26.7.2010
http://www.bfm.my/breakfast-grille-270710-tan-teng-boo.html?mobile=0
Monday, 5 November 2012
Saturday, 3 November 2012
Buffett’s Watershed Investment - From Graham to Fisher: See’s Candies:
- Buffett was initially "not sold" on purchasing See's Candies when presented with the opportunity in 1971.
- See's Candies was offered for $30 million and it was hardly a Graham style investment. See's had only $5 million in tangible asset value at the time.
- Berkshire shareholders can probably credit Charlie Munger, Berkshire's Vice Chairman, for convincing Buffett to make this investment.
- Buffett eventually agreed to a $25 million purchase of See's and based the logic of the purchase on See's earnings power and brand equity.
- The valuation paid was approximately 11.4 times trailing earnings.
- Buffett believed that See's had significant additional pricing power that was not being leveraged and could sell for premium prices compared to other candies.
This was what Buffett had to say about See’s Candies in his 2007 annual letter to shareholders:
We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories. Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.
Lessons learned:
1. Clearly See’s Candies is a business that is today worth many times the amount paid to acquire the company in 1971.
2. It is not a business that requires a high level of invested capital.
3. The value of See’s is the earnings power of the business.
4. That earnings power of See does not come from tangible equity. It comes from intangible assets, and specifically from the brand equity of the business.
Comparing Benjamin Graham and Philip Fisher's Techniques
Practical Application of Fisher’s Techniques
What can value investors take away from Philip Fisher’s book and from Warren Buffett’s application of these concepts?
The evidence is overwhelming that buying a business like See’s is far more attractive than buying “cigar butt” investments that are quantitatively cheap but either dying or offering average prospects for the future.
However, the big caveat is that any investor seeking the higher payoffs accruing to intangible assets like brand power must be very sure in his analysis to avoid buying into the sort of promotional stocks that Fisher warned us to avoid.
In short, knowing your “circle of competence” is critical to avoid paying up for illusory growth and taking the risk of permanent loss of capital.
Losing capital permanently is much less likely with Graham’s quantitative approach, but that approach also entails higher turnover and lower potential returns compared to a successful application of Fisher’s techniques.
Read:
Roger Lowenstein’s excellent 1995 biography of Warren Buffett, The Making of an American Capitalist, the purchase of See’s in 1971.
Alice Schroeder’s recent Buffett biography, The Snowball,
Thursday, 1 November 2012
Types of Investment Information
Investment information can be divided into 5 types, each concerned with an important aspect of the investment process.
1. Economic and current event information.
This includes background as well as forecast data related to economic, political, and social trends on a domestic as well as a global scale. Such information provides a basis for assessing the environment in which decisions are made.
2. Industry and company information.
This includes background as well as forecast data on specific industries and companies. Investors use such information to assess the outlook in a given industry or a specific company. Because of its company orientation, it is most relevant to stock, bond or options investments.
3. Information on alternative investment vehicles.
This includes background and predictive data for securities other than stocks, bonds, and options, such as mutual funds and futures.
4. Price information.
This includes current price quotations on certain investment vehicles, particularly securities. These quotations are commonly accompanied by statistics on the recent price behaviour of the vehicle.
5. Information on personal investment strategies.
This includes recommendations on investment strategies or specific purchase or sale actions. In general, this information tends to be educational or analytical rather than descriptive.
1. Economic and current event information.
This includes background as well as forecast data related to economic, political, and social trends on a domestic as well as a global scale. Such information provides a basis for assessing the environment in which decisions are made.
2. Industry and company information.
This includes background as well as forecast data on specific industries and companies. Investors use such information to assess the outlook in a given industry or a specific company. Because of its company orientation, it is most relevant to stock, bond or options investments.
3. Information on alternative investment vehicles.
This includes background and predictive data for securities other than stocks, bonds, and options, such as mutual funds and futures.
4. Price information.
This includes current price quotations on certain investment vehicles, particularly securities. These quotations are commonly accompanied by statistics on the recent price behaviour of the vehicle.
5. Information on personal investment strategies.
This includes recommendations on investment strategies or specific purchase or sale actions. In general, this information tends to be educational or analytical rather than descriptive.
Weighted Average Cost of Capital (WACC)
What It Is:
Weighted average cost of capital (WACC) is the average rate of return a company expects to compensate all its different investors. The weights are the fraction of each financing source in the company's target capital structure.
How It Works/Example:
Here is the basic formula for weighted average cost of capital:
WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]
E = Market value of the company's equity
D = Market value of the company's debt
V = Total Market Value of the company (E + D)
Re = Cost of Equity
Rd = Cost of Debt
T= Tax Rate
A company is typically financed using a combination of debt (bonds) and equity (stocks). Because a company may receive more funding from one source than another, we calculate a weighted average to find out how expensive it is for a company to raise the funds needed to buy buildings, equipment, andinventory.
Let's look at an example:
Assume newly formed Corporation ABC needs to raise $1 million in capital so it can buy office buildings and the equipment needed to conduct its business. The company issues and sells 6,000 shares of stock at $100 each to raise the first $600,000. Because shareholders expect a return of 6% on their investment, the cost of equity is 6%.
WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]
E = Market value of the company's equity
D = Market value of the company's debt
V = Total Market Value of the company (E + D)
Re = Cost of Equity
Rd = Cost of Debt
T= Tax Rate
A company is typically financed using a combination of debt (bonds) and equity (stocks). Because a company may receive more funding from one source than another, we calculate a weighted average to find out how expensive it is for a company to raise the funds needed to buy buildings, equipment, andinventory.
Let's look at an example:
Assume newly formed Corporation ABC needs to raise $1 million in capital so it can buy office buildings and the equipment needed to conduct its business. The company issues and sells 6,000 shares of stock at $100 each to raise the first $600,000. Because shareholders expect a return of 6% on their investment, the cost of equity is 6%.
Corporation ABC then sells 400 bonds for $1,000 each to raise the other $400,000 in capital. The people who bought those bonds expect a 5% return, so ABC's cost of debt is 5%.
Corporation ABC's total market value is now ($600,000 equity + $400,000 debt) = $1 million and its corporate tax rate is 35%. Now we have all the ingredients to calculate Corporation ABC's weighted average cost of capital (WACC).
WACC = (($600,000/$1,000,000) x .06) + [(($400,000/$1,000,000) x .05) * (1-0.35))] = 0.049 = 4.9%
Corporation ABC's weighted average cost of capital is 4.9%.
This means for every $1 Corporation ABC raises from investors, it must pay its investors almost $0.05 in return.
Corporation ABC's total market value is now ($600,000 equity + $400,000 debt) = $1 million and its corporate tax rate is 35%. Now we have all the ingredients to calculate Corporation ABC's weighted average cost of capital (WACC).
WACC = (($600,000/$1,000,000) x .06) + [(($400,000/$1,000,000) x .05) * (1-0.35))] = 0.049 = 4.9%
Corporation ABC's weighted average cost of capital is 4.9%.
This means for every $1 Corporation ABC raises from investors, it must pay its investors almost $0.05 in return.
Why It Matters:
It's important for a company to know its weighted average cost of capital as a way to gauge the expense of funding future projects. The lower a company's WACC, the cheaper it is for a company to fund new projects.
A company looking to lower its WACC may decide to increase its use of cheaper financing sources. For instance, Corporation ABC may issue more bonds instead of stock because it can get the financing more cheaply. Because this would increase the proportion of debt to equity, and because the debt is cheaper than the equity, the company's weighted average cost of capital would decrease.
A company looking to lower its WACC may decide to increase its use of cheaper financing sources. For instance, Corporation ABC may issue more bonds instead of stock because it can get the financing more cheaply. Because this would increase the proportion of debt to equity, and because the debt is cheaper than the equity, the company's weighted average cost of capital would decrease.
Funds from Operations (FFO) of REITS
What It Is:
Funds from Operations (FFO) is a measure of cash generated by a real estate investment trust (REIT). It is important to note that FFO is not the same as Cash from Operations, which is a key component of the indirect-method cash flow statement.
How It Works/Example:
The formula for FFO is:
Let's assume Company XYZ is a REIT that owns several properties. Last year, Company XYZ's income statement looked like this:
Using the formula above, we can calculate Company XYZ's FFO as follows:
$2,500,000 + $2,000,000 - $200,000 = $4,300,000
REITs and similar trusts typically disclose FFO in the footnotes to their financial statements (and in many cases in the headlines of their press releases), and they are required to show their calculations.
Using the formula above, we can calculate Company XYZ's FFO as follows:
$2,500,000 + $2,000,000 - $200,000 = $4,300,000
REITs and similar trusts typically disclose FFO in the footnotes to their financial statements (and in many cases in the headlines of their press releases), and they are required to show their calculations.
Why It Matters:
In general, the adjustments FFO makes to net income are intended to compensate for accountingmethods that may distort a real estate investment trust's true performance. This is especially true ofdepreciation. GAAP accounting requires REITs to depreciate their investment properties over time. However, many REIT properties actually appreciate over time, and for this reason, the required depreciation expense tends to make net income appear artificially low. FFO also adjusts for gains (or losses) on the sale of properties because they are not recurring and therefore do not contribute to the REIT's ongoing dividend-paying capacity (REITs are required to pay out 90% of their taxable income in dividends). Some analysts go a step further and calculate AFFO (Adjusted Funds from Operations), which adjusts FFO for rent increases and certain capital expenditures.
Many analysts prefer to examine FFO instead of net income when measuring a REIT's financial performance. Similar to EPS (earnings per share), FFO per share is a carefully scrutinized metric that is often used as a barometer to gauge a REIT's profitability per unit of shareholder ownership. Meanwhile, the interpretation of price/FFO multiples may generate valuation insights similar to those generated by P/E multiples. As such, FFO is a key driver of share prices.
Though FFO is widely considered to be the most popular method of quantifying a real estate firm's profitability, it's important to remember that FFO can often be susceptible to manipulation, accounting changes, and restatements. Nevertheless, FFO remains the industry standard in determining investment-trust profitability for shareholders.
Many analysts prefer to examine FFO instead of net income when measuring a REIT's financial performance. Similar to EPS (earnings per share), FFO per share is a carefully scrutinized metric that is often used as a barometer to gauge a REIT's profitability per unit of shareholder ownership. Meanwhile, the interpretation of price/FFO multiples may generate valuation insights similar to those generated by P/E multiples. As such, FFO is a key driver of share prices.
Though FFO is widely considered to be the most popular method of quantifying a real estate firm's profitability, it's important to remember that FFO can often be susceptible to manipulation, accounting changes, and restatements. Nevertheless, FFO remains the industry standard in determining investment-trust profitability for shareholders.
Free cash flow to the firm (FCFF)
What It Is:
Free cash flow to the firm (FCFF) is the cash available to pay investors after a company pays its costs of doing business, invests in short-term assets like inventory, and invests in long-term assets like property, plants and equipment.
The firm's investors include both bondholders and stockholders.
The firm's investors include both bondholders and stockholders.
How It Works/Example:
Cash flows into a business when the company sells its product (revenues, aka sales). Cash flows out to pay the costs of doing business: salaries, rent, taxes, etc. Once expenses are paid, whatever is left over can be used to reinvest in the business.
A company must continually invest in itself in order to keep operating. Short-term assets like inventoryand receivables (called working capital) get used up and need to be replenished. Long-term assets like buildings, plants and equipment need to be expanded, repaired and replaced as they get older or as the business grows.
Once the company has paid its bills and reinvested in itself, hopefully it has some money left over. This is the free cash flow to the firm (FCFF), called such because it's available (free) to pay out to the firm's investors.
To calculate free Cash flow to the firm, you can use one of four different formulas. The main differences among them pertain to which income measure you start from and what you then add and subtract to the income measure to end up with FCFF:
FCFF = NI + NCC + Int * ( 1 – T ) – Inv LT – Inv WC
FCFF = CFO + Int * ( 1 – T ) – Inv LT
FCFF = [EBIT * ( 1 – T )] + Dep – Inv LT – Inv WC
FCFF = [EBITDA * ( 1 – T )] + ( Dep * T ) – Inv LT – Inv WC
NI = net income
NCC = non-cash charges
Int = net interest
T = tax rate
Inv LT = investment in long-term assets
Inv WC = investment in working capital
CFO = Cash flow from operations
Dep = depreciation
All of these inputs can be found in the company's financial statements.
A company must continually invest in itself in order to keep operating. Short-term assets like inventoryand receivables (called working capital) get used up and need to be replenished. Long-term assets like buildings, plants and equipment need to be expanded, repaired and replaced as they get older or as the business grows.
Once the company has paid its bills and reinvested in itself, hopefully it has some money left over. This is the free cash flow to the firm (FCFF), called such because it's available (free) to pay out to the firm's investors.
To calculate free Cash flow to the firm, you can use one of four different formulas. The main differences among them pertain to which income measure you start from and what you then add and subtract to the income measure to end up with FCFF:
FCFF = NI + NCC + Int * ( 1 – T ) – Inv LT – Inv WC
FCFF = CFO + Int * ( 1 – T ) – Inv LT
FCFF = [EBIT * ( 1 – T )] + Dep – Inv LT – Inv WC
FCFF = [EBITDA * ( 1 – T )] + ( Dep * T ) – Inv LT – Inv WC
NI = net income
NCC = non-cash charges
Int = net interest
T = tax rate
Inv LT = investment in long-term assets
Inv WC = investment in working capital
CFO = Cash flow from operations
Dep = depreciation
All of these inputs can be found in the company's financial statements.
Why It Matters:
Free cash flow is one of the most important, if not the most important, concepts in valuing a stock. As you may already know, the price of a stock today is simply a sum of its future cash flows when those cash flows are put in today's dollars.
Technical analysts aside, most investors buy a stock because you they believe the company will pay them back in the future via dividend payments or stock repurchases. A company can only pay you back if it generates more cash than it spends. Hence the importance of calculating free cash flows.
Technical analysts aside, most investors buy a stock because you they believe the company will pay them back in the future via dividend payments or stock repurchases. A company can only pay you back if it generates more cash than it spends. Hence the importance of calculating free cash flows.
Enterprise Value
What It Is:
Enterprise value represents the entire economic value of a company. More specifically, it is a measure of the theoretical takeover price that an investor would have to pay in order to acquire a particular firm.
How It Works/Example:
Enterprise value is calculated as follows:
Market Capitalization + Total Debt - Cash = Enterprise Value
Some analysts adjust the debt portion of this formula to include preferred stock; they may also adjust the cash portion of the formula to include various cash equivalents such as current accounts receivableand liquid inventory.
Market Capitalization + Total Debt - Cash = Enterprise Value
Some analysts adjust the debt portion of this formula to include preferred stock; they may also adjust the cash portion of the formula to include various cash equivalents such as current accounts receivableand liquid inventory.
For example, let's assume Company XYZ has the following characteristics:
Shares Outstanding: 1,000,000
Current Share Price: $5
Total Debt: $1,000,000
Total Cash: $500,000
Based on the formula above, we can calculate Company XYZ's enterprise value as follows:
Shares Outstanding: 1,000,000
Current Share Price: $5
Total Debt: $1,000,000
Total Cash: $500,000
Based on the formula above, we can calculate Company XYZ's enterprise value as follows:
($1,000,000 x $5) + $1,000,000 - $500,000 = $5,500,000
[InvestingAnswers Feature: Financial Statement Analysis For Beginners]
Why It Matters:
When attempting to gauge the overall value Wall Street has assigned to a firm, investors often look exclusively at market capitalization (calculated by multiplying the number of outstanding shares by the current share price). However, in most cases this is not an accurate reflection of a company's true value.
Enterprise value considers much more than just the value of a company's outstanding equity. To buy a company outright, an acquirer would have to assume the acquired company's debt, though it would also receive all of the acquired company's cash. Acquiring the debt increases the cost to buy the company, but acquiring the cash reduces the cost of acquiring the company.
Debt and cash can have an enormous impact on a particular company's enterprise value. For this reason, two companies with the same market capitalizations may sport very different enterprise values. For example, a company with a $50 million market capitalization, no debt, and $10 million in cash would be cheaper to acquire than the same $50 million company with $30 million of debt and no cash.
The P/E ratio and other formulas commonly used to measure value don't typically take cash and debt into consideration. For this reason, it's sometimes called the "flawed P/E ratio." To get a better sense for a company's true valuation, many analysts and investors prefer to compare earnings, sales, and other measures to enterprise value.
Debt and cash can have an enormous impact on a particular company's enterprise value. For this reason, two companies with the same market capitalizations may sport very different enterprise values. For example, a company with a $50 million market capitalization, no debt, and $10 million in cash would be cheaper to acquire than the same $50 million company with $30 million of debt and no cash.
The P/E ratio and other formulas commonly used to measure value don't typically take cash and debt into consideration. For this reason, it's sometimes called the "flawed P/E ratio." To get a better sense for a company's true valuation, many analysts and investors prefer to compare earnings, sales, and other measures to enterprise value.
To learn more about how enterprise value is used by investors, don't miss our two top articles on the subject: The Best Alternative to the Flawed P/E Ratio and With This Ratio, Cash Flows Are King.
Enterprise Multiple = EV / EBITDA
What It Is:
Enterprise multiple is a financial indicator used to determine the value of a company. It is equal to a company’s enterprise value divided by its EBITDA (Earnings Before Interest, Taxes, Depreciation andAmortization).
How It Works/Example:
The enterprise multiple has many uses. In addition to helping investors determine if a company is over- or undervalued, it is also used by analysts to examine companies during the due diligence process that precedes a potential acquisition.
To determine the enterprise multiple, you much first find the company's enterprise value (market capitalization + value of debt, minority interest, and preferred shares - value of cash and cash equivalents). Once you know the company's EV, simply divide by the company's EBITDA.
Enterprise Multiple = EV/EBITDA
A company with a low enterprise multiple is considered to be an attractive takeover candidate (and investment), because it reflects a low price for the value of the company (more company for your dollar). Enterprise multiples are compared to other companies within the same industry and not across industries in order to obtain an insightful assessment.
Why It Matters:
The enterprise multiple ratio is considered a more accurate barometer of the firm's value than the price-to-earnings (P/E) ratio since it discounts various countries taxing policies and takes into account debt and cash on hand. The enterprise multiple provides a more accurate insight into the company as it provides the acquirer with better information about the company's prospects and will prevent the acquirer from overpaying as well as avoid a potentially inferior acquisition.
Free Cash Flow
Free cash flow (FCF) is a measure of how much cash a business generates after accounting for capital expenditures such as buildings or equipment. This cash can be used for expansion, dividends, reducing debt, or other purposes.
How It Works/Example:
The data needed to calculate a company's free cash flow is usually on its cash flow statement. For example, if Company XYZ's cash flow statement reported $15 million of cash from operations and $5 million of capital expenditures for the year, then Company XYZ's free cash flow was $15 million - $5 million = $10 million.
It is important to note that free cash flow relies heavily on the state of a company's cash from operations, which in turn is heavily influenced by the company's net income. Thus, when the company has recorded a significant amount of gains or expenses that are not directly related to the company's normal core business (a one-time gain on the sale of an asset, for example), the analyst or investor should carefully exclude those from the free cash flow calculation to get a better picture of the company's normal cash-generating ability.
It is important to note that free cash flow relies heavily on the state of a company's cash from operations, which in turn is heavily influenced by the company's net income. Thus, when the company has recorded a significant amount of gains or expenses that are not directly related to the company's normal core business (a one-time gain on the sale of an asset, for example), the analyst or investor should carefully exclude those from the free cash flow calculation to get a better picture of the company's normal cash-generating ability.
Investors should also be aware that companies can influence their free cash flow by lengthening the time they take to pay the bills (thus preserving their cash), shortening the time it takes to collect what's owed to them (accelerating the receipt of cash), and putting off buying inventory (again, preserving cash). It is also important to note that companies have some leeway about what items are or are not considered capital expenditures, and the investor should be aware of this when comparing the free cash flow of different companies.
Why It Matters:
The presence of free cash flow indicates that a company has cash to expand, develop new products, buy back stock, pay dividends, or reduce its debt. High or rising free cash flow is often a sign of a healthy company that is thriving in its current environment. Furthermore, since FCF has a direct impact on the worth of a company, investors often hunt for companies that have high or improving free cash flow but undervalued share prices -- the disparity often means the share price will soon increase.
Free cash flow measures a company's ability to generate cash, which is a fundamental basis for stock pricing. This is why some people value free cash flow more than just about any other financial measure out there, including earnings per share.
Free cash flow measures a company's ability to generate cash, which is a fundamental basis for stock pricing. This is why some people value free cash flow more than just about any other financial measure out there, including earnings per share.
A Primer On Inflation - Is Inflation always bad?
A Primer On Inflation
Inflation instantly brings to mind images of rising prices, shrinking paychecks and unhappy consumers, but is inflation all bad?
Inflation is defined as a "sustained increase in the general level of prices for goods and services." Many consumers fear inflation because it reduces the purchasing power of their money. The influence that inflation has on consumers in the United States and other developed nations can be seen in gasoline prices, to name one example. When the price of gasoline goes up, it costs you more money to fill up your vehicle at the gas pump. Although the amount of money allocated to fuel takes a bigger percentage of your paycheck, you get the same amount of gas. This hit to your bottom line leaves you with less money to spend on other items.
In less-developed countries, food price inflation is an ever-greater concern. When the price of basic food items increases significantly, low-income consumers experience severe hardships. In recent years, food price inflation has resulted in public demonstrations and rioting in numerous countries across the globe, including Chile, Morocco, Tunisia and Algeria.
Measuring Inflation
There are several ways to measure inflation. Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI). The Bureau of Labor Statistics releases the CPI monthly. It calculates the cost to purchase a fixed basket of goods as a way of determining how much inflation is occurring in the broad economy as an annual percentage increase. For example, a headline inflation figure of 3% equates to a monthly rate that, if repeated for 12 months, would create 3% inflation for the year.
The headline inflation figure is not adjusted for seasonal changes in the economy or for the often-volatile elements of food and energy prices. Headline inflation is the measure that has the most meaning for consumers, as we have to eat food and fuel our cars.
Core inflation, which is the Federal Reserve's preferred yardstick, is a measure of inflation that excludes food and energy. Core inflation eliminates these items because they can have temporary price shocks that can diverge from the overall trend of inflation and give what the prognosticators at the Federal Reserve view as a false measure of inflation. Core inflation is most often calculated by taking the Consumer Price Index and excluding certain items (usually energy and food products). Other methods of calculation include the outliers method, which removes the products that have had the largest price changes. Core inflation is thought to be an indicator of underlying long-term inflation.
Several variations on inflation are also worth noting. Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in a single month.
Stagflation is the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil prices.
At the other end of the spectrum is deflation, which occurs when the general level of prices is falling. This is the opposite of inflation.
The Good Side of Inflation
Inflation has such a negative connotation that many people fail to consider the good side of inflation. Yes, inflation means that it costs more money to purchase items that were previously available at a lower price. However, it can also mean that the prices of homes, precious metals, stocks, bonds and other assets are rising. For the owners of those assets, inflation can have a wealthbuilding effect. Inflation can also result in rising wages. If wages rise as quickly as the cost of goods and services, then the rising wages can offset the rising prices.
Monetary Policy
The United States, Great Britain and some other nations have set targets for the desired inflation rate. A January 2012 press release issued by the Federal Reserve's Federal Open Market Committee sums up the policy in the U.S. and highlights the reasons behind it.
"The inflation rate over the longer run is primarily determined by monetary policy, and hence, the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2%, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates, and enhancing the Committee's ability to promotemaximum employment in the face of significant economic disturbances."
That short paragraph sum up a complex and controversial set of issues. It starts with the Federal Reserve (Fed), the central bank in the U.S. and its dual objectives of maintaining a modest level of inflation and a low rate of unemployment. In order to achieve these objectives, the Fed controls monetary policy. The term "monetary policy" refers to the actions that the Federal Reserve undertakes to influence the amount of money and credit in the U.S. economy.
Changes to the amount of money and credit affect interest rates (the cost of credit) and the performance of the U.S. economy. To state this concept simply, if the cost of credit is reduced, more people and firms will borrow money and spend it, and this spending will then foster economic growth. Similarly, if interest rates increase, it costs more to borrow money. When this happens, fewer people and firms borrow money, which results in decreased spending and slower economic growth.
The Bottom Line
Putting it all together, the Fed uses its tools to control the supply of money to help stabilize the economy. When the economy is slumping, the Fed increases the supply of money to spur growth. This fuels inflation. Conversely, when inflation is threatening, the Fed reduces the risk by shrinking the supply. It all sounds simple enough until you view it in the context of the many other factors that influence the economy in the U.S. In this larger context, monetary policy, inflation and just about everything else associated with these topics become fodder for economists, politicians, academics and just about everyone else to discuss and debate.
Inflation instantly brings to mind images of rising prices, shrinking paychecks and unhappy consumers, but is inflation all bad?
Inflation is defined as a "sustained increase in the general level of prices for goods and services." Many consumers fear inflation because it reduces the purchasing power of their money. The influence that inflation has on consumers in the United States and other developed nations can be seen in gasoline prices, to name one example. When the price of gasoline goes up, it costs you more money to fill up your vehicle at the gas pump. Although the amount of money allocated to fuel takes a bigger percentage of your paycheck, you get the same amount of gas. This hit to your bottom line leaves you with less money to spend on other items.
In less-developed countries, food price inflation is an ever-greater concern. When the price of basic food items increases significantly, low-income consumers experience severe hardships. In recent years, food price inflation has resulted in public demonstrations and rioting in numerous countries across the globe, including Chile, Morocco, Tunisia and Algeria.
Measuring Inflation
There are several ways to measure inflation. Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI). The Bureau of Labor Statistics releases the CPI monthly. It calculates the cost to purchase a fixed basket of goods as a way of determining how much inflation is occurring in the broad economy as an annual percentage increase. For example, a headline inflation figure of 3% equates to a monthly rate that, if repeated for 12 months, would create 3% inflation for the year.
The headline inflation figure is not adjusted for seasonal changes in the economy or for the often-volatile elements of food and energy prices. Headline inflation is the measure that has the most meaning for consumers, as we have to eat food and fuel our cars.
Core inflation, which is the Federal Reserve's preferred yardstick, is a measure of inflation that excludes food and energy. Core inflation eliminates these items because they can have temporary price shocks that can diverge from the overall trend of inflation and give what the prognosticators at the Federal Reserve view as a false measure of inflation. Core inflation is most often calculated by taking the Consumer Price Index and excluding certain items (usually energy and food products). Other methods of calculation include the outliers method, which removes the products that have had the largest price changes. Core inflation is thought to be an indicator of underlying long-term inflation.
Several variations on inflation are also worth noting. Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in a single month.
Stagflation is the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil prices.
At the other end of the spectrum is deflation, which occurs when the general level of prices is falling. This is the opposite of inflation.
The Good Side of Inflation
Inflation has such a negative connotation that many people fail to consider the good side of inflation. Yes, inflation means that it costs more money to purchase items that were previously available at a lower price. However, it can also mean that the prices of homes, precious metals, stocks, bonds and other assets are rising. For the owners of those assets, inflation can have a wealthbuilding effect. Inflation can also result in rising wages. If wages rise as quickly as the cost of goods and services, then the rising wages can offset the rising prices.
Monetary Policy
The United States, Great Britain and some other nations have set targets for the desired inflation rate. A January 2012 press release issued by the Federal Reserve's Federal Open Market Committee sums up the policy in the U.S. and highlights the reasons behind it.
"The inflation rate over the longer run is primarily determined by monetary policy, and hence, the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2%, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates, and enhancing the Committee's ability to promotemaximum employment in the face of significant economic disturbances."
That short paragraph sum up a complex and controversial set of issues. It starts with the Federal Reserve (Fed), the central bank in the U.S. and its dual objectives of maintaining a modest level of inflation and a low rate of unemployment. In order to achieve these objectives, the Fed controls monetary policy. The term "monetary policy" refers to the actions that the Federal Reserve undertakes to influence the amount of money and credit in the U.S. economy.
Changes to the amount of money and credit affect interest rates (the cost of credit) and the performance of the U.S. economy. To state this concept simply, if the cost of credit is reduced, more people and firms will borrow money and spend it, and this spending will then foster economic growth. Similarly, if interest rates increase, it costs more to borrow money. When this happens, fewer people and firms borrow money, which results in decreased spending and slower economic growth.
The Bottom Line
Putting it all together, the Fed uses its tools to control the supply of money to help stabilize the economy. When the economy is slumping, the Fed increases the supply of money to spur growth. This fuels inflation. Conversely, when inflation is threatening, the Fed reduces the risk by shrinking the supply. It all sounds simple enough until you view it in the context of the many other factors that influence the economy in the U.S. In this larger context, monetary policy, inflation and just about everything else associated with these topics become fodder for economists, politicians, academics and just about everyone else to discuss and debate.
http://www.investopedia.com/articles/economics/12/inflation-primer.asp#axzz2AmPnsMqp
Scientex proposes 8 sen dividend for FY ended July 2012
Published: Tuesday October 23, 2012 MYT 5:09:00 PM
KUALA LUMPUR: Industrial packaging manufacturer and property developer Scientex Bhd has proposed a final single-tier dividend of 8.0 sen per share for its financial year ended July 31, 2012 (FY12).
The company said on Tuesday the final dividend would be paid on Jan 31 next year, when approved by shareholders at its AGM. This was in addition to a single-tier interim dividend of 6 sen per share paid on July 27, 2012.
Scientex said the total dividends of FY12 amounted to 14 sen per share, or a payout of RM30.1mil, which was 36% of Scientex's net profit of RM83.9 million for the year.
Scientex's group net profit rose 8.6% to RM83.9mil while group revenues increased by 9.6%to RM881.0mil, boosted by strong Asia-Pacific export sales experienced by the Group's manufacturing division, and the continued high margins and favourable product mix enjoyed by its property division.
Apollo Food replacing machines
Saturday October 27, 2012
By ZAZALI MUSA
zaza@thestar.com.my
Liang: ‘We already export to several European countries and the US but in small quantities, and we’ll beef up our efforts to increase our market share there.’
JOHOR BARU: Apollo Food Holdings Bhd plans to replace old machinery with newer equipment as part of its strategy to further strengthen its position in the industry.
Executive chairman and managing director Liang Chiang Heng said that the company was in the midst of calculating how much it would need to spend on the exercise.
“We have yet to come out with the figure but I can tell you that the investment is quite substantial,'' he told StarBizWeek after the company's AGM on Thursday.
Liang said the exercise involved the replacement of production machinery that had been around for more than 10 years as they were no longer economical to run and required higher maintenance.
He said the company would be getting state-of-the-art and fully automated machinery that could improve production capacity and reduce dependency on workers.
“Like other manufacturers in Malaysia, we are also having problems hiring locals as production workers and the only way is to invest in technology,'' Liang said.
The last time Apollo Food had invested in new machines was during the fiscal year ended April 30, 2006, when it spent RM10mil to enhance production capacity.
He said apart from boosting the firm's production, the new investment would see more new products.
Liang said Apollo Food introduced 10 to 15 new products annually, mostly chocolate-coated confectionery items and layer cakes.
He said these included premium products with good growth potential and able to generate better income for the company in the long run.
Liang said Asean countries, China and Japan remained the main export markets for the company, while the African and the Middle Eastern countries offered good growth prospects.
“We already export to several European countries and the US but in small quantities, and we'll beef up our efforts to increase our market share there,'' he said.
Liang said the company currently marketed 50% of its 100 products locally and the balance overseas.
For the financial year ended April 30, 2012, Apollo recorded RM21.74mil in net profit on revenue of RM200.54mil against RM17.85mil and RM176.29mil respectively the previous year.
AmBank issues new structured warrants
Friday October 26, 2012
KUALA LUMPUR: AmBank (M) Bhd is issuing five new European style cash-settled structured call warrants (CW) over the ordinary shares ofAstro Malaysia Holdings Bhd, Lingkaran Trans Kota Holdings Bhd andTop Glove Corp Bhd.
It is also issuing one European style cash-settled structured put warrant (PW) over the ordinary shares of Astro to meet investors’ demand for trading and investment opportunities in the current market scenario,AmBank Group said in a statement.
The structured warrants will be listed for trading on Oct 29, via the market making method, with issue size of up to 100 million each.
Director/head, equity derivatives, AmInvestment Bank Ng Ee Fang said:“As Malaysia’s benchmark FBMKLCI Index inched higher to hit new record highs, investor optimism remains as the local stock market is buoyed by liquidity and strong demand for good quality, high-yielding equity names.
“The slew of high-profile, multi-billion dollar IPOs year-to-date also played a significant part in attracting global investors’ interest to the local bourse.”
Besides Felda Global Ventures and IHH Healthcare, Ng said Astro became the third multi-billion dollar IPO on Bursa Malaysia this year when it raised US$1.5bil from its IPO last Friday.
“Therefore, for AmBank’s upcoming tranche of warrants, AmBank will be offering three call warrants and one put warrant over Astro to provide investors opportunities to participate and trade on both the direction and volatility of Astro.
There will also be two call warrants over Top Glove and Litrak.
AmBank’s three CWs on Astro are priced at 15 sen each with gearings of 2.5 and 4 times.
AmBank’s PW on Astro is also priced at 15 sen each with gearing of 5 times.
AmBank’s CW on Top Glove is priced at 15 sen each with gearing of 2.96 times while the CW on Litrak is priced at 15 sen each with gearing of 2.7 times.
This offer is aimed at sophisticated traders who want to trade on the direction and volatility of Astro, Top Glove and Litrak. – Bernama
Who are those selling Astro shares?
Friday October 26, 2012
Friday Reflections - By B.K. Sidhu
ASTRO Malaysia Holdings Bhd's paltry performance since its debut on the market last Friday raises one very pertinent question Who is selling Astro shares in the market?
The question is pertinent because it boggles the mind as to why anyone would be dumping the stock so early. Many investors who buy into companies linked to tycoon Ananda Krishnan have tended to be long-term investors looking for the promised dividend yield and capital appreciation, which have generally been decent.
Since its listing, Astro shares have not gone above its IPO price, save for a few moments on the day it was listed.
The stock opened at RM3.03, shot to RM3.11 and for a while, that brought cheer to many people but that joy ended as soon as it started.
The shares succumbed to selling pressure and ended its first day flat at RM3.
Alhough it has recovered some ground from its rock bottom of RM2.70, it is still pretty much “underwater,” closing at RM2.86 yesterday.
So, who's selling, because anyone who bought the shares at the IPO price of RM3 per share, would be selling at a loss.
The market is rife with rumours about this.
Did the cornerstones, other institutional investors, Miti-approved bumiputra investors, Astro employees or the retail investors sell the shares?
Note that none of them got their shares at a discount all the 22 cornerstone and Miti investors paid RM3 per share, just like the retail investors.
One unsubstantiated theory was that the selling was being done by those who got the Astro shares at a discount or worse, for free! That theory is far-fetched, as it wasn't disclosed in the prospectus which parties were getting shares at a discount or for free. But this if this is true, then some explanation is needed.
Another rumour is that the selling is by some institutions who had bought the shares only with the interest of dumping them on listing day. In other words, they weren't interested in holding the stock.
There's also the theory that the selling is by those who used margin financing the buy the shares. After the price dipped below IPO, these investors weren't able or did not want to fork out the amount required to top up their margin accounts. So, they preferred to sell the shares and just take the one-time hit.
Yet another theory is that the major shareholders are selling, considering that their cost is below the IPO price, so they will still pocket the profits.
That possibility though is highly unlikely. Both Ananda and Khazanah Nasional Bhd had already sold a lot of their shares in the IPO exercise. So why jeopardise the performance of an IPO that they already made tons of money from? Khazanah has a lock-in period for the shares.
Despite the selling or maybe because of it, it is noteworthy that those driving Astro's business are taking the opportunity to buy some of the stock on the cheap. These include Astro's two top bosses including its CEO and COO - Datuk Datuk Rohana Rozhan and Henry Tan respectively.
Whatever the case, it is possible that the mystery of the sale will be revealed soon when shareholder changes are posted on Bursa Malaysia. Then again, there is no assurance of that because only substantial shareholder changes will be recorded.
The seller may be holding less than 5% and if that is the case, it will remain a mystery as to who sold the shares and whether the party will continue to do so.
Success is sweet for Cocoaland
Saturday October 27, 2012
By CHOONG EN HAN
han@thestar.com.my
Cocoaland Bhd sees its best bet of expanding the business onto the next plateau of growth through organic means as it is spurred by the growing consumer consumption for sugar confectionary candies.
In an interview with StarBizWeek, founder and executive director Liew Fook Meng says that the company's expansion plans for the next few years would open up new capacity for the company to fill and also to leverage on the strength of its substantial shareholder, F&N Holdings Bhd for its beverage business.
“The additional capacity would free up the bottleneck that we have currently as sometimes we are faced by supply constraints when demand picks up,” he says.
Besides planning to spend about RM30mil to set up its sixth factory in Rawang, the company would invest about RM44mil to increase production of its hard candy and fruit gummy confectionery.
This will more than double its total production capacity to 4.6 million kg of hard candy and 11.7 million kg of fruit gummy from the current capacity of one million kg and 4.5 million kg respectively.
In the meantime, Liew is setting his eyes on the bigger picture now and is following closely the developments of the takeover of Singapore-listed F&N by Thai Beverage Plc, one of the largest beverage producers in Asia.
Liew: ‘The additional capacity would free up the bottleneck that we have currently.’
With F&N as its penultimate strategic partner with a 27% stake via F&N Holdings, the developments would have an impact the direction of the company.
Plans are afoot for the group to set up its franchise business model which would see Cocoaland manufacturing and marketing its products under the franchisor's brand name.
“We are still in the negotiation stage with a few well-known international companies, and we expect to sign up a few franchise businesses to start in financial year 2013 after the new lines for gummy and hard candy have been fully-installed and commercialised,” he says.
While Cocoaland is now synonymous with its fruit gummy products under the Lot 100 brand, and its partnership with F&N, the company is looking out for partnerships and work with other food brands.
“Besides F&N, we currently have other clients like GlaxoSmithKline,Ribena, 21st Century, and Coffeebean. We intend to increase penetration in export markets like China, Vietnam and Indonesia with our fruit gummy and CocoPie products,” he says. A wide range of its products are carried by local retail stores, and besides the domestic market, the group has been supplying confectionery to overseas market such as the United States, Japan, Middle East, Hong Kong, Australia and Europe.
The export market's share to the group's overall revenue has increased progressively from 46.5% in financial year 2009 to 54.2% in the first half of 2012.
Cocoaland has a market capitalisation of about RM400mil, and its journey has been one that is synonymous with other success stories.Cocoaland story began when two brothers started out as small time vendors selling deep-fried snacks and banana fritters in the Klang Valley.They got their first break when an acquaintance decided to dispose of his chocolate coating operations.
“That time we don't even have a name yet. And with RM10,000 in hand, we bought his machines and decided to venture into that business,” he says.
The brothers finally got their first break in the mid-1980s when they carved a niche for themselves in the market to manufacture polytubed drinks, which opened doors to the overseas market, and for the first time exporting to the Middle East.
The first factory was set up in Kampar in the 1980s and the second success story came in the form of “Koko Jelly” with its second factory in Kepong to manufacture the chocolate coated jelly that was well-received by the public. Today, the group is managed by 10 siblings.
AmResearch recently reaafirmed its “buy” call on the company, with a higher fair value of RM3.05 per share as it says the group is poised to hit an earnings inflexion point.
It says the group's three-year compounded annual growth rate of 28% will be underpinned by additional production capacities and the deepening in distribution channels.
“We understand plans are afoot for the installation of a new line each for the production of hard candy and fruit gummy to alleviate current supply constraint. Upon commercialisation by first quarter 2013, the new lines are expected to lift installed capacities by 360% for hard candies and 160% for gummies. This potentially translates into an additional RM158mil of revenue per annum,” it says.
For its first half ended June, the company recorded a revenue of RM110.74mil, passing the halfway mark of what it achieved for the entire 2011 at RM173.9mil. Net profit stood at RM12.2mil for the period under review, more than half its net profit of RM19.19mil for year ended 2011.
Its net profit was halved in 2010 to RM9.8mil from RM19.6mil previously due to slower sales, and losses it incurred after terminating a joint-venture production facility in China's Fujian province to manufacture fruit gummy for the China market.
Coastal plans to diversify
Saturday October 27, 2012
By PHILIP CHOO
pchoo@thestar.com.my
SANDAKAN: With Sabah set to become Malaysia's oil and gas hub, particularly in deep-water oilfield developments off the state's west coast, Coastal Contracts Bhd is actively pursuing strategic opportunities to diversify into other oil and gas-related business, such as offshore structure fabrication business, floating storage and offloading and floating production, storage and offloading.
Recently, one of the group's yards in Sandakan, measuring 52 acres, had been upgraded and it is now capable of erecting offshore structures and the group is looking forward to tap into this potential new phase of growth via collaboration with strategic partners that complement the group's technical capabilities in the fabrication business.
Executive chairman Ng Chin Heng said despite the global economic slowdown, the group managed to clinch its third major vessel sales order amounting to RM111mil in relatively quick succession, following its major deal of RM141mil in August.
“This is mainly attributable to the Coastal group's appropriate marketing strategy, as well as great effort contributed by its marketing team,” Ng told StarBizWeek.
The latest contract has brought the total of RM743mil worth of vessel orders awaiting delivery to customers up to 2013.
Ng said although earnings in the first half had been hampered by lower number of vessels delivered, he nevertheless added that shipbuilding revenue stream for the financial year ending Dec 31, 2012 (FY12) could be comparable with FY11.
However, Ng cautioned that that would happen barring any unforeseen factors which might result in late delivery of vessels or cancellation of sales
contract, and also any adverse changes in the US dollar-ringgit exchange rate.
The group posted a lower net profit of RM190.64mil in FY11 compared with RM200.79mil in FY10. However, revenue was up 6.5% at RM719.13mil from RM675.05mil in 2010.
“We are lucky that so far Coastal has not encountered any substantial cost over-runs since its public listing in August 2003,” he added.
In view of the continued uncertainty in the eurozone and an expected slowdown in global economic growth, the management hoped the group's revenue stream for FY13 would remain stable, Ng said, adding: “There should be no major breakthrough for the group's revenue for FY13 unless it
managed to secure big ticket oil and gas upstream projects.”
Coastal was established in 1976 by a local merchant in Sabah as a shipping company, operating merely a few used tugs and barges for commodities transportation within the Borneo region.
In 1982, when Ng, then a rubber trader, took over Coastal in the midst of the 1980s crisis and ran the business together with his wife and brothers with no knowledge of the business, little did they know that their fledging business would develop into one of the region's most prevalent marine and offshore support services provider.
Today, listed on the Main Market of Bursa Malaysia Securities Bhd, Coastal operates shipyards of over 90 acres and has built and delivered a diverse fleet of more than 330 units of conventional tugs, barges, landing crafts and offshore support vessels to worldwide customers.
Coastal has the prestigious honour of being featured in Forbes Asia's list of 200 Best Under a Billion for six years running (2006 to 2011). The annual list picked 200 top-performing publicly-traded corporations in Asia Pacific (with annual revenue between US$5mil and US$1bil) based on earnings growth, sales growth and return on equity over three years.
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