I wrote an article two days ago, “How to get rich quick in stock market” to illustrate the perils of margin finance using Sendai as an example in the link below,
https://klse.i3investor.com/blogs/kcchongnz/151060.jsp
This article has nothing to do if the company is doing well or not. It merely shows that if a youngster who have been touted to use margin finance to buy Sendai 6 months ago at RM1.37 with 50% margin finance would have lost every single sen of his money with the share price now at 71 sen. The promoter of sailang Sendai at that time is none other than the commentator below, with a different nickname though.
Posted by qqq3 > Mar 17, 2018 05:54 PM | Report Abuse
Sendai quarterly results 2017 Q1 to Q4
Pretax............18.7m, 25.7m, 19.7 m, 31.7 m
eps...............2.0 sen, 2.7 sen, 2.7 sen, 3.9 sen
Price high low for the year.............60 sen to $1.40
showing consistent and improving profitability...
enough range to make some real money.
trailing 12 m PE 6.4..............not a bad one to make some real money.
and the company delivered increasing profits.
alas, one badly advised private placement negated all their good work.
Well, if you have read his numerous comments in i3investor, you would know that person hates people talking about PE ratio, and anything related to value investing. He only talks about BS. Now he is talking about earnings, and the associated PE ratio. Fascinating! I am delighted to have a discussion with him, now.
Six months ago, I have shared my analysis on Sendai, “Banging on EverSendai, risk and return”, quite a detail one in my opinion, in the link below,
https://klse.i3investor.com/blogs/kcchongnz/132084.jsp
Basically, I discussed about the problems of the construction industry, the poor past performance in earnings and cash flows of Sendai, its precarious balance sheet, and many perceived risks it is facing. Hence, although it has a huge order book, it may not present a good investment.
The share price of Eversendai was RM1.03 then.
How has all these turn out since 6 months ago?
What the commentator posted above is true. Sendai seems to have turnaround with another two quarters of profit, a net annual profit of RM86.5m, or earnings per share of 11 sen.
That was a drastic turnaround from a loss of 36 sen a year ago to a commendable profit of 11 sen a share. But why was the share price not rising, but instead continue to slide to close at 71 sen today, for a loss of 30% in 6 months? Has the market got it all wrong?
Basically, it boils down to one word, “cash”.
Cash is king
Few businesses can survive long without the ability to generate cash. Basically, a business needs to pay all the expenses such as administration, marketing, workers, plant and equipment, materials etc. to produce goods and services. After deducting cash to pay for all these stuff, and sold or executed the services and receive cash, you get some cash left over from the operations, termed cash flows from operations (CFFO). The net income/profit (NI) or earnings figure, the income statement’s “bottom line,” is based on the principles of accrual accounting. Accrual accounting attempts to match expenses with revenues regardless of when the cash transactions that deal with the creation of the goods being sold and the receipt from the sale occurred. In essence, accrual accounting is not entirely concerned with when “cash trades hands.” However, over a long period of time, the cash figure should match closely the net profit figure.
FCF is whatever cash is left after all operating expenses, including capital expenses for growth, like buying new plant and machineries for growth. FCF is like the end all goal of companies. The point is to do so well that you make so much money that even after all the checks written to expand the business you still have a lot of cash. With this FCF a company can pay out dividend consistently, buy back its shares when they are selling cheap, pare down loans, or invest in other profitable ventures, all done without assuming more debts, or issuing more shares.
Sendai, show me the cash
Sendai made a profit of RM86.5m for the financial year ended 31st December 2017. First, I would like to see its cash increases, or total borrowings decrease. In Sendai’s case, as it is heavily in debts, I would expect its net borrowings, i.e. total debts less cash, decreased with the profit. However, the latest balance sheet does not show this is the case. Instead, the cash in the balance sheet decreased by M110m from RM387m to RM277m, and net borrowings increased by another RM90m. That has not taken into consideration of some cash received of about RM10m from private placement exercise during the same period.
Where has the “profit” gone? The suckers of cash are a few of them.
If you look at the Income Statement, you would notice that there is this “Other income” of RM24.5m, which the major part of it is “Unrealized foreign exchange gain”. This contributes nothing to the cash in the balance sheet, but merely an accounting number, just like booking a gain for a revaluation of a piece of land.
Another RM100m additional cash was tied up in inventories to a total of RM279m. Another additional RM118m was tied up in “I owe you” by clients owing you more, making the total trade receivables and contract claims of a whopping RM1.8 billion.
Take note that the profit for the year was only RM86.5m, but total clients owing is RM1.8 billion! With the turnover, it would takes one full year to collect your work done, if they were able to be collected all. What kind of business is this?
The cash flow statement, however, shows a good net CFFO of RM118m. This is an adjustment from the non-cash and non-operating items from the income statements. This CFFO was saved by a couple of items, number one in paying creditors later, with an additional RM108m in payable withheld. The other one, which to me is abnormal, by re-allocating the interest cost of RM32m, to the cash flows from financing activities. Interest cost, unlike borrowings, is usually under operating activities and will lower CFFO, and I do not see the logic of putting it under financing activities. This saved Sendai from cash trap in spending another RM97m in capital expenses last financial year.
Note that this precarious cash flow position of Sendai is not just last year, but most, if not all the time as shown in my previous article, Banging on EverSendai, risk and return”.
Coming back to the comments of the person below,
Posted by qqq3 > Mar 17, 2018 05:54 PM | Report Abuse
Sendai quarterly results 2017 Q1 to Q4
Price high low for the year.............60 sen to $1.40
showing consistent and improving profitability...
enough range to make some real money.
trailing 12 m PE 6.4..............not a bad one to make some real money.
and the company delivered increasing profits.
alas, one badly advised private placement negated all their good work.
Did you, or those youngsters and newbies whom you asked them to sailing with margin finance when it was trading RM1.35, really make money?
Do you know now why the price of Sendai has slipped to 71 sen, and at a PE ratio at 6.4?
Do you really believe in investing using PE ratio?
“Private placement negates all their good work?”
As far as I know, investment bankers are professionals in things like corporate exercises. The management also knows better than anyone else what is best for them too on how and where they can get more cash.
Without money from private placement, where does the company get money for working capital and capital expenses? Rights issues, more bank borrowings, bond issues? Which is easier, cheaper and faster?
Conclusion
Making money in the stock market is not easy as many people think. In fact, it is difficult for most retail investors. It is very silly to think that others are so kind to help you to make money in the stock market. Nobody will do that.
In order to be successful in investing, forget about get-rich-quick, one has to depend on none other than yourselves. He must understand the business, and how it makes money, and if it is a good business. They are all presented in the financial statements and annual reports. This is the language of business.
More importantly, one must know how to value the business. You have seen that just knowing the simplistic earnings, and the associated PE ratio, is far from being able to be successful in investing. In fact, it is dangerous to know just a little and become over-confident.
Even if you know how to do all these, it doesn’t mean you can get-rich-quick, but likely you would be able to avoid most of the pitfalls in investing. If you don’t lose, overall you should be able to get satisfactory return over the long-term. That is what an ordinary investor should strive for.
There are many resources out there for one to obtain this knowledge if he wishes to invest safely to build long-term wealth, even for free. If you wish to learn about them in a structured manner, below is one of the providers out there, and you may write to him,
ckc13invest@gmail.com
KC Chong
http://klse.i3investor.com/blogs/kcchongnz/151263.jsp
