Month: February 2012

OKP Pros and Cons Analysis

Pros

  • Acceptable moat – only listed road specialist, many years of experience and track record
  • Strong financials, FCF, ROE, margins
  • Good dividend yield
  • Even though undertaking mostly government projects, margins are high – shows management competence
  • China Sonangol catalyst (construction of condos, overseas opportunities, can be acquisition target)
  • Oil and gas industry catalyst
  • Property development catalyst
  • Overseas JV opportunities -$6.75 mil set aside for overseas business expansion
  • Won huge project for CTE widening from LTA – shows competency and trustworthiness of the company
  • Can acquire other smaller companies with cash hoard
  • MRT contract catalyst
  • Lots of awards won and in August 2010,  OKP made it to the Forbes Asia’s ‘Best Under A Billion’ List
  • Highest order book in company history till 2014 and winning lots of contracts of late
  • Construction expenditure by government usually increases during downturn
  • Or Kim Peow, 76 years old and owns 55% of company. Potential general offer by China Sonangol which owns 14%?
  • High success rate in tendering – 94% success rate in 2010
  • PUB said it will commit $750m over the next five years to fight flooding. OKP won a Zion Rd canal contract in Aug 2011 so it has experience in this and can win more contracts.
  • Opportunities like N-S expressway ($6-7 bil – starting 2013), Bukit Brown 4-lane dual carriageway (~$50 mil each package – 2013-2016), road around sports hub (<$1.3 bil – by 2014), widening/improvement of existing expressway.

Cons

  • Competition from Singapore and overseas companies but with respect to road works and construction – however, even though there’s keen competition, each company will get a slice of the billion dollar pie
  • Relying too much on government (especially LTA) for projects can be a double-edged sword
  • Road development cannot go on increasing as stated in LTA masterplan – however, can be mitigated by property development, overseas joint venture and expansion that the management is currently looking into
  • Exposure to labour shortage and foreign worker levy increase – OKP said it’s managing well and can pass on increase to customer
  • Price fluctuations and availability of construction materials – for LTA projects, there’s a clause to claim the rise in material costs

Adampak SWOT Analysis

Strengths

  • Good numbers and better than Brady’s (better NPM, ROE, ROA, div yield, lower PE than industry)
  • Barriers to entry – stringent requirements; strong relationship with clients (Seagate, Maxtor, HP, WD) and clients want reliability; established track record
  • Integrated capabilities and production facilities
  • 70% repeat customers
  • Management holds around 40% of company
  • Experience of management – chartered company through many crises including the recent Thailand flood; would have experienced many challenges over the years and learnt from it

Weakness

  • Heavy dependence on HDD sector (56% in FY2010. Out of this, 36.5% – die-cut parts)

Opportunities

  • RFID
  • Merger and acquisition – can acquire smaller companies and can also be acquired by bigger boys (founder owns 32% of company and it 62 years’ old); IR said private equity funds have approached Adampak but management not selling as right price not quoted; can be acquired by bigger boys like Brady which wants to expand into Asia
  • Expansion into non-electronics sector
  • Rise of emerging economies (China and India) – need for cheaper HDDs even if SSDs take over
  • Samsung & Seagate merger and WD & Hitachi merger – able to provide for more players

Threat

  • HDD decline – but SSD has huge limitations like high volatility and servers still need HDD
  • USD risk – over long-term, this will be naturally hedged
  • Natural disaster in Thailand – Seagate’s and WD’s shipping forecast has increased though.

Emotions taking over during a crisis?

Many of us have heard that the best time to buy stocks is during a stock market crash or during a correction. However, how many can actually put this into practice? The sure way to make money is to buy low and sell high. However, how many of have done the exact opposite? They buy high and plan to sell higher but the stock price tumbles, they end up selling low due to fear. Buying high and selling low is the surest way to erode wealth. How, then, is one to have emotional stability to buy stocks during a crisis when stocks are on a mega sale?

Firstly, you have to research into the company you are buying into. Behind every stock price is a company. How does the company generate profits? Where is it operating in? Is it a simple business? Is it a prominent business? Is it a strong brand? Next, you have to look into the management and access if they are honest and competent. Then, the most important thing is that you have to know the right price to buy at. This is essential as it makes sure you don’t sell prematurely when there’s still room for growth in the company. This takes the emotions out during a crisis. For example, a company is selling at $2 and has been dropping for the past few months due to market sentiments. You have valued the share at $4. This is a 100% discount. Would you buy it? Of course you would load up on this company as the stock price is screaming “Buy!”. On the other hand, someone who does not know the value of the company is going to sell at $3 when the price has been dropping due to fear. He will be cashing out at $3 even though the company’s value is at $4. Remember, that behind every stock price is a business with value.

You also have to be convinced and believe in yourself and in the company you have researched into. Conviction is paramount as this allows you to buy more of the company during a crash when it’s selling at a huge discount. Buying more at a lower price allows you to average your buying price downwards. This is how you buy low, sell high and create wealth. You cannot buy at the absolute lowest but at least you can buy at a low price region.

Recessions create new millionaires. During the last financial crisis in 2008-2009, Straits Times reported that the number of millionaires in Singapore increased by 32.7%. Do you want to be like them? If you do, you have to take opportunity and buy when stocks are low and not when they are high. To do that, you need to have emotional stability and that comes when you know the right price to buy at and be convinced with your purchases. Take control of your emotions and take charge of your financial destiny!

Trading vs Value Investing During a Recession

During a prolonged market downturn, many good companies get beaten down in price due to market sentiments. A few months back, some good companies such Capitaland, SIA Engineering, Hyflux, ARA, etc were at low prices. I was very tempted to buy some of these companies for a short-term trade up. Even though the companies might not be undervalued per se or fit exactly into the value investing criteria of low debt, high ROE, etc, making quick bucks out of these companies seemed very tempting.

During a market crash, is it better to buy blue-chip companies for a short-term trade or wait for fundamentally strong companies to become undervalued for a long-term buy? An example of this would be, is it more prudent to employ cash to buy Capitaland for trading or use the cash to buy Vicom when the stock becomes undervalued? There’s no perfect answer as you wouldn’t know if Vicom will come down to your predetermined price or if Capitaland will actually rise in price if you buy it. However, during a market downturn, to generate some returns, one can do trading for the short-term. To increase the “margin of safety”, doing trading only during a market crash or prolonged downturn can increase the chances of capital appreciation tremendously.

Trading can be done by looking at charts. I’m really new to trading but I use indicators such as the 2 period EMA and 5 period EMA crossover, together with candlestick patterns, volume, stochastics and MACD. I also look at valuation ratios and try to trade when the P/B and P/E ratios are near the lows seen in the previous crisis, i.e. the sub-prime crisis in 2008-2009. To be prudent, it’s wise to keep the trading to less than 5% of the stock portfolio. By doing so, one can take advantage of the low prices of the blue-chip companies and at the same time, keep any losses to a minimum. Also, by employing little cash for trading during a market crash, one can keep some cash when Mr. Market becomes more maniac-depressant and throws up some good companies at bad prices.

As a case study, Capitaland was trading at around $2.30 in early January 2012. Now, it’s at $2.89. This is approximately a 26% gain. In hindsight, this is a perfect trade. However, at the point in time, will buying Capitaland seem to be a good deal? No one can say for sure but by limiting your trade to less than 5% of your portfolio, you can at least keep your emotions in check should things go wrong and at the same time, generate decent returns.

Coffee with FFN and Andrew Hallam

Andrew Hallam is an English teacher at Singapore American School. He built a million dollar portfolio on a teacher’s salary, while still in his 30s. His book, Millionaire Teacher, is an international bestseller.

FFN: At what age did you get started in investing?

AH: I started to invest when I was nineteen.

FFN: How did you get interested in investing and who inspired you to get started?

AH: I met a mechanic who was raising two kids on a single salary.  He was 47 years old, and he was already a self-made millionaire.  He was frugal, and a great investor.  He inspired me to believe that I could do whatever I wanted to do in life, whatever my passion was, and still end up financially strong, if I was smart with my money.

FFN: What was your life like before investing and how is it now?

AH: Before I started to invest I was in high school, and today I’m still in high school.  The difference is that before, I was the student, and now I’m the teacher.

But seriously, I didn’t have much money.  My dad was also a mechanic, and my mom stayed at home to raise us (there were four kids in our family)

Having said that, money hasn’t really changed me much.  I still enjoy being active, physically, and spending time with friends.  I’m an odd duck, not really getting pleasure from material things.  But I do love to travel, and I can afford to do a lot more of that now.

FFN: What are some of the stocks in your portfolio currently?

AH: I own three index funds, but no stocks:  an international index, a U.S. index, and a short term Canadian government bond index.

FFN: You advocate index investing instead of stock picking. Why is that so? Don’t stock picking give higher returns?

AH: If I could earn higher returns as a stock picker over my lifetime, I would do that.  But that would be a rare feat.  If I were to beat a rebalanced, diversified portfolio of indexes over 35 years as a stockpicker, I would quickly find myself (if I could prove it) on all the major television channels pertaining to the stock market.  Beating the market with stocks is doable over a year, three years, maybe even fifteen years.  But over a lifetime, the statistical odds are far higher with diversified, low cost indexes.  Most professional investors lose to the market over their lifetime.  So I like to invest where my long term odds are highest.

FFN: What are the mistakes you have done pertaining to investing and what are the lessons learnt?

AH: I once got involved in a loans company that paid 54 percent interest each year.  A friend of mine had received 54 percent from the company for eight years.  I know that he wasn’t lying, because he tried to get me involved when he first invested.  But each year, I kept saying no.  Anyway, eventually, after he had made more than $300,000 in interest, I got involved.  But it was a Ponzi scheme that eventually collapsed.  I talk about this in my book.  It was definitely a crazy thing for me to get involved in.  I learned that if something sounds too good to be true, it is.  There’s no way that we thought it was a Ponzi.  But I guess Madoff’s investors were caught with their pants down too.

FFN: What psychology do people need to succeed in investing?

AH: Good investors have to be a little odd.  They have to be comfortable ignoring the news, and avoiding herd mentality.  As Warren Buffett says, they have to be greedy when others are fearful and fearful when others are greedy.  That makes sense, but it’s tough to do.

FFN: What lessons have you learnt over the years as an investor?

AH: I’ve learned not to listen to analysts.  That was one of my first lessons.  If you do choose to buy individual stocks, do your own research, order at least 5 years worth of annual reports, read every word and then try to figure out where the company is lying.  Most companies fudge.  If you can’t see where they’re fudging, then you don’t want to buy shares in the business.  That might sound paradoxical, but if you can’t find where the company is fudging a little bit, then you aren’t understanding the annual report fully.

I’ve also  learned that stock picking itself is difficult.  I was a good stock picker, but I learned that the odds of going with an indexed approach will give me a statistically higher chance of making more money.

Also, I have learned never to focus on the results of a single year.  In fact, as a relatively young investor, it’s very important to be happy about seeing markets fall, and unhappy when markets rise.  Think of yourself as a collector.  If you’re a collector of stocks or indexes, you shouldn’t want to see those prices rising while you’re collecting them.  You should only want to see rising prices once you’re retired (because you’re no longer buying, but selling).

FFN: How has the investor in you evolved over the years?

AH: I have become more and more dispassionate—unaffected by market swings.  When markets fall, I absolutely love it.  The best times to invest is when there’s blood in the streets.

FFN: What advice would you give for beginners who want to start investing?

AH: Don’t listen to investment tips.  Read A Random Walk Down Wall Street, The Intelligent Investor, and of course, Millionaire Teacher.  Read each of these books more than once.  Then you’ll know more than 99 percent of financial advisors.  And you’ll be ready to invest on your own.

FFN: How about an advice for the youth who are looking to build up their future?

AH: Try not to fall into the consumption trap.  You’ll see people around you who becomes slaves to the latest tech gadgets, the expensive cars etc.  Try your best to ignore that stuff.  Focus on building assets, not liabilities.  Anything that decreases in value over time is a liability.

When you become wealthy, you’ll be able to buy more of life’s finer things, and you won’t have to go into debt to do it.

FFN: What do you thing is the biggest misconception people have about money?

AH: They think that those who drive flashy cars and have big salaries are rich.  Some of them are, there’s no doubt about that.  But most people with high salaries have high debts.  They try showing off with their “5 Cs” and it adds a lot of stress to their lives.

FFN: What is the one thing, in your opinion, do people need to succeed in investing?

AH: They definitely need the right temperament.  They have to be happy to see falling stock markets.  It’s the same with housing markets.  If you were going to be buying a condo every year, would you prefer to see cheaper condo prices over the next five years, or higher condo prices?  The answer, of course, answers itself.  You should prefer sinking prices while you’re accumulating.  The same thing should be said of any asset, including stocks.

FFN: What are the habits one must follow to have a sound financial life?

AH: Live within your means, diversify your investments, don’t fall for the latest investment fad, and educate yourself.  Keep in mind, also, that stock market based television programs are there to make you excited, not to give you advice.  I don’t watch them, and I don’t recommend that you watch them either.

FFN: Would your finances and investing be different if u had a kid and were living all your life in another country like Singapore where living expenses are quite high?

AH: If I had children, there’s no doubt that I wouldn’t have as much money as I do.  That said, most millionaires in the U.S. are married with children.

Singapore, in my view, is as expensive as you want to make it.  For example, I find Canada (my home country) more expensive for me. My tax rate in Canada was 40 percent as a teacher there.  And we paid capital gains taxes on most of our invested money, unlike Singapore. With a great public transit option, a car in Singapore can be an option, not a necessity.  This isn’t the case in most Canadian towns.

From what I understand, Singapore is considered quite a wealthy country overall and I certainly wouldn’t view it as a liability for wealth accumulation.

FFN: What is your ultimate goal in life?

AH: To live until I’m 90!  I’m already a really happy guy, so if I can live longer, I can enjoy more happiness!

FFN: What does financial freedom mean to you?

AH: It means that nobody owns me.  At 41 years old, I don’t have to work anymore if I don’t want to.  But I work because I love my job.  If I HAD to work, that would be different.  In one way, I would be property to someone else, like some kind of commodity.  Early in life, I wanted to be in a position to choose to work, rather than be forced to work because I bought things I couldn’t afford, and had debts to pay off.

FFN: A parting shot for the readers…

AH: Your health and your relationships are worth more than all the money in the world.  Cherish them.

Click here to get Andrew Hallam’s book on Amazon.