I believe most of the investors or traders lose money today. Am I right?
Look at below Dayang Chart!
Dayang close +4.55%, rising from 1.28 to 1.38 (7.5%).
List of Advantages:
1. Uptrending Stock from 0.88
2. MA 20 cross MA50 (Golden Cross)
3. Resistance Break at 1.34, Next Resistance should be 1.51.
4. MACD Green Bar Appear with a Good Volume
5. Price of Dayang lowest today 1.28, closing at 1.38. Its actually rise 7.5% TODAY!
6. Petronas will be giving out many contracts to Dayang (Research said).
Market so bad today! But why DAYANG will move up so strongly???
Kindly read the below article on the recent Perdana RCPS Issue, then you will know why I'm prasing Uncle Koon has such great business sense as compared to other investors.
I believe Mr. Ooi Teik Bee is doing his job very well. As one of his subscriber, I am impressing on your research, and please keep it up.
I believe we (all subscribers of you) can make back the loss in 2018 very soon.
And to Uncle Koon, I'm glad if you can share more articles and idea in your coming public talks! See you !
<<< Converting PE into Business >>>
I recently read a book, The Alchemy of Finance by George Soros. It enlightened me that a long held belief that share price has no effect of whatsoever effect on the company business itself. I believe many shared this same conclusion. But, in understanding Reflexivity, I have some new thought. If a business do affect share price, then why shouldn't a share price affect the business? Both share a circular relationship, a cause-and-effect. Let me illustrate.
There is two burger stall: Burger Stall A and B. Both sell identical products with produce the same profit of RM5,000 per stall. To setup burger stalls requires RM10,000. Both burger stall A and B business is thriving and wanted to expand.
Burger Stall A raise capital at a multiple PE of 10, grossing RM100,000.
Burger Stall B raise capital at a multiple PE of 5, grossing RM50,000.
Burger stall A are able to setup 10 new stalls, generating a total profit of RM55,000 including the original stall; Burger stall B only able to setup 5 stalls, generating only total of RM30,000 profit (including original stores).
From an investor point of view, Burger Stall A succeed in turning a PE of 10 into PE of 2, creating 5x of return. While Burger Stall B only managed to turn a PE of 5 into PE of 2, creating only 2x of return. If I were the investor, I would buy more Burger Stall A shares due to more efficient capital deployment.
In real life, probably both burger stall is in same area and Burger Stall A will win the market, making Burger Stall B an even less attractive case for investors.
Another real life case. Warren Buffett decided to borrow money from market. He issued a bond that comes with a warrant which gives investors the right to buy Berkshire Hathaway stock five years from now. Buyers of the bonds will PAY interest to Warren Buffett. This instrument is called SQUARZ. Warren Buffett will now use the cash raised to acquire business. In 5 years time, these acquired business in turn generate returns and add value to Berkshire and increasing its share price, allow investors to capitalise on the SQUARZ. Given Warren Buffett reputation and skills, it is a win-win situation. Investors are willing to pay to lend money to the world greatest investor. This creates a positive self reinforcing feedback loop: Investor lend money to Warren Buffett, Warren Buffett deploy the money to acquire business, business add value to Berkshire, Bershire share price increase, investors get higher return and willing to lend more money to Warren Buffett, even if it means paying him interest and not the way around. This is how Reflexivity works.
I studied and meet a lot of listed companies in Malaysia. Most of the listed companies doesn't really know how the market works despite being listed. They care not to take advantage of the capital market to raise funds. When hard pressed for funding, the first thing they turn to is banks to get a loan rather than the capital market. Which is why our Malaysia Inc is not doing rather well. How quickly a company can expand if they are starved with capital and their banker keep on telling them to show me the money? If they got the money in the first place, they wouldn't go for a loan! It becomes a negetive self-reinforcing cycle. Yet, the sad case is, most listed company owner probably didn't realised the capital market is the safest and most prudent way to raise funds. Let me make an example.
Perdana Petroleum Berhad recently announced to issue a Redeemable Convertible Preference Shares (RCPS). It intend to raise RM500 million to pay off its debt and working capital. Dayang is the parent company. As investor, one should buy such instrument rather than the ordinary shares.
Firstly, it protects Dayang interest, in the event of default, Dayang will get secured Perdana Petroleum asset before other ordinary shareholders.
Second, as RCPS carries no dividend nor interest, lessening the cost of financing for Perdana.
Third, such instrument is convertible into ordinary shares which means the holders can benefit from the increasing share price in future.
Dayang is getting a good deal in essence. If anything happens to Perdana, it will able to secure a foothold. If Perdana is doing good, Dayang will able to increase its participation by converting the RCPS into ordinary shares. If Dayang need money, it can sell off its RCPS without diluting its ordinary shares stake at Perdana. Most people will get an advise to run away from such instruments because it is not well understood, in fact, if one is to invest, be as smart as Warren Buffett!
During 2008 financial Crisis, most off repeated story is that Warren Buffett invested in Bank of America and Goldman Sachs and made tons of money. Billions. But what makes such deals even more savvy is that Warren Buffett is getting preferences shares instead of ordinary shares. It comes with cumulative dividend rate, convertible (issued with warrants), and with preference pay out capital protections in case the banks indeed goes bust , all at a rock bottom price. If the bank is doing good, the instruments worth tons of money. If the bank doing bad, Warren Buffett get interest. If the bank bust, Warren Buffett get paid first. When we consider risk and reward, Warren Buffett is lowering his risk and increasing his reward simultaneously.
Raising funds from the market is like the Burger Stall story we told, getting funds at the right time saved not only cost, but also increase profitability. Smart company understood this well and tap into the capital market, which is also the reason they listed in the first place. A well thought fund raising fit well like what Warren Buffett did. Such smart company did exist in Malaysia. AEON Credit issued Irredemable Convertible Unsecured Loan Stock (ICULS) at the right juncture. To grow its business, it relying on fund raising. Japanese culture is meticulous, they calculate all costing wise and will settle to their best advantage. Instead of paying 7% for its bonds, it raised funding by tapping into capital market. It offered 3.5% of interest rate, half the interest cost of its bond, and a convertible instruments. Smart investors would of course knew it is a good deal, as investors is getting paid no matter what and still able to convert these loan stocks into ordinary at a notice. Both are win-win situation. The company saved half the interest, the investors get paid in interest and still can participate in the increase of share price.
Now, you might asked why AEON Credit don't issue ordinary share instead of loan stock. The answer lies in the dividend. As company paid more dividend than interest, it doesn't make sense to have right issue in ordinary shares. It would either have to cut the dividend paid or pay more dividend to shareholders. As mentioned, AEON Credit is a smart company with meticulous calculations. As noted, AEONCR is able to save cost and deployed its capital immediately. And thus the reflexivity in play. Interest saved and capital raised can immediately put into work, generating incomes and increase business value and its share price.
Now back to our Burger Stall story. What happens if Burger Stall A decided to acquire Burger Stall B after expansion? Assuming same PE for valuation, Burger Stall A have 11 stalls generating a profit of RM55,000. It valued at RM550,000 at PE of 10. Burger B have 6 stalls generating a profit of RM30,000. It valued at RM150,000 at PE of 5. Both Burgert Stall A and B combined value is RM700,000. Burger Stall A acquired Burger Stall B. Ceteris Peribus. Burger Stall AB will have 17 stalls, generating RM85,000 profit, at a valuation of PE 10, its valuation is now RM850,000. By the virtue of Burger Stall A commanding a higher PE, the increased profit have the effect of increasing the valuation of the merged entity. A stock-for-stock acquisition is to convert a low PE company into a high PE valuation. Executed properly, such acquisition add value in complementing existing business. Recently we came across such company in Malaysia: Revenue. Its recent acquisition is well done. By issuing shares at a high PE, it acquired companies at a half the PE valuation its command. In other word, it is using a PE 30 valuation to acquire companies that valued at PE 15. Any businessmen would testify that it would be a good deal, as the acquired company owners will get a higher valued shares for their companies while Revenue can increase its valuation by adding on the profits from these companies.
In understanding Reflexivity, a listed company can leverage on its PE to raise funds. Ideally, the raised fund is immediately put to work to generate incomes, adding business value and translating into higher share price assuming the same PE (if not higher due to the growth rate). The company share price do have effect on the company and vice versa. A smart company leverage on the capital market to either raise funds, acquire company or talent in the best possible way. Smart investors like Warren Buffett and George Soros knew too well about these instruments and its effect and minimising risk while maximising reward at the same time. Be smart.
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