Monday, September 28, 2009

How To Analyse An Annual Report

MANY of us receive a lot of annual reports every year.

Even though we are aware that there is a lot of important information in the reports, not many of us are willing to spend time going through those reports before buying stocks.

Besides, it is quite difficult for some investors, especially those who lack proper financial training, to analyse the financial information.

In this article, we will provide a quick guide on how to analyse an annual report.
Given that there are many ways to dissect an annual report, the following six pointers are just a quick check on the financial health of any listed companies.

Income statement is the financial statement that shows the effects of transactions completed over a specific accounting period.

In this statement, we have three key pointers: the current level of revenue; high growth in revenue; and the profits made in proportion to the level of revenue.

The current level of revenue indicates the size of a company. A company with revenue or sales of RM1bil is definitely bigger than one that has revenue of only RM100mil.

In Malaysia, companies with revenue of RM500mil and above should be considered as more established companies.

High growth in revenue implies that the company has been expanding over the past period.
Assuming the high growth in revenue will eventually translate into high growth in profits, we should invest in companies with higher growth in revenue because this may lead to higher stock prices.

If the overall economy is expanding, avoid those companies that are showing a decline in revenue.

This might imply that the overall operating activities of the companies are declining.

The profits made in proportion to the level of revenue indicates whether this company has high or low profit margins in its products. The profits here refer to the profit after tax or net income.

We should invest in high profit margin companies because high profit margins will provide a cushion to the sudden change in operating environment. A company with revenue of RM1bil and profits of RM10mil is more likely to face tougher challenges in a stiff price competition environment compared with a company with revenue of RM100mil and profits of RM10mil.

Balance sheet is the financial statement that shows a company’s assets, liabilities and owners’ equity at a point in time. The two main pointers in this statement are cash in hand and total borrowings.

Cash in hand refers to the cash or cash equivalent like fixed deposits. If possible, we should invest in companies with high cash in hand and zero borrowings. High cash in hand may imply that the company has high chances of rewarding shareholders with higher dividend payments.

Besides, companies with high cash in hand have more financial stability than companies with very tight level of cash. This explains why most investment gurus like to invest in cash-rich companies.

Total borrowings include the short- and long-term borrowings. Here, we should check whether the company has reported any sharp increase in borrowings during the financial periods. Most companies need to increase borrowings to support their capital expenditure on any business expansion.

However, if a company has been increasing its borrowings each year and the level has far exceeded one to two times the shareholders’ funds, unless its operating activities are able to support the repayments, the company faces very high financial risk.

Cash flow statement shows the sources and uses of cash over the period. One very important pointer in this statement is the operating cash flow.

High operating cash flow implies that the company is generating cash from its operating activities. A healthy company should show high operating cash flow because this number will indicate how much actual cash the company has generated from operations during the period.

We need to be careful of the companies that are showing profits but at the same time generating negative operating cash flows every year. This may imply that these companies have very high receivables. Any economic downturn may cause a sharp increase in provisions on bad debts.

Lastly, investors need to understand that the above six pointers are just a quick guide to analysing any annual report. Serious investors should not only analyse these six pointers. They are advised to scrutinise the reports further for more details.

Wednesday, September 23, 2009

Outlook For Malaysian Bourse Bright

PETALING JAYA: The general outlook of the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) remains bright, according to some local and foreign brokerages.

AmResearch Sdn Bhd, amongst the brokerages which join the upbeat prognosis, had raised its fair value for the FBM KLCI to 1,350 points from 1,190 based on 2010’s price earnings (PE) ratio of 16.5 times.

Managing director and regional head of equity research Benny Chew said in a report the anticipated correction phase in the third quarter of this year “may be behind us,” or at least “the risk of pullback was dissipating.”

He said there were still lingering worries over valuation after the steep run-up in share prices but the macro environment flushed with liquidity was most conducive to the equity market.

“More importantly, macro fundamentals are now pointing towards a start of a growth cycle moving into the fourth quarter. There is less doubt over a global economic recovery. Inflation expectations are muted, implying that the interest rate cycle is not going to rise anytime soon,” Chew said.

AmResearch is forecasting gross domestic product to expand by 3% in 2010.
Chew said historically, an earnings-driven re-rating from trough to peak of the market had never been shorter than 12 months.

“Rally in 1998/99 and 2001/02 sustained for 16 months and 12 months respectively. This present rebound is just six months from lows seen in March,” he said.

AmResearch has forecast corporate earnings to expand by 17% in 2010 or more than two times faster than its trend-average growth rate of just 7% in 2000 to 2009.

The Institutional Brokers’ Estimate System consensus earnings have bottomed, with nascent signs of upgrades taking hold while earnings surprises in the early phases of a recovery should be significant.

AmResearch expects the revision cycle to gain traction. It said earnings drivers of the heavyweight sectors, such as banks and plantations, were solidifying.

“With global economies on the mend and recovery gaining traction, we believe bank earnings could surprise on the upside. We expect banks to sustain earnings in the current year and to deliver a 15% improvement in 2010,” it said, adding that the improving industry outlook could see a return of the dividend theme as banks were well capitalised.

AmResearch is also positive on the plantation sector as a shortfall supply of palm oil was expected to sustain crude palm oil (CPO) prices.

“We reckon CPO prices should rise to between RM2,300 and RM2,500 per tonne as production enters a low output period moving into the fourth quarter,” it said.

The research house was “overweight” on the auto sector on expectations of 50% earnings growth for its auto portfolio in 2010 on the back of a recovery in total industry volume, which came off a low base in 2009 where it expected a 34% contraction.

According to Merrill Lynch’s fund manager poll for September, optimism over the overall global recovery remained strong.

“A net 72% of investors expect the economy to strengthen over the next 12 months. Yet caution exists on the shape of the recovery, with 72% of investors forecasting below-trend growth and below-trend inflation,” it said.

Merrill Lynch has rated Malaysia as “underweight”.

Kim Eng Research Sdn Bhd said there were clearer signs of rebound in Malaysia as seen in semiconductor, CPO and even property sales.

“The stock market has risen 33% year-to-date but still lagged other Asian bourses. Valuation have just broken out of the post-Asian crisis resistance level of 16 times and trading at financial year 2010 (FY10) PE ratio of 17 times on earnings per share growth of 17%.

“We opine it needs strong catalysts for the stock market to continue its northbound track, failing which it could settle back at the resistance of 16 times of around FBM KLCI 1,100 points,” it said.

Among its top big-capital picks are Genting Malaysia Bhd and Hong Leong Bank Bhd.
“We find mid-caps like Muhibbah Engineering (M) Bhd, EON Cap Bhd, Kulim (M) Bhd and Supermax Corp Bhd offer better bargains,” Kim Eng said.

Nomura Securities Malaysia Sdn Bhd said Malayan Banking Bhd was now one of its top large-cap picks while Alliance Financial Group was one of its top small-cap picks.

Nomura said banks, supported by an economic recovery and an earnings upgrade, would continue to outperform despite recent gains.

“To reflect the better-than-expected domestic credit conditions, we’ve raised Malaysian banks’ FY10 earnings estimates by an average of 15%,” it said, adding that banks were expected to start lending again as the economy recovers and stock markets rebound.

Nomura said banks have rebounded by 19% to 79% year-to-date. “But judging by past performance, where they rebounded by more than 200% after the 1997/98 recession, we expect more upside to their share prices.”

Tuesday, September 15, 2009

Featuring World-Renowned Investor Jim Rogers

As an investment guru, what is your advice to someone with little money and no expertise when it comes to investing on Bursa Malaysia? Why is it so hard to make money, but so easy to lose it? – Bulbir Singh, Seremban

I would suggest you continue to save your money, read and learn about investing. People get swept away by emotions and hot tips. It is easy to rely on other people but investing is something you must do on your own.

My strongest and most obvious advice to everyone – and I plead to people about this all the time – do not invest in anything unless you know a great deal about it. Just wait, and if there is something they know a great deal about, then invest in that. That is the only way to make money.

Subscribing to early wealth accumulation, if there is a single piece of advice on smart investing skills for young teenagers, what would it be? – Stephanie Teo

Have your own passions and pursue them. If you want to be a gardener, be the best gardener that you can be. Do not do what your parents or your teachers tell you to do. Follow your own passions.

You cannot be much more successful than doing what you want to do, and you will have a lot of fun in the process.

This decade is recommended by some investment gurus to be the decade for the commodities. Which commodities like oil, liquefied natural gas, gold, uranium, rare earth metals, copper, iron, timber, wheat or water will perform the best, you think? – James Ngu, Sibu, Sarawak

I have no idea which is the best. All of the above are good. There are shortages in developing all of the above. Everything is under pressure. We have supply problems from all commodities.

What are the prospects for the plantation sector, specifically, oil palm, as an investment tool? – Sonny Wong, KL

Oil palm is good. Like I said, the world is developing shortages in everything. The inventory for food is running low. However, it does not mean just because you have a plantation, you will make money. You will still have to organise and manage it well. I am very optimistic about agriculture.

Realistically speaking, could an individual earn a living full-time trading spot forex using technical analysis tool? Could the same tool be used for commodity futures trading? – Lieng Seong

If you are good at technical analysis, you will be successful. I personally do not use technical analysis and people have told me they do and they make money. You can analyse anything – bonds, commodities, forex, anything – if you are good at it. Many people use technical analysis and don’t succeed. But if you are good at it, you will succeed and you can trade in whatever you want.

Do you think Barack Obama or Ben Bernanke can save the world? – Ivan Ho, KL

No! They are making things worse. There are going to be many more problems – recessions – down the road. I am not optimistic about these two. The recession will get worse. This year will be better than 2008 but I am not optimistic about 2010 or further down the road. We are going to have more inflation and currency problems and they are mainly because of Barack Obama and Ben Bernanke.

You are bullish on China but had relocated to Singapore. Singapore is half-Chinese half-Western. Shanghai, or Beijing, provides excellent conditions for what you want to do in China. May I say you are hedging yourself just in case your investments in China do not perform as expected? – MJ, Bandar Utama

No, you cannot say I am hedging. These are wonderful cities but they are also very polluted. I have two young children and I don’t want them to grow up breathing all these polluted air. Everything in Singapore is good and in good working order. The air is fine.

I read your book, Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market. How do you see the price of gold in the next 10 to 20 years? What commodities have you invested in? – Hafis, Terengganu

I do expect gold to be higher 10 to 20 years from now. The International Monetary Fund is trying to sell its gold. I do have some gold and I have commodities – all of them.

China’s political and economic developments in the last 169 years have been drastic, dramatic and unpredictable. The last 30 years were just phenomenal. You have bought convincingly into China’s future. Are you not concerned deep inside that the Chinese Communist Party will change course because nothing was indispensable throughout China’s long period of history? – James Chang

This whole world ... what can I say! Look at the US. They have been a capitalist government but today, they own the mortgage, the insurance, the banking and the motor industries. All governments change. But if you know of any governments which you do not worry will change, tell me! When conditions change, governments change, unfortunately. Yes, I worry about China, Singapore, the US, everything!

Many times, you have said that the sectors with potential are farming and mining. How do ordinary people take advantage of such opportunities, apart from marrying a farmer? – Ng Shi Ping

It is a good idea to go into the farming business. You don’t have to marry a farmer to do that. There are other ways to do that. You can go into a business which sells to farmers, like selling seeds, tractors or farm equipment. You can even move into a farm area and open a shop. Farmers will be very well off in the next few years. You can be an accountant, a hairdresser, a lawyer but you offer your services to a farming community. The best way is to be a farmer.

Friday, September 04, 2009

Analysts Raise Target for Stock Market

CIMB Research has raised its year-end's FTSE Bursa Malaysia KLCI target to 1,240 points while OSK Research has increased its index target to 1,144 .
Stockbrokers, including CIMB Research, have turned more bullish on the local benchmark target for this year and next, after the strong rebound in second quarter earnings further boosted confidence.

After the August reporting season, CIMB has raised its year-end FTSE Bursa Malaysia KLCI (FBM KLCI) target to 1,240 points from 1,220.

It also set next year's target at 1,400 points, suggesting a 20 per cent potential upside from yesterday's closing.CIMB's estimates drew upon a projected 15 times price-earnings multiple.

The FBM KLCI, which has risen 33 per cent this year, fell 0.28 per cent to close at 1,168.01 yesterday."With green shoots peeping out during the May and August results seasons and the second quarter GDP (gross domestic product) pullback coming in lower than expected, the logical conclusion to draw is that the worst is behind us," CIMB said in a report yesterday.

Malaysia's second quarter GDP shrank a less-than-expected 3.9 per cent from a year earlier, Bank Negara Malaysia said last week.

CIMB kept its overweight stance on Malaysian stocks, with a preference for cyclical sectors, such as banking, construction, property, and oil and gas.

It also recommends gaming and utilities shares for investors with lower risk appetites, saying that the two sectors offer defensive qualities and attractive valuations.

Another broker, OSK Research, this week raised the index year-end target to 1,144 from 1,040. The gauge may rise to 1,265 by the end of next year, according to OSK's forecast. "While we continue to see the market as expensive, we note the continued liquidity and that investors are looking towards 2010 earnings," OSK said in a report.

It has upgraded the local market to "neutral" from "sell into strength", saying that investors may trade on small-cap stocks in the oil and gas, rubber, steel and construction sectors.

Tuesday, September 01, 2009

Should I Go Against The Market?

AS the stock market continues to move higher, a lot of investors are wondering when it will come down again. Those who have been involved in futures trading may be tempted to short the KL Composite Index (KLCI) futures contracts.

Unfortunately, each time they start shorting the index, the market surges even higher and touches a new high. As a result, they are forced to cover their short positions as the market turns against them. In this article, we will look at how to apply contrarian strategies in the present market conditions.

Contrarian strategy 1: only correct when the market turns around

Investors need to be careful when using contrarian strategies. These strategies are only effective when the market starts to turn around, otherwise, investors will end up being wrong.

Contrarian investors feel that most people in the market tend to get carried away by the market sentiment, so if they keep calm, they will have a better position by taking actions that are the opposite of what others are doing. They believe that they can make big money by betting against popular investment trends.

In the current stock market situation, even though the average daily-trading volume is about one billion shares, we notice that there are not many retail investors. The market is mainly filled with some big fund managers or day traders. Some investors who managed to catch stocks at cheaper prices may have been selling most of their holdings lately.

Unfortunately, the market continues to trade higher than previous selling prices. In such situation, the worst mistake for some retail investors is to abandon their contrarian strategies and start buying back the shares that they disposed off earlier at even higher prices.

Normally, when everyone starts to think that the stock market will continue to go up, that is the signal of an impending market crash. Hence, investors need to be patient to wait for the right prices before buying back those stocks.

There is also the danger that some investors may start accumulating their stocks too early. We believe that “the panic may be over, but not the crisis”. Even though there are signs that the overall economy may be on its way to recovery, we think it will take some time before we can see the real recovery of the stock market.

We need to understand that once the fund managers feel that the stock prices are far above the fundamental of the stocks, they may stop accumulating stocks.

As a result, due to a lack of demand, the market may start dipping lower again with dwindling trading volumes. It may take a long time before the market turns higher again.

We saw this phenomenon in 2000-2001 when the market dipped slowly with very thin volume for a 15-month period, with the KLCI tumbling from about 1,000-level in February 2000 to 550-level in May 2001, a total decline of about 45%.

Investors need to take note that unless they have deep pockets to average down their purchase prices over a long period, they may run out of funds before the market reaches the bottom.

One way to avoid accumulating stocks too early is by adopting the filter rule strategy proposed by Alexander (1961). He proposed that we should only buy stocks when the market touches the lowest point and starts recovering for k% from its low and sell stocks when the market discovers the peak and starts falling for k% from its high.

This strategy may reduce the feeling of regret from selling stocks too early. Given that we may never know when the market touches its peak, it may be a good strategy to let the market find the top and only start selling when the market confirms the declining trends.

Contrarian Strategy 2: Buying neglected firms

Recently, as the result of the merger between main and second board companies into the Main Market, we notice that some second board companies, which have good fundamentals but previously lacked analysts’ coverage, are starting to get the attention of investors.

We believe these companies may provide good buying opportunities for investors who have missed out on the opportunities of accumulating blue chip stocks at cheap prices. Some academic studies have shown that the returns from buying neglected firms, over a long-term period, may be better than investing in “popular” companies.

Personal Investing - By Ooi Kok Hwa