Present-Value Analysis and the Difficulty of Forecasting Future Cash Flow
Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Friday 30 December 2022
Difficulty of Forecasting Future Cash Flow
Thursday 29 December 2022
Three useful yardsticks of business value
Business Valuation
To be a value investor, you must buy at a discount from underlying value.
Analyzing each potential value investment opportunity therefore begins with an assessment of business value.
While a great many methods of business valuation exist, there are only three that I find useful.
1. NPV
The first is an analysis of going-concern value, known as net present value (NPV) analysis. NPV is the discounted value of all future cash flows that a business is expected to generate.
[Using multiples. A frequently used but flawed shortcut method of valuing a going concern is known as private-market value. This is an investor’s assessment of the price that a sophisticated businessperson would be willing to pay for a business. Investors using this shortcut, in effect, value businesses using the multiples paid when comparable businesses were previously bought and sold in their entirety. ]
2. Liquidation value
The second method of business valuation analyzes liquidation value, the expected proceeds if a company were to be dismantled and the assets sold off. Breakup value, one variant of liquidation analysis, considers each of the components of a business at its highest valuation, whether as part of a going concern or not.
3. Stock market value
The third method of valuation, stock market value, is an estimate of the price at which a company, or its subsidiaries considered separately, would trade in the stock market. Less reliable than the other two, this method is only occasionally useful as a yardstick of value.
Conclusions:
Each of these methods of valuation has strengths and weaknesses.
None of them provides accurate values all the time.
Unfortunately no better methods of valuation exist.
Investors have no choice but to consider the values generated by each of them; when they appreciably diverge, investors should generally err on the side of conservatism.
The concept of a range of value:
Businesses, unlike debt instruments, do not have contractual cash flows. As a result, they cannot be as precisely valued as bonds.
In Security Analysis Benjamin Graham and David Dodd discussed the concept of a range of value:
- the value is adequate – e.g., to protect a bond or to justify a stock purchase – or
- else that the value is considerably higher or considerably lower than the market price.
Graham frequently performed a calculation known as net working capital per share, a back-of-the-envelope estimate of a company’s liquidation value. His use of this rough approximation was a tacit admission that he was often unable to ascertain a company’s value more precisely.
Benjamin Graham knew how hard it is to pinpoint the value of businesses and thus of equity securities that represent fractional ownership of those businesses.
Wednesday 28 December 2022
A Range of Value
A Range of Value
Businesses, unlike debt instruments, do not have contractual
cash flows. As a result, they cannot be as precisely valued as
bonds.
value of businesses and thus of equity securities that represent
fractional ownership of those businesses. In Security Analysis he
and David Dodd discussed the concept of a range of value:
determine exactly what is the intrinsic value of a given security.
It needs only to establish that the value is adequate – e.g., to
protect a bond or to justify a stock purchase – or else that the
value is considerably higher or considerably lower than the
market price. For such purposes an indefinite and approximate
net working capital per share, a back-of-the-envelope estimate
of a company’s liquidation value. His use of this rough
approximation was a tacit admission that he was often unable
to ascertain a company’s value more precisely.
To illustrate the difficulty of accurate business valuation,
investors need only consider the wide range of Wall Street
estimates that typically are offered whenever a company is put
up for sale.
marketed Bloomingdales to prospective buyers; Harcourt Brace
Jovanovich, Inc., held an auction of its Sea World subsidiary;
and Hilton Hotels, Inc., offered itself for sale. In each case Wall
Street’s value estimates ranged widely, with the highest
estimate as much as twice the lowest figure. If expert analysts
with extensive information cannot gauge the value of high
investors should not fool themselves into believing they are
capable of greater precision when buying marketable securities
based only on limited, publicly available information.
Markets exist because of differences of opinion among
many fewer differences of opinion; market prices would
fluctuate less frequently, and trading activity would diminish.
To fundamentally oriented investors, the value of a security to
the buyer must be greater than the price paid, and the value to
the seller must be less, or no transaction would take place. The
discrepancy between the buyer’s and the seller’s perceptions of
value can result from such factors as differences in assumptions
regarding the future, different intended uses for the asset, and
differences in the discount rates applied. Every asset being
the value to the buyer and the value to the seller; the actual
transaction price will be somewhere in between.
In early 1991, for example, the junk bonds of Tonka
Corporation sold at steep discounts to par value, and the stock
sold for a few dollars per share. The company was offered for
sale by its investment bankers, and Hasbro, Inc., was evidently
willing to pay more for Tonka than any other buyer because of
economies that could be achieved in combining the two
operations. Tonka, in effect, provided appreciably higher cash
flows to Hasbro than it would have generated either as a
difference of opinion between the financial markets and Hasbro
regarding the value of Tonka, a disagreement that was resolved
with Hasbro’s acquisition of the company.
The Art of Business Valuation. BUSINESS VALUE IS IMPRECISIVELY KNOWABLE.
Not only is business value imprecisely knowable, it also changes over time, fluctuating with numerous macroeconomic, microeconomic, and market-related factors. So while investors at any given time cannot determine business value with precision, they must nevertheless almost continuously reassess their estimates of value in order to incorporate all known factors that could influence their appraisal.
- The NPV calculation provides a single-point value of an investment by discounting estimates of future cash flow back to the present.
- IRR, using assumptions of future cash flow and price paid, is a calculation of the rate of return on an investment to as many decimal places as desired.
The seeming precision provided by NPV and IRR calculations can give investors a false sense of certainty for they are really only as accurate as the cash flow assumptions that were used to derive them.
The advent of the computerized spreadsheet has exacerbated this problem, creating the illusion of extensive and thoughtful analysis, even for the most haphazard of efforts. Typically, investors place a great deal of importance on the output, even though they pay little attention to the assumptions.
- IRR provides the precise rate of return to the investor while
- NPV describes the value of the investment at a given discount rate.
In the case of a bond, these calculations allow investors to quantify their returns under one set of assumptions, that is, that contractual payments are received when due.
Dutch Lady
Fiscal year is January-December.
2021 2020 2019 2018 2017 5-year trend
Understanding financially distressed and bankrupt companies.
Financially distressed and bankrupt securities are analytically complex and often illiquid.
The reorganization process is both tedious and highly uncertain.- - the effect of financial distress on business results;
- - the availability of cash to meet upcoming debt-service requirements; and
- - likely restructuring alternatives, including a detailed understanding of the different classes of securities and financial claims outstanding and who owns them.
- - reorganization process in general as well as
- - the specifics of each situation being analyzed.
Companies get into financial trouble for at least one of three reasons:
- - operating problems,
- - legal problems, and/or
- - financial problems.
Financial distress is typically characterized by a shortfall of cash to meet operating needs and scheduled debt-service obligations.
- - When a company runs short of cash, its near-term liabilities, such as commercial paper or bank debt, may not be refinanceable at maturity.
- - Suppliers, fearing that they may not be paid, curtail or cease shipments or demand cash on delivery, exacerbating the debtor’s woes.
- - Customers dependent on an ongoing business relationship may stop buying.
- - Employees may abandon ship for more secure or less stressful jobs.
Since the effect of financial distress on business results can vary from company to company, investors must exercise considerable caution in analyzing distressed securities.
- capital-intensive businesses are, over the long run, relatively immune from financial distress, while
- those that depend on public trust, like financial institutions, or on image, like retailers, may be damaged irreversibly.
- - After a successful exchange offer, an injection of fresh capital, or a bankruptcy reorganization, these businesses recover to their historic levels of profitability.
- - Others, however, remain shadows of their former selves.
- - For debtors with most or all of their obligations at a holding company one or more levels removed from the company’s primary assets, the impact of financial distress can be minimal. Overleveraged holding companies, for example, can file for bankruptcy protection while their viable subsidiaries continue to operate unimpaired; Texaco entered bankruptcy while most of its subsidiaries did not file for court protection.
- - Companies that incur debt at the operating-subsidiary level may face greater dislocations.
The popular media image of a bankrupt company is a rusting hulk of a factory viewed from beyond a padlocked gate. Although this is sometimes the unfortunate reality, far more often the bankrupt enterprise continues in business under court protection from its creditors.
- - As soon as new lenders can be assured of their senior creditor position, debtor-in-possession financing becomes available, providing cash to meet payroll, to restock depleted inventories, and to give confidence both to customers and suppliers.
- - Since postpetition suppliers to the debtor have a senior claim to unsecured prepetition creditors, most suppliers renew shipments.
- - As restocked inventories and increased confidence stimulate business and as deferred maintenance and delayed capital expenditures are undertaken, results may begin to improve.
- - Cash usually starts to build (for a number of reasons).
- - When necessary, new management can be attracted by the prospect of a stable and improving business situation and by the lure of low-priced stock or options in the reorganized company.
Thursday 22 December 2022
PETRONAS DAGANGAN
Fiscal year is January-December.
NIKE
Fiscal year is June-May.
Wednesday 21 December 2022
Heineken Malaysia Bhd (HEIM)
Fiscal year is January-December.
How and Why Do Companies Pay Dividends?
An important part missing in many of these discussions
- is the purpose of dividends and
- why they are used by some companies and not by others.
Arguments Against Dividends
1. First, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create "homemade" dividends.
2. The second argument claims that little to no dividend payout is more favorable for investors.
According to the proponents of the no dividend policy, a company's alternatives to paying out excess cash as dividends are the following:
- undertaking more projects,
- repurchasing the company's own shares,
- acquiring new companies and
- profitable assets, and reinvesting in financial assets.
Arguments For Dividends
In opposition to these two arguments is the idea that a high dividend payout is important for investors because:
- Companies that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions; these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends.
- Furthermore, companies without a dividend history are generally viewed favorably when they declare new dividends.
Dividend-Paying Methods
Should the company decide to follow either the high or low dividend method, it would use one of three main approaches:
- residual,
- stability, or
- a hybrid compromise between the two.
Residual
Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These companies usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, which demonstrates that they decide on dividends only if there is enough money left over after all operating and expansion expenses are met.
For example, let's suppose that a company named CBC has recently earned $1,000 and has a strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity).
- Now, suppose this company has a project with a capital requirement of $900. In order to maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by using debt ($300) and two-thirds ($600) by using equity. In other words, the company would have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for dividends.
- On the other hand, if the project had a capital requirement of $1,500, the debt requirement would be $500 and the equity requirement would be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project required an equity portion that was greater than the company's available levels, the company would issue new stock.
Stability
The fluctuation of dividends created by the residual policy significantly contrasts with the certainty of the dividend stability policy.
- may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or
- it may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings.
Suppose our imaginary company, CBC, earned the $1,000 for the year (with quarterly earnings of $300, $200, $100, $400).
- If CBC decided on a stable policy of 10% of yearly earnings ($1,000 x 10%), it would pay $25 ($100/4) to shareholders every quarter.
- Alternatively, if CBC decided on a cyclical policy, the dividend payments would adjust every quarter to be $30, $20, $10 and $40 respectively.
Hybrid
The final approach is a combination between the residual and stable dividend policy. Using this approach, companies tend to view the debt/equity ratio as a long-term rather than a short-term goal. In today's markets, this approach is commonly used by companies that pay dividends.
- As these companies will generally experience business cycle fluctuations, they will generally have one set dividend, which is set as a relatively small portion of yearly income and can be easily maintained.
- On top of this set dividend, these companies will offer another extra dividend paid only when income exceeds general levels.
Conclusion
If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments will be for investors - and how stable the income.
http://investopedia.com/articles/03/011703.asp?partner=basics4bb
Tuesday 20 December 2022
Perlis Plantation Berhad
Fiscal year is January-December.
Sunday 18 December 2022
TESCO UK
Fiscal year is March-February.
Tencent HK
Fiscal year is January-December.
Saturday 17 December 2022
Alibaba HK
Fiscal year is April-March. All values HKD Millions.
Public Bank Berhad
Fiscal year is January-December. All values MYR Millions.
Southern Acids Berhad
Fiscal year is April-March. All values MYR Millions.
United Plantation
Fiscal year is January-December. All values MYR Millions.