Sunday, July 7, 2019

Company Prospecting: Modeling future earnings of companies

I have finished reading the book "Common Stocks, Common Sense", and have re-read a few chapters twice. I can really relate to the statement about modeling future earnings through qualitative analysis and "guessing" than just simply extrapolating pass data into future. This is especially true for companies that are cyclical in nature. It is not really meaningful to DCF its value, because the earning might be quite volatile. Reits might be a better target to DCF.

To cut the story short, I will like to share how I have applied my own future modeling using Singapore Companies as case studies. Readers who are interested, please read the book, as I am just trying to scratch the surface with my explanation.

First Step: Look for Market leader.
The reason is simple. I want a company that can captured the industry upturn. A company that will gain when industry turn around and not continue to be a laggard.

The example, I am using is PAN United. Looking at Revenue.

Image result for demand for construction in singapore chart

Pan United Rev from Cement and Construction materials
2018: 545,710,000
2017: 527,674,000
2016: 577,639,000
2015: 668,421,000

You can see from here there is some sort of correlation and according to
PAn united is the biggest Cement supplier. Engro, another Cement Supplier listed Singapore managed
2018: 153 mio
2017: 141 mio
2016: 144 mio

So I think there is no doubt Pan United is a Key Market Player that will stand to gain when industry upturn happen.

Second Step: Check for correlation

Profits from the segment of construction material
2018: 8,496,000 with rev 545,710,000
2017: 8,958,000 with rev 527,674,000
2016:  10,657,000  with rev 577,639,000
2015:  12,859,000  with rev 668,421,000
2014:  24,219,000  with rev 612,097,000
2013:  39,406,000  with rev 599,049,000

You can see margin destroyed due to lower demand as well as competition. But Pan United has hold market share reasonable well.

One more chart.

You can see the "good times" correlate to good price of cement RMC.

I am aware of different grade of RMC, the one included in BCA statistic is Grade 40, and there are different type of Concrete, some quick solidifying, some green and carbon neutral, but I still think is a reasonable calculated guess.

So is 2016 - 2018 horrible years in construction demand? From BCA data, the demand for construction in those three years are:
(Data from BCA)
2018 - 27 bio
2017 - 24.5 bio
2016 - 26.1 bio
2015 - 27.2 bio
2014 - 37 bio

Again, it seem 2014 is the golden year for a good reason.

BCA projection of demand is always announced in January. In January the projection is

Third: Guess Industry upturn

It seem it is going to be a slow year yet again, but the 9 bio expansion by MBS and Genting are announced in April, and I am quite sure assuming 3 Bio A year over the next 2 years when construction start, this demand is not captured in the projection, at least not accounted for in the lower end of projection

Worst case scenario, up to April, it is on track to hit the lowest 27 Bio Demand, so it should not get any worse. Reading on Pan United Quarter reports and BCA announcement of big tenders, various En-Bloc redevelopment again seem un-captured in 2018.  

RMC price is better in Q2 than in Q1, and Pan United Q1 results is already better in 2019, than 2018. I assume that the worst is over for Pan United.

In the book, the author model precise earnings.

I will pass giving a giving an exact figure, I will instead guess  a range of possible earnings. Assuming if price of RMC return to the good old days of 110 and above, will margin be closer to the bountiful of years of above 5% ( >6% in 2014)?

2018 margin is at 1.5%, it does not need a party for margin to double. Assume Status Rev 550 mio in 2019 and 600 mio in 2020 (Where the demand for the IR should start flowing), and Margin of 1.8% in 2019 and 2% in 2020, we should see profits of 9.9 mio and 12 mio.

Even if margin double, the best case and most optimistic scenario, it is still only half of what it is like in the good old years. So for a conservative projection, we see EPS of  about 1.4 cents, 1.66 cents in 2020.

Assuming pay out ration of 80%, dividend will 1.12 cents and 1.32 cents.

So at current price, PE for 2019 can be 24 times or at good as 12 times (If margin improve to 3%)
Yield can be 3% or 6%

So at current price, it makes no sense for me to add, no matter how much I like it. I bought my first tranche of Pan United at 28.5 cents, so valuation use, it makes slighly more sense at future PE of 20 times or 10 times, and dividend of near 4% to 8%

As I mention earlier, I did a range of valuation than giving a fix figure, but if  second quarter earnings makes 1H earning out of my expected range of earning, I know it is time to say good bye.


This is the first time, I spent so much time writing an article on investment, I will leave QAF modeling to next time. (Not vested in QAF)

Sunday, June 16, 2019

Random thoughts: Book recommendation

Check out this book. I have really enjoyed it. An investment theme book.

Sunday, June 9, 2019

Company prospecting: Pan United

A very short write up. More for discussion and putting it on investment bloggers radar, than throwing in numbers.

Pan United is a leading supplier of cement in Singapore. Hence their business depends on the demand of the construction sector. Information from BCA show that demand is picking up. The lowest projection of demand is expected to go up over the next few years. The projection came before the announcement of IR expansion. I am not sure if the 9 billion investment is accounted for, I assume that even if it is accounted for, all these would mean the projection Should come to the mid range of projection of close to 30 bio. 

When the construction sector  is declining in Singapore, pan United still manage to increase revenue and hence improve market shares except for the last 2 years.
If u do some tracking, at its Peak of it profitability, Revenue is half of what it is now but net profits is double of what it is now. Margin keep getting squeeze and became.lower and lower. RMC prices has shown some recovery ij the recent quarter but nowhere near its peak. If u look at Q1 reaults, it has double its profits simply by improved margins and RMC price ccontinue to improve due to expected higher demand in construction.

Beside the IR, the Deluxe of En bloc demand seem not BEING captured in 2018 as the BCA projection was higher than the actual Billings. So I am rather confident that construction demand will be nearer to 30 bio this year (clearing of backlog of developnent of En bloc site) and beyond in 2020.

Pan united has maintain profitability when demand hover around 26 to 29 bio.

Construction is turning, and I expect earnings to double.

Hence there is a chance for a yield play plus capital apprecitation to happen if pan united does double its NP for 2019.

Vested and maiden investment made at 28.5 cents. DYOD.

IF anyone has this in your radar, please leave a comment and I would really like a discussion. 

Thursday, June 6, 2019












Friday, May 17, 2019

Coporate updates of Silly InC

Dear readers, Silly Inc has sold all it netlink shares and make its maiden investment into capitaland.

Netlink has play out mostly as the board wanted. Dividends increase, growth in profits, etc. However, the growth is too slow to offset the 45 mio in loans that are used in distributions.

The board would be more hopeful had the growth be more impressive. Going forward, Capex will.most likely increase and if the rate of growth is to continue, netlink could, at best, offset the 45 mio in distribution but they could hardly increase dividends anymore without either CONTINUING WITH THE LOANS DISBURSEMENT OR INCREASE LOANS TO DISBURSE as dividends.

APPT is a good lesson and reference. While the 2 companies are different with different growth sectors and Netlink seem more likely and also competent to capture the growth, it is never a great idea to use loans for distributions.

What happen if Netlink do not use loans anymore? The fall in shares price could be drastic. But Netlink won't do it, they are not stupid. They have enough debt room and cash flow to be on morphim for a long time and hope for growth to come to the rescue.

However, enjoying a 6 pecent yield while facing with such risk seem illogicial. Silly inc had APPT for 11percent  yield and manage to offload it for capital gains yeARS ago. The riSK reward profile do not seem attractive.

With the increase in cash, there are several potential companies that silly inc would like to accumulate at the right price.

The company bought Capitaland not based on ratios but the fact that many did not realise the Capitaland will be a very different animal after the merger.

First, there will be a significant ARA type of fund management business. There are many ways to cash in the cow. Put all the reits under one managemENT and IPO it.

Offload different assets to different reits to recyle capital.

Last but not least, it will be able to truly build a whole township without the need to subcontract. Vietnam is industrial towns hot bed, capitaland can build hotels, malls, factories and homes, and also manage it, and sell it for any governmemt overseas.

Capitaland is not a value or turnaround play, but is a good concept play, and the possibities to cash in after the merger is quite aplenty, and those coporate actions make good story headlines.

As for the recent headlines grabbers on tradewar etc. The company is in the view that all investments should take into considerations the downturn of market. We hold a considerable amount of cash, close to 50 percent, as risk management. There also other funds like CPF OA and SRS that are hardly utilize as of now.

So silly Inc will just continue to do the silly thing of prospecting companies with growth prospects and wait for the right price instead of worrying of trade war or otherwise as a market correction and a gentle bear is already planned for in company cause of action. The company do fear a prolong Winter Bear as company has no experince with it. 

There are already a few counters close to purchase price and silly Inc has made a few bids with no avail. Silly Inc will.update as and when there are deals made.

Silly Inc to assure interested readers that it will continue to be prudent and would like to share The portfolio excluding cash is still doing well, with only 2 counters trading below cost 

Saturday, May 4, 2019

SillyInc corporate update : First Reit Accumulation

Silly Inc recently double the holdings of FR in portfolio. The Average price is 97 cents including costs.

The board is in the view that default risk by Lippo K (Biggest rental income customer 87%) is non-existence, since the rights exercise by Lippo K (yet to materialize)

However, since then, First Reit has been falling from above $1 to the low of 93 cents recently. All the known risks have been reduced, yet FR fall instead of rise.

Lets visit the risks:

1) Execution of Meikarta Project by Lippo K (Top management did not get indicted, and there is no adverse updates since then)

2) Default Risk (Almost non existence now, if they raise the fund like they say they would. 1 billion would have wiped off all the loans the parents company had, but of course, 200 mio will be earmarked to develop Meikarta

3) 2021 lease renegotiation to be in Indonesia Currency instead of Singaporean dollars. Well, it will expose one to currency risk indeed.

4) Asset dumping by OUELH or Lippo K. The troublesome and lawsuit laden China projects from OUELH cannot be dumped due to the litigation going on. Japanese home is likely dumping candidate. Hence this post is to provide some numbers for this high probable dumping.

Now the Maths:

Japan homes asset = 290 mio
Yield = 5.5 %
Rental revenue = 16.7 mio

Assumption: (All scenario based on market price of $1, the cheaper u get in, the better the deal)

1) 90 mio by debt, 200 mio rights/ placement (discount at 90 cents)

Future yield becomes 7.6%

2) All Debt. Yield accretive. 9%

3) All rights. Yield 6.9%

4) 140 mio debt (Almost Half), Yield 8%

Board in the view that all rights or all debts way to acquire Japanese Homes is unlikely.

So we are looking at yield at 7% upwards, asssuming they dun price too large a discount, and issue shares at below 90 cents.

Company did not calculate till 2 decimal place and readers are to do due dilligence. Company will most probably trade this counter and will monitor it closely with profit taking and loss cutting markers.

Thursday, April 25, 2019

Random thoughts:

Had been a few hectIc weeks.

However, I still offered to help train the volleyball teams every morning. I really enjoyed the sessions. I feel that the teacher IC is helping me more than I am helping her.

Today, the senior boys team became the national champions. A proud moment for them. There will be no more morning trainings, and I think I am really going to miss them.

At age 40, the last 4 weeks is really God send.  I felt I went back to my secondary school days. My school is a notorious school, but I have very fond memories of my CCA trainings.

The jumping and spiking hurt my ankle and knee. I need those guards now. I am no longer young, and the joints hurt. But I really miss those sessions, in fact, I am feeling rather down now.

Those days. Eh... training everyday. My team mates, our friendship.

Will I choose another secondary school? No.