Two fined for involvement in multiple IPO share applications

Wednesday July 8, 2009
Two fined for involvement in multiple IPO share applications


KUALA LUMPUR: The Kuala Lumpur Session Courts yesterday fined Yunus M. Haniff and Ramly Hussain RM25,000 each for using third party names in a multiple initial public offering (IPO) share application scheme.

In a statement, the Securities Commission (SC) said both Yunus and Ramly were fined after having pleaded guilty to offences under Section 9 (1) of the Securities Industry (Central Depositories) Act 1991 for failing to comply with Rule 26.02 of the Malaysian Central Depository Sdn Bhd rules.

The said rule provides that no person shall maintain more than one CDS account at any authorised depository agent/stockbroking company, the SC said.

The prosecution against Yunus and Ramly was initiated in 2005 after their failure to pay a compound meted by the SC, it added. — Bernama

Investors must analyse data, mere headline numbers may deceive

Wednesday July 8, 2009
Investors must analyse data, mere headline numbers may deceive
The Real Matter - By Pankaj Kumar



WHAT is the difference between a stock that is down 90% versus a stock that was down 80%, then halved? If you were quick enough, you would have the answer right away.

Yes, they are both the same! Some readers would have thought that the stock which was down 90% is in a worse situation compared with the stock which was down 80% earlier but later halved in value.

However, there could be readers who would have thought that the stock which was down 80% and then halved was worse than a stock that is down 90%. In any case, we all now know that the answer is the same and perhaps it is how the question or statement is phrased that matters.

It is also similar to looking at a glass of water and whether it is half full or half empty depends on one’s confidence level, when in actual fact if the glass was exactly 50% filled, it is either half empty or half full.

Moving towards the current economic indicators, it is also interesting to note how one economic figure can be misconstrued as good by some and bad by others when in reality it may well be saying something else.

The issue here is that as most fund managers are busy keeping track of economic data out of the US, Europe and Asia practically on a daily basis, are we seeing the trees from the forest or mainly just looking at headline numbers?

Most economic data are measured either on a month-on-month or year-on-year basis. There are two ways to measure the data points; either by absolute difference (for example consumer confidence data), which to me is more reflective of the real situation, or by percentage change, which can sometimes be misconstrued by investors.


For example, let’s take the durable goods order data out of the US.

The latest reading for May suggests that total durable goods orders stood at US$163.38bil, which compared with the preceding month was higher by 1.8%.

Of course, the headline that we see in the media as well as economic research reports is on the month-on-month change, i.e. the rise of 1.8% and we have seen how positive the market takes these data point as signs that the worst economic recession in living memory is indeed over.

However, if we were to analyse the data deeper, there are several other observations that we can make.First, on a year-on-year basis, the durable goods order contracted by 23.5% and in terms of absolute level, the May total orders were still hovering at levels last seen in 2002/2003!

They say a picture tells a thousand words. Now, let’s look at the above data points in terms of charts.

The chart on the left is the total durable goods orders in absolute form and the chart on the right is based on the widely accepted, month-on-month change. The two charts clearly show two different pictures of the same time frame!

While it can still be argued whether the durable goods orders are recovering or otherwise, it is noteworthy to take into account what a particular chart really means.

Hence, it is imperative for investors to dissect data before coming to a conclusion whether the economic data points released by regulators are in actual fact telling the right story or otherwise.

This is what we call a numbers game and how these data points are communicated to the market has very different interpretations.

Perhaps economists and market analysts need to be more detailed in analysing data points as mere headline numbers may not tell the real story.


Pankaj C Kumar is chief investment officer at Kurnia Insurans (M) Bhd. Readers’ feedback to this article is welcome. Please e-mail to
starbiz@thestar.com.my

S'pore bans 10 brokers from structured notes sales

Published: Wednesday July 8, 2009 MYT 9:05:00 AM
S'pore bans 10 brokers from structured notes sales


SINGAPORE: Singapore's central bank banned 10 financial institutions from selling structured notes for improperly marketing US$655 million of the bonds that were linked to U.S. brokerage Lehman Brothers Holdings Inc.

The banks and brokerages can't sell structured notes for between six months and two years, the central bank, known as the Monetary Authority of Singapore, said in a statement late Tuesday.

The bank said some of the financial institutions assigned risk ratings that were inconsistent with warnings stated in the notes' prospectus, and salespeople were ill-trained to sell the notes.

The structured notes were linked to the risk of a bankruptcy occurring to one of the reference entities, such as Lehman.

The Lehman collapse last fall led to a default on the dividend payment of some of the bonds, most of which had a maturity of 5 to 7 years and a yield of about 5 percent.

About 10,000 investors bought the notes, and financial institutions have compensated about 4,000 of them, the bank said.

Similar structured notes were sold in Hong Kong, Taiwan and Indonesia.

The 10 financial institutions banned by the central bank are DBS Group, UOB Kay Hian, OCBC Securities, ABN AMRO's Singapore branch, Maybank Singapore, CIMB-GK Securities, Hong Leong Finance, DMG & Partners, Phillip Securities and Kim Eng Securities. - AP

Book value and Intrinsic value

Warren Buffett observed that book value is the sum of what investor put into (or leave in) the business, while intrinsic value is what investors can take out of the business.

Book value or net worth is a key component of a company's intrinsic value.

But another and perhaps the more important component of intrinsic value is the net present and future income stream that a company can earn for the investor.

Therefore, the importance of looking at the balance sheet and also looking closely at income and income reporting, in your intrinsic valuation.

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Here is another Warren Buffett observation.

Apparently tired of answering questions about how to use book value to make investment decisions. Buffett pointed out the differrence between book value and intrinsic value: "Book value is what the owners put into the business, intrinsic value is what they take out of it."

In another explanation offered in a 1996 Berkshire Hathaway annual report, he likened book value to college tuition paid, with intrinsic value being the income resulting from the education. The education and the dollars spent on an education mean ntohing unless there is a resulting financial return.

The point: It is easy for investors to put too much emphasis on book value and not enough on intrinsic value.

What to look for: Quality

Important attributes to look for in an earnings statement - QUALITY

As the market exerts ever-increasing pressure on companies to perform to a stringent set of expectations, the idea of accounting "stretch" enters the picture.

Even in complying with the rules, companies have latitude to apply accounting principles in ways that make performance look better.

This lattitude can affect the quality of earnings reports.

Recent legislation and standardizations like the Sarbanes-Oxley Act, have brought financial reporting generally more in line with reality.

What to look for: Healthy Components in the Earnings Statement

Important attributes to look for in an earnings statement - HEALTY COMPONENTS: COMPARATIVE and TRENDS

Value investors look at individual lines in the earnings statement, not just the bottom line.

Improving gross margins - especially sustained improvement - signal strong business improvement.

Costs are under control, and the company is improving its market position.

Likewise, improving operating margins can show better cost control, greater efficiency, and rewards from earlier expansion cycles.

And value investors constantly compare companies in similar industries.

Gross margins of competing computer manufacturers, for instance, tell a lot about who has the

• best market position,
• production and delivery process, and
• business model.

Comparing the incomparable is an all-too-common investing pitfall. With earnings statements, this error takes three forms:

1. Earnings statements are not always broken down the same way.

• Although the bottom line is the bottom line, the intermediate steps may be different.
• One company's operating earnings may include marketing costs, while another's may not.
• Typically, statements from firms in the same industry are comparable, but not always.

2. Two companies that appear (and even are classified) in the same industry may have differences large enough to raise caution.

• Commercial and industrial suppliers, such as Honeywell, have consumer divisions, while consumer businesses, such as Procter & Gamble, have industrial divisions.
• Many businesses supply a mix of products in a mix of categories to a mix of customers.
• "Pure plays" in a business or industry are not always easy to find.
• The upshot: You must understand businesses before comparing them.

3. Numbers may include extraordinary items.

• Before comparing operating or net profit numbers, consider whether there have been write-offs for discontinued businesses or impaired assets that may be causing one-time distortions in the numbers.

What to look for: Consistency

Important attributes to look for in an earnings statement - CONSISTENCY

Long-term growth should be sustainable and consistent.

Look for sustained growth across business cycles.

A big pop in earnings one year followed by malaise for the next two does not paint a pretty picture. Long, consistent successful earnings track records get the A grades.

Beyond earnings, consistency is a desired feature for other parts of the earnings statement.

Consistency is highly prized in:

• sales and sales growth,
• profit margins and margin growth, and
• operating expense and expense trends.

The less consistency, the more difficult to predict the future five or ten years and beyond, and the less attractive a company looks to value investors.

What to look for: Growth

Important attributes to look for in an earnings statement - GROWTH

After all is said and done, the long-term growth of a stock price is driven by growth in the business.

Growth in the business means growth in the earnings - there is no other way to sustain business growth without infusions of additional owner capital.

Sure, you can acquire, merge, or sell more stocks to make a business larger by common definitions, but has the business really "grown"?

The value investor works to obtain a deep understanding of business growth, growth trends, and the quality of growth.

• Is reported growth based on internal core competencies?
• Or is it acquired or speculative growth based on unproven ventures?

The value investor assesses growth and growth patterns, judges the validity of growth reported, and attempts to project the future.

A business' ability to grow on its own, through its own success and resulting earnings, is known as organic growth.

Growth through acquisition or other capital infusions are not "organic" and thus does not suggest growth in true business value.

The Importance of Earnings

Business and economic activity are undertaken with the idea of generating a profit.

Profit is simply the gross revenue of an enterprise, minus the cost of producing that income, over a defined period of time. For businesses, it's important to measure the profit and allocate capital resources in such a way as to maximise it.

It is the earnings that make the world go round.

So much is made of earnings and earnings reports. Do you hear much about a company's cash balance, accumulated depreciation, or owner's equity during CNBC and other financial shows?

Does everyone salivate four times a year for "asset season?"

No, but there's a definite "earnings season" at the end of each calendar quarter, giving financial analysts, journalists, and pundits plenty to talk about.

On an ongoing basis, earnings are the driving force and "macro" indicator of a company's success.

• If earnings are growing, the financial press doesn't worry much about the other stuff.
• Conversely, serve up a couple of double faults on the earnings front, and everybody is all over asset impairment, write-offs, debt, weak cash positions, and the other similar "disasters."

In the purest sense, long-term stock price appreciation is based on the growth of a company's asset base and owner's equity in that base. Ultimately, that comes from earnings.

If a company is earning money, and particularly if it earns it at a growing rate, that's a good thing. As Warren Buffett says, "If the business does well, the stock always follows."

Earnings tell us how well a business manages its operations, while the balance sheet tells us how well it manages its resources.

Stick to what you need to know as an investor, avoiding deep accounting technicalities

Just as life cannot be measured or evaluated by a single snapshot, neither can a business.

Balance sheet gives a snapshot view of business resources (assets) and how they are contributed to the business (liabilities and owner's equity). Comparison of one snapshot to another tells you something changed. But what happened between shots, and why?

This is where earnings and cash flow statements come in. The balance sheet is critical in evaluating the financial state of a business; the income and cash flow statements together measure business activity and results.

Earnings and cash flow statements show the pulse of the business and explain changes in balance sheet snapshots. With these statements, the business analyst or investor can assemble a complete moving picture showing flows into and out of the business, successes and failures, growth and decline.

You need to stick to what you need to know as an investor, avoiding deep accounting technicalities.

Bottom lines and other lines

Revenue
less COGS
-----------
Gross Profit
less Operating Expenses
-SGA
-R&D
-Depreciation & Amortization
-Impairment, Investments & Write Downs
-Goodwill amortization
-----------
less or add interest
-----------
PBT
less tax
-----------
Operating Income or Income from continuing operations
less or add extraordinaries
-----------
Net Income



The bottom line, refers to the net earnings or income after all expenses, taxes, and extraordinary items are factored in. The bottom line is the final "net" measure of all business activity.

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Gross profit:

This is simply the sales less the direct cost of producing the company's product or service.

Direct cost includes:

• labor,
• material, and
• expenses directly attributable to producing it.

Gross profit, often called gross margin, is the purest indicator of business productivity, because each cost dollar is directly generated by production and sale of the product.

Value investors closely watch gross margin trends as an indicator of market dominance, price control, and future profitability.

----

Operating Income:

This term refers to gross profit less period expenses, such as overhead or marketing costs not directly attributable to product production.

Selling, general, and administrative expenses (SG&A) usually cover all headquarters functions, information technology, marketing, and other indirect costs.

It generally includes financing costs, such as interest, and taxes.

Amortization is usually included, because cost recovery for property, plant and equipment is part of operating expense.

Items deemed extraordinary are not included.

Operating profit gives a more complete picture of how the business is performing on a day-to-day basis.

It sometimes appears as operating income, earnings from operations, or something similar.

----

Net Income:

This represents the net result of all revenues, expenses, interest, and taxes.

----


There are other supplemental earnings measures, such as free cash flow and "EBITDA."

The point is that there are many ways to measure income.

Each reveals an important layer of business performance, both for determining intrinsic value and also for comparing companies.

Cash Flow from Financing Activities

Investing activities tell what a firm does with cash to increase or decrease fixed assets and assets not directly related to operations.

Financing activities tell where a firm has obtained capital in the form of cash to fund the business.

Source of cash for financing: Proceeds from the:

• sale of company shares or
• sale of bonds (long-term debt).

Use of cash for financing: If a company:

• pays off a bond issue,
• pays a dividend, or
• buys back its own stock.

A consistent cash flow from financing activities indicates excessive dependence on credit or equity markets. Typically, this figure oscillates between negative and positive.

A big positive spike reflects a big bond issue or stock sale. In such a case, check to see whether the resulting cash is used:

• for investments in the business (probably okay) or
• to make up for a shortfall in operating cash flow (probably not okay), or,
• if the generated cash flows straight to the cash balance, you should wonder why a company is selling shares or debt just to increase cash, although often the reasons are difficult to know. Perhaps an acquisition?
  

An illustration:

Company X's statement shows a happy story for investors:

• $15.4 m paid to investors as dividends
• $8.2 m paid out in "Sale Purchase of Stock" (- this is most likely for a share buyback. In fact, the company X actually repurchased $17.2 million in its own stock on the market; then issued $8.9 million in stock, most likely for employee stock options ESOS, and compensation.)

Still, this isn't bad - shareholders benefited from both the dividend and the repurchase.

Bottom line: Company X is using surplus cash generated from operations to give something back to shareholders. That's a good thing.

Free Cash Flow

Free cash flow is a good indication of what a company really has left over after meeting obligations, and thus could theoretically return to shareholders.

Free cash flow is sometimes called "owners' earnings."

Free cash flow is defined as net after tax-earnings, plus depreciation and amortization and other noncash items, less annual capital expenditures, less (or plus) changes in working capital (current assets and liabilities).

It is surplus cash that is really free, not waiting for a bill to come for a big capital purchase or inventory increase.

Earn income, pay for costs of doing business, and what's left over is yours to keep as an owner.

Free cash flow is a much more realistic long-term view of business success and potential owner proceeds than EBITDA and is used by many value investors as the basis for calculating intrinsic value.

Cash Flow from Investing Activities

Cash flow from operations tells what cash was generated in the normal course of business and by changes in current asset and liability (working capital) accounts on the balance sheet.

• But what about cash used to invest in the business?
• Invest in other businesses?
• What about cash acquired by selling investments in other businesses?

The statement of cash flow from investing activities provides this information.

This section shows, among other things: cash used for investments in the business, including

• capital expenditures for plant, equipment, and
• other longer-term product assets.

For most growing companies, while cash flow from operations should be positive, cash flow from investing activities is often negative.

Why? Because growing companies need more physical investments - property, plant, and equipment (PP&E) - to sustain growth.

It is possible to generate positive cash flows in this part of the statement either

• by selling PP&E or
• by selling investments owned by the company.

More often than not, the total "Cash Flows from Investing Activities" is negative, and that is perfectly normal.

TIP: By comparing net cash flows from operations and net cash flows from investing activities, you can get a first glance at whether a business is productive and healthy.

If positive CFO > negative CFI, then the business produces more cash than it consumes.

But don't jump to a favourable conclusion too quickly - you may be looking at an airline (e.g. Air Asia ?) that's about to pay for five new jets in the next quarter. A surplus cash situation must be sustained to be meaningful.

How changes in Working Capital affect Cash

How changes in Current Liabilities affect cash

Increase in accounts payable (a bigger liability) generates cash.

• Suppose the company you're watching has a $45 million increase in cash from accounts payable.
• There is $45 million in cash floating around in the business that didn't show up in net income.
• Let's suppose that one large item was purchased for $45 million. An accounting expense was incurred when the payable was created, but no cash has yet been used to pay the bill. It's still in the bank.
• So while the expense was incurred, reducing earnings, the cash wasn't paid and, at least for now, there's more cash in the business.

Increase in current liabilities provide cash.

Decrease in current liabilities use cash.

How changes in Current Assets affect cash

In different financial statements, it is common to see account receivable, inventories and accounts payables either providing or using cash.

Increases in current assets (other than cash) use cash.

Decreases in current assets (as in a net decrease in inventory) provide cash.

Cash Flow from Operations

Net Income
----------
Operating Activities, Cash Flows Provided By or Used In:

Depreciation
Adjustment to Net Income
Changes in Accounts Receivable
Changes in Liabilities
Changes in Inventories
Changes in Other Operation Activities
----------
Total Cash Flow from Operating Activities



Cash flow from operations, CFO, tells what cash is generated from, or provided by, normal business operations, and what cash is consumed, or used in the business.

Net income from continuing operations is the starting point, to which cash adjustments are made.

To that figure, add (or subtract) what was called the "adjustments to reconcile net income to net cash provided by operating activities."

The first adjustment item is depreciation.

• For example, depreciation in Company X was $24 million. So, we known that without other adjustments, $24 millionn more in cash was generated than reported as net income, because depreciation was subtracted from net income, but not from cash flow because it isn't a cash expense.

Then a catch-all "Adjustments to Net Income" category.

After this, comes:

• "Changes In Accounts Receivables"
• "Changes in Liabilities"
• "Changes in Inventories"

Finally, you arrive at a total "Total Cash Flow from Operating Activities," derived by netting the adjustments to toal income.

• This is a very important figure. Essentially, this is cash generated by ongoing day-t0-day business activities.
• If this amount is negative, that's bad, because it means that the business isn't even supporting itself on a day-to-day basis and requires an infusion of cash.
• If it's positive - we're still not out of the woods yet - capital investments may still require more cash than the business is producing.

A bit of EBITDA

EBITDA measures operating cash generated before:

• non-operating interest,
• taxes, and,
• noncash depreciation & amortization.

In a sense, EBITDA is operating income before:

• bankers (non-operating interest), and
• government (taxes), and
• accountants (noncash depreciation & amortization).

EBITDA is also sometimes looked at as a liquidity measure:

• Positive-EBITDA companies can service their debt, while
• Negative-EBITDA companies must borrow more.

Beware of glowing announcements of positive EBITDA, especially when accompanied by losses on the earnings statement.

Income from continuing operations versus EBITDA

Revenue
less COGS
-----------
Gross Profit
less Operating Expenses
-SGA
-R&D
-Depreciation & Amortization
-Impairment, Investments & Write Downs
-Goodwill amortization
-----------
less or add interest
-----------
PBT
less tax
-----------
Operating Income or Income from continuing operations
less or add extraordinaries
-----------
Net Income


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EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization

EBITDA measures operating cash generated before:

• non-operating interest,
• taxes and
• noncash depreciation and amortization.

Income from Continuing Operations

Operating income is simply sales less cost of goods sold, less operating expenses.


Because it includes noncash amortizations, it is a "fully loaded" view of operating performance in the business. (Depreciation and amortization expenses are usually broken out on the earnings statement, but may also be buried in a consolidated SG&A, or other operating expense line.)


If you closely observe the effects of amortizations, special write-downs, and accounting changes, you can better understand operating income and operating income trends.



Income from continuing operations tell shareholders, in total, what their investment is returning, after everyone, including Uncle Sam and his brethren, is paid.


Income from continuing operations is a good indicator of total business performance, but be aware of truly extraordinary events driving expenses or income.

Earnings Yield: Bond versus Growth Stock

PE Ratio and Growth

It would be nice if looking at price, P/E, and earnings yield was all there is to it. Find an earnings yield of 6% (PE of 17), beat the bond, and move on.

But you're buying equities, not bonds, right?

• Because you want to participate in company growth and success.

And why do you want to do that?

• Because, simply, you want to leave that static bond yield in the dust - if not today, sometime in the near future.
• And you want to keep up with - or better yet, beat - inflation.
• So to do that, you assume some risk that earnings won't happen, but you are hanging your hat on growth and a stock price that keeps up with it.

Given these choices, what would you do?

• Buy a bond for $100; receive $5 per year for 10, 20, 30 years; never look back.

or

• Buy a stock for $100, earnings per share constant at $5 for 10, 20, or 30 years with no change.

Should have bought the bond. Why?

Less risk.


----


But suppose the $5 earnings "coupon" grows at 10% per year. What happens at the end of year 10?

If the price were to stay the same, your $100 investment would be returning $12.97 in year 10, which is almost 13% earnings yield, or an implied PE of 7.7 at today's price.

A pretty nice yield, which really means the price of your investment should go up, because it's worth more.

This spreadsheet shows future earnings yields realized in the case of a bond with no growth versus a stock with a 10% earnings growth.

http://spreadsheets.google.com/ccc?key=0AuRRzs61sKqRcjdfd19OVTZrVVRlTUJnb05naGo3TWc&hl=en

So you can see that assessing growth is a major factor in analysing a stock price through PE.

Above all else, earnings growth drives stock price growth.

So value investors look closely at what the earnings yield is today and what will it be in the future.