EBITDA: Challenging The Calculation

by Lisa Smith (Contact Author | Biography) 

EBITDA has a bad rap in the financial world, but does this financial measure really deserve the investor distaste? EBITDA, an acronym for "earnings before interest, taxes, depreciation and amortization," is an often-used measure of the value of a business. But critics of this value often point out that it is a dangerous and misleading number, due to the fact that it is often confused with cash flow. In this article we'll show you how this number can actually help investors create an apples-to-apples comparison, without leaving a bitter aftertaste.

The Calculation

EBITDA is calculated by taking operating income and adding depreciation and amortization expenses back to it. EBITDA is used to analyze a company's operating profitability before non-operating expenses (such as interest and "other" non-core expenses) and non-cash charges (depreciation and amortization). So, why is this simple figure continually reviled in the financial industry?
The Critics

Factoring out interest, taxes, depreciation and amortization can make even completely unprofitable firms appear to be fiscally healthy. A look back at the dotcoms provides countless examples of firms that had no hope, no future and certainly no earnings, but became the darlings of the investment world. The use of EBITDA as measure of financial health made these firms look attractive.
Likewise, EBITDA numbers are easy to manipulate. If fraudulent accounting techniques are used to inflate revenues and interest, taxes, depreciation and amortization are factored out of the equation, almost any company will look great. Of course, when the truth comes out about the sales figures, the house of cards will tumble and investors will be in trouble.
Operating cash flow is a better measure of how much cash a company is generating because it adds non-cash charges (depreciation and amortization) back to net income and includes the changes in working capital that also use or provide cash (such as changes in receivables, payables and inventories). These working capital factors are the key to determining how much cash a company is generating. If investors do not include changes in working capital in their analysis and rely solely on EBITDA, they will miss clues that indicate whether a company is losing money because it isn't making any sales. (To learn more about cash flow, see The Essentials Of Cash Flow and Analyze Cash Flow The Easy Way.)

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The Cheerleaders

Despite the critics, there are many who favor this handy equation. Several facts are lost in all the complaining about EBITDA, but they are open promoted by the value's cheerleaders.

1. The first factor to consider is that EBITDA can be used as a shortcut to estimate the cash flow available to pay debt on long-term assets, such as equipment and other items with a lifespan measured in decades rather than years. Dividing EBITDA by the amount of required debt payments yields a debt coverage ratio. Factoring out the "ITDA" of EBITDA was designed to account for the cost of the long-term assets and provide a look at the profits that would be left after the cost of these tools was taken into consideration. This is the pre-1980s use of EBIDTA, and is a perfectly legitimate calculation.
   
2. Another factor that is often overlooked is that for an EBITDA estimate to be reasonably accurate, the company under evaluation must have legitimate profitability. Using EBITDA to evaluate old-line industrial firms is likely to produce useful results. This idea was lost during the 1980s, when leveraged buyouts were fashionable, and EBITDA began to be used as a proxy for cash flow. This evolved into the more recent practice of using EBITDA to evaluate unprofitable dotcoms as well as firms such as telecoms, where technology upgrades are a constant expense.
   
3. EBITDA can also be used to compare companies against each other and against industry averages.
   
4. In addition, EBITDA is a good measure of core profit trends because it eliminates some of the extraneous factors and allows a more "apples-to-apples" comparison.

Ultimately, EBITDA should not replace the measure of cash flow, which includes the significant factor of changes in working capital. Remember "cash is king" because it shows "true" profitability and a company's ability to continue operations.

Example - EBITDA Analysis The experience of the W.T. Grant Company provides a good illustration of the importance of cash generation over EBITDA. Grant was a general retailer in the time before commercial malls and was a blue chip stock of its day. Unfortunately, management made several mistakes. Inventory levels increased, and the company needed to borrow heavily to keep its doors open. Because of the heavy debt load, Grant eventually went out of business, and the top analysts of the day that focused only on EBITDA missed the negative cash flows. Many of the missed calls of the end of the dotcom era mirror the recommendations Wall Street once made for Grant. In this case, the old cliché is right: history does tend repeat itself. Investors should heed this warning.

The Caution

In both cases No.1 and No.2 listed above, EBITDA is likely to produce misleading results. Debt on long-term assets is easy to predict and plan for, while short-term debt is not. Lack of profitability isn't a good sign of business health regardless of EBITDA. In these cases, rather than using EBITDA to determine a company's health and put a valuation on the firm, it should be used to determine how long the firm can continue to service its debt without additional financing.
A good analyst understands these facts and uses the calculations accordingly in addition to his or her other proprietary and individual estimates.

The Conclusion

EBITDA doesn't exist in a vacuum. The measure's bad reputation is more a result of overexposure and improper use than anything else. Just as a shovel is effective for digging holes, but wouldn't be the best tool for tightening screws or inflating tires, so EBITDA shouldn't be used as a one-size-fits-all, stand-alone tool for evaluating corporate profitability. This is a particularly valid point when one considers that EBITDA calculations do not conform to generally accepted accounting principles (GAAPs).
Like any other measure, EBITDA is only a single indicator. To develop a full picture of the health of any given firm, a multitude of measures must be taken into consideration. If identifying great companies was as simple a checking a single number, everybody would be checking that number and professional analysts would cease to exist. (For more insight on EBITDA, read A Clear Look At EBITDA.)


by Lisa Smith (Contact Author | Biography)

Filed Under: Bonds, Fundamental Analysis, Options

 

 http://www.investopedia.com/articles/analyst/020602.asp

Value investing is, on average, successful in the long run.

Value investing

From Wikipedia, the free encyclopedia

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Value investing is an investment paradigm that derives from the ideas on investment and speculation that Ben Graham & David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis. Although value investing has taken many forms since its inception, it generally involves buying securities whose shares appear underpriced by some form(s) of fundamental analysis.^[1] As examples, such securities may be stock in public companies that trade at discounts to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.

High-profile proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value.^[2] The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions.

However, the future distributions and the appropriate discount rate can only be assumptions. For the last 25 years, Warren Buffett has taken the value investing concept even further with a focus on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price.

Contents 1 History 1.1 Benjamin Graham 1.2 Further evolution 2 Value investing performance 2.1 Performance, value strategies 2.2 Performance, value investors 3 Well-known value investors 4 Criticism 5 Value investing books and resources 6 See also 7 Value Investors at Wikiquote 8 References

History

Benjamin Graham

Benjamin Graham

Value investing was established by Benjamin Graham and David Dodd, both professors at Columbia Business School and teachers of many famous investors. In Graham's book The Intelligent Investor, he advocated the important concept of margin of safety — first introduced in Security Analysis, a 1934 book he co-authored with David Dodd — which calls for a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard to adverse future developments often encountered in the stock market.

 

Further evolution

However, the concept of value (as well as "book value") has evolved significantly since the 1970s. Book value is most useful in industries where most assets are tangible. Intangible assets such as patents, software, brands, or goodwill are difficult to quantify, and may not survive the break-up of a company. When an industry is going through fast technological advancements, the value of its assets is not easily estimated. Sometimes, the production power of an asset can be significantly reduced due to competitive disruptive innovation and therefore its value can suffer permanent impairment. One good example of decreasing asset value is a personal computer. An example of where book value does not mean much is the service and retail sectors. One modern model of calculating value is the discounted cash flow model (DCF). The value of an asset is the sum of its future cash flows, discounted back to the present.

 

Value investing performance

Performance, value strategies

Value investing has proven to be a successful investment strategy. There are several ways to evaluate its success. One way is to examine the performance of simple value strategies, such as buying low PE ratio stocks, low price-to-cash-flow ratio stocks, or low price-to-book ratio stocks. Numerous academics have published studies investigating the effects of buying value stocks. These studies have consistently found that value stocks outperform growth stocks and the market as a whole.^[3][4][5]

Performance, value investors

Another way to examine the performance of value investing strategies is to examine the investing performance of well-known value investors. Simply examining the performance of the best known value investors would not be instructive, because investors do not become well known unless they are successful. This introduces a selection bias. A better way to investigate the performance of a group of value investors was suggested by Warren Buffett, in his May 17, 1984 speech that was published as The Superinvestors of Graham-and-Doddsville. In this speech, Buffett examined the performance of those investors who worked at Graham-Newman Corporation and were thus most influenced by Benjamin Graham. Buffett's conclusion is identical to that of the academic research on simple value investing strategies--value investing is, on average, successful in the long run.

During about a 25-year period (1965-90), published research and articles in leading journals of the value ilk were few. Warren Buffett once commented, "You couldn't advance in a finance department in this country unless you taught that the world was flat."^[6]

 

Well-known value investors

Benjamin Graham is regarded by many to be the father of value investing. Along with David Dodd, he wrote Security Analysis, first published in 1934. The most lasting contribution of this book to the field of security analysis was to emphasize the quantifiable aspects of security analysis (such as the evaluations of earnings and book value) while minimizing the importance of more qualitative factors such as the quality of a company's management. Graham later wrote The Intelligent Investor, a book that brought value investing to individual investors. Aside from Buffett, many of Graham's other students, such as William J. Ruane, Irving Kahn and Charles Brandes have gone on to become successful investors in their own right.

Graham's most famous student, however, is Warren Buffett, who ran successful investing partnerships before closing them in 1969 to focus on running Berkshire Hathaway. Charlie Munger joined Buffett at Berkshire Hathaway in the 1970s and has since worked as Vice Chairman of the company. Buffett has credited Munger with encouraging him to focus on long-term sustainable growth rather than on simply the valuation of current cash flows or assets.^[7] Columbia Business School has played a significant role in shaping the principles of the Value Investor, with professors and students making their mark on history and on each other. Ben Graham’s book, The Intelligent Investor, was Warren Buffett’s bible and he referred to it as "the greatest book on investing ever written.” A young Warren Buffett studied under Prof. Ben Graham, took his course and worked for his small investment firm, Graham Newman, from 1954 to 1956. Twenty years after Ben Graham, Prof. Roger Murray arrived and taught value investing to a young student named Mario Gabelli. About a decade or so later, Prof. Bruce Greenwald arrived and produced his own protégés, including Mr. Paul Sonkin—just as Ben Graham had Mr. Buffett as a protégé, and Roger Murray had Mr. Gabelli.

Mutual Series has a well known reputation of producing top value managers and analysts in this modern era. This tradition stems from two individuals: the late great value mind Max Heine, founder of the well regarded value investment firm Mutual Shares fund in 1949 and his protégé legendary value investor Michael F. Price. Mutual Series was sold to Franklin Templeton in 1996. The disciples of Heine and Price quietly practice value investing at some of the most successful investment firms in the country.

Seth Klarman is a Mutual Series alum and the founder and president of The Baupost Group, a Boston-based private investment partnership, authored Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which since has become a value investing classic. Now out of print, Margin of Safety has sold on Amazon for $1,200 and eBay for $2,000.^[8] Another famous value investor is John Templeton. He first achieved investing success by buying shares of a number of companies in the aftermath of the stock market crash of 1929.

Martin J. Whitman is another well-regarded value investor. His approach is called safe-and-cheap, which was hitherto referred to as financial-integrity approach. Martin Whitman focuses on acquiring common shares of companies with extremely strong financial position at a price reflecting meaningful discount to the estimated NAV of the company concerned. Martin Whitman believes it is ill-advised for investors to pay much attention to the trend of macro-factors (like employment, movement of interest rate, GDP, etc.) because they are not as important and attempts to predict their movement are almost always futile. Martin Whitman's letters to shareholders of his Third Avenue Value Fund (TAVF) are considered valuable resources "for investors to pirate good ideas" by another famous investor Joel Greenblatt in his book on special-situation investment You Can Be a Stock Market Genius (ISBN 0-684-84007-3, pp 247).

Joel Greenblatt achieved annual returns at the hedge fund Gotham Capital of over 50% per year for 10 years from 1985 to 1995 before closing the fund and returning his investors' money. He is known for investing in special situations such as spin-offs, mergers, and divestitures.

Charles de Vaulx and Jean-Marie Eveillard are well known global value managers. For a time, these two were paired up at the First Eagle Funds, compiling an enviable track record of risk-adjusted outperformance. For example, Morningstar designated them the 2001 "International Stock Manager of the Year" and de Vaulx earned second place from Morningstar for 2006. Eveillard is known for his Bloomberg appearances where he insists that securities investors never use margin or leverage. The point made is that margin should be considered the anathema of value investing, since a negative price move could prematurely force a sale. In contrast, a value investor must be able and willing to be patient for the rest of the market to recognize and correct whatever pricing issue created the momentary value. Eveillard correctly labels the use of margin or leverage as speculation, the opposite of value investing.

Christopher H. Browne of Tweedy, Browne was well known for value investing. According to the Wall Street Journal, Tweedy, Browne was the favorite brokerage firm of Benjamin Graham during his lifetime; also, the Tweedy, Browne Value Fund and Global Value Fund have both beat market averages since their inception in 1993.[2] In 2006, Christopher H. Browne wrote The Little Book of Value Investing in order to teach ordinary investors how to value invest.[3]

 

Criticism

An issue with buying shares in a bear market is that despite appearing undervalued at one time, prices can still drop along with the market.^[9] Conversely, an issue with not buying shares in a bull market is that despite appearing overvalued at one time, prices can still rise along with the market.

Another issue is the method of calculating the "intrinsic value". Two investors can analyze the same information and reach different conclusions regarding the intrinsic value of the company. There is no systematic or standard way to value a stock.^[10]

 

Value investing books and resources

• Security Analysis, editions 1934,^[11] 1940^[12], 1951^[13] and 1962^[14] and 1988 ^[15] and 2008 ^[16] ISBN 978-0-07-159253-6
• "Value Investing Made Easy," Janet Lowe, McGraw-Hill. ISBN 978-0070388642
• The Theory of Investment Value (1938), by John Burr Williams. ISBN 0-87034-126-X
• The Intelligent Investor (1949), by Benjamin Graham. ISBN 0-06-055566-1
• You Can Be a Stock Market Genius (1997), by Joel Greenblatt. ISBN 0-684-84007-3.
• Contrarian Investment Strategies: The Next Generation (1998), by David Dreman. ISBN 0-684-81350-5.
• The Essays of Warren Buffett (2001), edited by Lawrence A. Cunningham. ISBN 0-9664461-1-9.
• The Little Book That Beats the Market (2006), by Joel Greenblatt. ISBN 0-471-73306-7.
• The Little Book of Value Investing (2006), by Chris Browne. ISBN 0-470-05589-8.
• Value Investor Insight (www.valueinvestorinsight.com)
• "The Rediscovered Benjamin Graham - selected writings of the wall street legend," by Janet Lowe. John Wiley & Sons
• "Benjamin Graham on Value Investing," Janet Lowe, Dearborn

 

See also

Contrarian investing Index investing Growth investing Quality investing Socially responsible investing Ethical investing Appreciation Capital accumulation Financial economics Magic Formula Investing

Investment management Investor profile Investor relations Momentum investing Return on investment Saving Speculation Stock investor Value (economics) Value averaging Chepakovich valuation model

 

Value Investors at Wikiquote

• Warren Buffett
• Benjamin Graham
• Joel Greenblatt

 

References

1. ^ Graham, Benjamin (1934). Security Analysis New York: McGraw Hill Book Co., 4. ISBN 0-07-144820-9.
2. ^ Graham (1949). The Intelligent Investor New York: Collins, Ch.20. ISBN 0-06-055566-1.
3. ^ The Cross-Section of Expected Stock Returns, by Fama & French, 1992, Journal of Finance
4. ^ Firm Size, Book-to-Market Ratio, and Security Returns: A Holdout Sample of Financial Firms, by Lyon & Barber, 1997, Journal of Finance
5. ^ Overreaction, Underreaction, and the Low-P/E Effect, by Dreman & Berry, 1995, Financial Analysts Journal
6. ^ Joseph Nocera, The Heresy That Made Them Rich, The New York Times, October 29, 2005
7. ^ Warren Buffett's 1989 letter to Berkshire Hathaway shareholders
8. ^ The $700 Used Book. (2006, Aug. 7). BusinessWeek, Personal Finance section. Accessed 11-11-2008.
9. ^ When Value Investing Doesn't Work
10. ^ [1]
11. ^ Graham and Dodd. 1934. Security Analysis: Principles and Technique, 1E. New York and London: McGraw-Hill Book Company, Inc.
12. ^ Graham and Dodd. 1940. Security Analysis: Principles and Technique, 2E. New York and London: McGraw-Hill Book Company, Inc.
13. ^ Graham et al. 1951. Security Analysis: Principles and Technique, 3E. New York: McGraw Hill Book Company, Inc.
14. ^ Graham et al. 1962. Security Analysis: Principles and Technique, 4E. New York: McGraw-Hill Book Company, Inc.
15. ^ Graham and Dodd. 1988. Security Analysis: Principles and Technique, 5E. McGraw-Hill Professional
16. ^ Graham and Dodd. 2008. Security Analysis: Principles and Technique, 6E. McGraw-Hill Professional

http://en.wikipedia.org/wiki/Value_investing

Profit (accounting)

In accounting, profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses.

1 Definition 2 See also 3 Notes 4 References 5 External links

Definition

There are several important profit measures in common use which will be explained in the following. Note that the words earnings, profit and income are used as substitutes in some of these terms (also depending on US vs. UK usage), thus inflating the number of profit measures.

Gross profit equals sales revenue less Cost of Goods Sold (COGS), thus removing only the part of expenses that can be traced directly to the production of the goods. Gross profit still includes general (overhead) expenses like R&D, S&M, G&A, also interest expense, taxes and extraordinary items.

Operating profit equals gross profit less all operating expenses. This is the surplus generated by operations. It is also known as Earnings Before Interest and Taxes EBIT, Operating Profit Before Interest and Taxes OPBIT or simply Profit Before Interest and Taxes PBIT.

(Net) Profit Before Tax PBT equals operating profit less interest expense (but before taxes). It is also known as Earnings Before Tax EBT, Net operating income before taxes or simply Pretax Income.

Net profit equals Profit After Tax (unless some distinction about the treatment of extraordinary expenses is made). In the US the term Net Income is commonly used. Income before extraordinary expenses represents the same but before adjusting for extroardinary items.

Net income less dividends becomes retained earnings.

There are several additional important profit measures, notably EBITDA and NOPAT.

To accountants, economic profit, or EP, is a single-period metric to determine the value created by a company in one period - usually a year. It is the net profit after tax less the equity charge, a risk-weighted cost of capital. This is almost identical to the economist's definition of economic profit.

There are commentators who see benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart & Co. which has trade-marked their adjusted economic profit as EVA or Economic Value Added.

Some economists define further types of profit:

• Abnormal profit (or supernormal profit)
• Subnormal profit
• monopoly profit (super profit)

Optimum Profit - This is the "right amount" of profit a business can achieve. In business, this figure takes account of marketing strategy, market position, and other methods of increasing returns above the competitive rate.

Accounting profits should include economic profits, which are also called economic rents. For instance, a monopoly can have very high economic profits, and those profits might include a rent on some natural resource that firm owns, where that resource cannot be easily duplicated by other firms.

http://en.wikipedia.org/wiki/Operating_profit

Earnings before interest and taxes (EBIT)

In accounting and finance, earnings before interest and taxes (EBIT) or operating income is a measure of a firm's profitability that excludes interest and income tax expenses.


EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income

Operating Income = Operating Revenue – Operating Expenses

Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit. This is true if the firm has no non-operating income.

A professional investor contemplating a change to the capital structure of a firm (e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by Earnings Before Interest, Taxes, Depreciation and Amortization EBITDA and EBIT), and then determines the optimal use of debt vs. equity.

To calculate EBIT, expenses (e.g., the cost of goods sold, selling and administrative expenses) are subtracted from revenues.^[3] Profit is later obtained by subtracting interest and taxes from the result.

Statement of Income — Example (figures in millions)
Operating Revenue
Sales Revenue	$20,438
Operating Expenses
Cost of goods sold	$7,943
Selling, general and administrative expenses	$8,172
Depreciation and amortization	$960
Other expenses	$138
Total operating expenses	$17,213
Operating income	$3,225
Non-operating income	$130
Earnings before Interest and Taxes (EBIT)	$3,355
Net interest expense/income	$145
Earnings before income taxes	$3,210
Income taxes	$1,027
Net Income	$2,183

(Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)

http://en.wikipedia.org/wiki/Earnings_before_interest_and_taxes

Earnings before interest, taxes, depreciation and amortization (EBITDA)

EBITDA «ee-bit-dah» is the initialism for earnings before interest, taxes, depreciation, and amortization. It is a non-GAAP metric that is measured exactly as stated. All interest, tax, depreciation and amortization entries in the income statement are reversed out from the bottom-line net income. It purports to measure cash earnings without accrual accounting, canceling tax-jurisdiction effects, and canceling the effects of different capital structures.

EBITDA differs from the operating cash flow in a cash flow statement primarily by excluding payments for taxes or interest as well as changes in working capital. EBITDA also differs from free cash flow because it excludes cash requirements for replacing capital assets (capex).

EBITDA Margin refers to EBITDA divided by total revenue. EBITDA margin measures the extent to which cash operating expenses use up revenue.

Contents
* 1 Use by private equity investors
* 2 Use by debtholders
* 3 Use by shareholders
* 4 Unprofitable businesses

Use by private equity investors

In the process of purchase, long-life assets will be revalued to market values. Their depreciation and amortization will necessarily be changed. Control of the business allows the purchaser to move it to a new tax jurisdiction and to refinance its debt.

Use by debtholders

EBITDA is widely used in loan covenants. The theory is that it measures the cash earnings that can be used to pay interest and repay the principal. Since interest is paid before income tax is calculated, the debtholder can ignore taxes. They are not interested in whether the business can replace its assets when they wear out,therefore can ignore capital amortization and depreciation.

There are two EBITDA metrics used.

1. The measure of a debt's pay-back period is Debt/EBITDA. The longer the payback period, the greater the risk. The metric presumes that the business has stopped making interest payments (because interest is added back). But it is argued that once that happens the debtholder is unlikely to wait around (say) three years to recover their principal while the business continues to operate in default. So does the metric measure anything? There is also the problem of adding back taxes. This metric ignores all tax expenses even though a good portion are cash payments, and the government gets paid first. Principal repayments are not tax-deductible.

2. One interest coverage ratio (EBITDA /Interest Expense) is used to determine a firm's ability to pay interest on outstanding debt. The greater the multiple of cash available for interest payments, the less risk to the lender. The greater the year-to-year variance in EBITDA, the greater the risk. Because interest is tax-deductible it is appropriate to back out the tax effects of the interest, but this metric ignores all taxes.

The ratios can be customized by reducing Debt by any cash on the balance sheet or by deducting maintenance CapEx from EBITDA to form a measure closer to free cash flow.

Use by shareholders

Public investors' use of EBITDA arose from their perception that accountants' measure of profits, using accrual accounting was manipulated, that a measure of cash earnings would be more reliable.

It is true that PE can use this metric. And it is true the professional analysts using detailed discounted cash flow models should replace non-cash expenses with projected time-weighted payments. But none of that applies to retail investors' reality.

EBITDA does NOT measure cash earnings because it omits all the tax expenses even though a good portion are cash payments. It also fails to correct for other non-cash expenses, e.g. warranty expense, bad debt allowance, inventory write-down, stock options granted.

It does not include the cash flows from changes in working capital. Suppose a business sells all its opening inventory in a year and replaces the same number of units but at a higher price because of inflation. The profits of a company using FIFO inventory valuation will not include that extra cash cost. Suppose the business is expanding and need to stock a larger number of units. That additional cash cost is not in anyone's EBITDA measure.

When using this metric to replace accountant's earnings it presumes to measure an economic profit. But any economic profit must include the cost of capital and the degradation of long-life assets. This metric simply ignores both. Warren Buffett famously asked, "Does management think the tooth fairy pays for capital expenditures?" Depreciation may not be exact but it is the most practical method available. It succeeds in equating the positions of companies using three different ways to finance long-life assets. It can be interpreted as:

1. the allocation of the original cost, at a later date, when the asset was used to generate revenue. The time-value-of-money (same argument used above) means that depreciation may understate the cost.
2. the amount of cash required to be retained in order to finance the eventual replacement asset. Since inflation is the basis for time-value-of-money, the amounts set aside today must be invested and grow in value in order to pay the inflated price in the future.
3. the decrease in value of the balance sheet asset since the last reporting period. Assets wear out with use, and will eventually have to be replaced.

Unprofitable businesses

When comparing businesses with non profits, their potential to make profit is more important than their Net Loss. Since taxes on losses will be misleading in this context, taxes can be ignored. Capital expenditures and their related debt result in fixed costs. These are of less importance than the variable costs that can be expected to grow with increasing sales volume, in order to cover the fixed costs. So depreciation and interest costs are of less importance. It is likely that an unprofitable business is burning cash (has a negative cash flow), so investors are most concerned with "how long the cash will last before the business must get more financing" (resulting in debt or equity dilution).

EBITDA is not used as a valuation metric in these circumstances. It is a starting point on which future growth is applied and future profitability discounted back to the present. Equity owners only benefit from net profits, after all the expenses are paid.

During the dot com bubble companies promoted their stock by emphasising either EBITDA or pro forma earnings in their financial reports, and explaining away the (often poor) "income" number. This would involve ignoring one-time write-offs, asset impairments and other costs deemed to be non-recurring. Because EBITDA (and its variations) are not measures generally accepted under U.S. GAAP, the U.S. Securities and Exchange Commission requires that companies registering securities with it (and when filing its periodic reports) reconcile EBITDA to net income in order to avoid misleading investors.

http://en.wikipedia.org/wiki/Earnings_before_interest,_taxes,_depreciation_and_amortization


EV/EBITDA
From Wikipedia, the free encyclopedia

EV/EBITDA is a valuation multiple that is often used in parallel with, or as an alternative to, the P/E ratio.

An advantage of this multiple is that it is capital structure-neutral. Therefore, this multiple can be used for direct cross-companies application.

Often, an industry average EV/EBITDA multiple is calculated on a sample of listed companies to benchmark against. An index now exists providing an average EV/EBITDA multiple on a wide sample of transactions on private companies in the Eurozone (Argos Soditic index).

The reciprocate multiple EBITDA/EV is used as a cash return on investment.

http://en.wikipedia.org/wiki/EV/EBITDA

Is QL Resources in for more M&As?

Monday August 30, 2010

Is QL Resources in for more M&As?

By LEE KIAN SEONG
lks@thestar.com.my

Market is concerned about firm’s financial capability, the prospects of its local and regional expansion

QL Resources Bhd, which announced its merger and acquisition (M&A) exercise last Monday, has been in the spotlight as there is wide speculation going around that the company might be pursuing more M&As going forward.

QL managing director Chia Song Kun said last Tuesday that the company would look into more M&As if there was something in the market that could benefit the company.

However, the questions are: Is the company able to pursue further M&As with its current financial capability and what are the earnings prospects going forward given its aggressive expansion plans locally and regionally?

According to Bloomberg data, the company’s market capitalisation stands at RM1.81bil. Its share prices have risen 40.3% to RM4.56 year-to-date.

The company announced its acquisition of a 23.29% stake in rival company Lay Hong Bhd for total consideration of RM11.6mil last Monday.

Lay Hong is mainly involved in the production of eggs, broiler farming and feedmill activities. It has also ventured into retail business in Sabah and currently operates eight supermarkets under the trade name G*MART.

Meanwhile, QL is a diversified resource and agricultural-based group with three core principal activities – marine products, manufacturing, integrated livestock farming and crude palm oil milling.

The acquisition of Lay Hong, which is in similar businesses, will enable QL and Lay Hong to achieve synergies from feed raw material sourcing arrangements, supply chain networks and operations efficiency.

Kenanga Research is factoring seven months of contribution from the new associate or RM1.7mil for the financial year ending March 31, 2011 (FY11) and another RM2.8mil for FY12 in its forecast.

QL has set aside RM400mil over the next two years to expand its poultry, fishing and oil palm planting businesses.

The company is expanding its business in Vietnam and Indonesia, with investment of US$10mil and US$20mil respectively. It is also investing about RM25mil to build biogas and biomass plants at its Sabah palm oil mill to turn waste into green energy.

It will also spend US$15mil to install a mill for its East Kalimantan oil palm estates.

It was reported last year that the company aimed to triple its profit contribution from palm oil operations by 2015 as it was bullish about the long-term growth outlook for the commodity.

Despite the high capital expenditure going forward, the company said it would continue to pay out 25% to 30% of the group profits as dividends. The market is concerned whether QL can really maintain this policy with such expansion plans.

An analyst from a local brokerage said QL’s management had shown its interest in M&A and always kept its options open.

However, it is hard to judge whether the company would undertake M&A activities soon.

“It would probably acquire layer farms rather than listed entities. With its net profit of over RM100mil a year, the acquisition of layer farms, is possible and the company has been doing that for many years,” she said.

She said given the gearing level of about 0.6 times with a large portion of it for feed trading business, the company still had plenty of room to take up more loans.

“QL has very strong free cashflow generation and I don’t see a problem for it to finance their acquisition. It also has good track record in getting loans,” she said.

According to QL’s annual report, its cash and cash equivalents as at the end of FY10 stood at RM106.1mil, compared with RM68.3mil a year ago. Its loans and borrowings stood at RM215.4mil in FY10, compared with RM163.1mil in FY09.

Another analyst from a local research house said she did not expect QL to conduct further M&A activities in the near-term as the company was now actively expanding its businesses.

“If it is looking for M&A, it might be in the Phase II expansion in its Surabaya plant. It might want to explore opportunities for value-added products and look for acquisition in this area or start a greenfield project.

“However, it would not happen in the near term,” she said.

She said the company would have banks lined up for its expansion or acquisition funding.

On its earnings prospects, Kenanga Research raised QL’s FY11 net profit forecast by 6.3% and 6.6% for FY12 to account for the stronger surimi prices, crude palm oil prices and new earnings stream supported by improving economic conditions.

OSK Research said the construction of QL’s Surabaya surimi plant and day-old chick breeder farm as well as Vietnam livestock farm had begun and the units were expected to start contributing in FY12.

“We are somewhat positive on the expansion in Indonesia and Vietnam as they will boost revenue of its marine products manufacturing segment and Vietnam layer farm by 16.5% and 3.1% respectively, taking into account the time taken to ramp up capacity and production,” the research house said.

OSK likes QL’s resilient business as well as strong management team, which will continue to drive growth in all its three core segments.

It reiterates its “buy call” on QL, given the 13% price upside on the stock.

QL posted slightly higher net profit of RM26.8mil in the first quarter ended June 30, compared with RM22.3mil in the same period last year.

Its revenue was lower at RM356.34mil, compared with RM364.49mil previously.

For FY10, QL registered a net profit of RM115.1mil, 19% higher than RM96.7mil in FY09. Its revenue rose 5.7% to RM1.48bil.

http://biz.thestar.com.my/news/story.asp?file=/2010/8/30/business/6926466&sec=business

Free Cash Flow (FCF) = EBITDA - Capex

The net Free Cash Flow is free cash flow less interest and other financing costs and taxes.

In this approach, FCF is defined as EBITDA (earnings before depreciation, interest and taxes) less capital expenditures.

Capital expenditure encompass all capital spending, whether for maintenance or expansion and no changes in working capital are considered.

Information obtained through analysis of cash flow statement.

Through analysis of individual cashflows, investors and creditors can examine the following characteristics of a business:

1.  Whether financing is internally or externally generated.
2.  Whether the firm is able to cover all debt obligations.
3.  Whether the firm is able to afford expansion.
4.  Whether the firm is able to pay dividends.
5.  Whether the firm has financial flexibility.

Boustead 2Q net profit surges 212% to RM146.

Boustead 2Q net profit surges 212% to RM146.

Written by Surin Murugiah
Tuesday, 24 August 2010 12:15


KUALA LUMPUR: Boustead Holdings Bhd’s net profit for the second quarter (2Q) ended June 30, 2010 surged 212% to RM146.5 million from RM46.9 million a year ago, mainly due to stronger palm oil prices and higher sales volume.

Its revenue for the quarter increased to RM1.42 billion from RM1.28 billion in 2009, with earnings per share (EPS) of 15.68 sen.

Boustead declared a second interim single tier dividend of 10 sen per share.

For the six months ended June 30, Boustead’s net profit jumped to RM236.7 million from RM107.8 million, on the back of a 20% increase in revenue to RM2.98 billion from RM2.49 billion in 2009. EPS came in at 25.45 sen.

In a statement yesterday, Boustead deputy chairman and group managing director Tan Sri Lodin Wok Kamaruddin said most of its divisions had performed satisfactorily and had marked improvements compared with the previous financial year.

“Coupled with this, our focus on improving efficiencies and strengthening organic growth has indeed proved viable,” he said.

Lodin said the plantation division registered a significant increase in profit mainly due to positive crude palm oil (CPO) prices, while Boustead’s finance and investment division was the highest profit contributor for the six-month period, delivering a profit of RM105 million.

“The primary contributing factor was the recognition of gains from the disposal of BH Insurance Bhd for RM75 million. Furthermore, the improved results from the Affin Group and interest savings from Boustead’s level contributed to the division’s bottom line,” he said.

The heavy industries division closed the six-month period with a lower profit of RM49 million, compared with RM64 million during the same period last year, mainly due to lower progress billings.

The trading division’s profit for the first six months of 2010, totalling RM33 million, was a significant improvement from RM7.2 million for the same period last year, due to increase in sales volume driven by BH Petrol.

The property division’s profit of RM31 million for the six month period saw a decrease compared with RM40 million in the same period in 2009 due to a decline in contribution from property development activity, while the manufacturing and services division recorded a RM10 million profit.

Lodin said Boustead was bullish on the prospects ahead as the Malaysian economy was expected to fare much better in the second half of the financial year.

“Our divisions are at the forefront of the Malaysian economy and we expect to ride on this positive sentiment,” he said.

“In addition, we are optimistic of CPO prices trending upwards over the next few months due to adverse weather conditions, thinning supply and an increase in demand, especially in traditional markets around the world.”

QL Resources lays hands on rival

QL Resources lays hands on rival

Tags: Lay Hong Bhd | London Biscuits Bhd | QL Resources Bhd

Written by Koo Jie Ni & Chong Jin Hun

Tuesday, 24 August 2010 12:17

KUALA LUMPUR: The quiet poultry industry is seeing some “egg-citement” with new corporate developments. QL Resources Bhd yesterday acquired 11 million shares or 23.29% of Lay Hong Bhd in an off-market transaction. The identity of the seller was not disclosed but it is believed to be London Biscuits Bhd. All three players are in the food business. The common denominator in the three companies is the need for eggs, which is what Lay Hong offers. Founded in the 1970s and listed since October 1994, Lay Hong is mainly involved in the production of eggs, broiler farming and feedmill activities. It has also ventured into the retail business in Sabah and currently operates eight supermarkets under the trade name G*MART. QL Resources is principally involved in marine products manufacturing, livestock farming and oil palm cultivation. It is the country’s largest fishmeal manufacturer and the largest producer of surimi in Asia. It is a leading egg producer in the country with a daily production of 2.5 million eggs. London Biscuits, on the other hand, is a home-grown manufacturer of cakes and snack foods. According to QL Resources’ announcement to the stock exchange yesterday, it acquired the shares at RM1.05 apiece for a total of RM11.55 million. This values Lay Hong at RM48.55 million, and at a price-to-book value of just 0.52 times based on its latest net assets per share of RM2. Lay Hong’s shares have been rising steadily for the past year. They hit a 52-week low of 60 sen on Sept 18, 2009, and then climbed 117% to reach RM1.30 on July 27, 2010. Both Lay Hong’s and QL Resources’ shares gained four sen yesterday to close at RM1.19 and RM4.59, respectively. A source familiar with the matter said it was Lay Hong’s layer operations, feedmill activities, broiler contract farming and good brand name that sparked QL Resources’ interest. “Additionally, Lay Hong’s corporate results are good, and have grown over the years. Furthermore, QL Resources and Lay Hong are in similar businesses, hence the two companies may be able to achieve synergies from sourcing arrangements, marketing networks and operations,” he said. The source declined to say if QL Resources would increase its stake in Lay Hong or seek board representation. One of Lay Hong's egg-producing farm in Selangor For its fourth quarter ended March 31, 2010 (4QFY10), Lay Hong reported a net profit of RM1 million on the back of a RM95.06 million revenue. The net profit was 81% lower than that of a year earlier. The company said this was mainly due to lower selling prices of poultry products as well as additional provisions for doubtful debts and inventories. Notwithstanding the weaker fourth quarter, it is worth noting that Lay Hong’s full-year FY10 results showed a net profit of RM10.33 million, on revenue of RM388.75 million, a 46% climb from its net profit of RM7.09 million for FY09. While Lay Hong is off investors’ radar screens, QL Resources is a firm favourite among fund managers. The company recently announced a net profit of RM26.8 million, or 6.86 sen per share, for its first quarter ended June 30, 2010 (1QFY11). In July 2010, QL Resources was recognised by The Edge as one of the Top 10 Companies of the Year in The Edge Billion Ringgit Club, in recognition of its profit performance, shareholder value creation and corporate social responsibility. London Biscuits: Sale at a loss of two sen per share While the seller of the stake in Lay Hong has yet to be announced, it is believed to be London Biscuits, which had purchased a substantial interest in Lay Hong in November 2006. Based on Bursa Malaysia announcements, London Biscuits acquired a 20% stake or 9.24 million shares in Lay Hong, representing the bulk of its holding, in two tranches priced at RM1.01 and RM1.14 per share. At a weighted average price of RM1.07, this represents two sen more than the resale value to QL Resources, or an average loss of RM184,800 for the 20% stake. An additional 2.13 million shares were acquired in the open market thereafter. It is estimated that the trades were made at prices ranging from 89.5 sen to RM1.15 per share. Before the divestment, London Biscuits sold 100,000 shares of Lay Hong last month. According to calculations by The Edge Financial Daily, the company now holds 170,000 shares or a small 0.37% stake in Lay Hong, after the sale of its 11 million shares yesterday. According to a source, London Biscuits disposed of its investment in Lay Hong because it felt the business overlapped with its investment in poultry farmer and feed manufacturer TPC Plus Bhd. London Biscuits emerged as a substantial shareholder in TPC in March this year after acquiring a 32% stake or 25.6 million shares for RM7.7 million. A month later, London Biscuits made a voluntary takeover offer for the remaining 54.4 million shares in TPC at 30 sen each or a total of RM16.32 million. It was conditional upon London Biscuits obtaining more than 50% of TPC. The takeover lapsed in June as it failed to secure over 50% of TPC’s shares. Its total interest stood at 46.99% at the close of the offer period. In its quarterly results for the three months ended March 31, London Biscuits registered a net profit of RM4.03 million on the back of revenue of RM50.92 million. Revenue grew by 7% while net profit fell by 12% from the previous corresponding period. The movement was mostly due to the income tax of RM544,000 charged to the company in 3QFY10, whereas in 3QFY09, it reported a tax refund of RM683,000. The company did not offer any explanation for the year-on-year change in performance. London Biscuits closed at RM1.16 yesterday, down four sen. This article appeared in The Edge Financial Daily, August 24 2010.

More acquisitions by QL abroad?

More acquisitions by QL abroad?

Tags: Chia Song Kun | Indonesia | Lay Hong Bhd | organic growth | QL Resources Bhd | Vietnam

Written by Chong Jin Hun

Wednesday, 25 August 2010 15:25

SHAH ALAM: QL Resources Bhd is looking to more “egg-citing” times ahead. Having acquired a controlling stake in a local egg-producing rival, the spotlight now falls on QL Resources’ overseas expansion as it pursues organic growth, and positions itself for potential acquisition opportunities. The major food player, which produces marine products, undertakes poultry farming as well as oil palm plantation operations, expects to register its maiden foreign income from Indonesia and Vietnam in the next financial year ending March 31, 2012 as the company’s operations in these countries take shape. “It’s not necessarily (acquisition of listed companies abroad),” QL Resources managing director Chia Song Kun told reporters at the company’s shareholders’ meeting here yesterday. “It’s too early to give figures,” he added, when asked about the level of foreign income contribution QL Resources hoped to achieve in the future as its overseas expansion gained further momentum. Chia, whose company is Malaysia’s largest egg producer with a 20% market share, said the firm would continue to look at acquisition opportunities abroad as long as there was a strategic fit with its core operations. On Monday, QL Resources announced it had acquired 11 million shares or 23.29% of rival Lay Hong Bhd for RM11.55 million or RM1.05 a share via an off-market transaction. The stake was acquired from London Biscuit Bhd (see related article). At RM1.05 per Lay Hong share, the acquisition price translates into 0.52 times its net assets per share of RM2 as at March 31, 2010, and a trailing price-earnings ratio of just 4.7 times. News of the acquisition created some “egg-citement” for the sector, sending the stocks of both companies to fresh highs yesterday. Lay Hong was the top performer on the local bourse yesterday, surging as much as 61 sen or 51.2% to RM1.80, its highest in over nine years since April 2001. The stock closed at RM1.73 for a gain of 53 sen. Apart from expanding its core businesses through acquisitions, QL Resources may also evolve into an independent power producer with its palm biomass pelletising project, says managing director Chia Song Kun That means QL Resources is already sitting on a “paper gain” of 65% for a one-day investment. QL Resources said the purchase was a good investment which could result in potential synergy between the two entities. An industry source told The Edge Financial Daily that QL Resources saw potential synergy between itself and Lay Hong. This is by virtue of Lay Hong’s layer, broiler and feedmeal operations. The source added that QL Resources also took note of Lay Hong’s financials, and foresees synergistic opportunities in the areas of sourcing, marketing network and operational efficiency. According to him, it is still too early to say if QL Resources would request for a board seat in Lay Hong. For now, it is also uncertain if the acquirer intends to raise its stake in Lay Hong, the source said. Analysts sees strong earnings for QL Resources Analysts said QL Resources’ recently released first-quarter results were within their and consensus estimates. They added that the group was likely to register strong numbers in the years ahead as it begins harvesting the fruits of its expansion. OSK Research Sdn Bhd analyst Law Mei Chi said: “We like QL Resources’ resilient business as well as strong management team, which will continue to drive growth in all its three core segments.” Its marine products division involves deep-sea fishing and the production of surimi-based or fish paste products. The company has factories across Malaysia — in Perak, Johor  and Sabah — as well as Indonesia. The company is also engaged in poultry farming with broiler, breeder and layer operations in Kedah, Selangor, Negri Sembilan, Sabah and Sarawak. It also runs poultry farms in Indonesia and Vietnam. Broilers are bred for meat while breeder and layer operations involve the production of eggs for hatching and consumption purposes, respectively. QL Resources owns some 1,200ha of oil palm plantation in Sabah and 20,000ha in Kalimantan where the company plans to buy more oil palm tracts. TA Securities Holdings Bhd wrote in a note: “Going forward, we expect QL Resources’ growth to remain strong thanks to its experience in manoeuvring the business into profitability even during economically challenging periods. “Although management usually earmarks 10%-15% annual growth, however, we believe QL Resources could comfortably grow at more than 20% in FY12.” TA and OSK have maintained their buy calls on QL Resources with fair values of RM5.30 and RM5.20, respectively. QL Resources’ net profit rose by 20.1% to RM26.8 million, or 6.86 sen a share, in the first quarter ended June 30, 2010,  compared with RM22.32 million, or 5.69 sen a share, previously. Revenue grew 7.9% to RM384.51 million from RM356.34 million. As at June 30, 2010, its net assets per share stood at RM1.35. The company had cash of RM70.72 million and debts of RM401.42 million. This translates into a net debt position of RM330.7 million, or a net gearing of 0.6 times based on the company’s equity of RM526.66 million. Yesterday, its shares advanced as much as nine sen or 2% to RM4.68 before settling unchanged at RM4.59. QL Resources’ Chia told The Edge Financial Daily in an interview in June that the company was setting aside up to RM600 million for capital expenditure (capex) in the current and next two financial years, as it pursued organic expansion and  acquisitions. The company is expected to earmark some RM200 million in the current financial year (FY) ending March 31, 2011,  while FY12 and FY13 may each see capex allocations of between RM150 million and RM200 million. According to Chia, about 40% of the planned capex for the three years is intended to finance expansion of the group’s plantation business which involves downstream projects, including the commercialisation of palm biomass as a source of renewable energy. QL Resources’ marine products, and poultry farming units will each be allocated 30% from the planned budget which would be financed via the group’s internally-generated funds or bank loans. Chia said the company may also raise money via a private placement of new shares, or bond issues. QL Resources to evolve into an IPP? QL Resources’ palm biomass project may potentially see the company evolve into an independent power producer (IPP). Chia said excess electricity generated from the company’s palm biomass pelletising project could be sold to state-owned utility Tenaga Nasional Bhd. “This concept is not green IPP yet,” he said. Last Wednesday, the company said it had finalised the pre-commercialisation stage of the renewable energy project.  This step enables the company to start commercialising the empty fruit bunch-based pellet, via the 40,000-tonne per year plant within its palm oil mill in Tawau, Sabah. QL Resources’ renewable energy initiative essentially uses palm oil mill effluent to generate methane. This in turn is used to generate electricity for the production of the pellets, deemed an alternative source of fuel to hydrocarbons such as coal. The zero-waste renewable energy project, which constitutes a part of the company’s bigger plan to develop palm biomass renewable energy business in Malaysia and Indonesia, will start operations by year-end. QL Resources is certainly moving forward. The company is not only expanding its integration processes within its core surimi, poultry and palm oil divisions, but also extending its tentacles to complementary and offshoot businesses, such as biomass energy.    This article appeared in The Edge Financial Daily, August 25 2010.

Glovemakers slide further on more negative developments

Glovemakers slide further on more negative developments

Written by Loong Tse Min
Thursday, 26 August 2010 15:29


KUALA LUMPUR: Malaysian-listed latex glovemakers’ shares continued to slide yesterday as investors’ concerns on the industry’s prospects appear to intensify this week.

Most glovemakers have been falling so far this week with the world’s second-largest latex glovemaker Supermax Corp Bhd losing about 8% over three trading days to end at RM5.07 yesterday.

Over the last three trading days, Hartalega Holdings Bhd lost 31 sen or 3.9% to close at RM7.63 yesterday, Kossan Rubber Industries Bhd fell 23 sen or 6.35% to RM3.39, Latexx Partners Bhd was down 26 sen or 7.71% to RM3.11, Adventa Bhd shed eight sen or 3.03% to RM2.56 and Rubberex Corp (M) Bhd was down 5.5 sen or 5.73% to 90.5 sen.

The world’s largest latex glovemaker Top Glove Corp Bhd put on 11 sen or 1.8% to RM6.16 over Monday and Tuesday but fell 10 sen or 1.62% to RM6.06 yesterday.

The long list of concerns over the industry was raised about a month ago, which was also highlighted by The Edge Financial Daily.

These include potential overcapacity, record-high latex prices, the appreciation of the ringgit, a potential cut in Malaysian gas subsidies and possibly slower demand ahead due to the economic slowdown and easing H1N1 influenza fears.

The latest developments that seem to support these concerns include the ringgit’s further strengthening, more signs of a slowing US economy and continued high rubber prices.

Following Bank Negara Malaysia’s foreign exchange liberalisation moves, the ringgit reached it highest levels in 13 years at RM3.1320 on Monday. In the US, the deluge of bad economic data continued. On Monday, investors were spooked by data showing that existing home sales for July plunged a record 27%.

Meanwhile, rubber prices continue to hold firm, despite the recent fall in the price of palm oil and other commodities. Standard Malaysian Rubber general purpose FOB current month was priced at RM9.84 per kg yesterday, the highest since May 5.

Among glovemakers, Supermax fell the most yesterday, down 16 sen or 3.06% to RM5.07, as CIMB Research warned yesterday that the company may report a quarter-on-quarter (q-o-q) earnings contraction for its second fiscal quarter. The company is expected to release its results today.

However CIMB Research, which has a buy call on Supermax, defended the stock saying, “We are not worried about the potential q-o-q earnings contraction as this is not the first time glove manufacturers are facing this situation. From our checks, demand for rubber gloves remains healthy and Supermax continues to operate at almost 90% utilisation, supporting our view of sufficient pricing power that will allow glovemakers to pass on any cost increases.”

At the same time, some institutional buyers appear to be nibbling in glovemaker stocks at their current low prices.

This article appeared in The Edge Financial Daily, August 26 2010.