Novo Group 3Q Results

Novo Group's 3rd Quarter results were released on the 15th of March.

Income Statement

Sales for 9M09 were down 18%, and cost of sales were down 23%. However, for the 3Q09, sales were up 67.7%, with an increase in cost of sales to 60.3% as compared 3Q08.

The reduction in the cost of sales contributed to a 186% increase in Operating Profit. This was also affected largely affected by change in other operating expenses. Other Operating Expenses
experience a 96% drop for year to date, due to a large decrease in foreign exchange losses.

Finance costs for the year to date decreased by 66%, total of 0.24% of sales. Net Profit for the year to date increased by 816%, and a profit margin of 3%. Estimated P/E for the year, assuming equal earnings through 4 quarters, was 7.3x.

As Novo is currently a supply chain manager and does not have an upstream mining facility, the profit margin of 3% is respectable. As it is actively growing, I would look to have profit margins between 3% to 5%.

Balance Sheet

Novo has a slightly weaker balance sheet as compared to the FY2009 due to its expansion activities.

• Current Ratio has dropped from 2.98 to 2.26
• Net cash per share of -0.04 as compared to a positive net cash position
• Asset per share has increased by 2 basis points to 0.12.
• Debt/Equity is 0.74, compared to 0.49 in 2009
  
• ROE is at 18%, compared to 4% in FY2009
• P/B has dropped from 1.55 to 0.20

As Novo expands, there is a need to observe the Debt/Equity Ratio. Noble Group has a debt/equity ratio that ranges from 2.5 to 3.5. I would look for Novo to increase their financial leverage over the next few financial reports.

The assumed increase in debt should be used for capital expenditures to expand Novo's business. If there is a large decrease in cash used for capital expenditures, there would be a flag for me. Likewise, if the gross PPE does not increase, another flag would be raised.

Overall, the balance sheet reflects that the company is in the growing stage and is starting to pursue expansion plans.

Cash Flow

Capital Expenditures was 1,357k YTD2008 up from 27k YTD2009. Free cash flow was negative.

Opportunities for the Future

China has a huge demand for raw materials as it grows, among which there is high requirement for steel due to the need for it to build infrastructure to support its growth. In 2009, the iron ore imports increased by 42% to 628million metric tonnes. Novo has secured fixed quantities of raw materials to be supplied from mining companies.

Novo has also intended to commence its scrap metal business in 2011. The capital spent to set up the business will be estimated at USD24million.

The Ten Bagger Principle

Currently I am reading "Beating the Street" by Peter Lynch and John Rothchild. I've finished "One Up on Wall Street". Most investors here would be able to identify with Peter Lynch's investing philosophy for one reason: he encourages an all equity portfolio.

For a background on Peter Lynch, please refer to this link.

The first thing I would like to address is the idea of a bagger. A two bagger will be a stock that multiplies twice, while a ten bagger would be a stock that multiplies itself ten times. It's derived from baseball, although bowling has the same name for the number of strikes you get after a turkey.

Peter Lynch is a strong advocate of the buy and hold strategy, and he has stated that 2 points

1. If an investor goes by the philosophy that he will sell if the stock goes up 50%, he will never be able to obtain a bagger. Likewise if you go by the philosophy of selling the stock when it is a two bagger,you will never be able to obtain a ten bagger.
2. Show him a portfolio with a stop loss of 10%, and he will be able to show you a portfolio that loses 10%.

In light of the financial crisis, the wisdom of the buy and hold strategy has been repeatedly questioned and more mutual fund managers are becoming flexible and not holding as long as they used to.

I personally feel that taking profit is never a bad thing, and buying low and selling high is an excellent strategy (I mean who wouldn't, that's the essential of making money). The question comes is how to time the market. Maybe there are few beings out there with superior ability as compared to most of us investors that are able to tell when is the bottom and the top. And the list of investors that will be able to do that wouldn't have my name on it.

Buying and holding undervalued companies would instead provide a return that wipes out market irrationality and rides through economic boom and bust. The fact is that many of us are unable to time the market. Further evidence can be found here. Finding companies that are undervalued will provide us with the margin of safety for investment, minimizing possible downside and increasing possible upside.

I believe that should there be no external influences such as a requirement for money, selling should only occur if there is a(n) (anticipated) change in the fundamentals of the company or macroeconomic conditions, or that you require to reposition your portfolio. I would like to emphasize that stock picking is important, and sitting on for the ride is extremely important.

I leave everyone with an idea that Peter Lynch was putting across.

If I had 10k, and I invested 1k in 10 companies. If one of the undervalued companies produces a 10x returns, essentially the other 9 companies can be declared bankrupt and I did not make any losses. This is the effect of the ten bagger.

China Telecom FY2009 results

China Telecom's Full-Year Profit Soars
By LORRAINE LUK

HONG KONG--China Telecom Corp., the country's largest fixed-line operator by subscribers, reported a jump in full-year net profit as the company's year-earlier result was weighed by an impairment loss associated with its mobile business.

China Telecom has been trying to boost its competitiveness in the mobile business after buying rival China Unicom (Hong Kong) Ltd.'s code division multiple access business in 2008 as part of a government mandated restructuring of its telecom sector.

But despite the purchase, China Telecom has still been a laggard in the mobile business compared with China Mobile Ltd. and China Unicom. Analysts said competition in the industry is likely to rise further this year and operators will be bogged down by higher marketing expenses and rising network depreciation costs.

Net profit for the 12 months ended Dec. 31 rose to 14.42 billion yuan (US$2.11 billion), from 884 million yuan a year earlier, when the company booked a 24.17 billion yuan impairment loss on property, plants and equipment mainly associated with the mobile business. The year-to-year jump was in line with expectations.

Stripping out the one-off impairment loss and amortization of non-cash connection fees, the company said its adjusted profit for last year was 13.27 billion yuan, down 34% from an adjusted profit of 20.07 billion yuan in 2008.

Revenue rose 12% to 209.37 billion yuan from 186.53 billion yuan.

China Telecom said it plans to increase its capital spending slightly this year on high-growth broadband and value-added mobile services amid rising competition in China's telecommunications industry, which it said poses serious challenges for the company. China Telecom plans capital spending of 39 billion yuan this year, up slightly from 38.04 billion yuan in 2009.

To boost its competitiveness, the company plans to offer Research In Motion Ltd.'s Blackberry devices in China in May and Palm Inc.'s Pre handsets in July, Chairman and Chief Executive Wang Xiaochu said at a news conference.

China Telecom is the second Chinese mobile operator to sign a deal with Canada-based RIM to offer Blackberry devices. China Unicom offers Apple Inc.'s iPhones. China Telecom hopes Blackberry devices will help attract more affluent customers in Chinese cities. RIM has offered Blackberry handsets to big businesses in China since 2006 through China Mobile, the world's biggest telecom operator by subscribers.

Average revenue per user--a key industry gauge to determine the long-term growth rate of telecom operators--for China Telecom's mobile business fell to 59.50 yuan in 2009 from 63.40 yuan a year earlier because of tough competition, the company said.

Mr. Wang said the company will continue its efforts to make its mobile business profitable, and that he expects it to turn a profit in 2011.

Mr. Wang reiterated the company expects its core profit—which excludes items such as impairment and amortization of upfront connection fees—bottomed out in 2009 and will resume growth this year. The company said selling, general and administrative costs in 2009 rose 47% to 40.51 billion yuan from 27.5 billion yuan a year earlier, mainly driven by handset subsidies of 10.1 billion yuan in the 12 months ended Dec. 31.

Last year, handset subsidies accounted for 33.6% of the company's mobile revenue, lower than the company's previous guidance of 37%.

China Telecom plans to lower its handset subsidies as a proportion of mobile revenue this year, Mr. Wang said. The company plans subsidies of more than 10 billion yuan to meet its target of adding 30 million mobile subscribers in 2010, including eight million third-generation, or 3G, subscribers.

China Telecom said it had 56.29 million mobile subscribers at the end of December, of which 4.07 million were 3G users. It maintained its target of having more than 100 million mobile subscribers in 2011.

To mitigate the decline in its fixed-line voice business, China Telecom has been focusing on increasing its revenue from value-added services.

Mr. Wang said the company is offering mobile payment services in 18 cities by cooperating with Chinese banks. But he said "China Telecom has no plan...and I think no need to invest in a Chinese bank for mobile payment services. We are already cooperating well with the local banks."

The comments came after China Mobile said this month it planned to buy a 20% stake in Shanghai Pudong Development Bank Co. for 39.8 billion yuan to expand into mobile payment services.

YRC Worldwide

I purchased YRC Worldwide (NASDAQ: YRCW) last week @0.54 per share.

About YRC Worldwide

YRC Worldwide Inc., a Fortune 500 company and one of the largest transportation service providers in the world, is the holding company for a portfolio of successful brands including YRC, YRC Reimer, YRC Glen Moore, YRC Logistics, New Penn, Holland and Reddaway. YRC Worldwide has the largest, most comprehensive network in North America with local, regional, national and international capabilities. Through its team of experienced service professionals, YRC Worldwide offers industry-leading expertise in heavyweight shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence. The company is headquartered in Overland Park, Kan.
(as taken from yrcw.com)

YRC Worldwide does transportation of goods mainly across North America, and main business is in the Less Than Truckload and Full Truckload market segment. Its division YRC Logistics in charge of international freight forwarding and providing full logisitical support.

What is Less Than Truckload and How Does it Differ from Full Truckload?

As the name suggests, LTL serves the middle ground between parcel services and full truckload services, and its goods weigh between 50kg to approximately 9000kg. LTL shippers will collect freight from various shippers and consolidate the freight at the terminal for sorting before delivering the freight.

Although LTL is cheaper than FTL, it takes longer to reach its customer as there are many intermediaries along the way. LTL delivery time is dependent on the number of terminals between the sender and the destination, while FTL is dependent on the distance. A visual example will be passing the parcel down the row till it reaches the final destination, while FTL would be throwing the parcel from the first person to the last person.

The key point here is that if the amount of LTL freight a company has is large, it is able to reduce cost by cutting the number of terminals between the sender and the destination by using FTL carriers to deliver from terminal to terminal.

This is why large freight carriers are good investments as it provides a cheap method of transporting items over long distances. This model works in countries with large land mass and a large population.

Freight carriers, esp LTL and FTL carriers across land are close to pure plays on the economy of the country.

YRC's Bankruptcy Issue

YRC Worldwide was extremely close to bankruptcy at the end of last year, due to its high rate of cash burn, and only managed to evade bankruptcy due to a debt for equity swap done at the end of the year. This resulted in the dilution of outstanding shares from 90million to 2billion.

The trigger for the large cash burn was due to macroeconomic conditions and other conditions in the industry. As we all know, consumer confidence in the USA has taken a downturn over the past 2 to 3 years, since the subprime crisis started and turned into what we know it as today. The economic downturn meant that less goods were demanded by retail outlets, resulting in a drop in volume of freight services, reducing the revenues earned industrywide. Freight service providers would then cut their prices in order to maintain their volume, sending price spiralling.

This macroeconomic effects of the economic crisis resulted in excess capacity in the freight sector, and even at present, this excess capacity still exists. Many have viewed that should there be a bankruptcy filing by YRC Worldwide, it would restore the supply and demand balance across the industry.

YRC Worldwide Financials
I am viewing this company as a turnaround. Just some notable figures that back up my decision include

• Pre tax loss for FY2009 was USD899million, an decrease from a pre tax loss of USD1,149million for FY2008
• 4Q2009 pretax loss was USD95million, down from pretax loss of USD335million in 4Q2008
• 4Q2009 pretax loss decreased the loss from 3Q2009 pretax loss of 118million, however, 2% to 4% of revenues are seasonal
• 4Q2009 National shipments down 39.9%, revenue down 4.2% compared to 4Q2008
  
• 4Q2009 Regional Shipments down 19.9%, revenue down 7.7% compared to 4Q 2008

The lower volume and revenue for 2009 was attributable to cost cutting measures. YRC has cut 2,000 jobs since the start of this year, and plans to reduce an additional USD300million in costs by the end of the year, of which USD200million should be done by the end of the year. Much of these costs are manpower related.

What lies ahead?

I do not believe that the American economy will turnaround and give the LTL freight industry a boost. In my opinion, in order for the economy to turn around, it requires a 2 prong boost.

1. The increase in consumer confidence
2. The increase in employment rate

Right now, the latest results that were released shows that consumer confidence is down and employment rate is constant at 9.7%.

However, what is attracting me is the massive cost reduction that is carried out by YRC Worldwide. Their aim to reduce costs by 200million by mid of 2010 would strengthen its balance sheet. Furthermore, since YRCW had completed the debt for equity swap, it has retained approximately 85% of its customers as customers are more confident about YRCW's ability to continue as a going concern.

YRCW analysts are predicting the company to be solvent in 2010, and may occur solvency issues in 2011. I am of that same view that insolvency may trouble YRCW in 2011, if (1) they are unable to meet cost cutting targets, and (2) USA's economy doesn't pick up. I believe that should cost cutting targets be met, YRCW would exit this crisis with a stronger, albeit smaller, company.

Closed Forex Trade

Closed out my forex trade for a 330 pips gain. Closed to take profit to make up for previous forex loss because I was stopped out.

Shorted the Pound

I shorted the GBP/AUD pair today at about 1230pm. The position was opened at 1.66323.

The reasons for shorting were purely fundamental, and the entry point chosen was somewhat technical. I will cover my reasons in a post that I will hopefully come up with by the end of the week. Swamped with a lot of things recently

Stock Selection

"A stock that moves is a good stock"

I have always been told that, and over here I would like to cover what I look for when I invest in a company, not in any particular order.

1. What are the prospects of the industry for the next 5 to 10 years.

Over here, what I look into is the products developed by the industry and how likely is the product's usage in the next 5 to 10 years. If chances are the product is going to be around in the next 5 to 10 years, then it's a good investment in that sector. For that reason, I value commodities highly. Another sector that is worth looking into is the food and beverage industry. After all, we all have to eat.

On the same note, I look towards employee placement companies in USA as a play on the job recovery. 2 companies come into mind: Barrett Business Services (Stock Quote: BBSI) and Spherion Corp (Stock Quote: SFN)

2. How large is the company, and what is the likelihood it grows?

For me, I look to invest in small growing companies. I believe that it is one of the most, if not the most, important factor when choosing a company to invest in. If you look at the companies I am investing in, they are not the market leaders in their industry. To me, there's only 1 correct time to buy a market leader in an industry, and that is during a recession when prices are depressed.

There is one exception to the rule, and that happens when I look at companies that would be classified as turnarounds. Turnarounds are companies that used to be market leaders, but now are so depressed due to mismanagement that it would probably be on the verge of bankruptcy.
Three companies come into mind: JC Penney (Stock Quote: JCP), Office Depot (Stock Quote: ODP) and YRC Worldwide (Stock Quote: YRCW).

3. Financials

I base my financial analysis on multiples - P/E and P/B ratios are the most common. Other important things I look at is Cash per Share, NAV per share and the leverage and current ratios. I personally think that Cash Flows, while important, should not be given too much emphasis - on this topic we should look at the Burn Rate of cash, which is an indicator for companies who may face troubles during a recession.

Negative equity is one thing that is a huge red flag, however, I believe that sometimes it does not mean it's the be all and end all of investing. It all depends how the company would fare in the future that matters. I will put one company forward should people wish to study a negative equity B/S that has prospects worth looking into in my opinion: Comforce Corp (Stock Quote: CFS). I believe that it is a possible investment if you are looking into the employee placement industry.

4. Management Policies

On the topic of management policies, I would like to mention Soilbuild as a company that conveys its message across to its investors succinctly. If you do just a little bit of research, you will realise 1 thing - that Soilbuild is focusing on hitting the 40million mark in rental income, and its dividend is based on rental income. If I told you that we aim to pay out a minimum 7 cents a share by 2012, and continue the payment beyond 2012, people who look for a stock with a developer play and would want to collect respectable dividends would look towards the company.

This is what I mean by the management policies. A policy that tells investors what to expect and what they intend to do in the future, especially its future expansion plans, is always a good thing as it reduces the investor's margin of error.

5. Invest In What You Know

The idea is taken from Peter Lynch. When we look at something to invest, we should look around us. Things that work around us, because it will give us first hand knowledge on how good/bad the product is.

For example, if your Toyota has an accelerator problem and you are one of the first users of it, you may wish to find out more about that problem, and an early research would turn out a result that a few people are experiencing the same problem as you. This is first hand information that may tell you that you should sell your shares in Toyota before the issue becomes widespread.

Or if you have bought an OSIM massage set ( I have never used an OSIM massage set), or if you always go to Popular to buy books, or if you get your coffee from Gloria Jean instead of Starbucks because they serve better coffee, all these are indicators that you should do a little bit of digging around about the company, so that equipped with the first hand information, you will be one step ahead of all the analysts.

For this same reason, I do not foresee myself looking towards techonology and semiconductor stocks because I can tell you, that I don't understand what actually happens at all.

First Resources FY2009 Analysis

First Resources FY2009 Highlights
* First Resources Increased PATMI to Rp1,169 Billion (US$112.5 Million) for FY2009; Ups Dividend Payment by 56%

* Record production volumes, tight cost control and lower export taxes buffer 18% lower revenue

* Well-placed to fund capex needs and dividend payments from robust operational cashflows and strengthened balance sheet

* Consistent planting strategy augments the Group’s position as a leading producer, enabling it to ride upturn in CPO prices

Analysis of Income Statement

For FY 2009, First Resources experienced an 18% drop in revenues from the crude palm oil division, and a 23% drop in revenues from the palm kernel division. The drop in revenue was due to lower prices of Crude Palm Oil and Palm Kernel for the year. Cost of Sales remained constant from FY2008 to FY2009, even though volume produced had increased.

Selling and Distribution Costs were greatly reduced by 83% as a result of the decrease in export taxes levied by Indonesia during this period. However, G&A expenses increased due to higher bonus and higher salary paid out to their staff. The lower gross profit for the year translated to a 26% decrease in Profit from Operations less Fair Value Changes.

The gains on forex and cross currency swap resulted in a profit for the year increasing 7% YOY. Eliminating the forex, swaps and fair value effects, profit for the year dropped 55% YOY, and was 21% of sales, compared to 39% of sales the year before.

Another thing to note is that finance expenses increased to 10% of sales, from 5% the year before. The increase is due to the convertible bonds issued and a smaller percentage capitalized from the year before.

P/E ratio for the year was at 8x.

Analysis of B/S

The Balance Sheet strengthened over the past year. Assets increased by 22% YOY, with Liabilities increasing by 13%. The increase in assets was attributable to a RP1trillion (SGD151 million) increase in biological assets. One thing to note is that the interest bearing loans increased by RP98billion (SGD14.8million).

Current Ratio increased from 2.75 in 2008 to 3.62 in 2009, and leverage dropped to 0.70. Net Asset Value was at SGD0.56. ROE dropped from 27% to 22% due to a lower asset turnover ratio.

First Resources Land Bank

First Resources grew its total planted area to 108,917 hectares, adding 13,000 hectares over the past year. Its planted area is approximately 50% of its total land bank.

Comparison with Other Companies

As Golden Agri turned in a lower than expected profit for the last quarter, the 2 companies that will be compared to First Resources are Wilmar and Indofood Agri.

One thing I would like to point out is that First Resources revenue performance this year was below analyst expectations, which could translate to the lower P/E ratio as compared to Wilmar and Indofood Agri.

One thing to note about Indofood Agri is that the high performance relative to Wilmar and First Resources is due to Fair Value revaluation, and more importantly, the forex changes are locked in under operating profit.

Looking at the figures above, I believe that First Resources is undervalued to its peers, with the industry trading at approximately 15x P/E. The adjusted P/E ratios when FV is taken out of he equation, assuming that the FV changes are shared among Equity Holders and Minority Interests, put Wilmar at 16x P/E, Indoagri at 21x P/E and First Resources at 13x P/E. Like it was mentioned earlier, one thing to take note of is the finance expense.

With about 50% of its planted area still immature, First Resources is poised to continuing growing and is the growth company to look into for Palm Oil.

Portfolio Review

For the month of Feb, my portfolio took a slight hit to end 0.1% in the negative. Over this month, I've added 3 companies to my portfolio: Novo Group, Blue Gem Enterprise and Soilbuild. The analysis and writeup of Novo Group and Soilbuild were covered earlier. For Blue Gem Enterprise, it is a speculative play. It's a young startup in America that is involved in the distribution of food and beverages. It's located in South Florida.

Here is my portfolio at the end of the month

Transpac

Transpac released its FY2009 results on the 24th of Feb. NAV/share dropped from SGD2.55/share to SGD1.81/share. However, this was due to the number of shares outstanding. NAV increased from 349million from 256million. Cash for the Group was at 164million at Year End. Bank Loans were fully repaid over the past year. Dividend announced was 10cents/share.

First Resources

First Resources announced its results today. Sales volume were up, but revenue down due to lower comparable palm oil prices. An analysis of the results will be done within this week. Dividend announced was 1.18cents/share.

China Telecom

It was reported today (Mar 1st) that China Telecom is in talks over taking over PCCW. PCCW was previously subjected to a failed takeover bid by China Unicom.

China Telecom released news on subscriber data for the month of January, with its total subscribers to its CDMA network amounted to 59.1million. Its fixed line network of users shrank 1.9million to 187million, while its broadband network saw an increase of 790,000 to reach 54.25million subscribers.

Deutsche Bank raised China Telecom to a buy, with a price target of HKD4.60/share. China Telecom should be reporting its results in March

Novo Group

Only noteworthy news was that Novo Group appointed CIMB Securities as its sponsor for its listing on SEHK. The news was released today.

Soilbuild

Soilbuild's full year financial performance was covered in the Soilbuild post earlier. Soilbuild intends to build its rental income to 40million. Its regular dividends is based on rental income while special dividends is based on sale of development properties. Dividend payout was 6cents/share.