Want to start this topic as many may find the quality of equity research really not up to the mark. Especially counters that are not well covered and have to depend on the SGX Research Incentive Scheme. The objective is not to criticise but discuss them and hopefully increase the overall research standard in Singapore.
Obviously we are not advocating sophisticated analyses, in-dept study of company or intensive market intelligence (because it may not make economic sense); but just plain simple desktop research to raise relevant business and financial issues.
Take for example, the most recent report on IFS Capital by CIMB on 10 March 2009 :-
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Salient points
• Net profit decline was primarily due to the severe economic downturn
coupled with the cautious approach taken by IFS in its lending and
insurance activities.
• While Singapore business saw declines, regional performances were
satisfactory with the Thailand associate turning in better profit and
Malaysia and Indonesia turning around with full year profits.
• Group leverage ratio was reduced to 2.0x from 2.7x in 2007.
Subsidiary ECICS’s capital adequacy ratio at over 500% was
substantially above the regulatory requirement of 120%.
Outlook – cautious
• IFS expects lower volumes for its factoring, loans and risk underwriting
business in FY09.
• On the cost side, the Company has frozen headcount and senior staff
salaries as well as cut down on discretionary expenditures.
• Dividends have also been slashed to a final proposed dividend per
share of 1.0cts versus 3.25cts per share last year. The Company paid
an interim dividend per share of 1.0cts versus an interim dividend per
share of 3.0cts last year.
Recommendation – HOLD
• To be conservative, we have assumed zero dividend payout for FY09-
FY11 as the Company seeks to “continue to maintain liquidityâ€.
• Based on Bloomberg price to book value data, the share price hit a
low price to book ratio of 0.33x in FY08 and 0.21x in 1998 during the
Asian Financial Crisis.
• If the share price were to retest these two price to book value
supports, the CY09 target prices could be S$0.22 (56% downside
based on 0.21x) and S$0.34 (30.9% downside based on 0.33x).
• However, having gone through the baptism of the Asian Financial
crisis, we believe the Company is better equipped to meet the
challenge of this down turn. As such, we are setting our target price at
S$0.53 based on 0.52x CY09 P/BV. This is derived based on the
average low P/BV that the shares have traded at since the Company’s
valuation went under 1.0x ( 1995 – 2008).
[Low price to book ratio chart]
[Forecast Table : FY2008 NI = 8m; F2009 NI = 6.6m; F2010 NI = 6.3m; F2011 NI = 5.9m; obviously no discussion of basis]
Technical view
• Technical SELL. Its short term uptrend appears to be losing
momentum. A break below S$0.46-0.47 could see the stock fall back
to its 30-day SMA at S$0.435. We do not discount that it could even
fall back to its S$0.32 low if the 30-day SMA fails to hold off the selling.
• MACD is starting to lose steam suggesting that the buying momentum
is weak. RSI is also beginning to hook downwards.
• As the uptrend channel appears steep, the bears are likely to pounce.
Sell now with resistance seen at S$0.52 and S$0.57.
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My criticisms :-
(1) Given that the economy is deteriorating, it makes more sense to look at performance of companies by quarter. For example, GDP for Singapore's economy in 2008 was +1.2%, but Q4 contraction was large at 16.8% ! Most banks suffer Q4 large losses that may continue in Q1 and Q2 2009.
In IFS Capital's case, its managment obviously did not want to present to you Q4 numbers when announcing the FY2008 result. However, if you compare FY 2008 and Q4 2008 numbers, Q4 was a loss of S$1.8 million pre-tax and S$350k post tax !
(2) From the financial statements, You can see that it is because of large provision in Q4 of S$4.3 million in Q4 and there was very little provisions in Q1 to Q3. So is it therefore Managment's policy to make provision only in Q4 or loan quality has actually deteriorated sigificantly in Q4 ? Either way, it is not good news. For the former, his means you cannot use the first 3 quarter numbers as good estimates for full year and for the latter this means more shit to come ?
(3) Since, the analyst does not have the common sense to show quarterly numbers, I have taken some time to do so :-
(S$'000) Q3 2008 Q4 2008
Interest Income 5,084 5,305
Interest Expense (2,221) (2,468)
Net Interest Income 2,863 2,837
Net Premium Revenue 1,278 (746)
Fee/Commission Income 1,503 1,490
Inx Income 468 1,247
Others 46 541
Income before OPEX 6,158 5,369
OPEX (3,975) (3,207)
Allowances/Provisiions (115) (4,276)
Operating Profit 2,239 (1,929)
Associate Income 589 131
EBT 2,828 (1,798)
NI 2,302 (350)
(4) Since financial companies' future quarter income come from mainly its loan assets that are booked in the last quarter, it is very important to understand the movement of its loan assets in each quarter :-
Q2, 2008 Q3,2008 Q4,2008
Loan/HP Assets 69,069 84,460 68,999
Factoring Receivables 208,341 226,649 186,569
Total 277,410 311,289 255,568
Change +34m -56m
It is alarming that total loan assets actually increased in Q3 (which probably helped in Q4 numbers somewhat) and fell drastically in Q4 2008 ! Why ? We do not know.
(5) The numbers derived from (3) and (4) above means IFS Capital earnings could be highly velnerable in Q1 2009 at least. Especially so if there are further provisions ???
Conclusion :-
The above can be gotten from published financial statements. A simple desktop research will be able to uncover more things than the analyst's research; abeit the nice looking charts from Bloomberg.
Unvested; long or short.