kcchongnz blog
Focus Lumber: the wind of change of foreign exchange kcchongnz
Just before Focus Lumber (Flbhd) announced its third quarter results for period ended 30th September 2015 somewhere on 17th November 2015, its share price jumped by 70% within 3 months from RM1.84 on October 12 2015 to a high of RM3.09 on January 12 2016 as shown in Figure 1 below.
Figure 1: Past one year share price movement of Focus Lumber
The results show the vast improvement for the third quarter 2015 with net profit increased by more than 200% from RM3.3m to RM9.6m for the corresponding period in 2014. EPS, as a result, also increased by more than 200% from a EPS of 3.2 sen to 9.4 sen for the quarter.
Some investors who purely base on a single metric of “Profit growth”, without considering where this “growth” comes from, saw a great opportunity and annualized the EPS by multiplying by 4 to the single quarter exceptional result and obtained an expected EPS of 37.6 sen for the next 12 months, and chased the share price up to more than RM3.00 in early January 2016.
Focus Lumber only has a total number of 103.2m shares outstanding with a total market capitalization of RM258m at that price of say RM2.50. The free float is even less. With just a capital of RM18m, you can buy and own 7% of its total market capitalization. If one uses 50% margin finance, he just needs RM9m in capital outlay. There are some players in the market who have that amount of money, and much more. Hence it is very easy to jack up the price, isn’t it?
Why not? Trees can grow up to the sky. With net profit tripled in that quarter and quarterly result annualized, the profit growth was more than 200%. With that growth compounded for the next 5 years, even at half that rate, Flbhd EPS will balloon to RM12 per share. With a PE ratio of 10 then, it should worth RM120 a share! Who doesn’t want to be a billionaire?
However, many failed to see that the greatly improved result for the third quarter of 2015 was in a major part, due to the gain in foreign currency adjustment of about RM4.7m, or about 4.5 sen a share, a result of rising USD against Ringgit from the beginning to the end of the period as shown in Figure 2 below.
Figure 2
Without that gain, the EPS for the quarter is only about 5 sen. The EPS for the quarter was boasted by this foreign exchange gain of a whopping 47%! Will USD continue to strengthen at such a high and steady rate against the Ringgit in the next 5 years?
How could a one-time-off foreign exchange translation gain to be used to extrapolate the expected profit in the future when the foreign exchange rate can go up and down, and according to academic research, nobody can predict correctly and consistently the direction of the change in the future?
There came the power of mean reversion in investing. Here are some examples of the power of mean reversion in investing, a very powerful phenomenon in investing indeed.
http://klse.i3investor.com/blogs/kcchongnz/95848.jsp
Subsequently, Flbhd’s share price drops from the high of RM3.09 to less than RM2.00 in just less than two months, or a third of its value when the power of mean reversion took place when Ringgit strengthened against USD. Investors who blindly follow this fuzzy profit growth investing strategy, without understanding where this “growth” came about, lost a bundle when they panic and sold their shares at less than RM2.00, or had no choice but forced sold by their investment banks because of margin calls.
“Wonderful companies become risky when people overpay for them.” Peter Lynch
The moral of the story is; Trees can’t grow to sky, and in investing, be conservative and invest with a high margin of safety, and for long term. Most importantly, do not be greedy by using margin finance as constantly propagated by investment bankers and individuals alike. If you do not make double or triple return without the margin finance, it is okay, because you may lose everything you have if the event turns against you, and it happens often in investing, especially in the short term.
“Focus on the downside and the upside will take care of itself.”
The latest quarterly results ending 31st March 2016
Focus Lumber announced its first quarter 2016 results ending 31st March 2016 on 20th May 2016. Its revenue jumped by 77% to RM53.3m and gross profit doubled to RM14.9m as compared to the corresponding period in 2015. However, its net profit remains flat at RM3.3m compared to the corresponding period the previous year. When compared to the preceding quarter, net profit sinks by 69% from an EPS of 10.4 sen to just 3.2 sen.
As expected, the share price of focus Lumber sank by 33 sen, or 14% at the opening bell on 23rd May 2016. It closed at RM2.07 at the end of the day, for a loss of 11%, in just one day.
Is Focus Lumber worth investing with the steep correction of its price now?
Questions to ask
One of the cardinal rules in investing is that we should never invest in a share without thorough analysis because someone asks us to, especially he owns a lot of it. It also doesn’t mean that we should scorn the share just because of that. We should do our own homework, analyze the business to see if it is a good and sustainable business in the long run, and more importantly, if the price is reasonable, or even better, if it is cheap.
Some other questions you should ask and seek answers before investing in it are but not limited to the followings.
- Are you a short-term trader looking for quick gains (and also quick loss), or a long-term investor aiming to build long-term wealth in a sustainable way?
- How has been the financial performance of the core business of the company in the past, and what probably will happen in the future, after stripping off the one-time-off gain or loss such as that of foreign exchange, sales of assets, revaluation of asset etc.
- How has been its return on capitals? How that return comes about, from high profit margin, asset turnover, or leverage?
- How is its dividend history? How is it compared to alternate investment such bank deposit?
- How is its balance sheet? Bear in mind this is important to assess the risk in investing, and the sustainability of dividend also depends on how much cash per share in its balance sheet.
- How has been its cash flows, especially free cash flows? This is also hugely important for the sustainability of its dividend payment.
- More importantly, is it selling a good price now in term of PE ratio, P/B, P/Cash flows, earnings before interest and tax versus its enterprise value etc.?
- What about its cash yield?
- What is its intrinsic value, and hence what is the margin of safety investing in it at this price now?
- Etc.
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operation not meeting these requirements are speculative”
Benjamin Graham
The well written article below by Harry appeared in i3investor yesterday may give you some good clues.
http://klse.i3investor.com/blogs/kianweiaritcles/96910.jsp
Yes, to invest safely and have higher probability of success, one does need to do some homework as above. Forget about what others say you only need intuition, guts feelings, and no need to look at the company’s financial performance and position, ROE, cash flows etc. as they are history and hence not important. Those talks are bullshit.
I always say I do not have the ability to give you stock tips to help you to make money in the stock market. I also believe no one else will and can do that consistently, and most of all, sincerely. This is because the stock market is unknowable and unpredictable. You may have heard numerous times how others had made millions in the stock market, and how they have amplified their wealth by using other people’s money. But no one will tell you they have lost their fortune, or almost of all what they have. That is just human nature.
However, if you wish to learn about how you can answer some of the questions above, I may able to help.
“Tis goeth down to a fundamental aspect that “An investment in knowledge pays the best interest”- Benjamin Franklin
Please contact me with the email address below if you are interested to learn about fundamental investing for a small fee in order to make good and safe investment decision yourself.
ckc15training2@gmail.com
Believe me, in the long run, it is much better for your future financial wellbeing than following the stock tips from anybody in the stock market.
K C Chong
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Discussions
21 people like this. Showing 50 of 99 comments
everybody thinks he is smarter , smartest.
that includes the author
scientifically proven.
2016-05-26 14:32
In other words, 90% retail investor lose money are not statistically proven and are used to make the author looks smarter.
2016-05-26 14:35
Dear KC apart from forex gain or losses , if USD strengthens or weakens what is the impact on FLB profitability and net profit margin ?
2016-05-26 14:46
we can only guess at what super investor did / is doing.
we cannot be sure except..............super investor cannot be super investor without margin accounts.
2016-05-26 14:51
Posted by stockmanmy > May 26, 2016 02:51 PM | Report Abuse
we can only guess at what super investor did / is doing.
we cannot be sure except..............super investor cannot be super investor without margin accounts.
Please carry on guessing, use margin to the limit, worship your super investor, or whatever.
We are talking about investing here.
2016-05-26 16:06
Posted by TAH > May 25, 2016 04:50 PM | Report Abuse
Mr Kcchongnz,can u please calculate for us the intrinsic value for Focus Lumber?
Posted by popo92 > May 25, 2016 05:43 PM | Report Abuse
Kc, so far my fundamental philosophy on flbhd has not changed yet. Current price 2.04-2.07 already provide me enough margin of safety to sleep well. Mind sharing your price tag for peace of mind too? :)
While I do have an estimate of Focus Lumber intrinsic value, It is unwise to publish here for a few reasons.
Its share price can be volatile because of its low liquidity, coupled with substantial holding by some short-term traders, some of whom have huge margin. If the market turns bad, the fall of its price can be ugly in the short term because of margin calls, even if its intrinsic value is high, which is suitable for long term investor.
Some of them with some sort of "Golden rule" may also just dump the share without understanding or bothering what causes the drop in profit.
It is not good to invest in this share for short term due to the above reasons, though long term investing in it may be good.
2016-05-26 20:09
Posted by shareinvestor88 > May 26, 2016 02:46 PM | Report Abuse
Dear KC apart from forex gain or losses , if USD strengthens or weakens what is the impact on FLB profitability and net profit margin ?
If USD strengthen, its product will appear cheap in USD term and it may be able to sell more as most of its products go to US.
2016-05-26 20:11
KC, i agreed and respect that its unwise for you to publish your intrinsic value for reasons. And i couldn't agree more with your concerns with low liquidity, existing of short-term traders, "believers", downside of margin calls and "golden rule" players. However, I find it hard to resist myself from this cash cow bargain. Any advises for me?
2016-05-27 21:36
yes, investing . I am talking about real investing to be super investor not wimps with 5% index returns.
=================
Please carry on guessing, use margin to the limit, worship your super investor, or whatever.
We are talking about investing here.
2016-05-27 23:17
old man Koon has erratic performance
He thinks he is stock God
Smallmanmind said no need to think, just follow Koon to buy focus lumber, canone， etc
Just blindly follow
Like a puppy follow master
2016-05-27 23:25
smallmanmind doesn't care
He has no moral compass
As long as u r rich, he will side with u on everything
2016-05-27 23:34
Posted by popo92 > May 27, 2016 09:36 PM | Report Abuse
KC, i agreed and respect that its unwise for you to publish your intrinsic value for reasons. And i couldn't agree more with your concerns with low liquidity, existing of short-term traders, "believers", downside of margin calls and "golden rule" players. However, I find it hard to resist myself from this cash cow bargain. Any advises for me?
"Cash cow bargain"? I kind of agree with you. But note these again
"low liquidity, existing of short-term traders, "believers", downside of margin calls and "golden rule" players."
However, you don't have to play in their field. Instead, focus on the business, treat buying a stock as investing in part of a business, oh yes, for longer term.
2016-05-28 03:18
Focus Lumber. It's a plywood and veneer factory. A smallish operation.
I have posted here several times....such a company , after one or two good years will still be the same company subjected to the same limitations of raw materials, logs, labour, commodity price of its products, it's a commodity company. There would be no transformation.
A closer look at this results shows that although profits exploded , there have been no volume growth......none at all. All the profit growth in the good years were a result of better prices and weaker ringgit.
Then, there are the sifus who like to look at cash in the balance sheet and calculate cash per share as if it give them margin of safety......
All I know is , is that there's lots of false prophets.
2016-05-28 11:03
what about your idol ?
why don't you say something about his decision to jump into it big time ?
2016-05-28 11:05
I also know .... Super investor is one with a few more zeroes in their cheques compared to mine. A super educated writer is one with a few more alphabets after their name.
All means nothing to me.
I am here to enjoy myself.
2016-05-28 11:09
I thought you said your Idol super investor is incapable of making mistakes ? So u r now reversing your position ?
That seemed to be the case, but I just want to hear u say it
I am also here to enjoy myself
2016-05-28 11:11
Icon...I know you as the leader of the anti KYY clan.
I don't like that at all.
I thought that he has been very unfairly treated by your clan, of which you are the leader.
Kyy jump into Focus big time and also promotes Focus in I3.....that is his prerogative......people like to promote what they have bought and believe in, that is very natural and the purpose of i3 in the first place.
The only difference is he got a few more zeroes in his cheques.
2016-05-28 11:23
When did I ever say Kyy don't make mistakes?
That is such a silly supposition from you as leader of the anti KYY gang.
2016-05-28 11:25
U sure or not....we have been exposing koon koon's biz since end 2013/2014 when he first set his foot in i3......we dont really know who icon8888 was then..
2016-05-28 11:27
Infact we knew him when he first cari makan in ipoh giving free lunch to share his holland trips in 2013
2016-05-28 11:29
I don't think I am anti Koon
if you check my comments, I have been pretty refrained when come to criticising him.
One of the reasons was because I considered OTB as my friend. So I try not to attack my friend's Boss
But I am leader of anti Desa aka stockmanmy PLP gang, just in case you didn't notice
2016-05-28 11:30
Stockmanmy, if you happens to dive into timber logs industry in Malaysia that will be a tougher story. the fact is timber logs industry are not transparent in Malaysia, period. Yes, all commodity companies are facing the same commodity prices competition due to currency flotation these days and labour problems given by Malaysia governments. We can see focus lumber are doing work to face these problems already, efficient or not time should be given to prove. Sales volume is actually higher not only merely with better selling prices and wreaking of ringgit. We could all agree higher profit were derived from weaker ringgit thou but export companies do not rely only with forex transaction. A weaker ringgit is a bonus to them. sifus who like to track at cash in balance sheets are true investors who want companies generate true cashflow from inner side not from borrowings and huge debts. What makes focus lumber attractive is not profits prophets...
2016-05-28 11:31
Yeap...no personal attack pls...attack on issues....i learnt this fm kc chong...
2016-05-28 11:36
Kc never attack on mr.koon for once according to him,he just condemn on heavy promotion of margin to newbies...
2016-05-28 11:38
Koon kena fined rm1mil. Too easy for him. Maybe shld sent him to jail, gantung license on all brokers, remisers who advise him. Hehe. Let him learn the lesson tht he lansi also no use. He screw up.
2016-05-29 11:50
He screw up still wanna blame mother, blame father. Real low life character like icon8888.
2016-05-29 12:33
Posted by Lee David > May 29, 2016 11:57 AM | Report Abuse
Kc, can i know what is the intrinsic.value.of wtk?
How I wish I am a super know-all investor and I can help you to answer your question. Sigh, I am just a small time investor who also have limited time.
2016-05-29 13:01
Posted by stockmanmy > May 28, 2016 11:09 AM | Report Abuse
I also know .... Super investor is one with a few more zeroes in their cheques compared to mine. A super educated writer is one with a few more alphabets after their name.
All means nothing to me.
I am here to enjoy myself.
Given a choice
1) A happy and contended "super educated writer is one with a few more alphabets after their name." who earn a honest living
2)"Super investor is one with a few more zeroes in their cheques compared to mine." who is so poor that what he has is just that
I wold have "fold my eyes and tie my hands" to choose the former. There just simply no comparison which is a better choice.
2016-05-29 13:07
Hi KC,
It is now trading at PE lower than 6, is it good time to accumulate?
I find it fundamentally strong, high DY, ROE, FCF, and some more is net cash position.
2016-07-02 22:11
FLBhd achieved all these beautiful numbers due to d appreciation of USD last year. The latest rate has plunged to 3.99. Moreover they don't have double tax deduction anymore. These two factors alone could slash their profit to how it was before d USD appreciated in Aug 2015.
2016-07-02 22:49
USD double tax deduction these all not a matter..important is after the calculation what price will make you feel worth to pay it
2016-07-02 23:18
Posted by Henry Tan > Jul 2, 2016 10:11 PM | Report Abuse
Hi KC,
It is now trading at PE lower than 6, is it good time to accumulate?
I find it fundamentally strong, high DY, ROE, FCF, and some more is net cash position.
Posted by clarencebak > Jul 2, 2016 10:49 PM | Report Abuse
FLBhd achieved all these beautiful numbers due to d appreciation of USD last year. The latest rate has plunged to 3.99. Moreover they don't have double tax deduction anymore. These two factors alone could slash their profit to how it was before d USD appreciated in Aug 2015.
Macro economic thingy is hard to predict. Hence I tend to ignore this unpredictable and uncontrollable things and focus on the fundamentals.
I think the drop of Focus Lumber these days is more due to selling of certain golden rule trader.
All these shall pass.
2016-07-02 23:24
Raider says,
Despite what kc had says...FLumber looks attractive at Rm 1.80.
This is one of the better manage company with good cashflow and dividend and selling reasonable valuation now mah!!.
Yes some insider is selling probably to raise some cash for its requirement, but again this is best opportune time to accumulate loh..!!
Raider suggest slowly accumulate mah....don worry loh....the value is there...collect over time...u should do well..!!
Raider don see why Kc need to come up with such a negative comment on Focus Lumber when share now is such an attractive buy loh...!!
He should make this type of comment when it is Rm 3.00 mah...!!
Anyhow the positive part...this negative report is good for accumulation loh...!!
2016-07-03 14:08
Raider says,
Despite what kc had says...FLumber looks attractive at Rm 1.80.
This is one of the better manage company with good cashflow and dividend and selling reasonable valuation now mah!!.
Yes some insider is selling probably to raise some cash for its requirement, but again this is best opportune time to accumulate loh..!!
Raider suggest slowly accumulate mah....don worry loh....the value is there...collect over time...u should do well..!!
Raider don see why Kc need to come up with such a negative comment on Focus Lumber when share now is such an attractive buy loh...!!
He should make this type of comment when it is Rm 3.00 mah...!!
Anyhow the positive part...this negative report is good for accumulation loh...!!
2016-07-03 14:09
Posted by stockraider > Jul 3, 2016 02:09 PM | Report Abuse
Raider says,
Despite what kc had says...FLumber looks attractive at Rm 1.80.
This is one of the better manage company with good cashflow and dividend and selling reasonable valuation now mah!!.
Yes some insider is selling probably to raise some cash for its requirement, but again this is best opportune time to accumulate loh..!!
Raider suggest slowly accumulate mah....don worry loh....the value is there...collect over time...u should do well..!!
Raider don see why Kc need to come up with such a negative comment on Focus Lumber when share now is such an attractive buy loh...!!
He should make this type of comment when it is Rm 3.00 mah...!!
Anyhow the positive part...this negative report is good for accumulation loh...!!
Why do you interpret that my post is negative about Focus Lumber?
2016-07-03 22:37
I SHALL FOLLOW KC's ADVICE. HE IS VERY GOOD IN ANALYSIS AND VERY CLEAR, VERY DETAILS AND VERY THOROUGH.
2016-08-21 14:59
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4.9 / 5.0
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
SejukSam
90 90 90
this is a well known rule in the US to refer to retail investors/traders
90% of the time, 90% of the investors lose 90 % of their money
go figure it out. and we dun need evidence. its up to u to believe or not.
this is wall street talk
2016-05-26 14:29