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Isaac Chan

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Isaac Chan

Business at NUS

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interested to learn much more about investing!

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Business at NUS

Isaac Chan

Business at NUS

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Stocks Discussion

Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated 1d ago
TL;DR Financially the company seems strong with low levels of debt and strong cashflow. Additionally, SIA Engineering also possesses a strong competitive advantage among its peers, but is also quite capital intensive with high fixed costs. Business Profile SIA Engineering (SIE) is a leading regional aircraft maintenance, repair and overhaul (MRO) company with bases in Singapore and the Philippines. They specialise in aircraft maintenance, repair and overhaul services in the Asia-Pacific and is part of the Singapore Airlines Group. The Company has a client base of more than 80 international carriers and aerospace equipment manufacturers. SWOT Analysis Strength I believe that one of the key strengths of the company is how it has partnerships and collaborations with many aviation industry players. For example, there have been JVs with OEMs and airlines in Singapore, Ireland, Taiwan, Indonesia and the Philippines as well as other players like Rolls-Royce. Such partnerships can increase the depth and breadth of the company's comprehensive service offerings. Weakness There are a few potential weaknesses about the company as well. For example, it is very dependent on Singapore airlines for revenue, which leads to concentration risk. Additionally, some major airlines do have their services providers as well. This could imply that switching costs for such service providers could be low if SIA engineering can't maintain their competitive advantage. Opportunities The company also had a recent joint venture with Stratasys Ltd. on additive manufacturing. Furthermore, collaborations with Safran Analytics and CaseBank Technologies in the field of Data Analytics could be key strategic moves to build capabilities that will be integral to the Group. Threat Due to large international exposure, a potential economic downturn in Europe and the US may affect profitability quite a bit. There is also high dependence on air travel and the size and age of aircraft fleets. Additionally, the business is operating in a very capital intensive industry which incurs very high fixed costs and capital expenditures. This could mean that during lull periods, there could still be high cash outflow even with lower sales. Financials Income Statement Since 2013, revenue has been falling consistently. This is not a healthy sign, as it shows a falling demand for their services. As can be seen, the bulk of the revenue comes from airframe overhaul and line maintenance. ! The most significant costs driver is actually from staff, almost forming 50% of costs. Looking at the chart, it can be seen that the company is trying to reduce costs by reducing staff costs per employee, rather than cutting the number of employees down. However, it seems that the value adds per employee have also decreased as well. ! ! Overall, the company seems to have maintained its profitability as compared to the last few years at around 17%. This is quite a high figure still, despite a drop in revenue. ! As can be seen, most of their profits are derived from the Airframe and Line maintenance segment, with the engineering component depressing profits. Balance Sheet The Current ratio for the company is around 3. This shows that the ability of the firm to meet short-term financial obligations is strong. With a debt of $22mn, the Debt/Equity ratio is very small. Additionally, the company holds more cash than debt. Hence, the debt profile of the company seems quite strong. This could mean that it might be easier for the company to take on more debt to grow in the future and also that less cash is needed to pay off debts. Cashflows ! Cashflow from operating activities is much lower than profit before tax at $54mn, almost 25% of PBT. This is because almost 50% of PBT could be attributed to profits from associated companies and joint ventures. Moreover, unfavourable working capital conditions had also caused cashflows to be reduced by $70mn as well. This happened through an increase in the amounts owed by debtors and a paying of creditors. The company had spent quite a lot on capital expenditures of purchase in the plant, property and equipment as well as investments in associated companies. In total, this was over $60mn. However, over $100mn of dividends was received from associates and joint-venture companies. Overall, free cash flow from the firm was around $120mn. This figure is slightly higher than 10% of revenue. I believe that this is healthy since the company does not have much debt to pay off, which leaves more cash flow for shareholders. The value of dividends paid out was $200mn, higher than the free cash flow of the year. This would also leave us with a dividend payout ratio of slightly higher than 1. Hence, the company paid out dividends in cash more than the amount of cash generated for the year. I believed that management was comfortable with this high amount paid out because of the high cash balance that the company has.
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Investments

Stocks Discussion

Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated 1d ago
! Hello maybe I can just share a few of my thoughts here! I will split them into personal and business factors. Personal Factors Risk Appetite This is probably dependent on how risk you are willing to stomach. Some stocks are much more volatile, such as tech, small-cap and emerging market stocks. On other hand, stocks in mature industries tend to be more stable. Passive vs Active Investing Depending on yourself, this might depend on how much time, willingness and effort you are willing to invest in monitoring your portfolio. Broadly speaking, passive investing usually requires less time and less need to monitor too often, although you still need to. The difference between these 2 strategies also depends on what you think might end up with more returns. A very active investor constantly trading can make nothing from capital gains and losses. In some instances, parking your money in dividend paying stocks might be better off. Investment Goals This again largely depends on what you hope to achieve. Some people want to have saved and invested a certain amount by a certain age to buy a new house, retire etc. Setting your goals might help you to realise what strategy is better. Business Factors Defensible Business Models You would probably want to choose businesses that can defend itself against new entrants into the market and competitors. These businesses probably should have some form of competitive edge that makes it different from other companies, is relevant to their customers and can sustain this competitiveness in the long run Growing and Innovating Businesses You most likely have heard from the government quite often that businesses need to innovate constantly. This is most probably true, as businesses who have not innovated have been left behind. One example is Kraft-Heinz, where due to a lack of innovation their food products had become less relevant to consumers Profitability At the end of the day, the company that you want to invest in should be profitable. The most basic form of profitability is looking at a company's net profit. But you should also be looking at gross profit, EBITDA and EBIT metrics as well, to find out which portions of the business are most profitable. Also, pay attention to changes in profitability of the business over time, as they show how the company is changing.

Securities

Investments

Stocks Discussion

Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated 1d ago
! Hi Anon! I will just leave a few thoughts about this stock down here. They are quite preliminary and I'm not familair with this industry at all. I will just share some thoughts from the news reports that I have read. Negative Market Sentiments The hike in tax for Singaporeans seem a lot higher than before at a 50% increase. But I don't think this should cause too much harm for short-term earnings since most of revenue I believe comes from tourists and not Singaporeans. In any case, for serious gamblers who are hooked, the hike in tax may not cause too much of a detterance. Risks Even with much larger expansion, I would not completely equate that to higher growth in the future. There is still the risk that the gaming and tourism market may not latch on to such growth, since these expansionary plans have a significant outlay and are very major. I read that some analysts say that for this to be a positive move, growth after the opening of these new facilities needs to be very strong. Long Gestation Period As what you mentioned in the question, this is a long term prospect. In terms of intrinsic valuation, the longer gestation period means that the increase in free cashflow from such a move would be discounted at a higher rate. Additionally, the large capital expenditures in the near term would cause free cashflows in the short term to be reduced. These 2 effects might cause some investors to price the shares lower, depending on how you assume the growth of these facilities will bring in the future.
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Stocks Discussion

Investments

Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated 1d ago
! ! Business Profile Most of us are familiar with the Jumbo brand name. It has been been quite popular on the F&B scene with their Chili Crabs, and has been featured as one of Singapore's iconic restaurants representing local food culture. Apart from just the Jumbo outlets, other brands under the Jumbo Group include JPOT, Ng Ah Sio Bak Kut Teh, Chui Huay Lim Teochew Cuisine, JCafé, and Singapore Seafood. Profitability ! Over the past 5 years, since its listing on the SGX, top line growth for the restaurant has been growing, but profitability had declined over their last 2 earnings call. This phenomenon probably needs to be looked at through their growth strategy. Last year, the Group opened 3 new outlets and partnered to open 4 franchise outlets. This is led to the high operating costs (labour) developed from expansion. Labour costs does not just represent direct labour for running restaurants, but also indirect labour such as management positions to oversee operations. Valuation According to DBS forward earnings for FY19, Jumbo's shares are properly pegged according to the industry average of 23X. This slightly higher valuation for Jumbo is probably investors awarding the company for their aggressive growth strategy into the local and international markets. Their valuation may also have dropped recently due to the group paying out less dividends after the decrease in profitability. By comparing the shares to the index, using P/E, P/S and P/B ratios, Motley Fool suggests that this valuation is risky since the growth premium awarded has not been justified with improved profitability. ! I have also included a simple form of relative valuation that compares jumbo with other F&B restaurants in Singapore, with around similar business modles. Based on P/E ratio alone, the shares seem fairly valued around a P/E of 23. However, based on P/S and P/B, the shares might seem overvalued. This could be due to Jumbo having weaker profitability than the other restaurants, such that the difference between sales and earnings are larger. Higher P/B ratio could be indicative of certain assets of the firm that are not recorded on the books, such as brand equity. I believe this stronger brand equity allows investors to price their shares higher for Jumbo. Based on these 2 reasons, and of the greater relative importance of P/E ratio, I wouldn’t conclude that the shares are either over or under valued. Risks ! There are quite a few risks which affects Jumbo's F&B outlets. As with other players in this industry, food safety and hygiene risks are always evident. This issue is probably exacerbated with social media. Even Hai Di Lao had to close for a few weeks last year. The good news about Jumbo is that they seem to be very concerned with quality assurance, with a specific department catered to this. Their outlets have also achieved relevant strong certification too. ! DBS has also identified another risk related to the food shortages, which may affect profitability of the business. This could potentially be another bigger issue with their seafood outlets and dishes, which Jumbo has tried to do by passing on higher prices to the customers. Growth Strategy Despite last year's growth strategy, Jumbo will continue to expand rapidly this year. Jumbo intends to open more new outlets in Singapore, but also to partner with other popular overseas brand to introduce them to Singaporeans. They are also looking to procure a property of their own to streamline food preparation. As with their organic growth in Singapore, it should drive growth since the Jumbo brand and items have already been tried and tested in our local market. But introducing international brands can be more tricky, since that would be akin to a newer entrant into the market. Another risk with opening their outlets overseas, is that revenue usually falls after novelty wears off. Improving and sustaining Same Store Sales (SSTS) should also be on their list.
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Securities

Investments

Stocks Discussion

Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated 2d ago
! Not quite sure what you mean, but I assume you are referring to scrubbing ? I have seen this happening too, when analysts use this method to remove certain line items when doing valuation of certain businesses. From what I have read, they seem to take out a few line items such as, one-time charges and extraordinary items . A good example of this could be one-time gains or losses due to disposals of property, plant and equipment, or sale and divesture of certain business units. Another common example is the removal of litigation gains or losses. There are a few reasons why these items are removed. Unrealised gains and losses, foreign currency translations and gains and losses from derivative assets may be taken out. Changes due to accounting policies and structures can also occur, which tends to affect net profit, but does not really reflect any changes in the company's business activities. Firstly , they help investors to measure what is the real operating capacity and strength of the company. For example, litigation is often a one-off thing, and either party tends to win or lose big. But the consequences of such activities are usually one-off, and they may not reflect how profitable or strong the company is in cutting expenditure. Secondly , they allow comparisons with other companies. Relative valuation usually compares the different financials of similar companies to reach a valuation on the company. These items are usually scrubbed out so that a proper comparison can be made between the different companies since these items may only be specific to on business. But a caveat to this is that for some companies, such items could be recurring. For example, SIA consistently has got gains and losses from disposal of their planes, and so these items should be scrubbed out since they seem to represent the core business of SIA. For pharmaceutical companies, litigation is also quite common, and the ability to gain from litigation and prevent losses from litigation might be considered core to their business.

Investments

STI ETF

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Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated 2d ago
! I think one of the main disadvantages would be the low returns of the STI (blue line), especially when compared against the S&P500 (red line). All of them started off the around the same post 0'8 crisis, but their difference as of today is quite stark. You can tell a significant increase from the S&P, but the STI index has hardly moved, merely making similar gains and losses such that the net effect is eliminated. If you had put your money in the S&P, which has a much more diversified base than the STI (with much of its weight on the banks), you would have clearly done much better. The S&P is not heavily weighted too much on a certain company (as compared to STI), and many of these companies have got huge international exposure like Apple, Shell etc. From a risk diversification point of view, the S&P seems stronger.
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Investments

Stocks Discussion

Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated 2d ago
! P/E ratios by themselves may not reveal much, since it usually needs to be seen in a particular context or compared with other companies. But still, here are some potential diadvantages of using this multiple. When Relative Valuations Don't Work A good example which I chance upon was on the Dotcom Bubble valuation in the year 2000. If you look at the chart, the NASDAQ matched the S&P until 1999, afterwards, the index shot up. After the huge sell-off, the NASDAQ matched the S&P again. During the bubble, the average P/E ratio was around 200, which can be intuited from how high the NASDAQ had soared. If you were looking at an internet stock with P/E ratio of 120 during the bubble, that stock would have seem undervalued. But once the market corrected, investing in that "undevalued" stock would have made a huge loss. P/E Ratio Not Reflective of Company's "True" Earnings The earnings of the company are not always reflective of the company's performance. This could be due to a few reasons. One Time Gains / Losses: A company can make extraordinary gains or losses due to non-recurring or one-time events. For example, a law suit from another company could cause earnings to be depressed, or a huge sell-off of a business could be lead to huge gains. Looking at the company's net profit like that can be deceptive. Accounting Estimates: Depreciation, amortization and asset write downs are all expenses which can result from management's estimates. This can dilute a company's true perfromance. Cashflow: Profits don't recognise cashflow, such as capital expenditures or payment of debt.

Stocks Discussion

Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated 2d ago
! Business Profile Most of us are familair with the Straits Times newspaper that SPH has. But they also invests in properties, provides multimedia, broadcasting and event management services, and operates internet portals. It has a 70% stake in SPH REIT. They business currently has a market cap of 3.94Bn, and is listed on the mainboard of SGX. Income Statment SPH has been experiencing a decrease in revenue over the past several years. This can be attributed to the decrease in their media revenue streams. SPH's media revenue streams focuses more on advertising rather than just newspaper sales. But advertising revenue has decreased due to competition from (1) digital marketing and other (2) news outlet. Digital marketing is more effective than traditional marketing, since it can be focused on your target audience, and is cheaper than marketing on the newspaper. The proliferation of smart phone means that you can get news from many other outlets easily too, and most of the time for free. Due to the fixed costs that SPH bears, like admin costs, salaries etc, their operating expenditures and cost of sales have not decreased proportionally with revenue. This has decreased profits overall, and weakened profitability. SPH has recognised the disruption in the media industry, and has expanded into other revenue streams like properties, which may help to buffer against the losses of their media segment. Balance Sheet The more significant effects of Balance Sheet changes over the years are the reduction in investments, and the recent taking on of new long-term debt. This has led to SPH becoming more leveraged than before. The receivables have also experienced quite a significant increase from the previous year, which could be signs of SPH slowly changing their business model by taking on more revenue from non-media sources like properties, or if SPH is extending their credit terms to encourage their advertising customers to stick with them. Cashflow Statements Cashflow from operating activties have been decreasing over the years mainly due to decreased revenue. Cashflow from investing activities does not seem to have too much significance over the years. Cashflow from financing activities have been in the red consistently over the last few years. Despite decreases in net income, SPH's dividend payout ratio is still very high (almost close to one). SPH is still cashflow positive due to additional borrowings taken on. Valuation UOB recently made a buy call, with a target price of $2.82, suggesting that the shares are currently undervalued. They argue that SPH REIT has a rally of 6%, and that the resilient assets in the portfolio and their expansion into defensive businesses have been underappreciated. The improved capital efficiency should also free up more free cashflow. SPH's forray into the UK student accomodation market seems interesting, especially with the argument that university enrollments increase during a downturn and UK had an unprecedent international students enrollments last year. This is supposed to hedge against a downturn since this is counter-cyclical.
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Stocks Discussion

Valuation

Investments

Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated 2d ago
! Business Profile : The first time I really got to know SATS was through lunch at the cookhouse during my NS days. Although SATS is known for their NS meals, they also provide food solutions to airlines, other government agencies, logistics companies but also have segments in gateway services, aviation security, aviation laundry and even a cruise centre. Financials: For their 3Q FY18/19, revenue had grown by 5.5% YOY to 464m. Operating profit had decreased slightly by 0.6% to S$65.3 million from higher expenditures, but associates and joint venture's profit after tax had increased considerably by almost 2%. Net profit attributable to shareholders thus had an increase by almost 4%. This led to an increase in PBT and overall net profit. Overall free cashflow had also increased due to higher operating cashflow generated by improved working capital conditions. Valuation : As of today, SATS has a share price of $5.17 with a P/E ratio of 22.25. As compared to the SPDR STI ETF ratio of 11.5, SATS valuation seems rather high. The shares also seem overvalued compared to the Asian infrastructure industry average. Based on a PEG ratio of 3.2X, Simply WallStreet has also concluded that the shares seems overvalued based on forward growth rates. The current P/B ratio of more than 3X also seems to suggest overvaluation as compared to Asia infrastructure market. Risks : The large proportion of SATS revenue belongs to aviation related activities, so a downturn in the aviation sector could result in SATS being heavily affected due to this concentration risk. Increase in operating expenditures from wages, raw materials can reduce margins considerably. With FX risk, SATS also has 14% of their revenue from Japan, and the changes in currency over the past years had led to changing revenues. Growth Profile: Overall, it seems that SATS has quite a few growth opportunities availible. Such of these drivers include passenger and air traffic growth at Changi Terminal 4, the opening of Terminal 5 by 2030 and more positive outlook from TFK Japan. There has also been increase in demand for convenient food within this region as well as increased operations in China which can drive en more growth.

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Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated 2d ago
! I kind of diasgree with your statement on how it puts to shame the hard work of other women. I believe that attaining a good amount of wealth requires hard work, but a lot of luck as well. Even Warren Buffet agrees that he was quite lucky, in that he was born in the right era and his skills were valuable to the economy and society. Personally, I really think that a lot of where we end up in life is circumstantial, and some people are just luckier than others. Divorcing from her husband might have landed her a windfall, but some people are also born into wealthy families, born with exceptional talents or just born in the right era with the right skills. To spin the argument around, some hardworking people may not develop wealth or success too, but I don't think that discounts the value of hardwork either. Having that amount of wealth may not be that great either for Mackenzie, since she is now under a lot of public scrutiny and criticism for leaving her husband just for his wealth. So she wins some but loses too.
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