Warren Buffett’s Letters to Berkshire Shareholders

Every year, in the Annual Report of Berkshire Hathaway, there’s a section called “Chairman’s Letter” and it’s penned by Warren Buffett himself. It’s a letter for his shareholders and it reveals Warren’s latest thoughts, investment ideas and theories.

I knew about these letters some time back but never really paid attention to them until recently. Three weeks ago, I read a wonderful book called “The Essays of Warren Buffett: Lessons for Corporate America”. The book contains the letters to shareholders from the various years and they are categorized according to different topics for easy read. After reading that book, I realised that I could learn so much from reading the letters alone than reading any other book out there. Most of the books out there on value investing and Warren Buffett are a spin-off off his thoughts revealed in the letters. So, I went to download the letters from the Berkshire Hathaway website, printed them out and got them binded and am reading them now slowly.

The latest 2010 letter was just released yesterday. Catch hold of the letter at http://www.berkshirehathaway.com/letters/2010ltr.pdf now. If you don’t have time to read the whole letter, do read pages 22 and 23. That section is very helpful for our personal finance and also for our investments.

Kingsmen FY2010 Analysis

Kingsmen released its FY2010 results on 22nd Feb 2011 and I’m very pleased with the results.

The revenue for 2010 dipped 2.8% mainly due to the completion of the Universal Studios Singapore project in 2009 that was worth about $78 million. However, it has to be said that Kingsmen did a good job to fill the vacuum left by the USS project with the completion of several major projects in FY2010.

The group’s Interiors division was the major contributor of revenue for this FY. It contributed to 49.6% of overall revenue versus the 44.7% contribution by the Exhibitions and Museums division. The Interiors division did well as it completed more than 20 shops in Marina Bay Sands. The Interiors division has always been a star for Kingsmen and I believe it will continue to shine in the years ahead.

The gross profit increased when compared to last year even though the revenue dipped. The gross profit margin improved and is at 27.8%. Net profit margin is at 6.9%.

Looking at the balance sheet, cash in hand stands at $29.9 million with negligible debt. Trade receivables is at $68.9 million and it has been in the high range for the past two FYs. This may be characteristic of winning mega projects but it would be good if Kingsmen could get push to receive cash earlier. This will increase cash flow as well. Retained earnings is at $39.3 million. ROE dipped whereas ROA increased slightly.

Looking at the cash flow statements, capex was at $6.1 million. This was due to acquisition of two new factory units in Malaysia. Average free cash flow is very healthy at $17.4 million.

Kingsmen’s competitor, Cityneon also released its FY2010 results. Its Thematics division’s revenue dipped 69.8% due to completion of USS projects. Comparing this to Kingsmen (drop of 23.5%), the drop was very drastic. Thus, Kingsmen’s performace is quite commendable. I didn’t compare with Pico, a bigger competitor, as their FY ended Oct 31, 2010.

I feel Kingsmen needs to aim for higher GPM of more than 30% and NPM of more than 7% going forward if it wants to become bigger and better. Kingsmen has the lowest GPM amongst its competitors. Cityneo’s GPM is at 31.9% and Pico’s at 28.6%. Cityneon’s GPM is high as I believe it doesn’t undertake that many mega-scale projects that Pico and Kingsmen undertake. Bigger projects affect margins.

Another thing that is commendable is that revenue from China contributed 22.8% vs 18.5% in 2009. US & Canada contributed 7.4% vs 2.2% in 2009.

Order book stands at $84 million as at 21st Feb 2011. The outlook for Kingsmen remains bright after having been awarded several thematic projects for 2011 and several more available for bidding. Kingsmen is also setting up a more automated production facility in Beijing and is expected to be operational by second half of 2011.

Vicom FY2010 Analysis

Vicom just released their FY2010 results on 10th Feb. As usual, their results are positive.

Their revenue, gross profit margin, net profit and net profit margin have all increased over the previous year. Revenue increased 7.7% and net profit increased 9.9% over the previous year. Their net profit margin is at the highest at 26.6%. This shows that Vicom has a viable business model producing outstanding margins.

Looking at their balance sheet, they have $49 million in cash with no debt at all! Vicom is a business that generates a substantial amount of cash every year.

Their current ratio is at 2.5. Even though this is good (current ratio is >1), I feel that the current ratio is on the high side. It would be beneficial if Vicom uses the cash to expand the SETSCO subsidiary which is facing high competition or acquire other businesses like STA Inspection Pte Ltd (STAI) to monopolise the vehicle inspection industry. Currently, the vehicle inspection industry is operating in duopoly with Vicom and STAI as the only two inspection companies in Singapore. If the company is not using the cash to expand/acquire companies, it could pay out more dividends than the 9.8 cents declared (6.6 cents final dividends + 3.2 cents special dividends). The current ratio will go down to 2.12 after giving away the 9.8 cents dividends, which I consider is still slightly on the high side.

The ROE is above 20% but has dipped slightly compared to the previous year. This might be attributed to the high amount of cash in the company’s coffers. The ROA has slightly dipped as well. Retained earnings has increased around $13 million compared to last year. Equity has also increased compared to previous year.

Looking at the cash flow statements, cash flow from operations dipped around $2 million or around 6.7% compared to the previous year. This can be attributed mainly to the increase in “Other Receivables and Prepayments” due to the GST receivable for the lump sum payment of land lease renewal at Sin Ming. Average free cash flow also dipped due to increased capex for FY2010.

Dividends paid has been consistently increasing. With a very positive free cash flow generation, Vicom is a cash cow that pays good dividends.

Looking at the individual business segment, revenues from vehicle inspection and non-vehicle testing and inspection both increased. These segments contributed to around 91% of the FY2010 revenue. The outlook from Vicom for these sectors are: “Given the current high cost of COE, the rate of vehicle de-registration for 2011 is expected to remain depressed, resulting in more vehicles being due for inspection. The test & inspection business will continue to face competitive pressures”. I have the same sentiments as the company. The company should look into increasing the economic moat of the SETSCO business. The SETSCO business is operating in a highly competitive industry unlike the vehicle inspection sector.

Overall, I’m very impressed with the FY2010 results due to the increasing margins and cash.

Value investing and soccer II

Back in November last year, I did a post on “Value investing and soccer“. It touched how similar value investing and uncovering rising soccer players is. I quoted an example on Andy Carroll who was from Newcastle at that point of time.

As of Jan 31st 2011, Andy Carroll has moved to Liverpool with a second highest BPL record fee of £35 million. He was actually the most expensive player in BPL till Chelsea signed Fernando Torres for £50 million a few hours later. Andy Carroll, however, is still the most expensive English player. Personally, I thought it would take a few more years for Andy Carroll to move from Newcastle to a bigger club (moving away was a sure-bet but the question was when). Maybe Newcastle thought that the current price was right so selling Carroll was the best option for now.

It can be seen that when a player (company in the instance of investing) ceases to be attractive (i.e. the price is very much more than intrinsic value), selling for profit may prove to be a very good option. We can sell a company for a high price and buy more fundamentally strong companies with the same amount of money and let the money roll. In the arena of investing, I can think of Thomson Medical Centre. Even though the fundamentals of the company didn’t change, selling was the best option.

Warren Buffett on buying a company

“If I were looking at an insurance company or a paper company, I would put myself in the frame of mind that I had just inherited that company and it was the only asset my family was ever going to own. What would I do with it? What am I thinking about? Who are my competitors? Who are my customers? Go and talk to them. Find out the strengths and weaknesses of this particular company versus other ones” – Warren Buffett