31 December 2007

My choice of "Value-Investing".

Value Investing is an investment principle of "buying a stock with a price lower than its value". This is a conservative and secure investment strategy, and have been proven to be one of the highest-return strategy in long-run. (The followers of Benjamin Graham are able to achieve an average CAGR of 20% or higher.)

Graham's way of applying "Value-investing" principle is quite easy to follow. We just have to buy a company with a price below its net asset value. Applying the margin of safety concept, Graham prefer in buying a stock where its share price is lower than two-third (67%) of its net working capital. (In Graham's definition, net working capital = current asset - total liabilities.) And Graham encourage a widely diversified portfolio, in order to minimize the risk.

Later, affected by Philip Fisher's investment philosophy, Warren Buffett improved the "value-investing" strategy, by using a different technique in stock valuation. In stead of valuing a stock by its book asset value, Buffett calculate the "intrinsic value" of a stock, taking its earning power, brand-name, etc. into account. That's why Buffett always buy some companies which has very little assets but a strong earning power. Different from Graham, Buffett's portfolio is quite concentrated, normally less than 20 stocks. When Buffett found a good company, he can throw 20% of his money into it. (one of his record is investing about 40% of his funds into American Express.) He have a very good understanding on the companies he bought, thus the risk is minimized although the portfolio is not diversified.

Buffett said, "you need only a little margin of safety if you understand the business very well; but a high margin of safety is needed when you have limited knowledge about the business you bought." and he said, "I prefer to buy a wonderful company with a fair price, than a fair company with a wonderful price."

I prefer to learn the Buffett's way. But this require us to do a lots of study and research about the business of a company. I found that this is not an easy job. (You have seen the mistake I've made in selecting AirAsia). But I can learn a lots of knowledge during my research.

Sometimes, especially when I found that I've made a serious mistake, I wondered if I can understand a business as good as Buffett. Few months ago, I thought that I understand a company quite well; months later, I found that I was wrong either in the accounting calculation or about the industry's future prospect. When I was busy, I wondered is it a better choice if I start with Graham's way, which is much easier and lower risk, yet can generate a comparable return as Buffett's. I just need to do some financial calculating... not much research have to be done on the business nature of the companies. (while it is easy, it's very boring...)

The problem is, Graham's approach needs a fully diversified portfolio. Currently, my investment fund is only RM 25K. If I invest RM1000 into each stock, I can have 25 companies in my portfolio. But, from next year (2008) onwards, the minimum brokerage fee of buying/selling a stock (on-line) could be increased to RM28 (still a proposal now, waiting for approval from the authorities). If it becomes true, then the money I invested into each stock should be at least RM5000, just to limit my trading cost within 1%. Thus, I can only "diversified" my RM 25K into five stocks....

So... seems that I don't have a choice...

28 December 2007

Titan's prospect for 2008~2010.

In this article, I'll list down the reasons why I think that Titan's prospect in the next two years is quite positive.

Base on the nature of its business, Titan's profit growth can only come from two ways. First, the increase of production capacity. Second, a higher polymer-naphtha spread.

About the capacity.
last year, Titan's newly acquired subsidiary -- PT Titan, only produced about 100 KT of polymer during the whole year, while its capacity is 450 KTA. This year (2007), the production of this subsidiary is expected to be around 200KT, still below 50% of its whole capacity. I believe that, under the management of Titan, this subsidiary will able to utilise 100% of its capacity by the end of 2009. This represent a 20% increase in total production of Titan Group from today.

In December 2007, Titan will start two new plants - a propylene plant (115KTA) and a butadiene plant (100 KTA). The product from the butadiene plant will be directly sold to customers. The propylene produced by the new 115KTA plant will most probably being used as raw material to Titan's PP plant. So, I'm expecting Titan to take some "debottlenecking" process to increase its PP plant capacity by another 100KTA, maybe within two years.

As a conclusion, I think Titan Group's production output will increase by about 40% by the end of 2009.

About the Polymer-naphtha spread
The spread is affected by the supply-and-demand condition of polymer. As we have seen, the polymer-naphtha spread showed a gentle uptrend in the past few years. This show that the growth of demand for plastics is slightly faster than the growth of supply.

Seeing that global economy will continue growing for the next few years (leading by the strongth growth in China), the growth of demand for plastics is there. In fact, a lots of petochemical companies now are having their expansion plan, and new production plants is being constructed in a lots of country/area, just to grab this growing market of polymers.

However, according to the information available now, most of these new production plants are still in the early stage of construction. They are scheduled to start production only around 2010~2011. In this two years (before all these companies complete their expansion plan), Titan has a chance to enjoy a higher polymer-naphtha-spread, due to the strong demand growth and the slow growth of supply.

10 December 2007

My Mistake - the "Defered Tax" in AirAsia's profit

In AirAsia's financial statement, There's a very important item, named "deferred tax". I didn't have any idea about what is it and what it means. (because I was a science-stream student, and never learn about accounting in school). I thought that it's some kind of complex taxing calculation, and I'd just ignored it in my previous analysis of AirAsia.

But, later I found that this "deferred tax" play an important role in AirAsia's financial statement. It made up about 20% of AirAsia's equity, and more than 40% of AirAsia's PAT! So, I think it's a MUST to understand what is it, and where it comes from.

After some readings and studies, I've get some idea about this "deferred tax". I understand that, due to the International Accounting Standard, this "deferred tax" is allowed to be recorded in an income statement. But I really doubt that this is a proper practice in reflecting the financial performance of a company.

The "deferred tax" item in AirAsia, for example, represent the tax credit given to the company. Though this tax credit is incurred during current year due to the company's CAPEX, it can only be realised/utilised in the future, i.e. when AirAsia is asked to pay a tax in the future, it can utilise the the tax credit, and save a lots of cash from the taxes it should pay.

My conclusion is, a "deferred tax" recorded in the income statement of a particular year actually bring no cash-flow into the company during that year. That's not an earning (at least in my opinion), just a future savings of tax. Showing the "deferred tax" in the income statement means recording a tomorrow cash-flow in today's statement. It's some kind of accounting technique to "polish" the financial performance of a company".

So, I've to do a new valuation on AirAsia. According to it's Q4-FY2007 statement, its EPS is about 21 sen, quite a good income. But if we exclude the deferred tax item from its income statement, its EPS is only 12 sen. If we exclude also the special item ("other operational income"), AirAsia's EPS for FY-2007 will become 8 sen only. This will give a PER value of about 25, quite a high number for a conservative investor like me. So, the share price of RM1.90 now is not as attractive as what i thought before.

However, the latest financial report shows that AirAsia still pose a very good prospect in the coming years. It's quite likely to have a 50% growth in PAT this year. So now... I'll hold its stock and continue to monitor its performance. If its EPS for FY-2008 (excluding deferred tax) can grow to a value not less than 15 sen, I'll consider to keep accumulating AirAsia's stock.

comments on the Sep-2007 financial reports

According to the current share price, my investment in AirAsia is now accountable for about 20% of my investment-portfolio. It's Q1-2008 earning per share is improved significantly as compared to Q1-2007. Besides its strong growth, I'm not planning to increase my stake in AirAsia. It's because recently I realised that I'd made a big mistake in the valuation of AirAsia's financial performance. I'll record this mistake in a new post, soon.

Earning for the quarter is 4.7 sen per share, almost same as the previous quarter. The result for the next quarter could be lower, due to the high soaring oil price. However, the rising polymer's price is going to catch up with the oil price soon. And I think the naphtha-polymer spread will be improved in next year.

The merging between Supermax and Seal Polymer was completed in September. But the contribution of revenue and profit from Spolymer is not fully reflected in this quarter's report. Balance sheet has a small improvent due to the merger. There's an accounting problem occured in APLI, but this shouldn't have a big impact on Supermx.

Earning per share for the quarter is about 2.7 sen. The company has already back into a profitable stage, as expected. Disposal of DDD business in HK has been completed and cash of about RM70 million will be generated from the process. About RM45 million proceed from the disposal has been utilised to settle the company's debt. The winding down of the entire DDD division is still in the process.

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