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.

Preventing Investment Mistakes: Ten Risk Minimizers

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Most investment mistakes are caused by basic misunderstandings of the securities markets and by invalid performance expectations. The markets move in totally unpredictable cyclical patterns of varying duration and amplitude. Evaluating the performance of the two major classes of investment securities needs to be done separately because they are owned for differing purposes. Stock market equity investments are
expected to produce realized capital gains; income-producing investments are expected to generate cash flow.

Losing money on an investment may not be the result of an investment mistake, and not all mistakes result in monetary losses. But errors occur most frequently when judgment is unduly influenced by emotions such as fear and greed, hindsightful observations, and short-term market value comparisons with unrelated numbers. Your own misconceptions about how securities react to varying economic, political, and hysterical circumstances are your most vicious enemy.

Master these ten risk-minimizers to improve your long-term investment performance:


1. Develop an investment plan. Identify realistic goals that include considerations of time, risk-tolerance, and future income requirements— think about where you are going before you start moving in the wrong direction. A well thought out plan will not need frequent adjustments. A well-managed plan will not be susceptible to the addition of trendy speculations.

2. Learn to distinguish between asset allocation and diversification decisions. Asset allocation divides the portfolio between equity and income securities. Diversification is a strategy that limits the size of individual portfolio holdings in at least three different ways. Neither activity is a hedge, or a market timing devices. Neither can be done precisely with mutual funds, and both are handled most efficiently by using a cost basis approach like the Working Capital Model.

3. Be patient with your plan. Although investing is always referred to as long- term, it is rarely dealt with as such by investors, the media, or financial advisors. Never change direction frequently, and always make gradual rather than drastic adjustments. Short-term market value movements must not be compared with un-portfolio related indices and averages. There is no index that compares with your portfolio, and calendar sub-divisions have no relationship whatever to market, interest rate, or economic cycles.

4. Never fall in love with a security, particularly when the company was once your employer. It’s alarming how often accounting and other professionals refuse to fix the resultant single-issue portfolios. Aside from the love issue, this becomes an unwilling-to-pay-the-taxes problem that often brings the unrealized gain to the Schedule D as a realized loss. No profit, in either class of securities, should ever go unrealized. A target profit must be established as part of your plan.

5. Prevent “analysis paralysis” from short-circuiting your decision-making powers. An overdose of information will cause confusion, hindsight, and an inability to distinguish between research and sales materials— quite often the same document. A somewhat narrow focus on information that supports a logical and well-documented investment strategy will be more productive in the long run. Avoid future predictors.

6. Burn, delete, toss out the window any short cuts or gimmicks that are supposed to provide instant stock picking success with minimum effort. Don’t allow your portfolio to become a hodgepodge of mutual funds, index ETFs, partnerships, pennies, hedges, shorts, strips, metals, grains, options, currencies, etc. Consumers’ obsession with products underlines how Wall Street has made it impossible for financial professionals to survive without them. Remember: consumers buy products; investors select securities.

7. Attend a workshop on interest rate expectation (IRE) sensitive securities and learn how to deal appropriately with changes in their market value— in either direction. The income portion of your portfolio must be looked at separately from the growth portion. Bottom line market value changes must be expected and understood, not reacted to with either fear or greed. Fixed income does not mean fixed price. Few investors ever realize (in either sense) the full power of this portion of their portfolio.

8. Ignore Mother Nature’s evil twin daughters, speculation and pessimism. They’ll con you into buying at market peaks and panicking when prices fall, ignoring the cyclical opportunities provided by Momma. Never buy at all time high prices or overload the portfolio with current story stocks. Buy good companies, little by little, at lower prices and avoid the typical investor’s buy high, sell low frustration.

9. Step away from calendar year, market value thinking. Most investment errors involve unrealistic time horizon, and/or “apples to oranges” performance comparisons. The get rich slowly path is a more reliable investment road that Wall Street has allowed to become overgrown, if not abandoned. Portfolio growth is rarely a straight-up arrow and short-term comparisons with unrelated indices, averages or strategies simply produce detours that speed progress away from original portfolio goals.

10. Avoid the cheap, the easy, the confusing, the most popular, the future knowing, and the one-size-fits-all. There are no freebies or sure things on Wall Street, and the further you stray from conventional stocks and bonds, the more risk you are adding to your portfolio. When cheap is an investor’s primary concern, what he gets will generally be worth the price.

Compounding the problems that investors face managing their investment portfolios is the sensationalism that the media brings to the process. Step away from calendar year, market value thinking. Investing is a personal project where individual/family goals and objectives must dictate portfolio structure, management strategy, and performance evaluation techniques.

Do most individual investors have difficulty in an environment that encourages instant gratification, supports all forms of speculation, and gets off on shortsighted reports, reactions, and achievements? Yup.

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’.