Tuesday, 20 May 2014

PEG Vs PE Ratio

Comes across a well written article on Investopedia and decided to share it here. 
It explains the difference between PEG and PE and why PEG is a more accurate ratio to determine a stock's value. The author is Ryan Barnes 

A stock's price/earnings to growth (PEG) ratio may not be the first metrics that jump to mind when due diligence or stock analysis is discussed, but most would agree that the PEG ratio gives a more complete picture of stock valuation than simply viewing the price-earnings (P/E) ratio in isolation.

The PEG ratio is calculated easily and represents the ratio of the P/E to the expected future earnings growth rate of the company. This article will discuss the positive attributes of the metric, how to best use it in your research and what to watch out for when using it. 

Determining a Stock's Value

Common stocks represent a claim to future earnings. The rate at which a company will grow its earnings going forward is one of the largest factors in determining a stock'sintrinsic value. That future growth rate represents everyday market prices in stock markets around the world. 

The P/E ratio shows us how much shares are worth compared to past earnings. Most will use 12-month trailing earnings to calculate the bottom part of the P/E ratio. Inferences may be made by looking at the P/E ratio; for instance, high P/E ratios represent growth stocks, while low ones highlight value oriented stocks. (For more insight, readUnderstanding The P/E Ratio.)

Example - Calculating the PEG

Let's look at two hypothetical stocks to see how the PEG ratio is calculated:
ABC Industries has a P/E of 20 times earnings. The consensus of all the analysts covering the stock is that ABC has an anticipated earnings growth of 12% over the next five years.
20 (x times earnings) / 12 (n % anticipated earnings growth) = 20/12 = 1.66

XYZ Micro is a young company with a P/E of 30 times earnings. Analysts conclude that the company has an anticipated earnings growth of 40% over the next five years.

30 (x times earnings) / 40 (n % anticipated earnings growth) = 30/40 = 0.75

What the PEG Ratio Tells Us

Using the examples above, the PEG ratio tells us that ABC Industries stock price is higher than its earnings growth. This means that if the company doesn't grow at a faster rate, the stock price will decrease. XYZ Micro's PEG ratio of 0.75 tells us that the company's stock is undervalued, which means it's trading in line with the growth rate and the stock price will increase.

Stock theory suggests that the stock market should assign a PEG ratio of one to every stock. This would represent theoretical equilibrium between the market value of a stock and anticipated earnings growth. For example, a stock with an earnings multiple of 20 and 20% anticipated earnings growth would have a PEG ratio of one. (To learn more, see Introduction To Fundamental Analysis.) 

PEG ratio results greater than one suggest one of the following:
  • Market expectation of growth is higher than consensus estimates.
  • Stock is currently overvalued due to heightened demand for shares.
PEG ratio results of less than one suggest one of the following: 
  • Markets are underestimating growth and the stock is undervalued.
  • Analysts' consensus estimates are currently set too low.
A great feature of the PEG ratio is that by bringing future growth expectations into the mix, we can compare the relative valuations of different industries that may have very different prevailing P/E ratios. This makes it easier to compare different industries, which tend to each have their own historical P/E ranges. For example, let's compare the relative valuation of a biotech stock to an integrated oil company:

Biotech Stock ABC

-Current P/E: 35 times earnings

-Five-year projected growth rate: 25%

-PEG: 35/25, or 1.40

Oil Stock XYZ

-Current P/E: 16 times earnings

-Five-year projected growth rate: 15%

-PEG: 16/15, or 1.07

Even though these two fictional companies have very different valuations and growth rates, the PEG ratio allows us to make an apples-to-apples comparison of the relative valuations. What is meant by relative valuation? It is a mathematical way of asking whether a specific stock or a broad industry is more or less expensive than a broad market index, such as the S&P 500 or the Nasdaq.

So, if the S&P 500 has a current P/E ratio of 16 times trailing earnings and the average analyst estimate for future earnings growth in the S&P 500 is 12% over the next five years, the PEG ratio of the S&P 500 would be (16/12), or 1.33.

The Risk of Estimating Future Earnings

Any data point or metric that uses underlying assumptions can be open to interpretation. This makes the PEG ratio more of a fluid variable and one that is best used in ranges as opposed to absolutes. The reason why five-year growth rate estimates are the norm rather than one-year forward estimates is to help smooth out the volatility that is commonly found in corporate earnings due to the business cycle and other macroeconomic factors. Also, if a company has little analyst coverage, good forward estimates may be hard to find. The enterprising investor may want to experiment with calculating PEG ratios across a range of earnings scenarios based on the available data and his or her own conclusions. (For more, see Great Expectations: Forecasting Sales Growth.)

Best Uses for the PEG

The PEG ratio is best suited to stocks with little or no dividend yield. Because the PEG ratio doesn't incorporate income received by the investor in its presentation of valuation, the metric may give unfairly inaccurate results for a stock that pays a high dividend. 

Consider the scenario of an energy utility that has little potential for earnings growth. Analyst estimates may be five percent growth at best, but there is solid cash flow coming from years of consistent revenue. The company is now mainly in the business of returning cash to shareholders. The dividend yield is five percent. If the company has a P/E ratio of 12, the low growth forecasts would put the PEG ratio of the stock at 12/5, or 2.50. An investor taking just a cursory glance could easily conclude that this is an overvalued stock. The high yield and low P/E make for an attractive stock to a conservative investor focused on generating income. Be sure to incorporate dividend yields into your overall analysis. One trick is to modify the PEG ratio by adding the dividend yield to the estimated growth rate during calculations. To give us a meaningful interpretation of the company's valuation, take a look a look at the following example.

Example - Adding Dividend Yield to the Estimated Growth Rate

This energy utility has an estimated growth rate of about five percent, a five percent dividend yield and a P/E ratio of 12. In order to take the dividend yield into account, you could calculate the PEG like this:

P/E / (Growth Estimates + Yield) = (12 / (5 + 5)) = 1.2

Final Thoughts on Using the PEG

Thorough and thoughtful stock research should involve a solid understanding of the business operations and financials of the underlying company. This includes knowing what factors the analysts are using to come up with their growth rate estimates, and what risks exist regarding future growth and the company's own forecasts for long-term shareholder returns.

Investors must always keep in mind that the market can, in the short-term, be anything but rational and efficient. While in the long run stocks may be constantly heading toward their natural PEGs of one, short-term fears or greed in the markets may put fundamental concerns on the backburner.

When used consistently and uniformly, the PEG ratio is an essential tool that adds dimension to the P/E ratio, allows comparisons across diverse industries and is always on the lookout for value.

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Sunday, 18 May 2014

EMS Energy – Soaring with Orders or a Ship Sinking Deeper

This week, I am thankful and honored to be included in the Blogroll of two famous Blog page - Singapore Stock Market News and Singapore Investment Bloggers. Even more gratifying is to hear from a random reader that she enjoy reading my blog. Thank you so much! Thank you!

To make my blog less analogous to most investment blogs, I will try my best to also focus on companies without Institutional analysis. I shall begin today with catalist listed EMS Energy Limited.

Company Brief

EMS Energy Limited (SGX: 5DE), through its subsidiary, EMS Energy Solutions "EES", designs, manufactures and installs engineering solutions and products such as drilling and well intervention systems, deck machineries, offshore cranes, etc. It also offers its customer’s aftermarket services. In addition, it owns a twenty-percent of Oilfield Services and Supplies Pte Ltd “OSS”, which relates to provision of downhole drilling tools.
  • Price = S$0.055 (0.037-0.095); Market Cap = 40.7m
  • Sales = 21.1m; PAT = 4.1m
  • PE = 11; PB = 3.1
  • Major shareholder; Koastal Industries (33.4%) and Asian Trust Investment (7.4%)

Recent Highlights

Acquisition of International Offshore
On 15 May, EMS completed acquiring the entire share capital of International Offshore Equipment for S$800,000. The acquisition is satisfied by issuance of 13,029,316 new ordinary shares at S$0.0614. NAV of International Offshore is S$480k with a net profit of S$163k from audited account available in 2012.

Rolf’s View
Acquisition of International Offshore comes as a surprise, because their product range is similar to what EMS can already supply. There is no profound synergy. Int’l offshore is established in 2011, a mere three years into a industry that demands vast experiences of engineering capability and strong track records. In Int'l Offshore, we can neither find strong clientele nor impressive project references from its listed website. Acquisition price of 1.67x book value is also considered high for a company that is relative unheard of in the industry.

Rights Issue & New Facility
Earlier in Feb this year, EMS announced the leasing of a 23k sqm waterfront facility at Tuas for period of 16 years 8 months commencing 1 May 2014. The new facility is expected to be ready in 2015 with a total cost of S$23.6m. Annual rental and fees expense of the new facility is estimated to be S$518k per year. The new facility is also five times bigger than EMS current facility, which had a book value of S$3.9m.

To fund the new facility, earlier this month, EMS proposed to raise up to S$14.8m in Net Proceeds via 1-for-1 Rights Issue at price of S$0.02 per share. If fully subscribed, the Rights issue will double share capital base to 1.48b shares from 740.4m shares currently. 30-40% of the proceeds will be used to fund the waterfront facility, while the balance is use for working capital and to fund its order book.

Rolf’s View
Years over years, EMS had borrowed from either share placements or rights issues citing future expansion. To date, we have yet to witness and meaningful return to the shareholder, since its RTO of Ecowater in 2007. This time, the expansion plan is even more aggressive with a facility five times bigger than its current one. Without a profitable and sustainable business model, it is hard to wonder how EMS can sustain additional overheads and increase debts over long term. 

Major Orders
The new facility serves mainly for the purpose of a S$45m Drilling Equipment Set “DES” contract awarded by Koastal Industries last November. What is more promising is the potential of another two more similar system worth up to a total of S$135m. EMS will deliver the first DES over 18 months to Koastal to be built in a China state-owned Shipyard (“Shipyard”). 

EMS current Order book stands at S$55m. From its corporate presentation announced Nov 2013, EMS main order book comprised of Koastal (52m), Fujian (3.1m), Keppel (1.5m), PC Vietnam (1.2m) and Natong Jialong (0.55m).

Rolf’s View
The S$45m order awarded by Koastal is the largest to date. It is even incredibly larger than the entire market cap of EMS. Koastal Industries is the biggest shareholder of EMS owned by Ting, the CEO and Chairman of EMS.

It is worthy to note that there is no mention if Koastal new Tender Rig has already secures a contract from an Oil Company. We have also no idea who are the exact owners or operator of the Rig. In situation of not having a contract, the Rig order may well be a speculative one which is highly risk-averse to any unprecedented events. 

We also need to ask if Koastal posses the necessary “muscles” or track records to convince any Oil company to award her a contract. In circumstances that Koastal is unable to secure a contract in time, the Tender Rig project will be delay, which means delay of DES order for EMS. This may prove to be an extremely risky for EMS, having committed to a large facility with huge expense overheads.


EMS Management team had been changing years over years. Over the last 5 years, EMS announced 14 resignations of key officers. From past year annual report, we note that the entire current management team is also newly appointed. Having a new management team spells nothing wrong, but having one with relatively mediocre experiences and track records may be a cause of concern. 

Business Model

Track Records
EMS is founded in 1977 know as Engineering Marine Services as a steel fabricator. In 2007 through an RTO of EcoWater Limited “EWL" renamed itself to EMS Energy Limited. At the same time, EMS venture into a complete new business to provide customized engineering solutions in the oil and gas sector, taking a big step from its previous straight forward steel fabrication business.

For the DES project, it means that EMS will have to use its short engineering experiences couple with a relatively new and inexperience management team to compete with the likes of International companies such as NOV or Aker Solutions with more than 100 years history and Billions in market capitalization.

The DES is the most important piece of system in a Drilling Rig. Neither failure nor minor error can be compromised at the back of a very stringent requirement within the Oil and Gas sector. Whilst it is only logical for Koastal to award the contract to EMS due to their affiliations, Oil companies will have to be convinced to hire a Tender Rig from Koastal that comes with a relative unknown EMS supplied DES.

Order from Related Parties
From figure below, we can clearly see that majority of the company receivables is derived from related parties out of Koastal in Singapore. The heavy dependence of Koastal in its order book suggests EMS has yet to be  truly recognized as a reputable solutions provider within the industry.

Disposal of profitable subsidiary
EMS dispose 40% stake in its subsidiary “OSS” in 2013. If we read the below charts extracted from ar2012, we see that OSS is generating revenue of S$21.7m with a very healthy gross profit of S$9.2m (>40% margin), compared to a miserable 2% in “EES” segment. 

It left us to ponder why the disposal of a highly profitable subsidiary by EMS. Is it to fulfill a change in business strategy or a desperate move to clear its raging debts?  

Fundamental Analysis

Income Statement
Despite a net profit of S$4.1m, EMS incurred an operational loss of S$3.8m in 2013. This is at the back of one time gain of S$7.9m from the disposal of a stake in its subsidiary. This implies two consecutive year of operating losses despite the positive outlook in the oil and gas sector.

Total expenses reduced by 53.5% to S$8.99m (19.36m), due to absent of impairment of goodwill of S$10.22m in 2012.

Operating expenses continue to be high as in fact staff costs increase from S$5.75m in 2012 to S$7m in 2013 due to increase expenses in China office. 

Balance Sheet
Current and total assets are S$17.7m and S$38.3m respectively. Cash and equivalent of S$3.5m is insufficient to cover the yearly staff cost of S$7m for year 2013.

Current liabilities is S$16.4m which almost account for the entire liabilities at S$16.6m. The huge current liabilities is worrying, as it require the company to receive or raise funds urgently to repay its debt. Total borrowings which includes bank overdrafts, term loans, bills payables stands at S$5.8m, out of which S$5.5m is due in 6 months or less. 

Instead of mitigating its current liabilities, EMS continue to take on more debts with the leasing of new S$23m facility to fulfill a questionable DES order book. 

Trade and other receivables is S$14.1m which is more than 65% of its total sales revenue of S$21m. YOY receivables had been more than S$10m which exhibit the company inefficiency in it's cash collection.

Goodwill of S$9.2m from consolidation as a group, remain to be convinced. 

Net assets increase from S$10.7m in 2012 to S$21.7m in 2013 mainly due to the absence of a one time impairement of goodwill in 2012 of S$10.2m.

Cash Flow
Net cash from operation activities is -S$12.3m compare to -S$1.2m a year ago. 

Cash from Investing activities is S$5.56m (1.41m) mainly from disposal of subsidiary offset by purchase of property, plant and equipment. 

Cash from Financing activities is S$4m (0.46m). This is due to issue of issuance of shares resulting in a gain of S$5.9m, plus new term loans of S$1.8m, partially offset by the repayment of term loans of S$1.57m and a increase in fixed deposits pledged of S$1.84m. 

Other Concerns
EMS recorded its sales using percentage-of-completion method to account for its contract revenue. This method of accounting can under-estimate cost captured prior to the delivery of the project.  This is especially risky when unanticipated costs occurs at later stage of the project, such as just prior to delivery or after delivery (warranty costs).

Provision for warranty of S$1m is also low considering the complexity of the DES order. 

Soaring or Sinking?

You decide!

Sunday, 11 May 2014

Invest Early - to achieve your own 4 "Water Taps"

Yesterday (Saturday) morning was meant for sleeping late but guess what? I force myself to be awake at 730am having slept at 2am earlier, to attend an investment course on dividend stocks. While the course contents was interesting, it is more for beginner. 

What is more notable was an happy old man seated beside me named Mr.Chua, though quite shabbily dressed with unshaven mustache. During our chat, I got to know Mr. Chua attended several other investment courses too, invested in blue chips like banks, reits and buy perpetual bonds. 

During the break and in one of the chat, Mr. Chua says "young man, Singapore have 4 national taps of water, so we need to have different water (money) taps for ourselves too!" This leaves a deep impression, more than the course itself!

What is 4 national water taps? Tap 1 local catchment area, 2 imported water, 3 reclaimed water aka NEWater and 4 desalinated water. For decades, Singapore had been dependent on our Neighboring country for imported water and our own water catchment which is limited by our scarce land. We were "hold by the neck" and have no negotiation power until the successful developments of our own alternative taps from NEWater and desalinated water in recent times.

Wait a minute...does this situation resemble what you are facing? 

You work for many years, with pathetic savings, high mortgages and expenses with only one source of income from a job you dislike. It is for reasons like this that you have no choice and no negotiating power over your salary and feel stressful about potential retrenchment woes as you become older and less efficient! Or did you even become worry?

For most people, their only tap of income is employment income. What if one day your only tap is shut off?

It is hence inevitable and of paramount importance for us to create our own multiple taps of "water" (money) through investments in stocks, properties or businesses. To achieve that, first we have to save. Many people are skeptical about the what the small amount of savings can achieve from their mediocre income. However, it is not the amount of savings, but the consistency of savings that is important. Make savings an habit and grow over time with a plan and target. Thereafter, learn and invest your savings for it grow using the power of compounding.

Back to the investment course, one common trait I noticed in all the beginner investment classes I attended, is that there are more older people or retirees compared to the young. Also often, the "old" are more proactive and inquisitive during the classes. Although "Better Late than Never," wouldn't it be more desirable if you start investing diligently at a younger age?

After-all Singapore took several decades before we established our 4 national taps!

So start savings and investments young to achieve your multiple taps of water earlier!

Related Posts:

Saturday, 10 May 2014

Vallianz Holdings - 1Q Results

April and May is a busy period for many listed companies, announcing their 1Q results. I will try my best to cover companies important at least to me. One of them is Vallianz as follows.

Results here
  • Record revenue increase of 10x vs 2013 to USD27.7m.
  • Mainly (89%) due to charter revenue. No one time significant gain. 
  • PAT increase 420% to USD5.5m vs 2013. Net profit margin is 19.7%. Improvement mainly from subsidiary, Rawabi in Saudi. 
  • Huge admin expenses and interest cost surge, but in line with growth 
  • Net cash used in operating activities was USD6m compared to USD628k a year ago. 
  • Net debt is 379 million [LT (323m)+ST(73m) debt minus cash(17m)]
  • Net Debt to equity ratio of 295% - highest geared offshore service company listed in SGX
  • Over the quarter, the company raised more than USD170million through new loans, issuing of new shares and redeemable convertible capital securities.

  • Optimistic outlook in the oil and gas industry. 
  • Order book ~US$442.0 million.
  • The capital raised is mainly used to acquire more vessels for its business. 
  • Bidding for projects amounting to ~US$1.2 billion in Asia, Middle East, and Latin America. 
  • Entered into a strategic collaborative agreement with one of China’s first class shipyard to secure long term vessel charter for up to 200 vessels.
  • Has young and best-in-class fleet of 28 offshore support vessels and intends to boost its vessel fleet to at least 50 vessels by 2016.

High risk high return. In similar fashion but conversely, high risk and high gearing can mean high damage, especially in times of crisis.

Vallianz is one of the first few oil and gas stocks I owned with an average buy price of single digit cents. I know the company well and was once my biggest holdings. After the high debt undertaken recently, I decided to divest, to retrieve some of my initial invested capital leaving behind mostly profits.

From the outlook and fundamentals, prospect of Vallianz is still extremely bright. It also has backing from Swiber and Rawabi.  Swiber possessed good track record of turning one of its earlier subsidiaries Kruez Subsea into a double bagger. In my opinion, the management of Vallianz is also at the right age to accelerate growth of the company coupled with integrity, drive and hard work.

In a nutshell, be conservative and monitor the industry and company closely since this is high growth but cyclical stock. It is better to be safe than sorry! Nevertheless, unless unprecedented catastrophic events take place, I still give two thumbs up for this company!

Wednesday, 7 May 2014

More Stocks Added – Asian Pay TV Trust, AIMS AMP REIT, Chip Eng Seng

In my last post, I mention that “14” is not auspicious number for my stock count. It means “going to die” in Mandarin. Since then, I added 3 more stocks.

Asian Pay TV Trust - First biz trust in Asia focused on pay-TV businesses of cable, digital TV and broadband. Seed-asset is Taiwan Broadband Communications Group. Buy call; strong trustee manager “Macquarie”, low PE 12.4 (competitors 12-17), yield highest at 11%.  PB 18% discount, Price 0.75 at lower range (0.72-0.97), stable cash flow, growth driven by digital TV segment, sole operators in areas it operates in. Temasek recent share purchase makes it the largest shareholder with 7.5%. Risks includes strong new-entrants competition in Taichung. Results 1Q14 yesterday reaffirming DPU of 8.25c close to 11% yield.

AIMS AMP Capital Industrial REIT - Comprise of 25 industrial properties all in Singapore, although recently acquire 49% of Optus centre in Sydney. Buy call; Strong trustee manager. One of the highest yield >7% industrial REITs with a lower PB 0.97. Properties lease expiry average > 30 years. Growth from existing developments of 20 Gul way (2H15) and Defu Lane (2H2014). No debts for refinancing until Oct 2015.  Manageable gearing below 35%. Recent 100m rights proceeds for more acquisition and redevelopments, but account for dilution risks. 4Q2014 results here. DPU increase but yield diluted by Rights from 7.7% to 7.4%.

Chip Eng Seng – Construction and property group in Singapore, Australia and SEA. Main contractor for Duxton – tallest public housing. Buy call; Strong construction orderbook S$520m. Comfortable PE 6x, attractive and stable yield of 5%. Record top/bottom line S$1.2b/180m (240% incr) in Y14 vs 13. Australian property still strong. Growth from Hotel in Alexandra SG in Mid-15. Strong ROE 28.5% and ROA 12.1% Y14F. Also attracted by its diversification from construction to property development in 55-45% rev contribution. Risk includes interest rate increase and property rules changes in SG and AUS.

I will likely add one more stock this month to make it “18” - meaning “going to be rich” in Mandarin.

Thursday, 1 May 2014

Re-balancing My Investment Portfolio

It's early morning of Labour day - Hurray Public Holiday! and my family members are all asleep. I am the lone "night cat" again and decide to "meow" a post. This is my 30th post, in my blog's second month anniversary since my first post. The past week had been a busy one buying and selling of stocks, in an attempt to re-balance my Stock Portfolio. Below are some of the purchase and sale done.

SPH - Reasons mentioned in my earlier blog. See here

Vallianz Holdings - I blogged about more growth to come for Vallianz earlier - see here.  So why the sale? I think it is timely to take generous profit at a price of 0.15 in order to recoup most of my initial capital invested more than 3 years ago. Besides, it is probably wise to use these significant funds to add more stocks to my portfolio for achieving more diversification. Lately, I also hear news of strong competitions from this market sector plus the additional 100 million debt Vallianz undertook in Mar, making me uncomfortable. Nevertheless, Vallianz is still one of my major holdings, but comprised mostly of unrealized profits now with limited risk in losing any large initial invested capital.

Swissco Holdings - After its share price tumbles more than 20% within a day on 20th Mar - refer here, I made an re-entry to buy it low then. Last week Swissco make a spectacular rise to 0.45. I chose to take profits, attracted by the 30% gain within less than a month. More importantly I consider this increase "temporary" and "speculative". Hopefully I am right. Meanwhile I will wait for a good opportunity to re-enter again if possible, since I believe it is a potential multi-bagger, going long term. 

Overseas Education Limited - I always love education company and OEL is one I spotted. Great company, lots of cash and no debts. Issue bonds recently to supplement its existing cash for the pay down of her new 270 million campus in Pasir Ris. School fees are not the most expensive compare to competitors. Together with the new campus, expected to be ready Apr next year, upside in earnings is very positive.

Mapletree Logistics Trust - Temasek backing and one of the most diversified logistic trust comprising of >100 properties in Singapore, Japan, HK, China, S.Korea, M'sia and Vietnam. Love the freehold properties in Japan, potential for more acquisitions, healthy WALE, 75% of debt hedged, and finally yield of ~7%  provides strong reasons for my buy call. 

KSH (Kim Seng Heng) Holdings - Construction company with diversification into property sector in S'pore, M'sia, China, and more recently Cambodia. Healthy construction order book 460m, strong cash 144m, low net debt (ST + LT debt - cash + equiv) to equity ratio 4%. Low PE 4.5, PB of 1, good dividend yield 4.8% and strong ROE 20% + ROA 10%.

1. Vallianz Holdings
2. Suntec Reits
3. Nam Cheong
4. KSH Holdings
5. Croesus Retail Trust
6. Comfort Delgro
7. Raffles Medical 
8. Mapletree Logistic Trust
9. Oveseas Education Limited
10. Lippo Malls Indonesia Retail Trust
11. Fraser Commercial Trust
12. BRC Asia 
13. SGX
14. Starhub

Seems like the current 14 stocks is not so auspicious since 14 means "going to die" in Mandarin.

I still have funds available for investments and will probably add on one or two more stocks in the next week or so. 

Happy Labour May!!!