Tuesday, 29 September 2009

Why the oil price will rise


'The Taxman Always Rings Twice'

10 golden rules to survive a tax investigation
Taxpayers have good reason to fear investigation by HM Revenue & Customs. Now Daniel Dover, a partner at accountants BDO Stoy Hayward LLP, and financial writer Tim Hindle have written a book – 'The Taxman Always Rings Twice' – explaining the process, showing what is at stake and how to get through it. Here are their 10 golden rules.

Published: 9:42AM BST 25 Sep 2009

Comments 21 | Comment on this article

Quit while you are behind: there is no point trying to put one over the HMRC

An investigation often provokes a number of violent emotions in those under scrutiny – not least sheer terror at the thought of ending up in jail. In reality, very few cases end in a custodial sentence. So there's no need to expect the worst.

If you are being investigated by HMRC, it is highly recommended that you seek out independent financial advice from a reputable accountant or adviser who specialises in this field. You will need somebody on your side who understands the jargon and knows how HMRC operates who can take some of the emotional strain from your shoulders. It's also likely to be cheaper in the long run.

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Tempting though it might be to offload your woes at the pub or the golf club, it's never a good idea – unless you want the whole town to know the details of your case; and that might include a taxman. It's also almost certain that what your friends advise you will be wrong and therefore detrimental to your chances of reaching a settlement with HMRC.

This is the simplest and most reliable way of avoiding that jail sentence!

An HMRC investigator has a huge number of resources at his disposal and is not afraid to ask questions. As the book says "Stick with the wartime advice: 'Careless Talk Costs Lives'. Letting a former flatmate know that you paid for your house in the Dordogne in cash is not literally going to kill you. But it may cost you the chance of getting a good deal with the taxman should he begin investigating your affairs."

Remember the motto "no one prepares to fail – they fail to prepare". It is pointless trying to evade the HMRC's questions with insufficient preparation – the investigator will simply use his statutory powers to force you to give him the answers he seeks and your lack of preparation will be deemed to be "lack of co-operation".

HMRC sees this as an important sign of a willingness to co-operate. It may also save you a huge amount in interest, which accrues from the date when the tax should have been paid to the day it is actually paid. On the other hand, overpayment of the outstanding liabilities may lead HMRC to an unrealistic expectation of the amount you owe.

It's usually unhelpful. If you don't have the appropriate records, HMRC may assume you are trying to hide something when you are not.

Do not suffer from selective amnesia when disclosing information involuntarily – this is particularly distasteful to HMRC and is likely to lead to a more punitive settlement since the HMRC will take into account your lack of co-operation when determining the penalty you have to pay as part of your settlement.

HMRC will view those who offend a second time in a much more serious light.

If you follow these rules you should survive a tax investigation – and may even do so with your sanity intact!

'The Taxman Always Rings Twice', published by Profile Books at £6.99, is available to order now from http://www.amazon.co.uk/


Money figures show there's trouble ahead

Money figures show there's trouble ahead
Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise.

By Ambrose Evans-Pritchard
Published: 8:48PM BST 26 Sep 2009

Comments 92 | Comment on this article

Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects.The jobless army in Spain will be reduced to €100 a week; in Estonia to €15.

Whoever wins today's elections in Germany will face the reckoning so deftly dodged before. Kurzarbeit, that subsidises firms not to fire workers, is running out. The cash-for-clunkers scheme ended this month. It certainly "worked".

Car sales were up 28pc in August, but only by stealing from the future. The Center for Automotive Research says sales will fall by a million next year: "It will be the largest downturn ever suffered by the German car industry."

Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car scrappage subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect US car sales to slump 40pc in September.

Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9pc in August. New house sales are stuck near 430,000 – down 70pc from their peak – despite an $8,000 tax credit for first-time buyers. It expires in November.

We are moving into a phase when most OECD states must retrench to head off debt-compound traps.

Britain faces the broad sword; Spain has told ministries to slash 8pc of discretionary spending; the IMF says Japan risks a funding crisis.

If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23pc in August; Japan's were down 36pc; industrial production has dropped by 23pc in Japan, 18pc in Italy, 17pc in Germany, 13pc in France and Russia and 11pc in the US.

Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring.

The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world.

Yet hawks are already stamping feet at key central banks.

Are they about to repeat the errors made in early 2007, and then again in the summer of 2008, when they tightened – or made hawkish noises – even as the underlying credit system fell apart?

Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years".

He could only have thought such a thing if he was ignoring the money data. Key aggregates had been in free-fall for months.

I cited monetarists in July 2008 warning that the lifeblood of the Western credit was "draining away". For whatever reason (the lockhold of New Keynesian ideology?) the Fed missed the signal.

So did the European Central Bank when it raised rates weeks before the Lehman collapse, blathering about a "1970s inflation spiral."

Yes, the money entrails can mislead. The gurus squabble like Trotskyists. But you ignore the data at your peril.

Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14pc since early Summer: "There has been nothing like this in the USA since the 1930s."

M3 money has been falling at a 5pc rate; M2 fell by 12pc in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1pc rate since April.

Private loans have fallen by €111bn since January. Whether you see a credit crunch in Euroland depends where you sit. It is already garrotting Spain. Germany's Mittelstand says it is "a reality", even if not for big companies that issue bonds. The Economy Ministry is drawing up plans for €250bn in state credit, knowing firms will be unable to roll over debts.

Bundesbank chief Axel Weber sees no crunch now, yet fears a second pulse of the crisis this winter. "We are threatened by stress from our domestic credit industry through the rise in the insolvency of firms and households," he says.

Draw your own conclusion. Western central banks will have to "monetize" deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.


The dollar is dead - long live the renminbi

The dollar is dead - long live the renminbi

Whatever happens at the G20, the days of Western dominance are at an end, says Jeremy Warner.

By Jeremy Warner

Published: 7:42PM BST 25 Sep 2009

Comments 70
Comment on this article

The balance of global economic power has shifted Photo: PA Sometimes it takes a crisis to restore reason and equilibrium to the world, and so it is with the trade and capital imbalances that were arguably the root cause of the financial collapse of the past two years.

To economic purists, the changes now under way in demand and trade are inevitable, necessary and even desirable. Even so, dollar supremacy and the geo-political dominance of the West are both likely long-term casualties.

One, almost unnoticed, effect of the downturn is that past imbalances in trade and capital flows are correcting themselves of their own volition, the simple consequence of lower demand in once profligate consumer nations.

Current-account surpluses in China, Germany and Japan are narrowing, as are the deficits of the major consumer nations – primarily America, but also smaller profligates such as Britain and Spain.

The key question for G20 leaders as they meet in Pittsburgh is not bankers' bonuses, financial regulation and other issues of peripheral importance, but whether this correction in trade might be used as the basis for a permanently more balanced world economy.

In direct contradiction of US objectives, Angela Merkel, the German Chancellor, accuses Britain and America of using the issue of trade imbalances to backtrack on financial reform and bankers' bonuses. "We should not start looking for ersatz [substitute] issues and forget the topic of financial market regulation," she said before boarding the plane to Pittsburgh.

To the big export nations, the primary cause of the crisis was Anglo Saxon financiers, whose wicked and avaricious ways created a catastrophe in the financial system, which led to a collapse in world trade. Once bankers are tamed, this one-off shock can be put behind us and the world will return to business as usual.

Blaming bankers is politically popular – Ms Merkel has an election to fight on Sunday – but the idea that the world economy will return to the way it was once this supposed cancer is removed is fanciful.

A seminal shift in behaviour is being forced on the deficit nations where, despite massive fiscal, monetary and financial system support, there is a continuing scarcity of credit and a growing propensity to save. Neither of these two constraints on demand will reverse any time soon.

This, in turn, is forcing change on surplus countries, whether they like it or not. Export-orientated nations can no longer rely on once profligate neighbours to buy their goods. Against all instinct, they are having to stimulate their own domestic demand.

The most startling results are evident in China, where retail sales grew an astonishing 15.4 per cent in August. Fiscal action has succeeded in boosting consumption in Germany, too, despite mistrust of what one German politician has dubbed "crass Keynesianism".

Unfortunately for him, Germany will have to persist with its Keynesian medicine for some time yet if it is to avoid a collapse back into recession. Tax cuts and perhaps the removal of fiscal incentives to save are essential to the process of supporting domestic demand.

The challenge for a developing nation such as China is a rather different one. In China, the propensity to export and save is driven by an absence of any meaningful social security net, in combination with the legacy of its oppressive one child policy, which has deprived great swathes of the population of children to fall back on for support in old age.

What's more, most Chinese don't earn enough to buy the products they are producing, so in what has become the customary path for developing nations, they export the surplus and save the proceeds.

Yet even in China the establishment of a newly affluent, free-spending middle class may now have gained an unstoppable momentum. In any case, the country can no longer rely on American consumers to provide jobs and growth. It needs a new growth model, which means ultimately adopting the Henry Ford principle that if you want a sustainable market for your products, you have to pay your workers enough to buy them.

These trends – all of which pre-date the crisis but which, out of necessity, are being greatly accelerated by it – will eventually drive a move away from the dollar as the world's reserve currency of choice. As China takes control of its economic destiny, spends more and saves less, there will be less willingness both to hold dollar assets and to submit to the domestic priorities of US monetary policy.

None of this will happen overnight. Depressed it might be, but US consumption is still substantially bigger than that of all the surplus nations put together. All the same, that the dollar's reign as the world's dominant currency is drawing to a close is no longer in doubt.


Sunday, 27 September 2009

Price and Dividend Growth Trends of Share


in 1975
$1.5 Per share

end of 1983
$12.7 Per share

Capital gain


in 1975
$1.5 Per share

end of 1983
$2.32 Per share

Capital gain

Why is there such an enormous difference in the capital gain?

What can we learn from the above table?
1.  We can see that both shares seem to sell at prices which fall within a range of dividend multiples which is fairly stable for each of the shares.   
  • If we ignore the freak year of 1975, Esso appears to sell for a price that is between five and eleven times its dividend. 
  • Malayawata, in contrast, seems to sell at a price that is between fifteen and forty times its dividend, except for the freak year of 1981. 
2.  We can see that the occasional freak year can take place when the prices move well out of the normal range.  
  • In 1975, Esso was selling at a price that was far too low by its historical standard. 
  • In 1981, Malayawata was selling at a price that was far too high.
  • In the event, both prices have corrected themselves and moved back into the usual range within a year.
3.  We can see very clearly that the sharp increase in the price of Malayawata during 1981 was almost certainly due to speculation or manipulation. 
  • The price rise could not be sustained in the absence of a big increase in dividend and the price fell back very sharply. 
  • In sharp contrast, the price of Esso could be sustained even though the overall market dropped.  This was because of the very high dividend which was being paid out.
4.  We can see quite clearly that the Malaysian/Singaporean stock market is not an efficient one (i.e. one which prices shares correctly). 
  • By all usual standards, Esso is a far superior company compared with Malayawata and yet, it continuously sells at a dividend multiple that is well below that of the latter.  
  • This is very strong evidence that Malaysian investors do not always consider the fundamentals when purchasing shares.  To them, the stock market is more a place for a gamble than an investment.
5.  In eight years, the DPS of Esso increased from 18 cents to 140 cents, an increase of 678%.  It experienced an increase in the share price of about 747%.  This means that, nett of the dividend effect, the price of Esso went up by about 70% for the period examined.
In contrast, there had been a decrease in the DPS of Malayawata of about 25% and the price went up by about 55%.  This means that the nett of the dividend range, there was a price increase of 80%. 
This is roughly in line with the increase experienced by Esso after the dividend effect has been excluded. 
  • Thus it is clear that dividend increase accounts for much of the price increase experienced by Esso while some other factors account for a small part of the increase. 
  • Although Malayawata has experienced no increase in dividend, its price went up nevertheless due to the same factors which caused Esso price to go up more than the increase in dividend. 
  • As to what factors these are, we are not yet in a position to answer.
A careful study of the table provides evidence that the long term growth in a share's price is closely related to the amount of dividend it pays out. 
Over the short run, there may be temporary market aberrations which cause the price to reach unreasonable levels. 
But such madness is usually of short duration and within a year or two, the price will go back to its usual level.
Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean

How can we use the Dividend Yield Approach to Evaluate Rights issues?

Some rights issues are good, others can be very bad

Like most things in investment, rights issues are not simple matters.

Rights are not automatically "good things" from the shareholders' point of view.  Some of the rights are good, others can be very bad. 

Investors have to be careful and they should not rush in every time there is an annoucement of rights.  They should classify the rights issue they are considering in accordance with the three categories indicated below:

(1) The case of the improperly managed companies
(2)  The case of moving into new business area
(3) The case of the very fast growing company

They should purchase only those of the last category.

Many will protest that they have neither the time nor the knowledge to carry out a detailed analysis of the company which announces the rights. 

It is not possible for each and every one to carry out a careful analysis but there is an easier way out for the small timers.  The dividend yield approach to stock valuation can be readily used to value a rights issue.

The Case of the Very Fast Growing Company

The Case of Moving into New Business Area

The Case of the Improperly Managed Companies

New capital requirement of a growing company

A hypothetical example to understand the above more clearly.  The following reasonable assumptions can be made based on this example:

Sales to Assets Ratio = 2x
Profit after Tax to Sales = 6%
Debt to Equity Ratio = 1.2
Dividend Payout Ratio = 0.5
Sales in Year 0 = $10 million
Growth Rate = 10% pa

Simplified Balance Sheet ($M)

At End of Year 0
Assets 5.00
Financed by:
Shareholders' Equity 3.33
Borrowing 1.67

Simplified P&L Statement ($M)

For Year 1
Sales 11.00
Profit after Tax 0.66
Dividend 0.33
Retained Profit 0.33

Simplified Balance Sheet ($M)

At End of Year 1
#   Assets 5.50
Financed by:
@  Shareholders' Equity 3.66
**  Borrowing 1.84

Notes on Balance Sheet at Year 1
#     Increase at the same rate as sales
@    = 3.33 (at Year 0) + 0.33 (Retained Profit of Year 1)
**   By difference = 5.50 - 3.66

  • From the above example, by maintaining the D/E ratio at around 1:2 (3.66 = 2 x 1.83), the company has no difficulty in financing a 10 percent increase in sales in one year. 
  • By having a zero dividend payout, it can in fact grow at 18 percent per year without increasing its D/E ratio.


Under the normal circumstances, a company should be able to finance its additional purchase of assets from either
  • retained earnings or
  • new borrowing or
  • a combination of the two.
But, companies may have to raise new capital by making rights issues under three types of abnormal circumstances. These three cases are:

(1) The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets. Or owing to poor management of its assets, it now requires a lot more assets to support its operations.

(2) The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.

(3) The company is in a very fast growing business. In fact, it is so fast growing that retained earnings and new borrowing alone are insufficient to sustain the growth.

In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place.

Why Companies Have to Make Rights Issue?

To put it bluntly, a company only needs to make a rights issue when it is short of money. 

A business, any business, requires investment in various forms of assets in order to carry out its operations.  A company is usually required to continually buy new assets in order to carry on its business either because its old assets have to be replaced or its expanding business requires more assets.  To buy new assets, it will need new capital. 

A company can obtain necessary money to purchase its assets from any one of three sources or a combination of all three. 

  • It can borrow the money,
  • retain part or all of its profit or
  • it can sell new shares. 

Under the normal circumstances, a company should be able to finance its additional purchase of assets from either retained earnings or new borrowing or a combination of the two.  There are many examples of very fast growing businesses in Malaysia that have prospered without recourse to issuing rights (for examples:   Nestle and BAT  )

But, companies may have to raise new capital by making rights issues under three types of abnormal circumstances.  These three cases are:

(1)  The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets.  Or owing to poor management of its assets, it now requires a lot more assets to support its operations.

(2)  The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.

(3)  The company is in a very fast growing business.  In fact, it is so fast growing that retained earnings and new borrowing alone are insufficient to sustain the growth.

In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place. 

Depending on which category of rights it is issuing, we can then carry out a further analysis to decide whether the rights issue is a good or a bad one. 

  • Through examining each type of rights issue, an intelligent investor can tell the wolves from the sheep. 
  • Pricing the rights also requires proper evaluation.

Not all right issues are the same; ought to treat them with a bit more suspicion

Many companies are making rights issues in this recent bull market..

Whenever a company announces that it is making a rights issue, the market in Malaysia/Singapore, on the whole, does not react adversely especially when the right issues are accompanied by a bonus issue. 

  • The price of the company's shares usually moves up and seldom does one come across cases where rights are badly undersubscribed. 

In Britain and more in particular, the US, the market seldom reacts so kindly to rights issues. 

  • Most rights issues are treated with great suspicion. 
  • The market usually takes a "wait and see" attitude and will only react favourably if it is convinced that the new capital obtained from the rights issue is put to good use and that the profit of the company can increase as a result of the rights issue.
  • In fact, the market in the US is so suspicious of rights issues that it is most unusual for a large US corporation to make a right issue.

Though not all rights are automatically bad, local investors could do with a good dose of cynicism and ought to treat rights issues with a bit more suspicion. 

  • Local investors ought to be aware of the fact that not all rights issues are the same. 
  • Each rights issue should be treated on its own merit and if it is truly good, then there is a case for bidding up the price of the shares and taking up the rights issues.

If we blindly follow the market without knowledge what we are doing, we can so easily be taken advantage of. 

  • Opportunists, insiders and rumour-mongers are abound in the local market. 
  • Here, as with everywhere else, Caveat Emptor (Latin for "let the buyer beware") is the key.

In order to understand why the Western investors are so suspicious of rights, we must go back to the first principle and try to understand:

  • what is so bad about a right issue and
  • the reason a company has for making a rights issue.

The concept of valuing a share according to its dividend

Hypothetical Company A:

EPS  30 cents (1987)  36 cents (1988)
DPS 15 cents (1987)  18 cents (1988)
Annual increase in dividend  20%

Assuming the intrinsic value of the share = 25 times its dividend (i.e. the dividend yield of a share should be 4%),  what should be the correct price of a share of Company A in 1987 and 1988?

Correct market price:
1987:  25 x 15 cents = $ 3.75
1988:  25 X 18 cents = $ 4.50

The intrinsic value of Company's A shares increased from $3.75 to $4.50 in a year, thus giving a capital gain of 75 cents or 20% on the 1987 price. 
  •  This is exactly the same as the increase in dividend
  • So long as the dividend of Company A goes on rising, its intrinsic value would continue to rise, thus providing its shareholders with continuous opportunity for capital gain.

To recapitulate:
  • This does not mean that the market price would indeed be at these levels. 
  •  It merely means that the price would be oscillating around these prices in the respective years. 

Question:  "But why should the price go up just because the dividend of a share has increased?" 

  • The reason is quite simple.  If the price does not go up while the dividend keeps on increasing, the dividend yield of the share will become higher and higher. 
  • Since the shares of Company A are traded in the same market as many other shares, its shares cannot sell at a dividend yield that is much higher than its competitors.  If its dividend yield is very attractive (i.e. very high) it will attract more buyers and its price would go up. 
  • Similarly, there is no reason at all why the price of a share should rise unless it has a prospect of paying more dividend in the future.  Otherwise, its dividend yield would get out of place compared with the other shares. 
  • This is why all too often, the speculative shares which are bidded up to stratospheric levels will eventually decline to their previous level. 


The concept of valuing a share according to its dividend is a very alien one to most of the investors. 

Most would find it difficult to accept and may even think that it is too simple a concept to be true. 

However, the dividend yield approach works well as an investment tool over the long term. 
It is beyond doubt that over the long run, the price of a share is dependent on the amount of dividend it pays out.  The higher the growth rate of the dividend, the higher the growth rate of the share.

Saturday, 26 September 2009

Importance of dividend yield in the evaluation of the worth of a share.

Shares should sell at prices which will provide their owners with a reasonable return

As an investment, shares have 3 characteristics:

1.  They are relatively illiquid.
2.  The return is uncertain.
3.  A large part of the return is in the form of capital gains.

Even the most inexperienced investor is aware of the last characteristic.

Question:  We should buy shares in accordance with their expected dividend yield (DY).  "If we buy a share for its dividend, why should its price go up so that we can get capital gains?"

Question:  "Why should the price of a share, any share for that matter, go up in the first place?"

Here are some reasons for share not to go up:

Share price should not go up as a result of reorganization.
Share price should not go up as a result of share split or bonus.
Share price should not go up as a result of property injection.
Share price should not go up as a result of rights issues.

There is only one good reason why a share's price should go up in the first place:

If one accepts the dividend yield approach to share valuation, the only reason why the price of a share should increase is that the share 
  • now pays a higher dividend than before or  
  • has the prospect of paying a higher dividend. 
In other words, the price (or more accurately, the intrinsic value) of a share is related to its dividend. 
  • That is, the intrinsic value tends to be a constant multiple (i.e. so many times) of the dividend. 
  • "How many times?" - this is a very complex subject which will be looked at later.

Dividend yield prevents investors from being side-tracked by irrelevant events.

The Malaysian/Singaporean stock market can be characterised by the occurrence of events which are of no real benefit to the existing shareholders and yet which excite them greatly. 

This is referring to the large numbers of bonus announcements, rights issues, property injections, take-overs and mergers which have made their appearnace in many years. 

Most of these events are of little, if any, real economic benefit to the existing shareholders of the companies involved.  Despite this, the price of shares of a company involved in an event of this nature tends to rise sharply.  These events are, in the main, irrelevant and some of them may even be damaging. 

According to the dividend yield approach to share valuation, a share can have increased value only if there is a likelihood that its dividend will rise faster than originally expected. 

In what way can events like bonuses, rights, mergers and reorganizations in themselves improve the future dividend picture of a company.  If these events cannot lead to such an increase, the share surely does not deserve a higher valuation. 

Here is an often quoted advice to first time share buyers:

A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividend.

Dividend provides a "floor" for shares during bear markets

Stock markets of the world, especially the Malaysian/Singaporean market, are not readily predictable.  They can collapse so easily into a "bear pit" with little warning.

If we wish to protect our hard earned capital, we must be defensive in our investment approach.

One of the best defence is to buy shares with reasonable dividend yield (i.e. a yield of between one-third to half of the expected long run deposit interest rate). 

If we buy a share becasue it pays a reasonable dividend, our loss is likely to be small even during periods of sharp market decline. 

For example, we can buy a share which pays 30 cents dividend at $5.00 a share and this gives us a dividend yield of 6%.  If the marekt goes into a sharp decline, the amount this share can fall to is limited by the fact that it pays a 30 cents dividend.  If the price is to fall as low as $3.00, it will be giving a dividend yield of 10% which is an excellent return compared to what one can get from fixed deposit and with the additional opportunity to capital gain thrown in.

Most people can see that at that price, the share is probably a good bargain and it is therefore unlikely to fall lower.  From experience, a dividend yield of 10% seems to be the floor below which most stocks will not drop. 

In sharp contrast, shares which pay low or no dividend at all do not seem to have any bottom and price decline can hit 90% or more.

Dividend provides a link with reality

When the market is truly "hot", few of us can remain rational as we tend to be swept along the general atmosphere of optimism.  

But the dividend yield of a share keeps us in close touch with the real world. 

Anyone who closely watched the dividend yield of a share would have realised that the price level was totally unreal.  A good dividend yield stock presently giving a dividend yield of 0.4% due to rising share price, it would be better to sell the share and invest the proceed in other assets or leave the money in fixed deposit.

In the established stock markets of the world, the dividend yield usually has a steady relationship with fixed deposit and its interest rate. 

It is normal for dividend yield to fluctuate at around one-third to half of the long-term fixed deposit interest rate.  This means that when fixed deposit interest is around 6% per annum, stock should sell at a price to provide a yield of 2% or 3%.

Take a look at the yield provided by local shares during bull markets, the dividend yield is usually so low as to be meaningless. 

Furthermore, one should not forget that some fixed deposits and fixed deposits in National Savings Bank are tax free in Malaysia while dividend has a withholding tax applied at source.

Dividend is a sure thing

All too often, investors and speculators pay too much attention to profit forecast. 

It is amazing that so many of the Malaysian companies have the courage to make profit forecast for many years into the future.  What is even more amazing is that so many of the investors seem to believe these forecasts absolutely. 

It is difficult to make a profit forecast a year ahead, let alone five years or even ten years.  Such profit forecasts can only be regarded as extremely shaky. 

Dividend is real and it is something which the shareholders can put to some use.

Most companies keep dividend at a level which they can afford to pay out irrespective of whether it is a good or a bad year and is hence a great deal more certain than profit forecast.

Why is dividend important?

The most important reason is dividend is the only benefit from which a shareholder can obtain from a company under the normal circumstances. 

Earnings, per se, is hardly of any use to him directly and the assets are only of value if the company is liquidated which is unlikely in a great majority of cases.

Apart from the above reason, dividend is important for the following reasons:

(1)  Dividend is a sure thing. 
(2)  Dividend provides a link with reality.
(3)  Dividend provides a "floor" for shares during bear markets.
(4)  Dividend yield prevents investors from being side-tracked by irrelevant events.

A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividends.

Friday, 25 September 2009

Boustead 5 years data



Share Price Performance

High Low

Prices 1 Month
3.590 (25-Aug-09) 3.470 (04-Sep-09)

Prices 3 Months
4.100 (16-Jul-09) 3.470 (04-Sep-09)

Prices 12 Months
4.660 (30-Sep-08) 2.180 (28-Oct-08)

Volume 12 Months
39,296 (30-Oct-08) 51 (24-Sep-08)

Last Updated: Friday ,September 25 2009 3:30 pm

Bursa Malaysia Summary

Composite: 1215.66

Quek and Chua invest US$150mil in HK IPO

Friday September 25, 2009
Quek and Chua invest US$150mil in HK IPO

PETALING JAYA: Tycoons Tan Sri Quek Leng Chan and Tan Sri Chua Ma Yu have agreed to take part in the initial public offering (IPO) of Wynn Macau Ltd on the Hong Kong Stock Exchange by investing US$80mil and US$70mil respectively.

Quek’s investment is via Guoco Management Co Ltd and GuoLine Group Management Co Ltd, which are indirect subsidiaries of Hong Leong Co (M) Bhd, while Chua’s vehicle is CMY Capital Markets Sdn Bhd.

It is learnt that these Malaysian parties are going in independently. Chua is an investor and the attraction in Wynn is purely seen as a China play.

Chua was unavailable for comment.

In the listing document, Wynn Macau said CMY’s stake could amount to almost 5% of the offered shares while Guoco and GuoLine could collectively hold 5.3% based on a mid-point offer price of HK$9.30 and assuming the over-allotment option was not exercised.

Wynn Macau, owned by US-based Wynn Resorts, is among the biggest gaming operators in Macau and caters mainly to high-end clientele. The IPO involves floating 1.25 billion shares at HK$8.52-HK$10.08 each.

Other investors include Hong Kong tycoons Walter Kwok and Thomas Lau, as well as fund management company Keywise Capital Management (HK) Ltd.

Quek, the sixth richest man in Malaysia based on Forbes Asia Malaysia Rich List 2009, is not new to the gaming business. His Hong Kong-listed entity, Guoco Group Ltd’s subsidiary, has gaming operations in Britain.

Chua, on the other hand, owned a stake in Star Cruises Ltd briefly in 2007.

Macau is the world’s largest gaming market based on gross gaming revenue and the only place in China with legalised casino gaming.

Last year, Macau attracted 22.9 million visitors, mostly from Hong Kong and mainland China. The gaming market generated HK$105.6bil in gross gaming revenue, double the amount of Las Vegas Strip. For the first six months, Macau generated HK$49.9bil in gross gaming revenue. In 2008, Wynn Macau took a 16% of Macau’s table revenues and a daily gross win per gaming table of about HK$119,000. Its listing, targeted for Oct 9, will make Wynn Macau the first American company to list on the Hong Kong Stock Exchange.

A local research house said the IPO would unlock the value and boost the valuations of Wynn Resorts.

“Currently, the simple average price-to-earnings (PE) for 2010 of gaming companies listed on the Hong Kong Stock Exchange is 66.9 times versus Wynn Resorts’ PE of 74.1 times in the United States. If Wynn Resorts’ PE were to expand, it would also boost valuations of regional gaming companies,” it said.

Wynn Macau is currently adding new VIP areas with 35 more high-limit slot machines and 29 VIP table games at the private gaming salons. These are expected to open in the first quarter of 2010.

A new resort, Encore, is also under way, which costs about HK$5bil and is expected to open in the first half of next year. These expansions should increase Wynn Macau’s VIP table games by 44%.

Meanwhile, Wynn Macau is still awaiting approval for its application to lease a 52-acre site in Cotai for the development of an integrated casino and a five-star resort.

Macau’s gaming business was hurt when China, in May 2008, limited travel by its citizens to Macau to once a month, and later extended the limit to once every two months.

However, there have been reports that the Chinese Government was easing restrictions, starting from those in Guangdong province travelling to Macau.


Comment:  What planning needs to be in place to graduate into their league?

How to manage your taxes in challenging economic times

Friday September 25, 2009
How to manage your taxes in challenging economic times

IN the current challenging economic environment, management of taxes is increasingly important. Failure to implement effective tax management can result in lost opportunities and the imposition of tax penalties.

Cash tax management

At the micro level there should be effective cash tax management. Tax instalments for corporate taxpayers should be as accurate as possible so that they don’t pay tax unnecessarily to the Inland Revenue Board (IRB), or find themselves exposed to under-estimation penalties.

Variations to instalments can be made automatically in, broadly, the sixth and ninth months of the financial year.

Further, the Income Tax Act gives the discretion to the IRB to consider applications for variations by taxpayers outside of the above months. Where profits are falling, taxpayers should consider seeking this discretionary relief.

Default by debtors

As profits are generally recognised for tax purposes on an accruals basis, businesses may be paying tax on amounts they have yet to receive. A challenge for businesses will be their ability to collect outstanding debts.

The critical issue is whether debts are bad or doubtful of recovery, or whether the debtor is simply a slow payer.

For tax purposes, the distinction is important as provisions for debts which are paid slowly will not qualify for a tax deduction.

Notwithstanding the above, bad or doubtful debts may still qualify for a tax deduction provided a number of conditions are met, and these are reflected in the IRB’s Public Ruling No. 1/2002.

To claim a deduction for a doubtful debt, taxpayers must among other things, be able to demonstrate that each debt has been evaluated separately; a general provision of say X% after Y months will not qualify. There must be evidence to show how the doubtfulness of each debt has been evaluated.

Regard must be paid to the period for which the debt has been outstanding; the financial status of the debtor; the debtor’s credit record and experience of the particular trade or industry.

These requirements must be supported by documentation and this will be key to substantiating a doubtful debt deduction.

Deteriorating inventory

Where business has slowed down, inventory may accumulate and hence the risk of deterioration (and fall in value) increases.

Where for accounting purposes a provision for deterioration in value is made, this will not qualify for a tax deduction. However, subject to various conditions, a specific write-down of inventory may qualify for a tax deduction.

Taxpayers who wish to claim a deduction have to demonstrate that the write-down is accurately calculated and represents a permanent fall in value. Again, keeping detailed records is the key to support a claim for a tax deduction.

Default on contracts

In deteriorating conditions, it may be necessary for businesses to terminate contracts which might require payment of compensation.

To determine the issue of deductibility, the starting point is to consider the nature of the contract being terminated.

Where the contract being terminated is revenue in nature, for example the purchase of inventory, this would suggest, at an initial level, that a tax deduction might be available.

Where, however, the contract is capital in nature, for example the purchase of machinery, a tax deduction for any compensation payable is unlikely to be available.

Defaults on loans

A particular concern is whether borrowers will default on loan obligations.

Where a default arises it may be necessary to work out a compromise between the creditor and the borrower which might involve the borrower being released from part of its financial obligations.

It is necessary to determine whether a release could be subject to income tax.

The Income Tax Act provides that where a tax deduction has been obtained for an amount represented by the release, the release is subject to tax.

A similar result also arises where the amount released relates to the purchase of an asset on which capital allowances have been claimed.

Where, however, the amount released has not been claimed as a tax deduction, the release should not, normally, be subject to income tax.

Retrenchment costs

Businesses that are particularly hard hit may find themselves with little option but to retrench employees. Where the retrenchment exercise is carried out in conjunction with the closure of a business, a tax deduction, based on case law, would not be available.

A different view is, however, likely to be reached where retrenchments are incurred for the purposes of enabling a business to be saved from extinction.

In the current economic environment, effective management of all costs including taxes is vital. From the tax perspective, businesses need to be aware of eligible deductions and ensure that adequate supporting documentation is maintained.

·The writer is executive director, KPMG Tax Services Sdn Bhd.


Structural weakness could dampen M'sian long term growth

Friday September 25, 2009
Structural weakness could dampen M'sian long term growth

PETALING JAYA: Malaysia is poised to be the largest beneficiary of higher commodity prices from positive terms-of-trade and commodity revenue supporting the public sector, according to Morgan Stanley Research.

“Beyond the cyclical uptick, we think structural weakness remains present which could put a dampener on longer-term growth prospects.

“However, we note that policymakers have been taking measures to liberalise the economy. Continued execution and acceleration will be needed to fully turn around the structural story, in our view,” it said in an Asean economics report.

The Malaysian market has generally fallen by the wayside amid structural issues in the economy. As a result, its asset market had ironically developed a defensive nature, outperforming during market downturns, and underperforming during market upturns, Morgan Stanley said.

“Despite this, from a macro perspective, we still expect Malaysia to deliver reasonable growth outlook in 2010,” it added.

Morgan Stanley’s 2009 and 2010 forecasts of contraction of 3.5% and a growth of 4.3% year-on-year respectively were below consensus’ contraction of 3% for 2009 but in line with the 4.3% growth for 2010.

“We see 2011 growth at 4.8% year-on-year. Interestingly, we note a dichotomy in terms of market sentiment. Whilst certain quarters of the market have been eager to get bullish on Singapore given the global rebound, we do not sense the same sentiment with Malaysia despite Malaysia being the second most exposed to global trade within Asean as well as a commodity play,” it said.

Morgan Stanley said the global backdrop and the political climate were two key risks for Malaysia.“Malaysia’s manufacturing exports are already under structural pressures, losing global competitiveness. Separately, the coordination within the federal government given the two-party system and the coordination between the federal and state governments would be key to watch in terms of how it would affect the workings of the public sector economy,” it said.

The research house said foreign interest in Malaysia had been waning. Net foreign direct investments (FDIs) in certain economies in the region (China, India, Singapore and Thailand) continued to climb higher, net FDI in Malaysia had generally trended down from the peak in the early 1990s, and was now dipping into negative territory.

On the upcoming Budget 2010, it expected it “to be less expansionary in terms of fiscal deficit.” “However, we still see Malaysia as likely to have one of the highest fiscal deficits within Asean for 2010.”

Commenting on policy measures, Morgan Stanley said Bank Negara was “relatively dovish.”

It said the absence of a strong credit cycle previously created more room for leverage.

“Policymakers also have the highest propensity for pump-priming within Asean.” Meanwhile, Credit Suisse Group said Bank Negara had become more confident the country was recovering from the global recession.

The central bank’s view was that the signs of an economic recovery seemed evident but it was only unsure on whether the economic rebound would be modest or sharp.


Recession or not McDonald's increases dividend for the 32nd year

Updated: Friday September 25, 2009 MYT 7:55:44 AM
Recession or not McDonald's increases dividend for the 32nd year

OAK BROOK, Illinois: McDonald's Corp. said Thursday that its board has raised its quarterly dividend 10 percent to 55 cents. It will be paid on Dec. 15 to shareholders of record as of Dec. 1. The increase brings its yearly dividend to $2.20 and its total quarterly dividend payout to about $600 million.

The previous quarterly dividend was 50 cents.

The company said it has raised its dividend every year since paying its first dividend in 1976.

The most recent increase puts the company at the high end of its goal to return between $15 billion to $17 billion in cash to shareholders over a three year period that started at the beginning of 2007, the company said.

McDonald's also said it would delist its stock from the Chicago Stock Exchange, where it had its secondary listing.

It decided to leave the Chicago exchange because of low trading volume there.

After Oct. 30, it will be listed only on the New York Stock Exchange.

McDonald's shares rose 58 cents to close Thursday at $56.12.

The stock added another 3 cents after hours following the dividend increase. - AP



At the price per share of $56.12, the yearly dividend of $2.20 translates into a DY of 3.9%.  This is equivalent to a dividend multiple of 25.5x.

A company giving increasing dividends year on year will see its share price trending upwards in unison.

Given the low interest rates for fixed deposits and low treasury yield, investing into this stock provides a better return comparatively.  Those with a long term investing horizon need not worry about the price volatility of the share.  The long term gains from dividends and capital gains seem safe and predictable as long as the company continues to perform as it did in the past.

Market Correction

Short term traders should be careful.

Long term investors can buy into good quality stocks when these shares correct 10% to 15% from their high prices.  Be ready to buy when the market corrects significantly.  There are still many good stocks selling at good valuations.

Thursday, 24 September 2009



Financial Year Ended 31 March 2009 2008 2007 2006 2005

(RM Million) (restated)

REVENUE 369.07 308.71 294.48 300.33 247.12


Profit before taxation 81.19 56.86 51.39 50.35 94.66

Profit before taxation

(excluding exceptional item) 81.19 56.86 51.39 50.35 44.36

Income Tax Expense 10.57 13.59 10.74 3.48 12.32

Minority Interests 24.47 12.99 10.99 12.01 8.58

Profit after taxation and minority interests 46.16 30.29 29.66 34.86 73.76


Total assets 653.15 609.17 514.53 458.59 463.11

Total liabilities 201.32 209.05 149.74 138.54 172.63

Minority interests 117.21 100.73 78.97 70.54 61.69

Shareholders’ Equity 334.62 299.40 285.82 249.51 228.79


Earnings per share (sen) 17.54 11.51 11.30 13.20 28.03

Gross dividend per share (sen) 3.00 2.50 2.00 2.00 1.00

Net dividend per share (sen) 2.25 1.88 1.48 1.44 0.72


Transacted price per share (sen)

Highest 51.0 94.5 75.0 54.5 58.5

Lowest 33.5 42.5 50.5 40.5 34.5

We should try to make sure we're not in the pessimist camp

Your Pessmism Is Holding You Back

By Selena Maranjian

September 23, 2009

Surveys and studies can shed a lot of light on news that's important to our lives. I've reported on many of them, such as the Employee Benefit Research Institute's findings that we may not retire when we think we will. There's the annual Retirement Confidence Survey, showing us why we stand a good chance of ending up with a gruesome retirement. And there's the report from Fidelity that can help us see how we're doing compared to others in our retirement planning.

Now there's another study out from Fidelity, with even more data on retirement and investing. Looking over the report, which happened to focus on pessimists and optimists, I learned that (drumroll, please):

•Pessimistic investors are less likely to expect a comfortable retirement than optimistic investors, by a 61% to 83% count

•Pessimists typically take on less investing risk. That's been especially true during the current uncertainties in the financial markets.

There's more. Among married couples, 61% of pessimistic spouses don't have much confidence in their ability to take over control of the household finances, versus just 39% of optimists.

The scoop

Yes, I know, the study is telling us that pessimists are kind of … pessimistic. But there's more to the study than just disposition. For instance, nearly twice as many optimists as pessimists have a detailed plan for how they'll generate retirement income. That lack of planning certainly suggests that those pessimists have good reason to expect the worst.

Given those results, we should try to make sure we're not in the pessimist camp. More often than optimists, pessimists seem to invest mainly to preserve the value of their investments -- in other words, rather conservatively. That's not a great way for most of us to build a nest egg for tomorrow, especially if you still have awhile to go before you plan to retire.

It will take a long time to build the wealth you need for retirement if you focus only on preserving your wealth rather than growing it. You'll be stuck with low returns that may not even keep up with inflation, let alone help you increase your purchasing power after you retire. If you expect to need $50,000 to cover your annual expenses, for instance, you need to build a nest egg of $1 million or more. You probably can't get there sticking with ultrasafe investments.

What to do

If you're starting to break out in a sweat as you imagine putting lots of your dollars into stocks you don't know well -- ones that might suddenly implode -- relax and take a deep breath. You can aim for solid returns with stocks that won't strike you as all that risky. Check out the following companies with top ratings from our Motley Fool CAPS investor community:


Return on Equity

Price-to-Earnings Ratio

10-Year Average Return





Canadian National Railway (NYSE: CNI)




Abbott Labs (NYSE: ABT)




Transocean (NYSE: RIG)




Petroleo Brasileiro (NYSE: PBR)




Schlumberger (NYSE: SLB)




ExxonMobil (NYSE: XOM)




S&P 500


Data: Motley Fool CAPS; Yahoo! Finance. *Over the past nine years.

Their relatively low P/E ratios suggest that they aren't wildly overpriced, and thus these stocks offer some margin of safety. You can find plenty of compelling familiar names these days, too -- ones that offer generous dividends.

So don't be such a pessimist! Over long periods, the stock market tends to make people wealthier. Feel free to feel optimistic that now, during a recession, is often the best time to invest.


Biggest Market Opportunity: Cash? (No, I'm Not Insane)

Biggest Market Opportunity: Cash? (No, I'm Not Insane)
By Alex Dumortier, CFA
September 23, 2009
What sort of insanity is this? How could cash be an opportunity at a time when three-month T-bills yield less than 10 basis points? No one gets excited earning virtually nothing on their cash balances, but stock investors should consider future opportunities in addition to existing choices: It's not about what you're not earning on the cash today, it's about earning premium returns on the investments you'll be able to make with that cash tomorrow.

Cash needn't be an anchor
In the words of super-investor Seth Klarman: "Why should the immediate opportunity set be the only one considered, when tomorrow's may well be considerably more fertile than today's?" At the head of the Baupost Group, a multi-billion dollar investment partnership, Klarman employs a value-oriented strategy, achieving exceptional performance in spite of -- or rather, because of -- the fact that he frequently holds significant amounts of cash. For example, on October 31, 1999, a few months before the tech bubble began to collapse, his Baupost Fund was approximately one third in cash.

Over the "lost decade" spanning 1999 through 2008, Klarman smashed the market with a 15.9% average annualized return net of fees and incentives versus a (1.4%) annualized loss for the S&P 500.

Don't go all in (cash or equities)
Let me be quite clear: I'm not advocating that you liquidate all your stocks and go all into cash; the market's current valuation simply does not warrant that sort of drastic action. Conversely, it shouldn't compel you to raise your broad equity exposure, either.

As I noted last week, the market doesn't look cheap right now: Based on data compiled by Professor Robert Shiller of Yale, at yesterday's closing value of 1,071.66, the S&P 500 is valued at over 19 times its cyclically adjusted earnings, compared to a long-term historical average of 16.3. Based on average inflation-adjusted earnings, the cyclically adjusted P/E ratio is one of the only consistently useful market valuation indicators.

As prices increase, so does your risk
All other things equal, as share prices rise, stocks will represent a larger percentage of your assets; however, logic dictates you should actually seek to ratchet down your equity exposure under those circumstances. As stock prices rise, expected future returns decline (again, all other factors remaining constant), making stocks relatively less attractive. Another way to express this is that as stock prices increase, so does the risk associated with owning stocks.

That risk may simply be earning sub-par returns or, in the worst case, suffering capital losses. Extremes in market valuations offer the best illustration of this principle: Owning a basket of Nasdaq stocks in March 2000: a high-risk or low-risk strategy? How about buying Japanese stocks in December 1989, with the Nikkei Index nearing 39,000 (nearly 20 years on, the same index trades at less than 10,500).

Don't misinterpret Buffett's words
So what are we to make of Berkshire Hathaway (BRK-B) CEO Warren Buffett's words when he told CNBC on July 24th: "I would much rather own equities at 9,000 on the Dow than have a long investment in government bonds or a continuously rolling investment in short-term money"? (Investors must have concluded the same thing, sending the Dow 8% higher since then.)

First, with just 30 component stocks, the Dow isn't a broad-market index; it's a blue-chip index. The stocks of high-quality companies have underperformed the broader market in the rally from the March market low, which has left them relatively undervalued. This is reflected in the Dow's 14 price-to-earnings multiple, against 17 for the wider S&P 500.

Buying pieces of businesses vs. owning the market
Second, keep in mind that Buffett likes to own pieces of high-quality businesses, not the whole market. As I mentioned above, there is reason to believe that there is still opportunity left in the higher-quality segment of the market. The following table contains six companies that trade with a free-cash-flow yield above 10% -- i.e., they're priced at less than 10 times trailing free cash flow (these are not investment recommendations):

Company Sector
Free-Cash-Flow Yield*

General Electric (NYSE: GE)

UnitedHealth Group (NYSE: UNH)
Health care

Bristol-Myers Squibb (NYSE: BMY)
Health care

Raytheon (NYSE: RTN)
Industrial goods

Altria Group (NYSE: MO)
Consumer goods

Time Warner (NYSE: TWX)

*Based on TTM free cash flow and closing stock prices on September 21, 2009.
Source: Capital IQ, a division of Standard & Poor's, Yahoo! Finance.

Summing up: What to do from here
To sum up:

If, like Buffett, you have identified high-quality businesses that are undervalued, there is nothing wrong with buying them now.

However, if you are mainly an index investor, it is probably ill-conceived to increase your exposure to stocks right now.

Either way, whether you are a stockpicker or an index investor, there is nothing wrong with holding on to some cash right now -- not for its own sake -- but to take advantage of better stock prices at a later date.

Morgan Housel has identified three high-quality companies that are still cheap.


Wednesday, 23 September 2009

How to analyse an annual report

Wednesday September 23, 2009

How to analyse an annual report

Personal Investing - By Ooi Kok Hwa

MANY of us receive a lot of annual reports every year.

Even though we are aware that there is a lot of important information in the reports, not many of us are willing to spend time going through those reports before buying stocks.

Besides, it is quite difficult for some investors, especially those who lack proper financial training, to analyse the financial information.

In this article, we will provide a quick guide on how to analyse an annual report.

Given that there are many ways to dissect an annual report, the following six pointers are just a quick check on the financial health of any listed companies.

Income statement is the financial statement that shows the effects of transactions completed over a specific accounting period.

In this statement, we have three key pointers: the current level of revenue; high growth in revenue; and the profits made in proportion to the level of revenue.

The current level of revenue indicates the size of a company. A company with revenue or sales of RM1bil is definitely bigger than one that has revenue of only RM100mil.

In Malaysia, companies with revenue of RM500mil and above should be considered as more established companies.

High growth in revenue implies that the company has been expanding over the past period.

Assuming the high growth in revenue will eventually translate into high growth in profits, we should invest in companies with higher growth in revenue because this may lead to higher stock prices.

If the overall economy is expanding, avoid those companies that are showing a decline in revenue.

This might imply that the overall operating activities of the companies are declining.

The profits made in proportion to the level of revenue indicates whether this company has high or low profit margins in its products. The profits here refer to the profit after tax or net income.

We should invest in high profit margin companies because high profit margins will provide a cushion to the sudden change in operating environment. A company with revenue of RM1bil and profits of RM10mil is more likely to face tougher challenges in a stiff price competition environment compared with a company with revenue of RM100mil and profits of RM10mil.

Balance sheet is the financial statement that shows a company’s assets, liabilities and owners’ equity at a point in time. The two main pointers in this statement are cash in hand and total borrowings.

Cash in hand refers to the cash or cash equivalent like fixed deposits. If possible, we should invest in companies with high cash in hand and zero borrowings. High cash in hand may imply that the company has high chances of rewarding shareholders with higher dividend payments.

Besides, companies with high cash in hand have more financial stability than companies with very tight level of cash. This explains why most investment gurus like to invest in cash-rich companies.

Total borrowings include the short- and long-term borrowings. Here, we should check whether the company has reported any sharp increase in borrowings during the financial periods. Most companies need to increase borrowings to support their capital expenditure on any business expansion.

However, if a company has been increasing its borrowings each year and the level has far exceeded one to two times the shareholders’ funds, unless its operating activities are able to support the repayments, the company faces very high financial risk.

Cash flow statement shows the sources and uses of cash over the period. One very important pointer in this statement is the operating cash flow.

High operating cash flow implies that the company is generating cash from its operating activities. A healthy company should show high operating cash flow because this number will indicate how much actual cash the company has generated from operations during the period.

We need to be careful of the companies that are showing profits but at the same time generating negative operating cash flows every year. This may imply that these companies have very high receivables. Any economic downturn may cause a sharp increase in provisions on bad debts.

Lastly, investors need to understand that the above six pointers are just a quick guide to analysing any annual report. Serious investors should not only analyse these six pointers. They are advised to scrutinise the reports further for more details.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.


'Where are the Customers' Yachts?'

A famous book on financiers asked: 'Where are the Customers' Yachts?'


The analysis by GLG Partners, the hedge fund, suggested that recommendations from European brokers have done better than the funds over each of the past four years.

The idea that private investors armed only with simple share tips can beat most professional fund managers recalls the book Where are the Customers' Yachts? – the question asked by someone shown the lines of expensive stockbrokers' yachts in a marina, making the point that the City can seem better at making money for its own insiders than for its customers.

Whitbread GLG's research imagined a simple "long-only" fund management strategy – in other words, one that avoided trying to make money from falling shares – that followed all broker recommendations to buy particular stocks. Under the strategy, the shares are bought at the closing price on the day of the share tip and held for 65 trading days, when they are sold.

The annual returns from using this technique would be as much as 6.4 percentage points above the performance benchmarks used by fund managers, the researchers calculated. Each 65-day period would produce gains of between 0.8 and 1.69 percentage points above the benchmark, after payment of commissions, and this could be repeated four times a year.

Annual returns would therefore beat the benchmarks – which typically reflect the performance of the stock market – by between 2.8 and 6.4 percentage points.

"This is enough to place the strategy in the top quartile of UK mutual funds with a Europe-including-UK benchmark in all [of the past] four years," the researchers said. In other words, the strategy would beat at least three-quarters of British funds that invest in UK and European shares.

"This simple strategy involves implementing all recommendations over a fixed holding period for each idea [share tip]," the research added. "Obviously, there are numerous execution improvements that could be made. Our calculation of 2.8 to 6.4 percentage point gains over the benchmark is meant to be illustrative of the opportunities available for the simplest investment strategy."

The research also proposed an explanation for the fact that analysts tip more stocks as "buys" than as "sells". It pointed out that the intended "consumers" of share tips were fund managers, and they had a greater demand for buy recommendations. "The reason is simple. Most managers are long-only managers … so it makes sense that brokers would put less time into sell than buy recommendations."

There is also more to lose with an incorrect sell tip, GLG's research said. "The downside of being incorrect is greater with sell recommendations. A stock with a sell recommendation can go up by an unlimited amount – so there is unlimited potential error – while a stock with a buy recommendation can fall only by a limited amount, meaning limited potential error."

It concluded: "These factors suggest that at the very least an analyst should issue a new sell recommendation with more caution than a buy recommendation."

The analysis also cast doubt on the belief that tipsters tend to tip only shares that are already rising – "chasing momentum", in City jargon.

"In all four years, the average buy recommendation was either moving in line with the market or underperforming prior to the recommendation change. So there's relatively little evidence to suggest that analysts are 'momentum chasing' by putting buy recommendations on outperforming stocks."

The researchers' early data for 2009 suggests that this year has been an extreme one for analyst performance. "Buy recommendations have worked very well; sell recommendations very poorly." This is likely to reflect the fact that the stock market has recovered dramatically since its March low, so shares tipped as buys will have been helped by the trend in the market, while those tipped to fall may also have been dragged upwards.

Richard Hunter of Hargreaves Lansdown, the stockbroker that compiles share tips for The Daily Telegraph, said: "Investors' ability to access share research has never been greater. The proliferation of the internet, the market's movements being of wider interest to the public and an appetite from the press have meant that finding tips for larger companies is relatively straightforward."

But he advised private investors to be wary of some of the research they read. "It may have been written by an institutional broker and aimed at institutional clients. This in itself does not lessen the validity of the research, but generally an institution's attitude to risk and time frame may be vastly different to that of a private investor.

"For example, it is likely that the institutional investor will be measured by its success compared to a wider benchmark, such as the FTSE 100 or the FTSE All Share. As such, it needs to be nimble and will switch between stocks and sectors on a regular basis in an effort to outperform its peers. Furthermore, if it finds itself underperforming its targets, its attitude to risk may change as it chases higher returns."

Meanwhile, he added, the research will inevitably have been seen by its intended institutional audience, and then by the wider market, before it comes to the attention of the private investor. "Any change in market sentiment will, therefore, more than likely already have been reflected in an adjustment of the share price."

For the larger stocks, there will often be opposing views among analysts, he said. A selection of broker views on BP, for example, showed 19 rated the stock as a "strong buy" and five as a buy, while 12 recommended holding and three rated the share a "strong sell". The consensus in this case would be a buy – the opposite of three of the tips taken in isolation.

GLG's research did not say what investors might do in this situation, so investing your way to your own yacht might not be all plain sailing.

Pound slides again as markets enter Bank of England-fuelled 'bubble' stage

Pound slides again as markets enter Bank of England-fuelled 'bubble' stage

The pound slid closer to parity with the euro on Monday, as one of London's leading hedge fund managers warned stock markets are in a Government-fuelled bubble.

By Edmund Conway and Jamie Dunkley

Published: 6:26AM BST 22 Sep 2009

Pound slides closer to parity with euro as it hits a five-month low against the single currency. Photo: CHRISTOPHER PLEDGER "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management.

However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.

Mr Odey's comments came as the pound fell further against other leading currencies after a report from the Bank warned of the effect of the financial crisis on sterling's long-term value.

Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.

"At some point the QE will have to come to an end but, until it does, this bull market is sponsored by HMG and everyone should enjoy it."

FTSE breaks six-day winning streak

Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.

"In 2008 markets were driven by fear; this year they have been driven by greed.

"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."

Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any other, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation.

This has pushed the pound lower against most other currencies. The euro hit a five-month high against sterling yesterday before slipping back to 90.58p. Citigroup said yesterday that sterling would drop to parity against the euro in the coming months.

The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."


Markets 'in Government-fuelled bubble'.

Markets 'in Government-fuelled bubble', says hedge fund manager Crispin Odey
Stock markets are in a Government-fuelled bubble, one of London's leading hedge fund managers said, as the pound slid closer towards parity with the euro.

By Edmund Conway and Jamie Dunkley
Published: 7:43PM BST 21 Sep 2009

Katherine Garrett-Cox, chief executive of Alliance Trust, said the recent stock market rally has been driven by sentiment "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management. However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.

The warning came as the pound fell further against other leading currencies, and as Citigroup predicted that sterling would drop to parity against the euro.

Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.

"At some point the QE will have to come to an end, but until it does this bull market is sponsored by HMG and everyone should enjoy it."

Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.

"In 2008 markets were driven by fear; this year they have been driven by greed.

"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."

Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any others, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation. This has pushed the pound lower against most other currencies.

The euro is now worth 90.58p, with economists from Citigroup saying yesterday that sterling would drop to parity against the single currency in the coming months. The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."


Rally at risk as long-term investors shun stocks

Rally at risk as long-term investors shun stocks

A glance at the shareholder register of Cadbury is revealing. It is no longer familiar UK names that control the company, but a motley assortment of US investment funds.

By Nicholas Paisner, Breakingviews.com

Published: 2:35PM BST 22 Sep 2009

This partly reflects the confectioner’s turbulent history, but it is also indicative of the changing shape of the European equity market.

A number of recent studies have shown that long-term institutional investors have cut equity allocations by as much as 40pc over the past two years. Many pension funds were net sellers of domestic equities even before the crisis, as they sought to diversify internationally and reduce risk. But by selling into the rally, and not reweighting portfolios in-line with market moves, the shift away from shares has been accelerated.

The crisis has given these investors more reason to be wary of stocks. Even on long-term time horizons, equity returns have not been attractive, with the UK’s FTSE-100 index now at the same level as in 1997. And after two bear markets in the past 10 years, individuals in defined-contribution pension schemes are understandably risk averse, prompting them to switch out of equities.

The flight of long-term money has left its mark. In spite of doubling or tripling, share prices in some sectors are still well-below their peaks. What’s more, liquidity in the mid- and small-cap stocks has plunged. This sharp decline in interest could well reflect risk-averse investors hastening their departure from these segments of the market. A large chunk of the investor base may simply have gone for good

The move by long-term investors into low-return safe havens of cash and government bonds is potentially bad news all round. For those who have not given up on equity, the exit of long-term money means that the current populace of shareholders are now a far less sticky lot. This hasn’t been a problem so far, as money has been flowing into the market on a net basis. But it could exacerbate future market wobbles.

Long-term investors could also suffer from their caution. Government bond yields are still at historical lows, albeit up from crisis troughs. The resurgent gold price suggests that the market is once again starting to fret about inflation. If rising prices do begin to take hold, bond yields could yet soar. Investors in risk-free assets may quickly start to wish they had been a little more adventurous.


Private equity may be on cusp of ‘golden age’

Private equity may be on cusp of ‘golden age’
NEW YORK, Sept 23 — The near collapse of the global financial system, which wiped out trillions in corporate value and personal savings, may be giving way to a new “golden age” for private equity investment, Silver Lake Co-CEO Glenn Hutchins said in an interview today.

Private equity firms suffered badly when debt markets seized up as a result of the crisis and banks did not want to lend increasingly scarce capital. Only just recently have credit markets started to unfreeze.

“The financial markets may be on the cusp of a new ‘golden age’ for private equity,” Hutchins, who is also a co-founder of the firm, told Reuters on the sidelines of the International Economic Alliance Symposium.

Hutchins, the co-founder of the US$13 billion private investment firm, cautioned that while there has been a significant stock market rally, the economy is showing stable, though not robust, growth.

“This recent stock market rally is a little troubling because it seems to me not to be supported by underlying economic fundamentals,” Hutchins said.

“But that aside, we have gotten down to levels that are pretty attractive and the banks seem to be recovering enough to provide modest levels of financing, which is all we need. We feel pretty optimistic,” he added.

The major concern, he said, is how long will investors have to be prepared to withstand low levels of economic activity.


But for the moment, Hutchins said, investors are once again finding risk premiums at attractive levels versus the low premiums before the asset bubble burst in December 2008.

“Now that the sort of panic of ‘08 is over and capital markets seem to be returning to some degree of normality ... companies will be able to access debt and equity markets like they have in the past. And that is no surprise,” Hutchins said.

But he added that investors needed to be mindful that valuations in 2007 should not be defined as normal. They were an “overshoot in another way,” he said.

The average investment grade corporate bond now yields 232 basis points over US Treasuries, down from the all-time high of 656 basis points on Dec. 5, 2008. By comparison, in May 2007, before the credit crisis started, spreads narrowed to 92 basis points, according to the Merrill Lynch indexes.

“Now risk premiums are at attractive levels. Investors are being paid to take risk again. That means when you look back on this, when you get back to economic recovery, this will have been a good time to invest,” Hutchins said.

Silver Lake makes only a few acquisitions a year and is more inclined to use financing for working capital rather than purchases, Hutchins said.

“If you need financial engineering to enter a deal and multiple expansion to exit a deal, then your business is fundamentally challenged,” Hutchins said.

The firm, along with other investors, agreed to a deal earlier this month to pay US$1.9 billion to buy a 65 per cent stake in online telephony unit Skype from Internet auction and services company eBay Inc.

Ebay agreed to sell the stake in Skype for US$1.9 billion to a consortium including Netscape founder Marc Andreessen’s Andreessen Horowitz, venture firm Index Ventures, Silver Lake, and the Canada Pension Plan Investment Board.

Asked what he thought about the Skype sale and lawsuits filed by Skype’s founders, Hutchins responded: “No comment.” — Reuters