Hello readers and investors. This post is mainly directed to my investors and those who bought the stocks I have recommended. Of course those who had met me have gotten slightly varying tips based on the individuals, but mainly the stocks comes from the 2016 posts of this blog.
Despite the slight correction these few days, I believe the profit till date is rather substantial, and this is quite a large difference from my prediction - whereby the market will do a slow climb from the bottom starting mid-end 2016. Clearly the market have rebounded quite strongly off the lows and I would say I was rather lucky to be able to get research done before that time period. The prices are shown all in their respective posts so if anyone would like to gauge the returns, feel free to do your own comparisons - namely OCBC, DBS, EMR and recently STI ETF & SHENG SIONG.
Regarding EMR, I understand that due to the lack of capital and understanding of foreign markets, many did not participate in it, so I would leave that out here. Prior to investments, I had always advised on my time horizon and perspective, and not to follow me blindly. Take for example, should someone with a time horizon of 1-2 months maximum bought OCBC and DBS shares the same time as I do, I believe the next couple of months has seen their shares dropping another 5-6%, which would have been realized losses for them. However, for those with similar appetite like mine, the movements would have suited perfectly for the DCA plan.
While personally my profits are nothing much since my capital is still small, I am extremely glad to have helped someone earn an amount equivalent to an COE (about?) with the capital of ~250k. The large trust of investing over 200k into shares based on my recommendations are worth much more to me than any monetary gains (I don't get a cut of it anyway), and because I feel only those who understand where I am coming from will have the ability to do it. The idea of my investing style is more towards avoiding risk than to seek profit. My only promise to investors is only that they will be richer 10 years down the road with my help vs fixed deposits. Since my holding period is indefinite, I have never and probably will not ever give advise on when to sell, so if they actually want to realize that mentioned COE, it is up to the individual.
I have always liked to maintain full honesty and transparency, so frankly speaking, I did not expect the jump in prices, nor your profits or mine. I would be happy if the prices didn't drop over 20% since I bought it, and that they continue paying dividends - that's it, I believe that's what I told everyone as well. Therefore, should prices maintain the way they are right now, of course its normal if the 'climb' i spoke about didn't happen, since... it already jumped up. Not considering dividends, current gains have already far exceeded the intended returns of 8% (annually+dividends) .Whether there be another crisis or not is still uncertain, given the general gloom about the economy, but should prices continue rising, then yeah go for more holidays and stuff, but if not, treat it as an opportunity to earn another COE.
There will probably not be any new picks given the adequately priced market right now, even more so if prices continue to rise. I am beginning to stray away from the Singapore market given its extremely inefficient workings, since it is often traded and very subjective to price manipulations - save for the few blue chips. However I will still continue to monitor the few large caps companies and will be ready to grab them when the chance presents itself.
In the meantime, I will be monitoring income-yielding securities, such as high dividend-blue chip stocks, REITs, defensive stocks and others. I am also not accepting funds for management in the meantime since I don't really know where to place them with current market conditions, so there will mostly be action only if the next crisis happens. Having said that, should any current or new investors have funds that want to be put to use, you can still contact me and I can try to figure something out - less lucrative opportunities are still opportunities!
Cheers!
Friday, April 29, 2016
Thursday, April 7, 2016
Same boat, different design - the value of money.
Hello readers! This article is not so much about finance than it is economics, just to let you know. This post is mainly addressed to my friends and investors that are waiting to buy shares only at the 'previous crisis' prices, be it 2008 global financial crisis, the great depression era etc. Many people I know are spooked by high prices right now compared to say 10 years ago, especially my parents. ;) While the concept of this discussion might be subject to some controversy because 'things are not that simple', I believe this basic concept will definitely apply no matter what time or place you are, to different extents.
First of all, I am fairly sure everyone more or less grasp the concept of inflation. It is a inevitable phenomenon that erodes the purchasing power of our money over time. I remember buying plain pratas at 50 cents about 13 years ago, back in primary school. Right now the cheapest I could find is $1.10 (the 10 cents was added rather recently, to my further dismay). Over 13 years, this would mean a price compounding of about 6.25% annually. While in reality I doubt there are as many products who rose in prices as fast as this, just take note of this as an example.
That leads us to our second point. Would you still, logically, expect plain pratas to cost 50 cent anytime soon, such as next year, 5 years later, or even 10 years later? It would take a miracle or a insane prata seller to make that happen anytime from now. I am fairly confident when I say that the average price of pratas will never hit 50 cents anytime from today onward, assuming everything goes as per normal. If you are one of those who would find reasons to rebut this statement, such as the world might fall into ruins or maybe 90% of all the money the world disappeared overnight etc., just know that I totally agree with you and I also suggest you exit this page immediately.
Moving on, lets say a similar product is produced by CURRY CO., we shall call it CCO. CCO sells pratas at 50 cent 13 years ago. The cost price, taking into consideration the dough, manpower, utilities etc. comes up to about 25 cent per prata. This allowed CCO to make a profit of 25 cent per piece of prata sold.
Because of inflation, the seller supplying the flour to produce the dough increases price by 5% year on year (y.o.y), the rest of the suppliers - utilities, manpower salaries, rental - follows suit. This would result in total costs of producing the prata to increase by 5%. The company then decides to adjust for this by increasing prices by 5% as well. A year later, the new cost of a piece of prata is now 52.5 cents, while the cost to produce it is 26.25 cents. This would result in a profit of 26.25 cents, versus the previous profit of 25 cents per prata. Fast forward 10 years, the cost of a prata would be 81.44 cents, while the cost to produce it would be 40.72 cents, resulting in a profit of 40.72 cents.
As you can see, technically the company did not gouge customers by raising prices more than it need to, but profits rose 5% y.o.y as sales and costs also rose 5% y.o.y. Sure, one can argue that the company can only raise prices enough to maintain the initial 25 cents profit. However if a company does that then it clearly has incompetent short-sighted management and that company will definitely not last long.
Now that we are all on the idea of companies profits will simply rise along with inflation if all else remains same, let's talk about share prices.
Lets go back to CCO 10 years ago. The company sells 10 million pratas that year, that would mean a profit of $2.5m for the year, with 25 cents of profit per prata. The management then decide to distribute 10% of earnings as dividends. Assuming 100,000 shares in circulation, that would result in a distribution of $2.50 per share. Given an average yield of 4% dividend on generic equities, that would mean a share price of $62.50.
Then comes an financial crisis, share price plummeted across the globe, with CCO share price falling about 50% to $30 per share. This resulted in yields of 8.33% (this is no exaggeration , yields were seen reaching ~10% in the 2008 financial crisis). Sales then continued as usual, people still have to eat right? As mentioned earlier, 10 years later - now, profit per prata is at 40.72 cents. All else remaining equal, total distribution per year would be $407.2k.
The company still distribute 10% of their earnings to 100,000 shares. Each share now has a distribution of $4.072. The economy is now healthy with a dividend yield of 4% again, this would mean a current share price of $101.80.
Let's say you're an investor and you look at the historical price chart of CCO. Definitely you would want to buy the stock when it was at $30 during the financial crisis, or you might want to buy the stock only when it is selling at the average price 10 years ago at $62.50. After going through all the above, does this rationale still make sense to you?
A price of $30 with current profits/distribution would mean a yield of 13.57%, while at $62.50 the yield is 6.5152%. While the latter if plausible during a financial crisis, you are just buying the stock at a face value of $62.50, while the intrinsic value of the stock has already risen much more than that. It means that even if the price is the same, the stock - and the various factors along with it - is already different.
If as an investor, one plainly looks at prices to decide the value of the stock, then you have already missed the axiom of inflation and the value of money. In the case of CCO, you might have missed the '$30 boat', but assuming yields of 8.33% for a DPU of $4.072, a price of $48.80 is exactly the same as the '$30 boat'.
The points brought up by this discussion might come as common sense to many, such as inflation etc. but the amount of people who misses the big picture is still astoundingly high. So I hope long-term investors would digest this discussion and don't be so hard up with your money, lest you miss more future 'boats'.
Happy investing!
First of all, I am fairly sure everyone more or less grasp the concept of inflation. It is a inevitable phenomenon that erodes the purchasing power of our money over time. I remember buying plain pratas at 50 cents about 13 years ago, back in primary school. Right now the cheapest I could find is $1.10 (the 10 cents was added rather recently, to my further dismay). Over 13 years, this would mean a price compounding of about 6.25% annually. While in reality I doubt there are as many products who rose in prices as fast as this, just take note of this as an example.
That leads us to our second point. Would you still, logically, expect plain pratas to cost 50 cent anytime soon, such as next year, 5 years later, or even 10 years later? It would take a miracle or a insane prata seller to make that happen anytime from now. I am fairly confident when I say that the average price of pratas will never hit 50 cents anytime from today onward, assuming everything goes as per normal. If you are one of those who would find reasons to rebut this statement, such as the world might fall into ruins or maybe 90% of all the money the world disappeared overnight etc., just know that I totally agree with you and I also suggest you exit this page immediately.
Moving on, lets say a similar product is produced by CURRY CO., we shall call it CCO. CCO sells pratas at 50 cent 13 years ago. The cost price, taking into consideration the dough, manpower, utilities etc. comes up to about 25 cent per prata. This allowed CCO to make a profit of 25 cent per piece of prata sold.
Because of inflation, the seller supplying the flour to produce the dough increases price by 5% year on year (y.o.y), the rest of the suppliers - utilities, manpower salaries, rental - follows suit. This would result in total costs of producing the prata to increase by 5%. The company then decides to adjust for this by increasing prices by 5% as well. A year later, the new cost of a piece of prata is now 52.5 cents, while the cost to produce it is 26.25 cents. This would result in a profit of 26.25 cents, versus the previous profit of 25 cents per prata. Fast forward 10 years, the cost of a prata would be 81.44 cents, while the cost to produce it would be 40.72 cents, resulting in a profit of 40.72 cents.
As you can see, technically the company did not gouge customers by raising prices more than it need to, but profits rose 5% y.o.y as sales and costs also rose 5% y.o.y. Sure, one can argue that the company can only raise prices enough to maintain the initial 25 cents profit. However if a company does that then it clearly has incompetent short-sighted management and that company will definitely not last long.
Now that we are all on the idea of companies profits will simply rise along with inflation if all else remains same, let's talk about share prices.
Lets go back to CCO 10 years ago. The company sells 10 million pratas that year, that would mean a profit of $2.5m for the year, with 25 cents of profit per prata. The management then decide to distribute 10% of earnings as dividends. Assuming 100,000 shares in circulation, that would result in a distribution of $2.50 per share. Given an average yield of 4% dividend on generic equities, that would mean a share price of $62.50.
Then comes an financial crisis, share price plummeted across the globe, with CCO share price falling about 50% to $30 per share. This resulted in yields of 8.33% (this is no exaggeration , yields were seen reaching ~10% in the 2008 financial crisis). Sales then continued as usual, people still have to eat right? As mentioned earlier, 10 years later - now, profit per prata is at 40.72 cents. All else remaining equal, total distribution per year would be $407.2k.
The company still distribute 10% of their earnings to 100,000 shares. Each share now has a distribution of $4.072. The economy is now healthy with a dividend yield of 4% again, this would mean a current share price of $101.80.
Let's say you're an investor and you look at the historical price chart of CCO. Definitely you would want to buy the stock when it was at $30 during the financial crisis, or you might want to buy the stock only when it is selling at the average price 10 years ago at $62.50. After going through all the above, does this rationale still make sense to you?
A price of $30 with current profits/distribution would mean a yield of 13.57%, while at $62.50 the yield is 6.5152%. While the latter if plausible during a financial crisis, you are just buying the stock at a face value of $62.50, while the intrinsic value of the stock has already risen much more than that. It means that even if the price is the same, the stock - and the various factors along with it - is already different.
If as an investor, one plainly looks at prices to decide the value of the stock, then you have already missed the axiom of inflation and the value of money. In the case of CCO, you might have missed the '$30 boat', but assuming yields of 8.33% for a DPU of $4.072, a price of $48.80 is exactly the same as the '$30 boat'.
The points brought up by this discussion might come as common sense to many, such as inflation etc. but the amount of people who misses the big picture is still astoundingly high. So I hope long-term investors would digest this discussion and don't be so hard up with your money, lest you miss more future 'boats'.
Happy investing!
Wednesday, March 9, 2016
Sheng siong (SGX: OV8)
Hello readers!
The financial situation is still rather rocky, amidst a few short rallies now and then. I believe the rally of oil prices are definitely contributing to the recovery of the economy. From its lowest of ~26(?) to the current prices of ~40. It is definitely staging a strong comeback. However, the lagging growth of China is still weighing on investor sentiments globally. The effects do seem to be cancelling each other out in general, since we have a bull (oil) and a bear (china) right now, as compared to both the bears months ago. Should China's growth recover I believe a bull market might be back in place, although this might be far from the present, given the fact that China has been growing rather exponentially for the past decade.
While I personally do not involve myself in commodities nor cyclical markets, the ripples caused by the falling oil prices do open up opportunities in other segments of the market. One of the more obvious example were definitely the banks, where sentiment soured after realizing the NPL of banks might increase due to the defaults arising from the O&G industry. I seem to be getting off topic already so lets get back to...
Sheng Siong
1. Business outlook
I believe anyone reading this would know of Sheng Siong (I'll call it SS from now on), since its everywhere and sell stuffs everyone needs. Retail goods is in itself a rather sustainable industry, as we always need ...stuff right? It is also very easy for them to phase out or bring in new products as the market changes, be it the rising trend of organic foods, Japanese products, that Korean spicy instant noodles and the like. Therefore bottom line is I believe their business will continue to survive in the years to come, that is the bedrock of all my investments - sustainability.
As usual, for the people interested in the numbers, here's the excel link :
https://drive.google.com/file/d/0B1fcD_lJpW6hR01mc2VGY2JrUnc/view?usp=sharing
Given the high volatility in the Asian markets, I would say SS is quite defensive in nature and prices have not fallen far from its peaks. As a matter of fact, their earnings are still increasing in FY2015 compared to FY2014, probably because even in financial crisis people still need their maggi mee, shampoo and.. you know.. stuffs. This company could provide investors a relatively safeer growth stock while providing decent dividends no matter what state the economy is in.
Onwards to competitors, I believe names such as NTUC, cold storage, and 7-11 could pop to mind. Firstly, I have been observing quite a few branches of these stores myself. I would say the greatest competitor would be NTUC, as cold storage's goods are rather distinct from SS as they are dealing with higher-priced premium products. Basically if you have something you want to buy in CS, you will go to CS. SS probably doesn't carry that particular product that's why you go to CS, for generic products I believe people will still go to SS over CS, given the accessibility and pricing.
Now comes NTUC, NTUC will never collapse, I hope that day never comes, because it would probably be disastrous. However, I like the fact that SS doesn't attempt to compete with NTUC and each of them ventures in their own strength. I would say NTUC caters to more large scale consumers such as shopping malls, and the occasional marketplace. SS however, pops up in locations you didn't knew existed. While this limits its customers to the neighborhood its in, the costs of operation are not high to do this. They do not need a huge amount of inventory either. As long as they are meeting demands, profits are there. In fact there's a SS right below my block, and if I wanted a carton of milk right now would I drive to NTUC in Jurong East? Definitely not.
NTUC is bigger and might be slightly cheaper, but trust me when I say if I were to go down now there would still be people buying stuff from SS. That's the power of convenience. Sure, if I wanted to stock up on groceries I might head down to NTUC on a saturday and get lots of stuff, but that's not the battlefield SS is in, SS profits from the few products you forgot to buy from NTUC or you know... you ran out of it and you're too lazy (and smart) to drive down to park at a $1.50/hr shopping mall parking lot to buy a carton of milk at NTUC. Oh and you're probably not going to 7-11 for that as you probably know, you're getting ripped off.
2. Financials
*Most discussion here are done with regards to the data in excel in case you're wondering.
2.1. Revenue
Revenue throughout the years is showing growth, at 3.32%. The chart below shows Singapore inflation rate.
Looking at the chart, Singapore's inflation averages out to be about 2% a year for the past 6 years (since SS's inception). With a revenue growth of 3.32% it is beating inflation rather well. This shows that other than simply raising prices due to inflation, their management is doing something to increase revenue, and doing it right.
2.2 Gross profit margin
While a growing revenue is good, its useless if costs grow as much as, or even higher than it. That's not the case for SS - showing a growth in profit margins from 21% in 2010 to 24.7% in 2015. This could prove that management is consistently taking steps to reduce costs and improve efficiency. One of the major factors I like to look at.
2.3 Net profit attributable to shareholders
Here we go investors, here's our money. Net profit has been growing strongly since SS's inception, at a compounded annual growth rate (CAGR) of 4.89%. Looking at the margins, it would seem that other than streamlining their cost of sales, SS also cut down operations expenses resulting in more profit for shareholders. Net profit margin improved from an average of 6% to 7.42% in 2015, hitting new highs.
2.4 Shares outstanding
The great improvements in net profits is however clouded by a relatively high issuance of new shares throughout the years too, coming in at a CAGR of 4.72%. Which means net profit growth is only slightly higher than shares dilution rate.
2.5 Assets & liabilities
One great thing I like about SS is that it has no debts. SS paid off its remaining debts in 2010, as shown in the non-current liabilities. No debts! Given the fact that it's a medium-sized company its understandable that it doesn't need to issue debt for funding, but having a self-funding business is definitely a major factor in sustainability and volatility avoidance. Interest rate hikes? Doesn't effects it. Having a bad year? Doesn't matter, don't owe anyone money.
Debt ratio is constantly improving yearly from 1.33 (that's already decent) to 3 in recent years, which is much higher than average. As a matter of fact, SS's quick ratio/acid test ratio is consistently over 1 after 2010. This means that SS's cash on hand is enough to pay off any liabilities it has for the entire year. That spells out safety better than anything else.
2.6 Inventory Turnover
SS has an average inventory turnover ratio of 12 throughout the years, save for 2010 where it is much higher. This translates to having a inventory of about 1 month worth of sales. It's very good since this demonstrates efficiency in inventory management. Maintaining a low inventory eliminates spoilage of goods from various reasons and also storage costs. However it cannot be too low as then it might be unable to meet demands. I do not believe this will happen though, since I seen them catering to the recent burst of sales during CNY2016 rather well.
A low inventory ratio also means that SS are selling the stuff they buy rather well, as a unnecessary growth in inventory usually means difficulty in clearing products.
2.7 Net asset value (NAV) and pricing
All good things must come to an end, such is the case for SS, where all the good points mentioned previously probably resulted in a much higher NAV/price than average. SS sits in at an average of 5.57 NAV/price. Which means should the company liquidates we are only getting 18 cents on the dollar. NAV is however growing at a rather solid pace of 8.66% CAGR. (2011-2015)
With the share price growing at 14.3% CAGR (2011-2015), there is still some catching up to do for the NAV. This could be rather evidently observed by the recent stagnation in price, as shown.
Given the rather solid price/nav ratio maintained throughout the years, I believe investor sentiment is rather strong towards this company, and this nav/price ratio could be maintained so long as earnings or p/e do not fall drastically. SS has shown bouts of stagnation in pricing previously, before climbing to new highs and staying there. Should this phenomenon repeats itself it might occur after the present china-oil crisis when the next bull run comes in.
With Singapore's inflation rate being so low recently, an increase in inflation from bull runs could also result in increased earnings from SS simply due to price raises, which means shareholders are getting more money.
2.8 Dividends
Sheng Siong pays a rather strong dividend, achieving over 4% yield every year. Taking the fast growth of share price into consideration, this is quite an accomplishment. However, there is no buffer for downturns as SS pays out over 90% of its net profits as dividends - this can be seen in the excel sheet and SS actually declares this themselves in the annual report. I do not feel much volatility from this lack of buffer however, since compared to REITs (which also does >90% payouts), the industry SS is in is much more stable.
3. Conclusion
I believe there wouldn't be much better deals out there taking into consideration the efficient frontier of investment theory. Assuming a stable flow of profits, and thus dividends, ~4% a year doesn't sounds like you will lose much in opportunity costs either even if you might have something slightly better. I wouldn't say SS dividend payout is inferior to REITs even though they are both paying over 90% and REITs averages a yield of 6%, given the volatility of the property market. Again, its all about risk-reward.
Share price wise there might be some appreciation to come should Singapore inflation rates get back on track, as mentioned above. This is assuming investor sentiment is strong enough to maintain the current NAV/price. Even if it doesn't, going by inflation of prices alone, SS should result in more profits and that could push dividend yields up. Good enough.
While this wouldn't be a cash cow, SS could serve well as a defensive segment in anyone's portfolio.
On a side note, I feel better buying stuff from SS knowing that I am a shareholder. Which is why I always convince my friends to buy stuff from SS ;)
Happy investing!
The financial situation is still rather rocky, amidst a few short rallies now and then. I believe the rally of oil prices are definitely contributing to the recovery of the economy. From its lowest of ~26(?) to the current prices of ~40. It is definitely staging a strong comeback. However, the lagging growth of China is still weighing on investor sentiments globally. The effects do seem to be cancelling each other out in general, since we have a bull (oil) and a bear (china) right now, as compared to both the bears months ago. Should China's growth recover I believe a bull market might be back in place, although this might be far from the present, given the fact that China has been growing rather exponentially for the past decade.
While I personally do not involve myself in commodities nor cyclical markets, the ripples caused by the falling oil prices do open up opportunities in other segments of the market. One of the more obvious example were definitely the banks, where sentiment soured after realizing the NPL of banks might increase due to the defaults arising from the O&G industry. I seem to be getting off topic already so lets get back to...
Sheng Siong
1. Business outlook
I believe anyone reading this would know of Sheng Siong (I'll call it SS from now on), since its everywhere and sell stuffs everyone needs. Retail goods is in itself a rather sustainable industry, as we always need ...stuff right? It is also very easy for them to phase out or bring in new products as the market changes, be it the rising trend of organic foods, Japanese products, that Korean spicy instant noodles and the like. Therefore bottom line is I believe their business will continue to survive in the years to come, that is the bedrock of all my investments - sustainability.
As usual, for the people interested in the numbers, here's the excel link :
https://drive.google.com/file/d/0B1fcD_lJpW6hR01mc2VGY2JrUnc/view?usp=sharing
Given the high volatility in the Asian markets, I would say SS is quite defensive in nature and prices have not fallen far from its peaks. As a matter of fact, their earnings are still increasing in FY2015 compared to FY2014, probably because even in financial crisis people still need their maggi mee, shampoo and.. you know.. stuffs. This company could provide investors a relatively safeer growth stock while providing decent dividends no matter what state the economy is in.
Onwards to competitors, I believe names such as NTUC, cold storage, and 7-11 could pop to mind. Firstly, I have been observing quite a few branches of these stores myself. I would say the greatest competitor would be NTUC, as cold storage's goods are rather distinct from SS as they are dealing with higher-priced premium products. Basically if you have something you want to buy in CS, you will go to CS. SS probably doesn't carry that particular product that's why you go to CS, for generic products I believe people will still go to SS over CS, given the accessibility and pricing.
Now comes NTUC, NTUC will never collapse, I hope that day never comes, because it would probably be disastrous. However, I like the fact that SS doesn't attempt to compete with NTUC and each of them ventures in their own strength. I would say NTUC caters to more large scale consumers such as shopping malls, and the occasional marketplace. SS however, pops up in locations you didn't knew existed. While this limits its customers to the neighborhood its in, the costs of operation are not high to do this. They do not need a huge amount of inventory either. As long as they are meeting demands, profits are there. In fact there's a SS right below my block, and if I wanted a carton of milk right now would I drive to NTUC in Jurong East? Definitely not.
NTUC is bigger and might be slightly cheaper, but trust me when I say if I were to go down now there would still be people buying stuff from SS. That's the power of convenience. Sure, if I wanted to stock up on groceries I might head down to NTUC on a saturday and get lots of stuff, but that's not the battlefield SS is in, SS profits from the few products you forgot to buy from NTUC or you know... you ran out of it and you're too lazy (and smart) to drive down to park at a $1.50/hr shopping mall parking lot to buy a carton of milk at NTUC. Oh and you're probably not going to 7-11 for that as you probably know, you're getting ripped off.
2. Financials
*Most discussion here are done with regards to the data in excel in case you're wondering.
2.1. Revenue
Revenue throughout the years is showing growth, at 3.32%. The chart below shows Singapore inflation rate.
Looking at the chart, Singapore's inflation averages out to be about 2% a year for the past 6 years (since SS's inception). With a revenue growth of 3.32% it is beating inflation rather well. This shows that other than simply raising prices due to inflation, their management is doing something to increase revenue, and doing it right.
2.2 Gross profit margin
While a growing revenue is good, its useless if costs grow as much as, or even higher than it. That's not the case for SS - showing a growth in profit margins from 21% in 2010 to 24.7% in 2015. This could prove that management is consistently taking steps to reduce costs and improve efficiency. One of the major factors I like to look at.
2.3 Net profit attributable to shareholders
Here we go investors, here's our money. Net profit has been growing strongly since SS's inception, at a compounded annual growth rate (CAGR) of 4.89%. Looking at the margins, it would seem that other than streamlining their cost of sales, SS also cut down operations expenses resulting in more profit for shareholders. Net profit margin improved from an average of 6% to 7.42% in 2015, hitting new highs.
2.4 Shares outstanding
The great improvements in net profits is however clouded by a relatively high issuance of new shares throughout the years too, coming in at a CAGR of 4.72%. Which means net profit growth is only slightly higher than shares dilution rate.
2.5 Assets & liabilities
One great thing I like about SS is that it has no debts. SS paid off its remaining debts in 2010, as shown in the non-current liabilities. No debts! Given the fact that it's a medium-sized company its understandable that it doesn't need to issue debt for funding, but having a self-funding business is definitely a major factor in sustainability and volatility avoidance. Interest rate hikes? Doesn't effects it. Having a bad year? Doesn't matter, don't owe anyone money.
Debt ratio is constantly improving yearly from 1.33 (that's already decent) to 3 in recent years, which is much higher than average. As a matter of fact, SS's quick ratio/acid test ratio is consistently over 1 after 2010. This means that SS's cash on hand is enough to pay off any liabilities it has for the entire year. That spells out safety better than anything else.
2.6 Inventory Turnover
SS has an average inventory turnover ratio of 12 throughout the years, save for 2010 where it is much higher. This translates to having a inventory of about 1 month worth of sales. It's very good since this demonstrates efficiency in inventory management. Maintaining a low inventory eliminates spoilage of goods from various reasons and also storage costs. However it cannot be too low as then it might be unable to meet demands. I do not believe this will happen though, since I seen them catering to the recent burst of sales during CNY2016 rather well.
A low inventory ratio also means that SS are selling the stuff they buy rather well, as a unnecessary growth in inventory usually means difficulty in clearing products.
2.7 Net asset value (NAV) and pricing
All good things must come to an end, such is the case for SS, where all the good points mentioned previously probably resulted in a much higher NAV/price than average. SS sits in at an average of 5.57 NAV/price. Which means should the company liquidates we are only getting 18 cents on the dollar. NAV is however growing at a rather solid pace of 8.66% CAGR. (2011-2015)
With the share price growing at 14.3% CAGR (2011-2015), there is still some catching up to do for the NAV. This could be rather evidently observed by the recent stagnation in price, as shown.
With Singapore's inflation rate being so low recently, an increase in inflation from bull runs could also result in increased earnings from SS simply due to price raises, which means shareholders are getting more money.
2.8 Dividends
Sheng Siong pays a rather strong dividend, achieving over 4% yield every year. Taking the fast growth of share price into consideration, this is quite an accomplishment. However, there is no buffer for downturns as SS pays out over 90% of its net profits as dividends - this can be seen in the excel sheet and SS actually declares this themselves in the annual report. I do not feel much volatility from this lack of buffer however, since compared to REITs (which also does >90% payouts), the industry SS is in is much more stable.
3. Conclusion
I believe there wouldn't be much better deals out there taking into consideration the efficient frontier of investment theory. Assuming a stable flow of profits, and thus dividends, ~4% a year doesn't sounds like you will lose much in opportunity costs either even if you might have something slightly better. I wouldn't say SS dividend payout is inferior to REITs even though they are both paying over 90% and REITs averages a yield of 6%, given the volatility of the property market. Again, its all about risk-reward.
Share price wise there might be some appreciation to come should Singapore inflation rates get back on track, as mentioned above. This is assuming investor sentiment is strong enough to maintain the current NAV/price. Even if it doesn't, going by inflation of prices alone, SS should result in more profits and that could push dividend yields up. Good enough.
While this wouldn't be a cash cow, SS could serve well as a defensive segment in anyone's portfolio.
On a side note, I feel better buying stuff from SS knowing that I am a shareholder. Which is why I always convince my friends to buy stuff from SS ;)
Happy investing!
Friday, March 4, 2016
Character & principles, your best friend in finance
I am sure many people know the famous quote by Warren Buffett, "Be greedy when others are fearful, be fearful when others are greedy". There's probably a good reason why a widely-spread saying from him has nothing to do with analysis skills. As I have probably said multiple times already, WB made a huge impact in my investing journey, he is a mentor to both my analysis skills and character, the latter being the much more important aspect of investment in my opinion.
Anyone can pick up analysis skills such as understanding financial reports, numbers crunching and graph-plotting, but everyone has their own personalities. The interest in finance is rather rare in my circle of friends. Coming from the engineering field, it shouldn't be a surprise I guess.
I would say my friends who came from a business-related diploma courses or had investor parents would have much less difficulty picking up finance than I did, but then apparently none of them had much interest in it. So there wasn't really anyone to guide me on what type of investing suits my personality. My parents knew nothing about shares investing either, my first introduction into shares was a google search of 'stocks'. It has been a long way since then.
It could be sort of a blessing in disguise. Since I started writing on this blank piece of paper with only my own pen, I was largely unaffected by the styles and character of others, I managed to develop my investing principles best suited to my character, while drawing serious influence from Buffett, Graham and Fisher. Of course at the beginning I didn't knew what kind of investor I am, but as I read through their books, their investment philosophy felt more and more like 'yeah I could definitely see myself doing that', it feels right - and good - to adapt their principles. During the start - the most exponential growth of my learning curve - I burned through piles of finance books in the library. I needed to know what I didn't know. From that experience I can definitely tell you that some investing principle are not suitable for everyone. I am rather averse towards the idea of using technicals to invest.
Personally I would say that I have sufficient knowledge of technical analysis - that's what majority of forex is. I did forex for some time before I realized that the profits does not outweigh my unrest. From basic SMA and candlesticks pattern to more complex indicators such as bollinger bands and ichimoku kinko hyo, the charting techniques like Fibonacci retracement and Andrew's pitchfork, along with oscillators such as RSI and MACD, I had my fair share of technical analysis. I would go out on a limb and risk sounding cocky (I am definitely not) to express that I doubt many business undergrads have TA knowledge that exceeds mine.
With that said, I absolutely do not use nor recommend technical analysis in my investments. One important thing in any learning journey is to know what isn't suitable for you. Technical analysis helps out my trading a lot, but it absolutely has nothing helpful in aiding my investing judgements - so I'm simply not using it. You don't have to apply everything you know, that's where analysis by paralysis comes from.
I have gotten quite a number of requests and questions asking me and also expressing the interest to start investing. Sure I can definitely tell you how to set up a brokerage account and buy shares, I could even give recommendations to which stocks to buy (I am definitely not liable for your losses). However, for one to really improve their circle of competence and principles, one have to understand what investing principles suits them best. Some people cannot hold their equities for more than a few months, some people can't sleep well at night knowing they have positions open, while some simply want to buy and forget about it. These factors, while definitely nothing skill-related, will surely plays a part in any investing journey to come.
Happy investing!
Anyone can pick up analysis skills such as understanding financial reports, numbers crunching and graph-plotting, but everyone has their own personalities. The interest in finance is rather rare in my circle of friends. Coming from the engineering field, it shouldn't be a surprise I guess.
I would say my friends who came from a business-related diploma courses or had investor parents would have much less difficulty picking up finance than I did, but then apparently none of them had much interest in it. So there wasn't really anyone to guide me on what type of investing suits my personality. My parents knew nothing about shares investing either, my first introduction into shares was a google search of 'stocks'. It has been a long way since then.
It could be sort of a blessing in disguise. Since I started writing on this blank piece of paper with only my own pen, I was largely unaffected by the styles and character of others, I managed to develop my investing principles best suited to my character, while drawing serious influence from Buffett, Graham and Fisher. Of course at the beginning I didn't knew what kind of investor I am, but as I read through their books, their investment philosophy felt more and more like 'yeah I could definitely see myself doing that', it feels right - and good - to adapt their principles. During the start - the most exponential growth of my learning curve - I burned through piles of finance books in the library. I needed to know what I didn't know. From that experience I can definitely tell you that some investing principle are not suitable for everyone. I am rather averse towards the idea of using technicals to invest.
Personally I would say that I have sufficient knowledge of technical analysis - that's what majority of forex is. I did forex for some time before I realized that the profits does not outweigh my unrest. From basic SMA and candlesticks pattern to more complex indicators such as bollinger bands and ichimoku kinko hyo, the charting techniques like Fibonacci retracement and Andrew's pitchfork, along with oscillators such as RSI and MACD, I had my fair share of technical analysis. I would go out on a limb and risk sounding cocky (I am definitely not) to express that I doubt many business undergrads have TA knowledge that exceeds mine.
With that said, I absolutely do not use nor recommend technical analysis in my investments. One important thing in any learning journey is to know what isn't suitable for you. Technical analysis helps out my trading a lot, but it absolutely has nothing helpful in aiding my investing judgements - so I'm simply not using it. You don't have to apply everything you know, that's where analysis by paralysis comes from.
I have gotten quite a number of requests and questions asking me and also expressing the interest to start investing. Sure I can definitely tell you how to set up a brokerage account and buy shares, I could even give recommendations to which stocks to buy (I am definitely not liable for your losses). However, for one to really improve their circle of competence and principles, one have to understand what investing principles suits them best. Some people cannot hold their equities for more than a few months, some people can't sleep well at night knowing they have positions open, while some simply want to buy and forget about it. These factors, while definitely nothing skill-related, will surely plays a part in any investing journey to come.
Happy investing!
Saturday, January 30, 2016
Dollar cost averaging, the math!
Edit: Thanks to bro Leonard for pointing out to me that the value for paper losses after the 3rd purchase is wrong. It is supposed to be 5.26% instead of 7.02%. The mistake has been corrected!
Hello, I am writing this post to help our friends who are beginning to invest have a better idea of returns and the math behind dollar cost averaging.
Dollar cost average(-ing), DCA for short, is the action of buying a certain product, be it equities, gold, funds etc. over a period. This is similar to the common saying of "drop more, buy more!" or spreading your capital over a typical poker game. However, mentioning to buy when it drops is easy, but how much are you actually prepared to lose or/and do you have the next buying point ready?
Gut feeling aside, this post is to simplify the maths of DCA and newer investors such as me can learn how to appropriate their funds prior to making their first order. There are many reasons why one would buy a stock, maybe the market has fallen quite an amount from it's peak, friend's recommendation, rumors, analysis shown great potential, etc. this plan will only help once you have decided to start buying - it doesn't teaches you when to enter or exit.
Please take note that the price will definitely drop lower in a bear market at the end of your planned DCA. If you have done your research prior to purchase, further drops in prices shouldn't bother you much as you should be confident that the company will go strong and have good prospects that price falls are temporary. If not don't even start to buy, much less a DCA plan. You might also not be able to complete the plan due to price not reaching levels as low as planned but that should be expected while planning.
Ok lets move on!
Scenario 1. You have $10,000 cash you decide to invest in a certain company having a initial share price, p, of $10. Since the economy is unstable right now you decide to DCA, here is one way you can do it.
The total amount invested at the end (of the 3rd purchase) is $8,550. Your paper losses at the end is $450. These are the only 2 values we will be concerned about right now, lets disregard the unused cash balance.
When share prices rises back to the price at which you first bought it, you will have a profit of $450, or 5.26% of invested capital. This 5.26% profit WILL always apply as long as you follow the 3 splits - 5% drop plan, be it the first purchase is worth $50k, $200k or $1 million.
Having said that, let the first purchase amount be x. By following the plan, your purchase will go by 1x, 0.95x, 0.9x = 2.85x
In order to ensure sufficient funds, your available capital must be 2.85 times more than your first purchase. So factoring in the minimum purchase of 100 lots and etc. you can do the calculations yourself.
Here are a few values to note.
Loss after 1st purchase = 0%
Loss after 2nd purchase = 2.56%*
Loss after 3rd purchase = 5.26% (of invested capital)
Any further losses isn't of concern since you are not buying any more.
*This is also your profit % after share price returns to p should your 3rd purchase threshold isn't hit.
Assuming you completed your plan, the price it needs to rise to to break even your costs is (total losses/total shares owned) + last bought share price. This scenario is pretty bad to demonstrate due to the fractions and all but you get the point.
Scenario 2. Will be going a little faster and more simplified now.
Your available capital must be at least 3.7 times of your first purchase cost.
When share price returns to p, your profits will be 0.05x+0.1x+0.15x = 0.3x. That gives us 0.3x/3.7x, or 8.11% of invested capital.
Loss after 1st purchase = 0%
Loss after 2nd purchase = 2.56%
Loss after 3rd purchase = 5.26%
(total)Loss after 4th purchase = 8.11%
Putting some numbers in.
1st purchase = 10x300 = $3,000
2nd purchase = 9.5x300 = $2,850
3rd purchase = 9x300 = $2,700
4th purchase = 8.5x300 = $2,550
Total = $11,100
To break even, (900/1200) + 8.5 = $9.25 (8.82% rise)
Scenario 3. This is slightly more drastic but still realistic.
Total cost = x + 0.9x + 0.8x = 2.7x
Your available capital must be at least 2.7 times of your first purchase cost.
When share price reaches p, profit is 0.3/2.7 or 11.1% of invested capital.
Total losses at the end of last purchase = (1x - 0.9x) + (1x - 0.8x) = 0.3x
0.3x/2.7x = 11.11% (of invested capital).
These are just 3 of the infinite possible DCA plans you can come up with, with it being even more complex should additional factors be added in such as : different amount of shares each purchase, perpetual/long term DCA, DCA over bear and bull market and many more.
I also didn't provide examples for scenarios of averaging up because it doesn't really make sense nor I have any benchmarks to relate. Firstly, one should really stop buying shares when it reaches ridiculous highs, DCA or not. Secondly, if I use original price p as reference, then DCA upwards will only result in losses, losing money isn't really the goal of investments isn't it.
If you are planning on having a perpetual DCA, you should also consider the price ceiling in which you stop buying anymore, save them up for a crash - the profits/effort ratio here is totally worth it.
That's all folks, thanks for reading!
Hello, I am writing this post to help our friends who are beginning to invest have a better idea of returns and the math behind dollar cost averaging.
Dollar cost average(-ing), DCA for short, is the action of buying a certain product, be it equities, gold, funds etc. over a period. This is similar to the common saying of "drop more, buy more!" or spreading your capital over a typical poker game. However, mentioning to buy when it drops is easy, but how much are you actually prepared to lose or/and do you have the next buying point ready?
Gut feeling aside, this post is to simplify the maths of DCA and newer investors such as me can learn how to appropriate their funds prior to making their first order. There are many reasons why one would buy a stock, maybe the market has fallen quite an amount from it's peak, friend's recommendation, rumors, analysis shown great potential, etc. this plan will only help once you have decided to start buying - it doesn't teaches you when to enter or exit.
Please take note that the price will definitely drop lower in a bear market at the end of your planned DCA. If you have done your research prior to purchase, further drops in prices shouldn't bother you much as you should be confident that the company will go strong and have good prospects that price falls are temporary. If not don't even start to buy, much less a DCA plan. You might also not be able to complete the plan due to price not reaching levels as low as planned but that should be expected while planning.
Ok lets move on!
Scenario 1. You have $10,000 cash you decide to invest in a certain company having a initial share price, p, of $10. Since the economy is unstable right now you decide to DCA, here is one way you can do it.
- 10k capital
- 3 splits
- 5% drop
The total amount invested at the end (of the 3rd purchase) is $8,550. Your paper losses at the end is $450. These are the only 2 values we will be concerned about right now, lets disregard the unused cash balance.
When share prices rises back to the price at which you first bought it, you will have a profit of $450, or 5.26% of invested capital. This 5.26% profit WILL always apply as long as you follow the 3 splits - 5% drop plan, be it the first purchase is worth $50k, $200k or $1 million.
Having said that, let the first purchase amount be x. By following the plan, your purchase will go by 1x, 0.95x, 0.9x = 2.85x
In order to ensure sufficient funds, your available capital must be 2.85 times more than your first purchase. So factoring in the minimum purchase of 100 lots and etc. you can do the calculations yourself.
Here are a few values to note.
Loss after 1st purchase = 0%
Loss after 2nd purchase = 2.56%*
Loss after 3rd purchase = 5.26% (of invested capital)
Any further losses isn't of concern since you are not buying any more.
*This is also your profit % after share price returns to p should your 3rd purchase threshold isn't hit.
Assuming you completed your plan, the price it needs to rise to to break even your costs is (total losses/total shares owned) + last bought share price. This scenario is pretty bad to demonstrate due to the fractions and all but you get the point.
Scenario 2. Will be going a little faster and more simplified now.
- 4 splits
- 5% drop
Your available capital must be at least 3.7 times of your first purchase cost.
When share price returns to p, your profits will be 0.05x+0.1x+0.15x = 0.3x. That gives us 0.3x/3.7x, or 8.11% of invested capital.
Loss after 1st purchase = 0%
Loss after 2nd purchase = 2.56%
Loss after 3rd purchase = 5.26%
(total)Loss after 4th purchase = 8.11%
Putting some numbers in.
1st purchase = 10x300 = $3,000
2nd purchase = 9.5x300 = $2,850
3rd purchase = 9x300 = $2,700
4th purchase = 8.5x300 = $2,550
Total = $11,100
To break even, (900/1200) + 8.5 = $9.25 (8.82% rise)
Scenario 3. This is slightly more drastic but still realistic.
- 3 splits
- 10% drop
Total cost = x + 0.9x + 0.8x = 2.7x
Your available capital must be at least 2.7 times of your first purchase cost.
When share price reaches p, profit is 0.3/2.7 or 11.1% of invested capital.
Total losses at the end of last purchase = (1x - 0.9x) + (1x - 0.8x) = 0.3x
0.3x/2.7x = 11.11% (of invested capital).
These are just 3 of the infinite possible DCA plans you can come up with, with it being even more complex should additional factors be added in such as : different amount of shares each purchase, perpetual/long term DCA, DCA over bear and bull market and many more.
I also didn't provide examples for scenarios of averaging up because it doesn't really make sense nor I have any benchmarks to relate. Firstly, one should really stop buying shares when it reaches ridiculous highs, DCA or not. Secondly, if I use original price p as reference, then DCA upwards will only result in losses, losing money isn't really the goal of investments isn't it.
If you are planning on having a perpetual DCA, you should also consider the price ceiling in which you stop buying anymore, save them up for a crash - the profits/effort ratio here is totally worth it.
That's all folks, thanks for reading!
Monday, January 25, 2016
DBS (SGX: D05)
A while ago I posted some fundamental analysis regarding OCBC(link), and here is one for DBS. I may do another article detailing the comparisons between these 2 (or even with UOB's) but this article will just mainly be focusing on DBS.
The general sentiment I received in my research into Singapore's big 3 banks is that many prefer DBS. As we all know that since share price is ultimately decided by investors sentiment, this could be a factor to keep in mind, although this is extremely un-quantifiable. I would take time to peer upon the various factors such as income distribution by regions/sectors and acquisitions/divestitures, etc. but I feel that these factors will ultimately reflect positively or negatively in the numbers discussed below so I won't drag everyone through a long essay that talks about everything.
Note: I ran through the 8 years of annual reports myself and the numbers I used were from the reports, thus it might be different from values reported elsewhere such as websites. Adjustments were also done based on my own judgement. Some values which might seem doubtful or raises further clarification were checked with notes to financial statements, and not all clarifications are stated here.
I usually write my articles over a period of time and thus there might be price inconsistencies to the market.
*Since formatting table in blog posts is extremely tedious I'll attach a excel doc for referring instead. Please refer to it should you need data to understand what some paragraphs are talking about.
Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6ha2RkdmVsNlRkdUk/view?usp=sharing
1.Financials
Revenue is growing steadily at nearly 6% compounded annual growth rate (CAGR). Operating expenses were also kept relatively stable at around 52%, except for 2009 and 2010. In 2009 there is a relatively huge loss arising from credits and other losses - mainly nonperforming loans (NPL). In 2010, a large goodwill expense arose from the loss of fair gains from acquisition of DBS HK. Technically one could say these 2 spike in expenses were caused by management oversight/poor decision making etc. but its really unfair for one like me to judge so we'll leave it as that.
On the positive side, net profit margin has been improving from ~30% to over 40% in 2014, bringing 'net profit attributable to shareholders' (hereinafter referred to as net profit) to a CAGR of 7.444%.
The rather high growth of net profit is however, clouded by the high shares issuance rate. The amount of shares from 2007 to 2014 has a CAGR of 5.818%, in my opinion this is ridiculously high. If that amount does not trigger some red flags, viewing it from another perspective, should the bank's net profit stays stagnant, one would be losing a compounded rate of 5.818% (not exactly share price, but it would be eventually reflected) annually from their DBS share holdings due to dilution.
Due to their high increase in amount of shares annually, EPS' CAGR has only been a meager 1.538% despite growth.
Dividends wise, the group paid out $0.68 per share in 2007 and $0.65 in 2008. This 2 values were not tax-exempt since the tax-exemption on dividends only kicked in after 2008. In 2009, dividend per share dropped again to $0.56. I am not exactly sure if the tax-exemption is a factor for the drop in dividends, it doesn't make sense for the group to reduce payouts (with regards to the exemption) since the tax is on us and not them anyway. I could use further clarification on this point as I wasn't exactly in the finance world back then, sorry. The reduction of dividends could possibly be due to the huge increase in expenses in 2009, as mentioned earlier. One should also take note of the payout margin of 81.94% in 2010. I believe due to the huge expenses again, this year the group has really stretched itself hard to maintain the payout amount.
Since then, the group has pushed their payout margin lower and lower to the current levels of ~35%, this has however, sacrificed quite a bit of payout increment.
Yield has increased since the average to 4.18%. It is not exactly a large increment from the average of 3.66% (2008's 7.37% removed as outlier), although one could reason that with the low payout margins, yields could be expected to increase as there is a lot of room for it to. Sounds speculative though, I won't bet on it.
Tier 1 capital adequacy ratio has been healthy at ~12%. IMO as long as the CAR is fine there isn't really much issues to harp about.
2. Balance sheets and ratios
Assets and liabilities have been growing at a pretty fast rate throughout the years, with the CAGR of assets at 8.257% and liabilities at 8.375%, although liabilities has a sliiightly higher growth rate, they are pretty similar, so its fine. That has given us an average debt ratio of 0.9, which is fine too. Nothing spectacular, nothing bad.
Net assets has been rising pretty well at a CAGR of 7.139%. However, as mentioned above, this number has been clouded by an also very high share issuance rate of 5.818% CAGR. That has resulted in net assets value (NAV) CAGR of only 1.249%. Assuming this rate continues t = ∞ and market is efficient, share price would only be expected to appreciate at 1.249% yearly, which is... rather unremarkable.
However, not all is that bad, at the current levels of $13.87, Price/NAV is at quite a low value of 0.833. In another way to put it is that should DBS wind up now and distributes everything left to its shareholders, for every $0.833 of shares you purchase you would receive $1. Of course there might be other complications but this is the general idea behind NAV.
DBS's average price/NAV isn't usually high, having an average of 1.087 throughout the years, while dropping to a drastic low of 0.58 in 2008. So should one be expecting this crisis to mirror 2008, DBS's share price still have a long way to fall - a similar price/NAV to 2008 would give us a share price of $9.66.
In fact the sentiment towards DBS has only increased a lot recently in 2014, where price/nav spiked to all time highs of 1.224. P/E is still reasonable at 12.1, however. The P/E now is rather low at 7.88, versus the average of 12.66.
3. Conclusion
In conclusion, I feel that for DBS, it is more of a correction than bargain towards their valuation, partly due to the huge growth of share price from 2014-2015. However, the recent drop has also brought them much below than what they are fairly worth. DBS is actually in quite a discounted position NAV wise. However, given their high rate of share issuance, I wouldn't buy this share for the long term gains as the dilution factor here is pretty high and the yields isn't exactly spectacular.
On the other hand, it is quite reasonable to buy for short-term share price appreciation, since investors have a tendency to inflate DBS's share price to much more than it's worth, and its also at quite a bargain at current prices.
Personally, given the numbers, I would vest myself in a higher percentage of OCBC shares than DBS, whereby the purchase of DBS shares is to be sold when prices are reasonably high although their yields isn't that bad either, period, cause I haven't research UOB yet.
Furthermore, given the fact that the 2014's yield is 10 cent lower than 2007's doesn't exactly tick well with me, there's a feeling of stagnation when I am valuating DBS, especially given the high dilution rate.
That's all folks, cheers!
Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6ha2RkdmVsNlRkdUk/view?usp=sharing
Link to article on OCBC: http://theinvestingnoob.blogspot.sg/2016/01/ocbc-sgx-039.html
Disclaimer: This article was written with no intention to solicit funds, any kinds of investments or benefits. I do not bear liabilities should any losses arise from actions made from reading this article nor are entitled to any profits thus risen. I do not represent any company or organization but myself in the writing of this article. Should there are any inquiries or invitation of discussion feel free to contact me in any possible way (facebook, comments, email: Bryan_rong@hotmail.com etc.)
The general sentiment I received in my research into Singapore's big 3 banks is that many prefer DBS. As we all know that since share price is ultimately decided by investors sentiment, this could be a factor to keep in mind, although this is extremely un-quantifiable. I would take time to peer upon the various factors such as income distribution by regions/sectors and acquisitions/divestitures, etc. but I feel that these factors will ultimately reflect positively or negatively in the numbers discussed below so I won't drag everyone through a long essay that talks about everything.
Note: I ran through the 8 years of annual reports myself and the numbers I used were from the reports, thus it might be different from values reported elsewhere such as websites. Adjustments were also done based on my own judgement. Some values which might seem doubtful or raises further clarification were checked with notes to financial statements, and not all clarifications are stated here.
I usually write my articles over a period of time and thus there might be price inconsistencies to the market.
*Since formatting table in blog posts is extremely tedious I'll attach a excel doc for referring instead. Please refer to it should you need data to understand what some paragraphs are talking about.
Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6ha2RkdmVsNlRkdUk/view?usp=sharing
1.Financials
Revenue is growing steadily at nearly 6% compounded annual growth rate (CAGR). Operating expenses were also kept relatively stable at around 52%, except for 2009 and 2010. In 2009 there is a relatively huge loss arising from credits and other losses - mainly nonperforming loans (NPL). In 2010, a large goodwill expense arose from the loss of fair gains from acquisition of DBS HK. Technically one could say these 2 spike in expenses were caused by management oversight/poor decision making etc. but its really unfair for one like me to judge so we'll leave it as that.
On the positive side, net profit margin has been improving from ~30% to over 40% in 2014, bringing 'net profit attributable to shareholders' (hereinafter referred to as net profit) to a CAGR of 7.444%.
The rather high growth of net profit is however, clouded by the high shares issuance rate. The amount of shares from 2007 to 2014 has a CAGR of 5.818%, in my opinion this is ridiculously high. If that amount does not trigger some red flags, viewing it from another perspective, should the bank's net profit stays stagnant, one would be losing a compounded rate of 5.818% (not exactly share price, but it would be eventually reflected) annually from their DBS share holdings due to dilution.
Due to their high increase in amount of shares annually, EPS' CAGR has only been a meager 1.538% despite growth.
Dividends wise, the group paid out $0.68 per share in 2007 and $0.65 in 2008. This 2 values were not tax-exempt since the tax-exemption on dividends only kicked in after 2008. In 2009, dividend per share dropped again to $0.56. I am not exactly sure if the tax-exemption is a factor for the drop in dividends, it doesn't make sense for the group to reduce payouts (with regards to the exemption) since the tax is on us and not them anyway. I could use further clarification on this point as I wasn't exactly in the finance world back then, sorry. The reduction of dividends could possibly be due to the huge increase in expenses in 2009, as mentioned earlier. One should also take note of the payout margin of 81.94% in 2010. I believe due to the huge expenses again, this year the group has really stretched itself hard to maintain the payout amount.
Since then, the group has pushed their payout margin lower and lower to the current levels of ~35%, this has however, sacrificed quite a bit of payout increment.
Yield has increased since the average to 4.18%. It is not exactly a large increment from the average of 3.66% (2008's 7.37% removed as outlier), although one could reason that with the low payout margins, yields could be expected to increase as there is a lot of room for it to. Sounds speculative though, I won't bet on it.
Tier 1 capital adequacy ratio has been healthy at ~12%. IMO as long as the CAR is fine there isn't really much issues to harp about.
2. Balance sheets and ratios
Assets and liabilities have been growing at a pretty fast rate throughout the years, with the CAGR of assets at 8.257% and liabilities at 8.375%, although liabilities has a sliiightly higher growth rate, they are pretty similar, so its fine. That has given us an average debt ratio of 0.9, which is fine too. Nothing spectacular, nothing bad.
Net assets has been rising pretty well at a CAGR of 7.139%. However, as mentioned above, this number has been clouded by an also very high share issuance rate of 5.818% CAGR. That has resulted in net assets value (NAV) CAGR of only 1.249%. Assuming this rate continues t = ∞ and market is efficient, share price would only be expected to appreciate at 1.249% yearly, which is... rather unremarkable.
However, not all is that bad, at the current levels of $13.87, Price/NAV is at quite a low value of 0.833. In another way to put it is that should DBS wind up now and distributes everything left to its shareholders, for every $0.833 of shares you purchase you would receive $1. Of course there might be other complications but this is the general idea behind NAV.
DBS's average price/NAV isn't usually high, having an average of 1.087 throughout the years, while dropping to a drastic low of 0.58 in 2008. So should one be expecting this crisis to mirror 2008, DBS's share price still have a long way to fall - a similar price/NAV to 2008 would give us a share price of $9.66.
In fact the sentiment towards DBS has only increased a lot recently in 2014, where price/nav spiked to all time highs of 1.224. P/E is still reasonable at 12.1, however. The P/E now is rather low at 7.88, versus the average of 12.66.
3. Conclusion
In conclusion, I feel that for DBS, it is more of a correction than bargain towards their valuation, partly due to the huge growth of share price from 2014-2015. However, the recent drop has also brought them much below than what they are fairly worth. DBS is actually in quite a discounted position NAV wise. However, given their high rate of share issuance, I wouldn't buy this share for the long term gains as the dilution factor here is pretty high and the yields isn't exactly spectacular.
On the other hand, it is quite reasonable to buy for short-term share price appreciation, since investors have a tendency to inflate DBS's share price to much more than it's worth, and its also at quite a bargain at current prices.
Personally, given the numbers, I would vest myself in a higher percentage of OCBC shares than DBS, whereby the purchase of DBS shares is to be sold when prices are reasonably high although their yields isn't that bad either, period, cause I haven't research UOB yet.
Furthermore, given the fact that the 2014's yield is 10 cent lower than 2007's doesn't exactly tick well with me, there's a feeling of stagnation when I am valuating DBS, especially given the high dilution rate.
That's all folks, cheers!
Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6ha2RkdmVsNlRkdUk/view?usp=sharing
Link to article on OCBC: http://theinvestingnoob.blogspot.sg/2016/01/ocbc-sgx-039.html
Disclaimer: This article was written with no intention to solicit funds, any kinds of investments or benefits. I do not bear liabilities should any losses arise from actions made from reading this article nor are entitled to any profits thus risen. I do not represent any company or organization but myself in the writing of this article. Should there are any inquiries or invitation of discussion feel free to contact me in any possible way (facebook, comments, email: Bryan_rong@hotmail.com etc.)
Saturday, January 16, 2016
OCBC (SGX: 039)
OCBC (SGX: 039)
The global economy has taken a beating in mid 2015 and the effects are just worsening. Banks aren't faring well either - share price wise. I believe this is a great time to highlight the fact that the market is always a manic depressive guy that pushes prices far too low to justify. Let's see what does the low now means.
Note: I ran through the 8 years of annual reports myself and the numbers I used were from the reports, thus it might be different from values reported elsewhere such as websites. Adjustments were also done based on my own judgement. Some values which might seem doubtful or raises further clarification were checked with notes to financial statements, and not all clarifications are stated here.
*Since formatting table in blog posts is extremely tedious I'll attach a excel doc for referring instead. Please refer to it should you need data to understand what some paragraphs are talking about.
Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6hcDhHOEZ4ZjlJR2M/view?usp=sharing
1. Financials
Revenue growth has always been growing at a solid pace since 2008 to 2014, at over 8% compounded annual growth rate (CAGR). This is also coupled with a healthy level of operating expenses, at about 40.59% throughout the 8 years. It has not grown or shrank by a lot. Given the fact that this is a service/financial industry with little to no manufacturing, upstream or downstream processing, operating expenses can be assumed to be relatively stable.
However, revenue by itself does not really impact shareholders in terms of valuation as for investors, we are more concerned about the money that are attributable to us. Let's take a look at the final picture or as what they call it in the annual reports 'Net Profit attributable to ordinary equity holders of the Bank after preference dividends' (Net profit)
I am not a fan of companies issuing preference shares, since it is usually something that is done when a company is in a more desperate need of funding. However, I am quite new towards evaluating finance companies and thus this will not effect my judgement whatsoever.
Net profit increased even more on a compounded annual growth rate basis, having a 10.6% growth rate, with the CAGR of EPS at 7.16%. These numbers are quite impressive given the fact that banks do not come up with a breakthrough in technology or new scientific discovery that can boost sales greatly. I believe this would be creditable to good management and banking policies. Proper risk evaluation by the bank would also prevent the occurrence of non performing loans and increase growth.
Net profit margin has also been rising steadily from 38.19% in 2008 to 45.39% in 2014. This means that more and more of the bank's revenue are attributable to shareholders, which is good.
Dividends payout has been very mild since the financial crisis of 2008. The bank seems to be working towards lowering their payout margin before increasing dividends. This could also be a way to increase their cushion should economic downturn occurs so they do not have to lower their dividend payout (and maybe even increase it). Dividends payout has been increasing consistently throughout the years, although there isn't a increase every year.
However, given the decreasing payout margin, the yield is standing at quite a decent rate of 3.44%, averaged from 2009-2014. The yield from 2008 is not considered since the super low share price skewed the yield up a lot. Since 2008's yield of 5.79%, the dividend yield has not reach 4%, or barely even 3.5%, from 2009-2014. Thus a yield of 4.53% with the current share price of 7.95 could be a good reason to buy in. This is assuming the dividends does not drop from the previous year's $0.36, although I strongly believe it won't.
One must also take note that OCBC is constantly issuing shares throughout the year, either from scrip dividends scheme or just rights issuing, and that the increase of shares has a CAGR of 3.6%. Should net profit growth slows from the 10.6% (a rather high number to maintain), the continued issuance of shares at this rate could drastically impact shareholders growth. A drop to net profit growth to 5% annually, a reasonable rate, would bring EPS growth to merely 1.x%, which is very little. I believe the management will handle this matter properly though, as during the crisis of 2008, very little new shares were issued.
2. Balance sheets and ratios
Assets and liabilities have been growing at a extremely fast rate throughout the years. In financial companies assets and liabilities are more intricately related than typical industries, this is because the bottom line is the majority of both the sections are money. Unlike typical industries where assets could be inventory, PPE, patents etc. and liabilities payables, debts, rent etc,. banks are just mostly dealing with money. Therefore as assets rise liabilities are definitely rising with it.
It is then good to note that the bank's debt ratio has always been consistent at 0.9, although there is a slight upwards trend since 2008.
Net assets has been rising steadily at a CAGR of 8.8%, bringing their net assets value (NAV) to 8.844 as of 3Q2015, as compared to their share price of 7.95. This value is extremely critical as the bank's NAV has never been higher than its share price since 2008.
OCBC's Price/Nav has been consistently above 1 (avg 1.2) from 2009 to 2014. With the recent crash in the market, it's Price/Nav has fallen to 0.90. In term of Graham's net-nets, this could be considered undervalued. However, should we apply Graham's valuation of 0.5x receivables, it would skew the bank's net-nets to catastrophically low levels, which is unrealistic, since most of the bank's assets are from loans receivables. Since the bank's NPL percentage has always been below 1%, with 2014's 0.6%, even with the slight increase of NPLs in the O&G sector, net receivables by the bank wouldn't seem to be affected much.
The bank's historic price/earnings ratio (P/E) has seen an average of 13 from 2009-2014, with a decreasing trend of 14.9 in 2009 to 11.03 in 2014. With the recent crash, the P/E has dropped as low as 8.39, even lower than 2008's 8.88.
In 2008, the P/E*P/B was at 7.18 and its 7.53 now, not much further away. Although I feel that it is nigh impossible, for share prices to drop to it's 2008 levels of 4.84, would mean nearly a halved valuation of the company back then. If you don't understand this portion its fine. Basically I am saying the prices now are just slightly more expensive then 2008's.
3. Conclusion
In conclusion, should you seek to get income from dividend yield, this is quite a opportune time to pick up some of OCBC shares, as discussed in part 1.
Also, should you seek to get share price appreciation, the NAV is only 90% of it's share price right now, which could also prove to be a bargain, as discussed in part 2. Please note that however, share price appreciation is something that even the greatest of minds cannot confirm it's occurrence nor the time it will take to occur, and these can only be viewed as educated guesses and predictions.
I will pick up OCBC shares should I verify that no other banks in the similar industry displays a better valuation (to be done).
Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6hcDhHOEZ4ZjlJR2M/view?usp=sharing
Disclaimer: This article was written with no intention to solicit funds, any kinds of investments or benefits. I do not bear liabilities should any losses arise from actions made from reading this article nor are entitled to any profits thus risen. I do not represent any company or organization but myself in the writing of this article. Should there are any inquiries or invitation of discussion feel free to contact me in any possible way (facebook, comments, email: Bryan_rong@hotmail.com etc.)
The global economy has taken a beating in mid 2015 and the effects are just worsening. Banks aren't faring well either - share price wise. I believe this is a great time to highlight the fact that the market is always a manic depressive guy that pushes prices far too low to justify. Let's see what does the low now means.
Note: I ran through the 8 years of annual reports myself and the numbers I used were from the reports, thus it might be different from values reported elsewhere such as websites. Adjustments were also done based on my own judgement. Some values which might seem doubtful or raises further clarification were checked with notes to financial statements, and not all clarifications are stated here.
*Since formatting table in blog posts is extremely tedious I'll attach a excel doc for referring instead. Please refer to it should you need data to understand what some paragraphs are talking about.
Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6hcDhHOEZ4ZjlJR2M/view?usp=sharing
1. Financials
Revenue growth has always been growing at a solid pace since 2008 to 2014, at over 8% compounded annual growth rate (CAGR). This is also coupled with a healthy level of operating expenses, at about 40.59% throughout the 8 years. It has not grown or shrank by a lot. Given the fact that this is a service/financial industry with little to no manufacturing, upstream or downstream processing, operating expenses can be assumed to be relatively stable.
However, revenue by itself does not really impact shareholders in terms of valuation as for investors, we are more concerned about the money that are attributable to us. Let's take a look at the final picture or as what they call it in the annual reports 'Net Profit attributable to ordinary equity holders of the Bank after preference dividends' (Net profit)
I am not a fan of companies issuing preference shares, since it is usually something that is done when a company is in a more desperate need of funding. However, I am quite new towards evaluating finance companies and thus this will not effect my judgement whatsoever.
Net profit increased even more on a compounded annual growth rate basis, having a 10.6% growth rate, with the CAGR of EPS at 7.16%. These numbers are quite impressive given the fact that banks do not come up with a breakthrough in technology or new scientific discovery that can boost sales greatly. I believe this would be creditable to good management and banking policies. Proper risk evaluation by the bank would also prevent the occurrence of non performing loans and increase growth.
Net profit margin has also been rising steadily from 38.19% in 2008 to 45.39% in 2014. This means that more and more of the bank's revenue are attributable to shareholders, which is good.
Dividends payout has been very mild since the financial crisis of 2008. The bank seems to be working towards lowering their payout margin before increasing dividends. This could also be a way to increase their cushion should economic downturn occurs so they do not have to lower their dividend payout (and maybe even increase it). Dividends payout has been increasing consistently throughout the years, although there isn't a increase every year.
However, given the decreasing payout margin, the yield is standing at quite a decent rate of 3.44%, averaged from 2009-2014. The yield from 2008 is not considered since the super low share price skewed the yield up a lot. Since 2008's yield of 5.79%, the dividend yield has not reach 4%, or barely even 3.5%, from 2009-2014. Thus a yield of 4.53% with the current share price of 7.95 could be a good reason to buy in. This is assuming the dividends does not drop from the previous year's $0.36, although I strongly believe it won't.
One must also take note that OCBC is constantly issuing shares throughout the year, either from scrip dividends scheme or just rights issuing, and that the increase of shares has a CAGR of 3.6%. Should net profit growth slows from the 10.6% (a rather high number to maintain), the continued issuance of shares at this rate could drastically impact shareholders growth. A drop to net profit growth to 5% annually, a reasonable rate, would bring EPS growth to merely 1.x%, which is very little. I believe the management will handle this matter properly though, as during the crisis of 2008, very little new shares were issued.
2. Balance sheets and ratios
Assets and liabilities have been growing at a extremely fast rate throughout the years. In financial companies assets and liabilities are more intricately related than typical industries, this is because the bottom line is the majority of both the sections are money. Unlike typical industries where assets could be inventory, PPE, patents etc. and liabilities payables, debts, rent etc,. banks are just mostly dealing with money. Therefore as assets rise liabilities are definitely rising with it.
It is then good to note that the bank's debt ratio has always been consistent at 0.9, although there is a slight upwards trend since 2008.
Net assets has been rising steadily at a CAGR of 8.8%, bringing their net assets value (NAV) to 8.844 as of 3Q2015, as compared to their share price of 7.95. This value is extremely critical as the bank's NAV has never been higher than its share price since 2008.
OCBC's Price/Nav has been consistently above 1 (avg 1.2) from 2009 to 2014. With the recent crash in the market, it's Price/Nav has fallen to 0.90. In term of Graham's net-nets, this could be considered undervalued. However, should we apply Graham's valuation of 0.5x receivables, it would skew the bank's net-nets to catastrophically low levels, which is unrealistic, since most of the bank's assets are from loans receivables. Since the bank's NPL percentage has always been below 1%, with 2014's 0.6%, even with the slight increase of NPLs in the O&G sector, net receivables by the bank wouldn't seem to be affected much.
The bank's historic price/earnings ratio (P/E) has seen an average of 13 from 2009-2014, with a decreasing trend of 14.9 in 2009 to 11.03 in 2014. With the recent crash, the P/E has dropped as low as 8.39, even lower than 2008's 8.88.
In 2008, the P/E*P/B was at 7.18 and its 7.53 now, not much further away. Although I feel that it is nigh impossible, for share prices to drop to it's 2008 levels of 4.84, would mean nearly a halved valuation of the company back then. If you don't understand this portion its fine. Basically I am saying the prices now are just slightly more expensive then 2008's.
3. Conclusion
In conclusion, should you seek to get income from dividend yield, this is quite a opportune time to pick up some of OCBC shares, as discussed in part 1.
Also, should you seek to get share price appreciation, the NAV is only 90% of it's share price right now, which could also prove to be a bargain, as discussed in part 2. Please note that however, share price appreciation is something that even the greatest of minds cannot confirm it's occurrence nor the time it will take to occur, and these can only be viewed as educated guesses and predictions.
I will pick up OCBC shares should I verify that no other banks in the similar industry displays a better valuation (to be done).
Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6hcDhHOEZ4ZjlJR2M/view?usp=sharing
Disclaimer: This article was written with no intention to solicit funds, any kinds of investments or benefits. I do not bear liabilities should any losses arise from actions made from reading this article nor are entitled to any profits thus risen. I do not represent any company or organization but myself in the writing of this article. Should there are any inquiries or invitation of discussion feel free to contact me in any possible way (facebook, comments, email: Bryan_rong@hotmail.com etc.)
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