Sheng Siong Group

[specuvestor]

We had been expecting the RoA and RoIC to go down since our discussion a year ago when mgt changed strategy to acquiring assets

But OPMI can't value on ex-cash basis and say ROE should be higher. RoE can be engineered and unless one can persuade SS to pay out cash hoard via dividend or capital reduction, the listco that one is buying is the structure that includes the cash hoard, like it or not can't pick and choose what part of the listco to buy.

Nonetheless SS has done better than most of us expected a year ago

Breaking up ROE of Sheng Siong:

http://www.fool.sg/2015/06/15/can-sheng-...ing-stock/

<not vested, missed the boat>

I have no dispute on the conclusion, but I would like to add few points

The ROE has gone lower in FY2014, due to the new strategy of properties acquisitions, beside shop rentals. The required fixed asset was increased. One important point, is, 40% of total asset is cash reserve. The asset turn-over has been distorted, thus the ROE. The "real" ROE should be higher.

Having the acquired properties as pre-paid rental, the OCF will be improved. In short, the cash return is improved. In FY2014, net profit improved by 22%, while OCF improved by 70%. The diluted OCF per share also improved by 46%, due to the share placement.

(vested, and sharing few points in my record)

[CityFarmer]

Structure as advocated by Mr. specuvestor, is an important consideration on valuation. I would like to share a view on the topic.

Should we value a stock, includes the cash hoard, as a generic rule of valuation? Structure includes the cash hoard, is real and important, but it should be adjusted after a qualitative assessment, IMO

There are cash hoards, aren't exactly "free", due to various reasons i.e. regulation, working capital and etc. For e.g., statutory reserves for China companies, and pension liabilities for US companies. We should identify the 'non-free" part, and exclude the "free" part from our valuation.

ROE, as a metric of capital structure efficiency, will be distorted without exclusion of real "free" cash reserve, IMO.

(sharing a view, and open for comment)

[specuvestor]

u are confusing ROIC and ROE. ROIC is the return on the investment based on total capital employed which includes working capital. And for quarterly/ annual reporting you can't really see what is the REAL working capital by just a snapshot. We can assume however that this snapshot is the best picture that management can present

Hence the cash could actually 1) be necessary for running the business or 2) it's just OPMI unfriendly management. Either way it is a drag on ROE which is the structural return of the ROIC after the layerings. And there is little that OPMI can do about it. Unless one can gain control and improve on the 2) then this is the raw deal you get by buying the listco. I strongly discourage people from using ex-cash, or ex-lousy asset type of valuation metrics unless you can control the outcome or you think/ know corporate action to that effect is coming.

[portuser]

Hai Leck has explained before, in response to call for more generous dividend payout, that setting aside enough cash betters its chance of contract win.

Jobs awarded by MNCs have to be completed within the stipulated time frames, and Hai Leck has to demonstrate that it is capable of spending the extra to speed up work when unforeseen delays occur.

[CityFarmer]

u are confusing ROIC and ROE. ROIC is the return on the investment based on total capital employed which includes working capital. And for quarterly/ annual reporting you can't really see what is the REAL working capital by just a snapshot. We can assume however that this snapshot is the best picture that management can present

I am not an expert, but should have stayed in investing long enough to know the differences between ROE and ROIC/ROCE. I am using ROE to be consistent with previous posts in this thread

Can we really see the REAL working capital needed for a biz, over several years of data? I believe we can, with sufficient accuracy for a reasonable valuation.

Hence the cash could actually 1) be necessary for running the business or 2) it's just OPMI unfriendly management. Either way it is a drag on ROE which is the structural return of the ROIC after the layerings. And there is little that OPMI can do about it. Unless one can gain control and improve on the 2) then this is the raw deal you get by buying the listco. I strongly discourage people from using ex-cash, or ex-lousy asset type of valuation metrics unless you can control the outcome or you think/ know corporate action to that effect is coming.

To put into extreme, are you saying, we should give two companies with same valuation, one with significant cash hoard, and the other without, but both with similar ROE/ROIC/ROCE? The question comes with an assumption that the cash hoard is "free" after an qualitative analysis process.

My answer to the above is NO. I reckon your answer is YES, which I disagree.

[CityFarmer]

Hai Leck has explained before, in response to call for more generous dividend payout, that setting aside enough cash betters its chance of contract win.

Jobs awarded by MNCs have to be completed within the stipulated time frames, and Hai Leck has to demonstrate that it is capable of spending the extra to speed up work when unforeseen delays occur.

In this case, we should conclude that the cash isn't freed after all. I assume the statement isn't a smoke from management, as an excuse (or a simple answer) not to pay "generous" dividends.

[specuvestor]

u are confusing ROIC and ROE. ROIC is the return on the investment based on total capital employed which includes working capital. And for quarterly/ annual reporting you can't really see what is the REAL working capital by just a snapshot. We can assume however that this snapshot is the best picture that management can present

I am not an expert, but should have stayed in investing long enough to know the differences between ROE and ROIC/ROCE. I am using ROE to be consistent with previous posts in this thread

Can we really see the REAL working capital needed for a biz, over several years of data? I believe we can, with sufficient accuracy for a reasonable valuation.

Hence the cash could actually 1) be necessary for running the business or 2) it's just OPMI unfriendly management. Either way it is a drag on ROE which is the structural return of the ROIC after the layerings. And there is little that OPMI can do about it. Unless one can gain control and improve on the 2) then this is the raw deal you get by buying the listco. I strongly discourage people from using ex-cash, or ex-lousy asset type of valuation metrics unless you can control the outcome or you think/ know corporate action to that effect is coming.

To put into extreme, are you saying, we should give two companies with same valuation, one with significant cash hoard, and the other without, but both with similar ROE/ROIC/ROCE? The question comes with an assumption that the cash hoard is "free" after an qualitative analysis process.

My answer to the above is NO. I reckon your answer is YES, which I disagree.

I thought of clarifying ROIC because terminologies in finance is quite grey (maybe purposely so that people can twist and turn if they are caught LOL) but the concept shouldn't be. "free" cash per se only exist for the management and not for OPMI, unless like I said above, you can convince them otherwise.

You can't have 2 similar company, one with significant cash hoard and the other without, yet both with similar ROE when ROIC/ROCE is the same.

Take a simple example we have 2 companies that has originally the same asset that produce constant 10% cash return without leverage, the diff is company A pays out all the cash while company B doesn't. In 10 years Company A will still have 10% ROE while Company B ROE will be 5% due to the cash drag. And in fact the market will ascribe higher valuations to company A ie asset+cash payout> Company B with asset and cash withheld.

This cash drag effect is significant in our money management decisions termed as asset allocation. We can have ROIC of 100% with a 2-bagger pick but on a total portfolio basis we have 90% cash, then the ROE is only 10%.

And in the Hai Leck example, if management needs the cash to convince customers, then the cash is a form of working capital for the business. That's why net nett it is somewhat irrelevant why the cash is there because as an OPMI of the listco, that's the deal one gets regardless of the reason.

[CityFarmer]

Take a simple example we have 2 companies that has originally the same asset that produce constant 10% cash return without leverage, the diff is company A pays out all the cash while company B doesn't. In 10 years Company A will still have 10% ROE while Company B ROE will be 5% due to the cash drag. And in fact the market will ascribe higher valuations to company A ie asset+cash payout> Company B with asset and cash withheld.

This cash drag effect is significant in our money management decisions termed as asset allocation. We can have ROIC of 100% with a 2-bagger pick but on a total portfolio basis we have 90% cash, then the ROE is only 10%.

And in the Hai Leck example, if management needs the cash to convince customers, then the cash is a form of working capital for the business. That's why net nett it is somewhat irrelevant why the cash is there because as an OPMI of the listco, that's the deal one gets regardless of the reason.

The scenario illustrated exactly the distortion by the cash hoard. Both companies have similar business quality, assuming the cash hoard in company B is passive. It is illogical to value company B any lesser, just because it has an extra passive asset.

From asset point of view, it is also illogical to value company B any lesser, because past earnings were retained.

Value investing is always conflicting with asset allocation, which has an assumption of prefect market, right?

[specuvestor]

It is not illogical. It makes perfect sense because cash is hand in worth two in others' bush

Using the same example, say both management changed on the 10th year. Company A continue to pay out while B retains. Then suddenly you realise IPT coming for both companies. Salary soaring. Cash unaccounted for. Which company has more risk... remembering that A actually has much less cash than B to play punk.

History is littered with all these OPMI-negative companies, from Sesdaq to S-chips to recent Synear and just saw Lafe. It is not illogical... market is giving appropriate discount to cash, NOT to the cash generating asset. And of course also to the fact that ROE is declining.

Asset allocation is quite broad but in this context we're talking about simple cash vs equities to illustrate the concept of cash drag. If it is a drag on your portfolio, how can it not be a drag on a stock's price. Do a simple experiment with your family: split your portfolio into 2 identical funds with the only difference being one of them will pay out all dividends received. See which one got better response

Buffett is a bit unique because he actually requires his subsi to pay out cash yet Berkshire doesn't. That predicated on the fact that 1) people trust him 2) he has high IRR for retained cash... in that order.

[CityFarmer]

It is not illogical. It makes perfect sense because cash is hand in worth two in others' bush

Using the same example, say both management changed on the 10th year. Company A continue to pay out while B retains. Then suddenly you realise IPT coming for both companies. Salary soaring. Cash unaccounted for. Which company has more risk... remembering that A actually has much less cash than B to play punk.

When we value both company A and B, it is illogical to value B less than A, because asset in A is less than B, while business qualities remain the same for both. The worst case, "extra" retained earning in B, worth nothing, and both A and B will have similar valuation. In practice, the "extra" retained earning should not be discounted to zero, but in between zero and full value.

I do understand the emotional factor for dividend payout, but value investing advocates elimination of emotional factor in valuation, right?

What do you think the above argument?