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A very quick look

Wednesday, February 17, 2010

Very, very tired from a long journey back to Singapore.  Need to sleep.  Yawn.  I have just replied to four comments from readers and I could barely keep my eyes open now.  So, this is going to be a very quick look.

STI is up 35 points on respectable volume.  I expect the index to continue gaining for a bit more.  This is probably a good chance for stale bulls to reduce exposure.  I wouldn't be adding to my positions except for those in counters which remain promising (read limited downside and good upside potential).

Golden Agriculture is pushing higher as expected.  I have divested some as a hedge, gaining 10% in the process.  If you followed my posts on this counter, you would remember that I have a target price of 59c for the upmove this time round.  This remains unchanged.  MFI has just risen above 50% and is a long way from being overbought.

Healthway Medical confirmed the buy signal we saw on the MACD in the last trading session of the Year of the Ox.  You might remember we talked about this in my last post on Healthway Medical as well.  Immediate resistance is at 15.5c, the 20dMA.  Continuing upmove in price could see the XR high of 18.5c tested once more.  Volume needs to expand more meaningfully for any upmove to have a more lasting impact.

Saizen REIT has no movement and I hope to collect more at 15.5c thereabouts.  This REIT, I believe, is a sleeping giant.

OK, would like to blog more but need sleep....  zzzz...

Fundamental Analysis: The Cash Flow Statement

Sunday, February 14, 2010

Cash Flow Statement quite obviously describes whether cash is flowing in or out of a company.  There are three sections.  

Firstly, Cash Flow from Operations.  

Secondly,  Cash Flow from Investments.  

Lastly, Cash Flow from Financing Activities.

Cash Flow from Operations is an aggregate of Net Income and any depreciation or amortisation put back.  

Depreciation and amortisation represent money which was spent years ago and must be added back to give us an accurate picture of the company's Cash Flow from Operations.  

Here, not only do we want to see a positive cash flow, the higher the cash flow, the better.

Next, we examine Cash Flow from Investments.  

Businesses make investments in income producing assets such as production equipment.  

Any money spent making such investments are labelled Capital Expenditures (CAPEX).  

It is also possible for companies to sell such investments and we might therefore get a positive figure under Others.  

However, here, cash flow is usually a negative figure.  

Companies which consistently have very high CAPEX should show that they are able to fund this through internal resources as far as possible and that they should be able to generate higher returns on such expenditures.

Lastly, we look at Cash Flow from Financing Activities.  

Money used in the payment of dividends or in the buy back of shares results in negative cash flow.  

Shareholders like dividend payouts.  They also like to see the value of their shares rising which happens when a company does a share buy back.  

So, negative cash flow here is actually good for shareholders.

Money gained from selling new shares or issuing bonds provides positive cash flow.  Here, again, we get a bit of a twist.  

The company might get positive cash flow through the issuance of new shares or bonds but it is actually bad for the shareholders as their shareholdings are diluted and bonds have to be repaid with interest.  

Unless the company is able to demonstrate that it will be able to use the funds raised to increase value for its shareholders, it has to be looked at most cautiously.

This post ends the quick introduction to Fundamental Analysis which I set out to blog starting with The Income Statement and followed by the Balance Sheet.  

I hope you have found these posts informative and if you are not already doing FA, I hope these have made you interested enough to look into the subject in greater detail.

I will be going away for a short holiday over the next few days with my family and will return mid week.  I wish everyone the very best and I will talk to you again soon.

Related posts:
1. Fundamental Analysis: The Income Statement.
2. Fundamental Analysis: Balance Sheet.
3. Why is Warren Buffet the world's greatest money maker?

Fundamental Analysis: Balance Sheet

A company's balance sheet is a record of its assets and liabilities.  

Basically, if we look at how much the assets are worth and deduct the total value of the liabilities, we will arrive at the net worth of the company.  

Net worth or the book value of the company is also known as shareholders' equity.

Under assets, first, we see Current Assets.  

Current Assets are cash and other assets which can be converted into cash within a very short time.  

Usually, they are listed in the balance sheet in order of liquidity with cash being the first item as it is the most liquid.  

Secondly, we have Non-current Assets.  These are assets which cannot be converted into cash within a very short time.

One thing that value investors look out for is how much cash and cash equivalents a company has.  

Having a lot of cash is usually a sign of strength.  

The company will have the ability to seize business opportunities and will be able to go over rough patches in the business cycle relatively intact.

Next on the list is inventory or the goods which are in the company's warehouse which it sells to customers.  

In business, we say that we cannot do business with an empty wagon.  

Our wagon has to be stocked and that's our inventory.  

However, we do not want our wagon to be overstocked as well.  

Goods also run the risk of becoming obsolete in many cases.

Accounts Receivables is next.  

When the company sells goods to its customers, very often, the customers are given credit terms.  

In businesses which have a strong retail bias, this might be a very small amount if it exists at all since they collect cash for all their sales.  

We want to keep an eye on this because if most of a company's Current Assets are in Accounts Receivables, we have to question the financial health of its customers and how long does it usually take before payments are made.

Prepaid Expenses or payment in advance is next.  I like this because it shows that customers are willing to pay in advance before they receive the goods.  

It shows that the company's products are in demand and, probably, cannot be replicated or very difficult to replicate by its competitors.  The company has a competitive advantage.

Next, we move on to Non-current Assets.  Companies might own properties, vehicles and production equipment.  

Vehicles and production equipment will depreciate in time and the value we see in this line is the total value at the time the balance sheet was prepared minus depreciation.

Then, we have goodwill.  This is something which has been discussed in the case of Healthway Medical.  

This number appears when a company buys over another company at a price above the latter's book value.  

The value above the book value ends up as goodwill in the former's balance sheet.

This is followed by other intangible assets which cover copyrights, patents, trademarks and so on.  

Only intangible assets bought from another company can be reflected in a company's balance sheet.

Both goodwill and other intangible assets must be amortised over time if they have a finite life.  

If they are not depreciating in value over time, then, they need not be amortised.

Long Term Investments are next.  This shows any investments a company might have made which have durations of longer than a year.  

We will have to dwell on this a bit more to see what kind of investments have been made here as and when it occurs.  

It will differ from case to case but generally, we want to see that these are investments which generate higher returns for the company.

An important ratio we use in fundamental analysis is Return on Assets (ROA).  

This is a measure of the level of efficiency in which a company utilises its total assets.  

If we take net earnings and divide this by total assets, we get a figure in percentage terms.  The higher the better.

We move on to Liabilities and just like Assets, there are Current and Non-current forms.  

First off under Current Liabilities, we have Accounts Payable which is money owed to suppliers for goods and services provided.

Then, we have Short Term Debt or Debt which is due.  If a company has a lot of Short Term Debt, this could be dangerous in times when credit is suddenly difficult to come by.

To calculate the financial health of a company, analysts employ the Current Ratio which divides the total Current Assets by the total Current Liabilities.  

So, you can imagine that if you have more of the former and less of the latter, it's a good thing.  A more stringent ratio is the Quick Ratio and it measures a company's ability to meet its short term obligations using its Current Assets minus Inventory.  Any ratio value of more than 1 is good.

Under Non-current Liabilities, we have Long Term Debts and so on.  

I guess the important thing to say here is that very strong and long established companies which generate healthy cash flow usually have very little debt.

I think it is common sense that we want to see as little debt as possible in a company's balance sheet but debt is sometimes a necessary evil.  

So, we have to evaluate debt on a case by case basis.

I hope this quick introduction to what is a Balance Sheet and how to use certain ratios to determine the health of a company is useful.  Next post will be about the Cash Flow Statement.

Related posts:
1. Fundamental Analysis: The Income Statement.
2. Recommended books for Fundamental Analysis.

Fundamental Analysis: The Income Statement

Saturday, February 13, 2010

Every trading day would see me looking at charts in the evening and looking out for pertinent news which might have an impact on my investments.  

On weekends, I would sometimes blog about my personal experience and some ideas which I might have about investments.  

The Chinese New Year long weekend is giving all of us a much needed break from trading. Take some time to smell the flowers, so to speak.

I have decided that I will blog about different aspects of FA and this will probably spread over a few posts to make it more manageable.  

My formal education in Economics and Business Administration, specifically, Financial Management help to inform my FA.  

Of course, these are textbook material and I try to keep myself up to date by reading weekly periodicals such as Newsweek and The EDGE.  

I also read analysts' reports, not to blindly follow buy or sell calls but more as an idea generating exercise.  

Being in business development also gives me an inside feel of the business climate especially in South East Asia where the company I work for has the greatest exposure.

In an earlier post, I said that FA could be done on many levels but the most basic level would be looking at a company's financial numbers.  

I have learnt much to my own regret that to overlook this for any reason (usually due to complacency) could be a big mistake.

What is an Income Statement?  

This basically tells us how a company's operations performed over a period of time.  

Right at the top is the gross revenue (GR) the company has generated.  In a company that deals with goods, you will have to deduct the cost of goods to arrive at the gross profit or GP.  

For people who are in tune with Warren Buffet's investment philosophy, you would remember that he says we should always look for companies with GPs of no less than 20%.  In fact, he consistently targets companies with GPs of 40% or higher.

So, let us say that a company has a gross revenue of S$100,000 and their cost of goods is S$60,000.  Gross profit is S$40,000.  

As a percentage, the GP is S$40,000(GP)/S$100,000(GR) = 40%.  

Simple enough.

Does this mean that everytime we see businesses which generate a GP of 40% or more, it is a good buy?  

No, we continue by looking at the next part of the Income Statement which shows the operating expenses.  

These are the Selling, General and Administration expenses or what is referred to as SGA, the Research and Development (R&D) expenses and Depreciation.  

Upon taking out all these expenses, we arrive at the Operating Profit or Loss of the company.  

As you can probably tell, a company which incurs massive expenses despite a high GP is not going to have much left for the shareholders.

The next part is the Interest Expense, Gains or Losses from sale of assets and Others.  

Taking all these out give us the Income of the company before tax

We want to make sure that the company is not borrowing too much and not paying too much for its borrowings.  This is what is known as leverage.  

There are many companies which are heavily leveraged and as long as they are making more money than the interest they are serving on their loans, they look good but if the tide turns and, in the last financial crisis, we saw how quickly they could turn, things could become very ugly.  

So, imagine if revenue dries up during a recession and the interest expense remains high, not a pretty picture. 

Having said this, leveraging is not all bad.  Credit is said to be the lifeblood of businesses.  Few businesses in this world operate with zero leveraging.  

As long as it is kept at a level that is manageable, a level that will not threaten the viability of the company in the worst case scenario, it is acceptable.  This is what is called stress testing.

The next part of the Income Statement would be the taxes paid.  

Once this is taken out, we have the net earnings of the company.

I hope you have found this post to be informative and I will blog about the Balance Sheet and Cash Flow Statement in upcoming posts.

Related posts:
Identifying trends and value: FA and TA
Determining the impact of news on specific companies.
Monitoring our stocks.

Gong Xi Ni Fa Cai!

Friday, February 12, 2010

With the Chinese New Year just two days away, I would like to extend my heartiest GONG XI FA CAI to all visitors to my blog.  May the new year bring you the best of luck and may all of us HUAT big time.  HUAT AH!!!

For my sister who wants to go see the Sakura flowers in Japan!


SPH: Promising signs.

On 9 Feb, I said: "SPH is, technically, the strongest blue chip here. Today, I made an interesting observation. Dare I hope? It looks like a symmetrical triangle is forming in SPH's price action of late. Look out for the MACD (blue line) closing in on the signal line (red line) as it might mean that it is ready to form a bullish crossover. This would mean that price would probably break out higher . With MFI forming a higher low, the buying momentum has an upward bias. I guess a bit of hope doesn't hurt."
Please see: Small, mid and large caps.

SPH continues to move higher and closed at $3.74, above the 20dMA, today.  MACD is rising and closing in on the signal line.  Will it form a bullish crossover this time?  That the MACD is still above zero indicates that the upward momentum has yet to be compromised.  MFI has risen above 50% and it now remains to be seen if it will form a higher high.  Breaking out of the symmetrical triangle could possibly see a higher high formed for this counter at $4 or so.  Heavily vested.  Crossing fingers.


Golden Agriculture: Delivering the goods?

In a previous post on 10 Feb, I said, "That its correction is at an end is quite evident as it has emerged from its recent steep downtrend resistance. It is consolidating and signs are that price might be getting ready for a move upwards. Initial resistance is provided by the 50dMA and 20dMA at 52c and 53c respectively. In an upward move, these resistance are likely to be swept away. More meaningful resistance are at 55c and 59c."
Please see:  Golden Agriculture: Reversal at hand?

Today, price action formed a strong white candle to close at 54c.  This happened on the back of expanded volume which promises more upside in the next session.  The MACD has made contact with the signal line and a bullish crossover is inevitable.  MFI continues to turn up and approaches 50%.

The first meaningful resistance at 55c has a high chance of being tested in the next session.  59c is a realistic target in the event that price continues to move up which seems likely enough.  I have a strong vested interest in this counter and I am hoping for the best.


Healthway Medical: Oversold

For those of you who are beginning to wonder if the decline will ever stop, remember I said that every lower support becomes stronger in a situation where pullbacks happen on lower volume.  MFI took a sharp dip today into oversold territory even as the MACD has a buy signal, the first in more than 2 weeks. 

Remember that TA shows where the supports and resistance levels are.  It does not mean that those levels would be reached.  For anyone who wants to go long here, it might be a good idea to hedge at 13.5c instead of waiting for 13c to be hit, which might or might not happen.  Remember, this is a hedge, there is still a chance that 13c might be reached.

Healthway Medical: Breaking an important support.


F&N: Rocketing upwards.

This counter rocketed upwards as it reported a 55% increase in nett profit.  This is on the back of expanded volume.  Very impressive seeing as it was a pre holiday trading session.  Resistance at $3.92 was sliced through like a hot knife through butter.  However, the dead cross at the confluence of the 20dMA and 50dMA was too strong a resistance to break today as price action touched $4.08 and retreated to close at $4.02, just under the declining 20dMA.  This is a fish that swam away from me. No matter. There are many other fish in the ocean.

For those of you who really like the F&N fish and still want to buy some, pay attention to the 100dMA.  This seems to be the resistance turned support at $3.93.  We need confirmation in the next trading session.  This would be a safer level to buy some F&N shares if the support is confirmed instead of chasing.
The MACD is closing in on the signal line and a bullish crossover seems most probable.  MFI has risen above the oversold territory and has plenty of room before it reaches 50% which may act as resistance.  Of course, there is plenty of room before it is overbought.
Using candlesticks, I've intuitively identified three higher levels of resistance if the counter moves higher.  Good luck to interested parties and congratulations to parties brave enough to buy earlier this week.


F&N: An amazing reversal

Thursday, February 11, 2010

A star performer today is undoubtedly F&N as it continues its amazing reversal to close at $3.92, resisted by the 100dMA.  Volume is lesser than yesterday's but is still respectable given the pre holiday mood.  MFI continues to move up, confirming that some buying momentum is back.  MACD has turned up and is closing on the signal line, seemingly poised for a bullish crossover.  That the MACD is below zero means that the upward momentum in the counter is not back in force.  If the buying momentum follows through tomorrow to break the 100dMA resistance, the next resistance will be provided by the confluence between the 50dMA and the 20dMA, where, incidentally, a dead cross formed today and is likely to be a strong resistance.  Any further move up in price would have to be accompanied by increased volume to break it.

We will need confirmation tomorrow to see if the rising 200dMA at $3.83 is now resistance turned support.  If it is, that might be a good price to buy some F&N shares.  However, one must not be too optimistic as one up day does not make an uptrend and this counter might consolidate in a wide trading band yet.


Healthway Medical: Breaking an important support.

Healthway Medical relinquished its 14c support level today  and with it the hope that it might consolidate at 14c.  Closing at 13.5c, it seems that people waiting to collect more shares of this counter at 13c might just get their wish.  Volume continues to be very thin but in the absence of any buying momentum, as is evident in the declining MFI, the chances are greater for its price to continue drifting downwards.

Related post:
Healthway Medical: Growing a defensive business
Healthway Medical's growing in china
Healthway Medical: A seven months journey


Saizen REIT's quarterly report

Saizen REIT closed flat at 16c even though its quarterly report is encouraging. Whether it is because investors want to have more clarity as to exactly when distributions would resume or how much would the quantum of the distributions be, I do not know.  It might also be a lack of interest in the counter due to a paucity of coverage by analysts or perhaps they are waiting for an upgrade by the rating agencies. Suffice to say that this might be a blessing in disguise as I would have more time to accumulate more units in this deeply undervalued REIT.

The following is from Saizen REIT's report this morning:

Property operations of Saizen REIT had remained stable in 2Q FY2010. Gross revenue  decreased by 3.1% in 2Q FY2010 as compared to 2Q FY2009, due mainly to the divestment  of five properties (four properties in 1Q FY2010 and one property in October 2009) as well as a slight decrease in rental rates of new contracts entered into after 2Q FY2009.

The increase in other trust expenses by JPY 6.1 million in 2Q FY2010 was mainly due to accruals for valuation fees. No valuation fees were accrued in 2Q FY2009. The loss on divestment of properties of JPY 10.1 million comprised net loss incurred on the divestment of one property in 2Q FY2010. The fair value loss on financial derivatives of JPY 401.7 million comprised mainly fair value losses on warrants of JPY 389.0 million, which arose due to the increase in market-traded price of the warrants.

Notwithstanding the the repayment of the loans of YK Kokkei and YK Shingen which resulted in interest savings, interest expenses increased mainly due to the increase in interest rate on the loan of YK Shintoku from 3.07% to 7.07% after its maturity default......
.....The loans of YK Kokkei and YK Shingen, amounting to JPY 5.4 billion (S$82.3 million), were fully repaid in 2Q FY2010. Pursuant to an agreement between YK Keizan and its lender on 25 January 2010, JPY 950.0 million (S$14.5 million) of its loan was partially repaid in January 2010, with the balance of JPY 586.3 million (S$8.9 million) to be repaid in April 2010. Save for the balance of this loan, which is expected to be be fully repaid with internal cash resources, Saizen REIT has no further loans maturing in FY2010.

Saizen REIT currently has an aggregate of approximately JPY 16.0 billion (S$243.9 million) of properties which are unencumbered. By the end of April 2010, it is expected that the properties of YK Keizan, which are valued at JPY 2.75 billion (S$41.9 million) will be unencumbered after the loan of YK Keizan is repaid.

The Management Team observed that the financing environment in Japan has stablised. With portfolios of unencumbered properties, relatively low overall leverage and the listing status of Saizen REIT, the Management Team is hopeful of making progress in securing new financing.

In respect of the maturity default of the JPY 7.253 billion (S$110.6 million) loan of YK Shintoku, the loan servicer is currently conducting a review of the properties in the YK Shintoku portfolio. The Asset Manager is working closely with the loan servicer on its review and proposed course of action.

Property operations are expected to remain stable in the remaining periods of FY2010. As previously announced, it is expected that Saizen REIT will start accumulating cash for distribution in the last quarter of FY2010, and will resume distribution for FY2010 which is ending on 30 June 2010.

Related posts:
Passive income with high yields: Saizen REIT
Buy Japanese real estate


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