My Views

What Investors should not do (30 November 2012)

Let me give you guys some guidance on what you should not do as an investor:

1) Investors should not invest just because their brokers tell them that a stock is hot.

2) Never invest if you think you can make money in minutes, hours or a couple of days. When you buy a stock you are essentially buying a business. So as an owner of the business, you have an undying faith to the business. You trust what your management is doing, what your staffs are doing, the direction the business is taking, its strategy and so forth. In other words take a long term view of the business and when you buy a stock, be prepared to hold it out for at least 3 years. not 3 days, 3 weeks or 3 months. But 3 YEARS!

3) Do not buy for the sake of diversification. The diversification strategy was pretty much promoted by not only academics but also mutual funds/unit trust that takes an approach which view the stock as a piece of paper. To them a stock is just something that has prices which changes very often. Don’t believe me? Go and ask a fund manager or a broker the minute a stock falls by 10%. I bet you he is offloading or telling his clients to sell out. But to value investors, what you are doing is buying more of the stock that you just cannot get enough of.

This is what Warren Buffett did in the 1970’s if im not mistaken when American Express had a huge decline in its stock price due to a huge write-off. Warren Buffett acknowledged the write-off but advised other investors in the company to treat the amount (the write-off was something like $30 million) as “a cheque which got lost in the mail”.  What Warren essentially meant is that – yes the company lost money but it was due to an event not connected to the company’s management, values, branding, revenue potential at all. It was a one-time event and should be treated as such so the company should not be punished. Now the stock fell low enough that Warren Buffett could not wipe the smile of his face and bought enough stock that it was something like 25% of his portfolio. Eat that diversification supporters!

4) Don’t bunch your portfolio by “sectors”. It is a terrible thing to do and forces you to purchase stocks from other industries or sectors. This should not be the mentality for purchasing a stock. Instead what you should do is invest in a business that you understand which has a very cheap valuation. That’s it! Once you have these two mentality, you are just able to hold onto the stock even in bad times. I am sleeping like a baby at night and knowing full well that the stock market is tanking. But my faith to these stocks is unbreakable. To me its like I buy a stock and I kinda tell them “see you in 3 to 5 years buddy”.

Ofcourse there are more than 4 “don’ts” but I you should start with the above first. Happy investing and think like an owner!

These gold schemes are just like Bernie Madoff! (31 October 2012)

So what’s up with the gold craze? I just could not believe it that people could just be suckered into buying shiny metal with the hope that it appreciate in value. That’s pure speculation. But here is the other thing, not only are people buying gold for speculation, but they allow themselves to participate in schemes that pays them enormous interest every month. That is just unsustainable and people should understand that is never a business for the long run and sooner or later they will find themselves at the losing end.

These schemes can only last as long as the prices of gold keep on rising. The money they receive from new investors are used to payoff current customers. This is a ponzi scheme but only its covered in shiny bright gold.

Bernie Madoff would still be around conning people of their money if it weren’t for the recent financial crisis. Before the crisis came he was able to play his game because the stock market was pretty hot and his firm developed an aura of mystery and secrecy that only the richest and famous people could become a member. Also, his so-called results were showing crazy returns every single year. How could you not invest right??

The same goes for gold investment schemes. These schemes are good only until we see a reversal in gold prices. The stupid money will panic and leave the investment in droves  which will see the promoters of the scheme really scratching their head trying to find enough money to cover the hole. And when the gold prices keep falling, the hole gets bigger and bigger. The next thing you know is that they are closing doors left and right. Calls will not be answered, the promoters will disappear and you will never see your money.

The frustrating thing about this is that this is not the first time that it has happened. It probably started more than 100 years ago and you’d still see people giving away their money in the hope that they’d double the money in the next ten seconds. Whats up with that???

I am not an investor in gold and never will be and here’s why:
  • You can't do anything with gold. Yes it is shiny and people see its value for use in the jewellery industry. But that’s about it. it is not a productive asset. It is just like a painting, you buy it and hang it on your wall and you can admire it once in a while. But apart from that it just hangs there. You only make money if the next person values it much higher than your purchase price.
  • I’d rather invest in a business. Contrary to point number 1, I like investing in businesses because they are productive. Businesses are produces the biggest wealth to individuals since the start of mankind. People like John D Rockeffeller who amasses wealth north of $300 billion or even Warren Buffett whose wealth is less grand compared to Rockefeller “only” $50 billion. Making up the top 20 of the world’s rich list are the founders of IKEA, LVMH, Zara, Google and even Microsoft. These are businesses baby! I seriously don’t see someone who made money investing in gold schemes. Just imagine, if you looked at the current price of Coca-Cola and Gold and compared that to its respective prices in the year 1990, Coca-Cola killed Gold like a bug. It gave a 800% return compared to Gold return of 350%. Not bad right? But if you stretch that further to 1980, Coca-Cola’s return to investors was more than 5000% in this is not including all those dividends! Gold in the same period gave only 250% return. If we look at local stocks such as Public Bank, the stock  was up 1800% using 1990 as a base. Companies like QL Resources Berhad also made better returns in the past 10 year vs gold. It returned 1200% vs gold of 470%.
  • Your just not too sure how to value gold. Seriously, how do you value gold how do you know that gold will reach USD2000, USD3000, USD4000??? It doesn’t produce any cash flow and it doesn’t employ people and it doesn’t have any business strategy. So how do you do it?? People can only sort of guess based on the historical price charts and the current economic situation. Some crafty guys uses certain ratios of gold against other metals or commodities or indices and figure out whether its overvalued or undervalued. That is pretty stupid to me. And these are done by some smart people.

Forecasting the value of a business is easier. Warren Buffett says that you essentially calculate the present value of all of the cash flow that you will get out of the business. But he also says that it is more of an art and you cant really get a precise figure of the business value.

So just forget about gold schemes. Some promoters are pushing the idea that in the next 2 years gold will reach USD2000. Well at current price your only getting a return of 8% a year and that is hardly good.

Invest in businesses, GOOD BUSINESSES that is and see your wealth grow.

A take on Airasia and the local airline industry (15 September 2012)

Airasia came on the scene as a no frills airline in 2001. I remember flying first time on Airasia. Back then there was yet that famous Airasia “feel” or should I say the culture. I guess they were still discovering what they are. I also remember talking to Dato Abdul Aziz Abu Bakar at the Subang airport. We spoke a lot about the airline and what it is since I didn’t really have much of an idea besides the fact that the ticket prices should be lower than MAS. He was humble and unassuming and I told him he reminded me of someone. Clearly I did not realize I was speaking to one of the founding directors!

Nowadays, Airasia has a sense of being this entrepreneurial, adventure loving company. It is very un-Malaysian and that’s what makes it stand out from the rest and for good reason. It is headed by the brilliant Tan Sri Tony Fernandes who is one of the few people to create a global, Malaysian brand and he’s not even finished with his grand plan. Low cost airlines will be the way to go and I believe Tony will shift gears and push even harder to make it the largest airline in the world. All this while MAS are busy restructuring themselves. Now that’s sad (for MAS).

The Airasia business model has proven to be the best one for the competitive airline industry. There are probably only a few full service airlines that are making money and I know Singapore Airlines is one of them. In the US it was an Southwest Airlines led by Herb Kelleher, a lawyer with a head for business. He is an icon in the business and happens to have a non-conventional style which he extended towards his airlines. He introduced the ticketless system and made flying fun. Herb was also one of the first CEO’s to feature in advertisements promoting the company. This includes him singing and rapping all in the name of marketing. He armwrestlers competitors to fight for precious routes use of planes. The corporate culture of the airline really stood apart with corporate America.

In Europe, Ryanair an airline founded in Ireland adopted the low cost and no frills model of Southwest Airlines to great success. It made travelling around Europe affordable and gave British Airlines a run for their money. Their success spawned other players such as easyJet and Virgin Airlines.
You can argue that Tony Fernandes did not initiate an original business idea and copied it from the likes of Southwest and Ryanair, but he had the guts to execute on an idea that was untested in Asia. Now the rest is history as it is one of the largest airlines in Asia and larger than MAS in terms of passengers carried.
I have always loved the underdogs battling and winning against its much larger counterpart. MAS was once an arrogant airline that made air travel a luxury. In 2000, a normal flight ticket from KL to Sabah was RM800 ONE WAY. Now with Airasia in the fray, you can get it below RM100 two-ways if you’re lucky and generally would have to pay RM300 for a two-way ticket. That’s very affordable.

When Airasia made flying a commodity, MAS had no choice but to price it competitively. With the arrogant airline humbled, Airasia did not sympathies on the “National Carrier” and just bulldozed its way through the field by buying more and more aircrafts and easily spending 30% of revenue on capital expenditures. In 2010, Airasia was so aggressive that its capex was as large as 50% of revenue while MAS was only 29%. Even Ryanair only spent 33% of revenue on capex.

A little concern though for Airasia is that its aggressive expansion plan is putting huge debts on their books. As a percentage of revenue, it is paying far higher in finance expenses than its peers. Its cost structure, although low compared to MAS, can be a little tricky as I can foresee that they may only be able to scale down on the cost via the fuel expenses which is 39% and 31% of revenue in 2011 and 2010 respectively. This is particular expense is in fact the largest of them all. With how the airplanes work, the number of flights and its load weight corresponds to the volume of fuel used. The heavier the weight and the more they fly, the more they use up fuel. But the quantum growth of its fuel usage in high vs its revenue growth to the tune of for every 1% growth in revenue, the fuel expenses grows by as averaged around this figure for the past couple of years and has outpaced revenue growth like forever.

Another area that the company should beef up on is its “sales in advance” portion. This is basically the money received for customers for service not yet rendered. To explain further, when you buy a cheap ticket a couple of months in advance, the monies paid to Airasia for this service yet rendered is categorized as “sales in advance” and will only be recognized once you have flown. Anyway, Airasia racked up about RM390 million in 2011 and RM330 million in 2010. This corresponds to about 9% and 8% of revenue in 2011 and 2010 respectively. MAS on the other hand, did better in this area! (wow). It generally racked up double digits in the same period or 12% and 13%. But Ryaniar has surpassed them both with 21% and 18% of revenue. This is why Ryanair has one of the highest cash hoard in the airline industry and makes it a safer bet compared to Airasia and MAS. So perhaps they can learn something from Michael O’Leary (CEO of Ryanair) of keeping cash for a rainy day.

I generally do not invest in the airline industry and im writing this on behalf of my audience who requested some write-up on Airasia/MAS. What I can say is this: MAS, please stop wasting shareholder’s money. You can’t compete with Airasia and have proven this year after year. MAS is working on a higher cost structure than Airasia and one of the reason is its staff wages. The steward/stewardess unions and the pilots union are very powerful and can dictate where the wind is blowing for MAS. A union representative wants the best for its members and do not really concern itself on MAS’ financial plight. A successful restructuring plan can fail if the unions play hardball at the negotiation table. Airasia on the other hand, has no dealings with unions and the same goes for Ryanair (except, the baggage handlers union, I think) too and thus lowering their expenses.

MAS should be privatized as it is a sin even being listed since the share prices have declined for the past 10 years and has fell below RM1.00 at the worst.

This is why monopolies can work wonders for a company which does not have the pressure of containing its cost if it can just simply counter that by increasing prices.  Again, as an investor, seeking monopolies to invest are few and far between but being competitive takes another set of principles and vision. Airasia has managed to bring down the mighty MAS and only time will tell if MAS admits it by taking itself private.

Now there will be a new kid on the block which will cause much pain to Airasia. A competitor landing into what was always considered as Airasia’s turf in Malaysia which they have reigned supreme without any competition. It will be called Malindo Airways and it is so exciting to see how Airasia will react to this new found enemy.

I envisioned there will be an effect to Airasia’s margins as price wars will emerge. Malindo should start off with a relatively large fleet since there were a lot of cases airlines failing due to the starting business with a fleet size which were too small.

The question that we would also like to know is what will Malaysia Airlines do about it? Perhaps bring back the Boeing aircrafts into Firefly? Only time will tell.

This will be an interesting moment for customers while i am watching with an arched eyebrow...

You must be brave to invest (7 June 2012)

Recently, the news of Silverbird Berhad’s accounting irregularity shows that no matter how good a company shows its numbers to be, it is very difficult to be absolutely sure that what you see in the annual report depicts the truth.
A few of my friends in large accounting firms have told me that they have audited many private companies where the owners had understated its net profit in order to pay lower taxes. The creative minds of management can dupe even the sharpest auditor in town. And obviously it happens with public companies too (do you recall Enron and Worldcom?). Here’s a secret, auditors can only really do their job when they receive support from management (such as requesting for documents, invoices, purchasing orders, etc). There are numerous ways to out fox an auditor if the management are really up for it. Auditors have only limited time and will only go through a few samples before making their unqualified (or qualified) decision.

So the question my friends is that in order to invest, you must buy the company using the most conservative estimates, analyze the company’s historical figures (that is why Buffett does not invest in IPO stocks or companies that have been listed in a short amount of time. The reason is that being a private company the management has not faced the demanding investing public shareholders. Also, a private company have more tendencies to massage the numbers e.g to pay lower taxes) purchase the shares when prices are lower that its perceived value and hold it for the long term.

It does take some leap of faith when we buy shares, even if it’s the bluest of the blue chip stock. Remember in 2010 when Sime Darby had a big impairment in its accounts? They were lucky they had a huge balance sheet with something like RM3 billion in cash to cushion the impact.

Some people, due to either not trusting the accounts or have no ability to analyze a company, would resort to technical analysis or even worse, insider trading. I have had some analyst friends who write these gung-ho reports or openly criticizes management for whatever corporate plan it had. But when it came to investing/trading the stock market, NOT ONE ANALYST INVESTED USING FUNDAMENTAL ANALYSIS!!! They all resorted to some special knowledge or technical analysis. These guys are hypocrites and should not have been analyst to begin with…

My seminar, and I don’t want to brag about it, will show you how to manage the mental part of investing and how to have that level of comfort and be confident in your analysis.

How to view risk (27 May 2012)

When your friends say “investing is risky”, tell them to come to me so I can reformat their heads. No im just kidding but please tell them to come and join my seminar. These days im doing a lot of private sessions.

Anyway, im going to describe this thing called “risk” and what it really means. Some of you may have the means to invest in a big fund management company and have fund managers telling you that so and so stock is very risky because it has a high beta. Well a “BETA” is a calculation that shows the riskiness of a stock by comparing it to the index. For example when they say that the stock has a beta of 1.5 it really means that a stock is 50% more volatile (e.g growth stocks thus they say its more risky) than the market while a beta of 0.5 means that the stock is 50% less volatile than the market (e.g defensive stocks so I guess its less risky). So a beta of 1 would just mean the stock will have the same volatility as the market.

Some people, however, take the beta all too seriously and would miss the whole point of it all. In fact their application of it would be so wrong that it would cause them to lose a lot of money. If only they could understand what risk really means.
To illustrate, let me give you a scenario, say a stock has a beta of 2 (its volatility is DOUBLE the market), but is still a pretty good company with ROE of 20% and sales and net profit growth exceeding 10% per year. A good and honest management at that too. Price to equity ratio is a conservative 10x PE (lets say it is trading below its historical PE of 16x) and the intrinsic value is RM20.

So now the company’s stock price is RM14 on Monday. And on Tuesday the KLCI dropped by 25% which would theoretically mean that our stock should decline to RM7 (50% decline). On Tuesday night your sweating like hell at the thought that your investment has halved its value, the question now is….would you sell?
The question really is is that when the stock’s trading at RM7 does it really mean that the stock is riskier than it started? The answer is no, at this point, all Buffettologist will purchase even more of the stock since the intrinsic value is RM20. Heck they would even be buying when it was RM14. However, uneducated investors will sell-out and this includes the fund managers. What they are focusing on is not the intrinsic value but the beta. The beta basically says that there is a stock has historically been falling or rising at a faster rate than the market. So lets just bail from it right? I wouldn’t even care if a stock has a beta of 2.5 in a rising bull market. I don’t even want to know it at all. My way of buying the stock is to focus on its financial historical and the intrinsic value.

I guess it is just human nature to take something simple and make it complex. It happens with intelligent people and it happens to bozo’s as well. I would blame my fund manager for ill advising me because he/she is focusing on what is measurable rather than what is meaningful. It is the people with little confidence in investing that takes technical analysis as their basis for “investing”.
That is why it is best to cover your eyes and sing a happy song whenever someone mentions the word “BETA” to you because it causes more pain. It derails you from true analysis procedure that Warren Buffett would take.

Psychology of Investors (16 Apr 2012)

For decades investors have experienced share prices falling to gruesome levels. What all of us share is the fear that we would lose money. Still it is pointless to advise someone who is sitting on a negative portfolio that it is only paper loss that you see and that if you don’t realize those losses, you don’t actually lose money. But of course fear overwhelms and usually the person just sells so that he or she is able to “throw away the feeling of fear” inside of them. The situation would also continue like this, and that person would feel much better when the stock falls even further because they were able to avoid losing more money.

Someone who buys short term would definitely be “faked-out” into selling when prices fall. Only to be hitting themselves in the head when that same stock rises above their original purchase price. I have seen and heard this every time to people who call or meet me up to discuss stocks.

However, on the other end, value investors are actually buying more shares as the share prices fall even further.
So the question that needs to be answered is that, how come there are two different groups of people selling and buying the same stock at the same time.

Usually the answer comes down to a person’s view of risk. Not just the risk of losing money but The Fear of risk of losing money.
How can you eradicate the fear of losing money in the stock market? Everyone wants to know how does someone like Warren Buffett actually buys heaps of stocks when prices crashes when some other fund managers are selling out like there is no tomorrow.

There are a few answers but most important is that you should view the stock as a business that you want to own forever. FOREVER. That’s the key word here. FOREVER.
The second is to consistently buy stocks below its intrinsic value. Say a company trading at RM5 has an intrinsic value of RM10 would be a perfect buy since you are able to double your money. The stock becomes less attractive as prices rises towards the intrinsic value.

In a good company, intrinsic value consistently grows while in a mediocre company the intrinsic value is never always high enough. A good company has good management that is able to maneuver through the ups and downs of the business cycle be it through cost management, business/product expansion or human resource management skills. These are elements that allows a business to grow which is why buying a stock is more than just charting. It is actually the human element.
Start off with these tips in mind and you’d be better investor.

How to use the news (21 Nov 2011)

Opening the newspaper and taking in the business headlines would make an investing experience very interesting especially if it leads to an idea about a particular company. This would usually lead to more digging up on the company’s balance sheet, income statement and cash flow and if your way into it, probably the fine prints as well. Reading the news is not enough to provide you with the bullet to buy or sell a stock but it can become a catalyst.

Also don’t believe news on events that occur every single day like the price closing of the stock market. For example headlines like “Stock market fell as market fear of a worsening Europe debt crises” makes you think that is really the case. On a daily basis, the stock market can end the day higher or lower for various reasons and most of the time the actual reason for the change is largely unknown. But reading in the news makes you think that it is for real. Reporters write these news of price closings of the market and insert what they think or believe is the reason behind it. This reason usually comes from specific current events like the economy, oil prices, political tensions, blue chip performances, interest rate expectation, economic news data…just to name a few. Good reporters bank on their connections in the financial industry to provide what was believed to be the main reason which would make up of players like fund managers, strategists and analysts. These guys provide the reporter a lot of weight and then bank on these “facts” as a basis of their report. Of course the said characters may be right or wrong but if you think about it, most of the time they are not in sync with one another so you’d start scratching your head deciding who to believe or start thinking “are they all correct?”.

The point of the matter is that an investor should discount the daily reports on the stock markets closing change and only focus on news regarding companies and industries. News on out of favor industries can be a signal to investors to start looking at related companies in that particular sector and digging up more on its financial statements.

This is where value investing becomes a sort of adventure that can be highly rewarding.

An investor who looks up an article about the shipping industry expected to weaken as a result of oversupply in vessels that pushes the shipping rates down can start to look at, say, Maybulk’s financial statement. A value investor would study the numbers and discount an amount that he deems appropriate to allow for that revaluation of the stock’s value of assets and future earnings consistent with a less than “base” case scenario or “normal” operating environment (note: participants learned this during the seminar).

The view of the value investor is that most of the time the market drives down the price excessively as a result of fear and lack of understanding of the company. A company with a strong balance sheet and good management can withstand a slowdown in its business environment (investors can do this by checking the historical ROE and profits margin). This provides the investor with a good opportunity to enter into the stock if the prices goes down at or below a % of the its value.

So just remember that the newspaper headline is a catalyst for further digging of a company’s financial statement. Understand that and then you’d realize why Buffett reads at least 5 newspapers a day.

Trust yourself when investing (18 June 2011)

Imagine this, you received a research report from a local brokerage house’s research arm whose analyst touts a certain stock basically telling you that its earnings will go up because of this or that, the stock price is cheap relative to its peers, the industry is going to improve and thus you should buy the stock now. You then decide to take the analyst’s advice and purchase the stock of the company….only to see it fall not long after you bought it. So what do you do next? Retail investors can find it hard to gain access to these analysts so the next best thing is to talk to your broker. Well, you may have spoken to him (or her) about the report and whether the stock is ripe for a purchase (your broker will definitely not say anything that will stop you from buying the shares because he is looking for that commission…and if you’re a whale, or in other words a person with a large account, he’d entice you to buy the shares like there’s no tomorrow!). He may know a bit about the company so he’d tell you what he thinks…BUT THE DECISION IS UP TO YOU!! What usually happens after your call with the broker is that you hold the stock hoping for a turn in the price. Therefore, your holding strength depends on the movement of the stock. If the stock declines by 30% I’d reckon you’d sell it.

How do you avoid this? Lucky for you, there are a ways. First things first: THROW AWAY THOSE ANALYST REPORTS! There are just not enough hours in a day for me to reiterate that sentence. What we all should do is to trust ourselves and buy a stock because we believe our analysis is correct and not because another person says so. You’d probably ask me this question “Analysts have access to company’s management and can share with us management analysts are actually pretty useful don’t you think?” Well, I have been an analyst as well as a fund manager so I pretty much know how they came to the decision..and it is not pretty. I will tell you if you come to my upcoming seminar and you will never trust an analyst report ever again!

Second: you must BUY A BUSINESS RATHER THAN A STOCK. Whats the difference? When you buy a business you are actually becoming a part owner of the company. Your decision to purchase the stock of the company would be due to your belief with management’s ability+ethics+experience+etc..or you understand the business enough to know that the company has a competitive advantage over its competitors and can maintain this advantage for many years to come..or historical financial shows that you are buying an undervalued business and you bet that sooner or later the real value will converge. Now on the other hand when you view a company as just another stock you are just buying it for its price action. This is exactly why a lot of investors could not stomach a 30% decline. All people want these days are quick profits and nothing else. This is the reason why technical analysis has found its way into nearly 80% (the number could be higher) of investors (I should call them traders). Can anyone tell me how technical analysis can provide that comfort and add conviction to your purchase if and when a stock declines by even say 10% (probably technical analyst will tell me that they’d already sold out at a 5% decline but if you include brokerage fees that’s probably nearly 7% assuming RM5k investment).

Also, technical analysis and trading are not scalable. Let me give you an example, I recently read an advertisement in a newspaper of this lady running a seminar who made $2 million from a $10,000 investment in just 2 years from trading. This translates to a 1314% compounded return. Now putting this in perspective, assuming that person can replicate 1314% for every single year until the 10th year..she would make….wait for it….3.2 quadrillion dollars! (or $3,200,000,000,000,000!!!) And our entire planet ONLY has a Gross Domestic Product of $60 trillion ($60,000,000,000,000). So if this is true then she will own 5 earths. Furthermore if you start a once a month seminar teaching this skill to a class of 30 students each for the next 3 years and all students achieve similar results..all of them will collectively own the universe including universes untapped by the Star Trek Entreprise spaceship!! (I hope they become fair leaders, im all for zero-taxation!)

THIRD, understand that you MUST invest for the long-term and never be sucked into the idea that you can make instant money…regardless if it’s a stock idea or an investment scheme. There is no such thing as getting rich instantly. When we instill this thinking that we can make money tomorrow, our mindset immediately affects our entire view of an investment. You will discover that all you want to see from a stock is the price chart going higher and higher. What you are doing is setting your approach to an objective that is just unrealizable. Your life will be a lot calmer if you disregard short-term price movements and just focusing on the business performance on companies THAT YOU OWN. Remember, the market is giving you the opportunity to invest in over 960 companies. Just choose the good ones, be a part-owner and share in the gains with the company’s management.

LASTLY, invest with a margin of safety. I can’t say this often enough. But its basically buying something worth RM1 for RM0.50..and that’s it. Of course the question is how much margin is sufficient. No worries, I will help you uncover the technique to calculate them and identify which is appropriate.

If you can adhere to these principles, you will become a better investor.

My take on the Mamee-Double Decker Berhad’s privatization (15 Apr 2011)

After too many years of being under investors’ radar, the majority shareholders of Mamee, the Pang Family (led by Datuk Pang Tee Nam) had had enough with the company continuously being undervalued and finally decided to take the company private. The total consideration for the remaining shares held by the public was offered for RM4.39 a share.

First of my many questions, is the offer a good one? Participants of my seminar on 27th March 2011 have learned a Warren Buffett valuation technique which I will use to value Mamee shares. So assuming that the company maintains an ROE of 12% for the next couple of years while using a PE ratio of 12x…the fair value for the company would be RM4.35 (again, participants of the seminar will know how to derive this number). Comparing the fair value using Warren Buffett’s valuation technique and the privatization offer price (RM4.35 vs RM4.39), the difference is rather subtle. Again the Buffett technique imputes a margin of safety and is very conservative to say the least. Im not sure how the Pang Family came up with the RM4.39 valuation but I reckon that he may already discounted a few ringgit from it. Remember, Mamee achieved an ROE of nearly 17% in FY2010 while the past 5 years ROE was an average the Pang Family had every right to discount the final offer.

However, I am caught offguard with the company’s comments regarding the rationale for taking the company private.

It says that it is seeking to upgrade its facility in Malacca and requires spending of around RM100m. This would result in high borrowing cost which in turn would affect its ability to pay dividends. Well, I must say the last thing in I consider Mamee is that it’s a dividend stock. Far from it! Yield is less than 3% so buying the stock because of its dividends is just silly. You’d have REITS doing that job for you.

Why would they say that because it is gearing up its balance sheet it would affect dividend repayments?…hence ‘lets take it private’ just doesn’t make sense. As a shareholder as long as you spend the money to improve future earnings and continuously seek to increase the ROE..then by all means go and spend the money.

Analyzing the balance sheet further and you will discover that the company has very low debt. Gearing is something like 0.02x while if they added the debt..gearing rises to 0.72x! This is a pretty nasty jump to say the least which may seem to indicate that it might as well go private. But despite this though, assuming yearly debt interest and repayment is RM7m, Mamee’s FY2010 (unaudited) Operating Profit of RM52.7m can easily repay this amount! I haven’t even factor in the productivity improvement as a result of the money spent on its facility!!

Management may have thought of other avenues such as rights issue but since the Pang Family basically owns more than 72% of the company, they may not get much from such offerings. I assume also they do not want to part with their shares so secondary placement is out of the question.

Again, you may think why are they taking it private? I believe…and I really do believe that the main reason is that since the family owns a large chunk of the paid capital, and that the shares are thinly traded…..they decided enough is enough. No more answering to more dealing with retails more quarterly more headaches! Analyst have not given proper justice that Mamee deserves since despite the fact the company can produce high ROE, its not an exciting company to promote. Low share volume does not help too! This is probably a little of management’s fault but I wouldn’t want to part with my shares of a good company with a good brand name too!

Putting yourself in the Pang Family’s shoes, imagine this hypothetical scenario..lets say Oriental Food Industries Holdings Berhad (another consumer food company) wants to buy your company because this allows them to diversify its product line and leverage on Mamee’s brand name, etc etc. Mamee is currently trading at RM3.60 and Oriental Food Industries offers you a 20++% upside for a final offer of RM4.39. Would you accept? Remember this….you have invested your capital, sweat and blood into this company for many many decades and this company wants to buy you out for a 20++% premium. How would you approach this in a rational manner? Warren Buffett’s saying is to “think like an owner”.

So again, is the price offer fully justified? I’d say the offer of RM4.39 is off by a few ringgit (probably minimum acceptance: RM6.01)…but shareholders can think for themselves.

Does the Dividend Reinvestment Plan (“DRP”) do any good for investors? (15 Mar 2011)

The recent plan for banks to strengthen its capital base is to reinvest the cash dividends it is supposed to give investors back into the bank. Of course investors can accept or reject this plan but reports stated that over 80% of stockholders have agreed to the plan. I reckon a lot of fund managers accepted this because these would be dilution in their shareholding should they opt to reject it.

Now is this all good for shareholders? A few things that investors should remember though:

1.      The shares they are getting as a replacement for dividends may already be very expensive to begin with. So there is no way to know how low the price would decline to when it does. Say we assume the stock is traded at 14.6x PE, so when it declines to even 11.4x PE that's already a -22% decline in your shareholdings value. In other words, that is a decline from RM9.00 to RM7.00... as a result of no margin of safety.

2.      The company may not use the cash that it took from you productive uses. If a company can promise on delivering higher profits as a result of utilizing its new found cash hoard for, say, expansion purposes that will produce higher net profits and increase its return on equity then im all for it. But if its just to ensure a stronger capital base to conform to some financial ruling, then please...take the cash!

3.      The Return on Equity ("ROE") may be lower even if the earnings increases. This is due to the enlarged capital base AND the unproductive use of the cash that the company has at its disposal.
I don't find it healthy and intelligent to substitute hard cash for an overvalued stock. It doesn't make any sense. This is like saying I have two choices of marrying either Susan Boyle or Megan Fox and I choose the former! Well perhaps my example isn't the best but you get the drift...

Now, I have a strong feeling that many more companies (within and outside the banking sector) will opt for Dividend Reinvestment Plan in the future as it saves them the money required to be paid out. Only accept the DRP if the stock is undervalued and management has specific ROE and earnings incremental plans.

Although Warren Buffett has never paid dividends to his shareholders (actually, only once back in the early days of his purchase of Berkshire Hathaway when he was told by lawyers that he could be questioned by authorities if he kept large amount of cash...he immediately regretted his decision and never paid dividends since!), he has the best of reasons to do so as he used the cash that he kept to purchase excellent businesses which provided him high returns and ROE.

If the companies/banks in question has the ability to do that then DRP should be adopted...ifnot then give me my dividends!

Masterskill’s cunning deception (24 Feb 2011)

At the lowest level of RM1.67, Masterskill Education Group Berhad (“MEGB”) stock priced declined by more than 52% from its IPO price of RM3.50. It is a nursing university college which is in that growth cycle with expansion plans involved throughout various states in the country. As a business, i have no issues. Looking at the ratios, net profit margin of over 30%, Return on Equity over 19%, double digit revenue and net profit more than comforting, assuming ofcourse these numbers can be maintained. And I believe they can.

It has recovered to RM2.15 but is still relatively cheap with PE ratio trading at 8.3x which basically means that if MEGB stops growing its earnings and maintains current earning levels, it will take them 8.3 years to return the money back to you. Not that I think they can’t grow ever in the next 3-5 years, so we’re pretty much seeing our money returned faster than 8.3 years.

However, the uncomfortable thing that I have with the company is just how they handled the issue of its low stock price.

Now…on February 18th 2011, MEGB’s CEO Datuk Seri Edmund Santhara told a Star reporter that he is looking to increase his holdings in the company on top of some 90.6 million shares that he has as the price is not justifiable at current levels. Fine..even to me the company is probably worth north of RM4 per share based on conservative estimates. Ok..sure…but lets see how this issue was played out by going back a few days.

On the February 16th 2011, on an announcement in Bursa, Datuk Seri Edmund stated his intention to deal with the security of the company. This basically mean that he is letting people know, as he is legally required from his position as a connected party to MEGB, that he may (or may not) buy (or sell) shares on the stock exchange. In this case we all can roughly figure out at that point…even before the Star interview occurred that the guy would be buying more shares. This is so logical and I would do the same thing (buy shares) if an excellent company that I own is valued at a ridiculously low price. You don’t want the problem, more for me!!

But that did not transpire but replaced with a twist to the tale. On February 22nd, Bursa announced that Datuk Seri Edmund did not buy shares..but “transferred” more than half of the shares to his spouse!! Not a single sen was spent and I was a little disappointed. This is my humble opinion but the timing of the initial bursa announcement stating his intention to deal in the security and the Star interview would have led an observer to believe that he was going to buy more shares at a deep discount to whatever valuation he thinks the company is worth. But the actually fact of the matter is that he did not buy shares in the company.

Lets look at how Warren Buffett handled a similar case when he liquidated his partnerships and issued a choice to his shareholders of either cash or shares in Berkshire Hathaway. Buffett did not say anything to encourage his investors to choose either option but it was documented eloquently in both Biographies of Warren Buffett by Roger Lowenstein and Alice Schroeder that he really didn’t want his shareholder’s to opt for Berkshire Hathaway shares because he knew the company would become his super compounding machine and he wanted as many shares as possible!! Buffett wanted all those shares for himself and could’ve led his shareholders to accept cash rather than shares in Berkshire but he didn’t. He allowed them to decide for themselves and respected their decisions.

Therefore I would reckon that should Buffett be in Datuk Seri Edmund’s position, he’d probably buy as much as he can..whenever he can.

This move by Datuk Seri Edmund of not buying any shares of the company despite stating an intention (and leading people like me to believe that he’s going to be this elephant of a buyer) of doing so is a cunning deception and not one we would want to see again. He doesn’t have any reason to do so. Share price movements are volatile in the short term and may not reflect its value right now but he should have ignored the current price movements and do what he does best. I don’t think character is the issue here but it could be that he may have received some bad advice. Whatever it is, remember Warren Buffett’s words “In the short run, the market is a voting machine, but in the long run, it is a weighing machine”.