Stock markets of the world, especially the Malaysian/Singaporean market, are not readily predictable. They can collapse so easily into a "bear pit" with little warning.
If we wish to protect our hard earned capital, we must be defensive in our investment approach.
One of the best defence is to buy shares with reasonable dividend yield (i.e. a yield of between one-third to half of the expected long run deposit interest rate).
If we buy a share becasue it pays a reasonable dividend, our loss is likely to be small even during periods of sharp market decline.
For example, we can buy a share which pays 30 cents dividend at $5.00 a share and this gives us a dividend yield of 6%. If the marekt goes into a sharp decline, the amount this share can fall to is limited by the fact that it pays a 30 cents dividend. If the price is to fall as low as $3.00, it will be giving a dividend yield of 10% which is an excellent return compared to what one can get from fixed deposit and with the additional opportunity to capital gain thrown in.
Most people can see that at that price, the share is probably a good bargain and it is therefore unlikely to fall lower. From experience, a dividend yield of 10% seems to be the floor below which most stocks will not drop.
In sharp contrast, shares which pay low or no dividend at all do not seem to have any bottom and price decline can hit 90% or more.
Saturday, 26 September 2009
Dividend provides a link with reality
When the market is truly "hot", few of us can remain rational as we tend to be swept along the general atmosphere of optimism.
But the dividend yield of a share keeps us in close touch with the real world.
Anyone who closely watched the dividend yield of a share would have realised that the price level was totally unreal. A good dividend yield stock presently giving a dividend yield of 0.4% due to rising share price, it would be better to sell the share and invest the proceed in other assets or leave the money in fixed deposit.
In the established stock markets of the world, the dividend yield usually has a steady relationship with fixed deposit and its interest rate.
It is normal for dividend yield to fluctuate at around one-third to half of the long-term fixed deposit interest rate. This means that when fixed deposit interest is around 6% per annum, stock should sell at a price to provide a yield of 2% or 3%.
Take a look at the yield provided by local shares during bull markets, the dividend yield is usually so low as to be meaningless.
Furthermore, one should not forget that some fixed deposits and fixed deposits in National Savings Bank are tax free in Malaysia while dividend has a withholding tax applied at source.
But the dividend yield of a share keeps us in close touch with the real world.
Anyone who closely watched the dividend yield of a share would have realised that the price level was totally unreal. A good dividend yield stock presently giving a dividend yield of 0.4% due to rising share price, it would be better to sell the share and invest the proceed in other assets or leave the money in fixed deposit.
In the established stock markets of the world, the dividend yield usually has a steady relationship with fixed deposit and its interest rate.
It is normal for dividend yield to fluctuate at around one-third to half of the long-term fixed deposit interest rate. This means that when fixed deposit interest is around 6% per annum, stock should sell at a price to provide a yield of 2% or 3%.
Take a look at the yield provided by local shares during bull markets, the dividend yield is usually so low as to be meaningless.
Furthermore, one should not forget that some fixed deposits and fixed deposits in National Savings Bank are tax free in Malaysia while dividend has a withholding tax applied at source.
Dividend is a sure thing
All too often, investors and speculators pay too much attention to profit forecast.
It is amazing that so many of the Malaysian companies have the courage to make profit forecast for many years into the future. What is even more amazing is that so many of the investors seem to believe these forecasts absolutely.
It is difficult to make a profit forecast a year ahead, let alone five years or even ten years. Such profit forecasts can only be regarded as extremely shaky.
Dividend is real and it is something which the shareholders can put to some use.
Most companies keep dividend at a level which they can afford to pay out irrespective of whether it is a good or a bad year and is hence a great deal more certain than profit forecast.
It is amazing that so many of the Malaysian companies have the courage to make profit forecast for many years into the future. What is even more amazing is that so many of the investors seem to believe these forecasts absolutely.
It is difficult to make a profit forecast a year ahead, let alone five years or even ten years. Such profit forecasts can only be regarded as extremely shaky.
Dividend is real and it is something which the shareholders can put to some use.
Most companies keep dividend at a level which they can afford to pay out irrespective of whether it is a good or a bad year and is hence a great deal more certain than profit forecast.
Why is dividend important?
The most important reason is dividend is the only benefit from which a shareholder can obtain from a company under the normal circumstances.
Earnings, per se, is hardly of any use to him directly and the assets are only of value if the company is liquidated which is unlikely in a great majority of cases.
Apart from the above reason, dividend is important for the following reasons:
(1) Dividend is a sure thing.
(2) Dividend provides a link with reality.
(3) Dividend provides a "floor" for shares during bear markets.
(4) Dividend yield prevents investors from being side-tracked by irrelevant events.
A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividends.
Earnings, per se, is hardly of any use to him directly and the assets are only of value if the company is liquidated which is unlikely in a great majority of cases.
Apart from the above reason, dividend is important for the following reasons:
(1) Dividend is a sure thing.
(2) Dividend provides a link with reality.
(3) Dividend provides a "floor" for shares during bear markets.
(4) Dividend yield prevents investors from being side-tracked by irrelevant events.
A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividends.
Friday, 25 September 2009
Boustead
Share Price Performance
High Low
Prices 1 Month
3.590 (25-Aug-09) 3.470 (04-Sep-09)
Prices 3 Months
4.100 (16-Jul-09) 3.470 (04-Sep-09)
Prices 12 Months
4.660 (30-Sep-08) 2.180 (28-Oct-08)
Volume 12 Months
39,296 (30-Oct-08) 51 (24-Sep-08)
Last Updated: Friday ,September 25 2009 3:30 pm
Bursa Malaysia Summary
Composite: 1215.66
Quek and Chua invest US$150mil in HK IPO
Friday September 25, 2009
Quek and Chua invest US$150mil in HK IPO
By YEOW POOI LING
PETALING JAYA: Tycoons Tan Sri Quek Leng Chan and Tan Sri Chua Ma Yu have agreed to take part in the initial public offering (IPO) of Wynn Macau Ltd on the Hong Kong Stock Exchange by investing US$80mil and US$70mil respectively.
Quek’s investment is via Guoco Management Co Ltd and GuoLine Group Management Co Ltd, which are indirect subsidiaries of Hong Leong Co (M) Bhd, while Chua’s vehicle is CMY Capital Markets Sdn Bhd.
It is learnt that these Malaysian parties are going in independently. Chua is an investor and the attraction in Wynn is purely seen as a China play.
Chua was unavailable for comment.
In the listing document, Wynn Macau said CMY’s stake could amount to almost 5% of the offered shares while Guoco and GuoLine could collectively hold 5.3% based on a mid-point offer price of HK$9.30 and assuming the over-allotment option was not exercised.
Wynn Macau, owned by US-based Wynn Resorts, is among the biggest gaming operators in Macau and caters mainly to high-end clientele. The IPO involves floating 1.25 billion shares at HK$8.52-HK$10.08 each.
Other investors include Hong Kong tycoons Walter Kwok and Thomas Lau, as well as fund management company Keywise Capital Management (HK) Ltd.
Quek, the sixth richest man in Malaysia based on Forbes Asia Malaysia Rich List 2009, is not new to the gaming business. His Hong Kong-listed entity, Guoco Group Ltd’s subsidiary, has gaming operations in Britain.
Chua, on the other hand, owned a stake in Star Cruises Ltd briefly in 2007.
Macau is the world’s largest gaming market based on gross gaming revenue and the only place in China with legalised casino gaming.
Last year, Macau attracted 22.9 million visitors, mostly from Hong Kong and mainland China. The gaming market generated HK$105.6bil in gross gaming revenue, double the amount of Las Vegas Strip. For the first six months, Macau generated HK$49.9bil in gross gaming revenue. In 2008, Wynn Macau took a 16% of Macau’s table revenues and a daily gross win per gaming table of about HK$119,000. Its listing, targeted for Oct 9, will make Wynn Macau the first American company to list on the Hong Kong Stock Exchange.
A local research house said the IPO would unlock the value and boost the valuations of Wynn Resorts.
“Currently, the simple average price-to-earnings (PE) for 2010 of gaming companies listed on the Hong Kong Stock Exchange is 66.9 times versus Wynn Resorts’ PE of 74.1 times in the United States. If Wynn Resorts’ PE were to expand, it would also boost valuations of regional gaming companies,” it said.
Wynn Macau is currently adding new VIP areas with 35 more high-limit slot machines and 29 VIP table games at the private gaming salons. These are expected to open in the first quarter of 2010.
A new resort, Encore, is also under way, which costs about HK$5bil and is expected to open in the first half of next year. These expansions should increase Wynn Macau’s VIP table games by 44%.
Meanwhile, Wynn Macau is still awaiting approval for its application to lease a 52-acre site in Cotai for the development of an integrated casino and a five-star resort.
Macau’s gaming business was hurt when China, in May 2008, limited travel by its citizens to Macau to once a month, and later extended the limit to once every two months.
However, there have been reports that the Chinese Government was easing restrictions, starting from those in Guangdong province travelling to Macau.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4776752&sec=business
Comment: What planning needs to be in place to graduate into their league?
Quek and Chua invest US$150mil in HK IPO
By YEOW POOI LING
PETALING JAYA: Tycoons Tan Sri Quek Leng Chan and Tan Sri Chua Ma Yu have agreed to take part in the initial public offering (IPO) of Wynn Macau Ltd on the Hong Kong Stock Exchange by investing US$80mil and US$70mil respectively.
Quek’s investment is via Guoco Management Co Ltd and GuoLine Group Management Co Ltd, which are indirect subsidiaries of Hong Leong Co (M) Bhd, while Chua’s vehicle is CMY Capital Markets Sdn Bhd.
It is learnt that these Malaysian parties are going in independently. Chua is an investor and the attraction in Wynn is purely seen as a China play.
Chua was unavailable for comment.
In the listing document, Wynn Macau said CMY’s stake could amount to almost 5% of the offered shares while Guoco and GuoLine could collectively hold 5.3% based on a mid-point offer price of HK$9.30 and assuming the over-allotment option was not exercised.
Wynn Macau, owned by US-based Wynn Resorts, is among the biggest gaming operators in Macau and caters mainly to high-end clientele. The IPO involves floating 1.25 billion shares at HK$8.52-HK$10.08 each.
Other investors include Hong Kong tycoons Walter Kwok and Thomas Lau, as well as fund management company Keywise Capital Management (HK) Ltd.
Quek, the sixth richest man in Malaysia based on Forbes Asia Malaysia Rich List 2009, is not new to the gaming business. His Hong Kong-listed entity, Guoco Group Ltd’s subsidiary, has gaming operations in Britain.
Chua, on the other hand, owned a stake in Star Cruises Ltd briefly in 2007.
Macau is the world’s largest gaming market based on gross gaming revenue and the only place in China with legalised casino gaming.
Last year, Macau attracted 22.9 million visitors, mostly from Hong Kong and mainland China. The gaming market generated HK$105.6bil in gross gaming revenue, double the amount of Las Vegas Strip. For the first six months, Macau generated HK$49.9bil in gross gaming revenue. In 2008, Wynn Macau took a 16% of Macau’s table revenues and a daily gross win per gaming table of about HK$119,000. Its listing, targeted for Oct 9, will make Wynn Macau the first American company to list on the Hong Kong Stock Exchange.
A local research house said the IPO would unlock the value and boost the valuations of Wynn Resorts.
“Currently, the simple average price-to-earnings (PE) for 2010 of gaming companies listed on the Hong Kong Stock Exchange is 66.9 times versus Wynn Resorts’ PE of 74.1 times in the United States. If Wynn Resorts’ PE were to expand, it would also boost valuations of regional gaming companies,” it said.
Wynn Macau is currently adding new VIP areas with 35 more high-limit slot machines and 29 VIP table games at the private gaming salons. These are expected to open in the first quarter of 2010.
A new resort, Encore, is also under way, which costs about HK$5bil and is expected to open in the first half of next year. These expansions should increase Wynn Macau’s VIP table games by 44%.
Meanwhile, Wynn Macau is still awaiting approval for its application to lease a 52-acre site in Cotai for the development of an integrated casino and a five-star resort.
Macau’s gaming business was hurt when China, in May 2008, limited travel by its citizens to Macau to once a month, and later extended the limit to once every two months.
However, there have been reports that the Chinese Government was easing restrictions, starting from those in Guangdong province travelling to Macau.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4776752&sec=business
Comment: What planning needs to be in place to graduate into their league?
How to manage your taxes in challenging economic times
Friday September 25, 2009
How to manage your taxes in challenging economic times
KPMG CHAT - By NICHOLAS CRIST
IN the current challenging economic environment, management of taxes is increasingly important. Failure to implement effective tax management can result in lost opportunities and the imposition of tax penalties.
Cash tax management
At the micro level there should be effective cash tax management. Tax instalments for corporate taxpayers should be as accurate as possible so that they don’t pay tax unnecessarily to the Inland Revenue Board (IRB), or find themselves exposed to under-estimation penalties.
Variations to instalments can be made automatically in, broadly, the sixth and ninth months of the financial year.
Further, the Income Tax Act gives the discretion to the IRB to consider applications for variations by taxpayers outside of the above months. Where profits are falling, taxpayers should consider seeking this discretionary relief.
Default by debtors
As profits are generally recognised for tax purposes on an accruals basis, businesses may be paying tax on amounts they have yet to receive. A challenge for businesses will be their ability to collect outstanding debts.
The critical issue is whether debts are bad or doubtful of recovery, or whether the debtor is simply a slow payer.
For tax purposes, the distinction is important as provisions for debts which are paid slowly will not qualify for a tax deduction.
Notwithstanding the above, bad or doubtful debts may still qualify for a tax deduction provided a number of conditions are met, and these are reflected in the IRB’s Public Ruling No. 1/2002.
To claim a deduction for a doubtful debt, taxpayers must among other things, be able to demonstrate that each debt has been evaluated separately; a general provision of say X% after Y months will not qualify. There must be evidence to show how the doubtfulness of each debt has been evaluated.
Regard must be paid to the period for which the debt has been outstanding; the financial status of the debtor; the debtor’s credit record and experience of the particular trade or industry.
These requirements must be supported by documentation and this will be key to substantiating a doubtful debt deduction.
Deteriorating inventory
Where business has slowed down, inventory may accumulate and hence the risk of deterioration (and fall in value) increases.
Where for accounting purposes a provision for deterioration in value is made, this will not qualify for a tax deduction. However, subject to various conditions, a specific write-down of inventory may qualify for a tax deduction.
Taxpayers who wish to claim a deduction have to demonstrate that the write-down is accurately calculated and represents a permanent fall in value. Again, keeping detailed records is the key to support a claim for a tax deduction.
Default on contracts
In deteriorating conditions, it may be necessary for businesses to terminate contracts which might require payment of compensation.
To determine the issue of deductibility, the starting point is to consider the nature of the contract being terminated.
Where the contract being terminated is revenue in nature, for example the purchase of inventory, this would suggest, at an initial level, that a tax deduction might be available.
Where, however, the contract is capital in nature, for example the purchase of machinery, a tax deduction for any compensation payable is unlikely to be available.
Defaults on loans
A particular concern is whether borrowers will default on loan obligations.
Where a default arises it may be necessary to work out a compromise between the creditor and the borrower which might involve the borrower being released from part of its financial obligations.
It is necessary to determine whether a release could be subject to income tax.
The Income Tax Act provides that where a tax deduction has been obtained for an amount represented by the release, the release is subject to tax.
A similar result also arises where the amount released relates to the purchase of an asset on which capital allowances have been claimed.
Where, however, the amount released has not been claimed as a tax deduction, the release should not, normally, be subject to income tax.
Retrenchment costs
Businesses that are particularly hard hit may find themselves with little option but to retrench employees. Where the retrenchment exercise is carried out in conjunction with the closure of a business, a tax deduction, based on case law, would not be available.
A different view is, however, likely to be reached where retrenchments are incurred for the purposes of enabling a business to be saved from extinction.
In the current economic environment, effective management of all costs including taxes is vital. From the tax perspective, businesses need to be aware of eligible deductions and ensure that adequate supporting documentation is maintained.
·The writer is executive director, KPMG Tax Services Sdn Bhd.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4778387&sec=business
How to manage your taxes in challenging economic times
KPMG CHAT - By NICHOLAS CRIST
IN the current challenging economic environment, management of taxes is increasingly important. Failure to implement effective tax management can result in lost opportunities and the imposition of tax penalties.
Cash tax management
At the micro level there should be effective cash tax management. Tax instalments for corporate taxpayers should be as accurate as possible so that they don’t pay tax unnecessarily to the Inland Revenue Board (IRB), or find themselves exposed to under-estimation penalties.
Variations to instalments can be made automatically in, broadly, the sixth and ninth months of the financial year.
Further, the Income Tax Act gives the discretion to the IRB to consider applications for variations by taxpayers outside of the above months. Where profits are falling, taxpayers should consider seeking this discretionary relief.
Default by debtors
As profits are generally recognised for tax purposes on an accruals basis, businesses may be paying tax on amounts they have yet to receive. A challenge for businesses will be their ability to collect outstanding debts.
The critical issue is whether debts are bad or doubtful of recovery, or whether the debtor is simply a slow payer.
For tax purposes, the distinction is important as provisions for debts which are paid slowly will not qualify for a tax deduction.
Notwithstanding the above, bad or doubtful debts may still qualify for a tax deduction provided a number of conditions are met, and these are reflected in the IRB’s Public Ruling No. 1/2002.
To claim a deduction for a doubtful debt, taxpayers must among other things, be able to demonstrate that each debt has been evaluated separately; a general provision of say X% after Y months will not qualify. There must be evidence to show how the doubtfulness of each debt has been evaluated.
Regard must be paid to the period for which the debt has been outstanding; the financial status of the debtor; the debtor’s credit record and experience of the particular trade or industry.
These requirements must be supported by documentation and this will be key to substantiating a doubtful debt deduction.
Deteriorating inventory
Where business has slowed down, inventory may accumulate and hence the risk of deterioration (and fall in value) increases.
Where for accounting purposes a provision for deterioration in value is made, this will not qualify for a tax deduction. However, subject to various conditions, a specific write-down of inventory may qualify for a tax deduction.
Taxpayers who wish to claim a deduction have to demonstrate that the write-down is accurately calculated and represents a permanent fall in value. Again, keeping detailed records is the key to support a claim for a tax deduction.
Default on contracts
In deteriorating conditions, it may be necessary for businesses to terminate contracts which might require payment of compensation.
To determine the issue of deductibility, the starting point is to consider the nature of the contract being terminated.
Where the contract being terminated is revenue in nature, for example the purchase of inventory, this would suggest, at an initial level, that a tax deduction might be available.
Where, however, the contract is capital in nature, for example the purchase of machinery, a tax deduction for any compensation payable is unlikely to be available.
Defaults on loans
A particular concern is whether borrowers will default on loan obligations.
Where a default arises it may be necessary to work out a compromise between the creditor and the borrower which might involve the borrower being released from part of its financial obligations.
It is necessary to determine whether a release could be subject to income tax.
The Income Tax Act provides that where a tax deduction has been obtained for an amount represented by the release, the release is subject to tax.
A similar result also arises where the amount released relates to the purchase of an asset on which capital allowances have been claimed.
Where, however, the amount released has not been claimed as a tax deduction, the release should not, normally, be subject to income tax.
Retrenchment costs
Businesses that are particularly hard hit may find themselves with little option but to retrench employees. Where the retrenchment exercise is carried out in conjunction with the closure of a business, a tax deduction, based on case law, would not be available.
A different view is, however, likely to be reached where retrenchments are incurred for the purposes of enabling a business to be saved from extinction.
In the current economic environment, effective management of all costs including taxes is vital. From the tax perspective, businesses need to be aware of eligible deductions and ensure that adequate supporting documentation is maintained.
·The writer is executive director, KPMG Tax Services Sdn Bhd.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4778387&sec=business
Structural weakness could dampen M'sian long term growth
Friday September 25, 2009
Structural weakness could dampen M'sian long term growth
By LEONG HUNG YEE
PETALING JAYA: Malaysia is poised to be the largest beneficiary of higher commodity prices from positive terms-of-trade and commodity revenue supporting the public sector, according to Morgan Stanley Research.
“Beyond the cyclical uptick, we think structural weakness remains present which could put a dampener on longer-term growth prospects.
“However, we note that policymakers have been taking measures to liberalise the economy. Continued execution and acceleration will be needed to fully turn around the structural story, in our view,” it said in an Asean economics report.
The Malaysian market has generally fallen by the wayside amid structural issues in the economy. As a result, its asset market had ironically developed a defensive nature, outperforming during market downturns, and underperforming during market upturns, Morgan Stanley said.
“Despite this, from a macro perspective, we still expect Malaysia to deliver reasonable growth outlook in 2010,” it added.
Morgan Stanley’s 2009 and 2010 forecasts of contraction of 3.5% and a growth of 4.3% year-on-year respectively were below consensus’ contraction of 3% for 2009 but in line with the 4.3% growth for 2010.
“We see 2011 growth at 4.8% year-on-year. Interestingly, we note a dichotomy in terms of market sentiment. Whilst certain quarters of the market have been eager to get bullish on Singapore given the global rebound, we do not sense the same sentiment with Malaysia despite Malaysia being the second most exposed to global trade within Asean as well as a commodity play,” it said.
Morgan Stanley said the global backdrop and the political climate were two key risks for Malaysia.“Malaysia’s manufacturing exports are already under structural pressures, losing global competitiveness. Separately, the coordination within the federal government given the two-party system and the coordination between the federal and state governments would be key to watch in terms of how it would affect the workings of the public sector economy,” it said.
The research house said foreign interest in Malaysia had been waning. Net foreign direct investments (FDIs) in certain economies in the region (China, India, Singapore and Thailand) continued to climb higher, net FDI in Malaysia had generally trended down from the peak in the early 1990s, and was now dipping into negative territory.
On the upcoming Budget 2010, it expected it “to be less expansionary in terms of fiscal deficit.” “However, we still see Malaysia as likely to have one of the highest fiscal deficits within Asean for 2010.”
Commenting on policy measures, Morgan Stanley said Bank Negara was “relatively dovish.”
It said the absence of a strong credit cycle previously created more room for leverage.
“Policymakers also have the highest propensity for pump-priming within Asean.” Meanwhile, Credit Suisse Group said Bank Negara had become more confident the country was recovering from the global recession.
The central bank’s view was that the signs of an economic recovery seemed evident but it was only unsure on whether the economic rebound would be modest or sharp.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4778483&sec=business
Structural weakness could dampen M'sian long term growth
By LEONG HUNG YEE
PETALING JAYA: Malaysia is poised to be the largest beneficiary of higher commodity prices from positive terms-of-trade and commodity revenue supporting the public sector, according to Morgan Stanley Research.
“Beyond the cyclical uptick, we think structural weakness remains present which could put a dampener on longer-term growth prospects.
“However, we note that policymakers have been taking measures to liberalise the economy. Continued execution and acceleration will be needed to fully turn around the structural story, in our view,” it said in an Asean economics report.
The Malaysian market has generally fallen by the wayside amid structural issues in the economy. As a result, its asset market had ironically developed a defensive nature, outperforming during market downturns, and underperforming during market upturns, Morgan Stanley said.
“Despite this, from a macro perspective, we still expect Malaysia to deliver reasonable growth outlook in 2010,” it added.
Morgan Stanley’s 2009 and 2010 forecasts of contraction of 3.5% and a growth of 4.3% year-on-year respectively were below consensus’ contraction of 3% for 2009 but in line with the 4.3% growth for 2010.
“We see 2011 growth at 4.8% year-on-year. Interestingly, we note a dichotomy in terms of market sentiment. Whilst certain quarters of the market have been eager to get bullish on Singapore given the global rebound, we do not sense the same sentiment with Malaysia despite Malaysia being the second most exposed to global trade within Asean as well as a commodity play,” it said.
Morgan Stanley said the global backdrop and the political climate were two key risks for Malaysia.“Malaysia’s manufacturing exports are already under structural pressures, losing global competitiveness. Separately, the coordination within the federal government given the two-party system and the coordination between the federal and state governments would be key to watch in terms of how it would affect the workings of the public sector economy,” it said.
The research house said foreign interest in Malaysia had been waning. Net foreign direct investments (FDIs) in certain economies in the region (China, India, Singapore and Thailand) continued to climb higher, net FDI in Malaysia had generally trended down from the peak in the early 1990s, and was now dipping into negative territory.
On the upcoming Budget 2010, it expected it “to be less expansionary in terms of fiscal deficit.” “However, we still see Malaysia as likely to have one of the highest fiscal deficits within Asean for 2010.”
Commenting on policy measures, Morgan Stanley said Bank Negara was “relatively dovish.”
It said the absence of a strong credit cycle previously created more room for leverage.
“Policymakers also have the highest propensity for pump-priming within Asean.” Meanwhile, Credit Suisse Group said Bank Negara had become more confident the country was recovering from the global recession.
The central bank’s view was that the signs of an economic recovery seemed evident but it was only unsure on whether the economic rebound would be modest or sharp.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4778483&sec=business
Recession or not McDonald's increases dividend for the 32nd year
Updated: Friday September 25, 2009 MYT 7:55:44 AM
Recession or not McDonald's increases dividend for the 32nd year
OAK BROOK, Illinois: McDonald's Corp. said Thursday that its board has raised its quarterly dividend 10 percent to 55 cents. It will be paid on Dec. 15 to shareholders of record as of Dec. 1. The increase brings its yearly dividend to $2.20 and its total quarterly dividend payout to about $600 million.
The previous quarterly dividend was 50 cents.
The company said it has raised its dividend every year since paying its first dividend in 1976.
The most recent increase puts the company at the high end of its goal to return between $15 billion to $17 billion in cash to shareholders over a three year period that started at the beginning of 2007, the company said.
McDonald's also said it would delist its stock from the Chicago Stock Exchange, where it had its secondary listing.
It decided to leave the Chicago exchange because of low trading volume there.
After Oct. 30, it will be listed only on the New York Stock Exchange.
McDonald's shares rose 58 cents to close Thursday at $56.12.
The stock added another 3 cents after hours following the dividend increase. - AP
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/20090925075349&sec=business
Comment:
At the price per share of $56.12, the yearly dividend of $2.20 translates into a DY of 3.9%. This is equivalent to a dividend multiple of 25.5x.
A company giving increasing dividends year on year will see its share price trending upwards in unison.
Given the low interest rates for fixed deposits and low treasury yield, investing into this stock provides a better return comparatively. Those with a long term investing horizon need not worry about the price volatility of the share. The long term gains from dividends and capital gains seem safe and predictable as long as the company continues to perform as it did in the past.
Recession or not McDonald's increases dividend for the 32nd year
OAK BROOK, Illinois: McDonald's Corp. said Thursday that its board has raised its quarterly dividend 10 percent to 55 cents. It will be paid on Dec. 15 to shareholders of record as of Dec. 1. The increase brings its yearly dividend to $2.20 and its total quarterly dividend payout to about $600 million.
The previous quarterly dividend was 50 cents.
The company said it has raised its dividend every year since paying its first dividend in 1976.
The most recent increase puts the company at the high end of its goal to return between $15 billion to $17 billion in cash to shareholders over a three year period that started at the beginning of 2007, the company said.
McDonald's also said it would delist its stock from the Chicago Stock Exchange, where it had its secondary listing.
It decided to leave the Chicago exchange because of low trading volume there.
After Oct. 30, it will be listed only on the New York Stock Exchange.
McDonald's shares rose 58 cents to close Thursday at $56.12.
The stock added another 3 cents after hours following the dividend increase. - AP
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/20090925075349&sec=business
Comment:
At the price per share of $56.12, the yearly dividend of $2.20 translates into a DY of 3.9%. This is equivalent to a dividend multiple of 25.5x.
A company giving increasing dividends year on year will see its share price trending upwards in unison.
Given the low interest rates for fixed deposits and low treasury yield, investing into this stock provides a better return comparatively. Those with a long term investing horizon need not worry about the price volatility of the share. The long term gains from dividends and capital gains seem safe and predictable as long as the company continues to perform as it did in the past.
Market Correction
Short term traders should be careful.
Long term investors can buy into good quality stocks when these shares correct 10% to 15% from their high prices. Be ready to buy when the market corrects significantly. There are still many good stocks selling at good valuations.
Long term investors can buy into good quality stocks when these shares correct 10% to 15% from their high prices. Be ready to buy when the market corrects significantly. There are still many good stocks selling at good valuations.
Thursday, 24 September 2009
KFIMA
http://spreadsheets.google.com/pub?key=tchlPoEmr7Slurf7K0p2trQ&output=html
Financial Year Ended 31 March 2009 2008 2007 2006 2005
(RM Million) (restated)
REVENUE 369.07 308.71 294.48 300.33 247.12
PROFIT
Profit before taxation 81.19 56.86 51.39 50.35 94.66
Profit before taxation
(excluding exceptional item) 81.19 56.86 51.39 50.35 44.36
Income Tax Expense 10.57 13.59 10.74 3.48 12.32
Minority Interests 24.47 12.99 10.99 12.01 8.58
Profit after taxation and minority interests 46.16 30.29 29.66 34.86 73.76
ASSETS AND LIABILITIES
Total assets 653.15 609.17 514.53 458.59 463.11
Total liabilities 201.32 209.05 149.74 138.54 172.63
Minority interests 117.21 100.73 78.97 70.54 61.69
Shareholders’ Equity 334.62 299.40 285.82 249.51 228.79
EARNINGS AND DIVIDEND
Earnings per share (sen) 17.54 11.51 11.30 13.20 28.03
Gross dividend per share (sen) 3.00 2.50 2.00 2.00 1.00
Net dividend per share (sen) 2.25 1.88 1.48 1.44 0.72
SHARE PRICES
Transacted price per share (sen)
Highest 51.0 94.5 75.0 54.5 58.5
Lowest 33.5 42.5 50.5 40.5 34.5
http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/520682cc8f32d7ea4825762a002da6f2/$FILE/KFIMA-AnnualReport2009%20(970KB).pdf
Financial Year Ended 31 March 2009 2008 2007 2006 2005
(RM Million) (restated)
REVENUE 369.07 308.71 294.48 300.33 247.12
PROFIT
Profit before taxation 81.19 56.86 51.39 50.35 94.66
Profit before taxation
(excluding exceptional item) 81.19 56.86 51.39 50.35 44.36
Income Tax Expense 10.57 13.59 10.74 3.48 12.32
Minority Interests 24.47 12.99 10.99 12.01 8.58
Profit after taxation and minority interests 46.16 30.29 29.66 34.86 73.76
ASSETS AND LIABILITIES
Total assets 653.15 609.17 514.53 458.59 463.11
Total liabilities 201.32 209.05 149.74 138.54 172.63
Minority interests 117.21 100.73 78.97 70.54 61.69
Shareholders’ Equity 334.62 299.40 285.82 249.51 228.79
EARNINGS AND DIVIDEND
Earnings per share (sen) 17.54 11.51 11.30 13.20 28.03
Gross dividend per share (sen) 3.00 2.50 2.00 2.00 1.00
Net dividend per share (sen) 2.25 1.88 1.48 1.44 0.72
SHARE PRICES
Transacted price per share (sen)
Highest 51.0 94.5 75.0 54.5 58.5
Lowest 33.5 42.5 50.5 40.5 34.5
http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/520682cc8f32d7ea4825762a002da6f2/$FILE/KFIMA-AnnualReport2009%20(970KB).pdf
We should try to make sure we're not in the pessimist camp
Your Pessmism Is Holding You Back
By Selena Maranjian
September 23, 2009
Surveys and studies can shed a lot of light on news that's important to our lives. I've reported on many of them, such as the Employee Benefit Research Institute's findings that we may not retire when we think we will. There's the annual Retirement Confidence Survey, showing us why we stand a good chance of ending up with a gruesome retirement. And there's the report from Fidelity that can help us see how we're doing compared to others in our retirement planning.
Now there's another study out from Fidelity, with even more data on retirement and investing. Looking over the report, which happened to focus on pessimists and optimists, I learned that (drumroll, please):
•Pessimistic investors are less likely to expect a comfortable retirement than optimistic investors, by a 61% to 83% count
•Pessimists typically take on less investing risk. That's been especially true during the current uncertainties in the financial markets.
There's more. Among married couples, 61% of pessimistic spouses don't have much confidence in their ability to take over control of the household finances, versus just 39% of optimists.
The scoop
Yes, I know, the study is telling us that pessimists are kind of … pessimistic. But there's more to the study than just disposition. For instance, nearly twice as many optimists as pessimists have a detailed plan for how they'll generate retirement income. That lack of planning certainly suggests that those pessimists have good reason to expect the worst.
Given those results, we should try to make sure we're not in the pessimist camp. More often than optimists, pessimists seem to invest mainly to preserve the value of their investments -- in other words, rather conservatively. That's not a great way for most of us to build a nest egg for tomorrow, especially if you still have awhile to go before you plan to retire.
It will take a long time to build the wealth you need for retirement if you focus only on preserving your wealth rather than growing it. You'll be stuck with low returns that may not even keep up with inflation, let alone help you increase your purchasing power after you retire. If you expect to need $50,000 to cover your annual expenses, for instance, you need to build a nest egg of $1 million or more. You probably can't get there sticking with ultrasafe investments.
What to do
If you're starting to break out in a sweat as you imagine putting lots of your dollars into stocks you don't know well -- ones that might suddenly implode -- relax and take a deep breath. You can aim for solid returns with stocks that won't strike you as all that risky. Check out the following companies with top ratings from our Motley Fool CAPS investor community:
Company
Return on Equity
Price-to-Earnings Ratio
10-Year Average Return
BP (NYSE: BP)
12%
15
4.0%
Canadian National Railway (NYSE: CNI)
18%
13
19.9%
Abbott Labs (NYSE: ABT)
27%
14
4.5%
Transocean (NYSE: RIG)
22%
7
10.6%
Petroleo Brasileiro (NYSE: PBR)
31%
10
27.1%*
Schlumberger (NYSE: SLB)
24%
17
10.1%
ExxonMobil (NYSE: XOM)
27%
11
8.8%
S&P 500
(0.2%)
Data: Motley Fool CAPS; Yahoo! Finance. *Over the past nine years.
Their relatively low P/E ratios suggest that they aren't wildly overpriced, and thus these stocks offer some margin of safety. You can find plenty of compelling familiar names these days, too -- ones that offer generous dividends.
So don't be such a pessimist! Over long periods, the stock market tends to make people wealthier. Feel free to feel optimistic that now, during a recession, is often the best time to invest.
http://www.fool.com/retirement/general/2009/09/23/your-pessmism-is-holding-you-back.aspx
By Selena Maranjian
September 23, 2009
Surveys and studies can shed a lot of light on news that's important to our lives. I've reported on many of them, such as the Employee Benefit Research Institute's findings that we may not retire when we think we will. There's the annual Retirement Confidence Survey, showing us why we stand a good chance of ending up with a gruesome retirement. And there's the report from Fidelity that can help us see how we're doing compared to others in our retirement planning.
Now there's another study out from Fidelity, with even more data on retirement and investing. Looking over the report, which happened to focus on pessimists and optimists, I learned that (drumroll, please):
•Pessimistic investors are less likely to expect a comfortable retirement than optimistic investors, by a 61% to 83% count
•Pessimists typically take on less investing risk. That's been especially true during the current uncertainties in the financial markets.
There's more. Among married couples, 61% of pessimistic spouses don't have much confidence in their ability to take over control of the household finances, versus just 39% of optimists.
The scoop
Yes, I know, the study is telling us that pessimists are kind of … pessimistic. But there's more to the study than just disposition. For instance, nearly twice as many optimists as pessimists have a detailed plan for how they'll generate retirement income. That lack of planning certainly suggests that those pessimists have good reason to expect the worst.
Given those results, we should try to make sure we're not in the pessimist camp. More often than optimists, pessimists seem to invest mainly to preserve the value of their investments -- in other words, rather conservatively. That's not a great way for most of us to build a nest egg for tomorrow, especially if you still have awhile to go before you plan to retire.
It will take a long time to build the wealth you need for retirement if you focus only on preserving your wealth rather than growing it. You'll be stuck with low returns that may not even keep up with inflation, let alone help you increase your purchasing power after you retire. If you expect to need $50,000 to cover your annual expenses, for instance, you need to build a nest egg of $1 million or more. You probably can't get there sticking with ultrasafe investments.
What to do
If you're starting to break out in a sweat as you imagine putting lots of your dollars into stocks you don't know well -- ones that might suddenly implode -- relax and take a deep breath. You can aim for solid returns with stocks that won't strike you as all that risky. Check out the following companies with top ratings from our Motley Fool CAPS investor community:
Company
Return on Equity
Price-to-Earnings Ratio
10-Year Average Return
BP (NYSE: BP)
12%
15
4.0%
Canadian National Railway (NYSE: CNI)
18%
13
19.9%
Abbott Labs (NYSE: ABT)
27%
14
4.5%
Transocean (NYSE: RIG)
22%
7
10.6%
Petroleo Brasileiro (NYSE: PBR)
31%
10
27.1%*
Schlumberger (NYSE: SLB)
24%
17
10.1%
ExxonMobil (NYSE: XOM)
27%
11
8.8%
S&P 500
(0.2%)
Data: Motley Fool CAPS; Yahoo! Finance. *Over the past nine years.
Their relatively low P/E ratios suggest that they aren't wildly overpriced, and thus these stocks offer some margin of safety. You can find plenty of compelling familiar names these days, too -- ones that offer generous dividends.
So don't be such a pessimist! Over long periods, the stock market tends to make people wealthier. Feel free to feel optimistic that now, during a recession, is often the best time to invest.
http://www.fool.com/retirement/general/2009/09/23/your-pessmism-is-holding-you-back.aspx
Biggest Market Opportunity: Cash? (No, I'm Not Insane)
Biggest Market Opportunity: Cash? (No, I'm Not Insane)
By Alex Dumortier, CFA
September 23, 2009
What sort of insanity is this? How could cash be an opportunity at a time when three-month T-bills yield less than 10 basis points? No one gets excited earning virtually nothing on their cash balances, but stock investors should consider future opportunities in addition to existing choices: It's not about what you're not earning on the cash today, it's about earning premium returns on the investments you'll be able to make with that cash tomorrow.
Cash needn't be an anchor
In the words of super-investor Seth Klarman: "Why should the immediate opportunity set be the only one considered, when tomorrow's may well be considerably more fertile than today's?" At the head of the Baupost Group, a multi-billion dollar investment partnership, Klarman employs a value-oriented strategy, achieving exceptional performance in spite of -- or rather, because of -- the fact that he frequently holds significant amounts of cash. For example, on October 31, 1999, a few months before the tech bubble began to collapse, his Baupost Fund was approximately one third in cash.
Over the "lost decade" spanning 1999 through 2008, Klarman smashed the market with a 15.9% average annualized return net of fees and incentives versus a (1.4%) annualized loss for the S&P 500.
Don't go all in (cash or equities)
Let me be quite clear: I'm not advocating that you liquidate all your stocks and go all into cash; the market's current valuation simply does not warrant that sort of drastic action. Conversely, it shouldn't compel you to raise your broad equity exposure, either.
As I noted last week, the market doesn't look cheap right now: Based on data compiled by Professor Robert Shiller of Yale, at yesterday's closing value of 1,071.66, the S&P 500 is valued at over 19 times its cyclically adjusted earnings, compared to a long-term historical average of 16.3. Based on average inflation-adjusted earnings, the cyclically adjusted P/E ratio is one of the only consistently useful market valuation indicators.
As prices increase, so does your risk
All other things equal, as share prices rise, stocks will represent a larger percentage of your assets; however, logic dictates you should actually seek to ratchet down your equity exposure under those circumstances. As stock prices rise, expected future returns decline (again, all other factors remaining constant), making stocks relatively less attractive. Another way to express this is that as stock prices increase, so does the risk associated with owning stocks.
That risk may simply be earning sub-par returns or, in the worst case, suffering capital losses. Extremes in market valuations offer the best illustration of this principle: Owning a basket of Nasdaq stocks in March 2000: a high-risk or low-risk strategy? How about buying Japanese stocks in December 1989, with the Nikkei Index nearing 39,000 (nearly 20 years on, the same index trades at less than 10,500).
Don't misinterpret Buffett's words
So what are we to make of Berkshire Hathaway (BRK-B) CEO Warren Buffett's words when he told CNBC on July 24th: "I would much rather own equities at 9,000 on the Dow than have a long investment in government bonds or a continuously rolling investment in short-term money"? (Investors must have concluded the same thing, sending the Dow 8% higher since then.)
First, with just 30 component stocks, the Dow isn't a broad-market index; it's a blue-chip index. The stocks of high-quality companies have underperformed the broader market in the rally from the March market low, which has left them relatively undervalued. This is reflected in the Dow's 14 price-to-earnings multiple, against 17 for the wider S&P 500.
Buying pieces of businesses vs. owning the market
Second, keep in mind that Buffett likes to own pieces of high-quality businesses, not the whole market. As I mentioned above, there is reason to believe that there is still opportunity left in the higher-quality segment of the market. The following table contains six companies that trade with a free-cash-flow yield above 10% -- i.e., they're priced at less than 10 times trailing free cash flow (these are not investment recommendations):
Company Sector
Free-Cash-Flow Yield*
General Electric (NYSE: GE)
Conglomerates
47.3%
UnitedHealth Group (NYSE: UNH)
Health care
11.7%
Bristol-Myers Squibb (NYSE: BMY)
Health care
10.6%
Raytheon (NYSE: RTN)
Industrial goods
10.5%
Altria Group (NYSE: MO)
Consumer goods
11.5%
Time Warner (NYSE: TWX)
Services
25.9%
*Based on TTM free cash flow and closing stock prices on September 21, 2009.
Source: Capital IQ, a division of Standard & Poor's, Yahoo! Finance.
Summing up: What to do from here
To sum up:
If, like Buffett, you have identified high-quality businesses that are undervalued, there is nothing wrong with buying them now.
However, if you are mainly an index investor, it is probably ill-conceived to increase your exposure to stocks right now.
Either way, whether you are a stockpicker or an index investor, there is nothing wrong with holding on to some cash right now -- not for its own sake -- but to take advantage of better stock prices at a later date.
Morgan Housel has identified three high-quality companies that are still cheap.
http://www.fool.com/investing/value/2009/09/23/biggest-market-opportunity-cash-no-im-not-insane.aspx
By Alex Dumortier, CFA
September 23, 2009
What sort of insanity is this? How could cash be an opportunity at a time when three-month T-bills yield less than 10 basis points? No one gets excited earning virtually nothing on their cash balances, but stock investors should consider future opportunities in addition to existing choices: It's not about what you're not earning on the cash today, it's about earning premium returns on the investments you'll be able to make with that cash tomorrow.
Cash needn't be an anchor
In the words of super-investor Seth Klarman: "Why should the immediate opportunity set be the only one considered, when tomorrow's may well be considerably more fertile than today's?" At the head of the Baupost Group, a multi-billion dollar investment partnership, Klarman employs a value-oriented strategy, achieving exceptional performance in spite of -- or rather, because of -- the fact that he frequently holds significant amounts of cash. For example, on October 31, 1999, a few months before the tech bubble began to collapse, his Baupost Fund was approximately one third in cash.
Over the "lost decade" spanning 1999 through 2008, Klarman smashed the market with a 15.9% average annualized return net of fees and incentives versus a (1.4%) annualized loss for the S&P 500.
Don't go all in (cash or equities)
Let me be quite clear: I'm not advocating that you liquidate all your stocks and go all into cash; the market's current valuation simply does not warrant that sort of drastic action. Conversely, it shouldn't compel you to raise your broad equity exposure, either.
As I noted last week, the market doesn't look cheap right now: Based on data compiled by Professor Robert Shiller of Yale, at yesterday's closing value of 1,071.66, the S&P 500 is valued at over 19 times its cyclically adjusted earnings, compared to a long-term historical average of 16.3. Based on average inflation-adjusted earnings, the cyclically adjusted P/E ratio is one of the only consistently useful market valuation indicators.
As prices increase, so does your risk
All other things equal, as share prices rise, stocks will represent a larger percentage of your assets; however, logic dictates you should actually seek to ratchet down your equity exposure under those circumstances. As stock prices rise, expected future returns decline (again, all other factors remaining constant), making stocks relatively less attractive. Another way to express this is that as stock prices increase, so does the risk associated with owning stocks.
That risk may simply be earning sub-par returns or, in the worst case, suffering capital losses. Extremes in market valuations offer the best illustration of this principle: Owning a basket of Nasdaq stocks in March 2000: a high-risk or low-risk strategy? How about buying Japanese stocks in December 1989, with the Nikkei Index nearing 39,000 (nearly 20 years on, the same index trades at less than 10,500).
Don't misinterpret Buffett's words
So what are we to make of Berkshire Hathaway (BRK-B) CEO Warren Buffett's words when he told CNBC on July 24th: "I would much rather own equities at 9,000 on the Dow than have a long investment in government bonds or a continuously rolling investment in short-term money"? (Investors must have concluded the same thing, sending the Dow 8% higher since then.)
First, with just 30 component stocks, the Dow isn't a broad-market index; it's a blue-chip index. The stocks of high-quality companies have underperformed the broader market in the rally from the March market low, which has left them relatively undervalued. This is reflected in the Dow's 14 price-to-earnings multiple, against 17 for the wider S&P 500.
Buying pieces of businesses vs. owning the market
Second, keep in mind that Buffett likes to own pieces of high-quality businesses, not the whole market. As I mentioned above, there is reason to believe that there is still opportunity left in the higher-quality segment of the market. The following table contains six companies that trade with a free-cash-flow yield above 10% -- i.e., they're priced at less than 10 times trailing free cash flow (these are not investment recommendations):
Company Sector
Free-Cash-Flow Yield*
General Electric (NYSE: GE)
Conglomerates
47.3%
UnitedHealth Group (NYSE: UNH)
Health care
11.7%
Bristol-Myers Squibb (NYSE: BMY)
Health care
10.6%
Raytheon (NYSE: RTN)
Industrial goods
10.5%
Altria Group (NYSE: MO)
Consumer goods
11.5%
Time Warner (NYSE: TWX)
Services
25.9%
*Based on TTM free cash flow and closing stock prices on September 21, 2009.
Source: Capital IQ, a division of Standard & Poor's, Yahoo! Finance.
Summing up: What to do from here
To sum up:
If, like Buffett, you have identified high-quality businesses that are undervalued, there is nothing wrong with buying them now.
However, if you are mainly an index investor, it is probably ill-conceived to increase your exposure to stocks right now.
Either way, whether you are a stockpicker or an index investor, there is nothing wrong with holding on to some cash right now -- not for its own sake -- but to take advantage of better stock prices at a later date.
Morgan Housel has identified three high-quality companies that are still cheap.
http://www.fool.com/investing/value/2009/09/23/biggest-market-opportunity-cash-no-im-not-insane.aspx
Wednesday, 23 September 2009
How to analyse an annual report
Wednesday September 23, 2009
How to analyse an annual report
Personal Investing - By Ooi Kok Hwa
MANY of us receive a lot of annual reports every year.
Even though we are aware that there is a lot of important information in the reports, not many of us are willing to spend time going through those reports before buying stocks.
Besides, it is quite difficult for some investors, especially those who lack proper financial training, to analyse the financial information.
In this article, we will provide a quick guide on how to analyse an annual report.
Given that there are many ways to dissect an annual report, the following six pointers are just a quick check on the financial health of any listed companies.
Income statement is the financial statement that shows the effects of transactions completed over a specific accounting period.
In this statement, we have three key pointers: the current level of revenue; high growth in revenue; and the profits made in proportion to the level of revenue.
The current level of revenue indicates the size of a company. A company with revenue or sales of RM1bil is definitely bigger than one that has revenue of only RM100mil.
In Malaysia, companies with revenue of RM500mil and above should be considered as more established companies.
High growth in revenue implies that the company has been expanding over the past period.
Assuming the high growth in revenue will eventually translate into high growth in profits, we should invest in companies with higher growth in revenue because this may lead to higher stock prices.
If the overall economy is expanding, avoid those companies that are showing a decline in revenue.
This might imply that the overall operating activities of the companies are declining.
The profits made in proportion to the level of revenue indicates whether this company has high or low profit margins in its products. The profits here refer to the profit after tax or net income.
We should invest in high profit margin companies because high profit margins will provide a cushion to the sudden change in operating environment. A company with revenue of RM1bil and profits of RM10mil is more likely to face tougher challenges in a stiff price competition environment compared with a company with revenue of RM100mil and profits of RM10mil.
Balance sheet is the financial statement that shows a company’s assets, liabilities and owners’ equity at a point in time. The two main pointers in this statement are cash in hand and total borrowings.
Cash in hand refers to the cash or cash equivalent like fixed deposits. If possible, we should invest in companies with high cash in hand and zero borrowings. High cash in hand may imply that the company has high chances of rewarding shareholders with higher dividend payments.
Besides, companies with high cash in hand have more financial stability than companies with very tight level of cash. This explains why most investment gurus like to invest in cash-rich companies.
Total borrowings include the short- and long-term borrowings. Here, we should check whether the company has reported any sharp increase in borrowings during the financial periods. Most companies need to increase borrowings to support their capital expenditure on any business expansion.
However, if a company has been increasing its borrowings each year and the level has far exceeded one to two times the shareholders’ funds, unless its operating activities are able to support the repayments, the company faces very high financial risk.
Cash flow statement shows the sources and uses of cash over the period. One very important pointer in this statement is the operating cash flow.
High operating cash flow implies that the company is generating cash from its operating activities. A healthy company should show high operating cash flow because this number will indicate how much actual cash the company has generated from operations during the period.
We need to be careful of the companies that are showing profits but at the same time generating negative operating cash flows every year. This may imply that these companies have very high receivables. Any economic downturn may cause a sharp increase in provisions on bad debts.
Lastly, investors need to understand that the above six pointers are just a quick guide to analysing any annual report. Serious investors should not only analyse these six pointers. They are advised to scrutinise the reports further for more details.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/23/business/4762997&sec=business
How to analyse an annual report
Personal Investing - By Ooi Kok Hwa
MANY of us receive a lot of annual reports every year.
Even though we are aware that there is a lot of important information in the reports, not many of us are willing to spend time going through those reports before buying stocks.
Besides, it is quite difficult for some investors, especially those who lack proper financial training, to analyse the financial information.
In this article, we will provide a quick guide on how to analyse an annual report.
Given that there are many ways to dissect an annual report, the following six pointers are just a quick check on the financial health of any listed companies.
Income statement is the financial statement that shows the effects of transactions completed over a specific accounting period.
In this statement, we have three key pointers: the current level of revenue; high growth in revenue; and the profits made in proportion to the level of revenue.
The current level of revenue indicates the size of a company. A company with revenue or sales of RM1bil is definitely bigger than one that has revenue of only RM100mil.
In Malaysia, companies with revenue of RM500mil and above should be considered as more established companies.
High growth in revenue implies that the company has been expanding over the past period.
Assuming the high growth in revenue will eventually translate into high growth in profits, we should invest in companies with higher growth in revenue because this may lead to higher stock prices.
If the overall economy is expanding, avoid those companies that are showing a decline in revenue.
This might imply that the overall operating activities of the companies are declining.
The profits made in proportion to the level of revenue indicates whether this company has high or low profit margins in its products. The profits here refer to the profit after tax or net income.
We should invest in high profit margin companies because high profit margins will provide a cushion to the sudden change in operating environment. A company with revenue of RM1bil and profits of RM10mil is more likely to face tougher challenges in a stiff price competition environment compared with a company with revenue of RM100mil and profits of RM10mil.
Balance sheet is the financial statement that shows a company’s assets, liabilities and owners’ equity at a point in time. The two main pointers in this statement are cash in hand and total borrowings.
Cash in hand refers to the cash or cash equivalent like fixed deposits. If possible, we should invest in companies with high cash in hand and zero borrowings. High cash in hand may imply that the company has high chances of rewarding shareholders with higher dividend payments.
Besides, companies with high cash in hand have more financial stability than companies with very tight level of cash. This explains why most investment gurus like to invest in cash-rich companies.
Total borrowings include the short- and long-term borrowings. Here, we should check whether the company has reported any sharp increase in borrowings during the financial periods. Most companies need to increase borrowings to support their capital expenditure on any business expansion.
However, if a company has been increasing its borrowings each year and the level has far exceeded one to two times the shareholders’ funds, unless its operating activities are able to support the repayments, the company faces very high financial risk.
Cash flow statement shows the sources and uses of cash over the period. One very important pointer in this statement is the operating cash flow.
High operating cash flow implies that the company is generating cash from its operating activities. A healthy company should show high operating cash flow because this number will indicate how much actual cash the company has generated from operations during the period.
We need to be careful of the companies that are showing profits but at the same time generating negative operating cash flows every year. This may imply that these companies have very high receivables. Any economic downturn may cause a sharp increase in provisions on bad debts.
Lastly, investors need to understand that the above six pointers are just a quick guide to analysing any annual report. Serious investors should not only analyse these six pointers. They are advised to scrutinise the reports further for more details.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/23/business/4762997&sec=business
'Where are the Customers' Yachts?'
http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/6217619/Share-tips-yes-they-do-work.html
The analysis by GLG Partners, the hedge fund, suggested that recommendations from European brokers have done better than the funds over each of the past four years.
The idea that private investors armed only with simple share tips can beat most professional fund managers recalls the book Where are the Customers' Yachts? – the question asked by someone shown the lines of expensive stockbrokers' yachts in a marina, making the point that the City can seem better at making money for its own insiders than for its customers.
Whitbread GLG's research imagined a simple "long-only" fund management strategy – in other words, one that avoided trying to make money from falling shares – that followed all broker recommendations to buy particular stocks. Under the strategy, the shares are bought at the closing price on the day of the share tip and held for 65 trading days, when they are sold.
The annual returns from using this technique would be as much as 6.4 percentage points above the performance benchmarks used by fund managers, the researchers calculated. Each 65-day period would produce gains of between 0.8 and 1.69 percentage points above the benchmark, after payment of commissions, and this could be repeated four times a year.
Annual returns would therefore beat the benchmarks – which typically reflect the performance of the stock market – by between 2.8 and 6.4 percentage points.
"This is enough to place the strategy in the top quartile of UK mutual funds with a Europe-including-UK benchmark in all [of the past] four years," the researchers said. In other words, the strategy would beat at least three-quarters of British funds that invest in UK and European shares.
"This simple strategy involves implementing all recommendations over a fixed holding period for each idea [share tip]," the research added. "Obviously, there are numerous execution improvements that could be made. Our calculation of 2.8 to 6.4 percentage point gains over the benchmark is meant to be illustrative of the opportunities available for the simplest investment strategy."
The research also proposed an explanation for the fact that analysts tip more stocks as "buys" than as "sells". It pointed out that the intended "consumers" of share tips were fund managers, and they had a greater demand for buy recommendations. "The reason is simple. Most managers are long-only managers … so it makes sense that brokers would put less time into sell than buy recommendations."
There is also more to lose with an incorrect sell tip, GLG's research said. "The downside of being incorrect is greater with sell recommendations. A stock with a sell recommendation can go up by an unlimited amount – so there is unlimited potential error – while a stock with a buy recommendation can fall only by a limited amount, meaning limited potential error."
It concluded: "These factors suggest that at the very least an analyst should issue a new sell recommendation with more caution than a buy recommendation."
The analysis also cast doubt on the belief that tipsters tend to tip only shares that are already rising – "chasing momentum", in City jargon.
"In all four years, the average buy recommendation was either moving in line with the market or underperforming prior to the recommendation change. So there's relatively little evidence to suggest that analysts are 'momentum chasing' by putting buy recommendations on outperforming stocks."
The researchers' early data for 2009 suggests that this year has been an extreme one for analyst performance. "Buy recommendations have worked very well; sell recommendations very poorly." This is likely to reflect the fact that the stock market has recovered dramatically since its March low, so shares tipped as buys will have been helped by the trend in the market, while those tipped to fall may also have been dragged upwards.
Richard Hunter of Hargreaves Lansdown, the stockbroker that compiles share tips for The Daily Telegraph, said: "Investors' ability to access share research has never been greater. The proliferation of the internet, the market's movements being of wider interest to the public and an appetite from the press have meant that finding tips for larger companies is relatively straightforward."
But he advised private investors to be wary of some of the research they read. "It may have been written by an institutional broker and aimed at institutional clients. This in itself does not lessen the validity of the research, but generally an institution's attitude to risk and time frame may be vastly different to that of a private investor.
"For example, it is likely that the institutional investor will be measured by its success compared to a wider benchmark, such as the FTSE 100 or the FTSE All Share. As such, it needs to be nimble and will switch between stocks and sectors on a regular basis in an effort to outperform its peers. Furthermore, if it finds itself underperforming its targets, its attitude to risk may change as it chases higher returns."
Meanwhile, he added, the research will inevitably have been seen by its intended institutional audience, and then by the wider market, before it comes to the attention of the private investor. "Any change in market sentiment will, therefore, more than likely already have been reflected in an adjustment of the share price."
For the larger stocks, there will often be opposing views among analysts, he said. A selection of broker views on BP, for example, showed 19 rated the stock as a "strong buy" and five as a buy, while 12 recommended holding and three rated the share a "strong sell". The consensus in this case would be a buy – the opposite of three of the tips taken in isolation.
GLG's research did not say what investors might do in this situation, so investing your way to your own yacht might not be all plain sailing.
Pound slides again as markets enter Bank of England-fuelled 'bubble' stage
Pound slides again as markets enter Bank of England-fuelled 'bubble' stage
The pound slid closer to parity with the euro on Monday, as one of London's leading hedge fund managers warned stock markets are in a Government-fuelled bubble.
By Edmund Conway and Jamie Dunkley
Published: 6:26AM BST 22 Sep 2009
Pound slides closer to parity with euro as it hits a five-month low against the single currency. Photo: CHRISTOPHER PLEDGER "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management.
However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.
Mr Odey's comments came as the pound fell further against other leading currencies after a report from the Bank warned of the effect of the financial crisis on sterling's long-term value.
Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.
"At some point the QE will have to come to an end but, until it does, this bull market is sponsored by HMG and everyone should enjoy it."
FTSE breaks six-day winning streak
Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.
"In 2008 markets were driven by fear; this year they have been driven by greed.
"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."
Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any other, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation.
This has pushed the pound lower against most other currencies. The euro hit a five-month high against sterling yesterday before slipping back to 90.58p. Citigroup said yesterday that sterling would drop to parity against the euro in the coming months.
The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."
http://www.telegraph.co.uk/finance/economics/6216874/Pound-slides-again-as-markets-enter-Bank-of-England-fuelled-bubble-stage.html
The pound slid closer to parity with the euro on Monday, as one of London's leading hedge fund managers warned stock markets are in a Government-fuelled bubble.
By Edmund Conway and Jamie Dunkley
Published: 6:26AM BST 22 Sep 2009
Pound slides closer to parity with euro as it hits a five-month low against the single currency. Photo: CHRISTOPHER PLEDGER "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management.
However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.
Mr Odey's comments came as the pound fell further against other leading currencies after a report from the Bank warned of the effect of the financial crisis on sterling's long-term value.
Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.
"At some point the QE will have to come to an end but, until it does, this bull market is sponsored by HMG and everyone should enjoy it."
FTSE breaks six-day winning streak
Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.
"In 2008 markets were driven by fear; this year they have been driven by greed.
"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."
Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any other, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation.
This has pushed the pound lower against most other currencies. The euro hit a five-month high against sterling yesterday before slipping back to 90.58p. Citigroup said yesterday that sterling would drop to parity against the euro in the coming months.
The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."
http://www.telegraph.co.uk/finance/economics/6216874/Pound-slides-again-as-markets-enter-Bank-of-England-fuelled-bubble-stage.html
Markets 'in Government-fuelled bubble'.
Markets 'in Government-fuelled bubble', says hedge fund manager Crispin Odey
Stock markets are in a Government-fuelled bubble, one of London's leading hedge fund managers said, as the pound slid closer towards parity with the euro.
By Edmund Conway and Jamie Dunkley
Published: 7:43PM BST 21 Sep 2009
Katherine Garrett-Cox, chief executive of Alliance Trust, said the recent stock market rally has been driven by sentiment "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management. However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.
The warning came as the pound fell further against other leading currencies, and as Citigroup predicted that sterling would drop to parity against the euro.
Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.
"At some point the QE will have to come to an end, but until it does this bull market is sponsored by HMG and everyone should enjoy it."
Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.
"In 2008 markets were driven by fear; this year they have been driven by greed.
"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."
Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any others, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation. This has pushed the pound lower against most other currencies.
The euro is now worth 90.58p, with economists from Citigroup saying yesterday that sterling would drop to parity against the single currency in the coming months. The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."
http://www.telegraph.co.uk/finance/economics/6216138/Markets-in-Government-fuelled-bubble-says-hedge-fund-manager-Crispin-Odey.html
Stock markets are in a Government-fuelled bubble, one of London's leading hedge fund managers said, as the pound slid closer towards parity with the euro.
By Edmund Conway and Jamie Dunkley
Published: 7:43PM BST 21 Sep 2009
Katherine Garrett-Cox, chief executive of Alliance Trust, said the recent stock market rally has been driven by sentiment "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management. However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.
The warning came as the pound fell further against other leading currencies, and as Citigroup predicted that sterling would drop to parity against the euro.
Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.
"At some point the QE will have to come to an end, but until it does this bull market is sponsored by HMG and everyone should enjoy it."
Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.
"In 2008 markets were driven by fear; this year they have been driven by greed.
"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."
Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any others, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation. This has pushed the pound lower against most other currencies.
The euro is now worth 90.58p, with economists from Citigroup saying yesterday that sterling would drop to parity against the single currency in the coming months. The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."
http://www.telegraph.co.uk/finance/economics/6216138/Markets-in-Government-fuelled-bubble-says-hedge-fund-manager-Crispin-Odey.html
Rally at risk as long-term investors shun stocks
Rally at risk as long-term investors shun stocks
A glance at the shareholder register of Cadbury is revealing. It is no longer familiar UK names that control the company, but a motley assortment of US investment funds.
By Nicholas Paisner, Breakingviews.com
Published: 2:35PM BST 22 Sep 2009
This partly reflects the confectioner’s turbulent history, but it is also indicative of the changing shape of the European equity market.
A number of recent studies have shown that long-term institutional investors have cut equity allocations by as much as 40pc over the past two years. Many pension funds were net sellers of domestic equities even before the crisis, as they sought to diversify internationally and reduce risk. But by selling into the rally, and not reweighting portfolios in-line with market moves, the shift away from shares has been accelerated.
The crisis has given these investors more reason to be wary of stocks. Even on long-term time horizons, equity returns have not been attractive, with the UK’s FTSE-100 index now at the same level as in 1997. And after two bear markets in the past 10 years, individuals in defined-contribution pension schemes are understandably risk averse, prompting them to switch out of equities.
The flight of long-term money has left its mark. In spite of doubling or tripling, share prices in some sectors are still well-below their peaks. What’s more, liquidity in the mid- and small-cap stocks has plunged. This sharp decline in interest could well reflect risk-averse investors hastening their departure from these segments of the market. A large chunk of the investor base may simply have gone for good
The move by long-term investors into low-return safe havens of cash and government bonds is potentially bad news all round. For those who have not given up on equity, the exit of long-term money means that the current populace of shareholders are now a far less sticky lot. This hasn’t been a problem so far, as money has been flowing into the market on a net basis. But it could exacerbate future market wobbles.
Long-term investors could also suffer from their caution. Government bond yields are still at historical lows, albeit up from crisis troughs. The resurgent gold price suggests that the market is once again starting to fret about inflation. If rising prices do begin to take hold, bond yields could yet soar. Investors in risk-free assets may quickly start to wish they had been a little more adventurous.
http://www.telegraph.co.uk/finance/breakingviewscom/6218807/Rally-at-risk-as-long-term-investors-shun-stocks.html
A glance at the shareholder register of Cadbury is revealing. It is no longer familiar UK names that control the company, but a motley assortment of US investment funds.
By Nicholas Paisner, Breakingviews.com
Published: 2:35PM BST 22 Sep 2009
This partly reflects the confectioner’s turbulent history, but it is also indicative of the changing shape of the European equity market.
A number of recent studies have shown that long-term institutional investors have cut equity allocations by as much as 40pc over the past two years. Many pension funds were net sellers of domestic equities even before the crisis, as they sought to diversify internationally and reduce risk. But by selling into the rally, and not reweighting portfolios in-line with market moves, the shift away from shares has been accelerated.
The crisis has given these investors more reason to be wary of stocks. Even on long-term time horizons, equity returns have not been attractive, with the UK’s FTSE-100 index now at the same level as in 1997. And after two bear markets in the past 10 years, individuals in defined-contribution pension schemes are understandably risk averse, prompting them to switch out of equities.
The flight of long-term money has left its mark. In spite of doubling or tripling, share prices in some sectors are still well-below their peaks. What’s more, liquidity in the mid- and small-cap stocks has plunged. This sharp decline in interest could well reflect risk-averse investors hastening their departure from these segments of the market. A large chunk of the investor base may simply have gone for good
The move by long-term investors into low-return safe havens of cash and government bonds is potentially bad news all round. For those who have not given up on equity, the exit of long-term money means that the current populace of shareholders are now a far less sticky lot. This hasn’t been a problem so far, as money has been flowing into the market on a net basis. But it could exacerbate future market wobbles.
Long-term investors could also suffer from their caution. Government bond yields are still at historical lows, albeit up from crisis troughs. The resurgent gold price suggests that the market is once again starting to fret about inflation. If rising prices do begin to take hold, bond yields could yet soar. Investors in risk-free assets may quickly start to wish they had been a little more adventurous.
http://www.telegraph.co.uk/finance/breakingviewscom/6218807/Rally-at-risk-as-long-term-investors-shun-stocks.html
Private equity may be on cusp of ‘golden age’
Private equity may be on cusp of ‘golden age’
NEW YORK, Sept 23 — The near collapse of the global financial system, which wiped out trillions in corporate value and personal savings, may be giving way to a new “golden age” for private equity investment, Silver Lake Co-CEO Glenn Hutchins said in an interview today.
Private equity firms suffered badly when debt markets seized up as a result of the crisis and banks did not want to lend increasingly scarce capital. Only just recently have credit markets started to unfreeze.
“The financial markets may be on the cusp of a new ‘golden age’ for private equity,” Hutchins, who is also a co-founder of the firm, told Reuters on the sidelines of the International Economic Alliance Symposium.
Hutchins, the co-founder of the US$13 billion private investment firm, cautioned that while there has been a significant stock market rally, the economy is showing stable, though not robust, growth.
“This recent stock market rally is a little troubling because it seems to me not to be supported by underlying economic fundamentals,” Hutchins said.
“But that aside, we have gotten down to levels that are pretty attractive and the banks seem to be recovering enough to provide modest levels of financing, which is all we need. We feel pretty optimistic,” he added.
The major concern, he said, is how long will investors have to be prepared to withstand low levels of economic activity.
‘ATTRACTIVE’ RISK PREMIUMS
But for the moment, Hutchins said, investors are once again finding risk premiums at attractive levels versus the low premiums before the asset bubble burst in December 2008.
“Now that the sort of panic of ‘08 is over and capital markets seem to be returning to some degree of normality ... companies will be able to access debt and equity markets like they have in the past. And that is no surprise,” Hutchins said.
But he added that investors needed to be mindful that valuations in 2007 should not be defined as normal. They were an “overshoot in another way,” he said.
The average investment grade corporate bond now yields 232 basis points over US Treasuries, down from the all-time high of 656 basis points on Dec. 5, 2008. By comparison, in May 2007, before the credit crisis started, spreads narrowed to 92 basis points, according to the Merrill Lynch indexes.
“Now risk premiums are at attractive levels. Investors are being paid to take risk again. That means when you look back on this, when you get back to economic recovery, this will have been a good time to invest,” Hutchins said.
Silver Lake makes only a few acquisitions a year and is more inclined to use financing for working capital rather than purchases, Hutchins said.
“If you need financial engineering to enter a deal and multiple expansion to exit a deal, then your business is fundamentally challenged,” Hutchins said.
The firm, along with other investors, agreed to a deal earlier this month to pay US$1.9 billion to buy a 65 per cent stake in online telephony unit Skype from Internet auction and services company eBay Inc.
Ebay agreed to sell the stake in Skype for US$1.9 billion to a consortium including Netscape founder Marc Andreessen’s Andreessen Horowitz, venture firm Index Ventures, Silver Lake, and the Canada Pension Plan Investment Board.
Asked what he thought about the Skype sale and lawsuits filed by Skype’s founders, Hutchins responded: “No comment.” — Reuters
NEW YORK, Sept 23 — The near collapse of the global financial system, which wiped out trillions in corporate value and personal savings, may be giving way to a new “golden age” for private equity investment, Silver Lake Co-CEO Glenn Hutchins said in an interview today.
Private equity firms suffered badly when debt markets seized up as a result of the crisis and banks did not want to lend increasingly scarce capital. Only just recently have credit markets started to unfreeze.
“The financial markets may be on the cusp of a new ‘golden age’ for private equity,” Hutchins, who is also a co-founder of the firm, told Reuters on the sidelines of the International Economic Alliance Symposium.
Hutchins, the co-founder of the US$13 billion private investment firm, cautioned that while there has been a significant stock market rally, the economy is showing stable, though not robust, growth.
“This recent stock market rally is a little troubling because it seems to me not to be supported by underlying economic fundamentals,” Hutchins said.
“But that aside, we have gotten down to levels that are pretty attractive and the banks seem to be recovering enough to provide modest levels of financing, which is all we need. We feel pretty optimistic,” he added.
The major concern, he said, is how long will investors have to be prepared to withstand low levels of economic activity.
‘ATTRACTIVE’ RISK PREMIUMS
But for the moment, Hutchins said, investors are once again finding risk premiums at attractive levels versus the low premiums before the asset bubble burst in December 2008.
“Now that the sort of panic of ‘08 is over and capital markets seem to be returning to some degree of normality ... companies will be able to access debt and equity markets like they have in the past. And that is no surprise,” Hutchins said.
But he added that investors needed to be mindful that valuations in 2007 should not be defined as normal. They were an “overshoot in another way,” he said.
The average investment grade corporate bond now yields 232 basis points over US Treasuries, down from the all-time high of 656 basis points on Dec. 5, 2008. By comparison, in May 2007, before the credit crisis started, spreads narrowed to 92 basis points, according to the Merrill Lynch indexes.
“Now risk premiums are at attractive levels. Investors are being paid to take risk again. That means when you look back on this, when you get back to economic recovery, this will have been a good time to invest,” Hutchins said.
Silver Lake makes only a few acquisitions a year and is more inclined to use financing for working capital rather than purchases, Hutchins said.
“If you need financial engineering to enter a deal and multiple expansion to exit a deal, then your business is fundamentally challenged,” Hutchins said.
The firm, along with other investors, agreed to a deal earlier this month to pay US$1.9 billion to buy a 65 per cent stake in online telephony unit Skype from Internet auction and services company eBay Inc.
Ebay agreed to sell the stake in Skype for US$1.9 billion to a consortium including Netscape founder Marc Andreessen’s Andreessen Horowitz, venture firm Index Ventures, Silver Lake, and the Canada Pension Plan Investment Board.
Asked what he thought about the Skype sale and lawsuits filed by Skype’s founders, Hutchins responded: “No comment.” — Reuters
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