Tuesday 8 August 2017

Summary Notes on 5 Rules for Successful Stock Investing

When looking at PE ratio, make sure that you look at the historical PE and make sure
that you don’t buy it at the high. If you do buy it at the high, you have to be confident
of the company’s outlook. More often than not, it is overestimating growth prospects.
DISCIPLINE + CONSERVATION in figuring out the prices.


When should you sell?
1) Did you make a mistake
2) Have the fundamentals deteriorated?
3) Have the stock risen too far above its intrinsic value?
4) Is there something you can do better with the money?
5) Do you have too much money in one stock? – Don’t make sense to have too
much egg in one basket


Chapter 2
7 mistakes:
1. Swinging for the fence
2. Believing that it’s different this time: not knowing market history is a major
handicap
3. Falling in love with products
4. Panicking when the market is down
5. Trying to time the market: Stock market returns are highly skewed- bulk of the
returns (positive or negative) from any given year comes from relatively few
days in that year. This means that the risk of not being in the market is high for
anyone looking to build wealth over a long period of time.
6. Ignoring valuation: the reason you should buy a stock is that you think the
business is worth more than it’s selling for- not because you think a greater
fool will pay more for it down the road. Buying the stock based on the
expectation of positive news flow or strong relative strength is asking for
trouble.
7. Relying on earnings for the whole story: cash flow not earnings. This
statement of cash flows can yield a ton of insight into the true health of a
business, and you can spot a lot of blowups before they happen by simply
watching the trend of operating cash flow relative to earnings. Watch out
operating cash flows stagnate or shrink even as earnings grow, it’s likely that
something is rotten.



Chapter 3
The bigger the profit, the stronger the competition.
To evaluate moat:

1) evaluate the firm’s historical profitability. Has the firm been able to
generate a solid return on its assets and on shareholders’ equity? This is

the true litmus test of whether a firm has built an economic moat around
itself.
a) Does the firm generate FCF? How much? Divide FCF by sales
(revenues), which tell you what proportion of each dollar in revenue
the firm is able to convert into excess profits. If a firm’s FCF as a
percentage of sales is around 5 percent or better, you’ve found a cash
machine - as of mid-2003, only one-half of the S&P 500 pass this test.
Strong FCF is an excellent sign that  a firm has an economic moat.
b) What are the firm’s net margins? ROE? (Chapter 6)
c) ROA: 6-7%
d) ROIC and estimating a weighted average cost of capital (WACC)

2) If the firm has solid returns on capital and consistent profitablility, assess
the sources of the firm’s profits. Why is the company able to keep
competitors at bay? What keeps competitors from stealing its profits?
a) We need to determine why a firm has done such a great job of holding
on its profits and keeping the competition at arm length. The strategy
pursued at the company level is even more important. Research shows
that a firm’s strategy is roughly twice as important as a firm’s industry
when it’s trying to build an economic moat.
b) Key is never stop asking, “why?” why aren’t competitors stealing the
firm’s customers? Why cant a competitor charge a lower price for a
similar product or service? Why do customers accept annual price
increase?
c) Look at it from the customer’s perspective.

5 ways firm can build sustainable competitive advantage:
1. Create real product differentiation through superior technology or
features
2. Creating perceived product differentiation through a trusted brand
or reputation: not enough to look at whether consumers trust the
product or have emotional connection to the brand. The brand has
to justify the cost of creating it by actually making money for the
firm and sustaining a powerful brand usually requires a lot of
expensive advertising.
3. Driving costs down and offering a similar product or service at a
lower price: Low cost works well in commodity industries. Identify
the sources of these cost savings. Create cost advantages by either
inventing a better process or achieving a larger scale. Look at
business model.
4. Locking in customers by creating high switching costs
5. Locking out competitors by creating high barriers to entry or high
barriers to success: regulatory exclusivity


3) Estimate how long a firm will be able to hold off competitors, which is the
company’s competitive advantage period: economic moat – width and
depth

4) Analyse the industry’s competitive structure. How do firms in this industry
compete with one another? Is it an attractive industry with many profitable
forms or a hypercompetitive one in which participants struggle just to stay
afloat.




Analysing a company:
Growth: sources and sustainability, sales growth drives earnings growth. Profit
growth can outpace sales growth for a while if a company can cut costs or fiddle with
the financial statements. So look at sales growth. To grow sales: Sell more products,
raise price, sell new goods or services, acquisition( management can use the fog
created by constant acquisitions to artificially juice results, and this financial tinkering
can take a long time to come to light because its buried in the financial rejiggering and
true growth is impossible to figure out because cant determine organic growth)
Profitability: What kind of a return does the company generate on the capital it
invests. Look at revenue. Instead of profit. Look at RRP.
Financial health: How solid is the firm’s financial footing
Risks/bear case: Look at full story
Management: Who’s running the show
ROA: Asset turnover, sales divided by assets
Financial leverage: Assets/shareholders’ equity
ROE: net margin x asset turnover x financial leverage

2 caveats:
1) Banks always have enormous financial leverage ratios, so don’t be scared off by a
leverage ratio that looks high relative to a nonbank. In addition, because banks’
leverage is always so high, you want to raise the bar for financial firms-so look for
consistent ROEs above 12% or so.
2) Concerns firm with ROEs that look too good to be true, >40% is a no no. Firms
that have been recently spun off from parent firms, companies that have bought back
many of their shares, and co that have taken massive charges often have very skewed
ROEs because their equity base is depressed.
FCF: any firm that’s able to convert more than 5% of sales to FCF-just divide FCF by
sales to get this percentage- is doing a solid job at generating excess cash.

Putting ROE and FCF together:
One good way to think about the returns a company is generating is to use the
profitability matrix, which looks at a company’s ROE relative to the amount of FCF it
is generating.  High ROE+ High FCF

ROIC: puts debt and equity financing on an equal footing: removes the debt related
distortion that can make highly leveraged companies look very profitable when using
ROE. ROIC uses operating profits after taxes, but before interest expenses. Again, the
goal is to remove any effects caused by a company’s financing decisions-does it use
debt or equity?-so that we can focus as closely as possible on the profitability of the
core business.
ROIC= net profit after taxes/ invested capital
Invested capital= total assets-non interest bearing current liabilities (usually account
payable, accrued liabilities and other current liabilities)-excess cash (and maybe
goodwill if it is a large portion)
Financial leverage of 4,5 is risky.
For every $ of equity, there is $4/5 worth of assets. Means borrow $3/4.
After assessing growth, profitability and financial health, your next task is to look at
the bear case for the stock you’re analysing. List the potential negatives so that you
will have the confidence to hang on to the stock during a temporary rough patch as
well as the savvy to know when the rough patch might really be a serious turn for the
worse.
Look at the customers of the business as well.



Chapter 7: Management – 3 parts: compensation, character and operations.
Compensation: bulk of information is found in proxy statement. First look at how
much management pay itself. See if bonus driven, raw level of cash compensation to
see if it’s reasonable. $8m cash bonus is silly no matter what. Also, look at competing
firms to see what their CEOs are paid.

Other red flags
Were executives given ‘loans’ that were subsequently forgiven? (loans of this sort are
usually disclosed in the ‘other compensation’ column of the executive compensation
table in the footnotes.)
Do executives get perks paid for by the company that they should really be paying for
themselves?

Does management hog most of the stock options granted in a given year, or do rank
and file employees share in the wealth? Generally, firms with more equitable
distribution schemes perform better over the long run. Most firms break out the
percentage of options granted to executives relative to the total granted in the proxy
statement.
Does management use stock options excessively? Even if they are distributed beyond
the executive suite, giving out too many options dilutes existing shareholders’ equity.
If a company gives out more than 1 or 2 percent of the outstanding shares each year,
they are giving away too much. Better if firm issues restricted stock instead of
options. Restricted stock has to be counted as an expense on the income statement
(options don’t, as of this writing), and restricted stock also forces the recipient to
participate on the downside if the stock falls.
If a founder or large owner is still involved in the company, does he or she also get a
big stock option grant each year?
Do executives have some skin in the game? Do they have substantial holdings of
company stock or do they tend to sell shares right after they exercise options? Large
unexercised option positions are cold comfort. You can find this information in the
footnotes of the proxy. Companies indicate executives percentage ownership
including options prominently in a table labeled ‘security ownership of certain
beneficial owners’, but they declare only how many actual shares are owned in the
footnotes.
Does management use its position to enrich friends and relatives?
Look for a section called ‘related-party transactions’. Does it pay money to family
members’ business.
Is the board of directors stacked with management’s family members or former
managers?
Is management candid about its mistake?
How promotional is management? Care about stock price or company?
Can CEO retain high-quality talent? How often do officers turn over?
Does management make tough decisions that hurt results but give a more honest
picture of the company? Management teams that use restricted stock grants instead of
options-because the former has to be expensed, while the latter doesn’t-or who
expense rather than capitalize items such as research and development or software
costs are the kind of folks who are more interested in running the business than
playing number games. Those are the people that you want.


Running the business

Dig out past M&A activity. Look at the share count over a long period of time. If the
number of shares outstanding has increased substantially because of aggressive
operations programs or frequent equity issuance, the firm is essentially giving away
part of your stake without asking you.
Follow-through: does it implement the plan?
Candor
Self confidence: do something different from their peers or from conventional
opinion.
Flexibility: has management made decisions that will give the firm flexibility in the
future? Like not taking on too much debt and controlling fixed expenses (even in
good years), as well as issuing equity when the stock is high. Attaching call options to
debt, retiring high rate debt when the opportunity presents itself, and buy back stock
at low prices.


6 red flags
1) Declining cash flow: if cash from operations decline even as net income keeps
marching upwards or if cash from operations increase much more slowly than
net income. AR increased to a large percentage of sales. Inventories increase
2) Serial chargers: frequent chargers are an open invitation to accounting hanky
panky because forms can bury bad decisions in a single restructuring charge.
Poor decisions that might need to be paid for in future quarters all get rolled
into a single one-time charge in the current quarter, which improves future
result.
3) Serial acquirers: acquisitive firms don’t spend as much time checking out their
targets as they should.
4) CFO or auditors leave the company: If a company fires its auditors after some
potentially damaging accounting issue has come to light, watch out.
5) The bills aren’t being paid:  One way to pump up its growth rate is to loosen
customers’ credit terms, which induces them to buy more products or services.
If they don’t get paid, it will come back to haunt them in the form of a nasty
write-down or charge against earnings. Track how A/R are increasing relative
to sales. On the credit front, watch the ‘allowance for doubtful accounts’. If
the amount doesn’t move up in sync with A/R, the company may be
artificially boosting its results by being overly optimistic about how many of
its new customers will pay its bill.
6) Changes in credit terms and account receivable: Check the company’s 10-Q
filing for any mentions of changes in credit terms for customers, as well as for
any explanation by management as to why A/R has jumped. ( Look in the
management’s discussion and analysis section for the latter and in the
accounting footnotes for the former.)
7) Gains from investments: an honest company breaks out these sales, however,
and reports them below the ‘operating income’ line on its income statement.
The problem arises when companies try to boost their operating results-

performance of their core business-by shoehorning investment income into
other parts of their financial statements. Finally, companies can hide
investment gains in their expense accounts by using them to reduce operating
expenses, which makes the firm look more efficient than it really is.
8) Pension pitfalls: If assets in the pension plan don’t increase quickly enough,
the firm has to divert profits to prop up the pension. To fund pension payments
to future retirees, companies shovel money into pension plans that then are
invested in stocks, bonds, real estate, and so forth. If a company winds up with
fewer pension assets than pension liabilities, it has an underfunded plan, and if
the company has more than enough pension assets to meet its projected
obligations to retirees, it has an overfunded plan. To see whether the company
has an over-or underfunded pension plan, go to the footnotes of a 10-K filling
and look for the note labeled ‘pension and other postretirement benefits’,
‘employee retirement benefits’, or some variation. Then look at the line
labeled ‘projected benefit obligation.’ This is the estimated amount the
company will owe to employees after they retire.
Second key number is ‘fair value of plan assets at the end of year’. If the
benefit obligation exceeds the plan assets, the company has an underfunded
pension plan and is likely to have shovel in more money in future, reducing
profits.
Pension padding: When stocks and bonds do really well, pension plans go
gangbusters. And if those annual returns exceed the annual pension costs, the
excess can be profits. Flowing gains from an overfunded pension plan through
the income statement is a perfectly legal practice that pumped up earnings at
GE. You should subtract it from net income when trying to figure out just how
profitable a company really is.
To find out how much profits decreased because of pension costs or increased
because of pension gains, go to the line in the pension footnote labeled either
‘net pension/postretirement expense’, ‘net pension credit/loss’. Companies
usually break out the contribution of pension costs to profits for the trailing
three years; therefore, you can see not only the absolute level of pension profit
or loss, but also the trend. Won’t see these numbers in the income statement.
9) Vanishing cash flow: you can’t count on cash flow generated by employees
exercising options.  The amount is labeled ‘tax benefits from employee stock
plan’ or ‘tax benefits of stock options exercised’ on the statement of cash
flows. When employees exercise their stock options, the amount of cash taxes
their employer has to pay declines. If the stock price takes a tumble, many
people’s options will be worthless and, consequently, fewer options will be
exercised. Fewer options are now exercised, the company’s tax deduction gets
smaller, and it has to pay more taxes than before, which means lower cash
flow. If you are analyzing a company with great cash flow that also has a high
flying stock, check to see how much of that cash flow growth is coming from
options-related tax benefits.
10) Overstuffed Warehouses

When inventories rise faster than sales, there is likely to be trouble on the horizon. 

Sometimes buildup is just temporary as a company prepares for a new product launch,
usually exception.
11) Change is bad: another way firm can make themselves look better is by changing
any one of a number of assumptions in their financial statements. Look skeptically on
any optional change that improve results. One item that can be altered is depreciation
expense (see if extend depreciation period). Firms can also change their allowance for
doubtful accounts. If it doesn’t increase at the same rate as accounts receivable, a firm
is essentially saying that its new customers are much more creditworthy than the
previous ones-which is pretty much unlikely. If the allowance declines as AR rises,
the company is stretching the truth even further. Current results are overstated. Firms
can also change things as basic as how expenses are recorded and when revenue is
recognized.
12) To expense or not to expense
Company can fiddle with their costs by capitalizing them. Any time you see expenses
being capitalized, ask some hard questions about just how long that ‘asset’ will
generate an economic benefit.


Valuation- The basic
Stock market returns come from two key components: investment returns and
speculative returns. Investment returns is the appreciation of a stock because of its
dividend yield and subsequent earnings growth, whereas speculative return comes
from the impact of changes in the PE ratio.
Using Price Multiples wisely
Price to sales: current price of the stock divided by sales per share. Price-to-sales is
used for spotting recovery situations or for double checking that a company's growth
has not become overvalued. It comes in handy when a company begins to suffer
losses and, as a result, has no earnings (and no PE) with which investors can assess
the shares. Retailers, which typically have very low net margins, tend to have very
low P/S ratios.
Price to book: stock market value vs equity value. For service firms, P/B has little
meaning. Also can lead you astray for a manufacturing firm such as 3M, which
derives value from its brand name and innovative products. Another item to be wary
of is goodwill, which can inflate book value to the point that even the most expensive
firm looks like a value. Be highly skeptical of firms for which goodwill makes up a
sizable portion of their book value, The P/B may be low, but the bulk of the B could
disappear in a hurry if the firm declares the goodwill as ‘impaired’(firm admits that it
grossly overpaid for a past acquisition) and writes down its value. PB is also tied to

ROE in the same way PS is tied to net margin. Higher ROE will have a higher P/B
ratio. P/B is very good for valuing financial services firms because most financial
firms have considerable liquid assets on their balance sheets. Financial firms trading
below book value, investigate just how solid that book value is before investing.
PE ratio: A firm that is expected to grow quickly will likely have a larger stream of
future cash flows than one that is growing slowly, so it’s rational to pay more for the
shares (thus, higher PE ratio). On the flip side, a firm that is riskier has a good chance
of having lower future cash flows than we originally expected, so it’s rational to pay
less for the stock.
Has the firm sold a business or an asset recently? If the firm has recently sold off a
business or perhaps a stake in another firm, it’s going to have an artificially inflated E,
and thus a lower P/E. You need to strip out the proceeds from the sale before
calculating the P/E.
Has the firm taken a big charge recently? If the firm is restructuring or closing down
plants, earnings could be artificially depressed, which would push the P/E up. For
valuation purposes, it is useful to add back the charge to get a sense of the firm’s
normalized P/E.
Is the firm cyclical? Calculate a PE based on the current price relative to what you
think earnings per share will be at the next peak.
Does the firm capitalize or expense its cash flow generating assets? Firms that
expenses assets (R&D) will have lower earnings and thus higher PE in any given year
than a firm that capitalizes assets.
Is the E real or imagined? Forward PE is almost always lower than the trailing PE
because most companies are increasing earnings from year to year. Cannot count on
that.
PEG
Don’t just look at the lower PEG ratio. Look at the capital that needs to be invested to
generate the expected growth, as well as the likelihood that those expectations will
actually materialize.
Say yes to yield
Earnings yield- used to compare with bonds.
Cash return- more useful than PE. Divide FCF by enterprise value. (Enterprise value
is simply a stock’s market capitalization plus its long term debt minus its cash). The
goal of the cash return is to measure how efficiently the business is using its capital-
both equity and debt-to generate cash flow. Essentially, cash returns tell you how
much FCF a company generates as a percentage of how much it would cost an
investor to buy the whole shebang, including debt burden. Cash return is a great first
step to finding cash cows trading at reasonable prices, but don’t use cash returns for
financial or foreign stocks. Not meaningful for banks and other firms that earn money
via BS.
Intrinsic value
As interest rates increase, so will discount rates. As a firm’s risk level increases, so
will its discount rate. Risk increase, discount rate will increase too.
Some factors that should be taken into account when estimating discount rates.
Size
Smaller firms are riskier than larger firms.
Financial leverage
More debts are generally riskier than firms with less debt.
Cyclicality
Tougher to forecast and level of risk increases.
Management/corporate governance
How much do you trust management?
Economic Moat
The wider the moat, the more likely it will be able to jeep competitors at bay and

generate a reliable stream of cash flows.
Complexity
More riskier companies higher discount rate. (13-15)
Perpetuity values
We need perpetuity value because it’s not feasible to project a company’s future cash
flow out to infinity , year by year, and because companies have theoretically infinite
lives.
The most common way to calculate a perpetuity is to take the last cash flow (CF) that
you estimate, increase it by the rate at which you expect cash flows to grow over the
very long term (g), and divide the result by the discount rate (R) minus the expected
long term growth rate.
CF (1+g)
 (R-g)
After that discount it to PV. Then add this discounted perpetuity value to the
discounted value of our estimated cash flows in years 1 through 10 to find total equity
value, and divide by the number of shares outstanding.


MOS

Say Clorox is worth $54, and the stock is trading at $45. If we buy the stock and
we’re exactly right about our analysis, the return we receive should be the difference
between $45 and $54 (20%) plus the discount rate of about 9%. That would be 29%,
which is darn good return. If you are not confident about a business, have a large
margin of safety before buying the shares. Great businesses are worth buying at
smaller discounts to fair value


https://docslide.us/documents/pat-dorsey-5-rules-for-successful-stock-investing-summary.html

Sunday 6 August 2017

Berkshire Hathaway class A share is trading at 148% of its Book Value (Overvalued)


Price per share of Berkshire class A shares $270,000.
Book value per share, at the end of March :  $182,816.
Price to book value ratio of Berkshire class A shares:  148% (overvalued)

(Book value per share is Buffett's preferred measure of growth, )

Saturday, 5 August 2017 |
Buffett(filepic) believes operating income is a better gauge of how Berkshire and its more than 90 businesses are doing than net income, which fluctuates more because it incorporates investment gains, which fell 51 percent from a year earlier.
Buffett(filepic) believes operating income is a better gauge of how Berkshire and its more than 90 businesses are doing than net income, which fluctuates more because it incorporates investment gains, which fell 51 percent from a year earlier.
NEW YORK: Billionaire Warren Buffett's Berkshire Hathaway Inc on Friday reported a 15 percent drop in second-quarter profit, as lower investment gains and a loss from insurance underwriting offset improvement in its BNSF railroad business.

Operating profit also fell short of analyst forecasts, though Berkshire attributed much of the decline to accounting issues, including for currency fluctuations and a major contract with the insurer American International Group Inc.

Net income for Omaha, Nebraska-based Berkshire fell to $4.26 billion, or $2,592 per Class A share, from $5 billion, or $3,042 per share, a year earlier.

Operating profit declined 11 percent to $4.12 billion, or $2,505 per Class A share, from $4.61 billion, or $2,803 per share.

Analysts on average expected operating profit of about $2,791 per share, according to Thomson Reuters I/B/E/S.

Buffett believes operating income is a better gauge of how Berkshire and its more than 90 businesses are doing than net income, which fluctuates more because it incorporates investment gains, which fell 51 percent from a year earlier.

Book value per share, Buffett's preferred measure of growth, rose 2.7 percent from the end of March to $182,816.

The company's stock price, meanwhile, set a record high on Friday, with Class A shares closing up $1,629.80 at $270,000.
"They had a good quarter," said Bill Smead, chief executive of Smead Capital Management Inc in Seattle, which owns Berkshire stock. "The results reflect Berkshire's positioning in the U.S. economy."

BNSF saw profit rise 24 percent to $958 million, helped by high single-digit percentage increases in freight revenue from consumer and industrial products, and double-digit increases from agricultural products and coal.

That helped offset a second straight quarterly loss from insurance underwriting, totaling $22 million compared with a year earlier $337 million profit.

Berkshire said that weakness reflected losses from currency changes, as well as the amortization of deferred charges from its January agreement to take on many long-term AIG property and casualty risks, in exchange for $10.2 billion upfront.

That contract helped boost float, or the amount of insurance premiums collected before claims are paid and which help fund Berkshire's growth, to $107 billion from $91 billion at year end, Berkshire said. - Reuters

Read more at http://www.thestar.com.my/business/business-news/2017/08/05/berkshire-profit-falls-as-underwriting-loss-offsets-railroad-gains/#IBzWWSqRbxmOzbYk.99

Australia slams brake on property investors

Saturday, 5 August 2017


Bull run: A man jogs in front of newly-constructed residential and commercial projects in Sydney. Demand from property investors has contributed to a bull run that has catapulted the city into the ranks of the world’s priciest property markets. — AFP
Bull run: A man jogs in front of newly-constructed residential and commercial projects in Sydney. Demand from property investors has contributed to a bull run that has catapulted the city into the ranks of the world’s priciest property markets. — AFP

Curbs taking effect and home prices are starting to cool
ONE of the key engines of Australia’s five year housing boom is losing steam.
Property investors, who have helped stoke soaring home prices in Australia, are being squeezed as regulators impose restrictions to rein in lending.
The nation’s biggest banks have this year raised minimum deposits, tightened eligibility requirements and increased rates on interest only mortgages a form of financing favoured by people buying homes to rent out or hold as an investment.
Australia’s generous tax breaks for landlords, combined with record-low borrowing costs, have made the nation home to more than two million property investors. Demand from those buyers has contributed to a bull run that has catapulted Sydney and Melbourne into the ranks of the world’s priciest property markets. Now, signs are emerging that the curbs are starting to deter speculators and home prices are finally starting to cool.
Take the case of 29-year-old Taku Ekanayake, a former IT salesman who owns six investment properties in cities including Adelaide and Brisbane. He shelved plans to add a Melbourne apartment to his portfolio after rising rates increased his annual mortgage bill by A$14,400 (US$11,360). The biggest banks have hiked rates on interest-only mortgages by an average of 55 basis points this year, according to Citigroup Inc.
“With the rate hikes I don’t think it is a very viable option for me to invest there now,” he said.
In other signs the market is cooling, property auction clearance rates in Sydney have held below 70% in seven of the past eight weeks, compared to as high as 81% in March before the curbs were imposed. And investor loans accounted for 37% of new mortgages in May, down from this year’s peak of 41% in January.
That’s helping take the heat out of property prices, particularly in Sydney, the world’s second-most expensive housing market. Price growth in the city slowed to 2.2 percent in the three months through July, down from a peak of 5% earlier this year, CoreLogic Inc said on Tuesday. In Melbourne, rolling quarterly price growth has eased to 4.2%.
“There have been some signs that conditions in the Sydney and Melbourne markets have eased a little of late,” the Reserve Bank of Australia said on Friday.
While the regulatory curbs are aimed at ensuring the financial system could weather any downturn in the property cycle, they may also make it easier for first-time buyers to break into the market.
Housing has become a popular investment for Australians, who can claim the cost of an investment property including interest payments as a deduction against other income, such as salary, and get a capital gains tax discount if they hold the property for more than 12 months.
The favourable tax treatment for investors has become a hot political issue, with young first-time buyers protesting they are being priced out of the market. The opposition Labour party has pledged to wind back the concessions if elected to office, while the government announced a range of policies in its May budget aimed at addressing housing affordability.
Now, with costs increasing, and price growth slowing, property may lose some of its luster as an investment asset.
The changes “reduce investors’ ability to pay, and means they have to pay owneroccupier values rather than investor values,” said Angie Zigomanis, senior manager, residential property, at BIS Oxford Economics in Melbourne.
The restrictions will take “some of the bubble and froth” out of the market, he said, forecasting median Sydney house prices will decline 5% by the end of mid-2019 as investors retreat.
To be sure, investors aren’t exiting the market entirely. Ekanayake, who recently quit his job to start a mortgage broking company, is now focusing on cities such as Brisbane and Adelaide where houses are cheaper, but haven’t enjoyed the price growth of Sydney or Melbourne.
He says many of his clients are now looking for properties where they can still make a profit with a principal-and-interest loan.
Even so, banks may need to get even tougher on lending standards in order to to meet the regulator’s order to restrict interest-only loans to 30% of new residential loans by September.
Interest-only loans are seen as more risky because borrowers aren’t paying down any principal and may look to sell en masse if property prices decline. Moody’s Investor Services in June cut the credit ratings of Australia’s big four banks, citing interest-only and investment loans as an indicator of rising risk.
“We’ve already seen developers start to shift their efforts and focus more on owneroccupiers and less on investors,” said Sophie Chick, head of residential research at Savills Australia. “The restrictions have really made investors think twice.” — Bloomberg

Read more at http://www.thestar.com.my/business/business-news/2017/08/05/australia-slams-brake-on-property-investors/#tIFGMsUVdSiTMCr6.99

Public Bank is among one of the biggest success stories in Bursa Malaysia


Summary
A shareholder who had bought 1,000 Public Bank shares in 1967 (the year it was listed) and held on to them, would be holding 148,938 shares as at end-2016 valued at RM2.94mil. In 
addition, that shareholder would have received a total gross dividends of RM1.2mil.
Trading at 2.3 times book value, Public Bank is easily the most expensive financial institution in the region with rivals commanding valuations of between 0.4 times and 1.4 times.
Its return on equity at 15.6% stands above the industry average of 11.6%, while its return on assets is 1.4%.
The announcement of Teh’s departure some 17 months ahead of the real schedule underlines the strategy of the banking group in putting in place a succession plan and making it public.
Public Bank is the country’s second-most valuable bank and third largest in terms of assets known for its conservative business approach.
So far, Public Bank has earned itself the track record of being among one of the biggest success stories on the local stock exchange.

Saturday, 5 August 2017

Public Bank game changer


The expected retirement of Teh could herald a new beginning for the bank
THERE are several items which are a fixture in Public Bank Bhd.
For instance, try walking into any Public Bank branch and you will find the familiar photograph of Tan Sri Teh Hong Piow, the 87-year-old founder, framed on the wall of the banking hall.
Another fixture is the number of millionaires that the banking group has created. Every year, a segment of the annual report will be dedicated to the number of shares an early investor of Public Bank would be holding now.
In the latest annual report, it was illustrated that a shareholder who had bought 1,000 Public Bank shares in 1967 (the year it was listed) and held on to them, would be holding 148,938 shares as at end-2016 valued at RM2.94mil.
In addition, that shareholder would have received a total gross dividends of RM1.2mil.
That is the winning tagline that has endeared the bank and its founder to both shareholders and staff.

Teh is no ordinary head of a financial institution. He is the face of Public Bank and is credited with building the bank to what it is now. The bank’s asset size and branch network belies the value the market attaches to it.
Trading at 2.3 times book value, Public Bank is easily the most expensive financial institution in the region with rivals commanding valuations of between 0.4 times and 1.4 times.
The valuation is largely due to the returns that the bank has given to shareholders consistently.
Its return on equity at 15.6% stands above the industry average of 11.6%, while its return on assets is 1.4%.
When Teh announced last week that he would be taking a backseat in January 2019, it hardly created any ripples because his departure has been speculated about in the last three years.
The tycoon will retire as chairman come that year, but will not be totally out of the picture.
He will remain as the bank’s adviser and assume the title of “chairman emeritus” in recognition of his contributions to the bank he founded at the age of 35 in 1965.
The announcement of Teh’s departure some 17 months ahead of the real schedule underlines the strategy of the banking group in putting in place a succession plan and making it public.
Overhang due to Teh’s shareholding
Despite the group’s constant assurance of a smooth transition should Teh leave one day, a Public Bank without the patriarch is a scenario that nobody can dare predict with certainty.
It is only to be expected.
None of Teh’s children are with the bank. And his 24% stake, valued at RM19.24bil, makes it an elusive takeover target.
Based on Public Bank’s expensive valuation, it is hard to find a buyer for his block of shares.
It is not only the valuation that would limit buyers.
Any party wanting to buy that block would need Bank Negara’s approval.
So, there are limited buyers.

Under banking regulations, individuals are not allowed to own more than a 5% stake each in a financial institution and in the event it happens, they are to get approval from the central bank.
In the case that happens, they are required to get approval from the central bank.
Currently, there is an unwritten “grandfather rule” that applies to Teh and two others bankers, namely, Tan Sri Azman Hashim of AMMB Holdings Bhd and Tan Sri Quek Leng Chan of Hong Leong Financial Group Bhd.
These individuals are allowed to hold their current stakes in a bank, as their personal stakes in the respective banks were acquired before the Banking and Financial Institution Act 1989 or Bafia – the Financial Services Act 2013’s predecessor – was implemented in 1989.
Azman’s AMMB is currently in merger talks with RHB Bank Bhd and if he stays as a shareholder in the enlarged group, his stake would be diluted to less than 6% from 13% now.
If that’s the case, it would leave Teh and Quek as the first-generation bankers with more than 5% in their respective financial institutions.
According to banking sources, the question of Teh putting his block of shares in a trust is also remote because any movement of more than 5% would need Bank Negara’s approval.
Banks are different compared with other large companies where their substantial shareholders can put their wealth in a trust.
“Banking is a highly regulated industry and any movement of shares of 5% would need regulatory approval,” says a corporate lawyer.
He says the “grandfather rule” exemption would likely stop with these founder bankers and cannot be passed on to their children.
Going forward, institutionalising banks’ shareholding is inevitable. And it applies more in the case of Public Bank because of the concentration in the shareholding with Teh.
Till now, the octogenarian has shown no inclination to part with his block of shares, and the prerogative to do so is entirely his.
One way to go around this, say some, is to break up the block to less than 5% each as what happened in Alliance Financial Group Bhd (AFG) last year.
In that case, Langkah Bahagia Sdn Bhd’s effective 14.8% interest in AFG’s, held through Vertical Theme Sdn Bhd (AFG’s single largest shareholder), was sold to three individuals. Essentially, the emergence of these individuals as owners of the 14.8% stake in AFG circumvented Bank Negara’s ruling and allowed the deal to be done without the regulator’s approval.
Besides Public Bank, Teh also controls about 44% in insurer LPI Capital Bhd where he is chairman.
Business as usual for now
Monday’s announcement hardly ruffled investor sentiment, albeit for a knee-jerk 26-sen fall in share price. Its shares have since rebounded to close at an all-time high of RM20.76 yesterday, giving it a market capitalisation of RM80.16bil.
For now, it appears to be business as usual for the country’s second-most valuable bank and third largest in terms of assets known for its conservative business approach.
Strong and stable: Earnings-wise, the bank can boast of over five decades of unbroken profitability, even during the height of the 1997/98 Asian Financial Crisis that saw many companies going belly up.
Strong and stable: Earnings-wise, the bank can boast of over five decades of unbroken profitability, even during the height of the 1997/98 Asian Financial Crisis that saw many companies going belly up.
While Teh is a central figure where Public Bank is concerned, the running of the bank has been left largely to professional managers, led by the banker’s most trusted lieutenant, Tan Sri Tay Ah Lek, who has been managing director and chief executive officer (CEO) since 2002.
“You can say the bank is on auto-pilot mode ... it has the process in place with the day-to-day undertakings residing in the hands of professional managers,” quips a banking executive.
Still, there is a perception that there appears to be too much dependence on the old guards.
Also, is Public Bank changing the way it runs to cope with future challenges in the financial sector? With the growing challenges in the banking landscape due to disruptive technology, will it be able to move fast enough?
So far, Public Bank has earned itself the track record of being among one of the biggest success stories on the local stock exchange.
The numbers speak for themselves.
Public Bank’s strong franchise among the smaller businesses with its network of branches has allowed it to capture a large size of the retail and small and medium-sized loan market segment that accounted for a large portion of its total loans as at financial year 2016 (FY16).
Earnings-wise, the bank can boast of over five decades of unbroken profitability, even during the height of the 1997/98 Asian Financial Crisis that saw many companies going belly up.
For FY16 ended Dec 31, it made a record RM5.2bil in net profit, while in the first half of FY17, net profits already rolled in at RM2.58bil.
The bank’s stability in asset quality is a major appeal, not forgetting the attractive dividend payouts it dishes out.
Its cost-to-income ratio – a measure of how efficiently a bank is run – at 32.3% is amongst the lowest as opposed to its peers.
While shareholders of the bank have nothing to complain about, Public Bank is seen as lagging behind in facing the future challenges of the financial landscape.
New players are coming in and operating at a cheaper cost compared to traditional banks.
For the longest time, the financial sector was seen as being insulated from disruptive technologies.However, fintech service providers such as Peer-2-Peer operators are ready to take away market share from banks.
“Is Public Bank ready for the challenging banking landscape post the Teh era?” asks a banker.
“It is very much reliant on the traditional lending business. It does not have much wholesale and corporate loans.
“The rates it gives for deposits are not competitive. When corporates look at financial institutions to place their deposits, Public Bank is not usually on their list,” says the banker.
Seasoned team of bankers
While the banking group has some young faces in its management team, some reckon that there is still a big gap in terms of getting new blood in the top echelon.
Based on the group’s information on its website, the average age of its board members is 72.
Its oldest board member is Teh himself, followed by the bank’s deputy chairman Datuk Seri Lee Kong Lam, who is 75.
Tay, meanwhile, is 74 years old, followed by directors Lai Wan, 73, and Tang Wing Chew, 72.
The directors below the age of 70 are its female representatives, namely Lai Wai Keen and Cheah Kim Ling.
Bankers say the most obvious successor to the chairman’s role is Tay.
Having been a pioneer staff of the group, Tay is in tune with Teh’s vision, they say. The bank’s deputy CEO is Datuk Chang Kat Kiam.
Recall that 62-year-old Chang was appointed as deputy CEO early last year, following the departure of accountant Quah Poh Keat.
Quah was seen as a successor to Tay but opted for early retirement in January 2016 three years after his appointment as deputy CEO.
Chang is seen as one of the bankers in the mould of Teh and Tay. A seasoned banker, he has been with the banking group since 1975.
Beyond Chang, the line of succession in Public Bank is not so visible.
New and young blood could provide the impetus to take the bank to the next level, reckon some.
Whatever the case, a scenario without Teh in Public Bank will certainly be a game changer for the bank.

Read more at http://www.thestar.com.my/business/business-news/2017/08/05/public-bank-game-changer/#L0mQIqzUDOdT0W2r.99

Public Bank Berhad

Saturday, 5 August 2017

From conservative to fastest growing bank


THEIR story is one that is long and rich in history. Chinese entrepreneurs have been instrumental in setting up the foundation of the banking industry in Malaysia, which has blossomed during the boom times and withstood many recessions.
With a steady pace of growth and a unique style of doing business, which is said to lean on conservatism, Chinese banks grew at a steady pace that saw them snare a chunk of the Malaysian financial market. The going was good until the Asian Financial Crisis.
Steeped in lending to small and medium enterprises, the number of Chinese-owned banks shrank after the crisis during the consolidation of the banking system by the government.
There was an unwritten policy that there should be two Chinese-owned banks in Malaysia, and the structure of the consolidation kept to that thinking. Public Bank Bhd and Hong Leong Bank Bhd (HLB), which is the metamorphosis of the oldest bank in Malaysia, are the two that have survived till today. Helmed by Tan Sri Teh Hong Piow and Tan Sri Quek Leng Chan, respectively, Public Bank and HLB were consolidated with other Chinese-owned banks. Public Bank was paired with Hock Hua Bank Bhd, while HLB merged with Wah Tat Bank Bhd. Malayan Banking Bhd (Maybank), meanwhile, swallowed Pacific Bank Bhd and PhileoAllied Bank (M) Bhd.
While not all Chinese banks were run at the same level of efficiency prior and during the Asian Financial Crisis, those that did exemplify a level of prudence stood the best chance of gaining market share during such a tumultuous time.
And that bank was Public Bank. Prior to the Asian Financial Crisis, Public Bank was a conservative bank. While others fed the appetite for credit by stretching their balance sheets in search of profit, Public Bank took a very conservative stance.
“Its loan-to-deposit ratio before 1998 was at around 60%, which was very low at that time,” recalls a banking analyst. That unadventurous approach saw the bank’s shares almost plateau at a low, which long-time market watchers say hovered between RM2 and RM3 a share when others were soaring.
But when the crisis struck, Public Bank was the one bank that had the ability and means to lend when everyone was clamping up while trying to stave off a flood of bad loans that were threatening the survival of a number of banks.
It was during that time, and some might say after a tongue-lashing by the Prime Minister back then, that Public Bank laid the foundations for the bank it is today.
It started to lend aggressively and saw huge growth in loans in the ensuing years after the Asian Financial Crisis. From a conservative bank, Public Bank became the country’s fast-growing bank for years after the crisis.
From a loan base of RM19.7bil in 1998, it grew to RM66.8bil by 2005. Its return on equity in that year too crossed 20% after being in the mid-teen levels before. By last year, its gross loans had hit RM294bil.
A huge loan growth kept non-performing loans in check and profits soaring. Public Bank’s big advantage in cheap saving and current account deposits offered it the ability to price its loans competitively.
Furthermore, it was its link to local industries and businesses that helped it to not only snare new customers, but also reap the rewards of an organisational structure that no other bank has managed to replicate.
While most of the modern institutionalised banks today have centralised back-room operations, Public Bank’s method of relying on branch managers to drive its business is unique.
“It has a simplified and clearly defined goals and reward system,” says an analyst on how Public Bank manages to run its business through its branch network.
While some might say that has been the way of Public Bank, others might point to the fact that Public Bank is not just a Chinese-run bank but an owner-run bank.
“In some ways, the business has been institutionalised, but he (Teh) has been instrumental in setting the tone,” he says.
But some of the risks associated with Public Bank are that its exco board is old, with an average age of more than 70, and its IT infrastructure could do with an expensive upgrade.
The allure of Chinese-owned banks for banking groups in Malaysia is the valuable franchise that they have. Should Public Bank or even HLB end up for sale or a merger, the chance is that many would look at them seriously. The one problem is that it will be expensive, as Public Bank’s price-to-book ratio is 2.3 times, while Maybank, the country’s largest bank, is trading at 1.4 times.
CIMB Group Holdings Bhd chairman Datuk Seri Nazir Razak did say that one of the reasons the group wanted to acquire Southern Bank Bhd, another of the Chinese-run banks that survived the consolidation phase, was for its Chinese customers.
He praises the way Public Bank is managed.
“Public Bank has had a fantastic track record through all sorts of operating conditions built on its organisation culture, which enabled a high degree of quick and decentralised decision-making for small businesses that most institutionalised banks found hard to challenge,” he says.
“It is amazing that it could do it at its scale, but I am not sure how much more scalable it can be.”

Read more at http://www.thestar.com.my/business/business-news/2017/08/05/from-conservative-to-fastest-growing-bank/#FSIcwL12jU4sD4XC.99