Showing posts with label cash hoard. Show all posts
Showing posts with label cash hoard. Show all posts

Wednesday 15 August 2012

Cash is a drag on your portfolio BUT it has a hidden embedded option value.

Cash is a drag on your portfolio, says the conventional wisdom.  Its returns are low and often negative after inflation and taxes.

But cash has a hidden embedded option value.  When markets crash, cash is king.  All of a sudden assets that were being traded at 5 and 10 times the money spent to build them can be had for a fraction of their replacement cost.

Highly leveraged competitors go bankrupt, leaving the field free for the cash-rich company.

Banks won't lend money except to people who don't need it  - such as the companies with AAA credit ratings and people with piles of money in the bank.

In times like these the marketplace is dominated by forced sellers who must turn assets into cash regardless of price.  This is when the investor who has protected his portfolio by being cash-rich is rewarded in spades:  people will literally be beating a path to his door to all but give away what they have in return for just a little bit of that scarce commodity called cash.


Additional note:
Buffett always has cash in Berkshire Hathaway.  In 2008 Global Financial Crisis, many companies approached Buffett as he has plenty of cash which they sought to have badly.

Thursday 8 March 2012

Oriental Holdings Berhad (At a Glance)


8.3.2012
Oriental Holdings
Income Statement
31/12/2011 31/12/2010 Absolute Chg Change
RM (m) RM (m)
Revenue 3132.23 3220.46 -88.23 -2.74%
Gross Profit 0.00 #DIV/0!
Operating Profit 441.63 341.86 99.77 29.18%
Financing costs -10.36 -7.81 -2.55 32.66%
PBT 461.26 384.41 76.85 19.99%
PAT 371.20 307.95 63.25 20.54%
PAT (to shareholders) 288.50 249.59 38.91 15.59%
EPS (basic) sen 46.51 40.23 6.28 15.61%
Balance Sheet
NCA 2475.054 2249.009 226.05 10.05%
CA 3530.074 3262.515 267.56 8.20%
Total Assets 6005.128 5511.524 493.60 8.96%
Total Equity 5092.038 4738.73 353.31 7.46%
NCL 30.315 36.096 -5.78 -16.02%
CL 882.775 736.698 146.08 19.83%
Total Liabilities 913.09 772.794 140.30 18.15%
Total Eq + Liab 6005.128 5511.524 493.60 8.96%
Net assets per share 709.230 664.970 44.26 6.66%
Cash & Eq 2882.239 2596.361 285.88 11.01%
LT Borrowings 9.415 11.76 -2.35 -19.94%
ST Borrowings 525.567 406.643 118.92 29.25%
Net Cash 2347.257 2177.958 169.30 7.77%
Inventories 259.525 267.138 -7.61 -2.85%
Trade receivables 359.536 356.18 3.36 0.94%
Trade payables 326.945 316.499 10.45 3.30%
Quick Ratio 3.70 4.07 -0.36 -8.88%
Current Ratio 4.00 4.43 -0.43 -9.70%
Cash flow statement
PBT 461.261 384.412 76.85 19.99%
OPBCWC 415.149 366.555 48.59 13.26%
Cash from Operations 480.743 518.110 -37.37 -7.21%
Net CFO 407.753 407.355 0.40 0.10%
CFI -94.432 19.695 -114.13 -579.47%
CFF -17.084 -46.092 29.01 -62.93%
Capex -53.798 -46.713 -7.09 15.17%
FCF 353.955 360.642 -6.69 -1.85%
Dividends paid -56.052 -38.772 -17.28 44.57%
DPS (sen) 9.04 6.25 2.79 44.57%
No of ord shares (m) 620.362 620.362 0.00 0.00%
Financial Ratios
Gross Profit Margin  -  - #VALUE! #VALUE!
Net Profit Margin 9.21% 7.75% 1.46% 18.85%
Asset Turnover 0.52 0.58 -0.06 -10.73%
Financial Leverage 1.18 1.16 0.02 1.40%
ROA 4.80% 4.53% 0.28% 6.09%
ROC 10.51% 9.75% 0.76% 7.84%
ROE 5.67% 5.27% 0.40% 7.57%
Valuation 8.3.2012 8.3.2011
Price  6.27 5.12 1.15 22.46%
Market cap (m) 3889.67 3176.25 713.42 22.46%
P/E 13.48 12.73 0.76 5.94%
P/BV 0.76 0.67 0.09 13.96%
P/FCF 10.99 8.81 2.18 24.77%
P/Div 69.39 81.92 -12.53 -15.29%
DPO ratio 0.19 0.16 0.04 25.07%
EY 7.42% 7.86% -0.44% -5.61%
FCF/P 9.10% 11.35% -2.25% -19.86%
DY 1.44% 1.22% 0.22% 18.05%












Announcement
Date
Financial
Yr. End
QtrPeriod EndRevenue
RM '000
Profit/Lost
RM'000
EPSAmended
23-Feb-1231-Dec-11431-Dec-11718,547124,00917.53-
18-Nov-1131-Dec-11330-Sep-11765,08342,0534.74-
25-Aug-1131-Dec-11230-Jun-11850,571122,72516.79-
31-May-1131-Dec-11131-Mar-11798,02782,4137.45-


Stock Performance Chart for Oriental Holdings Berhad



I have posted that cash hoard can be a boon or bane.

A company with a lot of cash and no debt is good.  This indicates their business is good and they are generating cash.


It is how the management allocates this cash that the shareholders should be aware of.

What can the management do with this cash?
- Pay down debt.
- Return un-allocated cash back to the shareholders through capital repayment or dividends.
- Grow the company's existing business.
- Expand the company's business into new areas, e.g. through acquisition.
- Buy back own shares.

The cash actually belongs to the shareholders.  When the management cannot find better use for the cash, the cash should ideally be returned, so that the shareholders can then reinvest it for higher returns.

Tuesday 21 February 2012

Cash Hoard – Boon Or Bane For Shareholders

Imagine if you have S$100m in your bank account, what joys and problems would you face? I believe some of the joys would entail

  • sacking your boss, 
  • living it extravagantly 

but problems would include
  • the deployment of cash, as well as, 
  • fearing for your life if people are aware of your immense wealth.

If the above situation happens to companies with large cash holdings, the management would also face similar problems, especially on the issue of effective cash deployment.

So for companies with a large cash hoard, is it a boon or a bane? Let’s delve into the pros and cons of maintaining a substantial cash hoard.


Advantages

Reflective of a company with strong business performance

  • One of the advantages is that a large cash hoard signals that the company seems to accumulate cash faster than it can deploy (assuming that the company is effectively deploying its cash but it is still accumulating).
  • Furthermore, it is also reflective of a good business performance as cash is derived from profitable operations.



Buffer against bad times

  • Cash can be used as a buffer against bad times or mistimed acquisitions. For example, during the recession in 2008/09, companies with large amounts of debt and little cash face refinancing difficulties and some even have problems paying off the loans when they are due. Ferrochina, ex Singapore listed firm in the manufacturing sector, is a case in point.
  • Moreover, cash serves as a safety net against unpredictable events. Companies which carry out acquisitions, joint ventures, or maiden expansions into new markets or geographies are likely to face their fair share of failures and difficulties. Some business ventures may not reach their desired results and may run into temporary losses. Cash can be used to cover the losses in such situations.



Business facilitator

  • Companies with cash holdings are also likely to be able to get favourable credit terms with suppliers and banks. 
  • This is apparent as suppliers and banks have to access the credit risk of the companies which they are doing business with and companies with a considerable amount of cash holdings would allay part of their credit concerns. This would aid in the business operations of the companies.



Flexibility for future growth

  • Cash also provides management with a myriad of options for future growth. For example, management can decide on the following options
  • Look out for attractive acquisition targets either to expand horizontally or vertically along the value chain.
  • Carry out capital expenditure such as to acquire land for future purpose, or expand their production capacity through buying more machines etc.
  • Invest in listed companies purely for investment purposes.



Disadvantages



Dearth of attractive investment opportunities

  • One of the most obvious reasons for a large cash hoard is that management has exhausted attractive investment opportunities at the moment and is keeping cash for future opportunities whenever that may be. 
  • This does not benefit shareholders as holding substantial cash incurs an opportunity cost and also drag down the return generated by the companies. 
  • Besides, shareholders prefer companies to return cash or carry out share buybacks if there are no attractive investment opportunities by the companies.



Lack of long term planning

  • Some companies may not have the practice of planning for the long term. Thus, as they do not have a concrete idea of their cash requirements over the next three to five years, they would prefer to hold cash as this provide them with flexibility. 
  • Nonetheless, it is generally non ideal to invest in companies which do not execute long term planning, as “failure to plan means planning to fail”.



Agency costs

  • With substantial cash in the companies’ coffers, management may be tempted to use these funds to build their own empire by spending on non synergistic acquisitions and loss making projects, so as to boost their power, reputation and prestige.




Possibility of incurring suspicion and indignation from shareholders

  • If the cash hoard is increasing and management does not have concrete plans on the use of such funds, this may incur the suspicion on the authenticity of actual cash owned by the companies. For example, Oriental Century, a Singapore listed firm in the education sector, has a large amount of cash in its books. However, it is subsequently revealed that its Chief Executive Officer has allegedly inflated the cash holdings.
  • Another company, China Hongxing, a Singapore listed firm in the sports shoe and apparel sector, has been incurring the indignation of shareholders for more than a year by sitting on a large cash hoard, amounting to RMB3b at Dec 09, up from RMB1.9b at Dec 08. The collapse in its share price from the high of S$1.45 in Oct 07 to a low of S$0.055 in Mar 09 was due in part to investors’ angst and displeasure in China Hongxing management of cash. However, China Hongxing management has recently unveiled plans on how it would be deploying its cash.





Conclusion – evaluate against the overall context

To determine whether having a large cash hoard is beneficial to shareholders, shareholders have to evaluate against the following criteria:

  • Companies’ existing and future incoming cash flows;
  • Companies existing and future cash flow requirements (i.e. outflows);
  • Stage of business cycles;
  • Existing loan and interest repayments.

Thus, if the companies have concise plans to deploy their cash,

  • either to satisfy outstanding loan repayments, 
  • or for synergistic acquisition purposes, 
  • or for capital expenditure in view of the recovery in the business cycles, 
then the cash hoard is a boon as it creates shareholder value.

Conversely, if management has

  • no concrete plans to deploy the cash or 
  • to deploy them in reckless fashion, 
then, the cash hoard is a bane as it destroys shareholder value.

Once again, investors have to put on their thinking hats and do some work to reach a decision on whether the cash hoard is a boon or a bane for shareholders.

Ernest Lim currently works as an assistant treasury and investment manager. Prior to this role, he was with Legacy Capital Group Pte Ltd, a boutique asset management and private equity firm, as an investment manager since 2006. He received a Bachelor of Accountancy (Honours) from Nanyang Technological University in 2005. He is a Chartered Financial Analyst, as well as, a Certified Public Accountant Singapore. He is currently taking a short break before embarking on a new role.



EDUCATION | 16 MARCH 2010
Cash Hoard – Boon Or Bane For Shareholders

By Ernest Lim

http://www.sharesinv.com/articles/2010/03/16/cash-hoard-boon-bane-sharesholders/

Friday 9 April 2010

A quick look at GENM (Genting Malaysia)

Genting Malaysia Berhad Company

Business Description:
Genting Malaysia Berhad Formerly known as Resorts World Berhad. The Group's principal activities are leisure and hospitality business which comprises hotel, gaming, cruise and cruise related operations, entertainment businesses, golf resorts, tours and travel related services and other support services. Other activities include property development and management provision of training, offshore financing, utilities and cable car management services, proprietary timeshare ownership scheme, selling and letting of apartment and investment holding. The Group operates in Malaysia and Asia Pacific.
Wright Quality Rating: AAA1 Rating Explanations


Stock Performance Chart for Genting Malaysia Berhad




A quick look at GENM
http://spreadsheets.google.com/pub?key=tBTCgSu7ESHENiACNLUujkg&output=html

AAA1 Wright Quality Rating.  With this company generating so much FCF and a lack-lustre DPO of 22.6%,  the growth of GENM is rather anaemic the last few years.  It is hoarding cash to the tune of RM 0.92 per share.  At RM 2.79, its PE is 12 and DY is 1.88%.

Also read:

Cash Hoard – Boon Or Bane For Shareholders

Thursday 8 April 2010

Cash Hoard – Boon Or Bane For Shareholders


EDUCATION | 16 MARCH 2010
Cash Hoard – Boon Or Bane For Shareholders

By Ernest Lim 




Imagine if you have S$100m in your bank account, what joys and problems would you face? I believe some of the joys would entail sacking your boss, living it extravagantly but problems would include the deployment of cash, as well as, fearing for your life if people are aware of your immense wealth.
If the above situation happens to companies with large cash holdings, the management would also face similar problems, especially on the issue of effective cash deployment. So for companies with a large cash hoard, is it a boon or a bane? Let’s delve into the pros and cons of maintaining a substantial cash hoard.


Advantages

Reflective of a company with strong business performance
One of the advantages is that a large cash hoard signals that the company seems to accumulate cash faster than it can deploy (assuming that the company is effectively deploying its cash but it is still accumulating).
Furthermore, it is also reflective of a good business performance as cash is derived from profitable operations.


Buffer against bad times
Cash can be used as a buffer against bad times or mistimed acquisitions. For example, during the recession in 2008/09, companies with large amounts of debt and little cash face refinancing difficulties and some even have problems paying off the loans when they are due. Ferrochina, ex Singapore listed firm in the manufacturing sector, is a case in point.
Moreover, cash serves as a safety net against unpredictable events. Companies which carry out acquisitions, joint ventures, or maiden expansions into new markets or geographies are likely to face their fair share of failures and difficulties. Some business ventures may not reach their desired results and may run into temporary losses. Cash can be used to cover the losses in such situations.


Business facilitator
Companies with cash holdings are also likely to be able to get favourable credit terms with suppliers and banks. This is apparent as suppliers and banks have to access the credit risk of the companies which they are doing business with and companies with a considerable amount of cash holdings would allay part of their credit concerns. This would aid in the business operations of the companies.


Flexibility for future growth
Cash also provides management with a myriad of options for future growth. For example, management can decide on the following options

  • Look out for attractive acquisition targets either to expand horizontally or vertically along the value chain.
  • Carry out capital expenditure such as to acquire land for future purpose, or expand their production capacity through buying more machines etc.
  • Invest in listed companies purely for investment purposes.


Disadvantages


Dearth of attractive investment opportunities
One of the most obvious reasons for a large cash hoard is that management has exhausted attractive investment opportunities at the moment and is keeping cash for future opportunities whenever that may be. This does not benefit shareholders as holding substantial cash incurs an opportunity cost and also drag down the return generated by the companies. Besides, shareholders prefer companies to return cash or carry out share buybacks if there are no attractive investment opportunities by the companies.


Lack of long term planning
Some companies may not have the practice of planning for the long term. Thus, as they do not have a concrete idea of their cash requirements over the next three to five years, they would prefer to hold cash as this provide them with flexibility. Nonetheless, it is generally non ideal to invest in companies which do not execute long term planning, as “failure to plan means planning to fail”.


Agency costs
With substantial cash in the companies’ coffers, management may be tempted to use these funds to build their own empire by spending on non synergistic acquisitions and loss making projects, so as to boost their power, reputation and prestige.


Possibility of incurring suspicion and indignation from shareholders
If the cash hoard is increasing and management does not have concrete plans on the use of such funds, this may incur the suspicion on the authenticity of actual cash owned by the companies. For example, Oriental Century, a Singapore listed firm in the education sector, has a large amount of cash in its books. However, it is subsequently revealed that its Chief Executive Officer has allegedly inflated the cash holdings.
Another company, China Hongxing, a Singapore listed firm in the sports shoe and apparel sector, has been incurring the indignation of shareholders for more than a year by sitting on a large cash hoard, amounting to RMB3b at Dec 09, up from RMB1.9b at Dec 08. The collapse in its share price from the high of S$1.45 in Oct 07 to a low of S$0.055 in Mar 09 was due in part to investors’ angst and displeasure in China Hongxing management of cash. However, China Hongxing management has recently unveiled plans on how it would be deploying its cash.




Conclusion – evaluate against the overall context

To determine whether having a large cash hoard is beneficial to shareholders, shareholders have to evaluate against the following criteria:

  • Companies’ existing and future incoming cash flows;
  • Companies existing and future cash flow requirements (i.e. outflows);
  • Stage of business cycles;
  • Existing loan and interest repayments.
Thus, if the companies have concise plans to deploy their cash, either to satisfy outstanding loan repayments, or for synergistic acquisition purposes, or for capital expenditure in view of the recovery in the business cycles, then the cash hoard is a boon as it creates shareholder value.
Conversely, if management has no concrete plans to deploy the cash or to deploy them in reckless fashion, then, the cash hoard is a bane as it destroys shareholder value.
Once again, investors have to put on their thinking hats and do some work to reach a decision on whether the cash hoard is a boon or a bane for shareholders.
Ernest Lim currently works as an assistant treasury and investment manager. Prior to this role, he was with Legacy Capital Group Pte Ltd, a boutique asset management and private equity firm, as an investment manager since 2006. He received a Bachelor of Accountancy (Honours) from Nanyang Technological University in 2005. He is a Chartered Financial Analyst, as well as, a Certified Public Accountant Singapore. He is currently taking a short break before embarking on a new role.

http://www.sharesinv.com/articles/2010/03/16/cash-hoard-boon-bane-sharesholders/