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TSO · 398 · 85926


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CEB - PSE , thanks in advance sir TSO.


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@ Choichoi:

I won't analyze CEB. Available financial information doesn't fit my standards. Sorry.


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It's ok sir TSO, how about JFC - PSE?


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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: Feb 18, 2011, 09:03 AM
Air T, Inc.
Country: USA
Stock Ticker: AIRT
Industry: Air Delivery & Freight --- Contract Cargo Carrier niche

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.    

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.  

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.

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. ^^
« Last Edit: Feb 18, 2011, 10:27 AM by TSO »


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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.
Country: Philippines
Ticker Symbol: TDY
Industry: Distilled Spirits

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%.

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.

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 even goes far as to say:

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 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.

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.

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.


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Reply #20 on: Mar 06, 2011, 09:27 AM
Mabuhay Vinyl Corporation
Requested by: Myself
Level: Screening
Country: Philippines
Stock Ticker: MVC
Industry: Chemicals - Chloralkali

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.

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, 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). 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, 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.

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.)

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.


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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


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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.)
« Last Edit: Mar 06, 2011, 10:27 PM by TSO »


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Hello TSO , medyo OT ako

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

pls send to

thanks in advance!


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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.


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Reply #25 on: Mar 29, 2011, 07:53 AM
Level: Screening
Country: US Pink Sheets
Stock Ticker: NTDOF
Industry: Video games -- hardware manufacturer and software developer


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.


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.
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.
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.
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.

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: 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 ( 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.


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.  


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.
« Last Edit: Mar 30, 2011, 09:09 AM by TSO »


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Reply #26 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

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.

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 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.)

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.


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.
« Last Edit: May 06, 2011, 12:35 AM by TSO »


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you made a very good analysis on alaska.

i will try to allocate some funds in the future when price is more attractive.


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Reply #28 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


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


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.

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, 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, 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.
« Last Edit: May 20, 2011, 01:12 PM by TSO »


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Reply #29 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


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