The power of Tony Fernandes's brand

On a holiday, I was watching CNBC Europe yesterday and what CNBC had was a 15 minutes interview with Tony Fernandes. They were not just talking about Airasia and Airasia X as well as the challenges that his airlines are facing but also QPR.

What strikes me about the interview with Tony was that, unlike some other interviews, CNBC Europe was pre-empting viewers (for some 2 hours) that Tony was to be part of the show for the day which made me stayed on to watch. Like I said, it ended up as only a 15 minutes interview - maybe less even.

Now - let's think it over - Airasia is not even a part of Europe nowadays. It does not fly to Europe anymore. He is part owner of QPR and QPR is not even a Premier League team now. But what makes CNBC pre-empting its viewers for some 2 hours not letting us know at what time the interview was supposed to happen? Tony Fernandes is a big brand himself even in Europe.

One may or may not support Airasia - due to several things that it made to its consumers - like charging for almost anything, but as a Malaysian ain't we proud that we have someone like him?

How do we leverage on his brand? How does Malaysia support him rather fight him? We embraced lesser stars aren't we? - Jimmy Choo (whom does not own the Jimmy Choo brand anymore) and Michelle Yeoh and her husband (not a Malaysian), even.

I have been on local flights every week nowadays - and the thing that strikes me is that airfares price competition has gone to quite ridiculous stage. I like it, as it allows me to buy cheap flight tickets, but I also know that it probably will not last - got to enjoy it while I can.

While I know Airasia is one of the brands controlled by Malaysians and made it big by Malaysians is facing lots of challenges from the likes of Malindo and MAS - we know that the current situation will not last. We should not give in to Tony Fernandez and his group with a silver platter. He is a furious fighter. What Airasia has is scale, speed and sourcing. If Malaysia does not turn out well for Airasia, it has the ability to move beyond Malaysia. Not MAS.

But we are using taxpayers money (for MAS especially) to fight on something which you know MAS will lose without the support of government's money. Malindo is facing the same thing. I do not know who owns the 51% of Malindo (except that it is NADI - and who is behind NADI?) and I like the price competition but not the way it is fought.

We are just fighting a war which all will lose. Consumers win for now - but somehow or rather it is very short term. What we need is a major revamp in terms of cost structure for MAS, not giving extra privilege to Malindo whom is allowed landing in Subang but not Airasia. Not the way the war is fought currently.

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Surprise winner in frontier debt last year

Which was the best performer in emerging bond markets last year?  The sector had a pretty torrid year overall, with sovereign dollar bonds finishing 2013 almost 7 percent in the red. But there were exceptions.

The best returns were to be had – hold your breath — in little-watched Belize, a member of JPMorgan’s NEXGEM frontier debt index. Someone who bought Belize debt at the start of last year would have been in the money, with gains of 50 percent, though the returns were in fact down to the restructuring of Belize debt early last year.

Second on the list was Argentina, despite court wranglings over hold-out funds from the country’s 2002 default.

Just as frontier stocks  outstripped emerging stocks in 2013 (Bulgaria was top dog in that index), the NEXGEM index as a whole outperformed emerging debt, enjoying returns of 5 percent last year.  Interestingly, the top 10 also included Ecuador, Jamaica and Cote d’Ivoire, three other countries that have been in default in the recent past.  

According to JP Morgan analysts:

NEXGEM issuers are likely to continue to come to market, with 16 countries forecast to issue a total of $14.8 billion in 2014, which would be a 40 percent increase from 2013

Frontier markets broker Exotix has Pakistan, high on the returns list for last year, as one of its top five picks in a note out this week, after investors cheered democratic elections last year:

So far, so good for the new government, elected on a platform of improving the business environment. Economic reforms have a long way to go, and we see further upside for the bonds.

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Rights, warrants, buybacks, dividend 101

Seriously, what does one expect from stocks investments? Capital appreciation, dividends, excitement - win or lose, learning experience?

Investment is a serious game. Unless, you are into it as a replacement for your weekly casino frequency, one should study the behaviour of the management, owner, company besides their financials which is equally important.

In studying the company's management, one should look at the behavioral trend of the company with their financials, which is why how these companies do their capital repayment, dividends, rights, warrants are important.

Think of companies as like running a family's expenses - whenever you need money, you borrow or ask from other members of family maybe in the form of capital investment. If you have more than enough, you will give more to your siblings, parents. You do not take in more debt if you do not need them. You do not mislead your family members that you need more money when you do not need them in order for you to buy a bigger car or a bigger house.

Similarly, rights, warrants, dividends and even buybacks are the same conceptually.

Dividends - Dividends are important when the company feels that it has more than enough money to be used for a period say more than a year and it is willing to share with you, the shareholders the extras beyond its need for operations. If it does not have enough or feel that it needs to use the money for further expansion or in anticipation of future needs, it should not be ditching out more than it should. If you follow my blog, I am wary of companies that issues dividends and yet over the short term, requesting for more money through rights.

Of course dividend is important to most shareholders, as this is a gesture that the company is showing to its shareholders that it is willing to share its extra cashflows - which is why sometimes, dividend policy is useful.

Equally useful to the shareholders is share buybacks. The flipside of buybacks is only that when the management or controlling shareholder uses it for their advantage. It is when they uses the company's financial resources to buy the shares from the market but at the same time, selling their own shares. Buybacks are good when it is used as a tool to provide support for its share price especially during high volatility and even more so, when the prices of the shares are undervalued. One should not underestimate the confidence that the management can create towards its share price especially during high volatility by doing buybacks.

On the other side to sharing their additional funds through dividends or capital repayment, is rights issue. Rights issue is when the company is asking you for more money due to their needs. As a shareholder, we always entrust the controlling shareholders to manage the money carefully - which is why one would probably wonder why I am writing an article on a company which I do not intend to invest in anyway - on its rights issuance.

In my mind, that company does not need the fund - it uses it for its controlling shareholders benefits - which you, as shareholder or potential shareholder have to be careful of. You do not give money to one who will probably misuse your money. Worse still in that case, it is not beneficial to the shareholder to not pick up the rights and it is not beneficial either to pick up the rights as the money may not be used in the right manner. The shareholders of Bright are caught in between a rock and a hard place.

Almost all companies need to reinvest or do investment. Anyone who underinvest, may lose out in the future as competition will always take opportunity on any conservative companies that do not take the more aggressive or continuous investment approach. in this case, rights are not always wrong. On that note, quite a lot of companies - Gamuda, IJM, WCT etc.- that do rights in their early days would go on to be successful as they have acted upon the rights correctly and carefully and by sharing that piece of investment needs with their shareholders. We as shareholders, can only hope their decisions are the right one.

What about warrants? Warrant is an option to pick up more shares of the company in the future. As for the company, it is a way for the company to raise more funds in the future. Warrants should not be used as a tool for the controlling holders to cash out, as that action is almost like misleading the investors - many of whom may be ignorant. Worse still if one is to buy the warrants from the market, and they end up out of the money. The warrants are worthless.

And even if it is in the money, one should think twice of exercising the warrant as putting more money into the management that you do not trust, is something which you should not do.

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The Most Successful Dividend Investors of all time

Dividend investing is as sexy as watching paint dry on the wall. Defining an entry criteria that selects quality dividend stocks with rising dividends over time and then patiently reinvesting these dividends while sitting on your hands is not exciting. While active traders have a plethora of hedge fund managers on the covers of Forbes magazine there are not many well-publicized successful dividend investors. Even value investing has its own superstars – Ben Graham and Warren Buffett.

I did some research and uncovered several successful dividend investors, whose stories provide reassurance that the traits of successful dividend investing I outlined in a previous post are indeed accurate.

The first investor is Anne Scheiber, who turned a $5,000 investment in 1944 into $22 million by the time of her death at the age of 101 in 1995. Anne Scheiber worked as an IRS auditor for 23 years, never earning more than $3150/year. The one important lesson she learned auditing tax returns was that the surest way to become rich in America is by accumulating stocks. She accumulated stocks in brand name companies she understood and then reinvested dividends for decades. She never sold, in order to avoid paying taxes and commissions. She also never sold even during the 1972-1974 bear market as well as the 1987 market crash because she had high conviction in her stocks picks. She also held a diversified portfolio of almost 100 individual securities in brand names such as Coca-Cola (KO), PepsiCo (PEP), Bristol-Myers (BMY), Schering Plough (acquired by Pfizer in 2009). She read annual reports with the same inquisitive mind she audited tax returns during her tenure at the IRS and also attended annual shareholders meetings. Anne Scheiber did her own research on stocks, and was focusing her attention on strong franchises which have the opportunity to increase earnings and pay higher dividends over time.

In her later years she reinvested her dividends into tax free municipal bonds, which is why her portfolio had a 30% allocation to fixed income at the time of her death. At the time of her death, her portfolio was throwing off $750,000 in dividend and interest income annually. She donated her whole fortune to Yeshiva University, even though she never attended it herself.

The second investor is Grace Groner, who turned a small $180 investment in 1935 into $7 million by the time of her death in 2010. Ms Groner, who worked as a secretary at Abbott Laboratories for 43 years invested $180 in 3 shares of Abbott Laboratories (ABT) in 1935. She then simply reinvested the dividends for the next 75 years. She never sold, but just held on to her shares.

She was frugal, having grown up in the depression era, and was the classical millionaire next door type of person who was not interested in keeping up with the Joneses. Grace Groner left her entire fortune to her Alma Mater. Her $7 million donation is generating approximately $250,000 in annual dividend income.

The reason why dividend investors are not highly publicized is because dividend investing is not sexy enough to be featured in the financial mainstream media. In addition to that, it is not profitable for Wall Street to sell you into the idea that ordinary investors can invest on their own. Compare this to mutual funds, annuities and other products which generate billions in commissions for Wall Street, despite the fact that they might not be in the best interest of small investors.

The third dividend investor is Warren Buffett, the Oracle of Omaha himself. In a previous article I have outlined the reasoning behind my belief that Buffett is a closet dividend investor. He explicitly noted in his 2009 letter that "the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow". His investment in See's Candy is the best example of that.

Some of Buffett's best companies/stock that he has owned such as Geico, Coca Cola , See's Candy are exactly the types of investments mentioned above. He has mentioned that at Berkshire he tries to stick with businesses whose profit picture for decades to come seems reasonably predictable. Per Buffett the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. In addition, his 2011 letter discussed his dividend income from all of Berkshire Hathaway investments, including his prediction that Coca Cola dividends will keep on increasing, based on the pattern of historical dividend increases.

In this article I outlined three dividend investors, who managed to turn small investments into cash machines that generated large amounts of dividends. They were able to accomplish this through identifying quality dividend growth companies at attractive valuations, patiently reinvesting distributions and in two out of three cases maintaining a diversified portfolio of stocks. These are the lessons that all investors could profit from.

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Most valuations (even good ones) are wrong

Now this can be shocking to you if you spend a lot of time arriving at that magical number (intrinsic value) that helps you ascertain whether you must buy a stock or not.

Damodaran talks about three kinds of errors that cause most valuations – even the ones “meticulously” calculated – to go wrong:

1. Estimation error…that occurs while converting raw information into forecasts.
2. Firm-specific uncertainty…as the firm may do much better or worse than you expected it to perform, resulting in earnings and cash flows to be quite different from your estimates.
3. Macro uncertainty…which can be a result of drastic shifts in the macro-economic conditions that can also impact your company.

The year 2008 is one classic example when most valuations – even the good ones – went horribly wrong owing to the last two factors – firm-specific and macro uncertainties.

As Damodaran writes…

While precision is a good measure of process in mathematics or physics, it is a poor measure of quality in valuation.

So, to value or not value?
Knowing that your valuation could be wrong (and in most cases, it would be) despite any kind of precision you employ in your calculations, it should not lead you to a refusal to value a business at all.

This makes no sense, since everyone else looking at the business faces the same uncertainty.

Instead what you must do to increase the probability of getting your valuations right is…

1. Stay within your circle of competence and study businesses you understand. Simply exclude everything that you can’t understand in 30 minutes.
2. Write down your initial view on the business – what you like and not like about it – even before you start your analysis. This should help you in dealing with the “I love this company” bias.
3. Run your analysis through your investment checklist. A checklist saves life…during surgery and in investing.
4. Avoid “analysis paralysis”. If you are looking for a lot of reasons to support your argument for the company, you are anyways suffering from the bias mentioned above.
5. Calculate your intrinsic values using simple models, and avoid using too many input variables. In fact, use the simplest model that you can while valuing a stock. If you can value a stock with three inputs, don’t use five. Remember, less is more.
6. Use the most important concept in value investing – ‘margin of safety’. Without this, any valuation calculation you perform will be useless.

At the end of it, Damodaran writes…

Will you be wrong sometimes? Of course, but so will everyone else. Success in investing comes not from being right but from being wrong less often than everyone else.

So don’t justify the purchase of a company just because it fits your valuation. Don’t fool yourself into believing that every cheap stock will yield good returns. A bad company is a bad investment no matter what price it is.

Charlie Munger explains that – “a piece of turd in a bowl of raisins is still a piece of turd”…and…“there is no greater fool than yourself, and you are the easiest person to fool.”

So, get going on valuing stocks…but when you find that the business is bad, exercise your options.

Not a call or a put option, but a “No” option.

Have you ever avoided buying a stock you “loved” because its valuations were not right? 

http://www.safalniveshak.com/avoid-2-bitter-truths-of-stock-valuations/

2 Bitter Truths of Stock Valuation

1. All valuations are biased

2. Most valuations (even good ones) are wrong

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Pay for Retirement with a Cup of Coffee and an Egg McMuffin

Pay for Retirement with a Cup of Coffee and an Egg McMuffin
$3 a Day Can Add Up to a Serious Nest Egg

By Joshua Kennon

How many times have you swung by McDonalds on your way to work for a cup of coffee and an Egg McMuffin? It may seem like small change, but the $3 a day it is costing you to buy your breakfast can fund your retirement. Don't believe it? Let's take a look at the numbers.

The stock market has historically averaged a return of around twelve percent. If you began investing $3 a day at twenty five years old and earned the same rate of return, by the day you reached sixty-five, you would have saved a total of $381,437 before taxes. That's a pretty substantial nest egg by anyone's standards. The results are even more spectacular if you start younger (a sixteen year old would save $789,896 pretax by retirement).

Why such the drastic difference between the 16 and the 25 year old? Compounding. When you invest or save, your money earns more money in the form of interest or dividends. If you reinvest these, you earn interest on your interest. Here's how it works: You put $100 in a savings account that earns 4% annually. At the end of the first year, you earn $4 in interest. Let's say you keep that $4 in the savings account. At the end of the second year, you would earn 4% on the $104 (instead of the original $100). This would result in your interest payments higher each subsequent year as you kept reinvesting your interest.

For those of you who are thinking, "Well, I'm 30, 40, 50, or 60+ years old. What can I do?", don't worry! No matter when you start, if you are diligent and intelligent in your investing, you will end up with more money than you would have had otherwise. A fifty year old could still put aside more than $36,013 by following the three-dollar-a-day plan.

The next time you bite into that sausage egg and cheese breakfast sandwich, keep in mind you may be eating your retirement.

http://beginnersinvest.about.com/cs/retirementcenter/a/040302a.htm

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Looking at Inari to understand Insas(Revised)

Anyone who puts in money in Insas over the last 4 - 5 months would have made decent sum - increase from RM0.50 to now RM0.94, which coincidentally was about the period which I wrote about the company. In this particular article, I wanted to know what makes the sudden rise in the stock price whereas it has been in trading in the RM0.40 to RM0.60 for a long time.

I wanted to know what type of character are behind the owners. As in my previous article, again not much can be known except that it is led by a careful investor, Datuk Thong. To do this, I would like to take a look again at Inari. Inari is a hugely successful invested company made by Insas and I would deem it to be successfully managed by the group of management. Insas has about 36.6% of Inari and on top of that it has about 16% of its warrants. Those holdings in Inari alone is worth about RM292 million according to Inari's price todate.

Inari Amertron is involved in EMS business. Just for knowledge, the largest EMS company in the world is Foxconn or Honhai which many people know manufactures for Apple and many other companies. To provide a simple analogy, EMS is something which some technology companies do not want to deal with as many of these companies largely concentrate on the technology aspects, hence phasing out some of the work to specialised companies like Hon Hai (for Apple). Inari is such for a company called Avago.

Avago, a spin offs from the old HP company and is hugely successful in having a large penetration supplying power amplifier chips and other technologies to most of the smartphones and tablets companies. As smart phones' penetration continues to grow, Avago as expected flies. Similarly, Inari riding on that wave as a contract manufacturer for Avago is enjoying that as well to the extent that its share price becomes one of the most successful IPO of recent times.

Inari's price chart since IPO

I know that Inari is doing well. But I wanted to probe further as I also wanted to know is there any action taken to take advantage of the over-exuberance towards the company. While Avago and Inari are performing, it is a business which I am not able to gather my thoughts or foresee over the next 5 years for example. It is a business which is largely dependent on orders and contracts. Apple's iphone and ipad, and Samsung's Galaxy or HTC's line of products may be using Avago's technology now. This things, as we know can change, which is why over the longer term it is important for Inari to not be overly dependent on Avago although it has been a very good partner.

A look at its financials can be done to sometimes ascertain that.

Based on the above numbers, it is pretty solid with good revenue and PAT growth. Against its free cash flow however, Inari does not seem to be doing that strong. I can partly understand however as one will need to invest quite substantially for it to grow as a EMS player. This I believe is warranted.

PAT and GP margin for last 9 quarters

It mentioned that its margin improved substantially due to economies of scale as provided below.

Would Inari be a good buy for the future and how about Insas? As mentioned before, Insas has some intrinsic value where as a investment company, it is doing decently well. To how much would the shareholder be providing value to its investor, that very much remains to be seen.

Inari, on the other hand would still be very dependent on Avago while Avago would be dependent on its technology for the smart phones and tablet industries. That is a lot of "IFs" I would say and looking at its share price todate, if one is to still jump in - I just have too many questions still. It is now priced at close to Globetronics market capitalisation and how it achieved this is just too strong for a EMS player.

Nevertheless, if it is able to achieve that momentum, the current traded price is still attractive.

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