Forex and Politics

Before I start this piece, I would like to mention that in no way does this blog have any political ideas, all things included in this post are just my opinions. Hope I don't lose any readers because of this.

On the Financial Times yesterday, there was an article about the upcoming elections in Britain (Britain is arguing about the past, by Philip Stephens). This article got me thinking about how politics and economy of a country is intertwined.

When Gordon Brown announced that elections were going to take place on May 6th, this is what happened between the GBP/AUD is shown below.

What is interesting here to note is that the GBP had a 200point dip against the AUD in a little over 4 hours. The large drop was due to the worries that neither party would be able to able to secure a majority in the upcoming elections. Although it has since recovered, to 1.6521, and admittedly forex is extremely sensitive to political instability, questions popped up in my head about governments and how political instability, flawed monetary policies, or just plain mismanagement can affect a country's finances and economy.

The best example would be Zimbabwe. Any country with inflation rates that high ought to be listed in the Guinness Book of Records. Other examples that come to mind would be as recent as the PIGS incident, where spending sprees by government has come back to haunt them. Likewise, low interest rates in US helped fuel the housing boom which resulted in the subprime crisis that we have all come to know.

Somewhere in the middle of the article, Stephens writes:

"Colleagues of Mr Cameron say he is confident about being the next prime minister: the nation, they judge, cannot contemplate the prospect five more years of Mr Brown. This tells us little about the Tory alternative"

I thought this was quite apt in describing the political situation in Singapore. With house prices increasing, without our salary matching it, and with COE prices increasing probably due to the change in number of COEs provided, it makes me wonder what happens when I graduate and start a family.

It makes me wonder whether a change in the number of opposition in government would be a good solution that would change policies that we have right now. However, from what I read from several websites, Temasek Review being one of them, it cast a lot of doubt on the quality of the opposition because simply, there isn't enough news on them and the positive things they have done. Instead it is more like an anti-PAP session than a positive opposition session. It seems that the idea is either NBP (nothing but PAP) or ABP (anything but PAP).

Looking at how several bad policies as mentioned earlier would have an adverse impact on the economy, my vote rests with the party that is able to prove that they are able to do a better job, instead of competing for which is the lousier of the 2 parties. If PAP's policies are working for Singapore's economy, I really don't see a need to change because I don't see much benefits.

Once again, I would like to reiterate that this is my personal opinion, and the only inducement is to provide a point of view for everyone.

Mencast Holdings

A friend asked me to look through this company, Mencast Holdings, and provide an opinion about it

About Mencast Holdings

Established in 1981, Mencast manufactures and supplies sterngear equipment and provides sterngear services for a wide range of commercial vessel applications.

Mainly caters to customers in the offshore oil and gas and marine industry, our customers include local and regional shipyards and owners, such as the subsidiaries within the offshore and marine business division of Keppel Corporation Limited, Labroy Shipbuilding and Engineering Pte. Ltd. and the subsidiaries of SembCorp Marine Ltd.

Led by a dedicated and experienced management team, as well as equipped with advanced machinery and strong technical expertise, Mencast is committed to providing quality products and services to our customers. We are one of the first sterngear equipment manufacturers in Singapore to obtained the ISO9001:2000 Quality Management System certification. In addition, we achieved the Singapore SME 500 award for two consecutive years in 2005 and 2006.

Strategically based in Singapore, Mencast is well-positioned to ride on the growth in the offshore oil and gas and marine industry.
Structure of Group

(as taken from mencast.com.sg)

First Thoughts on Mencast
When I was first told about Mencast and what they did, he looked at it as they provided a unique service that shipping companies needed. Furthermore, there were no other companies that specialized in building and maintaining ship parts.

The first thought that hit me was shipping. Earlier in the year, I did a research on dry bulk shipping and the shipping industry as a whole and not surprisingly, there was overcapacity in the sector resulting in low freight rates. Tankers however, fared better than dry bulk, with a higher demand.

I am currently avoiding shipping counters currently and may review it after this earnings season. (I bet those people out there holding NOL and Cosco will be laughing at me right now.) So when he first told me about Mencast, I was (and still am) negative about the industry as compared to the company itself.

I will give the upside on the industry at the end of this piece, although I remain underweight on it.

Mencast Income Statement

Since 2007, Mencast's revenue has grown approximately 39.19%, and COGS has been at 54% of sales on average over the past 3 years. Since its IPO in 2008, the Sterngear Manufacturing division's revenue has dropped by 3%, while the Sterngear Services division revenue increased by 16%, all together contributing to a 4.83% increase in revenue since its IPO.

This large topline growth has contributed to a 35% adjusted growth over 3 years for operating profit. One thing to note about operating profit for 2009. The Other Gains includes one off gains, and the figure of 35% does not take into account this one off gain. Net Profit excluding one off gains increased by 25% since 2007.

Since the IPO however, excluding one off gains, Operating Profit has increased by 5%, and Net Profit, excluding one off gains (in this case I included the IPO expense as a one off), fell by 1% from 2008 to 2009.

This translated to a P/E ratio of 6.6 at the end of FY2009, and a 3 year trailing P/E of 7.2.

Taking into account the theoretical growth rate (ROE x Retention Ratio) using the amount retained by the company, the PEG ratio comes in at 0.67 assuming continuous 20% growth. Using the earnings per share growth, however, the PEG ratio was 1.22 for FY2009. This assumes that the P/E of SGX trades at a 50% discount to NYSE.

Mencast Balance Sheet

Mencast NAV value for 2009 was SGD0.181, an increase of 4cents from 2008. Its NTA, however, was SGD0.16 for FY2009. This translated to a P/B ratio of 1.65 for FY2009. ROE decreased due to a decrease in the Asset Turnover Ratio, due to the increased amount of PPE they have taken on since the IPO.

The company has also taken on long term debt of 8345k at YE2009, compared to 2937k at YE2008. The increase in Finance Expense in the income statement to 1.3% of sales from 0.5% of sales shows that the company has incurred more debt, though not necessarily a bad thing should they wish to expand.

Mencast Cash Flow

Mencast Free Cash Flow has been positive over the past 3 years, with FCF 52% of Operating Cash Flow for 2009. For 2009, the dividend paid was 47% of its free cash flow.

Opinions on Mencast

Mencast is tied closely to the shipping industry, and with the shipping industry still at the bottom of a down cycle, I believe that Mencast would be have a buy rating if we are looking at industry wise, and if there were no opportunity costs. However, purchasing Mencast stocks exposes us to opportunity costs as we would have to wait to see signs of recovery from the Shipping industry.

Mencast is slightly overvalued at this current time, especially with limited growth prospects. The issue with Mencast is that there are no other companies to do relative comparisons.

Due to my negative forecast on the shipping industry, coupled with the analysis of Mencast, I would not think right now is the correct time to purchase Mencast Holdings Inc.

Shipping Industry

For readers who are still reading this, I wish to point out something regarding the shipping industry. Right now shipping seems to be at the bottom of a down cycle, and the question should be asked how low can it go. If your analysis tells you that the economy is recovering and commodities boom is going to reduce the capacity of the shipping sector, you should purchase shipping companies. I believe shipping would recover by 1H2011, and I actually own shares in a LTL company, YRC Worldwide, although it is banking more on the turnaround of the company, and hopefully an early recovery in transportation.

Portfolio Review

In the month of March, many indexes rallied, hitting new highs. One surprising thing that I noted over the releases in March is that the British economy is recovering very well, posting strong manufacturing data. However, there was still debt fears over Greece, and US and China are still at loggerheads over the failure of China to revalue its currency.

In Singapore, property prices soared yet again (looks like that has been the story for the past months). HDB prices rose 2.7% over the first 3 months compared to the 3 months before that. Private home prices are also through the roof, breaking its 2007 high by 6% for non landed private homes and landed homes are 15.6% ahead. More interestingly, private home prices are above their 1996 peak, meaning that home prices are their highest ever.

I am still neutral, tending to the underweight side on residential property. I do not think that high prices are here to stay because

1. Government restrictions on new foreigners in Singapore will not increase the demand of property
2. The effect of the IR is still unclear, with reports of it being frequented more by foreign workers instead of gamblers
3. The government has been releasing land for developers to bid, in an attempt to increase the supply of housing

My portfolio recovered in the month of March from the 0% returns posted to date in February.

Transpac

The dividend ex date was announced to be 3rd May, and upon announcement, the share price went up by 10cents, factoring in the dividend payout

First Resources

Company results were announced on 1st March, and can be found here.

Industry wide, Nestle has announced that it will not source palm oil from Sinar Mas Group in a victory for Greenpeace. Sinar Mas Group has been accused of deforesting while carrying out of its agricultural activities. Nestle has sourced from Sinar Mas only for its Indonesian businesses, and has announced that it will change suppliers. This is good for the industry as it seeks to produce palm oil while reducing damage to the environment. It also gives other companies in the industry to attract new customers.

Palm oil prices are well supported by energy prices, says James Fry, as the agri business and the energy business becomes more intertwined. The article can be found here.

China Telecom

China Telecom FY2009 results were announced, and the results were positive. The news article can be found here. As for the detailed analysis, it will be out before the end of April, hopefully by the end of next week.

Novo Group

Novo Group released its 3Q results, achieving tremendous improvement. It has also started preparing for its scrap metal business, which is scheduled to come online is 2011. The analysis can be found here. Operating Profit was up by 186%, and Net Profit up by 816% for 9M2010 as compared to 9M2009.

I am looking forward to Novo to increase the long term debt of the company as an indicator of expansion plans.

Blue Gem

Products have gone on sale at more Walgreens stores in Florida. I am looking forward to the release of the financial statements

Soilbuild

Soilbuild announced that the stock split has been approved in principle, in an attempt to increase liquidity. Many shareholders have been converting their warrants in an anticipation of the 6cents dividend payout, with the ex date on 7th May

YRC Worldwide

YRC Worldwide has announced that shipping trends over the 1st quarter has shown signs of improvement, and that its customers have been returning. I look for its cost cutting targets to be hit by mid year.

YRC Worldwide's independent auditors have announced that it has doubts on YRC Worldwide's ability to act as a going concern. It has seeked a court ruling to prevent a 20 million bond payment to its bondholders who did not agree to the debt to equity swap back in December. It has said that should the court ruling be approved, the 20million will be used to help its recovery thus far.

Prospective Companies

I am looking at several companies who have large land on their balance sheet. Furthermore, I am looking at Palm Inc as another turnaround play. Should there be a prospect for investment, I will do a writeup.

I am very busy for the next week, so apologies if there isn't much update for the next week.

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.