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PMT Forum's MOST POPULAR Discussion Boards => Stocks and Stock Trading => Topic started by: TSO on Jan 03, 2011, 05:35 PM

Title: TSO's Desk
Post by: TSO on Jan 03, 2011, 05:35 PM
STATUS: CLOSED
Updated: 21 Feb 2013
Notes: DS = Deep Scan; SN = Screen

Currently working on:
1. DS: FLIR Systems Corp., US (employer)
2. DS: Beckton, Dickinson, and Company, US (myself)
3. SN: GMA7, Philippines (Freefront)

21 Feb 2013 update: I have decided to scrap the wait list as I cannot analyze it at a speed fast enough to really deplete it.

Complete:
1. LOTO, PSE (myself) -- started 8 Nov 2010; ended 31 Dec 2010; covered '04 - '09; deep scan (found in Value Investors' thread, 38th page)
2. Safeway, US (myself) -- started 1 Jan 2011; ended 7 Jan 2011; covered '03 - '09; screening only
3. Air T, US (myself) -- started 14 Jan 2011; ended 17 Feb 2011; covered '03 - '10; deep scan
4. Tanduay Holdings, Inc., PSE (GoodSteward) -- started 17 Feb 2011; ended 19 Feb 2011; covered '06 - '09; screening only
5. Mabuhay Vinyl Corporation, PSE (myself) -- started 1 Mar 2011; ended 5 Mar 2011; covered '02 - '09; screening only
6. Nintendo Co. Ltd., US Pink Sheets (myself) -- started 25 Mar 2011; ended 28 Mar 2011; covered '03 - '10; screening only
7. Cityland Development Corporation, PSE (myself) -- started 31 Mar 2011; paused 2 Apr 2011; covered '06 - '09; screening only. scrapped due to other projects
8. Alaska Milk Corporation, PSE (boy_kolokoy, GoodSteward) -- started 1 Apr 2011; ended 7 Apr 2011; covered '03 - '09; screening only
9. EEI Corporation, PSE (panitanfc) -- started 17 Apr 2011; ended 7 May 2011; covered '04 - '10; deep scan
10. Megawide Construction Corporation, PSE (c_lmc) -- started 14 Jun 2011; ended 14 Jun 2011; covered '08 - '10; screening only; note: not in usual reporting format
11. Manila Water Company, PSE (cimic, akira0422) -- started 10 May 2011; ended 6 Jun 2011; covered '04 - '10; deep scan
12. Autoliv Inc., US (myself) -- started 20 Jun 2011; ended 25 Jul 2011; covered '01 - '10; deep scan
13. ProAssurance Corporation, US (myself) -- started 10 Sep 2011; ended 19 Oct 2011; covered '04 - '10; deep scan; full report uploaded to GuruFocus (http://www.gurufocus.com/news/149182/proassurance-passing-the-high-hurdle)
14. Energy Development Corporation, PSE (robot_sonic, novice, akira0422, brokerbackgirl) -- started 27 Oct 2011; ended 29 Oct 2011; covered '05 - '10; screening.
15. Hillenbrand Inc., US (myself) -- started 28 Dec 2011; ended 29 Feb 2012; deep scan; full report unfinished until now
16. GameStop Corporation, US (myself, supervisor at internship) -- started 7 Mar 2012; ended 17 Mar 2012; deep scan; summary report written but cannot be uploaded without permission
17. Diamond Offshore, US (myself, supervisor at internship) -- started 17 Mar 2012; ended 12 Apr 2012; deep scan; will write report after finishing Hillenbrand (permission obtained); 21 Feb 2013 update -- will no longer write report as research is a bit outdated for it
18. Liberty Global, US (myself, coworker at internship) -- started 25 Apr 2012; ended 26 Apr 2012; screening; summary report written but cannot be uploaded without permission
19. Iridium Communications, US (myself) -- started 18 Apr 2012; ended 23 Jun 2012; deep scan; will write report after finishing Diamond Offshore
20. Holcim Ltd., US (myself) -- started 13 Sep 2012; ended 7 Oct 2012; deep scan; 21 Feb 2013 update -- will write report for resume purposes, either this or Iridium
21. Pacific Online Systems Corporation, PSE (myself) -- revisited 18 Oct 2012; simultaneous with SAIA; ended 21 Feb 2013; deep scan; full report completed for self
22. SAIA, Inc., US (employer) -- started 18 Oct 2012; simultaneous with Pacific Online Systems Corporation; ended 31 Jan 2013; did not do valuation due to probable difficulty in improving gross profit margins (which is critical to unlocking its value); no report written but notes have been made



I am putting this thread up for one reason: to sharpen my analytical aptitude. Basically, I will be taking requests to analyze companies that are publicly-listed on both the US and Philippine Stock Exchange. You won't be paying anything. I will invest time and effort into the analysis, and rest assured, I always do my due diligence. I think this is a perfect service for people who want to invest but neither have time to study nor ability to discern opportunities from traps.

Here's how it works:
1. Post a reply here. If it's not a bank or a financial institution, I will be performing a quick skim of its most recent SEC filing to see if the company is worth pursuing for a deep scan or a quick screen. PLEASE INCLUDE THE COUNTRY IT IS IN, as I cover both US and Philippine listed corporations.

2. If I like the company, I will perform a deep scan, a process which can take a very long time. Those who request projects from me will be updated from time to time, via email or PM (if your inbox isn't full!). Once the research is completed or is stopped, I will publish the results in this thread within two weeks of completion. I highly doubt this will lead to coat-tailing as there are, at time of original posting: one, less than 20,000 users in PMT; two, only an average of 151 people are online in a given day.



Key issues to address.

1. How do I analyze companies?

I use what I now call the "V Framework", the letter referring to "five" (as in the Roman numeral) and "value". It is a comprehensive analytical system I personally formulated through personal experience. It is continuously evolving, improving as I keep on analyzing companies. The V Framework ascertains the investment worthiness of a security through its perceived risk and valuation.

Risk is determined as the confluence of five different elements characterizing the underlying enterprise's business character. I personally believe that risk cannot be quantified into a single number (e.g. beta, a "risk index"). The perceived risk assigns an arbitrary figure that will be the centerpiece of the valuation process. It goes without saying that intrinsic value estimation is crucial as there can be a point where one can overpay for a good company.

James Montier mentions in his book Value Investing: Tools and Techniques for Intelligent Investment that Benjamin Graham, the father of the discipline and the professional idol of the legendary Warren Buffett, prescribes 16 as the highest Price-Earnings ratio any investor should pay. Consequentially I adhere to this principle and have also algebraically manipulated the equation to arrive at the maximum premium that should be paid for growth depending on perceived risk.

The five elements are highly comprehensive, comprising both quantitative and qualitative factors. Tedious encoding, ritualistic data processing, and the compilation and study of the results form a bulk of the analytical process. I employ a brutal combination of recasts (and/or adjustments) along with vertical, horizontal, ratio, valuation, and stability analyses.

Just remember, I am a Value Investor. I don't do trading and all that crap.

Please note that I find a firm's inability to service debt without the perpetuation of more debt highly egregious and would, as a force of habit, raise the perceived risk level more than I probably should. Admittedly, my own portfolio has missed profitable opportunities (such as Semirara Mining Corporation) because of the higher demand for safety. Still, I am of the opinion that opportunities can be found anywhere and anytime. There is no penalty other than opportunity costs for missing a sure winner.

4 MAY 2011 EDIT: The computation method for the discount rates utilized in the valuation process has been changed from a user-defined percentage defined by perceived fundamental risks to the concept of Weighted Average Cost of Capital. Allow me to explain why. When you look at WACC through the lens of common sense, it is simply the minimum rate of return the company must make on its operations to merely offset its cost of capital--sourced from debt, equity, or both.

Computing the cost of debt financing is straightforward and will be based on historical interest rates on interest-bearing liabilities, further adjusted upwards if necessary. Acquiring the cost of equity, however, is a bit more complicated. I will be employing the Capital Asset Pricing Model, simply because the concept behind it makes a lot of sense.

CAPM, from analysis of its equation, simply asserts the cost of sourcing money from investors -- individual market participants, angel investors, or friends/family/colleagues (for the world of entrepreneurship) -- must be equivalent to the rate of return provided by a virtually risk-free investment (like a treasury bond from the government) they would've put their money in otherwise, plus a premium to compensate for the increased probability of incurring capital losses characterized by the investment vehicle being invested in. This risk premium is further adjusted by a multiplier that corresponds to the risk applicable to the individual vehicle being used.

The unadjusted risk premium applicable to the entire market is computed as the difference between the return provided by benchmarks (e.g., the Philippine All-Share Index and the S&P 500) and the risk-free return. Rest assured, I still despise beta (the academicians' proxy for this "individual vehicle adjustment") with every fiber of my professional beliefs as an analyst and a value investor. I've tried so many ways to develop a risk index that makes sense, but as time passed, I concluded that absolute precision isn't really necessary, and perceived risk is, though subjective, still the way to go.

Please note that I now derive my USA equity risk premiums from Aswath Damodaran's website.
     

2. What is the difference between "screening" and "deep scans"?

Screening. Vertical and horizontal analyses are not performed. The ratios I look at to ascertain the five elements are far less, and I am more concerned with the "umbrella" accounts such as "Current Assets", "Current Liabilities", "Retained Earnings", "Net PP&E", and the like. The only valuation techniques utilized are Reverse DCF and a very crude version of EPV. Discount rates, though tied to perceived risk, are practically user-defined.

Adjustments to the umbrella items of the financial statements are also made, but if I notice something that may be of interest (like an Off-Balance-Sheet item), then I would simply take note of it, as that's for the deep scan.

Deep Scan. More extensive than Screening and should be on par with what is done professionally. The financial statements are encoded in their original format, followed by recasts, as well as adjustments if necessary. Vertical and horizontal analysis are performed, along with segment analysis. I dive into depreciable assets and debt obligations. The ratios being studied are numerous, yet relevant enough to the analysis.

In other words, more information is processed to determine the inherent risk of the company. It is also done to increase the precision of the valuation process, which estimates the intrinsic value of the company's assets (NAV: liquidation or reproduction), sustainable earnings (Greenwald's EPV), and growth (the ever-so-popular DCF).

18 May 2011 EDIT: My valuation methods for the deep scan has evolved to incorporate Mauboussin and Johnson's concept of the Competitive Advantage Period into its DCF models. I am also currently reviewing the practicality of adjusting for inflation the earnings estimates I use for EPV and DCF. Furthermore, some correspondence between Motley Fool writer and financial analyst James Early and myself shed light on some gaps in my methods of estimating intrinsic value. This conversation, of course, contributed to their overall improvement, and it shall be first seen in the full analysis of the Manila Water Company... once I get past the whole "encoding" process, of course.

3. Do you have to understand financial analyst crap to know what I'm talking about?

Fortunately, no. After screening (or meticulous analysis), I summarize my findings into a laconic compendium that's easy to read and straight to the point. I don't have to show you the core details unless you request them. I mean, I'm not making an academic paper. Do you have any idea how long it'll take for me to give you a professional-standard report? ALONE?

4. What's my criteria for early rejections, i.e. for stopping the analysis at the screening level?

Easy. So long as it fulfills one of the following:

A. Annual reports prevent comprehensive elucidation. FACTSET and Weis Markets, both USA-listed companies, are two examples. I hate it when annual reports don't disaggregate all revenue and expense items, *especially* items that are directly related to operations. Structures like that prevent me from fully comprehending the business behind the security you're fancying. It stops me from performing adjustments, or from recasting the financial statements in such a way that it is more illumining.

19 Feb 2011 EDIT: Apparently, most US companies are like this, thanks to the differences between IFRS and GAAP reporting. I have adapted my personal system to it, but since the items aren't disassembled, the analysis will never really be as comprehensive as it is for Philippine companies -- that is, if anybody ever asks for the in-depth information.

B. Can't find enough data for at least 5 years. The V Framework demands at least 5 years' worth of data (preferably 7 or more). I look at a company this way because I am more interested in its inherent stability than its future growth prospects. As far as I'm concerned, TOEI Animation (US-listed) is currently my only example -- I couldn't find the annual reports, period!

I don't do well with processed information like those found in MSN Money or Bloomberg. They're good for screening and quick computations made on an iPhone, but not for intensive analysis. It is prudent to work with raw data the way the pros do.

C. I don't like the industry. Financials come to mind, like banks. I also avoid holding companies because they're difficult to analyze, as I firmly adhere to a bottom-up approach when selecting opportunities in equities.

D. It just doesn't pass. Here's a sample of my own notes from 2 Jan 2011's screening of Weis Markets. However, please note that this was made before I adapted my system for companies ascribing to GAAP.

Quote
DO NOT PURSUE FURTHER ANALYSIS! Though Weis is consistently stable, has strong credit, and good efficiency indicators, the lack of competitive advantages aside from self-supply (which I definitely know Wal-Mart, Sam's Club, & Safeway already has) and the high but grossly unrealistic growth expectations placed by the investors on its expansionary initiatives (made out of desperation for success) undermine Weis' investment worthiness.
   
Further tracking of the stock should be done, since the ideal purchase price for the company is $20 or less, considering Weis is a bastion of consistency as far as the numbers are concerned. Monitor its potential of future bankruptcy, its growth in revenues, and more importantly, its asset turnovers as the company pursues its expansion.

5. How long does the analytical process take?

Screening, three days, give or take. The analysis itself, about a month or two. I tend to take my time. Value opportunities normally last long enough for me to exploit them by the time I'm done. Take for example, Gokongwei's RLC. I did a screen on it based on its 2009 17A, which was released on 17 Jan 2009, when RLC was trading for P16 a share.

Its rise to P44 a share by Oct 2010 began in mid-2009, building up momentum starting around early March. I would've bought the company had I screened it, although I may have had to endure countless nightmares of lost capital --- debt situation and three-year back-to-back negative free cash flows were terribly unsettling (and also a reason why looking at "past 5 or 7 years" equates to good discipline.)

4 MAY 2011 EDIT: Since I'm now employed by my aunt in her business, this tremendously cuts down my free time, as I have to juggle this with studies for my CFA I Exam on December this year.

6. Will this lead to coat-tailing?

While I DO publish the results here for the PMT users' reference, at the time of this post's original posting (January 3, 2011), there were less than 20,000 users in PMT. An average of 151 people are online in a given day. As for the pyramid network that MLM companies love toting to gullible idiots who don't know how to sell, there are plenty of sources of "more credible" research in both the Philippines and the US market. Locally, for example, we have the Citisec Online research pool, whose chartered analysts regularly provide reports of covered companies' activities and potential earnings.

However, since I'm pretty much studying for my own charter, I am obligated to disclose any potential conflicts of interest. I am also managing my own investments in the Philippine market (and a paper one for the US), and consequently, analyzing companies upon your request would definitely expose me to the same information you will definitely be given. What I'm saying is, I might just eat what I cooked up for you. If you have problems with that, then approach someone else!

19 May 2011 EDIT: I did not say this in the original post, but the fact remains that the people who requested the analysis and myself (i.e. the "clients") will have at least a 2-week head start over the general public (meaning: whoever even looks at this thread) as I will not disseminate the report, screening or deep scan, to the public until after two weeks since its completion.

7. What if you want to do your own analysis?

I could care less. Go right ahead. At least, I'll have someone else I can talk to about this company.

8. What if I'm not the one you're looking for?

I'm not the only one providing analyses of companies here in PMT. Like me, Cliffhanger looks at companies either on his own initiative or on request. This entire subforum, furthermore, is dedicated to the stock market, so it is very easy to find respondents for your concerns. Seek out the other "gurus", such as ThriftyPinoy, Bauer, and GIG. That these three have more experience than I do lends credence to the saying "there's always something better".

9. So if there are people here already, why should I still request help from you?

Again, I am offering in-depth research into companies you are eyeing, provided the restraints given in #2 and #4. Cliffhanger prefers to screen through his companies lightly (it adds to his speed), though I have noticed some developments in his own analytical process. The other "gurus" here hasn't even started what I'm doing at the moment.

There are also people who try to evaluate companies on their own blogs, but again, I try to differentiate myself from them as a value investor with his own analytical framework and standards, covering both Philippine and American companies. ^^

10. How'd you come up with this?

Ever heard of Deviantart? It's a website where artists, writers, and animators upload the works they do on their own time. They also accept requests from people who have absolutely no talent with drawing (like me >.<), though some of the more experienced ones take commissions instead.

You should visit if you have time. It's actually entertaining, even though you may find some of the stuff posted up there weird.
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: GoodSteward on Jan 03, 2011, 06:05 PM
FPH, TDY, AMC- arranged according to priority, but any one of these is ok.. I  listed 3 in case there are stocks which you cant do the analysis on Thanks :)
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: thriftyPinoy on Jan 03, 2011, 06:33 PM
@TSO: this kinda reminds me of www.sumzero.com =D keep it up buddy, i'd certainly be interested on what you have to say about Cityland. By the way, any "legal" updates? ;-) Message me, please.
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: robot.sonic on Jan 03, 2011, 07:00 PM
HLCM baka pwede. :D

robot.sonic

Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: swami on Jan 03, 2011, 08:45 PM


Thanks sir for this thread. I shall soon post here.

just to clarify, sir. Are you also investing in the US stock market? NASDAQ, NYSE?


There's a guy in PEX, a Filipino, who is a full-time trader in the US market.  his handle is knightrider.
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: TSO on Jan 03, 2011, 11:39 PM
I just started a virtual portfolio in the US market. Which exchange I'm using doesnt exacty matter since you should be able to trade in both.

I cant manage a real portfolio there yet because I dont have income. Lack of work.

Btw, everyone, I haven't edited the post above yet ('cause i got some personal biz to do) but I can't cover holding companies in-depth. Due diligence requires comprehensive analysis but since I neither represent nor am supported by institutions I am restricted to top-down analyses of holding companies.
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: dinaren on Jan 04, 2011, 03:46 AM
wow galing talaga ni TSO. kudos.

i was about to ask about SecB or ChiB but you mentioned you dont really like the industry so wag na lang haha.. any speculations about this stock na lang will do..lol..
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: cimic on Jan 05, 2011, 03:34 AM
manila water company (mwc -pse) & Aboitiz Power (ap - pse)

Thanks.    :cool2:
 
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: freefront on Jan 05, 2011, 07:41 AM
^Broadcasting cos. like GMA and AbS? These are always on in my household and I thought' "what about those?"

Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: GIG on Jan 05, 2011, 10:22 AM
Its about time you had your own thread man. Goodluck and happy analyzing. Will definitely be supporting this thread.
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: jogitz on Jan 05, 2011, 05:12 PM
DGTL pls.... curious lang po ako
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: boy_kolokoy on Jan 05, 2011, 09:34 PM
AMC - PSE ...:)... tnx
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: TSO on Jan 08, 2011, 05:42 AM
SAFEWAY
I. Demographics
Country: USA
Stock Ticker: SWY
Industry: Groceries
Profile:

Safeway Inc. is one of the largest food and drug retailers in North America. As of September 11, 2010, the company operated 1,702 stores in the Western, Southwestern, Rocky Mountain, Midwestern and Mid-Atlantic regions of the United States and in Western Canada. In support of its stores, Safeway has an extensive network of distribution, manufacturing and food processing facilities. Safeway also holds a 49% interest in Casa Ley, S.A. de C.V., which operates 161 food and general merchandise stores in Western Mexico.

The brands GENUARDI'S FAMILY MARKETS, RANDALL'S FOOD MARKETS, CARR-GOTTSTEIN FOODS CO., DOMINICK'S SUPERMARKETS, and VONS COMPANIES have been acquired under Safeway. These brands are all acquired supermarket and retailer chains that are prominent on the state level.

Safeway focuses on both upscale and niche markets, as seen in its stores' earth-toned decor, special lighting, and custom flooring.

II. Risk Assessment
Quantitative and qualitative analysis on the screening level leaves me with the impression that SWY has moderate risk.

Justifications:
a. SWY has been over 60% debt-funded for the past seven years. Unfortunately, its creditworthiness fails on both asset liquidity and earnings coverage.

b. While the number of company stores are dropping, the fact that its revenues continued to rise above the rate of inflation implies growing efficiency in SWY's use of its properties. This, of course, is explicitly seen in its revenue per square footage, its fixed number of manufacturing, processing, and distribution facilities, and in its turnover ratios.

c. SWY's profitability is inadequate. Though operating margins normally hit 5% and above, these profits are subsequently killed off by nonoperating items (especially in 2003 and 2009), interest, and taxes. What remains, yes, is enough income to generate a 5% return on assets (and over 10% ROE, thanks to its debt). In spite of this uplifting figure, SWY's income is, in my opinion, horribly lacking in light of its precarious financial condition.

d. The industry is highly competitive, and the battlefield is slowly being dominated by Wal-Mart, whose economies of scale are so vast they are driving prices to the floor towards margins that are unprofitable for the rest of the competition. Safeway's control over the West Coast through multiple brands, each one adhering to its market differentiator as a high-end supermarket, alleviate this effect and give the company flexibility in terms of answering the needs of the market. Its probabilities of long-term survival is further buttressed by Safeway's 32 manufacturing and processing plants and 17 distribution and warehouse centers.

However, Wal-Mart is starting to creep onto the West Coast, experimenting with high-end marketing like SWY before it. The ramifications can go either way. Safeway's horrendous credit puts the company in a precarious situation. Whatever profits it earns, whether accrual OR cash, is wiped out by principal payments. Combined with dividend distributions since 2005 averaging 12% of net income, you can bet on the perpetuation of its creditworthlessness.

Flawed counterattacks or bad luck in general could bring SWY down.

III. Valuation
Initial Impressions
My initial impression was that of a value company. SWY is one of the largest retail networks in the United States trading below 2.0x book value, heading downward in the short-term. Its 2009 net loss also secured my attention, knowing that the market's loss aversion and action bias is sure to floor the stock price further downward. Zero-growth DCF valuations on its median operating income gave me at least 10% margin of safety, but using free cash flows implied a stellar undervaluation, providing a margin of safety of over 40%, one that was certain to increase as the market continues rerating the price down.

The 40% M.O.S. turned out to be an illusion later on, as this was based on overstated free cash flows arising from an error in the data entry. Correcting this brought down all FCF values to the point it is at least 60% overvalued, the most optimistic outlook being 25% overvalued. Consequently, all FCF values fell below debt payments, revealing threats to its sustainability.

Valuation Analysis
Disclaimer: all valuation analyses was done on the screening level.

Net reproduction cost of Safeway would result to an 89% margin of safety over its current market price. As its zero-growth DCF valuation implies, the overvaluation reveals either competitive disadvantages or poor management, or simply both. Evidence of the latter can be seen in the perpetuation of its egregious credit, while evidence of the former is visible through the immense competition. Growing efficiency and market differentiation are not enough, so it seems.

Personal Choice of Action
As an investment, I would stay away from this company. While it is practically guaranteed to survive the next few years, and is sure to grow during the same period (revenues, operating cash flows, and free cash flows grew above inflation rate of 1.6% annually for 5 years), its terrible credit is too unsettling to do away with.

Profits are too inadequate to cover it, yet it must secure money to counter the expansionary conqueror from the East (Wal-Mart) and its persistent neighbor, Kroger (both Kroger's and Safeway's stores have a 70% area overlap).

Obviously it is better to consider Wal-Mart (WMT) as an investment (as it is *cheaper* than Safeway in terms of P/E, has better debt, and definitely better cash flow positions). Other companies--niche businesses--like WFMI or Dollar stores would also be worth studying after Safeway. 

Of course, there's always the option of exploiting the unsustainable position of Safeway through time arbitrage by shorting it over the medium-term.



Personal Notes:
Aside from its apparent failure as an investment (which does not necessarily mean it's a bad business), my analysis of Safeway was stopped at the screening level for the following reasons:
- the company does not breakdown its operating expenses. I emphasize a breakdown for recasting and adjusting purposes, and to learn more about the business. It could've helped me identify recurring and nonrecurring portions of what the company considers operating and nonoperating expenses, which would've aided in identifying the drivers of its value.
- the company does not breakdown PPE into its movements, preventing me from conducting a thorough analysis of its capital expenditures vis-a-vis the growth of its PPE (as PPE can grow through reclassifications and business acquisitions).

.

After going through Weis Markets, FACTSET, and Safeway, I am beginning to observe an impediment common to US companies' 10K's. Looks like I will be acclimating the V Framework accordingly in the near future as to stop myself from halting the analysis process at the screening level due to this limitation.
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: Zach on Jan 09, 2011, 11:37 AM
Hi TSO, what's your insight on MBT - PH

Thanks!
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: tomtom on Feb 16, 2011, 02:06 AM
MBT, SMPH and ALI pls. TIA
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: choichoi on Feb 16, 2011, 05:03 PM
CEB - PSE , thanks in advance sir TSO.
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: TSO on Feb 17, 2011, 05:20 AM
@ Choichoi:

I won't analyze CEB. Available financial information doesn't fit my standards. Sorry.
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: choichoi on Feb 17, 2011, 01:48 PM
It's ok sir TSO, how about JFC - PSE?
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: TSO on Feb 17, 2011, 04:06 PM
I'll probably consider it once I get the commission list some more space.

The reason why I'm taking long is because my screening of AIR T revealed a very good opportunity, and I tend to be very comprehensive. (That, plus I just love taking my time XD)

Post Merge: 1297990980
Air T, Inc.
I. DEMOGRAPHICS
Country: USA
Stock Ticker: AIRT
Industry: Air Delivery & Freight --- Contract Cargo Carrier niche
Profile:

Incorporated since 1980 under the laws of Delaware, Air T is a company specializing on air delivery and aviation support, operating through four wholly-owned corporations in the Overnight Air Cargo ("Air Cargo"), Aircraft Device & other Specialized Industrial Equipment ("Ground EQT"), and Ground Support Equipment & Airport Facility Maintenance industries ("Ground Support").

Air Cargo
The Air Cargo division is held up by two 100%-owned subsidiaries, Mountain Air Cargo ("MAC") and CSA Air, Inc ("CSA"). These subsidiaries earn money via a dry lease contract under FedEx, in which FedEx leases its aircraft to MAC & CSA and dictates the routes they fly, in exchange for a monthly administration fee to Air T and full absorption of ALL direct costs of aircraft operation (incl. fuel, external maintenance, landing fees, flight crews, parts, and pilot costs) without markup. These dry lease agreements are renewable on 2-to-5 year terms and can be terminated with 30 days' notice. They do not preclude the two companies from servicing third parties, provided they possess the federal licenses required for this (so far, only MAC is authorized to do so.)

The industry is characterized with heavy regulations and various certifications. MAC is authorized to wield aircraft capable of carrying up to 18,000 pounds of cargo AND can provide maintenance services to third parties. CSA cannot perform the latter and is only authorized to operate/maintain aircraft with a capacity of 7,500 pounds.

Ground EQT
A 13-year old business, the Ground EQT division, operating through Global Ground Support ("GGS"), specializes in the manufacture and sales of mobile deicing vehicles and other industrial products, targeting passenger and cargo airlines, airports, ground handling companies, other industrial customers, and the US Military (Air Force and Navy). These products are well-diversified, including aircraft deicers, scissor-type lifts, decontamination units (military and civilian), and glycol recovery vehicles. Historically, deicing equipment sold under medium-term contracts to the US military contributed significantly to this business segment's revenues.

Prices of all deicing equipment are heavily reliant on the high-strength steel and stainless steel components bought from third party suppliers. A deicer's primary components are: the chassis (commercial medium/heavy-duty truck), fluid storage tanks, boom system, fluid delivery system, and heating equipment.

Industry players competes on quality and reliability, speed of delivery, after-sales service, and price. GGS strives to mitigate the effect of inflation on its prices by pursuing R&D initiatives aimed at innovation and efficiency improvement, simultaneously complying to regulatory standards.

Obviously, GGS's business is primarily seasonal. Reduction of seasonality has been accomplished through product diversification and attainment of mid-term contracts.

Ground Support
The Ground Support division is a young business, operational beginning the year 2007. Global Aviation Services (GAS), the operator of this segment, possesses "numerous... contracts with large domestic airlines under which GAS provides services...."

Majority of GAS's revenues throughout its life stemmed from a service contract with Northwest Airlines, which expired on 2010 year-end. Since Delta Airlines assimilated Northwest Airlines, as of now it is unknown whether GAS's pursuit of a contract renewal bore fruit.    

II. RISK ASSESSMENT
Summary
Air T's risk is assessed to be low to moderate. Good credit, solid efficiency, and great returns on investment, combined with moderate stability and some leeway for growth, support this evaluation.

Low debt ratios and high scores on liquidity and earnings coverage tests solidify its creditworthiness. There is a marked, long-term improvement on the company's overall efficiency, as indicated on asset turnovers and key performance indicators. This compensates significantly for the pathetically low net profit margins.

Stability and growth analysis suggests that Air T is moderately stable. Revenues are growing faster than operating expenses over the long-term, and the average investments made by the company represents, on average, half of depreciation. These figures imply an expansionary stance of low aggression, one that secures growth but leaves room for sudden bursts of investment activity.

In-depth justifications
A. Creditworthiness
Air T's credit is solid versus its state on '03, when all its assets were 55% debt-financed. As of the FY2010, debt funded a mere 16% of assets. Long-term debt (capital leases, deferred retirement obligations, and other loans) formed less than a quarter of total debt since '04 and is virtually zero for the past two fiscal years.

To emphasize both its creditworthiness and readiness for a sudden burst of expansion, Air T is armed with a $7 million, variable-rate credit line, which it maintains every year. This "ready-to-eat" debt carries several covenants and restrictions, all of which had been met since its amendment on '04.

Solvency, liquidity, and earnings coverage tests have been sufficiently met, adding to a great impression of Air T's credit standing. All relevant income metrics (NIDA, EBITDA, Net OCF, and FCF) earned amounted to median levels above 25% total liabilities and are currently on figures beyond 50% total liabilities since '09. Recent earnings coverages are robust compared to their pre-'06 values, owing to significantly smaller payments of debt. In fact, total debt, on average, takes less than 2.5 years for free cash flows to pay off. All liquidity ratios floated beyond the rule-of-thumb benchmarks and are currently at their highest points.

Note: I had a difficult time analyzing the company's operating and capital leases due to the nature of the consolidated income and cash flow statements. The notes helped somewhat, but the fact the effort was arduous makes me believe the computation of its earnings coverage can still be improved. At the very least, the other tests of creditworthiness offset this.

B. Efficiency
Financial ratios denote great, long-term improvements in Air T's operations. Receivables are generally converted into cash after 37 days, but the year 2010 depicted a collection speed 27% faster. Inventory is normally sold after 39 days, and the current showing of 42 is not only close to the average, but also far better than the 53 days it attained on '03.

The behaviors displayed by Air T's asset turnovers can be interpreted similarly. Studying the turnover ratios produced by Total Assets and Net PPE will reveal that the company's assets are being used more effectively. Air T is not investing a lot in the business, implying its capital expenditures are slightly above the minimum needed to maintain operations. Using NOA as a denominator will produce a declining turnover. This certainly doesn't necessarily mean inefficiency, considering the fact net operating assets have been increasing due to Air T's improving credit.

Furthermore, the Air Cargo division exhibited a marked enhancement in the business's overall performance. The number of aircraft in MAS & CSA's combined fleet has been dwindling gradually due to factors affecting FedEx's domestic business (i.e. a slow descent of its average volume of packages delivered), but despite this the administrative fees generated per package delivered -- along with Fedex's own dollar yield per unit -- have actually increased (this is one manifestation of FedEx's competitive advantage). The amount of money made by the business segment per aircraft has actually increased. This exemplifies FedEx's initiatives at cutting cost and Air T's ability to work with it. That the division's 2010 share in FedEx's revenues (1.39%) is close to the 7Y high (1.40%) and over 5 basis points above the average (1.3%) further speaks for this.

C. Profitability
Reversing the character of efficiency, Air T's profitability is actually quite poor. For all of the past seven years, operating expenses excluding depreciation and amortization eliminate over 90% of revenues earned. Under segment analysis, the operating margins of both Ground EQT and Ground Support averaged above 20%, whereas the margins of Air Cargo is entangled at a low 16% (with flight-related expenses 50% to 60% responsible). This is significant considering Air Cargo embodies 50% of consolidated sales. Sadly, the lack of disaggregated operating expenses prevents me from making a deeper dive.

Nonoperating and interest-related items have usually held little bearing on the company's ultimate profits, if any at all. Investment income is practically the only component of nonoperating income. Interest expense here is reported as "net", preventing a thorough examination, considering the fact most of Air T's debt is composed of operating and capital leases.

Taxes are a different story. Except on two occasions, effective tax rates were higher than the statutory rates of 34%, owing to the effect of state income taxes. The median rate is set at 37%, though it is better to be pessimistic about this and set it at 40% for the financial projections.

The company is a dividend-paying company, passing on dividends only once (on '04). The distributions averaged 23% of persistent net income. 23% NI is a reasonable average, but this is expected to drop considering NI grows far faster than dividends (unless the company improves on its policies).

D. Stability
Air T is a moderately stable company. Air Cargo reeks of stability, while Ground EQT's sustainability is still under question, due to the nature of the contract terms and its short relationship with the US Air Force. Ground Support, being an invader of the industry, has no competitive advantage at all and is only a source of speculative opinion.

~~ Air Cargo ~~
Ultimately, the inherent stability of Air Cargo's life is dependent completely on Fedex's business performance within the United States. However, Fedex's business is so good the business division will not likely drop out of business unless average number of packages delivered per day drops to levels far below the 7Y average of 2.74 million (in fact, I believe the *other 5* would be relinquished first since Air T has had a 30-year relationship with the courier company) OR unless something faster than air delivery is invented.

FedEx's business is characterized by: (1) gargantuan barriers to entry, (2) scale economies, (3) zero substitutes, and (4) a monopolistic playing field with UPS, USPS, and DHL.

Stepping out of Fedex's market and plunging further into Air Cargo's niche market, the two subsidiaries' operations are just as stable, as it enjoys the following advantages:
+ High barrier to entry: Air T has had a very long relationship with FedEx, which the company officially recognized. Any competitor must invest in the expertise of its aircraft operators and maintenance personnel. It also has to expend a lot of operating expenses on developing a business relationship with FedEx, or with any other large-scale courier company for that matter.
+ Zero substitutes: this is self-explanatory. FedEx's "Air Delivery" line of service carries no other substitutes except for "Land Delivery", which is in itself a separate business and has its own daily package volume and revenues.
+ Large market share: FedEx works with 7 contract cargo carriers, 2 of which are under Air T. The combined market share is believed to be larger than any of the individual slices controlled by the other five. Accurate industry data, however, is unknown as the other five are privately-held.

~~ Ground EQT ~~
The business is primarily seasonal and sold globally, though its current age of ten years must say something about the long-term longevity of GGS. Contracts are sought after to reduce the seasonality of GGS's products.

GGS shows major dependency on mid-term agreements such as its contract with the US Air Force (case in point: since '05, orders from the Air Force generated 51% of the division's sales). Though the company's relationship with the military has been in existence since 1999 (a contract that called for 420 deicers), I'm not fully convinced that it can act as a competitive advantage the way Air Cargo's tight partnership with FedEx is, since the '09 $15.4 million contract GGS was awarded had a term of only one year, which can be renewed for another year for a maximum of four times. (Compared to the first contract they won from the Air Force: a 4Y contract that had two 3Y extension options, both of which were exercised.)

If at all, the only consolation of stability with this business segment is the fact its revenues averaged $34m since '05 with little variation.

~~ Ground Support ~~
Once again, as GAS is a young company, Ground Support is by all means an invader of a foreign land. A competitive moat has yet to be established by Air T in this industry.

~~ Quantitative Measures ~~
If it helps anchor stability, excluding '03 and all extraordinary items from NI, return on assets averaged 10%, owing to Air T's efficiency. That the company employs a reasonable amount of leverage magnifies this value to an ROE ranging from 15% to 22%, producing a median 18% (the median assumes debt would rise to about 40% of total assets, otherwise ROE will fall to barely 200 basis points above the ROA).

Z-Score and C-score analysis suggest an improbability of bankruptcy in the near future and a reliable construction of the annual reports. Air T's current F-Score of 6 indicate the company is not likely to be a value trap (it has actually averaged at 7.)

E. Future Prospects
Research does not produce tangible future prospects being pursued by the company. However, we can note that Air Cargo's dry leases do not preclude it from pursuing other courier companies. Ground EQT's revenues are 49% based on commercial sales, and international sales seem to be gaining some foothold over domestic business (close to 20% of overall GGS revenues beginning '09, when it averaged 10% in all prior years).

Air T's investment in its capital expenditures has consistently propounded the company's low aggression towards growth, pursuing it heavily when it finds an opportunity and sticks to it (as evidenced by Air T purchasing a plane for $1m on '04 and making a 300K investment on GAS on '08). This is further supported by its low debt ratio vis-a-vis the presence of a $7m credit line ready for use at anytime.  

III. VALUATION ANALYSIS
Initial Impressions
My initial impression of the company was one that was heavily undervalued by the market. Air T is virtually unknown to the public eye (versus FedEx or UPS). As a result, the company is trading at a very cheap price. 2010's average market cap of $23.66m is 80% of Air T's book value and 3.5 times that of the amount paid by the company's owners upon incorporation. On top of that, all price-to-earnings ratios are well below 10, no matter what profit metrics are used.

Bottom line is, this is a VERY CHEAP company. That its current price is still below book value and below 10x P/E tells us the opportunity is still available for value investors to exploit.

At its current market price of $9.85, not only is the dividend yield at a good 2.88% (based on average persistent NI of $3m and a payout rate of 23%) but also the market is implying the company's revenues to be growing at a rate of 3.8% per year (assuming zero terminal growth) or 2.3% per year (assuming terminal growth matching the 7Y inflation). In contrast, revenues grew historically at a rate of 9.5%.

Clearly the market is underestimating the growth potential of the business. Earnings power valuations using residual free cash flows showed a slight overvaluation, though still below 10x P/E. The overvaluation is thus acceptable and the initial screen can pass for a purchase of the company's shares.

Full Study
Given the nature of the company, it isn't likely to liquidate within the decade, thus making the liquidation value of the company virtually moot. The book value $28.5m at the end of FY2010 clearly does not represent the reproduction costs of the enterprise.

The net reproduction costs of Air T's enterprise is estimated to be $48.74m, over twice the current market cap of approx. $24m. Contributing significantly to this cost were Air T's hidden assets: its relationship with FedEx and the Air Force, its sustained efforts to establish a name for its Ground Support segment, and the R&D initiatives undertaken by GGS.

The earnings power value (EPV) of the company is estimated to be $56.71m, about 30% above the $48.74m NRC. Contributing greatly to the adjusted earnings capitalized to produce the EPV is the R&D and other operating expenses spent towards the company's growth.

This 30% gap between EPV and NRC implies the existence of great management and/or, more importantly, competitive advantages. As I covered earlier in the stability and growth analysis, Air Cargo is an inherently stable business enjoying multiple benefits over its competitors. Ground EQT, contributing 40% of overall revenues, has shown signs of -- though does not guarantee -- stability through its relationship with the Air Force, the fruits of its R&D initiatives, its historical sales performance, and the permanent existence of its primary product's demand.

Finally, the value of neutral growth (represented by the net present value of all future free cash flows) is 5% above the EPV. Optimistic growth scenarios value the enterprise at almost 200% EPV. These are all very conservative estimates of growth, as the optimistic conditions simply utilize Air T's historical performance over the long run. The financial model through which the net present value was computed also sets aside a portion of net income and free cash flows for extraordinary items and debt payments

The consequent 7Y CAGR's of revenues, operating expenses, total assets, and multiple earnings metrics all fall below the historical averages -- save that of total assets, which projects a growth rate of 7% per year until '17 versus the '03 - '10 speed of 5%. The divergence exists due to asset turnovers being used to forecast total assets. This provides an anchor for the assumptions' realism.

The initial impression of the company's cheap price is corroborated by the high margins of safety embedded in the stock price. I am seeing margins of safety above 40%, with respect to valuations of Air T's net reproduction costs, earnings power, and discounted cash flows.

IV. PERSONAL COURSE OF ACTION
It's a good business being traded quite cheaply, with high margins of safety. It doesn't look like a value trap, and the competitive advantages available to it are decent enough. For me, this is definitely a buy. :)

However, for those of you who are reading this, be warned that the 10-year price behavior of Air T will show you the stock is not conducive to short time horizons. Investing in this company means you are going to be with Air T for the long haul. ^^
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: TSO on Feb 24, 2011, 05:06 PM
Since GoodSteward has rescinded his desire to pursue Tanduay's further analysis, I shall post the screening results here.



DISCLAIMER: This is only a screen-level analysis! The requester has stopped the analysis at this point and according to my policy I will release the findings for public view. Please remember that my study of the company is not as in-depth as Air T.

Tanduay Holdings, Inc.
I. DEMOGRAPHICS
Country: Philippines
Ticker Symbol: TDY
Industry: Distilled Spirits
Profile:

Tanduay Holdings, Inc. ("TDY") is a holding company at least seventy years old (but with a 155Y corporate history), engaged in the production of distilled spirits (rum, wine, gin, & brandy) and their distribution to over 170,000 retail and wholesale outlets in the Philippine archipelago through direct sales as well as FOUR exclusive distributors. These distributors operate 21 sales offices and 52 warehouses all over the country. To minimize overhead (maintenance and labor) and tap into a scale economy, TDY generally establishes contracts with 3rd parties for transportation services.

TDY enjoys a significant competitive advantage with its Rum, securing virtually all but 5% of all Rum sales in the industry (which accounts for 28% of the distilled spirits industry) Despite TDY's 99% focus on the domestic, low-income market, TDY's sales is second to Puerto Rico's Bacardi. (79% of TDY's sales is from its 5Y Fine Dark Rhum)

TDY's geographic dominance comes from VisMin. GSMI is the undisputed market leader of the entire distilled spirits industry (producing gin and brandy), controlling a rather large 46%. Emeperador Distillers, Inc. is the lesser company, controlling only an estimated 17%. TDY, in contrast, holds 33%.

II. RISK ASSESSMENT
Summary
TDY's risk is assessed to be moderate. While the company is stable, possessing multiple competitive advantages, and is actually well-positioned for growth, the fact remains these do not justify the company's shaky credit, mediocre efficiency, and variable profitability.

Justifications
A. Creditworthiness
Creditworthiness is rather shaky. I don't find it as disheartening as RLC's situation was, but nonetheless, there are several points of concern. Assets have consistently been debt-funded, and solvency tests produce subpar results.

Liquidity is actually rather decent, conforming to the usual rule-of-thumb standards, but earnings coverage simply doesn't fly. Tanduay churns out a loooot of money for debt. Neither EBITDA nor OCF amount to more than 2x required payments! These are current values. Average figures aren't exactly that reliable due to the debt payments on '06 and earlier and the effects of working capital changes and unusual/unpredictable items. In fact, even if you eliminate all factors causing the variation, the best you get is a median 2.1. That's not exactly a large margin especially when they were all below the average from '06 to '09.

Another warning sign here is the level of owner earnings and free cash flows earned by the company. Historically speaking, the company barely has anything left after paying off its debts, and it STILL has to pay for dividends -- which either forces the company to rack up more debt OR turn to other sources of cash flows (which is obviously unsustainable and, if frequent, definitely unpredictable).


B. Efficiency
We can at least say efficiency is generally increasing, considering that revenues being generated by TDY is going up, whereas total assets remains stable, lingering around P12B without much variation.

Inventory management has been maintained over the medium term, even though the company had a problem on '06 when they closed the year with a rather large volume of unsold goods. Anyway, that they turned it around in two years speaks plenty for operational efficiency.

Take note however that I consider the company's level of efficiency, at least from the turnovers, to be inadequate for the type of business it is in, as you will see in the next section.

C. Profitability
This is where I am divided. Operating margins are at stable 11% of total revenues, but as you move down, nonoperating items increase the variation all the way down to the bottom line. The lowest net margin TDY ever had was about 4% on '08. The highest? 11% on '05. Current margins are still lower than the median, so we can at least expect some improvement when we get the FY10 17A. (Of course, the median shows just how powerful nonoperating items, interest, and taxes are, eliminating 30% of operating income, which is harsh considering 80% of revenues dissolved after being swallowed by product costs.)

The very nature of TDY's business requires the company to have turnovers above 1.0. Unfortunately, this requirement isn't met, and ROA is bogged down, pulled up to an ROE of 10% by leverage alone.

Dividend payout rates are completely unreliable, of course, but if it helps, the company has distributed no less than 325.75m since '05. At today's price of P3.4/share, that's a 3% dividend yield every year. Not bad, I think.

D. Inherent Stability
In spite of troubling credit, good (but probably mediocre) efficiency, and low bottom-line profitability, Tanduay is actually a stable company. It's a bit sick, but it's definitely going to live.

TDY possesses multiple competitive advantages that help it dominate the playing field along with Ginebra San Miguel and Emperador:

~~ Treasure vault of experience ~~
The holding company's initial incorporation date stamps its age at a minimum of 70 years (the company claims in its annual report it is 5 years older than the Ateneo de Manila University campus).

TDY is thus a wellspring of knowledge when it comes to its products and how it is so tailored to domestic wants. That it still puts money on R&D implies a very large barrier to entry for anyone pursuing a venture into the distilled spirits industry, specifically rum.

~~ Massive scale economy ~~
Tanduay distributes their products through four exclusive entities, in easy reach of the public considering their alcohol is sold in over 170,000 retail and wholesale outlets. This doesn't count direct sales. The four distributors own 21 offices and 52 warehouses nationwide.

The company taps into the scale economy even more by setting up contracts for transportation services with third parties, minimizing shipping and delivery expenses.

~~ Geographic and Industry Monopoly ~~
The distilled spirits industry is controlled by only THREE major entities: Tanduay (33%), Emperador (17%), and Ginebra San Miguel (46%). HOWEVER, Tanduay controls 95% of the rum market, kicking out any hopes for either two competitors to make a killing from this niche segment.

~~ Self-sustenance ~~
TDY owns two alcohol production plants as well as a significant portion of a sugar producer. On top of that, it has a network of suppliers just in case supply is unable to meet demand.

~~ Goodness-of-fit with demand preferences ~~
Tanduay basically targets the low-income bracket, which represents 80% of the total population (and 66% of domestic liquor consumption). Filipinos are eminent for their alcoholism, to the point we were seen as the number one drinkers in Asia 15 years ago, families using 1% of their income to spend on alcohol.

A research paper (http://apapaonline.org/data/National_Data/Philippines/Alcohol_Media_Philippines.pdf) even goes far as to say:

Quote
Alcohol drinking is a big part of the Filipino merry-making activities. Beer is an essential part of fiestas, birthdays, and parties. Even when there is no special occasion, many Filipinos hang out together in the streets, in front of their houses and convenience stores drinking gin and tonic, which is a considerably cheaper alcoholic drink.

This seemingly outdated image has not even fazed in the slightest in current times. In fact, it's been reinforced. The average family in the lower 30% income group (i.e. TDY's targets) spent 1.2% of their income on alcohol on '06, and 1.1% on '09.

Of course, I think you and I will agree this is nothing more but confirmation of common knowledge: we Filipinos are alcoholics as a people. XD

If this does not even convince you, then I should bring up some *actual* sales data. I was actually able to derive unit sales of TDY in terms of liters of alcohol sold from '04 to '09. Demand has grown from 75M liters of alcohol to 123M liters in only five years, representing a 10% geometric growth rate. This translates to an average P87 of sales per liter: affordable, if you ask me. 

E. Future Prospects
As far as I'm concerned, unit sales will either be maintained at its current level or keep increasing domestically. The Philippine population is increasing at a rate of at least 2% per year (7Y CAGR from '00 ~ '07: 2.04%; 105Y CAGR from 1903 ~ 2007: 2.36%): roughly 312,000 families per year given today's average number of people per household. I hold the NSO (http://www.census.gov.ph/data/pressrelease/2010/pr10162tx.html) as my source.

To support this, the two alcohol production companies TDY owns have a combined capacity of 102.6M L/year. The company is actually investing on a capacity expansion that will increase the cap to 138.6M L/year.

If we let ourselves speculate, we could see that TDY may have a future in expanding to Malaysia. It already has its foot in the door, as 1% of its sales output is being sent there through a distributor.

III. VALUATION ANALYSIS
Initial Impressions
Essentially, we have on our sights a company mired in stability and, well, pretty good growth prospects. At the right price, Tanduay is certain to be a great buy, questionable credit, mediocre efficiency, and low profitability be damned!

The question is, is its price of P3.4 the right one?

One look at Tanduay's P/E ratio and you know it's going to be expensive! Current market cap versus last year's net earnings come very close to 20. Use adjusted earnings instead (representing an average that the company is sure to meet AND exceed) will bring this baby to 12.3x P/E --- rather expensive, and close to the threshold point.

Closer Look
The 2009 ending price of P2.7/sh are tells us the market is expecting this company to improve its revenues by 10% a year (if inflation rate takes over as terminal growth rate) or 15% a year (if the terminal growth is 2%). That it is currently at P3.4 means the market is looking for the large, 15% growth rate.

Is this realistic? It's probably optimistic. Despite the 10% growth in unit sales, TDY's revenues rose at 8.6% a year from '04 to '09, and, being the paranoid person that I am, think it is an *optimistic* habit to assume the company will match or even surpass this.

I assessed the value of Tanduay's sustainable earnings power. Precluding the impact of excess cash and long-term debt, we come up with a value of roughly P1.97 per share and a P/E ratio of 11.5. Including those two factors (to account for debt and financial assets), however, the value drops to P0.64, making the stock even more expensive.

I think the fact it is priced at 1.08 of 2009's sales revenues is another evidence to this.

IV. PERSONAL CHOICE OF ACTION
My personal choice of action would be to monitor the stock until it drops to 2.2 or lower. That value represents the highest level of P/E Graham is willing to accept. I refuse to pay a significant premium for growth that may not realize or may not be enough to satiate the arbitrary market consensus.

In fact, when I *do* buy the stock, it's probably going to be a small position of about 5%. I would then watch the news and keep an eye out for the 17A, and see if the income falls or not. Market letdowns are sure to pull the price down to a level closer to EPV.
Title: MVC Screening Analysis
Post by: TSO on Mar 06, 2011, 09:27 AM
Mabuhay Vinyl Corporation
Requested by: Myself
Level: Screening
Country: Philippines
Stock Ticker: MVC
Industry: Chemicals - Chloralkali

I. DEMOGRAPHICS
Mabuhay Vinyl Corporation (MVC) is a 76 year-old company initially incorporated as a rubber shoe manufacturer. About 45 years ago (1966), MVC reorganized to engage in chemical and PVC resin manufacturing. And almost 10 years ago, the company exited the PVC field and focused completely on chemicals, primarily the chlor-alkali business.

Though MVC has over 7 decades of corporate history, the fact remains it has achieved a remarkable position as the Philippines' only chlor-alkali chemical manufacturer, selling caustic soda (NaOH), chlorine/Cl, and chlorine derivatives (muriatic acid/HCl, bleach/NaOCl) to the domestic markets, industrial and household alike. These products are basic chemicals used by various industries, including paper, petrochemicals, electronics, and soaps. The chemicals are manufactured using the Ion-Exchange Membrane process, which produces the highest quality NaOh and provides cost efficiency (in the form of less energy consumption).

Being the only local manufacturer/supplier of NaOH and Cl, MVC's primary competitors are importers based in the capital and industrial provinces. HCl competition is stirred by 2 fertilizer businesses manufacturing HCl through a different process, while NaOCl is produced by 2 local manufacturers.

Due to the nature of the company's products, MVC's business health is directly tied to the demand of consumer goods, especially those made by export-oriented industries.

II. RISK ASSESSMENT
After a thorough screen of MVC's financial statements and qualitative direction, my perception of the company's risk is moderate to high.

MVC's business is capital intensive and requires a solid relationship with industrial clients. Without a doubt the company has impressed me with its median debt ratio of 25%. That the company acquired the debt through its IEM projects (first, IEM plant construction, and second, Diaphragm Cell Plant modification) means MVC seeks low leverage and bumps it up only when there are growth propsects available. Unfortunately, earnings coverage offers a low margin of safety above its required payments at best, no thanks to the yearly debt payments above 75M a year. Liquidity bolsters the security, but its mediocre level fails to reduce the risk.

The company's efficiency is also a problem. Indeed, the company has seen a remarkable improvement since '02, and the projects it had undertaken in the 7 years prior to 2009, along with its significant CAPEX on years '02-'03, and '08 are proof of this as well. Nonetheless, this efficiency is mediocre given the low profit margins that can be reasonably expected from a company based on commodities.

Stability, however, is absolute. On a conceptual level, NaOH and Cl derivatives are flexible, utilized by various industries. Someone will obviously need it, and whoever's in the business will never "run out of business". Expenses, however, shake up this theoretical pedestal.

Turning to several portals on the net, I found an increasing local demand for industrial soaps and detergents (http://investinr12.net/index.php/component/banners/click/index.php?option=com_content&view=article&id=111:detergent-powder-soap-and-chlorine-production&catid=62:project-briefs-files&Itemid=123), arising primarily from Sagittarius Mine Inc., and from the canneries of DOLE Philippines. (Personally, I cannot really count on MWC's big "Three River Project" to augment this demand even further. One of MVC's recent MDA's reported local water concessionaires turning to a "two-supplier" strategy for the needs of their distribution pipeline and sewage treatment facility improvements, i.e. MVC is the "local supplier of choice", yet imported Cl was still preferred.). Still, it helps to know that MVC supports a large share of the Philippines' NaOCl demand (was 50% a few years ago. I think I got this from one of its annual reports.)

Hydrochloric acid is another line of stability. HCl is used in 110 chemical manufacturing processes and is forecast to grow at a rate of 2% annually until 2013. On '08, most HCl consumption was driven by Japan, China, Europe, and the USA. China's consumption growth was viewed as the fastest. (Click here for the source (http://www.sriconsulting.com/CEH/Public/Reports/733.4000/)). On the local side, the very fact any person can buy industrial-grade HCl from supermarkets clearly speaks for its availability and widespread usage.

Another report, written in '07 (http://www.prlog.org/10011698-the-demand-for-caustic-soda-and-chlorine-is-forecast-to-rise.html), attached an estimated yearly growth rate of 2.2% for the global demand of Cl and NaOH. In 2009, Petron also began full operations of a fluidized cracking unit to produce higher volumes of petrochemicals, which requires a significant amount of NaOH.

Aside from these external sources, studying MVC's activities in the past 7 years will provide a clear look of what the industry holds in store for it. Its parent corporation, Tosoh, a Japanese conglomerate eminent globally, acquired 32.15% of MVC on '09. The Company made a 500M investment on '08 to improve its efficiency, and they have been itching to exploit this since then.

The company's low profitability is usually explained away as the consequences of force majeure. In '06, revenues declined 5%, no thanks to a mishap involving one of its chemical tankers (most of MVC's customers are in Luzon!). Regulations became stricter at the time and MVC was threatened to be booted out of business by the government due to the wake of the Guimaras oil spill.

In 2007, it was revealed that the government was being a complete b*tch, red tape getting in the way most of the time due to alleged final withholding tax liabilities (arising from some transactions as far back as 1988 and 1989) they were trying to collect. The company had to get these bastards off their back by [legally] bribing them through a one-time payment of almost 130M (95m as tax abatement, and 33m as a tax liability ARISING FROM IT) that brought MVC into the red.

2008! Its old Diaphragm Cell Plant (DCP) went kaput, and an accident damaged a crucial component of its IEM2 project (which basically converts the DCP into an IEM Plant), delaying project completion and increasing costs. MVC had to depend on only one manufacturing plant until August '08, putting a pressure on profits AND forcing the company to attempt importation at a time when the global circumstances made such scarce.

By 2009, export-oriented industries weakened. Despite Petron's pet project (fluidized cracking unit), the closing of PICOP's pulp and paper mill set a major setback for NaOH demand. Worse, Green Cross decided to perform a backward integration and put up their own NaOCl plant, cutting their costs and MVC's market share in the industry.

Bottom line is, I am still confident of the company's stability and am happy to know there is a hope for growth for the business, though I doubt it will be a fast one.

III. VALUATION
Currently, the company is trading at P0.71 a share. This represents a market capitalization of P492.14 million and a 28% discount to par value. PAR VALUE. On average, MVC has traded at a little less than 50% book value, enjoying average P/E's of 10x. Furthermore, the company's current price stands at 1.5x its net-net value. Obviously, the company is very cheap.

So is 72 centavos a bullet worth it?

Let's face it. We have a 10 year-old company with mediocre credit (impressive debt ratio, good liquidity, merely sufficient earnings coverage), efficient operations (but not enough to justify its low margins), and small overall profitability (its business character, plus the misfortunes it had weathered). Growth prospects are good, but won't promise exponential behavior. Stability is virtually guaranteed thanks to the large market shares, the flexibility of its chemical products, and the high barriers to entry impeding most new competitors.

Assuming Level 3 risk (moderate), the current price of 0.71 assumes an 8.2% yearly revenue growth from '10 to '16. At level 4 (moderate to high), the implied growth rate is close to 15%. Both are rather unrealistic given the 6% historical rise in revenues since '02.

Furthermore, rudimentary analysis of MVC's earnings power value results to 95.54m. The current price is 5.1x higher than this. Capitalized, this is equivalent to 77 centavos a share, which is far lower than whatever its net reproduction cost would be (book value is above 1 billion!). Inputting excess cash and LT debt into the equation, I ended up with 52 centavos for its final EPV. (At a moderate amount of risk, the EPV would be 0.67 instead of 0.52.)

IV. PERSONAL CHOICE OF ACTION
Watch the company. Just because MVC didn't give us impressive results for the past 7 years doesn't mean it's a good investment, not when it obviously has no intention of losing the game in an industry that isn't likely to go away in the near future. The price matters in this case, and the idea is to buy a position the moment the price drops to 50 centavos or lower. PREFERABLY LOWER. You want to get this baby at a discount to EPV.
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: bauer on Mar 06, 2011, 10:14 PM
TSO,

i wonder why AIRT has a very small book value 28.5M does not bode well for an air cargo company that has a contract with fedex for the dry lease of its fleet. 

the way i analyse your report on AIRT, i have to pass up on this one.  there are other great companies to invest
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: TSO on Mar 06, 2011, 10:20 PM
Bauer,

The low book value -- and essentially, the low asset value -- comes from the nature of their Air Cargo business. PPE does not consider the planes leased from FedEx, as they are being paid by FedEx to operate them. So definitely, their profitability from Air Cargo directly corresponds to FedEx's domestic profitability from the same business segment.

Majority of their assets are spent on Ground EQT and Corporate.

If AIR T were to own the planes, it will bring up their total assets to at least $80M (this is based on the $1M AIR T spent to acquire one plane in '03.)
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: dextereous on Mar 13, 2011, 03:12 PM
Hello TSO , medyo OT ako

pede makahingi ng PDF ng intelligent investor and ng security analysis?

pls send to dextereous@yahoo.com

thanks in advance!
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: bauer on Mar 14, 2011, 10:15 AM
are you serious, you wanted a PDF file?  security analysis by benjamin graham is more than 3 inches thick!!! Your asking too much from TSO.  better buy your own book at amazon just like i did.

anyway, if you are really interested in stocks, you should at least have some dough to invest.
Title: Nintendo Co. Ltd. Analysis (Screening)
Post by: TSO on Mar 29, 2011, 07:53 AM
NINTENDO CO. LTD.
Level: Screening
Country: US Pink Sheets
Stock Ticker: NTDOF
Industry: Video games -- hardware manufacturer and software developer

I.      DEMOGRAPHICS

Nintendo is a Japanese video game company with humble beginnings since 1889 as a playing card company. After its initial transition into the video game industry on 1983 with the Family Computer, in 27 years it has grown to be the fifth largest software company in the world. Nintendo manufactures and develops both hardware and software, its core strategy bent on encouraging people, regardless of background, to embrace video games as a mode of entertainment.

Its strategy so far is paying off. During the quarter of August - October 2009, Nintendo undertook a survey to determine the social acceptance of entertainment in America and determined that a cumulative 75% of the population have a neutral to favorable stance towards gaming. Nintendo even reports that 40% of Nintendo DS users are 35 years and older. The younger market, of course, can still be hooked through popular franchises in the industry.

Nintendo continuously aims to surprise consumers and expand the video game market. The company will attempt to encourage further communication in the living room through continuous software launches for the Wii; meanwhile, on the handheld device division, it will release the Nintendo 3DS within the fiscal year, which allows people to play videogames in 3D without the need for glasses. David Ewalt, a Forbes writer on technology and games, calls the 3DS as a "new kind of entertainment.... the Apple II of 3D Gaming", even after initially criticizing the company as jumping on the 3D bandwagon of 2010.

A Youtube trailer of the handheld device shows that the Nintendo 3DS not only possesses motion sensor and gyroscopes (making it capable of producing games similar to what can be found on the iPhone), but also has a camera for 3D photography. Combine this with the integration of voice recognition and touch screen technology already inherent in the DS line of devices and that represents an immense potential for software developers.

The company also aspires to prevent the video game crash of 1983, a time when subpar games oversaturated the market and nearly destroyed the industry through strict license guidelines and quality control measures for games that are published through its systems.

Since the year 2000, Nintendo has sold no less than 20 million units of hardware PER YEAR. Software sales, since 2007, never dropped below 200 million units annually, moving up from the 2000 - 2006 minimum of 120 million. Fiscal year 2010 saw the sale of 48M and 391M units of hardware and software, respectively.

Sales to Japan averaged 21% and 16% of its global performance with moderate variation. Even if we were to assume that all its sales in Japan would zero and everywhere else reduced by 20% as a result of the crisis in Japan, Nintendo would still sell at least 19M units of hardware and 119M units of software in a given year. The composite tie ratio in 2010 was 7.2 units of software sold per unit of hardware sales, 34% above the 2003 tie ratio of 5.4 units.

However, we should be wary of the industry forces shaping the playing field. Consoles typically have a useful life of five years before it is replaced by more advanced hardware. Sales of hardware typically top off in five years, so most of the money is made from software sales, with the vendors making money from long-tail royalties.

Furthermore, the gaming industry is dictated by consumer preferences on the levels of software and price. titles are characterized by "hits" and "duds", even from the same software developer. Increasing complexity of games (look at the progression of the Final Fantasy, Command & Conquer, Kingdom Hearts, Gran Turismo, Marvel vs. Capcom, The Sims, Half-Life, and other series) means the deployment of sophisticated technology and, naturally, intense capital. It isn't surprising that Nintendo's R&D spending has grown from 14.6B Yen in 2003 to 45.5B Yen in 2010 -- a 17.6% 7Y CAGR. Being a gamer myself, none of this comes to a surprise.

Research and development is thus a capital expenditure as well as an immense barrier to entry for any hardware and software developer.

II.    RISK ASSESSMENT

A. CREDITWORTHINESS
   
Here's what I noticed about Nintendo. Since 2003, Nintendo's assets were 90% current, and a significant amount of that was cash, STI, and receivables. (Note that inventory NEVER amounted to more than 10% of current assets in all eight years analyzed.)
   
Nintendo's debt ratio was in the range of 12% to 18% during the years of 2003 to 2006, but when the Wii came out, it leaped to 30%, staying there until it dropped to 24% on 2010. Historically, the average is around 23%. Clearly there is plenty of room for leverage should Nintendo find something worth the debt.
   
The company's creditworthiness is quite solid. Liquidity ratios never dropped below 2.7x. NIDA never dropped below 30% of total liabilities since 2003 and currently, NIDA equates to 56%. Nintendo actually keeps long-term, interest-bearing borrowings to a minimum, opting instead for finance leases of four-year lifespans. Obviously the company has an unusually impressive record of earnings coverage.
   
B.   EFFICIENCY
   
All I can say is, there has been a remarkable improvement in efficiency for Nintendo. Financial indicators, i.e. turnover ratios, have experienced a tremendous growth. Total Assets have been turned 0.8x in 2010 versus 0.46 in 2003. Nintendo's inventory takes an average of 3 months to be converted to sales revenues on 2010, versus the 2003 figure of 6 months.
   
Going into key operating figures, the company has sold hardware and software at levels above 20M and 200M units per year. Furthermore, the amount of software RELEASED PER YEAR for the Wii and DS combined have been above 700 titles since the Wii's year of release. The current standing was at 1.8K titles on Fiscal Year 2010. The current tie ratio of 7.2 software per hardware is far better than 2003's 5.36.
   
Clearly there is an improved level of efficiency.
   
C.   PROFITABILITY
   
Profitability is actually quite impressive for a company bent on a commodity-like product. Gross margins averaged 41% of net sales with very little variation across the eight years analyzed. Recurrent operating expenses typically eat up at least half of gross profits, with unpredictable and/or infrequent nonoperating items such as FOREX G(L), and G(L) on asset sales.
   
In fact, the money spent on operating expenses is actually relegated mostly to advertising, R&D, and "other" (unfortunately, Japanese accounting standards do not requre full disclosure of "other"). Salaries are the fourth highest expense class for the company, yet the amount is about 50% that of R&D and other, and approx. 1/6 of advertising.    
   
Net margins have consistently been 16% of sales since 2003, with the exception of 2003 (net margins were 6.5% due to FOREX. Operating income would've been 112B Yen if it wasn't for the 68B Yen in FOREX losses, translating to 75.8B Yen in NI and a 14.7% margin on sales.) Also note that residual OE has always been 11% of sales and above.

Overall returns have also been quite impressive. Returns on equity enjoyed a median of 12% for the past eight years, owing to high profitability, improving efficiency, and adequate levels of debt. Current showings are even more so: never dropping below 17% since 2007.
   
Moving into other metrics of income, an interesting figure to note is how the company's dividends have not once surpassed residual owner earnings from 2003 to 2010, even when Research & Development costs have been added to capital expenditures. In fact, there is a TON of room for dividend growth should the company decide to increase it, which is far unlikely since Nintendo is apparently better off reinvesting the money into its business.
   
Nintendo is obviously a profitable company.
   
D.   STABILITY
   
Its fairly easy to determine that the video game industry is rather stable in the near future. Though the industry typically earns from consoles for the first few years of their release, the real money is made over the long run from sales of the software produced by developers such as Activision, Ubisoft, Blizzard, Nintendo, Square-Enix, and Konami.
   
The industry's size is literally comparable to box office and music. The gaming market amounts to approximately $40 billion in the United States in 2008, 67% to 75% of it generated by software releases, of which 2/3 accounted for consoles.
   
When looking at industry forces, putting aside the intense competition between games and consoles, the only viable threats to the industry come from three fronts: [1] Consumers, [2] Subsitutes, and [3] Technological Obsolescence.

~ Consumers ~
Much like movies and television shows, the fact remains that consumer preferences drive the market. Talking from experience (being an avid gamer myself), videogames such as Mass Effect, Half-Life, Halo, Assassin's Creed, The Sims, Civilization, Command & Conquer, Call of Duty, World of Warcraft, Starcraft, Ragnarok Online, Tekken, Marvel vs. Capcom, and other franchises become popular due to innovations in gameplay and graphics, swift learning curves, along with accessibility and, last but not the least, one's genre inclinations (much like how I personally like RPGs and FPS franchises unlike one of my friends who adores fighting games in both consoles and the malls' arcades).
   
~ Substitutes ~
Substitutes are rather high. The gaming industry is spread into three niches: consoles, Internet-based (e.g. MMORPGs, Flash games), and mobile phones. Toys and board games have traditionally been an enemy of videogames, though observation clearly indicates they are suffering in sales due to children and teenagers moving away from them.
   
Console-driven companies such as Nintendo are threatened by the other niches, especially against internet-based and mobile phone games due to sheer ubiquity of the Internet and cellphones along with the easy accessibility. This consequently eats into Nintendo's market of casual gamers (and hardcore ones alike).

Once again, Nintendo's victory against substitutes fall upon innovation and the experience provided by its products.
   
~ Technological Obsolescence ~
This is a given in any company reliant on technology for its earnings.
   
At the very least, barriers to entry are also quite high, in the form of R&D (for hardware and software) and licensing (for software development). Any game developer must have up to three licenses to publish a game for a console: license to develop games for the console, license to publish games for the console (for publisher), and a license for each game. In addition, development systems must be bought from the console manufacturer to actually develop the game, as well as obtain approval of concept. History of console developments are also required by publishers.
   
E.   FUTURE PROSPECTS

Nintendo's future prospects, despite the Japan crisis, is decent. Their handheld device, the Nintendo 3DS, is expected to revolutionize gaming experience as it did with the Wii. In fact, the console has been proven successful in Japan, being immensely popular with the experience it provides. The company's management stresses the earthquake and tsunami did not materially affect its global operations, though the extent to which the management can provide effective leadership is still questionable as the Japan crisis is NOT YET OVER.
   
Some young industry players like Peter Vesterbacka, the owner of the company that developed Angry Birds (Rovio), publicly predict that console games are "dying". (Source: http://www.industrygamers.com/news/angry-birds-maker-console-gaming-dying/). Such foresight - like the one published on 13 March 2011 - is treated instantly with rebukes from the general public. For example, in Mr. Vesterbacka's case, the claim was disputed by six users, one of whom recognized the threat mobile gaming has on the casual gaming market, a market Nintendo specifically targets.
   
Nonetheless, the Nintendo 3DS stands as a potential growth driver for the gaming industry. A 15 March 2011 article from Zacks Investment Research (http://seekingalpha.com/article/258427-video-games-up-japan-casts-shadow) states it underwent some growth last month, reporting industry sales rising from $1.33B to $1.36B: a 3% increase. Long-term growth would be fueled by DLC, used games, game rentals, subscriptions, full-game downloads, mobile gaming, and other applications.

Still, cutthroat competition, a significant barrier to entry, will still make it difficult for any one company to make tremendous gains in market share.
   
Ultimately, Nintendo's business fundamentals, its stable place in the industry, and potential for growth lead me to conclude that the company has low to moderate risk.

III.   VALUATION

Being the "5th largest software company in the world", with rather ubiquitous products, it is naturally expected for this company to be expensive. The current market cap of 2844B Yen is almost twice its sales revenues. Despite this, the company is currently priced at a 12.4x 2010 earnings, 16x sustainable profits, and 2.1x book value.

In other words, the company is BORDERLINE EXPENSIVE, with its per share price of 22,240 Yen (approx. $273 per share) assuming a HIGHLY UNREALISTIC yearly growth rate in revenues of 43% (versus the historical 7Y CAGR of 16%).

However, we must consider that Nintendo historically had valuations far above 12.4x earnings, ranging from a minimum of 17.5x on '06 to 38.7x on '04. In comparison to its past, Nintendo is cheap and given its performance over the past seven years as a company with increasing efficiency, decent profitability, and safe levels of credit, it is worth going long.

If it helps, Nintendo's current market capitalization is 24% higher than its earnings power value of 2290B Yen--approx. 17910 Yen per share (which is based on the low-to-moderate risk rate and sustainable revenues of 1000B Yen (30% decrease vs. 2010 figures). Anyone purchasing the company would be paying a premium for growth. One that still isn't too high.  

IV.      PERSONAL CHOICE OF ACTION

I would commit to the company over the long-term. However, knowing that Nintendo is "borderline expensive", it will pay to stagger the position over a period of time (some friends of mine suggest acquisition behavior of 40-30-30 over a period of three months), as the Japan crisis, the unrealistic growth rates being expected from Nintendo by the market, and the uncertainty of the 3DS's success in the United States, can each potentially cause a temporary fall in the company's price.

Watching the movement in the foreign exchange between the Yen and the US Dollar is a reasonable action as well, considering any appreciation of the Yen (i.e. less yen for one dollar) is bad since it would have a significant impact on one's profits.
Title: Alaska Milk Corporation [Screening]
Post by: TSO on May 05, 2011, 11:49 PM
I haven't had the time to release this, as I've been busy with work, my CFA Level I studies, and a full analysis of EEI Corporation.

Moving on, this little piece of research represents two requests (from GoodSteward and boy_kolokoy on January 3 and 5 respectively) for me to study AMC. While both were interested in a full scan, GoodSteward did not ask for one while boy_kolokoy replied too late.

The full scan of AMC would be performed once my current backlog of requests are complete.

This screening analysis was completed on April 4, 2011 and was scheduled for release on April 7, 2011 (instead posted a month later than that O_O).

At the time of the analysis, AMC was trading around P12.52 a share. ^^
 


Alaska Milk Corporation
Level: Screening
Country: Philippines
Stock Ticker: AMC
Industry: Dairy - Manufacturer - Liquid and Powdered Milk
Periods covered: 2003 to 2009

I. DEMOGRAPHICS
Aspiring to be one of the Philippines' leading consumer foods companies with a diversified product portfolio, Alaska Milk Corporation (hereby referred to as "AMC") is a leading manufacturer of milk products in the Philippines, memorable for its tagline, "...Wala pa rin tatalo sa Alaaaaska". Operating in a mature industry, AMC possesses an established brand heritage and immense recognition for its liquid canned milk products marketed under an eponymous brand name. The company has an exceptional position in the powdered milk segment as well as a growing presence in the ultra heat treated ready-to-drink and ready-to-use milk product market.

AMC's 2009 annual report describes its business operations as 99% milk and 1% non-milk, yet does not bother to divide its sales according to product. Nonetheless, its 2009 SEC 17A reveals that 55% of its revenues are derived from liquid milk, 40% from powdered, and the remaining 5% from UHT milk products.

The liquid milk industry has historically been seasonal, peaking during the second and fourth quarters for the Summer and Christmas seasons. Alaska recognizes its primary competitors to be Nestle (Nido & Bear Brand, Nestle & Chuckie), San Miguel's Magnolia (Chocolait and Magnolia-branded milk), Snow Mountain Dairy Corp's Angel brand (Evaporated milk, Evaporada, and Condensada), along with imported brands.

Competition is intense, resting on product quality, brand history/recognition, and distribution. Price is not normally a factor, but emphasis on this factor heightens as the economy becomes mired in trouble. AMC has competed effectively thanks to its nationwide distribution network, which is supported by cost-effective marketing strategies. Stored in 11 warehouses, Alaska sells its products to large wholesalers, convenience stores, and regional distributors. Consequently, Alaska's items are sold to over 250,000 outlets in the country, including groceries and sari-sari stores.

II. RISK ASSESSMENT
Though the analysis of Alaska Milk Corporation stands at the screening level, a brief but thorough study of the company's financial statements and fundamentals impressed upon me its low to moderate level of risk.

While unfortunate to see that AMC failed to provide significant key operating metrics in its annual reports, I managed to derive some performance data from its financial reports and observed strong improvements in its operational efficiency over the medium-term. For example, in 2003, Alaska typically sells off 76% of its available-for-sale inventory. This has grown to 86% in 2009.

Every peso invested in assets have never generated less than P1 in sales, providing a sales volume that more than offsets the low profit margins expected from a company manufacturing and selling consumer goods. Furthermore, AMC's profitability is remarkable. Owner Earnings and Free Cash Flows alike have not only been positive throughout the seven scrutinized years, but were also growing at a rate of 22% and 40% per year respectively. Enticing us further is the fact Alaska has been generously disbursing dividends no less than 20 centavos a share since 2001, totaling to values that don't breach the profits available for value-adding decisions.

Regarding its operating margins, AMC netted 12.4% on the average. The current showing of 18%, while the highest in the analyzed period, is almost 1.5x that figure, giving us decent room for decrease in margins.

Combined with its level of efficiency, the company nets an average of 11% from its assets, with its 2009 showing of 20% being the all-time high. Toss in modest levels of debt and we are looking at a 19% average return on equity.

Although AMC's efficiency and profitability are compelling, credit is a situation that could materially affect the risk of the investment. And unfortunately, Alaska has no history of credit. Granted, the company's liquidity ratios averaged on safe rule-of-thumb benchmarks, but the fact remains its earnings haven't been sufficiently tested to see whether it can withstand high levels of debt.

This arises, obviously, from Alaska's debt composition. Its assets may have been 35% debt-financed on the average, yet this debt is virtually current. Current liabilities are close to 100% of total debt on '08 and '09, and were Alaska's payables on all prior years. These operating liabilities are mostly comprised of trade and acceptances payable.

Nonetheless, based on its earnings and strong financial health, Alaska is actually solvent and is not likely to go bankrupt in the near future.

We don't have to look far to consider Alaska's stability. AMC's annual report in 2009 has gone as far as to say it captured 80% of the liquid milk market, clearly showing off its status as an undisputed market leader. Alaska possesses a sizable portion of the powdered market, albeit undisclosed. Skimming through the flashy pages of the annual report -- obviously meant to impress the untrained eye and add some visuals to the reports -- I caught several organizations many in the Philippines would recognize. Organizations Alaska touted as customers worthy of mention in the annual reports. Aside from Robinson's Supermarket and Chowking, also displayed ostentatiously were Mountain Maid training center (think Baguio and Good Sheperd), The Original Biscocho House, and Sugarhouse bakery. Alaska's brand name has definitely earned its keep.

Aside from market leadership, cost-effective, encompassing distribution networks, and a large customer base, Alaska Milk Corporation's products are further buttressed by its strategic alliance with Kellogg's cereals and Nestle Corporation. For the former, AMC has been Kellogg's exclusive distributor in the Philippines since 2005. (However, AMC would probably re-evaluate the strategic benefit of this distributor agreement, as they reportedly have low margins and may be better off focusing on their own items.) For the latter and more importantly, AMC strengthened its core competencies by acquiring not only the brands and trademark properties of Nestle's Alpine, Liberty, and Krem-Top products but also the license to manufacture and sell Nestle's Carnation and Milkmaid at a cost of 5% net sales (as royalties).

Zooming out, focusing on the industry, the CattleSite's 2008 annual report on the Philippines' Dairy and Products (http://www.thecattlesite.com/articles/1779/philippines-dairy-and-products-annual-2008) reported that dairy products, including skimmed milk powder -- a crucial raw material for Alaska's milk -- are the Philippines' second largest agricultural import.

The market for milk products is enormous, with the National Dairy Authority of the Philippines estimating the demand at 2,635 thousand metric tons of milk on 2007 and sticking a yearly growth rate of 2% on that figure. Families across the entire country, according to NSO's 2009 total disbursements in cash and in kind by expenditure item table, spend an aggregate P61.8B on dairy and egg products, versus P40.5B in 2003. Combined with the Philippines' population growth rate of 2.36%, the demand for milk is not likely to fall. It is a good prospect for this mature industry.

AMC sees itself as having exceptional prospects for growth. On 2009 it has earmarked 1.625B of its retained earnings for capital investments and, on top of that, spent 361M on CAPEX alone. The CEO and President of the company implied in the 2009 report that most of this money was and is intended to be spent on supply chain efficiency and production capacity in anticipation of economic rebound.

More recently, a 21 Jan 2011 article posted in Business World pointed out AMC's aspiration to double sales revenues through new product launches, aggressive marketing campaigns, and price increases in order to counteract a foreseen reduction in profit margins resulting from higher raw material costs (note that AMC's net margins cannot drop below 4.7% -- which is not that likely considering its lowest performance had been 5.6% on '05, and that was due to FOREX losses and retroactive effects of adopting new accounting standards.)

III. VALUATION ANALYSIS
Despite AMC's sudden rise in price (from 9.49 in Jul '10 to the 12.00 ~ 13.3 range from Aug '10 onwards), the fact remains Alaska is still cheap. Effing cheap, for a business like it. Current price is worth 7.86 times 2009 earnings, when it has historically fluctuated around 6.7. Alaska has been giving dividends since 2001, and at a minimum of 20 to 30 centavos a share, we are looking at a yearly dividend yield of about 1.6%.

More recently, on 2010's 3rd quarter we had P6.4 as the book value per share. Current market price of P12.52 is approximately twice that amount.

Is the company worth the current price?

Reverse DCF valuation suggests the current market price assumes a yearly growth rate in revenues of 8.3%, far below the historical 16% (which would obviously be higher with all the reports that 2010's income has broken all previous records). This is under the scenario that Alaska does not grow at all, not even at the rate of inflation, after the next five years.

Since AMC's revenues never dropped below 5B since 2004, and definitely not beneath 9B after its acquisition of Nestle brands in 2007, it is safe to say we can expect Alaska to earn over the P9B pesos in revenues with reasonable safety.

Zero-growth valuation suggests the company would make a minimum of P965.64M in adjusted after-tax earnings. The fact cannot be undisputed that the current price of P12.52 per share, reflecting the market capitalization of 11B, is 11.43x the after-tax earnings in 2009.

This earnings figure provides an estimate of Alaska's earnings power value, approximating it at P9.47B. The current price is 16.5% higher. Raising Alaska's sustainable revenues to 10B would actually increase EPV to P10.14B, reducing the gap between market price and EPV to 8.75%. Almost cut in half.

The fact remains Alaska's P12.52 unit price is above the estimated earnings power value of P10.75 a share. Considering the fact we got a company walking into what seems to be a rosy future ahead of it, equipped with the financial health and competitive weaponry necessary to weather many of the obstacles it could face, there is no reason why we shouldn't cough up the 16.5% premium for its growth prospects. (Besides, given the level of risk we're taking, the maximum overvaluation we could have is 60% above EPV, as this represents the 16x price/earnings ratio Graham implied as the highest we could pay for any one company.)

Whoever buys into Alaska now is a bit late to join the party, but not that late.

IV. PERSONAL CHOICE OF ACTION

I would buy into the company. Go long, Alaska!

Now, what bothers me is the price. I don't like to pay for growth, and the fact 16.5% premium is blended into the prevailing market price just annoys me. As stated earlier, P12.52 a share is still a good price. The premium, in fact, is not THAT high. That there is an immense gap between EPV and Book Value (tangible or not!) implies a competitive advantage, which I already identified in the stability analysis portion of the risk assessment.

What I would do, then, is to stagger my entry into the position. Specify the desired percentage of Alaska in my portfolio. Say, 15%. Then I would buy the company at smaller portions over a period of three to four months, accumulating it to the target position.

Look out for technical indicators that suggest a dip in prices. The moment AMC drops below P10.75, BUY IT. WITHOUT HESITATION! You will not be paying for Alaska's growth if you buy it at P10.75 and it'll be even better if you could get it below that (which is highly unlikely given the fact it is trading at the P12 to P13 range. Like I said, we're late to the party by a bit more than eight months.).

Also, be wary of dilution! Alaska's outstanding shares have been increasing steadily over the past five years, but fortunately, AMC strives to provide value by keeping an inventory of treasury stock, which usually amounts to 10% of the outstanding shares. The company is authorized to issue a maximum of 1 billion shares, and, going from its history, that means a probable outstanding share count of 900 million -- which isn't that far from its current 881.2M population.

At 900M shares, EPVPS drops to 10.52. Not a significant decrease.

Oh, and just to tease, if Alaska grew at historical revenue rates (16.1%) and at long-term inflation during the terminal period, the company would be worth about P22.84 today. This represents a 12.8% annual growth rate if it takes five years for the market to price Alaska at that level. 22% per year if it takes three years.

Nonetheless, in the final analysis we are still looking at speculation. Sophisticated speculation, but speculation at any rate. No forecast can ever be fully or significantly accurate. That is only luck. It accentuates the need to buy at EPV or below it, if God permits it.



There you go. Hope it helps. Looking forward to your response.
Title: Re: TSO's Request Corner (support an ambitious analyst-to-be! ^__^)
Post by: bauer on May 06, 2011, 10:51 AM
TSO,

you made a very good analysis on alaska.

i will try to allocate some funds in the future when price is more attractive.
Title: EEI Corporation: Deep Scan
Post by: TSO on May 20, 2011, 01:01 PM
Almost exactly one month ago, I received a request from panitanfc to analyze EEI Corporation for him. The full analysis was initiated afterward, beginning with the encoding of the financial statements. It ended on 7 May 2011, a day before I wrote the report you are about to read. It was also funny how I had to cram the 2010 annual report information in there, too, considering the 2010 17A was disseminated three days prior to the conclusion of my research. :)

As stated in my first post, all my research -- the fruits of my labor -- are posted here on the PMT forum within two weeks of analysis completion and submission, giving the client and myself enough time to act on the report before public distribution. I believe this is fair.

Anyway, this is going to be a long report (15 pages, MS Word), so it'll be comprised of two merged posts. Expect a big wall of text. Don't worry, it's like reading a story! :D I think... >< Oh well.  Have fun reading it though!

EDIT: Errr, the report's going to be cut off right before the Elemental Analysis. Hell, I'll have to make a third part for the valuation. It's a pain, seriously. I thought three posts at once would work, but apparently the stupid merge system this forum operates on is getting in the way.

Since I can't do anything about it, sorry, but you'll have to wait until the merging thing no longer applies and I can put up a regular post for part 2 (and part 3, if needed?).



EEI Corporation
Country: Philippines
Ticker symbol: EEI
Industry: Construction – Industrial and Residential
Current price: P3.60 a share
(represents almost P3.73B in market cap)
Periods analyzed: 2004 to 2010
Date started:  17 Apr 2011
Date finished:  6 May 2011


 I. DEMOGRAPHICS

The EEI Corporation was founded in 1931 as the machinery and mills supply house for the Philippines’ mining industry. Moving eight decades forward, the company has grown into a provider of construction services as well as a range of industrial machinery and systems. It is currently one of the country’s leading construction companies with an impressive track record in general contracting and specialty works.

Over the years, EEI has been involved in the installation, construction, and erection of power-generating and transmission facilities, oil refineries, chemical production plants, cement plants, food and beverage manufacturing facilities, semiconductor assembly plants, road, rail, and bridge infrastructures, and high-rise landmarks. Assisting the company is its very own steel fabrication plants.

EEI currently possesses 11 subsidiaries and 2 joint ventures, three of which are engaged in the building and repair of marine vessels and structural, marine-related fabrication works, the provision of overseas manpower and recruitment services, and consultancy and management.

Source: SEC 17-A for the year 2009

II. RISK ASSESSMENT

Executive Summary

At a first glance, I considered EEI as one of those companies I would’ve shied away from. EEI’s costs were so ghastly it sapped most of the company’s hard-earned revenues. Efficiency—measured in terms of asset turnover ratios—was good, but not good enough to justify the low margins. Worse, the company’s credit standing did not look pretty. On average, the company financed 67% of its assets with debt. The amount of cash being generated by operations cannot even meet the terror thrown around by the combined weight of capital expenditures and payment of both short-term and long-term debt.

Had I been tasked to screen EEI rather than undertaking a thorough analysis, I would’ve slammed it for these blockbuster faults and recommended you, my readers, to avoid the company out of safety and fear of its excessive leverage.

Because I dedicated my free time in the past two weeks to analyzing this construction company, I uncovered a few facts that completely overturned my initial impression of the company’s prospects as a long-run investment.
-   EEI’s project backlogs are not reported in the financial statements
-   Its 49%-owned joint venture in Saudi Arabia, Al Rushaid Construction Company, is a hidden asset
-   Indicators of earnings management (i.e. accounting manipulations) exist

I concluded at the end of this section how EEI’s sufficient liquidity and ample earnings coverage made its credit strong, although until now I still doubt its solvency. Thanks to the backlogs, I managed to derive ten signs that convinced me of EEI’s operational efficiency, making up for the low bottom-line profitability of its business.

EEI has enough projects in the pipeline to keep itself busy in five years, yet the favorable prospects found in Saudi Arabia provide significant opportunities for future growth. Richard Lañeda, a chartered analyst employed by Citisec Online, also noted “an abundance of domestic projects” as well as the opportunity for EEI to participate in a post-tsunami Japan’s restoration.

All these point to low-to-moderate levels of risk. Unfortunately, my own misgivings on EEI’s treatment of depreciation and the ARCC joint venture, along with my doubts on its long-term ability to service debt, bumped this perception up to MEDIUM-HIGH. This subsequently corresponds to a weighted average cost of capital of approximately 18.36%.

Adjustments to Financial Statements

As stated in the executive summary, during my two week study, I found assets that aren’t easily visible in the financial statements. These assets proved useful in my analysis and were responsible for my vigorous opinion of the company’s investment worthiness.

Backlogs
This was the first thing I had on my mind when I began encoding the financial statements into an Excel spreadsheet. Backlogs, being the unfinished portion of contracts currently in progress, spoke a lot about the construction company’s future revenues, and it became my obsession for a few nights to determine how exactly the backlogs are represented in the financial statements.

EEI had asset and liability items that seemed to point to the backlogs (fun fact: their names tipped me off), specifically billings that are either below or above costs and estimated earnings on uncompleted contracts.

Research on construction accounting (particularly the “percentage-of-completion method” used by EEI) and a long, hard look on the footnotes related to these over/under-billings revealed the truth: the backlogs are not represented in the financial statements!

In a 2004 article (http://members.cox.net/cbicphoenix/Work%20on%20Hand%20Report%20Article.htm), Mark S. Hewitt, CPCU, AFSB, at the time employed by the Contractors Bonding and Insurance Company, wrote that the over/under-billing is an efficiency indicator computed by total billings less the sum of costs and estimated gross profits on the contract recognized to date  (Analyzing and Understanding the Work on Hand Report). Even EEI admitted the backlog’s detachment from the financial statements: the net over/under-billing is computed using “total costs incurred and estimated earnings recognized” (SEC 17-A, 2009).

As backlogs typically represent the estimated costs to complete, combined with four other inputs taken directly from the financial statements (costs, gross profits, & billings to date, and COGS for construction segment) I computed ten performance metrics that not only made better sense of EEI’s operations, but also supported the valuation process. The equations can be found in Understanding the Importance of a Work-in-Progress Schedule (http://www.thebond-exchange.com/Pages.aspx/Understanding-the-importance-of-a-work-in-progress-schedule), an article written by the Bond Exchange, a global provider of surety bonds.


Al Rushaid Construction Company
Before delving into the ARCC, I first need to explain the “equity method of accounting” typically used by corporations to keep track of their investments, of which they own 20% to 50% and thus have significant influence over. The acquisition costs of these investments are the starting balances of the line item “investments in associates and joint ventures”. The associate companies’ net income (losses)—which is reported as “equity in net earnings (losses)”—causes the amount invested to rise (fall). Dividends also reduce the balance sheet amount reported on the financial statement.

Returning to the topic at hand, the Al Rushaid Construction Company is the lone strongman pulling up the weight. If it weren’t for ARCC’s performance, EEI’s equity-accounted investments would’ve produced losses on ’04 and ’05, and absolutely nothing thereafter.

I have three good reasons to believe ARCC is a hidden asset. One, ARCC’s net profits have been growing at a 5Y CAGR of 12.5%, indicating growth. Revenues, in fact, have been growing faster than that. Two, despite the increasing profits posted by ARCC, the EEI Corporation, which owned 49% of ARCC for over six years, has done nothing to increase its ownership from influential to controlling. Three, EEI’s hold over ARCC is so close to 51% it might as well be a subsidiary.

Forcing ARCC’s consolidation into EEI’s financial statements was a simple task. A simple, simple task.

Unfortunately, because the disclosed accounting data for ARCC is limited to “umbrella” items, adjustments aren’t as exact as I would prefer, and all estimations of anything more precise than “revenues”, “net income”, “current assets”, and “current liabilities” are based on EEI’s unadjusted numbers. Concurrently, the aggregated nature of EEI’s “investment in associates and joint ventures” asset item prevented me from fully subtracting ARCC’s share in this pool, which all but ensured the crudeness of the consolidation process and overstated the adjustments made to total assets.

Still, the forced consolidation led to significant changes in EEI’s fundamentals:
1.   Total assets jump 26 percent. EEI’s share in ARCC’s assets, liabilities, and equities represents 14%, 12%, and 20% of unadjusted values, respectively.
2.   Debt ratios, whether the backlogs are capitalized into the balance sheet or not, all worsen, skipping upward by at least 10%. Median ratios, in fact, rise from 67% to 73%, clearly displaying how much liabilities were hidden in ARCC.
3.   Net margins plummet upon consolidation, falling by 20% on average. Using ‘10 values, the 9% net margin on the income statements in their original formatting dropped straight to 6%--practically cut by one-third!
4.   ARCC’s contribution to operating revenues was never less than 24%. Conversely, its contribution to expenses were always marginally larger.
5.   ARCC’s consolidation, however, is estimated to boost operating profits, shattering my initial perception of EEI’s creditworthiness. More on that on a later section.



With these observations, I concluded that ARCC is indeed a hidden asset. Its status as an associate company plays a significant role in reducing EEI’s effective tax rate and furthermore, distorts the fundamental indicators toted in EEI’s annual reports and typically scanned by investors and newbie analysts alike.


Depreciation expense
In addition to the furtive nature of ARCC’s impact on the financial statements, I have also noticed inconsistencies in EEI’s application of its depreciation policies. The second footnote, Summary of Significant Accounting Policies, is too often a crucial piece of information glossed over by novices and laymen, diffident and hesitant to read through walls of text more boring and mind-boggling than a textbook on hardcore philosophy.

EEI stated the range of useful lives it assigns to its fixed assets in this footnote. The funny thing was, when I studied the numbers and compared them to these written standards, they did not match. Check it out:
-   Machinery, Tools, and Construction Equipment: supposed to be 5 - 10 years, but implied average was 18 years
-   Land, Buildings, and Improvements: 20 years stated, but implied to average 31
-   Furniture, Fixtures, and Office Equipment: lasts from 2 to 10 years, but somehow EEI makes these last for more than 10.
-   Transportation and Service Equipment: the policy was set to 4 years, when it was 10 years at a minimum in practice
*   Power Plant is not included here as it had been sold by the end of FY09. Besides, the numbers complied with the standards set in footnote 2.[/size]

If reported depreciation was adjusted to reflect the longest useful lives available in the written standards, it would’ve lifted the numbers by at least 50%. EEI would’ve earned net losses on ’04 and ’05. Reported income from ’06 to ’09 would’ve dropped by a percentage varying from 6% to 16%.

I can only speculate on the reasons behind the useful life discrepancy. EEI could be depreciating its fixed assets based on its economic life. A more sinister possibility is that this could be construed as an indicator of earnings management. Considering how EEI handles ARCC, the latter is far more likely.

While this development neither changes cash flows nor affected my profitability analysis (since you can technically consider this depreciation management), this had a drastic effect on my valuation process and, consequently, my demands for safety.



To be continued in part II, Elemental Analysis.
Title: Re: TSO's Request Corner
Post by: akira0422 on May 20, 2011, 05:02 PM
ill ride with jogitsz on MPI and PSE, since I have both and still very intrested with them. I hope pse wont just get too diluted after june... it that happens it myt hurt profit a little bit as expected.
TSO by the way if theres still room or it happens that ur already done with ur analysis on this please please update us ur viewers!!!!!
1. AGI
2. ap vs aev
3. EDC( ur probly done with this)
4. musx ( to add a little excitement)
5 IP vs cloud ( more excitement).
by the way jonards also has an analysis on mpi-on investment philippines .com.
anyway these are just in case ur done with ur more important priorities... XD thnx...XD
Title: EEI Corporation: Deep Scan (continued)
Post by: TSO on May 20, 2011, 09:04 PM
Quote
ill ride with jogitsz on MPI and PSE, since I have both and still very intrested with them. I hope pse wont just get too diluted after june... it that happens it myt hurt profit a little bit as expected.
TSO by the way if theres still room or it happens that ur already done with ur analysis on this please please update us ur viewers!!!!!
1. AGI
2. ap vs aev
3. EDC( ur probly done with this)
4. musx ( to add a little excitement)
5 IP vs cloud ( more excitement).
by the way jonards also has an analysis on mpi-on investment philippines .com.
anyway these are just in case ur done with ur more important priorities... XD thnx...XD

Akira,

In case you haven't read, my analysis -- screening or deep scan -- goes through a priority list, which is pretty much the backlog of slots from the top of my first post.

I only analyze one at a time, and I refuse to analyze financial institutions and holding companies, simply because I stay away from them. And btw, jogitz only requested DGTL from me, not PSE. The convention of the project / backlog list is <stock ticker>, <location> (interested parties).

Just so you understand.

Anyway, since you posted and inadvertently removed the posting limiter from me, I could now post the second part of my EEI report.



Creditworthiness
There has been a general improvement in EEI’s creditworthiness. As far back as 2004, 73% of its assets have been debt-funded. This dropped to 53% six years later, and the best part of it was, current liabilities have always formed a substantial part of debt.

Solvency ratios look like they’re barely passing. OCF before working capital represented 16% of total liabilities on 2010. Traditional FCF shot up from 7% of liabilities to a whopping 44% but that is hardly convincing when a significant chunk of FCF came straight from the conversion of underbillings to cash—it would drop to 16% also if that was ignored. EBITDA seems to be the only thing consistent enough to be able to smash this down to zero in five years’ time, but that’s not worth rejoicing over considering it doesn’t consider other adjustments and capital expenditures.

Forcing ARCC’s consolidation, however, would drastically improve the numbers (adding to the reported values using estimates made from historical margins). OCF before working capital would actually improve from a barely-passing 16% of total liabilities to 27%, already taking into account the corresponding increase in the denominator.

As far as liquidity is concerned, I am quite happy to see that cash itself can pay for 24% of current debt. With the current ratio at 1.14 for 2009, Current assets, excluding prepaid expenses, were at a high enough level to pay off all current liabilities and leave a little bit behind. Taking away inventories, however, brings this down to 1.03, another “passing grade” when compared to the rule-of-thumb benchmarks

Earnings coverage is a different beast altogether. EEI has cast out over P1.8 billion in principal payments alone since 2008, and the company typically accrues P200 million in interest expenses every year. Operating cash flows isolated from extremely volatile factors such as changes in working capital are merely sufficient enough to meet maintenance capital expenditures (presumed to be the adjusted depreciation expenses) and modest principal payments of around 600M with a decent margin left over.

I find it highly ludicrous to think that could finance all the money flowing into EEI’s creditors. It’s no surprise they’re approaching lenders every year since ‘05, just to pay off their debts. The only reason why EEI’s interest-bearing debt dropped from P1.8B on ‘09 to P735M on ’10 can be found in the fact it has availed of P1B less debt than it did back then.

Obviously I have my doubts.

Efficiency
Luckily, EEI’s efficiency in its operations isn’t as suspect.

For FY10, EEI’s billings have exceeded its costs and estimated earnings by approx. P781M. Although this shouldn’t rally concern (being that the amount is a laughable drop in the bucket when compared to the amount it recognizes in revenues every year), anyone putting cash into the company should monitor overbillings every quarter. Any further increase could indicate trouble with cash flows—thanks to its credit, vigilance is even more necessary.

The management’s confidence in the long-run outlook of its construction-related costs and in the company’s ability to control them has also grown considerably. This is visible in the estimated project margins implied by information derived from the backlogs and costs and gross profits recognized so far, which grew from 4.6% in ’06 to 13.8% in ’10. The only thing that lends some weight on this interpretation is the fact EEI’s gross margins have consistently beat the estimated contract margins every year. In fact, the median contract profits were assessed at 6% of contract values, whereas the actual gross profits realized were 9%.

P16.6 billion in backlogs had been added to the P15.7 billion balance EEI had on the previous year. This significantly reduced its overall project completion rate from 56% to 39.5%--this ensures the company would have business for at least five more years, assuming a production rate equivalent to 12% of overall project costs. This is a drastic percentage higher than the average 3.5.

Diving into the accounting-based ratios, the main indicator I look at is the asset turnover. Adjusting sales and assets for ARCC, EEI has been earning at least P1 for every peso invested in its business, which completely offset its rather pathetic margins. The current multiple of 1.09× is lower than average, but markedly better than ‘05’s 0.85× asset turnover.

Furthermore, the time it takes for EEI to convert its inventory into cash and to pay off its trade payables have all decreased to levels below their medium-term averages and their levels way back in ‘04. Although there has been no significant change in the effectiveness of its collection activities, the average collection period of 130 days (for ’09 and ’10)—which is higher than both the 6Y average and the level for ’04—resulted from ‘08’s significant jump in trade receivables. (Speaking of receivables, there is another warning sign: revenues have been growing at a 6Y CAGR of approx. 15%. Net A/R beat this by 2 percentage points. Receivables’ faster growth versus revenues is usually taken as a sign of decreased efficiency in collections.)

At any rate, these numbers—most of them, at least—validate EEI’s claim to efficient business.

Profitability
Admittedly, I have had the most difficulty addressing this section. So many adjustments had to be made to the financial statements, inundating me with so much information it was difficult to determine which were relevant and which weren’t.

Nevertheless, I shall begin first with unadjusted figures. After all, the aim of profitability analysis is to determine the strength and effectiveness of any cost control measures being implemented by the company under study.

First and foremost, EEI’s net profits have always, always been below 10%. The most recent year, 2010, was no exception, posting 9.5% on yearend.  I pin most of the blame on two things: costs of goods sold and SG&A expenses.

Did you know that gross margins ranged from 8.2% to 17.4% in the past seven years, landing a median of 13.5%? Even though none of the historical figures breached what I call the “expected poor year average” of 7.8%, the fact remains so much money flows straight into COGS, which has grown to 2.36 times its value on ’04.

A brief study of the costs of goods sold of the four business segments operated by EEI Corporation shows that construction contracts and services have been the worst performers in comparison to real estate and merchandise, yet these two behemoths are the biggest drivers of revenue and growth—Construction hauls in 70% of revenues on average, services brings home 20% of the bacon, and the other two just… “tag along”. This has been true for all years since ’04, but has become more pronounced starting ’07, when services hit almost seven times ’04 (and of course, the management did not bother explaining this in the 2007 annual report).  

Breaking down the COGS of both construction and services, it is worth noting how virtually all of services’ costs go straight into man-hours (to be exact, it’s actually 94% on average). Constructions’ costs—personnel, equipment, and materials—had a tendency to be divided evenly among each other.

Selling, General, and Administrative expenses are far more insulting. These are corporate expenses. Barring depreciation, the historical figures suggest a shocking 55% of gross profits is welcomed by SG&A with open arms and are never seen again. Bursting through these doors and ripping SG&A into 11 bite-sized pieces. Of the gross earnings kidnapped by SG&A, 47% of it goes straight to administrative personnel. 10% is passed on to an umbrella account called “others”. 7% falls in with travel and transportation, while the remainder is almost evenly spread across the remaining 8 pieces (the two largest being outside services and professional fees, each amounting to 6% of SG&A expenses).

This speaks a lot for EEI’s corporate obesity.

Regarding depreciation expenses, generally 35% is taken out from the number arising from the subtraction of corporate expenses from gross profits. Alluding once more to their depreciation policies in practice, the reported numbers indicate non-compliance to the written standards EEI committed itself to in the second footnote. Forcing an adjustment for this would magnify reported D&A by at least 50%, which would have a very profound effect on net income reported to the public through press releases and their annual reports.

Nonoperating revenues are worth mentioning. It generally accounts for 6.4% of revenues, which is strange considering operating margins fall slightly below that percentage. 77% of nonoperating revenues are kept afloat by “equity in net earnings”, despite the fact this item is practically ARCC itself in more recent years, not to mention that anything related to ARCC is more apt for classification as operating.  An influential driver of this income statement item, about 20% for ’10, is the sum of tax reimbursements, reversal of provisions, and “others”.

Nonoperating expenses, on the other hand, come from provisions for doubtful accounts, obsolescence, and losses, along with FOREX losses and one-time expenses. 2010 was a bit different since the company made gains on foreign exchange that year, whereas it had been negative for all years prior.

Going into financing and investing activities, these have thankfully borne fruit. Boosts to EBIT from interest revenues from excess cash, AFS securities, and interest-bearing receivables gravitate towards 5.4%. This provides a shield against the 200M normally accrued in interest expenses on bank loans and LT debt. It is thin and flimsy, but nonetheless, a form of protection.

As for taxes, we can discount ’04 and ‘05’s weird behavior and point out how EEI had a tendency to stick to 26.7%. The most frequent factors affecting effective tax rates is the change in unrecognized deferred taxes, income subject to final taxes at lower rates, effective adjustments arising from changes in statutory rates, “others”, and of course, equity in net earnings of associates and joint ventures. The latter two are the more predictable of these adjustments: one can expect the former to raise effective rates by 52%, and the latter to lower it by 67%.

All these contribute to a low, but increasing net margin, from 0.1% in ’04 (taxes and FOREX losses killed it) to 9.5% in ’10, which I expect to remain as is or reverse towards 6.5%. I don’t have anything to talk about regarding the dividend policy started on ’08. Personally, it is still too early to see if EEI can continue posting dividends for the years to come, and increase it as time passes.

Adjusted for ARCC, net margins are actually lower, consisting 3% to 6% of consolidated revenues from ’06 to ’10 (compared to reported margins of 3.6% to 9%, which are a bit lower than what my spreadsheets produced due to recasts made on the income statement). Turnovers would raise it by a percentage point or less, producing ROA’s of 2.6% to 6.6% versus the reported 3.5% to 8.2%. When leverage is thrown into this mixture, the returns on equity take a significant leap from its base, multiplying ROA by as much as 2.7 to 4.5 times (unadjusted equity multipliers range from 2.1 to 4.3, averaging at 2.9. If you wish, you can algebraically compute E.M. using the debt ratio, as it is equal to total liabilities divided by the product of the debt ratio and total equity.)

To save some trouble for the reader, returns on equity vary from 13.6% to 20.4% unadjusted, and 11.6% to 19% adjusted.

Considering NOPAT would average 6% when revenues and the profitability metric itself are adjusted for ARCC (computed as ARCC’s estimated operating income, after effective tax plus reported NOPAT), we could reasonably expect a return of net operating assets more or less around 8%. Juxtaposed to the adjusted return on equity, this simply tells us that 60% of investors’ ARCC-adjusted returns come straight from business operations. In my opinion, this is far better than the 28.4% implied by the median of years ’06 to ’10.

My conclusion on EEI’s profitability is that EEI’s business is so effing costly their net margins aren’t as strong as I’d hoped they would be, even after throwing in ARCC’s financials into the computations. Furthermore, corporate fat undermines bottom-line earnings. Additionally, leverage is so large that ROE bulked up to double digits in unadjusted and adjusted figures, when deep scrutiny shows operations is 60% responsible for it.

Even though the ARCC-adjusted estimates of operating cash flows strengthen the resilience of EEI’s earnings coverage and liquidity, it does not allay my skepticism of EEI’s books and my doubts on the company’s long-run solvency.


Stability
There are three areas we have to look at as far as business stability is concerned: the industry EEI operates in, the arsenal of weapons EEI brings into the playing field, and—I must stress this multiple times!—the integrity of its public reports.

The industry, speaking from mere concept, should be marked by intense competition—international and local—and great bargaining power on the contract owners’ hands. There is no substitution for construction of electromechanical facilities and residential properties. Costs of supplies and construction materials also matter, but steel fabrication companies abound (running a search for fabrication steel in construction projects within the region of Asia and the Middle East on Alibaba.com would produce over 200 results), increasing vulnerability to the fluctuating market prices.

Political upheaval is also an area of concern, especially for EEI when majority of its revenues come straight from the Middle East, specifically the Kingdom of Saudi Arabia. However, a March 22, 2011, article on the Philippine Star (http://www.philstar.com/Article.aspx?articleId=668443&publicationSubCategoryId=66), written by Zinnie Dela Peña, assured us that the “political upheaval in the Middle East and North Africa” had no drastic effects on ARCC’s operations. In fact, the King had also declared approximately $100 billion worth of projects aimed at improving the lifestyle of his people.

As far as weaponry goes, EEI actually has several advantages over its competitors.

At a glance, EEI has had over 80Y of experience in construction, with current expertise in electromechanical structures and residential buildings and corporate offices—seen in its validated operating efficiency and its portfolio of projects (completed and ongoing), which have an estimated contract value of P51 billion, P20.2B of which have already completed. Already possessing a working relationship with high-profile entities such as RCBC, Petron, SM Corporation, Chevron, and Mitsubishi, the corporation even has the gall to call itself “the Philippines’ most reliable construction company in the international market” in its own website!

Economies of scale buttress EEI’s operations, and it is present in its product portfolio and geographical scope. Anyone visiting the website will see EEI offers a plethora of construction services, such as oil refineries, power plants, industrial installations, and food/beverage manufacturing facilities. Property development is also tucked under its wing.

In addition, EEI has established its presence in the countries of Saudi Arabia, Kuwait, Iraq, Algeria, Brunei, Libya, Qatar, Malaysia, and New Caledonia. The 2010 annual report also adds Singapore and Guam to the list.

To combat its exposure to the ever-fluctuating prices of the market, EEI has two steel fabrication shops in Batangas and Saudi Arabia for its internal supply.

Unfortunately, as much as I loved toting its advantages over the industry, I could never let go of my misgivings with EEI’s financial reports. Depreciation expenses, ARCC, and EEI’s ridiculous behavior as a debtor all tarnish the pristine image of a company founded on stability. Net income, when compared to net operating cash flows, swings from one extreme to another. Working capital is superlatively volatile, with net OCF’s being 91% to almost 400% of OCF before working capital (discount the fact it turned negative on ’07 due to the large increases in underbillings and other current assets). The point is, there is plenty of room for earnings management, and I seriously doubt EEI has the integrity to resist temptation, not when the numbers show otherwise.



To be concluded with future prospects and valuation. :)
Title: EEI Corporation: Deep Scan (concluded)
Post by: TSO on May 23, 2011, 02:15 PM
Looks like I need to wait a day, huh? Hmm...

Anyway, here's the third and final portion of my EEI Corporation report.

Hope it helps. :) The entire thing was 15 pages long...



Future Prospects
Still, just because a company has a pretty good chance of manipulating its accounting records for the investing public doesn’t mean it has no decent opportunities for growth.

In addition to a special section from EEI’s 2010 SEC 17-A, I have four sources here that attest to the wonderful opportunities available to this corporation today, one of them being a company update written by a chartered analyst working for Citisec Online.

The Saudi Gazette (http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentID=2010112387784) (released on Nov 2010)
-   The KSA is expected to award contracts of up to $86 billion in 2011.
-   There were, at the time of writing, $624 billion worth of projects underway or being planned
-   Demand for construction in the Middle East, according to UAE-based Proleads Global, is set to soar as the industry is faced with major developments and impending recovery from economic downturn.
-   Business Monitor International reports, the United Arab Emirates government has appropriated almost $12 billion for infrastructure projects from 2010 budget

Asia Today (http://asiatoday.com/pressrelease/construction-projects-saudi-arabia-be-worth-sr2374bn-2012) (released on 15 Mar 2011, written by AME Info FZ LLC)
-   Construction projects in the KSA, the Middle East’s largest construction market, are expected to be worth “around SR237.4bn in 2012 as the Saudi Government proceeds with its Five-Year Development Plan” (note added: 237.4 billion Real is approx. $63.31 billion)
-   “The rapid expansion of the construction sector is driving parallel growth in the Kingdom's construction machinery market, which is expected to expand further by 20% through 2015.”
-   “The Saudi Government's 2011 budget is currently funding construction-intensive, multibillion-riyal projects ranging from ports and roads to rail networks and communications facilities.” Infrastructure enhancements will account for a significant portion of Saudi Arabia’s development over the next five years.

Construction Week Online (http://www.constructionweekonline.com/article-9141-saudi-construction-industry-growth-hits-7-in-2010/) (released on 7 Aug 2010, written by Andy Sambidge)
-   Business Monitor International forecasting almost 7% growth in KSA’s construction sector in 2010, fueled by “billions of dollars of projects either in the pipeline or currently underway”. BMI analysts estimated a 4Y CAGR of 4.13% from 2010 to 2014, based on number of on-going projects. Industry value forecast should rise from SR92.2 billion ($24.57 billion) to SR122.48 billion ($37.7 billion) over same time frame.
-   Saudi’s native population is a key factor behind the stable and growing demand for infrastructure. The government has also shown a commitment to infrastructure development and its ability to support these plans through funding.
-   This is incredibly strong growth, taking place during a recession and thus, difficult access to credit. It illustrates resilience of the Saudi Arabian construction industry and the demand from the locals, whereas other countries rely on expatriates and tourists for infrastructure development. (emphasis added)

COL Company Report (released 8 April 2011, written by Richard Lañeda, CFA)
-   the significant increase in oil prices (now over US$100 a barrel) should lead to more investments in refineries and petrochemical facilities
-   Lañeda estimates a 12% success rate in EEI’s bidding for projects, all of which were reported by EEI to be valued significantly higher than pre-crisis levels (emphasis added)
-   Domestic operations also looking great. Property developers are launching multiple projects, supplying a very favorable demand-supply situation of the Philippine construction sector. Philippine government is also launching infrastructure development through a public-partnership program (PPP) that would hurl P38.9 billion in projects on 2011.
-   The tsunami-earthquake combo that brought Japan to its knees might provide more opportunities for EEI, since it can participate in the restoration efforts of damaged Japanese industrial facilities, refineries, and power plants. EEI has had previous partnerships with Japanese companies, so this direction may actually bear fruit.

Regarding the chartered analyst’s report, I investigated the PPP and discovered that the Philippines has a website for it (http://ppp.gov.ph/ppp-projects/ppp-projects-for-2011-rollout/), which details the projects it intends to roll out.
-   NAIA Expressway (Phase II)
-   DaangHari – SLEX Link Road
-   MRT & LRT Expansion (privatization of LRT 1 and maintenance)
-   NLEX & SLEX connector
-   MRT & LRT Expansion (LRT 1 South Extension)
-   CALA Expressway (Manila Side section, approx. 27.5 km.)
-   Airport Developments for Puerto Princesa, New Bohol, and New Legaspi (Daraga)
-   Privatization of Laguindingan Airport Operation and Maintenance
-   LRT Line 2 East Extension
-   Over 30 national projects for medium-term rollout, among the departments of agriculture, transportation and communications, and public works and highways, education, health, along with the MWSS and National Irrigation Administration

 The American Chamber of Commerce senior adviser John Forbes told ANC’s Business Nightly (http://www.abs-cbnnews.com/video/business/05/04/11/ph-can-grow-9-pct-doubling-infra-spending-pushing-ppp[/url) in an interview that the Philippine economy could grow 9% a year “by doubling government spending on infrastructure and pushing private-public partnerships. (Philippine PPP Center, 5 May 2011)

SEC 17-A 2010 Report (http://www.pse.com.ph/html/ListedCompanies/pdf/2011/EEI_17A_Dec2010.pdf) (released 2 May 2011)
-   The Philippines’ economic growth for 2011 and the medium-term is expected to be sustained, though not as outstanding as the year 2010. The projects handed out by the PPP should contribute significantly to this.
-   Growth drivers of the construction industry are presently the acceleration in construction, expansion in mining, and the housing sector’s recovery. An immense interest in biofuel and renewable energy has picked up, especially now that the attractions of nuclear energy thanks to the aftermaths of the recent Japan tsunami-earthquake event.
-   The political unrest in the Middle East aren’t expected to drastically impact ARCC’s operations; the King of Saudi Arabia had taken preemptive measures and declared benefit programs for his citizens. An increase in the number of projects should impend.
-   EEI’s presence in Guam    was made due to its medium-to-long0term need for workers for the construction of a US naval base that will eventually be transferred to Japan, as well as other renovation projects. Further, the company is preparing to set foot in Australia and Dubai, which EEI said are showing signs of recovery from the global crises.
-   Modular fabrication is seen to have enormous potential. The Saudi Arabian steel fabrication shop is currently operational, complementing its shop at Batangas.


EEI will focus on its core competencies: construction of industrial facilities, buildings, steel fabrication, and infrastructure. Through ARCC, it is a preferred contractor for heavy industrial projects in KSA and it plans to penetrate more countries overseas, throwing around its experience in petrochemical, oil and gas, power, and mining sectors.

To ensure the maximization of these opportunities, manpower is a critical priority. EEI would continue to focus on recruitment and training for the next few years, in order to meet the workforce requirements of the projects they will bid for. Safety and quality are the top value propositions offered to clients through EEI’s workforce, and, to complement their numerous training programs, the company began the process of acquiring the OHSAS 18001 certification and hopes to bag it by 2013.

Increasing efficiency of its operations remains an important initiative. EEI is in the process of modernizing the equipment and software used for construction and steel fabrication. In fact, there are layout improvement plans already underway for the Batangas shop, which would accommodate more machines and smooth the workflow, essentially increasing production caps. Internal businesses processes would be upgraded by a document management system that would save paper and facilitate data sharing.

It goes without saying that EEI’s future prospects are strong.

III. VALUATION ANALYSIS

Going back to what I stated in the executive summary of the risk assessment, EEI Corporation’s operational efficiency, decent profitability, inherent stability, and awesome prospects for the future pointed to low-to-moderate levels of risk. However, my own misgivings on EEI’s financial reports, as you have just read in the previous section, bumped up this perception to MEDIUM-HIGH.

As per my May 4, 2011 update, my valuation analysis will no longer assign a subjective discount rate tied to the perceived risk of the company for the deep scans. This has been changed to the weighted average cost of capital (WACC). You may find my reasons in my thread.

Historical interest rates on interest-bearing debt, ± any adjustments, were used to estimate EEI’s cost of debt-funded capital. Cost of equity, on the other hand, is computed using a modified capital asset pricing model.  The risk-free rate is set at 5.875%, the 7-year T-bond’s coupon rate last month. The market return is a 6-year geometric growth rate computing using the ’10 and ’04 quarterly averages of the Philippine All-Share Index, which was 15.24%.

Thus EEI’s WACC—as well as my discount rate—is approximately 18.36%.

Returning to the topic at hand, EEI’s book value currently stands at P3.74B, translating to P3.61 a share. Net income for FY10 was P657.2M, or P0.63 a share. The prevailing market price as of 6 May 2011 was P3.6 a share (P3.73B market cap). Converted to the usual valuation ratios, we find that EEI is priced at 5.71 times ‘10 net profits, and at almost exactly the level of book value.

However, the P27 billion worth of backlogs on ’10, when discounted to the present on a three-point premium above gross margin realized for the year and divided into its costs and estimated earnings portion, will add P1.1 billion to equity. Forcing consolidation of ARCC into the financial statements would increase it further by P965M (deducted for a corresponding decrease in “investments in associates”).

The adjustments would leave total equity with a balance of approx. P4.8 billion, or P4.63 a share. EEI may have been fairly valued at reported book value, but it is 22% undervalued when the analyst keys in the impact of uncompleted projects and ARCC.

Once again, we are faced with the question, is the EEI Corporation a good investment at P3.63 a share? Because it is undervalued (and continued analysis would only serve to accentuate this), will P3.63 a piece provide a large margin of safety, just in case everything goes to hell?

Net Asset Value
First of all, I had to estimate the value of EEI’s assets. Because of the long-term nature of its operations and its good prospects for the future, it was fairly obvious to me its executives weren’t going to be interested in liquidation within the next six or seven years.

The net reproduction cost method of asset valuation popularized by Bruce Greenwald was hence used for this. Before delving into the heart of the matter, my assumptions were relatively simple: everything is 100% except for investments in associates, Net PPE, Investment Properties, and net receivables.

Investments in associates were tripled to reflect the assets owned by ARCC. I am fully aware this might end up overstating the other joint venture EEI owns, but that doesn’t really matter since its assets are so small in value, any overstatement is laughable.

Net PPE’s value was reduced to 62% of its value (to P663M). To explain, EEI’s PPE consists of (1) machinery and construction equipment, (2) land, buildings, and improvements, (3) furniture, fixtures, computers, and office equipment, (4) transportation and service equipment, and (5) construction of fixed assets in progress. Obviously, anyone who was going to setup a company just like EEI would spend less for the same construction equipment, the same furniture and office gear, and the same transportation and service equipment.

That assumption is even more valid considering these same assets have remaining lives less than half their implied useful lives.  To convert it into plain language, I ask a simple question: if I buy an iPhone 3G for $300, would you be interested in buying that same phone a year later at the same price, when the iPhone 4 is already being sold for roughly the same amount?

Out of conservatism, I reduced the net figures of these items by 50%. I made no adjustments whatsoever to construction in progress, and land, buildings, and improvements due to the fact I know nothing about all the land under EEI’s ownership and whatever they are constructing for their own use. This reason also applies to investment properties, which was left to 100%.

As for net receivables, all I did was add-back the allowance for doubtful accounts. Combined with the present value of uncompleted contracts (assets) and that of their costs (liabilities), I ended with approx. P6.99 billion in reproduction costs.

This total is further adjusted by the value of their customer relationships (estimated by a small percentage of construction COGS and SG&A to represent operating expenses spent on finding new contract partners and clients and maintaining current ones, which is capitalized and depreciated over a five-year period) and of their expertise in electromechanical structures (estimated the same way as customer relationships).

Inputting those two modifiers, I arrived at roughly P8.1 billion in net reproduction costs—P7.82 a share. To add a layer of safety, this valuation is reduced by WACC, bringing it down to P6.38. Juxtaposed to the market price, we are left with a 43.6% margin of safety. Sweet!

Value of Zero Growth
Second, I had to approximate the intrinsic value of EEI’s earnings power, again as prescribed by Greenwald. The sustainable level of revenues that could be earned by EEI’s four business segments was assessed at P8.5 billion, including ARCC’s contribution to it. This is about 22% less than what EEI usually makes every year.

Operating margins are assumed to be at the median 4.1%. Effective taxes were set at 30% to effectively eliminate EEI’s skills in tax management. Maintenance capital expenditures were estimated at the adjusted depreciation expense.

We are left with an income metric of P477.8M, representing a margin of 5.6% (versus the median net margin of 6.5%). Capitalized using WACC and adjusted for cash in excess of what is needed for operations and interest-bearing debt, the value of EEI’s earnings without any growth whatsoever is roughly P2.5 billion—P2.41 a share.

The estimation shouldn’t be a cause for concern. Although the current price is almost 50% overvalued with respect to this value estimation, two things must be remembered. One, this does not include growth. Two, based on the discount rate used to obtain the nominal EPV, the highest price we must be willing to pay for this company is P7.09 a share (which is equivalent to Graham’s maximum 16 P/E prescription).

What matters is the discrepancy between the estimated values of EEI’s assets and its sustainable earnings. There would only be two reasons why the net asset values are higher than the values of earnings without growth: bad business fundamentals or poor management. The 62% gap between assets and sustainable earnings simply reaffirms my concerns with EEI’s risk profile. (Review Risk Assessment for more information.)

Value of Growth
Third, I had to bring in the check how much growth could impact the stock price of the company. The process used to estimate the value is the popular DCF model used by analysts everywhere, based on residual owner earnings projected over the next six years using a plethora of conservative judgments that effectively forecast the income statements. Before I proceed, note that my biggest assumption here is that EEI’s debt payments are all below 1B.

Scenario analysis is exercised to check the effects of all growth scenarios. Realism is also confirmed by juxtaposition of forward 6Y CAGR’s with historical figures and the proportion of terminal values in the net present value of owner earnings.

As I don’t want to kill brain cells rambling, I will cut to the chase. The DCF valuation produced forward 6Y CAGR’s weaker than what has been observed historically. Construction revenues, for instance, supposedly grew at 13.4% a year since ’04. My models all churned out forward rates of 6% and less. Furthermore, the net present values calculated using the financial models were mostly a result of yearly income rather than the hold of terminal values.

In the end, I arrived at P3.00, P4.58, and P7.17 in share prices for pessimistic, neutral, and optimistic growth scenarios, providing margins of safety of 21% (neutral) and 50% (optimistic). Pessimism was keen to remind we could end up losing 20% on this investment in the long run. Nonetheless, the value of growth is 24% higher than that of stagnation at a minimum.  

IV. PERSONAL CHOICE OF ACTION

The margins of safety are high as far as assets are concerned. It is 50% overvalued in comparison to earnings power, but the overvaluation is at a level we can accept based on the level of risk and the highest purchase limit prescribed for guidance in our decision-making. Growth scenarios present us with ample margins of safety, and chances of the company sticking to the pessimistic forecasts (or doing worse) are low, considering the opportunities available in its grasp.

Priced under adjusted book value and facing the impending opportunities ahead with 80 years of experience and a verified reputation for efficient operations, I personally think EEI Corporation is a company worth buying into in spite of my own reservations.

Of course, once I have a position in here, vigilance must be exercised. The quarterly statements are crucial in tracking the over/under-billing and the amount of money EEI is spending to pay its short-term bank loans. Anything related to Saudi Arabia should be observed regularly as well, as a majority of EEI’s construction revenues (reported and stashed away in ARCC) are straight from there.

Ample margins of safety aren’t viable excuses in the face of constant vigilance.
Title: Re: TSO's Request Corner
Post by: ianb on May 24, 2011, 01:10 PM
my, that was long. but awesome. thanks for the info
Title: Re: TSO's Request Corner
Post by: TSO on May 24, 2011, 02:21 PM
^ Trust me, dude, you should see what I did for my profitability analysis of RCBC back in my fourth year. That was a monster -- 20 pages, complete with graphs.

Now that I think about it, it's funny that, the other day, I found -- and studied -- a 52-page report online dedicated to industry analysis and ascertaining firm-specific competitive advantages that was published way back in 2002. In friggin' 2002. If I had that report back in my sophomore year in university during my "Industry analysis" class this would've made our work sooooooooooooo much easier.

Anyway, my next project's another deep scan, so expect another long report like this in a few weeks or so.
Title: Re: TSO's Request Corner
Post by: robot.sonic on May 31, 2011, 06:02 PM
Sir TSO,

baka pwede pa analyze din ng EDC.  :thankyou:

Pwede kita tulungan sa encoding. Bigyan mo lang ako ng template at ieencode ko lahat ng kailangan mo. :D

robot.sonic
Title: Re: TSO's Request Corner
Post by: novice on May 31, 2011, 09:04 PM
Yup baka pwede po ba pagawa report about sa EDC.... one question pala SMC its been staying 110 level for one week any info about this??

Post Merge: 1306847157
one more thing about PB.com spike up today from 35 to 52 wow....
Title: Re: TSO's Request Corner
Post by: TSO on Jun 01, 2011, 06:30 AM
@ Sonic and novice:

Okay. I'll put EDC in my backlog. Screening level or deep scan?

Please note that if you request for a deep scan like what I did for EEI and what I'm currently doing for MWC, I will take a long time.

And Sonic, the problem is, encoding is actually part of the analysis. You DO realize that changing accounting standards force you to think on how the financial statements could be reconciled from one year to the next. Not to mention that the encoding itself allows you to see what has been eliminated from the computation of earnings and what has been added.

In addition, necessary adjustments such as what I made for EEI (backlogs, D&A) and for MWC (SCA) wouldn't have been found if it weren't for encoding. It's a tedious and dirty job but it's still a part of the work....

BTW, novice, I don't have any information on SMC and neither will I accept requests on it. Bauer's report should suffice, and besides, it's a conglomerate of multiple businesses.
Title: Re: TSO's Request Corner
Post by: robot.sonic on Jun 01, 2011, 12:02 PM
Kahit screening level lang po muna boss TSO.

Thanks!
Title: Re: TSO's Request Corner
Post by: akira0422 on Jun 01, 2011, 04:58 PM
Thanks TSO. Great analysis, in depth and specific. sorry for too many requests, got carried away with the details on how efficient your strategy works. Seriously!!!!!! Thanks a lot!!!!!! XD
Title: Re: TSO's Request Corner
Post by: robot.sonic on Jun 01, 2011, 08:37 PM
Iconsider mo na rin ang paid subscription or pa seminar on VI. :D
Title: Re: TSO's Request Corner
Post by: c_lmc on Jun 03, 2011, 05:11 PM
@TSO

Sir, can be so kind as to add Megawide Construction (MWIDE) in your growing list of companies to screen.
Thanks so much!
Title: Re: TSO's Request Corner
Post by: robot.sonic on Jun 14, 2011, 07:09 PM
Sir TSO, pwede pa analyze din ng MEG? sobrang baba na nya ngayon e. baka ok din to. :)

Thanks!
Title: Re: TSO's Request Corner
Post by: TSO on Jun 15, 2011, 05:51 AM
@TSO

Sir, can be so kind as to add Megawide Construction (MWIDE) in your growing list of companies to screen.
Thanks so much!

Just checked Megawide. Currently at P9/share as of yesterday, with 857,000,002 shares out on the market, representing market cap of 7713M.

Book Value is equivalent to 974.73M on 2010-end, plus 14190M in backlogs with estimated remaining life of 3.7 years (assuming 2010 contract costs equals amount of costs recognized for the year). Discounted to present assuming a 14.6% gross margin, backlogs stand at 8600M. Adding that to book value, we have approx. 9575m as of 12/31/2010. Current market cap incorporates a 20% discount from adjusted book value.

Because MWIDE is about 70% debt-financed, solvency and liquidity are extremely important. Liquidity for 2010 barely passes: cash, STI, and net A/R equal current liabilities.

Since we're dealing with earnings coverage here... take note that we cannot rely on MWIDE's limited history to give us an earnings trend. Barring any major contract cancellations, backlogs' remaining life indicate we will see sales figures similar to 2010 on the 2011 ~ 2013 17A's if not better.

Operating margins ranged from 4.24% to 10.47% in '08 to '10. Taking this into account, let's assume the worst and think operating income to be 4%. At 30% statutory tax (giving no credit to tax management), we have a 2.8% NOPAT margin.

If I guess a 4515m level of sustainable revenues (using the backlogs and their implications as a guide), then OPINC should be 180.6k at least (NOPAT: 126.42k). If we go for the middle ground in operating margins, then we can expect a 7.36% operating margin = 332.3k OPINC (NOPAT: 232.61k). Price of 7713m is obviously too expensive as far as NOPAT is concerned, coming up to a 23× P/E for NOPAT derived from reported operating income and reported effective tax rates. The expected 232.61k NOPAT gives us a P/E of 33× instead.

The income metrics provided are higher than interest expenses and amount paid to creditors before any debt availments. This changes when capex is added into the mix, even if you were to add back depreciation. Operating earnings, in a nutshell, enough to meet debt obligations, but not for capital expenditures. Overbillings amounting to 1B for 2010 indicate some trouble in short-term cash flows.

Profitability looks good, with 2010 ROA at 10.52% and 2010 ROE at 34.35%. Profitability above cost of capital (assumed 15% to represent investors' required rate of return, not to mention 50 basis points above gross margin) can be reasonably expected to continue given Megawide's alleged competitive advantages in high-rise, residential/office condominium construction:
~ Technology (Formworks, Pre-cast) & heavy R&D background
~ Expertise in HR Condos, whereas DMCI and EEI concentrate on domestic infrastructure and electromechanical industries respectively
~ Company-owned facility for pre-cast components with intent on expanding into a nationwide supplier in the future
~ AAA construction license
~ Partnered with SMDC for past three years

Quick summary:
1. MWIDE is a good, profitable business geared to long-term with a decent work history especially if you consider fact it was SM's partner for past three years. Anyone analyzing growth prospects should study SMDC's potential for revenue growth as it is a major customer of the company.
2. Low margins indicate process advantages, compensated for by high sales generation. Probably comes from the Formworks and Pre-cast Systems employed by MWIDE.
3. MWIDE's long-run business character cannot be ascertained due to its recent listing date. In fact, '08's and '09's financial data are both completely unreliable in determining stability. Even the margins vary.
4. Current price of 7713M is too high at 23× P/E. Even if it is trading at 20% discount to adjusted book value, the highest price level where one can enter MWIDE with a reasonable amount of safety should be 4.35 a share (16× P/E). EEI, imho, is still a better investment compared to this (note I did not use the word "speculation"). Market cap of EEI is about 3522M at P3.4 a share, which is merely 41% higher than the 2500m zero-growth value, which is low considering the WACC used to capitalize it was exceptionally high. Implicit P/E here is about 7.7×, versus the estimated 23× for MWIDE. Net asset value per share of 6.38 gives EEI a 47% gap versus MWIDE's 20%. Note both estimates have taken backlogs into account.
Title: Re: TSO's Request Corner
Post by: c_lmc on Jun 15, 2011, 09:43 AM
@TSO

Sir, thank you so much for your analysis on MWIDE.
Title: Re: TSO's Request Corner
Post by: robot.sonic on Jun 15, 2011, 04:25 PM
Sir TSO,

How about pse? Dumadami na kasi mga nagiging public na companies e. So lalaki din kita nila sa palagay ko.
Title: Re: TSO's Request Corner
Post by: TSO on Jun 18, 2011, 09:36 AM
To everyone,

I'm going to be migrating my analysis geography to the US after I submit my report on MWC to its two requesters, as I have just read the July 2011 issue of Smart Money and found 5 low PE US-listed companies to screen, analyze, and add to my US portfolio (virtual... then real money come the July-end paycheck yeehaw! XDDDDD)

Although I will be posting my findings here on my thread (to the benefit of anyone who is investing in the US market), be warned that my personal interests may override that of anyone requesting for me to analyze or even screen Philippine companies.

Thanks for your understanding.

Yours,
The Silent One
Title: Re: TSO's Request Corner
Post by: singkit_1588 on Jun 18, 2011, 10:41 AM
"TSO means The Silent One"??

cool..
un pala ibig sabihin nun..
Title: Re: TSO's Request Corner
Post by: TSO on Jun 18, 2011, 10:54 AM
If you're curious, you could trace it back to Ragnarok Online.

I used to be a savvy poster (frequent... despite the fact I made the account with the intention of being a plain lurker) there under my full username at the pRO ragnaboards' Sage and Professor job class discussion threads with a guide of my own, hellbent on providing statistics, probabilities, and professional-level research.

Of course, said forum is now defunct and inactive, to my disappointment as I enjoy reading the fiction there and participating in "writer's challenges". :P (I even had my own story X3)
Title: Re: TSO's Request Corner
Post by: PLC on Jun 18, 2011, 11:44 AM
@TSO
what platform are you using for your US portfolio? schwab?

RIM's been taking some heavy hits lately. 1/5 of the recommendations on the stock pegged a sell on it after it cut quarterly profit forecasts again. vaguely interested?
http://finance.yahoo.com/echarts?s=RIMM+Interactive#chart5:symbol=rimm;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Title: Re: TSO's Request Corner
Post by: TSO on Jun 18, 2011, 12:57 PM
^ Virtual pa rin US portfolio ko. Will be putting in real money after my July-end paycheck. :D

I'm intending on going for E*Trade or some brokerage that can match $8 per trade.

Re: Research-in-Motion

I have nothing to say about the inherent stability of the firm, but I love the financials.

No interest-bearing debt, decent liquidity, and consistently high profitability. Get this, if I work with just "back of the envelope" computations of EPV, at a 15% discount rate and assuming RIM's revenues never go below $11B a year, we get an EPV of about 8.5B.

Current price 68% above this rudimentary computation. That's actually good... considering the company only needs to earn at least $16B a year in revenues and maintain its excellent cost controls just for its EPV to match the current price of 14.27B.

In this case, RIM is definitely something worth looking into... I'll add it to my list. :) I'm more worried about its ability to maintain $16B at a minimum or how modest its growth prospects are...

Still, I'll look into it.

*adds it to backlog*

Post Merge: 1308374023
Oh, and if you're curious on how I computed it. I took all numbers from Google Finance.

Revenues == assumed to be 11,000. Based on 2009
OPINC == 4Y median of operating margins (23.3%, 21.7%, 24.6%, and 28.8% from 2011 to 2008, moving backwards)
Growth R&D == 2011's 336.19. Constant revenue growth allows for usage of turnovers to estimate growth-related expenses
Growth SG&A == 2011's 595.99. Same as Growth R&D. Used SG&A as OPEX is too large.
Taxes == assumed tax rate of 35%, far above median of 28%. Did it for conservatism and to eliminate "Skillful" tax management
>>> We have an Maintenance NOPAT at 2162.30M
Excess D&A: 15% 2011 D&A
Maintenance CAPEX == 2011's 1200M. Obtained by subtracting est. growth CAPEX from total.
Owner earnings: about 1030M
Capitalized at 15% rate (Cannot rely on US exchanges to derive market-implied cost of equity) to hit unadjusted Zero-growth value at 6861M
Added back cash in excess of 5% revenues (1621M)
No long-term debt.
Other adjustments applied.
>>> Final EPV of 8620M, implying an "adjusted income" of 1293M

Current price of 14270 is 66% above final EPV (still safe), and 11 times the adjusted income, so it's still within the range of being cheap.

Further screening must cover:
1. Qualitatives, as the 49% 3Y CAGR of revenues  isn't sustainable and is likely to fizzle out
2. Market-implied growth rate, and effects of failure to meet it.
3. Efficiency indicators
4. Ability to absorb debt and use excess cash.

Also note: company has very high ROA's, never below 20% since '08. That's another good sign.

Title: Re: TSO's Request Corner
Post by: anm1 on Jun 18, 2011, 08:42 PM
I really like how TSO makes his analysis so detailed.  But still you must see things as a whole and make  decisions on your own.
Title: Re: TSO's Request Corner
Post by: GIG on Jun 19, 2011, 07:03 AM
The Silent One! I think that's the understatement of the year hehe!
Title: Re: TSO's Request Corner
Post by: gatsmavi on Jun 19, 2011, 07:24 AM
.
Title: Re: TSO's Request Corner
Post by: PLC on Jun 21, 2011, 11:29 AM
looks good. thanks for putting it in terms of EPV too. i don't do EPV as much as i do projections so that's a different way for me to look at it
Title: Re: TSO's Request Corner
Post by: TSO on Jun 21, 2011, 12:16 PM
No problem. Actually EPV is also a projection into the future, except you're assuming zero growth on a level of revenues you definitely know the company is almost guaranteed to meet in the next few years to come (i.e. revenue figures below that amount has an extremely low chance to occur... unfortunately I have no way of objectively quantifying the probability).

Bruce Greenwald makes it look so complicated in his book, with all those confusing terms like "income as adjusted", "adjusted income after tax". Even the name of the valuation tool is complicated! "Earnings Power Value", yet it all points to "sustainable earnings".

What is capitalized in EPV is actually maintenance free cash flows, following the traditional computation of "NOPAT + D&A - CAPEX". It took me a while to grasp that myself, but once you look at it from that framework, suddenly EPV becomes clear.



Also I've been reading Damodaran's Book on Valuation. I know I should be putting up the most important ideas he has particularly about the use of "relative valuation" (rather than direct valuation, i.e. DCF).

What I learned from that book is either striking, or well, so basic that I didn't understand it until I had to cogitate on WHY everyone -- even Greenwald -- takes out long-term debt from capitalized NPV's.

Valuations attack either the firm or its outstanding equity. If you're going for equity, you subtract everything from the enterprise value (or "asset value" if you want to keep things simple) that has to do with debt. You do this intuitively when you're basing valuations on book value or you're working with NAV.

To do this in a discounted cash flow valuation, your options vary:
a. Discount the future profits first, then subtract the entire value by debt (preferably at its market value)
b. The future profits already processed debt. Typically, that means including interest and debt obligations in the projection of said profits.
c. Using NOPAT to compute Free Cash Flows would produce FCF for the Firm. Using Net Income, on the other hand, produces FCF for the Equity, but you still need to account for principal payments. That's where (a) would come in handy. Then there is also the path of adding "net debt availments (repayments)".

The discount rate used also depends. If you're going to take out debt after getting the net present value, you use WACC. Otherwise, you would use the cost of equity. An arbitrary, subjective estimate of risk is equivalent to an implicit assumption on this discount rate, but in this case, it looks more appropriate to substitute it for cost of equity since it reflects on YOUR minimum rate of return, not necessarily the creditors'.

Any thoughts?



Anyway, RIM's probably going to be the first company I'm going to screen once I've gotten some rest. Since they're software suppliers, I'm probably going to start scouting out the end product. The Blackberry, right? Is RIM catering to anything else?

I'll get to work on it sooner or later. Typing that report on Manila Water was hell. Got hit by writer's block multiple times... probably because it's a 27-page document. :P
Title: Re: TSO's Request Corner
Post by: PLC on Jun 21, 2011, 01:33 PM
greenwald's methods sound interesting. any books from him that you recommend aside from 'from graham to buffett and beyond?'

yeah, blackberry. i don't think they're operationally affiliated with anything else.
looking forward to MWC as well
Title: Re: TSO's Request Corner
Post by: TSO on Jun 21, 2011, 01:46 PM
I've been trying to look for his book about "investing demystified", as I've never read it. At any rate, Greenwald's book is enough for me. OH! You may want to check out Expectations Investing by Michael Moubossini and... some guy whose name I forgot. It's a good one, also. I've never read it though, but apparently I've been doing it by instinct ever since I discovered "Reverse-engineered DCF" in Montier's book on Value Investing.

Of course, EPV is said to be an excessively conservative valuation measure (coming from an experienced analyst I am not obligated to name here) and exposes you to Type 2 errors (i.e. opportunities lost because your demand for safety was too high). Funny thing is, through the wonders of algebra, I found a way to compensate for the low valuations and determine "acceptable overvaluations" still within the realm of safety.

As for Manila Water, expect my report to come out by mid-July. I don't disseminate my reports to the public until at least 2 weeks after submission to the requesters, whether it's a deep scan or screening.
Title: Re: TSO's Request Corner
Post by: singkit_1588 on Jun 22, 2011, 12:20 PM
PSE-PH..

 :thankyou:

Title: Re: TSO's Request Corner
Post by: SAMPUSAMPU on Jun 24, 2011, 03:48 AM
MR.TSO,
PASUYO NAMAN ANG JFC IF POSSIBLE. :thankyou:
Title: Re: TSO's Request Corner
Post by: GoodSteward on Jul 02, 2011, 02:05 PM
@TSO,
I know you'll be focusing on US stocks after MWC analysis.

But please, kung may time you baka pwede pakisingit FOOD?

May PSE-PH at JFC pa nakapila, hopefully FOOD will catch your interest. Its because FOOD has a big drop recently, but based on news report their business operation seems to be doing well, im wondering if this is an opportunity.

Thanks!



Title: Re: TSO's Request Corner
Post by: TSO on Jul 03, 2011, 04:15 PM
Just because someone requested it on my thread doesn't mean I already accepted it. I neither posted my acceptance of the PSE request nor sent a private message to the requester indicating the same. Furthermore, I did not take on the responsibility of going for JFC.

I'm already in the middle of analyzing ALV, so I'm afraid I won't be able to take up the request to study FOOD...
Title: Re: TSO's Request Corner
Post by: c_lmc on Jul 03, 2011, 07:21 PM
@TSO:

Just want to ask you what are the 5 crucial materials, documents or any source you begin with in making a quick screen or stock analysis? Are they readily available?
Title: Re: TSO's Request Corner
Post by: TSO on Jul 04, 2011, 01:03 AM
Yep.

I usually work with either the company's SEC filings (usually the 17-A's by themselves suffice) or their annual reports.

Annual reports: useful for divining management expectations and other information
SEC 17-A: useful for extracting information on the business not provided in the annual reports
Title: Manila Water Company Deep Scan
Post by: TSO on Jul 11, 2011, 01:19 AM
Attn: Everyone following my thread

As a month has officially passed since I completed my research of MWC, and two weeks since I sent my 27-page report to its two requesters, I believe I have given enough time for them to act on the information. Suffice to say, I no longer have any problems with disseminating the deep scan report in its full detail for my next few posts.

By the way, to update followers and would-be requesters on my activities, I am currently neck-deep in analyzing Autoliv (NYSE: ALV). This will be followed with either Research-in-Motion (PLC) or the Dr. Pepper/Snapple (me). I intend to work on GMA afterwards, as requested by Freefront. I may perform a short screening of a Philippine company in-between any of these.

That'll be all. :)

Yours,
The Silent One



Manila Water Company
Country: Philippines
Ticker Symbol: MWC
Industry: Public Utility – Water Delivery and Sewage Sanitation
Current Price: P19.34 a share
(represents 38.88B in market cap)
Periods analyzed: 2004 to 2010
Date started: 10 May 2011
Date finished: 6 Jun 2011


I. DEMOGRAPHICS

The Manila Water Company, or MWC, is an Ayala-owned subsidiary whose headquarters is based next to UP Diliman. Engaged in the delivery of clean water and sewage sanitation services, the water utility has been a concessionaire of the government’s Metropolitan Waterworks and Sewerage System (MWSS) since 1997.

Through a concession agreement with the MWSS that has been extended to 2037, the MWC has been granted exclusive operating rights on the East Zone of Metro Manila, covering—as of 2007—6.2M people in 1.4M households in both Metro Manila and Rizal:
 
-   Angono
-   Antipolo
-   Baras
-   Binangonan
-   Cainta
-   Cardona
-   Jala-jala
-   Makati
-   Mandaluyong
-   Manila (part, roughly 10% of city)
-   Marikina (part)
-   Morong
-   Pasig
-   Pateros
-   Pililla
-   Quezon City (part, roughly 40% of city)
-   Rodriguez
-   San Juan
-   San Mateo
-   Taguig
-   Tanay
-   Taytay
-   Teresa
 

In more recent years, Manila Water has expanded to supply water to key areas beyond Metro Manila. In 2009, the company acquired a 70% joint venture covering the city of Sta. Rosa and the municipalities of Biñan and Cabuyao. Major businesses and industrial parks reside in this region. (Source: GMA News 7/21/2009 (http://www.gmanews.tv/story/167864/Manila-Water-acquires-Laguna-water-supplier))

In 2010, the company formed a joint venture with the Philippine Tourism Authority that will develop, operate, and manage the water and wastewater infrastructure of Boracay. Finally, the company has expanded its operations to Vietnam, India, and Australia, through a combination of management contracts and investments.

II. RISK ASSESSMENT

Executive Summary

Manila Water was one of my first investments, and it has been a staple of my portfolio since a few months past its inception. Like all the securities I have chosen, not once did I refer to Citisec Online’s estimates of MWC’s intrinsic value, preferring instead to “think for myself” and compute it on my own.

Back then, I was a complete novice. Whatever education I have had in the field of accounting and financial statement analysis became useless when I realized I didn’t know what to look for in a company worth parking my money in. Like any college student armed with a box of tools, I haphazardly utilized the equipment I had at the time, working on my limited knowledge.

Recasts of the income statement were terrible. I encoded the balance sheets without bothering to understand them as I went on. I did not even look at the cash flow statements. The only thing I did well was record key operating statistics, but this was undermined b excessive tunnel vision and an inability to relate them to growth.

Nonetheless, I managed to set up a very basic financial model based on income statement forecasts and used free cash flows as the foundation, employing a scenario analysis I still utilize today. The results were… mixed, I must admit. Pessimistic and neutral told me MWC was overvalued. Optimistic, along with a very low discount rate, were quite close—but lower than—COL estimates. Obviously, I ended up cheating.

This was two years ago.

Revisiting Manila Water was like a walk through memory lane, except that I had two years of equivalent experience under my belt and embodied an investment philosophy that just wasn’t there the last time I dived into this company.

MWC is just the same as I tackled it. The strategy, however, was not. Manila Water, sad to say, doesn’t have any hidden assets. If there was something I did notice, however, it was the fact all annual reports earlier than 2009 did not reflect the current expiration year of the Concession Agreement it has with the MWSS.

Aside from the implications (higher net profits, assets, and lower depreciation expenses), that’s all the company had to it. However, what attracted my attention were the growth prospects available to Manila Water’s water operations in the Philippines. (Refer to “Future Prospects” and “Value of Growth” under Valuation Analysis.)

Combined with solid creditworthiness, a track record of increasing efficiency, and excellent returns 70% influenced by business operations, MWC deserves a low risk rating. However, the looming water shortage—projected by the government to hit Metro Manila on 2015 (with personal estimates setting it on 2030)—is a major threat to MWC, not in the sense it could permanently lose its business but rather in the sense capital expenditures addressing the Angat Dam capacity and the production rate of its treatment plants may harm the investors’ free cash flows. Given this, my perceived risk level for MWC is LOW-MED, translating to a weighted average cost of capital (WACC) of 11.72%.

Adjustments to the Financial Statements

I scoured Manila Water’s financial statements, specifically their investments and fixed assets (Service Concession Assets & PPE), in an attempt to find anything worth adjusting the financial statements for.

However, the company’s joint ventures, particularly the Boracay and Laguna utilities, are subsidiaries where MWC is a controlling entity. The management contract business has incurred operating losses since their beginning on ’08. Assets held in these accounts are also marginal in comparison to total assets (think 41M vs. East Zone’s 46.6B)

 The JV MWC entered into with Jindal Water Infrastructure Limited did not earn profits on FY2010 and the acquisition costs were a mere 7.133M. The JV’s board of directors allotted a USD1.9 million budget for development expenses for the next three years, half of which was going to funded by MWC…a petty sum! It wouldn’t be farfetched to think losses are going to arise in the first few years of operations, so despite the potential for growth, it is too speculative to toss in as a hidden asset.

Next, Service Concession Assets represent the “present value of total estimated concession fee payments, including regulatory maintenance cost, pursuant to the Group’s concession agreements and the costs of rehabilitation works incurred.” In other words, all projected fees, regulatory costs, and other pecuniary obligations of SCA take into account items that would arise in the future. Nothing there.

However, given the fact Manila Water has extended its Concession Agreement (CA) with the MWSS and has also acquired two 25Y CA’s in Boracay and Laguna, then I had an inkling that past depreciation expenses published in the annual report just wouldn’t be restated for the new CA expiration year.

Adjusting SCA Amortization to reflect the 2037 expiration increased reported net income by 20% at a minimum. Of course, the effect on balance sheet items is minimal at best: Net SCA rose by 3~4% on average, and Total Assets, around 2%. Asset turnovers are unaffected, while accounting-based profit margins rose.

Also, a curious thing I noticed is the structure of Manila Water’s income statement. The format used in computing pre-tax net income is “revenues less expenses plus/minus other items”. This was recast into something similar to a contribution margin format, which defined operating income as “revenues less direct costs and corporate expenses”. The lack of specificity on the expense items’ definitions made classification difficult and subjective in nature. I did this to the best of my ability and categorized the following expenses as such:

Direct
Salaries & wages applicable to employees & managers of East Zone Operations, Operations, & Project Delivery divisions; power, light, & water; water treatment; wastewater; repairs and maintenance; regulatory (could be very well be corporate though); insurance; mgt, technical, and professional fees; transportation and travel; and, costs from contracts outside East Zone.

Corporate
Salaries & wages for non-operating employees & managers; taxes and licenses; entertainment and recreation; collection fees; occupancy costs; advertising; provision for losses; postage, telephone, and supplies; premium on performance bonds; others; and, D&A.

Also, the “other income” lumped in with total revenues have been brought to nonoperating items, with the rationale being that “sales of inventories”, “reopening fee”, “septic sludge disposal & bacteriological water analysis”, “sale of scrap material”, and “miscellaneous” revenues do not represent Manila Water’s business of water distribution and sewage sanitation.

All quantitative analyses, except segment analysis, utilized the recast and adjusted financial statements. Note that Manila Water does not add back the non-cash expense “Provisions for Losses” in its cash flow statements. Due to balance sheet balancing issues, I opted not to add these provisions back, even if it would’ve raised operating cash flows before working capital by 2 to 7 percent. (To compensate, the provisions are actually considered in the growth valuation.)


To be continued...
Title: Re: TSO's Request Corner
Post by: pinoy_abroad on Jul 11, 2011, 03:26 AM
Sir TSO,

I am looking forward to your analysis DPS (U.S)... Could this be as successful as KO or PEP? Thanks..
Title: Manila Water Company Deep Scan (continued)
Post by: TSO on Jul 11, 2011, 04:42 AM
Sir TSO,

I am looking forward to your analysis DPS (U.S)... Could this be as successful as KO or PEP? Thanks..

Alright. I'll add you as a requester of DPS then. :) You will be kept abreast of updates every time I work on the analysis.

OH, and thanks for replying. Because of you, I can post Part II of my MWC analysis ^^



Creditworthiness
MWC is a resilient bastard when it comes to debt. Even though its assets have been historically 60% debt-funded. Even though 70% of this debt arises from capital expenditures rather than SCA obligations, which merely represent duties such as the repair and maintenance of infrastructure.

Whether you use Operating Cash Flow’s before Working Capital, Adjusted EBITDA, Net OCF, Residual Free Cash Flow, or Net Operating Profits after Taxes, Manila Water earns over 20% of total liabilities on average. Although current figures are lower than average and closer to the 7Y median, these are still really high and indicate medium-term repayment.

Total debt is usually 2.5× residual FCF’s. Current figure of 3.44× comes only as a result of higher principal payments and lower debt availments.

Boosting Manila Water’s creditworthiness are an awesome combination of sufficient liquidity and conservative but great earnings coverage. Cash can literally pay 73% of current liabilities, with the receivables taking care of the rest. All current assets, in fact, exceed current liabilities, even if supplies and prepaid expenses have been precluded.

Earnings coverage basically measures the margin of safety (or lack of it) arising from the discrepancy between the sum of obligations and a selected profit metric. I took the liberty of assessing this protection using several profit metrics and incorporating principal payments, interest charges, preferred stock dividends, and occupancy costs in the denominator.

As of FY 2010, MWC has generally exceeded the long-term averages for earnings coverage, with the lowest of them being 1.35× (Adj. EBITDA) and 1.48× (FCF). Aside from the former, the excess of current figures were about 11% across all profit metrics except Adjusted EBITDA.

Nonetheless, the fact remains there is a large safe zone between obligations and profits. This is a crucial element considering I expect Manila Water to pay anywhere from 17.5B to 27.5B in principal payments of only its currently outstanding LT debt from 2011 to 2027. Depending on the interest rates the company will pay on its LT debt (based on historical figures: 6Y low, 6Y median, and 6Y High plus a 2% premium for conservatism),  foreign exchange (USD:PHP, JPY:USD, & EUR:USD), and MWC’s or its lenders’ decision to call its bonds or assign the put on the peso loans, my estimates of MWC’s yearly required payments fall in the range of 1.2B to 2.35B.

It is amazing how the profit metrics used exceed the minimum level of 1.2B. Clearly MWC is more than capable of meeting these required payments.

Lending strength to MWC’s long-term profitability—and perhaps guaranteeing solvency—is its stable business character, with potential for further growth. (Refer to “Inherent Stability” for more information.)

Warning: this analysis on creditworthiness does not and cannot consider future availment of long-term debt and their repayments.

Efficiency
MWC, unfortunately, appears to fall short when it comes to the efficiency in sales generation with respect to the amount it has invested equity-sourced and debt-financed funds in its assets. However, MWC strives hard to operate efficiently and has consequently landed itself a track record of smooth operations that it now totes in its annual reports to this day.

While I try to look at Manila Water’s numerous KPI’s ranging from the number of households desludged to the 24-hour availability of clean water, the key metrics I actually emphasized were their employees, their household connections, their billed volume, their non-revenue water ratio, and the production capacity of the Balara treatment plants.

Employees
The number of employees under Manila Water drifted around 1,563 people with minimal variation over the past seven years. Not a single year has passed when this number dropped below 1,500.

A majority of these people are staff and managers responsible for the company’s water and wastewater operations in the concession areas, probably assigned to East Zone Operations, Operations, and the Project Delivery divisions. The 2010 figure of 82% operating employees can be traced to a 35% increase in corporate workers (from 213 to 287) and around 36 terminations in operating employees (from 1,338 to 1,302).

It is ostensible MWC is focusing on management and other administrative functions. Despite this, the amount of operating staff servicing one thousand HH connections has significantly dropped by 40% from its ’04 level.

In other words, the company is maximizing the talents of its employees.

Household Connections
HH connection is a KPI crucial to the valuation process as it can be used to represent the level of Manila Water’s penetration of the East Zone, Boracay, and Laguna. The company has grown to 1.18 million HH last fiscal year from merely 717 thousand on ’04, or 418 thousand on ’00, representing a 10Y CAGR of 10.93%, notches faster than the East Zone population’s 3.7% 7Y CAGR growth rate from ’00 to ’07.

Manila Water’s market penetration moved from 39.15% on ’00 to 58.1% on ’04, then onto 76.3% on ’10. I don’t think it’s illogical to consider the idea that MWC’s level of penetration would slow down as it approaches 100% (similar to a logarithmic function) and mirrors the growth in population. It is in fact, more conservative than extrapolating the 6Y growth rate or executing linear regression on the data, which assumes maximum penetration by the year 2019 (whereas it would be 85% on a logarithmic trendline provided by MS Excel)

I estimated the size of the East Zone population by gathering population statistics of every municipality and city under Manila Water’s jurisdiction. The word “estimate” was used due to the fact MWC shares certain locations in Metro Manila with Maynilad, specifically Quezon City and Manila, as identified in the MWSS’s website (http://mwss.gov.ph/services.php), leading me to guess on how much percent MWC is in charge of them. However, any other visitors would notice that the company seems to control merely part of Makati, Rodriguez, and San Mateo—take note that the size of its control over these areas (there should be a map somewhere in the MWSS’s site. I just forgot where the link was) is so large it might as well control 100% of them.

Extrapolation of the East Zone population growth rate beyond the period from which its 7Y CAGR was obtained as the Philippines only conducts a census once every three years and even then, the statistical data doesn’t come out until one to two years thereafter.

I have also looked into the population statistics of Boracay (Manoc-manoc, Balabag, and Yapak) and Laguna (Sta. Rosa city, Cabuyao, and Biñan). As MWC does not disclose how many HH it has connected to in these regions, I merely derived the numbers from East Zone’s operational data, thus making implicit assumptions on their billed vol. per HH and water revenues earned per cu.m of demand.

That said, the captive market is an extremely important component of MWC’s terminal value. Please refer to “Growth Prospects” and “Valuation Analysis” for more information.

Supply and Demand
Currently, MWC’s treatment plants can handle approximately 628 mcm at most. Billed volume, on 2010, stood at 65% of this capacity, with the “supplied volume” slightly higher (i.e. vol. of water before pipeline losses). The discrepancy between supplied and billed volume has dropped significantly from what it was in ’04, due to improvements on MWC’s non-revenue water ratio (compare 43.4% on ’04 to 11% on ’10).

A quadratic equation derived from population data and billed volume suggests that 2,409,856 HH are necessary to saturate the production cap of 627.8 mcm, implying a unit demand of 260.5 mcm per year. Extrapolating the 7Y growth rate to the forecast periods indicate MWC has until the year 2019 to increase its treatment plants’ production rate and meet the growing demand as it captures more of its captive market.

Refer to “Stability Analysis” for more information.

Cash Conversion Cycle
If there’s something that’s likeable about MWC’s accounting-based KPIs, it’s the fact its cash conversion cycle, i.e. the period in which measures the time (days) between outlay of cash during the production process and cash recovery from sales and collections, net of payments made to satisfy trade creditors (Investopedia (http://www.investopedia.com/terms/c/cashconversioncycle.asp)), has been NEGATIVE for all years since ’04, becoming more negative as the years passed.

Why is this a good thing? It simply means the company is collecting money first way, way, way, waaaay before they need to pay their payables. Case in point:
1.   A/R generally takes 31 days to collect, with ’10 data worse than the average, being 47.
2.   Days’ Purchases Outstanding currently stands at 460 (coincidentally the long-term median), its high number attributable to the fact direct costs are materially comparable to operating payables.
* Manila Water does not rely on inventory in its business model, and if it did, the impact would obviously be minimal

Asset Turnovers
Last but not the least we have the turnover ratios, the analysts’ most basic form of efficiency, measuring the company’s ability to extract revenues per unit of investment in its assets.

Surprisingly, despite all the glowing remarks I have said so far about Manila Water’s perennial quest for operational efficiency, the company’s turnover ratios aren’t so jaw-dropping. They are low—extremely low—never breaching 0.50×. It doesn’t matter whether the term “assets” refers to total assets, fixed assets, or net operating assets.

Worse, all current figures of the turnover ratios are slightly less than BOTH ’04 and average values, indicating inefficiencies in MWC’s ability to generate money for every unit of investment in capital.

As far as total assets are concerned, this decline could be traced to an increase in noncurrent assets, particularly deferred taxes and net fixed assets (PPE & SCA combined, growing from 1.2B and 30.8B on ’09 to 2B and 37.5B on ’10). The same could even be said for net operating assets, whose leap was boosted further by the phlegmatic growth of its operating liabilities.

Obviously, the inability to translate its operational efficiency into higher sales is an enormous burden on the company’s profit margins. (Refer to the next section, “Profitability”, for more information.)

While it would be easy to say MWC’s best option is to lay off the capital expenditures until it has acquired enough of the market to improve its turnovers, the fact remains demand would never curb to MWC’s favor. It is growing and would eventually pose a threat to MWC in the form of opportunity costs, unless significant investments are made in its production capacity over the medium-term.

Profitability
Owing to Manila Water’s excellent consumer advantages (i.e. the all but insurmountable switching costs), the company has historically enjoyed extremely high profit margins. Depending on the numerator, MWC earns on its revenues a median of 40.5% in net income, 42.6% in net operating profits after tax, and 53.7% in operating income, with low variation.

Expense Controls
The company’s expense controls have also been properly managed. Over time, Manila Water’s contribution margins have risen in spite of mounting direct costs, simply because the proportion of expenses with respect to operating revenues (water, sewer, environmental, mgt. contracts) have been dropping.

Salaries and Wages (41.4%), Power, Light, & Water (24%), and Professional Fees (13.4%) form the bulk of direct costs. Of the three, only professional fees appear to be the most controllable—in fact, they have been moving downward to 11.5% of direct costs on ‘10 since ‘04’s 14.2%.

This upward momentum is counteracted by corporate expenses, especially depreciation. These all add up to a 30% decrease of contribution margins on average, with the largest contributors being salaries (8%), provisions for losses (15%), and of course, D&A (52.5%).

D&A isn’t surprising considering the company is engaged in a capital-intensive business and is in fact financing its capital expenditures with a combination of operating cash flows and new debt. High depreciation is a good thing as it would reduce taxable earnings and, being a non-cash expense, increase cash flows. (In addition, if there comes a point where the high D&A results in lower net profits or even net losses, the resulting contraction in the market would provide an excellent opportunity to get in… but I digress.)

Provisions for Losses are rather conservative. The allowance for doubtful accounts assumes that, at present, 26% of MWC’s receivables are going to go down the drain. Being a non-cash expense, high provisions confer the same benefits as high D&A, although I am curious on why this account item is not included in the computation of OCF before working capital for the ’09 and ‘10’s 17A reports.

As of FY10, operating income stands at 54% of revenues, slightly higher than the 7Y average and a notch higher than ’04 (26%, to be precise).

The effect of nonoperating items—including the “other revenues” MWC so generously included in the top quarter of its income statements—has been marginal, as is the impact of interest revenues. The increase was roughly 5%... each. (Note the year ’07 was spectacular for nonops, increasing operating profits by 18% due to temporal FOREX gains and a lack of offsetting “other expenses” from asset sales and derivatives.)

This provides a small buffer against the company’s interest expenses, which have been growing—and are poised to grow—thanks to rising LT liabilities and the implicit cost of debt. The 18% 6Y CAGR in interest-bearing debt is already inherent in its capital expenditures and the improvements it made in its quest for efficiency.

Although the lenders’ required rates of return are low (already visible in the MWSS’s required cost of capital of 9.4%) and floored by MWC’s excellent competitive advantages, the company’s debt is allocated among Philippine Peso, Euro, US Dollar, and Yen currencies, exposing the company’s principal and interest payments to foreign exchange fluctuations. Combined with the need to pursue further improvements in operations and the ability to service the market demand, the expected rise in CAPEX will surely result to more availments of debt in the foreseeable future… unfortunately, the magnitude of investments are virtually unknown.

Moving on to income taxes, ignoring the special tax situations created by the income tax holidays for years ’04 to ’06, Manila Water’s effective tax rates ranged from 23.7% to 34.5%, and has always been below the statutory rates of each respective year. (For the past two years alone, effective taxes were at 24% of net income). Interest income and nondeductible interest have always been the most frequent adjustments made to statutory taxes, but their ability to decrease tax liabilities pales in comparison to the powers of “changes in unrecognized deferred tax” and, naturally, “others”.
* For valuation purposes, the tax rates have been assumed to be 26% for Zero Growth and 30%/24%/24% for Growth (P/N/O scenarios).

Combined, Manila Water ends up with robust net margins of 37% to 50%, and its performance last fiscal year is about 10% below the margin, at its lowest. I noticed this was attributable to high corporate expenses, high depreciation, high interest expenses, and average level of taxes. Previous years have obviously seen better.

In the end, a material portion of its net income is relayed to an ever-increasing dividend policy. Retention rates have been dropping from 41% on ’05 to 26% on ’10. Correspondingly, dividends have climbed 29% a year, growing faster than revenues and net income. Dividends per share now amount to 3.3× that of ’04. But the fact is, Manila Water’s residual free cash flows are so large, Manila Water, if it so wished, could afford tripling the 2010 dividend distribution and still come out with plenty of money for investments and actions that increase shareholder value (e.g. buybacks), even after paying its debt obligations.

From my point of view, the rather conservative dividend policy in respect to the level of cash Manila Water accrues every year is a sign of management’s optimistic outlook on future business operations.

Returns on investment
ROA ranged from 8.5% to 16%, with the current figure of 8.5% lower than the 7Y average, but the low value is attributable to higher D&A, corporate, and interest expenses along with decreased ability to translate operational efficiency to sales revenues.

Still, Manila Water’s leverage assures shareholders of equity multipliers no less than 2.2×, giving us returns on equity ranging from 22.5% to 37.3%. Current showing of 22.5% is 33% lower than the average, but again the reason falls upon the lower return on assets.

NOPAT margins hover within 40% to 50% of operating revenues. The same could very well be said for net operating asset turnovers. Returns on NOA averaged 21% with minimal volatility, and, when compared to ROE, affirms the dominance of operations in Manila Water’s overall returns on investments. Since 2005, the business’s operations influenced over 70% of ROE.

Also worth noting the RNOA figure is extremely high, well above both the MWSS’s regulated weighted average cost of capital (9.4%) and that derived from my elemental analysis (11.72%). Immense switch costs, rising economies of scale, and zero competition all but ensure the perpetuation of Manila Water’s ability to grow sustainably.

To be continued...
Title: Re: TSO's Request Corner
Post by: anm1 on Jul 11, 2011, 10:30 AM
Good job about MWC. Waiting for the next part. ; D
Title: Manila Water Company Deep Scan (continued)
Post by: TSO on Jul 11, 2011, 11:28 AM
^ Thanks for the reply!

Now I can post the third part :D

To all, if you need more info, just ask.



Inherent Stability
Manila Water, as an enterprise, is in an excellent business. Water is essential to life and nobody can live without it. The company, by virtue of distributing clean (and, their representatives allege, potable) water to tens of thousands of households in the eastern regions of Metro Manila and portions of the Rizal province, ensuring 24/7 availability, and pursuing environmental initiatives (e.g. the “Three River Master Plan”), is doing this country an immense service.

The sustainability of their operations extends to their fundamentals, and they clearly denote Manila Water’s worth as an investment.

Reliability of indicators
One of the first things you want to look for when it comes to determining inherent stability is the dependability of its financial statements. You would want as little discrepancy as possible when comparing accounting earnings and cash-based profits. Additional flags of reliability, i.e. the C and F Scores (concepts developed by Montier and Piotroski, respectively), help bolster trust in the published financials.

OCFs before Working Capital (OCFBWC) and Adjusted GAAP EBITDA have negligible discrepancies. Same can be said for Net Income before D&A and other adjustments versus plain NIDA.

However, operating cash flows and net income, both before interest and taxes, are more capricious in relation to each other, but the level of variation between the two are fairly consistent with OCFBIT being 30 to 40 percent higher than NIBIT. Changes in working capital are never more than 25% (increase or decrease) of OCFBWC.

Coincidentally, Manila Water’s C and F scores average at 2 (of 6) and 5 (of 9), which one can infer to mean reliability in the company’s financial reports, as seen in the low level of incongruity, and a moderate degree of value present in the company, as seen in the company’s history of efficiency, profitability, and credit standing, in addition to the competitive advantages it exploits and continue to possess over the long-term.

Competitive Advantages

~ Consumer Advantages ~
One of Manila Water’s greatest advantages in the water delivery and sanitation business is the fact its market can be made captive solely by geographical location. Barring the fact there is no other industry player in the East Zone, customers of Manila Water face extremely high switching costs—they’d have to move out of their homes and out of Manila Water’s concession area just to switch to Maynilad.

Furthermore, there are no other players aside from Manila Water and Maynilad, leaving households with the choice of either going with one of the two (choosing the other means moving out) or finding a way to supply oneself with at least 200 cubic meters (exactly 200,000 liters) every year.

Obviously, the costs to switch water utilities are almost insurmountable.

~ Economies of Scale ~
Manila Water’s business is ripe with scale advantages. Every drop of water, every cubic meter supplied and billed to the 1.18 million households it services, generates revenues and absorbs costs.

At this moment, Manila Water’s scale advantage is still based within the limited confines of the East Zone. Its expansion into Laguna and Boracay may pave the way to extending it beyond Metro Manila, and thus allowing it to generate value-adding growth from other regions.

Currently, the company is paying less than P15 per m3 of demand in operating costs, and has earned 1.76× this amount in revenues. At its highest capacity of 627.8 mcm a year in the East Zone alone, assuming nothing changes, the operating expenses spent per cubic meter would fall 35% to approx. P8 per m3. Operating revenues per unit of demand would also drop by roughly the same percentage to P17.29, yet the difference between revenues and costs rises from 1.76 to 2.16×.

This is bound to fall as Manila Water expands the distribution aspect of its scale economy.

~ Zero Competition ~
If there’s something I like about the business, it’s the fact the concession agreements are exclusive between the utility and the appropriate government unit, precluding competition for a long period of time, normally 25 years and renewable for another extended period.

Manila Water’s concession in the East Zone has been extended to 2037, while its Boracay and Laguna businesses have begun operations with a concession period ending on 2035.

Zero, long-term competition not only prevents returns on invested capital from falling down to and/or below the cost it accrues on them, but also encourages coordination from other players in the industry, especially if their supply of water comes from the same source.

Future Prospects
Despite the fact Manila Water is conventionally treated as a “value investment” by most people, its prospects for the future make it a dark horse for growth. The circumstances that paint its growth are two-fold: local and international.

While both are swathed in the shadows of obscurity and speculation, Manila Water’s case in the East Zone—and in Laguna and Boracay for that matter—exhibits a potential for slight growth.

I am not concerned with sewerage services here. Neither am I concerned with the company’s “environmental charges” (which I suspect is what the company receives for its “Three River Master Plan”). My focal point is on water.

And rightfully so.

Majority of Manila Water’s revenues are tied to water. In fact, their ability to generate cash and improve on their growth completely—utterly—depends on three crucial factors: one, market penetration; two, market demand; and three, the ability to meet the demand.

Market Penetration
Hither on the end of fiscal year 2010, Manila Water is laying siege to 76% of the East Zone and 13% of the Laguna-Boracay market. It has gone far from 58% and nix in the year 2004.

Manila Water’s expansion in the East Zone market has dropped in speed. It took seven years for the company to reach a 58% piercing since the MWSS decided to privatize its water and wastewater services in ’97—roughly 8.3% additional market breach per year, on average. Fast forward six years to 2010, and the company has only made a measly 18% headway from its level in ‘04—hitting about 3% additional penetration per year on average.

This decline in growth justified the employment of a logarithmic trendline of the historical penetration rates, which not only boasts a near-perfect fit to the base information but also presages an 82.5% penetration by six years. A complete contrast to the 100% foretold by linear regression.

Since the Boracay and Laguna regions are petty compared to the East Zone in terms of population size, for the sake of simplicity I lumped the two together and assumed the company would, mirroring its performance with the East Zone in the last decade, hit 60% penetration by ’16.

That Manila Water will be able to fully pierce its territories even after six years is doubtful. Or even during the 2017-2035 19-year period for that matter. Of course, this by no means denies the existence of the possibility. Valuations would be more conservative and realistic if terminal penetration is less than 100%.

Market Demand
Demand for water is growing.

That is an immutable fact.

For fiscal year 2010, we can derive from the estimated East Zone penetration rate and their overall demand the billed volume of the entire region, which is approximately 536 mcm.

This means this inference of maximum demand is well within the maximum capacity of 627.8 mcm, as implied by the 1720 MLD capacity of Manila Water’s treatment plants (2010 SEC 17A).

This means Manila Water can still set its sights on improving its network or the raw water supply.

This also means the company could have added as much as 2.75 billion and 1.24 billion in East Zone and Laguna-Boracay water revenues had they managed to secure full-blown 100% market penetration this year. (I am, of course, assuming the 365,708 households in Laguna and Boracay consume the same amount of water as those in the East Zone—346.64 m3 each.)

I’m not even taking into account of realism here: the amount of time necessary to meet 100%, the rerating of water rates during this time period, the fact environmental charges are proportional to water revenues, and naturally, any additional growth beyond maximum capacity.

It does not even consider population growth. The entire East Zone, from 2000 to 2007, grew at a rate of 3.7% a year, consuming more and more as the years elapse. A linear equation supposes 2,409,856 households are required to meet the maximum capacity (implying a per unit demand of 260.5 m3 per home)

“2.41 million” is not a product of baseless speculation on my part. Neither is the development of the linear equation. The two-variable function was formulated using historical and intrapolated data in respect to the billed volume per year. It was a matter of plugging in values and solving for the missing variable when it came to determining the number mentioned on the beginning of this paragraph.

Supply and Production
With the maximum capacity Manila Water is capable of providing stands at 627.8 mcm, any shortages that would happen will definitely be a humanitarian issue and a problem about opportunity costs. Investors in the company’s equity shares have dilemmas arising from two fronts, namely the supply of raw water and the treatment plants’ rate of processing raw water.

~ Supply of Raw Water ~
Angat Dam typically allocates 4000 MLD (approx. 1,460 mcm) to Metro Manila. This allocation cannot increase as Metro Manila isn’t the only recipient of the water it stores. If the amount of water in the dam falls, so does the allocation. The lowest supply I am currently aware of is 3045 MLD (1111 mcm), which was the allocation on September 2010 (Manila Bulletin, 7/11/2010 (http://mb.com.ph/articles/266356/mm-nears-water-crisis)).

The shortage is a question of when, not IF. It is also a question of why.

To answer the first question, my computations. based on population growth (3.24% for Metro Manila and Cavite/Rizal under Maynilad/MWC’s terrirories), the base population (2,654,065 HH for ’00), and the max water demand (4000 MLD), mark 6.88 million households as the level of population necessary to meet the highest capacity of Metro Manila (implicit demand of 218.6 m3 per unit per year), which we would attain by 2030.

Government estimates, on the other hand, gauge the shortage to occur on 2015, when the population would hit 15 million (about 3.33 million HH at ’07 figure of 4.51 people per HH) and require 5600 MLD or 2044 mcm, translating to about 614 m3 per HH (Inquirer, 8/28/2009 (http://www.inquirer.net/specialfeatures/watercrisis/view.php?db=1&article=20090828-222331)).

The point is, a shortage will definitely happen in the medium-term and the only thing that can be done about it is to be prepared.

Pointing fingers at the climate and pollution is not a valid excuse. Apparently, these two have a negligible effect on the Angat River’s supply of raw water, from which 97% of Metro Manila’s demand is sourced. (MWSS Website (http://mwss.gov.ph/water_supply.php))

If that’s the case, why do we have water shortages in the first place?

Perseus Echeminada of the Philippine Star assigned fault to the government itself (Philippine Star, 8/4/2010 (http://www.philstar.com/Article.aspx?articleid=599541)), citing a policy paper released by Forensic Law and Policy Strategies, Inc. (Forensic Solutions), a company that aims to be the “leading provider of forensic studies and policy strategies to the courts of law, the national and local governments, public officials, and the public in general” (Forensic Solutions website (http://forensicsolutions.info/aboutus.html)).

Forensic Solutions employs a team composed of former government officials, lawyers, and professionals of multiple disciplines, combining experience in public service, the private sector, and international practice. Key members of its team include Atty. Alberto Agra, Maricel Baltazar, Faye Josephine Miguel-Ranola, Lally Ortilla-Mallari, L.F. Cynthia Perez-Alabanza, and Mari Jennifer Bruce (Forensic Solutions Website).

Perseus wrote,

Quote
In a policy paper entitled “Tightening Water Regulation,” which forms part of the water series of Forensic Solutions, the group said the country’s water problem is actually ironic, because the country has enough freshwater resources, rainfall, surface water and groundwater to meet the requirements of the country’s ever-increasing population and rapid urbanization and industrialization.

“This menagerie of laws led to the current weak and fragmented institutional and regulatory framework in the water resources sector and the absence of an integrated water resources management that adopts a holistic approach to water sector demands.

With regulatory functions controlled by so many different agencies, enforcement becomes difficult, especially when mandates and accountabilities overlap,” wrote former Justice secretary Alberto Agra and lawyer Mari Jennifer Bruce, a specialist on water, energy and infrastructure and consultant of the Asian Development Bank.

(All emphases added)

Perseus quoted the paper, saying “although the NWRB is designated under the Water Code of the Philippines as chief overseer… NWRB actually shares, if not competes for, its ostensibly all-encompassing mandate with more than 30 other government offices and corporations….” (all emphases added)

Compounding the problem was the government’s lack of concern, as “suffers from underfunding…, which limits its ability to hire experts, obtain complete data for planning and management, and to regularly monitor water resources and water resource activities at the local and national levels.”

Quote
Citing official data, it said the country has abundant water resources, given the DENR’s disclosure that dependable surface water is at 125.8 billion cubic meters and groundwater potential of another 20.2 billion cubic meters.

The group likewise said that the Philippine Atmospheric, Geophysical and Astronomical Services Administration (Pagasa) had pegged annual rainfall at a low of 965 millimeters to a high of 4,064 millimeters.

To abate further water supply shortage, the group said measures must be taken short of an overhaul of the current water regulatory system. (all emphases added)

Running a Google search on Forensic Solutions, I found an overview of the paper and that of another report on their website, whose links I will provide for you to read on regarding water regulation:

Institutional Reforms in Water Sector (http://forensicsolutions.info/page2.html)
-   Water scarcity is expected to be experienced by 2025
-   Provides a functional chart of water-related agencies in the Philippines (http://forensicsolutions.info/graph.jpg):

(http://forensicsolutions.info/graph.jpg)

 

-   Attempts were made to integrate water regulatory functions (Senate bills 518 and 799 by Jinggoy Estrada and Bong Revilla), but did not proceed beyond submission to Congress
-   Concludes that NWRB’s power must be emphasized  “to ensure that it has the capability to steer all other agencies involved in the water sector towards the proper and uniform implementation of regulations and policies”.
-   Cites 31 sources, all official information.

Tightening Water Regulation (http://forensicsolutions.info/page1.html)
-   Contains most of the information P. Echeminada reported in his article
-   Second paragraph discloses that 67% of river systems unsuitable for public supply and 58% of groundwater contaminated.
-   Describes the NWRB as the primary agency for “water resource regulation and control over the utilization, exploitation, development, conservation, and protection of water resources” and “authorized to issue water permits for use and appropriation of water…to allocate water resources, and to determine the most beneficial use of water” as the “economic regulator of water utilities other than those under… LWUA and MWSS”. (Personal note: Information in NWRB website points to itself as an attached agency of the DENR and “the lead government agency for the water sector in the Philippines”, conferred with “policy-making, regulatory, and quasi-judicial functions”.)
-   Problems:
o   As said in Echeminada’s article, regulatory functions over water belong to over thirty agencies and overlapping mandates/accountabilities, resulting in “weak and inconsistent enforcement of water-related laws”. The coordinating agency is in itself weak.
o   Said to be underfunded, which I personally confirmed by going to the Department of Budget and Management’s website (http://www.dbm.gov.ph/index.php?pid=8&xid=28&id=1364)). 2011 budgets are as follows:
   NWRB: 42.3 million
   Games and Amusements board: 49.72 million
   National Research Council of the Philippines (http://nrcp.dost.gov.ph/index.php?option=com_content&view=article&id=11:vision-mission-mandates&catid=39:about-us&Itemid=55) (committed to promoting and supporting basic and problem-oriented researches… to identify and provide solutions to national issues and problems….): 38.93 million
   DPWH: 100.83 billion
   DENR’s Environmental Management Bureau: 699.3 million
   Energy Regulatory Commission (http://www.erc.gov.ph/) (the equivalent of NWRB but with energy, promulgating/approving rules, enforcing them, issuing/revoking permits, etc.): 195.5 million
   Philippine Sports Commission: 168.7 million
   Philippine Carabao Center: 600 million

Clearly, the water shortage is a matter of politics. The lack of concern is troubling—can you imagine, the SPORTS commission is being given almost four times the amount budgeted for the nation’s water resources?

This only serves to complement the fact a water shortage will occur in the future. The only thing both Manila Water and Maynilad can do in this situation, aside from using corporate clout to spur changes in the regulatory bodies, is to fund capacity expansion programs for Angat Dam or seek new sources of raw water.

Neal Cruz, a columnist of the Philippine Daily Inquirer, called for consideration of the Wawa Dam instead, holding the opinion that the Wawa River has the potential to supply 1500 MLD (PDI 1/25/2010 (http://opinion.inquirer.net/inquireropinion/columns/view/20100125-249274/Wawa-Dam-or-Laiban-Dam)). Caroline Howard of ABS-CBN News Channel posted an article almost six months later with the same information going public, along with an accusation of Manila Water is selfish, wanting to develop the dam themselves (ANC 7/21/2010 (http://www.abs-cbnnews.com/anc/07/20/10/wawa-watershed-answer-metros-water-woes)).

How much would it cost to expand Angat Dam? How much would come from Maynilad and from MWC? How much of these capital expenditures would be funded by debt? By operating cash flows?

I could not find any information relating to these questions.

Because politics and cutthroat business dominate every other issue concerning water (as the aforementioned sources indicate), there is no definite time frame when there may actually be a feasible answer to these problems. The solutions exist, yes. Their enactment, I don’t think so.


To be concluded...
Title: Re: TSO's Request Corner
Post by: c_lmc on Jul 11, 2011, 01:19 PM
Awesome work TSO. Is this a paid analysis or a labor of love? Hehe
Title: Re: TSO's Request Corner
Post by: bajoyjoy on Jul 11, 2011, 01:51 PM
Hello TSO , medyo OT ako

pede makahingi ng PDF ng intelligent investor and ng security analysis?

pls send to dextereous@yahoo.com

thanks in advance!

@dextereous
i have pdf of intelligent investor, PM me if u want a copy...

@TSO, great work you've done here, and best of all-- its free! you'd be earning tons if you will do this analysis for a fee (i previously got offered to make short articles like this for $18/page, but im no professional analyst so i declined, much to my regret).  anyways, keep up your "serbisyo publiko" and you will be rewarded in more ways than one...

btw, did u ever consider posting these great analysis on your own page/blog? i can give u one if you like, w/ only one condition: just keep the blog updated...para di ka na nakiki-"squat" sa PMT (of course you can post the link to ur own blog here so your avid readers can continue following your latest updates); just a thought..

lastly, what do u think of SMC's plan to launch an IPO for its power unit (San Miguel Global Power Holdings) within this year? what would be your tips to stocks dummies like me on deciding whether this is a good buy or not? any guidelines/opinions would be highly appreciated... tia...

Quote
SMC power unit readies $500M IPO
The energy unit of San Miguel Corp. will brave the equities market this year to raise funds for more aggressive forays into the country’s power industry, in anticipation of higher demand as the government’s infrastructure development program takes hold.

In a mobile phone message to the Inquirer, SMC president Ramon S. Ang said San Miguel Global Power Holdings Corp. was planning to raise “about $500 million” from foreign and local investors through an initial public offering this year.

The planned fund-raising exercise will mark the second such foray this year for the country’s biggest conglomerate by market capitalization after parent firm San Miguel Corp. raised $900 million three months ago—the largest equity sale in the country’s history.

Ang has identified Goldman Sachs, UBS A.G. and Standard Chartered Bank as underwriters for the international component of San Miguel Global Power’s IPO, while ATR KimEng Financial Corp. and SB Capital would handle the domestic component.

Reports of the planned share sale helped propel the share price of San Miguel Corp. to P130 apiece last Friday—its highest level since its “re-IPO” in early May. The share price has so far gained 21 percent from its P107-a-share trough recorded six weeks ago.

San Miguel, a century-old food and beverage firm, more than doubled its market value last year after expanding into oil, mining, power and infrastructure.

Ang said the diversification was meant to triple return on equity, which had averaged only 7 percent in the food and beverage sector in recent years.

In the first quarter of 2011, San Miguel’s energy businesses reported an operating income of P3.4 billion while the group’s net income for the period hit P7.1 billion from P2.9 billion in the same period in 2010 due mainly to its investments in the energy sector.

At present, the San Miguel group is already the biggest player in the power generation sector of the country with a combined generation capacity of 3,300 MW from the Sual coal-fired plant (1,200 MW), Ilijan gas-fired plant (1,000 MW), Limay thermal plant (600 MW) and the San Roque hydropower plant (340 MW).

Ang has also expressed interest in acquiring the Caliraya-Botocan-Kalayaan hydropower peaking plant as well as the Malaya thermal plant from the state-owned Power Sector Assets and Liabilities Management Corp.

It is also looking at other coal-fired power plants to take advantage of coal from the Daguma mines, which San Miguel Energy Corp, another subsidiary, acquired in 2010.

The company is banking on the expected sharp increase in demand for electricity as the Aquino administration’s Public-Private Partnership program begins to take off starting in the first quarter of 2012.

Title: Re: TSO's Request Corner
Post by: TSO on Jul 11, 2011, 03:30 PM
Awesome work TSO. Is this a paid analysis or a labor of love? Hehe

Labor of love for now.

Eventually I will seek commissions... like your typical DeviantArt artist. XD

@TSO, great work you've done here, and best of all-- its free! you'd be earning tons if you will do this analysis for a fee (i previously got offered to make short articles like this for $18/page, but im no professional analyst so i declined, much to my regret).  anyways, keep up your "serbisyo publiko" and you will be rewarded in more ways than one...

btw, did u ever consider posting these great analysis on your own page/blog? i can give u one if you like, w/ only one condition: just keep the blog updated...para di ka na nakiki-"squat" sa PMT (of course you can post the link to ur own blog here so your avid readers can continue following your latest updates); just a thought..

$18 a page? Seriously? I would charge a flat rate instead. Doing it on a "per page" basis could seriously open up a hole for exploitation. Why, for example, with my MWC report, I could put in 27 pages for the report, then chalk up another 10 for the raw information (the tables, the charts, etc.). Voila! Instant manipulation.

As for having a blog of my own, never considered it actually. You see, this thread is meant for two things: (1) discovery of more opportunities to personally exploit (thanks to the requesters), which I disclosed in my first post, and (2) proof of ability, because I will point it out in my resume. (I mean, COME ON, I'm not just providing analyses but also giving advice on how others can learn the trade. That must mean something :P Plus there are too many blogs out there...)

Quote
lastly, what do u think of SMC's plan to launch an IPO for its power unit (San Miguel Global Power Holdings) within this year? what would be your tips to stocks dummies like me on deciding whether this is a good buy or not? any guidelines/opinions would be highly appreciated... tia...

1. First of all, I never developed an interest in SMC in the first place so I don't have any information on it and thus I am not qualified to give an opinion.
2. If they're going to do a spinoff, you need to start doing your research NOW. Try to get the financial statements of the Energy unit from SMC's existing annual reports and see if it's worth getting into. DO NOT RELY ON THE PROSPECTUS ALONE.

I'm skeptical of SMC itself (thanks to bauer's extensive analysis), but perhaps the Power unit may have some value on its own.
Title: Re: TSO's Request Corner
Post by: c_lmc on Jul 11, 2011, 03:36 PM
@TSO

Off topic here a bit, but what were the red flags bauer indicated regarding SMC?
Title: Re: TSO's Request Corner
Post by: bajoyjoy on Jul 11, 2011, 03:59 PM
ayt, thanks a lot for your reply TSO, i wish u well in ur ventures and will keep reading your thread...

OT:
to those asking for the graham book, i just placed it in one of my idle blogs temporarily.=) pls see my signature na lang, the link will get u right to the d/l page...

@batangenyo, ur inbox is full, cant reply to your PM..

@goodsteward, link already fixed... thanks
Title: Re: TSO's Request Corner
Post by: medlifemd on Jul 11, 2011, 04:21 PM
@bajoyjoy: thanks for sharing! i've been looking for that for awhile now...
Title: Re: TSO's Request Corner
Post by: GoodSteward on Jul 11, 2011, 04:39 PM
@bajoyjoy, your link signature below doesnt seem to work?
Title: Re: TSO's Request Corner
Post by: anm1 on Jul 11, 2011, 09:56 PM
@TSO goodluck with your resume, you're a great analyst in the making.

Title: Re: TSO's Request Corner
Post by: bauer on Jul 11, 2011, 10:36 PM
tso,

im eagerly awaiting the mwc conclusion.  hope there is a future stock price estimate like 10 years from now?
Title: Re: TSO's Request Corner
Post by: TSO on Jul 11, 2011, 10:41 PM
There is.

Wait until tonight (US CST) when I get back from work. All my files are in my personal laptop.
Title: Re: TSO's Request Corner
Post by: pinoy_abroad on Jul 12, 2011, 10:52 AM
Sir TSO,

Hindi na kami kumakain sa kaaantay ng conclusion mo ng MWC..he he (curios lang sir TSO, anong price ka nagenter sa MWC)
Title: Manila Water Company Deep Scan (continued)
Post by: TSO on Jul 12, 2011, 11:02 AM
15.4. About 55% higher than EPV.



~ Treatment Plant Capacity ~
Even if the raw water supply exceeds demand by significant margins, the raw water must still be treated. Both Maynilad and Manila Water must invest in capital to improve and expand the processing of raw water.

Manila Water is currently developing a third plant in Rodriguez, Rizal to meet the demand for the region, providing about 100 MLD. It is a P3 billion plant scheduled to go online by 2012 (ABS-CBN News, 5/11/2010 (http://www.abs-cbnnews.com/business/05/10/10/maynilad-manila-water-preparing-against-2015-water-shortage)). As 100 MLD is equivalent to exactly 36.5 million m3, I came up with a figure of P82 million spent to increase treatment capacity by one million m3. This is probably an inaccurate figure, but something that other analysts may want to work with given the very limited data available publicly. It is unknown how much of the P82 million was sourced from debt, and how much from operating cash flows (the financial statements do not help. If capital expenditures is made the sum of that reported on investing activities and the availment of debt, the amount of capex being funded by debt ranged from zero to over a 100% without any consistency whatsoever. This is a problem considering, taking cues from its ’05 to ’08 SEC 17A’s) Manila Water’s management budgets its capital expenditures as a total figure funded by both OCF and Debt.)

Even without this information, anyone can tell the capital expenditures needed to increase both treatment capacity and water supply are going to be enormous. It is a great misfortune I could not find any information relating to this, as it would be of great use for the DCF valuation.

After all, this can be a serious threat for equity investors. Inaction may plateau earnings. Measures taken to address these may significantly increase capital expenditures, a scenario that perpetuates high leverage and effectively lowers the free cash flow from where investors’ dividends are disbursed, debt is paid, and cash retained.

International Business
So far, Manila Water’s steps into the international realm are manifest in India and Vietnam, through joint ventures and management contracts. Segment analysis reveals these businesses have resulted in operating losses for the past two fiscal years and obviously, these cannot be expected to start making profit until Manila Water has established its presence and acclimates to the working environment and thereafter controls its costs more effectively.

~ Vietnam ~
Manila Water engaged in a Leakage Reduction operation in Saigon, Vietnam. The project has exceeded contract targets and the amount recovered by 2010-end was within reach of the company’s Aug 2011 target.

Needless to say, SAWACO’s trust and confidence in Manila Water was heightened. Currently, the company is working with REE Corporation (one of the largest mechanical and civil engineering groups in Vietnam) and Mitsubishi Corporation in pursuit of more opportunities (2010 Annual Report (http://www.manilawater.com/downloads/MWC_ANNUAL.pdf)).

A disclosure on Manila Water’s website indicates that the three companies intend on pursuing projects within Ho Chi Minh city and its surrounding areas (Development Agreement (http://www.manilawater.com/downloads/ltr.PSE.sec.pdex.REE.Mitsubishi.Dec09.pdf)).

According to the Asian Development Bank, Ho Chi Minh City is gearing to fully serve the water needs of its population by the year 2025, which is currently at 76%. It aims to haul capacity from 438 mcm to 1277.5 mcm per year of treated water as well as improve its distribution network and storage system. To this end, the city needs capital of at least US$3 billion over the next 15 years (ADB: Country Water Action, July 2010 (http://www.adb.org/water/Actions/VIE/ho-chi-minh-helping-hands.asp)).

~ India ~
Manila Water’s joint venture partner in India, Jindal Water Infrastructure Ltd., is a 2006-established subsidiary of Jindal SAW Ltd., one of India’s largest industry houses and indigenous steel producer and exporter. Jindal opted to work with the company for future projects in Maharashtra, Rajasthan, and Gujarat. Aside from that, Manila Water intends to participate in a bid to handle non-revenue water reduction projects in Bangalore.

Rajasthan may have opportunities for the Jindal-MWC partnership as Rajasthan is a desert state in India where the government, just last year, commenced focus on community-level water management solutions instead of engineering-based answers to address the alarming water shortage arising from worsening groundwater quality and level, following a recent grant of Rs 4.5 billion for water-related projects (Rediff, 05/06/2010 (http://business.rediff.com/report/2010/apr/06/water-woes-rajasthan-focuses-on-community-solutions.htm)).

Gujarat, however, presents a very compelling opportunity, being the world’s largest producer of castor and cumin and of processed diamonds, and the 3rd largest producer of denim, among others. A primer on Vibrant Gujarat 2011 (http://www.vibrantgujarat.com/documents/focus-areas/water-conservation-details.pdf) (a investors’ summit held biennially) lists down the following investment opportunities in Gujarat:
-   Specific investments
o   150 MLD Seawater Desalination Plant for Industrial supply in Kutch (est. cost of Rs 700 crore, or Rs 7 billion)
o   45 MLD Sewage Treatment Plant in Rajikot (est. cost of Rs 80 crore or Rs 800 million)
o   Improvement of water supply and sewage system in Bharuch (Rs. 570 million), Amreli (Rs. 300 million), and Arnand & Mehsana (Rs. 66 million)
-   Project types
o   Bulk Water Transmission,
   long-term concessions of 25 to 30 years
   has potential of producing Rs. 300 billion over one concession cycle (est. Rs. 10.91 billion a year)
   Major projects
•   Navda to Budhel duplicate express line (76 km. length, 400 MLD)
•   Bhaskarupa to Navda bulk water pipeline (105 km. length, 436 MLD)
•   Bhaskarupa to Malia bulk water pipeline (140 km. length, 436 MLD)
o   Water Distribution Management
   Long-term mgt contracts for efficient service delivery mgt
   Reduction in NRW losses may increase profit and efficiency
   Potential of Rs. 2 billion per year
o   Comprehensive Data Acquisition and online water quality monitoring
   Potential to setup for 10,000 kilometer network – unknown how much revenue potential
   Data collection and analysis on automated systems
o   Desalination / Solar Distillation
   Meeting coastal regions’ water needs
   Industrial water demand and urban/rural water supply
   Jamnagar, Pipavav, and Dholera are potential desalination areas
   Projects start from 50 MLD, scalable to 200 MLD
   Approximate investment is about Rs. 21 billion.
o   Energy Efficiency
   Improve energy efficiency in bulk water and water distribution transmission projects
   Potential of approximately Rs. 200 million per year
o   Sewage Treatment and Drainage projects for municipalities and towns
   Over 60 towns generating over 20 MLD in effluent and waste, needing conventional STP’s and C-Tech Technology
   Cost for each STP approximately Rs. 50 million
   Five year period needed for implementation
o   PPP’s involving CSR
o   Comprehensive Water Supply Projects

To put things into perspective, one Indian rupee is currently equivalent to 0.9713 Philippine pesos. From the period of June 19, 2001 to June 17, 2011, the currency exchange rate has ranged from 0.9343 to 1.3021 pesos per rupee, with a median of 1.0982 (10 year INR:PHP history from exchangerate.com (http://www.exchangerate.com/past_rates.html?letter=&continent=Asia&cid=109-INR&currency=184&last30=&date_from=06-19-2001&date_to=06-19-2011&action=Generate+Chart)). Based on the ten year history, it is highly probable that 1 rupee will net 90 centavos at a minimum.  

The implication of this is, should the 50-50 Jindal-MWC partnership succeed in bagging even one concession agreement from Gujarat, Manila Water stands to collect an additional P4.91 billion in revenues yearly—that amount is about 55% of the 8.86 billion in water revenues earned within the East Zone on FY2010.

However, Jindal CEO Allard Nooy pronounced his opinion to the Global Water Intelligence that there is a scarcity in “commercially viable ‘24/7 water supply projects’ and concession opportunities in the market, and the ones that are available…do not have economically and technically realistic key performance indicators.”

For example, the joint venture pulled out of a 20-year concession bid with Aurangabad due to a problem with the contract, which probably held unrealistic expectations from both the would-be concessionaire and the project itself, due to the fact the concept of partnerships between the private sector and the government is fairly new to the local municipalities. There is, according to Nooy, a lack of skilled transaction advisors for India (not specialists or benchmarking expectations on foreign countries whose results are impractical), particularly in the areas of capital expenditures, construction and implementation periods, and NRW rates.

Still, the joint venture has recently signed several Memoranda of Understanding documents with the state of Gujarat to develop 24/7 water supply projects (which entail a combination of leakage reduction, billing, collection, and metering) in the cities and municipalities of Ahmedabad, Surat, Rajkot, Anand, and Nadiad. Currently, Jindal has six projects in India—pay close attention to municipals! The municipal water, wastewater, and NRW businesses are the reason why Jindal partnered with Manila Water in the first place—totaling to about $206 million so far (GWI, Vol. 12, issue 4, April 2011 (http://www.globalwaterintel.com/archive/12/4/general/jindal-takes-second-partner-expansion-plan.html)).

 
(http://www.globalwaterintel.com/client_media/images/articles/jindal.gif)



To summarize, Manila Water’s growth prospects are pretty good. In the local game, assuming the company can meet the demand, the likelihood it has only cornered about 76% of the East Zone population means we can still see some revenue growth from the East Zone in the medium-term. Laguna and Boracay’s potential impact on the income statements are still questionable, and the fact their population is smaller than the East Zone simply implies the East Zone is likely to contribute a significant amount in water revenues. However, the increasing demand means Manila Water will eventually have to move plenty of cash to build up both raw water supply and treatment capacity, whose magnitude is currently unknown.

Internationally, India illustrates a very compelling picture of growth. A water crisis is beleaguering the country and provides a great opportunity for Manila Water to pursue higher growth. Unfortunately, the government is still acclimating to the idea of working with the private sector and it may take a while before the joint venture signs a long-term contract that would be deemed lucrative and operationally realistic to its beneficial owners.

I have nothing much to say about Vietnam. Aside from Ho Chi Minh’s aspiration to meet the water demands of its people by 2025 and its readiness to spend a cumulative amount of US$3 billion (Over 120 billion in Philippine pesos today), there is nothing specific. Continuing to work with SAWACO may lead to something here.

III. VALUATION ANALYSIS

Strong credit, exceptional operating efficiency (ignoring the inefficiency in generating high turnovers), and excellent profitability make Manila Water a great company to invest in. Furthermore, the inherent, long-term stability of its business operations and the compelling growth prospects it has here and abroad both add to a perception of low risk.

If it wasn’t for the threat of high capital expenditures of unknown magnitude looming in the horizon, I would’ve maintained its risk rating as such instead of moving it up by one tranche. At LOW-TO-MODERATE risk, I am seeing a weighted average cost of capital of 11.72%.

Initial Impressions
My initial impressions were that of a cheap company. Of a true “value stock”. Why, at P19.34 a share, you have a company that is trading at 2.06× its book value, 9.77× its net income, 8.73× NOPAT, and 1.07× capitalized NOPAT.

Manila Water is fairly entrenched and stands to reap an absurd amount of money over the next 25 years, which technical proponents would say is already embedded in the stock price. In fact, I approached this deep scan of Manila Water as if it was a fairly-valued company. Why?

I give you a couple of reasons.

One, having analyzed this company before, my old DCF computations—based merely on amateurish assumptions on growth in water revenues, growth in sewer revenues, environmental charges as a % of water, the net margins, and a dividend payout rate—had pegged the intrinsic value at P19 a share… on an optimistic scenario. P19 a share does not even reach a 4% upside on the current price.

Two, Paul Lu, the COL analyst covering the water company, had recommended a “BUY” on Manila Water, painting the intrinsic value at P22 a share. P22 versus P19.34 represented only a 13.75% upside. That doesn’t sound like a good margin of safety to me, especially when the WACC he used in his DCF valuation likely parroted the MWSS’s regulated 9.4%.

Everything changed, however, when I redid my valuations and incorporated more data than I have ever done in the past.



Someone please post a reply or anything. I can't put in the value estimations because there's just too much for the last part :P
Title: Re: TSO's Request Corner
Post by: robot.sonic on Jul 12, 2011, 11:11 AM
 :thankyou:
Title: Re: TSO's Request Corner
Post by: anm1 on Jul 12, 2011, 11:13 AM
Good, 13% is'nt that big for margin of safety. Is it in "buy" recommendation right now at COL? coz right now, I prefer to wait till it goes down even more. Waiting for your conclusion.
Title: Manila Water Company Deep Scan (concluded)
Post by: TSO on Jul 12, 2011, 11:25 AM
Thanks for replying, now I can complete it.

BTW, anm1, yes, it should still be in "BUY". The latest COL fundamental flash-report pegged it a buy, even though it is exactly two months since its public dissemination. (I still believe the next report will be a buy, still... but that's my opinion, so it's worth crap as far as speculating on someone else's actions is concerned.)

Whether you buy now or later ultimately depends on you. Of course, given the "storm clouds over the horizon" (as GIG so put it in his post at the VI thread), holding on to your money a bit just might work... you never know.



Net Asset Value
Because Manila Water is in a business that embodies—that literally screams!—long-term, even LONGER than EEI Corporation, its interest to remain operating until its concession agreement expires or extend it by another two decades makes it so clear the company isn’t going to liquidate. So clear that even newbies would realize it is a pointless exercise to estimate Manila Water’s intrinsic value on net asset value—on net liquidation value.

Net Reproduction Cost (NRC) is the way to go. However, no major adjustments had been made to the company’s assets. Manila Water does not really carry inventory. Even though depreciable fixed assets (not SCA) were reduced significantly to account for age, land and leasehold improvements were increased 25% to represent fair value—as I am betting on the thought that whatever land the company owns has appreciated a good deal. Service Concession Assets, another depreciable asset, was assumed at 100%. These were not broken down into individual asset classes, and I didn’t think it was right to adjust the values.

Adjustments arising from customer relationships and R&D were practically negligible. The value of the former added about 940 million in growth operating expenses to the NRC. R&D does not exist for Manila Water—it doesn’t even make sense for the company to have it in its business model. Threats arising from dilutive options were just as infinitesimal, reducing the NRC by a pathetic 50 million.

These adjustments totaled to almost 900 million. It sounds like a lot to you and me, but for Manila Water? That is 5% of the unadjusted NRC. A pathetic sum. I was actually disappointed when I saw valuing equity at 20.28 billion—P10.09 a share, or P8.91 when discounted by WACC.

You would be disappointed too, since the market is currently pricing the company at more than twice the discounted net reproduction cost.

Value of Zero Growth
After tackling the qualitative aspects of the company, to expect the Zero Growth value (or EPV, as Greenwald calls it) as higher—much higher—than the NRC is an act that falls perfectly within the dome of reason.

Allow me to list down the assumptions that I made:
1.   Population assumed at 1.22 million households, extrapolating 7Y CAGR into 2011 and assuming a 76.3% market penetration
2.   Billed volume projected at 433.1 mcm, projecting it similarly to population.
3.   Laguna and Boracay estimate of 30 thousand households is an extrapolation of 7Y CAGR into 2011 and assumes 15% penetration
4.   Total demand in m3 is 10.57 million, based on implied per-unit demand of the East Zone
5.   Revenues per billed m3 in Laguna and Boracay assumed to be the same as the East Zone.
6.   Environmental charge is 15.5%, based on 2010
7.   Sewer Revenues assessed at 7Y average. No growth rates used.
8.   Management Contracts based on 3Y average. This is a new segment, so “average” here may not represent a rough index of future performance.
9.   Direct costs and corporate expenses are based on 7Y medians of its margins
10.   D&A expenses are based on the 2010 D&A margin
11.   Growth direct costs and corporate expenses have been assumed to be 5% and 15% of reported values arbitrarily.
12.   Advertising costs are based on 7Y average margin to represent marketing expenses.
13.   Median tax rate of ’07 to ’10 used to compute maintenance NOPAT.
14.   Added back growth D&A based on growth CAPEX ratio. Adjustment further reduced by half the effective tax rate.
15.   Maintenance CAPEX estimated using 7Y median. Likely to understate maintenance CAPEX once Manila Water starts shelling out money for water supply and treatment capacity expansion.

The end result is 3,708 million in zero-growth owner earnings: a 32.4% margin to sustainable revenues. Compare to the 40.5% and 36.6% 7-year medians of the net profit and adjusted EBITDA margins, respectively. It is apparently a very conservative measure.

Capitalized at the cost of capital, and adjusted for excess cash, net pension liabilities, dilutive options, preferred stocks, minority interests, and long-term debt, we end up with an equity value of 19,549—P9.72 a share. Multiply this by cost of capital and the current market cap dwarfs it 16.97×, making it borderline expensive.

As expected, the estimate of zero growth is higher than NRC, whether it has been adjusted for debt or not. This by itself corroborates the competitive advantages wielded and abused by Manila Water.

From the investors’ point of view, however, if P9.72 is the zero growth value of the equity[/i] (not the firm itself!), then it is currently too expensive! Overvaluation is a perfectly acceptable phenomenon for this valuation method, in my opinion, as there are some situations when one must pay a premium for growth. But in this case, the overvaluation is just too much.

The maximum price to buy the company—for the sake of safety and in adherence to Graham’s 16× P/E prescription—is P18.23 a share. The adjusted P/E ratio of 16.97× confirms this.  

I can only interpret this in one way: anyone who buys the company at the current price is paying a large premium for growth, slightly larger than the highest amount bordering—borderline excessive—than what would be acceptable.

Of course, as you would later read, the growth prospects may actually prove to be worth the risk.

Value of Growth
The value of growth is what completely changed my opinion on Manila Water. Whereas EEI Corporation stuck to me with its hidden assets and the wonderful prospects in Saudi Arabia, Manila Water blessed my psyche with an epiphany on the reality hounding its growth prospects both here and abroad.

What makes it an even stronger case for growth is not the tantalizing potential of its investments in India and Vietnam, but rather the sheer facts that

(1) The price of P19.34 a share implies the market is presuming an 11% decline in residual free cash flows from 2011 to 2020 despite historical growth rates of 17% a year since ’04;
(2) Manila Water has the potential for a 30% revenue growth from East Zone operations alone (if it can attain 100% market penetration in the medium-term, that is); and,
(3) Demand for water will always grow proportionately to the growth of the populace

All ensure Manila Water (and Maynilad) will reap an enormous amount of money from Metro Manila through the year 2037, relatively steady cash flows whose prime drivers are population growth, market penetration, demand per household, and revenue per billed m3, and whose only threat comes in the form of capital investments.  

There are at least 25 variables built into the discounted cash flows model used to estimate the value of Manila Water’s growth, forecasting the income statement all the way down to owner earnings for years 2011 to 2016, and the terminal period. The net present value of these owner earnings—their projected 6Y annual growth rate at, depending on the scenario, terribly conservative 6% or 7% percentages in comparison to the historical 23%—are further reduced by dilutive options, preferred stocks, net pension liabilities, minority interests, and long-term debt.

At worst, we are seeing an intrinsic value of P22.25 a share (which surprisingly matches Lu’s assessment!).  By “worst”, I mean population growth 25% lower than historical data of 3.74%, terminal market penetration of only 85% and 80% in the East Zone and Laguna-Boracay, revenue per billed m3 rise of 5% a year (very close to long-run inflation of 4.6%), the lowest environmental charges per peso of water revenue (10.12 centavos versus 2010’s 15.48), unfavorable foreign exchange rates last seen only on April 1994 (JPY), September 2005 (USD), and April 2008 (EUR), the highest interest rates on debt over the past six years plus two percentage points (10%), a 40% decline versus the median amounts of cash and AFS securities per billed mcm, the worst rates on interest-bearing assets last seen on the financial crisis (2.42%), and statutory tax rates of 30% as if Manila Water did not actively try to reduce its tax footprint.

If P22.25 a shot is something we got from a pessimistic outlook on Manila Water’s life, then what if the future was slightly—a little brighter? Let’s make population growth 15% lower than historical, increasing terminal penetration to 90% (East Zone) and 85% (Laguna-Boracay). Instead of setting the yearly growth in revenue per m3 at a few points above inflation, let’s take the historical 11% and slash it 40%. On top of that, environmental charge rates are pulled up to the six-year average  (11.45 centavos per peso of water sales), improve the foreign exchange environment to neutral grounds, reduce the interest rates on debt to the six-year median (I still add two percentage points for conservatism), and lower the proportion of maintenance CAPEX to the total, which is kept at 16 per billed mcm. Manila Water is given slightly better operating margins (61.5% versus the downbeat 59.5%) on top of the median interest on cash and AFS securities (4.6%). The tax situation, naturally, remains the same.

A swift and speedy juxtaposition to the gloomy picture drawn by the previous paragraph indeed shows a thinner patina of negativity, but not superlatively thinner. The weather is cloudy still, just not as foreboding. Not forgetting the very point of this exercise, the intrinsic value estimate takes a dramatic leap from P22.25 to P39.72 a share: a gigantic stride of 80%! The margin of safety rose from 13% to an astonishing 51%!

Of course, almost 90% of the intrinsic value comes from the terminal period, clearly indicating how important it is for me to stress that any investment in Manila Water is an investment in the long term[/color]. Not the medium term. Definitely not the short-term. Another critical point of information here is the fact these valuation models COMPLETELY PRECLUDE all business operations abroad and the alluring potential they award.

Be advised the DCF models used to formulate my opinions do not take into account potential capital expenditures arising from ventures pursued to increase raw water supply or treatment plant capacity.

IV. PERSONAL CHOICE OF ACTION

In my opinion, Manila Water is a low-to-moderate risk investment that has the potential for immense growth. The only threats investors face would be the free cash flows arising from local water operations and time.

Free cash flows are threatened by looming capital expenditures that would definitely be spent on addressing the future water shortage, since I really, really doubt the Philippine government will get its priorities straight and aim for operational efficiency. Time, on the other hand, may significantly dilute returns if Manila Water takes its time in expanding its network toward full penetration or Jindal SAW Ltd. doesn’t enter a lucrative contract in Gujarat and the other two states its joint venture operates in within the next few years to come.

For example, if it took half a decade for the market to price Manila Water from P19.34 to P39.72, we would have a yearly growth rate of 15.5%, not including dividends (would be about 17.2% if potential dividends equivalent to 19% operating income were added). If the passage of time was six years instead, we would end up with a yearly growth rate of 12.7% (14.5% with dividends). In contrast, if it took four years instead, we would have a 19.7% yearly return (21.4% with dividends).

Because a profit is practically ensured regardless of what happens, time is the greater enemy. Engaging in healthy speculation, I thought of some catalysts that could cause a breakout in the market price:
•   Press releases about higher net profits
•   News of a long-term concession agreement bagged by the Jindal-MWC partnership
•   News regarding Manila Water’s participation in the US$3 billion Ho Chi Minh Master Plan
•   Spectacular growth from Laguna and Boracay
•   Improvements in international reputation and profits
•   Mounting revenues from the East Zone
•   Foreign exchange environment, particularly the weakening of USD or EUR. (May be offset by higher interest rates if the debt is tagged to foreign indices like LIBOR.)

The opportunities available for exploitation in the Asia-Pacific, and the remaining potential left for growth in the local game, combined with long-term competitive advantages, a perdurable reputation for efficiency, historically high profitability, and resilient credit, all lend credence to my recommendation of a BUY, that the large premium spent above the growth of zero value is worth the potential.
 
Title: Re: TSO's Request Corner
Post by: pinoy_abroad on Jul 12, 2011, 11:52 AM
Amazing...
Title: Re: TSO's Request Corner
Post by: bauer on Jul 12, 2011, 12:40 PM
quote from TSO analysis,

"Manila Water is currently developing a third plant in Rodriguez, Rizal to meet the demand for the region, providing about 100 MLD. It is a P3 billion plant scheduled to go online by 2012 (ABS-CBN News, 5/11/2010). As 100 MLD is equivalent to exactly 36.5 million m3, I came up with a figure of P82 million spent to increase treatment capacity by one million m3. This is probably an inaccurate figure, but something that other analysts may want to work with given the very limited data available publicly. It is unknown how much of the P82 million was sourced from debt, and how much from operating cash flows (the financial statements do not help. If capital expenditures is made the sum of that reported on investing activities and the availment of debt, the amount of capex being funded by debt ranged from zero to over a 100% without any consistency whatsoever. This is a problem considering, taking cues from its ’05 to ’08 SEC 17A’s) Manila Water’s management budgets its capital expenditures as a total figure funded by both OCF and Debt.) "


maynilad commission the putatan muntinlupa laguna lake water recovery project at a cost of 1 billion for 100 MLD.  Do you think MWC paid too much for 3B at 100 MLD?

Post Merge: 1310446121
TSO,

you have made a more modest valuation of 39 plus a share within the next 5 years.  my own valuation since 2 years ago was about 50 pesos a share within the next 10 years.  so deducting 2 years from last time, it's about 8 years down the road. is it close enough? 

disclosure: own MWC at IPO price of 6.50 since 2005 (never waivered, continued to purchase at 17)
Title: Re: TSO's Request Corner
Post by: TSO on Jul 12, 2011, 12:59 PM
Quote
maynilad commission the putatan muntinlupa laguna lake water recovery project at a cost of 1 billion for 100 MLD.  Do you think MWC paid too much for 3B at 100 MLD?

Am I guessing you got this information from this article in Waterworld (http://www.waterworld.com/index/display/article-display/4233746097/articles/waterworld/world-regions/far-east_se_asia/2011/02/Maynilad-inaugurates-Putatan-Plant.html)?

I think the difference comes from the approaches.

Maynilad's project treats water from the Laguna Lake as an alternative source to La Mesa and, at full capacity, would be able to supply potable water to 105,000 households in Alabang, Bayanan, Poblacion, Putatan, Tunasan, and New Alabang (Water Technology's profile of the project (http://www.water-technology.net/projects/muntinlupa-plant/)).

In contrast, MWC spent a lot higher for Rodriguez because it is meant to increase efficiency by:
1. Reducing water flow from Balara to Rodriguez as Rodriguez will directly proc water coming in from La Mesa
2. Laying a 1200-mm diameter water main and construction of a 4000 cubic meter reservoir.
(Source: a June 24, 2010 article from Manila Bulletin (http://www.mb.com.ph/node/263613/manila-water-undertake))

How much savings it would translate to is something I wouldn't know.

Post Merge: 1310447114
Quote
TSO,

you have made a more modest valuation of 39 plus a share within the next 5 years.  my own valuation since 2 years ago was about 50 pesos a share within the next 10 years.  so deducting 2 years from last time, it's about 8 years down the road. is it close enough?

disclosure: own MWC at IPO price of 6.50 since 2005 (never waivered, continued to purchase at 17)

Bauer, you should see my optimistic scenario. It's higher than P50, and I didn't apply excessive optimism in its computation, either.

I'd say it's close... but as I don't know the bases of your computations, I'm in no position to say anything. :P
Title: Re: TSO's Request Corner
Post by: disturbed on Jul 12, 2011, 06:30 PM
what a report! do you hold shares in MWC sir TSO?
Title: Re: TSO's Request Corner
Post by: TSO on Jul 20, 2011, 12:57 AM
Whew! Sorry, just noticed your post now. I've been busy analyzing ALV, y'see, and my findings on it to date are VERY interesting.

Anyway, yes, about 20% of my portfolio's in MWC and has been that way since '09. :) The MWC Deep Scan was pretty much a revision of my old analysis from two years ago (if you had taken the time to read the introduction portion of the report in the first part). I'm one of those who do eat what they cook, if you know what I mean.
Title: Re: TSO's Request Corner
Post by: pinoy_abroad on Jul 20, 2011, 06:47 AM
Sir TSO

ALV is really a very interesting stock in a broader perspective, I like the business..It can be a big winner in the incoming transition to electric/hybrid car ... I tried to compute the DCF( using a moneychimp, hindi ako marunong ng manual he  he )... I am really  looking forward to your findings sir...
Title: Re: TSO's Request Corner
Post by: netizen0911 on Jul 29, 2011, 05:43 AM
That was great! Can I have analysis for ELI please? PSE.

Post Merge: 1311972838
UNI and GERI (PSE) Mukhang mura ngayon eh. Papalo ba to? Pa analyze naman. Thanks.
Title: Re: TSO's Request Corner
Post by: TSO on Jul 30, 2011, 05:46 AM
That was great! Can I have analysis for ELI please? PSE.

Post Merge: 1311972780
UNI and GERI (PSE) Mukhang mura ngayon eh. Papalo ba to? Pa analyze naman. Thanks.

Which one is your biggest priority?

And I'm analyzing US stocks at the moment, and I've got Dr. Pepper / Snapple lined up right after I'm finished writing my report on Autoliv (currently at 13 pages).

There are other people before you who's been wanting me to do a screening, and I believe I may be able to screen one company before proceeding to DPS (US).
Title: Autoliv, Inc. (NYSE: ALV) Deep Scan, Part I
Post by: TSO on Aug 06, 2011, 12:33 PM
ALRIGHT!

First US stock deep scan, rolling out. :D

Damn report took a week to make. Reason? You'll see when you read.



Autoliv, Inc.
Country: United States
Ticker Symbol: ALV (NYSE)
Industry: Manufacturer – Occupant Restraint (Light Vehicles)
Current Price: $55.82 a share
(represents $4.98B in market cap)
Periods analyzed: 2001 to 2010
Date started: 20 Jun 2011
Date finished: 25 Jul 2011
Report written by: 5 Aug 2011


I. PROFILE

Synopsis
A corporation whose roots can be found in entrepreneurship, when Swedish businessman Lennart Lindblad started a dealership and repair shop for motor vehicles in 1953. Three years following its inception, the company produced its first seatbelt, marking its initial entry into the occupant restraint market. In 1968, twelve years into the seatbelt business, the company was renamed Autoliv AB to embody its vision of saving lives (“Liv” is “Lives” in Swedish).

Autoliv Inc. (ALV) is the merger of this renamed company and the American company Morton ASP, whose global headquarters is located in Stockholm, Sweden. It is presently the world’s largest automotive safety supplier with all leading auto manufacturers as its customers, the likes of which include GM, Ford, Volvo, Volkswagen, and Toyota.

With over eighty manufacturing facilities, eleven technical centers, twenty crash test tracks, and 43,800 employees in twenty-nine nations, ALV is in the business of developing, marketing, and manufacturing passive and active safety systems for light vehicles, having maintained a minimum 30% market share of the global occupant restraint market since 2001—in other words, there is an ALV product in every three of ten cars and light commercial vehicles seen plying the road. (If that is not arrogant enough for the reader, then allow me to point out the company itself claimed “statistically, there were almost two seatbelts and 1.2 airbags from Autoliv in every vehicle produced globally in 2010….”)

Vision-Mission and Core Values
ALV’s ultimate vision is the substantial reduction of traffic accidents, fatalities, and injuries across the globe. The company intends to achieve it through the creation, production, and sale of automotive safety systems.

In order to accomplish this mission, ALV has elected to exemplify the principles of A PASSION FOR LIFE, CUSTOMER SATISFACTION AND VALUE, INNOVATION, TALENT DEVELOPMENT, ETHICAL BEHAVIOR, and a DIVERSE CULTURE.

Products
Within the world of automotive safety, there are two technology classes enabling Autoliv—and its competitors—to fulfill its vision and mission: passive and active.

Active safety systems are designed with the intent of preventing crashes, or at the very least, lessening their severity. Autoliv employs a combination of night vision, radar systems of short, medium, or long range, and forward-looking cameras for applications such as speed sign recognition, collision warnings, pedestrian detection, and identification of dangers lurking in blind spots.

Even a seatbelt could be fitted with an electronic pretensioner, designed to tighten the belt or even warn the driver prior to collision through vibrations.

However, the company recognizes that perfect prevention of crashes and vehicular accidents is, like an ideal world of values and characteristics unattainable in practicality, asymptotic. It is an immutable fact collisions will occur. Hence, passive safety systems are eponymously aimed at mitigating the injuries arising from these mishaps.

Passive safety typically includes airbags, seatbelt systems—whose load limiters and pretensions contribute the bulk of their efficacy, along with crash electronics, pedestrian protection, and anti-whiplash systems.

Airbags are at the forefront of reducing fatalities, designed to fully inflate in 50 milliseconds (literally in the blink of an eye) and, through adaptive output inflators, can self-calibrate depending on the severity of the crash. As of December 2010, there are currently seven airbag classes out in the market:
(1)   Traditional passenger/driver airbags: reduces fatalities among belted drivers by 25%, serious head injuries by 60%, and belted passenger deaths by 20%.
(2)   Curtain airbags: decreases risk of lethal head injuries from the side. Covers whole upper side of vehicle.
(3)   Side airbag – single chamber: protects the chest.
(4)   Side airbag – dual chamber: protects both pelvis and chest.
(5)   Rear-side airbags: protects rear occupants
(6)   Knee airbags: defends the hip, knees, and thigh, as 23% of active-life years can be lost to vehicular accidents.
(7)   Anti-sliding airbags: installed in the seat cushion, developed to prevent the occupants’ sliding under the seatbelt. Improves efficiency of traditional airbags and further lowers risk.

Crash electronics serve to lower production costs by integrating redundant safety systems in modern vehicles and amplifying the efficiency of both active and other passive systems through the connection of external sensory inputs (cameras and radar, for example) to the actuators controlling motion. It also operates the functions of a black box, measuring relevant crash statistics.

Autoliv has never forgotten the people outside the vehicle, and how unprotected they normally are during accidents. To preserve their lives (or diminish injuries), the company has designed schemes enabling the hood of the car to act as a head cushion. Nonetheless, the crudest method available has and always will be, in my opinion, the employment of exogenous airbags.

Autoliv claims to spearhead the frontier of passive safety, declaring itself accountable for “virtually all major technological breakthroughs within passive safety for the last 20 years.”

Source: 2010 Annual Report

II. EXECUTIVE SUMMARY

Any reasonable investor in the securities market would gravitate towards all potential opportunities whose underlying businesses: (a) possess the tenacity to endure the costs of debt, (b) have gained and maintained splendid efficiency in its daily operations, (c) continuously accrue profits well above its expenses, (d) sustain an invaluable position in its macroscopic environs, (e) display the potential to pursue value-adding growth over the long-term, and most importantly, (f) whose market prices are far, far lower than their estimated value.

Guided by the principles stated above, I have utilized the best of my ability and a majority of my personal time to study this company with the ultimate goal of determining its worthiness as a long-term investment. This research report shall first assess the risk of capital loss associated with the underlying company through five different elements—a brutal combination of quantitative and qualitative analysis. Then it shall proceed to the valuation models I have formulated for this company using its financial statements and other data pertinent to its operating performance, the results of which are then compared to the prevailing market price as to ascertain the margins of safety.

After thoroughly scrutinizing the processed maelstrom of raw information at its purest, I have determined that Autoliv, Inc. (NYSE: ALV) represents a LOW risk to the long-term investor, translating to a weighted average cost of capital (WACC) of 6.92%.

I justify this evaluation by pointing to ALV’s manageable level of credit, strong levels of efficiency, relatively consistent bottom-line profits (and moreover, returns above the cost of capital), a distinct economic moat arising from the company’s production process along with the immense barriers to entry natural to the automotive safety industry, and finally, reasonable potential for growth as indicated by: (i) low safety content values per vehicle in the markets beyond Japan, North America, and Europe, and (ii) increasing regulatory decrees in favor of its business.

The only hazard faced by an investor in ALV is the permanent decline in the consumer demand for light vehicles, which is natural considering the products it manufactures and distributes. The needs of this downstream market are shaped by the confluence of individual aesthetic preferences, costs of transportation, costs of maintenance, and any threatening alternatives to cars and the like for the standard modes of transportation. An analysis of this triumvirate has lead me to the conclusion that rising costs of fuel and increasing concerns for the natural environment are presently driving the growth of the automotive industry.

ALV’s current price of $55.82 a share is cheap in terms of book value and multiples of earnings accrued during the 2010 fiscal year (particularly net income and net operating profits after taxes).

The intrinsic value estimates propagated by my financial models signify margins of safety commensurate to the risks assumed by the long-term investor. The gradual corrosion of the market to date—no doubt a product of the uncertainty revolving around the United States’ debt ceiling negotiations—proffers an excellent opportunity to jump in and exploit the widening discrepancy between ALV’s stock price and the appraised value.

III. RISK ASSESSMENT

As stated in the Executive Summary, I have deemed Autoliv to represent a low risk for capital losses to the long-term investor. This is justified by manageable levels of debt, sustained strength in operational efficiency, encouraging profitability (and returns in excess of the cost of capital), an economic moat formed by distinct competitive advantages and immense barriers to entry, and rather alluring prospects for the future, with the only threat being permanent declines in auto demand).

This level of risk effectively translates into a WACC of 6.92%. I based the after-tax cost of debt on the 5% average rate on all interest-bearing liabilities and the median effective tax rate of 31%. Autoliv’s cost of equity, meanwhile, was computed using a modified version of CAPM, assuming the July 2011 T-Bond coupon rate of just about 3% as the risk-free rate of return (Yield Curve for July ‘11 (http://www.yieldcurve.com/MktYCdata.asp)) and seven basis points above 8% for the market return, drawn from the equity risk premiums computed monthly by Aswath Damodaran (Damodaran Online (http://www.damodaran.com)).

Adjustments to the Financial Statements
Autoliv disclosed neither the financial reports of its significant equity investments or the owned portions of these associates from 2001 to 2007, preventing me from determining whether adjustments to the balance sheets and income statements are needed.

Furthermore, the implied useful lives of its tangible fixed assets have generally been between the acceptable range of 4 to 10 years (computed using the stated useful lives mentioned in the footnotes). However, it has come to my attention that the implied useful lives have risen to eleven years and higher in the past five years and should be monitored over time to determine whether: (a) ALV is playing around with its assets’ useful lives, or (b) the standards it adheres to might need to be reviewed.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/operating_leases-69427220.jpg)

Operating leases, as of 2010 year-end, had an aggregate value of $114.70 million, which will expire into oblivion nine years from now under the assumption this manufacturer does not adopt more leases.

Considering these factors, there was nothing for me to work with and the numbers have been left unadjusted.

However, I have performed several amendments to the format of the income statement, fine-tuning their receptivity for scrutiny.

One, I extracted the depreciation expenses partitioned among the costs of sales, R&D, and SG&A expenses and toted it in its own expense category.

Two, sales was computed as the product between composite revenues earned per light vehicle, and the number of light vehicles statistically captured from the amount produced by the global market.

Three, using the footnotes to the financial statements, I isolated the rent spent on operating leases and the yearly provisions for bad debt, excess and obsolete inventory, product-related liabilities (e.g. warranties, recalls), and restructuring expenses from both the SG&A and “other income (expense)” items. Please note that I assumed these are already recognized in the computation of net operating cash flows under the account item “deferred income taxes and others”.

Four, I classified “other income (expense)” items and the restructuring provisions as nonoperating income despite their yearly appearance in the financial statements due to their volatile behavior over the past ten years.

Five, the same was done to “net financial items” that were originally a part of interest computations. I meant to isolate interest revenues and expenses and lump the rest—which, from experience, may include but is definitely not limited to FOREX gains (losses), mark-to-market gains (losses) on derivatives or other securities—in the category designated for nonoperating revenues and expenses as well as operating items that have displayed volatility or infrequency.

Six, effective taxes were broken down to statutory tax requirements and the six most frequent and reasonably stable adjustments.

Seven, the only recast made to the balance sheet was the transfer of minority interests from equity to liabilities.

As a result of these modifications, any ratios and figures I derived from the recast income statements and then presented here on this report will be slightly different from what one may calculate using the financial reports as originally exhibited by Autoliv. From what I have observed so far, the differences directly affect Gross Profits, Operating Income, and EBIT.


Creditworthiness

Capital Structure
Autoliv’s debt ratio has been, for lack of a better term, modest. I’ve observed debt ratios never higher than 60% of total assets—the company has done an excellent job with its financial activities, ensuring the debt ratios meander close to the median 53%. The most recent fiscal year saw an immense improvement, posting a debt ratio five percentage points lower, having increased current assets, specifically cash and net receivables.

Currently, 67% of Autoliv’s liabilities are current (higher than the average 57%), almost all of which rested on accounts payable, accrued expenses (and those wonderful reserves for restructuring and product-related liabilities), and other current liabilities. Trade payables dominated ALV’s debt situation and aren’t likely to pose a significant threat to the company’s solvency.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/profit_vs_total_liab-14821011.jpg)(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/altman_z_score-19310717.jpg)

Speaking of which, ALV’s solvency ratios did not fail to impress me. OCFBWC, Adj. GAAP EBITDA, Net OCF, and NOPAT are all above 20% of total liabilities as of 2010 year-end, posting results greater than the 10-year averages. That none of these took a dip below 60% of these figures more than once lends weight on the company’s strength.

Altman’s Z-score, one of the more traditional litmus tests for ascertaining the possibility of bankruptcy, has grown from the borderline 1.80 in ’01 to 3.67 on ’10. As one can see from the graph, the Z-Score has never dropped below 2.0 since ’02—the financial crisis of ’08 and ’09 brought down the company but failed to deliver the killing blow, permitting it to rebound exactly one year later.

I think it’s worth noting Autoliv is prepared to take on a staggering amount of debt at anytime (should its use, partial or otherwise, be deemed necessary), as it possessed approximately $400 million and $3.5 billion in short and long term credit facilities of three different currencies (USD, EUR, and the Swedish Krona), 36% of which would be unsecured if exercised. For reference, this sum of $3.9 billion is almost worth ¾ of total assets in ’10. Its whole utilization would send debt ratios flying towards 70% -- interest rates haven’t been specified by the annual reports and for all I know it might as well be floating.

Liquidity and Earnings Coverage

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/cash_and_ar_vs_cl-20939529.jpg)

Buttressing the robust long-term financial strength is Autoliv’s exceptional ability to cover current obligations. I observed that cash alone can pay for over 30% of current liabilities since ’08, over 2.5× better than the median. Once net receivables are introduced, only a miniscule amount of the current debt remains, that is if it wasn’t eliminated already.

Current ratios throw in the rest of current assets into the fray: net inventory, income tax receivables, and other current assets. Alongside cash and net receivables, they exceed the enemy by 22% at a minimum. Anything else that somehow survived would be crushed by net operating cash flows, which amounted to 38% of current liabilities (and 21% of total) on average.

The margins of safety—above interest expenses, yearly operating lease obligations, and principal payments of debt—enjoyed by ALV last year range from a mediocre 21% to an amazing 88% depending on one’s choice of profitability: EBIT, NOPAT, OCF, FCF, or OCFBWC. However, the strength of this protection went wild during the past decade.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/modified_tie-3323895.jpg)
* note that interest has been added back into OCF here

Obviously, the current figures are promising, being 30 to 88 percent higher than the long-run averages. However, the coefficients of variation for each profit metric question the sustainability of its present level of financial protection—excluding the dismal ’09 performance (more on this in the section on Profitability) is a pointless endeavor, its impact on the variability measure laughable. A joke.

Nonetheless, a careful analysis of Autoliv’s long-term debt took this ratio one step further by projecting the required interest, operating lease obligations, and principal payments, as well as commitment fees necessary to maintain part of the astronomic credit facilities on reserve to the next nine years. These projections considered pessimistic, neutral, and optimistic scenarios based on historical data from 1991 to 2011 concerning the foreign exchange rates of four different currencies and the interbank borrowing rates for London (3-mo. and 12-mo.) and Sweden, on which interest rates have been pegged.

I estimated that, barring fresh infusion of debt or managerial whimsy, an average of $113 million must be paid every year. The 10Y medians of the same profit metrics in the table above are all at least twice the value of these estimated requirements across all three scenarios. This in itself suggests a satisfactory level of protection, and further contributes to Autoliv’s financial strength.

Of course, I can’t help but worry over this ratio’s historical volatility...



To be continued...
Title: Re: TSO's Request Corner
Post by: pinoy_abroad on Aug 06, 2011, 03:16 PM
Its down a lot in the previous week, which make it more attractive....Its very interesting to find out its future relationship with car companies...

Please correct me if im wrong this is cyclical right?
Title: Re: TSO's Request Corner
Post by: TSO on Aug 06, 2011, 03:50 PM
Technically it isn't because of the nature of its products. But since its recipients are cars, cars, and ONLY cars, that tremendous exposure right there makes it as cyclical as the auto industry. :)

I'll post Part 2 tomorrow afternoon probably. Will be driving to Houston in the morning.
Title: Re: TSO's Request Corner
Post by: pinoy_abroad on Aug 07, 2011, 02:52 PM
With 600 million cars today (still with very small percentage of hybrid/electric)..maybe doubled in 15-20 years.. with the inevitable transition to electric/hybrid cars..safety being a basic need (next to physiological needs of course he he)... intuitively speaking, you find a diamond..
Title: Autoliv, Inc. (NYSE: ALV) Deep Scan, Part II
Post by: TSO on Aug 07, 2011, 03:37 PM
Part II of Autoliv, Inc. Deep Scan coming right up!



Efficiency
If there’s one thing I can put my confidence in, it would be the high level of operating efficiency achieved by Autoliv in the middle of the decade and then sustained it for the years to come. ALV’s turnover ratios over the past ten years indicate this. Starting from ’01, the airbag manufacturer produced about $1 per every unit invested in assets ($1.33 per unit of NOA). This jumped to 1.19 (1.82) in ’05, and strode forward by several paces to 1.32 (2.26).

Both ’05 and ’10 figures achieved or surpassed the long-term averages for the year, and over the ten-year history I scrutinized, none of the ratios have ever banked towards 60% of these averages, let alone plummet beneath them.

As I am indubitably aware turnover ratios may not exactly be a perfect indicator of efficiency, I shall provide key figures derived from the annual reports (if not directly lifted from them) so the reader may verify the incredible achievements the underlying business obtained.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/kpi-17807072.jpg)
* The information involving ISO certifications, the consumer reject index, and the “share in global market” are estimates, as Autoliv presented the data in graph form without reference to the specific values.
† Low cost countries are as follows: Brazil, China, Estonia, Hungary, India, Indonesia, Malaysia, Mexico, The Philippines, Poland, Romania, Russia, South Africa, Taiwan, Thailand, Tunisia, and Turkey. High cost countries include Australia, Canada, France, Germany, Italy, Japan, South Korea, The Netherlands, Spain, Sweden, UK, and the USA.

As seen above, ALV’s key performance indicators have been improving. ALV embraces its culture of innovation and values the inputs of its employees, receiving an increasing number of suggestions from them and investing in more training days every year. Both injuries and absenteeism has decreased despite the steady growths in headcount, which I would infer as an indication of something being done right.

Furthermore, the company’s products have grown in quality, its rejection rates dropping from 50 for every million produced to a mere 5. Autoliv, naturally, pins the medal of distinction on its production process. The management calls it a “strategy of shaping a proactive quality culture of zero defects” (2010 Annual Report). I would call it an increased emphasis on carping.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/efficient_production-67848727.jpg)

Previous annual reports by the company also proffered two additional insights into ALV’s production process:
1.   Sales contracts are typically awarded three years prior to the commencement of vehicle production, and are valid for the 4-5 year production period of the platform/vehicle model under contract (2005 Annual Report)
2.   The company strives (or insists, as I’d like to put it) for the customer to immerse themselves in the project as early as possible in order to “reduce… financial risk” (2004 Annual Report).

The manufacturing portion of the system has been quite efficient. Rarely does Autoliv retain over 10% of its goods available for sale as inventory by the end of the fiscal year. Yearly production represents 90% of cost of goods available for sale and of what has been manufactured, only 0.4% are expected to be obsolete or excess—I observed that actual write-offs were far less than the provisions themselves, leaving me with the idea Autoliv’s business operations exude conservatism.

While there is only so much more Autoliv can go as far as improvements are concerned, by looking at these facts and estimates, I am inclined to believe the company is going to remain operating efficiently for the years to come.

Profitability

Sales Analysis
To commence my comprehensive profitability analysis of Autoliv, Inc., the first thing I looked at were its sales figures. After all, every dollar of profit and loss—or most of it, at least—are ultimately products of Autoliv’s ability to sell its goods.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/geography_sales-33643070.jpg)

Historically, North America and Europe were the greatest contributors of global sales, accounting for 90% of sales. As the years passed, Japan and “The Rest of the World” (this dismissive name is not a result of my own ruminations) stole shares once owned by the predominant regions, owing to stellar compounded growth rates of 16.3% (Japan) and 25.7% (ROTW) versus the mature areas’ 3.8% (America) and 2.9% (Europe). As of 2010 year-end, sales have been evenly divided between Europe, North America, and Japan/ROTW.

Autoliv identified two factors crucial to the development of the industry, a third of which it dominates: (a) Safety Content Value per vehicle, and (b) Global Production of Light Vehicles (2010 Annual Report). Government regulations also have an influence on ALV’s sales. (Refer to V. Future Prospects for more information.)

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/product_sales-61780208.jpg)


The stacked area chart I have provided clearly shows how much dependent Autoliv is on its airbags. 67% reliant, on average. The reasons behind the existence of this balance probably lie not in the question of which sells more, but in the fact seven kinds of airbags are being installed on light vehicles. Eight if “pedestrian protection” is included.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/customer_mix-84425665.jpg)

Finally, despite their heavy reliance on airbags and crash electronics, ALV’s customer mix is practically a sight to behold. Since 2001 the company has been catering to the needs of the most prominent companies of the auto industry. Better yet, not a single one was responsible for over 15% of a given year’s sales.

Autoliv’s very existence is not subservient to a small number of customers, or to any one region for that matter.

Expense Controls

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/sales_composition-96125382.jpg)

As seen in the graph, ALV’s operating profits have been within the $500M range. At worst, it has achieved merely $200M, and at best, slightly less than $900M. These results represent 4% to 12.4% operating margins (in contrast to the reported financial statements’ 1.3% to 12.1% range).

That costs of goods sold take up so much space goes to show how of sales is swallowed up by ALV’s manufacturing processes. COGS has never gone lower than 74% or greater than 80%, even during the financial crisis of ’08 and ’09. I find it notable for Autoliv’s COGS margins to have risen above 77% only four times: twice in ’01 – ’02, and twice again in ’08 – ’09, years succeeding the bursts of economic bubbles.

In my opinion, what little data I have can mean two things: one, volcanic eruptions in the economic sense aren’t expected to materially affect gross margins; and two, should the underperforming years be utterly discarded, gross profits have never deviated far from 24% of sales, speaking for the efficacy and the limitations of ALV’s cost-saving initiatives.

SG&A expenses have been just as stable. While normally 5% of sales, operating expense still siphons a material portion of what little remained for the company’s earnings, leaving behind 78.6% on average—with very little variability. It should stand as a testament to the sheer difficulty ALV has in curbing the growth of its rising costs.

With innovation as one of Autoliv’s core values, as well as a crucial aspect of its business operations, I’ve come to understand R&D is the backbone of its life and the prime driver of the innovations it leads the industry with. R&D has never dropped below $300M for the last six years, and moreover, not one year from ’03 onwards did the annual R&D expense go beyond one standard deviation of its average ($311M).

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/rd_exp-94601309.jpg)

Vertical analysis shows R&D did not vary much from 5.4% of sales, with its highest being 6%. Going further by designating 2001 as an index, the value dispensed under R&D for 2010 was 85% above the value of what was invested in R&D nine years earlier.

It doesn’t look like R&D has been growing in proportion, and judging from its relative predictability, one can infer that ALV does not seem to have a project worth plugging a significant chunk of sales into, or the regular annual investments are enough for such initiatives.

Nonetheless, it speaks for Autoliv’s perennial and unwavering commitment to innovation. What I find interesting here is the fact ALV maintained its control over 30% of the global automotive safety market without making drastic leaps in R&D investments.
  
(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/depn_amort-785655.jpg)(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/implied_ul-91133595.jpg)
* Disclosure: Autoliv does not amortize Goodwill over a fixed duration, but instead subtracts it when a portion of it has been deemed to be impaired.

Finally, depreciation has been the most unpredictable element factoring into ALV’s operating margins. Although D&A has had a rather fixed location, within the $250M to $350M interval, this immovability adds variation to its proportion to sales revenues.

The graph indicates 93% of D&A represents tangible fixed assets—land and land improvements (UL: indefinite to 15Y), machinery and equipment (UL: 3Y to 8Y), buildings (UL: 20Y to 40Y), and construction in progress. According to my estimations, there is nothing to worry about here so long as PPE’s implied useful life falls between 4 and 10 years. I’ve noticed this has been rising from below 10 to 11 and above from ’06 onwards.

While this does not certainly mean anything malicious is being done, that the implied UL stood at 14 years for ’10 gives anyone a reason to start watching the company’s net income, as higher average useful life conceptually reduces yearly depreciation, consequently inflating the net margins. Continued deviation from the “normal range” derived from ALV’s standards of useful life may eventually require adjustments to the financial statements.
 
Returning to the “overall picture”, the processing of COGS and SG&A often results to margins around 18%, ALV’s staunch devotion to R&D and the immobile behavior of D&A have thus been observed to reduce these margins by NO LESS THAN 40% (more commonly, 60%), leaving with very low operating margins.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/sales_composition_contrib_margin-30705097.jpg)
Source: Annual reports, from ’02 to ‘10

Looking through the lens of managerial accounting also allows for some more insights into Autoliv’s expense controls. Note that variable costs (direct material, direct labor, and overhead) have always totaled to no less than 74% of sales—rather close to the COGS margins. Raw materials have been around 66% of this sum. Surprisingly, overhead is more expensive than wages spent on manufacturing—after ensuring many of their workers were based in Low Cost Countries, one would think even that would fall.

Although the contribution margins are 24% of sales on average, this remainder is eaten up by fixed items, which were kept aggregated by ALV (preventing me from making any progress in recasting the contribution margin format of the income statement).

Nonetheless, this information does not significantly change my earlier assessment: SG&A and R&D have been kept stable by the company in relation to sales figures, while D&A has been so unmoving it caused large variance in operating margins.

Moving on to the portion of the income statement after operating income, the impact of items considered either nonoperating or operating but infrequent and/or unpredictable has been relatively small, typically a 10% reduction on operating income. Much of this siphoning has been traced to restructuring provisions, an unpredictable operating expense larger than most items under this category.

In fact, it was also the item responsible for nearly zeroing net income for ’09. Killing off this bastard, for example, pulls up ’09 net profits by approximately $300 million, raising the bottom-line margins from zero to six percent.

Interest revenues don’t have a very strong effect on the company’s EBIT, raising it by rather negligible amounts. ALV’s financial statements and its footnotes do not disclose its sources, although I am operating under the impression it is coming from its excess cash and cash equivalents and a long-term interest-bearing deposit.

Interest expenses are a different story. They have consistently been 5% of interest-bearing liabilities, and its value never strayed far from $56 million a year—one reason why interest expenses floored the sum of operating income, nonoperating and unusual items, and interest revenues by as much as 93% on ’09.

Finally, ALV’s rather creative tax management resulted in a median effective rate of 30.8%. This sounds just about right in light of that six of the eleven adjustments it has used in the past are reasonably predictable and can be expected to produce a 4.6-point absolute deduction in the effective tax rate—barring any anomalous years such as ’09, when all income tax adjustments had egregiously abnormal figures.  

Out of courtesy for the reader, I took the liberty of summarizing my findings in the table, which can be compared with the 10-year median and the coefficient of variation.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/expense_control-13525927.jpg)

So did Autoliv do well in reining its costs?

My response here would be a clear-cut yes.

Although its business is rather cumbersome, ALV’s control over its SG&A expenses and production costs is impressive, having maintained stability in both, in proportion to sales that is. Autoliv has devoted a steady amount of profits into R&D every year, while D&A’s paralysis cuts into the margins.

Nonoperating and unusual/unpredictable items generally have no effect on operating income, at least until the restructuring provision rears its ugly head. Interest expense, like D&A before it, hovered around a certain number rather than moving up and down commensurate to sales—a number I don’t expect to eventually drop to zero so long as the company keeps taking on debt. Tax management has been decent enough to prevent income taxes from rising to ghastly levels (it has gone above the statutory 35% once in the past ten years).

Earnings Retention

With the margins at the bottom-line being rather low on an average basis (despite the 8% NPM posted for 2010 year-end), an important aspect to consider here are the profits retained by Autoliv, after subtracting for both minority interests and dividends distributable to the shareholders.

Historically, the retention rate has been swinging madly. In the past decade alone, the company has had 18% for ’02 and 84% for ’10… but that’s considering dividends were compared to net profits alone.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/div_payout-82596587.jpg)

After peering at this chaotic mesh of numbers for an awkwardly long period of time, anyone would be able to see some level of predictability (ignoring the lack of reliability for free cash flows to either the firm or the equity). I could be reasonably certain that dividends are rarely expected to drop below 17% of NOPAT or owner earnings. Neither would it fall beneath 10% of net OCF, operating profits, EBIT, or adjusted EBITDA.

However, note the company opted not to distribute any dividends at all during the dismal year of ’09, when the net margin was virtually zero (culprits behind this: D&A, Restructuring Provisions, and Interest Expenses, and to a lesser extent, R&D and COGS). This gives me the impression Autoliv values its survival and would rather retain earnings than squander it on shareholders in times of economic turmoil—I see this as a positive trait, an indicator of the company’s honesty, choosing to admit it is in a pinch rather than pretending like nothing is wrong, allowing the distribution of dividends, financed by either debt or its own cash reserves.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/div_potential-5266076.jpg)

One item that got my interest here is what I interpret as the “dividend potential” of the company. While Autoliv’s management can theoretically proclaim the distribution of dividends equivalent to 100% of their retained earnings, 100% of profits for the year, or perhaps even more so—no matter how suicidal it might be—as far as sustainability is concerned, there is always an option to retain free cash flows after principal payments and debt arrangements in cash, equity investments, business acquisitions, and other assets, dispense them, or simply both.

The graph above displays compares the amount of distributable dividends to the amount of free cash flows earned by the company’s equity (inclusive of working capital or not). Dividends have always, always been less than either profit metric. FCF to Equity have always been greater than twice the value of dividends declared, with the exception of 2009 and 1-2 more years. This highlights the capability of the company to double its dividends at any given year, without any detriment, or much of it, to the amount thrown back into the system.

2010’s dividend declaration of $93.3M represents a 1.72% yield on the 2010 average market cap of $5,421M (computed through the average of closing prices at the end of every quarter, multiplied by the number of shares outstanding less treasury). Doubling this to $186.6M results in a 3.74% yield on the present market cap of $4,985M.



To be continued...
Title: Re: TSO's Request Corner
Post by: pinoy_abroad on Aug 09, 2011, 06:16 AM
this is getting more exciting, it is down for more than 10% today...
Title: Autoliv, Inc. (NYSE: ALV) Deep Scan, Part III
Post by: TSO on Aug 09, 2011, 10:44 AM
Returns on investment

Essentially, by virtue of maximized efficiency, low but fairly consistent profits, and a reasonable level of leverage, Autoliv in theory should have compelling returns on investment.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/roe_computation-37732194.jpg)

The terrible profit margins Autoliv has posted year after year are bumped up slightly (by 15% to 20%, usually) through the clever utilization of its assets. As debt hovered around 50% of all assets, any returns on assets earned are practically doubled. Long-run returns on equity are centered around 13%, excluding the years of ’01, ’02, and ’09. Precluding merely ’09, of course, lowers the average to 12%. Last year’s performance was exemplary, mostly due to high net margins resulting from splendid gross profits and low impact from all operating expenses.

Although returns on net operating assets (RNOA), another ROI metric, were never greater than historical ROE’s, that they always contributed over 70% of ROE values have lead me to insinuate that economic returns are predominantly operating, rather than financial management—and that’s a good thing.
   
(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/economic_returns-60823455.jpg)

However, what I find most intriguing is not its returns, but on the variance between that and ALV’s cost of capital over time.

RNOA has grown from 3% to 21% in the past nine years, incurring a long-term average of 10%. My estimates of ALV’s cost of capital has risen from 5.7% in ’02 to 6.5% in ’10. Autoliv has earned less than this in the beginning, and now posts returns with margins of safety above 50%. This gap between ROI and cost of capital supports Autoliv’s ability to create sustainable value (more on this in the next section, Inherent Stability) as it continues to exist and grow.

Inherent Stability

Reliability of indicators
Before moving on to identifying the qualitative facets of Autoliv’s manufacturing business, the first thing I had to look at was the reliability of the statistics I just presented. To supplement this part of the analysis, I included the C-Score and F-Score system concocted by James Montier and Joseph Piotroski, which were designed to be litmus tests of falsified accounting records and wellsprings of value, respectively.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/indicator_reliability-24204847.jpg)

Competitive Advantages
Beginning first with the layout of the industry, the key thing to remember about Autoliv is that all it and all of its competitors are heavily dependent on the auto industry. If the auto industry screws up one way or another, then we are bound to see a shocking impact on Autoliv’s business.

To answer the question of “why”, I point back to the very products Autoliv is manufacturing: airbags, seatbelts, steering wheels, electronic safety systems. Only an idiot would fail to see the synchronized connection between this business and the auto industry, especially in light of the fact all of Autoliv’s major customers are auto manufacturers.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/market_share-8726743.jpg)

This industry is mature and consolidated. Autoliv only recognizes two other companies as major competitors: the American TRW’s occupant safety division and the Japanese Takata, whose market shares have been estimated by Autoliv to be 19% and 20% respectively. As for the “other” competitors, of all of them, the Indian company Delphi has been assimilated into Autoliv’s business thanks to strategic acquisitions (2010 annual report). As for the rest, they are most probably fighting each other, vying for the table scraps (21% market share) falling from the massive buffet feasted on by the “Big Three”.

The Herfindahl-Hirschman index of firm rivalry, arrived at by multiplying 10,000 with the sum of the squares of each company’s market share, was valued no less than 2,650 in all three years scrutinized. That it exceeds the ballpark figure of 1,800 indicates reduced competition in the industry… or at least among the big three.

Looking at the average of all absolute changes in market share can assess the likelihood of sustainable value creation (Maubossini, Measuring the Moat). Working with the figures in the table above will produce averages of an absolute 2.5 (’02 to ’06), 3.2 (’06 to ’10), and 5.1 (’02 to ’10). These are rather high values and can signify the industry’s shaky partitioning among the major players, although I have to say it’s been favorable for Autoliv.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/rnoa-71159411.jpg)
* As another reminder, Takata does not have any publicly-available information for the years ’02 and earlier.

As it can be seen here, returns on net operating assets have been generally increasing for both Autoliv and TRW, while Takata’s fell from 10% to 5% in the four years from ’06 to ’10.

While TRW looks like a possibly better investment, I must stress that TRW’s occupant safety segment represented only 26% of its total assets on 2010. These haven’t been broken down, so I would have no idea how much of TRW’s $4.1 billion in net operating assets would fairly embody this business division. Furthermore, ALV’s larger control over the market ensures it earns more than TRW does as far as the absolute numbers are concerned, rather than percentage figures.

Summarizing what I have on the industry so far, we have reduced rivalry across the three firms, but not decreased enough to keep the market shares stable over time. In addition, the profits of the industry have been flooding into Autoliv and TRW, producing returns far greater than their costs of capital (refer to Profitability, “Returns on Investment”. Using this graph makes the assumption that TRW’s WACC is the same as ALV’s.).

Obviously, the enormous profits raked in by TRW and ALV would be alluring for many new entrants. However, several walls bar their invasion.
•   Incumbent dominance: look again at the table of market share. ALV is dominating the industry in terms of sales, snatching the diamonds straight out of TRW’s and Takata’s hands. The portion allocated to every nameless warrior does not move too much.
•   Investment costs: over the past ten years, ALV has spent approximately $3.11 billion on R&D and technical/engineering expertise. Capital expenditures on fixed assets totaled to $2.70 billion. These figures total to $5.81 billion—slightly higher than the total amount of assets owned by Autoliv. Seems daunting enough.
•   Patent protection: Autoliv files safety patents every year and its protected intangibles have a remaining life of 6 years on average, as of 2010 year-end. These are probably patents on its production processes and perhaps its actual products, resulting from its dedicated research and development, adding yet another significant barrier to entry.
•   Asset specificity: not less than 70% of Autoliv’s depreciable assets have been invested in machines and equipment. The company has technical centers in ten countries, and manufacturing facilities devoted to airbags, seatbelts, and steering wheels in 11, 15, and 8 nations. I would expect something similar from either TRW or Takata. This simply emphasizes the incumbents’ desire to remain in control, as they have had invested too much to get out. It also acts as a passive form of dissuasion for any entrant to enter the game, considering the assets that would be put to use would be specific to the product, and that alone.

A PDF sample of an industry research report on the airbag industry (which I think was prepared during the year 2005) written by Flatworld Solutions Pvt. Ltd. also adds other potential weaknesses for the industry:
a)   Suppliers of the industry can actually expand their business and begin competing with those who used to be their customers.
b)   Customers have plenty of power due to the fact they buy in bulk, as government regulations in developed nations ensure all light vehicles are equipped with airbags and seatbelts. While government regulations in the developing countries aren’t as stringent as those of the former, the 2010 annual report of ALV confesses in its 36th page to business trends where the value of automotive safety is being discerned. Adding to their bargaining power is the capability of corporate customers to arrange in-house suppliers for components—a common practice in China, Japan, and South Korea (2010 annual report, 25).

For those who are interested, this report can be downloaded here: An Industry Report on the Airbag Industry (http://www.outsource2india.com/kpo/samples/airbag-industry-report.asp).

To stave off the threats of competition, their suppliers’ potential expansion, and their customers’ possible independence, Autoliv has attained several qualities that serve to tilt the playing field towards its favor and preserve its ability to earn profits well above the costs of capital.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/comp_adv-90634178.jpg)

First, thanks to its large market share (40% in terms of firm revenues vs. industry sales, but ALV pinned its estimates at a more conservative 35%), it has attained an impressive scale economy.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/per_unit_figures-90009421.jpg)

From an industry that has produced no less than 54 million light vehicles (LV) in the past ten years (OICA, website), Autoliv’s products have captured at least 17 million LV per year during the entire analyzed period.

Sales generated per LV stabilized around $290, while all costs per unit have either increased slightly or took a backstep or two, when they would have gone up tremendously had ALV’s pool of captured vehicles remained constant since ’01. Take R&D for example. The company spends about $11 in research and development for every vehicle its products went into; this value hovered close to $16 from ’03 onward—yet had the company apprehended the same amount of vehicles annually, the amount spent on R&D would’ve risen to $20.2.

Taking that into consideration, Autoliv’s costs are strongly mitigated by the sheer volume of light vehicles using its airbags and seatbelts—the quantity of its market clearly permit the company to spend more for R&D and other improvements and dilute this across each vehicle. However, any weakness in LV production may affect the efficacy of this mitigation; therefore I believe it is important to look at the other sources of competitive advantage…

Such as its production process.

As mentioned earlier in the section covering “efficiency”, Autoliv’s production process is meticulous in terms of quality control and, thanks to constant streams of R&D expenditures, is subject to multiple improvements over time. Most, if not all, of its facilities are ISO-certified. Furthermore, many of its complex innovations and products in “automotive safety and key supporting technologies” are protected, holding over 6,000 patents on 2010 year-end, all of which expire on various dates from 2011 through 2030. This is especially important considering its products and manufacturing facilities are certain to possess indivisible components.

Strategic acquisitions have also added value to ALV’s production process. On 2009, ALV acquired Delphi’s European and North American assets for airbags, steering wheels, and seatbelts, effectively consolidating the industry. On 2010, the company bought the Estonian Norma (a top supplier of the Russian market), acquired the automotive radar business of Tyco and Visteon. Delphi’s Asian operations were virtually absorbed into Autoliv, “significantly strengthen[ing] our (Autoliv’s) position in the expanding Asian market, particularly in South Korea and with Hyundai/Kia” (2010 Annual Report, 36).

Though related somewhat to scale advantages, diversity is another key element to Autoliv’s dominance. The company’s operations are spread over 29 different nations, 17 of which are considered countries of “low costs”. R&D is spread over ten of these (both “high cost” and “low cost” countries), providing maximum flexibility in terms of critical thinking and mindset. Plus, the massive number of nations its manufacturing facilities are based in provides a significant defense against the effect of natural calamities on the production process.

This vast distribution ensures revenue streams coming from multiple locations across the globe, diluting Autoliv’s dependency on any one single region. Recently this has been working to its advantage, as the sales figures from Europe and North America have been decreasing in proportion to the total for the year, no doubt siphoned away by the rapidly growing markets in Asia and “the rest of the world”.

Finally, although the apparent lack of differentiation from one company’s airbag/seatbelt to another’s enables any customer to, quite literally, pick any one leading supplier and be done with it, Autoliv banks on its stalwart reputation and customer mix. Its dedication to innovation and quality all but ensures products well worth every penny spent on them; furthermore, its range of clients prevents the scenario of absolute dependency on any single one.

Despite these low search costs, these are offset by the accepted industry practice of locking in clients three years prior to production through contractual obligations.

An overwhelming majority of ALV’s competitive advantages lies in its production, covering both scale and process. It is diversified across multiple corporate clients and it is an accepted practice in the industry to lock them in for the medium-term. All four, thus, contribute to the immense market share controlled by Autoliv, since 2001 to present day.



Coming up next:

Future Prospects and Valuation! :D
Title: Re: TSO's Request Corner
Post by: pinoy_abroad on Aug 09, 2011, 04:21 PM
Even with the economic slowdown on develop countries (America and Europe)...The world has been producing 70M + cars per year average for the last 5 years (even with recession)... It looks like this is no longer considered as cyclical (kapag medyo exaggerated) , this is now a basic need. The car supply/production has been constantly increasing (considering there is not yet a big shift to hybrid/electric)
Title: Re: TSO's Request Corner
Post by: TSO on Aug 10, 2011, 03:16 AM
Even with the economic slowdown on develop countries (America and Europe)...The world has been producing 70M + cars per year average for the last 5 years (even with recession)... It looks like this is no longer considered as cyclical (kapag medyo exaggerated) , this is now a basic need. The car supply/production has been constantly increasing (considering there is not yet a big shift to hybrid/electric)

You're wrong on the 70M+ cars/year on average.

The 5Y average they've actually produced is 66.48 million cars and commercial light vehicles, worldwide. Of this production, 32% is from Europe. 28% from America. 39% from Asia-Oceania, and the remaining 1% Africa. Again source is OICA.net. I've mentioned it once in my report so far and I'll say it here again. OICA: International Association of Auto Manufacturers.

Of course, your take on it still doesn't really change. When the '08 - '09 recession hit and many auto companies filed for Chapter 11, demand fell from 69.4M to 66.6M ('08) then 58.3m ('09), with Asia-Oceania swallowing a bulk of production (over 40%). I think it is highly unlikely, if not impossible, for the auto industry to go away OR adapt to developments in transport technology.

Refrain from using the word "cyclical" to describe it if you want, but the fact remains it's more prone to falls than other industries whenever sh*t strikes the macroeconomy.

BTW, can't really post Part IV. Not on my computer...obviously.

Post Merge: 1312948167
Okay, here it is. Part IV to the Autoliv, Inc. Deep Scan!

Future Prospects

The growth of Autoliv—and the occupant safety industry itself—are driven by three factors: (a) Safety Content per Vehicle, (b) Supportive Government Regulations, and (c) Global Light Vehicle Production.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/growth_drivers-78475869.jpg)

Safety content per vehicle is the average value of a given vehicle’s safety systems—both active and passive. The global average for the year 2010 was $250 per unit, 20% higher than $210 (the 2001 average and the costs of goods sold spread across every captured vehicle for ’10).

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/safety_content_graph-31231330.jpg)

As the graph indicates, the global average did not deviate too much from $250, most historical values coming up on the $20 interval between $240 and $260. North America and Europe possessed the highest safety content value in all ten years, exceeding even the global average. Japan joined these two since the year 2008, hitting $280 and going up since then.

What I find intriguing here is the immense gap between the “Rest of the World” averages and the global average, or for that matter, the average safety content value for the so-called Big Three (Japan, Europe, and North America). Look at the purple line at the very bottom of the graph and compare it to the blue one in the very middle.

Automotive markets beyond the three primary sales regions have had safety content values at steep discounts to the global average: almost 50% on ’01, then down to ‘28% on ’10. This is only suggestive of an opportunity. Sniff it out on the management’s discussion of its growth prospects and two countries apparently pervade its discourse: India and China. India, whose safety content values are less than $60; China, less than $200.

Lest I forget it, I should mention that the amount of money spent on costs of goods sold, spread across every vehicle statistically captured by Autoliv, is lower than every number posted for the global average. Not only is that another clear indication of how effective Autoliv’s cost-saving initiatives are but also implies the possibility of it dropping as more investments are made into the regions beyond the Big Three—a strong one, too, considering the fact global LV production has become increasingly concentrated in the Asia-Oceania region.

Escalating government regulations in favor of safety—and the industry, inadvertently—also play into the immense profits earned in this life-saving business. I did my best to unearth the latest, specific vehicle safety mandates from the Federal Motor Vehicle Safety Standards (US), the ECE Vehicle and Equipment Regulations (World Forum for Harmonization of Vehicle Regulations (http://www.unece.org)), and other reputable sites across the Internet.

Unfortunately, this eluded me and all I have to present are the rather outdated information provided in the 2010 annual report:
1.   Side curtain airbags will become mandatory in all vehicles produced for the US market starting 2013.
2.   Brazil ruled that all light vehicles will have frontal airbags beginning 2014.
3.   Europe is in the process of phasing in more stringent crash tests into its standards.

Nonetheless, these led me to the expectation of governments eventually considering the implementation of higher safety standards for local vehicles.

The last source of growth, however, is something neither the company nor its industry can control: downstream opportunities, i.e. consumer demand for cars and light vehicles. It is a double-edged blade, capable of inciting either tremendous growth or an appalling decline.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/global_lvp-15821283.jpg)

Global production of light vehicles—passenger cars and light commercial vehicles—lifted straight from figures provided by the international association of automobile manufacturers (oica.net (http://www.oica.net)) indicates a 3.4% geometric growth rate for the 9-year period between ’01 and ’10.

It can be seen on the table that production in Europe and America have been falling, while the Asia-Oceania region is rising up, even during the financial crisis (when EU & NA production fell by 8 million cars in concurrence to Asia-Oceania production advanced 1 million). Asia-Oceania’s strong 9.3% 9-year geometric growth contributed significantly to the expansion of automobile industry.

Given the industry’s intrinsic dependency on auto manufacturers, the next question that I had to ask myself was: what factors shape LV production? 

Common sense dictates three:
•   Consumer preferences, including environmental footprints
•   Mileage: the cost of fuel
•   Cost of maintenance

Consumer preferences are, like the stock market as a collective whole, generally fickle. It is a pointless exercise to analyze these.

However, “going green” is a trend that has long been recognized by the manufacturers—otherwise they would not be producing hybrid and pure electric vehicles today. These two 2007 articles, one by professional automotive journalist Mike Bartley (German Car Manufacturers going “green” (http://www.articlesbase.com/automotive-articles/german-car-manufacturers-going-green-115301.html)) and another by Tamara Holmes of bankrate.com (Automakers see green across their business (http://www.bankrate.com/brm/news/auto/car-guide-2007/20070801_car_manufacturers_green_a1.asp)), wouldn’t have been published either with certainty in their voices.

Mileage, or rather fuel economy, has a profound influence on consumer behavior, and for a very good reason.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/oil_prices-86596350.jpg)
Raw data mined from inflationdata.com (http://inflationdata.com/inflation/inflation_Rate/Historical_Oil_Prices_Table.asp). 2011 data is merely partial, for obvious reasons.

The average price a barrel of crude oil would cost has risen from $16 on the year 1998 to at least five times that amount on 2011: roughly 13.7% a year. Consequently, costs of gasoline have also gone up, considering the fact crude oil is responsible for over 60% of gasoline prices (US Energy Information Administration, “Gasoline Explained” (http://www.eia.gov/energyexplained/index.cfm?page=gasoline_factors_affecting_prices), 19 May 2011).

This insinuates, if not confirms, gasoline is presently at its highest regions, affecting nearly every consumer. In concept and in practice, auto manufacturers would be hard-pressed to develop vehicles of superior mileage, through refinement of fuel-injected systems or technology such as electric vehicles, gas-electric hybrids, hydrogen-powered cars, and the like.

Roland Hwang, Transportation Program Director of the Natural Resources Defense Council (the NRDC), asserted in his May 10, 2011 article on the Green Car website “tougher pollution and fuel economy standards [ensured] American automakers are not just making world beating, competitive products, [but] they are [also] doing fuel economy.” Fuel efficiency is a matter of survival, he wrote. “With gasoline prices pushing $4/gal., consumers are flocking to fuel-efficient cars, shunning SUVs, and snatching up hybrids.” (Roland Hwang, “Fuel Economy is Key to Automobile’s Future” (http://www.greencar.com/articles/fuel-economy-key-automobiles-future.php) in Green Car

Hybrids are typically more expensive than conventional cars (fuel economy premium, I suppose), allowing the rise of the question “is the extra money worth the extra driving distance?”

Todd Kaho’s June 2008 article on the Green Car (http://www.greencar.com/articles/will-hybrid-car-really-pay-off.php) described the computation of the payback distance as “enlightening”, providing a hypothetical scenario where a $22.600 42-mpg Honda Civic hybrid would offset the differential between its price and that of a standard $18,710 29-mpg Civic EX in a little over 86,000 miles, assuming gasoline prices stood at $4 a gallon. Before any reader could make a conclusion, Todd added that tax incentives and other “sweet deals” offered by manufacturers directly influence the payback distance, although he merely stated at the very end that a sustainable car pays for itself “the day you (the reader) drive it off the lot”, on the grounds of “being an early adopter of environmentally-positive technology, reducing oil dependency, and creating less pollution”, along with the “substantial savings realized at the pump”.

I believe, in the final analysis, fuel economy is a significant driver of consumer demand of light vehicles, which in turn influences their production. So long as crude oil continues to rise, so will the need for superior mileage… and more vehicle production.

Finally, the last of the triumvirate affecting LV demand would be the cost of maintenance and/or repairs. Data lifted from Autoinc’s industry research on the two business categories for the US region (http://www.autoinc.org/howsbiz.htm) indicates at least 200 vehicles are being serviced every month by specialized shops nationwide, generating revenues not less than $300 per order. Shops capable of providing collision repair receive less repair orders monthly (an average of 90), each one worth about $1900 more or less.

These numbers have shown sticky consistency over the 2002-2010 nine-year period: little variation and little growth/decline.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/downstream_industries-31327654.jpg)
* Note: no data was available for the average value of service tickets for ’07 and ’08. The reports were unfortunately too vague on the subject. Another recorder of automotive servicing statistics, CarMD, reports the “US National Average for Repair costs” were $410 and $356 for ’07 and ’08 (CarMD stats (http://corp.carmd.com/Page/IndexData)). I think it is unwise to use these numbers as the apparent mismatch between CarMD and Autoinc suggests a divergence in methodology.

My point with automotive maintenance is simply that maintenance and repair costs also affect the production of a specific vehicle platform, and any signs of growth or stability (rather than decline) are bound to play a role in the purchasing decisions of Autoliv’s downstream consumer.

So far, Autoinc’s data does not appear to indicate anything detrimental to the auto industry.


Given the decent growth prospects in regions beyond the Big Three (in terms of global LV production and safety content value per vehicle), not to mention mounting discernment of value in safety and an incentive for auto manufacturers to constantly improve mileage and reduce or maintain the costs of regular maintenance, what has Autoliv done so far to pursue these opportunities?

According to the 2010 annual report, Autoliv’s management intends to finance plant extensions and manufacturing facilities’ construction in China, India, Brazil, Poland, and Thailand by increasing capital expenditures to $300-$350 million yearly (roughly 4% of sales) in anticipation of “continued positive vehicle model mix”, “strong order intake from prior years”, and higher expectations from its radar, night-vision, and vision cameras.

Furthermore, strategic partnerships and/or acquisitions are definitely going to be utilized. Within the past two weeks alone, ALV has established cooperation with Great Wall, a leading manufacturer for SUV and pickups in China (Business Wire, “Autoliv becomes strategic supplier to great wall”, 24 Jul 2011 (http://seekingalpha.com/news-article/1498914-autoliv-becomes-strategic-supplier-to-great-wall)). This partnership called for technical cooperation in the areas of active and integrated safety along with passive safety, enhancing the business relationship Autoliv has had with the Chinese manufacturer since 2003.

IV. VALUATION ANALYSIS

Looking back at the assessment of Autoliv’s risk, I have so far shown its decent level of leverage, its impeccable devotion to efficiency, and its low but relatively consistent profitability, all factoring into ample returns.

Qualitative analysis has revealed the existence of competitive advantages in Autoliv’s production process, taking the forms of scale economies, geographic and customer-based diversity, patent-protected products and technologies, and medium-term contracts commonly practiced by the company, all of which buttress its position in an industry near-impregnable to extraneous invaders.

Though the industry—and ALV’s life force—is tied to the automotive industry and safety content values per vehicle (mandated by customers, governments, or both), opportunities for growth exist due to low safety content values in vehicles produced and sold in countries outside Japan, North America, and Europe, as well as the likely preservation of the auto industry’s health by the continuing emphasis on fuel efficiency and the “green” trend.

As stated in the Executive Summary, these factors left me with the impression Autoliv Inc. embodies LOW risk to the investor, resulting in a 6.92% weighted average cost of capital.

Initial Impressions
I had a great initial impression of the company. Everything about it spoke of cheapness, even when the market was pricing it at $69.11 a share last week. That price was worth 2× the book value, 5× the tangible book value, and 10× the net income of year 2010. Furthermore, when compared to the “sustainable” or “predictable” level of maintenance owner earnings (the value capitalized to produce the unadjusted figure in Greenwald’s Earnings Power Valuation model), the July-end price was merely 12.8× that amount.

When the price took a significant hit today from the worries over the fate of the US economy despite what I think was a half-assed resolution of the explosive Republican vs. Democrat debt ceiling negotiations, it became even more attractive!

At a market capitalization of $4.88 billion, it dropped to 1.7× book value, 4.1× tangible book value, 8.4× net income of the year 2010. The price-earnings multiple for maintenance owner earnings FELL by two whole numbers, from 12.76 to 10.30.

The more Autoliv plummets, the more attractive it becomes as an investment. Of course, could there still be an appropriate estimate on its intrinsic value?



To be concluded...
Title: Re: TSO's Request Corner
Post by: pinoy_abroad on Aug 11, 2011, 11:12 AM
I don't know how long this hybrid/electric cars has been introduce but I believe that within the next 10 years there will be a shift to fuel efficient cars (hybrid/electric)... The only reason I think that its not yet very appealing to consumer is that this is more expensive (and still need a lot of improvement)..but we all know that technology is always expensive only at the beginning..
Title: Autoliv, Inc. (NYSE: ALV) Deep Scan, Concluded
Post by: TSO on Aug 11, 2011, 01:21 PM
Obviously, you're very biased towards fuel efficiency. We're all aware it's a popular trend in the western nations, but the rest of the world has yet to appreciate that. :P

Anyway, here's the rest of the research report.



(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/intrinsic_value-97341226.jpg)

Net Asset Value
Assessing the costs of liquidation is not appropriate for Autoliv, not when its products have virtually no substitute and their salability is intrinsically tied to that of the automobile. Cars are not likely to vanish from the face of the economic world in the near future, and even if robots had somehow replaced every human driver on the planet, airbags and seatbelts aren’t going to go away. In my opinion, accidents and disasters whose consequences are mitigated by Autoliv’s products are not exclusively dependent on human error, and the argument that GPS and “smart systems” designed to prevent accidents is a pathetic excuse for failing to anticipate even the unlikely scenario of a crash.

Aside from zeroing reserves for bad debt, restructuring costs, and inventory excess and/or obsolescence, to be frank, not every asset underwent an adjustment. Only fixed assets were adjusted.

Under fixed assets, the following were applied:
•   A 10% increase on land and land improvements, reflecting my belief a new entrant is likely to pay higher for all the land needed to construct buildings and operate.
•   A 20% leap for machinery and equipment, as the equipment a new entrant would surely purchase must be state-of-the-art, especially when the incumbents put the invader at a major disadvantage.
•   Buildings were padded with a 15% increase to their gross values. Manufacturing plants and other major operating facilities are likely to be more expensive, reflecting better equipment and layouts. However, I think it’s not going to be as expensive as machinery and equipment precisely because the company can skimp on corporate offices.
•   A 10% increase on construction in progress, basing it on the idea the new entrant would face prices different from whatever ALV spent on them. My own conservatism pushed for an increase rather than its polar opposite.
•   $1200 of ALV’s goodwill came straight from acquiring a significant chunk of Delphi back in the late 1990’s. Now, I have absolutely no idea how much this same portion of Delphi would be worth now, but seeing as how Autoliv did not bother reducing this goodwill (or at least, it gave me the impression it didn’t), then I suppose ALV until now still gets its money’s worth from an acquisition made ten years ago. In this case, a new entrant that would “reproduce” the Delphi acquisition by purchasing another major supplier in the industry is likely to pay more for it. I’ve decided to peg 20%.
•   The remaining $412.3 million in goodwill obviously came from ALV’s strategic acquisitions, but unfortunately, I have no idea where it specifically came from. Just to be safe, I padded this by 10%.
•   Finally, I made no adjustments to the amortizable intangibles. Filing for patents, I think, are likely going to reap similar costs and the value of creating the items they protect are already embedded in R&D.

Assuming a 10.6-year implied useful life of all tangible fixed assets, a 4-year remaining life on the same (both are medians), and the straight-line depreciation method, I arrived at $1.64 billion in Net PPE: a 160% adjustment. To arrive at Net Intangibles, I merely utilized the median useful and remaining lives. Note that Goodwill has been completely excluded. This resulted in $2.07 billion for net intangibles: a 120% adjustment.

With everything else held constant, the unadjusted net reproduction costs of Autoliv, Inc. stand at $4.03 billion. However, further adjustments have to be made for: (a) dilution, (b) value of customer relationships, and (c) the value of R&D.

Dilution is roughly equivalent to $178.8 million, arising from dilutive shares of 328 thousand (options), 361 thousand (RSU’s), and 5.7 million (Equity Units through Purchase Contracts).

The value of customer relationships (marketing/functionality operating expenses, as termed by Greenwald) and R&D were determined in the same manner: by taking in the relevant expenses and capitalizing it, subjecting it to a 5-year straight-line depreciation.

I assumed that 8% of COGS and SG&A—low by my own subjectivity, but possibly not in the industry—represent marketing and functionality operating expenses. Capitalized and subsequently dispensed over time, as of 2010 the depreciable estimate was about $1.25 billion. Turning towards the value of its R&D, under the same principle, the depreciable level of R&D was estimated at $1 billion.

These three, when applied to the unadjusted net reproduction cost, raised the total to $6.1 billion, a number higher than Autoliv’s current market cap but lower than both Earnings Power Value and the Value of Growth.

Value of Zero Growth
The value of zero growth, or “earnings power value”, in the words of Bruce Greenwald, is merely the net present value of maintenance owner earnings, capitalized over WACC and further adjusted as if it was a plain DCF financial model.

Rather than using 2010 figures and taking it as what the company could possibly accomplish at the very least over the next few years to come, I walked down the path of conservatism and applied the following assumptions in projecting the income statements—note that I tend to favor medians. I see them as more reliable than averages whenever the base numbers are too volatile to be useful.

   $277 sales per vehicle captured in the global market, representing the 10-year average. A little close to 2010’s $280.
   62 million vehicles produced worldwide, signifying the median level. About 15% lower than 2010’s 73 million.
   Estimated market share of 33%. Median of ALV’s own estimates, and significantly lower than market shares derived from % of industry sales (40%)
   Median COGS margin of  76.7%
   Median SG&A and average R&D margins, both of which experienced low variation over past ten years.
   Used median D&A margin, which underwent moderate variation due to its number being relatively immobile. The $285 million assumed is in line with what has been posted in the past.
   Growth R&D and growth SG&A expenses were based on the median depreciation charges, which resulted from estimating the values of customer relationships and R&D for net reproduction costs.
   Effective Tax Rate of 30.4%, arising from the statutory 35% lowered by 4.6% due to reasonably predictable tax adjustments (4.6% is the sum of their medians).
   Maintenance CAPEX is estimated to be 95% of actual CAPEX (based on estimates using number of light vehicles captured). Excess depreciation was signified by the remaining 5%.
   Number used was the 10Y median of the yearly estimates from 2001 to 2010, all calculated using number of light vehicles captured.

These assumptions resulted in operating margins of 7.85% (lower than median 7.9%), actual NOPAT margins of 5.53% (just above the median). My estimate of maintenance owner earnings (or “Income as further adjusted”, in the words taken straight from Greenwald’s book) was pinned on $484 million. As I have written earlier, the market cap of $4.88 billion ($54.64 a share) is just a bit above ten times this amount.

Capitalized via WACC, I arrived at a nominal earnings power value of $6.99 billion. After adjusting it for excess cash (+$304M), dilution (–$178.8M), underfunded pension assets (–$136), and interest-bearing debt (–$566; the present value of total principal payments, interest expenses, commitment fees, and rent expenses, given a pessimistic outlook, capitalized with WACC), the final estimate of earnings power value—the value of zero growth—was computed to be $6.42 billion.

This $6.42 billion indicates a 22% margin of safety over the market price. In other words, current prices are so low there isn’t even a premium for additional growth!

I also took the liberty of playing with the core assumptions and found several interesting points:
   If Global LVP was reduced to 54.11 million (the lowest number for the entire decade), the final EPV becomes $5.85 billion (↑20% over market cap)
   If all cost controls are minimized except the D&A margin, holding it constant, which I personally think is highly unlikely to become permanent considering all the cost-cutting initiatives it pursued in the past (e.g. supplier consolidation, employee geography mix, absenteeism rates, rejection rates, et al.), operating margins would fall to 6.3%. This will result to a final EPV of $5.02 billion (a 2.9% margin of safety).
   What if composite sales per car and global LV production were reduced to $238 (never seen since ’02) and 54.11 million vehicles? Final EPV would drop to $5.31 billion (↑8.85% over market cap). Throw in the 6.3% operating margin and it plummets to $4.61 billion: a 5.6% overvaluation (which is still acceptable, as 11% is the highest overvaluation I would accept)!

All these playful manipulations indicate one thing: there is a built-in margin of safety by buying Autoliv, Inc. at the prices it is trading at as of late, and the lower it gets, the more attractive it becomes. Of course, the only time any purchase decision is wrong would be, I think, when the market simply refuses to go up.

Here’s another kicker I think the readers would find interesting: the earnings power value of $6.42 billion is higher than the net reproduction cost estimate of $6.1 billion. Bruce Greenwald’s philosophy, as detailed in both his book and perhaps his lectures at the University of Colombia, stresses the discrepancy between EPV and NRC highlights qualitative factors, such as superb management and strong competitive advantages, or the lack thereof.

Possible sources of the $320 million discrepancy would be the very competitive advantages already brought up in the section on Inherent Stability:
-   Globalized presence, reducing dependency on any single region
-   Large scale economy, reducing all operating costs per captured vehicle
-   Strong commitment to R&D and zero defects for both products and processes
-   A supplier of the most eminent auto manufacturers in the industry
-   Protects its processes, products, and technologies with patents
-   Sustainable value creation since ‘03

Value of Growth
Lastly, the value of growth is another compelling item in Autoliv’s valuation. Here are some fun facts regarding Autoliv:

First, the current market price of $55.82 ($4.98bn market cap) assumes a 10.3% yearly decline in free cash flows over the next nine years, under the condition of zero growth in the terminal period. This is completely absurd, when it has been growing about 11% a year from ’02 to ‘10, posting annual returns well over the costs of capital for the same period of time, when it is the backbone of an industry that isn’t likely to die off in the near future.

Second, the potential for ALV to grow is quite strong. It controls over 30% of the occupant safety market, and there is a great opportunity for the company to tap into the low safety content values in the “Rest of the World”, not to mention exploit the high production of light vehicles worldwide.

Third, and finally, what the company is selling are not airbags and seatbelts. Autoliv is selling safety itself, striving to reduce the risks of death or crippling injuries from road crashes and accidents. Why would people shun something a service like this in the first place, if not out of conceit and arrogance?

The prime drivers of Autoliv’s growth comes straight from how much revenues it generates from its market share, and how much they can save in costs of production as well as corporate expenses.

My DCF models of valuation basically forecast Autoliv Inc.’s owner earnings, using over 30 variables involving market share, global LV production, sales generated per captured LV, multiple expense margins, effective tax rates, among others. The net present value of these owner earnings, once they have been discounted at WACC, are further adjusted for dilution, pension liabilities, minority interests, and long-term debt.

Before I even begin, I will announce that Terminal Value accounts for 60% of fair value across all three scenarios (pessimistic, neutral, optimistic), accentuating this company’s status as a long value play.

Here are some of the assumptions I used in my financial models—note that I did not disclose all, as I screened the 30+ variables on the bases of relevance and conservation of reading space. (Readers who are interested are free to request the full list of assumptions.)

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-08/sm/dcf_assumptions-64839593.jpg)

At worst, I would expect the intrinsic value to be $4.80bn ($53.76/sh.), slightly below the market price of $4.88bn ($54.64/sh.). Net sales and operating income would be both growing at 3% a year from ’11 to ’10, while owner earnings would grow at 3.6% a year—all three figures are significantly lower than historical growth rates over the previous 9-year period.

If we brighten the outlook slightly, the intrinsic value almost doubles, hiking up to $8.66 billion ($97/sh.): 77% higher than the market price, representing a margin of safety of 42%! A number that I think is reasonable, considering the discount rate being taken for the company is rather low. That a high margin of safety exists does not change if I lower neutral sales per LV to $240 per vehicle—applying this pulls the NPV down from $8.66bn to $6.99bn, ensuring a discount estimate of 30%.

V. PERSONAL CHOICE OF ACTION

It seems to me Autoliv Inc. is an excellent choice for a long-term investment. Whatever risk it assumes is throttled by the brutal combination of quantitative and qualitative analysis. Decent leverage, sustained efficiency, and positive profitability, plus great competitive advantages in a fortified industry as well as geographic diversity in its operations more than offset its single, greatest weakness that is the complete and utter reliance on the auto manufacturing business.

If at all, the only threat I am seeing would be the effect of macroeconomic forces. Not on Autoliv’s business fundamentals (its longevity over the tumultuous decade of 2001 to 2010 imply amazing resilience), but rather, its stock price and its dividend policy.

Remember, the company refused to distribute dividends during times of crisis. Furthermore, the crisis of ‘08 and ‘09 have severely depleted ALV’s price and dumped it low enough to produce year averages of $38 and $31.1 a share, respectively. News concerning the automotive industry, the market as a whole, and ALV’s own individual situation are the things I would monitor like a hawk.

Keeping these in mind, with its high margins of safety and excellent protection from permanent losses in economic prosperity, ALV is presenting itself as an excellent buying opportunity, at least for the week. I would personally take any signs of decreasing stock prices as a traffic light telling me to wait… and buy at even better prices.

Growth should not be a factor here as the purchase price already embodies a discount to inert degrees of profitability. What more if growth is factored in?

~ End ~



Okay, so I'm going to work on three things next:

1. Either GMA7 or EDC, screening only.
2. Deep Scan of Dr. Pepper Snapple... or ProAssurance Corporation (a prospect I found c/o a discussion I participated in at LinkedIn).

Known requesters will be contacted within the next few days, or once I have everything setup. Work is taking too much of my time and now that it's August, I'm kinda spending much of my free time studying for my CFA exam. D:




EDIT for 9/19/2011:

Found two news sources for those who are interested in investing in the company:

Quote
Autoliv Seeing Strong Growth For Battery Disconnect System

Sep 15, 2011 04:44:56 (ET)

   DOW JONES NEWSWIRES
 

STOCKHOLM (Dow Jones)--Swedish car safety equipment company Autoliv Inc. (ALV) said Thursday it is seeing high interest for its Pyrotechnic Safety Switch (PSS) from numerous original equipment manufacturers (OEMs) for their electric vehicle models as well as for gasoline-powered cars and trucks.

 
   MAIN FACTS:

-The PSS is an automatic safety switch which utilizes a pyrotechnic initiator to cut the electrical power to a designated portion of the vehicle in a crash.

-The safety switch is activated by the same crash sensors as the airbags.

-Cutting the vehicle's electrical power minimizes the potential for a fire caused by a damaged electrical system exposed to flammable liquids or gases.

-This year Autoliv expects to produce 1.6 million units of the PSS, mainly on luxury models.

-Production volumes are expected to more than double over the next three years as more vehicle manufacturers integrate this new safety technology into mid-scale higher volume platforms.

-At 0843 GMT shares traded 1.6% higher at SEK349.50.

-By Dominic Chopping; Dow Jones Newswires; +46-8-5451-3093; dominic.chopping@dowjones.com

(END) Dow Jones Newswires

September 15, 2011 04:44 ET (08:44 GMT)

and

Quote
Autoliv: Strong Growth for Automatic Battery Disconnects in new Vehicles

Sep 15, 2011 04:42:00 (ET)

STOCKHOLM, Sep 15, 2011 (BUSINESS WIRE) -- Regulatory News:

At the Frankfurt Auto Show, Autoliv Inc. (ALV, Trade )(and sse:ALIV sdb) -- the global leader in automotive safety systems -- announced that it is seeing high interest for its Pyrotechnic Safety Switch (PSS) from numerous OEMs for their electric vehicle models as well as for gasoline-powered cars and trucks.

The PSS is an automatic safety switch which utilizes a pyrotechnic initiator to cut the electrical power to a designated portion of the vehicle in a crash. The safety switch is activated by the same crash sensors as the airbags. Cutting the vehicle's electrical power minimizes the potential for a fire caused by a damaged electrical system exposed to flammable liquids or gases.

"Our customers see the Pyrotechnic Safety Switch as a necessary technology for their electric vehicles to automatically and safely cut off the immense stored electrical power to the powertrain and other systems that could be damaged in an accident", stated Jan Carlson, Autoliv's President and CEO.

"For traditional light vehicles and commercial trucks, our customers are utilizing the PSS as an effective, low cost way to minimize the potential for a vehicle fire caused by an accident, thereby preventing people from being injured by the flames - especially if the car occupants are unconscious. This is another example which demonstrates how our products continue to enhance a vehicle's overall safety for the general public" added Carlson.

This year Autoliv expects to produce 1.6 million units of the PSS, mainly on luxury models. Production volumes are expected to more than double over the next three years as more vehicle manufacturers integrate this new safety technology into mid-scale higher volume platforms.

~~ Tis a sign, I say!
Title: Re: TSO's Request Corner
Post by: robot.sonic on Aug 15, 2011, 06:25 PM
baka makalimutan mo na ako ang nag request ng EDC ha. :)

:thankyou:

Title: Re: TSO's Request Corner
Post by: gatsmavi on Aug 15, 2011, 10:41 PM
Waiting din ako sa EDC  Sir TSO :DThank you
Title: Re: TSO's Request Corner
Post by: TSO on Aug 26, 2011, 02:27 PM
Sonic, Mavi, and all other followers,

I just want to give you guys an update of what's been going on with me lately, and why I have been silent as of late. I can give you five reasons.

First, my laptop is busted. The hinges snapped, and I can't use my laptop without (a) something propping the monitor up, and (b) exposing its delicate innards to the outside world. Unfortunately, all my spreadsheets are in my wonderful gaming computer.

Second, I just underwent a medical operation that, uhhhh, made me bedridden for the next few days.

Third, as I cannot work on either the PSE.EDC screening or the NYSE.PRA deep scan, I am focusing my sights on stalking Autoliv like a hawk. I bought it at $57, it's down to $51, and I'm waiting for it to fall to $40 or less so I can snap it up and reduce my average costs (with the intent of pulling AVG cost per share down to about $48).

Fourth, the CFA Level I exam is virtually three months away, and I've just reached the statistical portion of book 1. That's slow considering I have technical analysis, economics, accounting and FS analysis, and other topics to work with prior to the exam. It is hell I tell you.

Fifth, I sent an experienced analyst a copy of my ALV report and I am excited to read his feedback on my 47-page report, as I am expecting tips and hints on how I can improve both my analytical process and writing style.

I apologize greatly for the waiting period. I know people are anxious to read what I have to say about the companies whose analyses they specifically requested, but unfortunately, I have other priorities to juggle about, priorities aimed at self-development and profit generation.

Yours,
The Silent One

Post Merge: 1314343870
Postscript!

Before anyone asks how the hell am I replying here on PMT Forum, I borrowed someone else's lappy. No way in hell am I transferring my spreadsheets here.
Title: Re: TSO's Request Corner
Post by: gatsmavi on Aug 26, 2011, 04:45 PM
Get Well soon Sir :hello:
Title: Re: TSO's Request Corner
Post by: brokerbackgirl on Oct 07, 2011, 10:47 AM
Pwede na po ba magrequest?

SMPH MWC ALI JFC EDC LC RCM

please :D hahahahaha
Title: Re: TSO's Request Corner
Post by: TSO on Oct 07, 2011, 11:10 AM
@ brokerbackgirl

Please read the first page. Note that I've already finished analyzing Manila Water and will not be touching it again until the next year, at the most.

As I've said in an earlier post, I'm busy studying for the CFA L1 exam, and I'm still working on a Deep Scan report on a US insurance company to boot.

Sorry.
Title: Re: TSO's Request Corner
Post by: brokerbackgirl on Oct 07, 2011, 11:16 AM
sorry rin :) sige magbackread na lang ako nahihilo kasi ako sa mixups ng local/foreign stocks
Title: ProAssurance Corporation Deep Scan Summary (w/ link to full article)
Post by: TSO on Oct 26, 2011, 02:25 PM
Hallelujah! I have finally finished my Deep Scan of ProAssurance!

It took me more than a month to work on it, but that is understandable simply because it had been my first time analyzing an insurer, and I think all the time I wasted studying how to analyze an insurance company contributed to the quality of my writing.

Now, I cannot post the full, 27-page report on PinoyMoneyTalk as I am duty-bound by an agreement with GuruFocus, as this has been entered into its monthly analysis contest. However, I am permitted to at least provide a summary.

If you are interested in reading the full article, please click the link: ProAssurance: Passing the High Hurdle. (http://www.gurufocus.com/news/149182/proassurance-passing-the-high-hurdle) Comments are welcome... along with 4 or 5 star ratings, of course. >:3



PROASSURANCE CORPORATION
Country:      United States
Ticker symbol:   PRA (NYSE)
Industry:      Property & Casualty Insurance – Medical Malpractice Liability (MMPL)
Current Price:   $77.79 a share / 2.38B market cap (as of 4:24 PM CST, 10/24/2011)
Periods Analyzed:   2004 to 2010
Date started:      9/10/2011
Date concluded:   10/19/2011
Report written on:   10/24/2011


I.   IMPORTANT DISCLOSURES

Before I begin my analysis of ProAssurance, I have two disclosures to make.

First, as of writing I do not hold any shares of the company.

Second, and more importantly, the wall of text you’re about to read represents my first ever analysis on an insurer.  Because of the industry’s special nature of using debt and investments as something akin to inventory, I will admit right here, right now, at the very beginning of this report, that financial companies just aren’t my strong point.

However, I think it is wrong for someone to shy away from industries or businesses one does not understand, and in fact, jumping into something one has absolutely no experience in will foster both a better understanding of the business under study, and a better grasp of what to look for in certain situations.

Although the reader may find my inexperience in the analysis of this industry as highly relevant—possibly enough to forgo the reading of this report in the first place—I have spoken with at least three people on the matter, spending the past month going through the annual filings and bombarding them with incessant blocks of questions as I scrutinized PRA with the best of my ability and in accordance to my personal system.

Should the reader decide to proceed, the caveat of exercising one’s own due diligence before making an investment decision must be stressed.

Thank you.

II.   PROFILE

The ProAssurance Corporation (PRA) is a holding company for property and casualty insurance companies focused on professional liability. While the corporation’s client mix traverses the gamut of healthcare professionals—from physicians, dentists, and surgeons to podiatrists, chiropractors, and even home healthcare—ProAssurance writes the vast majority of its premiums from physicians and dentists, who represent 66% of the 69 thousand policyholders it covered on 2010 year-end.

Its presence in the United States is phenomenal, considering the insurance industry is highly fragmented and very competitive. The National Association of Insurance Commissioners (NAIC) considers ProAssurance as one of the Top 5 MMPL insurance companies nationwide, along with Medical Liability Mutual, Medical Protective (a Berkshire Hathaway subsidiary), Doctors Company, and AIG.

Incorporated in Delaware during the second quarter of 2001, ProAssurance is the offspring of Medical Assurance, Inc. and the Professionals Group, Inc. Since then, the company has engaged in a flurry of mergers and acquisitions, virtually one year after another. In the past seven years, ProAssurance has assimilated at least six companies, one of them being a professional liability insurer for lawyers... an understandable decision considering the background of the CEO who stepped into power on 2007.

It was written on ProAssurance’s 2010 annual report (15th page) that it is “…the successor to eighteen insurance organizations….”

Nothing else clearly delineates ProAssurance’s nature as a serial acquirer.

III.   EXECUTIVE SUMMARY

Admittedly, ProAssurance is a stock the market pays little attention to. Though shares outstanding were never beneath a robust unit count of 30 million, the volume it has normally traded for were less than 5%. In fact, even during the debacle of ’08 and ’09, volume did not breach 10% of shares outstanding—price did not drop below the $50 range it had been trading in the pre-crisis period.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-10/sm/10y_pra_chart-4172582.jpg)

This company first got my attention after a short discussion about it with someone from LinkedIn, who informed me of its low P/B and P/E ratios, its high net profit margins in recent years (above 30%), and a safety net from debt thanks to most of its equity being in short-term bonds.

Obviously, a further study of the case gave me a tremendous insight on the risk it poses to investors.

While it is easy to discern ProAssurance’s excellent credit and the impressive efficiency it exhibited in the past, and even easier to add a premium to the target price for participating in an industry that would never go away, no matter how notable is PRA’s reported profitability as found on websites such as Google or GuruFocus, the profit figures enshroud the crutches on which it leans. Concealing the questions on loss reserve adequacy and the sustainability of investment returns.

Furthermore, future prospects are weak. The MMPL industry is a dog-eat-dog world. There are so many competitors, ranging from big-time insurers and other MMPL coverage providers to cooperatives and unions. The top five in the field do not even control more than 30% of the premiums written nationwide.

A zero-sum game, organic growth is almost impossible without aggressive M&A. While the volume of healthcare practitioners and the occupations supporting them have grown since 2004 despite the debacle that had cost the United States thousands of jobs, the fact remains ProAssurance’s major client base, physicians and dentists, have averaged one billion across the United States in the past seven years (Bureau of Labor Statistics Tables (http://www.bls.gov/cps/tables.htm)).

To put it laconically, the sustainability of ProAssurance’s conservatism and investment returns combined with a feeble outlook on growth left me with the impression this medical malpractice liability insurer represents a MODERATE LEVEL OF RISK, translating to a discount rate of 17.41%.

Although I find its risk rating unattractive and disconcerting, PRA nonetheless has a rather compelling valuation.

An analysis of market-implied growth rates suggests the market is assuming a lofty expectation on PRA’s float over the long-run. At the same time, the study shows book value is expected to grow at a rate that could only be described as “modest” in lieu of its historical record. The investing collective appears to emphasize business operations more than its investments, yet every other valuation technique weights the investments far more than the insurance business.

The entirety of ProAssurance’s investment portfolio, almost every bit of it placed in fixed maturities of medium-term duration, net of current loss reserves, long-term debt, and dilution, was worth almost $60 as of the 2nd quarter of 2011: a significant portion of fair value. Under pessimistic and zero-growth conditions, the underlying business does not even contribute more than 30% to the intrinsic value.

Even so, when the two are combined, I arrived at an EPV of $70.23, with the current price representing an 11% overvaluation—an acceptable level considering the high discount rate. This value is approximately 69% higher than the firm’s net reproduction costs: an ostensible indication of competitive advantages that, I believe, arise from its impressive efficiency and approach towards M&A. As of writing, the market price assumes a negative 3% margin of safety on pessimistic growth conditions, and a 16% figure on neutral growth conditions—items of interest in light of the high discount rate.



Coming up next...

1. Screens of EDC and GMA7
2. Another deep scan analysis, US company. Probably Hillenbrand, as it got my attention... but we'll see. Might have to review my project backlog again.
Title: Re: TSO's Request Corner
Post by: bauer on Oct 26, 2011, 05:28 PM
TSO,

your summary is very good for the said insurer.  I have also place a bet on the good potential of the US insurance industry although it is not the same as you evaluated.
Title: Re: TSO's Request Corner
Post by: akira0422 on Oct 26, 2011, 06:58 PM
by the way --what do you get if you passed cfa exams??? and to qualify??? it seems quite intresting...
Title: Re: TSO's Request Corner
Post by: TSO on Oct 26, 2011, 10:16 PM
@ bauer:

Thanks.

Just to add, I'm not advising an all-out aggresive buy of the company, I don't like its qualitative prospects, but what saved my opinion of it were its operating efficiency (other than loss reserves), its dominant position in the industry, its approach to acquisitions, and its great credit.

I'm not sure about the outlook of the other branches of insurance though, as I merely covered MMPL.

@ akira:

Anyone can sign up so long as they have either a 4Y bach degree or equivalent in experience. Parang MBA. Topics are very simular to an MBA in Finance but these guys weed out the unwortht with tests of extremely high rates of failure (pass rate ng L1: 35%; L2 and L3: 50%. so less than 10% of the L1 candidares end up becoming charterholders after going thru the system.)

The only benefit? Imo, it's just an improvement to your resume. You don't exactly learn much unless you use it regularly. I'm learning a lot on economics here. Book 1 helped eith tech analysis but only refreshed my memory on business stat.

I went through Book 3 (FSA) already and all i can say is, I'm probably going to skip a few readings and gravitate towards accounting shenanigans and analysis of taxes and retirement benefits, since those are my weakpoints and they etter be nore comprehensive than th book I studied back in ADMU.

If someone with no business background is going to take the test, unless you study really hard, you're not likely to pass even level one. I might not eveb pass it on December because books 5 and 6 are going to kill me AND my study habits are horrible! I'm supposed to be in book 4 now but I'm at book 2 atm!!!

Trust me, just go find yourself an old CFA candidate and get all his L1 books. Study it and you'll evntually know as much as analysts do as far as the toolkit is concerned.
Title: Re: TSO's Request Corner
Post by: vicces on Oct 27, 2011, 04:21 PM
@TSO, gusto kong bumoto dun sa gurufocus as props to your well written work, pero do i have to sign up pa?

Post Merge: 1319703804
^lgoznpjr, wtf?!?!
Title: Re: TSO's Request Corner
Post by: TSO on Oct 27, 2011, 08:34 PM
No need to sign up. May x mark dun sa lower right.meh, report mo na lang. Halata na spam ej
Title: Re: TSO's Request Corner
Post by: Marcelianox on Oct 28, 2011, 01:31 AM
sir TSO, whats your undergrad course?
Title: Re: TSO's Request Corner
Post by: TSO on Oct 28, 2011, 02:40 AM
Management lang, w/ minor in Finance. ^^
Title: Re: TSO's Request Corner
Post by: Marcelianox on Oct 30, 2011, 10:33 PM
Sir TSO, How much will it costs to take CFA exam?? ive heard its very costly.....
Title: Re: TSO's Request Corner
Post by: TSO on Oct 31, 2011, 11:46 PM
Sir TSO, How much will it costs to take CFA exam?? ive heard its very costly.....

$1500 for the first exam. $1000 for the remainder.



Calling BBG, robot.sonic, novice, and akira0422.

Your request for me to screen EDC has been finished, and I have a 24-page report waiting to be sent out via e-mail, so I need your email addresses.

To everyone else: sorry, but no free-loading, so you won't be getting the reports from me directly until I publish this two weeks from now.
Title: Re: TSO's Request Corner
Post by: okpinoy on Nov 06, 2011, 07:30 AM
Sir TSO, newbie po ako, paano b mapasama sa distribution list mo para hindi n maghintay ng 2 weeks about sa report mo ng EDC?

Meron ba workshop/hands-on training ng Deep Scanning method mo dito sa pinas? INterested ako matutunan pero tingin ko kelangan ko ng practice nyan para mag-sink in talaga sa utak ko hehe :) Thanks.
Title: Re: TSO's Request Corner
Post by: TSO on Nov 06, 2011, 10:38 AM
Okpinoy,

You're five days too late. My screening report on EDC has been completed on 31 Oct 2011, and has already been distributed to the requesters.

You aren't the only one who asked me to send my 24-page file, and I'm going to tell you the same thing I told him. I will not send you the report because it is unfair to my requesters. If you really want it, PM the ones who received it: brokerbackgirl, robot.sonic, gatsmavi, or novice. They should be more than willing to mail the file to your inbox, but as far as I am concerned, I, the analyst and writer behind the report, I'm bound by my duty to my clients.

For your consolation, I can include you in my updates on GMA7 when I work on it next month (after my CFA L1 exams).

Quote
Meron ba workshop/hands-on training ng Deep Scanning method mo dito sa pinas? INterested ako matutunan pero tingin ko kelangan ko ng practice nyan para mag-sink in talaga sa utak ko hehe

No, I don't have any. I'm not even in the Philippines. :P

Actually, kahit na meron akong workshop, hindi matuturo talaga ang deep scan method. Du Pont analysis lang 'yan, pero sa sobrang lalim na sinasabihan ako na overkill ung report. Sa totoo lang, ang Deep Scan, eh, encoding, number-crunching, at research lang yan. Mahalaga ang encoding ng FS mula sa annual report imbis ng mga numero galing sa website katulad ng Yahoo, Reuters, Google, FactSet, Bloomberg, o GuruFocus kasi lumalaki ang intindihan mo sa kumpanya.

 Kung gusto mo "hands-on training", gumawa ka ng sarili mong analysis at valuation. Tingnan natin ano mangyayari (at ano ung mga sasabihin ko hahaha! Ingles lahat ng critique ko, so humanda ka na para sa nosebleed XP).

Naalala ko nga eh, noong tinuturan sa 'min ung VI philosophy sa Ateneo dati ('di ako sigurado kung tinuturo nila ito ngayon; baka kaunti lang ang mga batch 'dun) , eh, lahat ng topic galing sa libro na may practical na application (hindi tulad ng mga tinuturo sa FIN classes...) Final project = isang financial analysis ng kumpanya 'di masyadong naiiba sa deep scanning ko... pero tig-apat-anim kayo bawat proyekto. LOL

~ The Silent One
Title: Re: TSO's Request Corner
Post by: switchiz on Nov 07, 2011, 10:11 AM
Pwede na po ba magrequest?

SMPH MWC ALI JFC EDC LC RCM

please :D hahahahaha

Sir TSO pwede bang magrequest din tulad nito? Pero SMPH, RCM and AC
Title: Re: TSO's Request Corner
Post by: TSO on Dec 15, 2011, 12:59 AM
And TSO is back!

Sh*t to do:
1) Upload EDC screening on thread. I'll have to put up the images on my usual hosting site, but once I got that, expect it up by the end of the week.
2) Begin working on GMA7. I know some people wanted me to go into one of those mining companies people are speculating on (AT was it?), but I made a commitment a while back and I really should get to doing it instead of leaving it alone in development hell.
3) Start churning NYSE: HI! Deadline --- the omgwtfsofrickinglong report undergoing writing phase by 12/31. ^^

@ switchiz:

I'll probably pick up RCM / AC once I'm done with my next Deep Scan project (NYSE: HI). US is going down again, and I'm pressured once again to seek out opportunities here.

Title: Re: TSO's Request Corner
Post by: freefront on Dec 15, 2011, 01:42 AM
ABC5 isn't public yet?
Title: Re: TSO's Request Corner
Post by: TSO on Dec 15, 2011, 02:08 AM
IIRC you gave me a choice b/n ABS and GMA?

Hm. Maybe the screening will be more of a comparison if that's the case.
Title: Re: TSO's Request Corner
Post by: freefront on Dec 15, 2011, 02:35 AM
 :hihi:I googled IIRC!

Yep. But i dumped my GMA and now there's MVP and Sharon, etc.

A 3-way comparison would be great just as long as you won't have to forgo the merrymaking this season. It can wait a bit.

TIA.
Title: Re: TSO's Request Corner
Post by: TSO on Dec 15, 2011, 02:58 AM
3-way comparison will be hard if ABC5 just went public recently.

You know I don't look at companies with little public history. Recent offerings like CEB or whatever, hanggang 3 years lang ung prospecti. 4 to 5 at best if they've been out for at least a year, but you've got to be wary about any significant changes. On top of that, if you're gonna do a comparative analysis, you've got to have enough data to make the study meaningful -- doesn't matter if it's a screen or deep scan.

Anyway, I don't know much about ABS/GMA/ABC, so I'll prolly DL their most recent 17A's and see how I can frame my work from there.

Actually ganun din ako sa HI ngayon eh. Ung HI, it's gonna be a new challenge. Would you believe it? Kahit na matagal nang publiko ang kumpanya, nasa ilalim ng magulang ang HI hanggang 2008, noong nagkaroon ng spinoff, tapos sa 2010, nag-merge sa negosyong naglalaro sa industrial na makina.

Haha... masisira ulo ko sa separasyon ng HI mula sa parent pre-'08. Ipapagaralan ko pa ang FS ng merger nila separately. But determination shall prevail! XD Hell yeah. Hopefully by end-December may report na ako... for my third submission to GuruFocus lol.
Title: Re: TSO's Request Corner
Post by: vicces on Dec 15, 2011, 06:31 AM
And TSO is back!

Sh*t to do:
1) Upload EDC screening on thread. I'll have to put up the images on my usual hosting site, but once I got that, expect it up by the end of the week.
^nainip n nga ako dyan e, di ko na naantay sinunggaban ko na edc...:D
Title: Re: TSO's Request Corner
Post by: TSO on Dec 15, 2011, 07:26 AM
So long as you got it as low as you possibly could, that's okay.

Recommendation on EDC was a buy so long as the price was right. Maganda ung kumpanya, pero masyadong dependent sa future growth ang presyo niya ngayon. Naiinis ako sa Philippine market eh -- hindi bumabagsak ang mga kumpanya ko, so lahat ng puwersa ko nasa America kasi lahat ng action nandoon.

(If no one replies, this post will eventually be merged with the EDC screen. :))
Title: Re: TSO's Request Corner
Post by: vicces on Dec 15, 2011, 08:58 AM
^guess thats my cue to make another reply, hihi... nakakatempt nga din mag-e*trade (i think coz the books i've been readinga re all US-based and mga cnn + cnbc + bbc news na napapanood ko).. buti na lang di ko pa din kaya financially, at higit sa lahat, wala pa akong muwang sa local stocks kaya katarantaduhan naman ang maghanap na naman ako ng ibang market na gagawing playground...

sige bos TSO hintayin ko pa rin edc analysis mo while accumulating more investible funds (hehe accumulate, parang andami)...
Title: EDC Screening Report
Post by: TSO on Dec 20, 2011, 04:06 PM
Energy Development Corporation
Country:          Philippines
Ticker Symbol:       EDC (PSE)   
Industry:         Power – Geothermal Energy
Current Price:      PHP6.10 a share // approx. 114.4B PHP in market cap
Periods Analyzed:      2005 to 2010
Date started:      10/27/2011
Date concluded:      10/29/2011
Report written on:   10/31/2011


I.   BUSINESS PROFILE

Proclaiming itself as the pioneer in the geothermal industry, the Energy Development Corporation is the Philippines’ largest supplier of geothermal energy, boasting an installed capacity of almost 1.2 Gigawatts. Since 2006, the company has produced no less than 60% of the renewable power generated nationwide.

EDC’s operations are predominantly situated in the heart of Visayas, producing geothermal steam either sold to the National Power Corporation (NaPoCor; NPC) directly or sent to its own power plants for electricity production. EDC’s President and Chairman has both expressed—boasted—the corporation’s status as the “largest integrated geothermal power producer in the world”, an organization that owns not only the fields from which it generates geothermal steam, but also the power plants that convert it into usable energy.

Founded under the Philippine National Oil Company in 1976, the company has been involved in the renewable power source since inception, having constructed and managed a 3 MW plant as a one-year-old. Despite the immense risks and capital inherent in the industry, the Energy Development Corporation, through perseverance, constant struggles for success, and a drive to coexist with the inflexible demands of its local communities and ecological sustainability, has matured into the better half of the Philippines’ geothermal duopoly more than thirty years into its life, when it is now gradually, slowly but surely, reaching forward beyond the constraints of its expertise and geography.

Source: 2010 Annual Report, EDC’s official website

II.   EXECUTIVE SUMMARY

The Lopez-owned Energy Development Corporation is one of those companies well-loved by investors, somehow worming its way into the lectures of business professors in the top universities. Though my graduation from my alma mater was a mere year and a half ago, my collegial memories are still quite fresh. Even so, not once could I recall an instance—a class—where an aspect of this geothermal producer was discussed, whether it be its screw-up on the Yen exposure a couple years back, or its allure as one of the best investments available in the local markets, so good it was featured during a contest held by the Philippine branch of the CFA Institute.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/yearly_chart-51806515.jpg)
 
Despite the fact I cannot remember how the company entered my sights back in 2009, in the middle of that giant valley depicted in the chart, the Energy Development Corporation was a major milestone for me, as it was not just my first investment ever, but also my first encounter with a crossroad, a choice that would distinguish me as either a member of the fearful herd or a value investor—a value investor that thrives on corporate missteps and fumbles.

My investment thesis two years ago was that the company’s price was already struggling with the negativity of the financial crisis that erupted in ‘07 and ‘08, only to lose its grip and fall headfirst when news of its extreme decline in net income of 85% was promulgated for all to see. I had already perceived the market’s folly when I realized its operating profits were as strong as ever, its efficiency ratios going strong and remaining within the three year average. (On a side note, I am very willing to distribute the spreadsheets I worked with back in ‘09, just to give my readers a grasp of the analytical style that I still employ to this day.)

What had cost me an extra 50 centavo discount per share was my diffidence in entering the stock market itself, rather than the entry point of mutual funds, time deposits, money market deposits, and other low-yielding but virtually infallible investments normally taken by novices of the craft, people who possess no ability to discern good investment prospects from bad, and last but not the least, cowards with no confidence in their skill.

Two years down the road, I find myself asking: has this investment thesis changed?

Honestly, even if my analysis of EDC was rudimentary, was a screening at best, and by no means as comprehensive as my deep scans of MWC, of EEI, or of LOTO, it actually hasn’t.

The Energy Development Corporation is still the leveraged beast it was back then, its ability to meet its obligations merely sufficient. Although efficiency as measured by financial indicators is not even better than what it had to show for back in ’06, even now, the few qualitative KPI’s I managed to salvage tell a different story. Profitability has grown stronger, though it is masked by some items found only in the notes.

Going into the corporation’s qualitative advantages, which I never went into—nor did I know how—back in the day, EDC’s status as a high quality business despite its high credit risk is quite discernible. As said earlier in the profile section, the company is the larger half of a duopoly in the Philippines’ geothermal energy industry, sharing the glory with Chevron, the owner of Caltex and one of the largest oil firms worldwide.

Despite a reasonable supply of geothermal reserves left in the nation free for all to seize, an almost insurmountable barricade bars new entrants from joining the game and turning the duopoly into a competition somewhat similar to the type seen between the Big Three of footwear: Nike, Reebok, and Adidas.

Future prospects are quite strong, bordering on speculative. On one hand, much like Manila Water, EDC can exploit the inevitable rise of energy demand, no doubt tied to population growth, seeking capacity expansions on three fronts. On another hand, EDC’s pursuit of geothermal investments beyond the Philippines tenders a long-term catalyst to the fray.

The impeccable sustainability of Energy Development Corporation’s business, its aspirations for operational efficiency, its strong profitability, and the glowing prospects for its future overwhelm any and all problems that would’ve been posed by its troubling credit. Therefore, EDC represents a LOW-TO-MODERATE RISK to the investor, corresponding to an arbitrary, risk-perceived discount rate of exactly 12%.

As this was a screening process, I did not employ a full Greenwaldian analysis, but rather a different set of analytical tools altogether. The trinity promoted by Bruce Greenwald of Value Investing fame requires a critical study of the financial statements and a more thorough analysis of the company’s future prospects and how it blends into the financial projections. If it wasn’t obvious to you now, it is a horrendous and time-costly process.

The analytical methods used in the end of the section were Vitaliy’s Absolute P/E model, a crude version of Greenwald’s Earnings Power Value, and reverse DCF for expectations analysis as hinted at by James Montier, and expounded on by Michael Mouboussini.

With reported profits masking the true P/E ratio of 15.71, EDC is borderline cheap in the absolute sense of the term. It is priced at a 27% discount to intrinsic P/E, and is overvalued by 61% in relation to the value of stagnation. Reverse DCF shows the market’s growth expectation of revenue per kilowatt hour is 47% lower than what has been observed over the studied time frame, implying the strong impact of possible surprises it is likely to dispense in the medium-run.

The net present values produced by both EPV and Reverse DCF have been adjusted for excess cash, long-term debt, deferred tax liabilities, and underfunded pension assets.

Additional disclosure: I currently hold a position in EDC.

III.   RISK ASSESSMENT

Creditworthiness
EDC’s business is prohibitively capital-intensive, and there is no doubt debt financing will play a role in its business. Debt becomes even more prominent as EDC aggressively pursues growth and expansion, a fact apparent in its ever-creeping spread towards other branches of renewable energy and geothermal prospects in Chile and Indonesia. (More on this in Future Prospects.)

As far as creditworthiness is concerned, I find EDC’s case disconcerting. Worrisome, perhaps.

To begin, I’d like to point out the company has produced operating cash flows ranging from 5 to 13 billion in the past five years, meaning the company is capable of paying off all its liabilities within 5 to 8 years. Buttressing its favorable outlook on long-run solvency is that NOPAT generated by the firm, adjusted for material non-recurring expenses, has been consistent enough to warrant the observation EDC could possibly pay off its obligations in seven years, give or take.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/edc_profit_metrics_debt-7152172.jpg)

If EDC has proven itself solvent for the long run, then why am I so anxious about its creditworthiness?

That concern falls directly onto its liquidity and its earnings coverage. How fluid is the company’s current assets? How much of required obligations can profit metrics, much like the three listed above, pay off?

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/current_ratio_and_earnings_coverage-3001705.jpg) 

Pay close attention to the two charts above. On the left, you have the current ratio, or rather, its components. In half of the six years observed, current liabilities exceeded current assets, and it had gone down in the last fiscal year only to make way for long-term debt. The inconsistency is glaring and doesn’t speak well of what could potentially happen in the short run.

Earnings coverage does not help neither. With the exception of 2008, when debt payments suddenly took a dive from the average 11 billion in payments to 2.8 billion, earnings have never provided a significant margin of safety above these obligatory payments. Is it any wonder why EDC maintains a debt ratio of 60%? It’s continually refinancing its outstanding loans, which wouldn’t have really been a problem for me if the company had a choice in the matter, if the company’s earnings and liquid assets could handle the hypothetical scenario of distress, i.e. every creditor demanding repayment without prior notice.

For this reason alone, EDC’s credit appears weak despite a dependent level of solvency.

Efficiency
Unlike Manila Water, EDC didn’t wow me with operating statistics and KPI’s in its annual reports. The closest thing I had was a “power plant steam rate” that didn’t show up until the 2010 AR, making a long-term analysis moot.

And unlike EEI Corporation, the blue chip of the construction industry, there’s almost nothing in the notes to financial statements that would’ve allowed me to extract key operating performance indicators crucial to the operations inherent in its industry.

Given these constraints, I only had utilization, employee productivity, and your typical financial ratios to work with.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/utilized_capacity-86613075.jpg)

As seen in the above graph, EDC has enjoyed a utilized capacity of roughly 79%, with little variation. The little dip seen on 2010 was attributed to a shortfall in the Unified Leyte geothermal plants’ production, something the annual reports did not bother explaining. I am, however, of the belief this misstep in power generation is not sustainable and revenues are probably going to go up. There is also a possibility the utilized capacity may increase as EDC finishes its BacMan rehabilitation project and open an additional 125.5 megawatts to operating capacity.

If there’s anything I like seeing here, it’s that EDC has gone for a surplus in capacity over the medium-term, ensuring it has enough space in its power generation process to accommodate not only peaks in energy demand but also the permanent bump-ups to electricity consumption in the future.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/employees-24851725.jpg)

EDC also has a rather stable level of personnel under its payroll. There has not been a point in time in the company’s history when employees assigned to operations—steam fields, power generation, technical services, engineering, or construction—fell beneath 80% of all people employed.

Employee productivity has actually gone up in the past five years. EDC, at present, makes about P12.6 million in steam and electricity revenues per operating employee in a given year, in a sharp contrast to the low figures in ’06 to ’08.

Gigawatt-hours sold per worker is currently at its lowest, and has undergone some fall due to slight jumps in the number of people employed compared to the amount of energy produced. GWh fell from 3.98 per person to 3.82 GWh in 2010, but only because of Unified Leyte’s stumble; had it stuck somewhere close to the average otherwise, the production per person would’ve matched ‘06’s 4.18.

Lastly, the typical financial ratios also show the same story. Turnover ratios have averaged 0.30× for computations made with total assets and 0.49× if with net fixed assets (including service concession assets), both with low variation. There had been a slight dip in the ratios beginning ’07, but they have gradually moved up.

However, if the turnovers were computed by juxtaposing GW-hours sold versus the billions of pesos invested into fixed assets, productivity has actually fallen, from 208 GWH per peso on ’05 to 133 GWH per peso on the last fiscal year. Normalizing that last figure only boosts the number to 145 GWH, clearly pointing out a significant decrease in efficiency.

At least, as far as the investments into capital assets are concerned, considering EDC’s utilization rate has always stayed beneath 80%.

If forced to answer the question of efficiency, my best guess would be a solid affirmation, if the limited number of figures in this section were of any indication.



Profitability, Inherent Stability, and Future Prospects will be added in section 2 as soon as I am permitted by the forum to do so. (Someone please reply to facilitate faster uploading! :D)
Title: Re: TSO's Request Corner
Post by: medlifemd on Dec 20, 2011, 04:22 PM
keep it coming sir! :)
Title: Re: TSO's Request Corner
Post by: george88 on Dec 20, 2011, 05:54 PM
Energy Development Corporation
Country:          Philippines
Ticker Symbol:       EDC (PSE)   
Industry:         Power – Geothermal Energy
Current Price:      PHP6.10 a share // approx. 114.4B PHP in market cap
Periods Analyzed:      2005 to 2010
Date started:      10/27/2011
Date concluded:      10/29/2011
Report written on:   10/31/2011


I.   BUSINESS PROFILE

Proclaiming itself as the pioneer in the geothermal industry, the Energy Development Corporation is the Philippines’ largest supplier of geothermal energy, boasting an installed capacity of almost 1.2 Gigawatts. Since 2006, the company has produced no less than 60% of the renewable power generated nationwide.

EDC’s operations are predominantly situated in the heart of Visayas, producing geothermal steam either sold to the National Power Corporation (NaPoCor; NPC) directly or sent to its own power plants for electricity production. EDC’s President and Chairman has both expressed—boasted—the corporation’s status as the “largest integrated geothermal power producer in the world”, an organization that owns not only the fields from which it generates geothermal steam, but also the power plants that convert it into usable energy.

Founded under the Philippine National Oil Company in 1976, the company has been involved in the renewable power source since inception, having constructed and managed a 3 MW plant as a one-year-old. Despite the immense risks and capital inherent in the industry, the Energy Development Corporation, through perseverance, constant struggles for success, and a drive to coexist with the inflexible demands of its local communities and ecological sustainability, has matured into the better half of the Philippines’ geothermal duopoly more than thirty years into its life, when it is now gradually, slowly but surely, reaching forward beyond the constraints of its expertise and geography.

Source: 2010 Annual Report, EDC’s official website

II.   EXECUTIVE SUMMARY

The Lopez-owned Energy Development Corporation is one of those companies well-loved by investors, somehow worming its way into the lectures of business professors in the top universities. Though my graduation from my alma mater was a mere year and a half ago, my collegial memories are still quite fresh. Even so, not once could I recall an instance—a class—where an aspect of this geothermal producer was discussed, whether it be its screw-up on the Yen exposure a couple years back, or its allure as one of the best investments available in the local markets, so good it was featured during a contest held by the Philippine branch of the CFA Institute.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/yearly_chart-51806515.jpg)
 
Despite the fact I cannot remember how the company entered my sights back in 2009, in the middle of that giant valley depicted in the chart, the Energy Development Corporation was a major milestone for me, as it was not just my first investment ever, but also my first encounter with a crossroad, a choice that would distinguish me as either a member of the fearful herd or a value investor—a value investor that thrives on corporate missteps and fumbles.

My investment thesis two years ago was that the company’s price was already struggling with the negativity of the financial crisis that erupted in ‘07 and ‘08, only to lose its grip and fall headfirst when news of its extreme decline in net income of 85% was promulgated for all to see. I had already perceived the market’s folly when I realized its operating profits were as strong as ever, its efficiency ratios going strong and remaining within the three year average. (On a side note, I am very willing to distribute the spreadsheets I worked with back in ‘09, just to give my readers a grasp of the analytical style that I still employ to this day.)

What had cost me an extra 50 centavo discount per share was my diffidence in entering the stock market itself, rather than the entry point of mutual funds, time deposits, money market deposits, and other low-yielding but virtually infallible investments normally taken by novices of the craft, people who possess no ability to discern good investment prospects from bad, and last but not the least, cowards with no confidence in their skill.

Two years down the road, I find myself asking: has this investment thesis changed?

Honestly, even if my analysis of EDC was rudimentary, was a screening at best, and by no means as comprehensive as my deep scans of MWC, of EEI, or of LOTO, it actually hasn’t.

The Energy Development Corporation is still the leveraged beast it was back then, its ability to meet its obligations merely sufficient. Although efficiency as measured by financial indicators is not even better than what it had to show for back in ’06, even now, the few qualitative KPI’s I managed to salvage tell a different story. Profitability has grown stronger, though it is masked by some items found only in the notes.

Going into the corporation’s qualitative advantages, which I never went into—nor did I know how—back in the day, EDC’s status as a high quality business despite its high credit risk is quite discernible. As said earlier in the profile section, the company is the larger half of a duopoly in the Philippines’ geothermal energy industry, sharing the glory with Chevron, the owner of Caltex and one of the largest oil firms worldwide.

Despite a reasonable supply of geothermal reserves left in the nation free for all to seize, an almost insurmountable barricade bars new entrants from joining the game and turning the duopoly into a competition somewhat similar to the type seen between the Big Three of footwear: Nike, Reebok, and Adidas.

Future prospects are quite strong, bordering on speculative. On one hand, much like Manila Water, EDC can exploit the inevitable rise of energy demand, no doubt tied to population growth, seeking capacity expansions on three fronts. On another hand, EDC’s pursuit of geothermal investments beyond the Philippines tenders a long-term catalyst to the fray.

The impeccable sustainability of Energy Development Corporation’s business, its aspirations for operational efficiency, its strong profitability, and the glowing prospects for its future overwhelm any and all problems that would’ve been posed by its troubling credit. Therefore, EDC represents a LOW-TO-MODERATE RISK to the investor, corresponding to an arbitrary, risk-perceived discount rate of exactly 12%.

As this was a screening process, I did not employ a full Greenwaldian analysis, but rather a different set of analytical tools altogether. The trinity promoted by Bruce Greenwald of Value Investing fame requires a critical study of the financial statements and a more thorough analysis of the company’s future prospects and how it blends into the financial projections. If it wasn’t obvious to you now, it is a horrendous and time-costly process.

The analytical methods used in the end of the section were Vitaliy’s Absolute P/E model, a crude version of Greenwald’s Earnings Power Value, and reverse DCF for expectations analysis as hinted at by James Montier, and expounded on by Michael Mouboussini.

With reported profits masking the true P/E ratio of 15.71, EDC is borderline cheap in the absolute sense of the term. It is priced at a 27% discount to intrinsic P/E, and is overvalued by 61% in relation to the value of stagnation. Reverse DCF shows the market’s growth expectation of revenue per kilowatt hour is 47% lower than what has been observed over the studied time frame, implying the strong impact of possible surprises it is likely to dispense in the medium-run.

The net present values produced by both EPV and Reverse DCF have been adjusted for excess cash, long-term debt, deferred tax liabilities, and underfunded pension assets.

Additional disclosure: I currently hold a position in EDC.

III.   RISK ASSESSMENT

Creditworthiness
EDC’s business is prohibitively capital-intensive, and there is no doubt debt financing will play a role in its business. Debt becomes even more prominent as EDC aggressively pursues growth and expansion, a fact apparent in its ever-creeping spread towards other branches of renewable energy and geothermal prospects in Chile and Indonesia. (More on this in Future Prospects.)

As far as creditworthiness is concerned, I find EDC’s case disconcerting. Worrisome, perhaps.

To begin, I’d like to point out the company has produced operating cash flows ranging from 5 to 13 billion in the past five years, meaning the company is capable of paying off all its liabilities within 5 to 8 years. Buttressing its favorable outlook on long-run solvency is that NOPAT generated by the firm, adjusted for material non-recurring expenses, has been consistent enough to warrant the observation EDC could possibly pay off its obligations in seven years, give or take.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/edc_profit_metrics_debt-7152172.jpg)

If EDC has proven itself solvent for the long run, then why am I so anxious about its creditworthiness?

That concern falls directly onto its liquidity and its earnings coverage. How fluid is the company’s current assets? How much of required obligations can profit metrics, much like the three listed above, pay off?

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/current_ratio_and_earnings_coverage-3001705.jpg) 

Pay close attention to the two charts above. On the left, you have the current ratio, or rather, its components. In half of the six years observed, current liabilities exceeded current assets, and it had gone down in the last fiscal year only to make way for long-term debt. The inconsistency is glaring and doesn’t speak well of what could potentially happen in the short run.

Earnings coverage does not help neither. With the exception of 2008, when debt payments suddenly took a dive from the average 11 billion in payments to 2.8 billion, earnings have never provided a significant margin of safety above these obligatory payments. Is it any wonder why EDC maintains a debt ratio of 60%? It’s continually refinancing its outstanding loans, which wouldn’t have really been a problem for me if the company had a choice in the matter, if the company’s earnings and liquid assets could handle the hypothetical scenario of distress, i.e. every creditor demanding repayment without prior notice.

For this reason alone, EDC’s credit appears weak despite a dependent level of solvency.

Efficiency
Unlike Manila Water, EDC didn’t wow me with operating statistics and KPI’s in its annual reports. The closest thing I had was a “power plant steam rate” that didn’t show up until the 2010 AR, making a long-term analysis moot.

And unlike EEI Corporation, the blue chip of the construction industry, there’s almost nothing in the notes to financial statements that would’ve allowed me to extract key operating performance indicators crucial to the operations inherent in its industry.

Given these constraints, I only had utilization, employee productivity, and your typical financial ratios to work with.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/utilized_capacity-86613075.jpg)

As seen in the above graph, EDC has enjoyed a utilized capacity of roughly 79%, with little variation. The little dip seen on 2010 was attributed to a shortfall in the Unified Leyte geothermal plants’ production, something the annual reports did not bother explaining. I am, however, of the belief this misstep in power generation is not sustainable and revenues are probably going to go up. There is also a possibility the utilized capacity may increase as EDC finishes its BacMan rehabilitation project and open an additional 125.5 megawatts to operating capacity.

If there’s anything I like seeing here, it’s that EDC has gone for a surplus in capacity over the medium-term, ensuring it has enough space in its power generation process to accommodate not only peaks in energy demand but also the permanent bump-ups to electricity consumption in the future.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/employees-24851725.jpg)

EDC also has a rather stable level of personnel under its payroll. There has not been a point in time in the company’s history when employees assigned to operations—steam fields, power generation, technical services, engineering, or construction—fell beneath 80% of all people employed.

Employee productivity has actually gone up in the past five years. EDC, at present, makes about P12.6 million in steam and electricity revenues per operating employee in a given year, in a sharp contrast to the low figures in ’06 to ’08.

Gigawatt-hours sold per worker is currently at its lowest, and has undergone some fall due to slight jumps in the number of people employed compared to the amount of energy produced. GWh fell from 3.98 per person to 3.82 GWh in 2010, but only because of Unified Leyte’s stumble; had it stuck somewhere close to the average otherwise, the production per person would’ve matched ‘06’s 4.18.

Lastly, the typical financial ratios also show the same story. Turnover ratios have averaged 0.30× for computations made with total assets and 0.49× if with net fixed assets (including service concession assets), both with low variation. There had been a slight dip in the ratios beginning ’07, but they have gradually moved up.

However, if the turnovers were computed by juxtaposing GW-hours sold versus the billions of pesos invested into fixed assets, productivity has actually fallen, from 208 GWH per peso on ’05 to 133 GWH per peso on the last fiscal year. Normalizing that last figure only boosts the number to 145 GWH, clearly pointing out a significant decrease in efficiency.

At least, as far as the investments into capital assets are concerned, considering EDC’s utilization rate has always stayed beneath 80%.

If forced to answer the question of efficiency, my best guess would be a solid affirmation, if the limited number of figures in this section were of any indication.



Profitability, Inherent Stability, and Future Prospects will be added in section 2 as soon as I am permitted by the forum to do so. (Someone please reply to facilitate faster uploading! :D)

Thanks TSO... think you should create your own site or blog you will have many followers :D)
Title: Re: TSO's Request Corner
Post by: vicces on Dec 20, 2011, 10:48 PM
t.y.v.m. sir tso! EDC nga lang nagpapaberde sa portfolio ko  the past week e... :thumbsup:
Title: Re: TSO's Request Corner
Post by: akira0422 on Dec 21, 2011, 11:41 AM
yup.... edc + excellnt credit worthiness... Thanks to TSO for sharing his time and expertise, providing us with great valuation everytime.....

Title: EDC Screening Report, Part 2
Post by: TSO on Dec 21, 2011, 12:18 PM
Part II of EDC Screening Report



Profitability
Because this is an analysis on the screening level, I did not bother going into an extensive analysis of cost controls. Rather my focus here is on the key profitability ratios and what caused them in the first place.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/profitability_analysis-76835054.jpg)

First impressions, anyone?

Indulge in the table and focus your vision on the last three years to the right. First up, we have the lowest net income on ‘08. Furthermore, effective taxes took a giant leap on the same year, only to deflate by a shocking 70% come ‘10.

Also on the most recent fiscal year, operating income had been cut by ¼ compared to the previous year. This six-year low also happened to be the LOWEST in EDC’s entire publicly-listed history. (Ouch!) I’m actually surprised EDC’s net income on that year floored the ’09 figure by over 20%!

Also notice how steam and electricity revenues—money produced from selling the GW-hours produced to NPC and a healthy variety of electricity cooperatives—were at their highest for ’10, when the energy generated for the year was at the completely opposite end of the spectrum.

This table alone exposes the following questions:
1)   Why was EBIT so negative on ‘08?
2)   Why was there a divergence in revenues earned from power produced?
3)   Why the hell did the tax rate for ‘08 take a giant leap?
4)   Just what catastrophe dragged operating profits down in ’10?
5)   Is there actually a reasonable explanation behind ‘10’s maddening division in the effective tax rate?

Question #1 is the easiest to answer: foreign exchange killed operating profits, pulling EDC’s pants down. There is no need to seek the reason behind it considering the debacle that occurred in those years.

The answer for Question #2 can be found in the company’s implied price per kWh, along with the financial impact of the Renewable Energy (RE) law, which also explains the next three matters altogether.

Unit Pricing
Unit pricing underwent surprising developments. Every kilowatt-hour sold by Energy Development Corporation was priced at an average P2.13 each on ‘06. This took a dive the next year when steam/electricity sales fell, but ascended until it struck P3.20 per kWh on 2010, ending the four-year period with a remarkable 11% growth rate. (Take note that “unit pricing” is on average, and in reality, sales of steam and sales of power are priced differently per kWh, but since electricity rakes in higher tariffs than steam...)

New accounting rules spawned by the RE Law also affected not only the revenue recognition system EDC adhered to prior to ‘09, pumping up revenues on ’10, but also the suppressing covenants of the contracts under which it operates.

The Renewable Energy Law
To first answer Question #4, anyone who would take a plunge into the notes would discover that operating expenses went up by exactly 3.39 billion pesos on 2010, thanks to a wonderful entry called “Impairment loss on PPE of NNGP”. Furthermore, EDC also posted higher depreciation, particularly in power plants and FCRS production wells.

Before anyone adds back anything to operating profits, the first thing that has to be understood was WHY the impairment loss—why the increased depreciation—took place. Perusing the other notes linked to either expense item would eventually lead the reader to RA 9513, the RE Law, and ultimately, the little monster called “Geothermal Renewable Energy Service Contracts” (GRESC’s).

In ‘09, the Energy Development Corporation had its plain vanilla, run-of-the-mill Geothermal Service Contracts changed to GRESC’s, where the terms of the service concessions were similar to the old ones. It had done so in pursuit of its best interests, as the company would be entitled to multiple benefits delivered by the RE Law along with “control over any significant residual interest”—fancy words essentially mean “full ownership”—of all steam fields, all power plants, and all related facilities throughout and after the service concession period.  

This allowed the company to exclude it from IFRIC 12, retroactively and from that point onward. Consequently, all concession receivables and intangible assets were derecognized and transferred to PPE, spread across various line items. Furthermore, the new PPE items were depreciated and electricity and steam revenues were recognized at full invoice price, whereas prior to October ’09 these were partly revenues and partly “financial repayment of Receivables and Interest on Service Concessions” (2009 IR Briefing by EDC). Also, every capital expenditure on the fixed assets could be classified as such and be capitalized as additions to PPE, as before, under IFRIC 12, EDC couldn’t do so if the expenditure didn’t increase revenue potential (even if it did prolong useful life).

Furthermore, in addition to all these changes, EDC reran the perpetuity growth model valuation of NNGP, changing key assumptions and consequently producing the 3.39B loss seen on ’10, and the 349M loss seen the year before.

But wait, what about the taxes? How does the RE Law—the GRESC conversion—fit into that?

Put plain and simple, the RE Law added 2.96 billion to income taxes in 2009! The year before, when the RE Law was first promulgated and implemented, added almost 500 million, and the EDC’s tax rate couldn’t qualify for the statutory tax rate applicable only to companies involved in renewable energy. Had these adjustments been absent, the effective tax rates for ’08 and ’09 shouldn’t have been 49% and 54%, but rather 31% and 13%.

Under those conditions, net income on ’09 and ’10 should’ve been 6.63B and 7.28B. Net income on ’08 would have been 8.31B without the immense FOREX loss. These three adjustments would bring up average net income to 7.84 billion, with small variations (CV = 0.13).

Let’s not forget NOPAT as well! With these changes to the tax rates and operating expenses, net operating profits after tax should’ve been P7.74B, P7.92B, and P8.36B on ’08, ’09, and ’10, respectively, raising the average NOPAT margin seven percentage points to 33%.

Before I close the section on profitability, the Renewable Energy Law (http://www.iea.org/textbase/pm/?mode=re&id=4273&action=detail) provides some details that reveals just why the company’s tax rates freefell to 15% on the most recent fiscal year:
-   7-year income tax holiday
-   Carbon credits free from taxes
-   10% statutory income tax instead of 30%
-   A 1.5% realty tax cap on renewable energy facilities (according to EDC’s FY09 presentation, the tax was at the power plant level)
-   Priority on all electricity purchases, grid connection, and transmissions
-   Renewable power is VAT-exempt

Inherent Stability
After doing a little bit of digging and some reflection on the information I gathered on EDC, if there’s something I love here, it’s the signs of sustainability. The Energy Development Corporation is cornered by multiple sources of competitive advantages, ensuring value-adding growth, i.e. continuous returns above the costs of capital. The image below summarizes these.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/competitive_advantages-84497261.jpg)

Prohibitive Barriers
Although the Philippines is currently making use of a mere 33% of its potential geothermal capacity of 6000 megawatts, the barriers to entry by new entrants are EXTREMELY HIGH, fraught with risk from multiple sources along with exorbitant capital requirements encompassing the realms of time, money, technology, and knowledge.

According to information available from the US Department of Energy,

“The level of risk for the project must account for all potential sources of risk: technology, scheduling, finances, politics, and exchange rate. The level of risk generally will define whether or not a project can be financed and at what rates of return.

Current hydrothermal projects or future EGS projects will, in the near term, carry considerable risk as viewed in the power generation and financial community. Risk can be expressed in a variety of ways including cost of construction, construction delays, or drilling cost and/or reservoir production uncertainty. In terms of “fuel” supply (i.e., the reliable supply of produced geofluids with specified flow rates and heat content, or enthalpy), a critical variable in geothermal power delivery, risks initially are high but become very low once the resource has been identified and developed to some degree, reflecting the attraction of this as a dependable baseload resource.” (“Chapter 9: Energy Sector Fundamentals (http://www1.eere.energy.govgeothermalpdfsegs_chapter_9.pdf)”, US Department of Energy, 6; emphases added)

The resource file used here proceeds with a table delineating the four steps of geothermal power development: geologic assessment and permits, exploratory drilling, production drilling and reservoir stimulation, and finally, power production and market performance.

A rough index of costs in terms of time, money, and risk accompanies the table. It may not provide the specifics someone pursuing a geothermal opportunity would require, but it nonetheless corroborates the precarious, upward slope all potential competitors must traverse.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/geothermal_project_stage_1-85261160.jpg)

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/geothermal_project_stages_2_and_3-90172524.jpg)

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/geothermal_project_stage_4-66193267.jpg)

As you may have read, the first three stages to developing a project for geothermal energy can take extremely long, and are very taxing insofar as demand for labor and geological expertise are concerned.

Investors face high costs and risks in the path to constructing a geothermal power plant, along with a learning curve. These would dissuade many a potential competitor from attempting to join the interplay between Chevron and EDC, who already approach prospective geothermal projects with experience behind them.

The file from the US Department of Energy even breaks down the capital investments among three categories: exploration, drilling, and testing of production wells; construction of power conversion facilities; and discounted future redrilling and well stimulation.

“Previous estimates of capital cost by the California Energy Commission (CEC, 2006), showed that capital reimbursement and interest charges accounted for 65% of the total cost of geothermal power. The remainder covers fuel (water), parasitic pumping loads, labor and access charges, and variable costs. By way of contrast, the capital costs of combined cycle natural gas plants are estimated to represent only about 22% of the levelized cost of energy produced, with fuel accounting for up to 75% of the delivered cost of energy.” (“Chapter 9: Energy-Sector Fundamentals”, US Department of Energy, 8; emphases added)

An Integrated Business
The executives of EDC tote their company as the “largest integrated steam and power producer in the world” (2010 Annual Report, 9). Such boasting has support in economics: by virtue of managing the reservoir, the steamfields, and the power plants, the Energy Development Corporation has effective control over steam production and electricity production, creating a vertically integrated model no competitor smaller than Chevron could possibly attain within the medium term.

Think of it this way. Imagine owning a small chain of convenience stores, may it be 7-Eleven or Ministop. You have no choice but to accede to the competitive rates charged by your suppliers, and as such, you attempt to find deals that minimize your costs, whether the approach is done through a long and meaningful business relationship with the supplier (“preferred pricing”) or through finding companies that are cost-saving, even at the risk of debasing quality (think China).

Ah, but what if you owned the suppliers? What if your convenience stores replenish their inventories from the products of companies you own? It’s essentially an intersegment sale, and it’s highly likely you’re going to charge the business at cost. After all, it’s still your money that’s transferring between two entities you own.

On top of that, by owning the suppliers, revenue production is amplified by the two sources: supplying other convenience stores and selling the wares through those you control.

It is this business model, the integrated value chain, that EDC capitalizes on, decreasing their exposure to “international price volatility and supply shocks”.

Contractual Lock-in
Licenses and contracts also provide another competitive advantage for the industry incumbents. EDC’s customers in Leyte, Cebu, and Panay—all electricity cooperatives—have renewed their interest in EDC and entered into 15 Power Supply Agreements, all but three expiring on December 2020. Annual reports indicate these PSA’s supplied P6.56 billion in electric revenues on 2010, roughly 32% of all electric revenues at an implied price of P3.2 per kWh.

Furthermore, the 3 Power Purchase Agreements with the NPC all have a term of 25 years, expiring on the years of 2022 to 2024. The PPA’s stipulate a contractually assured energy purchase of at least 5,243 GWh a year over the entire period from the Mindanao I and II, Leyte-Cebu, and Leyte-Luzon power plants, with the purchase price being a base amount plus inflation adjustments.

Finally, EDC has also gone ahead of its competitors and now possesses geothermal project contracts for Mt. Labo in Camarines Norte and Mt. Mainit in Surigao del Norte, along with six Wind Energy Service Contracts for wind projects in Burgos, Pagudpud, Taytay, Camiguin, Dinagat, and Siargao. All contracts fall under the RE Law and expire on 2035, although I am not sure if these WESC’s are similar to the GRESC’s where the company is given full ownership to the fixed assets upon expiration of the concession.

Geothermal Duopoly
EDC is the bigger half of the geothermal duopoly comprised of itself and Chevron Philippines, and that fact is quite clear from its installed capacity and the power it had generated over the past five years.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/energy_suppliers_philippines-85017047.jpg)

EDC has consistently controlled over 60% of geothermal energy capacity and power supply in the past six years. Furthermore, geothermal energy itself accounted for 20% of all GWH generated nationwide on average.

The market shares controlled by the two companies have been largely stagnant and it is a hallmark of industry stability, as far as geothermal energy and “all others” are concerned. The duopoly, however, must compete with coal and natural gas, as these two have been geothermal’s greatest competitors, at least according to the Philippine DOE’s historical estimates.

Economies of Scale

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/scale_economy-25541074.jpg)

Finally, economies of scale play a big role in reducing EDC’s costs. As it can be seen here, steam and electricity revenues earned per kWh on average has been clearly above that of all operating expenses (excluding the “other charges” that drag down operating profits to EBIT). The OPEX spent per unit would’ve been cut to 2.25 had kWH sold been closer to the average sales volume of 8.2 TWh.

The rise in OPEX could probably be attributed to either an increase in fixed costs or an increase in variable costs. Of course, this is where a deeper analysis would delve into.


Post Merge: 1324441140
In next post, will be posting Future Prospects and Valuation Analysis. ^__^
Title: Re: TSO's Request Corner
Post by: vicces on Dec 22, 2011, 12:53 AM
awaiting for the next post TSO... btw, is it ok if i ask some questions about your analysis sir (yep i read that^, words por words)? after reading the first two parts up there, and a consult from someone who used to be in the know about these lopez-owned firms, may mga naisip akong tanong (probably silly). i will hold them in till the report has been posted in full. thanks uli
Title: Re: TSO's Request Corner
Post by: TSO on Dec 22, 2011, 01:01 AM
Quote
awaiting for the next post TSO... btw, is it ok if i ask some questions about your analysis sir (yep i read that^, words por words)? after reading the first two parts up there, and a consult from someone who used to be in the know about these lopez-owned firms, may mga naisip akong tanong (probably silly). i will hold them in till the report has been posted in full. thanks uli

I'll be posting it when I get home from work.

And yep, you're free to ask questions. Anyone is. That's why I'm posting my work online. Otherwise, I would've kept it all to myself. ;)

Just remember, I only did a screening. ^^

Title: Re: TSO's Request Corner
Post by: george88 on Dec 22, 2011, 10:10 AM
Hi TSO can you screen ATN Holding firm and TBGI(Transpacific Broadband Group) they have clean energy project in Rizal a 30MW solar plant that will be sell in WESM..The location is a property of ATN 324 hectare so it is possible for expansion once it become successful. :thankyou:
Title: Re: TSO's Request Corner
Post by: TSO on Dec 22, 2011, 03:24 PM
Future Prospects
While I give a bigger weight to sustainability—inherent stability—than growth, the fact still remains investors ultimately seek it. Furthermore, growth opportunities also equate to catalysts for value recognition by the investing public as a whole.

In the short run, the Energy Development Corporation has a decent prospect for an increase towards fair value: the BacMan power plants are almost operational and the benefits of the GRESC setup, in particular, the higher prices charged in its supply contracts, are likely to produce higher revenues and, consequently, higher earnings: both of which pulling the price up.

However, and more importantly, EDC faces a future of sustainable growth, both international and domestic, as one could see in the chart.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/elements_of_organic_growth-78903258.jpg)

Domestic Opportunities
As noted earlier in the chart, domestic opportunities are threefold. EDC has the option of rehabilitating its existing plants as to improve their installed capacity—or utilization, in the case of the BacMan plants. The corporation is also faced with the prospect of expanding their network of geothermal sites. Lastly, EDC can branch out into other forms of renewable energy, thereby turning into a “pure renewable energy play”, into a company lovingly described by CitisecOnline’s analysts.

As it turns out, EDC is actively pursuing all three. One can easily read in the 2010 annual report that the company has been working hard on the Palinpinon, Tongonan, and BacMan power plants to improve their utilization. The Palinpinon and Tongonan plants have a combined installed capacity of 305 MW (a little over ¼ of EDC’s geothermal portfolio), while the BacMan plants have an operating capacity of 4.5 MW, a depressing utilization of its 150 MW capability, no doubt arising from its bleak condition—opting to repair it came at a “significant [short-term] loss: PHP1.8 billion a year in take-or-pay steam revenues from the government” (2010 annual report, 14).

The annual report does not hint at how strongly the Palinpinon and Tongonan plants will improve, EDC has alleged the rehabilitation of the BacMan plants will add 125.5 MW to the current operating capacity, adding to sales volume a minimum of 824 GWh (at 75% utilization)—2.64B pesos in revenues, at least under the 2010 price of P3.2 per kWh.

As mentioned earlier in the subsection on EDC’s contracts, the company has actively pursued an expansion in both network and reach. The company has two GSERC contracts for Mt. Mainit and Mt. Labo, along with six WESC’s for different contract areas, each. The Burgos area has a wind potential of 86 MW.

EDC’s website also notes three ongoing exploration and development projects in North Cotabato (Mindanao III, 50 MW potential), Negros Oriental (Nasulo, 20 MW potential), and Sorsogon (Tanawon, 50 MW potential). Should these follow through, we are looking at a probable increase of at least 120 MW (↑10%!) on EDC’s 1.2 GW geothermal capacity, and that’ s not counting the impact of EDC’s wind operations or on the potential improvements to the 132 MW hydroelectric capacity.

Further network expansion for the industry itself is possible, as only 2000 MW of the 6000 MW potential capacity of the Philippines has been tapped so far.

Nonetheless, all this talk of capacity diverts us from the point this is merely potential. A surplus. The question to be considered is, will the “future demand” be enough for EDC to rake profits?

First things first, by operating at a level below optimal capacity, EDC is ensuring the ability to absorb growing demand and meet unexpected peaks in energy consumption, otherwise the areas affected by power shortages would undergo rolling brownouts.

Second, according to the Philippine DOE’s 2009 Power Plan (http://www.doe.gov.ph/EP/EP Update 07272010/PDP 2009-2030.pdf), the energy demand is expected to grow by 4.6% every year through 2018, in a three-stage growth forecast running until the year 2030. Government data is essentially assuming climbing consumption as the Philippines continues to develop as a nation.

The increase is all but guaranteed, as “demand is generally a function of population growth, housing demand, and energy intensity of operations in both the industrial and commercial sectors of the economy” (“Chapter 9: Energy-Sector Fundamentals”, US Department of Energy, 6).

Moreover, remember the RE Law, which emphasizes increased priority for electricity powered by renewable energy. This will clearly fall onto EDC’s advantage as it continues to position itself as the leader in sustainable, green power.

International
Ah, yes, international.

For once, however, the future prospects on the international stage aren’t based on either India or China, but rather Indonesia and Chile. An investors and analysts’ briefing conducted by EDC on March 2011 highlighted the fact Chile and Indonesia possess an estimated potential capacity of 3.35 GW and 27 GW, and of these only Indonesia has undergone developments amounting to a 1.05 GW in tapped capacity.

Growth prospects are robust on the international stage. To pursue growth here in the long run, EDC has already applied for 13 concession areas on 2010 and partook in bids for 5 more geothermal zones in Chile, while exploring and assessing 16 sites across Sumatra, Java, and North Sulawesi.

But will they truly be profitable?

Chile
In Chile, developing renewable energy would provide an excellent solution for its residents. Considering the average home consumes 150 kWh every month according to Dow Jones on September 2011 (http://www.nasdaq.com/aspx/company-news-story.aspx?storyid=201109211403dowjonesdjonline000441&title=chile-residential-electric-bills-to-rise-12-on-central-grid), paying 121.26 Chilean Pesos for it (over PHP 1,300 PER kWH based on CLP:PHP exchange rates for the past year).

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/chile_energy_demand-86611765.jpg)

Highlighting the need to pursue growth in power capacity is the fact Chile consumed no less than 50 TWh since 2005, averaging 55 TWh to the present day, and produced no more than 60 TWh beginning 2007. (Enerdata, 2010 Yearbook (http://yearbook.enerdata.net/electricity-domestic-consumption-data-by-region-in-2010.html)).

It is barely producing more than what it consumes in power, and people are forking over absurd amounts of cash for the electric bill (the average Filipino household consumed about 1,000 kWh per month in 2005. Can you imagine spending at least P10,000 on electricity alone?)

Indonesia
In contrast, EDC’s operations are still in the exploratory phase, and the costs of capital are so high the company has expressed interest in forming joint ventures to lighten the load. Finding partners doesn’t prove at all that difficult: EDC is comparable to the hottest lady in class, where some alluring aspect of the girl reels in one suitor after another.

In this case, it is EDC’s knowledge base and experience, accumulated over 35 years in a nation trodden by natural calamities annually.

With 27,000 MW of potential capacity, the 17,500 islands of Indonesia’s archipelago hides over 40% of the world’s geothermal energy reserves. With only six geothermal fields in use, only 1050 MW in operation, and with Indonesia’s government pushing for renewable energy development, it is a clear prospect for the long run.

Information on Indonesia’s production and consumption of energy from enerdata has also proven quite attractive. According to its 2010 yearbook, Indonesia has consumed a growing amount of energy—from 25 TWh in ’90 to 140 TWh in 2010 (a 9% 20Y CAGR!).

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/indonesia_energy_demand-2624234.jpg)

In 2010, 12 geothermal contracts worth $5 billion have been signed, scheduled for completion by 2014. Although the Indonesian president Susilo Yudhoyono expressed a desire for developed geothermal capacity to be at 9.5 gigawatts by 2025, investors face immense risks over the medium-term, risks that run in tandem with what has been outlined by the US Department of Energy:

Technical risks, lengthy lead times and soaring exploration costs have deterred foreign investors seeking a quick return. Geothermal plants use wells to tap subterranean pockets of heated water, releasing pressurized steam capable of turning huge turbines. Operational and maintenance expenses are relatively low, but the initial investment in heat-extraction and power-generating technology is capital intensive, and additional infrastructure spending is often needed, for example to build access roads in remote and mountainous regions. By most estimates, moreover, preliminary geological surveys and exploratory drilling for a single plant can take seven to eight years.

“You might put $20 to $40 million into digging holes just to find out what the capacity of your field is,” said Brett King of the law firm Paul, Hastings, Janofsky & Walker, in Hong Kong, which has been involved in several geothermal deals. “No one will sign contracts until you know for sure.”

….Regulatory and policy obstacles continue to plague the potentially lucrative sector. Investors are pushing the government to make long-term policy changes, particularly to its subsidy structure for fossil fuels. A low electricity tariff has also hampered progress, despite an average 10 percent rise this month.

“Over the last year there has been a lot of policy movement to get the investment climate in shape for foreigners to come in,” Mr. Saeger, the U.S. Embassy official, said. “But key barriers remain,” he added, including “a confusing tendering process and land acquisition problems.”

….Speaking at the Bali conference, James Blackwell, Chevron’s head of exploration and production in the Asia-Pacific region, held up the Philippines, the world’s second-largest geothermal producer, as an example to follow. Manila recently enacted a renewable energy law to stimulate private investment that he described as encouraging open and competitive power generation while reducing excessive royalties and taxes.

To encourage investment, the World Bank’s Clean Technology Fund made available $400 million of financing in March, as part of an effort to bolster spending to combat climate change in the developing world and to help double Indonesia’s geothermal capacity. The Indonesian government recognizes that because of PLN’s poor financial condition, the risk premium required in financing power projects tends to be prohibitive. A recently established Indonesia Infrastructure Guarantee Fund, backed by the World Bank, aims to provide political and payment risk insurance for infrastructure projects.

An exploration risk mitigation fund, specifically for geothermal, is also in the works, and already the Indonesian government is offering tax incentives to investors in renewable energies, Maryam Ayuni, director general of new energy at the Energy and Mineral Resources Ministry, said at a conference in Jakarta this month.

Source: Hillary Brenhouse, “Indonesia seeks to tap its Huge Geothermal Reserves (http://www.nytimes.com/2010/07/27/business/global/27iht-renindo.html)”, New York Times, 26 Jul 2010. (emphases added)

Also, another point of interest would be the fact the government dictates the electricity prices in addition to providing subsidies for producers. Consumers are charged a range of 172 to 621 rupiah per kWh (Reva Sasistiya, “PLN Eyes 30% Rate Hike (http://www.thejakartaglobe.com/home/pln-eyes-30-rate-hike-for-electricity-in-indonesia/329052)”, Jakarta Globe, 10 Sep 2009), translating to 0.87 to 3.15 PHP per kWh, given exchange rates for past year (http://www.exchange-rates.org/history/IDR/PHP/G/M).

Returns are so low for local power suppliers that it’s far more profitable to export the products, to the point rolling blackouts in several regions are happening in the country: a sign that Indonesia is according to Mukri Friatna, “at a tipping point, facing a forestry crisis, an environmental crisis, an energy crisis, and even a food crisis” (Fidelis Satriastanti, “Resource Policies will bring Catastrophe (http://www.thejakartaglobe.com/home/indonesias-resource-policies-will-bring-catastrophe-walhi-says/471776)”, Jakarta Globe, 15 Oct 2011).

Apparently, even if Indonesia is a compelling investment for the long run, with untold growth potential, the fact remains any investments here are going to be stuck in a quagmire of red tape and bureaucracy. Instruments to mitigate costs of exploration and infrastructure projects are on their way, but other political risks still remain. In Indonesia’s case, it would be something similar to an “It’s not you; it’s me” problem.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/long_term_growth_plans_for_edc-87162247.jpg)

As far as EDC’s plans are concerned, in their March 2011 presentation to analysts and investors, the company has given the public a rundown of what they intend to do in the future. Phases I and II are both underway, with Phase III already taking its first steps.

IV.   VALUATION ANALYSIS

Initial Impressions
My initial impressions of EDC weren’t stellar when I gave it another glance, two years after my first investment into the company. At P6.1 a share—a market capitalization of 114.4 billion—it is currently trading at 4.6× sales, 26.0× net profits and 3.74× book value, using 2010 figures.

At a glance, EDC is being traded at very high valuations, and is more than likely to be classified a growth stock than value—the kind of businesses value investors would avoid unless the price undergoes an immense dip.

Further analysis, however, led me to question this. While I cannot deny its high P/S and P/B, the P/E multiple is quite misleading. Recalling the adjustments performed back in the Profitability section, net income should have been PHP 7.28 billion had the GRESC conversion did not generate the immense impairment loss recognized by EDC on 2010, which would translate to a 15.71× P/E multiple for 2010 earnings at current prices. Considering that the average net income would’ve been 7.84 billion with little variation, a P/E multiple for that would be ≈14.6×.

The two adjusted multiples are on the verge of Graham’s 16 P/E rule, meaning the company at this point is breaching the plane of growth, which is not surprising considering the high multiples relative to sales or book value. Considering the risk factors I just walked through in the past few pages, which support a “LOW TO MODERATE” risk rating for EDC, I’m more than willing to suspect EDC subscribes to the famous Buffett quip of buying “excellent companies at fair prices” rather than “fair prices at wonderful prices”—people normally interpret this to mean as buying fundamentally excellent companies cheap, and mediocre businesses at a premium.

As far as EDC is concerned, perhaps this is a case where “fair price” means buying it at a slight premium.

I must remind the reader that I do not have enough information to forecast various situations of financial performance with sufficient precision, preventing me from employing a Greenwaldian valuation analysis as striving for such requires a more extensive look into the financial statements and the qualitative opportunities available.

The three valuation methods I will employ for the EDC Screening report does not attempt to project future growth at all, instead trying to pin a reasonable price-to-earnings multiple on the stock, evaluating the value in the absence of progress, and lastly, assessing the expectations of the Filipino palengke.



To be concluded in next post.


Post Merge: 1324538949
Hi TSO can you screen ATN Holding firm and TBGI(Transpacific Broadband Group) they have clean energy project in Rizal a 30MW solar plant that will be sell in WESM..The location is a property of ATN 324 hectare so it is possible for expansion once it become successful. :thankyou:

I might not be able to. After screening the next Philippine company I've got scheduled (either GMA7 or ABS... or... AT, as someone else suggested), I'm devoting my time to Hillenbrand (NYSE: HI). ^^

Why not estimate how much revenues that plant can generate? Multiplying 30 MW by 365 days and 24 hours should get you production at 100% capacity. :D
Title: Re: TSO's Request Corner
Post by: bauer on Dec 23, 2011, 11:07 AM
very good insightful analysis!  Congratulations!

we need a thousand more people like you. 

Your screening is beyond compare to the analysts of brokerage houses.
Title: Re: TSO's Request Corner
Post by: finance123 on Dec 24, 2011, 02:32 AM
Before EDC has exposure to Yen loans pero most of it have been swap to peso loans.

I chose PERC and AP over EDC dahil sa liabilities ng EDC.


 
Title: Re: TSO's Request Corner
Post by: moishi on Dec 24, 2011, 10:26 PM
Thanks for the analysis TSO!
Title: Re: TSO's Request Corner
Post by: GIG on Dec 25, 2011, 11:18 AM
Thanks man, first class analysis here!
Title: Re: TSO's Request Corner
Post by: freefront on Dec 25, 2011, 05:22 PM
@GIG---Really? :D Break it down for me then, in 50 words or less. TIA-ff :hihi:
Title: Re: TSO's Request Corner
Post by: rds on Dec 25, 2011, 05:36 PM
right.

i myself is waiting for the conclusion, like buy at below ___ sell at ___ period.
Title: Re: TSO's Request Corner
Post by: vicces on Dec 25, 2011, 06:16 PM
right.

i myself is waiting for the conclusion, like buy at below ___ sell at ___ period.
^i dont think TSO provides buy/sell signals, the most you can look forward to is his personal course of action which he discloses in the last part of his report/analysis.
Title: Re: TSO's Request Corner
Post by: finance123 on Dec 25, 2011, 06:41 PM
Can you do similar analysis for AT?
Title: Re: TSO's Request Corner
Post by: rds on Dec 26, 2011, 02:32 AM
^i dont think TSO provides buy/sell signals, the most you can look forward to is his personal course of action which he discloses in the last part of his report/analysis.

i am not asking for signals, i'm looking for the right price to buy, the fair value per share...
Title: Re: TSO's Request Corner
Post by: bauer on Dec 26, 2011, 09:25 AM
RDS,

the current market price is the current fair value per share as far as Mr. Market is concern.

in layman's term,

any price is the fair price between a buyer and seller.
Title: Re: TSO's Request Corner
Post by: akira0422 on Dec 26, 2011, 09:38 AM
yup we need a alot of TSO in here.... and BAuers too...... XD
by the way @ finance 123- Berong mines a JV of AT and TMC went back to green... they have made around 5 shipments already and has quite a stockpile watiting for favorable weather XD and i guess better ni prices...
Title: Re: TSO's Request Corner
Post by: rds on Dec 26, 2011, 02:09 PM
RDS,

the current market price is the current fair value per share as far as Mr. Market is concern.

in layman's term,

any price is the fair price between a buyer and seller.

ganun pala yun...pasensya na po hindi tayo masyadong bihasa sa technical terms ng stocks. so what's the exact term for the price which TSO will arrive at after doing his analysis?
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Dec 26, 2011, 04:41 PM
i myself is waiting for the conclusion, like buy at below ___ sell at ___ period.
that's like asking for a crystal ball.
a lot of things always happen between NOW and THEN.

i am not asking for signals, i'm looking for the right price to buy, the fair value per share...
TSO's right price to buy will definitely be not the same for u.
investing is highly a relativity business.
Title: Re: TSO's Request Corner
Post by: freefront on Dec 26, 2011, 05:25 PM
that's like asking for a crystal ball.
a lot of things always happen between NOW and THEN.
TSO's right price to buy will definitely be not the same for u.
investing is highly a relativity business.

It........you.......okay.....sigh. Books!!! Come to mama! :D
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Dec 26, 2011, 06:35 PM
:D
sorry Mama, i've been skippin' school & soiled my uniforms.... lurking at Nat'l bukstor & Booksale, 'sitting in' on their floors :D

ok, tambay rin ako sa mga bilyaran minsan :D
Title: Re: TSO's Request Corner
Post by: vicces on Dec 26, 2011, 10:06 PM
tagal nung conclusion ni TSO... holiday mode siguro... :D
Title: Re: TSO's Request Corner
Post by: TSO on Dec 27, 2011, 01:57 AM
^ Tama ka nga, hahaha.

Sorry, guys, lately I've been swamped with:
- last minute holiday shopping
- X-Mas parties
- Reading on two new books (Random Walk Down Wall Street and Boomerang: Travels in the New Third World)
- Skimming through Hillenbrand's annual reports (just to "have a feel" of the company)
- Writing my fanfic :P Haha, it's been a while since I worked on it

I'll be posting the conclusion later when I get home.

Post Merge: 1324923180
that's like asking for a crystal ball.
a lot of things always happen between NOW and THEN.

Agree.

Malkiel wrote there are five reasons why all forecasts and analyses can fail:
1. Uncertainty of the future
2. Mismanagement
3. Errors and differences in the analyst's computations
4. Brain Drain to sales or portfolio management
5. Conflicts of interest

James Montier, on the other hand, provides the following:
1. Corporate analysts are too optimistic.
2. If the CAPM is employed, corporate analysts generally define risk as price volatility alone. (I personally don't even consider price volatility a risk.)
3. Corporate analysts are too shortsighted
4. Career risk rules the game.
5. Every analysts' parameters are different.

The post on Gurufocus (re: RIMM) also forwards the following:
1. Corporate analysts can change their targets all too easily.
2. Long-term = 1 year or less.
3. Analysts tend to herd (just as Montier says the same thing for managers of actively-managed equity funds)

All three prove analysts have a horrendous track record for 1-year and 5-year projections of earnings growth.

Quote
TSO's right price to buy will definitely be not the same for u.
investing is highly a relativity business.

Agreed.

Example, my analysis of ProAssurance Corp. (NYSE: PRA) -- which you'd find on GuruFocus -- places the ideal buy price at anywhere below $70.

Someone on LinkedIn called my valuation excessively conservative, proclaiming it is still good to buy even now at $79.

His valuation process is like Buffett's: using the risk-free rate as the discount rate and employing a simple DCF model over a 25-year period. Mine, on the other hand, combines Maubossin's (expectations analysis) and Greenwald's, and my discount rates are computed differently, using a personalized version of CAPM. (If it's a screening, it's just an arbitrary number like 12% or something.)

Clearly, my "right price" was not the right price for that person.

Post Merge: 1324923540
ganun pala yun...pasensya na po hindi tayo masyadong bihasa sa technical terms ng stocks. so what's the exact term for the price which TSO will arrive at after doing his analysis?

An estimate for "intrinsic value" or "fair value", which aims to put a price tag on the business as if someone was going to buy it instead of going to the open market. Current market price just means fair market value.

Another piece of literature calls this "firm-foundation value".

Post Merge: 1324924790
Off-topic:

Believe it or not, A Random Walk down Wall Street is actually a good read and makes a strong complement to the book by James Montier.

Malkiel is very defensive of the Efficient Market Hypothesis, and I actually agree the developed nations have efficient markets, regardless of whether the market is reeling from irrationality or suffering from euphoria even if induced by market manipulation.

He doesn't exactly diss value investing and provides the same ammunition James uses in his writing: VI does not outperform growth (just matching it over the long run), and low P/E's don't necessarily mean good businesses.

And to Ferrari, this might be of interest to you: Malkiel writes that technical analysis does not work for stocks in the long run. He has a section specifically for it, although my only criticism of that would be that he didn't consider it too important to even throw in the empirical results of the test (instead just writing what the findings mean).
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Dec 27, 2011, 02:52 AM
thanks TSO. :D
is Malkiel a trader? or just a researcher/book author?
i've been trading long enough to know that TA works.
we just need to take time to learn, practice & apply it well & consistently.
Title: Re: TSO's Request Corner
Post by: TSO on Dec 27, 2011, 03:35 AM
thanks TSO. :D
is Malkiel a trader? or just a researcher/book author?
i've been trading long enough to know that TA works.we just need to take time to learn, practice & apply it well & consistently.


Currently an economist.

Had years of experience as an analyst and a portfolio manager. Was also a teacher at some point in his life.

I can go take a look at his credentials later on if you want.

Malkiel admits he is biased against technical analysis in his attacks against TA.

TA is useful in some cases where fundamentals aren't that helpful. Stocks are different, but I'm not qualified to give an opinion for/against TA in this regard.
Title: Re: TSO's Request Corner
Post by: vicces on Dec 27, 2011, 10:15 AM
^ Tama ka nga, hahaha.

Sorry, guys, lately I've been swamped with:
- last minute holiday shopping
- X-Mas parties
- Reading on two new books (Random Walk Down Wall Street and Boomerang: Travels in the New Third World)
- Skimming through Hillenbrand's annual reports (just to "have a feel" of the company)
ok lang kami maghintay, enjoy mo lang ang iyong vacation time...
Off-topic:
Quote

Believe it or not, A Random Walk down Wall Street is actually a good read and makes a strong complement to the book by James Montier.

^uy meron akong ebook nyan a, dagdag ko sa thread ni miko pag nahalungkat ko...
Title: EDC Screening (conclusion)
Post by: TSO on Dec 27, 2011, 10:45 AM
Relative Valuation
Before I begin, the relative valuation operates on Vitaliy’s Absolute P/E model, the information on which could be found on Seekingalpha (http://seekingalpha.com/article/276827-value-stocks-like-a-pro-the-absolute-pe-model). I am not going to give you a peer-to-peer comparison of the different energy companies available for public investment in this section. I think the exercise is futile for the caliber of EDC’s business—being a predominant geothermal energy play with extensions into wind and hydroelectric power—when the only company closest to it is Chevron.

Moreover, I am unaccustomed to the use of relative valuation as professional analysts are, simply because I very much prefer the employment of a DCF model incorporating a multitude of variables as to delineate clear yet conservative snapshots of worst-case and best-case growth scenarios.

The first thing that has to be done is establish the basic P/E multiple, one that represents zero-growth.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/computing_basic_p_e-24161882.jpg)

This basic P/E is then run through a combination of three adjusters, representing different, subjective perceptions of risk.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/risk_multipliers_for_absolute_pe_model-54057365.jpg)

The end result is a fair value P/E multiple of 19.93×, ≈26.8% higher than the current P/E ratio of 15.71×. Under Vitaliy’s P/E model, a margin of safety exists.

Assuming Stagnation
The value of zero growth is a valuation tool I love using, and that it is employed in the screening report is not surprising. However, unlike its counterpart in my comprehensive analyses, the EPV computed here is merely a proxy and isn’t as exact and well-defined as I’d prefer it to be.

To begin, the computation of sustainable revenues (in billions of PHP, naturally) is calculated as a function of sales volume and price. I am assuming an output of 8,183 GWh, which is unmistakably the average over the entire period analyzed. I am aware this is greater than the 7,548 GWh sold in 2010, but I am operating under the belief the Unified Leyte shortfall was but temporary.

Actually, the average output here should be closer to nine terawatts, as it does not take into account the 800 GWh increase the BacMan rehabilitation would have on the company’s production volume. That I excluded it already makes the EPV measure more conservative.

The sales revenue generated per kWh sold to NPC or the electricity cooperatives EDC services is assumed to be P3.78. Why? Remember that the 15 new contracts EDC made in the past fiscal year contributed 32% of electricity revenues. These have been priced at P4.7 per kWh, reflecting the new terms EDC has settled upon (refer to the 2010 annual report). However, the NPC is likely to retain the current price with, perhaps, an inflation adjustment. Since EDC received approximately P3.2 for every kilowatt-hour sold, the price for the remaining 68% of sales volume is P3.35 (raising the 2010 price by the long-run inflation rate of 4.62%). End result: an average sales price of P3.78 per kWh.

30.95 billion in sustainable revenues is hence computed. Had the BacMan rehabilitation been considered, recurring sales should be around P34.06B, as average sales volume went up to 9,007 GWh.

Normalized operating income is about 12.28 billion, using the average operating profit margin of 42%. This is in line with the OPMS attained on ’05 – ’06 and ’09 – ’10 (provided the one on ’10 was adjusted). Operating expenses spent on growth—on improving steam assets, expanding power capacity, and exploring potential opportunities—is assumed to be 15% of operating expenses, which is added back to operating income.

Effective tax rate applied to EDC is 20%, which is twice that of the company’s statutory tax rate and assumes the company does things that increase its tax liability to the government rather than reducing it.
Excess depreciation and amortization is based on 20% of 2010 D&A expenses, representing growth capital expenditures. The high percentage value is meant to emphasize intense aggression towards its future prospects.

A value of 12.75 billion is computed for normalized NOPATDA, which is capitalized at the risk-perceived discount rate of 12%. This produces a P106.28 billion unadjusted earnings power value. The amount of 35.31 billion is deducted from this amount to account for excess cash, deferred tax liabilities, long-term debt, and underfunded pension assets.

Ultimately, the valuation process unveils P70.97 billion in adjusted EPV, corresponding to P3.79 a share. At this amount, the current price of P6.10 per unit is 61% overvalued. Meaning, anyone who buys the company now is paying a P2.31 premium for its future growth. However, based on Graham’s 16× P/E rule, the adjusted EPV amount here suggests the highest we should buy EDC for is P7.27.

Now, the adjusted amount would’ve been P81.10 billion (P4.33 a share) if the results of the BacMan rehabilitation were included. Under this scenario, the overvaluation is 41% (a P1.77 growth premium), with the highest permissible price being P8.30 a share.  

The reader should consider whether it is reasonable to pay these high premiums.

Analyzing Expectations
The final valuation method used on Energy Development Corporation is reverse DCF, which isn’t used to extract the value of growth but rather the growth rate being expected by the market. It does not indulge in the blissful games of forecasting and allows us to determine the realism behind the market’s consensus of a company’s growth rate.

The computation of NPV is based on the present value of NOPAT over a five year period, and several assumptions have been laid out. The number of shares is constant at 18.75 billion, and a 33% NOPAT margin is assumed, which reflects the true average that would’ve resulted if it weren’t for all the nasty expenses incurred during the past three fiscal years. Terminal growth, applied to revenues per kilowatt-hour, was assumed to match inflation (4.62%).

Finally, I assumed a sales volume growth rate of 4.6% a year to reflect the government’s long-term estimates of energy demand. This was cut by 30% to reflect conservatism, resulting in a 3.22% yearly increase in sales.

The results are rather interesting.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/expectations_analysis-81079644.jpg)

Historically, the growth rate had been close to 11% over the past four fiscal years. 8.5% if I extrapolated it to five.

As one could definitely see, the market is being a little modest towards its expectations for EDC’s sales growth, and it leads one to wonder if there is a good chance for the business to “surprise” the tinderas and tinderos trading the stock, considering what it’s got in store, as far as its future prospects are concerned.

V.   RECOMMENDATION

The trickiest part of the section! So far, we have identified EDC as a company posing a low to moderate risk to the long-term investor.

Furthermore, the valuation methods used produced a set of conflicting information. Vitaliy’s P/E model propounded EDC is being traded at a 27% margin of safety. Reverse DCF supports it, encouraging the supposition the market is in for a slight “surprise” in the medium term. However, the earnings power value computed shows premiums greater than 41%, and now I have to ask myself if it is worth paying a little more for growth prospects alone.

So I consulted the charts for anything noteworthy.

(http://www.keepandshare.com/userpics/m/a/g/i/cboy13/2011-12/sm/2y_chart_for_tech_analysis-52152054.jpg)

The most I’ve seen here is that EDC has been going on a trend for a long time, and it only broke when August hit (and with it, the US debt crisis). The chart at the very beginning of this long report indicated the 15 and 50 day SMA’s crossed over 200-day SMA, not to mention the chart appears to be in the midst of drawing a right shoulder.

However, when I zoom in for a closer look (two year frame, weekly basis), I can perceive what looks like a downward flag over the most recent weeks, which indicates a possible continuation of the trend rather than a reversal. The moving averages show that the 15-week line has just crossed over the 50-week mark, but is far, far above the 200-week average, but the breach isn’t significant, and it seems to be behaving as if it was skimming the surface of the ocean, rather than diving into it.

The low volumes for the past three weeks seem to say traders aren’t that interested in EDC, with the last few columns carrying an interpretation of growing optimism (given the green candles), but not enough to attract a following. One oscillator encourages its persistence, while another is on the verge of retreat.

Considering there are some signs indicating continuation, combined with what we already know about the company’s fundamental prospects, EDC looks like something I would buy. However, the entry should be done in stages rather than a lump-sum purchase because the signs for reversal are also present.

Plus, anyone who would go through the news reports on Yahoo or MSN would realize the global markets are zeroing in on either the details of the EU debt deal or the performance of the US economy. Being a pessimist, I am naturally inclined towards the markets’ disappointment, and the drop that would accompany it—opportunities to reduce the high growth premiums inherent in the purchase price.



There, that's it. ~ Fin ~

Also my first attempt at including technical analysis in the recommendation portion. Hahahahaha.
Title: Re: TSO's Request Corner
Post by: vicces on Dec 27, 2011, 10:55 AM
nagulat ako dun sa naka-insert na TA ah, hehe....

Post Merge: 1324954614
:applause: :applause:
Title: Re: TSO's Request Corner
Post by: TSO on Dec 27, 2011, 11:45 AM
^ Started incorporating TA into my actions when I realized market sentiments and price volatility play a big factor in generating returns.

Value investing mitigates risk through a very selective process and a healthy dose of realism during the analysis step. However, painting your targets and shooting them are two completely different things.

Post Merge: 1324957585
Anyway, I'll be working on encoding Hillenbrand....

Will probably simultaneously work with either GMA/ABS or AT once HI financials have been encoded and ready for data processing.
Title: Re: EDC Screening (conclusion)
Post by: ferrariEverest on Dec 27, 2011, 12:38 PM

So I consulted the charts for anything noteworthy.
im happy to see a chart  :D

Quote
The most I’ve seen here is that EDC has been going on a trend for a long time, and it only broke when August hit (and with it, the US debt crisis)
it broke downward but didnt necessarily break the underlying trend.
5.50 again proved to be a strong support.
price might be consolidating &/or we can blame the holiday season for this :D
for sure, January/Feb makikita natin what it wants to do.

Quote
However, when I zoom in for a closer look (two year frame, weekly basis), I can perceive what looks like a downward flag over the most recent weeks
i can see how u plotted that flag/channel. nakikita ko rin yung ganyang pag-plot sa local stock/int'l trading forums.
but if u want to be technically correct, u want price to zigzag inside a flag (or triangle, channel, etc) to consider it 'valid'.. in this case, price didnt (price didn't touch the upper line of the 'flag'/channel )

Quote
The low volumes for the past three weeks seem to say traders aren’t that interested in EDC
remember, it's the holiday season. :D

Quote
One oscillator encourages its persistence, while another is on the verge of retreat.
they would often/always diverge. since iba ang computations nila &/or uses.

kailangan 'kilalanin' mo mabuti ang indicators na ginagamit mo.
stick to using 1 to 3 indicators, learn the ins & outs.
the reason & benefit is 2-fold:
-reduce clutter
-bawasan/iwasan ang info overload/sycophantism.
Title: Re: TSO's Request Corner
Post by: TSO on Dec 27, 2011, 01:03 PM
Don't forget: OCTOBER pa ang report na 'to. So the "holiday season" thing doesn't count.

Anyway, thanks for the tip re: Future tech analyses. Actually typical noob move ung ginawa ko: throwing the entire toolkit without really knowing what to look for.

Haha.

Funny thing is... EDC is also the company I first "analyzed" back in 2009 when I was starting out as a fundie (hindi pa Value Investor).

Also threw the toolkit blindly LOL

Revisiting companies you studied before makes you go on memory lane... ^^
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Dec 27, 2011, 01:07 PM
my bad, october pa pala yan.
in that case, follow the US market ang nangyari then.

wala ka pang tulog, no? :D
oo, masarap mag-reminisce :)
Title: Re: TSO's Request Corner
Post by: GIG on Dec 27, 2011, 05:35 PM
@freefront

the thrill is in the chase my man. . .
Title: Re: TSO's Request Corner
Post by: bauer on Dec 27, 2011, 09:27 PM
TSO,

Why are you interested to buy edc at stages if you believe it is overvalued right now?

In my case, if my screen shows an overvaluation, I will wait for it to reach 20% below my own valuation before I dip my fingers.
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Dec 27, 2011, 09:50 PM
@Sir bauer,
why 20%?
arbitrary % yan o may sound basis?
Title: Re: TSO's Request Corner
Post by: TSO on Dec 27, 2011, 10:31 PM
Bauer:
1. It's overvalued from a zero-growth perspective, yet the research indicates we're likely to see increasing sales and profits over the long-run as energy demand goes up and they abuse their vertically-integrated model.
2. I don't pay a 41% premium. I don't know if I disclosed it in the summary portion or not, but I still have a fraction of the shares I got way back in 2009 and buying at 5.90 in mid-November raised my average price to 4.3x, which represents a 20% overvaluation -- not a bad price to pay for growth in this case, as opposed to 40%.
3. i was expecting EDC to drop to P5/share from the problems in the US and the tech indicators. I don't want buying the full load at P5.9 if I can buy cheaper and reduce the effect on my average costs.
Title: Re: TSO's Request Corner
Post by: vicces on Dec 28, 2011, 12:08 PM
^another slamdunk analysis from TSO, :thumbsup for u dude.

May ilang katanungan lang po ako, brad pete… nasusulat po ba…. Oops, teka, wrong forum, hihi..

Seriously, here are some questions I hope TSO and everyone else who cares to read, will find time to answer/clarify:

1. on EDC’s debt servicing
   May data ka ba TSO on EDC’s detailed schedule ng kanilang debt servicing? Ano ba dapat tignan if I want to know kung ano at kung tama ba ginagawa nila sa problemang yan?

Sabi ng aking bubwit, EDC was bought by the Lopezes even if it was neck-deep in debt, and it was only later on that they realized this (plus, madaming mga facilities na luma or needs repairs/upgrading). Result: The problem that is (or was) EDC spilled-over to other Lopez-owned companies. To save face, Meralco had to be sold to MVP (to the shock of the Lopez clan), so they can generate funds to pay off maturing obligations of EDC and FPHC or was it FGEN, I get confused, hehe.

Enough with the chismis…In your statement in your analysis:
   
Quote
“As far as creditworthiness is concerned, I find EDC’s case disconcerting. Worrisome, perhaps.”

and
Quote
Earnings coverage does not help neither. With the exception of 2008, when debt payments suddenly took a dive from the average 11 billion in payments to 2.8 billion, earnings have never provided a significant margin of safety above these obligatory payments. Is it any wonder why EDC maintains a debt ratio of 60%? It’s continually refinancing its outstanding loans, which wouldn’t have really been a problem for me if the company had a choice in the matter, if the company’s earnings and liquid assets could handle the hypothetical scenario of distress, i.e. every creditor demanding repayment without prior notice.

For this reason alone, EDC’s credit appears weak despite a dependent level of solvency.

^that indeed raised a red flag for me. Worse comes to worst, baka it’s the same old story as before, meaning, they have to sacrifice other companies just to keep EDC afloat.  Binaba pa pala nila ang kanilang debt payments to 11B to 2.8B (for this year ba yan?)… Refinancing/restructuring? Does that mean mas lalong hahaba ung term ng existing loans? You said in 7 to 8 years, debts should have been paid in full na, but how about the years before that? In August 2011 FGEN and EDC both declared losses for the first half of the year:
Quote from: Inquirer.net
MANILA, Philippines — Lopez-led companies First Gen Corp. and Energy Development Corp. (EDC) posted net losses in the first half due mainly to a P5-billion “impairment charge” resulting from the decommissioning of a geothermal facility.
In separate disclosures to the Philippine Stock Exchange, First Gen said it posted a net loss of $13.3 million in the first six months of 2011, while its affiliate, EDC, reported a net loss of P2.3 billion from a year-ago net income of P5.63 billion.
Both companies explained that the P5-billion non-cash loss came from the decommissioning of the 49-megawatt (MW) Northern Negros Geothermal Power Plant. The facility shutdown was necessary to curb losses arising from its continued operations.
xxx
Meanwhile, EDC president and COO Richard B. Tantoco also assured stakeholders that the P5-billion impairment charge would not affect the company’s ability to declare dividends, considering that it has over P9 billion in unrestricted retained earnings.
Tantoco also stressed that measures have been undertaken to “right-size” the Northern Negros plant.
“We are headed towards the conversion of our NNGP plant into a cash accretive asset. With the right-sizing initiative, we are putting a stop to the P800 million yearly cash hemorrhage caused by the plant’s sub-optimal operations. Some value on the steamfield will likewise be restored once the right-sized replacement power plant is put in place,” Tantoco explained.

Tantoco further disclosed that the company’s P2.3-billion net loss could also be attributed to the P900-million reduction in steam revenues due to the Bacon-Manito facility rehabilitation.

EDC, the country’s largest geothermal producer, likewise posted higher operating expenses mainly attributable to higher operations and maintenance expenses for steam field and power plant facilities in all areas where it operates.
Read full article here (http://” http://business.inquirer.net/13031/first-gen-power-energy-dev%E2%80%99t-corp-post-net-losses-after-geothermal-decommissioning”)

I DO HOPE THEIR NUMBERS IMPROVE BY YEAREND.

When asked kung may possibility ba na bitawan nila ang EDC, my bubwit says, hindi naman daw siguro, paninindigan na nila yan considering what they have already foregone in the case of Meralco. And then joked, baka daw ABS, pwede pang bitawan, laki na ng lugi nila jan… (sabi ko, hindi naman siguro papayag si Madam Charo, hihi-- as if may say sya).

Anyway, base sa mga “kwentong-lasing” at sa iyong pag-aaral TSO, pang-long term talaga ang EDC, assuming tama ang istoryang nakikita natin at kinukwento sa kanilang mga papel. In short, palabas pa talaga ang pera nila for rehab/repairs/maintenance ng mga planta. At kung aarangkada man, mukhang matatagalan pa, at least hanggat makita na nating namamanage na ng tama ang mga utang na yan at maging surebol na ung mga projects sa loob at labas ng pinas. Walang masyadong “super” sa analysis mo TSO, except for EDC being one of the “duopoly in the sustainable energy sector”, kaya wait and see (for dips) ang attitude ko sa ngayon.

2.  On EDC’s future prospects
   Looks good and very promising to me. But where would the money to fund all these projects come from? Anyway, so far, good pa naman ang kanilang credit rating, correct? At sana, hindi na madagdagan yung “decommissioned” plant nila that caused the P5B impairment charge/non-cash loss. We’ll see, we’ll see..

3. on EDC’s management/leadership
   I don’t remember reading anything in your analysis about this (or maybe my memory is failing me). Hindi ba yan part ng analysis mo or dahil “screening” lang yung ginawa mo kaya wala nyan? Or strictly financials/operations lang ang usually tinitignan sa ganyang valuation model? Forgive the ignorance of a newbie. Ako kasi particular sa mga tao sa likod ng tabing. lol

Anyhoo, kung hindi man relevant sa valuation study, just for discussion’s sake.  EDC and FGEN (and a host of other energy-related subsidiaries/affiliate companies) have the same CEO/Chairman, Piki Lopez. The very same person said to be responsible for the Lopezes losing their crown-jewel, Meralco (Read  (http://“http://business.inquirer.net/money/topstories/view/20090401-197457/Lopez-family-rift-over-Meralco-sale-widens”)Inquirer’s story on this in 2009).

My bubwit tells me, Piki (lets call him PL) is the next gen Lopez, young and very handsome daw (MVP seems to be fond of the guy, too; athletic din siguro?:D) but not very popular from within their clan (again because of the sellout) and not even close to the brilliant minds of the Old Lopezes (though he did graduate cum laude at the Univ of Pennsylvania according to his profile posted at EDC’s website). Is that enough for the Lopezes to entrust majority of their businesses to him? Sana.

Incidentally, PMT blog also named him as the highest paid CEO in the Philippines (http://” http://www.pinoymoneytalk.com/monthly-salary-executive-compensation/”), earning approx. P3M/mo as FGEN CEO then P1.7M as EDC CEO (di pa kasali ung sangkaterbang subsidiaries ng Lopez companies which he also chairs). Anyway,  I really do hope EDC will overcome their P2.3B losses as of mid-2011 and post positive earnings at the end of the year. Kung hindi, ibig sabihin, si PL lang ang may net profits. Ikaw na!

I suppose, PL is trying to prove himself and the “ballsiest-slash-stupidest” move he did being at the helm of most Lopez-owned companies, will only be validated in the years to come. Meralco pinagpalit sa EDC/FGen, ang bigat nun. Yung Meralco parang synonymous na yan sa Lopez, biglang, MVP na ngayon.  Parang pinagpalit mo ang Patek Philippe heirloom sa second-hand na Techno Marine. Ulit, sana tama sya (just like what TSO said, malaki ang potential ng sustainable energy). You can never can tell. :hihi:  But one thing I don’t like about kids trying to “outdo” their parents, is, they’re usually too proud to admit their mistakes. May bravado, pero sila din yung lagi napapasubo. Wag sana mabulunan (biting off more than what they could chew).

Anyway, green pa rin ako jan sa EDC, tignan natin ang maging takbo next year.

Salamat ulit TSO  :hello:

ps
@mikoangelo, baka mapadpad ka dito, magtanong ka na naman kung ako ba ^yan? ako yan, kita mo nga, puro chismis ang laman. :hihi:  :rakenrol:

HAPPY NEW YEAR!!
Title: Re: TSO's Request Corner
Post by: mikoangelo on Dec 28, 2011, 12:17 PM
You got me at hello  :hihi:

Galing ng student trainee mo ha...thumbs up ako sa knya.   :thumbsup2
Title: Re: TSO's Request Corner
Post by: vicces on Dec 28, 2011, 12:24 PM
^ siopao na pinakain ko... :hihi:
Title: Re: TSO's Request Corner
Post by: TSO on Dec 28, 2011, 01:22 PM
^another slamdunk analysis from TSO, :thumbsup for u dude.

1. on EDC’s debt servicing
   May data ka ba TSO on EDC’s detailed schedule ng kanilang debt servicing? Ano ba dapat tignan if I want to know kung ano at kung tama ba ginagawa nila sa problemang yan?

No. Did not go into principal / interest payment schedule.

My impression of EDC is that its debt situation is good for the long run, but not the short-run and it can screw up there.

You proved my point here:

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Sabi ng aking bubwit, EDC was bought by the Lopezes even if it was neck-deep in debt, and it was only later on that they realized this (plus, madaming mga facilities na luma or needs repairs/upgrading). Result: The problem that is (or was) EDC spilled-over to other Lopez-owned companies. To save face, Meralco had to be sold to MVP (to the shock of the Lopez clan), so they can generate funds to pay off maturing obligations of EDC and FPHC or was it FGEN, I get confused, hehe.


IIRC, back when I was still in college, we were talking about how EDC also screwed up trying to hedge its Yen loans and ended up paying an exorbitant amount of money in '08.

Now if you want to assess if what they did was correct:
1. Go through all available financial statements.
2. Construct a principal & interest payment schedule and tie it to multiple variables.
3. Use actual figures for anything tied to a foreign exchange or floating interest rates
4. Estimate total expected payments in the future.
5. See if actual results went over that.

If actual results went over that, then you question why. It is a red flag if it isn't addressed by the annual report, and a bigger one if investor relations ignore you (like they usually do).

One reason could be because they're trying to get rid of a debt obligation early, but if you want that to leave the realm of speculation, the source of the funds become important. If it comes from more debt, then it could be a refinancing. If it comes from FCF, then it's from the business. Then you check if it comes from changes in working capital... or profits. Now if they don't disclose debt taken (instead, doing it like f*cking US companies by saying "net debt financing (payments)", THAT's when you get suspicious because it becomes obvious they're hiding it.

Also read that article when COL posted it on their grapevine.

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MANILA, Philippines — Lopez-led companies First Gen Corp. and Energy Development Corp. (EDC) posted net losses in the first half due mainly to a P5-billion “impairment charge” resulting from the decommissioning of a geothermal facility.

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Meanwhile, EDC president and COO Richard B. Tantoco also assured stakeholders that the P5-billion impairment charge would not affect the company’s ability to declare dividends, considering that it has over P9 billion in unrestricted retained earnings.

Tantoco further disclosed that the company’s P2.3-billion net loss could also be attributed to the P900-million reduction in steam revenues due to the Bacon-Manito facility rehabilitation.

1. Impairment loss lang yan. Check the cash flows then. I don't do quarterly or semi-annual reports. ThriftyPinoy has already criticized me for ignoring quarterly reports, but my defense is that I don't want to risk falling into the shortsighted "quarterly obsession" ailing every Wall Street analyst.
2. So what if it has 9-billion in retained earnings? Let's say it declares P9 billion in dividends. How is EDC going to finance THAT, huh? If the market rises because of it, then bully for them. Bobo o guerrilla trader ang mga sumakay diyan.
3. Bacon-Manito rehab... I never trusted its schedule in the first place. That's why I didn't include it in the projections. If you think about it, the only expenses Bacon-Manito make will be wages and materials. Nothing related to PP operations.

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I DO HOPE THEIR NUMBERS IMPROVE BY YEAREND.

I hope it doesn't. I want it cheaper. Drop to P4.8 or less.

In fact, I'd be happier if it drops to P2.

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Anyway, base sa mga “kwentong-lasing” at sa iyong pag-aaral TSO, pang-long term talaga ang EDC, assuming tama ang istoryang nakikita natin at kinukwento sa kanilang mga papel. In short, palabas pa talaga ang pera nila for rehab/repairs/maintenance ng mga planta. At kung aarangkada man, mukhang matatagalan pa, at least hanggat makita na nating namamanage na ng tama ang mga utang na yan at maging surebol na ung mga projects sa loob at labas ng pinas.

Pag-isipan mo na lang na parang mining company ito. Parang ORE bago lumabas ung good news. /gg Puro losses dahil sa setup tapos naging profitable sa huli.

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Walang masyadong “super” sa analysis mo TSO, except for EDC being one of the “duopoly in the sustainable energy sector”, kaya wait and see (for dips) ang attitude ko sa ngayon.

Wala naman talaga. I just report what I uncover.

Besides, EDC didn't give me that "OMG-BARGAIN-TO" feel. Expectations analysis already presumes modest growth. So either it's fairly OR over valued from the current price. Of course, it's better for me personally -- mas maliit ang average cost ko eh. Hehe.

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2.  On EDC’s future prospects
   Looks good and very promising to me. But where would the money to fund all these projects come from? Anyway, so far, good pa naman ang kanilang credit rating, correct? At sana, hindi na madagdagan yung “decommissioned” plant nila that caused the P5B impairment charge/non-cash loss. We’ll see, we’ll see..

Ideally, it would come from a combination of operations and debt financing, like Manila Water.

But before they should pursue growth, they got to pursue internal opportunities and resolve them quickly. If they don''t do it timely, they likely won't be able to handle it.

That they're after rehab and repairs are all well and good. Whether they kill their liquidity doing so is something else altogether.

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3. on EDC’s management/leadership
   I don’t remember reading anything in your analysis about this (or maybe my memory is failing me). Hindi ba yan part ng analysis mo or dahil “screening” lang yung ginawa mo kaya wala nyan? Or strictly financials/operations lang ang usually tinitignan sa ganyang valuation model? Forgive the ignorance of a newbie. Ako kasi particular sa mga tao sa likod ng tabing. lol

Screening doesn't analyze management/leadership.

Otherwise, I would've ran red flags already simply because they didn't give me enough key operating indicators.

I measure the will of management through three things:
1. Operating Efficiency -- if you're not good, then you won't improve efficiency. If you don't want to disclose your KPI's, then it's a strike against you for being too secretive. Look at what EDC did in their 2010 annual report -- they disclosed a KPI that has NEVER been shown in previous AR's, yet is a key industry metric. Why? My guess is that so they can boast.
2. Reliability of the figures -- consistencies and deviations. Cash vs. Accrual.
3. Montier's C-Scores  -- accounting management

With US companies, a fourth is added: social behavior, including reaction to failures/setbacks.


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My bubwit tells me, Piki (lets call him PL) is the next gen Lopez, young and very handsome daw (MVP seems to be fond of the guy, too; athletic din siguro?:D) but not very popular from within their clan (again because of the sellout) and not even close to the brilliant minds of the Old Lopezes (though he did graduate cum laude at the Univ of Pennsylvania according to his profile posted at EDC’s website). Is that enough for the Lopezes to entrust majority of their businesses to him? Sana.

MVP must be fond of him because of the special gift.
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sana tama sya (just like what TSO said, malaki ang potential ng sustainable energy).

Standalone, maganda ang EDC. Malaki potential.

But as a conglomerate? MER = monopoly on coal/nat-gas electricity, right? Throw in EDC for duopoly on geothermal. San ka pa?

I would be REALLY p*ssed off if someone lost a milking cow like Meralco and got EDC in exchange. EDC is the ticket to securing growth. Meralco is there to make sure you can finance it sustainably. Think of it like an investment portfolio == MER is the safe company, and EDC is your "gamble". Turnaround bet. If you can make it better, then boom! siguradong yayaman ka pa lalo in 5-7 years.

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But one thing I don’t like about kids trying to “outdo” their parents

Buti nalang di ako ganun. I'm governed more by the fear of burning my dad's businesses to the ground.

Fear helps keep it real. Hubris and pride leads you down a path that ends in ruin.
Title: Re: TSO's Request Corner
Post by: rds on Dec 28, 2011, 01:44 PM
@ vicces

ikaw ba yan?!?

i never thought you were that "expert" in criticizing expert's work.

yung napansin ko lang na post mo is more of kalokohan. baka may tinatago ka pa girl. sige ilabas mo na...
Title: Re: TSO's Request Corner
Post by: TSO on Dec 28, 2011, 01:55 PM
rds,

baka kasi kabisado ni vicces ang EDC. XD
Title: Re: TSO's Request Corner
Post by: rds on Dec 28, 2011, 02:07 PM
maari...or di nya lang type ang mga lopez.

but that's good. a well-founded analysis + a sound criticism/queries + a clear answer =  a very good understanding of the topic.

damihan nyo pa sir ng analysis. total nabanggit nyo na rin ang ORE, pwede kaya to masama sa list nyo?
Title: Re: TSO's Request Corner
Post by: vicces on Dec 28, 2011, 02:14 PM

Now if you want to assess if what they did was correct:
1. Go through all available financial statements.
2. Construct a principal & interest payment schedule and tie it to multiple variables.
3. Use actual figures for anything tied to a foreign exchange or floating interest rates
4. Estimate total expected payments in the future.
5. See if actual results went over that.
dyoskopo, baka magtatae ako ng blade ^jan!

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I hope it doesn't. I want it cheaper. Drop to P4.8 or less.
In fact, I'd be happier if it drops to P2.
I mean, their numbers sa kanilang financials ang mag-improve, not the stock price itself... or hindi pa rin? :confused:

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Pag-isipan mo na lang na parang mining company ito. Parang ORE bago lumabas ung good news. /gg Puro losses dahil sa setup tapos naging profitable sa huli.
yan ang problema, hindi pa ako comfortable magtrade ng mining, hence, the same skepticism...
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Wala naman talaga. I just report what I uncover.

Besides, EDC didn't give me that "OMG-BARGAIN-TO" feel.
yup, yup exactly the "vibe" i got from your report... or "no vibe".
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Screening doesn't analyze management/leadership.

Otherwise, I would've ran red flags already simply because they didn't give me enough key operating indicators.
ayun pala yun...

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MVP must be fond of him because of the special gift.
anong special gift yan TSO, baka meron din ako, magppakilala nako sa knya... :rofl:
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I would be REALLY p*ssed off if someone lost a milking cow like Meralco and got EDC in exchange. EDC is the ticket to securing growth. Meralco is there to make sure you can finance it sustainably. Think of it like an investment portfolio == MER is the safe company, and EDC is your "gamble". Turnaround bet. If you can make it better, then boom! siguradong yayaman ka pa lalo in 5-7 years.
oo nga e, dami naman pwede nilang ibenta, brand pa lang ng meralco, buhay na sila e.. when they sold it, everyone's like, "Whats up with the Lopezes?!" pero yun daw meralco kasi ang pinaka-attractive sa lopez portfolio and the easiest to sell at a good premium...

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Buti nalang di ako ganun. I'm governed more by the fear of burning my dad's businesses to the ground. Fear helps keep it real. Hubris and pride leads you down a path that ends in ruin.
tama, tama...  pwede namang gumawa ng sariling pangalan and ma-preserve pa rin ang legacy ng pamilya.
@ vicces

ikaw ba yan?!?

i never thought you were that "expert" in criticizing expert's work.

yung napansin ko lang na post mo is more of kalokohan. baka may tinatago ka pa girl. sige ilabas mo na...
Ateng rds, aketch nga itetch... subukan mo kasing rumampa sa parlor, para makasagap ka ng mga chorva at chenelin. Go tayo minsan, ‘teh!!  sama natin si MVP :hihi:

seriously, hindi naman criticism yun^, nag-discuss lang kami.  :harhar:



Post Merge: 1325052960

baka kasi kabisado ni vicces ang EDC. XD
lasing ka pre?! :hihi:
Title: Re: TSO's Request Corner
Post by: TSO on Dec 28, 2011, 03:02 PM
dyoskopo, baka magtatae ako ng blade ^jan!

Tinanong mo ako eh!

Oh, ayan. There you go. XD

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I mean, their numbers sa kanilang financials ang mag-improve, not the stock price itself... or hindi pa rin? :confused:

Pareho.

Bababa lang ang stock price kung may masamang nangyari sa EDC. Apparently walang epekto ang US sa EDC.

Ang isang inaasahan ko dito, delay sa Bacon-Manito rehabilitation. Lower revenues due to lower capacity = lower stock price but not a worse-off business.

May seryosong problema na 'pag nagkaroon uli ng debt issue ang EDC.

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yan ang problema, hindi pa ako comfortable magtrade ng mining, hence, the same skepticism...

Yan dahilan bakit kailangan ka flexible sa pag-aaral ng mga kumpanya.

Ang HI (NYSE) na tinitingnan ko ngayon? Parang ganoon din. Mahirap planuhin ang attack strategy.

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anong special gift yan TSO, baka meron din ako, magppakilala nako sa knya... :rofl:

Sinabi mo na nga kanina: diba binenta ni Piki ang MER kay MVP? Oh, regalo na yan! Nyahahaha!

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oo nga e, dami naman pwede nilang ibenta, brand pa lang ng meralco, buhay na sila e.. when they sold it, everyone's like, "Whats up with the Lopezes?!" pero yun daw meralco kasi ang pinaka-attractive sa lopez portfolio and the easiest to sell at a good premium...

F*ck the premium.

Ano ba nangyari sa "negotiation" option? Bakit hindi lang sila nag-utang sa mga ibang kumpanya? Hindi naman kailangan ibenta ang kumpanya. Hindi ba puwede isang modified na swap agreement? Lump sum of moolah for an obligation to hand over free cash flows to the creditor...

Kung bumagsak ang presyo, wala naman pake ang mga owner. Sila ang kumikita sa ROE, hindi naman parang tayo na hanggang palengke lang.

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tama, tama...  pwede namang gumawa ng sariling pangalan and ma-preserve pa rin ang legacy ng pamilya.

Yes.

Problema na lang kung tinutulak ka pumasok sa negosyo ng pamilya mo as if na destined ka para sa legacy, eh wala ka pang sariling pangalan. :hmmph:

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Ateng rds, aketch nga itetch... subukan mo kasing rumampa sa parlor, para makasagap ka ng mga chorva at chenelin. Go tayo minsan, ‘teh!!  sama natin si MVP :hihi:

Di ko naintindihan ang chuva-chuva mo.

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seriously, hindi naman criticism yun^, nag-discuss lang kami.  :harhar:

rds, I encounter stronger arguments on GuruFocus, LinkedIn, and TMF.

Medyo magaan pa 'to.



AT hindi ako lasing. Antok lang.
Title: Re: TSO's Request Corner
Post by: george88 on Dec 28, 2011, 03:57 PM
ang habang baliktaktakan... Basta ako kakapit ako sa EDC...as natural resources is running out too fast... May liwanag ang bukas...
Title: Re: TSO's Request Corner
Post by: akira0422 on Dec 29, 2011, 09:31 AM
by the way on nat resources.... APC seemed a geotherm+mining +infra company... penny stock but seems ok fundamentally at a glance... i did a glance screening 2days ago... ther prospects are gud, though a few mining sites waiting for jv and funding... they seemed to be forging a partnership with bel and lr din... catch is that itys a little overbought and ratios are not to gud - i gues at 80% current ratio...

anyway back to edc...
is it ok to ask the most beasic question? i seem not to fully comprehend this one.
1. How does a geothermal energy producer profit? - (on a capacity production basis, usually how much to they earn per kilo/ megawat/hr they produce, versus the cost of generating it? vs cost of putting up the plant or Maintnce... it seems that currently one of the most efficient way of producing enegy is geothermal (i wont agree with wind or solar--)however it is not the most popular choice in the power sector.
2. y does the impairment penalties cost so much? esp, for a plant with relaticvely small capacity.
3. how much would renewable energy act affect its revs and profits...
4. what will be the targeted date for production and partial return of investment, esp on the note on offshore projects...

on the side... i think renwable energy act is just a bluff... but kodos ot EDC...the no. 1 geothermal energy producer in the world!!!
thanks TSO....

Title: Re: TSO's Request Corner
Post by: TSO on Dec 29, 2011, 02:38 PM
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by the way on nat resources.... APC seemed a geotherm+mining +infra company... penny stock but seems ok fundamentally at a glance... i did a glance screening 2days ago... ther prospects are gud, though a few mining sites waiting for jv and funding... they seemed to be forging a partnership with bel and lr din... catch is that itys a little overbought and ratios are not to gud - i gues at 80% current ratio...

Might want to look at it over the long run and determine why "current ratio" doesn't look good. Composition of current assets? Current liabilities?  Sh*t like that.

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1. How does a geothermal energy producer profit? - (on a capacity production basis, usually how much to they earn per kilo/ megawat/hr they produce, versus the cost of generating it? vs cost of putting up the plant or Maintnce... it seems that currently one of the most efficient way of producing enegy is geothermal (i wont agree with wind or solar--)however it is not the most popular choice in the power sector.

Contract basis. Minimum take or pay.

They set a volume and price/unit vol. for the customer, usually an electric coop, and they send it over to them via electricity lines. Because it is a "minimum take or pay contract", the customer has to cough up money whether it takes the generated electricity, takes some of it, or not at all.

EDC never disclosed how much their MTOP contracts are supposed to pay when the customer does not take the min. volume, but I suppose it's at a cheaper rate per MW.

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2. y does the impairment penalties cost so much? esp, for a plant with relaticvely small capacity.

According to IFRS accounting (CFA L1 book 3, 2011 ed.), impairment costs occur when carrying amount of the assets exceed its recoverable amount, which is "fair value less than either selling costs or value in use".

Selling costs
~ price acquired from direct market or an existing agreement, less direct costs of disposal

Value in use
~ based on discounted cash flow model of valuation
~ estimates are based on how much of future CF's are derived from use of the asset, expectations on the CF's variations on amount/timing, the discount rate, and other factors

Sources of asset impairment are as follows:
~ Decline in market value
~ Negative changes in technology, market, economy, or laws
~ Increases in market interest rates
~ Company stock price below book value
~ Obsolescence or physical damage
~ Asset is part of restructuring or disposal
~ Worse econ performance than expected

Source: IAS 36, Impairment of Assets (http://www.iasplus.com/standard/ias36.htm)

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3. how much would renewable energy act affect its revs and profits...

Cannot be determined from what has been disclosed by the company. When I was doing the screening, I read the entire annual report like I would with a deep scan, but the analysis/valuation itself just wasn't as descriptive and it was more "back-of-the-envelope" style, if you could already guess from the way I estimated its intrinsic value.

The only thing that's sure about the Renewable Energy Act is:
1. The government must yield priority to electricity made from renewable sources. Of course, if it comes to a head between competing types of renewable energy (nat gas vs. geothermal vs. solar vs. wind), then it's probably going to be FIFO. (I can't see it as anything else.)
2. Statutory income tax fixed at 10%, versus 30% for other corporations.

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4. what will be the targeted date for production and partial return of investment, esp on the note on offshore projects...

No target dates. None of their materials promised a schedule on their returns from their offshore projects.

Besides, even if they did, it would be over the span of years.

One of my friends told me the reason for this discretion on disclosure is that companies' are in a conflict of interest already: if they reveal info, they inform both investors (good) and competitors/new entrants (bad). Unfortunately, even if competitors had zero access to investor-related material, they would STILL be in a conflict of interest.

Why?

Best example is EDC itself!

2010 A/R uses a KPI they never used in the previous years, but it is a KEY piece of info used in the industry, so they obviously had it since it became public. Now why do you think they just started disclosing it now?

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thanks TSO....

Np.
Title: Re: TSO's Request Corner
Post by: bauer on Jan 02, 2012, 10:42 PM
@Sir bauer,
why 20%?
arbitrary % yan o may sound basis?

Self imposed rate of discount. As much as possible I tried not to buy based on a book value stock price (ratio 1:1)

Syempre it's better if it is at least 20% below my book value para masunod ko ang rule na margin of safety.

I don't find edc attractive right now
Title: Re: TSO's Request Corner
Post by: finance123 on Jan 02, 2012, 11:35 PM
Para sa akin for this year 2012 - NO for EDC.
Title: Re: TSO's Request Corner
Post by: Curious_investor on Jan 04, 2012, 09:26 AM
Hello TSO,

What is you opinion on AAI?
Its a backdoor listing vehicle of bloombery resorts of Razon.

Your insights is much appreciated.

Thanks
Title: Re: TSO's Request Corner
Post by: jawo on Jan 08, 2012, 03:47 PM
Good day TSO,

I'm looking for an insight regarding PCOR and PPREF for the next 3 years.

As I have read from an online newspaper, SMC CEO RSA flaunted about the expansion of the Petron Refinery and will become the Philippines' most biggest and most modern Industrial plant and also a pacesetter refinery in the Asia-Pacific at a cost of Php77B.. (Whew!)

Is it recommendable to invest my money to them this year?
Thanks in advance.. :)
Title: Re: TSO's Request Corner
Post by: TSO on Jan 08, 2012, 07:06 PM
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As I have read from an online newspaper, SMC CEO RSA flaunted about the expansion of the Petron Refinery and will become the Philippines' most biggest and most modern Industrial plant and also a pacesetter refinery in the Asia-Pacific at a cost of Php77B.. (Whew!)

Before you even think of investing in them:
1. How long do you think it'll take before this expansion program is finished? Don't rely on company expectations.
2. How much will this expansion add to their capacity?
3. How much are they using right now?
4. Can they find the demand that will make use of this excess capacity, without compromising their prices?
5. Who will they sell to? Mostly international? Mostly domestic? Or equally both?

If you cannot figure this out... then here's a simpler set of questions:
1. How did the stock price react to the news?
2. Does the current market price reflect an expected growth rate that ASSIMILATES the expansion project?

~ If it went up after, then by how much did it go up? If it was a significant increase, you might wanna stay away from it, unless #2 is a "no".

Post Merge: 1326020941
EDIT: Just to remind people, I'm engaged with personal projects and another company right now, so I'm not taking requests.
Title: Re: TSO's Request Corner
Post by: bauer on Jan 09, 2012, 10:24 AM
TSO, your questions about PETRON's business plans are valid and deserves an answer.

AS i see it in the global front, most of the biggest oil producers are veering away from refining business and concentrate all their resources in oil exploration and delivery.

Worldwide, there is a dent on demand from refining.  It is too expensive to operate a refining plant.  Competition is too strong.  There is no government incentives for local refiners.  I do not know how PETRON will survive in the short term after carrying a huge debt load.
Title: Re: TSO's Request Corner
Post by: jawo on Jan 09, 2012, 11:34 AM
Well many thanks TSO for good and logical questions you put up that will make up to provide answers... That's just open me up reading the market behavior...

Thanks also Bauer for your piece of mind...

As a newbie, this is very helpful for my self analysis.. :)

As I know Petron has an excellent credit rating (AAA) according to PhilRating.. Then this clear up my mind to put my money to them..

Title: Re: TSO's Request Corner
Post by: ooddiicckk on Jan 24, 2012, 11:07 AM
I'm investing with SMPH for a quite some time now.  Earnings like 27% now, i saw the rate in CITISEC that their recommendation is to sell at Php 20 per unit.  My question is whats the BUY BELOW rate of SMPH?

thanks!
Title: Re: TSO's Request Corner
Post by: akira0422 on Jan 27, 2012, 04:19 PM
on petron for short term... everyone was buying low at 17% discount....... now whose gonna buy up???????
Title: Re: TSO's Request Corner
Post by: robot.sonic on Feb 20, 2012, 07:02 PM
Hi TSO.

Nag request ako ng analysis mo sa EDC dati. Pero di ako kaagad bumili. Buti na lang at medyo bumaba. So bumili na ako. :)

Kung may time ka baka pwede pa analyze din ng Philodrill Corporation (OV). May Konti ako nito. Sa .032-.033 ko nakuha. Medyo ok naman ang gain. Di ko lang alam kung kelan maganda bumitiw. Ang target ko ay around 0.06.
Title: Re: TSO's Request Corner
Post by: pocoyo on Feb 20, 2012, 09:06 PM
S' TSO if u have time can u help me in GLO thanks!
Title: Re: TSO's Request Corner
Post by: TSO on Feb 23, 2012, 06:11 AM
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As I know Petron has an excellent credit rating (AAA) according to PhilRating.. Then this clear up my mind to put my money to them..

Jawo, do not rely 100% on credit rating agencies. If there's anything the 2008 subprime crisis had taught us, it's that they are not infallible.

For all you know, Petron could've given Philrating a lot of money for their AAA grade.

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I'm investing with SMPH for a quite some time now.  Earnings like 27% now, i saw the rate in CITISEC that their recommendation is to sell at Php 20 per unit.  My question is whats the BUY BELOW rate of SMPH?

I wouldn't know.

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Nag request ako ng analysis mo sa EDC dati. Pero di ako kaagad bumili. Buti na lang at medyo bumaba. So bumili na ako.

Kung may time ka baka pwede pa analyze din ng Philodrill Corporation (OV). May Konti ako nito. Sa .032-.033 ko nakuha. Medyo ok naman ang gain. Di ko lang alam kung kelan maganda bumitiw. Ang target ko ay around 0.06.

robot.sonic, I'm starting to get interested in it, actually.

I've been watching TFC (Filipino Channel) lately, and I've noticed that every time the little bar thing that shows executed trades show something, I've seen OV pop up quite a bit, along with WIN and some other companies. (along with the stuff I've already invested in lol).

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S' TSO if u have time can u help me in GLO thanks!

Globe?

You don't need my help. Figure out what exactly their business is. I'm very sure it's not limited to phone subscription plans and Internet services. You're going to need to know this if you want to understand it.

@ All

Just want to post here so everyone knows THAT I AM NOT DEAD and AM STILL HIGHLY ACTIVE.

The thing is, for the past two months, I have been working on the hardest, most complicated company I've ever analyzed and it's currently in the last step of the risk assessment phase (which is followed by the valuation phase, and believe me, creating a valuation matrix takes less than a day).

My next Deep Scan report is coming up soon and, to be honest, I don't know how I'm going to write it because the things I did to investigate its investmentworthiness is complicated in itself. Even more than what I did for EEI.

Besides that, I've been investigating the Euro crisis and all I can say about it is BE PREPARED. Be VERY prepared. The debt crap that's happening over there as I write this (and as you read this) is a result of cultural illnesses and optimism towards human nature. They are not doing anything to solve the fundamental problems and the austerity measures are so unpopular with the public it is evident that a deep disconnect exists between politicians and their constituents (ah, doesn't THAT sound familiar?).

Sooner or later there's going to be an implosion. Until there is overwhelming political will, a miracle is almost unlikely. (So the lesson there is, don't be all in! Always keep some cash on hand just in case.)

As for requests / next projects,

GMA or ABS-CBN is going to have to take a backseat. My interest in OV is starting to get the better of me, and if I like it enough, I might just turn it into a Deep Scan. On top of that, an investing convention I attended just last weekend handed me my next big USA project on a silver platter (because of the high 0.9 beta, attractive fundamentals, and insufficient powerpoint presentations).
Title: Re: TSO's Request Corner
Post by: bauer on Feb 23, 2012, 11:15 AM
TSO,

why is it so that you consider 0.9 beta as high?  what is your acceptable beta range before you invest?

I just recently invested on a firm with a beta of 0.5 and likewise invested on another one last year with a beta of 1.7

of course, in my decisions, beta alone is not the trigger point.
Title: Re: TSO's Request Corner
Post by: robot.sonic on Feb 23, 2012, 11:34 AM
Thanks TSO!

Pashare din ng analysis mo kung ok lang sayo ha. :D

Naghahanap din ako ng mga undervalued companies ala clifftheinvestor. P/E at P/B nga lang ang indicator ko tapos tingin sa interim EPS. So far ang nakita ko pa lang ay yung RCB. Nakabili ako kanina at tumaas naman ngayon.
Title: Re: TSO's Request Corner
Post by: TSO on Feb 23, 2012, 01:23 PM
TSO,

why is it so that you consider 0.9 beta as high?  what is your acceptable beta range before you invest?

I just recently invested on a firm with a beta of 0.5 and likewise invested on another one last year with a beta of 1.7

of course, in my decisions, beta alone is not the trigger point.

I have no beta range.

However, I prefer any beta that is approximately equal to 1.0 and anything up. So if it's 0.9, I consider it "high". I love volatility, you know.
Title: Re: TSO's Request Corner
Post by: drenevich on Feb 28, 2012, 01:22 PM
TSO,
Salamat. Ang galing naman ng ginawa mo dito sa thread. Not to mention that it's free pa. It's very generous of you to provide such informative analysis.
I know you're busy. But if you happen to have some time. Can you make an analysis on FDC?
I hope it's not too much to ask. And please, take your time. Ayaw ko po makaistorbo sana but I badly need help.
Title: Re: TSO's Request Corner
Post by: akira0422 on Mar 09, 2012, 10:19 AM
hi TSO!!! can i ask your opiniion on your view on EDC's managemnt.... i feel that its drag is currently due to perception of how mangement is dealing with the impairments they have.... the business though has no question, however growth myt be hampered with fuzzy direction... THNX XD
Title: Re: TSO's Request Corner
Post by: panitanfc on May 14, 2012, 05:01 PM
Looks like I need to wait a day, huh? Hmm...

Anyway, here's the third and final portion of my EEI Corporation report.

Hope it helps. :) The entire thing was 15 pages long...



Future Prospects
Still, just because a company has a pretty good chance of manipulating its accounting records for the investing public doesn’t mean it has no decent opportunities for growth.

In addition to a special section from EEI’s 2010 SEC 17-A, I have four sources here that attest to the wonderful opportunities available to this corporation today, one of them being a company update written by a chartered analyst working for Citisec Online.

The Saudi Gazette (http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentID=2010112387784) (released on Nov 2010)
-   The KSA is expected to award contracts of up to $86 billion in 2011.
-   There were, at the time of writing, $624 billion worth of projects underway or being planned
-   Demand for construction in the Middle East, according to UAE-based Proleads Global, is set to soar as the industry is faced with major developments and impending recovery from economic downturn.
-   Business Monitor International reports, the United Arab Emirates government has appropriated almost $12 billion for infrastructure projects from 2010 budget

Asia Today (http://asiatoday.com/pressrelease/construction-projects-saudi-arabia-be-worth-sr2374bn-2012) (released on 15 Mar 2011, written by AME Info FZ LLC)
-   Construction projects in the KSA, the Middle East’s largest construction market, are expected to be worth “around SR237.4bn in 2012 as the Saudi Government proceeds with its Five-Year Development Plan” (note added: 237.4 billion Real is approx. $63.31 billion)
-   “The rapid expansion of the construction sector is driving parallel growth in the Kingdom's construction machinery market, which is expected to expand further by 20% through 2015.”
-   “The Saudi Government's 2011 budget is currently funding construction-intensive, multibillion-riyal projects ranging from ports and roads to rail networks and communications facilities.” Infrastructure enhancements will account for a significant portion of Saudi Arabia’s development over the next five years.

Construction Week Online (http://www.constructionweekonline.com/article-9141-saudi-construction-industry-growth-hits-7-in-2010/) (released on 7 Aug 2010, written by Andy Sambidge)
-   Business Monitor International forecasting almost 7% growth in KSA’s construction sector in 2010, fueled by “billions of dollars of projects either in the pipeline or currently underway”. BMI analysts estimated a 4Y CAGR of 4.13% from 2010 to 2014, based on number of on-going projects. Industry value forecast should rise from SR92.2 billion ($24.57 billion) to SR122.48 billion ($37.7 billion) over same time frame.
-   Saudi’s native population is a key factor behind the stable and growing demand for infrastructure. The government has also shown a commitment to infrastructure development and its ability to support these plans through funding.
-   This is incredibly strong growth, taking place during a recession and thus, difficult access to credit. It illustrates resilience of the Saudi Arabian construction industry and the demand from the locals, whereas other countries rely on expatriates and tourists for infrastructure development. (emphasis added)

COL Company Report (released 8 April 2011, written by Richard Lañeda, CFA)
-   the significant increase in oil prices (now over US$100 a barrel) should lead to more investments in refineries and petrochemical facilities
-   Lañeda estimates a 12% success rate in EEI’s bidding for projects, all of which were reported by EEI to be valued significantly higher than pre-crisis levels (emphasis added)
-   Domestic operations also looking great. Property developers are launching multiple projects, supplying a very favorable demand-supply situation of the Philippine construction sector. Philippine government is also launching infrastructure development through a public-partnership program (PPP) that would hurl P38.9 billion in projects on 2011.
-   The tsunami-earthquake combo that brought Japan to its knees might provide more opportunities for EEI, since it can participate in the restoration efforts of damaged Japanese industrial facilities, refineries, and power plants. EEI has had previous partnerships with Japanese companies, so this direction may actually bear fruit.

Regarding the chartered analyst’s report, I investigated the PPP and discovered that the Philippines has a website for it (http://ppp.gov.ph/ppp-projects/ppp-projects-for-2011-rollout/), which details the projects it intends to roll out.
-   NAIA Expressway (Phase II)
-   DaangHari – SLEX Link Road
-   MRT & LRT Expansion (privatization of LRT 1 and maintenance)
-   NLEX & SLEX connector
-   MRT & LRT Expansion (LRT 1 South Extension)
-   CALA Expressway (Manila Side section, approx. 27.5 km.)
-   Airport Developments for Puerto Princesa, New Bohol, and New Legaspi (Daraga)
-   Privatization of Laguindingan Airport Operation and Maintenance
-   LRT Line 2 East Extension
-   Over 30 national projects for medium-term rollout, among the departments of agriculture, transportation and communications, and public works and highways, education, health, along with the MWSS and National Irrigation Administration

 The American Chamber of Commerce senior adviser John Forbes told ANC’s Business Nightly (http://www.abs-cbnnews.com/video/business/05/04/11/ph-can-grow-9-pct-doubling-infra-spending-pushing-ppp[/url) in an interview that the Philippine economy could grow 9% a year “by doubling government spending on infrastructure and pushing private-public partnerships. (Philippine PPP Center, 5 May 2011)

SEC 17-A 2010 Report (http://www.pse.com.ph/html/ListedCompanies/pdf/2011/EEI_17A_Dec2010.pdf) (released 2 May 2011)
-   The Philippines’ economic growth for 2011 and the medium-term is expected to be sustained, though not as outstanding as the year 2010. The projects handed out by the PPP should contribute significantly to this.
-   Growth drivers of the construction industry are presently the acceleration in construction, expansion in mining, and the housing sector’s recovery. An immense interest in biofuel and renewable energy has picked up, especially now that the attractions of nuclear energy thanks to the aftermaths of the recent Japan tsunami-earthquake event.
-   The political unrest in the Middle East aren’t expected to drastically impact ARCC’s operations; the King of Saudi Arabia had taken preemptive measures and declared benefit programs for his citizens. An increase in the number of projects should impend.
-   EEI’s presence in Guam    was made due to its medium-to-long0term need for workers for the construction of a US naval base that will eventually be transferred to Japan, as well as other renovation projects. Further, the company is preparing to set foot in Australia and Dubai, which EEI said are showing signs of recovery from the global crises.
-   Modular fabrication is seen to have enormous potential. The Saudi Arabian steel fabrication shop is currently operational, complementing its shop at Batangas.


EEI will focus on its core competencies: construction of industrial facilities, buildings, steel fabrication, and infrastructure. Through ARCC, it is a preferred contractor for heavy industrial projects in KSA and it plans to penetrate more countries overseas, throwing around its experience in petrochemical, oil and gas, power, and mining sectors.

To ensure the maximization of these opportunities, manpower is a critical priority. EEI would continue to focus on recruitment and training for the next few years, in order to meet the workforce requirements of the projects they will bid for. Safety and quality are the top value propositions offered to clients through EEI’s workforce, and, to complement their numerous training programs, the company began the process of acquiring the OHSAS 18001 certification and hopes to bag it by 2013.

Increasing efficiency of its operations remains an important initiative. EEI is in the process of modernizing the equipment and software used for construction and steel fabrication. In fact, there are layout improvement plans already underway for the Batangas shop, which would accommodate more machines and smooth the workflow, essentially increasing production caps. Internal businesses processes would be upgraded by a document management system that would save paper and facilitate data sharing.

It goes without saying that EEI’s future prospects are strong.

III. VALUATION ANALYSIS

Going back to what I stated in the executive summary of the risk assessment, EEI Corporation’s operational efficiency, decent profitability, inherent stability, and awesome prospects for the future pointed to low-to-moderate levels of risk. However, my own misgivings on EEI’s financial reports, as you have just read in the previous section, bumped up this perception to MEDIUM-HIGH.

As per my May 4, 2011 update, my valuation analysis will no longer assign a subjective discount rate tied to the perceived risk of the company for the deep scans. This has been changed to the weighted average cost of capital (WACC). You may find my reasons in my thread.

Historical interest rates on interest-bearing debt, ± any adjustments, were used to estimate EEI’s cost of debt-funded capital. Cost of equity, on the other hand, is computed using a modified capital asset pricing model.  The risk-free rate is set at 5.875%, the 7-year T-bond’s coupon rate last month. The market return is a 6-year geometric growth rate computing using the ’10 and ’04 quarterly averages of the Philippine All-Share Index, which was 15.24%.

Thus EEI’s WACC—as well as my discount rate—is approximately 18.36%.

Returning to the topic at hand, EEI’s book value currently stands at P3.74B, translating to P3.61 a share. Net income for FY10 was P657.2M, or P0.63 a share. The prevailing market price as of 6 May 2011 was P3.6 a share (P3.73B market cap). Converted to the usual valuation ratios, we find that EEI is priced at 5.71 times ‘10 net profits, and at almost exactly the level of book value.

However, the P27 billion worth of backlogs on ’10, when discounted to the present on a three-point premium above gross margin realized for the year and divided into its costs and estimated earnings portion, will add P1.1 billion to equity. Forcing consolidation of ARCC into the financial statements would increase it further by P965M (deducted for a corresponding decrease in “investments in associates”).

The adjustments would leave total equity with a balance of approx. P4.8 billion, or P4.63 a share. EEI may have been fairly valued at reported book value, but it is 22% undervalued when the analyst keys in the impact of uncompleted projects and ARCC.

Once again, we are faced with the question, is the EEI Corporation a good investment at P3.63 a share? Because it is undervalued (and continued analysis would only serve to accentuate this), will P3.63 a piece provide a large margin of safety, just in case everything goes to hell?

Net Asset Value
First of all, I had to estimate the value of EEI’s assets. Because of the long-term nature of its operations and its good prospects for the future, it was fairly obvious to me its executives weren’t going to be interested in liquidation within the next six or seven years.

The net reproduction cost method of asset valuation popularized by Bruce Greenwald was hence used for this. Before delving into the heart of the matter, my assumptions were relatively simple: everything is 100% except for investments in associates, Net PPE, Investment Properties, and net receivables.

Investments in associates were tripled to reflect the assets owned by ARCC. I am fully aware this might end up overstating the other joint venture EEI owns, but that doesn’t really matter since its assets are so small in value, any overstatement is laughable.

Net PPE’s value was reduced to 62% of its value (to P663M). To explain, EEI’s PPE consists of (1) machinery and construction equipment, (2) land, buildings, and improvements, (3) furniture, fixtures, computers, and office equipment, (4) transportation and service equipment, and (5) construction of fixed assets in progress. Obviously, anyone who was going to setup a company just like EEI would spend less for the same construction equipment, the same furniture and office gear, and the same transportation and service equipment.

That assumption is even more valid considering these same assets have remaining lives less than half their implied useful lives.  To convert it into plain language, I ask a simple question: if I buy an iPhone 3G for $300, would you be interested in buying that same phone a year later at the same price, when the iPhone 4 is already being sold for roughly the same amount?

Out of conservatism, I reduced the net figures of these items by 50%. I made no adjustments whatsoever to construction in progress, and land, buildings, and improvements due to the fact I know nothing about all the land under EEI’s ownership and whatever they are constructing for their own use. This reason also applies to investment properties, which was left to 100%.

As for net receivables, all I did was add-back the allowance for doubtful accounts. Combined with the present value of uncompleted contracts (assets) and that of their costs (liabilities), I ended with approx. P6.99 billion in reproduction costs.

This total is further adjusted by the value of their customer relationships (estimated by a small percentage of construction COGS and SG&A to represent operating expenses spent on finding new contract partners and clients and maintaining current ones, which is capitalized and depreciated over a five-year period) and of their expertise in electromechanical structures (estimated the same way as customer relationships).

Inputting those two modifiers, I arrived at roughly P8.1 billion in net reproduction costs—P7.82 a share. To add a layer of safety, this valuation is reduced by WACC, bringing it down to P6.38. Juxtaposed to the market price, we are left with a 43.6% margin of safety. Sweet!

Value of Zero Growth
Second, I had to approximate the intrinsic value of EEI’s earnings power, again as prescribed by Greenwald. The sustainable level of revenues that could be earned by EEI’s four business segments was assessed at P8.5 billion, including ARCC’s contribution to it. This is about 22% less than what EEI usually makes every year.

Operating margins are assumed to be at the median 4.1%. Effective taxes were set at 30% to effectively eliminate EEI’s skills in tax management. Maintenance capital expenditures were estimated at the adjusted depreciation expense.

We are left with an income metric of P477.8M, representing a margin of 5.6% (versus the median net margin of 6.5%). Capitalized using WACC and adjusted for cash in excess of what is needed for operations and interest-bearing debt, the value of EEI’s earnings without any growth whatsoever is roughly P2.5 billion—P2.41 a share.

The estimation shouldn’t be a cause for concern. Although the current price is almost 50% overvalued with respect to this value estimation, two things must be remembered. One, this does not include growth. Two, based on the discount rate used to obtain the nominal EPV, the highest price we must be willing to pay for this company is P7.09 a share (which is equivalent to Graham’s maximum 16 P/E prescription).

What matters is the discrepancy between the estimated values of EEI’s assets and its sustainable earnings. There would only be two reasons why the net asset values are higher than the values of earnings without growth: bad business fundamentals or poor management. The 62% gap between assets and sustainable earnings simply reaffirms my concerns with EEI’s risk profile. (Review Risk Assessment for more information.)

Value of Growth
Third, I had to bring in the check how much growth could impact the stock price of the company. The process used to estimate the value is the popular DCF model used by analysts everywhere, based on residual owner earnings projected over the next six years using a plethora of conservative judgments that effectively forecast the income statements. Before I proceed, note that my biggest assumption here is that EEI’s debt payments are all below 1B.

Scenario analysis is exercised to check the effects of all growth scenarios. Realism is also confirmed by juxtaposition of forward 6Y CAGR’s with historical figures and the proportion of terminal values in the net present value of owner earnings.

As I don’t want to kill brain cells rambling, I will cut to the chase. The DCF valuation produced forward 6Y CAGR’s weaker than what has been observed historically. Construction revenues, for instance, supposedly grew at 13.4% a year since ’04. My models all churned out forward rates of 6% and less. Furthermore, the net present values calculated using the financial models were mostly a result of yearly income rather than the hold of terminal values.

In the end, I arrived at P3.00, P4.58, and P7.17 in share prices for pessimistic, neutral, and optimistic growth scenarios, providing margins of safety of 21% (neutral) and 50% (optimistic). Pessimism was keen to remind we could end up losing 20% on this investment in the long run. Nonetheless, the value of growth is 24% higher than that of stagnation at a minimum. 

IV. PERSONAL CHOICE OF ACTION

The margins of safety are high as far as assets are concerned. It is 50% overvalued in comparison to earnings power, but the overvaluation is at a level we can accept based on the level of risk and the highest purchase limit prescribed for guidance in our decision-making. Growth scenarios present us with ample margins of safety, and chances of the company sticking to the pessimistic forecasts (or doing worse) are low, considering the opportunities available in its grasp.

Priced under adjusted book value and facing the impending opportunities ahead with 80 years of experience and a verified reputation for efficient operations, I personally think EEI Corporation is a company worth buying into in spite of my own reservations.

Of course, once I have a position in here, vigilance must be exercised. The quarterly statements are crucial in tracking the over/under-billing and the amount of money EEI is spending to pay its short-term bank loans. Anything related to Saudi Arabia should be observed regularly as well, as a majority of EEI’s construction revenues (reported and stashed away in ARCC) are straight from there.

Ample margins of safety aren’t viable excuses in the face of constant vigilance.


Ah this is a great company..waiting for correction!
Title: Hillenbrand Deep Scan Report (Mar 2012)
Post by: TSO on Jul 20, 2012, 04:46 AM
Hillenbrand, Inc.
Country:      United States
Ticker Symbol:      NYSE – HI
Industry:      Manufacturer – Death and Process Equipment
Current Price**:   $22.78 a share ($1.42B market cap)
NOPAT*:      $100.20 / $99.93 / $113.43
Net Income*:      $102.36 / $91.73 / $106.44
Adj. GAAP EBITDA*:   $188.91 / $185.73 / $215.83
Periods Analyzed:   2004 to 2011
Date started:      28 Dec 2011
Date finished:      29 Feb 2012
Report written by**:   1 Mar 2012
* For fiscal years 2009, 2010, and 2011, respectively. All in millions of US dollars.
** Finalized and updated the report on June 2012. Market price of HI was $19.09 on the most recent trading day ($1.19B market cap).


I.   PROFILE

Hillenbrand, Inc. (NYSE: HI) is the parent company consisting primarily of three companies: Batesville Services, Inc., K-Tron International, Inc., and Rotex Global, LLC. HI proclaims itself in its 2011 10-K as a “global, diversified industrial enterprise with two platforms that manufacture and sell premium business-to-business products and services for a wide variety of industries”.

For Hillenbrand, stability is the name of the game. Its presence is felt in the deaths of thousands of Americans and Canadians alike, the funeral products it manufactures (e.g. caskets, cremation urns, and vaults) contributing about 80% of sales from year to year. Two years ago it has begun diversifying from the scythes of death, expanding through M&A transactions into process equipment, machines aimed at automating and maximizing the efficiency of manufacturing processes (i.e. feeders, industrial crushers, and dry-solid screeners).

The business of death rests mostly in Canada and the United States, with the company holding about 25% of the $2.6B industry on 2011 year-end.  Process equipment, on the other hand, has a larger geographical and customer distribution, with sales across both the globe and multiple businesses, catering to the likes of General Mills, DuPont, Dow Chemical, MasterFoods (Mars), Merck, Pfizer, Nestlé, and Saudi Basic Industries (Zack O’Malley Greenburg, “Counted, Weighed, and Divided”, Forbes.com, 29 Oct 2007).

Three “enduring core competencies” (2011 AR) permeate their operations:
•   Strategy Management: sharpens focus on critical objectives
•   Lean Business: a philosophy nitpicking on methods of eliminating waste and inefficiencies
•   Talent Development: the custom of developing and retaining in-house talent from the ground up.

II.   EXECUTIVE SUMMARY

Hillenbrand seemed like an excellent target...

First brought to my attention by Anand Chokkavelu, an analyst of the Motley Fool who mentioned it in an article he wrote five months ago, Hillenbrand seemed to have everything I looked for in a lucrative investment: high margins, high returns on equity, a dividend yield no less than 3%, and a viselike grip on its market share.

The company’s stock, on further investigation, seems fraught with inefficiency. No more than three analysts covered this stock in the past three years (S&P’s Quantitative Services, Quantitative Stock Report, Standard & Poor’s, 24 Feb 2012, accessed via E*Trade). No articles about it exist on GuruFocus or SeekingAlpha. How can a business as great as Chokkavelu claimed escape the scrutiny of multiple, intelligent eyes? The answer to this, apparently, lies in its special situation (More info in “Disclaimers” under Section III.)

…but the company proved resilient to analysis.

Much time was spent and wasted on planning my attack strategy for this monster of a project. Industry-related information relevant to the analysis was scarce. Opacity and obscurity veiled the company reports, shielding it from investors and talented analysts alike. The footnote for “Segment Information” was more an obstacle than a tool of illumination. Standard procedures employed in appraising a business’s long-term value floundered in the face of Hillenbrand’s complexity, requiring much creativity and mental fortitude from the analyst.

By the time I have begun diving into the business, a month has already passed.

Hillenbrand represented the most difficult project I have ever undertaken in my entire history as an analyst (as of writing). Writing this research report filled me with as much pride…

…As my agonizing disappointment in this company.

Perseverance and determination uncovered damaged credit…

The company’s creditworthiness are troubling, but still enough to keep Hillenbrand out of trouble, provided it acts with caution and prudence, especially in its M&A dealings.

Debt ratios stand in the 60’s, and solvency ratios saw less profit metrics meeting the safety marks. Asset liquidity may be adequate, but earnings coverage has worsened considerably, which will certainly result in refinancing of debt in the near future should HI permit the permanent expiry of its $400M revolving credit facility in 2013.

…obfuscation of operating efficiency…

Opacity impedes understanding of the company. Management has consistently provided zero transparency on the nature of its operations in any of its filings. Even the investor-oriented presentations provide little help, tailored to a gross exhibition of pie charts stripped free of the numbers. Backlogs of the Process Equipment business aside, operational efficiency was analyzed using the financial statements alone.

The computed information suggest improving efficiency across the board, with discrepancies between LIFO and FIFO inventory accounting indicating both rising costs and an ineptitude in anticipating future demand.

Asset turnovers, an overused ratio for efficiency, are distorted further by the K-Tron and Rotex acquisitions, for the massive levels of goodwill added to the balance sheet would certainly exude the illusion of drastically falling turnovers, when in fact the plunge is not as dramatic as it seems.

…and a struggle to defend profitability.

Hillenbrand deserves a round of applause for keeping its gross margins consistent for the past eight years, despite the pressure exerted on it by cremations and their steady rise since the 1960’s. However, operating profits have gone defensive, squeezed by unidentifiable operating costs, depreciation and amortization, and pension liabilities.

Restructuring and acquisition costs chip away at the profits retained by Hillenbrand, as do the litigation costs that hound its cases against the unrelenting plaintiffs of the 2005 antitrust case and the more recent lawsuit involving its fellow competitor, Matthews. Whatever is left behind is eaten away by a growing base of interest-bearing debt—leverage employed to fuel HI’s acquisitional expansion in process equipment.

Considering the amount HI has paid and must pay towards debt principals, it is clear the attractive dividend yield of no less than 3% is illusory, being purely debt-financed, limited by the separation agreement between HI and its parent, Hill-Rom (NYSE: HRC), and under threat by unseen catalysts.

Although the company is stable, immune to death…

Any idiot can easily figure out Hillenbrand’s product lines are enduring, if not everlasting. Caskets, cremation urns, and vaults are facts of life as is the scythe of mortality.  Machinery such as crushers, screeners, and conveyors are critical components in large-scale processing, with no alternatives available save for manual labor: tedious, expensive, and error-prone.

Roughly 75% of the Process EQT segment’s revenues are driven by six industries: plastics, food, chemicals, coal mining/power, pulp/paper/biomass, and pharmaceuticals. Certainly it wouldn’t be hard to imagine how large are the demand for these products when aggregated.

…it is undermined by both management…

For all the stability and invulnerability dominating Hillenbrand’s lines of work, I harbor heavy distrust for the management. An analysis of internal accounting and the variances between cash and accrual bases imply moderate consistency, a neutral observation had “C” and “F” scorecards convinced me Hillenbrand’s leadership isn’t likely to screw its owners.

The management clearly doesn’t want serious investors and analysts from fully understanding their business, a desire deduced from the nondisclosure of KPI’s in their public reports, conference calls and presentations tailored to selling their story and “double-digit growth” instead of apprising the shareholders on more important matters with far-reaching ramifications on Hillenbrand’s future value.

Trouble encountered in catching a knowledgeable person from investor relations and a leadership willing to overpay for M&A transactions and partially finance them with debt to boot have both eroded my faith in the leadership.

These are giant red flags that mustn’t and shouldn’t be ignored, whether or not the management maintained satisfactory levels of efficiency, profitability, and growth.

…and uncertain prospects for the future…

There is little growth awaiting Batesville. With the market pool pinned to approximately 2.7 million Americans and Canadians on average, year after year, it is clearly in a zero-sum game poised for shrinkage as healthcare, biotechnology, and lifestyle quality advance. Lawsuits battering Hillenbrand and Hill-Rom portend serious damage should their defenses flounder. On top of it all, gross margins are still under threat from the evolving preferences of their weeping, grieving consumers.

...which are hazy at best.

The process group’s upside potential, furthermore, is uncertain, tied not only to the economic cycle but also to the growth catalysts of so many industries they are too broad to specify and too many to factor in quantitative models. But whatever potential this business segment may hold is nonetheless exposed to the high possibility of Hillenbrand being ripped off by its M&A targets.

Thus Hillenbrand’s margins of safety are clearly insufficient.

Hillenbrand’s passable credit, generally improving efficiency, a preservative state of profitability, and strong competitive advantages all point to a “low to moderate” (Level 2) risk rating at best and a “moderate” (Level 3) risk rating at worst. However, the frustrating efforts it took to contact management, their acquisitional conquest in a different market combined with the likelihood of accepting overpriced deals, opacity in their public documents, negative catalysts for Batesville, and the diversified but uncertain growth outlook for the Process Equipment segment have all led me to conclude, after much review and reflection, Hillenbrand, Inc. represents a MODERATE TO HIGH RISK (Level 4) to the investor.

This risk rating produced a WACC of 9.65%. HI’s market price of $22.78 contains an 18% premium for growth and implies a yearly revenue growth rate of negative 0.7% for the next seven years and a 2.4% rate of growth for the terminal period thereafter.

DCF models assuming maintained gross margins and the eventual payment of 50% of known potential litigation damages during the terminal period point to 48% overvaluation on a pessimistic scenario, and an inadequate 10.4% margin of safety for the neutral scenario. Should the company escape the lawsuits unscathed, HI would be undervalued by 20% on a neutral outlook and overvalued by 18.5% on pessimistic.

I do not recommend HI for short or long operations. However, its beta of 0.74 (according to Google Finance), Europe’s continuing problems, America’s struggling recovery, the uncertainty of Batesville’s litigation outlook, and the excellent stability of the company’s manufacturing businesses are compelling enough for continued observation until a suitable buy price has been reached.



June 9, 2012 UPDATE:

With the current price of Hillenbrand now at $19.09 a share, owing to developments during the ongoing Euro crisis and its May 7, 2012 guidance (when its FY12 expectations were revised downward).  This is definitely a potential entry point, as this represents:
-   A 2.5% discount to stagnation value
-   22% overvaluation to pessimistic growth and 25.6% margin of safety for neutral growth, taking into account the impact of failures to defend against litigations.
-   2% margin of safety for pessimistic growth in the absence of litigation damage. (35% for neutral!)
-   Expected revenue decline of 1% a year for the next seven years with a damning stagnation for the terminal period. (Expected decline of four percent yearly if terminal growth rate equaled long-run inflation.)
-   A dividend payout ratio of about 4%, whereas the price three months ago represented a DPR of 3.2%

However, I will not be editing the majority of this research report since it will not be necessary.



You may find the full analysis on Gurufocus (http://www.gurufocus.com/news/180290/hillenbrand-inc-rising-from-the-grave). BE WARNED: IT IS EXTREMELY LONG. (Twice as long as my usual write-up!)
Title: Re: TSO's Request Corner
Post by: finance123 on Jul 21, 2012, 03:18 AM
TSO, I like the way you write. Saang business school ka nag aral sa manila?>
Title: Re: TSO's Request Corner
Post by: TSO on Jul 21, 2012, 03:23 AM
ADMU.

You like it, huh?

That's good. :) I was thinking my Hillenbrand report was a little too flashy.
Title: Re: TSO's Request Corner
Post by: alacrity on Jul 21, 2012, 10:00 AM
Hi TSO, this is off-topic, but what do you think of conglomerates, in general?
Title: Re: TSO's Request Corner
Post by: finance123 on Jul 21, 2012, 08:45 PM
K lang naman. Masyado lang syang mataas but it is good. I always read your analysis.
Title: Re: TSO's Request Corner
Post by: TSO on Jul 22, 2012, 12:29 AM
@ Fin 123

Okay. Just a little concerned since my professional contacts all tell me that I need to be more concise and direct, and less flashy, if I'm going to show my write-ups to hedge fund managers.

@ alacrity

Conglomerates are a lot like trying to analyze forests.

Analyzing them from the top-down helps, but ultimately, you want to know how they are doing on a per segment basis. Furthermore, you need to understand how their major businesses operate.

This all depends on the generosity and largesse of the management to disclose information to you, the analyst-investor, and in such a manner that it is consistent and relevant.
Title: Re: TSO's Request Corner
Post by: finance123 on Jul 22, 2012, 01:06 AM
Ano ba ang inaral mo sa ADMU finance, accountancy or economics?. Ako din ay finance major sa isang university sa province. Hopefully, I will graduate in 2014.

I think tama sila. Its too long. Can you write your research as if your writing for bloomberg news at hindi pang academics?
Title: Re: TSO's Request Corner
Post by: TSO on Jul 22, 2012, 01:13 AM
Management lang. Hindi pa nga honors eh haha.

Hmm, well, I'm writing my next report on Diamond Offshore (DO). I'll make it more direct then.

Title: Re: TSO's Request Corner
Post by: alacrity on Jul 22, 2012, 07:03 AM
@TSO

Thanks for pointing me in the right direction and for the quick reply.

@ alacrity

This all depends on the generosity and largesse of the management to disclose information to you, the analyst-investor, and in such a manner that it is consistent and relevant.

Mind if I ask what information from the management you're pertaining to? Because all I look at are annual reports and the other disclosures on the PSE website.
Title: Re: TSO's Request Corner
Post by: TSO on Jul 22, 2012, 07:24 AM
This is basically info that has nothing to do with the financial statements, which are useful on their own or can be combined with financial info to produce meaningful data on their operations.

Examples: unit sales, breakdown of ppe (from my experience, found in PFRS & IFRS, but not US GAAP), customer base, etc.

Problem here is that a transparent management can be TOO transparent and inadvertently expose either the investor to information overload or their internal data to competitors.

Just because a company complies with regulatory standards doesn't necessarily mean everything's okay with that company. Look at Enron. Look at Green Mountain. You need to read between the lines. And even then, you can't trust even the very information provided by the company... not without being conservative in your risk assessment, in your valuatin, or both!

It is better to encounter false negatives (you're wrong, but price goes up) than false positives (you're wrong and price falls for the long run), because recoveries can cripple your absolpte performance.
Title: Re: TSO's Request Corner
Post by: finance123 on Jul 26, 2012, 09:00 PM
TSO have you worked as finance researcher for local brokerage firm? How much ang compensation?? Any idea?
Title: Re: TSO's Request Corner
Post by: TSO on Jul 27, 2012, 01:28 AM
No never did. I probably would be working under them if I had stayed in the Philippines after graduating from Ateneo.

what I do know is that in the States, your starting compensation's around $20 per hour. The seniors make at least twice that.

I know someone working for COL. I'll ask him how much the junior and senior analysts make.
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Jul 27, 2012, 01:44 AM
^ wow, ang taas. $20! :D
Title: Re: TSO's Request Corner
Post by: finance123 on Jul 27, 2012, 02:16 AM
Thanks. Mahirap ba maka pasak sa ganyang field if you are not a graduate of top university sa Pinas?
Title: Re: TSO's Request Corner
Post by: glady on Jul 27, 2012, 04:26 AM
Hi TSO, what do you think of Rockwell po?
Title: Re: TSO's Request Corner
Post by: TSO on Jul 27, 2012, 05:04 AM
Thanks. Mahirap ba maka pasak sa ganyang field if you are not a graduate of top university sa Pinas?

I can't fully answer that question. However, since I'm technically in the same position here in the States, let me just say that it took two years in a recessionary environment for me to a find an underpaid analyst job at a small investment firm.

You're likely to have the same results in the sample case, but since the Philippines isn't reeling from an econ crisis of some sort, then it should be quicker than one year. Or at least I hope.

Quote
Hi TSO, what do you think of Rockwell po?

Basic stats?

I haven't touched the Philippine market in a while. All the action's here in the US so my eyes are focused there... sorry.
Title: Re: TSO's Request Corner
Post by: glady on Jul 28, 2012, 04:39 AM
hi TSO, no problem po, how about Goldman Sachs? :)
Title: Re: TSO's Request Corner
Post by: TSO on Jul 28, 2012, 05:39 AM
I avoid banks, so no opinions on them as an industry. As far as I'm concerned, Goldman Sachs will shoot itself in the foot when the next crisis happens.

Plus, I'm a bottom-up investor. You can tell what companies I am or have analyzed by looking at the first page. :)
Title: Re: TSO's Request Corner
Post by: bauer on Jul 30, 2012, 09:00 PM
 As far as I'm concerned, Goldman Sachs will shoot itself in the foot when the next crisis happens.
 

So i have shoot my own foot on GS tsk tsk tsk...
Title: Re: TSO's Request Corner
Post by: TSO on Jul 30, 2012, 09:56 PM
^ well, I don't know. Investment banks thrive on callous operations, manipulation of clients, and deceit. It may get them money, but it comes at the expense of everyone around them.

I've always held disdain for IB's, and if I ever owned a hedge fund, anyone who applies coming from merrill lynch, gs, or whatever is someone I'll auto-reject unless I can gleam something un-IB in the resume.
Title: Re: TSO's Request Corner
Post by: alacrity on Jul 30, 2012, 11:03 PM
I've always held disdain for IB's, and if I ever owned a hedge fund, anyone who applies coming from merrill lynch, gs, or whatever is someone I'll auto-reject unless I can gleam something un-IB in the resume.

How about local IB's? Are they all the same?
Title: Re: TSO's Request Corner
Post by: TSO on Jul 31, 2012, 12:53 AM
Never heard of any scandals in the Philippines corresponding to local investment banks.

I wouldn't know.

HOWEVER, do keep in mind that investment banks by their nature have a conflict of interest between their clients and the ultimate recipients of those who purchase their underwritten securities.

That Merrill Lynch and Goldman Sachs have failed to uphold their loyalty to the true clients (the retail investors) goes to show even the existence of so-called firewalls and the presence of chartered professionals cannot fully halt unethical activities.
Title: Re: TSO's Request Corner
Post by: GIG on Aug 01, 2012, 07:24 AM
TSO . . . still an idealist huh . . . that's good to know.
Title: Re: TSO's Request Corner
Post by: TSO on Aug 01, 2012, 02:03 PM
TSO . . . still an idealist huh . . . that's good to know.

Not really.

Being a value investor has made me very cynical towards people in general. You profit from the emotional or irrational shortcomings of other people, and you discriminate prospects using a mosaic of information that requires intuition to process, rather than pure quantitative screening as some investors are wont to do. You exploit human nature.

The VI philosophy thrives on market inefficiency and market euphoria/panic, and you practically depend on the single defining facet of humanity: that we learn absolutely NOTHING as a species in the long run. That no matter how technology changes the quality of life, it does nothing to improve our impulsive dispositions and other behavioral quirks.

I'm an idealist only insofar as business ethics are concerned.
Title: Re: TSO's Request Corner
Post by: alacrity on Aug 01, 2012, 05:37 PM
Not really.

Being a value investor has made me very cynical towards people in general. You profit from the emotional or irrational shortcomings of other people, and you discriminate prospects using a mosaic of information that requires intuition to process, rather than pure quantitative screening as some investors are wont to do. You exploit human nature.

The VI philosophy thrives on market inefficiency and market euphoria/panic, and you practically depend on the single defining facet of humanity: that we learn absolutely NOTHING as a species in the long run. That no matter how technology changes the quality of life, it does nothing to improve our impulsive dispositions and other behavioral quirks.

I'm an idealist only insofar as business ethics are concerned.

Do you get the feeling that the VI philosophy has somehow been extended into your personal life?

I read Roger Lowensteins' biography of Buffet and the way he portrays him is that of a man who had to sacrifice ties (the memory his kids have of him is someone who worked at the second floor of their house, only coming down when he needed to eat) ,

relationships (his first wife left him)

 even emotions (when his car got smashed he said nothing to his son) for his life's work.
Title: Re: TSO's Request Corner
Post by: freefront on Aug 01, 2012, 06:49 PM
^do wonder if he cheated a little and did trading on the side?
Title: Re: TSO's Request Corner
Post by: bauer on Aug 02, 2012, 12:04 AM
I read Roger Lowensteins' biography of Buffet and the way he portrays him is that of a man who had to sacrifice ties (the memory his kids have of him is someone who worked at the second floor of their house, only coming down when he needed to eat) ,

relationships (his first wife left him)

 even emotions (when his car got smashed he said nothing to his son) for his life's work.

another biography author robert p. miles presented it this way,

Buffett just read IN his HOUSE (anywhere convenient to read).  His children had a normal kids' lives.

His wife left him because she is more of a 'social person' and he is a homebody.  Her life was marked by parties, celebrations, and boyfriends.  even then, buffett had taken good care of her after she has a terminal illness.  buffett married his wife's best friend, who is also a homebody like him.


Buffett's children were raised uprightly and all three were given funds for their own charity foundations.

His life is normal as any family would be in america.
Title: Re: TSO's Request Corner
Post by: TSO on Aug 02, 2012, 02:02 AM
Do you get the feeling that the VI philosophy has somehow been extended into your personal life?

Huh, I don't just "get the feeling". I know it is.

I've a reputation for being stingy. Seriously. I donated $50 to my sister's cause once, and she went "OMGWTF my bro just gave me $50 it's so amazing!"

Quote
I read Roger Lowensteins' biography of Buffet and the way he portrays him is that of a man who had to sacrifice ties (the memory his kids have of him is someone who worked at the second floor of their house, only coming down when he needed to eat) ,

relationships (his first wife left him)

 even emotions (when his car got smashed he said nothing to his son) for his life's work.

I've read The Snowball, which is an excellent biography of ol' Warby (one that was written at the cost of the author's ties to him).

It's the same thing, too.

He's obviously very intense about it and the whole investing gig's his life's work.

Clearly there is a reason why he's the golden calf of value investing.

Personally, I don't want to end up wasting my personal life. :P

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@ bauer

I don't know about homebody though.

Buffett was always out. He fell in love with businessmen and their passions, rather than women, parties, and all that socializing. So instead of get-togethers, he has meetings and plant tours, and golfing. lol.

Post Merge: 1343844349
I, on the other hand, would want to travel the world and go trekking/spelunking when I'm capable of doing so.

That's the best part about the Internet. You can manage money, anytime, anywhere.
Title: Re: TSO's Request Corner
Post by: bauer on Aug 02, 2012, 09:26 PM
@ bauer

I don't know about homebody though.

Buffett was always out. He fell in love with businessmen and their passions, rather than women, parties, and all that socializing. So instead of get-togethers, he has meetings and plant tours, and golfing. lol.
 

thanks for the information but i was referring to buffett's life during the early years of his investing.  today, he really spends time outside the house.

actually, during the first few years when he just bought his house, his neighbor's thought he was a bum.  all the companies he acquired, he just check their condition by phone (i dont know until when).
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Aug 02, 2012, 10:40 PM
Huh, I don't just "get the feeling". I know it is.

I've a reputation for being stingy. Seriously. I donated $50 to my sister's cause once, and she went "OMGWTF my bro just gave me $50 it's so amazing!"
hahah. good one! hooray for the stingies
Title: Re: TSO's Request Corner
Post by: TSO on Aug 03, 2012, 12:19 AM
thanks for the information but i was referring to buffett's life during the early years of his investing.  today, he really spends time outside the house.

I was also referring to his days with the partnership and the era early after the biggest mistake that is the Berkshire Hathaway takeover. His kids developed the impression that he's the stoic guy who never shows up for family events and prefers to go out and have business meetings, and then stay in one room whenever he's at home.

He started changing after his first wife left him though, 'cause that's when he realized just how much he missed.

Quote
actually, during the first few years when he just bought his house, his neighbor's thought he was a bum.  all the companies he acquired, he just check their condition by phone (i dont know until when).

LOL.
Title: Re: TSO's Request Corner
Post by: freefront on Aug 03, 2012, 09:15 AM
....And from hereon, there will be a part in some questionnaire where you will be considered in some capacity by the answer you give to this : are you a investor or a trader?
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Aug 03, 2012, 10:00 AM
he is a value investor :)
Title: Re: TSO's Request Corner
Post by: bauer on Aug 03, 2012, 01:41 PM
I was also referring to his days with the partnership and the era early after the biggest mistake that is the Berkshire Hathaway takeover. His kids developed the impression that he's the stoic guy who never shows up for family events and prefers to go out and have business meetings, and then stay in one room whenever he's at home.

He started changing after his first wife left him though, 'cause that's when he realized just how much he missed.

LOL.

oh maybe that's why robert miles is still very much like by buffett after the book was published.  Your information was not shared in the book.

di naman kaya 'bookworm lang siya'?
Title: Re: TSO's Request Corner
Post by: TSO on Aug 03, 2012, 03:14 PM
Not really. Warby was a hardcore businessman since he was ten years old. He had a business then, bought his own car before turning fifteen. Paid for is own college tuition (at columbia iirc), etc.

That is NOT a bookworm. His idea of "fun" in those days was driving across the country, attending asm's and buying stock certificates directly from people WITH a poa so his name doesn't show up on SEC docs on ownership until it's too late and he practically gets a seat or degree of influence on mgt.

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@ freefront: I don't understand the context of your post.
Title: Re: TSO's Request Corner
Post by: freefront on Aug 03, 2012, 07:23 PM
^ Sorry. That was an aftermath of a discussion if traders are feeling sexy ( due to an article that claims the pleasure-pain center of the brain behaves the same way during trading as with other pleasure seeking behavior. It also connected with the pathway of addictive behavior. Meaning, because a trader feels a high everytime he trades, he tends to that over and over to experience the same feeling, etc.). And then, we speculated on how VI's would look like or how would their swagger be. I haven't been to an FA seminar yet so we haven't settled that one. And then again, you guys were going on about a VI's behavior. Am I getting warm so far?
It was just my own weird sense of humor that escaped.

ex. If TSO was being considered as somebody's son-in-law, " Is he a VI or a trader?"
>not saying being one or the other is good or bad, but you did say they behave differently.

@bjj- free pass again. walked in on that one.  :hihi:

Title: Re: TSO's Request Corner
Post by: alacrity on Aug 03, 2012, 07:33 PM
@TSO

I'd also like to expand the story on that car he bought, he and Jerry Orans would drive to town
along with a girl, Buffet would wear a suit while clutching an expensive looking cane and the
script was that Buffet was the 'rich' man with his wife and Orans was the chauffeur (also with
uniform) and  they made sure that the car would 'break down' in a public street and while Orans
was 'fixing' the engine Buffet would tap on the window telling Orans how to 'fix' the car.

This goes to show that Buffet was not the average teenager, I think this shows how intense he really was. He saw himself being rich during his early age, and he did.
Title: Re: TSO's Request Corner
Post by: pilyong_husband on Aug 04, 2012, 09:13 AM
Hi TSO.

What's your analysis about these cloud computing companies(US)?
1. Salesforce (CRM)
2. Netsuite (N)

TIA.
Title: Re: TSO's Request Corner
Post by: TSO on Aug 04, 2012, 05:51 PM
I should probably run it thru my prelim screener.

Why those two companies in particular?
Title: Re: TSO's Request Corner
Post by: bajoyjoy on Aug 05, 2012, 10:45 AM

@bjj- free pass again. walked in on that one.  :hihi:

in fairness, i got ur point without need for an endnote. guess i'm getting the hang of it na ff! :hihi:
Title: Re: TSO's Request Corner
Post by: TSO on Aug 06, 2012, 02:30 AM
@ pilyong_husband:

Just checked both companies on google.

Netsuite is out; has been incurring operating losses since 2008. Debt is also high, mostly current liabilities, and retained earnings have been shot dead. Worse, it has little liquidity whatsoever.

Salesforce has posted an operating loss for most recent fy. However it has been profitable in th prior so you may want to check if this is one-time or not. Assets are slightly more towards debt, but still decent enough to be a going-concern. Warning: 30% of assets are in fixed assets (both ppe & intangibles, incl goodwill), so you'll have to analyze capital investments well, and determine how well the mgt is paying for their acquisitions.

Salesforce looks something worth studying, but as far as directly investing goes, I cannot blindly recommend anything. I'm not jim cramer. :)
Title: Re: TSO's Request Corner
Post by: pilyong_husband on Aug 06, 2012, 07:42 AM
Thanks TSO :)
Title: Re: TSO's Request Corner
Post by: BatmanBeyond on Aug 07, 2012, 09:23 AM
Hi TSO!

This is my first post on this thread though I have been reading this for a few months already. I am new to stock investing. In fact, my COL's application was just approved yesterday and I am to fund my account today so most probably, I can start getting my feet wet tomorrow or the next day.

I am eying COL's recommendations as of now. I have chosen BDO, EW, EEI, FLI and SMPH. That seems to many but I will take this opportunity to request an analyses of them from you.

This is a very helpful thread especially to newbies like me. Though we know that you have other things to do, you still give time to our requests. More power to you TSO. Thank you very much!
Title: Re: TSO's Request Corner
Post by: prnd32 on Aug 10, 2012, 11:02 AM
Sir, how about TDY?  I would like to know whether this would be a good long-term investment.  I have already purchased few shares. Is it worth accumulating?
Title: Re: TSO's Request Corner
Post by: TSO on Aug 10, 2012, 12:36 PM
I'll run both that and LOTO through my screener (just a quick spreadsheet) when I have time. I want to hold both but I'm unsure of their prices, hehe.
Title: Re: TSO's Request Corner
Post by: bajoyjoy on Aug 10, 2012, 12:48 PM
hi prnd32! I'm not sure if you've browsed through the entire thread yet, but the quoted post below was originally posted in page 2 of this thread by TSO himself.... maybe it could help with your preliminaries (on filtering stocks for possible long-term investment). just remember it was scanned last year pa.  any additional/update for this post would be great, considering the change in circumstances that have occurred over the past few weeks . but still is a very good read imho (and concise too!), update lang siguro on the figures, and most importantly for part III-IV...  :applause:

Since GoodSteward has rescinded his desire to pursue Tanduay's further analysis, I shall post the screening results here.



DISCLAIMER: This is only a screen-level analysis! The requester has stopped the analysis at this point and according to my policy I will release the findings for public view. Please remember that my study of the company is not as in-depth as Air T.

Tanduay Holdings, Inc.
I. DEMOGRAPHICS
Country: Philippines
Ticker Symbol: TDY
Industry: Distilled Spirits
Profile:

Tanduay Holdings, Inc. ("TDY") is a holding company at least seventy years old (but with a 155Y corporate history), engaged in the production of distilled spirits (rum, wine, gin, & brandy) and their distribution to over 170,000 retail and wholesale outlets in the Philippine archipelago through direct sales as well as FOUR exclusive distributors. These distributors operate 21 sales offices and 52 warehouses all over the country. To minimize overhead (maintenance and labor) and tap into a scale economy, TDY generally establishes contracts with 3rd parties for transportation services.

TDY enjoys a significant competitive advantage with its Rum, securing virtually all but 5% of all Rum sales in the industry (which accounts for 28% of the distilled spirits industry) Despite TDY's 99% focus on the domestic, low-income market, TDY's sales is second to Puerto Rico's Bacardi. (79% of TDY's sales is from its 5Y Fine Dark Rhum)

TDY's geographic dominance comes from VisMin. GSMI is the undisputed market leader of the entire distilled spirits industry (producing gin and brandy), controlling a rather large 46%. Emeperador Distillers, Inc. is the lesser company, controlling only an estimated 17%. TDY, in contrast, holds 33%.

II. RISK ASSESSMENT
Summary
TDY's risk is assessed to be moderate. While the company is stable, possessing multiple competitive advantages, and is actually well-positioned for growth, the fact remains these do not justify the company's shaky credit, mediocre efficiency, and variable profitability.

Justifications
A. Creditworthiness
Creditworthiness is rather shaky. I don't find it as disheartening as RLC's situation was, but nonetheless, there are several points of concern. Assets have consistently been debt-funded, and solvency tests produce subpar results.

Liquidity is actually rather decent, conforming to the usual rule-of-thumb standards, but earnings coverage simply doesn't fly. Tanduay churns out a loooot of money for debt. Neither EBITDA nor OCF amount to more than 2x required payments! These are current values. Average figures aren't exactly that reliable due to the debt payments on '06 and earlier and the effects of working capital changes and unusual/unpredictable items. In fact, even if you eliminate all factors causing the variation, the best you get is a median 2.1. That's not exactly a large margin especially when they were all below the average from '06 to '09.

Another warning sign here is the level of owner earnings and free cash flows earned by the company. Historically speaking, the company barely has anything left after paying off its debts, and it STILL has to pay for dividends -- which either forces the company to rack up more debt OR turn to other sources of cash flows (which is obviously unsustainable and, if frequent, definitely unpredictable).


B. Efficiency
We can at least say efficiency is generally increasing, considering that revenues being generated by TDY is going up, whereas total assets remains stable, lingering around P12B without much variation.

Inventory management has been maintained over the medium term, even though the company had a problem on '06 when they closed the year with a rather large volume of unsold goods. Anyway, that they turned it around in two years speaks plenty for operational efficiency.

Take note however that I consider the company's level of efficiency, at least from the turnovers, to be inadequate for the type of business it is in, as you will see in the next section.

C. Profitability
This is where I am divided. Operating margins are at stable 11% of total revenues, but as you move down, nonoperating items increase the variation all the way down to the bottom line. The lowest net margin TDY ever had was about 4% on '08. The highest? 11% on '05. Current margins are still lower than the median, so we can at least expect some improvement when we get the FY10 17A. (Of course, the median shows just how powerful nonoperating items, interest, and taxes are, eliminating 30% of operating income, which is harsh considering 80% of revenues dissolved after being swallowed by product costs.)

The very nature of TDY's business requires the company to have turnovers above 1.0. Unfortunately, this requirement isn't met, and ROA is bogged down, pulled up to an ROE of 10% by leverage alone.

Dividend payout rates are completely unreliable, of course, but if it helps, the company has distributed no less than 325.75m since '05. At today's price of P3.4/share, that's a 3% dividend yield every year. Not bad, I think.

D. Inherent Stability
In spite of troubling credit, good (but probably mediocre) efficiency, and low bottom-line profitability, Tanduay is actually a stable company. It's a bit sick, but it's definitely going to live.

TDY possesses multiple competitive advantages that help it dominate the playing field along with Ginebra San Miguel and Emperador:

~~ Treasure vault of experience ~~
The holding company's initial incorporation date stamps its age at a minimum of 70 years (the company claims in its annual report it is 5 years older than the Ateneo de Manila University campus).

TDY is thus a wellspring of knowledge when it comes to its products and how it is so tailored to domestic wants. That it still puts money on R&D implies a very large barrier to entry for anyone pursuing a venture into the distilled spirits industry, specifically rum.

~~ Massive scale economy ~~
Tanduay distributes their products through four exclusive entities, in easy reach of the public considering their alcohol is sold in over 170,000 retail and wholesale outlets. This doesn't count direct sales. The four distributors own 21 offices and 52 warehouses nationwide.

The company taps into the scale economy even more by setting up contracts for transportation services with third parties, minimizing shipping and delivery expenses.

~~ Geographic and Industry Monopoly ~~
The distilled spirits industry is controlled by only THREE major entities: Tanduay (33%), Emperador (17%), and Ginebra San Miguel (46%). HOWEVER, Tanduay controls 95% of the rum market, kicking out any hopes for either two competitors to make a killing from this niche segment.

~~ Self-sustenance ~~
TDY owns two alcohol production plants as well as a significant portion of a sugar producer. On top of that, it has a network of suppliers just in case supply is unable to meet demand.

~~ Goodness-of-fit with demand preferences ~~
Tanduay basically targets the low-income bracket, which represents 80% of the total population (and 66% of domestic liquor consumption). Filipinos are eminent for their alcoholism, to the point we were seen as the number one drinkers in Asia 15 years ago, families using 1% of their income to spend on alcohol.

A research paper (http://apapaonline.org/data/National_Data/Philippines/Alcohol_Media_Philippines.pdf) even goes far as to say:

This seemingly outdated image has not even fazed in the slightest in current times. In fact, it's been reinforced. The average family in the lower 30% income group (i.e. TDY's targets) spent 1.2% of their income on alcohol on '06, and 1.1% on '09.

Of course, I think you and I will agree this is nothing more but confirmation of common knowledge: we Filipinos are alcoholics as a people. XD

If this does not even convince you, then I should bring up some *actual* sales data. I was actually able to derive unit sales of TDY in terms of liters of alcohol sold from '04 to '09. Demand has grown from 75M liters of alcohol to 123M liters in only five years, representing a 10% geometric growth rate. This translates to an average P87 of sales per liter: affordable, if you ask me. 

E. Future Prospects
As far as I'm concerned, unit sales will either be maintained at its current level or keep increasing domestically. The Philippine population is increasing at a rate of at least 2% per year (7Y CAGR from '00 ~ '07: 2.04%; 105Y CAGR from 1903 ~ 2007: 2.36%): roughly 312,000 families per year given today's average number of people per household. I hold the NSO (http://www.census.gov.ph/data/pressrelease/2010/pr10162tx.html) as my source.

To support this, the two alcohol production companies TDY owns have a combined capacity of 102.6M L/year. The company is actually investing on a capacity expansion that will increase the cap to 138.6M L/year.

If we let ourselves speculate, we could see that TDY may have a future in expanding to Malaysia. It already has its foot in the door, as 1% of its sales output is being sent there through a distributor.

III. VALUATION ANALYSIS
Initial Impressions
Essentially, we have on our sights a company mired in stability and, well, pretty good growth prospects. At the right price, Tanduay is certain to be a great buy, questionable credit, mediocre efficiency, and low profitability be damned!

The question is, is its price of P3.4 the right one?

One look at Tanduay's P/E ratio and you know it's going to be expensive! Current market cap versus last year's net earnings come very close to 20. Use adjusted earnings instead (representing an average that the company is sure to meet AND exceed) will bring this baby to 12.3x P/E --- rather expensive, and close to the threshold point.

Closer Look
The 2009 ending price of P2.7/sh are tells us the market is expecting this company to improve its revenues by 10% a year (if inflation rate takes over as terminal growth rate) or 15% a year (if the terminal growth is 2%). That it is currently at P3.4 means the market is looking for the large, 15% growth rate.

Is this realistic? It's probably optimistic. Despite the 10% growth in unit sales, TDY's revenues rose at 8.6% a year from '04 to '09, and, being the paranoid person that I am, think it is an *optimistic* habit to assume the company will match or even surpass this.

I assessed the value of Tanduay's sustainable earnings power. Precluding the impact of excess cash and long-term debt, we come up with a value of roughly P1.97 per share and a P/E ratio of 11.5. Including those two factors (to account for debt and financial assets), however, the value drops to P0.64, making the stock even more expensive.

I think the fact it is priced at 1.08 of 2009's sales revenues is another evidence to this.

IV. PERSONAL CHOICE OF ACTION
My personal choice of action would be to monitor the stock until it drops to 2.2 or lower. That value represents the highest level of P/E Graham is willing to accept. I refuse to pay a significant premium for growth that may not realize or may not be enough to satiate the arbitrary market consensus.

In fact, when I *do* buy the stock, it's probably going to be a small position of about 5%. I would then watch the news and keep an eye out for the 17A, and see if the income falls or not. Market letdowns are sure to pull the price down to a level closer to EPV.
Title: Re: TSO's Request Corner
Post by: TSO on Aug 10, 2012, 11:12 PM
Bajoyjoy, what exactly have I missed with Tanduay?

I visited the thread, and all I'm seeing are dilution threats. That only hits my valuation, but not my actual analysis of its economic moat. Is this all?
Title: Re: TSO's Request Corner
Post by: bajoyjoy on Aug 11, 2012, 10:03 PM
^yes TSO you're correct, mostly just on the valuation or part 3 of the report and consequently part 4 too (personal choice of action). i also mentioned updating the figures used -- if fresher data are now available. I took note that under part IV you suggested to "monitor until the price drops to 2.2 or lower" which i believe is no longer the case, considering the impending consolidation of all lucio tan interests under TDY as one conglomerate. this is one of the big changes in circumstances i thought would have a huge impact on TDY's current valuation and pricing. another one is the 3B worth of shares to be sold to comply with the minimum 10% float requirement which you've already mentioned, would cause the dilution of shares. hence, the need to update the above feb 24, 2011 report. it was just a suggestion though :hihi:
Title: Re: TSO's Request Corner
Post by: TSO on Aug 12, 2012, 12:32 AM
considering the impending consolidation of all lucio tan interests under TDY as one conglomerate.

Do you realize this changes everything?

What are the biggest Lucio Tan interests already public on the market?

Anyone who's analyzing TDY at this point NEEDS to consider the individual risk-growth outlook for each company, and compare-contrast each of their prices/fair value against that of TDY's as it might be better to just go for one of the subsidiaries...

This is starting to look like Hillenbrand again. *facefault*
Title: Re: TSO's Request Corner
Post by: alacrity on Aug 17, 2012, 11:19 AM
Hi TSO,

I'd just like to ask, how can I evaluate SPE's (Special Purpose Entities) ? Thanks in advance for any help.
Title: Re: TSO's Request Corner
Post by: TSO on Aug 17, 2012, 11:50 PM
^ You're analyzing the SPE itself? Or is it an SPE of a public company you're analyzing? I need to know the context.
Title: Re: TSO's Request Corner
Post by: alacrity on Aug 18, 2012, 12:08 PM
I was just randomly scanning financial reports, and I saw that there was an SPE on the annual report.

On context, it's an SPE of a public company, I'm just wondering what should an SPE do, ideally?

Because iirc, Enron had SPE's, not that I'm saying the company is doing something shady but it just kinda set of some alarms since I don't know what an SPE does. Thanks in advance.
Title: Re: TSO's Request Corner
Post by: TSO on Aug 19, 2012, 01:53 PM
In that case, you're depending on the generosity of the public company. The SPE is basically a vehicle that owns some assets that belonged to the company, and is used for purposes like securitizing them and isolating them from what is legally owned by said company, virtually protecting them from the company's legal obligations. It should be something like that--the reason is often disclosed in the annual report.

However, what you should do to evaluate it is to read the disclosure in the footnotes and PROCESS the paragraphs of boring and legal-like text for the sole purpose of determining the possibility the company has, is, or can manipulate its earnings and/or balance sheet in the future.
Title: Re: TSO's Request Corner
Post by: alacrity on Aug 20, 2012, 11:33 AM
I see, thank you TSO.

Title: Re: TSO's Request Corner
Post by: BatmanBeyond on Oct 01, 2012, 01:22 PM
Hi TSO! How are you? I really appreciate all your efforts in this thread. It helps us a lot, especially the novice investors including me. I always read all your posts on your thread. I just wonder, it seems more than a month already that this has been silent and so I break it!

Would care to share what keeps you busy? TIA. Expecting to see more of your stock screens/analysis in the coming months.
Title: Re: TSO's Request Corner
Post by: TSO on Oct 02, 2012, 12:34 AM
I've been working for the past month and a half on Holcim Ltd. (SIX: HOLN). The information Holcim provides is excessive and if you're not careful you will suffer from "information overload".

The analysis of Holcim is actually complete and I'm just finishing up its entry in my notepad, where all my notes and observations are put in and which is used as the basis for every report I write.

Unfortunately, I've decided not to make reports like that anymore as it takes at least a week to translate the notations into a formal report with charts and graphs. To be frank, the opportunity cost is too high.

I'll be copy-pasting my findings on Holcim Ltd. here, although I post everything on my LinkedIn profile anyway (I have a box). Of course, I am really pissed off at the moment as all that work wasn't worth much -- Holcim Ltd. isn't a buy at the current price of CHF 63 and my target entry price is "anywhere below CHF 50", so that pretty much sucks.

I'm going to work on SAIA, Inc. (SAIA) and Pacific Online Systems Corporation (LOTO revisited), as the former represents something undervalued and the latter is now trading at about PHP 14 a share, which is pretty close to where I would want to buy the damn thing and I need to verify. I'm wondering if I should still do Holcim Philippines.

Unfortunately I will be declining the revisiting of Tanduay. The new environment intimidates me and I'm sure it'll be no different from another Hillenbrand. It's clearly an opportunity, that much is sure, but the time it'll take for me to analyze it? How many companies will slip by me during that time?

If I had someone who can analyze SAIA and LOTO for me, I'd do Tanduay, but I don't. Tsk. The reason for this is because Lucio Tan is collating all his companies under this, and that significantly changes the fair value as:

(1) You can identify the largest contributors of value based on the biggest companies owned by Lucio Tan (which should be public)
(2) You need to identify the competitive advantages in EACH separate business segment. This alone will necessitate breaking out each major "segment" (really another public company) to identify their historical characteristics.
(3) You will have to consolidate the earnings power of the distiller with those of the other business segments over conglomerate's recent history. This is because you want to see how all segments coalesce and support/drag down each other as that is how it'll happen from now on.
(4) Valuation models WILL be based on the "overall", as I have done with Hillenbrand.
 Your risk rating will most likely be a weighted average of the discount rates applied to each company, considering the risk of each business will vary.

It is because of this time-consuming process that I don't want to analyze Tanduay. Not until after SAIA and LOTO.

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Oh, and thanks for bumping this up. :P
Title: Re: TSO's Request Corner
Post by: bauer on Oct 02, 2012, 11:38 AM
^ it's good that you might drop tanduay for evaluation.  with PAL being jointly managed by Ang ang Tan, expect a lot of hiccups (by the hundreds of millions ----- in DOLLARS)

I think the PAL venture will be in trouble in a couple of years.
Title: Re: TSO's Request Corner
Post by: TSO on Oct 02, 2012, 11:46 AM
Considering that the Fed is exporting its inflation, I think that's a good thing -- the inevitable weakness of the US dollar will enhance loss absorption.

At any rate, how big is PAL in comparison to overall revenues and assets? If it isn't substantial in the first place (despite being a capital-intensive business like distillation) then won't that be a good thing?
Title: Re: TSO's Request Corner
Post by: bauer on Oct 04, 2012, 04:35 PM
^ Well PAL's revenues is a lot less than 2 billion dollars a year.  walang masyadong assets kasi most planes they use are own by others.  tapos balak pa nila ngayon bumili ng planes worth 10 billion dollars at gumawa ng sariling airport worth 6 billion dollars?  If we believe the news, we must be living in paradise!
Title: Re: TSO's Request Corner
Post by: TSO on Oct 06, 2012, 06:05 PM
^ That's about P82.84 billion in sales given recent FOREX. If Fed QE-infinity brings inflation up and US lackadaisical policy on the fiscal gap (I'm not just alluding to deficit reduction, as this excludes the present value of SOCIAL ENTITLEMENTS) drags the dollar below 1:40 USD:PHP (which will happen if the US government keeps its present course) or even $1:PHP 35 after a few years, then we're looking at significant reduction in operating revenues from PAL.

My next question to you is, how large is Lucio Tan's domestic sales excluding PAL? And if PAL intends on investing in these planes and an airport, how is it going to be financed? $16B is 663M ($1:P41.42) now, but it can be 640M ($1:P40 FOREX) or 560M ($1:P35) if Tan plays his cards right, even less if he hedges the currency pair with medium-term FOREX options, e.g. shorting the US Dollar or putting up a bearish spread on it.
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Oct 06, 2012, 07:15 PM
TSO is up quite early, huh? ;)

finally a topic that's a lot less complicated and something i can butt in on, somehow.... lol :D

he's probably going to offer bonds or stocks, or sell more liquor :D

With QE2, the US Fed intended to keep rates low until 2013/2014 (iirc, the latter). But with QE3, the US Fed is practically keeping the rates low indefinitely. given the macroeconomic disparity between the west and the east, particularly US vs. Philippines, a breach below $1/P40 is guaranteed, i think as early as next year (Q2 and Q3 2013). i expect the local CB to continue controlling the pace of Peso strength.
Title: Re: TSO's Request Corner
Post by: TSO on Oct 07, 2012, 04:18 AM
TSO is up quite early, huh? ;)

Was watching the anime Accel World. Just finished a marathon of the first season lol.

Quote
finally a topic that's a lot less complicated and something i can butt in on, somehow.... lol :D

LOL.

Quote
he's probably going to offer bonds or stocks, or sell more liquor :D

~ sell more liquor: wow, using another business to finance a second one. =_= Well, that's better than offering bonds or stocks.
~ stocks: ugh, more dilution.
~ bonds: how much do you think it'll cost?

Quote
With QE2, the US Fed intended to keep rates low until 2013/2014 (iirc, the latter). But with QE3, the US Fed is practically keeping the rates low indefinitely. given the macroeconomic disparity between the west and the east, particularly US vs. Philippines, a breach below $1/P40 is guaranteed, i think as early as next year (Q2 and Q3 2013). i expect the local CB to continue controlling the pace of Peso strength.

Fed did announce they'll maintain their ZIRP until 2014, and this was done after QE2 so I don't think it had anything to do with it. The Federal Reserve's only option is the printing press as everything else relies on fiscal policy and general business economics, but US demographics aren't good and the politicians are acting like children.

The Eurozone is just as bad as the United States, or perhaps even worse as the inaction and unwillingness for the ECB to admit they've made a mistake and push for political union is bringing everything to the fold. I'm following a cornucopia of sources for my macro research, and all of it is pointing to zero political will towards the real solutions and the real cost-cutting, which is focused on political spending and reckless investing.

Even China looks like it's starting to fall into Spain's trap by investing so much in infrastructure (publishing the 3000+ projects the PROC already approved to stimulate market mania) and there's little information on how much they're expecting to make from them.

My mind's already short on the USD and EUR due to the political gridlock shown in respect to the most effective solutions to the crises. (Further US austerity and EU pol union or one-time losses from Spexit/Grexit/Germexit) I'd have already placed forex trades in my US portfolio if I wasn't already fully invested in bargains I've found in the US stock market. And unfortunately, COL doesn't have a forex platform... so using my floating pesos is out of the question.

Gotta wait for more capital I guess... but even so, it's just going to go into more stocks. Inflation devalues both the dollar and collapses stock prices (by raising interest rates and forcing people to hoard money or cut back "excessive spending") so investing in great businesses is always good.

EDIT: And no, I refuse to take up margin for forex hedging. Hell no.
Title: Re: TSO's Request Corner
Post by: alacrity on Oct 07, 2012, 09:22 AM
My next question to you is, how large is Lucio Tan's domestic sales excluding PAL?
Aside from the liquor he does have a cigarette company, according to the WHO's GATS (General Adult Tobacco Survey), LT's Fortune Tobacco dominates the cigarette market (33%). Average spending on cigarettes is around Php 326 monthly, with 13M daily smokers (male and female), and another 4M (M&F) who don't smoke daily. And he's also in partnership with Phillip Morris.
Title: Re: TSO's Request Corner
Post by: bauer on Oct 07, 2012, 03:01 PM
Guys,

we should be reminded that Lucio Tan does not control a very sizable stake in his businesses.  The man is trying to liquify his assets! and he has a point, he had a very big extended family that will scamper to control whatever will be left behind when he dies.

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TSO, FerrariEverest,

If US dollar and EURO will be weak in the next few years, what will be the best alternative to avoid too much inflation and lost of value in our savings?
Title: Re: TSO's Request Corner
Post by: TSO on Oct 07, 2012, 04:47 PM
Guys,

we should be reminded that Lucio Tan does not control a very sizable stake in his businesses.  The man is trying to liquify his assets! and he has a point, he had a very big extended family that will scamper to control whatever will be left behind when he dies.

A big extended family? Who really controls the family of companies then?

Quote

Post Merge: 1349593380
TSO, FerrariEverest,

If US dollar and EURO will be weak in the next few years, what will be the best alternative to avoid too much inflation and lost of value in our savings?

As far as "values" are concerned, stocks have and always will be my number one asset class, followed by options.

When you include "inflation", it's ultimately all about having a portfolio return that beats it in the long run. In that case, you should split your capital to include foreign, non-USD/non-EUR currencies . Even if the countries are predominantly reliant on the Western currency units (e.g. the Philippine OFW's and their dollar remittances which keep the country afloat and abates social revolt), it doesn't mean the companies you're investing in won't go bad when the West crashes. The economic disaster that results from the political playground hence becomes an opportunity to average down.

If you're unable to bifurcate your portfolio and must rely on the weakening currencies, then your best bet is to exploit the same strategy. Find great companies whose costs can be transmitted to the customer and whose sales volumes are relatively insensitive to discretionary spending without driving too many of them away and average down when you can.

I know I never mentioned FOREX Trading or Options Trading here, but in my view, neither of these are investments. These are hedges from the investors' point of view and are thus meant to either cushion or mitigate the impact of currency/macroeconomic chaos or generate short-term profits that decrease the resulting net loss. EDIT: Shorting bonds is always a good idea given that inflation would eventually raise interest rates and kill the net present value, but considering that the question of "when" is the uncertainty here, plain vanilla shorting is too risky and you might be better off with a spread if you can afford the minimum capital requirement.
Title: Re: TSO's Request Corner
Post by: bauer on Oct 08, 2012, 02:39 PM
A big extended family? Who really controls the family of companies then?
 

Lucio Tan has a number of wives, hence, a good number of children.  Right now, Michael Tan, is the apparent heir while LT is still around.  Who knows what will happen right after he dies?

Our law on legitimate heirs does not play favorites among children.

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If you're unable to bifurcate your portfolio and must rely on the weakening currencies, then your best bet is to exploit the same strategy. Find great companies whose costs can be transmitted to the customer and whose sales volumes are relatively insensitive to discretionary spending without driving too many of them away and average down when you can.
 

Our thinking are currently aligned.

I am still hopeful that right before or right after the end of Noynoy's term, the value of bonds will start to look attractive (price upward more than 10%p.a). 
Title: Re: TSO's Request Corner
Post by: TSO on Oct 08, 2012, 11:49 PM
Lucio Tan has a number of wives, hence, a good number of children.  Right now, Michael Tan, is the apparent heir while LT is still around.  Who knows what will happen right after he dies?

Michael Tan? As in the PDI columnist?

Quote
Our law on legitimate heirs does not play favorites among children.

No it doesn't. I'm glad my sister and I aren't fighting over inheritance.


Quote
Our thinking are currently aligned.

I am still hopeful that right before or right after the end of Noynoy's term, the value of bonds will start to look attractive (price upward more than 10%p.a). 

What makes you think the YTM would go to 10% p.a.? You're talking corporate bonds or treasury bonds?

Hmm... makes me wondering how you're selling it.



To readers of my thread:

I have completed the analyses on the following companies in the past few months:
~ Diamond Offshore (NYSE: DO)
~ Iridium Communications (NASDAQ: IRDM)
~ Holcim Ltd. (SIX: HOLN)

These do not have reports in the way that I have been making them in the past, as the charts, graphs, and flashy but comprehensible language are time-consuming to produce. I will be posting my notes and observations directly, since these are based on the processed information, comprising the source material from which the reports are derived.

I will be working on the following businesses over the next two months: SAIA, Inc. (NASDAQ: SAIA) and PCSO (PSE: LOTO). These will be worked on simultaneously, and information on LOTO will begin data entry mode as soon as I'm done w/ data entry for SAIA.
Title: Re: TSO's Request Corner
Post by: bauer on Oct 09, 2012, 02:48 PM
Michael Tan? As in the PDI columnist?
 

Entirely not related. 

Post Merge: 1349765671
What makes you think the YTM would go to 10% p.a.? You're talking corporate bonds or treasury bonds?

Hmm... makes me wondering how you're selling it.
 

My "guesstimate" that the US will have a strong recovery after 2015-2016 so inflation will set in as a consequence of printing too much money.  To control inflation, US treasury shares will rise to 2-4% from the current less than 0.5% (still a lot less than the 20-year average of 4-5%). US corporate bonds will adjust accordingly to a range of 6-8%.

Of course, our country will be force to increase the rate of corporate bonds issuances to about 10% or more in order to compete with developed economies.

My projected rise in rates will be short lived though because basically the whole world is currently adjusting to the effects of globalization that includes a world revolution in technology.
Title: Re: TSO's Request Corner
Post by: alacrity on Oct 10, 2012, 02:45 PM
Hello TSO,

I'd just like to ask what do the EMH theorists mean when they say that Buffet is a three-sigma event?

I know they're probably saying he's just lucky etc. But I'm just curious as to what a three-sigma event really is. Thanks in advance :)
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Oct 10, 2012, 03:31 PM
TSO, FerrariEverest,

If US dollar and EURO will be weak in the next few years, what will be the best alternative to avoid too much inflation and lost of value in our savings?
i have very limited macroeconomic perspective and knowledge to make an authoritative answer to your question.
mas marami ka pa nga alam sakin Sir e. :D

move (at least some) your assets away from $.
tuloy nyo lang yung sa stocks nyo, since malaki na ang experience and advantage nyo jan.
take note of companies that constantly rely on foreign-exchange transactions and exposed to related exchange rate fluctuations.
lastly, iwas gumastos masyado para makamenos sa inflation. hehe :D



Fed did announce they'll maintain their ZIRP until 2014, and this was done after QE2 so I don't think it had anything to do with it. The Federal Reserve's only option is the printing press as everything else relies on fiscal policy and general business economics, but US demographics aren't good and the politicians are acting like children.
Even China looks like it's starting to fall into Spain's trap by investing so much in infrastructure (publishing the 3000+ projects the PROC already approved to stimulate market mania) and there's little information on how much they're expecting to make from them.

TSO, dami pera China so they are in a spending spree tapos gusto na rin nila pumwesto as world power.
Fed's QE3 promises to keep rates low to at least mid-2015
share mo macroresearch 'directory' mo when you have the time or inclination , here or thru PM :D
Title: Re: TSO's Request Corner
Post by: Senyor on Oct 11, 2012, 04:36 AM
This is a gold mine FE "companies that constantly rely on foreign-exchange transactions and exposed to related exchange rate fluctuations."

simple yet practical - na alala ko ng dekada 90 maraming kumpanya nalugi na may utang na dollares.

Bili ako ng TDY at LOTO
Long ako sa EURUSD

Buy Peso Sell Dollar
Title: Re: TSO's Request Corner
Post by: bauer on Oct 11, 2012, 01:28 PM
Long ako sa EURUSD

Buy Peso Sell Dollar


How is it possible?
Title: Re: TSO's Request Corner
Post by: TSO on Oct 11, 2012, 01:38 PM
Quote
I'd just like to ask what do the EMH theorists mean when they say that Buffet is a three-sigma event?

I know they're probably saying he's just lucky etc. But I'm just curious as to what a three-sigma event really is. Thanks in advance

Essentially, they're referring to the three-sigma empirical rule of statistics, which states that a normal curve has 99.73% of its data located within 3 standard deviations from the mean. Consequently, this means that the occurrence of something abnormal is 1 out of 370, and by calling Buffett a 3-sigma event, they're calling him someone who appears 0.27% of the time.

Of course, Buffett himself refutes this with the now famous "Graham and Doddsville" speech.

Quote
TSO, dami pera China so they are in a spending spree tapos gusto na rin nila pumwesto as world power.
Fed's QE3 promises to keep rates low to at least mid-2015
share mo macroresearch 'directory' mo when you have the time or inclination , here or thru PM

China's on a spending spree because it's trying to stimulate growth. Whether it wants to have more influence than it already has is a political speculation, and we can't be certain on its feasibility.

Fed's QE3 is open-ended, so I won't be surprised.

Macro resources ko... well, there's always mainstream financial media. But as far as the specific ones go, I'm going to go and disclose PIMCO's William Gross, Zerohedge, Business Insider, and The Big Picture. Those are already a lot in and of themselves.

Quote
the US will have a strong recovery after 2015-2016 so inflation will set in as a consequence of printing too much money

Bauer, this assumes the US consumer is ready to start spending again and banks are lending to the real economy instead of hoarding it all in reserves or safe haven flows.

Quote
This is a gold mine FE "companies that constantly rely on foreign-exchange transactions and exposed to related exchange rate fluctuations."

simple yet practical - na alala ko ng dekada 90 maraming kumpanya nalugi na may utang na dollares.

Bili ako ng TDY at LOTO
Long ako sa EURUSD

Buy Peso Sell Dollar

Hope you did your due diligence on TDY because my analysis on it is currently outdated and I am not interested in revisiting it. LOTO... well, tingnan na lang natin.

Companies that rely on FOREX are vulnerable to changes in FOREX, which can be a good or bad thing depending on what balance sheet and income statement items are affected. My mind's short on the US Dollar because of QE-infinity and political gridlocks for the most economic solutions to the crisis, which should eventually impact demand for the USD if left unabated.

The question is, will the US politicians ever get their act together? Same for the Euro. If you're long on both, then you're long on a near-political impossibility.

And regarding the 90's, IIRC that's during the Asian crisis. I don't know the specifics of what happened then, but I can imagine it must've been a flight away from Asia, which strengthened Western currencies and therefore crippled companies holding dollar-denominated bills.

The opposite is currently happening, so you shouldn't be "long sa EURUSD" unless you're a political idealist who thinks these idiots, cutthroats, and Wall Street puppets can get their sh*t together and learn to compromise, cooperate, and make mutual sacrifices instead of bullying their way around Congress and the Senate.
Title: Re: TSO's Request Corner
Post by: bauer on Oct 11, 2012, 01:53 PM
Bauer, this assumes the US consumer is ready to start spending again and banks are lending to the real economy instead of hoarding it all in reserves or safe haven flows.
 

There are good signs that private sector deleveraging is producing great results like credit card receivables, housing debt, and corporate debt has been decreasing from a high of 45 trillion plus to close to 40 trillion plus at current level.  So consumers, most likely, will be more confident to spend by 2015 up (specially since jobless rate will fall considerably by that time).

The current problem is the RISING trend of government debt which counteracts the good signs of private deleveraging. 

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it does not bother me what banks do right now.  the banks substantially over leverage themselves and it is but normal for them to hoard the cash borrowed from FED and relend it again to the government. there's nothing much banks can do right now.
Title: Re: TSO's Request Corner
Post by: TSO on Oct 11, 2012, 01:57 PM
I can only hope so.

At any rate, I'll keep on buying stocks... and going after Free Money Fridays.
Title: Re: TSO's Request Corner
Post by: alacrity on Oct 12, 2012, 08:57 PM
Thanks for the reply TSO, btw, have you ever considered being in the academe - be a professor? Like Graham, galing mo mag-breakdown ng mga complex topics, binababa mo sa understandable na level :).
Title: Re: TSO's Request Corner
Post by: TSO on Oct 12, 2012, 11:16 PM
Thanks for the reply TSO, btw, have you ever considered being in the academe - be a professor? Like Graham, galing mo mag-breakdown ng mga complex topics, binababa mo sa understandable na level :).

I actually have, but I don't think my "experience" (3 years cumulative) qualifies me for it yet plus I'm a bad teacher. I'm one of those guys who can explain things well to a single person and do it great but flounder when it comes to a structured lesson plan. People'd simply despise me if I was a prof. See, here's how I'd go about it:

First thing I'd do is explain "Value Investing" as a lifestyle more than an impersonal exercise in the academe's ivory tower, that its core principles are applicable everywhere and anytime, and that most people do it all the time until they end up with financial or investment issues where they get duped, they fail to budget for emergencies or misfortune, they fail to pay the "value" price, etc., etc. Basically give away the importance of why it's more important than any of their classes.

What follows after that lecture would be a systematic attack on the Modern Portfolio Theory's underpinning. I'd have students come to the front and explain to the class Markowitz's Efficient Frontier, the Capital Market Line, the Security <something> Line, the Risk Tolerance equation, the Risk-Free Rate. Maybe get them to talk about wanting to be an economist or a banker... even ask 'em about their thoughts on LIBOR (which they'll be so brainwashed on they probably wouldn't know it's being manipulated like gold, silver, and oil). When they're done, I'd rip it apart and show 'em how "reliable" it is in the real world. Beta, LIBOR, Sovereign Bankruptcy, Philosophical Collectivism, etc.

The subsequent lessons after that then flow into its long-term performance, its "paradoxical quality" to academics and professionals living in an ivory tower, and then put into practice: one financial analysis after another using companies I've analyzed and invested in (passed on) myself. Grading then becomes an issue since it's hard to measure how much "Value Investing" students learn. I can imagine myself making an announcement right before things "get intense" and declare an ultimatum where I don't want to waste my breath trying to teach people who are too brainwashed, too shocked, or too lazy to understand or want to learn Value Investing. I'll tell them how much time I'm wasting and how it translates to money, and therefore offer to hand out free C's to any and all dropouts but warn them they're going to miss out. And then I also say that I "may just decide" to give a D instead, so there's risk involved. Haha! XDDD

EDIT: And did I mention that I'd want to take on only seniors? And if any yuppie or recent grad can remember, senior year is often filled with projects and theses and more projects and theses.
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Oct 12, 2012, 11:45 PM
plus I'm a bad teacher. I'm one of those guys who can explain things well to a single person and do it great but flounder when it comes to a structured lesson plan. People'd simply despise me if I was a prof.
based on the keywords/phrases in bold...
i now confidently confirm you are my long lost twin who somehow fled to tx :D ...finally found you  :applause:
Title: Re: TSO's Request Corner
Post by: freefront on Oct 13, 2012, 05:16 AM
I actually have, but I don't think my "experience" (3 years cumulative) qualifies me for it yet plus I'm a bad teacher. I'm one of those guys who can explain things well to a single person and do it great but flounder when it comes to a structured lesson plan. People'd simply despise me if I was a prof. See, here's how I'd go about it:

First thing I'd do is explain "Value Investing" as a lifestyle more than an impersonal exercise in the academe's ivory tower, that its core principles are applicable everywhere and anytime, and that most people do it all the time until they end up with financial or investment issues where they get duped, they fail to budget for emergencies or misfortune, they fail to pay the "value" price, etc., etc. Basically give away the importance of why it's more important than any of their classes.

What follows after that lecture would be a systematic attack on the Modern Portfolio Theory's underpinning. I'd have students come to the front and explain to the class Markowitz's Efficient Frontier, the Capital Market Line, the Security <something> Line, the Risk Tolerance equation, the Risk-Free Rate. Maybe get them to talk about wanting to be an economist or a banker... even ask 'em about their thoughts on LIBOR (which they'll be so brainwashed on they probably wouldn't know it's being manipulated like gold, silver, and oil). When they're done, I'd rip it apart and show 'em how "reliable" it is in the real world. Beta, LIBOR, Sovereign Bankruptcy, Philosophical Collectivism, etc.

The subsequent lessons after that then flow into its long-term performance, its "paradoxical quality" to academics and professionals living in an ivory tower, and then put into practice: one financial analysis after another using companies I've analyzed and invested in (passed on) myself. Grading then becomes an issue since it's hard to measure how much "Value Investing" students learn. I can imagine myself making an announcement right before things "get intense" and declare an ultimatum where I don't want to waste my breath trying to teach people who are too brainwashed, too shocked, or too lazy to understand or want to learn Value Investing. I'll tell them how much time I'm wasting and how it translates to money, and therefore offer to hand out free C's to any and all dropouts but warn them they're going to miss out. And then I also say that I "may just decide" to give a D instead, so there's risk involved. Haha! XDDD

EDIT: And did I mention that I'd want to take on only seniors? And if any yuppie or recent grad can remember, senior year is often filled with projects and theses and more projects and theses.

Try to reconsider when you're a lot older and calmed down a bit and  you'd have minions in your investment house already. For the elegant inglis alone, TSO, ...darn...  :hello:
Title: Re: TSO's Request Corner
Post by: bauer on Oct 13, 2012, 12:34 PM
   I can imagine myself making an announcement right before things "get intense" and declare an ultimatum where I don't want to waste my breath trying to teach people who are too brainwashed, too shocked, or too lazy to understand or want to learn Value Investing. I'll tell them how much time I'm wasting and how it translates to money, and therefore offer to hand out free C's to any and all dropouts but warn them they're going to miss out. And then I also say that I "may just decide" to give a D instead, so there's risk involved. Haha! XDDD
 

You really hit the mark! hehehe..........
Title: Re: TSO's Request Corner
Post by: abolababo on Oct 14, 2012, 05:43 PM
wow dami ko natutunan dito keep it up mga guru' hehe
Title: Re: TSO's Request Corner
Post by: TSO on Oct 15, 2012, 04:11 PM
Since I haven't posted my analyses here for a while, I'll be putting up the following over the next week or two:
- Diamond Offshore (NYSE, DO)
- Iridium Communications (NASDAQ, IRDM)

I will not post Holcim Ltd. until these two are done.

I'm currently working on SAIA Inc. (NASDAQ, SAIA) and Pacific Online Systems Corporation (PSE, LOTO) simultaneously. SAIA has just finished data entry phase. As for LOTO, while my past spreadsheets back in 2010 have "forward compatible" to the current incarnation of my analytical framework, so this should speed up the data entry phase.

TSO out.
Title: Re: TSO's Request Corner
Post by: GoodSteward on Jan 11, 2013, 12:47 PM
@TSO, dont know if youre still busy nowadays....

But in case youre free, i would like to request your analysis of the value of SSS : SLF, SGI and SPH. (Either or/and)

SLF : Im holding it becuse of its good dividend.

SGI : My technical chambanalysis giving me good gains now, but want to know if its fundamentally stable or not...

SPH : They SEEM to be the leader in local beauty care products. I dont get why this is a sleeping beauty stock.

TIA!
Title: Re: TSO's Request Corner
Post by: TSO on Jan 11, 2013, 01:00 PM
Ano negosyo nila? I'll do a quickie tom night to see if they're worth further scrutiny. I've been busy writing a chapter for an e-book a LinkedIn connection of mine is planning on publishing, about my philosophy and one of my more recent projects (which my partner has adopted), and I didn't work on LOTO-SAIA during the Xmas break...

If I like something enough for a Deep Scan, I'm seriously going to follow it up after LOTO, but I can only do it one at a time now and for a long period of time as I alternate companies after completing (i) data entry, (ii) adjustments, (iii) data processing, (iv) elemental analysis, and (v) valuation. It'l be slow so long as I'm not working full-time on investments (hopefully that'll change when the hedge fund rolls out by Feb/Mar).

Title: Re: TSO's Request Corner
Post by: TSO on Jan 11, 2013, 01:02 PM
Now should also be a good time to mention that I have CFA level II to study for and the habit of reading/compiling a linkfest for my friends and pro contacts concerning world news on tech, econ, pols, society, biz, etc
Title: Re: TSO's Request Corner
Post by: Bino on Jan 11, 2013, 01:41 PM
Hi sir TSO thanks for all your effort on this it really helped allot of us like me who's not that really techie when in comes to crunching the numbers and analysis. I would like to know if you are still accepting requests coz I currently have SMPH for a year now I bought it because of its high ROE and mainly because it is SM. I know that high ROE doesn't tell you enough that it is worth a buy but at a glance what would be your take on SMPH?

Thanks in advance.
Title: Re: TSO's Request Corner
Post by: TSO on Jan 11, 2013, 03:03 PM
SLF
- Sunlife Financial? Ew, no. Rejected just because.

SGI
- Mkt Cap: 3.92B (P2.2 per share)
- 22.6% free float (damn)
- It's a holding company. Quote from PSE Website:

Quote
SGI, through its fifteen (15) wholly owned subsidiaries, engages in various businesses. These include, among others, the operation of a broadband cable infrastructure, operation of repair and service centers of audio and video consumer electronics equipment, video equipment distribution, development and sale of real estate properties, financing and extension of business, housing and logistics services, distribution and importation of any type of digital communication devices and technology, injected plastics parts manufacturing, and sale of broadcast/professional equipment and accessories.

So it's into (1) telecom, (2) repair/servicing/sale of consumer electronics, (3) real estate, (4) finance, (5) housing, (6) parts manufacturing, and sale of broadcast equipment.

Whether or not I analyze this in deeper scrutiny depends on how these six segments play out. Unfortunately, I can't access its website and I would want its actual annual report (not just the SEC 17A) so this is ruled out.

SPH
- Mkt Cap: 1.16B (P1.75 per share)
- 32.86% free float
- Manufacturer and seller of skin and hair care products, and food supplements. I like this.
- Website sucks like a b*tch and I need more than four years worth of data to make an adequate deep scan. PSE website only has 2011 and 2010 17A's, and it's regrettable, because it is trading for 49% of incorporators' investment
- The low valuation, from merely the financial statements, reflect the sheer volatility of profits. Operating income alone was 2M, 141M, and 74M in past three years, 2009 to 2011 respectively. 2011 costs jumped b/c of raw materials, labor, and fuel, as well as corporate overhead and plenty of bad loans (had it been "normal", it would've added min 40M to operating income in 2011). In 2009, the company had higher costs and expenses relative to that of 2010.
- If I were to assume OPINC was 100M to be "conservative" and assume statutory taxes (bad history for tax analysis) of 30%, the 70M est. profit is 16.6x P/E. Borderline expensive, but of the market price of 1.16B, at least 66% of it is a premium for future growth. But how much penetration does skin care and food supplements have in the Philippines? That sort of information will not be found easily, and alas it would be necessary to determine whether or not such growth is feasible. I might have studied this if it wasn't for the dearth of data.

SMPH
- Mkt Cap: 295.35B (P16.86 per share)
- Free Float: 30.5% (that isn't really good)
- Revenues predominantly from Rent, with remainder from movie tix and "others". Perfect.
- With 3Y-AVG NOPAT of 9,54B, SMPH, it is trading at 31x P/E. However, even if I added back the 3~4B of D&A back into NOPAT (which would've increased the average fig to more or less 13B, the effect is an 8-point reduction in P./E, down to 22.7. However, even so, SMPH invests most of its profits into its business, and it's constantly growing, so D&A isn't likely to reflect this maintenance investments.
- Also, SMPH's 128B assets is 50% debt-ridden, four-fifths of which are long-term debt. Free cash flows further reduced by debt servicing and perpetuation will be likely because of continuous expansion. FOREX plays here, but alas only 10B of its 40B debt are in USD and 4.2B are in RMB. Even if both China and USA currencies crash because of political gridlocks, bloated governments, and diminishing marginal returns of monetary stimuli, there will still be 26B left in PHP denominated loans, almost all of which are 5 years in duration, expiring through 2013, 2015, and 2018, with interest of 10%. Whatever free cash flow is left will be eaten up by debt, which isn't a problem so long as the company continues to grow and be efficient.
- While a good company, unfortunately, it's too expensive. Ruled out.
Title: Re: TSO's Request Corner
Post by: finance123 on Jan 11, 2013, 03:13 PM
Why did you reject Sunlife Of Canada? It's a life insurance company which has large exposure in both equities and interest markets.
Low interest rate situation in the US has hurt this company. But I find value on this company, the risk is that they have to cut dividends.
It tries to keep its dividend during and after the financial crises - unlike Manulife. I don't know how long it could keep it that way.

If you invest in SLF traded on PSE, you actually have exposure to foreign exchange since SLF is traded on both US and Toronto.
It's like a hedge just in case the peso declines aside from the equity aspect of it. Any movement of it abroad will be reflect on PSE
in PHP prices. North American Financial companies are recovering...

I have exposure of SLF at 910 per share. 6% Dividend yield is tempting.
Title: Re: TSO's Request Corner
Post by: TSO on Jan 11, 2013, 04:00 PM
Quote
Why did you reject Sunlife Of Canada?

My reason is there for all to see: "just because".

If you want something a little more detailed, then I took the liberty of going through just a little bit for you. Investment income amounts to 40% or so of sales and so are the insurance premiums, yet distributed claims and benefits along with sales commissions and operating expenses are already 80% of sales or so. Consider that their investments are predominantly in medium-quality corporate debt and Canadian treasuries, with a very large chunk in mortgages and loans. And they also happen to  have a notional amount of about CAD20B in derivatives for FOREX, options, and equity futures.

Doesn't sound like something I would want to analyze further.

Title: Re: TSO's Request Corner
Post by: Bino on Jan 12, 2013, 05:51 AM
Thanks sir TSO for your analysis on SMPH very helpful indeed. I would hold on more on this since I do believe in the company unless the management would do something negative hehe
Title: Re: TSO's Request Corner
Post by: TSO on Jan 12, 2013, 07:16 AM
Bino, no problem.

Keep SMPH if you got it at a low price, though I wouldn't know how long as I do not know the intrinsic value. The Philippine market doesn't have options available, so I'm not interested at all in finding out what it is anyway (at least not until something drags its prices down by a significant amount).

Anything else to suggest?
Title: Re: TSO's Request Corner
Post by: robot.sonic on Jan 12, 2013, 10:29 AM
Hi TSO.

Pa check naman ng House of Investments (HI). Holding company nga lang to. Kung may time ka lang for quick scan.

http://www.bloomberg.com/quote/HI:PM (http://www.bloomberg.com/quote/HI:PM)
http://en.wikipilipinas.org/index.php?title=House_of_Investments (di ko maopen website nila e.) (http://en.wikipilipinas.org/index.php?title=House_of_Investments (di ko maopen website nila e.))
Title: Re: TSO's Request Corner
Post by: poloy on Jan 12, 2013, 10:32 AM
Good day Sir TSO,

Sir can you analyse for me with this stocks: EEI

TIA!!

Poloy
Title: Re: TSO's Request Corner
Post by: TSO on Jan 12, 2013, 10:46 AM
Poloy, look up my analysis of EEI in the earlier pages and the 2012 update in the EEI thread in the Stocks subforum. I don't need to do anything.

And just so you guys know, the quick scans aren't meant to be investment recommendations. I'm on the prowl for my post-LOTO project so I'm just pursuing leads.
Title: Re: TSO's Request Corner
Post by: Bino on Jan 12, 2013, 01:14 PM
Looks like SM plans to be bigger this year with its joint venture with Waltermart http://www.rappler.com/business/19296-sm,-waltermart-in-joint-venture (http://www.rappler.com/business/19296-sm,-waltermart-in-joint-venture) abang abang lang muna hehehe.
Title: Re: TSO's Request Corner
Post by: TSO on Jan 12, 2013, 03:29 PM
Out of curiosity... ano ung P/E mo, base sa average cost per share at 2011 EPS?
Title: Re: TSO's Request Corner
Post by: aychua11 on Jan 14, 2013, 08:38 AM
Goodday sir, I'm sort of new to this forum... if I may ask what's your take on Metro Pacific will it be a good investment if I put a substantial amount of my investible funds into it considering the outlook on its EPS for year 2012?   What about on the technical side.  If I remember correctly, it had its run-up sometime last December 2012 are we experiencing a pause, do you still think it has more Leg's. Thanks very much
Title: Re: TSO's Request Corner
Post by: sj.unite on Jan 14, 2013, 11:34 AM
Hello sir TSO. Can you make an analysis regarding MEG? I'm really curious about the current movement of this stock.

Thank you sir. :)
Title: Re: TSO's Request Corner
Post by: TSO on Jan 14, 2013, 11:49 AM
Guys, hold on. I'm busy working on my linkfests for Jan 10 to 13, so I'm kinda unavailable for any "quick peeks" for today.

And as a disclaimer, I am not actually offering analysis with this. What I am basically doing here, taking what bino, sj.unite, aychua11, etc. are requesting, is determining whether the companies mentioned are fit for deeper scrutiny. Nothing more, nothing less. That's what I've done for the companies scoured so far in this page.

Why? Because I don't have time to focus completely on two to three Philippine stocks at a time now. I can do a Deep Scan of two at a time, but as I'm studying for my CFA LV2 AND managing my Philippine and US portfolios by myself with no extra help, and on my free time (since I'm paid to be an investment analyst only 2x a week until my company launches our hedge fund project) to boot, obviously it's only one US and one Philippine company, and I often take several days to analyze.

With that said...

Aychua and sj.unite, I'll drop in with MEG and Metro Pacific, hopefully tomorrow when I don't have too much on my plate.

And aychua?

Quote
considering the outlook on its EPS for year 2012?   What about on the technical side.  If I remember correctly, it had its run-up sometime last December 2012 are we experiencing a pause, do you still think it has more Leg's. Thanks very much

One, I do not give a f*cking damn about EPS forecasts/outlook/etc. To predict the future is to be arrogant and foolish. We can only have a rough index of what will happen, and never a precise grasp over the specifics.

Two, I DO NOT DO TECHNICAL ANALYSIS. Technical analysis for me is a waste of time for individual stocks. I'll admit it works much better for macro, FOREX, and for short-term trading, but never in my investing life have I ever relied on technical analysis for an actual investment decision.

What I do here is assess business risk and estimate the margin of safety through a rigorous cross-examination of three valuation models according to the process of Bruce Greenwald. Whether or not investment action is taken depends on the margin of safety, the degree of price volatility relative to the market, and the prevailing trends on the macro scale.

Not once do you see me toting EPS forecasts and outlooks like the typical analyst report you will see in COL, First Metro, BPI, etc., etc.

And additional EDIT: Just so you know, companies I do end up analyzing do have their research, or at least my notes and observations on their risk and margins of safety, are posted here eventually, so your requests don't fall on deaf ears. You get really good results when I do take up something, that I can promise you.
Title: Re: TSO's Request Corner
Post by: aychua11 on Jan 14, 2013, 12:37 PM
Thanks for the newbie info,  I'm a "not so newbie" in this forum just like I mentioned and did not take the chance to read over much of the previous posts in order to understand it fully.  What you do here is actually a VERY BIG favor for us all if we know how to use the research appropriately.  I'm now crystal clear.  BTW you mentioned a hedge fund?  As I try to diversify my investments as much as possible, I hold some $ ROP's, a few forex bets, corporate bonds, preferred shares and invested a little (actually its a lot more now) in the PHISIX.   I'm curious and interested. How can I get more info?
Title: Re: TSO's Request Corner
Post by: GoodSteward on Jan 14, 2013, 01:12 PM
Keep it up TSO, your contributions in this forum is deeply appreciated!!! :)
Title: Re: TSO's Request Corner
Post by: finance123 on Jan 14, 2013, 02:39 PM
If MEG has to match ALI Price-to-Book value then MEG has to trade 11.00 pesos per share.
Title: Re: TSO's Request Corner
Post by: TSO on Jan 14, 2013, 03:46 PM
Thanks for the newbie info,  I'm a "not so newbie" in this forum just like I mentioned and did not take the chance to read over much of the previous posts in order to understand it fully.  What you do here is actually a VERY BIG favor for us all if we know how to use the research appropriately.  I'm now crystal clear.

Yes, I did catch that you were merely new to the forum, but I also wanted to make myself clear that I'm atypical when it comes to the methodology and approach I use, even though it is underpinned by the exact same "techniques" and number-crunching like everyone else.

If you've gone through the previous posts for a bit, you'd see that the contents aren't "newbie" friendly. I've been criticized for it several times by my LinkedIn connections and a couple analysts I've run my write-ups through, but in the end, if you want valuable information, at one point or another you'll end up hitting those nasty jargon.

Quote
BTW you mentioned a hedge fund?  As I try to diversify my investments as much as possible, I hold some $ ROP's, a few forex bets, corporate bonds, preferred shares and invested a little (actually its a lot more now) in the PHISIX.   I'm curious and interested. How can I get more info?

My employer is in the process of setting up one and we're currently working with a prominent securities lawyer in Texas to get it started. I don't think you'll be able to invest in it though. For one thing, our minimum initial investment is US$62,500. Another, we're accepting only clients within the state of Texas (and probably some others I'm not privy to as I'm the co-manager, not the salesman) to avoid any hiccups with FINRA, who's more interested in going after the small fries rather than the big fish.

EDIT: And I forgot to add the the fact my partner and I (we're co-managers) are obligated to be rather selective of our clients. So if the prospect's profile doesn't fit, it's an automatic reject. Unfortunately our idiot boss is a salesman, so he doesn't grasp how important that is. I'd rant about him, but out of respect for the guy I'll hold my fingers still.
Title: Re: TSO's Request Corner
Post by: aychua11 on Jan 14, 2013, 04:41 PM
I see...that's really too bad for me, I've always wanted to invest in US equities especially the previous years after the crash of 2008 basically because aside from global uncertainty the market and low interest rate environment in the US were very obviosly politically motivated by the elections and the FED (which is supposedly detached from politics).  Very few incumbent US Presidents got re-elected during high interest rate environment and below par jobs growth.  Manipulation in these areas was obviously going to happen. I wanted to invest in individual US equities and I believe that one of my online bank accounts can allow me to do so, unfortunately I lack confidence because of lack of information and knowledge in company analysis therefore I am stuck with global and US equity funds.  Anyway, no hurry but looking forward to your take on MPI. 
Title: Re: TSO's Request Corner
Post by: TSO on Jan 14, 2013, 05:24 PM
I hope you're picking your US equity funds right, though. As far as the mainstream goes, Fidelity and Vanguard are the best out of the bunch, but you should go for other publicly-listed mutual funds that aren't part of Wall Street. They're the ones managed by the investment gurus. :) It's tough competing against them though.

BTW, if you're going to study individual companies at some point in your life, please don't listen to any sell-side analysts. I quote Aswath Damodaran on the subject:

Quote
Many analysts use data to avoid making tough judgments about businesses or dealing with uncertainty. Thus, assuming that a company will earn a profit margin typical of the industry is much easier to do than analyzing its competitive advantages and estimating a margin, based on your assessment. [....] In fact, using an expert or a service estimate of these numbers... allows analysts to claim immunity from errors and to pass the buck, if the numbers turn out to be wrong in hindsight.

Happy investing! I gotta go sleep now.
Title: Re: TSO's Request Corner
Post by: personalfinanceapprentice on Jan 16, 2013, 10:56 PM
Sir TSO, how about Globe Telecom, Aboitiz Power or Ayala Corporation? (all from the Philippines, btw)

Thanks!
Title: LOTO Deep Scan
Post by: TSO on Feb 24, 2013, 11:46 AM
PACIFIC ONLINE SYSTEMS CORPORATION
Country   Philippines
Ticker Symbol   PSE – LOTO
Primary Business   Gaming and Casino – Equipment Lessor
Periods Analyzed   2004 to 2011 (7 years)
Market Cap (2/19/2013)   P14 a share (P4.1 billion market cap)
Volatility (Beta)   Not computed
NOPAT (2009, 2010, 2011)   P240.2 mil   P303.0 mil   P336.3 mil
Net Income (2009, 2010, 2011)   P266.38 mil   P434.51 mil   P391.39 mil
Adjusted EBITDA (2009, 2010, 2011)   P481.2 mil   P662.4 mil   P735.3 mil
Perceived Risk   DEPENDS ON SCENARIO
Duration of Analysis   October 18, 2012 – January 31, 2013 (106 days)
Simultaneous with another project
Report written by   February 21, 2013

Company Profile

The Pacific Online Systems Corporation, or POSC, is a technology broker of integrated gaming systems from leading global suppliers, Intralot and Scientific Games. Contracted by the Philippine government to provide the infrastructure and technical support for its legal gambling industry, POSC officially controls the Visayas and Mindanao regions of the Philippine archipelago, in which 40% of the national population reside. It has enjoyed a virtual monopoly over these areas since 2004, competing only against substitutes (e.g. casinos) and the persistence of illegal gambling. The company's primary business -- the leasing of online lottery terminals to the Philippine Charity Sweepstakes Office (PCSO) -- currently governs 66% of its assigned market, indicating how much room there is for growth assuming the displacement of illegal gambling.

Presently, the company's exclusive Equipment Lease Agreement (ELA) with the Philippine government is almost at an end, expiring on March 2013 month-end. The PCSO reserves the option to purchase the network of 2039 online lottery terminals at the expiration of the ELA. Should the government seize control over these assets, POSC stands to lose roughly 45% of its business, assets and sales. Letting the ELA lapse to pave the way for a potential competitor or entrant into the Visayas-Mindanao region does not look like a reasonable choice, given the enormous switching costs that have been accumulated for 17 years and counting.

Pacific Online has recently begun diversifying away from this existential dependency on the whimsy of the Philippine government, entering the Online KENO market in 2008 and commencing the Instant Scratch Ticket project the year before, both of which have grown at extremely fast rates of 207% and 65% a year respectively since inception. It is also considering making an investment in the P20 billion casino complex its affiliate, Belle Corporation, is constructing in the reclaimed land of Manila Bay.

Adjustments to and Recasting of the Financial Statements

There have been very little adjustments to the income statements, amounting to some figures coming from Pension Expense Adjustments (to reflect economic pension expense rather than the smoothed number) and the expensing of debt write-offs (rather than a predetermined provision of bad debt).

These income statements were recast to collate all operating revenues in one place and bifurcate expenses between variable costs and fixed expenses, which have been defined to be:

VARIABLE COSTS: Direct costs for Instant Scratch Tickets, Software and License Fees, Repairs and Maintenance Fees, Consultancy Fees, Management Fees, Operating Supplies, Personnel Expense

FIXED COSTS:
PCSO’s share on Sales of Instant Scratch Tickets, Travel and Accommodation Expense, Communication Expense, Rent for Operating Leases, Utilities, Taxes and Licenses, Entertainment, Amusement, and Recreation, Professional Fees, Bad Debt Expense, Advertising Expense (to the extent of disclosure), Depreciation and Amortization, “Others”

All other expense items not originally located under net finance charges and income tax provisions have been lumped under "unpredictable and/or nonrecurrent items"
                                    
In the balance sheets, I eliminated allowance for bad debts and replaced it with write-offs instead. I also capitalized its expected minimum operating lease income and added any tax benefits for the economic pension adjustments. Under the liability and equity side, I increased the retirement liabilities to reflect economic reality as opposed to the smoothing number accountants are enamored with. Tax Liabilities from the operating lease and debt write-off adjustments have been included. The remainder has been assigned to retained earnings under an item called "Net Operating Leases and Reversal of Add-back of Actuarial Gain and Loss".

The Five Elements

Even from a compendiary scan of POSC's five elements -- Creditworthiness, Efficiency, Profitability, Stability, and Future Prospects -- if I can just shove aside the substantial threat posed by the ELA expiry, the corporation is looking like one of the best investments available in the Philippine market. By being WILLFULLY BLIND to this highly negative future short-term catalyst, anyone can see Pacific Online has the ideal solvency and liquidity, decent efficiency indicators, and double-digit profits, on top of a 3% dividend yield that CAN STILL INCREASE if the company so wished it.

Its monopoly is eroded by the competition provided by illegal gambling dens and substitutes, burdening POSC with the weight of economic forces, and its growth prospects are terrific in light of the booming KENO and Instant Scratch Ticket projects and the potential multimillion casino investment in Manila Bay. Indicators pointing to earnings management are not notably strong, implying a good investment.

Once I start ogling Pacific Online without the rose-tinted lens, it becomes clear the company may not be a good investment at all, not at this point in time. The Leasing Business comprises 90% of the consolidated business, of which 84% is attributable to online lottery. Taking this out for good might reduce revenues by roughly 32% of 2011 sales and possibly cut approximately 7% from total assets (10% for equity, via equity multiplier), all assuming zero growth in the operations left behind. Should Pacific Online somehow, by miracle or by design, keeps its profit margins of 15.7% and its P/E of 10.2x, the market cap could drop to P3.12 billion -- a 24 percent slash, and even if the surviving operations remain low-risk investments, the yearly growth rate thereafter must come within 500 bps or exceed what Pacific Online had historically shown over the NEXT SEVEN to justify the current market price of PHP 4 billion.

Creditworthiness
   
Pacific Online Systems Corporation has excellent credit, owing to the extremely low debt ratios of its consolidated businesses, net of adjustments for operating leases, retirement liabilities, and allowance for doubtful accounts. The company enjoyed an adjusted debt ratio of 27% in 2011 -- a far cry from the 80% in 2005. The primary reason for this reduction stems from the shrinkage in finance lease obligations and additional tax liabilities from operating lease adjustments, both of which tie into the looming expiration of the Equipment Lease Agreement for the online lottery segment.
   
A simple computation of the cost of debt (pre-tax interest costs over financial liabilities) yields borrowing costs of 10.5% on average (ranging from 8% to 13% in the past six years), the finance leases for Pacific Online's transportation equipment are embedded with an implied pre-tax cost of debt of 18.9%. Given the magnitude of the company's debt, the finance costs wouldn't make a dent on Pacific Online's business. Furthermore, the finance leases entered with Scientific Games and Intralot are not related to the Online KENO and Instant Scratch Ticket segments, limiting the damage the ELA expiry can do to the company's creditworthiness.
   
All seven variations of the solvency ratios are far above the rule of thumb of 20% since 2005, testifying to the strength of Pacific Online's earnings. Asset liquidity remains robust at almost 3x the figure of current liabilities (a number up from the low 2.xx's of 2009). Computations of earnings coverage places the numerator (required payments and obligations, including maintenance capex) at PHP 450 million in 2011 (a 13.3% 5Y CAGR from 2006). Whether EBIT, EBITDA, NOPATDA, Net OCF, Owner Earnings, or OCFBWC are used as denominators, not once has the multiple been less than 1.0x the required payments in the eight years Pacific Online has been tracked.
   
As icing on the cake, the Altman Z-Score has gone over 4.4 four times out of the past five years.
   
This highlights the strength of Pacific Online's business, or rather, its track record in terms of meeting its obligations. And should Pacific Online fail to renew its ELA with PCSO and lose 44% of its 2011 sales, we can expect a significant shrinkage in debt obligations, maintenance capex, rent, and consultancy fees as well.
      
Maintenance CAPEX
      
At present, the gross value of all Pacific Online's PPE ex Lottery Equipment is at P223.3M. (Lotto equipment is at P673.1m.) Add an estimate for Online KENO (104.8m in gross PPE for the remaining 376 terminals) and there is a point estimate of P328.1 million in PPE. Divide by roughly 8.6 years (2011 weighted average est. useful life) and the depreciation expense -- itself a proxy for maintenance expenditures -- stands at P38.2 million, a 63.5% decrease of 2011's estimated maintenance capital expenditures.
      
Considering how net income from distribution and retail activities alone are 61% ABOVE maintenance capex for the consolidated business left behind, it looks like the shrinkage in Pacific Online's assets should offset any damage to its creditworthiness resulting from the ELA expiry.
      
Management and Consultancy, & Software and License Fees
      
Both items are linked to the online lottery equipment. This will vanish should PCSO seize the network from Pacific Online.
      
Rent
      
Operating Leases concerning office spaces and other properties, for "minimum rental commitments with annual escalation rate of 5%" (this should be slightly slower than the long run rate of inflation). These will not vanish after an ELA expiry, but the burden on operating profits are not likely going to be as strong a burden either, considering the amount Pacific Online might retain as net profits under this harrowing scenario.
         
Other Debt Obligations
      
Pacific Online has finance leases connected to its Lottery Equipment (removed the instant PCSO seizes the network) and Transportation Equipment (which have a present value of P8.7 million). This is not a problem.
   
Title: Re: TSO's Request Corner
Post by: TSO on Feb 24, 2013, 11:47 AM
Efficiency
   
Being a company listed on the Philippine Stock Exchange, and an unknown one at that, there is a dearth of key performance indicators, which is in itself a cause for concern as I would not have a complete picture of business risk. Regardless, I have identified several key points LOTO can be assessed under, and the portrait they depict is good enough. Thus the following are Pacific Online Systems Corporation's KPI's: (i) Contact Points, (ii) Sales per Unit, (iii) Market Penetration/Capacity, (iv) Management, Software, and Consultancy Fees, and (v) financial indicators.
   
KPI’s: Contact Points

Pacific Online's contact points for the customer to reach its products has bloomed from 800 online lottery terminals in 2005 to a portfolio of 4,364 outlets and terminals in just six years, of which 47% belong to Online Lottery and 41% to Instant Scratch Tickets.
      
Obviously, this goes to show how STRONGLY Pacific Online's business can grow by displacing illegal gaming as a poor man's alternative to casino gambling. Online Lottery Terminals have grown 17% a year in the Visayas-Mindanao region since 2005, and the instant scratch tickets outlets have grown at an abnormally swift 40% a year since 2008. The same can be said for Online KENO, which has grown even faster over the past three years (104% a year).
      
Pacific Online's growth prospects should remain strong going forward.
      
KPI’s: Market Penetration and Capacity
      
Government-mandated coverage limits for the Visayas-Mindanao region amounted to 913 cities and municipalities (in 2011: 863) on average. Market penetration by Pacific Online's terminals are virtually saturated under cities (average 92.6% penetration over past five years), but have plenty of room for growth in the local municipalities (averaged 60% penetration from 2008 to 2011). Even so, the intrapolated population during these periods has gone up from 34.2 million people in 2006 to 37.4 million after five years, with persons per contact point presently stabilizing at 8,560, with revenues per potential customer going up and up (P12 per person in '06 to P67 per person in '11).

Year   Pop’n per VISMIN contact point   Revenues per potential customer
2006   34,944   P12.08
2007   24,199 (-31%)   P19.27 (+59%)
2008   14,968 (-38%)   P32.44 (+68%)
2009   10,437 (-30%)   P48.92 (+51%)
2010   9,269 (-11%)   P66.19 (+35%)
2011   8,561 (-8%)   P66.93 (+ 1%)
Disclosure: The Online KENO, Lucky Circle, and Scratch Ticket businesses are not limited by geographic territory, so Pacific Online can invest anywhere in the Philippines. For the sake of simplicity, however, I used the Visayas and Mindanao (VISMIN) regions as the backdrop as a significant portion of sales is exclusive to these two regions. Regardless, this does not change my assessment in the paragraph succeeding this table.

Clearly, the pool of people serviced by one Pacific Online contact point in Visayas and Mindanao -- whether it be an online lottery, online KENO, lucky circle, or instant scratch ticket outlet and/or terminal -- are shrinking while the revenues per potential customer are growing. Although the numbers suggest revenues per potential customer is close to falling even as the population becomes more saturated with Pacific Online's equipment, because I do not know how many people the gaming terminals actually serve every year and government statistics on a family’s yearly budget for gaming and casino is not a measured item, it is not possible to project the marginal revenues possible from further saturation.

The same, however, cannot be said for instant scratch tickets. Pacific Online’s Instant Scratch ticket agreements with the government, though they were not renewed after fulfillment, are contracts to sell a specific number of tickets for a specific price, over a period of several months that can overlap with another contract’s. With total segment revenues reported, this permitted estimation of unit sales and capacity, as follows:

Year   Units Sold   Unit Price   Capacity    Utilization
2007   7.57 million   P23.33   13.33 million   57.8%
2008   16.15 million   P26.67   26.67 million   60.6%
2009   26.96 million   P32.22   70.00 million   38.5%
2010   75.80 million   P17.78   511.67 million   14.8%
2011   133.27 million   P10.00   500 million   26.7%

The figures for capacity utilization is useless for analytical purposes as the increasing capacity and sales volume arose from the new contracts and the different terms of sales, price, and time. Of all five years, only 2011 is useful as the contract called for P5 billion for every 500 million tickets sold during the seven-year contract period of December 2009 to November 2016.

Unfortunately, we do not know if the 133.3 million in sales reflects Pacific Online’s potential sales rate / capacity utilization in the future, due to the magnitude of capacity and its ability to compete with illegal gambling. 

Year   Scratch Ticket Outlet   Unit Sales per Outlet
2008   657   24,600
2009   1338 (+104%)   20,150 (-18%)
2010   1552 (est. +16%)   48,840 (est. +142%)
2011   1800 (est. +16%)   74,040 (est. +52%)

The rapid rise of sales volume per outlet indicates instant scratch tickets will be an exceptional source of revenues in the future, should Pacific Online manage to sell more than 500 million tickets during the seven-year period.

Financial Indicators: Management, Consultancy, Software Fees

As a percentage of rental income, these fees have fallen sharply from almost 40% of rent in 2005 to 20% in 2011, which have changed up due to the multiple %-of-sales fees levied by the Finance Leases with Scientific Games and Intralot. I’m not that concerned with the rent expense spent on the Equipment Lease Agreement as they presently amount to 5.6% of rental income, which is dwarfed to 2.2% after including other sources of income.

Since Scientific Games and Intralot are associated more strongly with the online lottery subsegment rather than both that and the KENO business, should PCSO decide to buy the network off of Pacific Online, these expenses will vanish and profit margins will go up, perhaps by an additional 20 percentage points (which increase leasing activities’ net margins to 48% from 34%: this is a 41% increase).

Financial Indicators: Cash Conversion Cycle

Prior to the introduction of the instant scratch ticket business in 2007, when the company derived all revenues from equipment leases, Pacific Online’s cash conversion cycle (CCC) had been negative by as much as 62 or 130 days, evidence that the company was flush with cash. When the instant scratch ticket segment rolled out, how the CCC is computed determines whether it is positive or not.

From a purely financial perspective (DSI based on revenues and NRV of inventory), the CCC remains negative, though the figures increase to roughly -6, as opposed to double digits. This does nothing to change the earlier observation, but undermines the margin of safety available for leniency or disruptions.

Financial Indicators: Accounts Receivable

Conversion of receivables to cash, based on average trade A/R, was improving. From 18.4 days to 14.8, this suggested an ongoing improvement in collections operations. Come 2011, the company’s trade receivables went up by 1.5x, and they only had this in reply: “The increase… was due to the increase in sales, among others.”

What was this “among others”? It couldn’t have been an increase in sales. Sales revenues were P2.4 and P2.5 billion in 2010 and 2011 yet Trade Receivables went up from P91 mil to P227 mil in a single year.  The fact trade receivables are normally on a “30 to 45 days credit terms” implies an expectation to collect almost a quarter of a billion pesos from its business partners. An expectation they might be failing, as the following table suggests:

Accounts Receivable   2006   2007   2008   2009   2010   2011
   Beginning   25.07    27.97    67.67    116.80    169.24    137.15
   Additions   413.63    671.49    1,150.20    1,764.92    2,430.39    2,500.65
   Available for Collection   438.70    699.46    1,217.87    1,881.72    2,599.63    2,637.81
   Collections   410.73    631.79    1,101.07    1,712.48    2,462.47    2,366.52
   Ending   27.97    67.67    116.80    169.24    137.15    271.28
   Collection Rate   93.62%   90.33%   90.41%   91.01%   94.72%   89.72%
   Accretion Rate   94.29%   96.00%   94.44%   93.79%   93.49%   94.80%
   Net Decrease (Increase) in A/R   (0.66%)   (5.68%)   (4.03%)   (2.79%)   1.23%   (5.08%)
* Assumes Revenues are purely credit sales, and beginning and ending balances for A/R, including advances given to employees, suppliers, and contractors are given in financial statements. Everything else is implied.

Financial Indicators: Inventory Turnovers

Pacific Online, in the past, was never a company that relied on inventory to generate cash. This changed in 2007, when the instant scratch tickets business started and took off an automatic 26.6% from the rental business, growing and growing until it became a monster, controlling over half of revenues. I’m not even including the sales commissions from ticket sales. (Doing so would add another 7% of total sales.)

And with Pacific Online focusing on KENO and the Instant Scratch Ticket business, it looks like they’re expecting the government to snatch away their virtually risk-free monopoly, and have prepared for it by diversifying away as much as seven years before the original ELA expired. This reflects well on the management’s competence in adopting a long-term point of view, their insufficient openness towards minority investors notwithstanding.

From a monetary standpoint, we’re looking at a highly significant decrease of days sales in inventory, cutting it by 40% in a span of four years. On average, Additions to tickets in supply amounted to about 98% of available goods, with the mean sales rate being 96% of available goods. A 200 bps difference.

From a volume standpoint, the sales and printing rates of the instant scratch tickets were much lower at 70% and 83% on average, indicating that the tickets in inventory spilled over from one fiscal year to the next. This, of course, was obvious to begin with: with the exception of the “Money Bags and Triple Cash” series of tickets, every other agreement Pacific Online has had with the Philippine Charity Sweepstakes Office (PCSO) overlapped by at least two years. Translated to DSI ratios, rather than the [9.3, 21.2] range observed in the monetary view, the ratios ranged from 90.4 (the current figure) to 121.9 days.

Days Sales in Inventory   2007   2008   2009   2010   2011
Monetary DSI   21   13   9   10   12
Volume-based DSI   122   128   116   92   90
Instant Scratch Tickets Business, % of revenues   27%   38%   49%   56%   53%
Instant Scratch Tickets Business, % of assets   7%   15%   15%   24%   28%

Naturally, using the volume-based metrics would reverse the signs of the Cash Conversion Cycle, bringing it up to the [24.2, 49.9] day range. The fact this CCC is at 28.2 days as opposed to the near-fifty figure of 2009 implies a 44% improvement in the efficiency of the business model, through a span of merely two years. This still reflects well on the management, in my view.

Financial Indicators: Accounts Payable

Lastly, the overly-generous terms Pacific Online has with its suppliers and business partners reflects either leniency on the latter’s part or the ability to stretch out their payments as far back as possible. Starting from 2007 (as opposed to 2006 and earlier, when trade payables were virtually nonexistent), the days payable outstanding has gone up from 17 to 31 days. They stretched out the terms of their business partners well, though I find it difficult to imagine they can extend this to a much longer period (as creditors want to collect their receivables too, in the final analysis).

At any rate, if the company can maintain this 30-day grace period and focus on improving sales efforts of the instant scratch business (as opposed to collections company-wide, which is already efficient ), it should be able to bring down CCC considerably—all the more better for the efficacy of its business model.



To be continued!
Title: Re: TSO's Request Corner
Post by: rabbit on Feb 25, 2013, 07:44 AM
TSO. kudos.great man!!!
 
Title: Re: TSO's Request Corner
Post by: TSO on Mar 01, 2013, 01:09 PM
Profitability

Adjusted Income Statements (PHP, mil)   2004   2005   2006   2007   2008   2009   2010   2011
EQT Rental   249   333   402   472.37   642.60   770.64   903.67   967.96
Instant Scratch Tix            176.72   430.73   868.70   1,347.54   1,332.71
Others            13.21   65.24   113.01   163.96   185.38
Maintenance & Repair Fees   4.06   5.07   11.59   7.19   9.74   11.53   13.14   13.34
Total Revenues   253.46   337.69   413.63   669.50   1148.30   1763.88   2428.31   2499.38
Variable Costs   (118.10)   (160.10)   (174.35)   (246.53)   (475.32)   (985.85)   (1,371.03)   (1,428.90)
Gross Profits   135.35   177.59   239.28   422.97   672.98   778.03   1057.27   1070.48
Corp. Expenses, excl. D&A   (68.01)   (95.42)   (104.14)   (142.87)   (286.97)   (333.03)   (536.42)   (459.21)
Depreciation & Amortization   (27.13)   (23.35)   (42.79)   (55.49)   (79.07)   (117.08)   (136.71)   (151.45)
Operating Income (Loss)   40.21   58.82   92.35   224.61   306.93   327.92   384.14   459.82
NUI, operating   (7.34)   (3.04)   (38.36)   17.53   7.70   10.23   15.97   21.93
NUI, nonoperating   (0.78)   (10.84)   44.42   (10.94)   (46.75)   49.67   173.45   69.45
EBIT   32.09   44.94   98.41   231.19   267.88   387.82   573.57   551.21
Net Interest   1.18   3.06   (17.83)   (20.26)   (24.27)   (24.00)   (21.78)   (15.87)
Pre-tax Net Income   33.28   48.00   80.58   210.93   243.61   363.82   551.78   535.34
Effective Tax Rate   41.98%   (32.09%)   (37.37%)   (37.35%)   (45.75%)   (26.99%)   (21.55%)   (27.06%)
Net Income   47.25   32.60   50.47   132.15   132.16   265.63   432.88   390.47
* “NUI” stands for nonrecurrent and unpredictable items, which includes all accounting line items that are deemed to be too volatile or too infrequent to be considered part of operating profits.

Having established LOTO as an institution of remarkable creditworthiness and a well-oiled business poised for future growth in its target markets, with—of course—a little room for internal improvement in its salesmanship and distinctions from the illegal gambling that controls half of the gaming industry’s sales revenues, it is only reasonable to expect the two business models to be lucrative and profitable, taken separately or in aggregate.

Pacific Online does not disappoint. I am looking at a corporation that has consistently sustained net margins in the mid-10’s, with adjusted asset turnovers clocking in at an average of 1.5x, effectively boosting returns on assets to no less than 20% in the past three years alone. Combined with a respectable degree of leverage, we’re seeing adjusted returns on equity that, with the exception of 2008’s 25% (caused by a P48M loss in marked-to-market securities and a corresponding tax increase from derivatives trading instead of a tax benefit), has not dropped beneath 30%.

That my numbers show RNOA to range from 20% to 55% (current figure) implies this leverage is dragging Pacific Online’s returns down—it is much better off minimizing of this excess if at all possible.

Consolidated Cost Controls

For reference, here are the cost controls in terms of percentages.

   2004   2005   2006   2007   2008   2009   2010   2011
Consultancy, Mgt, & Software Fees   63.94%   62.30%   65.56%   88.27%   91.28%   91.58%   93.04%   92.25%
Other Variable Costs   83.52%   84.42%   88.24%   71.58%   64.21%   48.17%   46.80%   46.43%
Gross Margins   53.40%   52.59%   57.85%   63.18%   58.61%   44.11%   43.54%   42.83%
Corporate Fat   49.75%   46.27%   56.48%   66.22%   57.36%   57.20%   49.26%   57.10%
D&A   59.71%   71.58%   68.34%   80.19%   79.52%   73.69%   73.75%   75.22%
Operating Margins   15.87%   17.42%   22.33%   33.55%   26.73%   18.59%   15.82%   18.40%
NUI (O)   81.75%   94.83%   58.46%   107.80%   102.51%   103.12%   104.16%   104.77%
NUI (NO)   97.63%   80.57%   182.27%   95.48%   85.14%   114.69%   143.35%   114.42%
Interest Burden   99.24%   98.90%   78.65%   88.77%   89.79%   92.74%   95.45%   96.05%
Investing Activities   104.48%   107.99%   104.10%   102.78%   101.28%   101.15%   100.79%   101.11%
Tax Burden   141.98%   67.91%   62.63%   62.65%   54.25%   73.01%   78.45%   72.94%
Net Margins   18.64%   9.65%   12.20%   19.74%   11.51%   15.06%   17.83%   15.62%
Minority Interest   100.00%   100.00%   100.00%   100.00%   101.01%   100.42%   99.77%   99.88%
Shareholders   100.00%   100.00%   100.00%   100.00%   25.57%   64.13%   66.92%   74.39%
Retained Earnings   18.64%   9.65%   12.20%   19.74%   2.97%   9.70%   11.90%   11.61%

As observed, the most important determinants of Pacific Online’s profitability are found in its variable costs and corporate expenses, with depreciation and amortization as third runner-up. Taxes are well under control, with the past three years having an effective tax rate beneath the statutory 30%.

Of the variable costs, before 2007, consultancy, management, and software fees were the deal-killers for the company’s profitability, contributing more or less 80% of total variable costs. Ever since Pacific Online brought in the instant scratch ticket business, a substantial shift occurred. Direct costs for instant scratch tickets—the prize money, the costs of printing and sales, not including the sales commission the government gets for giving Pacific Online the very basis of this segment’s existence—grew from close to 50% of variable costs to a little less than 75%, with the prize money comprising 87% of direct ticket costs on average, with near-zero volatility. Simultaneously, that old mainstay of consultancy, management, and software fees dropped to 12 – 15 percent of variable costs.

Pacific Online needs to ramp up the volume of its sales to reap the benefits of scale for its Online Lottery business, considering the relatively low gross margins of 19% to 24%, ex PCSO’s share of the profits. Either that or lower the “other direct costs” weighing down the sales pulled in from this business.

Breakdown of Variable Costs   2004   2005   2006   2007   2008   2009   2010   2011
Direct Costs, Instant Scratch Tix Biz            47.26%   57.42%   70.79%   74.39%   72.63%
Software & Licenses   9.39%   12.41%   0.19%   0.93%   3.95%   2.90%   1.58%   1.77%
Repairs & Maintenance   8.20%   6.99%   3.71%   4.28%   6.38%   3.75%   3.04%   3.80%
Consultancy Fees   56.36%   56.35%   70.50%   20.54%   8.55%   7.45%   6.99%   7.86%
Mgt Fees   11.64%   10.77%   11.01%   10.39%   8.56%   4.72%   3.76%   3.93%
Operating Supplies   0.58%   1.14%   1.34%   1.54%   1.05%   0.68%   0.69%   0.64%
Personnel Expense   13.83%   12.34%   13.25%   15.05%   14.09%   9.71%   9.55%   9.37%
Total Variable Costs   100.00%   100.00%   100.00%   100.00%   100.00%   100.00%   100.00%   100.00%

And of the remainder, consultancy and management fees are taking the biggest share of variable costs other than personnel expense. As stated before under the prior two elements, irreversible removal of the Online Lotto business segment will result in across-the-board reductions of management, and software & licenses fees, bringing the instant scratch tickets expense into the forefront… at least until the Online KENO arm ascends to the Online Lottery’s level.

Breakdown of CORPEX   2004   2005   2006   2007   2008   2009   2010   2011
PCSO’s share of ticket sales            27.44%   24.39%   31.21%   30.13%   23.33%
Travel, accommodations   7.44%   14.24%   16.32%   11.67%   22.92%   18.13%   17.69%   18.60%
Communications   61.45%   44.59%   45.68%   28.33%   15.46%   16.73%   12.68%   13.78%
Rent and Op Leases   5.15%   3.67%   3.74%   8.19%   7.74%   9.01%   7.92%   11.87%
Utilities   1.03%   3.06%   3.29%   0.11%   3.66%   5.96%   8.46%   14.00%
Taxes & Licenses   1.51%   4.03%   2.88%   3.93%   4.00%   3.75%   5.62%   3.71%
Partying   3.58%   4.15%   4.38%   5.17%   3.76%   2.71%   2.15%   2.54%
Professional Fees   12.38%   18.78%   14.28%   5.78%   8.04%   5.05%   3.66%   2.43%
Bad Debt Expense   Not disclosed at any point before fiscal year 2008.   0.31%   0.22%   0.00%
Advertising   Not disclosed before FY 2007.   0.52%   3.82%   7.75%   6.71%
Others   7.48%   7.48%   9.43%   9.38%   9.51%   3.33%   3.72%   3.03%
Total   100.00%   100.00%   100.00%   100.00%   100.00%   100.00%   100.00%   100.00%

Under corporate expense ex depreciation and amortization, other than PCSO’s take of instant scratch ticket sales, the largest contributors to corporate expenses excluding Depreciation and Amortization are Travel & Accommodations, Communications, Rent and Operating Leases, and Utilities.

What are notable here are utilities and rent expenses’ huge jumps since 2008 and 2007, respectively, as well as the fact travel and accommodations are bordering on a fifth of corporate expenses, with the 2011 figure of P85.43 million being 30% higher than whatever it was in 2008. Both proportional and index figures have been rising.

The 8-year median of corporate expenses comes up at 23.5% of sales (CV of 0.15). Transportation and accommodations are taking away 4% to 5% of sales, when they could be spending roughly 50 to 100 basis points (bps) lower.

While I do not know whether this behavior falls under misuse of company funds or excessive traveling, I believe it is detrimental to the shareholders for the company to spend this much on travel and accommodations—50 to 100 bps translates to an increase in ROA by 75 to 150 bps (based on average turnovers), an increase in ROE by 105 to 210 bps (based on current equity multiplier), and an increase in RNOA by 100 to 200 bps (based on median NOA Turnover). Furthermore, if these savings had been passed on to the shareholders through dividends, we’re looking at an additional 11 to 22 bps in % of sales going to the investors’ pockets (based on current payout rate computed from operating income): a 3% increase in dividends paid.

Both spikes in rent and utilities expenses are understandable. Until the March 2013 expiry of the Lottery ELA with the PCSO, Pacific Online is paying rent for leasing the online lottery system from Scientific Games and Intralot, which are fixed at the higher of a minimum cost or a certain percentage of lottery sales. (Unfortunately, the company doesn’t delineate the primary sources of rent and interest expenses). Office spaces and other operating facilities are being leased by the company, adding to the expense.

Pacific Online does not detail the sources of its rent expense beyond the information concerning the Lucky Circle Corporation subsidiary and the Online Lottery business, it sounds reasonable for one to infer from the spike in rent—which began in 2007—to coincide with the scratch tickets and online KENO businesses. It wouldn’t be surprising for rent to increase in proportion over the next few years, as operating a KENO business also requires machines and other electronic systems (http://www.on-line-keno.eu/operate-keno-lottery.html) and it is not farfetched to consider the possibility of Pacific Online seeking another lease contract for such systems.

Depreciation and Amortization (D&A) is another expense class affecting accrual profitability, taking out as little as 5.6% of sales, and as much as 10.7%. Expensive in its own right, ignoring the impact of D&A tended to increase operating margins by a significant value, enough to put it teetering on the edge of hitting 30%. D&A expenses for the past five years summed up to a total of P540 million—roughly one-thirds higher than my estimates of maintenance investments (indicating expenditures spent on extending the company’s existence).

Gross PPE (PHP, millions)   2006   2007   2008   2009   2010   2011
Lottery EQT   290.38   394.11   488.74   567.09   629.31   673.14
Leasehold Improvements   16.06   16.44   52.34   54.89   58.03   59.92
Office EQT   19.24   27.38   37.29   54.61   78.84   95.98
Transpo EQT   15.97   22.61   33.65   42.20   58.64   67.39
Non-depreciable   0.00   23.92   0.00   0.00   0.00   0.00
Total   341.65   484.45   612.03   718.80   824.81   896.43

Before the scratch tickets and KENO business blossomed, the online lottery equipment made up virtually all of D&A expense. Though this proportion is falling now that Pacific Online is putting more money into its office equipment (furniture and fixtures), it goes without saying that this will still increase as the company continues to invest in terminals and systems for the KENO and scratch tickets segments.

   2007   2008   2009   2010   2011
Lotto Terminals   1,401   1,600   1,915   2,039   2,039
Other Contact Points   39   769   1542   1922 (est.)   2325 (est.)
Total Contact Points   1440   2369   3457   3961 (est.)   4364 (est.)
Change in Lotto Terminals   421   199   315   124   0
Gross PPE (Lotto EQT, Leasehold Improvements)   410.55   541.08   621.98   687.33   733.06
Average Cost per unit, year-end   285,100.96   228,401.18   179,919.82   173,525.35   167,979.17
Marginal costs per unit, during year   226,322.62   140,513.48   74,357.00   129,664.88   113,466.94
Reported D&A (millions, PHP)   42.79   55.49   75.84   112.77   132.40
Est. Maintenance CAPEX (millions, PHP)   52.75   69.18   81.75   95.37   104.47
* Maintenance CAPEX is estimated using the depreciation expense computed using the weighted average useful life and the total depreciable PPE at year-end.

However, should the government decide to snatch up the lucrative, virtually risk-free Online Lottery business come April, I am expecting Gross PPE to fall (as I suspect the Online Lottery Terminals to cost as much as P300 thousand each, based on 2006 and 2007 figures—the numbers should be higher now given inflation and improved technology). KENO sites, instant scratch ticket centers, and lucky circle outlets are not as expensive, considering marginal costs of new equipment from these categories are aggregated at P113.5 thousand on average, per unit. Even if these segments undergo unprecedented growth over the next five years, depreciation and amortization probably won’t shoot up as fast as it did with online lottery alone—20% a year, compounded.

This assumes the estimated useful life doesn’t shift down by one year as Pacific Online’s agreements with PCSO approaches expiry—in reality, it actually does. (Reported capital expenditures don’t seem to reflect the business’s duty to make sure the equipment is in excellent condition by the time it’s ready for the government to take them, as they’ve invested much less than reported D&A and estimated maintenance capex.)

Last but not the least, taxes. I haven’t seen any reasonable trend in the tax adjustments, as the only items consistently mentioned through the past eight years are “Mark-to-Market Gain/Loss on Derivatives”, “Taxable Interest Income”, and “Nondeductible Expenses”. As a percentage of pre-tax net income, the largest adjustments from these regulars have historically come from the taxable gains & losses on derivatives (usually positive, and in the three years ending 2010, very large in magnitude—from four to eight percent) and nondeductible expenses (8-year median of 1.84%, but the highest values within the past five years amounted to 4.7% and 3.6%, stacking additionally to the statutory rate).

Statutory Rate   30.00%   Current figure
Nondeductible Expenses   +2.62%   Average (CV = -0.87)
Mark-to-market G/L on Derivatives   -1.73%   Average (CV = 3.28)
Taxable Interest Income   -0.28%   Average (CV = 0.52)
Change in Tax Rate   -0.06%   Trimmed Average (CV = 9.31), currently zero
All Others   -1.08%   Average (CV  = 0.91)
Average Effective Rate   29.47%   Summed up everything else

As the coefficients of variation for all tax rate adjustments are all above 0.50, the adjustments by themselves are clearly unpredictable. There is simply no point in trying to “forecast” tax rates here, and out of conservatism, it is prudent to assume a 30% statutory rate or bring it up to 35%, a figure that assumes Pacific Online shoots itself in the foot with its tax accounting or derivatives trading hedging, somewhere down the road.


Title: Re: TSO's Request Corner
Post by: TSO on Mar 01, 2013, 01:13 PM
Segment Analysis: Leasing and Maintenance versus Distribution and Retail

Although Pacific Online does not disclose anything detailed in pertinence to its business segments, this subject matter is highly relevant in light of the threat from the possible expiration of the company’s ELA with the government agency PCSO. Here are the figures:

* Millions, PHP except percentages   2007   2008   2009   2010   2011
Sales
Leasing & Maintenance   479.56   652.34   782.18   916.81   981.29
Retail & Distribution   189.93   495.97   981.70   1511.50   1518.09
Total Revenues   669.50   1,148.30   1,763.88   2,428.31   2,499.38
L&M as % of Total   72%   57%   44%   36%   36%
Unadjusted  Net Income, applied eliminations pro rata
Leasing & Maintenance   134.86   72.41   212.39   391.32   331.30
Retail & Distribution   (0.27)   58.36   51.06   39.03   60.77
Total Net Income   134.59   130.77   263.44   430.34   392.06
L&M as % of Total   100%   55%   81%   91%   85%
Unadjusted Segment Assets, applied eliminations pro rata
Leasing & Maintenance   689.84   655.79   781.60   1,003.44   1,280.10
Retail & Distribution   46.61   112.89   113.98   269.59   393.46
Total Assets   736.45   768.69   895.57   1,273.02   1,673.56
L&M as % of Total   94%   85%   87%   79%   76%
Unadjusted Segment Liabilities, applied eliminations pro rata
Leasing & Maintenance   375.12   70.43   72.62   388.38   297.85
Retail & Distribution   57.66   47.50   34.29   49.33   122.55
Total Liabilities   432.78   117.93   106.90   437.71   420.40
L&M as % of Total   87%   60%   68%   89%   71%
Capital Expenditures
Leasing & Maintenance   48.16   87.27   39.74   43.37   23.81
Retail & Distribution   4.82   0.00   0.00   21.90   17.28
Total CAPEX   52.99   87.27   39.74   65.27   41.09
Depreciation and Amortization
Leasing & Maintenance   55.19   73.76   108.66   122.82   132.49
Retail & Distribution   0.30   1.87   8.42   13.89   18.96
Total D&A   55.49   75.63   117.08   136.71   151.45
Unadjusted Net Margins
Leasing & Maintenance   28.12%   11.10%   27.15%   42.68%   33.76%
Retail & Distribution   (0.14%)   11.77%   5.20%   2.58%   4.00%
Consolidated   20.10%   11.39%   14.94%   17.72%   15.69%
Total Asset Turnover (year-end figures)
Leasing & Maintenance   0.70   0.99   1.00   0.91   0.77
Retail & Distribution   4.07   4.39   8.61   5.61   3.86
Consolidated   0.91   1.49   1.97   1.91   1.49
Unadjusted Equity Multiplier (year-end figures)
Leasing & Maintenance   2.19   1.12   1.10   1.63   1.30
Retail & Distribution   (4.22)   1.73   1.43   1.22   1.45
Consolidated   2.43   1.18   1.14   1.52   1.34
Return on Equity (year-end figures)
Leasing & Maintenance   42.85%   12.37%   29.95%   63.62%   33.73%
Retail & Distribution   2.41%   89.27%   64.06%   17.70%   22.41%
Consolidated   44.31%   20.10%   33.41%   51.51%   31.29%

What I want to point out here is the sudden boost in L&M’s net margins in the past two years alone. The year 2010 is actually when the Online KENO segment went up a notch from 98 sites to 221, explaining not only the P300 million rise in assets but also the P134 million increase in sales. The instant scratch tickets terminals and lucky circle outlets also underwent a drastic boom, bumping up sales in the retail and distribution segment by roughly 50%. In contrast, the 43% L&M ROE in 2007 came directly from a fall in overall variable costs, lower costs of depreciation and corporate expenses relative to sales.

I’ll focus on 2008 and onwards because that is when both Online Keno and Instant Scratch Tickets entered the game.

As it has been observed, Pacific Online has been diversifying its operations, introducing both Online KENO into its leasing business and Instant Scratch Tickets as another, lasting revenue stream. The Online KENO will be as resilient as Online Lottery was in a few years, facing zero rivals (other than illegal gambling) and plenty of competing substitutes. Instant Scratch Tickets, on the other hand, is more open to competition and carries virtually no competitive advantage other than the scale and throughput time of its network and distribution processes.

   2008   2009   2010   2011
Lotto Terminals   1600   1915   2039   2039
KENO Sites   44   98   221   376
Lotto Rent Income   P639M   P757M   P863M   P876M
KENO Rent Income   P3M   P13M   P41M   P92M
Total Rent Income   P643M   P771M   P904M   P968M
Lotto Revenues, % of Total   99%   98%   95%   91%
Lotto Sales per Terminal   P399K   P396K   P423K   P430K
KENO Sales per Site   P73K   P135K   P185K   P245K

KENO is growing rapidly, exponentially raising the sales generated for every KENO site Pacific Online installed in its contracted territory. The combined performance of Online Lotto and KENO resulted in amazing returns, boosting segment net margins to 30%. Turnovers may have fallen beneath 0.9x, but the equity multipliers nonetheless remain large enough to stabilize (or augment) investment returns for the L&M segment.

Meanwhile, the instant scratch ticket segment has grown much, much faster than the Online KENO line. From P160 million to P1.5 billion over the course of four years, Pacific Online has sold a staggering amount of tickets  (refer to KPI’s: Market Penetration and Capacity), with PCSO taking 15% cuts off the sales price as stated in the contracts’ terms.

Past scratch ticket agreements seemed—based on the language in the SEC 17A filing—to be exclusive between the government agency and Pacific Online, but this was offset by the facts the agreements had tenures of no more than 1.5 years, and save for the most recent one (effective Dec 2009), was limited to a specified sales volume and sales price (“face value”). The December 2009 7-year Agreement is non-exclusive, with a target 500 million tickets, for which Pacific Online must pay P750 million for “every 500 million tickets printed and sold”. The emphasized word led me to conclude this target resets as soon as the company meets it. Provided Pacific Online can consistently meet this benchmark year after year, this could very well be a permanent staple of the business.  (Refer to Future Prospects).

The Scratch Ticket business fits the profile of a small-margin, high-volume model, enjoying several multiples in turnover ratios compounded by a modest amount of leverage. Pacific Online has been conservative with respect to its debt (less than 33% debt ratio for both segments each), although it is presently investing far more resources into Leasing & Maintenance (probably KENO) as opposed to Retail & Distribution (Scratch Tickets), and for obvious reasons—unadjusted margins for L&M has been and should remain several times higher than that of the Scratch Tickets.

By the numbers alone, Pacific Online is improving, growing rapidly to diversify its income streams across scratch tickets and another form of online gambling. Whether the company loses its online lottery business or not is irrelevant: the characteristics of the underlying business will remain relatively similar, and perhaps profit margins would rise as it’s a bit cheaper to operate KENO.

Dividends and Investment Returns

Dividend policy, which began in 2008, has been largely erratic relative to just about any profitability metric. 2010’s P142.9M dividend distribution is an exception so far, as the other three years had P100 million for distributable dividends. When juxtaposed to various measures of free cash flow, however, it looks like Pacific Online can easily increase its dividend distribution by over 50% and still have enough money to invest in its own business.

At the current market capitalization of P4.09 billion, the 2011 dividend distribution represents a 2.45% yield. This can easily double based on history—and again, only in hindsight. Whether it is capable of doubling its dividends after April 2013 is another question altogether.

Millions, PHP   2007   2008   2009   2010   2011   5Y Total
OCF before Working Capital   298.62   382.22   451.66   535.03   635.22   2,302.76
Net Operating Cash Flows   145.26   231.50   255.47   440.44   417.91   1,490.58
Adj. EBITDA (before CAPEX)   282.90   400.93   562.37   756.85   838.98   2842.03
Dividends Declared   N/A   99.37   95.68   142.85   99.88   437.77
Reported CAPEX   52.99   85.52   37.18   104.53   35.34   315.56
Est. Maintenance CAPEX   52.75   69.18   81.75   95.37   104.47   403.53
Maintenance CAPEX is the estimated minimum level of capital investment necessary to retain competitive advantages. While there are multiple methods of computation, because Pacific Online’s predominant business model relies heavily on fixed assets that are not replaced so readily, its maintenance CAPEX is represented by depreciation computed using the weighted average useful life of its fixed assets. Of course, this assumes the PCSO does not de facto own equipment via finance leasing.    5Y CAPEX Deficit (Reported vs. Maintenance)   -87.97

Nonetheless, this table confirms my assertions. It also depicts the P88 million deficit the company must invest into its fixed assets to at least maintain the competitiveness and quality of its business lines. But because the Philippine Charity Sweepstakes Office might grab the equipment in two months, it isn’t so farfetched for me to tender the thought that the company is yielding to the conflicts of interest inherent in its business model, as was mentioned earlier.

As far as investment returns go, I don’t have to produce a table. Pacific Online is presently earning unadjusted returns on equity above 30% a year since 2005. Returns on Assets average in the low 20’s, and with a reasonable degree of leverage, this is enough.

Scrutinized under the lens of Net Operating Assets, once Pacific Online rolled out the Scratch Tickets, the Lucky Circle, and the Online KENO businesses, its unadjusted RNOA zoomed from the mid-20’s, soaring above and beyond 40 percent. This does not change when Maintenance FCF is used as the numerator (rather than the accounting-derived NOPAT). When compared against ROE, that RNOA exceeds it is highly apparent, indicating the leverage is actually deadweight for Pacific Online.

This observation does not change under segment analysis. (Refer to the table in that section for corroboration).

Inherent Stability

Trustworthiness and Reliability of Management

The existence and breadth of the proverbial economic moat aside, nothing destroys value more than a management team that simply cannot be trusted to treat all its shareholders fairly and work for the good of the company rather than their own interests. I compiled a list of indicators with which I analyzed Pacific Online’s management. My conclusion is that of wariness. The data is mixed or borderline, so you cannot fully take anything listed in the SEC reports at face value.

Beneishe’s M-Score   
These are bordering on breaching the -2.22 benchmark. Historical figures have gone above this twice, in 2006 and in 2011, landing somewhere around -1.60.  In plain English: they could be manipulating the numbers.

Piotroski’s F-Score   
Gyrates around the middle, split between 6 and 7. This indicates the presence of value, but as a caution, these are based on historical numbers. Going forward, I have no idea what the F-Score might look like if Pacific Online loses Online Lottery—and 32% of revenues with it.

Consistency between Accrual & Cash   
OCF before Working Capital has some form of consistency against EBITDA, and the other adjustments used to compute the former—other than D&A—are a bit volatile, with the average landing at 12% higher than “Net Income + D&A”.

Accounting for Working Capital Changes and other cash disbursements and receipts from interest, dividends, and taxes pulls Net OCF to 60% of OCFBWC, but alas working capital ranged from -43% to +27% of OCFBWC, which does not bode well for the company.

Auditors   
It has changed them merely twice in the past nine years.

Investor Relations   
Access is impossible. Their phone number does not work. The website is just primitive, neglected by the company. Attempts to tap knowledgeable Citisec Online analysts have been unsuccessful to boot.

Voluntary Disclosures   
Pacific Online is opaque. They provide no real key performance indicators and are, for all intents and purposes, minimalist in the sense they give out too few to make any real decisions. All they give out are involvement in territory, slightly inconsistent counts of their customer contacts, and summary details of their MOA’s and ELA’s with PCSO.

As a direct consequence, I am relying on many estimates, compounding the possibility of error.
Title: Re: TSO's Request Corner
Post by: Richard4 on Mar 02, 2013, 08:39 PM
Omg.. detailed analysis only TSO can do. thanks TSO. u the man!
Title: Re: TSO's Request Corner
Post by: rabbit on Mar 02, 2013, 11:03 PM
 :thankyou: RAbbit here.... @jimlimsu@gmail.com sir
Title: Re: TSO's Request Corner
Post by: glady on Apr 03, 2013, 02:01 AM
Hi TSO :)

Do you think you could analyze DNL as well?

Thanks in advance :)
Title: Re: TSO's Request Corner
Post by: iamgawwy on Apr 03, 2013, 03:26 AM
Generous analysis, one of the reason why I keep on visiting this forum.

@Richard4
What tools do you use in your TA?
Title: Re: TSO's Request Corner
Post by: EngrjEEpoy on Apr 03, 2013, 04:14 AM
Hi TSO :)

Do you think you could analyze DNL as well?

Thanks in advance :)

Hopefully, TSO will do DNL as well :)
Thanks in advance!  :thumbsup2
Title: Re: TSO's Request Corner
Post by: INDO on Sep 25, 2013, 03:51 AM
nosebleed naman ako sa mga analysis ni sir TSO... di ko na nga binasa lahat, random na lang ginawa ko... paano kaya ako matoto pag ganito ugali ko :(
Title: Re: TSO's Request Corner
Post by: singkit_1588 on Sep 25, 2013, 08:17 AM
1. Post a reply here. If it's not a bank or a financial institution, I will be performing a quick skim of its most recent SEC filing to see if the company is worth pursuing for a deep scan or a quick screen. PLEASE INCLUDE THE COUNTRY IT IS IN, as I cover both US and Philippine listed corporations.

TSO,
you must be busy, we never een you in a while..
what is the meaning of your statement here with financial institution and banks?
does it means that you didn't touch banks & financial institution for scanning, etc?
just curious..

*already done with the exam for CFA?
^_^
TIA
Title: Re: TSO's Request Corner
Post by: TSO on Sep 27, 2013, 02:24 PM
Hey man.

Well, a lot has been happening. Let me try to give you some color.

First, I've been seeing a lot of progress with my employer's hedge fund project. The company has brought in a manager to assist and facilitate operations, and the guy has taken a direct interest in what my partner and I are doing. So he's focused on getting the capital raised, but at the same time, we've been tasked to shop for third-party software like Capital IQ and Thomson Reuters to speed up my analytical model. The efficiency improvement is enormous, I'll have to tell you. If it used to take me two months to manually analyze a company one by one, with the third-party service, it'll quicken to two weeks.

Second, I've been focused on the US markets lately, so I've been woefully ignorant of the Philippine market during that time. All the action is happening here, and from what I've seen before, a lot of the stocks I checked on the Phil seemed too expensive for my tastes (i.e. P/E's exceeding 16). I don't know if this is the case now, but currently, I'm embroiled in another analysis project.

Third, CFA Level 2 Exam.

Fourth, family matters. There was a death in the family, a few close calls, as well as some serious thinking I had to do concerning my future.

----

Going back to my statement with banks, it's just that I don't trust them and I refuse to get myself involved in analyzing them. It's a personal opinion, really, and if you must want to invest in a financial institution, please go to an insurance company. At least they're not completely dependent on interest rates.

TSO,
you must be busy, we never een you in a while..
what is the meaning of your statement here with financial institution and banks?
does it means that you didn't touch banks & financial institution for scanning, etc?
just curious..

*already done with the exam for CFA?
^_^
TIA
Title: Re: TSO's Request Corner
Post by: singkit_1588 on Sep 27, 2013, 02:33 PM
condolence The Silent One..
congratz for passing CFA level 2.
goodluck also for the CFA level 3 exams.. :)
so overall, TSO is very busy in work, career, family, & US investment..

with regards to financial institution, the reason of not touching them is personal preference only..
thanks, got the point..

some don;t want to touch the mining sectors, if i remember it right
Title: Re: TSO's Request Corner
Post by: TSO on Sep 27, 2013, 02:40 PM
Thanks, man.

Yep, good luck na sa CFA Level 3! Short answers na kailangan dun. Pucha di ako magaling sa bullsh*t!

BTW, dude, makikita mo na iba na ang pagpresenta ng mga analysis ko. Gumawa ako ng sarili kong template :D Meron na akong pinag-aralan na dalawa o tatlong kumpanya gamit un... pero sabi ni FutureGizmo sakin nung isang buwan eh, hindi pwede mag-embed ng PDF file dito sa PMT, hahahaha!

condolence The Silent One..
congratz for passing CFA level 2.
goodluck also for the CFA level 3 exams.. :)
so overall, TSO is very busy in work, career, family, & US investment..

with regards to financial institution, the reason of not touching them is personal preference only..
thanks, got the point..

some don;t want to touch the mining sectors, if i remember it right
Title: Re: TSO's Request Corner
Post by: ferrariEverest on Sep 27, 2013, 02:49 PM
^ Bro, nice job on the exam; condolence as well. Whatever the issues are, i am pretty sure you're more than tough enough to get through and make the right calls (or puts :D ).

Sir Singkit,
I don't think it is just a matter of preference. iwas risk si TSO. i do not have complete understanding of the issues about interest rates, pero I am sure TSO is wary of the current global economic conditions. Central banks are unnaturally keeping interest rates low and doing so leads to inevitable repercussions.

yung tungkol sa mining sectors, ang posibleng reason why some don't want to get involved with it ay
- volatility
- potential/projected vs actual yields ng bawat mines
Title: Re: TSO's Request Corner
Post by: singkit_1588 on Sep 27, 2013, 02:52 PM
Thanks, man.

Yep, good luck na sa CFA Level 3! Short answers na kailangan dun. Pucha di ako magaling sa bullsh*t!

BTW, dude, makikita mo na iba na ang pagpresenta ng mga analysis ko. Gumawa ako ng sarili kong template :D Meron na akong pinag-aralan na dalawa o tatlong kumpanya gamit un... pero sabi ni FutureGizmo sakin nung isang buwan eh, hindi pwede mag-embed ng PDF file dito sa PMT, hahahaha!


pedeng i-copy all then paste??pero parang mawawala ung sense nung template?
i don't know..hehe :rofl:
Title: Re: TSO's Request Corner
Post by: TSO on Sep 27, 2013, 04:19 PM
Hey Ferrari_Everest! Thanks for the support.

Quote
pedeng i-copy all then paste??pero parang mawawala ung sense nung template?

Have you ever seen a report made by S&P or ValueLine?

My template's just like THAT, except it's 6 pages and is a condensed research report like what you've seen in the previous pages.
Title: Re: TSO's Request Corner
Post by: bauer on Sep 29, 2013, 12:29 AM
^ can you please care to share it via email?
Title: Re: TSO's Request Corner
Post by: INDO on Sep 29, 2013, 01:27 AM
^ can you please care to share it via email?

if possible pasali naman ako  :watchuthink:  :thankyou:
Title: Re: TSO's Request Corner
Post by: TSO on Sep 29, 2013, 05:49 AM
Check your PM's.
Title: Re: TSO's Request Corner
Post by: mps on Sep 30, 2013, 09:23 AM
Good day Sir TSO. Baka puede din ako makakuha ng kopya ng template.

Thanks ng marami.
Title: Re: TSO's Request Corner
Post by: INDO on Sep 30, 2013, 11:51 PM
Check your PM's.

Thank you sir TSO  :applause:
Title: Re: TSO's Request Corner
Post by: jaboy on Oct 02, 2013, 12:59 PM
Check your PM's.
Sir TSO, pwede din po ba akong makahingi ng copy?
Title: Re: TSO's Request Corner
Post by: Wills on Oct 05, 2013, 02:29 PM
Boss what happen sa autoliv ALV? lumampas na sa 85, what is your new evaluation?
Title: Re: TSO's Request Corner
Post by: INDO on Mar 11, 2014, 08:33 AM
sir TSO, pwede na ba ulit mag request dito????
Title: Re: TSO's Request Corner
Post by: TSO on Mar 11, 2014, 10:40 AM
US companies nalang muna for deep scan. Screening, pwede pa Phil companies, c/o Reuters ;) I can do "quick and easy" valuations too, if needed.

I'm still swamped as it is. |||OTL I'm tweaking my research report structure, just finished analyzing another US company to the point it's ready for a report, and on top of that I'm about to update Iridium & Diamond Offshore AND I'm juggling all that with CFA level 3 weeeee
Title: Re: TSO's Request Corner
Post by: GIG on Mar 11, 2014, 12:24 PM
Hello TSO

back read the thread and you were giving away your research work for free. Glad to know a pinoy is hacking it good in the big apple. Anyways, I would like also a copy of how you analyze things there. TIA.
Title: Re: TSO's Request Corner
Post by: TSO on Mar 11, 2014, 12:54 PM
I'm not yet "hacking it good" but I'm getting there! Now that my partner and I decided to strike it out on our own, we got one of his i-banker friends to help us with the capital raising. They're dropping in $50K for a slice of the pie and in return, we're getting access to their black book of contacts AND assistance in reeling them in. ;) Give us maybe a few more months and if we're lucky, we'll be ending 2014 with a few mil out the gate.

Best I can do at the moment is give you my report on Teva Pharmaceuticals or National Oilwell Varco. The formatting's kinda dated, but the content is still good. Actionable in NOV's case, since it's still trading below $80.
Title: Re: TSO's Request Corner
Post by: bauer on Mar 11, 2014, 12:56 PM
@TSO,

you mean your on your own right now together with your partner analyst?
Title: Re: TSO's Request Corner
Post by: TSO on Mar 11, 2014, 01:25 PM
I suppose you could say that :)

I'm giving this whole venture til the end of the year, before I decide to go back.
Title: Re: TSO's Request Corner
Post by: george88 on Mar 11, 2014, 03:07 PM
TSO I've read a comment from Mark Cuban that there is a bubble in Silicon Valley? It's kinda obvious since a lot of tech companies valuated too much like WhatsApp, Snapchat etc etc.. Do you think there will be another Dot.Com bubble in the future?
Title: Re: TSO's Request Corner
Post by: TSO on Mar 12, 2014, 09:54 AM
Hey george!

Sorry, but I'm really following the energy sector and the US macro rather than techs, so I can't really give you a thorough answer on that.

However, I've read an article a few weeks ago that challenges Mark's thoughts, and the reasoning goes that, unlike the dotcom bubble, there are still too few tech IPO's dotting the investing landscape, relatively speaking, and that insulates the market from any bubbles bursting there.

sorry I can't be any more help...
Title: Re: TSO's Request Corner
Post by: george88 on Mar 12, 2014, 02:39 PM
Thank you TSO you always give a very good inside thoughts even you didn't give an answer... BTW... If I remember you plan before to start a of Hedge fund company in the Philippines you didn't pursue it? I'm not sure if that is you or the other guy who is good in TA and taking CFA in US 2 years ago
Title: Re: TSO's Request Corner
Post by: TSO on Mar 12, 2014, 11:30 PM
Thank you TSO you always give a very good inside thoughts even you didn't give an answer... BTW... If I remember you plan before to start a of Hedge fund company in the Philippines you didn't pursue it? I'm not sure if that is you or the other guy who is good in TA and taking CFA in US 2 years ago

That was someone else, evidently, but I don't know who that was. Even though we're both doing the CFA exams, I'm better with FA.

I wanted to pursue a HF in the Phil before, but at the time, I didn't have that much experience anyway. :P
Title: Re: TSO's Request Corner
Post by: akira0422 on Mar 17, 2014, 06:31 PM
Been awhile since my last visit... Wow congrats TSO!!!!!
Gud luck on your venture
Title: Re: TSO's Request Corner
Post by: akira0422 on Mar 17, 2014, 07:32 PM
Btw, if it's not too much huddle can I request for a quick scan or valuation for LPZ- lopez holdings. Thank you in advance!
Title: Re: TSO's Request Corner
Post by: TSO on Mar 18, 2014, 12:51 AM
Btw, if it's not too much huddle can I request for a quick scan or valuation for LPZ- lopez holdings. Thank you in advance!

> Market cap: P20.42B
> Company revenues are growing quickly over time (from P15B 2005 to P28B 2012 -- 9.33% a year for past seven years).
> Gross margins declining from mid-40's to mid-30's, suggesting inadequate cost controls or rising costs of doing business.
> At first glance, operating margins averaged about 20% since 2006 (including the outliers for 2006 and 2008) with quite a bit of volatility, but when scrutinized, we can see LPZ has been experiencing "unusual income" since 2007 and they are inflating operating profits. However, such income is historically volatile. When this is backed out, operating margins turn out to average 13%, including major outliers in 2006 and 2007. Volatility is NOT affected, as it still ranges from -6% to +21%. The lack of consistency does not make me any confident about Lopez's ability to control costs.
> There is also an immense gap between operating and pretax margins, so nonoperating items raise the bottom line. Scrutiny indicates this is coming from Lopez subsidiaries and affiliates. As I consider this operating (because Lopez exerts significant influence over these entities' operations and strategies), then by adding these, the average margin jumps to 30%.
> Tax rates have been consistently below 10% since 2009, and below 15% since 2006. However, there have been three years when it experienced 37%, 27%, and 23% effective tax rates. For valuation, 20% should be conservative enough.
> Asset turnovers are much higher in 2012 than they had been in 2004, but they are currently worse than in 2009 and 2010. This corresponds to an increase in PPE and receivables, so it doesn't have much to do with acquisitions.
> Equity multiplier (Assets ÷ Equity) has been falling from very high figures in 2008 and earlier, so Lopez has been deleveraging (or shoving them all away from the reported balance sheet if you want to be paranoid), so ROE can be seen as falling. To make matters worse, operating profits (with unusual income deducted and share of affiliates' profits added) to assets have shown little consistency and with no discernible trend, so any so-called competitive advantages don't seem to be reflected in the bottom line. With reported data, there is a discernible upward trend, but the OPA results are in the single digits. That still doesn't sound like a good company when I've seen better.
> Still remaining in leverage, we can see that liabilities as an absolute value dropped after 2008, so it does lend credence to the deleveraging idea. Regardless, adjusted operating profits has never exceeded 20% of total liabilities since 2003 except in 2010, which makes solvency questionable. Current ratios are also below the 2.0 rule of thumb.
> Free cash flow positive in all years except in 2005 and 2011, with CAPEX taking an increasing % of sales year-on-year. I would think Lopez is aggressively pursuing growth, but with operating profits the way they are? I don't think it'll really create a significant chunk of value unless they exercise more control over operating expenses and bring it to either a sustainable level or an upward trend.

As far as I can see, the surface numbers are a turnoff and I don't like the holding company as a result. But let's humor ourselves and establish a form of valuation using the following assumptions:
> Sustainable sales would be assumed at P24.14 billion, or 15% less than 2012 figures.
> Operating profits = 30% to reflect the equity in net income of affiliates and subsidiaries and remove the impact of unusual items such as "excess of carrying amount of obligation" or whatever.
> Taxes = fixed at 20% to be conservative. This has been below 10% in the past four years.
> CAPEX is currently at 18% of sales. So I'll go with this. D&A averages 15% of sales with much less volatility than the profit margins.
> Discount rate of 18%, which is 300 bps higher than my 15% Philippine default to account for the higher risk.
> LT growth = inflation = 5%.

Stagnation
Sustainable operating profits given the above assumptions would be PHP 7,242 million. This translates to PHP 5,794 in net operating profits after taxes. We add back PHP 3,621 in D&A and deduct $4,345 in CAPEX, resulting in "sustainable" free cash flows of PHP 6,518 million. Capitalized to an 18% discount rate, I'm getting an unadjusted value of PHP 36,211 million. Let's add PHP 6,300 in excess cash and PHP 200 in deferred tax liabilities, then subtract PHP 3,600 (current portion of LT debt), PHP 13,375 (noncurrent LT debt), PHP 3,237 (unfunded portion of pension liabilities), and PHP 1,570 in operating leases (using 2011 since Reuters has no information for 2012 at the moment). This results in net adjustments of PHP -15,282 million and a net stagnation value of PHP 20,929 million.

Given the current market cap, it looks like Lopez is trading right at its stagnation value and offering future growth for free.

Growth Expectations
Based on the above assumptions, the market appears to be expecting sales to decline by 1.21% a year over next seven years. If LT growth is at 2% instead, it is expecting a 0.64% annual increase. If the half-life model is used, the Y/Y expected sales growth jumps to 1%.

If I lower the operating margins to 20% and raise taxes to 30% but keep inflation normal, the expected sales growth is suddenly 10% with the half-life model, which is a repeat of recent history. Using the traditional DCF model, the expected growth is 12.21% a year. With current adjusted operating margins currently at 19.6%, Lopez Holdings better figure out how to retain more sales as profits and quickly.

Growth
Let's use an adjusted Gordon Growth model with the Half-Life adjustments, assuming that it loses competitive advantages to other holding companies after eight years. If I assume the company grows at 4.5% a year (half the recent past of 9.33%), the end value is P31.28 billion (35% MOS against current price / 53% upside). Making OPM = 25% would result in a value of P22.40 billion (9% MOS / 10% upside). If the company grows in-between the recent past and the 4.5% level, at a rate of 6.75%, then the value at OPM = 25% is P28.66B (29% MOS / 41% upside) and OPM = 30% is P38.94B (48% MOS / 92% upside). Even if we lower OPM to 21%, the value just equates to the current market price, so as long as the company grows at a reasonable enough pace (comparing favorably against the recent past even if it fails to surpass it) and slightly grows its profit margins and keeps it there, it becomes something that might just be worth holding.

Be warned that you may lose 30% of your investment in the long run, depending on how the company manages its costs, when it can no longer rely on its "unusual income", and how effectively it can keep growing sales despite its aggressive capital expenditure levels..
Title: Re: TSO's Request Corner
Post by: INDO on Mar 18, 2014, 01:09 AM
 quick scan pa lang ito, paano na kaya yung deep scan  :D :idol:

Thank you sir TSO  :cool2:
Title: Re: TSO's Request Corner
Post by: TSO on Mar 18, 2014, 02:59 AM
quick scan pa lang ito, paano na kaya yung deep scan  :D :idol:

Thomson Reuters helps speed up my quick scans.  :hihi:
Title: Re: TSO's Request Corner
Post by: akira0422 on Mar 18, 2014, 10:29 AM
Hi indo,you should try reading his deepscan it's about 40 pages long but it's worth every letter. I still look back at his edc deep scan he sent me earlier, it says a lot!!! Thnx TSO for the great contribution. You're right they must have been inflating things, and has no clear experience in driving cost down. They are suffering lower yoy income for the past 2-3 years if I'm not mistaken but current prices must have priced it in already? Hmmm. And again, many thanks!
Title: Re: TSO's Request Corner
Post by: INDO on Mar 18, 2014, 11:19 AM
thanks for the info akira :)

Sir TSO pwede bang maka hingi ng copy sa EDC deep scan mo? kung free of charge po, hingi ako kopya  :hihi: ito po email add ko: indomelorin@yahoo.com
Title: Re: TSO's Request Corner
Post by: TSO on Mar 18, 2014, 01:56 PM
Quick note about the deep scans:
a. I use a new format now that compresses the investment thesis, elemental analysis, and valuation into two pages and throws in a slew of information for reference and transparency's sake in the next seven. So it's cleaner and more concise.
b. The "40-page reports" that akira mentioned now refers to the full risk assessment I use to guide each report prepared.

And as for the EDC report, I don't know why you'd want it. That's about three years outdated, I think.
Title: Re: TSO's Request Corner
Post by: INDO on Mar 18, 2014, 02:04 PM
Quick note about the deep scans:
a. I use a new format now that compresses the investment thesis, elemental analysis, and valuation into two pages and throws in a slew of information for reference and transparency's sake in the next seven. So it's cleaner and more concise.
b. The "40-page reports" that akira mentioned now refers to the full risk assessment I use to guide each report prepared.

And as for the EDC report, I don't know why you'd want it. That's about three years outdated, I think.

ah ok... nabanggit kasi ni akira na you sent it to her earlier kaya nagka interest din ako, mali lang cguro interpretation ko sa post nya  :watchuthink:
Title: Re: TSO's Request Corner
Post by: GIG on Mar 19, 2014, 10:15 AM
quick scan pa lang ito, paano na kaya yung deep scan  :D :idol:

Thank you sir TSO  :cool2:

indeed
Title: Re: TSO's Desk
Post by: TSO on Oct 11, 2018, 07:53 PM
I suppose it's about time to revive this thread, now that I'm doing some analyses on my own free time to manage my US and PH portfolios.

For those who don't know me, I was very active on PMT about 7 or so years ago and was known to be an active proponent of Value Investing. I am still a value investor, of course, but aside from that I have also had the blessing of professional experience in the financial markets, my current status as a Level III CFA candidate (kinda holding off on finishing the certification until I have the time for it, because essays are a b*tch), and most importantly, the resources to finance a visit to Omaha, NE every year in May and watch my hero in action. My portfolios have done really well relative to their benchmarks and I believe I can expect more of the same in the future.

Compared to how I operated this thread in the old days, I will not be performing any Deep Scans. I simply do not have the time -- or the energy -- to delve deep into things the way I used to. My nimbler analyses -- my "quickies", as I like to call 'em -- require about six hours of work to do (compared to the two to four weeks required for the Deep Scan). I only research just enough to get an understanding of how the business operates and what risks they present to the value investor, but nothing more. Additionally, any requests that someone will give to me will not be automatically taken, because I am only going to look into things I find interesting. If I do accept it, eh, you'll see it when I post it. (I also plan on putting my work up on Investagrams at some point -- it will help with my long-term career goals.)

Investment universe I'll be covering: companies listed on PSE, NYSE, NASDAQ, and OTCMKT. My required rate of return is either 10% or 12% for public businesses. These will be higher for private equity or real estate, but that's for personal reference.

With that said, I'll begin with my first post in years.

------------------

PH: LR
Leisure & Resorts World Corporation
Assessed on: 10/10/2018
Market cap on common equity: 4.2 billion (3.50 per share)
Market cap on preferred equity: 1.7 billion (1.04 per share)
Recommendation: Buy

Risk: Level 5 (High)
Reasons:
Valuation notes:
Summary:
Title: Re: TSO's Desk
Post by: TSO on Oct 12, 2018, 04:21 PM
PH: ATI
Asian Terminals, Inc.
Assessed on: 10/12/2018
Market cap: 27.72 billion (13.86 per share)
Current dividend yield: 3.1%
Recommendation: Buy

Risk: Level 2 (Low to Moderate)
Reasons:
Valuation Notes:
Summary:
Title: Re: TSO's Desk
Post by: jenofstructures on Oct 15, 2018, 09:05 AM
thanks for this TSO
Could you analysis on CLI, ANI, or yung sikat ngayon.... IRC
thanks
Title: Re: TSO's Desk
Post by: TSO on Oct 15, 2018, 02:23 PM
Not interested in IRC.

The trailing three-year financial statements looks like a wild ride. Real estate sales is pretty much the only cash-generating activity of IRC other than non-cash income from increases in property values, and it's at 160m at the moment. Furthermore, the pre-tax operating income figures I'm seeing with IRC deflate significantly once I adjusted the figures, to -13.5, +11.9, and +7.9 for the years 2015, 2016, and 2017, respectively. That's an average of 2.1 million. IRC's enterprise value, at PHP 2.4 per share (or 3.2 billion in market value), is at 3.46 billion. So you have price-to-sales of almost 20x, EV/EBIT of 438x, and an EV/avg. EBIT of more than a 1000x. Even if I were to use the P/E multiple, it would only be positive if I included the non-cash "fair value gain on investment property" in the equation.


If that isn't bad enough, investors will also face potential dilution going forward, because IRC has increased its authorized capital stock from 1.5 billion to 10.5 billion. This means their investment can plummet by as much as 86%, which is what would happen if none of the new shares go to the current shareholders. What's the point of trying to get into the company before the Makati subway project and all the other infrastructure stuff kick in, when the value of their investment can and will be easily diluted away? The company isn't even making that much cash to begin with.

So no. Not interested. Pass. If you want to make money in this, go look for a trader to help you.




Title: Re: TSO's Desk
Post by: TSO on Oct 15, 2018, 03:04 PM
As for CLI, first of all, the Company has 1.714 billion shares outstanding in FY 2017, of which only 430 million is circulating in the stock market. This is currently down to 1.69 billion, so with CLI trading at 4.3 a share, that means the total market capitalization is PHP 7.27 billion.

Assuming CLI does not grow from here on out, you've got roughly 1.31 billion in net operating profits after taxes. If I were to capitalize that with my 12% discount rate, I'll get 10.5 in enterprise value. After adjusting that for excess cash, debt, and deferred taxes, you'll get PHP 7.59 billion in equity value. Much higher than the book value of 5 billion, so that's good.  ROE is presently at 26.7% (down from 51% in FY2016), so if that is actually something along the lines of 20% in the long-term, then you'll get something like 8.5 billion in equity value once you allow for growth. Let's go with 8.5 billion for the intrinsic value. Compared to the market price of 7.27 billion, you've got a 17% upside. Sounds good, right?

Well, even if the valuation sounds good, let's go over how risky the bet is. I've done not a single bit of research on the financial ratios or business matters of CLI -- precisely because its long-term record as a publicly-listed company is practically nonexistent -- so let's classify it as high risk. So that I have an appropriate margin of safety in my purchase, I need the company to be priced at 6.0 billion (PHP 3.55 per share) before I'll even consider put my money in it. If I'm more generous with its risk level and classify it as "moderate", then CLI must be priced at 6.8 billion instead (PHP 4.00 per share). Unfortunately, the current price doesn't offer a margin of safety high enough for me to be comfortable with my investment.

Furthermore, that's just assuming that the company's net operating profits after taxes don't drop below 1.3 billion year after year. What if it was just a fluke? What if the sustainable operating profits were, say, 1 billion? The value changes completely. The capitalized value falls from 10.5 billion to 8.0 billion, with zero-growth equity value falling to 5 billion. That's basically equal to book value, which implies the company either has no competitive advantage over other firms in its sector OR its management requires a more extensive scrutiny. If we were to apply the value of growth into it, then it would be PHP 5.6 billion instead. Now the company becomes overvalued.

Personally, I will pass on CLI as a long-term investment. I may put a small amount of my own portfolio into it, with the intent of selling within a year or so, but nothing more than that. I will wait a few more years before I check out CLI again.
Title: Re: TSO's Desk
Post by: TSO on Oct 15, 2018, 04:10 PM
Regarding ANI, it's had operating losses for years, going positive only in 2017 due to vast improvement in domestic distribution sales (rice trading business, wholesale of fresh fruits/vegetables, and fruit purees) and retail/franchising sales (fruit shakes, coffee, franchise revenues/royalties). Moreover, sales has been really inconsistent too. Also, market cap is presently PHP 13.75 billion. In comparison, net sales is PHP 2.1 billion (P/S of 6.55). Book value is PHP 1.46 billion (P/B of 9.42). EBITDA was negative for FY2015 and FY2016, but is about 190m in FY2017. EV over FY2017 EBITDA is about 66x too.

None of that sounds good to me, plus turnarounds aren't my circle of competence. So it'll be incredibly difficult for me to perform a thorough analysis of its fundamentals and estimate its intrinsic value. So, I'm passing on that too.
Title: Re: TSO's Desk
Post by: TSO on Oct 16, 2018, 12:46 AM
US: WPP (ADR)
Assessed on: 10/11/2018
Market cap: 13.58 billion GBP ($70.21 per ADR)
ADR Conversion rate: 5 shares each (approx. $14.04 per share)
Common shares currently trading on the London Stock Exchange for 10.675 GBP each.
Recommendation: Buy

Risk Rating: Level 3 (Moderate)
Reasons:
Valuation:
Summary:


The margin of safety provided by WPP is currently 20%. In addition, the company provides an average of 6% or 7% shareholder yield, with two-thirds of the value going into dividends. Thus, WPP should be a good buy even if the FOREX situation goes south.

Title: Re: TSO's Desk
Post by: jenofstructures on Oct 17, 2018, 03:34 PM
THanks TSO!

how about crown? mejo mabagal nga lang to
or phen sa power instead of meralco
Title: Re: TSO's Desk
Post by: TSO on Oct 18, 2018, 07:05 AM
I'll take a look at CROWN or PHEN later tonight.  Was pretty busy yesterday and should be busy later today due to work. (Company's having an exhibit in Mindanao and I'm obliged to attend.)

--------------------------

PH: PPC
Pryce Corporation
Assessed on: 10/15/2018
Market cap: PHP 12.15 billion (6 per share)

Risk Rating: Level 3 (Moderate)
Reasons:
Valuation notes:
Summary:

In spite of the stock's illiquidity and its cyclical exposures -- both of which make it a moderate risk -- PPC looks well-positioned. Management believes LPG is gradually becoming the fuel of choice and the TRAIN law recently passed as favorable to the industry. Moreover, it is shifting away from residential real estate and more on towards the memorial parks (read: cemeteries).

Although valuations suggest PPC is worth around PHP 7.15 a share, the implied margin of safety (18%) is borderline passing for a stock with a "moderate" risk rating. Whether this is adequate depends on further analysis of LPG markets in the Philippines and PPC's liquidity in the stock markets. If there's any comfort to be found at all, it's that the current market price implies an average forward 5Y CAGRs of 8%, a number that appears quite doable given its historical record. As for that time revenues fell in 2015, that was due to a drop in global LPG prices and probably doesn't reflect the rest of the business.

Finally, management has declared dividends for FY2017 (2% yield on current price). They intend for this to be persistent, so it is a good sign for the future.
Title: Re: TSO's Desk
Post by: TSO on Oct 19, 2018, 02:27 AM
PH: PHEN
Phinma Energy Corporation
Assessed on: 10/19/2018
Market cap: PHP 4,694 million (PHP 0.96 per share)
Recommendation: Buy

Risk Rating: Level 5 (High)
Reasons:
Valuation notes:
Summary:

Considering my estimate of PHEN's net reproduction value, it appears that the company is significantly undervalued. Even after averaging it all out, the figure of 7.87 billion represents a 40% margin of safety, which meets my criteria of adequacy for a company rated as "high risk". Now that sounds great at first glance, but the numbers do not support the notion that the company has phenomenal competitive advantages relative to other power generation companies in the sector.

Consequently, I think that PHEN falls under the category of a "cigar butt" -- a really cheap company (0.5 P/B and 0.3 P/S) with bad fundamentals (terrible financial ratios; EPV's negative implications on either mgt skill or competitive advantages) -- despite the fact it is operating in a growing industry (renewable power). I am of the opinion it's a buy, though I probably wouldn't recommend it as something worthy of large capital allocations. (Disclaimer: "Deep Value" or "Cigar Butt" investing is not my circle of competence.)
Title: Re: TSO's Desk
Post by: TSO on Oct 19, 2018, 11:13 PM
PH: CROWN
Crown Asia Chemicals Corporation
Assessed on: 10/19/2018
Market cap: PHP 1015.6 million (PHP 1.61 per share)
Dividend yield: 3.7% based on the three-year average of 6 centavos per share. (The FY2017 dividend of 9 centavos is approx. 5.6% of the current market price.)
Recommendation: Strong Buy

Risk Rating: Level 2 (Low to Moderate)
Reasons:
Valuation notes:
Summary:

CROWN is a family business with great fundamentals. The Villanueva family seems to have the problems of succession taken care of (at least that's what it looks like on paper) and the company is still investing considerably in its future growth. That 23% discount to estimated intrinsic value is more than enough to compensate for the risks in the stock, and with a hefty dividend yield on top of it, this is a great name to have in your long-term portfolio.
Title: Re: TSO's Desk
Post by: jenofstructures on Oct 22, 2018, 09:46 AM
thanks for the review. Hindi pa rin good ang PHEN. I wonder kung meron pa ba na maganda sa power. Mejo mahal ang meralco. I'm looking into SPC kaya lang hidni ko sya kilala
Title: Re: TSO's Desk
Post by: TSO on Oct 22, 2018, 06:14 PM
Heh, well, thanks to you, I found CROWN. That makes me happy :P

Also, I've redone my SHNG valuation in case you're interested in that. It's my real estate play (along with DD's preferred shares).
Title: Re: TSO's Desk
Post by: TSO on Oct 23, 2018, 01:59 AM
US: AIRT
Air T, Inc.
Assessed on: 10/23/2018
Market cap: $82.46 million ($40.35 per share)
No shareholder yield
Recommendation: SELL

Risk Rating: Level 3 (Moderate)
Reasons:
Valuation notes:
Summary:


AIRT is currently having problems with its "new" business model, and valuations do not look safe. A look at Shareholders Unite's article on AIRT in SeekingAlpha also shows that the current stock price is being inflated for no fundamental reason. Even if I ignore the other two valuation methods and concentrate on the DCFs, the value of $97 million only offers a 15% margin of safety, which is far too low for AIRT's risk rating. Because of the current situation, I recommend to sell AIRT if you have it or avoid the stock and wait for the stock price to crash. It is recommended to buy the stock at prices below $24 per share.

---

On a personal note, AIRT has been one of my longest holdings in my US portfolio. I've had it since 2011, when I first picked it up at $17 per share. The thought of letting it go just saddens me. I suppose this means I'll have to sell 70% of my holdings. (Gotta hold on to the rest; I COULD be wrong after all...) Oh well. Time to look for another stock!
Title: Re: TSO's Desk
Post by: TSO on Oct 23, 2018, 06:14 PM
US: BBAVY (ADR)
BBA Aviation PLC
Assessed on: 10/22/2018
Market cap: GBP 2,584 million (2.50 GBP per share)
Recommendation: HOLD OR SELL

Risk Rating: Level 2 (Low to Moderate)
Reasons:
Valuation notes:
Summary:
Title: Re: TSO's Desk
Post by: jenofstructures on Oct 26, 2018, 09:49 AM
where is your scan on SHNG po?
Title: Re: TSO's Desk
Post by: TSO on Oct 27, 2018, 03:07 PM
I asked if you were interested but you didn't reply, so I didn't bother putting it up, hahahahaha
Title: Re: TSO's Desk
Post by: TSO on Oct 27, 2018, 05:25 PM
Anyway, here it is.
---------------

PH: SHNG
Shang Properties
Assessed on: 10/20/2018
Market cap: PHP 14.77 billion (PHP 3.1 per share)
Dividend yield: 5% (based on average dividends of 740 million per year)
Discount rate: 12.47%
Recommendation: Strong Buy

Risk Rating: Level 3 (Moderate)
Reasons:
Valuation notes:
Summary:

This is a strong buy. All ratios other than ROIC figures indicate it's a wonderful business, and even the adjusted Piotroski F-Score averages at 7.2 out of 10. The dividends continue to grow as well (now a 5% yield based on the 4Y average dividends). The margin of safety is very wide.


I would argue that it's wide enough to even contain a catastrophic scenario in the real estate sector. I've tried crowdsourcing reasons for the sideways price movement on Investagrams, but unfortunately I couldn't get any solid fundamental reason other than the possibility of a real estate bubble. I actually made another DCF model that factored this (assuming that condo sales are completely wiped out for three years, hotel sales drop 30%, and SHNG's investment properties drop in value by 40%), but it resulted in something like a 10% loss for SHNG shareholders.


Considering how small I believe is the probability for a catastrophic scenario to occur in the Philippines' real estate sector, I'd still put money in the stock.
Title: Re: TSO's Desk
Post by: jenofstructures on Oct 29, 2018, 08:20 AM
^^^ i  thought you updated a certain post about SHNG. So nag-tried ako maghanap dito but not successful ha ha
Title: Re: TSO's Desk
Post by: TSO on Oct 29, 2018, 01:57 PM
PH: STI
STI Education Systems
Assessed on: 10/25/2018
Market cap: PHP 7.43 billion (PHP 0.75 per share)
Recommendation: Strong Buy

Risk Rating: Level 1 (Low)
Reasons:
Valuation notes:
Summary:
Title: Re: TSO's Desk
Post by: panitanfc on Nov 02, 2018, 03:40 PM
TSO, thanks for the valuation..matingnan nga ito.
Title: Re: TSO's Desk
Post by: TSO on Nov 06, 2018, 03:04 AM
PH: WLCON
Wilcon Depot, Inc.
Assessed on: 11/5/2018
Market cap: PHP 46.33 billion (PHP 11.30 per share)
Recommendation: Do not buy

Risk Rating: Level 3 (Moderate)
Reasons:
Valuation:
Summary:
- Bullish market sentiments over the stock is ballooning the price to a great degree, thanks to its very fast growth rate and, perhaps, residual optimism from the recent IPO a couple years ago.
- At the moment, there doesn't look like there's any point to ascertaining the long-term risk of the company (and thus the appropriate margin of safety to seek) when the current price is more than double that of the estimated intrinsic value per share.
- I suspect that WLCON would make a good short-term trade (say over a one-year period), but as an investor who likes holding companies for three years or longer, I wouldn't put my money in this company and will first wait until there's more publicly-available history to go by.
Title: Re: TSO's Desk
Post by: panitanfc on Nov 07, 2018, 03:47 PM
Sir Tso, can you ,make valuation with, PCOR, CHP and HOLCIM.GMA7
Title: Re: TSO's Desk
Post by: TSO on Nov 08, 2018, 12:24 AM
I already made one of GMA7 a few weeks ago. Didn't I post it?

Re: PCOR, CHP, and HOLCIM. Sure, I'll take a look at those three once I'm done with my current prospect in the US markets.
Title: Re: TSO's Desk
Post by: panitanfc on Nov 09, 2018, 08:48 PM
Tso, maybe you forgot to post it. I will appreciate it. GMA7 please
Title: Re: TSO's Desk
Post by: TSO on Nov 10, 2018, 02:53 PM

@ panitanfc: here you go.


----

PH: GMA7
GMA Network Corporation
Assessed on: 10/17/2018
Market cap: PHP 17.04 billion (PHP 5.07 per share)
Dividend yield: 10.1% on average dividends declared (FY2017: 17.4%)
Recommendation: Strong Buy

Risk Rating: Level 1 (Low)
Reasons:
Valuation Notes:
Summary:
Title: Re: TSO's Desk
Post by: TSO on Nov 10, 2018, 05:06 PM
US: CWH
Camping World Holdings
Assessed on: 11/9/2018
Market cap: $1,492 million ($17.03 per share). Note that both Class A and Class B shares are treated as one and the same.
Dividend Yield: 1.5%
Recommendation: Strong Buy

Risk Rating: Level 3 (Moderate)
Reasons:
Valuation:
Summary:
Title: Re: TSO's Desk
Post by: panitanfc on Nov 16, 2018, 09:58 AM
Tso good day,

Got any interest with AGI and ISM?
Title: Re: TSO's Desk
Post by: TSO on Nov 16, 2018, 02:52 PM
On vacation right now :P

With my gf. Hehe, gonna propose to her on this trip. XD
Title: Re: TSO's Desk
Post by: panitanfc on Nov 16, 2018, 07:32 PM
WOW that's great!!!good luck on that!All the best! I hope she will said YES!!!
Title: Re: TSO's Desk
Post by: TSO on Nov 24, 2018, 09:03 PM
US: IGGGF (HK: 799)
I Got Games, Inc.
Assessed on: 11/12/2018
Market cap: $1,539 million ($1.20 per share on the OTCMKTS, HKD 9.22 per share on the HKSE)
Dividend Yield: 5% (based on FY2017 dividends)

Recommendation: Strong Buy

Risk Rating: Level 4 (Moderate to High)
Reasons:
Valuation:
Summary:
Title: Re: TSO's Desk
Post by: GIG on Dec 03, 2018, 04:57 PM
I guess it was a yes, if inactivity is a good basis! congratulations man and welcome to the club!
Title: Re: TSO's Desk
Post by: TSO on Dec 06, 2018, 01:52 AM
Lol yes, she did accept :D

Inactivity explained by work though. I've had no time to conduct analyses lately.
Title: Re: TSO's Desk
Post by: jenofstructures on Dec 06, 2018, 10:58 AM
congrats TSO!
Title: Re: TSO's Desk
Post by: panitanfc on Dec 11, 2018, 11:09 PM
BOOM!!KASALAN NA!!
Title: Re: TSO's Desk
Post by: TSO on Dec 17, 2018, 12:22 PM
PH: CNPF (Century Pacific Tuna)
Assessed on: 12/14/2018
Market Cap: PHP 52.8 billion (PHP 14.90 per share)
Dividend Yield: 1.2% (based on FY2017 dividends)

Recommendation: Buy

Risk Rating: Level 1
Reasons:
Valuation
Summary:


Great company, with an 18.6% margin of safety embedded into the current market price. While this MOS is insufficient for my own standards (with respect to the level of risk presented by this company and the discount rate used in the valuation models), CNPF's economic moat and longevity may be compelling enough for other people to enter into a position with this stock. For me, I'll wait until macroeconomics plunge the value down to PHP 14 and below.
Title: Re: TSO's Desk
Post by: jenofstructures on Dec 18, 2018, 09:22 AM
EMP naman boss
Title: Re: TSO's Desk
Post by: TSO on Dec 20, 2018, 02:29 PM
@ panitanfc

Tried to start my evaluation of Holcim Philippines (HLCM). Couldn't access their consolidated financial statements. So I'm skipping that over, unless you have them.

Will soon check any of the others provided here (right now I can choose between Petron, Cemex, Alliance Global, and Emperador). Hopefully I'll have a little bit of free time before the holiday weeks officially begin.
Title: Re: TSO's Desk
Post by: TSO on Dec 30, 2018, 09:42 PM
Just checked Cemex Holdings Philippines. Big red flags for me were (1) the fact it just went public in 2016 -- which means there isn't enough history -- and (2) its offering prospectus is no longer available, preventing me from taking a good look at the stock.

What I DO see are pretty terrible. Net margins for 2016 and 2017 were in the low single digits (not surprising given this is a commodity business), and total asset turnovers were less than 1, which means ROAs are just bad. Days Sales in Inventory went up from 39 days in 2016 to 49 days in 2017, and days payables outstanding (computed using total OPEX and total operating payables, including the accruals) went up from 158 days to 227 days. Even if I took out "due to related parties", it'll still come out as 144 days in 2016 and 192 days in 2017. So... CHP is paying off suppliers, business partners, and related parties as late as they can? SMH.

Company is currently worth PHP 9.2 billion too. Since there isn't anything I can base growth off of, I'll just do a quick valuation based on its current earnings power. Operating profits is currently at PHP 2 billion. I don't know how much of that will be impacted by the ban on its subsidiary's mining operations, but let's say for whatever reason, the CHP can generate operating profits sustainably at PHP 1.8 billion. (Coincidentally, CHP's operating income for Q3 2018 YTD is 1.5 billion.) Set tax rate at 30% and... NOPAT of 1.26 billion.

My required rate of return will be 12%, but I'll assume that NOPAT will grow at the rate of LT inflation, which I expect to be around 4% over the super long run. So plugging that in... you get a value of PHP 16.38 billion. But wait! That's just enterprise value. We want EQUITY value. So we have to adjust that for financial liabilities (-13.74 billion), excess cash (well, it's pretty much zero in my book, but let's say they can do whatever they want with that PHP 1 billion in cash in the bank, so +1.06 billion), and deferred tax assets (+0.9 billion). Total adjustment is -11.78 billion, so that results in an equity value of 4.6 billion. If I reduced my required return to 10%, the calculated enterprise value would be PHP 21.84 billion, with PHP 10.06 billion left over for equity. Even less if I were to assume a portion of CHP's PHP 28 billion in goodwill to be suddenly impaired over the next five years (after all, companies are historically bad acquirers, overpaying for their acquisitions).

I suppose this means that you're getting growth for free, The top questions now are: how much growth are they going to get, and how are they going to compete against Holcim -- edit -- and cement imports on the Build-Build-Build thing? I haven't checked that out just yet.


2nd edit: I checked out COL analyst reports on the stock and noted that they expect sales to go up by 8% per year through 2021. If net margin averages at 4.5% (which happens to be the annual average of COL's expected net margins), then the intrinsic value should be at 2.7 per share. Thing is, when you compare 1.93 to 2.7, you get something like an implied 29% margin of safety. That's way too low for me; I'd buy only at PHP 1.62 per share, and even then, because of the high risk, my exposure would be limited, perhaps half or even a third of my typical allocations.
Title: Re: TSO's Desk
Post by: Rahl on Jan 21, 2019, 10:52 AM
Sir TSO, bought my SHLPH stocks during it's IPO and held on to it since it is my very first stocks. After two years and almost 30% paper loss, I'm thinking of selling it na and just suck up the losses. Any advice?

Thanks bro. And thank you for all your analysis here on the thread.
Title: Re: TSO's Desk
Post by: TSO on Jan 22, 2019, 12:55 PM
Oooh... you bought a stock during the IPO? Dude, first thing first: if you're gonna buy a stock that's going public for the first time, do not buy it for the long-term, because initial post-IPO prices will be significantly overvalued. You buy companies at IPO prices with the intent of flipping over the stocks within the next few days (or a week at max).

If you're eyeing the company as a long-term investment, you need to wait until at least a few months AFTER the IPO.

As for SHLPH itself... well... if I'm just STRICTLY gonna rely on valuation... I'd argue that the company could generate about 10 billion a year in operating profits. That should be more or less 7 billion after taxes. Assuming it grows at a rate of 4% a year (long-term inflation rate of the Philippines) and a discount rate of, say, 10% (the recent long-term annual returns of the PH stock market), You'd have 121 billion in enterprise value. So... from that... accounting for +2 billion in excess cash, +4 billion in long-term receivables/rentals/investments, and -15.7 billion in debt and deferred tax liabilities... you'll have an adjusted value of PHP 111.3 billion. With current shares outstanding at 1613.44 million, that equates to an average value of PHP 69.

SHLPH right now is trading at 76.23 billion. That translates to 47.25 per share. The implied margin of safety is 31.5%.

ASSUMING you bought your shares right out the gate, that means your average per share price should be around PHP 75 each. Yet the value right now is PHP 69.

Now I don't know the risk level of the company -- and that's pretty important to me because that and the discount rate I selected directly influence the margin of safety I demand --  but let's say you need a minimum margin of safety of, uh, 20% to be satisfied with your position. This means you need to reduce your average price from PHP 75 to PHP 60. I do not know how much money you need to invest to average it down to that level, but if you can (1) afford the averaging down and (2) keep your portfolio exposure to SHLPH below your maximum tolerance (mine is somewhere between 10% - 15%)... then keep SHLPH and average down. If you are unable to do any of those things... just sell it and suck up the losses.
Title: Re: TSO's Desk
Post by: Rahl on Jan 24, 2019, 10:59 AM
if you're gonna buy a stock that's going public for the first time, do not buy it for the long-term, because initial post-IPO prices will be significantly overvalued.

Lesson that will forever be etched in my memory. Thank you very much TSO.
Title: Re: TSO's Desk
Post by: Yamnjack on Jul 29, 2019, 11:12 AM
Heard of All Home doing IPO in September. Very interested. Hope will not regret it though. Heard its going to be priced low.
Title: Re: TSO's Desk
Post by: TSO on Aug 06, 2019, 12:19 PM
If you're gonna go in that stock, then be careful. Again, there is a tendency for newly-listed stocks to normalize a few weeks after the IPO.

Get in, trade out at a profit, then HOPEFULLY you'll have an opportunity to invest later.

If not... eh, you made some money. There's always another LT investment available.


Title: Re: TSO's Desk
Post by: TSO on Aug 06, 2019, 12:20 PM
Also, to anyone following me here on PMT, note that I've moved over to Investagrams under my full name ("The Silent One").

Username: @somni206

I cover both PH and US securities. See you there! :D

And follow me XD
Title: Re: TSO's Request Corner
Post by: Gabrial on Aug 30, 2019, 02:23 PM
Since I haven't posted my analyses here for a while, I'll be putting up the following over the next week or two:
- Diamond Offshore (NYSE, DO)
- Iridium Communications (NASDAQ, IRDM)
I will not post Holcim Ltd. until these two are done.

I'm currently working on SAIA Inc. (NASDAQ, SAIA) and Pacific Online Systems Corporation (PSE, LOTO) simultaneously. SAIA has just finished data entry phase. As for LOTO, while my past spreadsheets back in 2010 have "forward compatible" to the current incarnation of my analytical framework, so this should speed up the data entry phase.

TSO out.

Hello everyone,,
This is a gold mine FE "companies that constantly rely on foreign-exchange transactions and exposed to related exchange rate fluctuations."

simple yet practical - na alala ko ng dekada 90 maraming kumpanya nalugi na may utang na dollares.

Bili ako ng TDY at LOTO
Long ako sa EURUSD

Buy Peso Sell Dollar..
Title: Re: TSO's Request Corner
Post by: Gabrial on Sep 07, 2019, 07:10 PM
by the way on nat resources.... APC seemed a geotherm+mining +infra company... penny stock but seems ok fundamentally at a glance... i did a glance screening 2days ago... ther prospects are gud, though a few mining sites waiting for jv and funding... they seemed to be forging a partnership with bel and lr din... catch is that itys a little overbought and ratios are not to gud - i gues at 80% current ratio...

anyway back to edc...
is it ok to ask the most beasic question? i seem not to fully comprehend this one.
1. How does a geothermal energy producer profit? - (on a capacity production basis, usually how much to they earn per kilo/ megawat/hr they produce, versus the cost of generating it? vs cost of putting up the plant or Maintnce... it seems that currently one of the most efficient way of producing enegy is geothermal (i wont agree with wind or solar--)however it is not the most popular choice in the power sector.
2. y does the impairment penalties cost so much? esp, for a plant with relaticvely small capacity.
3. how much would renewable energy act affect its revs and profits...
4. what will be the targeted date for production and partial return of investment, esp on the note on offshore projects...

on the side... i think renwable energy act is just a bluff... but kodos ot EDC...the no. 1 geothermal energy producer in the world!!!
thanks TSO....

Hello everyone,,
TSO, your questions about PETRON's business plans are valid and deserves an answer.

AS i see it in the global front, most of the biggest oil producers are veering away from refining business and concentrate all their resources in oil exploration and delivery.

Worldwide, there is a dent on demand from refining.  It is too expensive to operate a refining plant.  Competition is too strong.  There is no government incentives for local refiners.  I do not know how PETRON will survive in the short term after carrying a huge debt load...