Singapore Stock Market News

Buffettology is really a good book. I think I'm going to get this book for sure, as I think I'll re-read 12 times. I made an important realisation when I'm a quarter into the book. This realisation is handy to quickly get a rough value of a business entity that sounds promising. First of all, I need to assume 2 things:

1. When I buy shares of a company, I am a partial owner of the business entity, hence I'm entitled to get a part of the earnings generated by the entity. Hence, EPS (earnings per share) of the company is also my earnings, though the earnings can either be put back into the business to generate more future earnings, or it can be distributed to shareholders like me as dividends.

2. The market will someday price the company at the right value.

We can calculate the earnings yield of a business, which is also the inverse of the P/E ratio. Supposing that the PE of a company is 12, then the earnings yield will be 8.33% (1 / 12 = 8.33%). This will be like a bond where you pay the price of the stock and expect to get an earnings of 8.33% with 2 major exceptions. First is that you might not get the principal back at the end of the period - which is both a good or bad thing because you might get more or less than the principal you put in. Second, the returns of 8.33% per year can vary - it can go up or down.

Of course, when we're investing, we will want the earnings per year to go up. Based on assumption 2, this means that the price will also go up. Conversely, if earnings go down, the market will also price the stock accordingly.

Let's say I want to get a returns of 15% per annum. Let's say the EPS (forward) is $0.23, it will mean that I will have to buy at $1.53 (0.23/0.15 = 1.53). If I pay:

$2.00, my earnings yield becomes 11.5%
$1.00, my earnings yield becomes 23.0%

In other words, the lower the price, the better the yield becomes. For me, I'll be happy with a earnings yield of 15%, which means a PE of 6.7 (1/0.15 = 6.7). If I buy a company with PE greater than 6 or 7, that will mean my earnings yield becomes lesser than 15%! That's an important realisation!

Of course, this is a simplistic case. What happens if the earnings keep on increasing? That will mean that my yield will increase and increase, even though the price of the stock remains the same! I finally understand why price is irrelevant, except when you're going to buy or sell, because earnings is what matters at the heart of this. But if we can assume assumption 2 to be true, then eventually the price of the stock will also increase as long as the earnings do too.

Okay, what happens when company gives out dividend? If profits earned are either put back into the business to let it grow or are given out to shareholders are dividend, it will only mean that when dividends are given out, future earnings will not grow to its greatest potential. Responsible companies that have no confidence of being able to maintain or generate higher earnings will give out dividends to shareholders. For those companies that can generate higher returns, why ask for dividends? Can shareholders generate returns higher than the ROE of the company themselves?

I'd rather let the company compound the earnings for me.

A few things must be put in place here.

1. Companies must be capable and responsible to handle the earnings efficiently. Otherwise, mismanagement of earnings into less worthy avenues will erode the value. Hence, an efficient, capable and candid management is crucial.

2. Inherent economics of the business must be sound. Some business/industry are just better than others.

3. Companies must have an economic moat so that their earnings will not be eroded by future and present competitors. This will ensure that earnings are high, consistent and growing.

This is going to be an exciting journey :)

This report was compiled by DBS Vickers this morning:

March Down to A Quiet Quarter.

URA released yesterday the monthly price and sales data of new residential units sold in the month of March. Developers sold a total of 301 units in March, and this brings the total number of uncompleted units sold by developers in the first quarter of 2008 to 795 units.

This is the lowest number of new units sold in a quarter since 1Q2003 (when 322 units were sold), during the worst of the SARS crisis. The quarterly data is within our expectations and continues to reaffirm our view that the economic uncertainty relating to the sub-prime crisis and the health of the US economy took a toll on the confidence of property buyers.

March Less Than Before.

On a q-o-q basis, 1Q08 new sales declined 43% from the 1,397 units sold in 4Q07. On a y-o-y basis, the contrast was even starker – an 83% slide from the 4,565 new units that were sold by developers in 1Q07.

Prices were generally maintained across the broad market segments, supporting the earlier flash estimates of a 4.2% increase in overall prices in 1Q08. However, some developments began to see lower prices in their transactions, although this was again observed more in the projects by smaller developers.

High-End Prices Likely to Fall.

The 53 units at Grange Infinite that were sold to ARA Asset Management at a median S$psf of around S$2,600 in March 2008 is about 20% lower than the last transacted price (in January 2008) of around S$3,300 psf for that development.

This is consistent with our belief, highlighted in "Frosty February for Home Sales, 18 March 2008", that the high-end segment could come under some price pressure this year, with a possible drop of up to 20% in high-end prices.

A Challenging Quarter Ahead.

Going forward into the second quarter, we believe that the number of launches will continue to be thin in line with the caution and volatility in global financial markets, as the sub-prime woes continue to unravel and the prognosis of the US economy becomes clearer.

If overall global economic news continues to be negative, developers may start to get more realistic with their pricing; but if 2Q08 signs point towards a quick recovery in the US economy, then developers may decide to maintain price levels at the expense of slower sales.

Either way, 2Q08 should continue to be a challenging quarter for the property market.

Marching Forth.

Going forward into 2Q08, we believe that the number of launches will continue to be thin in line with the caution and volatility in global financial markets, as the sub-prime woes continue to unravel and the prognosis of the US economy becomes clearer. 2Q08 should continue to be a challenging quarter for the property market.

We continue to prefer companies that are more well-diversified geographically, with a multiple-revenue model that combines both development properties as well as investment properties. Among those with a focus on development projects, we would prefer diversified players that have a greater exposure to the mass-market segment.

Our top picks in the sector are Allgreen Properties (BUY, TP S$1.66), which offers attractive P/Book NAV valuations along with a stable recurrent income from its commercial properties and low-cost mass-market landbank.

We also continue to like F&N (BUY, TP S$5.85), which has become a relatively big mid and mass-market developer whilst offering exposure to the less cyclical F&B business.

This report was compiled by analyst Narjeeb Jarhom for AmFraser Securities this morning:

STI tested 3000-3050 support zone and poised to recover back to 3100-3150.

The market is unlikely to sustain any downtrend all the way below 3000 to 2900 or 2800 during the current earnings season without making significant rebounds as the macro picture has not deteriorated.

At this stage the market is not reacting too negatively to the same old bearish views that the worst of the sub-prime is still to come and that the US is headed for the worst economic and financial woes since the oil crisis of the 70s or even since WW2 or the Great Depression of the 30s.

Even the likes of Ben Bernanke and Alan Greenspan have acknowledged that the balance sheets of US corporations are sound with strong cash positions and that the real economy “appears to be reasonably good” which implies that core corporate earnings should underpin the market in the event of more sub-prime related credit losses.

After the first quarter market turmoil, analysts too have become increasingly cautious in earnings forecasts which should help to mitigate any investor disappointments during this latest reporting season.

Having seen the STI plunged some 28% from its 3831 peak to 2746, with the 2750-2800 area well-defended after being tested 3 to 4 times, there is less fear of a major crack of this support level anytime soon.

Although the future remains bleak the market has a way of adapting itself to bearish situations always trying to discount them quickly and try to read the fundamental picture 6 to 9 months going forward.

Thus even if the credit losses reach the US$945b IMF figure or $1.2tr Goldman Sachs estimate, Wall Street’s reaction may not be worse than it had been in q1 which had seen the Dow plunged to below 12000 to around 11600.

Investors have been encouraged by the consistent rebounds to above 12000 with the Dow showing single digit year to date loss (currently 7.4% down at 12302).

This will lead to more widespread views that Wall Street will be sticky on the downside and the STI too will not easily break the established 2750-2800 support.

The recent strong rebound to as high as 3181 shows the market’s potential to look at the bright side of things especially with the Singapore economy rebounding strongly in q1, the strong S$ which will mitigate inflationary pressures and the continued bullish economic picture with tens of billions to be pumped into transport and building projects.

The STI’s recent rebound and relatively tame pullback notwithstanding yesterday’s 84 point plunge (lows of 3035 yesterday/today), shows the market had read the local economic and hence earnings picture well and will not over-react to bearish overseas leads more than it had done earlier.

The STI after all is down 12.4% YTD against 7.4% for the Dow when our economic and earnings picture look much better than the US.

Thus there is still a good possibility that the STI will meet our 50% retracement target of 3250-3300 in the next one to 2 months. At this level it will still be 5-6% below 2007 close of 3466.

I'm extremely delighted today :)

First of all, I've been hunting for Philip A.Fisher "Common stocks and Uncommon profits" for some time already. I've chanced upon it a few weeks ago, only to go back home in disappointment because the book cannot be borrowed due to some technical problems. But this time, I found it nestling between the shelves. It's a bit old, but I'm too happy to find it to care much :)

The second thing is that the 2 books that I've been waiting was mailed over to me today! I've been waiting for the free copies of the books after completing the pop quiz by Wallstraits. Been 2 long weeks! I'm even beginning to suspect that it was somehow lost in the mail till it came over today.

The books are in excellent condition - hard covered and smells of 'new'-ness, enticing me to read it. What's more impressive is the fact that both the books are signed by the author, Curtis J. Montgomery, with a short encouraging phrase addressed to my name. I was both touched and impressed by this act of generosity and sincerity that I promised to myself that when I have such a day that I publish my own books, I'll do the same to pay it forward.

Thank you Wallstraits! You not only delivered my free books to my doorstep, you've also received a promise by La papillion to pay this kind act forward.

Monopoly Rules by Milind Lee was a book that I completed reading last week. I didn't have time to publish what I thought about this book last week, so this is a bit long overdue.

In a nutshell, I think this book is very interesting. The author talks about the wrong focus on SCA (sustainable competitive advantage) whereas they should first focus on whether their business have a monopoly. Let me explain. Monopoly, according to the book, isn't exactly the definition that text books gave. To state it simply,

Monopoly is an ownable space for a useful period of time.

There are 2 aspects of monopoly, space and time. Space is talking about the product uniqueness, service uniqueness and price difference. You find that those 3 that are mentioned are actually something tangible space - that can be seen. There are other intangible space, namely custom/tradition and emotional involvement. Perhaps I need to explain a little more on custom/tradition and emotional involvement by giving some examples.

Some companies, by virtue of them having been around, will have what I call brand presence. The book quoted Standard and Poor, having been around for so long, will be the first place a newbie will look for to find out about a company or a unit trust. Emotional involvement will be those that Warren Buffett owns...coke, see's candy and so on.

Time will be the other aspect of a monopoly. There only 2 things to talk about it - either we know the length of time of the monopoly (trademark, regulation, patent, copyrights etc) and unknown (how long will ebay monopolise the online auction trade).

These are the different types of monopoly.

1. Asset monopolies

This is based on tangible assets or brand (yea, i know brand is intangible, but that' how the book classifies it under. A brand is something that can be seen, hence it's classified under asset by the author)

Limited natural resources, unique products/services, breakthrough in technology, license/patents/technologies/copyrights are all examples of this type of monopolies. The author sees this type of monopolies as old-schooled and will be less and less relevant in today's fast changing economy. These are easy to see and hence they are easier to erode by competitors.

2. Situational monopoly

This is one that exists because there is a need that no other companies met or even discovered. Even in generally bad industry (like airlines), certain companies can still find a little need that is totally unmet by others can carve a situational monopoly for itself.


nuffnang_bid_sing = "6ab2c870667e6fd25a550454f47307af";
Monopolies need to be protected by 3 havens:

1. Regulation haven - controlled by legal rights such as patents and government controlled.

2. Technological havens - such as the difficulty to do, copy, reverse engineer or it simply costs too much

3. Customer islands - these are network effects such as high switching cost and loyal customers. Think ebay.

I think this part of the book is most interesting. It talks about how to identify monopoly in companies so that one will know when he/she sees one. These are the 5 questions he/she ought to ask when searching for one:

1. Do your customers see only you if they are looking for this product or service?

2. Are you invisible to your competitors?

Some companies are in denial and/or are complacent and arrogant, thinking that this and that companies poses no threat to their business until it's too late. It happened to AT&T and Bells, long time ago in US.

3. Are the true competitors outside the dotted line?

By dotted line, the author means that these competitors are classified outside the definition of your industry. For example, when thinking about the competitors of airlines, sometimes the competitors are not other airlines, but are other modes of transportation. By looking outside the scope of your immediate industry, perhaps more can be said about the strength of the monopoly.

4. Can you price like a monopolist?

5. Do you earn unusually high profits?

Quite a good reading as I learnt more about this aspect of analysing my own business and other companies :) Next time you evaluate any company, think along this line:

1. Where is the monopoly?
2. How does it came to be?
3. How long does it last?

I think it'll be quite a good guide to analyse any companies qualitatively :)