When looking to buy a stock, what is the most important thing you look for?

Stocks are usually valued in several ways:

1) By earnings potential, or P/E ratio,
2) By reliability or sustainability of earnings, or
3) By cash flow

1) - typically is employed for high potential companies - ie companies which have little earnings today but a propensity for large gains in the future - for eg companies in R&D etc where a "killer product" might emerge. A high P/E generally comes about from peoples' expectations of future growth. Evaluating such companies are typically more difficult as investors have to sort out the gems from the hype, and thus are fairly high risk by nature

2) - otherwise known as "blue chips", these companies offer stable and sustainable income in the form of consistent dividend policies and some capital growth over the long term. They are typically market leaders in their industry and are thus valued at a rate of return that is consistent with their lower risk category, thus typically have a lower P/E

3) - also known as value investing, this somewhat differs from 2) in the sense that it takes into account cashflow more than earnings. Theoretically a company may be making an accounting loss and yet be cashflow positive (ie they are in a cash or near cash business, for eg telecoms and utility stocks. There is little or no consideration given to the profitability or sustainability of the company in the long term. Rather, a simple nett asset value computation is used where so long as the NAV per share trades at a certain percentage discount to share price (typically 60% or more discount), they represent a "value investment". This is where NAV is defined as current assets (less of inventory, which is relatively illiqud) minus all short and long term liabilities. In other words, should the company be shut down tomorrow, the "return" would be around 3 times your investment. The company should also have a good dividend policy which pays out a relatively high portion of their net cash flow. The company should also not be too tightly held, else the individual investor might be disadvantaged, even though there are laws to protect minority investors in most cases.

Comment: I contribute to Yahoo! Answers, and sometimes when there is a question I feel is pertinent to this blog, I add the same answer here.

Lest we forget

The cheerful little girl with bouncy golden curls was almost five.

Waiting with her mother at the checkout stand, she saw them, a circle of glistening white pearls in a pink foil box. "Oh mommy please, Mommy. Can I have them? Please, Mommy, please?"

Quickly the mother checked the back of the little foil box and then looked back into the pleading blue eyes of her little girl's upturned face.

"A dollar ninety-five. That's almost $2.00. If you really want them, I'll think of some extra chores for you and in no time you can save enough money to buy them for yourself. Your birthday's only a week away and you might get another crisp dollar bill from Grandma."

As soon as Jenny got home, she emptied her penny bank and counted out 17 pennies.

After dinner, she did more than her share of chores and she went to the neighbor and asked Mrs. McJames if she could pick dandelions for ten cents.

On her birthday, Grandma did give her another new dollar bill and at last she had enough money to buy the necklace. Jenny loved her pearls. They made her feel dressed up and grown up. She wore them everywhere, Sunday school, kindergarten, even to bed. The only time she took them off was when she went swimming or had a bubble bath.

Mother said if they got wet, they might turn her neck green. Jenny had a very loving daddy and every night when she was ready for bed, he would stop whatever he was doing and come upstairs to read her a story.

One night as he finished the story, he asked Jenny, "Do you love me?"

"Oh yes, daddy. You know that I love you." "Then give me your pearls."

"Oh, daddy, not my pearls. But you can have Princess, the white horse from my collection, the one with the pink tail. Remember, daddy? The one you gave me. She's my very favorite."

"That's okay, Honey, daddy loves you. Good night."

And he brushed her cheek with a kiss.

About a week later, after the story time, Jenny's daddy asked again, "Do you love me?"

"Daddy, you know I love you."

"Then give me your pearls."

"Oh Daddy, not my pearls. But you can have my baby doll. The brand new one I got for my birthday. She is beautiful and you can have the yellow blanket that matches her sleeper."

"That's okay. Sleep well. God bless you, little one. Daddy loves you."

And as always, he brushed her cheek with a gentle kiss. A few nights later when her daddy came in, Jenny was sitting on her bed with her legs crossed Indian style.

As he came close, he noticed her chin was trembling and one silent tear rolled down her cheek.

"What is it, Jenny? What's the matter?"

Jenny didn't say anything but lifted her little hand up to her daddy.

And when she opened it, there was her little pearl necklace. With a little quiver, she finally said, "Here, daddy; this is for you."

With tears gathering in his own eyes, Jenny's daddy reached out with one hand to take the dime store necklace, and with the other hand he reached into his pocket and pulled out a blue velvet case with a strand of genuine pearls and gave them to Jenny. He had them all the time. He was just waiting for her to give up the dime-store stuff so he could give her the genuine treasure.

So it is, with our Heavenly Father.

He is waiting for us to give up the cheap things in our lives so that he can give us beautiful treasures. Isn't God good?

Are you holding onto things that God wants you to let go of? Are you holding on to harmful or unnecessary partners, relationships, habits and activities that you have come so attached to that it seems impossible to let go?

Sometimes it is so hard to see what is in the other hand but do believe this one thing .

God will never take away something without giving you something better in its place.

The greatest gifts happen when you share love & touch others. NOT to DECIDE is to DECIDE ..

Comments:

Personally, I was touched by this e-mail. No matter what God you worship, we must always come back to the fundamentals - ie what is our true values in life? Money is money, and does a lot of things - but it cannot buy love, family or well-being.

So we come to a different concept of "value investing" - money as a means to an end on not the end goal itself.

Outside of the moral/religious aspect, also know when to let go of what is ultimately unimportant and focus on how to increase what is important to you.

Lest I be accused of preaching, at the very lowest definition, for those of you who are truly only interested only in the bottom-line, the moral that still can be drawn from this simple yet complex story is that you should know when to let go of an "investment" lest you be blinded to a "true gem". But then again, this would be a sad definition.

Value Stocks - a different perspective in trying times

Reading through the forums, it is clear that many "investors" rely heavily on market rumours, often uninformed advice from friends & family or even total strangers for advice as to which stocks to pick. One question that should perhaps be asked is that would you take advice from such sources in deciding who to marry, what degree to take, or indeed any other major decision in your life? After all, whilst money doesn't indeed buy happiness, it sure goes a long way towards helping one get on with life - a wrong decision could set you back many years in terms of retirement planning, planning a family or even taking a holiday. If not, then perhaps sourcing your next "hot pick" from such people might not be such a great thing after all.

So what next? Many people are not familiar with financial statements - a course I once attended on basic accounting for non-accounting managers was an eye-opener. Senior professionals were at a loss when it came to understanding simple debit/credit, let alone P&L statements and Balance Sheets. Couple that with the fact that we are not industry experts and do not have access to company officials like Warren Buffet for example does, what chance indeed has the man on the street.

To begin with, we are to a smaller or larger extent equipped with "common sense" (if only common sense were so common!). Just like Warren Buffet, look to companies who produce products that you understand. Then do a little crystal ball gazing and see if the product or service is one that is both sustainable and one in which the company in question has some definable advantage in, compared to its peers in the industry. Then see what threats (or opportunities) there are in the marketplace that will erode (or enhance) the company's business over time. Now you have a simple basis by which to evaluate a company from a long term value perspective.

Still ignoring the specific financials, as yourself if the company and its industry is growing, maturing or declining. Look next to the overall economy (local and/or global - depending on the company's "playing field") - this determines the the "best" time to enter (if you are a long term investor, there may be no "best time to enter" - rather it would be a progressive accumulation.

Next, is the company tightly held (and thereby illiquid and subject to manipulation), has it got a good (and sustainable) management, and what is its reputation like.

The above "measures" are purely qualitative and serve to mainly act as a form of a sanity check. These can be done independently of analyst reports, market rumours, etc and should provide a fairly firm foundation even in the absence of financial analysis.

Don't forget - even stock analysts are prone to hype and just like any other person are susceptible to hype and white-washing (for eg take the case of Ferro China, just to mention one). A study of top analysts on Wall Street sometime back revealed that more than half the top analysts at the time did not even know how to read a simple P&L and Balance Sheet!

So is all the above just plain common sense? Yes. And yet too much money has been lost on hype that many of us do not understand but gamble on to this date - the dot com bust, structured investment products and even penny stocks which should have been allowed to die a natural death years ago.

Happy investing~!

What's the difference between an ETF and a mutual fund?

ETFs or Exchange Traded Funds are sometimes also known as non-managed or passive funds. Ie, the ETF is created against a specified index, be it a sectoral or market index, and the fund manager just purchases the components of the index as closely as possible to the ratios within the index. Such funds have an almost pure correlation to the tracking index. Being unmanaged, they are also cheaper in terms of management fees. They are also traded on the stock exchange where transaction fees are typically lower.

Mutual funds or unit trusts on the other hand, are often actively managed. Ie a fund manager or fund management team invests in a particular segment (be it country, region, industry, etc) and monitors and trades in order to achieve a given return. This sort of fund typically attracts a management fee and transaction costs, and are therefore relatively more expensive. They are also not traded on the stock exchange, so transaction costs (buying and selling the fund) can be higher.

So, is an active or passive fund better? The market is still out on this. Empirical statistics however show that less than 50% of actively managed funds beat their reference or tracking indexes over the long term.

Market, wither art thou?

It's been a long and volatile week, and the downward trend continues as recessionary fears rule the day.

Specific to the STI, is the bottom in sight? During the height of the SARS crisis, the STI fell around 30% before recovering, and during the Asian Financial Crisis, around 60%. The STI closed at 1600 today, which very nearly brings us to the 60% level. Is this a buy signal? Hard to say as this time around the global financial system is affected. What then - 1500? 1200?

The fundamentals are not yet fixed. The sub-prime crises that started this only represented a fairly small portion of the overall mortgage market. Should the recession progress, then we are going to be seeing a lot more mortgage defaults in the US as property prices fall and prime loans begin to default. A vicious cycle is formed.

As US debt instruments are one of the most prolific in the world today, it becomes a global problem as the global banking market is affected. The move by the various governments to inject capital to ease the liquidity issue still hasn't addressed the fundamental question of who holds the (bad debt) baby at the end of the day. This in turn has led to a credit crunch which is affecting main street, thus leading to the recessionary trend.

As companies and consumers become ever more bearish, fiscal policy becomes less and less effective, as savings become the order of the day - where individuals would rather save in a returns negative environment (interest < rate of inflation) rather than spend on goods and services (and capital investments in the case of companies).

The only way out of this is for the economies of the world to show positive GDP growth - which implies the need for governments to have the political will to spend (on infrastructure, etc) to give private industry a shot in the arm.

So is a recovery likely? Not for now. Will there be any progress on Nov 15? Time will tell.

For now the trend continues downwards with little end in sight.

Stocks: What to Watch for in the Recession

BusinessWeek - Ben Steverman
Tuesday, October 21, 2008

This article is part of a series on Beginning Investing.

Don't be surprised to see a new wave of consolidation as stronger players snap up weaker ones

Eventually, the crisis will end. That has investors contemplating what a post-crisis stock market might look like.

Predictions of a serious economic downturn are everywhere, and not just for the U.S. but for the entire globe. If the credit crunch lasts long enough, it could be the first truly deep economic pullback in a generation or longer.

Asked about the future, many professional investors and fund managers say they're far too preoccupied with the current crisis to make any long-term bets. That's why many refuse to buy stocks—the unprecedented global credit crunch has made solid predictions all but impossible.

"I'm going to wait until the dust settles," says William Rutherford, president of Rutherford Investment Management.

Glimpsing the Future

Still, investors will eventually have to picture what the new economic order will look like.

Arguably, a credit crunch or recession makes all of us losers. But even in a severe recession, some businesses survive and prosper—even if only on a relative basis, and even if they take years to muddle through.

"There's always going to be a winner out there," says Ryan Crane, chief investment officer at Stephens Investment Management Group.

Here are five trends that may emerge whenever the crisis finally ends:

1. The strong eat the weak.

In the financial sector, failing banks and brokerage houses have already been gobbled up by safer (if not exactly strong) rivals. Bank of America (BAC) bought up mortgage giant Countrywide Financial and Merrill Lynch (MER). JPMorgan Chase (JPM) absorbed Bear Stearns and Washington Mutual. Citigroup (C) and Wells Fargo (WFC) battled over buying Wachovia (WB).

If the economic downturn is bad enough, expect the same trend to hit other industries, as strong players either buy or take market share from companies in financial trouble.

2. Fast-growing companies might not get the funding they need.

The credit crunch is cutting off the financing that helps businesses grow and create new jobs, says Michele Gambera, chief economist at Ibbotson Associates, a unit of Morningstar (MORN). Companies can't float issues on the stock market or sell bonds—investors won't buy them. And they can't borrow from banks, which are too panicked to lend.

If those conditions persist, it means trouble for new growth companies. "Who is going to make the next Google (GOOG) if there is no money to borrow to build the next Google campus?" Gambera asks.

3. Cash is king.

In a credit-starved economy, the advantage goes to companies with strong cash flow. Gambera cites cigarette maker Altria Group (MO) as a company famous for its strong cash generation.

A healthy balance sheet—without much debt—will also be crucial. "Given the fact that credit markets have totally deteriorated, it's a question of survival," says Gary Wolfer, chief economist at Univest Wealth Management (UVSP).

He believes survivors could include consumer staples and health-care companies that sell products their customers need and that generate lots of cash in the process. He cites Procter & Gamble (PG) and Johnson & Johnson (JNJ).

4. Don't bet on the U.S. consumer.

Wolfer predicts "an awful Christmas" for retailers. But for consumer-oriented companies, the problems aren't just short term.

For a generation, the U.S. has created a "quadruple deficit," Gambera says: a government deficit and a trade deficit, along with heavy borrowing by the financial sector and, finally, by U.S. households. Few expect Americans' reliance on credit cards and cheap home mortgages to continue.

In fact, many commentators see a fundamental shift in the U.S. economy, away from a reliance on both debt and the overstretched American consumer. "The era of the consumer-based U.S. economy is coming to an end," Wolfer says. "Our whole economy is going to be much more export-driven."

5. Don't bet on the global infrastructure boom, either.

Wolfer and others may be pinning their long-term hopes for the U.S. on exports. But there are lots of worries about one force driving global demand for U.S. goods: the building boom in many emerging economies around the world.

In a global slowdown, many are betting that demand for capital equipment, commodities, and energy are going to fall off.

Emerging economies, such as China and India, may not slip into recession, but their rapid growth will probably slow, says Chad Deakins, portfolio manager of the RidgeWorth International Equity Fund. "There are going to be different problems each country is going to have to address, [problems that will] distract them from plans to build infrastructure," he says.

Five years from now, however, Deakins expect emerging countries to start building again. "There are a lot of people in the world who want a higher standard of living and are willing to work for it," he says. "That's capitalism."

Steverman is a reporter for BusinessWeek's Investing channel.

Comments: Great article!

Random thoughts on ETFs versus Unit Trusts

ETFs or Exchange Traded Funds are sometimes also known as non-managed or passive funds. Ie, the ETF is created against a specified index, be it a sectoral or market index, and the fund manager just purchases the components of the index as closely as possible to the ratios within the index. Such funds have an almost pure correlation to the tracking index. Being unmanaged, they are also cheaper in terms of management fees. They are also traded on the stock exchange where transaction fees are typically lower.

Mutual funds or unit trusts on the other hand, are often actively managed. Ie a fund manager or fund mgt team invests in a particular segment (be it country, region, industry, etc) and monitors and trades in order to achieve a given return. This sort of fund typically attracts a management fee and transaction costs, and are therefore relatively more expensive. They are also not traded on the stock exchange, so transaction costs (buying and selling the fund) can be higher.

So, is an active or passive fund better? The market is still out on this. Empirical statistics however show that less than 50% of actively managed funds beat their reference or tracking indexes over the long term.

One risk with regard to mutual funds are that in markets such as today, any redemption of the fund tends to lead to potential capital losses on the part of the other unit holders - as the fund management company unwinds its position, the prices will downward trend and be reflected in the U/T price. ETFs do not suffer from this as they track the index.

ETFs, being tracked against and index, also tend to be tradeable in "real time", whereas Mutual funds are typically priced out at the end of each trading day.

Bernanke says US stimulus plan may be "appropriate"

WASHINGTON: US Federal Reserve chairman Ben Bernanke warned of a possible "protracted slowdown" on Monday and said consideration of a second economic stimulus plan would be "appropriate."

"With the economy likely to be weak for several quarters and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," he said in comments to a House of Representatives budget committee.

Bernanke said that economic recovery would depend greatly "on the pace at which financial and credit markets return to more normal functioning" and said Congress should consider ways to encourage lending in any package.

"If Congress proceeds with a fiscal package it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers," he said in his prepared remarks.

The speaker of the House, Democrat Nancy Pelosi, has suggested that Congress may convene after the November 4 presidential elections to pass a projected 150-billion-dollar stimulus package.

President George W. Bush signed into law a 168-billion-dollar stimulus package earlier this year, but Senate Republicans rejected a second package last month.

Bernanke was candid about the slowing US economy, saying consumption was falling, confidence was low and the housing market still depressed.

"The slowing in spending and activity spans most major sectors," he said.

He gave no firm hint of further interest rate cuts to help the economy, but said inflationary pressures were falling due to declining prices of commodities and imports.

"If not reversed, these developments, together with the likelihood that economic activity will fall short of potential for a time, should bring inflation down to levels consistent with price stability," he said.

On October 8, the Fed slashed its interest rates by 0.50 percentage points in a coordinated move with other major central banks around the world.

The key federal funds rate is currently pegged at 1.5 percent. The Federal Open Market Committee holds its next rate-setting meeting on October 28-29.

The Fed has spent weeks in crisis-management mode, using a series of weapons to combat the most severe financial crisis since the Great Depression of the 1930s. - AFP/de

Comments: Remember, you saw this here first on Oct 15 on the need for some form of fiscal policy :)

So is value investing all it's cut out to be?

Extract from Investopedia.com:

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

Investopedia Says... The big problem for value investing is estimating intrinsic value. Remember, there is no "correct" intrinsic value. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept to value investing is that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value.

Also keep in mind that the very definition of value investing is subjective. Some value investors only look at present assets/earnings and don't place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than it is worth.

Source: http://www.investopedia.com/terms/v/valueinvesting.asp

Comments: So what is it about value investing that appeals? Essentially, value investing is all about finding discounts in the market and reselling the same product later for a higher price. Simple? Only if the markets were perfect - but if the narkets were perfect, then all companies would be fully valued and such "arbitrage" opportunities would not exist. So what then is value investing, and how can such an approach work for an investor?

1) A "value company" may or may not have future growth prospects - both are ok; of course, a company with future growth potential is better than a company without one. Even the subject of future growth potential can be sometimes a subject of controversy - quote, “I see little commercial potential for the Internet for at least ten years.” – Bill Gates, 1994. That is why traditional investors such as Warren Buffet stick to stocks whose companies produce products that they know well - of course this approach led Buffet to miss out on the Google phenomenon (but saved him during the dot com bust)

2)The company should be trading at a discount to its Net Asset Value. How much a discount and what assets to take into account is itself a challenge to define. The most conservative approach would be to take into account only the cash and near cash current assets (ie those that can be converted into cash easily like accounts receivables), and to leave out fixed assets and inventories (which although current assets, are less liquid) and less off all short and long term liabilities. The resulting amount, after dividing across the number of outstanding shares should give an investor a pretty good idea as to how much he would get back in a situation where the company shuts down and the proceeds distributed. These sort of companies used to be the target of corporate raiders in the past - of course depending on the float of the company, they might or might not be easily taken over

3) What is the trading volume like for the stock? If the stock is closely held, then its full potential is unlikely to be "unlocked", as larger investors such as funds avoid such companies.

4) What is the objective of the investor? To receive above average market returns in terms of dividend yield or to cash out on the intrinsic value when the market goes back up. This would help answer part of point 3).

5) Are you in it for the mid or the long term. If it is meant to be a long term investment, then some crystal ball gazing is called for. It might be easy to say now that computers, for example are in high demand today, but in the 1940s who would have known this? "I think there is a world market for maybe five computers." - Thomas Watson, chairman of IBM, 1943. One way would be to invest only in those industries that you are familiar in, but like Tom Watson and Bill Gates, even the industry insiders might get it wrong.

Happy investing!

MAS wants to focus on helping vulnerable investors

MAS wants to focus on helping vulnerable investors
By Wong Siew Ying, Channel NewsAsia | Posted: 17 October 2008 2335 hrs

SINGAPORE: Singapore's central bank has not ruled out buying back minibonds linked to failed investment bank, Lehman Brothers.

But the Monetary Authority of Singapore (MAS) said its focus is to help "vulnerable customers".

Many investors have asked for a replacement to take on Lehman's role in the minibond programme and they should know if such a replacement can be found by the end of next week.

If no replacement comes along, the assets could be sold so that investors could be paid. It is, however, unclear how much investors would be getting back. This has understandably caused some frustration among Singaporeans.

MAS said it is now investigating the matter and could not offer more details. But it added that the probe will look into allegations that financial institutions (FIs) have breached laws or have inadequate internal controls or poor sales practices.

Heng Swee Keat, managing director, MAS, said: "For cases where there are sufficient indications that the product was mis-sold or that it was clearly inappropriate given the investor's profile and circumstances, the FI should take responsibility. Several FIs have assured MAS that they will take full responsibility in such cases."

This could mean that the banks may have to compensate some investors if evidence proved that the products were mis-sold.

Although thousands have been affected, MAS is more concerned about investors who are most vulnerable, such as retirees above 55 years old, those who are less educated, and first-time investors.

The central bank is also reviewing its regulatory framework to cope with the changing global investment environment.


- CNA/so

Comments: With the MAS moving to guarantee deposits earlier in the week, it seems like preparations are being made to help those investors badly impacted by the Lehman Bonds (and related issues) crises. Although I suspect that the deposit guarantees are primarily to ensure that capital does not flow out of Singapore to other countries, this move might also have been put in place to ensure no panic in the marketplace (ie a run on the banks) should MAS have to step in and arbitrate on the issue. This would however still translate to a cost to the various banks and although some figures have been bandied to date, no one is entirely certain as to the extent of the cost both to the investors and to the banks involved should some sort of arbitration occur. In HK for eg, investors felt that the reimbursement should be made in full, vs the market realised value proposed. Personally I would go short on the banks during this period of uncertainty.

Market Sentiment – When the “tried and true” no longer holds

Observing the markets over the last several weeks, one cannot help but feel a sense of foreboding that rational thought has ceased, and mob mentality has taken over. Both governments and the common man are reacting to the situation rather than looking towards a long term “fix” to the marketplace. Is this so strange? No, when you consider leaders are just as human and you and me. When disaster looms on “your watch”, the initial tendency is to look to others to blame. After which, the next tendency would be to take some or any form of action, wisely or unwisely, to show that you are on top of things. Human nature is fallible, if nothing else. The general market then is reduced to a series of “sound bites” in terms of guidance. Couple this with huge uncertainty and lack of concrete information in the marketplace, this leads to over-reaction, be it optimism or pessimism. Complicate things further by introducing program trading algorithms and there you have the formula for massive swings in the marketplace.

So, can money be made still in this environment? Perhaps, but in such a situation, throw out TA and FA. Look instead to the baser human instincts of fear and greed. Herd mentality is the rule of the day, and the successful short term trader will be one who can read the sentiments of the hour (or day) accurately. Long term traders should not be impacted as by focusing on the intrinsic value of a stock, returns have proven superior over the medium to long term.

Achieva Group

Summary
Achieva recently made news selling off its components business to Arrow Electronics, Inc for USD 51.5M. The company plans to return some of the proceeds to shareholders.


Background

Listed on 11 April 2000, Achieva is one of Asia-Pacific's value-added distributors and solutions providers focusing on electronic components, peripherals and IT-related lifestyle products. Until June 08, the Group's business operations were grouped principally under two product sectors - Peripherals and Electronic Components.

Financials as at 30 June 08 (prior to divestment):

Current asset net value for Achieva prior to divestment of its components business stood at 11.48 cents

(The net current asset value comprises current (ie liquitable) assets less off all current and long term liabilities. This assumes that the LT assets cannot be liquidated in good time/at full value, ie plant & machinery. goodwill, etc, esp in a crisis situation/;liquidation of the firm, and is a good way to conservatively estimate the approximate market value of the firm.)

Acid test ratio = 0.96

Dividend policy-wise, last recorded payout was in 2001 (SGX info page).

EPS stood at 0.37 cents for H1 08 - assuming straight line earnings (simplistic), this shld yield 0.74 cents by end 08, or a return of 8.2% for a P/E Ratio of 12.16 against its last closed price of 9 cents.

Industry trend

The peripherals and electronics components industries are characterised by intense competition and fairly low profit margins. The businesses are fairly cyclical and are subject to the health of the IT industry, which according to DELL and some other major players is on a downward trend. The overall outlook for the computer/IT industry is likely to remain bleak for several quarters to come.

Thus as at 30 June 08 Achieva represented a small cap share (which was in a market that was in the process of a down-turn) yielding an estimate 8.2% return and selling at a 22% discount to net current asset value.

Events after June 08 (announced May 08 and sealed Jul 08)

Achieva divested its electronics components business to Arrow Electronics, Inc for a consideration of USD51.5M

The estimated nett gain (one-off) is expected to be in the region of SGD 20M, or 3.9 cents per share. This is in exchange for the equivalent of 53% of Achieva's revenues in 2007 and 50% of its EBITDA (ie the sustainability of the company).

As a going concern, the value of the company is now half of what it was. However the good bit is that Achieva has said that it will return some of the proceeds to the shareholders:

“The sale will also enable us to increase shareholder value and the Company’s
management intends to distribute part of the proceeds from the disposal to
shareholders,” added Mr. Lim.

Not knowing how much is to be returned at present, at 9 cents current share price, forward PE is estimated to be around 24x in 2009 and EPS at around 0.37 cents per share assuming that the H1 08 revenue and margin trends continue and not deteriorate

On the positive side, the Net Current Asset Value/share has gone up a minimum of 3.9 cents/share (based on the net gain from proceeds of sale) - actually difficult to say as no details were given wrt to which ST/LT assets and ST/LT liabilities are to transferred out as part of the sale (and thereby exchanged for cash).

This would be a conservative way to guesstimate the net increase in NCAV; the NCAV shld be higher as some parts of the sale would be plant & machinery/investments which would be encashed. So the nett increase will probably fall somewhere between the 3.9 cents per share (nett encashment) and 13.9 cents per share (full encashment against only LT Assets) range.

Adding to the original 11.38 cents/share NCAV, this wld represent a discount to market of around 41.1% (using nett gain of 3.9 cents) or more (but not to the full add of 13.9 cents as this would impact the original 11.38 cents NCAV calculation), which is closer to the 60% mark I mentioned.

As there are no specific wrt the amount of cash to be returned to shareholders, I would say "caveat emptor" when investing in this share

EU to take steps to support industry

BRUSSELS, : The European Commission will come up with proposals by the end of the year to help industry cope with slumping economic activity, according to draft conclusions of an EU summit on Thursday.

"Outside the financial sector, the European Council underlines its determination to take the necessary steps to react to the slowdown in demand and the contraction in investment, and in particular to support European industry," the document said.

"It requests the commission to make appropriate proposals by the end of the year," the document added.

EU leaders were to wrap up a two-day summit Thursday dominated by the financial crisis with a call for an overhaul of the global financial architecture to avert a repeat of the current turmoil.

Concerns are growing about how to limit the impact of the financial crisis on the broader real economy amid growing signs of a sharp slowdown in activity across Europe.

- AFP /ls

Comments: This would be the next step towards turning sentiment around. Politically palatable? If the EU can get their act together, then perhaps a recovery might be on the books as early as H1 09.

The theme of the day: Caveat Emptor

The banks have been saved and further catastrophe avoided. Now where the market goes from here would be largely dependant on the next moves the governments of the world make. Monetary policy has been tried over the last several months and has had little impact as banks tighten credit and batten down. Even with this latest massive interventions by the various central banks, the interbank rates have remained relatively high. What this means is tighter credit for the real world - leading to foreclosures and a contraction in the economy. In a recessionary environment, both companies and consumers also focus on hoarding cash and cutting back on spending/reducing debt levels - thus leading to a vicious cycle where less investment in capital leads to lower employment leading to lower spending leading to even less capital investment and so on.

Is the world ready yet for some serious spending on the part of the various governments (ie fiscal policy)? Right after the massive bank bailouts, it would be politically difficult for most governments to justify huge public spending on infrastructure. Not until things get worse at any rate (just as several banks had to fail/be nationalised before the bailout could occur). But it is only when there is massive injections in the public sector can the private sector overcome its fear of investment. Australia has taken baby steps towards this direction during this week, but other have yet to follow.

Thus until this happens, my personal feel is that the world economy will continue sliding downwards possibly to Q3/Q4 09. Will there be opportunities? Most assuredly, but caveat emptor.

How the markets really work

An excellent humourous account by team of Bird & Fortune! Mind you this was in 2007 just when Bear Sterns was beginning to face problems.

Asia Power Ltd

Summary
Asia Power offers stable returns and currently trades at a PE of between 4 and 5.

Background
Asia Power is principally involved in the ownership, management and operation of power plants in China. It was incorporated in Singapore in March 1997 and later converted to a public company in October 1999.

Asia Power has been developing and focusing on the following three core businesses:

* Power Generation
o Coal-fired Power Plant
o Peaking Power Plant
o Hydro Power Plant
* Power-related Technology
* Power Consulting & Investment Holding

The strategy is to invest in low-risk, profitable power projects in China. In particular, it comprises taking equity stakes in coal-fired combined heat-and-power plants, highly efficient combined-cycle peaking power plants, hydropower stations,computerised power automation, protection systems and power auxiliary equipment manufacturers.

The power business offers stable cash flows, and Asia Power has gradually brought more capacity on line over the last several years, doubling its revenues from $60.7M in 2003 to $129.6M in 2007 ($74.4M in H1 08).

EPS grew from 0.76 cents in 2003 to 3.38 cents in 2007 (EPS was at 1.83 cents for H1 08), and Net Tangible Asset Value stood at 23.49 cents/share as at H1 08.

Ratios as at H1 08
Current Ratio = 1.27
Acid test Ratio = 1.19
Cash Asset Ratio = 0.61
ROE (based on FY2007) = 15.4%

EPS per share in 2007 stood at 3.38 cents and at H1 08 at 1.83 cents.
Based on Asia Power's share price of $0.15 as at 9 Oct 08, return on share price stands at 22.5% against 2007 earnings.

This translates to a historical PE of 4.447.

Dividend policy has been fairly consistent, with dividends growing over the years along with profitability

Year 2004 2005 2006* 2007
EPS 1.70 2.90 5.62 3.38
Div/share 0.70 0.90 1.10 1.10

* Extraordinary gain from sale of plant

At a projected 2008 dividend of 1.1 cents, yield currently stands at 7.3% at the current share price of 15 cents

Discount to market

As at 30 June 08, Net Tangible Assets (NTA) stood at 23.49 cents. This essentially means that at 15 cents, the share price discount to market is 36%. Unlike my earlier article on AEI, this includes fixed assets given the nature of the utilities industry (ie high levels of capital required).

Other information
Asia Power is expected to shut down its peaking power plants by end 2008 in compliance with Chinese Government directives. The impact is expected to be marginal due to the nature of such plants (ie short term use during peak periods only).

Largest revenue growth in 2008 was from AP's coal fired power plant (largest capacity). Unlike other coal fired plants however, AP the type of bitumen coal used by AP is less subject to fluctuations in pricing. This is however still subject to supplier risks.

AP's hydroelectric power stations continued to yield the best margins and AP's strategy to move into/acquire/build more hydroelectric plants over the years have paid off.

AEI Corp

Summary
A conservatively run company with good fundamentals that is currently trading at a 67% discount to net assets

Background

AEI is principally engaged in the production of aluminium alloy extruded profiles.

The Company’s business is categorised into two broad segments, namely,
(a) Electronics and precision engineering
a. HDDs, computer printers, computer monitors
b. Precision machining and industrial automation
(b) Construction and infrastructure building.
a. Public infrastructure, building construction, interior fixtures, signages and advertising panels

AEI has grown the electronics and precision engineering segment from 66% in 2003 to a high of 85% in 2007 (in terms of product mix) as the company moved away from its traditional bread and butter construction and infrastructure building segment. This move has been in line with AEI’s strategy to move into higher yield products. The company expects customer order levels from this segment to remain healthy for the rest of 2008. The construction and infrastructure building segment on the other hand is expected to face higher levels of price competition and longer payment terms.

Financials

2004 2005 2006 2007 2008 (H1)
Revenue 44.9 58.9 73.1 68.1 32.4
Profit before Tax 5.1 8.9 6.8 5.2 2.2


The company has come through relatively unscathed to date due to its move into higher value-added products over the years. During Q2 2008, the company had installed a new extrusion line to replace an older line. As a result the company operated only three lines during the period, leading to a slight decline in YOY revenue.

Ratios based on H1 2008:

As at H1 2008, the company had no loans outstanding and is in a net positive cashflow situation.

Current Ratio = 7.3x
Acid test Ratio = 5.5x
Cash Asset Ratio = 3.4x
ROE (based on FY2007) = 7.1%

Based on its share price of $0.08 as at 6 Oct 2008, investor ROE stands at 23.25%. Based on 2008 H1 results on a simple straight line method, ROE stands at 21.25%.

Current P/E stands at 4.7X.

Dividend policy

2004 2005 2006 2007 2008 (H1)
Dividends (cents) 0.75 1.0 1.1 1.0 -

Dividend yield has been fairly consistent and at current share prices ($0.08 as at 6 Oct 08) yield 12.5%.

Discount to market

Net Assets is defined as current assets less all liabilities, and excludes fixed assets (ie plant and fixtures). As at 30 June 08, Net Assets/share (NAV) stood at 24.2 cents. This essentially means that at 8 cents, the share price discount to market is 67%. In other words, if the company was to be liquidated, the shareholders would be compensated 24.2 cents or realize an approximately 300% gain on their holdings, excluding fixed assets which also carry a further book value of 6.4 cents/share for a total value of 30.6 cents.

Other information

AEI is a cash rich and has a fairly conservative management team, as evidenced by the lcak of leveraging and the high cash retention (which dilutes EPS). Cash and cash equivalents stand at 10 cents/share.

In 2007, the company provided a convertible loan facility of $4.038M to the Hoi Po Group in HK to access the Hoi Po Group’s product design, mould making and extrusion technology and provide a lower cost platform to expand the Company’s production capacity. The facility will be restructured into a Joint-Venture agreement with the Hoi Po Group to buy over the Group’s China-based operations.

As at June/July 2008, AEI had also invested USD2.5M into M2B World Asia Pacific Pte Ltd in the form of convertible loans at a conversion rate of approximately USD 0.942/share, or at a slight premium of 1.6%. The yield on the loan stands at 5% (which compares favourably against the USD fixed deposit rate). Should the loan facility be converted into an equity stake, the yield would stand at 27.3% in terms of ROE based on M2B’s FY2007 results. The transaction is expected to have no material impact on the net assets and earnings of the firm for FY2008.