Thursday, June 30, 2016

Gold and Silver? - Jeff Clark, Senior Precious Metals Analyst

If the Stock Market Crashes, What Happens to Gold and Silver? - Jeff Clark, Senior Precious Metals Analyst
We received a lot of queries asking if it would be better to wait to buy gold until after the stock market crashes.

After all, Mike has warned that a stock market crash is likely. Given what happened to global markets from the Brexit surprise, it’s a timely question.

And if the market takes a dive, many investors think gold and silver prices will fall, too.

If so, wouldn’t it be better to wait to buy them until after the dust settles?

Probably the best way to answer this is to look at what’s happened in the past…

The Message From History

I looked at past stock market crashes and measured gold and silver’s performance during each of them, to see if there are any lessons we can learn.

The following table shows the eight biggest declines in the S&P over the past 40 years, and how gold and silver responded to each.
There are some reasonable conclusions we can draw from this historical data.
  1. In most cases, the gold price rose during big stock market crashes.Notice this was regardless of whether the crash was short-lived or stretched over a couple years. Gold even climbed in the biggest crash of them all, the 56% decline that lasted two full years in the early 2000s. It seems clear that we should not assume gold will fall in a stock market crash… just the opposite has occurred more often.

    The reason for this is because gold generally has a negative correlation with the stock market. In other words, when one goes up, the other tends to go down. Which makes sense… if the stock market falls, fear is usually high—and investors typically seek out the safe haven of gold. If stocks are rocking and rolling, the perceived need for gold from the mainstream is low.

    You’ll recall gold did fall in the initial shock of the 2008 financial crisis. But while the S&P continued to decline, gold rebounded and ended the year up 5.5%. Over the total 18-month stock market selloff, gold ended that period up over 25%. The lesson here is that one should not panic if gold temporarily suffers from a stock market collapse. And of course see it as a buying opportunity.
  2. Gold’s only significant selloff (-46% in the early 1980s) occurred just after its biggest bull market in modern history. Gold rose over 2,300% from its 1970 low to the 1980 peak… so it isn’t terribly surprising that it fell with the broader stock market at that point.

    We have the opposite situation today. Yes, gold is up roughly 24% year-to-date, but we’re still coming out of a punishing four-year bear market where the price declined by as much as 45%.
  3. Silver did not fare so well during stock market crashes. In fact, it rose in only one of the S&P selloffs (and was basically flat in another one).

    This is likely due to silver’s high industrial use, and that stock market selloffs are usually associated with a poor or deteriorating economy.

    However, notice that silver’s biggest rise (+15% in the 1970s) took place amidst its biggest bull market in history. It also did not decline during the financial crisis period of late 2007 to early 2009, which was its second biggest bull market. In other words, we have historical precedence that silver could do well in a stock market crash if it is already in a bull market. Otherwise it could struggle.
The overall message from history is this: odds are good that gold won’t crash if the stock market does. Silver might depend on whether it’s in a bull market.

What if the Stock Market Doesn’t Crash?

We have to consider another scenario: what if the stock market doesn’t fall off a cliff?

Or what if it’s just flat for a long period of time? The 1970s (through 1980) saw three recessions, an oil embargo, interest rates that hit 20%, and the Soviet invasion of Afghanistan.

Look what the S&P did during that turbulent period, along with gold.
The S&P basically went nowhere during the entire decade of the 1970s. After 10 years it was up a measly 14.3% (excluding dividends and commissions). Gold, on the other hand, rose from $35 per ounce to its January 21, 1980 peak of $850, an incredible 2,328%.

In other words, gold’s biggest bull market in modern history occurred while the stock market was essentially flat. That’s because the catalysts for higher gold weren’t solely related to the stock market—they were more about everything else going on at the time. We have to allow for the possibility that this happens again: citizens are drawn to gold due to other pressing concerns besides the performance of the S&P.

I’m not suggesting there won’t be a stock market crash. Odds are better than 50/50 that’s what we’ll get. But if we do, history shows that gold may not crash with it. Or it might fall only temporarily. Or we might not get a crash at all.

For these reasons, I think it is wise to own a good chunk of gold now.

Anything can happen when markets are hit with extraordinary volatility. But consider all the risks we face today… do you really want to be without gold right now? I don’t.

Perhaps the ideal solution is to have a stash of cash ready to deploy if we get another big decline in precious metals—but also have a stash of bullion already set aside in case the next crisis sends gold off to the races.

AirAsia buys 80% stake in T&Co Coffee for RM914,000

KUALA LUMPUR (June 27): Budget airline AirAsia Bhd is buying an 80% stake in T & Co Coffee Sdn Bhd (T&Co Coffee) for RM914,000, to provide more lifestyle-focused offering to its passengers by expanding its inflight menu.
In a filing with Bursa Malaysia today, AirAsia said it has entered into an agreement with Datin Charlene Yeo Ming Ling for the proposed acquisition.
The purchase consideration will be satisfied in part by cash of RM814,000 and the remaining RM100,000 by AirAsia credit shell which may be used to pay for flights on all carriers within AirAsia Group.
The airline also entered into a shareholders agreement with Yeo, Datuk Douglas Cheng Heng Lee and T&Co to govern the foregoing parties’ relationship as the shareholders of T&Co.
T&Co has been supplying inflight coffee and tea solutions to AirAsia since December 2013.
AirAsia said the purchase price of RM914,000 is based on T&Co’s agreed valuation of RM1.14 million, derived after taking into consideration its net tangible assets (NTA) of RM280,586 as of June 30, 2015; and the capitalisation of the amount owing to Cheng of RM852,341.
Upon capitalisation, the total shares of T&Co will be increased to 1.1 million, bringing up the NTA per share to RM1.03.
AirAsia said acquiring majority stake in T&Co would allow it to have greater management control on T&Co, which will allow it to focus more on product development.
"Coffee and tea are an important part of the inflight experience. A good coffee and tea offering would help AirAsia differentiate its brand in an increasingly competitive market," it said.
It added that the move would allow AirAsia to raise premiums on beverages, as well as improve the margin.
"A majority stake in T&Co would confer on AAB [AirAsia Bhd], greater control over product planning and development, to ensure they are both in line with the company's vision of delivering the ultimate inflight coffee experience, featuring the best of Asean beans — the 'Barista in the Skies'," it said.
AirAsia shares closed down four sen or 1.53% at RM2.57 today, for a market value of RM7.15 billion.

Berjaya Corp set to open Four Seasons Kyoto

Handover ceremony: Tan shaking hands with Taisei Corp of Japan managing executive officer of Kansai branch Takao Kanai (centre). Looking on (from right to left) Four Seasons Kyoto GM Alex Porteous, Berjaya Land CEO Datuk Francis Ng, and Kume Sekkei CEO Yukio Yamada
Handover ceremony: Tan shaking hands with Taisei Corp of Japan managing executive officer of Kansai branch Takao Kanai (centre). Looking on (from right to left) Four Seasons Kyoto GM Alex Porteous, Berjaya Land CEO Datuk Francis Ng, and Kume Sekkei CEO Yukio Yamada
PETALING JAYA: Berjaya Corp Bhd is set to open the Four Seasons Hotel and Hotel Residences Kyoto (Four Seasons Kyoto) in Japan by the end of this year.
In a statement, Berjaya Corp said its main contractor, Taisei Corp of Japan, had delivered the property to Kyoto Higashiyama Hospitality Assets TMK.
Kyoto Higashiyama is a subsidiary of Berjaya Kyoto Development (S) Pte Ltd (Berjaya Kyoto).
Berjaya Kyoto is a 50:50 joint venture company between Berjaya Corp and Berjaya Land Bhd. The group said that the total investment pumped in for the Four Seasons Kyoto was about US$380mil, inclusive of land cost. The hotel would be managed by Four Seasons Hotels and Resorts.
The soft opening of the hotel is sheduled in mid-October, followed by a grand opening in December.
“We expect Four Seasons Kyoto to perform very well with the expected high tourist and business arrivals into Japan. Foreign tourist arrivals have been experiencing double-digit growth and have reached record highs in the past few years and this augurs well for our hotel as we expect this trend to continue into the 2020 Summer Olympic Games in Tokyo,” said Berjaya Corp founder Tan Sri Vincent Tan.
The Four Seasons Kyoto is located on 20,433.55 sq m in the historical core of Higashiyama-ku amidst the temples and heritage sites of Kyoto. It has an estimated gross floor area of 34,632.55 sq m and consists of 180 key counts (123 hotel rooms and 57 hotel residences).
It is within walking distance of tourist sites such as the Myohoin Temple, Sanjusangendo Temple, Kyoto National Museum, Toyokuni Shrine and Kiyomizu-dera Temple.

AIRASIA – Fundamental Analysis (28 Jun 2016) - L. C. Chong

Excel – Download the analysis file
FY16 Q1 Results Highlight:
  • 1QFY16 revenue jumped 31.0% yoy to RM1.7bn on stronger pax traffics (RPK: +26.2% yoy), overall yield improvements (1.4% yoy), higher ancillary income/pax (+11.1% yoy) as well as new revenue recognition of maintenance fee charges to JVs/Associates. (Hong Leong 27 May 2016)
  • Margins improved significantly in 1Q16 mainly due to lower jet fuel costs at US$56/bbl (vs. US$75/bbl in 4Q15 and US$85/bbl in 1Q15). AirAsia has hedged 76% of jet fuel requirement for the remaining FY16 at US$54/bbl and 25% of 1H17 at US $58/bbl. Hence, AirAsia’s strong margins is expected to be sustainable. (Hong Leong 27 May 2016)
  • TAA (Thailand) also cont ributed strongly at RM94.9m in 1Q16 (+225.8% yoy; +226.1% qoq) on the back of strong demand on China sector as well as low jet fuel costs. (Hong Leong 27 May 2016)
  • Outlook on the turnaround of IAA (Indonesia) and PAA (Philippines) seemed promising, after both registered lower operating losses of RM34.6m (-52.8% yoy) and RM32.6m (-54.6% yoy) respectively. The ongoing restructuring effort of IAA (capacity cut & focus on profitable routes) and PAA (fleet restructuring & focus on North Asia sector) continue to improve the load factors, yields and cost structures. The capital restructuring of both entities (new fund injections from other shareholders) are expected to complete by 3Q16. (Hong Leong 27 May 2016)
  • JAA (Japan) is expected to commence operation by Oct 2016 with 2 A320s. AAI (India) continued to improve with lower operating losses (-55.6% yoy) as it expanded further. (Hong Leong 27 May 2016)
  • In my opinion, fair value of AIRASIA range from 2.5 to 2.6. Uncertainty risk of fair value is HIGH.
Going Forward:
  • Higher risk that IAA’s convertible bonds (CB) may not be successfully issued, as the CBs are now being marketed to foreigners rather than the initial target of local Indonesian investors
  • The continued weakening of the Ringgit against the US$ which is on average 12.7% lower compared to FY14. ~70% of operating expenses and 80% of debt are US$ denominated. AirAsia’s US$ debt hedges are at 73% utilising a combination of natural and derivative hedging. Meanwhile, ~8% of operating costs are hedged to reduce the impact from USD/MYR volatility.
  • AIRASIA is a beneficiary of lower jet fuel prices with lower hedges in FY16 of US$59/bbl (FY15: US$88/bbl)
  • Positives:
    • A persistent appreciation of the Ringgit against the USD (ytd: up +10%) as 65% of AirAsia’s operating expenses and 80% of its debt is USD denominated
    • Lower jet fuel expenses as Airasia has hedged 72% of its FY16 fuel requirements at a lower US$54/bbl (FY15: US$88/bbl) with 28% exposure to the spot market which is hovering around US$48/bbl
    • A sustained recovery of its associates, Indonesia AirAsia and Philippines AirAsia
  • On 1 Apr 2016, the company announced that its founders Tan Sri Tony Fernandes (TSTF) and Datuk Kamarudin Meranun (DKM) have entered into a conditional subscription agreement for 559m new AirAsia shares (representing 16.7% of AirAsia’s enlarged share base) at a price of RM1.84 per share (RM1.80 after adjusting for a  4sen dividend announced on 31/3/2016) to potentially raise RM1b. The subscription of shares will be done via their 50:50 owned entity Tune Live Sdn Bhd (TLSB), raising their shareholding in AirAsia from 18.9% to 32.4% which is just a shy of the 33% trigger in which they would have to make a mandatory general offer. The exercise is subject to shareholder and regulatory approvals.
    • The main reason AirAsia chose to raise equity funding via share placement to its founders despite announcing earlier in the year a US$1b multi-currency bond programme is due to unfavourable terms for the its bonds in light of weak market sentiment.
    • The share  placement  would cause an unwelcomed 15.3% dilution in EPS to existing shareholders. However, shareholders would in return get: 1) a reduction in debt by RM342m which reduces financing costs by RM10.7m; 2) higher equity  and lower debt reduceds net gearing from 2.29x to 1.80x; 3) 65.5% of the proceeds are to fund the company’s expansion (capex, new HQ and working capital). Meanwhile, the placement at its market price could be seen as a vote of confidence by its founders in the company’s prospects.
  • I am still worry about AIRASIA, but I believe AIRASIA will be able to go through these issues.
At the time of writing, I owned shares of AIRASIA.

Friday, June 17, 2016

Vistara, AirAsia India seek quick fleet growth as aviation rules eased - sources

SINGAPORE (June 16): Vistara and AirAsia India, airline ventures of India's biggest conglomerate Tata Group, aim to boost their fleet sizes to 20 planes within a year and launch international services after the country overhauled aviation rules, two people familiar with their strategy said.
The Indian government revised on Wednesday its so-called '5/20' policy, removing a restriction that domestic carriers have to operate for five years before they can fly abroad. They must, however, still deploy 20 aircraft or 20% of total capacity in India, whichever is higher.
Vistara and AirAsia India, which began operations in January 2015 and June 2014, respectively, will prioritise services to the Gulf and flights to Southeast Asia to connect with their investors Singapore Airlines and AirAsia, added the sources, who declined to be identified as they were not authorised to speak to the press.
Singapore Airlines has a 49% stake in full-service carrier Vistara, while Southeast Asian low-fare pioneer AirAsia owns 49% of budget airline AirAsia India. Tata Group has a 51% stake in Vistara and 49% in AirAsia India.
AirAsia India CEO Amar Abrol said on Wednesday that the airline will increase its fleet from six to 20 aircraft "as soon as possible".
These will come from Malaysia-headquartered AirAsia, which supplies Airbus A320s from its large orderbook to affiliates around Asia. AirAsia declined to comment.
Vistara has 11 A320s and will get two more this year, and it originally planned to have 20 planes by June 2018. All of these are from leasing firms, and it will turn to them for more planes, said a source familiar with the company's plans.
Widebody aircraft could also be on the cards for Vistara, but that is not a priority, added the source.
Singapore Airlines referred questions to Vistara, which did not immediately respond to a request for comment.
Vistara has a three-class configuration with business, premium economy and economy cabins. This is geared towards the higher-yield international segment, where executives believe they can compete against Gulf carriers such as Emirates, Etihad and Qatar Airways which dominate the market for travel to and from India.
International services by AirAsia India and Vistara may not significantly hurt incumbents such as Air India, Jet Airways and InterGlobe Aviation's IndiGo, some analysts said.
"We don't really see this as a negative for the competition because in today's global environment, the airlines also need to compete with carriers from abroad and they do not just face the local competition alone," said Pankaj Sharma, Head of Equities, Equirus Securities.

Thursday, June 16, 2016

Silver Assets Climb to Record as ‘Forgotten’ Metal Soars

Holdings in exchange-traded funds backed by silver swelled to a record as investors sought a haven from global economic and political risk.
Assets expanded 72.6 metric tons to 20,227.2 tons as of Wednesday and have risen 7.3 percent this year, data compiled by Bloomberg show. Prices have advanced 28 percent in 2016, outperforming gold, as investors scale back expectations for increases in U.S. interest rates, benefiting precious metals because they don’t offer yields or dividends.
Federal Reserve Chair Janet Yellen signaled Wednesday that secular forces may keep borrowing costs lower for longer, which helped push gold to the highest level since 2014. Silver joined the rally, adding 2 percent. Investor anxiety over a British vote June 23 on whether to leave the European Union is also bolstering prices.
“When there is big buying in precious metals, silver sometimes leads the way up,” Bob Takai, chief executive officer and president of Sumitomo Corp. Global Research Co., said by phone from Tokyo. “It’s very natural for investors to run for the safe haven which is gold and silver.”
Investors have added 421.6 tons of gold to exchange-traded funds in 2016, the most for any year since 2009, after reducing holdings for three straight years, according to data compiled by Bloomberg. Silver assets have risen 1,370 tons this year, the most since 2012.

‘Value Opportunity’

“The case for silver will just get stronger and stronger because silver was essentially forgotten by much of the investment community for a long time, thereby creating a great value opportunity both in absolute terms and relative to gold,” Gregor Gregersen, chief executive officer and founder of Singapore-based Silver Bullion Pte., said in an e-mail before the data were released.
An ounce of gold bought 73.7 ounces of silver on Thursday from a high of 83.8 ounces at the end of February, which was a level last seen during the 2008 financial crisis.
Silver looks ready to outperform gold now with the ratio moving lower in a consistent fashion, signaling a genuine bull market condition for both metals, according to Ned Naylor-Leyland, manager of Old Mutual’s Gold and Silver Fund in London.

Tuesday, June 14, 2016

Investors eye bumper dividend as AirAsia plans to sell aircraft leasing business

PETALING JAYA: Shares in AirAsia Bhd climbed to its highest level in more than a year on hopes the low cost airline will pay out a bumper dividend from the impending sale of its aircraft leasing business.

CIMB Research expects 96 sen a share payout assuming the deal goes through.
“Post-sale, gearing levels would fall, and the risks arising from the associate airlines would be shared with the new majority owner of AAC,” it said in a note yesterday.
“We expect 96 sen per share in special dividends to be declared post-Asia Aviation Capital’s (AAC) disposal,” it said.
Shares in AirAsia rose two sen yesterday to close at RM2.67. CIMB Research yesterday raised its target price for the stock to RM4.15.
This values the airline at nine times its projected earnings in 2017 and adding in the expected special dividend.
It has been reported that the low cost carrier was in the process of evaluating the proposed sale of AAC.
Group chief executive officer Tan Sri Tony Fernandes said AirAsia had appointed three banks to conduct the sale and there had been significant interest in AAC with a ready offer in hand valued at about US$1bil.
AAC is AirAsia’s wholly-owned leasing arm that leases aircraft to associate airlines in Thailand, Indonesia, the Philippines, India and Japan.
At the point of sale, AAC will have a portfolio of about 70 A320 planes, with aircraft and their associated debt novated from Airasia.
CIMB Research said the best offer on the table so far values AAC’s equity at US$1bil, although it believed that AirAsia was attempting to push the valuation even higher.
“The latter was calculated based on the market value of AAC’s expected portfolio of 70 aircraft, with the valuation boosted, in our view, by AirAsia’s large and attractively-priced order book with Airbus, which AirAsia has promised to share with the future AAC owner,” it added.
The exact proportion of AAC to be sold has yet to be decided by AirAsia, but a buyer has offered to purchase an 80% stake for US$800mil.
CIMB Research said Airasia might sell a smaller stake if it could get a higher valuation. “We suspect that the key criteria is the amount the two founders need to receive in special dividends to settle the RM1bil they would borrow to pay for the upcoming placement of 559 million new shares at RM1.80 each,” it said.
The research house said after the placement, the two founders would have a combined 32.4% stake in AirAsia.
“This means they will need AirAsia to pay at least RM3.1bil in special dividends (RM1bil/32.4%) to settle their loan. The US$800mil proceeds from potential sale of 80% stake in AAC (or RM3.2bil at RM4 to US$1) neatly matches the amount the founders need.
“This is the reason we think the entire proceeds will be paid as special dividends, representing 96 sen per share on enlarged post-placement base of 3,342 million shares,” CIMB Research said.
The research house estimated that RM1.5bil-RM1.7bil in debts associated with the leasing business would be deconsolidated, reducing net gearing to below one time.
Also, the future funding of loss-making associates would be shared with the new AAC owner, since the associates will pay aircraft rents directly to AAC.

Thursday, June 2, 2016

AirAsia eyes bigger growth in China

KUALA LUMPUR - AirAsia eyes increasing its footprint in China, which remains an important market for Southeast Asia's leading budget airlines, media reported.
Its chief executive officer Aireen Omar said AirAsia is the biggest international airline in China, operating 45 routes to 18 destinations.
The airlines operates hubs that connect into various destinations in China, like it fly from Guangzhou not only to the Malaysia's capital city of Kuala Lumpur, but also to the southern state of Johor.
She told reporters on the sidelines of the World Economic Forum (WEF) on ASEAN that AirAsia is weighing on more routes to China.
"There are a lot of things that are being planned at least for the next five years on how we are going to grow into China from the ASEAN base," she was quoted as saying by Bernama, state news agency of Malaysia.
Meanwhile, Air Asia group chief executive officer Tony Fernandes said Chinese regulators understood the aviation business and were very proactive.
"It has been great working with them. Wuhan airport authorities have seen us last week and wanted to know how to be a low-cost (carrier) and how to build a low-cost terminal," he told reporters.

The Shocking Reason Why China Will Send The Price Of Silver Skyrocketing Over $100!

With so much focus on the West’s massive money printing schemes, here is the shocking reason why China will send the price of silver skyrocketing over $100.
Stephen Leeb:  “Whatever your views about climate change, the reality is that the world as a whole is rushing to replace fossil fuels with renewable energies (along with nuclear, which is so plentiful that for all intents and purposes it can count as renewable). And while in recent articles we’ve focused on the forthcoming massive bull market ahead in gold, the transition to renewables will mean at least comparable opportunities for investors in another metal: silver, which is destined to soar into triple-digit territory

In Volatile Markets, Is Wealth Preservation King?
In a King World News interview I spoke with the man who predicted the Swiss National Bank would experience staggering losses and that the Fed would also experience massive losses that will destabilize the global financial system! His company is the only one in the world offering a precious metals investment service outside the banking system, with direct ownership and full control by the investor. He has also become legendary for his predictions on QE, historic moves in currencies, and major global events. To find out what he and his company can do to help answer that age old question for you CLICK HERE.
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Stephen Leeb continues:  “While gold’s rise will mainly reflect its role as a currency as commodity shortages emerge, silver – which also has a history over the millennia as a precious metal – possesses special qualities as an industrial metal that will give it an added kick. For instance, it’s one of the best conductors of both electricity and heat, giving silver a critical role in industrial applications ranging from automobiles to computers and mobile phones (and virtually all modern electronic devices).
KWN Leeb I 5:28:2016
Silver Playing A Massive Role In Renewable Enegery
And of rising importance as the world seeks to move away from fossil fuels, silver is also a critical component in photovoltaics, a renewable energy whose growth over the past decade has been spectacular at nearly 100-fold. In 2006 photovoltaics was just a twinkle in European and Middle Eastern eyes. Recently China has been leading its growth: in the past five years, China has counted for around 50 percent of solar’s gains.

Shocking Chinese Demand To Send Silver Prices Skyrocketing
Looking ahead, estimates of growth in photovoltaics between 2015 and 2020 range from about 250 gigawatts (the IEA) to well over 400 gigawatts (Bloomberg New Energy). Moreover, virtually all reputable researchers expect accelerating growth through at least the next decade. China had installed about 45 gigawatts of photovoltaics by 2015. It aims for 1000 gigawatts  by 2030, nearly five times what the entire world has installed today.

Basic math shows what this means for silver consumption. Today it takes about 2.8 million ounces of silver to produce one gigawatt of solar power. If we assume that about 650 gigs will be installed worldwide by 2020, simple multiplication and division tell us that about 35,000 tons of silver, or 1 billion ounces, will be needed by 2020.
And photovoltaics constitutes just one part of the demand side for silver. Demand for silver for computers, the internet of things, and, indeed anything electronic – and for coins and jewelry, especially in the East – will also continue to grow. But solar energy will be responsible for the greatest growth in demand.
King World News - Commercial Short Positions In Silver Hit All-Time Highs! Gold Shorts Near All-Time Record!World To Face Massive Silver Shortages
So where will all this extra silver come from? According GFMS, a division of Thompson and Reuters, silver supplies have peaked. In its most recent analysis it sums up the supply situation as follows: “Declining total supply is expected to be a key driver of annual deficits in the silver market going forward.” In other words, when you combine the basic demand math along with supply assumptions, the world is facing a five-year supply shortage that amounts to more than one year of production, or enough to draw down to nearly zero all the aboveground silver inventories that might be used to fill the gap.

After 2020, increasing silver demand will mean increasing rationing of the metal, which can only be done by via extraordinarily high prices. Of the world’s major countries, only China seems to get the message and to be preparing for this eventuality, with China’s recent silver imports soaring to five-year highs. Meanwhile, U.S. imports have stagnated.
Barring a miracle, silver prices are going to the moon, leaving the U.S. in a very difficult position. It would not surprise us one bit if silver is confiscated much like gold was during the Depression. This means, as was the case with gold, the best investments are likely to be silver producers. Over the next decade almost all credible silver producers could see their prices multiply by anywhere from 10- to 100-fold.” ***KWN has now released Pierre Lassonde’s remarkable audio interview, where he discusses his $10,000+ gold price prediction and much more CLICK HERE OR ON THE IMAGE BELOW.

Finding the real numbers in timber & furniture stocks and some key observations

Follow up on my last post discussing timber & furniture stocks and after the release of the recent quarter results, I am curious to find out how would the margin, turnover and ROIC of these stocks look like after stripping away all the nonoperating gain & losses. Are they still going to look similar or very different? and .
Before jumping in, it is important for you to know the adjustments I've made before you interpret the figures. All the adjustments are made in order to find 2 things -
  1. Invested capital (IC)
  2. Net operating profit after tax (NOPAT)
Invested capital looks at how much money is put into the business. NOPAT looks at how much the business earns without all the extraordinary things. When you have these 2 things, you can find out NOPAT margin & turnover, both will lead you to Return on invested capital (ROIC).
IC = Operating fixed assets + operating current assets - operating current liabilities
Most common things in IC will be property plants equipments, accounts receivable, inventories, accounts payable etc. Excess cash is excluded.
NOPAT = Operating income x (1 - Tax rate)
For NOPAT it is a bit tricky. I can't remember everything on top of my head but I have either taken out or added back everything not related to how the core operation makes money. Things like interest income/expenses, foreign currency gain/loss, insurance compensation, assets disposal gain/loss. rental income/loss, inventory loss to fire and so on. Most of them are small amount, but interest income/expenses & forex gain/loss are major ones, especially as of late.
Tax rate is the most controversial. None of these stocks pay a full tax rate of 25%. You have FLBHD with tax deduction benefits (now no more), Hevea reversal of deferred tax assets, Latitude paying different tax rate because they have operations in other countries, same for Poh Huat. Because my goal is to look at the economic side of the business without letting tax rate distorting profits, I've decided to apply full tax rate on all of them by assuming level playing field. And reality is not level.
With all these in mind let's look at their figures.

With all the numbers on our hands, I plotted them on a chart for easier understanding and interpretation. Again as mentioned in last post, be careful when you tried to compare these companies. Although they all falls under the same industry and their businesses tend to overlap in some areas but some can be distinctively different.  

The X or horizontal axis depict NOPAT margin (NOPAT/Revenue), Y or vertical axis depict turnover (Revenue/IC). X*Y gives you ROIC. There's are few ways to interpret both margin and turnover. Turnover has more to do with operational efficiency while margin can either be business has lower cost or higher selling price or mix of both.
The only way for these companies can generate more value is to move as far top right as possible, that means expansion of both margin and turnover, or in most of the cases here, higher turnover can offset a lower profit margin.

Key observation
1. Looking at X-axis, over the 5 years from 2010-2014 you can see margin earned by these companies mostly falls in between 4% to 8% band, with 5-7% being average.
2. At Y-axis, turnover ratio is more dispersed. With concentration around 1.5-2.5 band.
3. If you take these 2 averages (Average can be meaningless), average margin of 6% and turnover of 2x, you get ROIC of 12%, which is decent for the industry as a whole. Earning above cost of capital of 10%.
4. All these stocks experienced strong margin and turnover expansion in 2015. Hevea's margin swings passed 12% while turnover breached 1.5x for the first time. Liihen turnover hitting record 3.5x and register a 10% margin, propelling ROIC to 34.4% (3.5*10).
5. Hevea's low turnover compare to others is mainly because of equipments & machinery needs to produce their products (particleboard). Mieco which trade particleboard too but not mentioned in here has a lower turnover of below 1x. Another interesting thing about Hevea is that it is the only stock with IC falling since 2010, pushing up turnover gradually.
6. Bear in mind although these numbers have been 'cleaned' to remove any distortion, the currency distortion on revenue is real and alive and that's something that cannot be 'cleaned'. So beware of things reversing. You need to be able to explain facts that margin & turnover expansion is due to business doing this and that rather than take it at face value.
7. Homeritz has always been an outlier in terms of margin, partly has to do with their focus on niche high end luxury market. Whether the margin can be maintained remains to be seen. It seems the market is giving it a high valuation because of consistency in high ROIC.
8. Poh Huat's turnover have been relatively consistent and with margin growing over the past 2 years, it remains interesting to see how their plan to move into high end furniture turns out in the future.

Another key takeaway is when it comes to predicting growth, unless the company had a record to prove that it is an outlier, such as the case of Homeritz, it is always better to use the industry rate (outside view) as the starting point before focus on the stocks previous metrics (inside view).
Let's say you are interested in Focus Lumber, you want to forecast FLBHD's revenue growth rate.
1. You noticed industry average ROIC is sitting around 12% (6% margin x 2x turnover). That is a good starting point.
2. FLBHD past 6 years ROIC is 15.6%, take out 2015 figure ROIC is 12.8%. You noticed FLBHD have been able to earn a margin above 6% and turnover above 2x consistently, so you decide to adjust FLBHD's future ROIC upward slightly to 12.5% or 13%.
3. A quick check at FLBHD previous payout ratio, you found out that they pay on average 40-50% of their EPS as dividend. With that in mind, you know the revenue growth rate will be around 6.2-7.8% a year. Growth = ROIC * (1- Payout ratio).
4. If you want to estimate margin then profit from here, it's the same thing. Look at industry NOPAT margin, look at company specific and adjust from there, not other way round.
5. This way you will avoid using a too high growth forecast, say using 10% because 10% seems alright and a nice rounding figure.