My Journey

September 2017 Portfolio Report

Dear Readers

Did we just escaped an all out nuclear calamity by the skin of our teeth? It sure did seem like it.

Although the world has moved on from the peak of the rhetorics between the Delusional Mr President and Little Rocket Man, the effect of such a threat is still lingering in the market to the extent that money is being reaped off from the equity market to be sown in gold, Yen and bonds (traditionally safe haven investments in anxious times).

down-chart-stock

Aggravating the already dire situation was the Fed’s indication that it will raise interest rate in December 2017. Since such announcement, the Greenback has been strengthening and an outflow of foreign funds, from the Malaysian equity market, is gaining prominence. The effect of which meant Bursa went into consolidation mode thus reinforcing September’s notoriety as consistently the worst performing month for Malaysian equities for some time now. It is currently on a 7-8 days bear streak with no light at the end of the tunnel just yet.

Considering everything that has happened, my portfolio remains resilient. In fact it gained 1.5%, down from a gain of 3%, right after the nuclear war rhetorics between North Korea and the USA.

The star performer was the shares of Samchem which rallied quite a bit (about 20%) bringing it back to the black. I disposed half of my holdings at RM0.995 making a tidy profit and channeled that profit to purchase more of blue chip stocks such as CIMB which experienced a gap down.

COUNTER COMPOSITION (%) AVERAGE PRICE LAST PRICE GAIN/LOST (%)
3A 6.45 1.18 1.14 -3.62
AIRASIA 28.40 2.80 3.45 23.30
CIMB 22.06 5.53 6.30 13.77
DNEX-WD 5.40 0.245 0.215 -12.45
EKOVEST 11.00 1.22 1.09 -11.00
EVERGREEN 7.20 0.84 0.79 -6.00
SAMCHEM 9.00 0.945 0.955 1.05%

I am upbeat about the dividend payments from AIRASIA, SAMCHEM and CIMB in October and November 2017. In all, my portfolio has achieved a 25.77% gain this year, inching ever closer to the 30% mark. Cash is at ~10% of portfolio.

Lets see what October has in store for us.

How well did your portfolio brave the bear of September? Do drop a comment.

If you find this write-up an enjoyable read, please hit that like and share buttons on my Facebook for more updates and analysis.

Reference

  1. https://www.cnbc.com/2017/09/25/we-have-right-to-shoot-down-strategic-us-bombers-even-if-they-are-not-in-north-korean-airspace-nk-foreign-minister-says.html
  2. https://www.nytimes.com/2017/09/20/business/economy/fed-bond-buying.html?mcubz=3
  3. http://www.thestar.com.my/business/business-news/2017/09/29/klci-ends-september-on-downbeat-note/
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Thoughts

Who’s afraid of share margin facility?

Dear Readers

Leverage is a double-edge sword.” You may have heard this adage ever so often. Leveraging is the usage of debt to acquire an asset.

There are many forms of leveraging. However. as the heading suggests, we will be sharing our thoughts about share margin facility (“SMF“), through our experience.

margin-trading-Illustration
Having too much leverage is like walking on a tight rope. Credit: finpipe
What are the benefits of leveraging?

From an investment perspective, leveraging can magnify your gains. This is true when the gain achieved from leveraging is higher than the cost of borrowing.

Example:

If the RM1,000.00 which you have borrowed, has achieved a yield of 10% per annum, when compared to an interest rate of 3% on an annual basis (cost of borrowing),  you will have a net gain of 7%. In other words, you have pocketed a gain of RM70.00, which you would not have, had you not used leverage.

Further, leverage also provides you with additional liquidity to take advantage of an opportunity when it arises.

What are the downfalls of leveraging?

Leverage is risky and often works in the opposite by magnifying your losses.

Example:

If the RM1,000.00 which you have borrowed from the bank, with a 3% costs of borrowing per annum, incurred a loss of 10% per annum,  you will have a net loss of 13%. That means you have lost RM130.00, which you would not have, had you not used leverage.

In addition, interest, imposed on leverage, is often costly.

What is a SMF?

SMF is a line of credit which is often secured by a collateral. It may be easier to compare SMF to a revolving credit facility (for example, credit card) in that you only draw down funds as much as the credit limit allows.

There are a few components to a SMF, which this write-up intends to touch upon, to assist you in better understanding how a SMF works:

  1. Credit limit.
  2. Collateral.
  3. Margin account.
  4. Interest.
  5. Margin call.
What is a credit limit in a SMF?

Much like a credit card, SMF has a CREDIT LIMIT which depends largely on your disposable income. Once it is approved, you may, at any time, draw down funds, by providing an acceptable share as collateral.

Example:

Investor X has a credit limit of RM500,000.00 in his SMF. Before he is able to draw down the facility, he must pledge some shares in a form of a collateral.

What type of collateral does a SMF provider accept?

Most financial institutions accept COLLATERALS in the form of:

  1. Shares.
  2. Mutual funds.
  3. Fixed deposit.

It is important to note that a certain multiplier is attached to a form of collateral. Usually, a multiplier for fixed deposits, pledged as collateral, is set at 2 times/2X whereas a multiplier of a share, pledged as collateral, is set as 1.5 times/1.5X.

Multipliers are important because they multiply the value of your collaterals in relation to the available credit thus allowing you to control a larger amount from a smaller amount.

Example:

Going back to Investor X, he would now like to draw down RM100,000.00 from his SMF which has a credit limit of RM500,000.00, by pledging, either RM50,000.00 of fixed deposit (2X) or RM66,666 worth of shares (1.5X).

What is a margin account?

Upon a successful application for SMF, a MARGIN ACCOUNT will be created for you. A margin account is an account where the drawn down funds are made available. This will also be the account which you will be using  to make purchases of shares through SMF.

The margin account has an associated CDS account with Bursa Malaysia (“Collateral CDS Account“). Shares which are pledged as collateral, and shares which are purchased through the margin account, are held in the Collateral CDS Account.

Example:

Returning to Investor X who has decided to pledge 5,000 shares of SCIENTEX as collateral.  He fills out the appropriate Bursa Malaysia Transfer of Securities Request form which will transfer 5,000 shares of SCIENTEX from his personal CDS account to the Collateral CDS Account.

Upon confirmation that the 5,000 shares of SCIENTEX has been transferred to the Collateral CDS Account, his SMF provider makes available a RM100,000.00 line of credit to his margin account which Investor X can then draw down as when he pleases.

Seeing a right moment to make a purchase of shares, Investor X then draws down RM50,000.00 of the RM100,000.00, from his margin account to finance the purchase of 15,000 shares of AIRASIA.

A few months later, he draws down the remaining RM50,000.00 line of credit to purchase 7,500 shares of CIMB.

Therefore, the Collateral CDS Account holds 5,000 shares of SCIENTEX, 15,000 shares of AIRASIA and 7,500 shares of CIMB.

How is interest calculated?

Currently,  INTEREST on most SMF is about ~5% per annum. Hence, the cost of borrowing is quite high.

Interest is accrued on a daily basis, commencing from the first drawn down, on all outstanding credit balance. There is no obligation to make monthly repayments (as there is none per se) so long as there is no margin call.

Example:

Going back to Investor X, his first draw down, in the amount of RM50,000,00 was to finance the purchase of 15,000 shares of AIRASIA. Interest will start to accrue on that RM50,000.00, at that point in time, on a daily basis, at 5% per annum. 

If you remember, Investor X, a few months later, made another draw down of RM50,000.00 to purchase 7,500 shares of CIMB. At that point in time, interest will accrue, on the credit balance of RM100,000.00 instead of the previous RM50,000.00.

A costly interest rate is further exacerbated by the fact that any outstanding sum on unpaid interest will be added onto the principal amount (like an interest of a credit card). In other words, interest is compounded.

Hence, your debt grows exponentially because of the compounding interest. In the long run, this will also affect your loan-to-value ratio (“LVR“) (see below). Therefore, you should act sensibly by paying off any accrued interest, which is calculated on a monthly basis, to ensure that your LVR is well-managed.

What is a margin call?

The benefit of a SMF comes with certain obligations. One of such is to maintain a certain fixed ratio between your outstanding credit (principal + interest) and the value of  your collateral or also known as a LVR (loan-to-value ratio).

LVR = outstanding credit ÷ value of collateral

Generally, most SMF providers require that margin account be maintained at or a lower  LVR of 60%. 60% is usually the threshold level. I’ve seen a couple of SMF providers who set a threshold level of 70% (this is much better that a threshold level of 60%).

MARGIN CALL is a demand by a SMF provider that you deposit fresh funds to bring the LVR at or below the threshold level.

Example:

Back to Investor X who has been maintaining an outstanding credit amount of RM100,000.00. The value of the shares in the Collateral CDS Account is in the amount of RM166,666.00, in aggregate. Accordingly, Investor X is maintaining a LVR of 60%.

Unfortunately for Investor X, the share market crashed as a result of an unforeseeable alien invasion which caused the value of his collateral to fall by 50%. Consequently, the LVR of his margin account has skyrocketed to 120% (RM100,000.00  ÷ RM83,333.00). 

To maintain a LVR of 60%, he must pare down the outstanding credit in his margin account (by injecting cash) for a failure to do so may cause the SMF provider to sell off the shares in the Collateral Account, and demand any shortfall from Investor X.


What to consider prior to applying for a SMF?

Roughly, prior to obtaining a SMF, you should give consideration to the following factors:

  1. Whether your broker is in the list of approved brokers by the SMF provider?
  2. What is the LVR?
  3. What can be used as collateral?
  4. What is the multiplier attached to each collateral?
  5. What is the prevailing interest rate?
  6. Will interest be compounded?
  7. What shares are acceptable to the SMF provider for the purpose of a collateral? [Because of their volatility, penny stocks may not be in a list of shares which are acceptable by the SMF provider as collateral.]
  8. Is there a base price value for collateralised shares and are you comfortable with that base price value? [A base price value means that even if the share of, say MAYBANK, is RM9.80 in the market, the SMF provider will only accept a base price value, of a share of MAYBANK, as RM8.00, for the purpose of accepting the share as a collateral. In other words, your shares may not worth much as collateral.]
  9. Is there any flexibility to pare down your credit limit?
  10. How much is the stamp duty? [Stamp duty depends on the credit limit – if we are not mistaken.]
  11. How helpful is the sales team? [From your interaction with the sales team, we recommend that you gauge their service performance. You need a SMF provider which provides a helpful service.]
Conclusion

Debt should not be connoted as a form of negativity. There are good debts and there are bad debts. An SMF is what we consider to be a good debt. It allows one to generate income from it. On the contrary, mounting debts on a credit card to fund your lifestyle purchases are bad debts.

Leverage should be viewed in a holistic manner in one’s portfolio and it can be utilised in many different ways, as long as the need for capital arises. Hence, our stance is that every investor should have a margin account even if there is no impending need for it yet. Like substituted soccer players, you can keep them on the sideline and only put them to play when it is necessary to do so.

So what are your thoughts about leveraging and SMF in general? Do leave a comment.

If you find this write-up helpful, please hit that like and share buttons on our Facebook for more updates and analysis.

 

 

Analysis

Analysis of Ajinomoto (M) Bhd

Dear Readers

In the last 11 trading days, the shares of Ajinomoto (M) Bhd (“Ajinomoto“) took a nosedive from an average price of RM26 (24.08.2017) to an average price of RM19 (13.09.2017). That is an average RM7 drop in share price. Percentage-wise, that is close to a 27% loss.

In my personal view, the negative movement in the share price was caused by:

  1. an adjustment to the share price as the dividend and special dividend, to the tune of RM1.55, went ex on 30.08.2017; and
  2. a widespread selloff in a cascading manner.

There were high volumes of transactions at that time during which RM400 million was wiped off from Ajinomoto’s market capitalisation.

Ajinomoto_logo1

For the benefit of those who are in the dark, a special dividend was approved for distribution from a one-off compensation of RM166 million. The compensation is with regard to a compulsory acquisition of a 7.58 acre land, at Jalan Kuchai Lama, KL. The land which houses one of its plants was acquired by the government for the Mass Rapid Transit Line 2 project.

Now as it seems like the dust has settled, the more fitting question to be asked is whether the shares of Ajinomoto are attractive at their current average price of RM19?

Let’s find out.

Overview

Ajinomoto is part of the Ajinomoto Group which was founded in Japan. Its principle business is the manufacturing and sale of umami seasoning. Umami is one of the basic tastes such as sweetness, saltiness, sourness and bitterness.

In Malaysia, Ajinomoto’s business can be categorised into the manufacturing and sale of:

  1. retail products; and
  2. industrial products.

Apart from the basic monosodium glutamate a.k.a. MSG seasoning (AJI-NO-MOTO), Ajinomoto’s retail products have branched out to include chicken stock (TUMIX), instant seasoning of various local dishes (SERI-AJI), pepper (AJI-SHIO), sweetener (Pal Sweet), blended garlic and onion-based seasoning (AJI-MIX) and a premium taste enhancer (AJI-NO-MOTO Plus).

Group-retails-2017-1
Meet the Ajinomoto retail familia. Credit: Ajinomoto

Its industrial products consist of TENCHO which encompass a range of industrial food ingredients used in the food processing industry such as noodles, sauces, processed food and etc.

Apart from the Malaysian market, which accounts for 60% of Ajinomoto’s sales, other sources of revenue come from overseas markets such as the Middle East (14%) and Asian (24.8%), among others.

During the FYE 2017, Ajinomoto’s retail business contributed RM305.3 million (73%) to its revenue whilst its industrial business contributed a cool RM114.6 million (27%).

Resilience 

Ajinomoto is a well-known for its umani seasoning since it was first marketed in Japan in 1909.

In Malaysia, Ajinomoto has become a household name since 1961 due to its aggressive television marketing in the past. Further, the use of umani seasoning is deeply entrenched and synonymous with Asian-styled cooking. The versatility of umani seasoning meant that it can be incorporated into a variety of ethnic cooking including Indian and Malay.

Through its leading market share and strong branding in the local scene, Ajinomoto’s products gets an unparalleled competitive edge over rivals.

Being a staple consumer product means that it has enjoyed steady sales even during economic downturns and the same will stay true in the future.

Potentials

Ajinomoto plans to introduce a new segment in its business which may entail the manufacturing and importing of food products as part of its plan to diversify beyond the seasoning products line. It wants to emulate what its counterpart in Thailand is doing; by selling food products and food seasoning. If indeed so, there is a likelihood that Ajinomoto may be producing or importing 3-in-1 coffee sachet, canned coffee and instant noodle. However there is nothing concrete to this regard yet.

The company also intends to boost sales in the Middle East as it sees potential in that market, especially in Saudi Arabia, Jordan, Oman and Yemen. Ajinomoto’s product which are produced in Malaysia has a better chance of penetrating the Islamic market.

Financials
DATA 2017 2016 2015 2014 2013
REVENUE (RM’000) 419917 400200 340376 345351 332908
OPERATING PROFIT (RM’000) 211469 53941 40596 37596 28085
PROFIT (RM’000) 187462 40787 29733 28041 19403
SHAREHOLDERS’ EQUITY (RM’000) 474638 307813 279524 262077 244344
DEBT (RM’000) 57800 59240 53422 45942 50060

RATIO

DEBT TO EQUITY RATIO 0.12 0.19 0.19 0.18 0.21
OCF RATIO 1.20 1.26 0.92 1.27 0.76
OPERATING PROFIT MARGIN 0.50 0.13 0.12 0.11 0.08
PROFIT MARGIN 0.45 0.10 0.09 0.08 0.06
EPS (CENTS) 308.30 67.10 48.90 46.10 31.90
EPS (ADJUSTED) CENTS 308.30 67.10 48.90 46.10 31.90
DPS CENTS 0.00 33.80 20.00 18.50 20.00
DIVIDEND PAY OUT (%) 0.00 50.40 40.90 40.10 62.50
P/E 5.16 13.40 12.90 11.10 13.90
ROE 39.50 13.25 10.64 10.70 7.94

With the exception of FY2017, there is a steady growth of earnings from FY2013 to FY2016. FY2017 is a little tricky though as there was a one-off gain, of RM166 million, from the said compensation. Generally a one-off gain would be discarded when valuing the fair value of a company; Ajinomoto is no different.

Of the RM166 million, only about RM144 million was recognised as profit. This can be seen in Ajinomoto’s Q4 FY2017 income statement and it’s Annual Report for FY2017.

By discarding the RM144 million from profit, Ajinomoto made only about RM42 million of profit or an EPS of about RM0.70 for FY2017.

Hence, between FY2013 and FY2017, earnings progressed at the a compound annual growth rate of about 17%. Impressive!

Other praiseworthy qualities are its low debts, good cash flow, improving profit margins and improving business efficiency. Dividend was erratic throughout the years but on the plus side the payout was on the modest side, with the exception of FY2017.

Conclusion

Even if Ajinomoto could sustain its current high growth rate in the foreseeable future, its average price of RM19 per share is, unfortunately, well above its fair value. My calculation of Ajinomoto’s fair value is about RM11.

Before I am accused of ruffling feathers, I would like to fortify my opinion that Ajinomoto is a company with solid fundamentals. Further it has a commendable economic moat in that its core MSG products are resilient from competition and economic downturns.

However, my only concern is that, at the price of RM19, there is a higher risk of a downside than an upside. Hence, a potential investor, contemplating purchasing at RM19 per share, is left with no margin of safety should things take a turn for the worse.

Having good fundamentals should not only be the sole consideration of whether a company is worth buying. This is because those fundamentals may change as time passes. To ensure that you are well protected from any adverse change in the fundamentals of the company, you must deploy a safety net in the form of a margin of safety. That means becoming a part-owner of the company for a sum lesser than its fair value.

While I am not suggesting that Ajinomoto’s share price will likely to decrease to a level near to RM11 over time (in fact it, at the time of writing on 13.09.2017, Ajinomoto’s shares are massively oversold, and may even rebound), I suggest putting Ajinomoto to your watchlist and only contemplating purchasing its shares are priced favourably in the future.

If you find this write-up helpful, please hit that like and share buttons on my Facebook for more updates and analysis.

Reference
  1. Q4 FY2017 report
  2. FY2017 Annual Report
  3. http://www.ajinomoto.com.my
  4. http://www.thestar.com.my/business/business-news/2016/12/22/ajinomoto-accepts-rm166mil-compensation-award-for-land/
  5. http://www.thestar.com.my/business/business-news/2016/11/30/dividend-windfall/
  6. http://www.theedgemarkets.com/article/ajinomoto-diversify-product-offering
  7. http://www.theedgemarkets.com/article/ajinomoto-venture-food-products
Thoughts

P2P Financing Tips

Dear Readers

In my last write-up, P2P financing update, I brought all of you to date with my P2P financing investment through Funding Societies Malaysia. As highlighted previously, P2P financing yields much better returns than traditional investment bonds and fixed deposits. Consequently, it is an effective investment to combat inflation.

11442058625_5223427501_b
Credit: letstalkpayments.com

Every investment has an inherent risk. P2P financing is no different. The major risk of P2P financing is the risk of a default by a borrowing SME. Fortunately, the default repayment percentage through the platform established by Funding Societies Malaysia is a negligible ~2%.

As for me, I have received 3 monthly repayments (July, August and September 2017) out of an agreed 6 monthly instalments. I am at the midpoint of the repayment schedule which has been a breeze thus far. I do not foresee any hiccups in receiving all of my remaining capital plus interest.

Business Term Financing Fact Sheet

Funding Societies Malaysia makes available, to all of its registered investors, a Business Term Financing Fact Sheet (“Fact Sheet“) for crowdfunding purposes. The Fact Sheet contains all of the necessary information regarding an SME including its financials over a certain period of time. This information is obtained by Funding Societies Malaysia through a due diligence process.

Unfortunately, Fact Sheets are confidential and only accessible to registered investors. Hence, I am unable to disclose the Fact Sheet of my investment. However, Funding Societies Malaysia was very accommodating when they provided a sample Fact Sheet which can be obtained by clicking the link HERE. As the format of the sample Fact Sheet is similar to that of the format of other Fact Sheets, is therefore ideal to be used for illustration purposes.

For convenience, I will refer to the SME in the sample Fact Sheet as Chocolate SME. As you click on the above link, you will notice that there are several headings in the sample Fact Sheet. The headings and their contents are listed in the table below:

HEADINGS

CONTENTS

Financing Details Contains all of the terms of the financing including financing tenure, simple interest rate, effective interest rate (compounded) and other conditions of finance.
Investors’ Repayment Schedule Contains an anticipated repayment sum which investors are to receive for each instalment until the end of the tenure.
Company’s Summary

Contains vital information on the SME including its incorporation date, the nature of the SME’s business, paid up capital, employees, existing litigation, any blacklist and financing records.

Financing records will summarise the SME’s other financial commitments with other lenders.

 

Director’s & PG’s Summary Contains vital information about all of the directors of the SME.
Financials Contains the past audited financials of the SME.
Financial Ratios Contains an evaluation of the financials of the SME.
Bank Statement Summary Contains a snapshot of the SME’s bank accounts.
Risk snapshot Contains an outline of the risks associated with the SME.
Comments Contains important highlights made by Funding Societies Malaysia.

The sample Fact Sheet contains information which you may analyse to make an inference as to the sustainability of the business and financial liquidity of Chocolate SME.

However, as a prudent investor, you should nonetheless read and understand all of the contents of a Fact Sheet. For the purpose of this write-up, allow me to list some of the major considerations which you should take into account prior to deciding whether to invest in Chocolate SME.

First consideration: Nature of business

Chocolate SME is a manufacturer of cocoa products in Malaysia, mainly chocolates. The chocolates are sold to chocolate retailers including the ones in Langkawi.

As excited as you are, at the thought of investing in a chocolate confectionery manufacturer,  you will need to satisfy yourself of the risks involved in Chocolate SME’s business.

But what makes a business risky? Well, any two persons looking at the same business may reach a different conclusion about the sustainability and risks associated with that business. Hence the answer to that question is better left to your knowledge, experience, power of observation and common sense.

For example, if an SME is in the business of selling typewriters, I would categorise it as a risky business. It is apparent, through my knowledge, experience, observation and common sense that not many people, if at all, are still using typewriters.

As chocolates is a popular confectionery and there is a strong demand for it in Malaysia – especially in a tax haven like Langkawi. Therefore, there is no reason for you to discount the sustainability of Chocolate SME’s business.

Second consideration: Debt repayment history

Ever heard of the saying, “History repeats itself”. The knowledge of the debt repayment history of an SME is crucial in gauging whether it has the means to make timely repayments.

In the case of Chocolate SME, the “Payment Behaviour and Financing Record” item of the Fact Sheet indicates that Chocolate SME has a good payment history across 2 existing accounts. That means that it is truly committed and financially capable of satisfying its debts.

Third consideration: Current ratio

The “Financials” part of the sample Fact Sheet consists of a summary of the income statement (the upper part of the Financials) and the balance sheet (the lower part of the Financials) of Chocolate SME. Some parts are blacken out as the information is not currently available.

With the available information, you should analyse whether Chocolate SME has too much debt for its own good in the short term. Why short term? It is because the financing tenure is only for 12 months (See: “Tenure” under the heading of “Financing Details”) . Therefore, it is only necessary to look at the ability of Chocolate SME to service its short term debt.

For the financial year-end (“FYE“) 2016, Chocolate SME had about RM2.7 million in current asset. Current asset is classified as an asset which is likely to be converted into cash within a year. For example, inventories are one of such types of assets because they can be easily sold in return for cash. Other types of current assets are cash (or its equivalent), equipment and receivables (money owing by debtors).

On the other hand, in the same year, Chocolate SME had about RM370k in current liabilities. Current liabilities are classified as moneys due to creditors within a year and are usually short term debts and account payable (to utility provider, suppliers and etc).

As a general rule of thumb, you want to invest in an SME which owns more current assets than current liabilities. This can be measured by using a current ratio.

Current ratio = (current assets ÷ current liabilities) x 100%

The current ratio of Chocolate SME for FYE 2016 was about 720%. This means, for FYE2016, Chocolate SME had roughly 7.2 times more current assets than current liabilities. Very impressive indeed.

Fourth consideration: Inventory turnover ratio

An inventory turnover ratio is simply a measurement of the effectiveness of an SME in dealing with the sales of inventories. In other words, how good is Chocolate SME in selling their inventories. Why is this relevant? This is because the more inventories are being sold – the more income that is generated by Chocolate SME. And by having more income, there will potentially be better cash flow to pay off outstanding financing liabilities.

An inventory turnover ratio is obtained by dividing the cost of goods sold with the average inventory. The higher the ratio, the better.

Inventory turnover ratio = cost of goods sold ÷ average inventory

For FYE2015, the inventory turnover ratio was at 6.70. This means the inventories were sold 6.7 times over during the course of FYE 2016. Even though it was lower than the than the 7.14 and 7.74 recorded for FYE 2013 and FYE 2014 respectively, that difference is not too far off.

Fifth consideration: Receivables Turnover

Receivables turnover ratio is a measure of how efficient Chocolate SME is able to collect receivables. Receivables means money/accounts to be received by Chocolate SME from its debtors. The more money Chocolate SME receives, the better it is for its cash flow. Consequently, a better cash flow translates to a better ability to pay monthly financing repayments.

A receivable turnover ratio is calculated by dividing net credit sales with the average account receivable. The higher the ratio, the better.

Receivable turnover ratio = net credit sales ÷ average receivable

For FYE 2015, the ratio was 7.40. This means that Chocolate SME was successful in collecting 7.4 times the average receivables during the course of FYE 2015. The ratio of 7.40 was slightly lower than the 8.75 and 8.37 recorded for FYE 2013 and FYE 2014 respectively but not by a huge margin.

Sixth consideration: Risk Snapshot and Comments

The Fact Sheet also contains Funding Societies Malaysia’s comments and observations of the financials and the risks associated with an investment in Chocolate SME.

I find that these observations are insightful as I was able to discern that:

  1. Chocolate SME’s products are sold on a healthy profit margin which has been improving other the years.
  2. The purpose of the financing is to expand its production capacity. I would be less inclined if the purpose of the financing is to pare down other outstanding debts.
  3. The directors of Chocolate SME are experienced business people.
Conclusion

Before I end, I just want to reiterate that the above considerations are not meant to be exhaustive in nature. There are many other considerations which you can take into account in determining whether a SME has a sustainable business model with the means of making financing repayments.

And more importantly, I hope that this write-up will arm you some guidance, courage and the confidence to nudge you into investing in P2P financing as a means to diversify your investment portfolio.

Your safeguard to the risks in every investment, including P2P financing, is knowledge.

Till then, happy investing!

Helpful links

Click the link if you would like to know more about P2P financing with Funding Societies Malaysia.

Click this LINK to register an account with Funding Societies Malaysia and earn RM50 when you deposit and invest RM1,000.00 through them. 

If you find this write-up helpful, please hit that like and share buttons on my Facebook for more updates and analysis.

My Journey

August 2017 Report Card

Dear Readers

With the end of August, comes September,which has always been a notoriously dreadful month for Malaysian equity.

There is always a silver lining even in a pessimistic month like September. However, to take advantage of the impending bargains, I suggest that you keep some cash lying around. About 19% of my portfolio is in cash at the moment – ready to pounce at a moment’s notice.

Bruce Plante Cartoon: The Stock Market
Credit: Bruce Plante Cartoon
What’s new?

I’ve added DNEX-WD (warrant) into my portfolio when the market was frantically disposing DNEX’s shares because of its lacklustre earnings, last quarter.

A couple of counters announced the distribution of dividends: Samchem @ 1 cents per share (30 Aug) and Airasia @ 12 cents per share (5 Sept). Rest assured, the dividends will be reinvested.

Presently, my portfolio consists of the following counters:

Airasia Bhd – 21.25% gain

CIMB Group Holdings Bhd – 31.88% gain

Dagang Nexchange Bhd WD (warrant) – 12.45% loss

Ekovest Bhd- 6.49% loss

Evergreen Fibreboard Bhd – 4.72% loss

Samchem Holding Bhd – 13.13% loss

The portfolio, despite of the losses suffered by 4 out of 6 counters, only retreated 0.3% to a 24.2% gain. You may compare August’s performance with July’s performance.

Until next time. Happy investing.

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Thoughts

Becoming Warren Buffett

Dear Readers

Ever thought how Warren Buffett became Warren Buffett?

HBO Documentary shows an interesting insight on the life of Warren Buffett.

Do enjoy.

Analysis

Analysis of Superlon Holdings Bhd

Dear Readers

Ever thought something as simple as thermal insulators could be such a profitable business. To understand why, we shall delve into what makes Superlon Holdings Bhd (“Superlon“) tick.

thumb-e1503405746912.jpg
Credit: Superlon
Overview

Superlon is principally a manufacturer of, among others, high quality nitrile butadiene rubber (synthetic rubber) thermal insulators (“NBR“). NBR is mainly used in Heating, Ventilation, Air Conditioning and Refrigeration systems (“HVAC&R“) in residential, commercial and industrial buildings.

Superlon’s focuses on the premium segment in terms of quality of its manufactured thermal insulators. Superlon branded those products as its namesake.

The majority of its clients are product distributors and sales agents. You can also find Superlon’s products sold on Alibaba.

Superlon’s secondary activity is the trading of HVAC&R components, The earnings from trading is nominal and will not be mentioned in this write-up.

Manufacturing of thermal insulation

Insulation is extremely effective at saving energy. The science behind insulation is rather simple; to stop heat transfer.

Imagine turning on the water heater on a cold winter’s night. When hot water runs through the pipes, heat from the hot water dissipates because the hot water pipes are exposed to the cold environment. Energy is then wasted.

On the other hand, in a tropical climate, such as the one in Malaysia, insulation works the other way around – by keeping heat from affecting air conditioning or refrigeration systems. That way, the air conditioning compressors do not have to work harder to keep the air cold. A thermal insulator will also prevent air conditioning or refrigeration pipes from sweating (or condensation) by preventing hot air to come into contact with the cold pipes. This prevents water damage to building structures, furniture and machineries.

These are a couple of scenarios where thermal insulators are utilised to achieve energy savings and to prevent condensation.

Energy savings, although may not seem much at first glance but at a grander scale, such as air conditioning or refrigeration systems in shopping malls, hotels, airports, mega factories or cruise liners, thermal insulators take on a much impactful role.

Superlon diversifies production, from thermal insulators to exercise mats (yoga mats) and acoustics insulators. If you are unsure of what an insulation foam is, have a feel of a yoga mat.

Superlon’s thermal insulators have a market share of about 50-60% in Malaysia. Its major export markets are Asia, North America, Europe, Oceania and more recently, Africa. Major markets in Asia include India and Vietnam.

Its manufacturing site is located at Klang, Malaysia.

On top of that, Superlon also sells adhesives, copper tubes, compressors, refrigerant gas, vacuum pump, fan motor and a variety of temperature and gas detectors.

Financials
DATA 2017 2016 2015 2014 2013
REVENUE (RM’000) 106,269 90,411 74,509 61,787 59,959
PROFIT (RM’000) 23,715 16,660 9,381 5,851 4,098
OPERATING PROFIT (RM’000) 30,379 21,555 12,845 8,047 4,471
SHAREHOLDERS’ EQUITY (RM’000) 107,989 89,444 79,940 59,062 55,766
DEBT (RM’000) 36,093 20,153 17,485 13,946 13,093

RATIO

DEBT TO EQUITY RATIO 0.33 0.23 0.22 0.24 0.24
OPERATING PROFIT MARGIN 0.28 0.23 0.17 0.09 0.07
OCF RATIO 0.76 1.78 1.19 1.01 1.20
PROFIT MARGIN 0.22 0.18 0.12 0.09 0.06
EPS (CENTS) 29.87 20.98 11.81 7.34 5.19
EPS (ADJUSTED) CENTS 14.82 10.41 5.86 3.66 2.56
DPS CENTS 11 9 8 3.3 1.8
DIVIDEND PAY OUT (%) 36.8 42.9 67.7 45.0 35.6
P/E 11.38 9.39 10.33 8.72 6.74
ROE 21.96 18.62 11.73 9.91 7.35

Over the course of 5 years, there was a significant improvement in areas such as: turnover (revenue), profit, profit margin, dividend and cash flow (OCF ratio).

In 2013, Superlon achieved a profit margin of 6%. Fast forward to 2017, that profit margin increased exponentially to 22%. Concurrently, return on equity also increased threefold.

The factors which contributed to the increase in earnings and revenue were increased sales volumes, the weakening of Ringgit Malaysia, lower raw material costs and increasing production efficiencies (economies of scale).

The major raw materials which make up the production of NBR are acrylonitrile and butadiene. The price of both raw ingredients intertwines with the price of crude oil. Therefore, a low and stable crude oil price will translate to lower raw material costs.

During the years under review, earnings per share increased at a growth rate of 41%. That is phenomenal.

To keep up with demand and production, Superlon started the construction of a warehouse in 2016. The warehouse is now in operations. The construction of the warehouse hopes to alleviate the production bottleneck caused by the lack of storage space in Superlon’s factory. The freed up space in the factory will be utilised for the installation of more production lines. This is expected to add to its manufacturing capacity by an additional 30%.

Potentials

Superlon is in the midst of erecting a new factory-cum-warehouse in Vietnam. This is Superlon’s first overseas production plant and is expected to commence operations in the first half of FY19 (1H FY19). Not much details are available about the said production plant except that the company is set to invest about USD4 million to its setting up.

An expansion to Vietnam makes so much sense it is already one of Superlon’s major export markets and is geographically closer to Superlon’s other export markets, such as India and the cluster of South East Asian countries. In addition, the cost of doing business in Vietnam is well below that of Malaysia due to its lower wage level.

Conclusion

I like Superlon for:

  1. Increasing its earnings at an incredible rate.
  2. Tapping export markets such as Vietnam and Africa.
  3. Strong research and development (extended product range to acoustic insulators).
  4. Capital expenditure on the construction of a warehouse in Klang and a manufacturing site in Vietnam.

Superlon is unattractive for the following factors:

  1. Share price has increased about 165% from a year ago.
  2. Affected by the volatility of raw material price (crude oil) and currency fluctuation.
  3. Capital expenditure in Vietnam may not be a fruitful venture.

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Disclosure

I do not own any shares in Superlon.

 Reference
  1. 2016 Annual Report
  2. Q4 FY2017 Quarterly Report
  3. http://www.superlon.com.my
  4. http://economictimes.indiatimes.com/markets/commodities/fall-in-crude-oil-prices-fails-bring-cheer-for-synthetic-rubber/articleshow/50554238.cms
  5. http://www.theedgemarkets.com/article/superlons-profit-attributed-higher-volume-better-margins
  6. http://www.theedgemarkets.com/article/attractive-valuation-superlon
  7. http://www.theedgemarkets.com/article/superlons-new-facility-boost-its-production-rate
  8. http://www.theedgemarkets.com/article/superlon-hits-alltime-high-solid-fy17-positive-fy18-earnings-forecast
  9. https://markets.ft.com/data/equities/tearsheet/summary?s=SUPERLN:KLS

 

 

Analysis

Analysis of Three-A Resources Bhd

Dear Readers

Three-A Resources Bhd (“3A“) is a manufacturer of halal and kosher (Jewish) certified food and beverage ingredients such as:

  1. Caramel colour, a food colouring.
  2. Natural Fermented Vinegar such a rice and distilled vinegar.
  3. Hydrolised Vegetable Protein/Soya Protein Sauce which is pretty much soy sauce.
  4. Glucose/maltose syrup.
  5. Maltodextrin, a thickener like starch which is used in food and beverage.

3A’s main operating site is in Sungai Buloh, Selangor.

subsidiary_sssfi
Credit: 3A
Financials
DATA 2016 2015 2014 2013 2012
REVENUE (RM’000) 387,718 352,400 311,410 302,910 306,428
PROFIT (RM’000) 38,921 20,082 18,214 10,316 17,638
OPERATING PROFIT (RM’000) 60,493 38,636 33,768 23,113 26,563
SHAREHOLDERS’ EQUITY (RM’000) 279,435 248,171 231,825 219,031 213,754
DEBT (RM’000) 60,142 70,948 47,824 73,748 100,894
RATIO
DEBT TO EQUITY RATIO 0.21 0.28 0.21 0.34 0.47
OPERATING PROFIT MARGIN 0.15 0.11 0.11 0.07 0.09
OCF RATIO 2.33 0.14 1.64 1.11 0.03
PROFIT MARGIN 0.10 0.06 0.06 0.03 0.06
EPS (CENTS) 10.00 5.10 4.60 2.60 4.50
EPS (ADJUSTED) CENTS 7.91 4.08 3.68 2.10 3.23
DPS CENTS 1.80 1.40 1.40 1.20 1.20
DIVIDEND PAY OUT (%) 18.0 27.4 30.4 46.1 26.7
P/E 13 20 19 32 24
ROE (%) 13.9 8.09 7.86 4.71 8.25

FY2016 was reportedly the best performing financial year of the company since being listed in 2002. 3A recorded a revenue of RM387 million as compared to RM352.4 million, in FY2015. That is an increase of 9%. Generally, the revenue trend is increasing over the years.

Of the total revenue for FY2016, 33% was derived from export sales which includes Singapore (10%). The remainder 67% of sales was derived from the local market.

Profit in FY2016 (RM38 million) increased 90% as compared to FY2015 (RM 20 million). Following the strong profit uptrend, earnings per shares also rose in tandem with higher revenue and increased profit margin. In fact, profit margin rose from 6% in FY2015 to 10% in FY2016. That is a tremendous increase of 60%. Further, the increase in earnings per share is validated with the increase in return of equity.

According to the Annual Report for FY2016, the main reason for the surge in profitability and profit margin is due to targeted pricing strategy employed by 3A. The company targeted high value customer to get better margins and profits. A higher operating margin (15%) in FY2016 (compared to 11% in FY2015) also indicates that management was effective in in keeping costs in check.

Suppose if 3A keeps up the trend of increasing profits and lowering costs (the fundamentals of a business), I am confident that this year’s profit will see an improvement from FY2016.

Potentials

Not letting success to invite complacency, 3A continued to invest in the business by initiating capital expenditures such as the construction of an additional maltodextrin plant namely Maltodextrin Plant No.3. This project is tagged as a growth driver for 3A in the near future and it is funded purely from internal funds. Maltodextrin Plant No.3 will add another 2,200 metric ton of maltodextrin a month and will bring the overall capacity of maltrodextrin production to 5,500 metric ton per month.

As of May 2017, Maltodextrin Plant No.3 is at 25% capacity and that capacity is expected to rise.

The management of 3A has also earmarked RM40 million for capital expenditure for FY2017 and FY2018. About RM17 million will be used to acquire 2 pieces of land for future plant expansion.

Conclusion

I like 3A for:

  1. Its involvement in the food business. The saying in the food business has always been “Everybody’s gotta eat.”
  2. Increasing the capacity of Maltodextrin.
  3. Sound financials.
  4. High earnings growth rate of about 19% CAGR by my calculations or about 20% CAGR as calculated by FT.

3A is unappealing because:

  1. In 2010, 3A partnered with Yihai Kerry Investment Co Ltd, a subsidiary of Wilmar International Limited,  to set up a factory in Shanhaiguan, China, to manufacture food and beverage ingredients. The collaboration is still suffering losses to the tune of  RM7.3 million in FY2015 and RM5.8 million in FY2016. Losses are expected for another 3-4 years because the products are getting a slow response from consumers in China.
  2. The directors of 3A are being charged for insider trading in relation to the joint-venture with Yihai Kerry Investment Co Ltd. Corporate governance is definitely put in the spotlight.

Notwithstanding the negatives, my take is that at its current price of RM1.35, 3A is trading at a bargain. Hence, this counter is on my watchlist.

As for the cherry on top, Three-A Resources Bhd is a pretty dull name for a company and there is no coverage of this company by any research houses. These traits fit into the investment philosophy propounded by Peter Lynch (not a joke).

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Reference

  1. FY2016 Annual Report
  2. http://www.three-a.com.my/bursaAnnouncements/files/2017/2017-5-11-3A-AGM-Summary%20of%20Key%20Matters.pdf
  3. https://markets.ft.com/data/equities/tearsheet/financials?s=3A:KLS
  4. http://www.theedgemarkets.com/article/3a-and-wilmar-begin-partnerships-china
  5. http://www.thesundaily.my/news/2015707
My Journey

July 2017 Report Card

Dear Readers

The Feds’ decision to keep interest unchanged in July 2017 is a step in the right direction to quell the possibility of a recession. This means that cheap money is here to stay. By no means this is sustainable because a debt-fueled economic expansion will give way as soon as signs of inability to service debts appear. Do be weary of this.

market-roller-coaster
Courtesy of fxempire

I’ve made major changes to my portfolio since the last month by adding Evergreen Fibreboard Bhd and selling Maxis Bhd (for a -2% loss), Elsoft Research Bhd (for a 42% gain) and Kronologi Asia Bhd (for a 40% gain) for various reasons including profit-taking and to consolidate my portfolio.

The reasoning behind the purchase of Evergreen is that I’m sold by its turnaround plan which has already been implemented and is currently undergoing commercial operations. As for Elsoft and Kronologi, even though I have offloaded them, I still believe that the fundamentals of both these companies are still very much intact. In fact, Kronologi latest quarterly report showed an increased earnings of 140% than the reported earnings in the corresponding quarter a year ago.

Currently, my portfolio stands as follows:

Airasia Bhd – 17.22% gain

CIMB Group Holdings Bhd – 26.72% gain

Ekovest Bhd- 8.95% loss

Evergreen Fibreboard Bhd – 3.57% gain

Samchem Holding Bhd – 10.70% loss

I’m not too concerned about Ekovest and Samchem. I believe both companies will pose better earnings in the future. In fact, I’m considering purchasing more of Samchem, on a bargain.

In the aggregate, my portfolio advanced 1.5%, from a 23% gain in June 2017 to 24.5% gain, this month.

31 July 2017 is the Evergreen’s ex-date for a 2 cent dividend which is to be paid on 18 August 2017. At an average price of RM0.868 per share, that equates to a dividend yield of 2.3%.

Until next month.

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Thoughts

P2P Financing Update

Dear Readers

In my last article, Who’s afraid of P2P financing?, I shared about my initial experience of P2P financing through Funding Societies Malaysia. So, if you haven’t read Who’s afraid of P2P financing?, I strongly suggest you give it a go.

lending-01-5
Credit Yourstory.com

Now, not everyone has the appetite for the volatility of equity investment (shares investing), and its derivatives. But, at the same time, I am sure most of us are seeking other investments which may yield better returns than conservative investments such as fixed deposit and bonds. This is because we are living in a low interest rate environment ever since the last global financial crisis in 2008. Interest rate in Malaysia, although higher than most developed economies such as Japan, USA and Europe, has remained stagnated since 2008. Low interest rates couple with higher inflation will see your hard-earned savings slowly diminishing, in terms of purchasing power.

Between 2008 and 2016, fixed deposit in Malaysia,  on average, yields a measly 2.85%.

deposit rate malaysia

Exacerbated by a rising inflation rate since the beginning of 2017, which has been hovering around 4% mark and hit a high of 5% in March 2017, higher inflation rate may have nudged us to look elsewhere for higher yields other than the low return generated by fixed deposits.

As for me, I only maintain a minimum amount in fixed deposit for a rainy day. My logic is simple; putting too much money in cash is not going to benefit me in the long run.  In fact, it may be detrimental. Hence, this is where P2P financing comes into the picture as it provides an opportunity to achieve a balance between a manageable risk and considerable return.

So, let’s get down to it.

What is your experience of P2P financing with Funding Societies Malaysia?

I am pleased to report that I have received my first monthly return from a crowdfunding which began in May 2017. I have made an initial test investment of RM1,000.00 in a crowdfunding exercise which raised RM1 mil for a small and medium-sized enterprise (“SME“). I did this after satisfying myself of the viability of the venture by carefully reading the investment fact sheet provided by Funding Societies Malaysia (think of it like a product disclosure statement).

Funding Societies Malaysia also performs stringent due diligence and credit assessments to sift out SME with bad creditworthiness – like how any banks would conduct themselves before approving a financing facility.

In this particular crowdfunding exercise, the investment tenure is for 6 months with an interest rate of 10% per annum. That is effectively, 5% interest over the course of 6 months (excluding service fee). Some crowdfunding exercise may yield up to 16% per annum (even after deducting service fee).

Screenshot_20170717-222827

So for July 2017, I received RM174.99 from the investment, of which, RM166.66 is principal and RM8.33 is the interest (or the yield). RM1.74 (or 1% of investment) is deducted from RM174.99, as service fee for Funding Societies Malaysia, thus leaving me with a balance of RM173.25.

A thing which I am particularly fond about P2P financing is that the money received from the instalment repayments can be reinvested, in another crowdfunding exercise, as soon as it is made available to me. In other words, if there is an available crowdfunding exercise (there are about 2-3 crowdfunding exercises per month on average), I can reinvest my balance of RM173.25 through Funding Societies Malaysia. Hence, I am constantly generating income, as I should, because inflation never sleeps.

In my case, a yield of 10% per annual (excluding service fee) is handsome and definitely ample to tackle a rising inflation.

How would you rank P2P financing against fixed deposits and bonds in terms of yield?

Because P2P financing via Funding Societies Malaysia could potentially yield up to 16% of interest per annum (after deducting service fee), it has a return which is much higher than that of fixed deposits and most investment grade bonds (the AAA or AA-rated bonds).

See, by taking on an acceptable risk, you could be in a position to potentially receive a yield of about 4-5 times higher than that of the yield from a fixed deposit.

How does P2P financing stack up against investment in the share market (equity)?

P2P financing is an investment in debt as oppose to an investment in shares (equity). Hence, it has zero correlation with the performance of the share market. In spite of that, the yield from P2P financing is comparable with the yield from investing in the share market, which averages to about 7-10% per annum, in the long run.

Furthermore, P2P investing is definitely a suitable investment for those who cannot stomach the volatility of the stock market (like my mum) or for those looking to balance their portfolio with some high-yield debt investing (like me).

As an investor, I can truly appreciate the element of certainty of the return from P2P financing. For example, I know beforehand the return of investment which I will be getting from the get-go.

Conclusion

P2P financing is definitely a strong contender to other conservative investment such as cash or bonds. On the other hand, equity investors could also benefit from a high-yield diversification into P2P financing.

Like any other investments, the element of risk is inevitable and should be accepted as part and parcel of investing. With proper risk management, the risks involved in P2P financing can be greatly reduced.

In my next write-up about P2P financing, I will share some considerations which I personally make before investing in a particular crowdfunding exercise. Such consideration is part of my risk management strategy which I hope will be useful to you.

So how do you find P2P financing? Do drop me a comment.

Until then.

Helpful links

Click the link if you would like to know more about Funding Societies Malaysia.

Click on this special LINK should you would wish to sign up and create an investor’s account with Funding Societies Malaysia.

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