MIDF Research reiterates buy call on KPJ

MIDF Research reiterates buy call on KPJ

Tags: Brokers Call | KPJ | MIDF Research

Written by Financial Daily
Friday, 31 July 2009 11:17

MIDF Research reiterated its buy recommendation on KPJ HEALTHCARE BHD [ KPJ 3.300 0.040 (1.227%) ] at RM3.06 with a target price of RM3.90 after the healthcare provider proposed to acquire an abandoned hospital building in Kapar, Klang for RM38 million to be developed as a private specialist hospital.

The research house maintained its FY09 and FY10 forecasts for KPJ under the assumption that the hospital would only show meaningful contribution to KPJ’s topline from FY12 onwards, while earnings would be about three to four years later.

KPJ’s wholly-owned Kumpulan Perubatan (Johor) Sdn Bhd has proposed to acquire Bandar Baru Klang Medical Centre building (BBKLC) for RM38 million cash.

The property is a partially completed six-level purpose-built private specialist hospital building with two levels of basement car park. CONSTRUCTION [Not Available] had been stalled since the Asian financial crisis in 1998.

MIDF said the further development cost was estimated at RM70 million, with expected completion by 2011. The acquisition will be funded via internally generated funds and/or borrowings.

The research house estimated that the new hospital, with its gross floor development area of 355,014 sq ft, would have about 200 beds, based on the gross floor area comparison with other KPJ hospitals.

The announcement of the acquisition came as a surprise given that KPJ had just announced the construction of a new hospital in Tanjung Lumpur, Kuantan last week, which is expected to commence operations by 2011, said MIDF.

“Besides, management has guided that their expansion strategy is to add one new hospital every year into their existing network.”

It added that as BBKMC would be KPJ’s first hospital in Klang, it could penetrate a lucrative private healthcare market with a substantial 1.05 million population.

The research house, however, was neutral on the overall development due to stiff competition and disadvantages of KPJ being a latecomer.

It said there are quite a few private hospitals in Klang, for instance, Pantai Klang Specialist, Sri Kota Medical Centre and Arunamari Specialist Medical Centre.

“From the long term, potential to capture the market share still exist, capitalising on KPJ’s strong brand name,” it said.

After incorporating KPJ’s capital expenditure assumption of RM100 million per annum, MIDF believed that funding was not an issue to KPJ to undertake further expansion in the future, backed by healthy net operating cash flow (averaged at RM150 million in the past two years).

“Although net gearing is expected to increase from current 0.2 times resulting from the recent acquisition, KPJ is still able to manage it at comfortable levels,” it added.

The research house said its buy call and target price was based on nine times FY09 price-earnings ratio (PER) or equivalent to 40% discount to the regional sector average of 15 times.

“We believe that our target price has already factored in KPJ’s lower earnings before interest and tax margin, which is 40% lower as compared to average regional peer’s of about 16%.

“Dividend yield of 5.7%-6.4% for FY09-10 are relatively attractive, taking into account current low interest rate environment,” it said.

With the favourable future outlook, underpinned by network expansion and increasing demand for private healthcare services, KPJ was definitely a compelling choice for long-term investment, said the research house.

“In addition, the Employees Provident Fund (EPF) is now KPJ’s third largest shareholder with 5.2% equity stake, after acquiring 10.9 million shares from the open market on July 8, according to the filing to Bursa Malaysia.

“Emergence of a strong institutional investor like EPF is another plus point to KPJ,” it said.

Yesterday, KPJ put on eight sen to close at RM3.14.


This article appeared in The Edge Financial Daily, July 31, 2009.

Earnings, share price upgrade for Latexx

Earnings, share price upgrade for Latexx

Tags: Brokers Call CIMB Research Latexx

Written by Financial Daily
Tuesday, 04 August 2009 14:01

RUBBER glove producer LATEXX PARTNERS BHD [ LATEXX 2.230 0.060 (2.765%) ] has earned a place in analysts’ good books following a sterling second-quarter (2Q) performance against a landscape of stronger demand for disposable gloves due to the outbreak of the H1N1 pandemic.

In a note, CIMB Research said it had raised its earnings forecast for Latexx by 20% for financial year ending Dec 2009 (FY09) and some 5% for FY10 and FY11. The earnings upgrade, in turn, led CIMB to increase its fair value for Latexx shares by 5.3% or 13 sen to RM2.56.

“We maintain our outperform recommendation on Latexx, premised on the potential share price trigger of improving quarterly earnings, driven by its high utilisation rates and ongoing expansion,”CIMB said.

The revised fair value is derived from a price-earnings ratio (PER) of 10.5 times FY10 earnings. Latexx shares closed one sen down at RM1.90 yesterday.

Latexx’ net profit in 2Q ended June 2009 jumped tenfold to RM11.41 million from RM1.14 million a year earlier as the company bumped up its glove production capacity and sold more gloves. Revenue surged 73.3% to RM74.43 million from RM42.95 million.

First-half net profit was up nine times to RM20.55 million from RM2.28 million a year earlier while revenue leapt 60% to RM144.75 milion from RM90.74 million.

Latexx’s capacity expansion is on track. Since the previous quarter, the group has added four double-former glove production lines, increasing its annual capacity to 5.2 billion pieces from 4.4 billion pieces as at June.

The firm planned to add four more lines in 2H09 to increase its yearly capacity to six billion pieces by year-end.

“The prognosis for the medical glove industry is favourable in light of rising healthcare needs and greater awareness of the need for hygiene, especially with the increasing incidence of health scares.

“Latexx is in an excellent position to tap this growth as more than 90% of its production is catering to this segment,” said CIMB.


This article appeared in The Edge Financial Daily, August 4, 2009.

Genting offers cheaper exposure to Singapore IR

Genting offers cheaper exposure to Singapore IR

Tags: Genting RWS Singapore IR

Written by Financial Daily
Wednesday, 05 August 2009 12:11

CIMB Research yesterday maintained an outperform call on GENTING BHD [ GENTING 6.210 -0.070 (-1.115%) ] at RM6.30 with a 19% higher target price, calling it a cheaper alternative for indirect exposure to the “promising” Resorts World at Sentosa (RWS) project.

“We are impressed by the speed of work at RWS. We believe that the odds have increased for Genting Singapore Ltd’s RWS to open ahead of its rival. Our earlier estimates are overly conservative given the integrated resort’s (IR) potential for opening before the year is out,” CIMB said in a note.

CIMB raised its price target for Genting to RM9.40 from RM7.90. This was after updating Genting’s sum-of-parts value with its revised target price for Genting Singapore (GS) and its latest market risk premium assumptions.

“Although GS is the listed vehicle with the direct exposure to RWS, its parent Genting offers a cheaper indirect exposure to the promising project,” CIMB said.

Genting’s price-to-earnings (P/E) and price-to-book (P/BV) valuations are at 40% to 50% discounts to Genting Singapore’s ratings, the brokerage house noted.

Nonetheless, it went on to say that Genting Singapore looked more attractive from a price earnings-to-growth (PEG) perspective, trading at less than one time PEG versus the sector’s average of 2.4 times. This, CIMB said, was “not surprising” as Genting Singapore’s three-year earnings per share (EPS) growth potential is “way higher than 100%” while most of its peers are projected to notch only single-digit growth.

Among potential catalysts for Genting include potential mergers and acquisitions (M&As), more news flow on the progress of works at Sentosa IR, and higher weighting in the market benchmark.

“We believe Genting Bhd should trade close to its sum-of-parts (SOP) valuation given that the group is continuously looking to unlock value via the disposal of its non-core assets. Also, discounts usually evaporate during a bullmarket environment. Note that we also value other conglomerates like SIME DARBY BHD [ SIME 8.310 0.030 (0.362%) ] at their SOPs,” CIMB said.

It now prefers Genting Bhd over Genting Malaysia (previously Resorts) as its top pick in the Malaysian gaming sector, given its renewed enthusiasm on RWS’ prospects.

Nonetheless, Genting Malaysia is still an attractive investment proposition, given its resilient domestic operations and its sizeable RM4.86 billion cash hoard which could mean potential M&As and/or higher dividends, CIMB added.

Genting added 10 sen to close at RM6.40 yesterday while Genting Malaysia shed one sen to RM2.92.


This article appeared in The Edge Financial Daily, August 5, 2009.

Pantech: Still in the early phases of growth

Pantech: Still in the early phases of growth

Tags: InsiderAsia Pantech Group

Written by InsiderAsia
Tuesday, 04 August 2009 18:10



THE latest earnings results for Pantech Group (90.5 sen) for the first quarter (1Q) of its financial year (FY) ending February 2010 underlined the relative resilience in the company's business operations. Sales totalled RM123.9 million, down 11% quarter-on-quarter (q-o-q) but were up 9.3% year-on-year (y-o-y).

We expect sales and earnings to contract slightly for the full year, after adjusting for "abnormally high" steel prices, demand and margins in 2008. Sales and net profit are estimated to decline 4% and 10% to roughly RM490.3 million and RM53.8 million, respectively in FY10.

However, we are sanguine on Pantech's growth prospects beyond the current adjustment period. The company is enjoying continued stream of orders from customers and demand should gradually strengthen over the coming months. Sales are forecast to resume growth, by about 15%-17%, in FY11-FY12.

Potentially handsome capital gains
Based on its growth prospects, the stock appears to be trading on very attractive valuations. Pantech's shares are priced at only 5.9 and 5.0 times our estimated earnings for FY10-FY11, respectively.

Besides compelling valuations relative to its prospective growth rates, its shares are also trading well below the average price-to-earnings (P/E) for the oil & gas industry — estimated at about 10 times — as well as the broader market, which is currently priced above 15 times forward earnings.

In addition to potentially handsome capital gains, Pantech also rewards shareholders with fairly decent yields. Dividends are estimated to total 2.5 sen per share for the current financial year, which translate into a net yield of 2.9%.

Resilient local demand from oil & gas

As mentioned above, the company's sales held up fairly well in 1QFY10 despite the global downturn.

Sales under the trading arm, which caters primarily to the domestic oil & gas market, remain robust. The manufacturing arm, mainly for exports, did register some slowdown. We believe this was due, primarily, to customers drawing down on stocks. Demand should start to recover over the course of the next few months.

In fact, Pantech has also been unwinding some of its own inventory. Stocks were lower at RM174.9 million at end-May 2009, down from RM202.7 million at end-February. As a result, the company's gearing improved to 55% compared to 64% over the same period.

Oil prices unlikely to revisit lows

Crude oil prices have rebounded from the December 2008 lows of around US$35 (RM122.85) per barrel — rallying as high as US$73 per barrel in June. Although oil has since given back some of its recent gains on the back of growing concerns over the pace of the global economic recovery, we doubt prices will fall back to previous lows.

Market consensus suggests crude oil will trade between US$50 and US$70 per barrel in the near to medium term — and likely to head higher going forward as the global economic recovery gains traction. The long-term outlook for oil remains unequivocally bullish.

Currently, crude oil is hovering around US$70 per barrel — above the breakeven levels for most projects, including deepwater projects. Hence, we should see strong support for continued exploration and production activities in the sector.

Solid order book of around RM150 million

Indeed, Pantech continues to receive good flow of orders. The company typically maintains a running order book of around RM150 million, which will keep it busy for at least the next three months.

Pantech to pursue growth

Pantech's sales grew at an average compounded rate of 57% per annum over the past five year. We are confident that it will continue to grow at a double-digit pace in the foreseeable future.

The company has a wide clientele base as the largest one-stop centre for PFF (pipes, fittings and flow control products) solutions in the country. It carries in excess of 20,000 inventory items, thus providing customers timely and comprehensive solution for the transmission of all fluids and gases. Each and every one of the company's products carries proper certification, to meet the high benchmark standards for safety and quality required of the oil & gas industry.

Repeat orders for regular maintenance undertaken by its existing customers provide a steady stream of business and account for up to 40% of Pantech's annual sales.

Expanding product range and customer base

To further boost growth, the company is pursuing new markets and expanding its product range. It is an active participant in oil & gas exhibitions — local and overseas — to raise the company's profile and tap new markets.

It recently acquired two pieces of land — adjacent to its current manufacturing facility in Selangor and office in Johor — for future expansion purposes. In particular, Pantech intends to focus on niche market segments for customised products that carry higher profit margins.

In a positive development, Pantech has just won approval from the European Union (EU) commission to sell its products in the eurozone without attracting the hefty anti-dumping duties currently levied on many countries, including Malaysia. This exemption will give the company an upper hand in further widening its export markets and customer base.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

F&N earnings up 49% to RM59m

F&N earnings up 49% to RM59m

Tags: 100PLUS Fraser & Neave soft drinks

Written by The Edge Financial Daily
Thursday, 06 August 2009 20:22

KUALA LUMPUR: FRASER & NEAVE HOLDINGS BHD [] posted net profit of RM59.12 million in the third quarter ended June 30, 2009, up 49% from RM39.65 million a year ago as it benefitted from higher soft drinks sales volume, improved sales mix and increased productivity.

It said on Aug 6 that revenue was higher at RM921.11 million compared with RM884.58 million while earnings per share were 16.6 sen versus 11.1 sen.

"Group operating profit increased 43% over the previous year as the group benefitted from higher soft drinks sales volume, improved sales mix and increased productivity," it said.

Group revenue registered a modest growth of 4.1% over the corresponding quarter last year in spite of negative GDP growt h in the core markets of Malaysia and Thailand.

Soft drinks sales benefitted from the unusually hot weather and successful marketing and promotional activities. Sales volume and revenue grew an encouraging 14% and 18% respectively. 100PLUS sales volume was up 36% against the same period last year.

The dairies division revenue declined 4%, due to lower export sales and higher trade discounting in the domestic markets. However, domestic sales volume was stable.

However, the glass division volume was affected by lower sales of the Thai plant and the reduction of capacity in Malaysia following the closure of the Petaling Jaya furnace. Revenue was however maintained due to overall higher selling prices.

For the nine months to June 30, 2009, group revenue grew 2% to RM2.75 billion against a backdrop of a regional economic recession. Soft drinks division registered a high single digit revenue growth but lower exports affected overall sales of the dairies division.

Group operating profit before unusual items, improved by 30.5% to RM262.6 million as all core business divisions registered double digit improvements. After accounting for unusual items, group operating profit grew by 21.7% to RM244.9 million.

In the first nine months of FY08/09, the Group has already matched the attributable profit for the full FY07/08 year.

"The group is confident, barring unforeseen circumstances, to perform better than last year," it said.

Stocks to watch: Glove makers

Stocks to watch: Glove makers

Written by The Edge Financial Daily
Monday, 10 August 2009 23:20

KUALA LUMPUR: Glove manufacturers are likely to continue to be in focus on Tuesday, Aug 11 as governments, including Malaysia, step up measures to stem the spread of the A H1N1 flu virus, which has seen a marked increase in cases and fatalities.

The smaller capitalised glove manufacturers including ADVENTA BHD [ ADVENTA 2.090 -0.020 (-0.948%)], RUBBEREX CORPORATION (M) BHD [ RUBEREX 1.930 -0.070 (-3.500%) ], SUPERMAX CORPORATION BHD [ SUPERMX 2.980 -0.050 (-1.650%) ], KOSSAN RUBBER INDUSTRIES BHD [ KOSSAN 4.110 -0.040 (-0.964%) ], LATEXX PARTNERS BHD [ LATEXX 2.230 0.060 (2.765%) ] rose in active trade on Aug 10 and could continue to generate trading interest.

Larger capitalized manufacturers like TOP GLOVE CORPORATION BHD [ TOPGLOV 7.300 0.020 (0.275%) ] and Hartalega Bhd would also see trading interest.

However, after the hefty price gains in recent weeks, investors should also expect intermittent profit taking.

Maybank IB upgrades F&N to buy

Maybank IB upgrades F&N to buy

Tags: Brokers Call F&N Maybank IB

Written by Financial Daily
Monday, 10 August 2009 11:37

MAYBANK Investment Bank (Maybank IB) has upgraded FRASER & NEAVE HOLDINGS BHD [] (F&N) to a buy at RM9.80, from hold previously, with a higher target price of RM11.16 (from RM9.20).

The research house said margins at the company’s dairies division had expanded back to FY03-FY06 levels while F&N’s Thailand dairy assets were set to propel the division to become F&N’s largest based on operating profit, surpassing the soft drinks division.

“We are raising our earnings forecasts by 10%-25% as skimmed milk powder prices appear set to return to long-term equilibrium levels,” it said in a report last Friday.

The research house said F&N’s third-quarter (3QFY09) results were above expectations, and net profit soared 49% year-on-year (y-o-y) to RM59 million as the two largest divisions, soft drinks and dairies, both outperformed.

“Soft drink revenues rose 18% y-o-y in spite of the absence of major festivities during the quarter. This helped the operating profit margin expand by 1.2 percentage points y-o-y to 10.2%,” it said.

Maybank IB said skimmed milk powder costs fell 44% y-o-y and dairies division operating profit rose 35% y-o-y in spite of marginally lower revenues.

“This appears to be the historical equilibrium range at which F&N was able to record operating profit margins of about 7% in four of the five years before it acquired the Thailand assets,” it said.

The research house noted that the dairies division margins appeared sustainable, and looked ready to surpass the soft drinks division as F&N’s main operating profit contributor.

“We raise our FY09-11 forecasts for this division by 42%-63% on the expectation that operating margins can be sustained at a minimum of 7% (versus 4.5% in FY08),” it said.

Maybank IB said while it awaited clearer management guidance on developments at its two smaller divisions, it acknowledged the brighter prospects for the group’s two key divisions in the forecast period.

“F&N’s stronger earnings potential and stronger cash flow generation justify a raising of our target price-earnings ratio (PER) multiple to 17 times CY10 PER, (from 16 times PER) which is at the top end of historical valuations,” it said.

F&N notched up 10 sen to close at RM9.90 last Friday.


This article appeared in The Edge Financial Daily, August 10, 2009.

Glovemakers soar on H1N1 threat

Glovemakers soar on H1N1 threat

Tags: Kossan Supermax Top Glove

Written by Surin Murugiah
Tuesday, 11 August 2009 01:05

KUALA LUMPUR: The increasingly deadly outbreak of the influenza A (H1N1) virus threat sent the stocks of rubber glove manufacturers soaring on Aug 10, with some hitting their 52-week high.

With the death toll from the H1N1-related disease in Malaysia having reached 32 yesterday, demand for rubber gloves and masks have been increasing.

Inter-Pacific Research Sdn Bhd head of research Anthony Dass said he did not see any softening in the demand for rubber gloves and surgical masks at the moment.

“The strong demand due to the virus outbreak will continue to push the stock prices. This would translate into potentially good earnings for the companies,” he said.

Last week, OSK Equity Research in a report had said it remained overweight on the rubber gloves sector, and that the demand for gloves from the medical industry was strong, especially from developing countries.

It said that since the H1N1 outbreak has been raised to pandemic level, the governments of developed countries like US and Europe have urged all healthcare MNCs to stock up on rubber gloves, which has created short-term demand.

“Over the longer term, demand is expected to come from developing countries like China, India and Russia, which are gradually increasing their use of gloves.”

“Also, with US tightening Food and Drug Administration (FDA) regulations effective December 2008, the number of glove defects per batch would need to be reduced to qualify for entry to the US market,” it said.

This would reduce the supply of rubber glove exports to US due to the retention of “unqualified” gloves at the ports and hence creating new sales opportunities for the established rubber glove manufacturers, said the research house.

On Aug 10, the shares of ADVENTA BHD [ ADVENTA 2.090 -0.020 (-0.948%) ] rose almost 22% or 38 sen to close at its 52-week high of RM2.11, while RUBBEREX CORPORATION (M) BHD [ RUBEREX 1.930 -0.070 (-3.500%) ] added 15.6% or 27 sen to RM2.

SUPERMAX CORPORATION BHD [ SUPERMX 2.980 -0.050 (-1.650%) ] gained 10.99% or 30 sen to RM3.03, KOSSAN RUBBER INDUSTRIES BHD [ KOSSAN 4.110 -0.040 (-0.964%) ] up 4.3% or 17 sen to RM4.51 while LATEXX PARTNERS BHD [ LATEXX 2.230 0.060 (2.765%)
] rose 10.1% or 20 sen to RM2.17.

Supermax was among the most actively traded stocks yesterday with 11.6 million shares done, while Latexx saw some 10.4 million of its shares traded.

Meanwhile, TOP GLOVE CORPORATION BHD [ TOPGLOV 7.300 0.020 (0.275%)] gained seven sen to RM7.28.

HARTALEGA HOLDINGS BHD [ HARTA 5.260 -0.030 (-0.567%)], however, fell six sen to RM5.29.

From The Edge

Which one stock excites you in the glove sector?

Glove sector

No. Name Last Open High Low Chg Chg(%) BuyQ Buy SellQ Sell Volume
1. ADVENTA 2.14 2.15 2.02 2.05 -0.06 -2.84 43.0 2.05 13.6 2.06 3,776.9
2. HARTA 5.29 5.29 5.25 5.26 -0.03 -0.57 14.0 5.25 11.9 5.26 137.0
3. KOSSAN 4.15 4.19 4.10 4.12 -0.03 -0.72 1.0 4.12 15.0 4.13 605.8
4. LATEXX 2.20 2.24 2.13 2.23 0.06 2.76 42.0 2.22 86.0 2.23 8,078.0
5. SUPERMX 3.04 3.06 2.97 2.97 -0.06 -1.98 96.0 2.96 105.6 2.97 3,619.6
6. TOPGLOV 7.30 7.30 7.29 7.29 0.01 0.14 42.5 7.29 200.7 7.30 480.6


Which is the "best" company to choose in this sector?

Assess each of the above based on the following criterias:

• Sustainable future earnings and future earnings growth
• Profit Margin, ROE
• Market capitalization (small cap company can grow at faster rate)
• Debt/Equity Ratio
• Market valuation: P/E, P/B, P/S

A recent article in the Star newspaper mentioned that Adventa was the glove company with the lowest valuation. The company's price has since shot upwards by a huge percentage. From my analysis, another stock is perhaps more attractive.

Be very shrewd

The investor has two powerful enemies:

• market psychology and
• the uncertainties of the future.

His essential ally is:

• a low price.

General rules to follow:

Avoid secondary stock for investment if it sells at a full price. (That is, unless it is selling at a substantially less than indicated by his calculation of the value of the enterprise.)

• When a secondary stock is popular - because of some substantial improvement in its position and prospects - it is practically never a sound purchase for investment.
• On the contrary, the investor who bought it when it was unpopular and the price was low should now be strongly moved to sell it despite the promising development.
• This is his chance to cash in on his earlier shrewdness. It should not be missed.

There will be a number of individual instances in which this important principle will seem to work out poorly, because the company will continue to forge ahead and the average price of the future will be much higher than the level at which the investor sold.

• Such occurrences, while very possible, are exceptional and delusive.
• If they did not happen the market would never go to its extemes. They resemble the cases of large winnings at roulette, without which encouragement there would be no customers for the wheel.
• It would be too easy to supply examples from the past of secondary stocks that rose too far on favourable developments and then cound a much lower average level.

When a security is popular the relationship of its price to indicated value is an entirely different matter than when the same or a similar security is unpopular.

• The stock market often departs from a rational valuation of the securities it deals in, and is often prone to go to extremes in the direction of optimism and pessimism on the flimsiest of foundations.

Be shrewd

One cannot be taught how to weigh the future. No matter how rosy the prospects, the price may still be too high.

Therefore, always remember:

1. keep away from buying inferior stocks during periods of enthusiasm and high prices.
   
   
2. buy your good quality companies when the market level is below, rather than above, its indicated long-term normal figure.
   
   
3. do not pay extremely high prices for good stocks.

Warren Buffett stocks up on foreign government bonds

Warren Buffett stocks up on foreign government bonds

Warren Buffett has increased his holdings of foreign government bonds as the billionaire investor's spending on equities fell to its lowest in more than five years.

Published: 8:23AM BST 10 Aug 2009


Mr Buffett's Berkshire Hathaway owned about $11.1bn in foreign government bonds in its insurance units at the end of June, up from $9.6bn three months months earlier, Berkshire said in a regulatory filing, according to a report on Bloomberg.

In the second quarter, Mr Buffett spent $2.6bn on bonds compared with $350m on shares. The billionaire investor, whose views on financial markets are closely followed around the world, has benefitted as equity markets rallied over the past three months.


Related Articles
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“Some of the normal places he’s gotten the cash to invest are just getting killed in the recession,” Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington, told Bloomberg News.

“So he’s locking in these guaranteed returns, moving from the volatility of stocks to a steady stream of income that, in some cases, is almost at the return you normally get from the stock market.”

Mr Buffett booked a $4.1bn (£2.5bn) paper profit on the $5bn he invested in Goldman Sachs at the height of the financial crisis.

Known as the "Sage of Omaha" for his money-making ability, has made the return in one of the bleakest periods for investing in decades, benefiting from the recent uptick in Goldman's share price.


http://www.telegraph.co.uk/finance/markets/6003042/Warren-Buffett-stocks-up-on-foreign-government-bonds.html

** Insiders Can Alter Market Value as Their Needs Dictate

The value of the stockholdings of insiders is measured by what they can do with the business if and when they want to do it.

• If they need a higher dividend to establish this value, they can raise the dividend.
• If the value is to be established by selling the business to some other company, or by recapitalizing it, or by withdrawing unneeded cash assets, or by dissolving it as a going concern, they can do any of these things at a time appropriate to themselves.
  

Rarely if ever do (controlling) insiders suffer loss from an unduly low market price which it is in their power to correct.

• If by any chance they should want to sell, they can and will correct the situation first.
• In the meantime they may benefit from the opportunity to acquire more shares at a bargain level, or to pay gift (and prospective estate) taxes on a small valuation, or to save heavy surtaxes on larger dividend payments, which for them would mean only transferring money from one place where they control it into another.
  

To the extent that operating management and inside stockholders form a cohesive group - and this is more typical than not in corporate affairs - the insiders must be considered as opposed in a practical sense to the improvement of bad management.

• They are often opposed to the payment of an adequate dividend, because they save taxes by a low dividend and they have effective control over the undistributed earnings.
• A holding-company setup may be of great strategic advantage to them, and they can terminate its disadvantages whenever they wish.
• The same is true of the retention of excessive capital in the business.
  

Thus on many counts the insiders are likely to look upon corporate policies in ways diametrically opposed to the interests and desires of the typical outside stockholder.

• We believe that the public stockholder is entitled to have his legitimate interests preferred over the special interests of the insiders.
• Once the public has been asked to invest its money in the common stock of any company, the management and the controlling stockholders should recognize a continuing obligation to conduct the business in all respects as trustees for the public stockholders and to follow such policies as are conducive to satisfactory investment results by the ordinary, outside owner of their shares.
• This principle is in accord with the spirit of our laws. It has not been applied as yet to any extent in legal cases, because, we believe, the issues are somewhat subtle and they have not been presented to the courts with sufficient clarity and vigor.
  
  

Ref: Security Analysis by Graham and Dodd

Controlling Stockholders and the Outside Stockholders

There are some important differences of status and possible conflicts of interest between the controlling stockholders and the outside stockholders.

The basic point is that controlling stockholders are not dependent on either the dividend returns or the market price of the shares as the fundamental source of the value of their investment.

The outside stockholder is dependent on one or both of these factors.

This basic difference is of the greatest practical importance in corporate affairs, but so far it seems to have escaped both public notice and judicial notice.


Ref: Security Analysis by Graham and Dodd

The general concept of corporate insiders seems to view them as people who profit from their special knowledge of what is going on, and who benefit at times by being on both sides of business deals with the company.

Whatever its earlier validity, this idea has little present relevance to corporate affairs. Strict interpretation of the laws imputing a trustee's responsibility to those in control, plus constant watchfulness by the SEC, plus a great advance in ethical standards of personal conduct, have combined to eliminate the gross abuses of the past.

Poor Management a Double Liability in Unprofitable Business

It is a true remark that the determining factor in keeping an unprofitable business running is often the natural desire of the management to hold on to their jobs.

Unfortunately, poor-caliber management is more anxious to hang on than high-caliber management, since the latter can usually find other and perhaps better employment elsewhere.

Thus, good management can make most businesses successful, and if the obstacles to success are insurmountable it will try to work the situation out in whatever way will yield the best results to the stockholder. *

Bad management often makes an intrinsically good business unsuccessful; it bitterly opposes any move that will hurt its own position, whether the move be in the direction of

• improving the management,
• selling the business at a price far above the past market value, or
• discontinuing it altogether.

Ref: Security Analysis by Graham and Dodd

* The case history of Hamilton Woolen showed how a capable and conscientious management dealt with the problem of continuing a hitherto unsuccessful business. The question was twice put to the stockholders for a vote. In 1927, they voted to continue the business, with new policies, and the results were satisfactory for a time. In 1934, following a disastrous strike, they voted to liquidate the business and realised considerably more than its previous market value as a going concern.

Ref: Security Analysis by Graham and Dodd

The Question of Continuing the Enterprise

If a publicly owned business is consistently unsuccessful, should the stockholders move to dispose of it?

Does the answer depend mainly

• on business judgement,
• on ethics or
• on custom?

We think that what usually happens in such cases is dictated mainly by custom - by the stockholders' habit of letting things drift until something happens to change the picture.

The ethical question turns on the possible obligation of the owners toward society, the employees, or the management, which may require them to continue to operate the business even though it is unprofitable. This matter has not been thought through.

Economists say that the elimination of unprofitable enterprises is an important means by which the free-enterprise system adapts its output flexibly and efficiently to the public's wants. However, while society as a whole may lose rather than gain by the continuance of unprofitable businesses, the impact of discontinuance on local communities may be disastrous and cannot be ignored.

With respect to employees, no ethical obligation seems to interfere with drastic layoffs and discharges when demand declines. Whether a concern is successful or unsuccessful, the NUMBER of employees retained on the payroll is expected to be a matter of sound business judgement, and not of ethics.

The increasing power of labour unions has tended to impose uniform wage requirements on all companies in an industry, with the result that the less favourably situated units have no flexibility of contract and therefore little chance of working out a decent return for the owners. If ethical considerations are to dictate the continuance of such enterprises, it would seem that there should be some give-and-take between stockholders and employees.

Ref: Security Analysis by Graham and Dodd

The Holding-company Device

Disadvantageous Corporate Structure: The Holding-company Device

In the 1920s, there were many holding companies. These were enterprises organized to acquire voting control of previously existing concerns.

In most cases, the holding company issued its own senior securities (bonds and preferred shares) to pay in whole or part of the common shares it acquired. The process was repeated, in many instances, by the formation of new holding companies, with new layers of senior securities, to acquire control of existing holding companies. In this way, there were rapidly created a number of heavily pyramided capital structures - nearly all in the public-utility, railroad and "investment-trust" fields.

After the crash of 1929, most of these structures collapsed, with tremendous losses to speculators and misguided investors therein.

The moving spirits behind these astonishing examples of "high finance" were actuated by the twin motives of making enormous profits out of such corporate manipulations and of wielding personal power over great financial and industrial empires. Their motives were extremely popular with the public, until the day of reckoning, because there provided continuous fuel for the speculative fires.

As might be expected, the subsequent debacle created a complete revulsion of feeling. Holding companies became, and are still, highly unpopular with both investors and speculators.

For many years past, the existence of a holding company, instead of adding to the value of the underlying assets, has constituted a definite drawback and detriment. The market has been emphatic on this point. Holding-company securities have consistently sold at substantial discounts from the concurrent market value of the securities they own.

Discounts Disappear in Dissolution

All the evidence points clearly to the conclusion that, since 1929, a holding-company setup has been disadvantageous to the outside shareholders, and that they benefit significantly from the dissolution of such companies and the consequent direct ownership of the underlying securities.

It has been the standard experience that the shares sold at substantial discounts from their true value as long as the holding company continued as such,k and that these discounts disappeared when the holding company disappeared.

The attitude of managements in this matter deserves to be recorded. In nearly all cases, they opposed the dissolution of the holding companies; in a number of instances they waged bitter and costly legal battles, with their stockholder's money, to prevent the step. In their communications to stockholders they insisted that continuance of the holding companies would be to the stockholders' advantage.

We believe that most of their arguments were disingenuous and that in this matter they were defending their own interest - in some cases unconsciously, no doubt - in preference to that of the public stockholders.

We make these statements with considerable reluctance; but we believe it essential that the fact be brought home to stockholders, as forcibly as possible, that in matters in which management's interests may be opposed to the stockholders', the latter cannot rely upon receiving fair treatment from management and must be prepared to recognize and do battle for their own advantage.

A number of holding companies still existed at the end of 1950. The market persisted in its considered judgment, voiced through year-after-year prices, that such arrangements are detrimental to the outside stockholder. The fact they are permitted to continue we consider to be a monument to the inertia and bad judgment displayed by the American investor in his capacity as continuing shareholder.

Ref: Security Analysis by Graham and Dodd

Inactivity is also an intelligent investing behaviour

Warren Buffet wrote to the shareholders of Berkshire Hathaway:

Inactivity strikes us as intelligent behaviour. Neither we nor most business managers would dream of feverishly trading highly-profitable subsidiaries because a small move in the Federal Reserve's discount rate was predicted or because some Wall Street pundit had reversed his views on the market. Why, then, should we behave differently with our minority positions in wonderful businesses? The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.

When carried out capably, an investment strategy of that type will often result in its practitioner owning a few securities that will come to represent a very large portion of his portfolio. The investor would get a similar result if he followed a policy of purchasing an interest in, say, 20% of the future earnings of a number of outstanding college basketball stars. A handful of these would go on to achieve NBA stardom, and the investor's take from them would soon dominate his royalty stream. To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.

In studying the investments we have made in both subsidiary companies and common stocks, you will see that we favour businesses and industries unlikely to experience major change. The reason for that is simple: Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.

I should emphasize that, as citizens, Charlie and I welcome change: Fresh ideas, new products, innovative processes and the like cause our country's standard of living to rise, and that's clearly good. As investors, however, our reaction to a fermenting indsutry is much like our attitude toward space exploration: We applaud the endeavour but prefer to skip the ride.

The importance of buying good companies.

Warren Buffett, despite his prowess, required 20 years to recognize how important it was to buy good businesses.


Warren Buffett and Charlie Munger do not see many fundamental differences between the purchase of those companies that ended up in their control (controlled company) and the purchase of shares of other holdings in the market (marketable security).

• In each case, they try to buy into businesses with favourable long-term economics.
• Their goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price.

"Charlie and I have found that making silk purses out of silk is the best that we can do; with sow's ears, we fail."

Warren Buffett, despite his prowess, required 20 years to recognize how important it was to buy good businesses. In the interim, he searched for "bargains" (true to the teaching of his teacher, Benjamin Graham) - and had the "misfortune" to find some.

"My punishment was an education in the economics of short-line farm implement manufacturers, third-place department stores, and New England textile manufacturers."

Warren Buffett and Charlie Munger may misread the fundamental economics of a business. When that happens, they will encounter problems whether that business is a wholly-owned subsidiary or a marketable security, although it is usually far easier to exit from the latter. (Indeed, businesses can be misread. Witness the European reporter, who, after being sent to this country to profile Andrew Carnegie, cabled his editor, "My God, you'll never believe the sort of money there is in running libraries.")

In making both control purchases and stock purchases, they try to buy not only good businesses, but ones run by high-grade, talented and likeable managers. If they make a mistake about the managers they link up with, the controlled company offers a certain advantage because they have the power to effect change. In practice, however, this advantage is somewhat illusory. Management changes, like marital changes, are painful, time-consuming and chancy.

"In any event, at our three marketable-but-permanent holdings this point is moot: With Tom Murphy and and Dan Burke at Cap Cities, Bill Synder and Lou Simpson at GEICO, and Kay Graham and Dick Simmons at The Washington Post, we simply couldn't be in better hands."

Young investors in US wary of jumping into market

Young investors in US wary of jumping into market
Written by By Erin Kutz (Reuters)
Thursday, 06 August 2009 11:54

BOSTON: Young investors may accept the argument that those who begin investing when stocks are cheap end up with more retirement money, but after the turmoil of the past year, some find it hard to put their money in the market.

Asset managers and analysts say that those who invest in rock-bottom stocks of a bear market will see share values rise for decades.

But many in their 20s and early 30s are not buying rosy projections, due to immediate financial pressures and exposure to the longest recession since the 1930s Great Depression.
“I would keep all my money in cash,” said Alex Corbacho, a senior at Boston University.

The trend has some worrisome long-term implications. Stock brokers may find themselves largely shut out of a big customer base, and demand for equities will likely be crimped as investors favour safer havens, hurting the stock market’s prospects.

It’s also unclear whether these young investors will have accumulated enough to fund their retirement when the time comes.

Corbacho is no stranger to markets. At age 13, he invested his birthday money and a matching donation from his father, US$1,000 (RM3,500) in total, in tech stocks only to feel the sting when the Internet bubble burst.

He carried the lesson with him in early 2008, after seeing signs of economic trouble as an intern at a Boston investment bank. He put the majority of his stock investments, which had reached about US$5,000, into a certificate of deposit instead.

Corbacho doesn’t plan to return to stocks for a few years after graduation and is instead focusing on saving.

The recent market collapse has made holding cash for immediate expenses far more attractive to young people than investing, said Rodger Smith, managing director of Connecticut consulting firm Greenwich Associates. “They are taken aback by how much they lost and how quickly they lost it,” Smith said.

The early exposure to such dramatic declines could restrain many from investing aggressively when they are older and have accumulated more money to put into the market, some say. Asset managers, financial advisers and investors agree that young people will emerge from the financial crisis more educated, and more cautious, about managing their money.

“I do think they are taking a more practical and slightly more conservative view of the world,” said Michael Doshier, vice-president of Fidelity’s Workplace Investing Group.

Corbacho said his generation should not expect to accumulate sudden wealth like some in the past.

“We might be a little smarter and a little wiser moving forward. We will have been more conservative and more observant and won’t have 65% of our life savings invested in equities,” he said.

Assets in US retirement plans fell 22% in 2008 or nearly US$4 trillion, with almost 75% of the drop in the second half of 2008, the Investment Company Institute found. “These folks need to be resold on the idea that a 401k is a long-term investment,” said Smith, who oversees a profit-sharing plan for his firm and advises younger investors.

Long-term concerns

Financial advisers have long suggested that those further from retirement invest more heavily in equities, then switch to less risky assets as they near their golden years.

But the portfolios of those in their early 20s don’t reflect that advice. At Fidelity Investments, those aged 20-24 invest 31% of their 401k in equities, compared to those aged 50-59 with 35% in equities.

Overall, those saving for retirement have pulled back from stocks. In June, 48% of all Fidelity 401k participants were in equities, down from 53% a year ago.

Those in the investment industry say young investors should buy stock early and often.

“The key message is that it’s not a bad time for everybody,” said Christine Fahlund, senior financial planner at T Rowe Price. Ita Mirianashvili, a 35-year-old fellow at Massachusetts Institute of Technology’s Sloan School of Management, has confidence in long-term stock market prospects.

“I know the downturn cycle we are in will continue for some time but it will come back,” she said outside a MIT class that simulates a stock trading room.

But concerns about inflation, heavy government spending and rising bankruptcies have left many young investors uncertain. “It’s still difficult to be bullish... for the long run,” said Ashan Walpita, a 2009 Boston University graduate and former president of the school’s finance club.
Other short-term obstacles may hold young investors back. Employer-sponsored retirement plans often give people their first market exposure but with many graduates not finding work, they are yet to get started on making investments. — Reuters

Prime Minister Lee Hsien Loong's National Day Message

Prime Minister Lee Hsien Loong's National Day Message

08:10 PM Aug 08, 2009

My fellow Singaporeans,

Singapore has had a turbulent and challenging year. In January, dark clouds had gathered all around us. Our economy was hit by the worst storm in our history. Exports went down by a third, and manufacturing too declined sharply, since we produced for world markets. Given this backdrop, we projected GDP to shrink this year by 6% to 9%.

We couldn't have avoided the storm, but we didn't passively resign ourselves to fate. Instead, we mobilized Singaporeans to tackle the crisis together. We brought the Budget forward to January, implemented a Resilience Package, and drew on past reserves to help fund the Special Risk Sharing Initiative and the Jobs Credit.

We are now in a stronger position. The global economic situation has somewhat stabilised. Our measures have cushioned workers from the worst of the storm. Our economy was amongst the worst hit, and yet we still have one of the lowest unemployment rates in the world. Singaporeans too have responded resolutely and cohesively. These factors helped the Singapore economy to bounce back strongly in the second quarter. As a result, growth in the first half of the year was -6.5%, a very significant contraction, but less bad than we had feared. Hence we have revised up our growth projection for 2009. Our economy will still shrink, but only by between 4% and 6%.

But it's too early to celebrate. The outlook remains clouded. The advanced economies aren't expected to bounce back soon. Our exports remain much lower than last year, and companies like SIA are still facing very tough conditions. We might see another wave of retrenchments later in the year. So we must stay on guard for more challenges to come.

Beyond this year, we expect the global situation to remain difficult for some time. But the adverse external environment doesn't mean that Singapore cannot grow. We can and must look for new ways to develop and prosper. Opportunities still exist, especially in Asia, but we need all our ingenuity and resourcefulness to find them and exploit them.

Businesses and workers are already adjusting to the new world. Many firms are changing their business processes, finding innovative ways to cut costs and generate revenues, and aggressively seeking out new markets. Workers are taking advantage of the SPUR programme to upgrade their skills and retrain for new fields. The unions are cooperating closely with employers to adapt to the changed conditions, instead of resisting change. We must keep this up.

In the midst of recession, as we tackle the immediate challenges, we must also look to the future. The Economic Strategies Committee is studying how we can transform our economy. The Committee will examine how Singapore can find new opportunities, build new capabilities, sustain balanced growth and overcome our constraints. We are involving the private sector, to gather the best ideas that can enable us to prosper. I am confident the Committee will have good proposals when it reports next year. Our responses in this crisis will ensure that once the US and Europe emerge from their troubles, and the world economy recovers, Singapore will forge ahead again in a dynamic Asia.

Up close, our current difficulties may appear daunting; but we should see them against a longer perspective. It's been 50 years since we attained self-government in 1959. Over this half century, Singapore has encountered many serious challenges - racial riots in the 60s, oil shocks in the 70s, a major recession in the 80s, the Asian Crisis in the 90s, the 9/11 attacks and SARS in this decade. Each time our people have rallied and prevailed, and hence Singapore has continued to thrive and prosper, and has arrived here today.

We didn't start out as one people. Our forefathers were different peoples from different lands, who had come to Singapore to seek better lives for themselves and their children. But our formative years fighting for independence, then striving as a new nation to survive against the odds, brought us all closer together. Each time we were challenged, we responded as one, everyone pulling together and working for the common good. And each success further cemented our cohesion, and helped us to meet the next challenge.

We are doing this again in this crisis. Everyone of us - government and people, employers and unions - is working together, keeping companies viable and competitive, preserving jobs and livelihoods, and enhancing social safety nets like Workfare and ComCare. This crisis may be a severe test, but our history and record give us confidence that we will once again turn it into an opportunity to strengthen our social compact, and upgrade our economy.

We've responded to the outbreak of Influenza A(H1N1) in the same way. We worked hard to delay and slow down the spread of the new virus in Singapore. Our efforts depended not only on the healthcare system and professionals, but also on citizens being vigilant and socially responsible. We bought ourselves precious time to learn more about the virus and gear up our defences.

Whether fighting the recession or the flu, we made sure every Singaporean knows he's not alone, but that the community and country are behind him. So long as you make the effort and do your best, the rest of us will help you to pull through.

This unity is key to our success in many fields. We must work hard to strengthen it, and to bridge potential divides within our society, be it between Singaporeans and new arrivals, between rich and poor, or most fundamental of all, between the different races and religions. We often see ethnic strife and religious conflicts in other countries. This last year alone, we've witnessed the Mumbai terrorist attacks, and the recent bombings in Jakarta. In Singapore we have to respect each other's cultures, practices and beliefs, build trust and harmony between our communities, and gradually enlarge the secular common space which all groups share. In this way, we can become one people, one nation, one Singapore.

We are well placed to deal with these challenges. We are not just pursuing economic growth, or strengthening our society, or remaking our city, but creating a new Singapore.

We are improving our living environment, and developing better amenities for the community, more green spaces and park connectors. We are creating more avenues for students to advance and opening up more opportunities to go to university. We are building new hospitals, improving step-down care, and making healthcare more accessible and affordable to all. We are also revitalising the city - upgrading housing estates all over the island, refreshing our downtown into a premier shopping and entertainment venue, and creating a new skyline around Marina Bay, which is taking shape day by day.

My fellow Singaporeans, in the half century since we attained self-government, we've been tested many times, but we've also created many possibilities for ourselves. Let us stand shoulder-to-shoulder, so that whether it rains or shines, we can work together and achieve the best results for Singapore. This is how we build a better and more vibrant nation, and make Singapore a special place that we are all proud to call our home.

I wish all Singaporeans a very Happy National Day.

Fundamentals driving oil prices higher: BP economist

Fundamentals driving oil prices higher: BP economist

by

Cheow Xin Yi

Last 5 articles by Cheow Xin Yi

• Fundamentals driving oil prices higher: BP economist
• Room for SMEs here: Iswaran
• MyHome Fund: For a stake in Singapore
• DBS speaks out about GE move
• No rush for offer by Great Eastern Holdings

05:55 AM Aug 07, 2009

OIL prices are poised to climb higher in the coming years as consumption by industrialising nations are expected to outstrip that of the developed countries, predicted BP chief Asia economist Dr Zhang Chi.

Presenting the latest BP Statistical Review of World Energy report at a briefing yesterday, Dr Zhang pointed out that consumption of coal by industrialising nations have already surpassed that of Organisation for Economic Cooperation and Development (OECD) countries since 1998. And last year, these developing countries have also caught up with consumption on the natural gas front.

Dr Zhang believes it is a matter of time before developing countries will surpass OECD ones in terms of oil consumption.

When this happens "in the next few years", it will put pressure on oil prices to move higher, he said.

"Oil prices are affected by marginal demand ... and in the long term, the trend will put pressure on the margin and it depends on whether that price will bring in more oil on the supply side," he said.

Already, the primary energy consumption of non-OECD countries, including China, has - for the first time - exceeded OECD consumption last year. China alone accounted for nearly three-quarters of global growth in energy consumption, said BP in its report. World energy consumption is measured by the consumption of various fuels such as oil, natural gas, coal, nuclear and hydro power.

When asked how important are speculators in the energy markets, Dr Zhang said: "The fundamental drives the direction, the speculation may add on and follow that trend, rather than determining the trend."

"If you look at last year's fuel price volatility, coal prices were more volatile than oil (prices), but nobody was saying somebody was speculating in coal.

"So, in a sense, speculators look at the same data that we look at - they are not stupid - they look at the fundamental supply and demand trends and then they make their bets," he said.

Sembcorp Industries Q2 profit edges up

Q2 profit edges up

Marine, utilities units help earn conglomerate $142m

by Kelvin Chow
05:55 AM Aug 07, 2009

NET profit of Mainboard-listed conglomerate, Sembcorp Industries (SCI), edged-up 3 per cent to $141.9 million for its second quarter, thanks to the higher earnings from its utilities and rig building divisions.

In comparison, SCI recorded a $138.2 million net profit in the same three-month period a year ago.

However, group revenue fell to $2.43 billion in the same quarter from $2.58 billion a year ago due to lower contributions from its environment and industrial parks business. The group said yesterday that its utilities and marine business segments accounted for 94 per cent of total profits. Profit contribution from its utilities segment saw an 11 per cent increase to $47.9 million while its marine business contributed $85.9 million, up 9 per cent.

Mr Tang Kin Fei, SCI's chief executive said: "Sembcorp's healthy performance in this difficult global business environment reflects the underlying strength of our businesses." For example, its marine business has a net orderbook of $7.9 billion with completions and deliveries until early 2012. "Long-term fundamentals driving future deepwater activities continue to be strong," Mr Tang said in a statement.

Sembcorp also said that while global economic and financial environment appears to have improved, its outlook remains uncertain. However, the company said that it is "committed to deliver satisfactory operating results for the year."

DBS bad debt spikes

DBS bad debt spikes

by Kelvin Chow
05:55 AM Aug 08, 2009

DESPITE enjoying record revenue of $1.79 billion in the three months ended June, DBS Group Holdings' performance was marred by a sharp increase in bad debts and provisions, giving cause for concern among several analysts.

On Friday, South-east Asia's largest lender said it made $466 million of allowances for doubtful debts in the second quarter, up a whopping eight times from $56 million a year ago.

This came as its non-performing loans (NPL) ratio, a measurement of loans close to or in default, surged to 2.8 per cent from 1.4 per cent. As a result, second quarter net profit fell 15 per cent on-year to $552 million.

To Fox-Pitt Kelton banking analyst Brian Hunsaker, the results show DBS is "still struggling a little bit with asset quality. It would suggest that they've still got some volatility to cope with before things will look better", he told Today.

Some investors sold off DBS shares after the results were released. The stock closed at $12.84, down 3.5 per cent - outpacing the Straits Times Index's decline of 2 per cent.

Among the three domestic banks, DBS recorded the biggest increase in NPL in the second quarter, UBS Investment Research banking analyst Jaj Singh said in a report on Friday, "surprised" by the spike in provisions.

DBS explained during a briefing that the NPL increase came primarily from "exceptional" exposures to shipping and Middle East corporates and institutions.

When asked if DBS had seen the peak in its NPL ratio, chief financial officer Chng Sok Hui replied: "I think there are signs that the credit pressure has already eased."

The NPL ratios of DBS' core markets, which are Singapore and Hong Kong, are also improving, she added.

Still, Ms Daphne Roth, head of Asian equity research at ABN Amro Private Bank, told Bloomberg: "Non-performing loans are still something that we're watching very closely because even though we seem to be past the worst, unemployment could still pick up."

DBS chairman Koh Boon Hwee, too, believed that for Asia, "the worst is over" - echoing views expressed earlier this week by his peers at United Overseas Bank and OCBC.

The second quarter's broad-based revenue growth - which surpassed the previous record high of $1.6 billion recorded in the first quarter - encouraged Mr Koh.

Net interest income - comprising interest earned on loans and interbank credit spreads - grew 5 per cent from a year ago to $1.11 billion.

Non-interest, which are fees earned from investments and brokerage activities, rose by about 25 per cent to $680 million.

However, Mr Koh said he remained "cautious about the continuing pace of improvement" in the economy.

----

DBS results better than expected

Profits up 21% from Q1, but bad debts up $410m from Q2 2008

11:55 AM Aug 07, 2009

DBS Group Holdings, South-east Asia's biggest bank, reported a smaller-than-estimated 15-per-cent decline in second-quarter profit as income from stock broking, investment banking and wealth management rose.

Net income fell to $552 million from $652 million a year earlier, the bank said in a statement to the Singapore stock exchange this morning. The median estimate in a Bloomberg survey of analysts was for a profit of $425 million.

The net earnings represented an increase of 21 per cent from the previous quarter.

"DBS is well positioned to weather the uncertainties ahead as our balance sheet remains strong," chairman Koh Boon Hwee said in a statement.

Revenues rose 8 per cent from the previous quarter to a new high of $1.79 billion as better net interest margins, capital market activities, trading and investment income resulted in broad-based revenue growth.

Net interest income grew 3 per cent from the previous quarter and 5 per cent from a year ago to $1.11 billion.

Following several quarters of growth, loan volume was unchanged for the quarter. Including currency translation effects, loans fell 2 per cent from the previous quarter to $128 billion but remained 8 per cent above a year ago, said the bank.

Bad debt charges jumped almost nine-fold to $466 million, from $56 million a year ago.

Singapore and Hong Kong savings and current deposit volume grew during the quarter. Including currency translation effects, deposits were stable at $179.0 billion, said DBS.

Non-interest income rose 16 per cent from the previous quarter to $680 million, which was up 25.7 per cent on the $541-million figure of a year ago.

Trading income hit $172 million on the back of gains in foreign exchange and interest rate activities and better asset valuations, said DBS. Investment gains of $138 million, mainly from the sale of equity holdings this quarter, was up from the $106 million of the previous quarter.

DBS and smaller rival Oversea-Chinese Banking Corp were upgraded on July 23 to "buy" from "neutral" at Bank of America's Merrill Lynch on optimism earnings will improve as Singapore's economy recovers. The bank, which gets about a quarter of its earnings from Hong Kong, is also expanding in mainland China and Taiwan.

"DBS' earnings are most sensitive to an economic recovery," Merrill Lynch analysts Kar Weng Loo and Alistair Scarff wrote in their report, citing its low loan-deposit ratio and strong capital position. AGENCIES

Changes in Capital Structure

The preference for an all-common stock capitalization could in many cases prove disadvantageous for the owners of the business.

Not only might it prevent them from "maximising their gains", but more seriously, it might prevent them from earning enough on their capital to support or carry the investment.

We think there is an unanswerable argument in favour of a moderate amount of senior securities (bonds and preferred shares) if:

• (1) such senior securities might be conservatively created and bought for investment under established standards of safety; and
• (2) the use of senior capital is necessary to provide a satisfactory return on the common equity.

A company with only common stock outstanding may change toward the optimal structure by any of several means:

• 1. It may issue senior securities (bonds and preferred shares) pursuant to an expansion move, perhaps involving the acquisition of another business. (Example: Beaunit Mills Corporation changed from an all-common structure in March 1948 to a predominantly senior-security structure in March 1949.)
• 2. It can recapitalize, and issue new preferred stock and common stock - or even new bonds and common stock - in place of the old common. (Example: Ward Baking Company did this, via a new holding-company setup in 1924.)
• 3. It can declare a stock dividend, payable in new preferred shares. (Example: Electric Boat issued such a stock dividend in 1946.)
• 4. It can sell senior securities (bonds and preferred shares) and distribute all or part of the money to the common stockholders. (Example: In effect this was done in the recapitalization of Maytag Company in 1928.)

When a move of the fourth kind is made, it is almost always tied in with a merger or other corporate development - presumably because financial opinion is prejudiced against the sale of senior securities for cash to be distributed to common shareholders, regardless of the logic in the individual case.

Experience amply shows that once management is persuaded that the capital structure should be changed, to create a better earning power per dollar of common investment, it can readily find suitable means of accomplishing this end.

While this is a matter that may be of considerable importance to the stockholders of many companies, we do not think that they are likely to formulate and express independent views thereon until they have made considerable progress in self-education on other points affecting their interest.

Attention to this matter will repay careful thought by security analysts, managements, and enterprising stockholders.



Ref: Security Analysis by Graham and Dodd

Prorata Distributions of Capital the Fairest Arrangement

The basic questions are:

• whether any substantial amount of capital is redundant, and,
• whether the stockholders would benefit if such capital were returned to them.

If these were true, it becomes the duty of the directors to treat all stockholders fairly in the process.

A return of capital by a prorata distribution, would be the most direct and equitable way of accomplishing this.

However, valid tax considerations often dictate the alternative process of buying in shares.

It still remains the duty of the management to deal equitably with all the holders and to equalize as nearly as possible the position of those who sell and those who keep their shares.

Outside stockholders should insist on a policy of fairness, regardless of whether they would sell or not.

They are much more likely to benefit in the long run by having the principle of equitable treatment of all stockholders established, than by taking temporary advantage of the necessities or bad judgment of those who are willing to dispose of their holdings at a totally inadequate price.

Ref: Security Analysis by Graham and Dodd

Repurchases of Shares by Companies

Convincing evidence that many companies do in fact accumulate more capital than they need is seen in the prevalence of repurchases of stock in the open market.

A check in 1951 of companies listed on the New York Stock Exchange showed 430 (or 40.3%) holding shares of their own previously issued common and preferred stocks. A compilation by the Exchange in 1934 indicated 250 (or 32%) of the corporations held such stock in the treasury.

It is appropriate to mention that there are legitimate reasons (other than possession of surplus cash) for reacquiring stock, such as

• for retirement under sinking-fund provisions,
• to acquire assets which cannot be purchased for cash, and
• for distribution to employees as awards or
• for sale under company stock-purchase plans.

These repurchases as a whole present ethical questions which have not been thoroughly considered either by managements or stockholders.

It is assumed to be a "smart" thing to buy in stock at the lowest possible price, just as a smart buyer would purchase anything else.

For some reason, managements consider their duty lies only to those stockholders who do NOT sell, and that they have no obligation to deal considerately with anyone so disloyal or so speculatively minded as to want to dispose of his shares.

Furthermore, the argument runs, the company could refrain from buying shares at all, in which case those selling out would receive a still lower price. Hence, there can be no unfairness in paying a price, however small, as long as the seller could not do better elsewhere.


Ref: Security Analysis by Graham and Dodd