heavyth

kcchongnz..what is yr view on Kfima..hold, buy sell..??

2013-12-27 23:03

Ooi Teik Bee

Dear Kcchongnz,
I need a favour from you, I like to learn about Operating cash flow (OCF).
Look at Ulicorp financial result (P & L) for FY 2012.
Operating profit = 23,447
OCF = 6,277.
What is OCF ?
Why OCF is not >= Operating profit.
What is the difference between these 2 items ?
Please enlighten me.
Thank you.
Ooi

2013-12-27 23:20

sense maker

OTB:

I looked at unaudited version with slightly different figures
The answer is all there in the cashflow statement.

Operating profit: 23.5m
+Depreciation: 4.8m
+Fund that tied in Working capital changes: -15.4m
+Income tax paid: -5.5m
+Interest income wrongly classified within operating profit in PL: -0.7m
+Non-cash items:-0.2m
=CF from operation: 6.5m

Another mistake made by Ulicorp is in cashflow statement. It is operating cashflow before working capital changes, not operating profit before working capital cahnges.

In short, with sales stagnant, working capital management has worsened in 2012. Stock holding period lengthened, account receivable became bigger and the free financing squeezed from suppliers became smaller in amount. 15.4m fund was tied in this manner from 1.1.12 to 31.12.12.

2013-12-28 01:06

nch218

Proper risk response strategies should be in place. In risk management, these are avoidance, acceptance, transfer, and mitigation. Depends on situation, risks eventually can be avoided. Organization should implement 3 lines of defense  to deal with risks. First line=risk owners should deal with the risk, assessing and managing the risks. Second line=risk management, design controls to mitigate the risks. Third line=internal audit, provide independent review of the risk , look at the controls in place and their level of effectiveness.

2013-12-28 08:13

Ooi Teik Bee

Learn a lot from all Sifu. Thank you to everyone.

2013-12-28 09:19

rikki

Be risk aware not risk adverse.

2013-12-28 09:48

aunloke

When we have to take greater risk to look for return it becomes risk tolerance which should be avoided. The situation in US has already become risk tolerance so what do you all think of DOW and our market which follows closely ?

2013-12-28 10:15

kcchongnz

What is risk?

“ I am a risk taker, no risk no gain.” This is what most people say most of the time when punting stocks. Risk taking seems to be a heroic thingy, something macho. But my question is do you understand what is risk when you punt a stock? Because if you don’t, and if all the time you are only talking about how high return you would get, you may make spectacular return once in a while, but most of the time, I am very sure, the outcome would not be favourable to you.

Return alone-and especially return over short periods of time-says very little about the quality of investment decisions. Return has to be evaluated relative to risk taken to achieve it.

What exactly is risk in investing? In academic, one of the measures they talk about is a Greek word called sigma, the volatility or annual standard deviation of the return of a stock. The more volatile, or more and big up and down swing of the stock prices, the higher the volatility, and the higher is the risk. As most investors are risk averse, or they shun risk, high sigma is not good, or isn’t it?
But is sigma a good measure of risk? Datasonic share price rose from about 1.30 a year ago to above RM10.00 now. Its volatility as measured by sigma must be hell of high, more than 100%, 200%? By the way, the sigma of the broad market is around 25% a year. So is Datasonic a risky investment a year ago as sigma is so high, and hence risky? I cannot figure out that way, and so I don’t think Datasonic is risky in that sense, do you?

Another measure of risk in academic is beta for a diversified portfolio of stock. Beta is also very interesting mathematically. It is the slope of the straight line when you regress the return of the stock against the return of the broad market. The higher the beta, the higher the risk of that stock in the portfolio, so it says. Surely when you regress the return of Datasonic against the return of the market, you would get a very steep upward line. So does this imply Datasonic is risky? To me it is not with the same logic as above.

No, in my book, risk is none of these stuff. To me riskier investments are those for which the outcome is less certain. The probability distribution is wider. They come with:
1. Higher expected return
2. The possibility of lower return, and
3. In some cases the possibility of losses

In practice, risk is the danger of loss of capital, or an unacceptable low return

Is Datasonic a risky stock with its present price now using the context of risk as just defined?

Yes, it is in my opinion. Its share price has risen too high and a lot of future rosy expectations have been incorporated inside. The high growth expectation is extrapolated in a straight line into the future. To me, there is probability of lower return, or possible loss, not because of the poor quality of its business, but the high price you are paying. Yes, paying a high price for a stock is the most risky thing in investing.

What is your context of risk in investment?

2013-12-28 10:50

Jvei

Superb explanation all sifus. Tenkiu

2013-12-28 11:08

CityTrader

Tq but need time to digest the above postings. Stil blur blur.

2013-12-28 11:33

sense maker

We should take CALCULATED risks by buying shares that are priced with margin of safety. This is to allow for the fact that future is unknowable and certain key profit drivers may undershoot our financial projection for the company. This takes care of the downside risks.

As for upside potential, we assess using risk-reward analysis which includes consideration of one's risk appetite. Most people say they have low risk appetite out of conservatism. But the true answer often is that they are too ignorant of risk identification, assessment and management.

Nothing in this world is riskless with monetary debasement. Risk in fact is the very PRODUCT investment banks like Goldman Sachs sell, and they make huge profits by slicing risks into bits and sell them to a vast range of customers with different risk appetites. Mortgage loan securitisation, forward contracts, interest rates and forex swap contracts, options, warrants and the like are just some examples of their products.

So, it pays to embrace risk but you must be armed with knowledge.

2013-12-28 12:22

Fat Cat Tim Buddy

risk is when you don't know what you're doing

2013-12-28 13:03

aunloke

There is a difference between risk embracement and risk tolerance, when we take the calculated risk to look for gain, this is risk embracement which should be encouraged, after all no risk no gain, but if we take the extra risk which in principle should not be taken and we tolerate it ,this is risk tolerance which should be avoided .

2013-12-28 13:11

Madam YS

When you take risks you learn that there will be times when you succeed and there will be times when you fail, and both are equally important. - Ellen DeGeneres -

2013-12-28 14:41

kcchongnz

Risk-adjusted return

My portfolio of 10 stocks posted in i3 in January 2013 returned 52% for the year. Is that good? I will talk about it when KLSE closes for the year 2013.

In actual fact, return alone-and especially return over short periods of time-says very little about the quality of investment decisions. Return has to be evaluated relative to risk taken to achieve it. How do we evaluate it then?

First we have to compare the return of a benchmark, and let say we just take KLSE as one. KLSE’s total return including dividend is about 16% for 2013 with a standard deviation, sigma, of 10% say. One may jump into conclusion that a stock in the portfolio, Kimlun with a total return of 26% is better. But let say the sigma of Kimlun is 20%, does Kimlun make a better risk-adjusted return?

A simplistic way to look at it is Kimlun returns 1.3 (26%/20%) per unit risk compared to 1.6 of the KLSE. Hence Kimlun does not do better than the market in a risk-adjusted basis.

The other way to look at idiosyncratic risk is the use of a more acceptable ratio, the Sharpe ratio;

Sharpe Ratio, SR=(Rs-Rf)/Sigma.

Where Rs is the return of stock, Rf the risk free rate, say 3.5%.
In this case, Kimlun’s risk-adjusted return of 1.13 is still inferior to the 1.25 of the market.

In evaluating the performance of a diversified portfolio of stocks, I like the following way:

Risk-adjusted return y = alpha + Beta * x,

where alpha is the excess return, Beta is a risk measure, 1.0 for the broad market, and x is the return of the market. In theory, Beta of s stock is the slope of the regression of the return of the portfolio against the return of the market, and Beta of the portfolio is the weighted average of Betas of individual stocks.

If you have a portfolio of concentrated (of the same industry) and volatile stocks, Beta can be very high, say at 2.5. So if the return of your portfolio is 35%, and the return of the market is 16%, your excess return, alpha, is minus 5% (35%-2.5*16%). You do no better than the market.

However, if you have a diversified portfolio of stocks with low correlations, and stable and less volatile companies, say with a Beta of 0.8, meaning less volatile than the market, and a return of 13%, your alpha is positive at 0.2% (13%-0.8*16%). You outperform the market even though the return is not as good as the market.

You may carry out regression to get the Beta value of a portfolio. But I still don’t buy the notion that a portfolio which moves more than the market is a risky portfolio. However in practice, it is more of a judgement. Judgement of Beta is a skill of an experienced investor, not anybody.

KC Chong (28/12/13)

2013-12-28 17:09

betulbetulcakap

cakap betul betul avoid risks sama dengan cut loss betul tak ? tak ada risk free dan sure naik punya saham di dunia ini . cuma timing yang make you kaya .

2013-12-28 17:52

up41

Interesting. I am still mcc after reading above. Only remember one old fellow told me years ago that , it is not real profit or loss until you sell yr shares & get out when the market is very hot. ( In fact I asked how hot was hot? He gave me a smile and mentioned that you would know lah..... ) Aammm Interesting why his saying pop up in my mind after reading through all the guru guru comments above.

2013-12-28 18:39

JCool

Kcchongnz....

sigma.... beta... risk adjusted ratio.... return... blah blah... r measurements of d END RESULTS OF D RISKS TAKEN by a company.... they r not risk per ser..

d risk taken by u when u invest in a co... is d sum total of all d risks taken by d company tat co itself..... such as... credit risk... interest rate risk... marketing risk... cashflow risk... liquidity risk... political risk... reliance on keymen risk...etc etc... whc r quite readily shown in d financial statements of cos nowadays....

2013-12-28 19:11

kcchongnz

Posted by Ooi Teik Bee > Dec 27, 2013 11:20 PM | Report Abuse
Dear Kcchongnz,
I need a favour from you, I like to learn about Operating cash flow (OCF).

Who else if not sense maker who is an accountant by profession and working in the industry who is qualified to explain that? Thanks sense maker and hope more input from you on my postings.

The easiest way to know what is the cash flow of operating activities is just look at the CFO statement. Years ago (before Enron?), companies were not required to provide the cash flow statements. One who is interested had to work out this CF statement like what sense maker has done, ie starting from the operating cash flow. Some may start from net profit like what I would do, some from profit before tax. But eventually the CFFO would be the same if you follow the principles of what constitute cash flow of the operating business.

CFO is the actual hard cash you receive from the ordinary business. Net profit is just an accounting number, based on accrual accounting. Ulicorp made a net profit of 17m doesn't mean they receive 17m cash in the year. They only receive a net cash of 6.5m. Why? sense maker had explained that clearly.

Company may report 20m profit by including some non-operating income, such as a gain from selling some plant and equipment, a hedging gain, a revaluation of properties etc. But these stuff are non-operating. They are one-time off items, non-recurring or not dependable on recurring.

Beware of construction companies which appear to make profit but bleeding cash. They can book in doubtful claims and variation orders into the receivables which are not even approved by the consultants nor agreed by the clients that these claims are valid yet. It is likely that the claims can become liabilities as the consultant decides that instead of it as a claim of loss of profit or additional works cause by the fault of the clients or consultants, is actually the faults of the contractor who have delayed the work and cause damages to the clients.

2013-12-29 06:17

Ooi Teik Bee

Thank you. Kcchongnz. Good explanation and noted.

2013-12-29 08:23

kcchongnz

Posted by JCool > Dec 28, 2013 07:11 PM | Report Abuse
Kcchongnz....
d risk taken by u when u invest in a co... is d sum total of all d risks taken by d company tat co itself..... such as... credit risk... interest rate risk... marketing risk... cashflow risk... liquidity risk... political risk... reliance on keymen risk...etc etc... whc r quite readily shown in d financial statements of cos nowadays....

Excellent comments. "I have nothing else to add"

2013-12-29 10:11

JCool

" ".... is quote n unquote.... normally used in sarcastic remarks.. wat? u don't agree with wat i say?

Risks in biz in real life r jz simple n mundance things u know.... whc more often thn not .... bombastic sigma.. beta.. ratios.... whc r trailing measurements of relative risk anyway... r of no help at all....

So... for eg... wit d QE tapering to start in Jan.. interest rate risk.. foreign currency risk... shd b in focus.... for cos whc borrow a lot.. n worst stil in foreign currency too..

N for co like sp setia... d liew fellow is gonna leave soon... it is reliance on keyman risk...

How wld sigma... beta... ratios gonna help in ths?

D question is..... how to b anticipatory... n b a step ahead of risks... whc r everywhere.... inherent in everything n everybody?

2013-12-29 11:36

kcchongnz

"I have nothing else to add" is the normal reply when Warren buffet asks Charles Munger if he has anything else to say after replying to shareholder query, implying Warren Buffet has looked into all angles.

You sometimes talked nonsense, but in here you talked sense.

2013-12-29 11:47

JCool

oic... blush blush thn... i know no much old master WF says...

fyi... whn i talk nonsense... it is whn i wanna talk nonsense... but in mfcb was no nonsense..



well... anyway... looks like u hv spent time looking at tis risk thingy... so in d two examples i stated abv... how to deal wit it b4 hand? Rather thn look at d sigma.. beta.. ltr... n say shit...

2013-12-29 12:05

Ooi Teik Bee

Kcchongnz,

Below is my analysis of LBALUM to check the debt, CFO and CFFO.
STL=Short Term Loans, LTL=Long Term Liabilities.

Year -2012/2013/Increase or decrease %
CFO -17209/33831/49%
CFFO -10812/27581/61%
Cash + Securities - 7704/21546/64%
Total(STL+LTL) -116715/107776/-8%
Cash/Total(STL+LTL) - 6.60/19.99/67%
CFO/Total(STL+LTL) - 14.74/31.39/53%

Question :-
What is the standard for Cash/Total(STL+LTL) and CFO/Total(STL+LTL) ?
Should it >=100, 90, 50 ?

To me, the debt is high but slowly improving. 8% reduction in 2013.
CFO and CFFO are getting better in 2013.
EPS, ROE and all other FA are good.
TA is good and the price is breakout. To me is a buy.
The only worry I have is the debt is high.

Note : I had email you my IV calculation.

Please comment.
Thank you.
Ooi

2013-12-29 12:21

sense maker

In Malaysia, cashflow statement was required for its usefulness >20 years ago to replace Fundflow statement in financial statements.

Cashflow statement may be prepared using direct method or indirect method. Indirect method that starts from Profit before tax is more widely used by KLSE-listed companies.

Cashflow statement of any companies gives clear enough a picture of how the cash flows under operating, investing and financing activities.

What I did was just to reconcile the figures from operating profit to operation cash flow as requested by OTB. I did that mainly because the 2 mistakes made in Ulicorp financial statements may be confusing and misleading to laypersons such that they cannot reconcile the two properly.

2013-12-29 14:25

kcchongnz

OTB
I have just looked at LBAluminium's audited accounts for 2013.

Cash flow from operations (CFFO)for 2013 is 33831 thousand for 2013, as per your CFO. I don't know what is your CFFO stands for. CFFO and FCF is generally not consistent each year, so you have to look at a number of years and make a judgement if they are good.

For looking at the bankruptcy and solvency risks of company, I don't look at the ratio of cash/Debts. I look at D/E ratio (<1, or 0.5 depending), current ratio (>1.5), times interest earned, or times cash flow cover (>5). LBALum is generally alright in these aspects.

CFFO should be more than Net income, especially for high asset based business like LBAlum as there is high depreciation cost. LBAlum is ok also in this aspect as CFFO=200% of net income. Free cash flow I prefer average over a number of years to be above 5% of revenue. FCF=CFFO-capex. the FCF I obtained for these two years are 24.6m and 1m respectively. I don't know how you get yours and they are different from mine.

ROE last year of 7.1%, twice better than previous year is still not good for me. Why? As a equity holder, I won't invest if the return is less than 10%. Hence you can say my minimum ROE is 10%. Worse still, ROIC for LBAlum is only 6.3%, though it is also twice better than the previous year of 3.3%. This is way below the weighted average costs of capital, roughly about 8%-10%.

The only thing which may entice me to invest in it is if it is very cheap, since its operating numbers are not good. However, at a PE of 8.5, and especially a EV/Ebit of 10, it is not cheap at all for this type of performance.

Oh yeah I think I told you before, in valuation you have to have a good and reasonable estimate of future growth and required return. And these have to be consistent in all your valuation methods. You should not fudge the numbers just to get the similar end results you want.

My opinion of you using a growth rate of 15% for the Graham growth formula is ultra liberal. The method is also more suitable to check if other liberal valuation method is too liberal, rather than to get the intrinsic value. Using the ROE method is suitable for financial institutions which the assets are generally marked-to-market is the appropriate one, but not for others, especially for LBAlum which the assets quality is low of which most of the assets is in PPE. Similarly for the Graham number.

2013-12-29 14:34

Ooi Teik Bee

Post removed.Why?

2013-12-30 17:14

kcchongnz

OTB, What is your ROR? Is it the rate of return of your investment in a stock?

If you are interested in the academic aspect of required rate of return in investment, have fun reading the appended link:

http://www.investopedia.com/articles/fundamental-analysis/11/calculating-required-rate-of-return.asp

For me for simplicity, I require a minimum of 10% for a low risk company with steady profit and cash flow, good operating numbers and a healthy balance sheet. Otherwise I may require a ROR of 15%-20%, depending on the risks I evaluate and judgement made for that particular company.

I used this ROR to discount the future cash flow to present to obtain the present value, or intrinsic value of the stock, and most of them still come with a margin of safety of more than 30%. This means if my judgement of the future cash flows are good, my return of investment would be way above the discount rate I used.

The return of my portfolio of 10 stocks I selected a year ago return 52%. The highest is 146% (Prestariang), and the lowest is minus 3% (SKPRes). It is the same for the portfolio of yours a year ago.

So it is not difficult. But of course the past one year is generally a bull market and we can get such a good return. However over a long term, to invest in the equity market, I still want a minimum of 10%.

This relates to the risks you take as equity market return is very volatile. A risky asset demands a risk premium over a bench mark such as fixed deposit.

I am in the process of writing an article of how to determine the rsik premium. It is a very subjective matter.

2013-12-30 17:59

kcchongnz

Or are you talking about ROE, the return of equity?

Why minimum ROE of 10%?

The E in ROE is the equity of the shareholders, the net asset left for equity holder after all liabilities are settled. You can view it as the money left over for you after all dues are paid. So if this money doesn't earn you 10% return, would you still want to leave it there for the management to manage for you?

For me, if they cannot get 10% return, I prefer you to give back to me and I can find other investment providing me much more than 10%.

And if so many other companies can return 15%, 20% from the equity, why should I invest that money in your company?

All those earnings-based companies I have invested and posted in i3 have ROE>10%. Many have ROE >15%. Some even 20% like Pintaras. But because many of them are cash rich and debt free, more useful return metric is return of invested capital. Many have ROIC of >30%.

2013-12-30 18:17