CURRENCIES

Lately there are a couple of theories circulating that China with the peg in gold, will replace USD dollar, and USD dollar will become toilet papers soon (less than 6 months).  Jim Rogers dismissed it as another conspiracy theory.  What do you think?

There are a couple of experts who talk about this.  Even during the time when the Russian and China of talking about trading of oil in RMB or Euro or other currencies than USD in 2008/9.

I know a lot will disagree with this scenerio that USD will strengthen over next 2-3 years AGAINST Euro, Sterling and Yen.  We will revisit this in the next few years.

As at 29 April 2016

1 Euro    =     1.14 USD

106 Yen =     1.00 USD

1 pound =      1.46 USD

As usual in the short run, it will be driven with sentiment.

Europe, Britian, and Japan, including USA, debt to GDP is above 200%.  Some even near 300%.  Among all these nations, USA is not the worst.  So, when financial market goes chaotic, where do people put their money? Euro (some are negative yield), Yen (negative yield as well), Sterling vs USD, which is better, for 10 years treasuries?  Each currency is reference to another major currency. 

VALUATION USING DCF

More appropriate for IPPs, Toll Roads, Sale and leasebacks, where the predictability of the free cash flow is easier with the support of a long term contract.   This is not dismissing that other sectors cannot use this method.  

Some limits:

I notice, some analyst used the latest FCF balance as a starting point for doing the next 10 years forecast of the future FCF.  However, there are limitations to it.  Has the latest cash flows adjusted for one off currency gain/loss? What about taking into account the average FCF for the past 5 years or 10 years, due to cyclical of the sector.  Once you normalised the FCF, your starting point will be a normalised figure (most likely a lower figure).  That way, chances of OVER valuation is reduced.  It is a prediction after all, it is never easy.

This is not to discredit any analyst, but some are overly bullish using the highly inflated starting point of the latest FCF.  Because the moment we use the inflated figures, very high chances the valuation is OVERSTATED.  It is expecially more difficult using DCF method for OEM manufacturing as the book order may not have a 10 years predictability.  Of course, we can predict 2-3 years with book orders being secured.  But using a linear way, from that 2-3 years forecast, there is a high chances it will be OVERSTATED.

The normal WACC used is about 9-10%, which is reasonable for Malaysia projects.

PROFIT INCREASE AND SHARE PRICES INCREASE

Sometime I am puzzled when someone said that the high drop in share prices is not reasonable, but when the prices goes up too fast, no one complaint that it is unreasonable.  Prices movement basically is the reaction of the sentiment of the moment, i.e. voting machine, no need to use logic, because, it cannot be explained by logic.  If prices move up too fast too soon, you must also be careful (even though the profit increases) that it is not reasonable.  It is reasonable that prices move up 4-5 times in 2 years when the results only show its earnings has doubled?  Is this reasonable?  It all depends on the "prospect" of the company, there is no such thing as reasonable of the price action by investors or traders.

I have also observe sometimes analyst are over confident or overstate the projections, as much as 30-50%.  Sometimes it is due to the implementation delay.