Dividend Valuation: dividends are the boldest way that a company can announce their performance and earnings potential.

Dividend Valuation

Valuing a company based on its ability to provide regular and increasing dividends is a worthy practice.  This is because dividends represent the only real gains of investors in a company where they have stake.

• Either in cash or asset payout, dividends are the boldest way that a company can announce their performance and earnings potential.  

• Unlike market value which indicates the idle wealth of shareholders, dividend valuation injects the past, present, and future earnings performance of the firm as it cannot distribute dividends without any excess money to finance operations and expand.  

• On this ground, however, growing companies are likely not regularly distributing dividends.  This is caused by their interests to reinvest excess earnings and concentrate them to growth prospects rather than disbursed to individual investors.

The dividend policy of a firm tells so much of its life cycle. 

• When companies reached their maximum growth potential, dividend payouts tend to be a practice.  This is because the firm wants to retain investors and encourage them to maintain their investment even growth had stopped.  

• Investors can use dividend policy as reference whether a firm is facing financial difficulties and failed to produce planned profits.  This scenario is observed in cases of dividend payment cuts.  

• On the other hand, consistent and even rising dividend payment may also represent a negative feature like financing such payments with debt.  In effect, the benefits of dividends are waived by costs and risks of debt and interest financing.  

• With dividends coming directly from earnings or buyback programs, continuity and regularity of its distribution minimizes the probability that managers will manipulate accounting data particularly earnings.

Computing for corporate value, specifically common shares, using dividends is done in at least three ways as there are numerous models that have been developed.

• Zero and constant dividend growth is a formula appropriate for mature companies which can minimally expand their operations.  Discount rate and expected dividend payout are required variables.  Although with less uncertainty and greater potential to accurately value the firm, growth potential is not present.

• The second formula offers the ability to estimate future dividend growth of a firm.  As this relies on historical data of actual dividends, the quality of valuation is a function of the quantity of the periods that have been collected.  If the firm do not have an ample historical data, results may not likely be as statistically significant as with a sufficient data under study.

• Lastly, irregular dividend to be followed by constant growth is apparently a version that follows the corporate life cycle (e.g. from growth to mature years).  This formula requires the beta or the degree of share sensitivity to market changes as well as the forecasted dividend growth.  This computation requires extensive market research and analysis which is vital to investing but troublesome to some investors.

http://ivythesis.typepad.com/term_paper_topics/2010/03/valuation-method-analysis-a-case-study-of-tesco.html

Schools are churning out the unemployable

http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article7034975.ece

Schools are churning out the unemployable
Harriet Sergeant

The latest unemployment figures are a shocker. Eight million adults are “economically inactive”. That means one in five people of working age does not have a job. A new and expanding group, poignantly described as “discouraged” workers, have even given up looking.

They are right to be discouraged but wrong that there is no work. A report out on Friday points out that a fifth of firms and a quarter of employers in the state sector are still hiring — despite the recession. Except they are taking on migrant workers — not our home-grown “discouraged” variety.

The managing director of a medium-sized IT company explained why. High-flyers — Oxford and Cambridge graduates — are still as good as any in the world. His problems come when he tries to recruit middle management. Last year he interviewed 52 graduates — all educated in state schools. On paper they looked “brilliant students”. Each had three As at A-level and a 2:1 degree. He shook his head. “There’s a big difference between people passing exams and being ready for work.”

This was obvious even before the interview began. Of the 52 applicants, half arrived late. Only three of the 52 walked up to the managing director, looked him in the eye, shook his hand and said, “Good morning.” The rest “just ambled in”. When he asked them to solve a problem, only 12 had come equipped with a notebook and pencil.

The three who had greeted him proved the strongest candidates and he hired them. Within a year they were out because of their “lackadaisical” attitude. They did not turn up on time; for the first six months a manager had to check all their emails for spelling and grammar; they did not know how to learn. It was the first time they had ever been asked to learn on their own. Their ability to “engage in business” was “incredibly” disappointing and “at 5.30 on the dot they left the office”.

This year the managing director has joined the 20% of companies recruiting overseas. “We are an English company but we have no English staff. It’s just too much trouble,” he said.

It is the same story with employers at every level in the UK. Sir Terry Leahy, the chief executive of Tesco, put it bluntly. Too many children have been leaving school after 11 or 13 years of compulsory education “without the basic skills to get on in life and hold down a job”. He said 5m adults were functionally illiterate and 17m could not add up properly. “On-the-job training” cannot act as a “bandage or sticking plaster” for “the failure of our education system”.

A CBI survey revealed that literacy and numeracy were not the only problems. More than 50% of employers complained that young people were inarticulate, unable to communicate concisely, interpret written instructions or perform simple mental calculations.

This goes a long way to explain why, of the 1.7m jobs created since 1997, 81% have gone to foreign workers. The Department for Work and Pensions (DWP) agrees with Leahy. UK citizens are on the dole because of “issues around basic employability skills, incentives and motivation”. It is a pity it has not passed that insight on to the Department for Children, Schools and Families.

The DWP has made it clear: work is where the inflated claims for our state education finally hit the buffers. At every stage we have a system in which the expediency of politicians and the ideology of the educational establishment take precedence over the interests of pupils.

We have children who can barely read and write scoring high marks in their Sats because it makes the school, and therefore politicians, look good. We have exam boards competing to offer the lowest pass mark because it allows heads to fulfil their GCSE targets. We have pupils pushed into easy subjects at A-level — which excludes them from applying to a top university — because it benefits the school. And we have universities that offer a 2:1 degree, as the IT company director put it, to “anyone who bothers to sit down and take the exam”.

On top of that is the attitude of the staff themselves. I was visiting schools to discover why so many black Caribbean and white working-class boys were failing. One reason soon became obvious. Their teachers, middle class themselves, failed to pass on those very values that had allowed them to progress in life.

They viewed inculcating attributes such as lucidity, spelling, grammar, punctuality and manners as “patronising”. They feared anything that smacked of the didactic. “I am not a teacher. I am a facilitator,” said one teacher primly. The head of another school insisted she was a “head learner” rather than a headmistress.

Joseph P Parkes is clear who he is and it is definitely not a head learner. Father Parkes is the president of Cristo Rey, a Catholic coeducational school in East Harlem, New York. His mainly black and Puerto Rican pupils come from single-parent homes; many have fathers in prison. But he is determined that no one is going to turn them down for a job.

His school operates an ingenious work-share scheme with some of New York’s most prestigious companies and charities. Once a week pupils put on their identity cards, go down to Wall Street and enter another world — of law firms and investment banks.

From the age of 14 they join a team of five pupils each performing clerical work one day a week. They know their salary pays “a big chunk” of their education. As one young man said: “They treat me like an adult.” Parkes explained: “It encourages them to take school seriously.”

How seriously I saw for myself when Parkes addressed morning assembly. We stood in rows, teachers patrolling on either side, straightening a shoulder here, checking a tie there. The talk was entitled First Impressions. “Now what kind of first impression have you made on our visitor from the UK here?” asked Parkes. “Have you shaken Miss Sergeant by the hand and looked her in the eye?” he demanded. Seventy pairs of eyes immediately engaged me. “Have you greeted her?” “Good morning,” they all chanted enthusiastically.

He held up a sheaf of papers, printouts of emails. The previous day, he had set them the task of applying for a job interview on the internet. First, had they researched the company? He summoned one boy to the front, who listed his company’s interests fluently. Parkes nodded approval, then turned back to us. Now then, how many had tracked down the right address for the email? Who was dispatching their precious job application to the man in the post room? Everyone laughed.

No detail seemed too small for Parkes. Had they spelt names correctly? He waved the papers accusingly. Some of the students had addressed their emails to him: “You were not following directions. You have got to learn to follow directions.” He selected three or four sheets. “And some of you have an email address that is inappropriate for a job application. Put yourself in the company’s shoes. Are you really going to give an interview to JosetheNiceGuy, FastandFurious@Hotmail” — the boy next to me blushed — “or Cristo Rey Hottie?” The pupils erupted. Finally, the head demanded: “What happens when you are not proactive?” “You are being a procrastinator,” they shouted back.

Parkes knows that his school is the only chance these young people have. Education has to make up for their background and the lack of those values that ensure success. He knows they are totally dependent on him for their future. If employers like the managing director are to recruit in England again, it is a lesson that our state schools will have to learn.

Valuation Method Analysis: A Case Study of Tesco

http://ivythesis.typepad.com/term_paper_topics/2010/03/valuation-method-analysis-a-case-study-of-tesco.html

http://ivythesis.typepad.com/term_paper_topics/valuation-methods/

Thursday March 11, 2010

Stronger ringgit boosts Bursa

By IZWAN IDRIS and YVONNE TAN

starbiz@thestar.com.my

PETALING JAYA: The ringgit is on a roll after Bank Negara raised interest rates last week amid mounting evidence the nation’s economic recovery is gaining traction.

And the currency strength has rubbed off on the share market, propelling the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) to a fresh two-year high of 1,328.22 points at the close yesterday.

“Many thought that Indonesia or South Korea would be the first to hike interest rates but Malaysia was the one which started the ball rolling in the Asian region,” Datuk Lee Kok Kwan, deputy chief executive officer, group treasury and investments at CIMB Group, told StarBiz yesterday.

As a result, “funds are flowing back in,” he said.

The ringgit had risen 1.5% against the US dollar since March 4 to 3.321 yesterday after Bank Negara increased its key overnight policy rate (OPR) from its historic low by 25 basis points to 2.25%.

Year-to-date, the local currency had shot up 3.18% yesterday and was the best performing currency in Asia ahead of the Korean won’s 2.9% gain over the same period.

The local unit’s performance against embattled European currencies was even more impressive, up 10% against the British pound and 8.7% against the euro since the start of the year.

Royal Bank of Scotland Group Plc, in a recent report, advised investors to buy the ringgit against the won and yen on expectations of further interest rate hikes here.

Its strategist Chia Woon Khien told Bloomberg yesterday that Bank Negara “could do a few more” rate hikes. “The question is whether they want to go straight to neutral level or stay a little dovish along the way,” he said.

OSK Investment Bank Bhd director and head of treasury Yeo Chin Tiong expects rates to “gradually” rise as the economy recovers. “Our house target for the ringgit is 3.20 versus the US dollar by year-end,’’ he toldStarBiz yesterday.

Meanwhile, RAM Ratings Services Bhd in its 2010 edition of its CreditPulse report said the ringgit was expected to strengthen to 3.20-3.30 against the greenback by end-2010.

It said there would be a “gradual” currency appreciation boosted by high current account surplus, international reserves and low inflation.

The stronger outlook for the ringgit, fuelled by rising rates and improving economy, has also boosted the appeal of local assets, especially for foreign investors.

At yesterday’s close, the FBM KLCI was up 4.36% since the start of the year. But the stronger ringgit means returns calculated in US dollar terms have shot up to 8.4% over the same period.

This made the local bourse the second best performer in the region behind Indonesia’s Jakarta Composite Index which gained 9%.

http://biz.thestar.com.my/news/story.asp?file=/2010/3/11/business/5839792&sec=business

What To Expect From The Market In The Next 8 Years

Mar. 10, 2010

(GuruFocus, March 9, 2010) This much we have a consensus: The current bull market was officially born on March 9, 2009 and market has rallied about 70% since then. What we do not know and we cannot agree on whether we are in a secular bull market or a bear market rally. 

That is the topic of debate between Robert Shiller of Yale University, Jeremy Siegel of University of Pennsylvania’s Wharton School, and Ben Inker of GMO LLC, as it is written up in today’s Wall Street Journal. Shiller and Siegel became friends since their student years in MIT in the 1970s, yet they disagree on which way the market is going.

Shiller, author of famous book Irrational Exuberance in which he warned of the tech bubble before it burst in 2000, is on the bearish side. His reasons, according to the WSJ:

• Despite the two bear markets, stock have spent almost all their time since 1991 priced above historic average. History suggests that when the stock prices are high, performance in ensuing years is disappointing.
• Shiller compiled market data back to 1881, measuring stock prices month by month relative to corporate profits, To avoid short-term profit distortions, he uses an average of profits over the previous 10 years. Over the long run, by his measure, stocks trade at an average of about 16 times annual corporate profits.
• Today the ratio is about 20. Historically, when stock market hit that number, the average return a decade after that is about -2%, adjusted for inflation
• Catalyst for the bearish scenario could be when the government takes away the support in the housing market. Housing market could be turning down after a brief recovery, which could contribute to a decline in U.S. stocks.

Siegel, also author of a well-read book called “Stocks for the Long Run” is on the bullish side. He contends that Shiller’s method of looking at earnings of the past 10 years doesn’t work well in the current environment due to the large write-offs of the financials in 2008. Instead, he prefers to use the forecasted earning:

• When economy came out of recession, the common P/E is 18.5.
• Currently the market is selling at about 14.5 times forecast 2010 profits, making it cheap in comparison to the past after-recession market.
• If the P/E expand to 18.5, S&P could rise to1400 this year, a 23% gain from today’s level.
• What’s more, ”We could easily see 10% to 12% stock returns with low inflation in future years”, Siegel predicts.

Ben Inker, in consistence of the firm’s stance on the matter, presented his arguments from a different angle – he uses historical profit margins to forecast future corporate profits. His reasoning:

• Internet and real estate bubbles pushed corporate profit margin to 7% above historical level of 6%. The higher margin was due to exceptional borrowing and investment by corporations and consumers.
• While the one percent seems to be small, it represents a 17% jump in profitability which is not sustainable.
• Use the historical 6% margin and applying it to an expected rise in corporate revenues as the economy recovers, he finds that the stocks today trade at almost 19 times expected profits, making them expensive.
• To be reasonably priced, he calculates the S&P 500 would have to fall 21% to about 900.

Of course, true value investors will consider guessing the short-term move of the market is a fool’s game. Whether the market will climb 20% or decline 20% next is really everybody’s guess. Guessing the long-term’s performance might be a fool’s game too, if it is up to guys like Warren Buffett, Bruce Berkowitz, and Donald Yacktman to say. For them, one ought to buy a good business on the assumption that no matter how the market will performance in the next couple of years, the business will do well so will the stock follow.

But at least one can answer question of long term expected investment return of the market with a bit more intelligence.

What to Expect in the Next 8 Years?

GuruFocus has developed a webpage dedicated to answer that question. The theory behind (it is actually explained on the webpage itself, I repeat here in case you do not want to click to another page) is that market return consists of three component: dividend yield, profit growth, and change in market valuation. Quoting from the page:

1. Business growth 

If we look at a particular business, the value of the business is determined by how much money this business can make. The growth in the value of the business comes from the growth of the earnings of the business growth. This growth in the business value is reflected as the price appreciation of the company stock if the market recognizes the value, which it does, eventually.

If we look at the overall economy, the growth in the value of the entire stock market comes from the growth of corporate earnings. As we discussed above, over long term, corporate earnings grow as fast as the economy itself.

2. Dividends

Dividend is an important portion of the investment return. Dividend comes from the cash earning of a business. Everything equal, higher dividend payout ratio, in principle, result in a lower growth rate. Therefore, if a company pays out dividend while with growing earnings, the dividend is an additional return for the shareholders besides the appreciation of the business value.

3. Change in the market valuation

Although the value of a business does not change overnight, stock price does. The market valuation is usually measured by the well-known ratios such as P/E, P/S, P/B etc. These ratios can be applied to individual business, as well as the overall market. The ratio Warren Buffett uses for market valuation, TMC/GNP, is equivalent to the P/S ratio of the economy.

Putting all the three factors together, the return of an investment can be estimated by the following formula:






Investment Return (%) = Dividend Yield (%)+ Business Growth (%)+ Change of Valuation (%)

Armed with this analysis and assuming in 8 years, the TMC/GDP ratio takes any one of the 40% (doom’s day scenario), 80% (average scenario), and 120% (happy ending), one can calculate the expected investment return.








As of now, we should expect an average gain of 5.7% for the next 8 years if the market ends the 8-year period at TMC/GDP=80%. Yes, it is mediocre gain as compared to the historical average gain, but it does beat the 10-year treasury yield by about 2%.

Market could sink an average of 2.6% per year if TMC/GD ratio declines to 40%, an extreme level seen in the 1975 to 1985 period. During that period, OPEC was on our case and inflation ran as high as 12%, and long term treasury bonds were yielding at a double digit. Will we go there?

However, if the market participants decides to irrationally exuberant again and TMC/GDP jumps to a 120%, level seen in the 1998-2000 period, we could actually expect a 11.6% gain per annum. What medicine do we need to take in order for us to be so happy again?

So even in long run anything is possible -- if the market goes to the extremes in the next 8 years, the bears like Shiller and Inker could be right, so could be the bullish Jeremy Siegel. Investors are better equipped to know what to expect under each scenario. GuruFocus memebers can access the Broad Market Valuation in real time.

"That's why the value of expertise and the ability to interpret information will someday go to infinity", so says Investment Guru Wilbur Ross recently. 

http://www.gurufocus.com/news.php?id=87078

Stock Picking Strategy- The Parameters That One Needs To Look At

Stock Picking Strategy- The Parameters That One Needs To Look At

October 4th, 2009 | Author: admin

When investing in stocks, an investor needs to be aware of what they are putting themselves into. This is to say that, they should have the facts right about the securities they hope to invest in. Stocks, in this case, come in many characteristics and an investor needs to be fully aware of their behaviour before committing their money. A characteristic of stocks is that, they are those that are value-oriented and others are growth oriented.

Value oriented stocks are those that are trading at a price that is lower than what they are really worth. An investor buys them with the hope that, the price will rise above the stocks worth and that, they will then realize a profit, hence adding value to their investment. On the other hand, the growth oriented stocks are focused on future prices. They look at the potential of the company, and not necessarily the securities.

Under the growth stocks, there are those that grow faster than others and it is upon the investors to find to more about them. There is no laid out formula as to how the stocks experience growth, but the growth is based on speculation. As an investor chooses to look at growth as a stock picking strategy, they should first make an observation of how they have performed in the past.

Another stock picking strategy that an investor may chose to adopt is the income factor. As we can see, there are value and growth stocks and income stocks as well. Stocks that generate dividends are popular among many people today. Many investors have preference over high yield stocks, or those that guarantee them a steady income.


http://www.stockmarket-results.com/stocks/stock-picking-strategy-the-parameters-that-one-needs-to-look-at/comment-page-1

Wednesday February 10, 2010

How to improve your investment skills

Personal Investing - By Ooi Kok Hwa

WE have been asked by many readers on ways to improve their investment skills. In fact, for all of us who invest, it is one of the essential skills that we need to acquire in our lifetime. Like it or not, we need to have it if we need to generate returns for our investment.

All investors want good returns from their investments. However, most of the times, instead of generating returns, retail investors are suffering from losses from their investments. We feel that one of the key differences between an intelligent investor versus a normal investor is that the intelligent investor will be aware that he may make mistakes in some of his investment decisions while a normal investor tend to overlook the fact that he will make wrong decisions no matter how good he thinks he is.

Despite extensive research on certain listed companies, due to some unforeseen changes in certain fundamental factors, even good value companies may suffer losses. Under such circumstances, an intelligent investor will admit that he had made a mistake in his investment decision and will cut losses fast.

However, the problem with most investors is that they refuse to face their mistakes; some are not willing to cut their losses even though they are aware of their mistakes.

Hence, rule number one in investing is that we must be fully aware that regardless of whether you are an investment guru or an average investor, everyone will make mistake in his investment decisions. That’s why some experts say: “When somebody mentions that they have more experience than you, they mean that they have incurred more losses than you in stock market.” The key is to learn from our mistakes.

In order to avoid incurring losses in stock market, we need to develop our own investing system that suit our needs, skills, knowledge and risk tolerance level.(Comment:  Time horizon, risk tolerance and investment objectives)  The investing system can be adopted from the fundamental analysis, technical analysis or combination of both. If we ask some remisiers, they will most likely tell you that they need two to three years to develop their own investing system that can help them to generate returns from stock market.

One of the fastest ways to acquire investing knowledge is through reading books relating to investment. There are many good investment books in the market. However, since every investor has different preferences, the best way is to visit bookstores and look for investment books that he or she can understand and can offer the skills needed. For beginners, always start with some basic investment books that explain well on key investment concepts.

Here are some good investment book titles for consideration: The Intelligent Investors (by Benjamin Graham), The Essays of Warren Buffett: Lessons for Corporate America (Warren Buffett and Lawrence A. Cunningham) and Rule #1 (Phil Town). For advanced investors, you may consider Security Analysis (by Benjamin Graham and David Dodd), which is still one of the best investment books in the world.

Apart from reading books, investors need to read more business news in newspapers and magazines to keep themselves updated on the latest happenings. In addition, many newspapers, magazines and websites also publish good articles for the purpose of educating general public on investment. For example, investors can get good investment knowledge from website like www.min.com.my, by Securities Industry Development Corp.

Reading analysts’ research reports will enhance our understanding on some issues and factors in valuation as well as comments on some corporate strategies and developments. This knowledge is crucial in helping us making better investment decisions. Besides, for those serious fundamental investors, they may consider buying books like Stock Performance Guide (by Dynaquest Sdn Bhd) and Shares (Pioneers & Leaders (Publishers) Pte Ltd), which will provide all the essential investment information like companies’ background and some key critical investment information.

Another way to acquire investing knowledge is through attending investment training classes. There are many types of investment training classes, for example, classes on fundamental investment, technical analysis, currency trading or option trading. Given that a lot of these classes are quite expensive, we need to check whether investment training suits our needs. We believe some of those classes may be able to help investors generating returns, however, they require higher level of discipline and commitment.

Before we start investing with “real” money, one of the ways to gain experience and at the same time test out our skills is by building up a “virtual” portfolio and investing using “virtual” money. We can always try out our investment skills through playing a simulated investment game and monitor the investment returns before putting the real money into the stock market. Besides, we should also start young. If we acquire these investment skills at younger age, the losses that we may incur will be much lower than trying them when we are getting nearer to our retirement age.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/2/10/business/5646486&sec=business 

Comment:  Find a mentor.  Coat-tail on him or her for a period of time during your early years of investing.  

Wednesday March 10, 2010

How to analyse company statements and reports

Personal Investing - By Ooi Kok Hwa

Analysts usually judge the quality of a company’s management team by looking at the comprehensiveness and truthfulness shown in the management statements

FOR the next few weeks, investors will start to receive annual reports for companies that have their financial year ended Dec 31. Even though the majority of investors may not look at those reports in detail (in fact, some investors may not even open the envelope containing the annual reports), some people will still spend time analysing the whole report. One of the key sections that investors will analyse in detail is the chairman’s statement and management discussion or operations review. In this article, we will label the above statements as management statements.

Most of the management statements will explain the companies’ immediate past one-year financial performance, external environment, major corporate developments as well as the companies’ future prospects.

Based on our observations, the majority of companies will try to explain and highlight a lot of positive elements that happened in the companies. It is very rare to find negative issues that affect the companies’ performances being discussed in the statements. Even though we cannot conclude that those companies that are willing to highlight their financial problems as good companies, at least these companies show their effort in trying to be truthful to their investors. This will provide a lot of plus points to these listed companies.

Analysts usually judge the quality of a company’s management team by looking at the comprehensiveness and truthfulness shown in the management statements.

Nowadays, if there are areas that a company does not comply with the accounting standards, the external auditor will highlight those areas inside the auditor report. Hence, investors need to read the management statements and financial statements together with the auditor’s report.

The management statements will normally provide the reasons driving the companies’ overall performance, whether good or bad. However, there are certain companies that tend to focus on higher sales and avoid mentioning the profitability when ever they report lower profits during the year. They will try to avoid the reasons causing the reduction in profits, for example, higher operating costs, raw material costs or stiff price competition.

Some times, some companies will claim they have managed to maintain profits at the same level as the previous year. However, if we further analyse the financial statements, we will notice that the profit had included a lot of exceptional items, such as gains from the disposal of fixed assets as well as investments. Hence, we should not rely on the explanation given by the management in the chairman’s statement.

In fact, we need to investigate further the driving factors for the profitability of the company, especially if it had included some exceptional gains or losses, which are not part of the company’s normal operations. These details can be found in the notes to the accounts. Normally, most companies will list the key items that affect their profitability in the notes to the “profit before tax”.

We can get a summary of key corporate developments that happened in the company in the “corporate development” section. If you have been following the company’s corporate developments, this section may not provide you a lot of new information.

Nevertheless, certain companies may provide the latest status of their corporate developments, such as any new projects being initiated or certain approvals from relevant parties being granted for their critical projects.
As for the section on the company’s future prospects, investors should not place too much weight on it. Based on our experience, a lot of Malaysian companies have the same statement on future prospects by saying that “the company will perform better in the future”.

There are companies that have reported losses every year but the chairmen will still say the companies would perform better next year without the backing of solid grounds to improve profitability.

Hence, a good company statement should provide a fair account of the actual happening in the company. In reality, it is quite difficult for listed companies to hide their problems as the level of financial literacy of the general public has improved over years.

There are some mature investors and analysts who are able to detect the problems faced by the company by analysing the notes to the accounts in addition to making comparison of the current financial statements versus the statements or quarterly financial statements of past years.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/3/10/business/5827481&sec=business 

More getting married later or not at all

Thursday March 11, 2010
More getting married later or not at all

KUALA LUMPUR: Fewer Malaysian men and women want to tie the knot now compared with 10 years ago.

A recent survey by the National Population and Family Development Board on trends between 2000 and 2007 indicated that the average marriage age of marrying Malaysians would increase to 33 years by 2015 or they may choose not to get married at all.

Universiti Malaya’s Associate Professor Tey Nai Peng said the average age at first marriage for men and women had increased from 25.5 and 22.0 years respectively in 1970 to 28.6 and 25.1 years in 2000.

Also, the number of those who had never been married between the ages of 25 and 29 years had more than doubled for women from 13% to 29%, and rose from 32% to 54% among men, he added.

“Although marriage behaviour varies widely across the various ethnic groups and regions, the general trend is one of rising age at marriage and non-marriage at all,” he said during the consultative forum on population strategic plan research conducted by the board here yesterday.

Tey noted that education and career considerations had expanded women’s horizons, giving them opportunities which competed with marriage.

“Traditionally, women tended to marry men with at least the same level of education. But with higher educational levels, more and more women are now having difficulty finding compatible partners,” he said.

Issues like migration, urbanisation and modernisation had also resulted in women having more autonomy in making decisions, including in those relating to marriage, he pointed out.

Tey said the younger generation was becoming more self-centred, with modern women having high expectations and becoming choosy when it came to finding mates.

Board director-general Datuk Aminah Abdul Rahman said current marriage trends were contributing to the rapid decrease in fertility rates for Malaysians.

“The changing role of women is the main reason for their infertility. They are getting married later now or not at all as they build a career alongside men to become equal breadwinners,” she said on recent data showing that Malaysians were now having fewer babies.

She said more focus should be placed on ways to increase the percentage of marriages instead of blaming any gender.

http://thestar.com.my/news/story.asp?file=/2010/3/11/nation/5837574&sec=nation

Money at the heart of govt: REFLECTING ON THE LAW

Wednesday March 10, 2010

Money at the heart of govt

REFLECTING ON THE LAW
By SHAD SALEEM FARUQI

The fiscal gap, the difference between the states’ domestic revenue and their expenditure, ranges between 15% and 75% of their total expenditure.

KELANTAN has a long-standing and popularly backed claim for royalty for petroleum extracted off its shores. Some years ago, the then PAS government in Terengganu had made a similar demand.
These persistent assertions highlight the broader question whether the financial resources of the nation are divided equitably between the federal and state governments.

To begin with, let us agree with Prof R.H. Hickling (who drafted the ISA) that “money represents power, and is at the heart of government”. An equitable distribution of financial resources between the federation and the states is the ultimate test of a true federation.

Under the Malaysian Constitution, there is a clear demarcation of financial powers between central and regional governments, though the balance is tilted heavily in favour of the former.

Federal revenues: In Schedules 9 and 10, most of the lucrative sources of revenue like income tax, customs and excise duties on imports and exports, sales tax, licence fees for motor vehicles, and incomes from banking, foreign exchange, capital issues, insurance, passports, visas, newspapers, radio, TV, tourism, foreign pilgrimages, maritime and estuarine fishing, shipping on the high seas, trade, commerce, industry, patents and designs are allocated to the federal exchequer.

Except for state power over licence fees, the development of mineral resources; mines, mining, minerals and mineral ores; oils and oilfields; import and export of minerals and mineral ores; and all petroleum products are within federal jurisdiction.

All foreign and extra-territorial jurisdiction (presumably including offshore prospecting for oil, gas or minerals) is in federal hands. Regrettably, the situation is clouded by clearly illegal contracts between Petronas and all state governments about payment for onshore as well as offshore oil.

Federal expenditure: With such lucrative sources of income to the federation, come the most onerous items of expenditure. Thus, foreign relations, diplomatic and consular representation, international organisations, national defence, internal security, the armed forces, the police, prisons and intelligence services are federal responsibilities.

Criminal and civil courts, elections, education, medicine, health, fire services, federal pensions and gratuities, medicine, health, social security, currency, audit, roads, bridges, ferries, railways, ports and harbours, posts, telegraph, communication, transport, airways and safety in mines and oilfields are entirely a federal burden.

State revenues: Even though there is a heavy preponderance of financial power in the hands of the Federal Government, the Constitution guarantees certain sources of internal and external revenue to the states.
Article 110 and the Tenth Schedule allocate to the states 14 domestic sources of income. The most lucrative are taxes derived from natural resources like land, mines and forests, fees from toddy shops, entertainment places and water supplies, rents on state property, fines and forfeiture in state courts, zakat, fitrah, Baitulmal and other Islamic religious revenue.

Under Article 110(3), each state receives 10% or more of the export duty on tin produced in the state. Likewise, Parliament may provide that each state shall receive, on such terms and conditions as may be laid down, a proportion of the export duty on mineral ores, metal and “mineral oils” (which term includes petroleum) produced within the territorial boundaries of each state.

Under Paragraph 2(c) of the Ninth Schedule, permits and licences for prospecting for mines and mining leases are exclusively within the competence of the states.

In addition to the above domestic sources of revenue, Articles 109 and 110 guarantee some money reimbursements to the states in the following forms:

Capitation Grants: Under Article 109, this is an annual mandatory payment by the Federal Government to each state based on the state’s population.

State Road Grants: Under the Tenth Schedule, the Federation is required to pay to each state a compulsory road grant to cover the average cost of maintaining state roads.

State Reserve Fund: Under Article 109(6), each year, the Federal Government, after consultation with the National Finance Council, deposits into the above fund, certain amounts to be allocated to the states for purposes of development.

Conditional grants: Under Article 109(3) the Federal Government allocates further conditional grants to supplement the states’ own domestic revenue. These grants are discretionary and are as much influenced by fiscal policies as by political considerations.

Kelantan under PAS from 1959 to 1974 and 1982 to now; Terengganu under PAS from 1959 to 1964 and 1998 to 2003; Penang under Gerakan from 1969 to 1974 and under DAP from 2008 to the present; and Sabah under PBS experienced such financial frustrations.

Loans: Under Articles 111 (2) & (3), a state is not allowed to raise or borrow money except from the Federation or a federally approved bank. In Government of Malaysia v Government of Kelantan (1968), the Pan-Malayan Islamic Party, after its victory in the 1959 state elections in Kelantan, sought to fulfil an election pledge to build a bridge over the Kelantan river but it was financially in no position to do so.

In the face of federal objections, it negotiated a clever financial arrangement with a private company which advanced RM2.5mil to it in return for mining and forest concessions. The Federal Government went to court to challenge the deal as an illegal loan. The Federal Court decided in favour of Kelantan.

The Federal Government then retaliated by pushing through a constitutional amendment so that pre-payment of royalties would now constitute lending.

In sum, it can be stated that in the financial field, the central government’s preponderance of power is very evident. The Constitution has been so devised that almost all the important direct and indirect taxes belong to the Centre.

The states are entitled to the proceeds from some taxes, fees and other sources of revenue, but these are insufficient to solve the chronic shortage of funds experienced by some states.

The fiscal gap, the difference between the states’ domestic revenue and their expenditure, ranges between 15% and 75% of their total expenditure. This imbalance has two aspects: vertical imbalances between the centre and the states, and horizontal imbalances between the states inter se.

It must be noted, however, that federal predominance in respect of functions and resources is less pronounced vis-à-vis the East Malaysian states of Sabah and Sarawak, which control a number of additional sources of income along with additional functions under Articles 112B, 112C, 112D.

Datuk Dr Shad Saleem Faruqi is Emeritus Professor at UiTM and Visiting Professor at USM 

http://thestar.com.my/columnists/story.asp?col=reflectingonthelaw&file=/2010/3/10/columnists/reflectingonthelaw/5827905&sec=Reflecting%20On%20The%20Law

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How to Analyze Receivables & Inventory

How to Analyze Receivables & Inventory

Thu, Feb 11, 2010

Featured, Stock Analysis

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How to Perform Inventory and Receivables Anlaysis

I wanted to go through a quick exercise that I perform during a stock analysis.

A recent stock that has come up in the Graham stock screener and forum is CONN. Conn’s Inc is a specialty retailer of home appliances such as fridges, freezers, washers, dryers and consumer electronics such as TV’s, cameras, computers etc. Think Best Buy.

The company just released their results for their 2009 4th quarter results and the stock took a 17%hit. The actual financial statements hasn’t been released but I wanted to show how these things are foreseeable by analyzing the inventory and accounts receivables. This has also been discussed in the balance sheet analysis.

Sales, Inventory and Receivables Analysis

For any company that sells products, a careful look at the correlation between sales, accounts receivables and inventories is crucial. In the above example, I’ve only compared the 3rd quarter statements but you can see that CONN does not know how to manage their assets.

From what I see, the problem began to surface in 2006 where revenue only increased 0.23% while accounts receivables increased 31% and inventory went up 8%. Before 2006, the company was able to grow revenues at a faster rate than accounts receivables and inventory but from 2006 onwards, the correlation worsened until 2008 where you can immediately see that things were bound to fall apart.

In 2008, revenues declined 3% compared to the previous comparable period while accounts receivables increased by 116% and inventories up 9%.

The same thing happened in 2009 where accounts receivables increased another 102%! The only thing waiting for CONN is trouble, and it finally surfaced in their latest quarter. It goes to show that Wall Street does not perform the proper analysis required.

Here is a graphical view of the same thing.

Whenever you see either accounts receivables of inventory increase quicker than sales, watch out. But for inventory, you need to dig deeper.

When raw materials component of inventories is advancing much  more rapidly than the work-in-progress and finished goods components, this means that the company is receiving many new orders and an inventory buildup is necessary. So the company will simultaneously ship products from its finished goods inventory while ordering raw materials in larger amounts.

But in the case of CONN, the company only sells the items so 100% of inventory is finished goods so any excessive increase is a big red warning sign.

Dirt Cheap or Value Trap

All valuations point to a cheap company. Looks like the intrinsic value is roughly $15-$16.

If I had come across CONN when I first started investing, I’m pretty sure I would have bought it. At today’s price of $4.61 it is definitely cheap and tempting but until there are signs that management is able to get a handle on inventory and accounts receivables, it is best to leave it alone.

Sure the stock can go up, but it doesn’t hide the fact that the company is struggling. CONN has also increased their accounts payables and taken on huge amounts of long term debt.

If I was to buy the stock now, I would only be speculating and hoping that things improve.

http://www.oldschoolvalue.com/stock-analysis/inventory-receivables-analysis-conn/