Investor's Checklist: Business Services

Understand the business model.  Knowing if a company leverages technology, people, or hard assets will provide insight as to the kind of financial results the company may produce.

Look for scale and operating leverage.  These characteristics can provide significant barriers to entry and lead to impressive financial performance.

Look for recurring revenue.  Long-term customer contracts can guarantee certain levels of revenue for years into the future.  This can provide a degree of stability in financial results.


Focus on cash flow.  Investors ultimately earn returns based on a company's cash-generating ability.  Avoid investments that aren't expected to generate adequate cash flow.

Size the market opportunity.  Industries with big, untapped market opportunities provide an attractive environment for high growth.  In addition, companies chasing markets perceived to be big enough to accommodate growth for all industry participants are less likely to compete on price alone.

Examine growth expectations.  Understand what kind of growth rates are incorporated into the share price.  If the rates of growth are unrealistic, avoid the stock.  



Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Transmile Q3 net loss climbs to RM135m

Transmile Q3 net loss climbs to RM135m
Published: 2010/11/16


Transmile Group Bhd (7000) reported an almost ninefold jump in third quarter net loss mainly due to the lower value of its aircraft.


The financially-troubled air-cargo company posted a net loss of RM135.1 million for the quarter to September 30 2010, up from RM15 million a year ago.

Transmile did not directly comment on its loss but said it made a smaller adjusted loss before tax and exceptional items of RM8.45 million as against RM20.4 million in the same quarter in 2009.

Revenue for the quarter was also two thirds higher at RM50.7 million.

The impairment loss on Transmile's MD-11 aircraft is RM143.8 million.
"The group is committed to dispose of its idle wide body aircraft to settle its loan obligations. Efforts to sell the aircraft are on going and accordingly, the aircraft are presented as held for sale," Transmile said in a statement to Bursa Malaysia.

The planes are now valued at RM242.1 million on its books.

The impairment loss reflects "the fair value less cost to sell based on the latest indicative offers received by the company for the wide body aircraft".

The company now owes more than RM500 million to creditors in the form of convertible bonds and medium-term notes (MTN), which it is unable to repay after freight traffic crashed in late 2008 to early 2009.

The MTN holders are owed RM105 million, with the EPF holding around half of those notes. Other MTN holders are Meridian Asset Management, OSK Group, Agrobank and AmBank Group, according to previous reports.

Transmile had fallen into the financially-troubled category of Practice Note 17 earlier this year. It has made little progress in restructuring its debt as it has failed to find buyers for its MD-11 aircraft.




Read more: Transmile Q3 net loss climbs to RM135m http://www.btimes.com.my/Current_News/BTIMES/articles/miletran/Article/index_html#ixzz15Og2awt2

Investor's Checklist: Hard-Asset-Based Businesses

Companies in the hard asset based subsector depend on big investments in fixed assets to grow their businesses.  Airlines, waste haulers and expedited delivery companies all fall into this subsector.  In general, these companies aren't as attractive as technology-based businesses, but investors can still find some wide-moat stocks and good investments in this area.

Industry Structure

Growth for hard asset based businesses inevitably requires large incremental outlays for fixed assets.  After all, once an airline is flying full planes, the only way to get more passengers from point A to point B is to acquire an additional aircraft, which can cost US $35 million or more.

Because the incremental fixed investment occurs before asset deployment, companies in this sector generally finance their growth with external funding.  Debt can be used to finance almost all of the asset's cost, so lenders generally require the asset to provide collateral against the loan.  With this model, high leverage is not necessarily a bad thing, provided that the company can make enough money deploying the asset to cover the cost of debt financing and earn a reasonable return for shareholders.

Subsector:  Airlines


(With this in mind, airlines are generally the least attractive investment of all the companies in this subsector.  Airlines must bear enormous fixed costs to maintain their fleets and meet the demands of expensive labour contracts, yet they sell a commodity service that's difficult to differentiate.  As a result, price competition is intense, profit margins are razor-thin - and often non-existent - and operating leverage is so high that the firms can swing from being wildly profitable to nearly bankrupt in a short time.  If you don't think this sounds like a recipe for good long-term investments, you're right - airlines have lost a collective $11 billion (excluding the impact of recent government handouts) between deregulation in 1978 and 2002.  Over the same time period, 125 airlines had filed for Chapter 11 bankruptcy protection and 12 of them filed for Chapter 7 liquidation.)

Hallmarks of Success for Hard-Asset-Based Businesses

Cost leadership:  Because hard-asset based companies have large fixed costs, those that deliver their products most efficiently have a strong advantage and can achieve superior financial performance, such as Southwest in the airline industry.  To get an idea about how efficiently a company operates, look at its fixed asset turnover, operating margins and ROIC - and compare its numbers to industry peers.

Prudent financing:  Remember, having a load of debt is not itself a bad thing.  Having a load of debt that cannot be easily financed by the cash flow of the business is a recipe for disaster.  When analysing companies with high debt, always be sure that the debt can be serviced from free cash flow, even under a downside scenario.

Investor's Checklist:  Hard-Asset-Based Businesses

• Understand the business model.  Knowing a company leverages on hard assets will provide insight as to the kind of financial results the company may produce.
• Look for scale and operating leverage.  These characteristics can provide significant barriers to entry and lead to impressive financial performance.
• Look for recurring revenue.  Long-term customer contracts can guarantee certain levels of revenue for years into the future.  This can provide a degree of stability in financial results.
• Focus on cash flow.  Investors ultimately earn returns based on a company's cash-generating ability.  Avoid investments that aren't expected to generate adequate cash flow.
• Size the market opportunity.  Industries with big, untapped market opportunities provide an attractive environment for high growth.  In addition, companies chasing markets perceived to be big enough to accommodate growth for all industry participants are less likely to compete on price alone.
• Examine growth expectations.  Understand what kind of growth rates are incorporated into the share price.  If the rates of growth are unrealistic, avoid the stock.

The Five Rules for Successful Stock Investing

by Pat Dorsey

A quick look at Transmile (14.5.2010)

A quick look at Transmile (14.5.2010)
http://spreadsheets.google.com/pub?key=t3UYetvUUuc1vbXWvCaAOTw&output=html

AVOID!!!
The company is still losing money.  It has a lot of debts.  


It's cash and cash equivalent is declining, presently at MR 86.43 million.  It is struggling using cash generated from working capital (account receivables' day decreased from 73 days to 27.5 days, and account payables' days increased from 22.3 days to 37.9 days).


At 50c per share, its market capitalisation is MR 135.06 million.  Its total equity in its balance sheet at 31.12.2009 was MR 22.26 million.  It's assets are in the planes.



Click also:
Lessons From Transmile

Buffett (2000): The risks associated with the twin issues of CEO's lofty projections and sustainable long-term profit growth.

Warren Buffett talked about wealth transfers to greedy promoters during IPOs in the letter for the year 2000. Let us go further down the same letter and see what other investment wisdom the master has to offer.

The master's macro bet

Usually, Buffett refrains from making precise comments about the future especially at the macro level. But if he is willing to bet a large sum on the likeliness of an event happening, then indeed we must sit up and take notice. In the letter for the year 2000, the master has made one such prediction and was willing to bet a large sum on it. The prediction was about the magnitude of growth in profits that would take place among the 200 most profitable companies in the US at that time. Since the master does not believe in short term predictions, the time horizon that was assumed was ten years.

The CEO with a crystal ball

The letter for the year 2000 came out at a time when the practice of a CEO predicting the growth rate of his company publicly was becoming commonplace. Although Buffett did not have an issue with a CEO setting internal goals and even making public some broad assumptions with proper warnings thrown in, it did annoy him when CEOs started making lofty assumptions about future profit growth.

This is because the likelihood of the CEO meeting his aggressive targets year after year on a consistent basis and well into the future was very low and hence this amounted to misleading the investors. After having spent decades researching and analyzing companies, the master had come to the conclusion that there are indeed a very small number of large businesses that could grow its per share earnings by 15% annually over a period of 10 years. Infact, as mentioned in the above paragraph, the master was even willing a bet a large sum on it.

The reasons may not be difficult to find. In free markets, the intensity of competition is so high that it is very difficult for profitable players to maintain high growth rates for consistently long periods of time. Unless the business is endowed with some extremely strong competitive advantages, competition is likely to nibble away at its market share and cut into its profit margins, thus making high growth rates difficult.

Let us hear in the master's own words his take on the twin issues of

• CEO's lofty projections and 
• sustainable long-term profit growth.

The golden words

"Charlie and I think it is both deceptive and dangerous for CEOs to predict growth rates for their companies. They are, of course, frequently egged on to do so by both analysts and their own investor relations departments. They should resist, however, because too often these predictions lead to trouble."

He further adds, "It's fine for a CEO to have his own internal goals and, in our view, it's even appropriate for the CEO to publicly express some hopes about the future, if these expectations are accompanied by sensible caveats. But for a major corporation to predict that its per-share earnings will grow over the long term at, say, 15% annually is to court trouble."

The master reasons, "That's true because a growth rate of that magnitude can only be maintained by a very small percentage of large businesses. Here's a test: Examine the record of, say, the 200 highest earning companies from 1970 or 1980 and tabulate how many have increased per-share earnings by 15% annually since those dates. You will find that only a handful have. I would wager you a very significant sum that fewer than 10 of the 200 most profitable companies in 2000 will attain 15% annual growth in earnings-per-share over the next 20 years."

Adding further, the master says, "The problem arising from lofty predictions is not just that they spread unwarranted optimism. Even more troublesome is the fact that they corrode CEO behavior. Over the years, Charlie and I have observed many instances in which CEOs engaged in uneconomic operating maneuvers so that they could meet earnings targets they had announced. Worse still, after exhausting all that operating acrobatics would do, they sometimes played a wide variety of accounting games to "make the numbers." These accounting shenanigans have a way of snowballing: Once a company moves earnings from one period to another, operating shortfalls that occur thereafter require it to engage in further accounting maneuvers that must be even more "heroic." These can turn fudging into fraud. (More money, it has been noted, has been stolen with the point of a pen than at the point of a gun.)"

Transmile still grappling with turnaround

Transmile still grappling with turnaround

Transmile Group MD Liu Tai Shin (right), and Group COO Robert Hyslop at the press conference today. — Picture by Choo Choy May

By Lee Wei Lian

KUALA LUMPUR, April 29 — Cargo airline Transmile Group Bhd is working on resolving its debt woes and was given till April 16 to settle its debts with Malaysian Trustees Bhd (MTB), failing which the latter would seek a winding up petition.

Transmile Managing Director Liu Tai Shin said today that although the April 16 deadline had lapsed, the company had yet to receive a winding up notice from MTB.

“We’ve not received any further notice,” he told reporters after the company’s annual general meeting today.

Transmile’s debts amounting to RM532 million with some 20 local and foreign banks have been in default for 30 months and Liu said the company is working with advisors to restructure the debt.

Liu said that Transmile’s focus will be on resolving its debt issues.

“Our target is to get rid of all our debt problems,” he said.

He also said that the lawsuit filed against the former management that was announced on Tuesday was partly to help the company regain credibility.

“We have a bad reputation which we need to address,” he said. “It is not about getting money back. From the company’s perspective, we need a closure.”

Transmile came into the spotlight after an accounting scandal was exposed in mid-2007 which resulted in a steep drop in the company’s share price.

The company said on Tuesday that its board of directors is suing former chief executive officer Gan Boon Aun and former chief financial officer Lo Chok Ping for breaching their duties by grossly overstating the company’s revenue.

Liu declined to give a timeframe on when Transmile — which recorded a pre-tax loss of RM270.6 million in 2009 as compared with a loss of RM121.2 million in 2008 — is expected to be turned around.

He said that the company faced difficulty in disposing four planes worth an estimated RM386 million as potential customers faced troubles in obtaining financing.

“We have four planes on the tarmac that are not flying,” he said.

In terms of expansion plans, the company is branching out to the oil and gas sector, and started a Singapore to Labuan service which it hopes will help it return to profitability.

It also intends to open a new route to Balikpapan in Kalimantan.

In Transmile’s press statement, Liu said: “Despite major issues faced we are still doing business and developing new routes to strengthen the group’s presence in the region and generate revenue.”

Transmile files suit against former execs

Published: 2010/04/28
Transmile Group Bhd (7000) has filed its first civil suit against its former chief executive officer, Gan Boon Aun and chief financial officer, Lo Chok Ping, after spending three years clearing up the mess left behind from an accounting scandal.

The former industry darling is seeking compensatory damages to be determined by the High Court, special damages of RM10.6 million, costs on a full indemnity basis and interest on special and/or general damages as may be awarded by the High Court.

Transmile and Transmile Management Sdn Bhd are suing Gan and Lo for grossly overstating the group's revenue and causing questionable payments and receipts in relation to the affairs of two wholly-owned subsidiaries - Transmile Air Services Sdn Bhd and Grouptech Sdn Bhd.

The writ of summons and statement of claim were filed in the Kuala Lumpur High Court yesterday, which also claimed that the former executives had breached their duty of care to the group for failing to put in place proper internal controls.
These breaches caused the group to suffer loss and damage, such as exposing the group to inquiries and prosecution by regulatory authorities and causing it to suffer reputational loss thereby affecting its future business prospects and ability to generate income.

It also caused the group to be classified as an affected company under Practice Note 17 of Bursa Malaysia as a result of it defaulting on its loan repayments.

In 2007, a special audit by Moores Rowland Risk Management revealed that the group had overstated its revenue from 2004 to 2006 by RM622 million.

The air cargo firm has been struggling to regain its financial footing ever since the debacle, charting a net loss of RM272.4 million for the financial year ended December 31 2010.

Read more: 
Transmile files suit against former execs 
http://www.btimes.com.my/Current_News/BTIMES/articles/tmile27/Article/#ixzz0mOZ0GJgG

Kuok Khoon Ho quits Transmile board

Kuok Khoon Ho quits Transmile board

Tags: Kuok Brothers Sdn Bhd | Kuok Khoon Ho | resignation | Transmile Group Bhd

Written by Financial Daily
Wednesday, 07 October 2009 10:36

KUALA LUMPUR: Beleaguered TRANSMILE GROUP BHD [] saw the resignation of non-independent and non-executive director Kuok Khoon Ho.

The air transportation company said Kuok’s resignation took effect yesterday. He had been with the board since April 2004.

Kuok, 59, is the chairman of Kuok Brothers Sdn Bhd, which holds a 17.99% stake in Transmile or 48.6 million shares. Kuok himself holds 50,000 shares.

Transmile has borrowings of up to RM575.29 million as of June 30, 2009. It posted net loss of RM449,000 on the back of RM38.53 million in revenue in the second quarter ended June 30.

The company, which was a darling of foreign investors, was once trading at a high of RM13 in May 2007. But since then, its share price has plunged after the uncovering of massive financial irregularities. The stock closed unchanged at RM1.16 yesterday.

The Securities Commission had in July preferred criminal charges against Transmile’s former chief executive officer Gan Boon Aun, former chief financial officer Lo Chok Ping and executive director Khiudin Mohd under the Securities Industry Act 1983.

The charges were for abetting Transmile in making a statement that was misleading, in particular relating to revenue in the unaudited consolidated results for the financial year ended Dec 31, 2006. The misleading statement was in relation to its reported revenue of RM338.47 million.

However, in May last year, the SC withdrew the charge against Lo after he paid a compound of RM700,000.


This article appeared in The Edge Financial Daily, October 7, 2009.

Bear Trap(s)

Bear Trap(s)



There is an interesting post on this topic here: http://ssinvesting.blogspot.com/2008/05/how-to-define-bear-trap-if-public-bank.html


One of the challenges in investing for the long term is to have a personal strategy in handling volatility of stock prices.


You can choose to avoid such volatilities by investing in stalwarts like Nestle. This stock has long term revenue and profit growth. Its share price is trending upwards in keeping with its business performance. The consistency and predictably attracts certain types of investors. Yet, there are others who feel investing in this stock is not for them. Too slow and the returns are at best moderate!


Then, there are stocks with high volatilities or Beta. Their prices swing greatly, often based on rumours. Long term investors will be better off ignoring these fluctuations and monitor the quarterly reported results instead.

A good safety strategy in investing is to assume the attitude that all shares in the market are overpriced. This will prevent you from making big mistakes and forces you to carry out the appropriate valuation to counter this belief before putting good money to work.


What to do when the price of a good stock suddenly dropped drastically?

Instead of looking at price, follow PE. PE fluctuations up or down 20% are quite normal. You can usually ignore these, assuming you know the business of your investments well.


However, do not ignore the big fall in the PE of more than 20%. Check the news. What might be causing this sudden fall in price? Is there any fundamental deterioration in the business of the company? Will this be a temporary or permanent situation? You may have to decide to hold or sell quickly depending on your assessment.


Should you be buying more? If yes, when?


Let's review some recent events in the market.

Transmile: When news first broke a few years ago, that the auditor was unwilling to approve the accounts without qualification, the shares got sold down. This was a good learning experience. Some thought this was a buying opportunity. With the benefit of hindsight, cutting loss by selling at $9 to $11 was definitely better than the below $1 price the stock is trading at present. Wonder why related Kuok's company bought the shares during the particular period? The objectives of the majority or significant shareholders may not be in congruent with those of the minority shareholders. It was more to inspire some confidence in investors in Transmile.



PBB: Public Bank too was sold down since last year. Another drop occurred in Feb and March 09. Generally, the banking industry is going into a tough period. The price of the stock will reflect this. Is this a sell or a buy? Is this a temporary or a permanent setback to PBB core business?


Selling or buying into Transmile and PBB when their stock prices sunk are 2 entirely different operations. Which is a bear trap? Which is an opportunity or investment?

Usually the price will remain low for sometime after a bad news was known. You have time to pick these stocks. The important thing is to do the homework, check out and follow the news as this unfold. What is its impact on the long term durability of the business of the company? If you have done the homework, the analysis, the assessment of the impact of the news, the risks, and you understand the business and issues, be courageous. Make your own decision based on your own analysis. Don't be swayed by the crowd, or follow the crowd or look for affirmation by others.

The link: http://ssinvesting.blogspot.com/2008/05/how-to-define-bear-trap-if-public-bank.html rightly pointed out that the bear trap need only be applied to lousy companies with no prospect of recovery in their business. Those investing in good high quality companies need not fear the "bear traps" situations. Thanks for sharing this point. Instead the best opportunity to buy good quality companies is when they are being sold at low prices on some temporary bad news, assuming that these companies are within your circle of competence.

Understanding the business model: Hard-Asset-Based Businesses

Companies in the hard-asset-based subsector depend on big investments in fixed assets to grow their businesses. Airlines, waste haulers (Waste Management, Allied Waste, Republic Services), and expedited delivery companies (FedEx, UPS) all fall into this subsector.

In general, these companies aren't as attractive as technology-based businesses, but investors can still find some wide-moat stocks and good investments in this area.

Industry Structure

Growth for hard-asset-based businesses inevitably requires large incremental outlays for fixed assets. After all, once an airline is flyinng full planes, the only way to get more passengers from point A to point B is to acquire an additional aircraft, which can cost $35 million or more.

Because the incremental fixed investment occurs before asset deployment, companies in this sector generally finance their growth with external funding. Debt can be used to finance almost all of the asset's cost, so lenders generally require the asset to provide collateral against the loan. With this model, high leverage is not necessarily a bad thing, provided that the company can make enough money deploying the asset to cover the cost of debt financing and earn a reasonable return for shareholders.

With this in mind, airlines are generally the least attractive investment of all the companies in this subsector. Airlines must bear enormous fixed costs to maintain their fleets and meet the demands of expensive labour contracts, yet they sell a commodity service that's difficult to differentiate. As a result price competition is intense, profit margins are razor-thin - and often non-existent - and operating leverage is so high that the firms can swing from being wildly profitable to nearly bankrupt in a short time. If you don't think this sounds like a recipe for good long-term investments, you're right - airlines have lost a collective $11 billion (excluding the impact of recent government handouts) between deregulation in 1987 and 2002. Over the same time period, 125 airlines had filed for Chapter 11 bankruptcy protection, and 12 of them filed for Chapter 7 liquidation.

But despite the terrible performance for airlines in general, a few carriers have fared very well. Southwest, for one, has been profitable for 30 consecutive years - an amazing achievement considering the cyclicality of its business and the dismal operating environment for the industry in 2002. Southwest's superior financial performance is largely because of its main strategic advantage: a low cost structure driven by its practice of flying one type of aircraft for all its no frills, point-to-point routes. In an industry with less-than-desirable fundamentals, Southwest has achieved superior financial results by deploying a different and dominant, business strategy.

Other characteristics of hard-asset-based businesses make this segment worth watching. The idea of limited or shrinking assets, for example, can go a long way to provide stability in the competitive landscape for these companies. Because of the NIMBY (not in my back yard) principle, it is very difficult to get approval for new landfill sites. As a result, it is highly unlikely that new competitors will enter the landfill side of the waste management business. That puts a company such as Waste Management, which owns 40 percent of the total U.S. disposal capacity via its 300 landfills, at an advantage.

The majority of hard-asset-based companies fall into the narrow- or no-moat buckets. With few, if any, competitive advantages for many of these companies, investors should look for a pretty steep discount to a fair value estimate before buying shares.

Hallmark of Success for Hard-Asset-Based Businesses

Cost leadership: Because hard-asset-based companies have large fixed costs, those that deliver their products most efficiently have a strong advantage and can achieve superior financial performance, such as Southwest in the airline industry. Firms don't usually advertise their cost structures per se, so to get an idea about how efficiently a company operatees, look at its fixed assets turnover, operating margins, and ROIC - and compare its numbers to industry peers.

Unique assets: When limited assets are required to fulfill the delivery of a particular service, ownership of those assets is key. For example, Waste Management's numerous, well-located landfill assets represent a significant competitive advantage and brrier to entry in the waste management market because it's unlikely that enough new landfill locations will get government approval to diminish its share of this business.

Prudent financing: Remember, having a load of debt is not itself a bad thing. Having a load of debt that cannot be easily financed by the cash flow of the business is a reccipe for disaster. When analyzing companies with high debt, always be sure that the debt can be serviced from free cash flow, even under a downside scenario.

(Some Malaysian companies in this hard-asset-based businesses are Air Asia, MAS, Maybulk and Transmile.)



Ref: The Five Rules for Successful Stock Investing by Pat Dorsey