Company: Carlsberg Brewery Malaysia Berhad (2836)

When you scrutinize Carlsberg's annual report, you simply cannot avoid to notice its 10 years of healthy growth in revenue and profit. There was also a remarkable recovery story of profit margin since 2009 (9.8%) until 2012 (15.5%). Year 2012 was the first year that the company's profit margin surpassing its old profit margin of 15.2% in 2003.

Here are a few salient facts:

• It pays most of its profit after tax to its shareholders as dividend. The two exception years in 2009 and 2010 were due to payment made for the acquisition of Singapore business. We can expect consistent dividend payment
• There were reasonable growth in revenue, profit and dividend
• In 2012, subsidiary in Singapore contributed 23% and 30% of overall revenue and profit respectively. Singapore's profit margin is higher than that in Malaysia. We simply cannot ignore the Company's business in Singapore's in our analysis.

10 year financial performance extracted from Carlsberg's Annual Report 2012

From the 10 Year Financial Summary extracted from its Annual Report, 2010 was a watershed year that we see significant improvement in almost all of its financial indicators, i.e. 31% revenue growth, 72% profit growth, 31.5% profit margin improvement to its double digit percentage of 12.9%, dividend growth, etc. There were two major events during these period with significant financial improvements:

• The acquisition of Singapore subsidiary was completed in Oct 2009. Year 2010 was the first year that included full year performance of Singapore subsidiary
• A new MD, Mr Soren Ravn, were appointed in March 2010. (He was transferred as Chief Executive Officer of Carlsberg Greater China in July 2013)

Financial Positions

The balance sheet was well managed. Despite the growth since 2009, trade debtors and inventory turnover improved!

Improved trade debtors and inventory turnovers despite significant growth since 2009.

A well managed balance sheet's items like trade debtors, inventory and creditors usually means:

• it is unlikely that the company maniputes its income statements numbers. This means the profit figures are reliable as performance indicators.
• operational management is good. (Therefore debts collection is quick, stocks level is low and payment to creditors is fast.)
• Tight credit control

It indicates a really good and professional management team behind this company.

• Positive cash flow from operations and after capital expenditure
• Very little borrowings and only to facilitate short term working capital
• Simple balance sheet that devoid of chance of manipulation

Why I follow this company?

1. Consistent performance of profitability and growth for both revenue and profit.
2. Professionally managed operations and finances that reflect in balance sheets.
3. Strong and improving profit margin.
4. Cash rich and cash generating. Pays most of their net profits as dividend to shareholders. 
5. Sustainable and growing dividend at reasonably yield (4% as at 26/8/2013)
6. Strong brand names
7. Malaysia's demography, a nation with growing populations (include non Muslims)

What are the concerns or risks investing in this company:

• 30% of profit came from Singapore's subsidiary, yet the profit margin from Singapore business fell to 20.1% in year 2012 from 22.0% of year 2011. (Malaysia profit margin is much lower at 12.7% and 13.9% for 2011 and 2012 respectively.)
• The growth of Singapore business had slowed down in year 2012
• Its business affects by general economy performance
• Tiger, its competitor's brand, had been gaining ground
• Its current valuation based on historical earning PE ratio is very high at 23.79

In a duopoly market, one cannot gain a full perspective of Carlsberg business and prospects without looking at its main competitor, i.e. GAB. But I will have to leave this part out until next time.

Segment results

I think this Company is worth following and that its shares are worth buying. The key point is, therefore, at what price?

The complicated issues in valuing Carlsberg stock are

• Current PE is too high, but does it matter? As the dividend is being paid at 4% yield, sustainable and probably growing. 
• The stock is a dividend play with growth factor. In dividend play, growth is the major factor in determine price and return. Can the growth continue? and at what rate? 
• Major change in leadership in July 2013, can the good performance and trend continue?

And at this point, the market is expected to plunge within the next few months.

I will write the valuation analysis in my next post on Carlsberg. Meanwhile, Carlsberg will be in my watch list and I will continue to find pricing opportunity to buy into this stock.

Short-sellers rely on fundamental analysis!

Here is a very interesting article, "Those Evil Naked Short-Sellers Actually Trade On Fundamentals, Study Says" by Daniel Fisher.

It is through fundamental analysis that we can know the financial weakness of a company before the true picture is showed in income statements.

It is really not surprising that the short-sellers target on companies detected with obvious financial weakness before markets take note of the conditions. They are "evil" only because they detect and exploit the weaknesses hidden away from public.

They are the makers of efficient markets.

It is through fundamental analysis that we can make decisions (not short-selling, but avoiding) before the market price actions.

Other similar articles

• On fundamental analysis and value investing. I am arguing in favor of fundamental analysis enables early decisions before market price reactions.
• On detecting financial problems of a company

Company: Pharmaniaga Bhd

This is a classic example of why we need to be more careful in reading financial statements.

The numbers and indicators above paint a positive picture of recent performance of the company:

• Healthy growth in revenue, profits and earnings per share ("EPS")
• Growing shareholders' equity and net assets per share
• Growing dividend per share
• Improving profit margin since 2010

Things seem perfect.

But if you analyze its Balance Sheets, it gives you a different picture.

Pay attention to the changes in balance sheet items.

The working capital in total, i.e. inventory ADD trade debtors LESS creditors (I+D-C), increased more than RM300million or by 576% since year ended 2010!

• Inventory turnover deteriorate from 71 days in 2010 to 102 days in 2012. The company needed to fund the inventory, in year ended 2012, twice the size of that in year ended 2010. (2012: RM465million, 2010: RM230million)
• Net profits for financial year 2011 and 2012 are RM52.8million and RM63.2million respectively. In total, RM116.0million. The working capital I+D-C increased by RM305.2million from 31 Dec 2010 to 31 Dec 2012. This means profits did not turn into real cash but merely used to accumulate inventory.
• The revenue growth was in the range of 10% - 20%, but the working capital (I+D-C) growth was 366.9% in 2011 and 44.8% in 2012

In fact, the company turned from net cash position of RM69.9million in year end of 2010 to net debts of RM306.5million in year end of 2012. It was a deterioration of RM376.3million!

Large borrowings in year end of 2012.
EDR of 59:41 is beyond my comfort level of 70:30 to invest in the company's shares.

With deteriorating gearing ratio and bloating inventory, it is only natural for me to have doubts like

• Is the profit real since the company generate little cash flow from operations? 
• Any problem with inventory valuation? or any problem in manufacturing or planning that caused a high inventory book value?
• With such gearing and cash flow, is current dividend payout sustainable?
• Current trend of cash usage is definitely not sustainable, when will there be a reversal of trend?

In 2013 Quarter 1 results, the inventory level did improve a little. The net borrowings position improved marginally to RM304.3 million. The overall picture in Q1 2013 stayed the same.

As investor, we have limited bullets (limited cash available for investment). We need to be selective. There may be many good reasons or exciting growth stories of why the Company's balance sheet should be like this for just a while. But it is not important, because it means uncertainty. And that there are other listed companies that give a positive, crystal clear AND consistent picture of its financial affair, available in the stock markets.

I remind myself of my investment objectives:

• There are other listed companies that shows growth, positive cash flow and with healthy gearing. So I don't need to jump into such uncertainty of outcome investing in this company
• I am looking for Company with business that can sustain a growing dividend to its shareholders

As such, I am looking elsewhere and not dwelling into valuation of the shares.


Resources:

• True fundamental analysis and value investing
• Detecting profit manipulation in financial statements
• Criteria for selection of stocks

Fundamental analysis and value investing: from a book review

Charles Sizemore wrote a book review on Intermarket Analysis And Investing by Michael E.S. Gayed in Forbes.

He wrote, "Gayed addresses the strengths and weaknesses of each of the major schools of investing thought. For example, of fundamental analysis he writes that it is “more reliable than any other approach…tangible and logical.” But also acknowledging its shortcomings, he notes that 'fundamentals tend to lag behind the price action. The discounting mechanism of the market often senses evolving financial problems before the company actually discloses them.'"

I think this is a common misconception of fundamental analysis. In fundamental analysis, we don't wait for company's disclosures to know its financial problem. we can sense the company's financial problems easily and ahead of others by noticing its changes in balance sheet's items like inventory, receivable, payable, gearing, etc., its cash flow and the consistency of three elements in financial reporting, i.e. financial performance, changes in balance sheets and announced stories.

What we need is a complete analysis on balance sheets and cash flow statements to smell troubles ahead.

In fact, Daniel Fisher, another writer of Forbes wrote this article, "Those Evil Naked Short-Sellers Actually Trade On Fundamentals, Study Says", stated that the short-sellers rely on fundamental analysis to trade. They detect and exploit financial weaknesses of companies. It is not beautiful, but fundamental analysis allow them to act before market price action.

Balance Sheets' Items

The health of a company's business operations reflects in the management of inventory, receivable and payable. A good company with healthy operations shows a "thin" working capital items like inventory and receivables. The balance sheet of a company with healthy inventory turnover, prompt collections of account receivables and willingness of suppliers to provide longer financing reflects a small Net Current Asset's value of "Inventory ADD Account Receivables (Debtors) LESS Account Payable (Creditors)" ("I+D-C"). Consistent increase of this "I+D-C" value reflects deterioration of management performance, e.g. mismanagement or bad planning of inventory, raw materials, and problematic production processes, longer credit period to keep unhappy customers from leaving, non-collectible sales revenue, disputed sales, lacking clout on suppliers and is forced to pay cash for inventory due to bad reputation, etc.

A balance sheet with bulky inventory, bulky receivable, and small payable indicates either a mediocre company or a troubled company with manipulated income statements. Read here.

Fundamental analysis enabled you to avoid such company. Or alert the value investor early enough to sell the stocks before market price actions.

Cash flow

Has the company been generating positive operating cash flow? Has it been paying down its borrowings? Has the gearing less than 30% of its total assets? If the answers of any of the above are NO, we need to be alarmed.

Avoid or sell the stocks of the company that does not generate operating cash flow. In some cases, I even avoid those that generate positive operating cash flow but with negative net cash flow.

Opportunities in the stocks market are unlimited but our money is limited. Sell and run, if the company you invested in was not generating positive net cash flow. We don't have to wait. Whether there will be a financial problem in the future, it is irrelevant to value investors like us.

Announced Stories

We can estimate future performance from the announced statements and notes to the financial statements. I remember one of the stocks I held:

It was a listed company. In one of its quarterly reports it explained that the profit reduced as there were many festive holidays during the quarter and that the plant had already reached its full capacity. Six months down the road, when it announced the purchase of a new plant, I immediately knew that the profit was going to increase before the commission of new plant.

I just wish to make a point that by linking the financial numbers to Notes to the Financial Statements and announcements, we usually can see the underlying business progress. Sometimes, we can pick up things that missed by the management. We can "smell" what is coming before the market price actions. And this is fundamental analysis.

Conclusion

In true sense of value investing, we would have dump the stocks when its balance sheets reflect a mediocre operations management with lackluster performance, with or without its subsequent financial troubles. With such complete fundamental analysis, the actions of value investors (to sell/ to avoid) always come much earlier than the market price actions.

Relevant resources:

• Reading financial statements
• Detecting accounting manipulation in financial statements
• Finding financial information from the net
• Example of fundamental analysis (Not example of the selected company)

Investing in Stocks: Overview

More useful writings:

• Business cycle
• A game of wisdom
• Investing in Singapore Stocks

Stock watch:

• AEON Co

There are five areas in stocks investing:

• Paradigms
• Objectives
• Strategies
• Skills
• Execution

Paradigms

"We interpret everything we experience through these mental maps. We seldom question their accuracy; we're usually even unaware that we have them. We simply assume that the way we see things is the way they really are or the way they should be. And our attitudes and behaviours grow out of those assumptions. The way we see things is the source of the way we think and the way we act." --Stephen R. Covey.

"...All of my clients had bought the same stock. Some had made money, and some had lost it...Over the years I started to notice that the people who lost money in either of these ways were always the same ones. They'd sell too soon or too late, but they always lost money..." --Suze Orman.

Her clients acted consistently based on their own paradigms. Those with winning paradigms acted consistently to win. Those with losing paradigms always acted consistently to lose.

These are the right paradigms on the natural law of market, risks and knowledge for effective stock investing.

1. The natural law of market
2. Selective stock prices and market movement
3. Understanding risks
4. Elimination of risks
5. Consistent and accurate prediction of market timing
6. Seeing stock investing through these perceptions turns successful stock investing into exact science. In short, we should seek knowledge and information before we invest and we should not base on market timing that is based on chance or probability.

Objectives

The objectives to invest in stocks are set to meet our financial planning objectives, i.e. to acquire and to grow income generating assets(i). From stock investing objectives we can establish our broad criteria in stocks selection.

Strategies:

Successful stock investing involves two main area, i.e. good stocks selection AND good cash management.

Stocks selection

• Establish stocks pick criteria to fit into the objectives
• Stock selection checklists
• Stock selection criteria of various gurus, i.e. Warren Buffett, Philip A Fisher, Benjamin Graham, Fool.com, Peter Lynch, etc.
• Choice between price growth and dividends growth

Cash management

• Understand market reality and one's cash flow situation and invest accordingly
• When to buy
• When to sell
• Cash inflow in bad time

Skills

• Reading financial statements
• Detecting accounting manipulation in financial statements
• Finding financial information from the net

Executions

• Setup trading accounts
• Basic online trading process
• Finding stockbrokers, i.e. a list of stockbrokers
• Choose and get a bank account
• Share margin financing
• Executions of trade
• Basic trading techniques: order, settlement and contra
• IPO
• Rules and regulations
• Counting gain & loss
• Tax issues
• Credit control

AEON Co valuation based on Quarter 1's results

The reasons why I started my writing with AEON are that

1. its current price at RM17.64 is ridiculously high due to a few reasons, and
2. for another reason, such price may not be really crazy

But in either cases above, one thing for sure, it is definitely not the right price for me to buy more into this stock.

The price is too expensive:

• Unless there is new announcement that gives a different financial picture, I think the fair price for AEON is still at between RM9.00 - RM12.00. At such price the P/E ratio of forecast earning is in the range of 12.5 - 16.7 times.
• This stock has very low trading volume. Prices can be easily affected by just a few traders. I can only guess that some punters are playing up the share price.

But what are the reasons that may justify current high price:

• If the management decided to dispose its property at market value, the increase of price beyond reasonable of P/E ratio can be justified. But based on research report, we know the management is not keen.
• If the management decided to dispose its property and decided not to retain control over the property management, then such disposal will hurt its Retailing business. On the other hand, if the management decided to dispose the property to a REIT and retain control over the property management, then the new REIT will be loaded with debts and interest expenses that eventually will hurt the Retailing business too.
• On a more far fetched speculation, as AEON's book carries high value property, are there corporate raiders quietly accumulating this stock until they get sufficient votes to force current management to sell its property and realize a huge short term disposal gain? This is quite unlikely though make a good story. :-)
• Big blocks of shares are traded among/ by Employees Provident Fund, Aberdeen Asset Management Asia Limited and Mitsubishi UFJ Financial Group, Inc for several months. Maybe these are just normal trading activities or maybe there are something more than apparent that I don't really understand.

In all cases above, they are not good for the long term prospects of the business.

Cut the long story short, if I were to buy this stock more for investing (and not trading or speculating), the price should not be more than RM11.00, unless and until the next announcement that reflects a different scenario. (Its Q2 results will be announced in August 2013)

• Information about AEON, the Company
• Previous valuation

AEON Co valuation based on performance of FYE 31 December 2012

The share price doubled in 2012. While PE ratios for the years between 2008 - 2011 were hovering between 12.22 and 13.00, PE for the year ended 2012 was increased to an astonishing 23.3 times!!

Such drastic increase may mean changes of something more fundamental, otherwise just a fluctuation of market forces that we should take advantage of (means it is time to sell la).

1. The historical growth of EPS was normal (on the face of it, the growth number is lackluster. but we know there were RM12.7m disposal gain in 2011.)  Growth of net dividend payout had been increased at 20% range year on year.

2. There is only one new store at Kulai expected to start in 2013. Two stores, Ipoh Station 18 and Seri Manjung that started in 2012, will have full 12 months earnings in 2013.

3. Taking into forecast profit growth consideration of 10% for Retailing, 25% for Property Management Services and 30% for interest income, my forecast EPS for year 2013 is RM0.72 per share (or 72 sen per share). Valuing at PE 13 times, the fair value of the share should be at RM9.36. One research house gave a more positive outlook and higher valuation at RM11.82.

Currently, the share price is RM17.64 at forecast PE of 24.5, which is ridiculously high.

Unless there is something that we don't know, i.e. disposal of old land at revalued price, new interested investors, corporate finance activities to securitise the property and put them into REIT, etc. otherwise, I am avoiding to buy more into this stock.

• More recent research report on AEON
• Information about AEON, the Company

Company: AEON Co. (M) Bhd (6599)

Latest updates:

• AEON's valuation

To invest in this Company, we must know it has two businesses that contribute almost equally to its bottom line. The businesses are related and they are complementing to each other growth, yet they are distinctively different in terms of financial performance and assets employed. They are:

1. Retailing ("RET"): Operations of Department Stores and Supermarkets 
2. Property Management Services ("PMS"), which include to be as landlord renting out shops and/or store space to other retailers. 

In 2012, both business contributed 50% of the profit of AEON. Property Management Services had grown significantly in recent years.

The reasons why I follow this company:

• Well managed Retailing business with strong branding that are able to ride on the growth of our nation populations
• Lucrative and stable Property Management Services Business that can ride on its Retailing business
• Strong balance sheets (no debts) and rational management that focus on long term business growth instead of cashing out one-time short term profit that may jeopardize simplicity of management (in which the many unhappy investment bankers' would termed as "Conservative")
• Its clouts, due to sheer size, over its suppliers to provide long payment period 
• In my opinion, this is a well managed company that can sustain and grow for many years to come. Our concern should be only buying at the right price.

Problem of this stock as investment:

• Low trading volume. Price can be staled for a long period of time and suddenly moved beyond reasonableness. Just a few interested parties, or lack of them, can move the price significantly.
• Valuation of properties. Will one day the management finally yield to investment bankers' pressure on their "grand idea" of putting the properties into REIT and make a huge one-time short term profit? This decision will distort valuation of the share. 

More Notes:
• If the REIT thing does happen, the Net Assets and share price of AEON may increase many folds. Investors may make a one time big gain. However, such move may kill its Retailing business if the management does not retain control over the new REIT, as the Retailing business needs constant renovations to provide freshness of the malls to retain and attract shoppers. On the other hand, if the management does retain control over the REIT, it will then have to manage a highly geared (loaded with borrowings) properties that may cause many distractions, e.g. tussle between malls' needs and REIT's financing needs.
• At this point, it is wise for the management to "shun" (as the words used by a financial analyst) the idea of REIT completely. Just hope they can continue to resist the temptation. In long term, it only benefits the one-time investors who made gain and run away and the bankers who make lucrative fees and interest income from the deal. The new REIT arrangement would leave a messy borrowings structure to be managed by the same management that would take many years to pay down, if at all.

Financial Performance (until FYE 31 Dec 2012)

• Growing revenue, with average 7% revenue growth for the past 4 years.
• Growing profit, with average 14% profit before tax growth for the past 4 years.
• Improving profit margin, mainly come from PMS
• Expected better prospects

Financial Positions

The unique part of AEON's balance sheet is that the Company has no bank borrowing, and that the entire Assets are funded by Equity and Accounts Payable that include suppliers, accruals, rental deposit collected, etc.

This kind of balance sheet can only be considered as a positive sign (healthy with liquidity) for the kind of business, i.e. Retailing Departmental Stores & Supermarkets and Malls' Property Management Service that include rental income, and the kind of clout they have over their suppliers due to their size.

The key risk for investor, is therefore the true valuations of the Non Current Assets. Part of Non Current Assets are invested in Quoted Shares listed in Malaysia and intangible items like software. These amounts has relatively little impacts on income statements. Property they acquired through out the years are mostly valued at cost or at valuations done 18 years ago in 1995.

Some salient points about AEON's financial positions:

• Positive cash flow from operations
• Positive net cash flow after capital expenditure
• Account Payable is funding Current Assets and part of Non-Current Assets (But this is not a problem for AEON)
• No borrowings
• Simple balance sheets that devoid of chances of manipulation
• Property value reflected in balance sheet are significantly below current market value

Investor issues

• Growing dividend though with low yield

The conclusion is that AEON is a good company that we should keep an eye on. The next step is to find out stock valuation, i.e. what is consider as good price to buy its shares.




You can download AEON's annual reports here.
You can find some historical data, information and even research reports on AEON in this page.
Check out our latest valuation updates on AEON.

Investing in Foriegn Stocks and Currency

Summary
In the midst of worldwide currencies devaluation race, the safe haven is Singapore Dollar. Keep your money there.

Analysis
Countries from all over the world are devaluing their currency to save their economy. United States had been quietly devaluing US Dollar while blaming China of keeping Renminbi artificially low. UK, Japan, South Korea, Venezuela, etc. all had their currencies devalued recently.The devaluations can be intentional simply to gain competitive edge or just a side effect of monetary easing (i.e. lower interest rate, printing money into economy, loosen credit control, etc.) to boost economy.

In response to the possible currency war, G20 government officials met to vow not to devalue currencies for economy benefits.

When we invest in the stocks of a country, we will not want the denominating currency to devalue. So which country that we should invest in?

Which currency to buy?

In a world where most countries race to devalue their own currency in order to gain competitive advantage for the nation's economy, there is one tiny country that has little incentive to manipulate to keep their currency low.

In another words, for this country, it is okay to allow their currency to grow higher without losing economy competitiveness.


This country has

1. large export and large import (therefore any changes of forex are merely pass through)
2. a very large portion of international trade (import and export, investment and being invested) as compared to their own tiny little local economy in terms of GNP
3. been hiring overseas people and would like to pay them cheap

Higher currency value will still affect service sectors of this country, i.e. tourism, living expenses, etc. But this tiny little red dot country has one of the highest income per capita in the world and attracts all sort of investments and tourists from all over the world. There should be little problem with slow and steady growth of currency value.

When the whole world tries to devalue their own nations' currency, this country is okay with its currency valuation or even allow it to grow in relation to other currencies.

If I trade in forex, I would buy this currency for long term.

This currency is Singapore Dollar.

Disclaimer:

• I don't trade forex
• To me, currency valuation is important because I invest in shares
• This is my analysis only, there is no other "Authority" reference

Explore investing in Singapore Stocks

There are two main reasons why I am interested in investing in Singapore stocks:

• For value investing, especially on the dividend growth stocks that I am interested in, there are limited choices in Bursa Malaysia.
• While we can expect US dollar to drop further in relation to Ringgit Malaysia, we can expect Singapore Dollar to continue to raise against Ringgit Malaysia. This will provide extra investment gain from foreign exchange gain.

The problems are how one can open an online trading account and bank account in Singapore? How one can source for quarterly report and annual financial results of companies listed at Singapore Stock Exchange? This is a journey that I decided to explore, step by step.

If you are interesting in finding out how to open a Stock Trading Account in Singpore, follow this blog. I will update my progress here.

For a start, there is a post in this forum providing useful and complete guide in setting up a Singapore Stock Trading account, or click here.