Kim loong - An Efficient Planter (Malacca Securities)

Author: MalaccaSecurities   |    Publish date: Wed, 9 Aug 2017, 05:45 PM 

---

• We initiate coverage on Kim Loong Resources Bhd (KLR) with a HOLD recommendation and a target price of RM 4.15. Although we like KLR for its standing as one of the leading mid-cap plantation companies in Malaysia with an established track record of approximately 40 years of operational experience, its valuation is already fair, in our view, after its share price has climbed steadily since the start of the year.

• We also like the company’s proficient operational structure of having delivered a higher-than-average oil extraction rate (OER) vs. the industry average over the years. Approximately 84.0% of KLR’s trees are at the prime production age and offers strong fresh fruit bunches (FFB) production yield on the approximately 15,000 ha. of oil palm land that it has cultivated in Malaysia.

• The group is currently expanding its plantation landbank, focusing on East Malaysia that will ensure longer term earnings growth and has started planting on 2,419 ha. of Native Customary Rights (NCR) land in Sarawak. Going forward, its earnings will also be augmented by the sale of electricity generated by its biogas plants.

• We expect KLR to register a double digit three-year net profit CAGR of 15.0% to reach RM94.1 mln in FY19, while revenue is expected to grow 3.9% to RM962.8 mln over the same period. We arrive at our target price by ascribing a target PER of 14.0x to its forecast FY18 EPS of 29.6 sen. The assigned PER is within its’ peers’ PERs of 13.0x-15.0x. We also expect KLR to continue rewarding its shareholders with decent dividend yields of between 5.7%-5.9% over the next two years.

Recommendation

We like KLR for its established track record as one of the more reputable plantation companies in Malaysia, having been operational over the past 40 years. Over the years, the group has also gradually positioned itself as a sizeable mid-cap plantation company in Malaysia, owning approximately 15,000 ha. of oil palm land.

KLR has been reaping higher oil extraction rate (OER) vs. the industry average over the years, showcasing the group’s competitiveness and competency in maintaining its FFB processing efficiency and quality through an integrated milling operation, coupled with reduction of wastages through the conversion of waste to increase the extraction of residual oil from pressed fibre.

We are also positive on KLR’s expansion plans in the Sarawak region. The group is in the midst of obtaining the acceptance from Native Customary Rights (NCR) owners for the remaining land. With the completion of the aforementioned acquisition, KLR will own approximately 23,500 ha. of plantation land across Malaysia.

The group’s operations are also overseen by an experienced management team with over 40 years of experience in the oil palm industry (refer to Appendix 1 for full profile of its Board of Directors), thereby ensuring sustainable top-of-the-range operational statistics and OERs going forward.

At current price of RM4.00, however, we think that its share price upsides are limited given that KLR valuation is already fair, trading at prospective FY18 and FY19 PERs of 13.1x and 12.9x, which are close to its peers average of 13.3x and 15.1x respectively. Nonetheless, we are positive on KLR growth prospects, backed by its established track record, coupled with its position as one of the leading plantation companies in Malaysia with higher operational efficiency vs. its peers.

At the target price of RM4.15, KLR will trade an implied PER of 13.5x and 13.3x for FY18 and FY19 respectively, which is slightly below of its peers, but close to fair, in our opinion, given the cyclical nature of the crude palm oil industry.

Investment Risk

Risks to our recommendation include fluctuations in the CPO prices. The volatility of CPO prices is subjected to weather conditions, demand (mainly from both China and India) and supply (from both Malaysia and Indonesia).

The supply of soybeans could affect CPO prices as both products are regarded as substitutes. Should the soybean price premium against the CPO price decline overtime, demand will shift to the former product and vice versa.

A firmer Ringgit against the U.S. Dollar could impact the group’s bottom line. A recovery in the local currency against the Greenback will negatively impact on the group’s earnings and vice versa, as the majority of the country’s CPO output are exported.

The plantation sector in Malaysia relies heavily on foreign workers. Foreign workers in the plantation sector’s job scope typically include harvesting, field works and other adhoc works. A worst-than-expected labour shortage, particularly in East Malaysia, could hamper harvesting and the corresponding production efficiency.

Source: Mplus Research - 9 Aug 2017

Semicon support firms upbeat

Saturday, 23 April 2016

BY DAVID TAN

Eye for detail: Chuah checking out test equipment produced for the automotive and semiconductor industries.

Strong sales seen for second quarter after a slow first quarter

THE semiconductor test and vision inspection equipment makers in the country are projecting a strong second quarter of 2016, following a slow first quarter, in line with the projection of SEMI South-East Asia.

The companies expecting a strong second quarter are 

• MMS Ventures Bhd, 
• Pentamaster Corp Bhd, 
• Elsoft Research Bhd and 
• Vitrox Corp Bhd.

MMS Ventures expects to deliver test equipment for the automotive and smart device industries with a market value of RM16mil in the second quarter compared with RM11mil from the same period last year.

“Both the automotive and smart device industries contribute 60% to group revenue.

“As for the third and fourth quarters, there is no visibility yet, because orders usually come in three months before the delivery.

“We should see orders for the third quarter arriving in May. The test equipment would need to be shipped out by August and September,” its managing director T.K. Sia says.

Pentamaster Corp Bhd executive chairman C.B. Chuah says the group would deliver approximately RM40mil of test equipment in the second quarter of 2016.

“About 30% of the test equipment are for the automotive segment, while the remaining for the smart devices.

“We are projecting a double digit percentage growth for our revenue and bottomline in 2016,” he adds.

In the first quarter 2016, the group delivered about RM30mil of test equipment, according to Chuah.

In the second quarter, Elsoft Research expects to deliver 40 units of test equipment priced between US$100,000 and US$200,000 per unit for customers in the automotive, smart devices, and general lighting segments.

“The customers are in Malaysia, Thailand, China, and Taiwan.

“There is no visibility yet for the second half,” says Elsoft chief executive officer C.E. Tan.

Vitrox Corp chief executive officer Chu Jenn Weng, meanwhile, says that the second quarter is expected to improve over the same period of a year ago.

“We had a very good first quarter 2016, even though the first period is traditionally a soft quarter.

“For this reason, we are confident of a good second quarter compared to last year’s second period.

“As of now, we have more than RM25mil worth of backlog orders for vision inspection equipment to be delivered in the second quarter,” he adds.

SEMI South-East Asia has recently forecast that the capital expenditure for the fab equipment manufacturing sector in South-East Asia would grow to US$1.8bil (RM7bil) in 2016 from US$1bil (RM3.9bil) in 2015.

Its president Ng Kai Fai says this would have a positive impact on the test equipment industry in South-East Asia.

“The capital expenditure for the test equipment sector in South-East Asia is projected to increase to US$580mil in 2016 from US$530mil, creating spill-over effects for the test-equipment and the electronic manufacturing cluster in Penang,” Ng explains.

SEMI is the global industry association serving the manufacturing supply chain for the micro- and nano-electronics industries.

The Free Industrial Zone, Penang, Companies’ Association (Frepenca) chairman Dr Roland Mueller says that based on the members feedback obtained in the first quarter of 2016, some 57% of the members expect results to improve in the second half of 2016.

“This is an improvement over the survey done in the fourth quarter 2015 which showed that 36% of the members were optimistic of achieving better results in the second half of 2016,” Mueller says.

However, the overall prevailing mood in the semiconductor and electronics industry is still cautious, Mueller says.

“The first quarter survey also showed that some 57% of the members have indicated that they do not plan to engage new workers and may also reduce the size of the workforce this year, compared to 43% of the members with plans to engage new headcount in 2016.

“The percentage of members with plans to introduce new products in 2016 have also dropped slightly to 71% from the 73% surveyed in the fourth quarter 2015.

“Those with plans to invest fresh capital to adopt new technologies this year have also declined slightly to 70%.

“In the fourth quarter 2015, some 75% indicated that they were keen to adopt innovative technologies with new capital investments,” Mueller says.

The recent ban on foreign workers into Malaysia is one of the reasons for the prevailing cautious mood of the manufacturing industry, according to Mueller.

“The manufacturing sector, across the board, is very dependent on foreign workers.

“If there is a shortage of foreign workers, our members would not be able to plan for expansion.

“This is why there are some members who have indicated that they may cut down the size of their investments in Malaysia and relocate to neighbouring countries, in light of the shortage,” he adds.

The Frepenca companies, comprising 70 local firms and multinational corporations from the United States and Europe, are involved in the semiconductor and electronics industries.

Read more at http://www.thestar.com.my/business/business-news/2016/04/23/semicon-support-firms-upbeat/#X0rY0bC8U9UFqOoJ.99

Pentamaster to gain RM19mil from sale of 7.4% in PIL

Monday, 17 July 2017 | MYT 11:51 PM

BY M. HAFIDZ MAHPAR

Pentamaster's technicians working on test equipment for the automotive and semiconductor industries.

KUALA LUMPUR: Pentamaster Corp Bhd, which seeks to list its automated solution business in Hong Kong held under holding company Pentamaster International Ltd (PIL), is selling a 7.4% stake in PIL to GEMS Opportunities Ltd Partnership for RM25.5mil.

In a filing with Bursa Malaysia, Pentamaster said it stood to gain RM19.08mil from selling the equity interest in newly-incorporated PIL to GEMS, a Singapore-based private equity fund.

Pentamaster had on Monday signed agreements to transfer its entire equity interest in three wholly-owned subsidiaries involved in the automated solution business to PIL and, afterwards, to sell 7.4% equity interest in PIL to GEMS for RM25.5mil in cash.

It said the internal reorganisation would lead to a more efficient group structure separating PCB’s existing automated solution business and its other smart control solution system business.

Besides for raising funds, Pentamaster said its proposed disposal of PIL shares  to GEMS would broaden PIL’s shareholder base by exposing it to international institutional investors.

It added that GEMS’ positioning as strategic investor of PIL, coupled with fund manager GEMS Capital Pte Ltd’s extensive investment experience and network, would add value to the proposed listing.

On the use of the RM25.5mil proceeds, Pentamaster said the bulk  - RM15mil - would go towards paying the listing expenses while RM7.5mil would be for repaying bank borrowings.

Read more at http://www.thestar.com.my/business/business-news/2017/07/17/pentamaster-to-gain-rm19mil-from-sale-of-7pt4pc-in-pil/#g33v34aCfpeWtZwb.99



==============

Tuesday, 13 June 2017 | MYT 8:59 PM

Pentamaster eyes HK listing of automated solution business

BY M. HAFIDZ MAHPAR

Pentamaster technicians working on test equipment to be used in the automotive and semiconductor industries.

KUALA LUMPUR: Pentamaster Corp Bhd is pursuing a separate listing for its automated solution business in Hong Kong.

In a filing with Bursa Malaysia, the company said it had appointed advisers for the purpose of listing the business on the main board of the Stock Exchange of Hong Kong Ltd, including financial advisory firm Altus Capital Ltd as the sponsor.

It said the automated solution business would gain recognition and corporate stature through having its own listing status, hence allowing it to expand of its customer base.

The proposed listing is also expected to enhance efficiency by way of promoting a clearer segregation of business responsibilities and operations for Pentamaster’s existing automated solution business, thereby enabling the respective management teams to focus on opportunities specific to each of the automated solution business.

Pentamaster said the proposed exercise would also unlock shareholders’ value and provide the company and its automated solution business with a diverse fund-raising platform in the future.

The group has three operating segments: 

• automated equipment (its biggest revenue and profit contributor), 
• automated manufacturing solution, and 
• smart control solution system.

“Prior to the completion of the proposed listing, Pentamaster will undertake a reorganisation of its subsidiaries involved in the automated solution business and these subsidiaries will continue to remain as its subsidiaries on completion of the proposed listing,” the company said.

It said a detailed announcement would be made in due course after it had finalised and approved the structure of the proposed listing.

To facilitate the proposed listing, Pentamaster has applied to incorporate a wholly-owned subsidiary in the Cayman Islands, namely Pentamaster International Ltd (PIL), on Monday. PIL’s principal activity is that of investment holding.

Pentamaster said the board wished to highlight to its shareholders that the proposed listing was at a preliminary stage and fairly extensive preparatory work was required and that such preparatory work might involve an uncertain time frame.

“Shareholders should note that the proposed listing may or may not materialise,” it said.

The company noted that the exercise was subject to, among others, satisfactory due diligence and assessment of suitability for listing by the Hong Kong sponsor and other professional advisers, approvals being obtained from the relevant authorities in Hong Kong and Malaysia (where required), as well as the shareholders at an EGM to be convened.

In addition, the proposed listing depends on assessment of other factors such as general economic and capital market conditions.

Read more at http://www.thestar.com.my/business/business-news/2017/06/13/pentamaster-eyes-hk-listing-of-automated-solution-business/#q53CLJCbpykejAmc.99

Pentamaster bullish on operations in first half 2017

Monday, 9 January 2017

BY DAVID TAN

Sales seen to exceed figure achieved in same period last year

GEORGE TOWN: Semiconductor test-equipment Pentamaster Corp Bhd expects its sales for the first half of 2017 to exceed the figure it had achieved in the same period last year.

Group executive chairman C.B. Chuah told StarBiz that the group was confident of achieving more than RM70mil worth of sales for the first half of 2017.

“So far, we have locked in about RM40mil sales for the first of 2017, which is more than half of what we achieved in the same period of 2016.

“The demand for testers should remain strong until the second half, as there will be an increase in the number of new smart telecommunication products in the market.

“The new smart products would require testers to check their sensors,” he added.

Chuah said about half of the orders for the first half of 2017 were for the smart device industry, while the automotive industry generated the demand for the remainder.

The semiconductor test-equipment is expected to contribute about 60% of the group’s revenue.

This year, the group will focus on expanding its intelligent automated robotic manufacturing line business (IARM), which is expected to contribute about 15% to revenue, compared to about 5% previously.

“Companies in Malaysia looking to replace skilled workers are our main customers.

“The IARM is growing due to the interest to replace workers where high-precision engineering and fabrication skills are involved,” he added.

On the group’s new RM25mil plant in Batu Kawan, Chuah said construction work for the 100,000-sq-ft facility would begin in the second half of 2017.

“We plan to start operations mid-2018 to produce IARM line. The group develops its own software for the IARM line. The plant will also manufacture medical washers for the export market.

“The medical washers are used for cleaning of essential hospital equipments such as wheel chairs and walking sticks” he added.

According to a Transparency Market Research report, the artificial intelligence is a fast-emerging technology, dealing with development and study of intelligent machines and software.

This software is being used across various applications such as

• manufacturing (assembly line robots), 
• medical research and 
• speech recognition systems.

“It also enables in-build software or machines to operate like human beings, thereby allowing devices to collect, analyse data, reason, talk, make decisions and act,” the report said.

“The global artificial intelligence market was valued at US$126.24bil in 2015 and is forecast to grow at a compounded annual growth rate of 36.1% from 2016 to 2024 to reach a value of US$3,061.35bil in 2024,” it added.

Read more at http://www.thestar.com.my/business/business-news/2017/01/09/pentamaster-bullish-on-operations-in-first-half-2017/#Mg5k6rlruUKG01I8.99

Scientex reaches new record in quarterly earnings

June 21, 2017, Wednesday

KUCHING: Global packaging manufacturer and leading property developer Scientex Bhd (Scientex) reached a new record in quarterly performance in the third quarter ended April 30, 2017 (3Q17) with 8.6 per cent increase in net profit to RM66.5 million and 17.0 per cent gain in revenue to RM636.2 million.

The stronger performance was mainly attributed to 

• stronger exports in the group’s manufacturing segment and 
• higher progress billings for ongoing property development projects, it said in a statement.

Managing director Lim Peng Jin said Scientex’s consumer packaging reported growth in adoption from export customers, especially for cast-polypropylene (CPP) and biaxially-oriented polypropylene (BOPP) films which started in early and end-2016 respectively.

“Meanwhile, the ongoing expansion at our consumer packaging plant in Ipoh to double up annual capacity to 24,000 metric tonnes is expected to complete by August 2017,” he said in the statement.

“The increased capacity, particularly for form-fill-seal (FFS) bags, hygiene bags, and label films, would allow for additional growth in our consumer packaging division.

“Additionally, our new stretch film plant in Arizona, US, is seeing good progress in factory renovations. We have also acquired five stretch film rewinders that are set to commence in October 2017, and two cast film production lines to be installed in December 2017 and early-2018 respectively.

“Furthermore, our property development segment continues to achieve commendable sales, with average take-up rate above 75 per cent across ongoing projects as at 3Q17.

“As a recognised leader in affordable developments, we will continue to focus on bringing reasonably priced and quality houses to the masses, and look forward to consistently growing our property division.”

Approximately 70 per cent of total 3Q17 revenue was derived from the manufacturing segment with RM442.8 million, which rose 15.7 per cent from RM382.8 million previously. The boost was led by exports of industrial and consumer packaging. Exports made up 75.9 per cent of manufacturing segment revenue in 3Q17, compared to 72.4 per cent in 3Q16.

The group’s property segment contributed the remaining RM193.4 million to 3Q17 revenue, growing 20.0 per cent from RM161.1 million a year ago on higher progress billings for ongoing development projects in Johor, Melaka and Ipoh.

Cumulatively, revenue for the nine months ended 30 April 2017 (9M17) amounted to RM1.8 billion, increasing 7.1 per cent from RM1.6 billion previously. However, the group posted a marginal decline in net profit to RM183.7 million from RM186.7 million a year ago, in line with the Group’s market penetration strategy.

Scientex declared an interim dividend of 6 sen per share in respect of FY2017, with ex-date on 5 July 2017 and payable on 21 July 2017. The estimated payout would stand at RM29.0 million or 15.8 per cent of 9M17 net profit. The group has a dividend policy to distribute at least 30.0 per cent of net profit to shareholders.

Commenting on future prospects, Lim was pleased that the expansion plans for the consumer packaging segment are en route for completion by end-2017, enabling them to focus on maximising its capacity in the near term.

“Meanwhile, we continue to replenish our landbank, and have recently completed the acquisition of 197.4 acres of land in Melaka,” he said. “We also expect to complete the purchase of another 121.2 acres of land situated in Senai, Johor in the second half of 2017.

“With demand for affordable homes on the rise, we would strive to launch more projects going forward to capture a larger share of the market.”

http://www.theborneopost.com/2017/06/21/scientex-reaches-new-record-in-quarterly-earnings/

Analysts: Boilermech a leading palm oil mill boiler

 July 10, 2017, Monday

KUCHING: Boilermech Holdings Bhd (Boilermech) has been viewed as a strong player in the palm oil mill boiler industry.

The research arm of AmInvestment Bank Bhd (AmInvestment) pointed out that the stock is trading at a premium to its peers on the back of its strong market share in the boiler industry, proven track record and roster of blue-chip clients.

However, it noted that despite the aforementioned attributes, the research team pegged a ‘hold’ recommendation on the group as it believed that its valuations are stretched and the group’s earnings growth are still in the early stage of recovery.

Nevertheless, it pointed out that some of its positive attributes include its range of boilers with different grates and prices.

“Backed by a proprietary combustion technology, the boilers are efficient and reliable. Boilermech’s market shares are estimated at 40 to 50 per cent in Malaysia and 30 per cent in Indonesia.

“The group is the second largest boiler manufacturer in Indonesia presently,” it noted.

Aside from that, it pointed out, “The group is on its way towards becoming an integrated player in the palm oil mill chain. With its water treatment and biogas operations, Boilermech is poised to take advantage of the MPOB’s potential requirement that all palm oil mills must have biogas facilities in the future.

“Currently, most of Boilermech’s earnings are from the manufacturing and installation of boilers.”

The research team also highlighted that the group is well-positioned to capture a slice of the biogas market in Sarawak.

“According to the MPOB, there are 76 palm oil mills in Sarawak currently,” it said.

Overall, AmInvestment said, Boilermech’s balance sheet is healthy as the group has net cash of RM55.8 million as at end-March 2017 while its gross borrowings were a small RM8.3 million.

It also noted that the capital expenditure (capex) cycle of the plantation industry is just starting to pick up after being affected by the downturn in CPO prices in 2014 and 2015.

Boilermech manufactures boilers mainly for palm oil mills.

http://www.theborneopost.com/2017/07/10/analysts-boilermech-a-leading-palm-oil-mill-boiler/

Hartalega’s earnings to remain resilient in financial year of 2018

 July 13, 2017, Thursday Sharon Kong, sharonkong@theborneopost.com

KUCHING: Hartalega Holdings Bhd’s (Hartalega) earnings are expected to remain resilient in financial year 2018 (FY18) on the back of new demand coming in from China.

The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) opined that Hartalega’s earnings will remain resilient in FY18 as it expected new demand to come from China due to the switch from vinyl gloves to rubber gloves.

“In addition, the continuous switch in demand for powdered gloves to non-powdered gloves and nitrile gloves has allowed demand to remain resilient,” MIDF Research said.

Furthermore, the research arm opined that revenue will also continue to be supported by the slower growth in the glove industry’s capacity expansion which has provided Hartalega with a more conducive environment to price its product.

It added that this is as opposed to the intense pricing competition last year which caused the glove manufacturers to reduce prices in order to compete for orders.

From the research arm’s observation, MIDF Research noted that natural rubber price have been steadily coming down from its peak of RM8.16 per kilogram (kg) back in February.

“As of June 30, the average price of natural rubber stands at RM5.73 per kg,” it said.

Thus, MIDF Research said Hartalega would have to adjust the group’s average selling prices (ASPs) lower to accommodate for lower raw materials price.

However, despite the expected lower ASPs, the research arm opined that the new capacity from Plant 3 will assist to offset the lower ASPs going forward as demand is expected to remain resilient.

“We understand from the management that the commissioning of the production lines in its Plant 3 of the next generation integrated glove manufacturing complex (NGC) has now been fully-completed.

“It will now move on to the production lines in Plant 4 which will begin commissioning in late July,” the research arm said.

MIDF Research noted that there will be 12 production lines in Plant 4 and Hartalega expects to commission one production line per month.

The research arm further noted that management expects to complete the full-commissioning of Plant 4 by middle of 2018.

With the complete commissioning of Plant 3 of the NGC, MIDF Research opined that Hartalega’s first quarter of FY18 (1QFY18) earnings will replicate the group’s 4QFY17 earnings of about RM85 million to RM90 million.

This is due to the fact that the research arm believed that the ringgit will continue to trade at current level and revenue will continue to be driven by the 24 billion of annual glove production capacity.

“We are also expecting Hartalega to maintain its net margin in the mid-teens in FY18 premised on the abovementioned factors,” the research arm said.

http://www.theborneopost.com/2017/07/13/hartalegas-earnings-to-remain-resilient-in-financial-year-of-2018/

Red Flags

Red flags

1) Declining cash flow: 

• if cash from operations decline even as net income keeps marching upwards or 
• if cash from operations increase much more slowly than net income. 
• AR increased to a large percentage of sales.
• Inventories increase

2) Serial chargers: 

• frequent chargers are an open invitation to accounting hanky panky because forms can bury bad decisions in a single restructuring charge. 
• Poor decisions that might need to be paid for in future quarters all get rolled into a single one-time charge in the current quarter, which improves future result.

3) Serial acquirers: 

• acquisitive firms don’t spend as much time checking out their targets as they should.

4) CFO or auditors leave the company: 

• If a company fires its auditors after some potentially damaging accounting issue has come to light, watch out.

5) The bills aren’t being paid:  

• One way to pump up its growth rate is to loosen customers’ credit terms, which induces them to buy more products or services. 
• If they don’t get paid, it will come back to haunt them in the form of a nasty write-down or charge against earnings. 
• Track how A/R are increasing relative to sales. 
• On the credit front, watch the ‘allowance for doubtful accounts’. 
• If the amount doesn’t move up in sync with A/R, the company may be artificially boosting its results by being overly optimistic about how many of its new customers will pay its bill.

6) Changes in credit terms and account receivable: 

• Check the company’s 10-Q filing for any mentions of changes in credit terms for customers, as well as for any explanation by management as to why A/R has jumped. 
• ( Look in the management’s discussion and analysis section for the latter and in the accounting footnotes for the former.)

7) Gains from investments: 

• an honest company breaks out these sales, however, and reports them below the ‘operating income’ line on its income statement. 
• The problem arises when companies try to boost their operating results- performance of their core business-by shoehorning investment income into other parts of their financial statements. 
• Finally, companies can hide investment gains in their expense accounts by using them to reduce operating expenses, which makes the firm look more efficient than it really is.

8) Pension pitfalls: 

• If assets in the pension plan don’t increase quickly enough, the firm has to divert profits to prop up the pension. 
• To fund pension payments to future retirees, companies shovel money into pension plans that then are invested in stocks, bonds, real estate, and so forth. 
• If a company winds up with fewer pension assets than pension liabilities, it has an underfunded plan, and if the company has more than enough pension assets to meet its projected obligations to retirees, it has an overfunded plan. 
• To see whether the company has an over-or underfunded pension plan, go to the footnotes of a 10-K filling and look for the note labeled ‘pension and other postretirement benefits’, ‘employee retirement benefits’, or some variation. Then look at the line labeled ‘projected benefit obligation.’ This is the estimated amount the company will owe to employees after they retire.
• Second key number is ‘fair value of plan assets at the end of year’. If the benefit obligation exceeds the plan assets, the company has an underfunded pension plan and is likely to have shovel in more money in future, reducing profits.
• Pension padding: When stocks and bonds do really well, pension plans go gangbusters. And if those annual returns exceed the annual pension costs, the excess can be profits. Flowing gains from an overfunded pension plan through the income statement is a perfectly legal practice that pumped up earnings at GE. You should subtract it from net income when trying to figure out just how profitable a company really is.
• To find out how much profits decreased because of pension costs or increased because of pension gains, go to the line in the pension footnote labeled either ‘net pension/postretirement expense’, ‘net pension credit/loss’. 
• Companies usually break out the contribution of pension costs to profits for the trailing three years; therefore, you can see not only the absolute level of pension profit or loss, but also the trend. Won’t see these numbers in the income statement.

9) Vanishing cash flow: 

• you can’t count on cash flow generated by employees exercising options.  
• The amount is labeled ‘tax benefits from employee stock plan’ or ‘tax benefits of stock options exercised’ on the statement of cash flows. 
• When employees exercise their stock options, the amount of cash taxes their employer has to pay declines. 
• If the stock price takes a tumble, many people’s options will be worthless and, consequently, fewer options will be exercised. 
• Fewer options are now exercised, the company’s tax deduction gets smaller, and it has to pay more taxes than before, which means lower cash flow. 
• If you are analyzing a company with great cash flow that also has a high flying stock, check to see how much of that cash flow growth is coming from options-related tax benefits.

  

10) Overstuffed Warehouses: 

• When inventories rise faster than sales, there is likely to be trouble on the horizon.  
• Sometimes buildup is just temporary as a company prepares for a new product launch, usually exception.

11) Change is bad: 

• another way firm can make themselves look better is by changing any one of a number of assumptions in their financial statements. 
• Look skeptically on any optional change that improve results. 
• One item that can be altered is depreciation expense (see if extend depreciation period). 
• Firms can also change their allowance for doubtful accounts. 
• If it doesn’t increase at the same rate as accounts receivable, a firm is essentially saying that its new customers are much more creditworthy than the previous ones-which is pretty much unlikely. 
• If the allowance declines as AR rises, the company is stretching the truth even further. Current results are overstated. 
• Firms can also change things as basic as how expenses are recorded and when revenue is recognized.

12) To expense or not to expense:  

• Company can fiddle with their costs by capitalizing them. 
• Any time you see expenses being capitalized, ask some hard questions about just how long that ‘asset’ will generate an economic benefit.

https://docslide.us/documents/pat-dorsey-5-rules-for-successful-stock-investing-summary.html