How to Keep Away From Muddy Waters?

The commotion surrounding Muddy Waters and Olam has been the latest talk of the town. Muddy Waters said that Olam has accounting discrepancies and it has since released a 133-page report on why it feels as such. Olam retorted and defended itself in a 45-page report. Muddy Waters has said in its report that Olam is a “black box” just like Enron, which collapsed in 2001. The purpose of this post is not to dissect the reports, as many other capable accountants and analysts have already done that, but rather to educate readers on how to avoid investing in such companies.

I’m not surprised that Olam has attracted the attention of Muddy Waters. The debt levels of Olam are astronomical and cash flow from operations and free cash flow has been negative for a long period. Only in two of the past 11 periods has free cash flow been positive. The table below shows some of the figures for six periods from 2007 – 2012:


Olam’s CEO, Sunny Verghese, has told The Edge recently that Olam attracts many traders who short the stock due to their financial numbers. How can an investor protect himself and invest in a company that does not attract the attention of Muddy Waters and the likes?

One way is to invest in a company with a clean balance sheet. This means investing in companies with zero or negligible debt. Having lots of debt presents problems. Take the “Total debt” and divide it by “Net Income”. Ensure that it this value is below three (zero would be the best). This ensures that the company is not over-leveraged. Companies with lots of debt will face re-financing problems when a recession strikes. In the worst case scenario, the company might go into bankruptcy.

The company must also have positive Cash Flow from Operations. Preferably, the numbers should be increasing yearly. Furthermore, the company must have Cash Flow from Operations higher than Net Income. Cash is king in any company and scrutinizing the Cash Flow Statements is more prudent than scrutinizing the Profit & Loss Statements. Net Income does not provide an accurate picture as some revenues are booked even though the cash has not been received physically by the company yet.

The above are some of the matrices one has to look into before investing in a business. Avoid investing in companies with lots of debt and negative free cash flow for long periods of time. It is better to stay away from such businesses entirely than be sorry later!


Tiger Got Mauled

Tiger Airways has been banned from flying until next Saturday in Australia, following a serious safety breach on Thursday. The Australian Transport Safety Bureau confirmed it was investigating the latest incident at Avalon Airport, near Geelong, on Thursday night in which a plane is understood to have dropped 900ft below the 2500ft safe minimum height.

Tiger has also been given the Civil Aviation Safety Authority (CASA) show-cause notice to improve the proficiency of Tiger’s pilots, improvements to pilot training and checking processes, changes to fatigue management as well as improvements to maintenance control and ongoing airworthiness systems.

Today, on the first day of trading after the ban, Tiger Airway’s stock price plunged 15.97% to close at $1. Is this just a small blip for Tiger or is this the start of more woes? Only time will tell.

Artivision or Dudivision?

Many who have been following the stock market closely since May would know about Artivision. They released a news on 15th May saying the company has made a Facebook application called Advision which is a revenue-sharing application that displays advertisement on videos and still photographs uploaded by users of Facebook. The share price has been volatile for some time and rose by a whooping 69.2% to close at 22 cents yesterday!

However, if we were to look at the fundamentals of the company, it’s nowhere near a company that value investors will invest in. Take a close look at the following:

From the above, it can be seen that Artivision had net losses, dwindling shareholders’ equity, negative cashflow, dwindling cash balances, negative margins, negative ROE and ROA for the past three years. The share price has been going up like crazy based on pure speculation and not due to the fundamentals of the company.

We should all remember that behind every stock price, there’s an underlying business. If the underlying business is not sound, one should stay away from the business. Buying such businesses will only cause an emotional roller-coaster (based on fear and greed). Unless you have lots of money to spare and can stomach huge risks, you should stick to investing in fundamentally strong companies with good free cash flow. Such prudent investing will ensure that you can have a good night’s sleep and can also pave way for a worry-free retirement.

Analysis of an aerospace company

I recently looked into a local listed company involved in the aerospace industry. It is NOT a business that suits the value investing tenants. It is actually a company that has been having net losses for the past 3 financial years (FY2009 to FY2006). I analysed this company to learn from the mistakes of this company and to not have these negatives in the company that I invest in.

Looking at the FY2009 annual report, the CEO’s message didn’t touch on the losses and what the company did wrong. I was looking if there were reasons given by the CEO for the dismal results for the past few years but it was nowhere to be found in the CEO message. This is very atypical of a good CEO. A responsible and honest CEO would talk about the losses and share with the shareholders what went wrong frankly and not sweep them under the carpet.

In the 2007 annual report, the CEO mentioned,  “We believe we can overcome challenging times”. In 2008, the CEO cited, “We will overcome the challenging times ahead s we overcome the previous ones, emerging even stronger”. However, all these are not evident in the financial statements which can’t really lie unless one cooks the books.

Under the operations review section, the losses were solely blamed on the financial crisis even though the company has been having losses consistently and not only for that particular year.

Looking at the balance sheet, the company has huge trade receivables almost year-on-year and this is affecting the cash flow of the company.

Thus, when investing in a company, do look out for an honest CEO message and strong financials. You are putting money in a company so you would surely want the company to be run by truthful, dependable and competent people who can grow your funds.

Analysis of construction companies

I have been always wanting to invest in a construction company for a few months already but didn’t free up enough time to analyse the companies. I recently concluded my analysis and will post my analysis.

I feel that the construction sector will boom in Singapore with the development of future MRT lines, new condominiums and new HDB flats. The prices of the construction companies are depressed so much that P/E ratios of most construction companies are less than 10, with some being as low as 3.

Firstly, I read analyst reports by Kim Eng and DMG on the construction sector to get an overview of the sector and the different companies involved in the sector. I also used ShareInvestor to sieve out the good construction companies by using certain criteria such as P/B, P/E, ROE, etc. The comparison of the companies are presented below.

Then, I did a financial analysis of the all companies listed in the table above, except CSC and Yongnam (negative cashflow for many years). I will present the analysis table of the individual companies and summarise my findings.

Lum Chang

Lum Chang’s revenue, equity and cash flow are not consistent even though it has the highest current ratio and lowest P/B among all the companies. On a side note, Lum Chang is currently trading “cum dividend”.

Chip Eng Seng

CES received the “Most Transparent Company Award 2010” (Runner-Up) at the recent SIAS Investors’ Choice Awards, Construction category. It has the highest NPM, ROE, ROA, dividend yield and lowest P/E ratio among all the companies in comparison. Despite all these, the revenue and cash flow are not consistent so I’m not comfortable in investing in this company even though it has many merits.


OKP’s revenue dipped only in FY2005 and FY2008. If not, it’s on a consistent rally. Its equity and cash flow is increasing consistently and its balance sheet is strong with little debt. I was torn between investing in OKP or Hock Lian Seng (HLS). In the end, I decided to invest in HLS as I felt HLS is more well-versed in the MRT construction with many projects completed for LTA versus none for OKP. Also, if OKP were to bid for a MRT project, it has to do so as a joint venture with another company as OKP doesn’t have experience in this segment.

Hock Lian Seng

I will present HLS analysis in another post as I purchased this company. I will do a separate thorough analysis on them like my previous purchases.

Supermax Corporation Bhd

At the recent Invest Fair 2010, I set in a company presentation by Supermax. Supermax is Malaysia’s largest Own Brand Manufacturer and the world’s second largest producer of rubber gloves. The company presentation was given by Dato Seri Stanley Thai, Executive Chairman and Group MD. The company seems pretty strong and I feel has good prospects. I have yet to analyse it properly though. I may do it in the future but this post serves as information for those looking to adding another company into their portfolio.

Singpost – Debt and Cash

I was analyzing Singpost a few days back and while analyzing, I learnt something about net cash and net debt that I was not fully aware of before. When I saw companies with huge debt previously, I merely brushed them off without doing a thorough analysis to learn more about them. Now that I have done an analysis on such a company with a proper Excel spreadsheet, I have realised some new things.

Singpost has a long-term debt of $502.977 million against a net profit of $165.741 million as of FY2010. Their cash and cash equivalents on their balance sheet was $390.220 million. By deducting their long-term debt and cash, we have a net debt of $112.757 million. Their long-term debt comprises of $200 million 10-year notes that they released in March 2010. I was wondering why are they taking up so much of debt. I could not find any news about any imminent investments by Singpost. Is the debt to be used to pay their dividends that they have consistently been paying (a ridiculous move!) or are they looking to buy up smaller overseas logistics companies? I don’t really know. Maybe someone can shed some light on this.

In FY2004, their dividends paid in total was $319.988 million. Their payout ratio was a whooping 307%! This figure is much more than their cashflow, net profit or cash in hand, so I’m wondering where they got the money from to pay so much dividends (anyone knows how this works?). Furthermore, Singpost has always been in a net debt position rather than a net cash position that value investors prefer.

Some things I like about Singpost is that their net profit margin is very high and they have lots of free cash flow with low CAPEX.

I’m also going to re-read some investment books that I read long time ago to reinforce the theories on how to thoroughly analyse companies that throw up funny situations. I don’t have any accounting background so from books are where I learn the accounting principles from. When I re-read, statements and ideas that didn’t warrant my attention previously will be reinforced.

Hopefully, I have analysed Singpost correctly and if seasoned value investors spot any mistakes, do let me know so that I can learn from it as well.