Investment Moats

Food Junction 2008 Full Year Result Analysis

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So they released their full year result in November sometime back. Frustrating company now down from my bought price of 68 cents to 17 cents.

Is this a good opportunity to add further? Lets check out the balance sheet first:

  • Profit is down 33% from 5 mil to 3.2 mil
  • Net Operating Cashflow after tax was up from 4.2 mil to 4.7 mil
  • Cash is abit higher from 1.8 mil to 1.9 mil
  • Debt is still the same very low to insignificant compare to assets or cashflow
  • Liabiliities are higher. This would explain the higher operating cashflow compare to profits.
  • The main reason for the higher cashflow vs profit is down to higher other payables,deposit received and accruals. Due to that cashflow looks better even though business wise they generate less cash.
  • The propensity to invest and buy capital stays largely the same. capital spending increased from 2.8 mil to 3.6 mil
  • Dividends paid fell from paying 6.6 mil in 2007 to 2.4 mil. This represent 75% of profit and 51% of operating cashflow. Year 2007 paid out a dividend of 2 cents

All in all, we couldn’t really tell much since its suppose to be a bad year but they are still profitable. Hey, when the going gets tough, you will still need to eat right?

Lets look at some ratios now:

This table is taken from my Dividend Stock Tracker which is updated frequently with the latest sgx share price so you will see the ratios evolve with the share price:

Previous Year 2007

Latest 2008

Details

  • Based on Earnings yield and operating cashflow, earnings have decreased. However it is still quite good. Opearting cashflow have improved. but i have stated why it improved and its now due so much to better profits and all.
  • Net margin was low, i can’t remember it is this low. It used to be above 10%. A continual decrease in this is definately a sign of trouble. Especially if it is this low.
  • A very high return on investment capital. Well basically most of what is in the assets are cash or fixed deposit. Equity and debt is so low that a matrix like ROIC or ROE will show that it is astoundingly good. A 112% roc means that $1 of capital put into work will yield you $1.12. Sounds good. BUT only if you can replicate it to a large extend.
  • Cash on hand is 94% of market cap. At 17cents you are roughly buy 16cents worth of cash + managements “skills” in food related business execution. There is safety in this at this level definately.
  • EV/EBITDA is 0.5 times. What it means is that if the profit stays the same, it will take you HALF a year to earn back your full capital. There is safety in this at this level definately.
  • PTB is at 0.9. Its nearly at book value, since all its book value is … cash.
  • I am using a very conservate forward div yield. According to SGX, they have or going to distribute 2 cents for 2008. they should distrbute another at the mid of next year normally but i don’t think based on this year’s experience they going to do that. The yield based on the share price now is 11%. If they keep the profits it is sustainable. if they go into a loss, it is still sustainable since they can pay out nearly 5 years without profit.

Problem

The problem with Food Junction is not so much of what we can uncover from the balance sheet. It is the execution going forward. I have stayed vested in this company for a long time since early 2004.

Back then this company have such a good ROE and good margin and good balance sheet. Trading nearly 3 times book value, it shows that investors and the market value its stability and predicability in earnings. However, all their ventures have stagnated.

They being to venture into Malaysia and China. The venture in China took so long to materialize and in the end it weren’t very successful. Lets take a look at the turnover/Assets for the 4 regions:

Singapore = 40mil/29mil = 1.37 times

Malaysia = 3.9 mil /4.7 mil = 0.82  times

China = 0.682 mil /2.688 mil = 0.25 times

Indonesia = 0.466 mil /0.693 mil = 0.67 times

As you can see, overseas ventures haven’t been profitable. Which is why this year’s larges cap ex is spent in singapore to the tune of 4.6 mil.

This year they turn to operating more japanese food and beverage business in Singapore and buying Malone’s Restaurant in Shanghai. I am not sure how much that would make up but it seems from my internet research Malone’s restaurant is a very hectic american restaurant in Shanghai.

All in all, i believe there is safety at this price. However, if you are looking for growth, you gotta punt in the believe that the management have after this 4 years of learning does come up with a good plan going forward.

Jim Cramer’s Call: Ultimate Bear Bottom Indicator?

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The VIX hit 56 this morning in US and the stock market dropped an average of 4.5% in a day. Since the start of these, the market have dropped 30%. A good time to start bottom calling?

Jim Cramer seems to think not. But in a way, he might be indirecting calling for one:

Bullish investors should turn into shrinking violets as the stock market continues its shocking downward spiral, CNBC’s “Mad Money” host Jim Cramer told Ann Curry on TODAY Monday.

In what Curry called a “dramatic statement,” Cramer emphatically urged any investor who has money they may need in the next five years tied to stocks to pull their dough out.

“I thought about this all weekend,” Cramer told Curry. “I do not want to say these things on TV.

“Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.”

While the animated Cramer is known for telling investors the best prospects for earning money on the stock market, he’s now saying retreat is the best position in the face of some of the worst financial news in decades. The bank lending default crisis that put financial firms around the country on the brink of collapse could bring “as much as a 20 percent decrease in the stock market,” Cramer predicted.

He noted that the world’s markets are nosing downward in the face of the U.S. fiscal trauma.

“One thing is certain — they are, in Europe, behind us,” Cramer told Curry. “We’ve experienced more pain than they have, we are surprised at their pain, we didn’t know how bad off they were.”

He called the U.S. government’s $700 billion bailout plan, which includes raising the insured rate on bank deposits from $100,000 to $250,000, as a “good one,” assuring bank depositors: “Your money is safe.”

But he warned that the same may not be true for stock market investors.

“I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market,” Cramer told Curry. “I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market.”

Still, those with the assets — and the stomach — to ride out the stock market’s ups and down over a five-year period might be best served by holding their nose and holding onto their stocks.

“I think what you have to do, if you can withstand it, is just ride it out,” Cramer said.

Cramer’s gloomy scenario came from calculating individual Dow stocks and estimating how far they might yet fall, he told Curry. And companies’ third-quarter earning reports, due this week, aren’t going to be music to investors’ ears.

“I think the previous quarter, the one we’re now hearing from, was a terrible quarter — but it will look good versus the coming quarter,” Cramer warned.

I thought its a very responsible call to be honest, but these kind of personal finance advice should not be given now. Its not Cramer’s fault. he ain’t so much big on personal finance. The individual must realise this before even watching his show!

Money meant for investing should not mix with what u set aside as daily expenses. Having said that, the headline does not mix well with his actual message, which is to stay vested if you can ride it out.

It is the timing of this article that makes us wonder if we have reach a certain stage of extreme pessimism.

Macquarie International Infrastructure Fund (MIIF) quarter review

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Its time to screw MIIF. The infrastruture play that people say good and others say that it is deeply suspect.

They just released their quarterly report and by all figures it looks like they are suffering the effects of this global slowdown.

  • Net income was 25 million vs 145 million in the same period last year. This was attributed to
    • A Lower gain from fair value of MIIF’s financial assets (6.5 mil vs 211 mil)
    • Performance fees were lower (0 vs 3 mil)
    • Management fees were lower (3.4 mil vs 4.3 mil)
    • Lower total investment revenue. This is due to lower investment income collected as new asian investments generallly pay their distributions out of accounting profits annually in arrears. This results in a lagged receipt of intiial post acquisition disributions from such businesses.
  • Dividend of 4.25 cents vs 4.15 cents last year declared.
  • Cash position fell from 36 mil vs 55 mil. This is negligible compared to the asset size.
  • New longterm debt of 85 mil. However short term debt was reduced from 178 mil to 58 mil.
  • Operating cashflow decrease from 63 mil to 2.7 mil
  • Capital expenditure decrease from 286 mil to 0
  • 43 mil was paid out for div vs 0  mil last year same period.
  • Revealed that underlying debt INSIDE ASSETS amount to 2.2 billion.

What we can take away from this set of results is this:

  • We hope that by year end, the investment income from the asia assets does come in. MIIF borrowed 30 mil just so that they can pay the dividends. This has to be repaid.
  • Consequently, they repaid more of their debt compared to last year, which is always a good thing.
  • As a performance guage, the new assets would need to yield higher investment income then the European one. This is an important criteria. They sold those and justify that Asian assets will provide better yields and better value. We as shareholders would like to see that justfication in the bottomline.
  • The report revealed more information on the assets. Particularly
    • The revenue
    • The operating Expenses
    • EBITDA
    • EBITDA Margin
  • While we appluad that, much can be revealed about the interest coverage or the kind of debt financing plans these assets use. Most of these assets are unlisted and thus it is difficult to find any information on them. why am i so particular about this?
  • Because the total debt held by these assets amount to 2.2 bil! Thats even more than the parent’s market cap. This is synonymous as those leverage buyouts that borrowed heavily in the hope of paying it off based on consistent, proven cashflow generate by the assets.
  • Interest on these debts will reallly wacked the company if its floating rate. In a rising interest environment, interest rates will squeeze net profit margins greatly, thus making MIIF a sour investment.
  • Normally these assets do cover these floating rate debts using interest swaps on fixed rate debts. We hope the underlying assets does manage their debts well.

All in all, there is still alot of holes to be filled. The yield is definately attractive at nearly 11%. But is this sustainable? I feel it is. The biggest question are those underlying debts.

MIIF is covered as a dividend play at my Dividend Stock Screen.

Safety in Reits? Don’t count on it:Analysts

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I’m bringing you this article that caught my attention on the business times. Certainly for dividend investors the opportunity in REITs have been getting good these few months with some REIT having yields up to 9-10%.

While searching for top yielders are important, it is worthwhile to choose based on growth prospects and value prospects as well.

Personally i would rather hold down a REIT if it is a growth story but irrationally beaten down, rather than an outright high yielder. You might stand to earn more from the attention the market gives it and the capital appreciation rather than a high yielder that gives the same yield that stagnates.

Yields are attractive but they are subject to movements in cyclical property market

(SINGAPORE) High yields and strong results are making real estate investment trusts (Reits) stand out in a volatile market. But there is debate over their potential as defensive plays, with some market watchers cautioning that Reits are not necessarily safer bets because of their link to the cyclical property sector.

Most Reits turned in impressive results for the quarter ended June 30, 2008. The 18 which reported their performance before last Friday all achieved higher distributable income and distribution per unit (DPU) over the same period last year.

Distribution yields reported by the Reits, based on annualised DPUs and last Friday’s closing prices, ranged from 4.8 per cent to 11 per cent. Reits which offered yields above 10 per cent included MapleTree Logistics Trust, healthcare-related First Reit and Lippo- MapleTree Indonesia Retail Trust.

Overall, the Reits had an average distribution yield of around 7.8 per cent, offering a spread of over 4.6 percentage points above the 10-year Singapore government bond yield of 3.14 per cent on Friday. Compared with one-year fixed deposit rates which start from around 0.8 per cent, the Reits offered an even wider spread.

Analysts say Reits have largely performed in line with expectations. Their good performances have won them fans – with many trading at discounts to net asset values and thus offering relatively high yields, OCBC Investment Research said in a recent report that investors could ‘take a fresh look at S-Reits as defensive vehicles offering stable cash flows and high yields’.

However, others pointed out that Reits still may not match up to traditional defensive plays, including high-yielding blue chips like telcos and banks. While Reits do offer high distribution yields, the sector is influenced by movements in the property market, which tends to be more cyclical compared with, for instance, the telecommunications industry, or even banking, they say.

Distribution yields are also a function of Reits’ unit prices, so yields may look high simply because unit prices have dropped, explained one analyst. Considering both capital gains and distributions to investors, Reits have not done as well compared to around a year ago, he added. The FTSE ST Reit Index has fallen by more than 10 per cent since it was launched on Jan 10 this year.

Reit fans, on the other hand, argue that few sectors are completely resistant to economic slowdowns. Also, some Reits may be more resilient because they can lock in leases over several years, which helps stabilise earnings.

Where there is agreement among most of the market watchers BT spoke to is that Reits will continue to generate steady operating results. For those which have locked in leases or are able to gain from higher rental reversions on lease renewal, ‘there is a lot of predictability in terms of their earnings and distributions,’ said Daiwa Institute of Research analyst David Lum.

With credit conditions staying tough, however, much of the earnings growth will have to come organically. Reits may still acquire properties but they will have to be more selective, analysts say.

Analysts’ top Reit picks include Suntec Reit. ‘With 32.6 per cent of total office net lettable area up for renewal in FY09, we believe Suntec is well-positioned for rental reversion with current $14 psf signing rents versus passing rent of around $6.30 psf,’ said a Citi Investment Research report last week.

CapitaCommercial Trust was another popular choice. Goldman Sachs reiterated its ‘buy’ call on the Reit, favouring its strong organic growth and ‘leadership among office Reits’.