Finding real value in beaten-down markets
Indeed, it is during bearish times like these that investors who believe in the value proposition come out hunting for bargains.
-ST Tue, Feb 10, 2009The Straits Times
By Lorna Tan
With stocks hitting new lows, the share market is like another Singapore sale but minus the crowds, given that only a few brave souls are putting their cash down.
While investors may have misgivings about the uncertain and volatile markets, the assets are just too cheap to ignore.
Valuations of many stocks are at attractive levels, so it is no wonder that financial experts are pointing to 'value' as a key theme for this year.
Indeed, it is during bearish times like these that investors who believe in the value proposition come out hunting for bargains.
What value investing is
Essentially, value investing means buying at good value and holding for the long term to reap capital appreciation and dividend yields. It is the investing style that made Mr Warren Buffett and his mentor, value-investing pioneer Benjamin Graham, kings of the share markets.
It contrasts with the strategy known as growth investing. This involves investing in companies deemed to have good growth potential, even if the share price appears expensive.
A growth stock is typically defined as a company whose earnings are expected to grow at an above-average rate compared with that of its industry peers or the overall market.
In value investing, buying something for less than its worth is a fundamental principle.
This was an important concept used by Mr Graham, who believed that investors should buy only firms that are selling lower than the value of their net current assets. That is, their value after deducting their liabilities.
Doing this ensures that even if one is wrong, there is a margin of safety. Your downside is protected to a certain extent if the stock price falls further.
For example, if your perceived value of stock A is $3, you may want to buy in only at around $2.70. This gives a margin of safety of 10 per cent to protect you from any fall.
Many investors have trouble deciding if a stock is cheap or expensive. There are several factors to consider to accurately determine a share's worth.
How to pick value stocks
First, never look at the stock price in isolation. To see how it is faring, it must be compared with other stocks in the same industry. You also need to know how the industry and overall market are performing.
For instance, if you are considering buying a property stock, do not sink your money in just because it seems cheap on the surface.
Compare it with other property stocks in the same region, say, the Asia-Pacific, or in the same business segment, such as residential mass-market developers.
If you are value investing, do not rely just on prices to determine how cheap or expensive a firm is. In the long term, price and intrinsic value are likely to be similar but this is not so in the short term, when prices usually reflect investor emotion.
So low prices do not necessarily mean low values. Instead, use an appropriate valuation measure to help determine the value.
A common measure for comparative purposes is the firm's earnings. In this case, buy stocks selling at a low multiple of their earnings - what the company has left after expenses are paid. It follows that a firm selling at a low earnings multiple is usually a better value pick than one with a high earnings multiple.
You should also compare the price-earnings multiple to that of its competitors in the same industry and also the broader indexes to determine if the company is a value buy.
Another common measure is a firm's price-to-book ratio, which is derived by dividing its share price by the book value of the firm. The book value provides an estimate of how much the firm would be worth if it had to be liquidated.
Investors should also check if a firm passes the following criteria: Does it have sound businesses with good earnings and revenue growth? Is it run by competent managers?
Be wary of 'value traps'
Some stocks and markets could turn out to be 'value traps'. This means that despite being attractively valued, they could still prove disappointing and remain cheap for a prolonged period.
This could happen when a particular market is suffering from political uncertainty, for example, or the company is facing depressed earnings without any prospects of a near-term turnaround.
This is the first of a three-part series on value investing brought to you by DWS Investments.
This article was first published in The Straits Times on February 08, 2009.
Saturday, February 21, 2009
Monday, February 2, 2009
COSCO - Fully valued : DBS
FULLY VALUED: DBS Group ResearchJan 13, 2009 The Business Times
Cosco Corporation
Jan 12 close: S$0.815
DBS Group Research, Jan 12
COSCO Corporation announced that its subsidiary, Cosco (Zhoushan) Shipyard, has entered into an agreement with an Asian shipowner pertaining to order cancellation and rescheduling. Out of the four units of 57,000-deadweight-tonne bulk carriers placed in 2007, two will be cancelled. The delivery of the remaining two vessels will also be postponed.
The cancellations are estimated to be worth about US$90 million, representing only 1.2 per cent of Cosco's total orderbook of US$7 billion. We believe no major cost has been incurred, as the construction works for the two cancelled vessels have not commenced. As part of the agreement to cancel the orders, the shipowner has paid compensation to Cosco; no details were disclosed as to the amount paid.
We are retaining our forecast for Cosco as we have already imputed 40 per cent cancellations/delays in our earnings model. Maintain 'fully valued' and TP of S$0.76, based on 4 times its shipbuilding profits and 8 times its shiprepair profits.FULLY VALUED
Compiled by Lynette Khoo
Cosco Corporation
Jan 12 close: S$0.815
DBS Group Research, Jan 12
COSCO Corporation announced that its subsidiary, Cosco (Zhoushan) Shipyard, has entered into an agreement with an Asian shipowner pertaining to order cancellation and rescheduling. Out of the four units of 57,000-deadweight-tonne bulk carriers placed in 2007, two will be cancelled. The delivery of the remaining two vessels will also be postponed.
The cancellations are estimated to be worth about US$90 million, representing only 1.2 per cent of Cosco's total orderbook of US$7 billion. We believe no major cost has been incurred, as the construction works for the two cancelled vessels have not commenced. As part of the agreement to cancel the orders, the shipowner has paid compensation to Cosco; no details were disclosed as to the amount paid.
We are retaining our forecast for Cosco as we have already imputed 40 per cent cancellations/delays in our earnings model. Maintain 'fully valued' and TP of S$0.76, based on 4 times its shipbuilding profits and 8 times its shiprepair profits.FULLY VALUED
Compiled by Lynette Khoo
COSCO - Underperform : CIMB
UNDERPERFORM: CIMB-GK SecuritiesJan 06, 2009 The Business Times
Cosco Corporation
Jan 5 close: $0.99
CIMB-GK SECURITIES, Jan 5
COSCO recently warned that its FY08 earnings will be lower than FY07. We estimate a loss of about $16 million for fourth quarter 2008 with FY08 net profit of $310 million, down 8 per cent year-on-year.
We believe that customer credit risk has heightened as more ship owners are negotiating for delays in progressive payments due to the credit financing drought. The deteriorating shipping industry with near break-even freight rates could also cause ship owners to delay taking delivery of new vessels to avoid operating at a loss. In Q4 alone, Cosco has announced pushing back deliveries of 21 vessels by six to 26 months.
Cosco's problems have been worsened by operational woes as shipbuilding margins have been hit by higher steel and ancillary outsourcing, tighter pre-delivery inspection procedures costs and additional development cost to vacate residential properties originally planned for yard expansion. The inconsistent disclosure of the number of ships under construction and delivery schedule also added to our negative view on the stock.
Our earnings estimates have been cut by 15 to 30 per cent for FY08-FY10. We have also cut our target price to $0.58 from $0.80.UNDERPERFORM
Cosco Corporation
Jan 5 close: $0.99
CIMB-GK SECURITIES, Jan 5
COSCO recently warned that its FY08 earnings will be lower than FY07. We estimate a loss of about $16 million for fourth quarter 2008 with FY08 net profit of $310 million, down 8 per cent year-on-year.
We believe that customer credit risk has heightened as more ship owners are negotiating for delays in progressive payments due to the credit financing drought. The deteriorating shipping industry with near break-even freight rates could also cause ship owners to delay taking delivery of new vessels to avoid operating at a loss. In Q4 alone, Cosco has announced pushing back deliveries of 21 vessels by six to 26 months.
Cosco's problems have been worsened by operational woes as shipbuilding margins have been hit by higher steel and ancillary outsourcing, tighter pre-delivery inspection procedures costs and additional development cost to vacate residential properties originally planned for yard expansion. The inconsistent disclosure of the number of ships under construction and delivery schedule also added to our negative view on the stock.
Our earnings estimates have been cut by 15 to 30 per cent for FY08-FY10. We have also cut our target price to $0.58 from $0.80.UNDERPERFORM
COSCO - HOLD: Kim Eng
HOLD: Kim Eng ResearchJan 02, 2009 The Business Times
COSCO has issued a profit warning, stating that 2008 earnings will be lower than 2007. The bulk of the lowered earnings will be caused by provisions of doubtful debts.
Cosco recorded a net profit of $336.6 million for 2007, and had already posted net earnings of $326.5 million for the first nine months of 2008. This profit guidance therefore deviates significantly from the consensus estimate of $425 million for 2008 earnings and our own forecast of $465 million.
We are downgrading Cosco to a 'hold', while we re-assess our earnings forecast and target price. Specifically, Cosco says it has recently received requests for delays in making payment by several ship owners.
Accordingly, provisions will have to be made for doubtful debts. While increased operational costs such as higher steel and sub-contracting costs and additional development costs at Zhoushan are also being cited, these issues were already well-known and have been addressed by the market.
However, Cosco says that these operational issues have also contributed to further delivery delays, and Cosco said that it is assessing the various causes of delay and considering the need for further provisions for penalties under these contracts.
In addition, Cosco has also announced that it has been asked to reschedule the delivery dates of a total of seven units of 57,000-deadweight-tonne (dwt) bulk carriers by these ship owners.
The delivery dates of four of these vessels have been rescheduled from between February 2010 and June 2010 to between February 2011 and November 2011, and the delivery dates of the other three vessels have been rescheduled from between August 2009 and November 2009 to January 2012.
We are also in the process of factoring in these delays to our forward earnings forecasts.HOLD
Cosco CorporationDec 31 close: $0.95Kim Eng Research, Dec 31
COSCO has issued a profit warning, stating that 2008 earnings will be lower than 2007. The bulk of the lowered earnings will be caused by provisions of doubtful debts.
Cosco recorded a net profit of $336.6 million for 2007, and had already posted net earnings of $326.5 million for the first nine months of 2008. This profit guidance therefore deviates significantly from the consensus estimate of $425 million for 2008 earnings and our own forecast of $465 million.
We are downgrading Cosco to a 'hold', while we re-assess our earnings forecast and target price. Specifically, Cosco says it has recently received requests for delays in making payment by several ship owners.
Accordingly, provisions will have to be made for doubtful debts. While increased operational costs such as higher steel and sub-contracting costs and additional development costs at Zhoushan are also being cited, these issues were already well-known and have been addressed by the market.
However, Cosco says that these operational issues have also contributed to further delivery delays, and Cosco said that it is assessing the various causes of delay and considering the need for further provisions for penalties under these contracts.
In addition, Cosco has also announced that it has been asked to reschedule the delivery dates of a total of seven units of 57,000-deadweight-tonne (dwt) bulk carriers by these ship owners.
The delivery dates of four of these vessels have been rescheduled from between February 2010 and June 2010 to between February 2011 and November 2011, and the delivery dates of the other three vessels have been rescheduled from between August 2009 and November 2009 to January 2012.
We are also in the process of factoring in these delays to our forward earnings forecasts.HOLD
Cosco CorporationDec 31 close: $0.95Kim Eng Research, Dec 31
COSCO - SELL : DMG
Cosco: Sell: DMG & Partners Securities
Dec 05, 2008 The Business Times
COSCO Corporation (Cosco) announced that its 51 per cent owned subsidiary, Cosco Shipyard, has entered into a variation agreement for five units of its 57,000 dwt bulk carrier newbuilds.
This variation agreement includes cancellation of two vessels and deliveries rescheduling of the three remaining bulk carriers. The cancellation would be conditional upon an advance payment of up to 80 per cent of the total contract price (of the remaining three bulk carriers) received from the shipowner.
We are keeping our forecasts intact as we have previously factored in 20 per cent cancellation orders in our estimates. Our target price remains at $0.68. We believe Cosco's share price would be negatively affected due to concerns over further possible cancellations in the near term.
Maintain SELL.SELL
Dec 05, 2008 The Business Times
COSCO Corporation (Cosco) announced that its 51 per cent owned subsidiary, Cosco Shipyard, has entered into a variation agreement for five units of its 57,000 dwt bulk carrier newbuilds.
This variation agreement includes cancellation of two vessels and deliveries rescheduling of the three remaining bulk carriers. The cancellation would be conditional upon an advance payment of up to 80 per cent of the total contract price (of the remaining three bulk carriers) received from the shipowner.
We are keeping our forecasts intact as we have previously factored in 20 per cent cancellation orders in our estimates. Our target price remains at $0.68. We believe Cosco's share price would be negatively affected due to concerns over further possible cancellations in the near term.
Maintain SELL.SELL
COSCO - SELL: DMG
SELL: DMG & Partners Securities
Nov 01, 2008 The Business Times
ON a year-on-year comparison, Cosco Corporation's revenue surged 80.7 per cent to $987.7 million in Q3 2008 as order backlog for shipbuilding and marine engineering was recognised.
Revenue from this segment contributed 92.1 per cent (an increase of 87 per cent) or $909.9 million. Dry bulk shipping turnover grew 36 per cent to $72.5 million, lifted by more favourable charter rates renewed in the earlier part of the year. Though gross margin was lower at 23.4 per cent (compared to 37.9 per cent in Q3 2007) as a result of higher material costs and a shift in revenue contribution mix towards lower margin shipbuilding business, Cosco still managed to improve its bottom line by 16.5 per cent to $113.9 million.
But as compared to Q2 2008, Cosco's revenue declined 5.7 per cent. Turnover from ship building fell 10.7 per cent while marine engineering dropped 24.4 per cent, bringing the overall top-line contribution from ship repair, shipbuilding and marine engineering down by 6 per cent. Coupled with a lower gross profit margin of 23.4 per cent (a decline of 260 basis points), Cosco's profit after tax and minority interests fell by 11.5 per cent.
Only one of the first 10 dry bulk carriers would be delivered this year. The remaining nine carriers, which are currently being built in Zhoushan shipyard, would be delivered progressively in 2009. The management attributed the delay to several reasons:
1. Zhoushan shipyard was not operating at optimal capacity as the yard was undergoing expansion works concurrently.
2. Over-ambitious vessel delivery schedule, overlooking the fact that Cosco only ventured into the newbuilding business segment in 2007. Going forward, we remain concerned on the tight schedule and further possible delay in vessel deliveries as the management hinted that not all 40 vessels scheduled for delivery in FY 2009 have commenced construction work. A typical bulk carrier newbuild takes 12-15 months to build.
The Baltic Dry Index (BDI) plunged below 1,000 recently (This is a fraction of the 10,000 a year ago). While Cosco would not expect any material negative impact from this falling BDI in the short term as the current charter contracts had been locked in based on higher freight rates previously, we believe the protracted low BDI rates would impact Cosco's shipping contribution in FY 2009 significantly.
The management guided that Cosco's shipping business division would be loss making should its bulk carriers be chartered at the current spot rate.
Cosco has always been a relatively high-beta stock, and this is especially evident in today's volatile market environment. As we continue to take a cautious stance on our sector outlook pertaining to the shipping industry, we are lowering our price-to-book valuation parameter to 1.0 times (from 1.2 times previously), deriving a target price of $0.680 (from $0.860 previously). Maintain SELL.
Cosco Corporation
Sell
DMG & Partners Securities
Oct 31 close: $0.775
Nov 01, 2008 The Business Times
ON a year-on-year comparison, Cosco Corporation's revenue surged 80.7 per cent to $987.7 million in Q3 2008 as order backlog for shipbuilding and marine engineering was recognised.
Revenue from this segment contributed 92.1 per cent (an increase of 87 per cent) or $909.9 million. Dry bulk shipping turnover grew 36 per cent to $72.5 million, lifted by more favourable charter rates renewed in the earlier part of the year. Though gross margin was lower at 23.4 per cent (compared to 37.9 per cent in Q3 2007) as a result of higher material costs and a shift in revenue contribution mix towards lower margin shipbuilding business, Cosco still managed to improve its bottom line by 16.5 per cent to $113.9 million.
But as compared to Q2 2008, Cosco's revenue declined 5.7 per cent. Turnover from ship building fell 10.7 per cent while marine engineering dropped 24.4 per cent, bringing the overall top-line contribution from ship repair, shipbuilding and marine engineering down by 6 per cent. Coupled with a lower gross profit margin of 23.4 per cent (a decline of 260 basis points), Cosco's profit after tax and minority interests fell by 11.5 per cent.
Only one of the first 10 dry bulk carriers would be delivered this year. The remaining nine carriers, which are currently being built in Zhoushan shipyard, would be delivered progressively in 2009. The management attributed the delay to several reasons:
1. Zhoushan shipyard was not operating at optimal capacity as the yard was undergoing expansion works concurrently.
2. Over-ambitious vessel delivery schedule, overlooking the fact that Cosco only ventured into the newbuilding business segment in 2007. Going forward, we remain concerned on the tight schedule and further possible delay in vessel deliveries as the management hinted that not all 40 vessels scheduled for delivery in FY 2009 have commenced construction work. A typical bulk carrier newbuild takes 12-15 months to build.
The Baltic Dry Index (BDI) plunged below 1,000 recently (This is a fraction of the 10,000 a year ago). While Cosco would not expect any material negative impact from this falling BDI in the short term as the current charter contracts had been locked in based on higher freight rates previously, we believe the protracted low BDI rates would impact Cosco's shipping contribution in FY 2009 significantly.
The management guided that Cosco's shipping business division would be loss making should its bulk carriers be chartered at the current spot rate.
Cosco has always been a relatively high-beta stock, and this is especially evident in today's volatile market environment. As we continue to take a cautious stance on our sector outlook pertaining to the shipping industry, we are lowering our price-to-book valuation parameter to 1.0 times (from 1.2 times previously), deriving a target price of $0.680 (from $0.860 previously). Maintain SELL.
Cosco Corporation
Sell
DMG & Partners Securities
Oct 31 close: $0.775
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