[Eye Candy]: An update on Addvalue Tech

Hi all, I have decided to do an update on Addvalue Tech since a lot had happened since my last post on Addvalue. For those who may not know what I am referring to. You can check out my 2 posts on Addvalue below.

1. Addvalue Tech, a turnaround play? 

2. Addvalue Tech’s 3Q results 

1) What happened?

— New Investors —

A few things happened since my last post. Addvalue declared 2 trading halts in a span of a few weeks.

Addvalue news.png

Firstly, news were released about AT raising money to prepare for the commercialisation of the IDRS. If you are thinking that raising money = debt = even more financial trouble at AT, then these news will be slightly different. Money were raised in 3 forms, one is through the issue of new ordinary shares, convertible loan notes and lastly an exchangeable bond worth $2 million.

Why I would say this will be slightly different is because majority of those who gave their money to AT are affluent investors. They include investment firms and some accredited investors. The placement shares were priced $0.039 per share.

placement subscribers

As for the convertible loan note, its a 5% per annum with a choice to convert it into shares of the company at $0.055.

loan note subcriber.png

Once again, most of the subscribers of the placement shares are also subscribers of the loan note.

Also a venture investment firm known to be Cap Vista, the investment arm of DSTA invested $2 million in the form of exchangeable bonds for 5 years. It is a 5% per annum payable in full on maturity, however in the event that AT spin off Addvalue Solutions (AVS) a subsidiary of AT, these shall be exchange for shares in the company. FYI, AVS is the arm in AT that is focusing on the development of the IDRS, hence the investment.

These shows that there is a form of quiet optimism that AT’s IDRS will succeed. That’s the reason for the slight difference.

— Uptick in sales —

AT uptick in sales

It’s current product the Wideye iFleetONE terminal have earned an initial trial order of about US$1.0 million. It is also in discussion with potential customers for an additional order of about US$3.5 million.

3q2017

I am not sure if the initial trial order amount of 1m is going to be recorded in Q4. But let’s assume it is. This would mean a revenue of more than US$10 million for FY 2017, as Q4 usually records 2-3 million in revenue. That would be much higher than the 9 million revenue recorded in 2016. Using a bold estimate, we could see AT returning to the black, as AT have been trying to cut cost in recent Qs. Currently, 9M2017 is a loss of US$1.2 million. Of course the above is my personal estimation, we shall see if its true in the coming FY announcement.

2) Risk remain

The recent spate of events have ticked some of the catalysts that I have laid out in my first post on AT. However, risk like their cash flow still remain in this business.

— Cash Flow —

Having sales is of no use if the company cannot bring in cold hard cash to finance the company’s operations. As for now, it could be a race against time to see if they can fully commercialise the IDRS before their money eventually run out. I am still hoping that they could finally reach a deal to sell away AVC one of their subsidiary in order to spice up their balance sheet. I will be watching its cash flow closely in the coming earnings report.

In conclusion,

AT new chart.png

The recent events have caused the stock to run up from $0.044 to $0.062. I have a tiny portion at $0.04 just 0.1 cent higher than the placement share. For now, I am holding out since I am already in the money. I am looking to add to my position when the stock consolidate or after the upcoming earnings results. Personally, I feel quite confident of the IDRS project, now the ball is in AT’s court to translate what they have into an earnings generating monster!

 

 

 

 

 

[Eye Candy]: Tiong Seng, a sleeping giant?

Recently, I have been trying to look at sectors that have been through a rough patch to see if I can find any hidden gems within this depressed sectors. One sector that pops up is the construction industry. Property prices have been stuck on the ground for some time now. As property developers grapple with the cooling measures imposed by the government, this means lesser construction demand by property developers which affects the construction industry as a whole. I feel it is in times like this we are able to look for promising companies that are strong enough to weather this storm and thrive when the sectors eventually recovers. One such company that came across is Tiong Seng Holdings Ltd.

tiong-seng-1

A little bit about Tiong Seng. Tiong Seng is a homegrown construction and civil engineering company with  58 years of track record. JTC@Tuas, Mediapolis@One North the new home of MediaCorp, SIM Campus were just some of the projects that Tiong Seng have undertaken. They are also into property development in China, mainly with projects in the second and third-tier cities like Suzhou and Yangzhou.

1) Fundamentals

– Debt level –

Tiong Seng’s debt is a bit on the high side. It have a 92m dollars cash & cash equivalent but debt of about 175m dollars (ST+ LT).

TS BS1.png

TSBS2.png

That’s about 2 times its cash & cash equivalents. As the construction industry is a very competitive industry that require high upfront costs, I wanted to see if this figures are considered over-leverage. Hence, I decided to do a comparison across some of the big construction companies listed in the SGX. I chose 4 companies with comparable market cap to Tiong Seng and did a comparison of their debt levels.

TS compare debt

Hence, in my opinion, Tiong Seng debts/CCE of about 2 times seem to be acceptable for a construction company.

– Cash Flow –

Managing cash flow in a construction company is rather challenging. There’s always a risk when any business take on a huge capital to finance a project. Furthermore, earnings in the construction industry are usually lumpy in nature as they receive their earnings in phases. This could lead them into a huge debt spiral if they borrow huge amounts and are unable to repay them in time due to unsuccessful project tenders, costs overrun etc.

TS Cash Flow.png

It has recorded positive cash flow from operations for 4 out of 5 years. Net change in cash is positive for 2 out of 5 years. It’s cash flow is still considered decent in my opinion.

– Management –

Tiong Seng was founded by the current CEO’s father, Pek Ah Tuan. Peck Tiong Choon which is a company founded by the current CEO’s father and his brothers. Peck Tiong Choon have a 59.8% stake in Tiong Seng. One of the non-executive director, Lee It Hoe also deemed to have about a 63.1% stake in the company.

Ownership2.png

What I think it means is that members in the board like Mr Lee It Hoe have Tiong Seng’s shares through Tiong Seng Shareholdings. Furthermore, the current CEO being the son of Mr Pek Ah Tuan should have a vested interest to advance the business started out by his father. Of course, that is hard to say. Family business can be prone to infighting and can fail as well. But I have to say I have been rather happy with the management’s decisions so far. I will share with you why below.

2) Prospects

– Technology focused –

The adoption of technology in the construction industry have been a long drawn process. In an environment where competition to offer the best tender is strong, it is hard to see these companies adopting technology to aid productivity. However, Tiong Seng have a different approach in this. For instance, Tiong Seng invested in the very first Precast Automation Hub in Singapore where they have experienced a significant 70.0% reduction in manpower while raising output and maintaining consistency. They also use computer software programs to ensure that their buildings are well designed before starting actual construction reducing wastage. Tiong Seng also employ the use of PPVC and PBC where a portion of the building are fabricated off-site. Building Construction Authority (BCA) have also been encouraging the use of such approach.

TS tech

TS tech 1

In my opinion, Tiong Seng’s innovation to the construction industry will put it in good stead to provide not just quality but also efficiency. Being one of the few construction firms in Singapore to focus so heavily on technology, I think this factor should play out well in favour of Tiong Seng in the future.

– Construction industry to be boosted by public sector demand in 2017 –

Given the current property outlook, private demand for construction remains soft. However, the government have announced more public construction work in 2017, valued to be around $24 billion. Tiong Seng have the highest A1 grade from BCA for both civil engineering and general building which allows it to undertake public sector projects with unlimited value. To illustrate how prestigious that is, take a look below.

BCA A1.png

BCA grades the construction sector in two categories, General Building and Civil Engineering. To be able to obtain A1 for both categories is certainly not an easy feat. Most companies only have 1. Hence, with public sector demand rising, Tiong Seng should be in a nice position to grab a share of the pie given its strong track record. Besides, it is becoming a common practice for the government to award contracts to companies that may not be the lowest bidder in tender exercises.

 

3) Risks

– China Property Bubble –

Property prices in China have been running sky high. In the short term, that could definitely be a boost to Tiong Seng’s revenue. However, like every bubble, there will be a correction coming. China’s government have put in place many cooling measures like tighter loan restrictions to simmer down the property market.

china house price

As we can see a top has formed, and a correction will definitely not be good for Tiong Seng’s property developments business in China. Revenue will definitely be affected. However, in my opinion, the main issue with China property prices, is speculation. Prices can raced up about 23% in a year.

An article in Business Insider also explains that the Chinese government is looking for healthy developments of the real estate market.

business insider.png

Hence, I believe that although Tiong Seng’s China venture will be impacted when the property bubble burst. Their strategy to only develops in 2nd and 3rd tier cities will help them in the long run as China embraces the OBOR initiatives to connect more of their cities together through building infrastructure. Furthermore, by developing in the 2nd and 3rd tier cities, it can translate to lower costs compared to a 1st tier city. We shall see how their China venture pans out, hopefully they have learn their lesson from their overseas venture debacle in 2014.

– Execution risk –

And like all construction companies, execution risks remain the most probable. Having to deal with rising labour costs, material costs, safety etc etc. It is important that a construction companies do not run into a Stop Work Order, which will be no good to the company. However, given Tiong Seng’s track record, that risk should be relatively smaller compared to other construction firms.

 

In conclusion,

Tiong Seng’s PE stands at 7.7 as of today with a price of $0.260 per share. Tiong Seng’s PE don’t really tell much as most construction firms are undervalued at the moment. Also, the construction industry being a lumpy in nature, we may experienced very wild fluctuations in their earnings and hence their PE ratio. A better indicator would be their Net Asset Value (NAV), it stands at $0.594 with $0.164 cash in hand per share.

Tiong Seng chart.png

Also, based on the chart, it has been consolidating at a rather low price for some time now, which provides a favourable entry point. If Tiong Seng can achieve more contracts in 2017, there will be a strong reason to believe an upward break out in price can be achieved. Currently, I am not vested yet as I am still observing the price movement of the stock. Do always remember to DYODD! Cheers! 🙂

[My Story]: My Investing Strategy

Hi all, apologies for not posting for a while now. Peak period of outfields week in week out made me procrastinate for quite a bit haha. I realised it’s been about 1 year since I started investing. A lot had happen and I am thankful for the many lessons I have learnt over the course of the year. All that happened, made me stronger and allow me to continuously revise my own investing strategy. Today, I shall share about my own investing strategy. How I identify potential investment targets, what I use to time my entry into a stock and when to sell.

1) Investment Objectives

Previously, I shared the importance to know your own investment objectives before being able to craft out your own investment plan.

my-investment-objective

Your own investment strategies are the actions you are going to take in your investment plan. Just a recap, for now my investment objective remains to grow my capital. From a measly sum of $300 at the very start of my investment journey, I am targeting to grow it to at least $10k before I enter the university. (Of course along the way, I added more money into my investment.) As of now I have about $6k vested in the stock market and sitting on a 20% realised return so far. Below is my investment strategy I am using to reach my objectives.

2) How I pick my investment targets

Personally, I like to look for companies with low Price to Earnings (PE) ratio with huge growth catalysts ahead. Companies that are of such qualities fill up about 60% of my portfolio. The reason why I adore such a company is because it is both undervalued and have ample of growth characteristics. (Killing 2 birds with 1 stone!)

Of course, sometimes it’s hard to find such a company. But all you need is that 1 or 2 opportunities to give you astronomical gains. Examples are companies like AEM which was previously PE of 8-9 (undervalued) and had a innovative product (growth). When the market comes to realise the company’s potential, the share price will readjust upwards.

After finding that few value-growth companies, I like to diversify across themes. By that, I like to research their growth areas and see if it fits any major trends happening in the world or in Singapore. For instance, now the One Belt One Road is quite a big thing, companies (construction, railway builder etc) that are undervalued and have operations in this area will potentially stand to gain from the growth opportunities available. Here’s another example, I may want to look at a more defensive theme. Companies that are undervalued and are in the industry that provides services to consumers, governments etc are all plausible candidates.

Of course, after shortlisting the few that make the cut. Checking their fundamentals is next and even better if there has been insider buying. (Here’s how I evaluate a fundamentally sound company)

3) Timing my entry

After all that filtering process, you should probably be left with a list of less than 4 companies. Timing my entry to buy into the stock is next. How should I buy at the correct timing. For me, some technical indicators and the chart have helped me quite a bit.

I like to enter my first position after a period of consolidation (where the price have been around the same level for a few weeks) and with low volume.

AT chart

I use the weekly chart for a better long term view since I usually hold my position for a few months at least. The red rectangle is the period of consolidation where prices close in very tight range. And if you look at the blue circle, the volume is below average for those few weeks. This represents a rather good opportunity to enter. I like to see consolidation period as a spring board to propel you upwards. But, how do we tell if price will go up after consolidation and not down?

AT chart1.png

I use the MACD indicator to see if there’s a possible uptrend coming. (I am not going to go too in depth into indicators) When the blue line cross the red line as shown in the circles, it is a possible indication of an uptrend. For me, I only use indicators as an additional reference after I spot a consolidation zone.

4) When to sell?

Haha to be honest, this question always baffles me. I myself am also not a good seller. There are a few times a stock raced upwards after I sold away all my position. Sometimes, I get to emotionally attached to a stock and tend to sell too late. Hence, this portion is something I am constantly still learning. However I do have a few ground rules to follow.

  1. Sell when the undervalued stocks become overvalued.
  2. Sell at your stop loss.
  3. Sell when the business is no longer attractive or fundamentally sound.

I don’t really use technical indicators to predict when to sell, because I believe that as long as the business’s value and growth aspects remain intact, a downtrend should be temporary.

In conclusion,

planning your own investment strategies to achieve your own objectives is important.  You need to know what stocks you are looking into, when to enter and when to sell. Only then will it translate into gains in your portfolio. Hopefully for those who started investing, you will be empowered to write out your own investment strategies after reading my own strategies. Writing it out is really effective, as it makes sure you do not get flustered when anything happens in the market.

[Building Blocks]: 3 useful online resources to help with your investing journey

Living in a world connected by the internet means information are widely available just a few clicks away. No doubt, I myself have benefited immensely from the information I found online. Today, I want to share with you some of the useful online resources that will definitely be of help to your investing journey.

1) Investopedia

investopedia.png

Investopedia was the very first website that I visited to understand more about investing. It is like a huge encyclopedia on anything related to finance. I would say that it is easily one of the top few investing websites that are easy to understand and well organised. Not only are there information on investing, there are information on current affairs, insurance and many more. The only down side of this is that it mainly focuses on the US markets. However I would recommend this website for beginners wanting to invest because their beginners’ tutorials are very comprehensive and easy to understand.

investopedia 2

You can find tons of tutorials about investing at this website.

And if you are still clueless where to start from, I have compounded a list of tutorials from Investopedia that you should start with. Click on the link below for you to be teleported there haha.

  1. Investing Basics 101: A tutorial for beginner investors 
  2. Stock Basics Tutorial
  3. Bonds Basics Tutorial
  4. Mutual Funds Tutorial
  5. Introduction to Fundamental Analysis
  6. Basics of Technical Analysis

Here you go. Starting out with these few tutorials should allow you to understand investing clearer. If in doubt you can always drop a comment below and I will answer to them 🙂

2) InvestingNote

investingnote

Think of InvestingNote like a Facebook for investors. It boast a huge collection of users ranging from beginner investors to the very experienced ones. Interestingly, this platform is set up by Singaporeans and was only launched recently. The community in InvestingNote is fantastic as many are willing to share about their strategies and styles of investing. What’s more? You can also find out more about the stocks you are interested in, like the information of the company, what other investors are talking about that stock etc etc.

Investingnote 1

For instance, if you are trying to find out more about Japfa, you can get a summarised information on Japfa’s price actions, fundamentals and financials on the left and the chart of Japfa on the right. Personally, I find InvestingNote’s charting platform to be one of the best. It allows you to plot your own lines, overlay them with a myriad of indicators and you can even save your drawings on the chart.

investingnote 2

Scrolling down further, you can see what are some of the things other users are talking about and the upcoming events the company may have. It currently have information on companies in the SG, US and HK markets. But many of the users of InvestingNote mainly talk about SG stocks which are good for new investors looking to go into the local market.

What’s more important is that you can get these amazing features for FREE. All you have to do is to sign up with them. It seems like I am doing an advertisement for them haha. Rest assured I am not paid to do this. For me, this platform have really accelerated my learning on investing and hence I thought of promoting it to you guys.

3) Investment Blogs

Many investors do have their own blogs where they document their own investment experiences. Some of them are so influential that some investors buy whatever they preach. Personally, some of the blogs that I have came about have helped me in terms of understanding how different investors analyse a company, their investment strategies etc.

I think what’s really beneficial about learning from investment blogs is learning the way others analyse a company. By reading their investment thesis on certain companies, you can understand the way they think which you can apply when you are analysing the company you are planning to invest.

Here’s an article on 55 SG Financial Blogs that are useful.

For me I am a regular reader of TTI, thelittlesnowball, my15hourworkweek and TUBinvesting.

Do give them a visit! 🙂

In conclusion,

good resources are everywhere on the internet. Use it to propel your investment knowledge as much as possible. You will realise that you may not have to even pay a dime to attend courses which teach you about the basics of investing. Also, the best way to learn is from each other. Hence, I believe InvestingNote and reading of other investors’ blogs are two good ways to deepen your understanding of investing. Do note that everyone have their unique styles of investing, different upfront capital and different investment objectives. Thus, completely copying someone else’s method may not suit you. I would suggest adopting good practices and incorporate it into your own method of investing. Hopefully this post can help you realise some of the good investing resources online that will be beneficial to your investing journey!

[Building Blocks]: Dissecting the Annual Report (Part 2)

Hi all, today I will be continuing with Part 2 of Dissecting the Annual Report. In part 1, I shared about some ways to dissect the annual report in order to find the information that you need. For those who missed it, you can read Part 1 here. Today, I will be going more in depth into the financial statements portion of the annual report. The financial statements in the annual report is an important piece of document that shed light on how the company is doing and challenges that the company may face.

financial-statement-post-pic

The financial statements in the annual report always consist of 1) the Balance Sheet, 2) the Income Statement, 3) the Cash Flow statement and 4) the Statement of Equity. We will focus on the first 3 as the statement of equity is used less frequently.

My Strategy

Whenever I look into the financial statements of any company, I do it for 2 reasons. It’s either to identify if the company is fundamentally sound to invest or to evaluate the financial health of a company after every earnings report season that I am already vested in.

When deciding if a company is fundamentally sound, I would look for stability of earnings, debts level and their cash flow which I wrote about here. After, confirming that the company is a fundamentally sound company, I will scrutinise their financial statements further for any abnormal figures. This can come in the form sudden increase when compared to previous year’s figures or extremely high figures. As for companies that I am already vested, I always try to look out for abnormal figures when compared to the previous year.

By doing so, I am able to detect any drastic change that may happen to a company. This is because any abnormal figures usually have a huge impact on the company. For instance, when the company suddenly register a 50% decrease in Cash & Cash Equivalents in their balance sheet, you must find out what did the company spent the money on. Is it for expansion or paying down debts? Will this affect their operations etc etc. Hence it is important to always find out about abnormal figures that may puzzle you when you read their financial statements.

Alright, with that aside, we shall dive deeper into the financial statements. I will share with you the important things to look at and some basic calculations you can make to better understand the financial health of the company.

1) Income Statement

Let’s start with the income statement. The income statement is basically a summary of profit and loss for the company. It documents the revenue and expenses for the specific accounting period.

aem-3q-result

The above is an example of the income statement of a company.

Things to know:

  • Revenue – a gauge of the amount of sales (look for stable or increasing revenue)
  • Gross Profit  – this is obtained after subtracting costs of goods from their revenue.
  • Gross Profit Margin – this is obtained from dividing the gross profit by the revenue (High GPM shows that the company have some form of competitive advantage over their rivals)
  • Operating Expenses – which consists of all expenditures that are not directly associated with the production of the good or services. Expenses like R&D costs, depreciation, amortization etc (Companies with durable competitive advantage have consistent operating expenses)
  • Earnings Per Share — EPS is based on net profit attributable to shareholders after deducting any provision for preference dividends and then divided by total shares outstanding. (An increasing or consistent EPS is always preferred)

 

The income statement is important in telling me if the company’s business have a form of moat around it and also if the company have been able to keep costs low.

 

2) Balance Sheet

The balance sheet documents the assets, liabilities and the shareholders’ equity of a business at a particular point of time.

aem-balance-sheet

Things to note in a balance sheet:

  1. total assets = total liabilities + total equity
  2. Current assets refer to assets that can be liquidated into cash within a year
  3. Current liabilities refer to the money to be paid in less than a year
  4. Non-current assets refer to assets that takes more than a year to be converted to cash. For eg, property, factory buildings etc
  5. Non-current liabilities refer to the money payable after 1 year.
  6. Shareholders’ equity refer to the net worth of the company
  7. Current Ratio calculates the company’s abilities to meet their short term obligations. (Current Ratio = Current assets divided by Current Liabilities)

 

Important values:

  • Cash & Cash Equivalents > Total Debts – I always try to ensure that the company have enough cash on hand to pay off their total debts. An over-leveraged company is a troublesome company.
  • Current Ratio > 1.5

 

For me, the balance sheet is important in telling me if the company will have a problem of paying their dues.

3) Cash Flow Statement

The cash flow statement records the cash inflow and outflow of a business. The cash flow statement shows how changes in the balance sheet and the income statement affects the cash and cash equivalents.

aem-cash-flow

It consists of 3 parts. 1) Cash flow from Operating Activities which records the net cash into or out of the business from their main operations. 2) Cash flow from investing activities which records the cash movement from the company’s investment. For instance, purchase or sale of a property, subsidiary etc. 3) Cash flow from financing activities records the cash movement of financing activities in the company.

Cash Flow from Operating Activities

A positive cash flow from operating activities means that cash is flowing into the company from their business. This means that net of all the expenses, the company is receiving cash from the products they sell. This is important as you want a company to take in cash from the products they sell. A company with consistent negative cash flow from operating activities is burning through cash fast and may need to take on debt in the future to finance their expenses. Hence, we would want a company to have positive cash flow from operating activities.

Cash Flow from Investing Activities

Purchase of assets, company investing their money in the market etc. These are all counted as cash outflow from investing activities. Sale of an asset etc will be register as an inflow. This section can tell you if the company is spending money to expand their current infrastructure or expanding capacity through higher capital expenditures.

Cash Flow from Financing Activities

Financing activities include payment of dividends to shareholders, paying off debts, money used in share buyback etc. In this section, you will be able to find out what the cash is used for in their financial activities. For instance, a negative cash flow from financing activities can mean that the company is paying off its debt. A positive cash flow from financing activities could mean that the company is raising money through selling new shares in the market etc.

The sum of all three sections above will give the net change in cash and cash equivalents which will be added to the amount of cash they have at the beginning of the year. By understanding the functions of the different sections of the cash flow statement we can better understand what the company is doing with their cash.

Disclaimer

Not all companies’ financial statements follow to the template I describe above. A lot of them have to be evaluated in the context of their business. For instance, although I emphasised a lot on positive cash flow from operating activities,.property developers would register most of their cash flow in the investing portion than operating activities when they sell a completed property project. Hence, the financial statement should be read in context with the industry the company is in.

In conclusion,

the financial statement is a powerful tool to better understand a company. In fact, I am also still in the process of further deepening my understanding of the financial statements. The management may coat investors with nice narratives about the brilliance of the company but you can always cross check what the company is saying with their financial statements to gauge their reliability. Understanding the financial statements will definitely level up your investing many folds! 🙂

 

[Eye Candy]: Nordic Group riding on O&G recovery?

Nordic Group have long been in my eye candy list for some time now. Not only does it have a good fundamentals, it has been able to withstand the chaos in the O&G sector while posing earnings growth during this period of time. A company that can withstand headwinds in the industry are certainly poised to do well when the sector recovers.

nordic-group-limited

Nordic Group is a global systems integration solutions provider serving mainly the marine, offshore and oil & gas industries. Their business segments include 1) system integration, 2) maintenance, repair, overhaul and trading, 3) precision engineering, 4) scaffolding services 5) Insulation services. Most of their businesses are in the O&G sector but they also do serve the aerospace and medical industries. (But to a small portion)

Fundamentals

1) Strong earnings record

As I mentioned earlier, Nordic have managed to grow their earnings rather significantly over the past few years. Even when many O&G companies (their customers) are cutting budget and hence spending, this company have punched above its weight. Here’s a snapshot of its financial highlights.

nordic financial highlights.png

Various indicators of earnings are all pointing upwards, which shows the strong earnings momentum the company has. Also 2016 being the year where O&G sector faced many unpredictable headwinds, like falling oil prices. Nordic have still managed to grow its revenue.

nordic-q4-result

Despite challenges, revenue for FY 2016 increase 2%, profit net of tax increased 21%. If Nordic can weather the storm in the industry, it should present a good growth opportunity when eventually the industry recovers and O&G companies start to spend again.

2) Strong balance sheet and cash flow

Current ratio of 1.74, with cash and cash equivalents covering its debts. Nordic have also been registering positive cash flow from operations for the past few years.

Fundamentals.png

3) Insider ownership

nordic-insider

All 3 executive directors of the company are part of the 20 largest shareholders in their own company. Furthermore, company have been doing regular share buybacks. Latest one being at $0.24 a share.

Catalysts

Going forward there are a few catalysts that could propel the stock further.

1) More contract wins and possible acquisitions

With oil prices stabilising around $50 per barrel, compared to the atrocious $30 per barrel at the start of 2016. A recovering 0&G sector can be beneficial for Nordic as more of their customers start spending more to upgrade or improve their facilities. This should lead to more contract wins for Nordic given the strong reputation it has in the industry. With Nordic low debt, they could also possibly look to acquire companies in similar industry to boost their source of revenue, just like the acquisition of Austin Energy in 2015.

2) Going into pharmaceutical industry

In the AR of 2015, the Chairman also mentioned going into the pharmaceutical industry. This should open up new form of revenue stream and allow Nordic to grow their business out of the O&G sector.

austin-energy

Technical

Based on the chart, this gem have already been discovered by many investors.

Nordic chart.png

Clear and nice uptrend. Currently, Nordic have reach upper channel line and I am hoping the pull back will hit the support at $0.270. This will present a rather lucrative price to enter given the upside potential.

In conclusion,

this is a rather straight forward company to analyse. Strong fundamentals and possible tailwinds to promote growth should the O&G sector improves. $0.270 will be a great price to enter!

 

[Building Blocks]: Dissecting the Annual Report (Part 1)

Buying and selling stocks are easy, but the amount of research one puts into determines your profitability. One such place to find out more about a company current performance and future plans is through their annual reports. The sage of Omaha, Warren Buffett revealed that his success in investing comes from reading hundreds and hundreds of annual reports every year. If annual reports are this important, how do we go about understanding it and finding the information that we need. Today in part 1, I shall share a bit on how I dissect the annual report into digestible parts. In part 2, I will attempt to muster what little accounting knowledge I have to share with you how to look for specific measurements that indicates the health of the company through their financial statements.

warren-buffett-on-annual-report_finaacle.jpg

In my sharing, I will use the FY 2015 Annual Report of AEM Holdings. You can download it here to follow along as I dissect the annual report.

1) Where to find a company’s Annual Report?

Any public listed company will have to file their annual report with the stock exchange. This report can be found either from the website of the stock exchange it is listed on or in the investor relations segment in the company’s website. Here’s an example of where you can find the annual reports for AEM Holdings.

2) What to do with the 100+ pages monster?!

Yup, a company annual report tends to be 100 over pages long! (At least in the case of SG companies) Don’t worry, not every part of the annual report is equally important. Locating the parts that give you what you need is more essential.

annual-report-content-page

This is a typical contents page of a company’s annual report. It is almost a standard format of annual reports which is comparable to many other companies’.

3) What information is important to me?

When analysing a company’s annual report there are always some standard information that is important to a shareholder. This can range from their financial performance to who exactly is running the company. Below are some information which I always look out for when I read a company’s annual report.

  1. Present company’s performance
  2. Company’s outlook and future catalysts
  3. Management’s information

4) Where to find these information?

Present company’s performance

We want to understand how the company is doing for the past financial year and most importantly their financial statements for the FY. This information can usually be found in 1) The Chairman’s and CEO’s statement, 2) Business and Financial Review (some company may name it differently but it is basically just a summary of financial figures for the FY), 3) The full financial statement in corporate information

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Here’s a snippet of the present performance by the Chairman. You can likewise find the same from the CEO in the next page.

Business review AEM.png

Under the business and financial review, the company tends to show a quick summary of financial performance for the FY. They can come in the form of informative illustrations comparing their performance over the past few FYs. I tend to read this part with a pinch of salt. This is because the company may tend to cherry-picked “nicer” numbers to put here to impress shareholders. A in depth analysis into their full financial statement in the corporate information segment is needed to determine the reliability of their performance.

If you are lost. You can find the above information from page 36, 40 and 37 respectively. A financial statement usually includes the Balance Sheet, Income Statement and Cash Flow statement. I will touch on these in part 2, but just know that these 3 pages are one of the most important part of any Annual Report. You will also notice one whole bulk of information which occupies majority of the annual report in Notes to Financial Statement. Basically this part give additional pointers to how each segment in the financial statement were derived.

Company’s outlook and future catalysts

You can usually find a company’s future plans and outlook from the Chairman’s and CEO statements. This is usually found at the last few paragraphs of their statements. They will address challenges and the strategies going forward. Any upcoming plans are also explained here.

aem-chairman-statement-2

During the FY 2016, you can stay tune to their announcements as they may announce some information about whatever plans they were set out to do in FY 2015. This can supplement your information about the company’s outlook and plans.

Management’s information

It is always important for me to know who are the people that are running the company. To find this information, you can look them up in the portion Board of Directors.

aem-board

They usually include a short write up about the achievements of the person and his previous experiences.

Knowing how much the management is earning is also important. This is because we want to ensure that the management have their interests aligned to ours’ and are not overpaying themselves. You can find out details about remuneration in Corporate Governance on page 23 of the annual report.

aem-remuneration

In a board of any company, it is made up of the Chairman, CEO, the independent directors and some other position depending on the company. The independent directors are just people who are not related to the company but sitting in the board. This ensures that the Board do not do things that are beneficial to themselves only and in turn harming the shareholders. It is a common sight to have independent directors in any listed company. You should pay close attention to the payslip of the Chairman and CEO. Make sure they do not give themselves too high a pay.

One simple way to see if the Chairman and CEO have interests aligned to the shareholders is to see if they hold the company’s shares. You can find that either from the variable bonus component in the remuneration package above or from page 92, Information on Shareholdings.

aem-shareholdings

The CEO is one of the top 20 shareholders of the company’s shares. If the insiders of the company have rather large stakes in the company they should act in the interests of the shareholders.

In conclusion,

these are usually the information that I look for when I read into any companies’ annual report. By categorising the annual report into 3 key areas, we can effectively understand the company. In the next part, I will mainly talk about how to break down the financial statement in the annual report to help you understand some accounting jargon. Ohh and on the side note, if you have been a regular reader of this site, please do subscribe so I know roughly how many active readers I have and you can also comment below if there are any queries. Hahaha! Thank you! 🙂

 

[Building Blocks]: 4 principles of a fundamentally sound company

Hi all, as promised I would like to share with you some of the criteria I have before I decide that the company is fundamentally sound and worth investing. These 4 simple principles can be applied irregardless of what style of investing you pursue. (Growth, value, income etc) Investing in a fundamentally sound company reduces your exposure to the risk that the company may fail. These principles also act as red flags when a company with good track records flouted any of these principles. Adhering in these 4 basic principles should put you in good stead when investing directly on the stock market.

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Without further ado, here are 4 principles I always apply when evaluating a company.

1) Earnings Record

A fundamentally sound company should have a stable or growing earnings record. If the company can show stable or growing earnings over the past few years, it is likely that the company’s product or service are well sought after and there is some form of economic moat around them.

The 2 most important components to determine the strength of their earnings are:

  1. Revenue
  2. Net Profit

** Revenue – (Cost of Sales + Expenses incurred) = Net Profit

Revenue reflects the amount of sales that the company have done for the products/services it provides. It is often referred to as the company’s top line. On the other hand, net profit shows the earnings after subtracting the costs involved in manufacturing the products or providing the service and the various expenses incurred. Net profit is often referred to as the company’s bottom line. Hence, when someone say a company has achieved top line growth, it is referring to increase in revenue and likewise for net profit.

aem 3q result.png

Companies with stable or growing revenue shows that their sales are increasing. Improving net profit also shows that the company have been able to manage their costs and preventing it from exceeding its revenue. Thus, these are good sign of a company that will be stable compared to a company with fluctuating revenues and net profit.

2) Low Debt

This goes without saying. Company that takes on huge debt are often at higher risk of failing. Imagine being chased by debtors for payment while trying to do business. Earnings will definitely be affected as earnings may have to be used to pay off debt. These are definitely not a good sign for a company. A classic example would be Noble Group which I shared before in [My Story] component.

Of course low debts are healthy as they aid a company to grow its business. So what’s a healthy amount of debt? I have 2 ways to evaluate if a company have over-leverage.

  1. Cash and Cash Equivalents > ST Debt + LT Debt
  2. Current Ratio > 1.5

This works in such a way that if both rules 1 & 2 don’t hold, you are probably looking at an over-leveraged company. The best case scenario would be that rule 1 holds which most of the time means rule 2 will hold.

3) Positive Cash Flow from Operations

Cash flow is important for a good company as some companies can have very strong earnings but those earnings may not be recognised in cash. If a company consistently register a negative cash flow from operations, it should set off some red flags. This is because most of the company’s debt and expenses are paid for in cash, if their earnings do not bring in cash this might be a problem in the future.

Take the case of Yuuzoo Corporation.

yuuzoo

Strong growth in revenue and net profit recorded. Indeed very impressive.

yuuzoo3

However, look at net cash from operating activities. It has been negative for 2 years. It is okay if the company at times record negative cash flow from operations as they may have use the money to pursue expansion etc. But if it has been happening for a few years, it is definitely not a good sign of things to come.

4) Insider Ownership

Insider ownership is often a good sign to tell whether the company’s management believes in the company. This will show whether the company’s management put their money where their mouth is. A good level of insider ownership should give you the confidence that the company is good because the interests of the management is at stake as well.

Hence events like management buying or selling their own company’s shares could be a pre-indicator of their outlook on the company.

shareholder-info-for-dutech

This is extracted from the annual report of Dutech Holdings. Dr Johnny Liu Jia Yan who is the Chairman and CEO owns about 42.76% of the shares. Hence this should reassure shareholders that he will act in the interest of the shareholders.

Bonus

If you can find a company that satisfies most of the above, at least 3 out of 4 and you realise that the company are buying back their own shares (share buyback) or the management have been buying more shares of the company. (Insider ownership) This could mean that something big is brewing within the company and it is likely an excellent opportunity to invest in the company.

Some of you may ask how should I go about finding these information regarding the company I am investing. Firstly you should always check out the investor relations segment in their website which should contain information regarding the company. Alternatively, you can head to SGX website to find them. You can find out about every companies announcement with regards to their financials, insider transactions, annual reports etc here.

In conclusion,

these are 4 principles that I look for in a fundamentally sound company. It may not be fool-proof as many factors can affect a company. But these principles should allow you to sieve out the better companies in the entire stock market which should provide a relatively safe and lower risk investment should you decide to enter the stock market directly.