Does M1 Deserves it Current Predicament?

Many months ago, I calculated the book value per share and debt-to-equity, as well as ROE of the three telcos, and surmised that the balance sheet of Singtel is the strongest of them all. It was also the cheapest company based on book value per share.

I shared this little piece of information to a forum and was pointed out, by a rather senior member of the forum, that Starhub was trading at a huge price over its book value because most of its assets had been written down to zero. Part of them could be the cable business.

As such, I shelved my interest in all telcos, but recognize the attractive dividends that Starhub and M1 paid to their shareholders. However, Singapore is a small market for a mature industry.

Recently M1 announced a dramatically decrease in revenues compared to its quarter last year. I think perhaps a comparison over the Return of Invested Capital (ROIC) over a period of 10 years would be a fairer means of checking which is a better telco, since their balance sheet composition are, possibly, vastly different.

My method of calculating ROIC would be

taking Net Operating Profit after Tax (NOPAT), without taking into account interest charges,
and taking this sum,
divide by Invested Capital, which is all Debts + Equity

M1's annual reports are available at
https://www.m1.com.sg/aboutm1/investors/annualreports

and the figures used would be from 2006 to 2015, in thousands unless specified.

2006
NOPAT = 174839
Invested Capital (IC) = 631968
ROIC = 27.67%

2007
NOPAT = 171801+ 9472 = 181273
Invested Capital = 201,911 + 250,000 + 35,000 = 486911
ROIC = 37.23%

2008
NOPAT = 157687
IC = 473232
ROIC = 33.32%

2009
NOPAT = 156764
IC = 525113
ROIC = 29.85%

2010
NOPAT = 162901
IC = 618894
ROIC = 26.32%

2011
NOPAT = 170021
IC = 625847
ROIC = 27.17%

2012
NOPAT = 151991
IC = 619914
ROIC = 24.51%

2013
NOPAT = 164665
IC = 645096
ROIC = 25.53%

2014
NOPAT = 179821
IC = 696570
ROIC = 25.82%

2015
NOPAT = 183400
IC = 767013
ROIC = 23.91%

2016 (3 quarters announced so far.)
NOPAT = 117.9M + 4.7M = 122.6M
IC = 772.4M
In order for M1 to maintain last year ROIC,
Assuming it maintains its debts and equity,
it must post 62.08M of profits in the last quarter this year...

One would take note that it was performing well in 2006-7, and dip dramatically from 2008-10, didn't perform too badly between 2010-4, but started sliding down for the last two years.

In summary, this year's ROIC could well be the worst performing year for M1 in a decade. Perhaps, in the next post, I will look at Starhub's.

Recommended Book List (as of 23-Oct-2016)

A year had passed since I bought my very first stock.
I attributed whatever profits and desire to learn from my losses in the stock market. Since then, I read a few books and think that they wouldn't hurt any investors.

Must reads: 
The Five Rules for Successful Stock Investing
The Intelligent Investor

Good to have:
F Wall Street
Introduces bond laddering, DCF with existing equity in mind, cash yield%, etc.
One Up on Wall Street
The Little Book on Big Safe Dividends
Common Stocks and Uncommon Profits
Michael Burry's posts on MSN Money (Brilliant value investor, do not let his reputation in "The Big Short" cloud your impression of him)

Wish I can understand, but couldn't:
Aswath Damodaran's books (Investment Valuation, Little Book of Valuation)
Security Analysis

There you go, perhaps one day I will add more.

An Arbitrage Trap of Sorts

Investors trying to profit from Twitter's possible buy-out deal are burnt badly twice just this month. With Disney, Verizon, Google (somehow I think they are best suited to buy Twitter) walking away, the news of Salesforce deciding not to "rescue" Twitter left Softbank as the only _rumoured_ entity to be interested.

Never ever get involve in an IPO; it was sold at 69/share at its height

I personally think there are a few reasons why this is a not an opportunity for an arbitrage
1) Twitter management did not show any interest to be acquired
2) There were no official talks announced, as such anything is speculative.
3) They are not in a dire situation yet; They have about 3B in cash and about 1.5B in debt, with a total of 2B in liabilities. The problem is profits are not coming, equity dilution, tons of stock-based compensation for employees.

As such, this isn't a distressed opportunity and neither is Twitter undervalued.

What I think about Insider Trading

Just today, I was alerted by the very useful SGX Mobile iPhone app that Sing Holdings (5IC) is likely to secure a land parcel for development from Urban Redevelopment Authority.

This wouldn't raise an eyebrow except that Sing Holdings recorded an extraordinary, unexplained increase of about 10 percent within a single day, with large volume.

There were no news released that day (at least officially), and this is probably attributed to some kind of insider trading.

I have already sold my shares in this company because I think I need to revise my idea of an asset play. Whether the market decided to act otherwise is not in my control nor my interest... I need to hold forth to my ideas stubbornly.

But I do have some views on insider trading.

Firstly, they are, definitely something we can do without, for it propagates the idea that in order to make a decent amount of money from the stock market, you need to have insider information. You can never eradicate insider trading with regulation...

Secondly, it takes some courage to act upon insider info. Let me explain.. for instance, an associate will advise me that company ABC is going to announce that they have secure a large project, and it is best to act upon it.

My first question will be: How big is this project? The second question will be: When will it happen?

It is also foolhardy to assume that the catalyst will happen within days. For instance, how would you felt if the price plunged by 1%, with a slightly larger than normal volume? Would you steadfastly held on? After all, technical analysis is about reading crowd emotion and by buying on insider information, you are influenced by a mere 1 person, how about more?


If a certain Mr Schloss could hide inside a small office, meet no management, and yet make plenty of money, why not?

And it falls...

After a couple of post about warning signs (as gleaned from William O'Neil's book about market topping off), the markets, without any warning, drop about 2.3-5 percent last night.

The book mentioned about market "stalling," which means neither having a clear up or down direction (in short, a doji), and increased volume over the previous day. This hints of institutional selling.

The market has already hit new heights since post-Brexit and investors should have taken care not to "pay a fair price for a good company," and insist on a good margin of safety.

Singtel

Singtel (SGX:Z74) shares declined to a price of 3.97 today, which somewhat brought attention to some investors. The man in the street might not know this but Singtel is the biggest company by market capitalization in Singapore. It is also generous with dividends.

I guess most investors are keen in Singtel for the dividends and not capital gains.

As you can see, Singtel's share price barely moves from 2009-2012 and then moves up another notch in 2013 and been such ever since.

That is the share price, let's take a look at earnings.
Year - Earnings Per Share (EPS) in cents
2016 - 24.26
2015 - 23.73
2014 - 22.87
2013 - 21.96
2012 - 24.97
2011 - 23.98
2010 - 24.46
2009 - 21.60
2008 - 24.76
2007 - 23.13
As you can see, EPS is largely the same over the last decade.

Singtel isn't the type of share that I will be interested in for a couple of good reasons
1) Largely no growth possibilities other than major M&A overseas.
2) No exciting new products.
3) A very large dividend payout ratio. It is paying out about 2.7 billion out of 3.8 billion of retained earnings in the last year. Below screen captured from Singtel's latest annual report...

 Out of 3.870B of earnings, it is paying out 2.789B, which translate to a 72% payout.

I think a growing dividend is not possible with this type of company... a growing dividend usually translate to a growing share price as well. If you are looking to acquire Singtel for dividends, it will be a better bet than Starhub, that is for sure, having a way better debt to equity ratio and lower dividend payout.

Signs of Market Topping?

Here comes another possibly futile exercise in chart reading.

All four major indexs, the dows, s&p, nasdaq and nyse composite are showing signs of selling off with increase volume.

Perhaps, at the very least, it is time to take profits on stalwart or slow grower stocks, particular those that are on leverage.

Notes from Chapter 5, "The Defensive Investor and Common Stock"

One of my favourite book is "The Intelligent Investor" and chapter 5 describe principles that a defensive investor (one who wish to be free from worry, in other words, passive) should look for.

4 rules were prescribed

1. Diversification of between 10-30 securities
2. Companies involved should be large and modestly-financed. This means a certain amount of market capitalization and manageable debts
3. A long record of dividend payments. 20 years might be a good start.
4. PE of average earnings of less than 25, no more than 20 for the Trailing-Twelve-Months (TTM) PE. Note the term "average earnings." Earnings tend to fluctuate all the time, hence an average PE might make more sense especially when a company might have only 1 good year out of 5.

The idea of Dollar Cost Averaging (DCA) is also broached, with almost guaranteed satisfactory return at the end of such implement, despite liquidating on a bad year.

The excellent commentary by Jason Zweig talks about the danger of "buying what you know" (made famous by Peter Lynch) without making the necessary research. Complacency in buying stocks, especially if it is something familiar to you, is nefarious as an investor.

DCA into index funds is stressed once again, as disciplined buying will enable one to have gains even during the worst bear market.

Calling Market Tops? I won't try.

Lying among my favored "The Intelligent Investor," "One Up on Wall Street," and many others is a book on momentum investing, "How to Make Money in Stocks" by the legendary William O'Neil. Mr O'Neil is a mentor to David Ryan, multiple winner of the U.S Investing Championship.

In summary, this book talks about

• various chart patterns that will lead to an explosive increase in prices (cup with handle, tight flag, etc)
• stocks that react accordingly usually have the attributes of C.A.N.S.L.I.M

What is more interesting to me is that the book claims to be able to tell market topping just before a major decline. Re-reading what was said in 2000-March, it cited 3 days (not consecutive) of warning signs. The only takeaway for me is to be careful of dojis, and stay focus on volume increases (even though the example wasn't really obvious!) that result in a drop... this is highly confusing and definitely happening all the time.

The 3 indexs, SP500, DJ and NASDAQ is lay down below:

I can only note that towards the end of July, the Nasdaq and DJ were inversely correlated.
On the whole, I could only point out 2-August as a possible red flag.
August 8-10 was extremely worrisome, but like how the market will often make a mockery of us, August 11 was a bullish movement.

Volume for the past two weeks wasn't spectacular, the last trading day, 19-Aug, was a typical hammer but there wasn't any discernible trend going on.

Predicting market movement is as tough as nails.

Self Doubt

Very few of us can beat the index. Yet much of us spend a lot of time analyzing companies, looking at stock charts and reading news, in an effort to move closer to our goals.

Once, a dear friend asked me, “What is your investment target?” I don’t have much positive traits but I think my honesty outweighs my humility, and I replied that I simply have no idea.

I do not have a quantifiable target, nor do I have a relative target. What that means is that I do not have a numerical target for returns (i.e. “I want 15% returns this year!”), nor am I seeking a >2% return better than the index.

I am only 10 months into this game and I am too early to set a target.  Even legendary investors have years, at times consecutively, have lost to the index, or even worse, lost money.

So why am I,

… son of labourers with no experience in investing,

… not financially trained (I had a diploma in a computing field, and a degree in liberal arts),

… not in the finance industry

... a lowly paid IT-support staff in a local university, with no insider knowledge in the finance or financial education industry,

… having no dealings with people of finance or high social standing

…doing in the stock market?

There are numerous times that I questioned my investing abilities.

“What if I am wrong?”

There are times earlier that I do capitulate and suffer from “break-even-itis” (selling at break even prices and proceed to watch the stock soar).

My friends had berated me for being negative. Will I able to get a grip during a bear market?

Investing is a testy proposition. The stock market can taunt you, rock your confidence, and sour your moods. 

You can feel like the loneliest person around.   

Your friends will question your intelligence. 

You go home to your loved ones and wondered if you can ever repay the faith or effort they have invest in you.

I can only have faith.

Undervalued Companies: By what definition?

By and large, there are 3 simple ways of describing a company as undervalued. To define the term undervalued would to say that the stock market is offering you, a buyer, a price that is worth less than what the company is worth, in 3 ways:

1) By assets

This involves looking at the balance sheet of the company and assessing if the composition of the assets are sound, versus the liabilities listed. This also involved looking at the Notes listed afterwards for hidden liabilities, which can be law suits, or even leased items that can generate huge costs.

As most assets goes, usually the most "reliable assets" are ranked roughly as such,

i) Cash/Equivalents (bank deposits)

ii) Land/Property at cost

iii) Land/Property at fair value (market price, as valued by professional valuators)

iv) Accounts Receivable that are largely secured and not having a trend of increasing late payments, be it quantity or by days due.

The "unreliable assets" include

i) good will

ii) intangible assets

iii) assets classified as loans with dubiously high interest rate and/or unsecured.

iv) plants and equipment that are obsolete, or very little resale probability.

Catch: Companies who are human-capital intensive will fail to make the cut. Old companies with assets that are either depreciated (tangible assets) or amortized (intangible assets) will be screened out as well.

2) By Discounted Cash Flow valuation or sophisticated ways of quantitative valuation

Designed for companies with very consistent yearly cashflows and preferably consistent and low capital expenditures. The companies are assessed for its durable competitive advantage, which can be classified by

a) size of company in relative to competition

b) intangible/brand name assets that makes the end-user pay more solely for that.

c) unique access to a resource, either by geographical reasons or regulations.

d) high switching costs

An expected growth is computed for a defined number of years, and the total cash flow is discounted based on how risky the analyst think the company is. The number of cash generated is then divided by the amount of shares available and compared to the market price. If there is a significant difference in the favor of the buyer, this is constituted as "a margin of safety" and can be reliably purchased.

Catch:
a) Growth stocks will likely fail the cut, but discounted cash flow valuation is usually done by conservative investors anyway.
b) Companies who are by and large cyclical, that is, with earnings that are seasonal or project-based, will probably be hard to value.

If you are very lucky to get a company that is cheap based on (1) and (2), I regard that as a very safe purchase.

3) Cheap by Relative Valuation

By using this method, you are implicitly subscribing to this theory that the markets are always efficient, in that the market always price the stock correctly.

The last type of "cheap" companies are companies that are relatively cheap by comparison.
This involves comparing the company with
a) Its peers in the same industry and comparing their
   i) Price to sales
   ii) Price to cash flow
or even iii) Price to book value.

b) Ranking the companies in a reliable Index, such as S&P 500, Straits Time Index, FTSE, etc, and sorting them by its Price-to-Earnings or even just by the loss in price. The last few companies are then examine for its business qualities and then purchase. The idea is that the worst performers usually do well in the future.

I think this approach might be testy, and a lazy investor may be hurt very badly. Also, the market can be right at times, and companies can fall off the index due to failing to make the index's required market capitalization. Companies who suffer this fate usually don't recover largely because institutional buyers who not be interested in these companies, for fear of reprimands when the purchase don't bode well.

This is my opinion of how stocks are generally regarded as cheap, and my favorite approach is (1) and (2).