Tuesday, November 29, 2016

The true fact on Airasia's sale and leaseback

To those who have read my blogs, you would know that I have written about Airasia and some other airlines for many years. Throughout that, I have learned a lot through my own research as well as being part of the community that have been using the services provided by Airasia, MAS, Malindo, Firefly as well as several other airlines.

As an investor, I am always on the mission to know further what these companies are doing and I am not entirely and purely a numbers person (although my background is). I am fascinated with the business as much as the numbers. In my previous short article, I have highlighted that the Bloomberg's article is not quite correct. I respect Bloomberg as my source of business news and have pointed their articles to many of my friends but this time around it is with a wrong message.

Below is another after I said to myself, did I miss something. I looked through Airasia's AUDITED accounts since 2013 and try to search for any sense of sale and leaseback from the airline as I have said I have been following the airline and this also mean I read their annual reports year after year.

For FY2014, there was not even a mention of sale and leaseback. There are leases that Airasia embarked on being a lessor as well as lessee (if you are not sure what is lessor and lessee, check it out) but they did not do sale and leaseback.

Further for FY2015, as I checked further - this time around there are such arrangement - i.e. as in sale and leaseback. This shows that sale and leaseback has been a new thing since 2015 only, not prior. As shown below, where in 2015 there are sales of RM1.527 billion with gain of RM27 million. This shows that the gain that was registered is not as much as purported in the Bloomberg article.

2015 sale and leaseback as shown for FY2015 while there were no numbers for FY2014
Again disposals as shown for FY2015
What the above shows that Airasia was getting ready for an upgrade of planes with Airbus to deliver the new 320neo. Airasia, in my mind wanted better fuel efficient planes and 3rd quarter 2016 is the time which started to get these deliveries. Obviously, it cannot be operating with much lesser planes hence the sale and leaseback. I guess once it starts to get deliveries of the newer and one which has 186 seats, it will start to let go of the older planes. If you have noticed, Airasia over the last few years have had its maintenance costs increased and these shows that its fleet is getting older.

What some have been thinking that these older planes do not have value. They actually have, especially the narrow body planes as compared to a lesser sellable wide body planes.

Airasia has been having a depreciation policy of 12 years straight line for its plane assets and besides operating as an airline, it definitely knows what is best for its operations.

What Airasia has been doing in this case is not so much an accounting ploy but a business decision i.e. reducing its debt level, while preparing for purchases of newer planes. It is not buying new planes at low price (because of its bulk deal), sell them and lease them back. It is selling older planes, lease them back while waiting for newer planes.

I hope Bloomberg can get its facts correct.

Vivocom is potentially a Hoa...

I do not want to deliberate on a very good discovery on the early release of report by CIMB prior to the quarterly announcement by the company itself. How can it be?

This however also shows one should not trust a company as such and its perpetrator.

If one is to look at the company and at its free cashflow, one should wonder. They raised funds to cover the operating expenses. How is it valued at RM0.60, I wonder.

I cannot remember how many rounds of placements that it has made and the beauty of this company is that it is better at doing this kind of work than Asia Media. It still survives and can still have a valuation of 60+ sen by a respected IB. Just count, how many free warrants it has created.

I have written about Vivacom (formerly Instacom) and I think not much has changed, perhaps even more cruel and unsympathetic over people, but to enrich themselves.

Sunday, November 27, 2016

Airasia: Article on Bloomberg quite inaccurate

There was quite a bit of brouhaha on an article on Bloomberg which I think is largely to sell readerships.

One of the statement, which reads as below:

I do not think it works for Airasia like what is mentioned unless the Airasia group is not telling us the truth. See below:

From 3Q15 financial statement
The above basically shows that Airasia is doing its planning for the deliveries of newer A320neo aircrafts which has better mileage and caters for 186 seats for Airasia (an extra of 6 seats from its current fleet). 6 extra seats makes a significant difference. It does not seem to be doing a financial engineering as mentioned in the article on Bloomberg.

Further testament to that even if it is doing a sale and leaseback, the accounting treatment does not allow Airasia to be doing a financial engineering as mentioned. See below which is picked from its 2015 annual report.

Nowhere do I see Airasia locking in huge profits for its sale and leaseback in its accounts in the last few years. Yes, it does make profits from its leasing business but not to the tune as mentioned in the article.

I do agree that Airasia's financial performance for its airline business can be more volatile, which is why there are seemingly good interests for its leasing arm which has much less volatility.

What I think of the proposed sale of AAC
An aircraft leasing company seems to be able to garner a good 20-30x PE while as most people know Airasia is trading at mid single digit PE now. If the group is able to sell the leasing arm at a good price, it will see its balance sheet much improved while it can get ready for the deliveries of the A320neo which is much important for the next stages for the group as its fleet is getting old.

From my reading, not all the new planes that it purchases will be under the leasing arm (although new deals including the A321 does include AAC to have options for some of the new planes. This will make the sale of AAC much sweeter, in which case a DCF from the financial numbers of the company would probably be much better).

I also do not think the group would be so stupid to obtain all its planes under lease as a combination of owning and leasing are being done by airlines such as Southwest and Ryanair.

I think if it is able to get a good price for AAC, would be good to sell as it is now focusing on growing the brand rather than being also deemed to be a leasing company - which it should not be. Airasia is a low costs airline which it does best.

Thursday, November 17, 2016

Airasia's forex hedge

I am reading some of the articles or even comments that came from analysts or other investors per se. They are saying that the rise in USD against MYR would be bad for Airasia as I am presuming that they think since the aircrafts are bought at USD pricing, it would be bad for Airasia. I am also asking did they read the financial report? As below is the financial report that is extracted from the 2Q16 announcement.

It is clear that a substantial portion of its liabilities are hedged at a low 3.2368 exchange rate. Yes, Airasia will take some losses in forex, but most of them are book numbers - it will be reversed in the event MYR strengthens.

Also, some may think that all transactions for Airasia is in MYR. It is not. They have Renminbi, Thai Baht, USD, AUD, SGD etc. Airasia is not a domestic business only. MYR comprise of perhaps around 40%. Hence, that is already balanced by the hedge.

What about future planes? Other airlines that compete against Airasia face the same thing. So, they will increase price as well - hence evened out. This is not like MAS, SIA, Qatar, Lion Air are buying in their own currencies but Airasia is doing it in USD.

What could even be positive for Airasia is in the event it sells its leasing arm - that is in USD, would even translate to even bigger profits for Airasia and this is real number as I do not think it is even provided for anywhere.

Tuesday, November 15, 2016

Why would Buffett buys into airline business?

So the below video on CNBC, shows that Warren Buffett is really in the know on the purchase, so much so that he felt he was not doing justice to Southwest if he did not buy the airline's stock after buying the other big three i.e. Delta, American Airlines and United. This action also shows that he is picking industry and not really picking stocks as he bought all 4. (He puts more money actually into American Airlines)


This obviously made a big turnaround that caused some of observers to be wondering why would Buffett buys into a low profit airline business?

Let me take some guesses:

- Things change, industry changes as well. From a fiercely competitive industry, it has now become somewhat more conducive for players to co-exist. Airlines have now become more aware of their costs as well. Flying is no longer a rich people's travel alone. It is towards the masses, hence the full-fledged are also cutting down on frills.
- Low cost of oil. One of the largest costs component is oil depending on at what price, oil comprise of around 30% to 50% of airlines operating costs. It seems that oil price at this low USD40 - 50 is here to stay for a longer period.
- Transportation is ever more important. In the age of Uber becoming mainstream as compared to old days "sapu-teksi" was illegal, there are many spaces or industries that are or could be affected. Hotels can be affected by AirBNB. Banks is in a precarious situation. (I do not know how to invest on banks, although I still feel it is not that bad, hopefully). Media has obviously been the one that has changed. Shop retail is affected by e-commerce.
The one that could be triumphing is transportation be it towards people transport or goods transport. People travel more and more - so much so that these people are constantly on the move. They do business from one city to another, one country to the other. Casual tourists are also growing above average economic growth.
This calls for roads, rail, air transport to be positively affected. But the way some of these companies do business have to change.
Cathay rebranded its DragonAir. Why?
SIA bought into Tiger Airways. Why?
(This does not mean these airlines can be purchased. See Cathay Pacific and SIA still, their returns have not been good.)
In US, it is about the same or could even be better. New airlines are now into a business that is mature but still growing healthily - in which point it refers to lesser competition from newcomers but healthier and not careless competition among the status quo airlines.
- lesser more obvious areas to invest in. As mentioned earlier, media, banks and additionally insurance may not be what they seem to be 20 years ago. It was different then from today.
- airline business can be structured differently more so today than the past. Airlines can be leasing planes and operate as an airline rather than owning planes and operating them. This will cause lesser stress towards balance sheet than the own and operate. In any case, I am seeing airlines having a mixture of both.

Warren Buffett buying into airlines!?

Yup, hear this right!. For those whom have been saying that airlines are bad business - they are into too much debt etc. Things could have changed. This could be, a similar bet that Buffett have made a decade ago when he started to buy rail businesses and later made a huge bet on Burlington Northern Rail. Railroads need money but they are also very oligopolistic in a natural way now. This is similar to airlines in almost all parts of the world.

Although the barrier of entry to start an airline is small, but in making a successful airline is not easy - hence it is becoming oligopolistic in nature.

The below is an article on Forbes


When Delta Airlines was trading below $20 a share, billionaire Warren Buffett dismissed airlines as a place where his conglomerate Berkshire Hathaway would invest, stating at a May 2013 annual shareholder meeting the sector has “been a death trap for investors.”

Now, with Delta trading at far higher prices, Berkshire Hathaway is buying the stock and its peers, American Airlines, United Continental Holdings and Southwest Airlines.

On Monday evening, Berkshire Hathaway released a quarterly 13-F filing with the Securities and Exchange Commission, which showed it built new stakes in three airlines during the third quarter. Berkshire now owns 21.8 million shares in American Airlines, worth nearly $1 billion at current prices, in addition to stakes in Delta and United Continental of around $300 million apiece. CNBC separately reported Berkshire purchased shares in Southwest Airlines.

The buying marks a reversal of opinion for Berkshire Hathaway, which earlier in 2016 closed a $32 billion takeover of Precision Castparts, one of industry’s biggest parts suppliers. Three and a half years ago, Buffett was pressed by value investor Bill Miller on whether Berkshire would consider buying airlines due to the industry’s consolidation and rising pricing power. Buffett responded by stating “investors have poured their money into airlines and airline manufacturers for 100 years with terrible results,” citing the losses Berkshire took on a 1989 bet on the preferred stock of U.S. Air, a predecessor to American.
Now, with Precision Castparts inside the coffers of Berkshire Hathaway to go with over $1 billion in airline stock bets, it seems Buffett’s calculus may be changing. It also indicates Buffett and the firm’s up and coming portfolio managers Ted Weschler and Todd Combs spot value in the industry’s single digit price-to-earnings multiples.
American, Delta and United Continental currently trade at a multiple of less than 9-times their forecast 2017 profits, and enterprise values of less than 5-times forecast earnings before interest, taxes, depreciation and amortization, according to FactSet. Southwest Airlines trades at a more expensive P/E of 12.4x, closer in line with industry upstarts like JetBlue and Alaska Airlines.

When compared with a market multiple approaching 20-times profits and an economy showing signs of life, perhaps airlines aren’t the deathtrap Buffett once made them out to be. That being said, airlines traded off sharply during the summer as industry-wide capacity began to increase and some pricing power abated. The selloff gave Berkshire a nice opportunity to enter the sector, but it could also indicate investor concern after years of sharply rising profits.

There is a chance it is Buffett’s lieutenants Combs and Weschler who are spotting the value in airlines and caused a change of opinion inside Berkshire’s Omaha, Nebraska headquarters. After all, it was Combs who brought Precision Castparts to Buffett’s attention. Meanwhile, many of Berkshire recent stock bets such as Charter Communications, Liberty Media and Twenty-First Century Fox have come from either Combs or Weschler.

Thursday, November 10, 2016

Ekovest: What is IRR 10%

In the deal that EPF has signed with Ekovest, as mentioned, there is 1 most important clause - which is the guarantee of 10% IRR by Ekovest to EPF over the period of 5 + 2 years.

What is this IRR for those non-financial people. Basically, what EPF and Ekovest have agreed is a valuation of RM2.825 billion on the DUKE Expressway (DUKE 1 & 2). That valuation has a condition i.e. it must provide a IRR of at least 10% to EPF - a good deal to EPF as it gets guaranteed 10%.

What both parties do is that they most probably use a Discounted cashflow (DCF) method and work backwards whether the revenue, cashflow and profits achieve the intended minimum 10%.

As mentioned, there is a target to get into an exercise be it IPO or trade sale etc for the asset. If Ekovest does not achieve that, it will have to payback to EPF at a certain guaranteed arrangement.

Based on the below table, this is the assumed valuation of the highway in the event there is no dividend paid. It will on compounded basis grow 10% every year. I have provided a row on what would the value be for EPF and Ekovest as well since it still owns 60% of the highway.

Please click to enlarge
As an example, by 2020 the value of the highway if it achieves the 10% IRR to Ekovest would be RM2.481 billion. (This is the reason why I am so positive on Ekovest as this is one of its few assets)

In the event, it does not achieve the intended 10% IRR, it would be however detrimental to Ekovest - which is also why in several news report they have mentioned of their intention to quickly do an IPO probably by 2018.

I however do not think it is that bad as I trust the management to have that confidence that it will achieve 10%. In fact, if I read between the lines, EPF sees it will achieve more than 10%.

By the way, as I know despite I write so much I have not put in my money under this particular personal fund for Ekovest, I have decided to do what is obvious by buying 5000 units of Ekovest-WB (this is how confident I am) as it still has about 2.5 years to go before expiry. I took the opportunity of yesterday's slump to do that.

Purchase of Ekovest-WB at RM1.30
The purchase is partly helped by my sale of Insas-PA as I think the remaining more than 5% of return could be better now.

Sale of Insas-PA

Wednesday, November 9, 2016

TA and TAGB: The 2 stocks that took the brunt from Trump's almost failed election

Market was jittery. The world seemed like it was going to collapse. S&P's futures dropped 800 points triggering a circuit breaker. It seems like it is now recovering with both DJIA and S&P indexes are on the positive. So now the market is discovering and anticipating what kind of president Donald Trump is going to be. Pro-development? Pro-business?

Of course, during the run towards his presidency, he was expected to lose - and that has some bearing towards 2 stocks. The 2 stocks are TA and TAGB. Just look below.

TA Global over last 6 months

TA Enterprise over last 6 months
Why? Trump and TA Global have a project together. Well, now it is all luck as along the last few months Trump was a depreciated brand - i.e. bad for business partners. That seems to turnaround together with the stocks valuation of TA Global and TA as their shares were two of the not so many which rose yesterday.

The project with Trump managing the hotel is in Vancouver Canada

Both of them rebounded when it was almost certain that Trump was going to win. Prior to this (and now as well), TA and TA Global are trading at below 1/2 of their NTA.

TA and TA Global's share price rose yesterday

The drop in TA and TA Global's share price actually happened over last 2 years. The market is either not knowledgeable or fond of foreign exposed companies. That is quite ironic, as now many of TA's assets are overseas. When Malaysian currency depreciated, it should have been positive for these 2 companies but because of their exposure to foreign denominated loans, in the books it look really bad as they took losses from currency exposure. However, many people did not realise that the assets that they sat on appreciated in value as well just because of they are in other currencies in countries that are in appreciated against RM - Australia, Canada, China, Thailand. In fact, net net it is positive as their asset value (for sure) should be higher than the loan value. It is mainly accounting - not so much about the fundamental of the business.

Despite all this, I am sure there were some uneasiness and concern as well among the members of family of TA when after the Trump is declared the winner, they bought some shares of TA as shown below (just yesterday).

Just in case, you may want to read this.

Ekovest is for the long term

Yesterday, Ekovest came out with a long well crafted filing for its sale of 40% of DUKE Expressway, and when I asked my dealer on whether there are any analysts that provide report based on the filing made - I guess most analysts went home early, more interested into deciphering the US election than looking at the long-winded filing(please read them if you can) made by Ekovest. Ironically, the dealer of mine passed me an article and that article is this. I did not know they follow me too. Hence, I decided to write another one.

In deciphering the entire purpose of the company and what they intend to do, I would say Ekovest's management have been very fair to its shareholders, thus far. This is in considering that it is the type of management that is able to get into Iskandar Waterfront and Bandar Malaysia projects. They have done well in this respect.

What's important in this filing?

(Again: I request you to read yourself, even though can be tough - http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=75898&name=EA_GA_ATTACHMENTS)

  1. Special Dividend of 25 sen per share;
  2. Split share of 2 into 5 shares of Ekovest - hence par value will reduce from RM0.50 to RM0.20 per share
  3. IRR guarantee - The way the agreement between EPF and Ekovest is drafted, it is with a purpose (I would say) for a listing of the highway business within 5 + 2 years from the completion of this deal
1. Special dividend - 25 sen

I guess I do not have to explain this much but upon completion of the deal with EPF, Ekovest will pay 25 sen per share of dividend to its shareholders that hold the parent share (now RM2.35). This includes those warrant holders that have exercised the shares into parent within certain allowable timeframe.

Few things to note, based on below (if I am not wrong), even if you hold the warrant the warrantholders will not lose out as its exercise price will be adjusted accordingly after the dividend payment. Also the share split which I will discuss in the next point, the warrants will be equally split as well.

Proposed distribution means the special dividend distribution
Do also take note that from the sale valued at RM1.13 billion, RM244 million will be distributed as dividends while RM400 million to repay borrowings. The rest are for working capital and other purposes such as fees.

Details as follows:

2. Share split

As usual, the share split is to make the shares more tradeable - nothing significant but I guess the number of tradeable shares will increase to about 2.44 billion shares (inclusive of the converted warrants). The dividend will be paid first then only the shares will be split from 2 into 5 shares. As mentioned, the warrant holders will not be prejudiced. If I am not wrong, assuming the warrants exercise price is RM1.35 and after the dividend payment of 25 sen - it will be adjusted to RM1.10 before the split. (Do let me know if I am wrong.)

Proof of additional warrants to be issued

3. Exit via IPO, trade sale etc.

This item 3 is the most important and one which we have yet to see prior to this. (I DO expect good dividends, prior to this announcement).

To cut things short, basically there is a guarantee of 10% IRR to EPF for the next 5 + 2 years. (EPF has protected itself well - so everyone thats working should be happy). If Ekovest does not achieve the intended target, it will have to pay EPF the difference through the monies that are allocated under the escrow account (RM149 million). The whole negotiation as I see it is to find another place for the highway asset - most probably IPO (see below).

I would say that itself will allow shareholders of Ekovest to benefit from the dis-entanglement exercise. Most shareholders, I presume would prefer a direct exposure to the highway assets as compared to now park under Ekovest, the holding company.

For me, this is the most important element in the entire filing as it inherently explain the intentions of the organization in discussion with EPF.

I have mentioned of the intrinsic value of Ekovest. It depends on whether the management will want to surface them and allow shareholders to participate. In some events (cases like Tradewinds Plantations, old Maxis, Mamee example), the major shareholders wanted to take most of the value by privatising their controlled companies.

Seriously, I was concerned that it could have done that as the shares was trading at around RM1.00 - RM1.30 for some time.

With this exercise, I am convinced of the company even more, I should say.

Tuesday, November 8, 2016

PRS Investment Performance

4 years ago, I invested RM3,000 into Private Retirement Scheme to take advantage of the tax benefits (see especially point no 7). However, after that 4 years, sadly to say it has not helped me much except for helping the industry to grow. Although I do not reveal which fund it is, obviously I have invested into growth fund and I can only say it is one of the more prominent fund company.

I do not track the performance of other funds but it seems that our fund industry has not been able to show their worth. The government has given incentives to promote the public into investing into our unit trusts but I can't see them proving to people their worth.

Monday, November 7, 2016

What needs to be done by Ekovest

There is no doubt that Ekovest has still a lot of value although to many people the stock has climbed from around RM1.00 to now RM2.25 within less than a year. As much as one can get excited, I should also be afraid that despite good value, stocks can still go back to hibernation and that was what Ekovest was for many many years - since 2000, as I was doing some tracking back on the progress of the company during the weekend.

(Note that I prefer to look at Ekovest as valued at RM1.925 billion at price of RM2.25 rather than just the stock price itself)

For many years, the company has had many construction projects and the company's performance has been fairly volatile as I had mentioned in most construction companies. Its performance has been dependent on projects it has managed to secure as well as signed-off to register the revenue as well as profits, if any. Ekovest had one good break way back in 2004/05 where it secured the DUKE 1 project, however at that time it did not own the concession. The bigger break was back in 2012/13 when Ekovest through issuance of new shares has managed to secure 70% of the concession rights for DUKE 1. Following on, DUKE 2 and later DUKE 3 (now renamed as SPE) have been secured. As mentioned in my article earlier, these are very valuable assets which are able to provide good cashflow over the next 40+ (DUKE1 & 2) - 50+ years (SPE).

There is no other better ways to value these kind of assets besides using DCF and it seems there is already a certain growth trajectory for both parties i.e. EPF and Ekovest to agree on, hence I am quite confident of DUKE 1 & 2 (DUKE Expressway) value as given, or at least close.

Note that in the valuation of DUKE Expressway, a binding agreement was signed with a valuation of RM2.825 billion provided although subject to due diligence by EPF. Ekovest's stock is hence suspended for 2 days to allow finalisation of the contract between EPF and Ekovest although some variation to the earlier agreement may happen after EPF's final due diligence. I would think, for EPF to be committed at a certain valuation before the due diligence, the value of DUKE Expressway is already very close to the valuation of RM2.825 billion. Even if the negotiation is to fail, there are other ways for Ekovest to surface its assets.

I have read of the management of Ekovest intention to list the highways as REITS. That is a possibly good method as it allows direct participation from investors into a certain asset class. If one is to read how EPF's involvement into private equity deals, it has many times put money into a certain cash generating assets and subsequently either allow them time to be have a better and more certain growth path - then monetise them further. That has happened to PLUS and it seems KFC is going through the same path. It is not certain whether EPF may be interested to do the same with DUKE Expressway but that can always happen, and to me is the way to go to provide better returns for its depositors. There are many ways to structure the REITS IPO (if any). It could have directly submit for DUKE Expressway first, then only SPE or could have done for all the 3 highways in one listing. 

With the separate listing of the highway assets, I could safely value the DUKE Expressway and SPE to be not less than RM3.5 billion, even taking out the EPF's 40% portion. One should not forget that by 2018, SPE has still more than 50 years of concession period counting in the construction period.

Although the timeframe for SPE to be monetised (for me) could be too early if it is to be done by 2018, but I guess if it is done the RM1.13 billion cashflow from the sale of 40% of DUKE Expressway may not be used entirely for the equity portion of SPE. This will provide Ekovest with more cash.

I am thinking if the management of Ekovest wants to make it right and not putting the company's stock into hibernation, surfacing the assets individually especially those with good cashflow is the way to go. Let the investors decide which they want to invest into.

Learn To Spot a Forex Scam To Protect Your Hard Earned Money

Forex or FX is the short form for foreign exchange which involves buying, selling and trading of currencies. The most widespread foreign exchange scams are forex schemes which usually promises very high returns or profit rates. Learn how you can spot a forex trading scam so you don’t fall victim and lose your hard earned money.

1. They Offer High Initial Returns

To lure investors and get them to pump in more money, scam operators may initially offer extremely high returns for your initial investment. This is to convince you to increase the amount of investment when you reinvest again during the second round. But what usually happens is the victims will lose everything when the illegal foreign trading scheme operators don’t give the promised profits. The victim will also find that the illegal foreign trading scheme operators have cut off contact completely when they do not receive the profits.

2. They Claim To Be Small Scale

Illegal foreign trading operators may tend to operate on a smaller scale and will claim to do so to provide more efficient remittance services. They will also say you don’t need any documents or identification. These illegal operators will be reluctant to use documents to validate and verify transactions. They will usually give various excuses or even delay processing the documents for verification. By engaging with these types of operators, investors risk being cheated as a result of the lack of documentation as proof if anything happens to your investments.

3. They Operate “Overseas”

Many forex trading scam operators are based overseas in order to take advantage of their victims. The operator usually informs his or her ‘investors’ that they have to send the contract and documentation of the investment to their headquarters located overseas to get it signed.
But victims will usually later find out that the contracts were left unsigned from the operator’s side. Because there is no binding contract between the two parties, legal action cannot be taken even though the investors are unhappy with the transactions. Furthermore, as the forex scam companies are based outside the country, Malaysian authorities cannot do much for the victims.

There will always be some risks involved when it comes to investing. If it promises an excessively high returns within a short span of time you should be wary. Stay safe by dealing with licensed companies or individuals for your investments. Another tip is to only deal with licensed onshore banks in Malaysia. This is because in the event that anything happens, it will be difficult to recover your money when dealing with offshore banks.

This article is contributed by CompareHero.my.

Friday, November 4, 2016

How do companies avoid earnings volatilities?

I probably have a magic trick which I hope I can say I can help companies to avoid volatilities in their earnings. I DON'T.

Basically many companies - or all of them - CANNOT avoid volatilities! Some businesses or companies are just more volatile than others. For example, a company which provides tax filing business for tax returnees makes only one quarter profit, H&R Block most of the time registers 1 quarter of profits while the rest of the quarters it registers losses. It makes a lot during 2nd quarter of the year when individuals or companies file their taxes. Other quarters, are just very quiet for the company.

In Malaysia, airlines for example make more during the 4th quarter due to end of year school holidays. In Europe, airlines make the most in the July to September quarter while during winter, they probably can make losses.

Construction companies have high volatilities due to the nature of their business which is dependent on sign offs and contracts in which case I gave some opinions on Gadang. Hotels, retail, toys businesses can be very seasonal too.

To provide soft landing to anyone's earnings on a quarterly or annual basis is CHEATING. No company can or should do that.

I just read an article which teaches companies to avoid filing bumpy financial results through several methods - in which case, one of the method is to increase the company's provisions. This is hugely wrong.

In fact, what companies should do is to provide more guidance or reasonings on their results. As an example, if the company has huge exposure to earnings or borrowings from foreign currencies, they should explain - not leave it to individual investors to decipher. Numbers sometimes do not match the actual performance. This is also why analysts use core earnings as part of their valuation.

Malaysian companies generally do not do well in explaining. They in fact are not that honest sometimes.

As an example, I remember, I wrote an article warning investors on some of the good results which were registered by several export oriented companies, and many investors jumped to the good results like bees to honey. This example was by a company which I respect - Top Glove. And to prove to what I have said here is an example on its press release during 30 November 2015 results, the height of our Malaysia recent economic problem where our currencies dropped drastically last year.

Part of Top Glove's press release for Nov15 quarter ending results

If you read the article I wrote December last year and the rationale which was provided by Top Glove for example (I boxed in red), the real reasons why Top Glove made good money was not MAINLY because of their operational efficiencies. Operational efficiencies do not bring 173% improvement in bottomline in just one year. If today, one is to go though its latest results, it has come down as its huge currency benefits from ringgit depreciation has dwindled and buyers (foreign companies) can now have better bargaining power as Top Glove's competitors can also fight back by providing lower pricing. (Note: This does not mean Top Glove is a bad company)

As I have said many times, do not look at quarter to quarter results. They can be misleading. Look at fundamentals of the business and perhaps their annual results as they are audited.