Hartalega leads healthcare on revisions

Publish date: Fri, 16 Nov 17:43  Hartalega Holdings Bhd leads on analyst revisions among eight companies in Malaysia's healthcare sector tracked by at least three analysts, data from Thomson Reuters StarMine shows. The glove manufacturer has an Analyst Revision Model (ARM) score of 98, the highest in the sector. This score has increased 40 points over the past 30 days. It has high Smartholdings and Earnings Quality scores of 94 and 80 respectively. The former suggests a potential increase in institutional ownership while the latter implies good earnings sustainability over the next 12 months. Hartalega's forward 12-month EV/EBITDA and P/CF ratios beat industry averages by 2 per cent and 9 per cent respectively. Its quarterly net income grew 28 per cent to RM59 million between September 2011 and 2012 while its quarterly free cash flow rose 27 per cent to RM42 million during the same period. Seven of 13 analysts tracking the stock have raised EPS estimates on the firm for 2013 by an average of 3.3 per cent since Nov. 7. Eight of the 13 have also increased EPS estimates for 2014 by an average of 5.1 per cent during the same period. Of the 12 analysts rating the stock, seven give it a "strong buy" or "buy", four have a "hold", while one recommends a "sell" rating. Hartalega currently trades at an all-time high of RM5, around 86 per cent of its intrinsic value of RM5.79. The stock price has risen nearly 80 per cent over the past 12 months, while the broader index gained over 10 per cent during the same period, as of Thursday's close. On the other end of the spectrum, Adventa Bhd lags the sector with an ARM score of 22. - Reuters http://www.btimes.com.my/articles/20121116174302/Article/

The Verdict on Market Timing

Over a fifty-four year period, the market has risen in thirty-six years, been even in three years, and declined in only fifteen.

• Thus, the odds of being successful when you are in cash rather than stocks are almost three to one against you.  
• An academic study by Professors Richard Woodward and Jess Chua of the University of Calgary shows that holding on to your stocks as long-term investments works better than market timing because your gains from being in stocks during bull markets far outweigh the losses in bear markets.  
• The professors conclude that a market timer would have to make correct decisions 70 percent of the time to outperform a buy and hold investor. I have never met anyone who can bat 0.700 in calling market turns.

The words of John Bogle, founder of the Vanguard Group of Investment Companies on the subject of market timing.

Bogle said,
"In 30 years in this business, I do not know anybody who has done it successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently.  Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counterproductive."

HDBSVR maintains Buy on HL Bank, TP RM17

Friday November 16, 2012 MYT 8:46:00 AM

KUALA LUMPUR: Hwang DBS Vickers Research (HDSBVR) is maintaining a Buy on Hong Leong Bank and a target price of RM17.

“This is based on the Gordon Growth Model (16% ROE, 5% growth and 10% cost of equity) and implies 2.3 times CY13 book value,” it said on Friday.

HDBSVR said HL Bank remains one of its top Buys despite share price already rising by 33% year-to-date.

It believes there is still value in extracting synergies from the rejuvenated business banking platform post merger with EON Cap.

HDBSVR said the bank's net interest income was weaker on-quarter as net interest income fell, albeit less than in the previous two quarters.

“Loan and deposit growth were subdued, with loans expanding only 1.3% q-o-q (led by mortgage) while deposits inched up 0.3%. Loan-to-deposit ratio at 73% is still the lowest among peers. Non-interest income was boosted by trading income from treasury operations.

“Excluding one-off items (EON Cap merger) in 4QFY12, expenses and cost-to-income ratio (44%) were stable in 1QFY13. Operating profit was lifted by lower collective allowance (CA) charge following the adoption of MFRS139, coupled with loan recoveries,” it said.

HDBSVR said excluding one-off adjustments for MFRS139, provisions were a mere RM4mil. Share of profit from Bank of Chengdu was 10% of pretax profit, within its expectation. Capital remains strong with Tier-1 and RWCAR (bank level) at 11.7% and 14.0%, respectively.

“We believe it is a good strategy to keep balance sheet liquid in a competitive operating environment but this may cause NIM to remain under pressure as excess liquidity which is typically placed in the interbank market carries lower yields. We are retaining our loan and deposit growth assumptions of 11% and 9%, which implies 73% loan-to-deposit ratio,” said the research house.

http://biz.thestar.com.my/news/story.asp?file=/2012/11/16/business/20121116084608&sec=business

Guan Chong Q3 earnings up 5.6% to RM27.4m, dividend 2 sen

Published: Friday November 16, 2012 MYT 1:54:00 PM

KUALA LUMPUR: Cocoa processor Guan Chong Bhd's earnings rose 5.6% to RM27.41mil in the third quarter ended Sept 30, 2012 from RM25.94mil a year ago, supported by a 5.9% increase in sales volume and improved profit margin.

It said on Friday the higher profit was achieved in spite of a 4.7% decline in revenue to RM348.47mil from RM365.72mil a year ago due to lower average selling prices of cocoa ingredients and the drop in cocoa bean prices.

Earnings per share were 5.76 sen compared with 5.44 sen. Its dividend was 2.0 sen compared with 4.0 sen a year ago.

Its managing director and CEO Brandon Tay Hoe Lian said the better earnings were despite the challenging markets in the US and Europe, and volatile prices for raw materials.

"GCB was able to weather the storm as we continued to find new markets and maintained an efficient cost structure for our plants in Pasir Gudang and Batam," he said.

On the 2.0 sen dividend, the company said it had paid 9.0 sen per share so far in FY12, or RM31.8mil, which was in line with its dividend policy of paying 25% of net profit to shareholders.

Guan Chong's nine-months earnings increased by 3.9% to RM94.02mil from RM90.47mil in the previous corresponding period. Revenue rose 2.5% to RM1.015bil from RM990.36mil.

iCAP closed end fund: 87% of shareholders voted for the status quo

 Saturday November 10, 2012 MYT 5:22:15 PM

Trio fail to get elected to iCapital.biz

By John Loh

KUALA LUMPUR: Andrew Pegge, Low Nyap Heng and a shareholder Lo Kok Kee failed to get elected to the board of iCapital.biz Bhd at its packed AGM on Saturday.

At the six-hour meeting, which started at 9am, shareholders overwhelmingly threw their support behind its fund manager andfounder Tan Teng Boo.

Some 87% of shareholders voted against the resolutions seeking board representations for Pegge, Low and Lo on Malaysia's only listed closed-end fund.

Earlier, Kingsnorth told journalists outside the AGM at a hotel here that Laxey, which owns 6.9% of iCapital.biz, had accomplished what it set out to do.

"The debate (about the discount between iCapital.biz's share price and net asset value) is good. The company is better for this.

"We are still the largest shareholder and will continue to express our views," he said.

http://biz.thestar.com.my/news/story.asp?file=/2012/11/10/business/20121110165554&sec=business

Tan Teng Boo's interview on bfm on the latest development in iCAP

http://www.bfm.my/assets/files/MarketWatch/2012_11_09_MW_TanTengBoo.mp3


To fellow Shareholders of iCAP
Let us keep to the initial objectives of this fund.
Please cast your votes to send a decisive message in this AGM.

I throw my support for Tan Teng Boo to maintain the status quo in iCAP.

Also read:

http://www.bloomberg.com/quote/ICAP:MK

iCAP closed end fund manager responds to Laxey Partners accusations

http://icapital.biz/agm/FORMAL_RESPONSE_TO_LAXEY_PARTNERS_LTD_ACCUSATIONS.pdf


My comments:

Actually, those who are disgusted with ttb or iCAP can choose to sell their shares.  I think this happened all the time.  Those who favoured ttb or iCAP may be the buyers of these shares.  I think this happened all the time.

The issue facing iCAP shareholders this Saturday is quite different.  Laxey Partner has amassed a sizeable stake in iCAP.  As a shareholder, they rightfully can request for changes.  However, their motives may not be fully aligned to many long term shareholders of iCAP.

They are invited to state their case.  How can they hope to reduce the market price - NAV gap?  I thought this was a stupid thing really.   This gap exists because of various factors.  They should propose how they hope to reduce this gap without liquidating this fund.  

Share buyback?  Will this work?  Doubtful ... 
Dividends?  Why?  I would rather have my funds retained in iCAP to compound at a high rate of return.

As I have written earlier, ttb and his board of directors (hopefully they will be retained at this AGM) should stay focus on the performance of the NAV of this fund rather than wasting any time worrying over the market price - NAV gap of iCAP which I feel they have little or no control over.

If Laxey Partner wishes to pay a price closer to the NAV price, this gap would have narrowed.  On the other hand, it was also this discount that allowed them to buy into this fund in the first place?  Now they are going for their exit strategy.  They are invited to be long term investors in this fund, just like the rest.  Hope this will be realised on Saturday.    



Also read: 

Tan confident of support from iCapital.biz shareholders to against Laxey

I throw my support for Tan Teng Boo to maintain the status quo in iCAP.

How the Top 2 investors of iCAP closed-end fund might have acquired their 10.56% outstanding shares.

From the 1.1.2011 to 7.11.2012, there were 459 market transaction days.
The total number of outstanding iCAP shares is 140,000,000 shares.

The average number of shares traded per day for that period = 89,700 shares
The % of total outstanding shares transacted per day for that period = 0.064%.
The average RM value of shares traded per day for that period = RM 195,249.

The total number of shares traded for that period  = 41,277,700 shares
The % of total outstanding shares transacted for that whole period = 29.5%.
The total RM value of shares traded for that period = RM 89,814,731.


The Top 2 shareholders of iCAP as on 31.5.2012 own 9,028,491 and 5,748,600 shares respectively.
These Top 2 shareholders collectively own 14,777,091 shares or 10.56% of total outstanding shares of iCAP.

Assuming that these Top 2 shareholders started to accumulate their shares in iCAP from 1.1.2011 to 7.11.12, the followings can be inferred:

- they would have been responsible for 35.8% of the total transactions for this period.

- they would have invested a total RM 32,152,965 to acquire a combined total of 14,777,091 shares of iCAP.

- they would have invested an average of RM 70,050 per day to acquire their shares during this period.

- their average price per iCAP share they bought at was about RM 2.18 per share.


Excel worksheet:
https://docs.google.com/open?id=0B-RRzs61sKqRMG5WZU9mdXJld0E

How To Evaluate The Quality Of EPS and find out what it's telling you about a stock.

Examining Earnings Quality

Overview  

The evaluation of earnings per share should be a relatively straightforward process, but thanks to the magic of accounting, it has become a game of smoke and mirrors. This, however, does create opportunities for investors who can evaluate the quality of earnings over the long run and take advantage of market overreactions.

EPS Quality  

High-quality EPS means that the number is a relatively true representation of what the company actually earned (i.e. cash generated).  But while evaluating EPS cuts through a lot of the accounting gimmicks, it does not totally eliminate the risk that the financial statements are misrepresented. While it is becoming harder to manipulate the statement of cash flows, it can still be done.

A low-quality EPS number does not accurately portray what the company earned.  A reported number that does not portray the real earnings of the company can mislead investors into making bad investment decisions. 

How to Evaluate the Quality of EPS

The best way to evaluate quality is to compare operating cash flow per share to reported EPS. While this is an easy calculation to make, the required information is often not provided until months after results are announced, when the company files its 10-K or 10-Q with theSEC.

To determine earnings quality, investors can rely on operating cash flow. 

1.  Positive earnings but negative Operating cash flow.

• The company can show a positive earnings on the income statement while also bearing a negative cash flow. 
• This is not a good situation to be in for a long time, because it means that the company has to borrow money to keep operating. And at some point, the bank will stop lending and want to be repaid. 
• A negative cash flow also indicates that there is a fundamental operating problem: either inventory is not selling or receivables are not getting collected.
• "Cash is king" is one of the few real truisms on Wall Street, and companies that don't generate cash are not around for long.

2.  Operating cash flow > earnings 

• If operating cash flow per share (operating cash flow divided by the number of shares used to calculate EPS) is greater than reported EPS.
• In this case, earnings are of a high quality because the company is generating more cash than is reported on the income statement. 
• Reported (GAAP) earnings, therefore, understate the profitability of the company.

3.  Operating cash flow < earnings

• If operating cash flow per share is less than reported EPS, it means that the company is generating less cash than is represented by reported EPS. 
• In this case, EPS is of low quality because it does not reflect the negative operating results of the company.
• Therefore, it overstates what the true (cash) operating results. 

Trends Are Also Important

Because a negative cash flow may not necessarily be illegitimate, investors should analyze the trend of both reported EPS and operating cash flow per share (or net income and operating cash flow) in relation to industry trends.

• It is possible that an entire industry may generate negative operating cash flow due to cyclical causes.
• Operating cash flows may be negative also because of the company's need to invest in marketing, information systems and R&D. In these cases, the company is sacrificing near-term profitability for longer-term growth.

Evaluating trends will also help you spot the worst-case scenario, which occurs when a company reports increasingly negative operating cash flow and increasing GAAP EPS. 

• As discussed above, there may be legitimate reasons for this discrepancy (economic cycles, the need to invest for future growth), but if the company is to survive, the discrepancy cannot last long. 
• The appearance of growing GAAP EPS even though the company is actually losing money can mislead investors. This is why investors should evaluate the legitimacy of a growing GAAP EPS by analyzing the trend in debt levels, times interest earned, days sales outstanding and inventory turnover.

The Bottom Line

Without question, cash is king on Wall Street, and companies that generate a growing stream of operating cash flow per share are better investments than companies that post increased GAAP EPS growth and negative operating cash flow per share. 

Earnings increasing and Operating cash flow increasing > Earnings increasing but negative operating cash flow

The ideal situation occurs when operating cash flow per share exceeds GAAP EPS. 

Operating cash flow > Earnings

The worst situation occurs when a company is constantly using cash (causing a negative operating cash flow) while showing positive GAAP EPS. 

Positive Earnings but negative operating cash flow.

Luckily, it is relatively easy for investors to evaluate the situation. 

http://www.investopedia.com/articles/analyst/03/091703.asp

An Example
Let's say that Behemoth Software (BS for short) reported that its GAAP EPS was $1. Assume that this number was derived by following GAAP and that management did not fudge its books. And assume further that this number indicates an impressive growth rate of 20%. In most markets, investors would buy this stock.

However, if BS's operating cash flow per share were a negative 50 cents, it would indicate that the company really lost 50 cents of cash per share versus the reported $1. This means that there was a gap of $1.50 between the GAAP EPS and actual cash per share generated by operations. A red flag should alert investors that they need to do more research to determine the cause and duration of the shortfall. The 50 cent negative cash flow per share would have to be financed in some way, such as borrowing from a bank, issuing stock, or selling assets. These activities would be reflected in another section of the cash flow statement.

If BS's operating cash flow per share were $1.50, this would indicate that reported EPS was of high quality because actual cash that BS generated was 50 cents more than was reported under GAAP. A company that can consistently generate growing operating cash flows that are greater than GAAP earnings may be a rarity, but it is generally a very good investment.

I throw my support for Tan Teng Boo to maintain the status quo in iCAP.

I welcome shareholder activism in iCAP.  This can only be good for this fund.  However, given the short notice of this new development, it would be good to understand the issues deeper.

Questions I pose to myself:

1. Has iCAP outlived its usefulness and its breakup or liquidation be beneficial to existing shareholders for the long-term??
2. Has iCAP managers proven themselves incapable of making a decent return?
3. Would iCAP having a dividend policy be beneficial to the long term investors of this fund?
4. Would iCAP buying back its own stocks that are trading at a discount necessarily improve market price of its stock?

1.  Has iCAP outlived its usefulness and its breakup or liquidation be beneficial to existing shareholders for the long-term??

iCAP was started in 2005 with a set philosophy laid down by Tan Teng Boo.  The early investors of iCAP subscribe to his philosophy.  The fund was set up to enable small shareholders to invest in the stock market managed by a proven fund manager.  There is a need for such fund to exist.  Therefore, iCAP plays a useful role for those small or big investors whose investing philosophy are aligned with that of Tan Teng Boo, its fund manager.

Therefore, my answer to Question 1 is NO.

2.  Has iCAP managers proven themselves incapable of making a decent return?

We should be wary of short term performances of funds or any investing.  The market volatility can be such that the performances of the short term can fluctuate widely.  Nevertheless, it is the long term return one should be focus on.  On this point, iCAP has more than delivered on its promise at inception to those who are long term invested in this fund.  It has delivered 18% compound annual return in its NAV since 2005.

Therefore, my answer to Question 2 is NO.

3.  Would iCAP having a dividend policy be beneficial to the long term investors of this fund?

iCAP has delivered compound annual returns to its shareholders 18% since inception.  Given its excellent performance since inception, it is rational and logical to retain all earnings to compound at these high rates of returns to grow your networth.  In any case, this objective was stated clearly by Tan Teng Boo when he started this fund.  

Therefore, my answer to Question 3 is NO.

4.  Would iCAP buying back its own stocks that are trading at a discount necessarily improve market price of its stock?

Share buybacks offer advantages and disadvantages.  However, these too do not guarantee that the discount to NAV of the fund will narrow either.  It is not unknown that there are companies that bought back their own shares with little impact on their share price.  In fact, for many, the stock prices even continue with their relentless decline driven by fundamental reasons.  Share buybacks by companies of their own shares are not without their controversies and complicities.

Therefore, my answer to Question 4 is NO.

Tan Teng Boo should mobilise the investors who share his philosophy who are long term invested in his fund to defeat the challenge posed by Laxey Partner.

Hopefully, he will be successful.  After having survived this in the 8th AGM, he will have time to rethink and continue taking this fund to a higher level of performance.  It is far better for Tan Teng Boo and the Board of iCAP to concentrate on investment performance than to worry too much over how to shrink the discount to the NAV of the fund which they have some or little control over.