Wednesday, 31 October 2012
Public Bank - Malaysia's strongest bank in 2012
Public Bank has leapfrogged both CIMB Group Holdings Bhd and Malayan Banking Bhd to the top spot in 2012 as Malaysia’s strongest bank, according to the Asian Banker 500 2012 (AB500) report.
“This was largely due to the cost and risk management as a result of the conservative approach of the bank,” the report said.
Further, the report also said that the Asia Pacific banking sector is expected to remain resilient as economies in the region continue to expand in 2011 albeit at a slower pace than last year.
Singapore-based financial services community strategic business intelligence provider Asian Banker said the Asia-Pacific regional banks saw a significant acceleration in asset growth in 2011 while the largest 500 banks from the US and the European Union did not grow as fast.
“If the momentum holds, Asia-Pacific regional banks are likely to overtake their Western peers by 2014.
“This is primarily due to a combination of resilient economic performance of the region’s economies, increasing private wealth and growth in the number of Asian highnet- worth individuals and continual retrenchment of some Western banks from Asia and growing regional expansion by Asia-based banks,” it said in a statement.
Asian Banker said key performance indicators of the banking sector in the Asia-Pacific region such as assets, loans, deposits and net profit grew over 15% last year.
“In particular, net profit growth remains staggering at 43% to US$315.9 billion (RM958.3 billion) albeit slower than 2010’s growth rate of 53%,” it said.
Asian Banker said 2011 has been a good year for banks in Malaysia, achieving weighted average asset growth of 21.7% year-on-year (YoY) which was among the top in the Asia-Pacific region.
“The growth was mainly fostered by the strong and resilient gross domestic product growth of the Malaysian economy and Islamic banking growth of 5.1% YoY and 33% YoY in 2011 respectively as Malaysian banks embark on a regional expansion strategy in an attempt to increase their regional presence and to diversify their geographical revenue sources,” it said.
Asia-Pacific regional banks have been shoring up their capital positions as implementation of the new Basel III requirements draws near, it said. “Asset-weighted average Tier 1 and total capital adequacy ratio (CAR) grew much stronger to 14% and 16.5% in 2011 from 9.1% and 12.3% in 2010 respectively.
“For this iteration, Singapore and Philippine banks rank among the highest for Tier 1 and total CAR respectively,” it said. Asian Banker said lack of sovereign debts deter Asia-Pacific regional banks’ compliance to Basel III liquidity requirements.
“Although banks are able to withstand long-term stress to their operations as reflected in their strong capital positions, short-term risks such as liquidity continue to be one of the top issues for Asia-Pacific regional banks,” it said.
AB500 research manager Doron Foo said some regional banks in countries such as Australia, Singapore and Hong Kong are still unable to satisfy Basel III liquidity requirements due to the lack of sovereign debt in their domestic countries.
http://themalaysianreserve.com/main/index.php?option=com_content&view=article&id=2338:public-bank-ranked-as-strongest-bank-in-msia&catid=36:corporate-malaysia&Itemid=120
Panic Buying
What It Is:
Panic buying refers to the purchase of a stock immediately after a sudden, substantial price increase.
How it works/Example:
Investors watching the market may jump to buy a stock immediately after a major move in the stock's price, hoping to take advantage of the surge in the price.
Why it matters:
Investors may buy stock for a number of reasons. Fear of being left out of the next big thing, however, is not the best reason. Panic buying usually is the result of the herd instinct among some investors. While there may be some gains on the residual increase in the price spike, it is often too little, too late.
https://mail.google.com/mail/?shva=1#inbox/13ab421d8b1c529a
Tuesday, 30 October 2012
Spotting Sharks Among Penny Stocks
October 30 2012
For every publicly traded corporations with market capitalization in the hundreds of millions and billions, there are thousands of smaller companies with much more modest market caps. Because these companies have smaller operations and more risks, they trade at only a fraction of the price of their much larger counterparts. These are, of course, the infamous penny stocks. This article will look at some of the dangers that lurk in penny stocks trading.
The Myth Of Evolution
One thing that keeps people dabbling in penny stocks is the belief that these corporations will evolve into firms that will become much like their larger counterparts. This has happened, but not as regularly as penny stock proponents would have you believe.
Many public firms simply defer going public until they have grown large enough for it to be worthwhile. Until that time, they will usually raise money through private investors or corporate loans along with their regular operations. Generally, these companies do not need an initial public offering (IPO) to fund an expansion. The larger a company becomes, the more practical it is to raise funds through a public offering, because although equity is seen as a relatively more expensive form of financing, it often becomes necessary for larger companies.
Good Intentions?
If a company is offering its stock at the penny level, it is usually for one of the following reasons. First, the company may be on the cusp of a large expenditure, and it believes that the money raised by an IPO will be enough to finance it. Second, the company may have reached the apex of its growth and it wants to change its tax structure or disperse the profits.
There are also less noble reasons for a company to go through an IPO process when it is still quite small. Sometimes a company is talked into an overpriced and overhyped IPO by penny stock brokerage firms that want to make a quick dollar from unwary investors. An IPO could also be an attempt by the company's owners to offload their ownership to investors because they see little promise in the company's future.
The Myth Of Evolution
One thing that keeps people dabbling in penny stocks is the belief that these corporations will evolve into firms that will become much like their larger counterparts. This has happened, but not as regularly as penny stock proponents would have you believe.
Many public firms simply defer going public until they have grown large enough for it to be worthwhile. Until that time, they will usually raise money through private investors or corporate loans along with their regular operations. Generally, these companies do not need an initial public offering (IPO) to fund an expansion. The larger a company becomes, the more practical it is to raise funds through a public offering, because although equity is seen as a relatively more expensive form of financing, it often becomes necessary for larger companies.
Good Intentions?
If a company is offering its stock at the penny level, it is usually for one of the following reasons. First, the company may be on the cusp of a large expenditure, and it believes that the money raised by an IPO will be enough to finance it. Second, the company may have reached the apex of its growth and it wants to change its tax structure or disperse the profits.
There are also less noble reasons for a company to go through an IPO process when it is still quite small. Sometimes a company is talked into an overpriced and overhyped IPO by penny stock brokerage firms that want to make a quick dollar from unwary investors. An IPO could also be an attempt by the company's owners to offload their ownership to investors because they see little promise in the company's future.
Oranges and Apples
It is important to remember that within penny stocks, there is a wide range of companies. You can find an oil prospecting company with a recognizable corporate structure right next to a family-run organic farm that specializes in cabbage. Some of those companies may allow investors to have a say in who is running the show, and some may be one-man operations that suffer terribly when the founder retires or dies. And while larger companies generally strive to please investors, penny stock companies may pay no mind to their investors at all.
The Bait
Not many value investors spend their time in penny stocks. Although a well-managed penny stock company may see good returns over the years, it is much more difficult to get full disclosure and the rules that apply to penny stocks are much looser. These companies do not face the same standards as large firms, are required to file with the Securities and Exchange Commission (SEC) less frequently and have limited requirements for listing.
What lures investors into the oceans of penny stocks is the dream of buying 1,000 shares for $0.50 and then later selling them for $5 or some similarly lucrative transaction. Unfortunately, that ocean is full of sharks that know exactly what you're looking for.
The Bite
Some people think that brokerage firms that specialize in penny stocks are often just a step up from a guy with a bat waiting to rob someone in a dark alley. Successful companies don't need people to cold call and talk up their stocks. Penny stockbrokers engage in a mixture of cold calling and targeted sells. They often have a collection of leads, people who have had a history of buying into poor investments over the phone or who have given their information to someone who turned around and sold it.
Using this list, the stockbrokers will call prospective marks and introduce themselves. Soon after, be it a day or a week, they will call again with a chance to get in on the ground floor of a stock that is set to rocket away. This will prove to be a stock that they have been pumping up in message boards, emails, newsletters, etc. Then, when investors buy in, the firm and its partners get out and leave a gaping wound in the investors' portfolios. These firms are also known to take their pound of flesh in the form of high commissions.
These firms, and the brokers that support them, will often use techniques such as advertising in mass emails. You may see mailings in your account about the latest greatest stock that is set to return 1,000%. In all cases, without doubt, it is a penny stock, and one you probably should avoid.
Multiple Victims
Sometimes the companies involved in these swindles are complicit, but even honest companies find their stocks targeted by unscrupulous penny stockbrokers. These sharks may take an innocent company that has had a few good years and make false publications or claims that "insiders" have said it is poised for a leap. When the brokers pull out, they have not only ripped off investors but also ruined the reputation of an otherwise stalwart company.
Blood in the Water
If an investor has the poor judgment to get involved with penny stockbrokers, he or she may find a permanent target painted on his or her back. Because of the profits and commissions involved, these brokers will persist with their calls until they get your check - after that the calls will dry up and the number may even change. Many of the sharks in penny stock brokerages have securities violations on their records, but it is their ability to sell that keeps other firms hiring them - and it is dishonest profits that keep penny stock brokerage firms in business.
The Bottom Line
By and large, attempts to regulate penny stocks have been thwarted. The low prices make them ideal for manipulation because a few false cents per share can mean thousands if you hold most of the shares. The internet has also offered a whole new medium by which to cheat investors. For every site that exposes penny stock fraud, there are hundreds of sites espousing one undiscovered treasure or another. The best way to avoid getting swindled in the penny stocks is just to stay out of the water - if you don't swim, you won't be bitten.
Multiple Victims
Sometimes the companies involved in these swindles are complicit, but even honest companies find their stocks targeted by unscrupulous penny stockbrokers. These sharks may take an innocent company that has had a few good years and make false publications or claims that "insiders" have said it is poised for a leap. When the brokers pull out, they have not only ripped off investors but also ruined the reputation of an otherwise stalwart company.
Blood in the Water
If an investor has the poor judgment to get involved with penny stockbrokers, he or she may find a permanent target painted on his or her back. Because of the profits and commissions involved, these brokers will persist with their calls until they get your check - after that the calls will dry up and the number may even change. Many of the sharks in penny stock brokerages have securities violations on their records, but it is their ability to sell that keeps other firms hiring them - and it is dishonest profits that keep penny stock brokerage firms in business.
The Bottom Line
By and large, attempts to regulate penny stocks have been thwarted. The low prices make them ideal for manipulation because a few false cents per share can mean thousands if you hold most of the shares. The internet has also offered a whole new medium by which to cheat investors. For every site that exposes penny stock fraud, there are hundreds of sites espousing one undiscovered treasure or another. The best way to avoid getting swindled in the penny stocks is just to stay out of the water - if you don't swim, you won't be bitten.
Read more: http://www.investopedia.com/articles/stocks/07/penny_stocks.asp#ixzz2AmZW70kj
Politicians should not assume that the Malaysian voters are not smart.
'Exodus at MCA dinner not sign of flaccid support'
Politicians should not assume that the voters are not smart. In fact, the Malaysian voters are very intelligent in exercising their votes. This was evident over the many elections over the years since Independence. Let us bring forth a new political era whereby the government is a clean, efficient, responsible and responsive one. Above all, everyone will benefit from having a good government in place. For this, our institutions need to be respected and strengthened. Due respect to the processes should be in placed and applied fairly and equally to all. The checks and counter-checks to ensure an efficient, clean, and responsive government should be in placed.
The focus should be on issues. Addressing these issues adequately and pragmatically is the least demanded of the politicians by the voters. Issues should be debated responsibly, carefully and intelligently in the context of our multi-ethnic, multi-cultural, multi-religious and multi-racial country. The politicians with integrity, intelligence and who are willing to work hard, should be elected to serve.
Since the last election, there was enough time for parties to reform their political agenda and directions to accommodate the changing views and desires of the Malaysian.
This forthcoming election is above all allowing Malaysians to freely exercise their rights as citizens to pick the good government that they wish to have in place. Hopefully, through our democratic processes and the high quality responsible leaderships provided by the leaders of all parties, Malaysians can be proud of the outcome of any elections carried out irrespective of whichever party wins.
Saturday, 27 October 2012
DiGi Q3 net profit rises 7.84%
Wednesday October 24, 2012
PETALING JAYA: DiGi.com Bhd's third-quarter net profit for the period ended Sept 30 rose 7.84% to RM315.37mil on the back of revenues increasing as well to RM1.58bil from RM1.52bil.
The third largest mobile operator by subscribers in the country said revenue growth in the third quarter was moderate because of the impact of its ongoing network modernisation.
“We expect better revenue momentum in the fourth quarter from network improvement and seasonality,” DiGi said.
DiGi also declared a third interim tax-exempt dividend of 4 sen per share and a one-off special tax-exempt dividend of 8 sen for the financial year ending Dec 31, 2012.
Meanwhile, earnings before interest, taxes, depreciation and amortisation (EBITDA) margins for its third quarter stood at 45.2% from 47.6% in the second quarter.
“The quarter-on-quarter decline was on account of the lost revenue opportunities' explained earlier and IDD margin pressure.
“Nevertheless, overall EBITDA margins for 2012 should be on par with the 2011 EBITDA margin as guided,” DiGi stated.
Its chief executive officer Henrik Clausen said in a press release that the company had committed to invest between RM700mil to RM750mil this year to modernise its network to cater for the increased demand from data users and is at the halfway point of rolling out this network.
“Our ambition is to provide access to high-speed Internet and next-generation services for all our customers, and in the first nine months of 2012 we have pushed harder than ever to make data accessible and affordable to everyone on a mobile device, and meet our customers' demand for high quality mobile Internet experience,” Clausen said.
Friday, 26 October 2012
DEVELOPMENT OF MALAYSIAN STOCK MARKET: AN OVERVIEW
Toy Jun Zheng; August 2007
After decades of worldwide recognition as a joint stock market with Singapore, the Malaysian stock market finally detangled itself as a separate market in 1973 and eventually renamed itself from the initial Kuala Lumpur Stock Exchange to the recently-known Bursa Malaysia in 2004. The journey was tough, with the domestic stock market experiencing four crashes, which were the 1973, 1981, 1987 and the devastating 1997. Each survival from the previous crash made the stock market stronger and more matured, and finally led to the establishment of the Securities Commission (SC) in 1993, a statutory body empowered to supervising all the public companies in Malaysia. This had exhibited the commitment of the Malaysian Government in stabilizing and promoting a healthier domestic financial system. Our domestic stock market capitalization reached and stood at a handsome $300 billion at the month of April 2007. But what’s next ahead of our 50 years of independence?
From an economic viewpoint, the Malaysian economy could be seen as a “finance-led” growth economy, with the growth of the finance sector especially the stock market, assisting or even creating the momentum of the economic growth. The stock market is seen to be acting the role of allocating resources in efficient manners which would then spur growth (Chong, Zulkornain Yusop, Law & Sen 2003). Funds,especially from foreign investors through the domestic stock market play significant roles in financing the domestic enterprises which in the end would increase the domestic output. As so, the development of the domestic stock market should not be neglected when we are considering of stimulating the domestic economic growth but should be seen as a whole. Some more, the endogenous growth model which emphasizes the importance of the role of stock market development along the path of real development prompts us to pay much more efforts than we have to develop the domestic stock market when speaking of pushing the economic growth (Bose 2005). But, unfortunately, the next 10 or 50 years to come would post great challenges in our efforts to do so. This is due to the emergence of plenty of new and attractive markets in the world that would shed our domestic market’s attractiveness globally. All these, in my opinion, should bring to our great concern and should constitute the main themes for developing the stock market in the future. But, where should we start?
From an economic viewpoint, the Malaysian economy could be seen as a “finance-led” growth economy, with the growth of the finance sector especially the stock market, assisting or even creating the momentum of the economic growth. The stock market is seen to be acting the role of allocating resources in efficient manners which would then spur growth (Chong, Zulkornain Yusop, Law & Sen 2003). Funds,especially from foreign investors through the domestic stock market play significant roles in financing the domestic enterprises which in the end would increase the domestic output. As so, the development of the domestic stock market should not be neglected when we are considering of stimulating the domestic economic growth but should be seen as a whole. Some more, the endogenous growth model which emphasizes the importance of the role of stock market development along the path of real development prompts us to pay much more efforts than we have to develop the domestic stock market when speaking of pushing the economic growth (Bose 2005). But, unfortunately, the next 10 or 50 years to come would post great challenges in our efforts to do so. This is due to the emergence of plenty of new and attractive markets in the world that would shed our domestic market’s attractiveness globally. All these, in my opinion, should bring to our great concern and should constitute the main themes for developing the stock market in the future. But, where should we start?
An examination into the current weaknesses and issues of our domestic stock market and solving them would help in the first place, before we should even think of promoting our stock market internationally. Attractiveness should be from the inside and not from mere seen beauty. As so, we should first examine the two important issues of our domestic stock market, which are laid out below.
The Malaysian stock market is always seen as the one with poor institutional structures. Concentrated ownerships, loose judiciary system and etc are some of the main culprits. Poor institutional structures such as the examples mentioned would to some extend deprive a person’s freedom to own and increase wealth and would then discourage people to invest. Why would a person invest in businesses when the judiciary power to enforce contracts is not stringent? Why would foreign investors invest when they can’t perform their shareholders’ rights to the degree of what they should have regarding to the operations of businesses, due to concentrated ownerships? As a result, these poor institutional structures would cause the stock market to be less developed and would eventually retard the domestic economic growth (Castaneda 2006).
The second problem applies to all stock markets through out the world and not just to our domestic stock market: the disequilibrium between the growth of the financial market and the economic growth. In essence, it means that the growth of the financial market (in terms of the amount of funds brought in) do not synchronize with the ability of the domestic economy to absorb. Overgrowth occurs and fueled future crashes. A high investment to GDP ratio would not necessarily be a good sign if the funds could not be allocated efficiently (Liu & Hsu 2006). Adverse selection and moral hazards take place and consume the financial sensibility. This is identical to what had happened to our domestic stock market in 1997. Thus, great efforts should be put into synchronizing the growth of the stock market and the economic growth, which would be extremely difficult, if not impossible.
What steps that we can take to solve the problems or at least, improve our domestic stock market to a better stage? First, we can have further deregulations of the financial system. Self regulation is always a better way to develop the financial system rather than the central regulative actions. But, all these improved-openness should be within the boundaries of a more stringent judiciary system that protects investors. We could also practice capital controls on foreign direct investments, such as the one done in the past. The control of these foreign inflows of funds would prove to be useful when we try to minimize the gap of the disequilibrium between the stock market growth and the economic growth. Though, the trade-off of a higher economic growth rate without controls should be taken into considerations as well.
What we have done in developing the domestic stock market or the financial system as a whole in the past has been great. What to come after our 50 years of independence? Only time has the answer.
What we have done in developing the domestic stock market or the financial system as a whole in the past has been great. What to come after our 50 years of independence? Only time has the answer.
KLSE Market PE is 17.7 (19.10.12)
| KLCI | 19.10.12 | ||||
| Index Stock | M.Cap | Earnings | Dividends | Equty (BV) | |
| Stock Name | Price | (RM m) | (RM m) | (RM m) | (RM m) |
| AMBANK | 6.44 | 19411.3 | 1528.4 | 601.8 | 11152.5 |
| AXIATA | 6.68 | 56828.1 | 2377.7 | 1591.2 | 19396.4 |
| BAT | 64.00 | 18273.9 | 719.4 | 785.8 | 431.1 |
| CIMB | 7.62 | 56637.7 | 4016.9 | 1642.5 | 25940.4 |
| DIGI | 5.48 | 42607.0 | 1253.1 | 1363.4 | 1399.5 |
| GAMUDA | 3.43 | 7139.1 | 549.2 | 249.9 | 4058.7 |
| GENM | 3.59 | 21315.5 | 1501.1 | 511.6 | 12528.1 |
| GENTING | 8.75 | 32545.5 | 2880.1 | 292.9 | 17741.9 |
| HLBANK | 14.20 | 26694.7 | 1866.8 | 720.8 | 2312.3 |
| HLFG | 12.84 | 13517.5 | 1165.3 | 256.8 | 8495.8 |
| IOICORP | 5.06 | 32530.5 | 1787.4 | 1008.4 | 11122.1 |
| KLK | 21.42 | 22865.9 | 1577.0 | 914.6 | 7088.2 |
| MAXIS | 6.87 | 51528.5 | 2525.9 | 2988.7 | 8100.6 |
| MAYBANK | 9.09 | 75142.9 | 5692.6 | 3005.7 | 36207.5 |
| MHB | 4.74 | 7584.0 | 206.6 | 159.3 | 2432.0 |
| MISC | 4.23 | 18881.8 | 0.0 | 0.0 | 22318.9 |
| MMCCORP | 2.70 | 8221.7 | 334.2 | 123.3 | 6212.0 |
| PBBANK | 14.88 | 52555.0 | 3503.7 | 1681.8 | 14975.3 |
| PCHEM | 6.56 | 52480.0 | 2637.2 | 1259.5 | 20080.0 |
| PETDAG | 22.24 | 22094.4 | 655.6 | 795.4 | 4778.5 |
| PETGAS | 19.70 | 38981.0 | 1079.8 | 779.6 | 8864.7 |
| PPB | 12.60 | 14937.3 | 982.7 | 268.9 | 14060.0 |
| RHBCAP | 7.48 | 16723.5 | 1534.3 | 568.6 | 11603.6 |
| SIME | 9.79 | 58832.6 | 4143.1 | 2118.0 | 26021.0 |
| TENAGA | 6.96 | 38348.4 | 504.6 | 230.1 | 30469.3 |
| TM | 6.05 | 21643.3 | 1189.2 | 692.6 | 6975.9 |
| UMW | 10.08 | 11776.4 | 503.3 | 365.1 | 4264.3 |
| YTL | 1.79 | 19033.9 | 1252.2 | 209.4 | 13291.8 |
| YTLPOWR | 1.63 | 11956.2 | 1245.4 | 346.7 | 9535.6 |
| TOTAL | 871087.6 | 49213.0 | 25532.2 | 361858.0 | |
| Market PE | 17.7 | ||||
| Market DY | 2.9% | ||||
| Mark cap/BV | 2.4 | ||||
| ROE | 13.6% | ||||
| Earnings Yield | 5.6% | ||||
| Risk free interest | 3.5% | ||||
| Equity Risk Premium | 2.1% | (Fairly Priced) | |||
| KLCI | |||||
| 19.10.2012 | 1666.35 | ||||
Leverage and Risk
The most obvious risk of leverage is that it multiplies losses.
- A corporation that borrows too much money might face bankruptcy during a business downturn, while a less-levered corporation might survive.
- An investor who buys a stock on 50% margin will lose 40% of his money if the stock declines 20%.
- If a company borrows money to modernize, or add to its product line, or expand internationally, the additional diversification might more than offset the additional risk from leverage.
- Or if an investor uses a fraction of his or her portfolio to margin stock index futures and puts the rest in a money market fund, he or she might have the same volatility and expected return as an investor in an unlevered equity index fund, with a limited downside.
So while adding leverage to a given asset always adds risk, it is not the case that a levered company or investment is always riskier than an unlevered one. In fact, many highly-levered hedge funds have less return volatility than unlevered bond funds, and public utilities with lots of debt are usually less risky stocks than unlevered technology companies.
Popular risks
There is a popular prejudice against leverage rooted in the observation that people who borrow a lot of money often end up badly. But the issue here is those people are not leveraging anything, they're borrowing money for consumption.
In finance, the general practice is to borrow money to buy an asset with a higher return than the interest on the debt. That at least might work out. People who consistently spend more than they make have a problem, but it's overspending (or underearning), not leverage. The same point is more controversial for governments.
People sometimes borrow money out of desperation rather than calculation. That also is not leverage. But it is true that leverage sometimes increases involuntarily. When Long-Term Capital Management collapsed with over 100 to 1 leverage, it wasn't that the principals tried to run the firm at 100 to 1 leverage, it was that as equity eroded and they were unable to liquidate positions, the leverage level was beyond their control. One hundred to one leverage was a symptom of their problems, not the cause (although, of course, part of the cause was the 27 to 1 leverage the firm was running before it got into trouble, and the 55 to 1 leverage it had been forced up to by mid-August 1998 before the real troubles started). But the point is the fact that collapsing entities often have a lot of leverage does not mean that leverage causes collapses.
Involuntary leverage is a risk. It means that as things get bad, leverage goes up, multiplying losses as things continue to go down. This can lead to rapid ruin, even if the underlying asset value decline is mild or temporary. The risk can be mitigated by negotiating the terms of leverage, and by leveraging only liquid assets.
Forced position reductions
A common misconception is that levered entities are forced to reduce positions as they lose money. This is only true if the entity is run at maximum leverage.
The point is that it is using maximum leverage that can force position reductions, not simply using leverage. It often surprises people to learn that hedge funds running at 10 to 1 or higher notional leverage ratios hold 80 percent or 90 percent cash.
Model risk
Another risk of leverage is model risk. Economic leverage depends on model assumptions. If that assumption is incorrect, the fund may have much more economic leverage than it thinks. For example, if refinery capacity is shut down by a hurricane, the price of oil may fall (less demand from refineries) while the price of gasoline might rise (less supply from refineries). A 5% fall in the price of oil and a 5% rise in the price of gasoline could wipe out the fund.
Counterparty risk
Leverage may involve a counterparty, either a creditor or a derivative counterparty. It doesn't always do that, for example a company levering by acquiring a fixed asset has no further reliance on a counterparty.
In the case of a creditor, most of the risk is usually on the creditor's side, but there can be risks to the borrower, such as demand repayment clauses or rights to seize collateral. If a derivative counterparty fails, unrealized gains on the contract may be jeopardized. These risks can be mitigated by negotiating terms, including mark-to-market collateral.
http://en.wikipedia.org/wiki/Leverage_(finance)
Leverage
Using OPM (other people's money) to make money is smart business as long as the company doesn't go over its head in debt.
From the perspective of a shareholder, the more revenue-producing assets a company can put into play without requiring more money from the shareholders, the better.
The downside, of course, is the vulnerability issue and what creditors might do if the income dries up enough to make servicing the debt difficult or impossible.
Common ratios to evaluate leverage are:
1. Debt to Assets (Total Debt / Total Assets)
2. Assets to Equity (Total Assets / Shareholder Equity)
3. Debt to Equity (Total Debt / Shareholder Equity)
4. Debt to Capital (Long-term Debt / Total Capitalization)
Don't base an investment solely on any of the ratios above. Their most useful purpose could be to call your attention to possible upcoming changes in your quality criteria and might lead you to be more vigilant about them as you manage your portfolio.
Debt Service
For those companies with high leverage, you should also look at their ability to service their debts. For this, look at these ratios:
1. Interest Coverage (EBIT / Interest)
2. Interest and Principal Coverage [EBIT / (Interest + Adjusted Principal Repayments)]
Read more: http://www.investopedia.com/terms/l/leverageratio.asp#ixzz2ALwlASAr
From the perspective of a shareholder, the more revenue-producing assets a company can put into play without requiring more money from the shareholders, the better.
The downside, of course, is the vulnerability issue and what creditors might do if the income dries up enough to make servicing the debt difficult or impossible.
Common ratios to evaluate leverage are:
1. Debt to Assets (Total Debt / Total Assets)
2. Assets to Equity (Total Assets / Shareholder Equity)
3. Debt to Equity (Total Debt / Shareholder Equity)
4. Debt to Capital (Long-term Debt / Total Capitalization)
Don't base an investment solely on any of the ratios above. Their most useful purpose could be to call your attention to possible upcoming changes in your quality criteria and might lead you to be more vigilant about them as you manage your portfolio.
Debt Service
For those companies with high leverage, you should also look at their ability to service their debts. For this, look at these ratios:
1. Interest Coverage (EBIT / Interest)
2. Interest and Principal Coverage [EBIT / (Interest + Adjusted Principal Repayments)]
Definition of 'Leverage Ratio'
Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.Investopedia explains 'Leverage Ratio'
The most well known financial leverage ratio is the debt-to-equity ratio. For example, if a company has $10M in debt and $20M in equity, it has a debt-to-equity ratio of 0.5 ($10M/$20M).Read more: http://www.investopedia.com/terms/l/leverageratio.asp#ixzz2ALwlASAr
Thursday, 25 October 2012
Tesco: A FTSE 100 Dividend-Raising Star
October 19, 2012
LONDON -- In an outcome that's tough on investors, the FTSE 100 has failed to deliver a rising dividend payout over the last few years.
Just look at the iShares FTSE 100 ETF, for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:
Year
|
2007
|
2008
|
2009
|
2010
|
2011
|
|---|---|---|---|---|---|
| Dividend per share (in pence) |
19.1
|
20.2
|
17.1
|
16.2
|
18.1
|
But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is Tesco(LSE: TSCO.L ) (NASDAQOTH: TSCDY.PK)
The big question is: Can the company's dividend continue to outperform its index? Let's take a closer look.
Tesco owns the U.K.'s largest supermarket chain and is expanding abroad as well. With the shares at 322 pence, the market cap is 25.8 billion pounds. This table summarizes the firm's recent financial performance:
Trading Year
|
2007
|
2008
|
2009
|
2010
|
2011
|
|---|---|---|---|---|---|
| Revenue (in millions of pounds) |
47,298
|
53,898
|
56,910
|
60,455
|
64,539
|
| Net cash from operations (in millions of pounds) |
3343
|
3960
|
4745
|
4239
|
4408
|
| Diluted earnings per share (in pence) |
26.61
|
26.96
|
29.19
|
34.25
|
36.64
|
| Dividend per share (in pence) |
10.9
|
11.96
|
13.05
|
14.46
|
14.76
|
So, the dividend has increased by 35% during the last five years -- equivalent to a 7.9%compound annual growth rate.
Tesco describes itself as one of the world's largest retailers with operations in 14 countries and employing more than 500,000 people. In the U.K., it is the country's largest retailer. Britain is important to Tesco as it currently accounts for two thirds of global sales. That's why the shares fell when profits slipped recently, and the directors admitted that the U.K. store portfolio had suffered from under-investment, thanks to the pursuit of international growth. There's evidence to suggest where investment has gone in the statistic that two-thirds of Tesco's selling space is overseas. So the majority of stores are abroad despite foreign sales only contributing one third of revenues.
Right now, the directors have firmly re-focused on the core U.K. market, and a domestic investment program is under way. Tesco has some catching up to do at home, but I'm with those that think it can achieve that and go on to grow international sales and profits. If the company pulls off that double whammy, there's potential cheer for those using the current share price setback to lock in a decent dividend yield, as the progressive dividend policycontinues.
Tesco's dividend growth scoreI analyze four different features of a company to judge whether its dividend can continue to rise:
- Dividend cover: the recent dividend was covered around 2.5 times by earnings. 4/5
- Net cash or debt: net gearing just over 50% with debt around 2.5 times earnings. 3/5
- Cash flow: historically, good cash support for profits. 4/5
- Outlook and recent trading: earnings down in recent trading and the outlook is flat.3/5
Overall, I score Tesco 14 out of 20, which encourages me to believe the firm's dividend can continue to out-pace dividends from the FTSE 100.
Foolish summaryCash flow is backing profits, and debt appears to be under control. The short-term outlook may be flat but it's hard to see Tesco's domestic investment failing. To me, the progressive dividend policy looks secure.
Right now, the forecast full-year dividend is 15.26 pence per share, which supports a possible income of 4.7%. That looks attractive to me.
Tesco is one of several dividend out-performers on the London stock exchange.
How Long Will It Take Tesco to Recover?
LONDON -- Top U.K. supermarket Tesco (LSE: TSCO.L ) shocked the market back in January with its first profit warning in 20 years. The FTSE 100 firm saw almost 5 billion pounds wiped off the value of its shares at a stroke.
Nine months on, and a disappointing set of interim results later -- a double-digit percentage fall in trading profit -- Tesco's shares languish at the same level they dived to immediately following the profit warning.
So, how long will it take Tesco to recover? Let's have a look at three other supermarkets that have issued profit warnings in the past 10 years.
Morrison's meal deal: four years of indigestionIn March 2004, Wm Morrison Supermarkets completed the 3.4 billion pound acquisition of rival chain Safeway. Within six months, it issued a profit warning for its fiscal year 2005 -- the chain's first profit warning in 37 years.
By June 2005, Morrison had issued no less than five profit warnings, extending the fallout from the acquisition into fiscal year 2006. As the table below shows, it would take until 2008 for Morrison's earnings per share to surpass its pre-profit-warning level of 2004.
2004
|
2005
|
2006
|
2007
|
2008
| |
|---|---|---|---|---|---|
| Revenue (in billions of pounds) | 4.9 | 12.1 | 12.1 | 12.5 | 13.0 |
| EPS (in pence) | 12.6 | 8.1 | (9.5) | 9.3 | 20.8 |
| Dividend per share (in pence) | 3.3 | 3.7 | 3.7 | 4.0 | 4.8 |
Of course, Morrison's bout of severe indigestion from feasting on Safeway is very different to Tesco's current situation.
However, there are perhaps a couple of points worth noting. On the optimistic side, Morrison was able to maintain its dividend despite its difficulties. On the pessimistic side, analysts remained over-optimistic about Morrison's earnings, not only after the first profit warning but also through the following 12 months.
Sainsbury's six years of hurt
J Sainsbury issued three profit warnings for its fiscal year 2005. The company had been chasing higher margins at the expense of the customer experience. Sound familiar?
Sainsbury's directorspeak and actions to remedy the situation in 2004-05 also reverberate in many ways with Tesco's in 2012. Here are some pertinent snippets from Sainsbury:
There is nothing fundamentally wrong with the brand. The problem was that we hadn't delivered it well enough in recent years.Our number one priority … to make things better for our customers as quickly as possible … to "fix the basics."Recruitment of 3,000 additional colleagues into stores.131 stores have not received any investment for a number of years … Customers, representing 20 percent of Sainsbury's sales, are not experiencing the best store environment and these stores will be refurbished over the next two years.Overall, we think we've made a good start, but there's still much left to be done.
As the table below shows, there was indeed much left to be done.
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
| |
|---|---|---|---|---|---|---|---|
| Revenue (in billions of pounds) | 18.2 | 16.6 | 16.1 | 17.2 | 17.8 | 18.9 | 20.0 |
| EPS (in pence) | 20.7 | -3.0 | 3.8 | 19.2 | 19.1 | 16.6 | 32.1 |
| Dividend per share (in pence) | 15.7 | 7.8 | 8.0 | 9.8 | 12.0 | 13.2 | 14.2 |
Sainsbury had reckoned it would take until fiscal year 2008 to bring about lasting change. As far as earnings performance was concerned, it took until 2010 for EPS to surpass its pre-profit-warning level of 2004. Meanwhile, the dividend, which was slashed in 2005, had yet to regain its former level.
Carrefour on all fours: five years and countingFrench supermarket giant Carrefour has similar revenues to Tesco and, like its U.K. counterpart, is the dominant force in its home territory.
Carrefour issued a profit warning in June 2008 and a second six months later, citing weaker consumer spending, particularly in Europe. An uptick in revenues and earnings in 2010 proved to be a false dawn and the company issued five profit warnings for its fiscal year 2011.
As the table below shows, an improvement is expected in the current year. Nevertheless, the dividend has been cut, and both EPS and dividend per share are forecast to be at around half their pre-profit-warning level of 2007.
2007
|
2008
|
2009
|
2010
|
2011
|
2012 (forecast)
| |
|---|---|---|---|---|---|---|
| Revenue (in billions of euros) | 82.1 | 87.0 | 87.4 | 91.5 | 80.5 | 80.8 |
| EPS (c) | 267 | 186 | 48 | 64 | 56 | 134 |
| Dividend per share (c) | 108 | 108 | 108 | 108 | 108 | 59 |
Foolish bottom lineIt took four years for Morrison to get its EPS back to the level before the first profit warning; it took Sainsbury six years; and for Carrefour it's five years and counting.
Tesco may pull a quick-turnaround rabbit out of the hat, but if recent supermarket history is any guide, it could be a longer and rougher ride than I suspect many investors are expecting.
Certainly, Tesco's problems amount to a whole lot more than one period of poor Christmas trading. In the words of the chief executive, the company needs to address "long-standing business issues" in the U.K.
Once on the wrong tack, supermarkets, like supertankers, typically take an age to change course. Tesco's shares may be trading at under 10 times current-year earnings forecasts and offer a prospective yield of 4.8%, but investors need to consider the opportunity cost of a protracted recovery.
One super-investor who is aboard the Tesco supertanker for the long haul is US multi-billionaire Warren Buffett. You can read the full story of Buffet's investment in a free and exclusive Motley Fool report: "The One UK Share Warren Buffett Loves."