministry of Tourism in a serious effort to increase the number of visitors to Malaysia. We expect all these positive factors to be favourable for our business.
.
Last year, we reported that we made a sizeable investment in London in Chantrey House, a residential cum commercial property in the Belgravia area, a prime property location with our UK partner, we took an equal interest in the investment amounting to 22.5 million British Pounds. Since we purchased that property, central London property prices have recovered strongly. Current prices for apartments in comparable locations are transacting at between 1,200 to 1,400 Pounds per square feet compared to our purchase price of 670 Pounds per square feet. We intend to hold on to this investment as we believe property prices should continue to rise in view of the low interest rate environment.
.
We ended the financial year with a strong and liquid balance sheet. We are continueing to look for new investments that can provide the Group with sustainable earnings in the future.
.
.
Dato' Thong Kok Khee
Executive Deputy Chairman/
Chief Executive Officer.
.

Sunday, November 28, 2010

SPNB awards RM1.7bil jobs for LRT extension

Saturday November 27, 2010


PETALING JAYA: Syarikat Prasarana Negara Bhd (SPNB) has awarded contracts worth RM1.7bil for the first phase (Package A) of the RM7bil light rail transit (LRT) extension project involving the Kelana Jaya and Ampang lines.

In a statement yesterday, SPNB, which was established by the Finance Ministry to facilitate, undertake and expedite infrastructure projects for the Government, said the main contractor facilities job for Package A of the Kelana Jaya line, valued at RM950mil, was awarded to Trans Resources Corp Bhd. The work will take 30 months to complete.

UEM Builders Bhd and Intria Bina Sdn Bhd were jointly appointed the nominated sub-contractors for the fabrication and delivery of segmental box girder jobs worth RM93.16mil, which is expected to take 21 months to complete.

Package A of the Kelana Jaya line will be a 9.2km extension from the Kelana Jaya station to Summit (Station 7). Package B will involve a 7.8km extension from Station 7 to the Putra Heights station.

Meanwhile, the main contractor facilities job for Package A of the Ampang line was jointly awarded to Bina Puri Holdings Bhd and Tim Sekata. Valued at RM634.64mil, the work will take 27 months to complete.

Bina Puri and Tim Sekata were also jointly appointed the nominated sub-contractors for the fabrication and delivery of segmental box girder jobs, which is valued at RM67.70mil and expected to take 19 months to complete.

Package A of the Ampang line will be a new 7.4km stretch from the Seri Petaling station to Station No. 5, while Package B will see a 10.3km extension from Station No. 5 to the Putra Heights Station.

SPNB said recipients of the main contractor facilities jobs would be responsible for all guideway sub-structure and main structure works, foundation work for stations and traction power sub-stations (TPSS), to launch and install segmental box girders and to supply and install parapets and noise barriers.

In addition, within the total contract value, the main contractors will also manage the nominated sub-contractors for contracts worth RM469mil (Kelana Jaya line) and RM305mil (Ampang line).

SPNB said the selection of the contractors was done through an open-tender process starting from November 2009. A total of 119 applications were received, but one was rejected due to failure to comply with application guidelines.

The tender for the facilities works under Package B for both lines will be called upon approval of the final railway scheme, which is expected by mid-2011.

With the appointment of the main contractors, it is expected that work on the line extension projects will start as soon as possible, SPNB said.

Intro Balance Sheet Analysis ~ Bruce Greenwald

The enduring value of Security Analysis rests on certain critical ideas that were then, and remain, fundamental to any well-conceived investment strategy. The first of these is the distintion between "investment" and "speculation" as defined by Graham and Dodd :

An investment operation is one which, upon thorough analysis,
promises safety of principal and a satisfactory return.
Operations not meeting these requirements are speculative.


The critical parts of this definition are "thorough analysis" and "safety of principal and a satisfactory return." Nothing about these requirements has changed since 1934.

A second related idea is that of focusing on the intrinsic of a security. It is according to Graham and Dodd,

that value which is justified by the facts,
eg., the assets, earnings, dividends, [and] definite prospects,
as distinct, let us say, from market quotations
established by market manipulation or distorted by psychological excesses.
.

Saturday, November 27, 2010

Berkshire Chairman's Letter 1977

We select our marketable equity securities in much the same
way we would evaluate a business for acquisition in its entirety.

We want the business to be
(1) one that we can understand,
(2) with favorable long-term prospects,
(3) operated by honest and competent people, and
(4) available at a very attractive price.

We ordinarily make no attempt to buy equities for anticipated
favorable stock price behavior in the short term. In fact, if
their business experience continues to satisfy us, we welcome
lower market prices of stocks we own as an opportunity to acquire
even more of a good thing at a better price.

Our experience has been that pro-rata portions of truly
outstanding businesses sometimes sell in the securities markets
at very large discounts from the prices they would command in
negotiated transactions involving entire companies.

Consequently, bargains in business ownership, which simply are
not available directly through corporate acquisition, can be
obtained indirectly through stock ownership. When prices are
appropriate, we are willing to take very large positions in
selected companies, not with any intention of taking control and
not foreseeing sell-out or merger, but with the expectation that
excellent business results by corporations will translate over
the long term into correspondingly excellent market value and
dividend results for owners, minority as well as majority.

Such investments initially may have negligible impact on our
operating earnings. For example, we invested $10.9 million in
Capital Cities Communications during 1977. Earnings attributable
to the shares we purchased totaled about $1.3 million last year.
But only the cash dividend, which currently provides $40,000
annually, is reflected in our operating earnings figure.

Capital Cities possesses both extraordinary properties and
extraordinary management. And these management skills extend
equally to operations and employment of corporate capital. To
purchase, directly, properties such as Capital Cities owns would
cost in the area of twice our cost of purchase via the stock
market, and direct ownership would offer no important advantages
to us. While control would give us the opportunity - and the
responsibility - to manage operations and corporate resources, we
would not be able to provide management in either of those
respects equal to that now in place. In effect, we can obtain a
better management result through non-control than control. This
is an unorthodox view, but one we believe to be sound.
.

Friday, November 26, 2010

Other requisites for common stocks of Investment Grade and a Corollary Therefrom

It should be pointed that if 20 times average earnings is taken as the upper limit of price for an investment purchase, then ordinarily the price paid should be substantially less than this maximum. This suggests that about 12 times earnings may be suitable for the typical case of a company with "neutral" prospects.

We must emphasis also that a reasonable ratio of market price to average earnings is "NOT the ONLY" requisite for a common stock investment. The company must be satisfactory also in its "financial set-up and management," and not unsastifactory in "its prospects."

From this principle there follows another important corollary, viz.: "An attractive Investment is An Attractive Speculation." This is true because, if a common stock can meet the demand of "conservative" investor that he get full value for his money 'plus' not unsatisfactory future prospects, then such an issue must also have a fair chance of appreciating in market value.
.

A suggested basis of "Maximum Appraisal" for Investment

The investor in common stocks, equally with the speculator, is dependent on future than past earnings. His fundamental basis of appraisal must be an intelligent and conservative "estimate" of the future earning power.

But his "measure" of future earnings can be conservative only if it is limited by "actual performances over a period of time." And in most instances he will derive the investment value of a common stock from the "average earnings of a period between 5 and 10 years."

This does not mean that all all common stocks with the same average earnings should have the same value.
The common-stock investor (@ the conservative buyer) will properly accord a "more liberal valuation" to those issues
> which have current earnings above the average or
> which may reasonably be considered to possess better than average prospects
> or possess an inherently stable earning power.

But it is essential that some moderate upper limit must "in every case" be placed on the multiplier in order to stay within the bounds of conservative valuation, suggested that "about 20 times average earnings" is as high a price as can be paid in an "investment" purchase of a common stock.

Limited Functions of Analyst in Field of Appraisal of Stock Prices

Confronted by the mixture of changing facts and fluctuating human fancies, the securities analyst is clearly incapable of passing judgement on common-stock prices "generally."

There are , however, some concrete, if limited, functions that he "may" carry on in this field, of which the following are representative :

1. He may set up a basis for "conservative or investment" valuation of common stocks, as distinguished from speculative valuations.

2. He may point out the significance of :
(a) the capitalization structure; and
(b) the source of income
as bearing upon the valuation of a given stock issue.

3. He may find unusual elements in the balance sheet which affect the implications of the earnings picture.
.

Exact Appraisal Impossible

Security analysis cannot presume to lay down general rules as to the "proper value" of any given common stock. Practically speaking, there is no such thing. The bases of value are too shifting to admit of any formulation that could claim to be even reasonably accurate. The whole idea of basing the value upon "current earnings" seems inherently absurd, since we know that the current earnings are constantly changing. And whether the multiplier should be 10 or 15 or 30 would seem at bottom a matter of purely arbitrary choice.

But the stock market itself has no time for such scientific scruples. It must make its values first and find its reason afterwards. Its position is much like that of a jury in a breach-of-promise suit; there is no way of measuring the values involved, and yet they must be measured somehow and a verdict rendered.

Hence the prices of common stocks are "not carefully thought out computations" but "the resultant of a welter of human reactions."

The stock market is a voting machine rather than a weighing machine.
It responds to factual data "not directly" but only as they "affect the decisions" of buyers and sellers.
.

Leader Universal expects diversification to pay off by 2013

Monday, 25 October 2010 00:00

Leader Universal Holdings Bhd is expecting its diversification away from its core business into power transmission and distribution to bear fruit within three years.

Leader Universal, which has its mainstay in manufacturing wire and cables, made its foray into the power transmission and distribution business in 1994 by building electric transmission cables and power plants in Cambodia.

The company is currently building a 100MW coal-fired power plant near the port city of Sihanoukville, Cambodia, which is funded by a syndicated term-loan facility and internally generated funds.

It undertook a financing facility of US$140 million (RM436 million) for the project and has seven years to repay the loan, with an option to extend the repayment period by another two years, subject to its lenders’ approval.

Besides power generation, Leader Universal is also building a 230kV, 110km overhead transmission line linking two substations near Phnom Penh.

The transmission project is partly funded by bank borrowings of US$65 million, payable over 13 years commencing from 2010, from Export-Import Bank of Malaysia Bhd and by internally generated funds. The cost of the entire power transmission project is estimated to be US$107 million. It is targeted for completion by mid-2011, while the substations north of Phnom Penh are expected to be ready by early 2012.

Based on Leader Universal’s latest quarterly report, its long-term borrowings are RM130.38 million while short-term borrowings are RM224.33 million, on the back of total equity of RM667.78 million.

The company, which derives only 6.55% of its revenue from the power transmission segment, expects to see this figure grow to about 20% by FY2013 ending Dec 31.

“Yes, we will see both projects completed by 2013. Currently, over 90% of our revenue is contributed by the wire and cables division,” says Leader Universal’s investor relations official Albert Wong.

Indeed, the company’s revenue for 1HFY2010 was RM1.22 billion, a rise of 33.3% from the corresponding period a year ago. Net profit was RM25.1 million, compared with RM26.2 million for the same period last year.

Earnings per share for the six months stood at 5.75 sen, while net tangible assets per share was RM1.25 on the back of a market capitalisation of RM384.08 million.

On Leader Universal’s outlook for 2H2010, Wong says the company is expected to achieve “better results” compared with the same period last year, barring any unforeseen circumstances.

The company recorded revenue of RM918.76 million for the first six months of FY2009. If it is able to repeat its performance this year, its annualised revenue could hit RM2.45 billion. This is almost equal the RM2.54 billion recorded in 2008, before the US subprime crisis hit the world economy, and also 25.6% higher than the RM1.95 billion revenue achieved in FY2009.

However, it should be noted that Leader Universal saw a 33.5% drop in its cash and bank balances for 1HFY2010 to RM135.11 million, compared with the same period a year ago. Its net cash flow from operations also dropped to RM23.92 million, from RM205.91 million.

Wong attributes this to the company’s increased sales, which led to an increase in working capital requirements and resulted in increased debtor balances that were not due for collection yet.

Wong is confident that a steady stream of jobs coming in will keep the company busy over the next few years. Among the projects he cites are
1. the RM40 billion mass rapid transit,
2. RM26 billion KL International Financial District,
3. RM5 billion 100-storey Warisan Merdeka Tower,
4. six highways,
5. schools and
6. hospitals.

Leader Universal also expects to benefit from the Sarawak Corridor of Renewable Energy programme and the implementation of other projects under the Ninth Malaysia Plan worth RM7 billion.

Leader Universal’s associate, Sarawak Cable Bhd, is the front runner to land plump jobs to provide cables in the state. Among its shareholders are Sarawak Energy Bhd, the sole electricity supplier in the state.

Leader Universal’s optimism in Cambodia is premised on its young population hungry for power as the country develops further. It is not a new market for the Penang-based company, which has been looking at Cambodia for some years now.

Given its persistence and expanding power plant business in Cambodia, the company’s diversification is expected to pay off in the years to come.

This article appeared in Corporate, The Edge Malaysia, Issue 829, Oct 25-31, 2010

Perodua sees higher sales on strong demand

Friday November 26, 2010


KOTA KINABALU: Perusahaan Otomobil Kedua Sdn Bhd (Perodua) has revised upward its sales figure for the year, given the strong demand for its vehicles.

Managing director Datuk Aminar Rashid Salleh said the company was now expecting to sell 185,000 vehicles in 2010 compared with an initial projection of 176,000 units.

He said that MyVi remained the most popular of Perodua's range of vehicles, accounting for about 41% sales, while the Viva compact and Alza multi-purpose vehicle (MPV) made up 37% and 22% of sales respectively.

To us, the Viva will continue to be relevant for many years to come, Aminar said at the launch of the Viva Elite Exclusive here yesterday.

He said the Viva accounted for 10,500 of the 21,300 vehicles sold in Sabah and Sarawak so far this year.

Sabah contributed 46% to our sales in this region and I believe the market still has a lot of room to grow.

We aim to increase the sales contribution from this part of the country from 14% to 20% within five years, Aminar said, adding that this would be achieved through a concerted advertising campaign and various ground activities.

Asked about competition from foreign makers of compact cars, such as those from South Korea and China which were trying to make their presence felt in the country, he said Perodua had had a good headstart in terms of establishing its sales and service network nationwide.

We are an established brand as evident from the good resale value of our vehicles. This includes the Kancil which was introduced some 17 years ago, he said.

Aminar said Perodua also understood Malaysians' taste and that it designed its vehicles accordingly.