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Archive for the ‘Research Reports’ Category

I just updated my main webpage to include a financial report of Johnson & Johnson so do check it out.

Johnson & Johnson Report

Also, its come to my attention that I didn’t update the Lubrizol Corporation link properly on the right hand side of the page. I have since corrected it.

Before investing in pharmaceutical companies, its important to know the pros and cons of the industry.

Big pharmaceutical companies typically have wide moats and attractive financial strength. Most of the global pharmaceutical  companies post Returns on Invested Capital of > 20%. They also have little debt on their balance sheets and plenty of free cash flow generation.

However, developing drugs is extremely costly and time consuming. Clinical testing phases of drugs can take upwards of a decade. Whats worst is that these expenses does not guarantee the success of a drug. A company can pump in a considerable amount of money into research with no guarantee of return.

Once a drug is developed and approved by the FDA, they normally enjoy patent protection. This typically lasts about 8 – 10 years.

Armed with this knowledge, one should look for the following traits in pharmaceutical companies:

  • Companies which have a diverse range of drugs, and that have considerable patent time left.
  • Companies that are actively developing new drugs to refill their pipeline.

Due to their strong financial positions, many pharmaceutical companies are choosing to acquire smaller companies to replenish their pipeline. This really illustrates why free cash flow and low debt levels are so important. Companies that are highly leveraged and generate little free cash flow would be unable to fund such acquisition’s easily.

Conclusion:

I am bullish on healthcare companies in the long run. As we face an aging population in developed nations around the world. Furthermore, as developing countries improve their standards of living, there will also be a corresponding increase in demand for better healthcare.

However, it’s important (to me anyway) not to get too carried away with macro trends. Always ensure that the companies you invest in are trade at a reasonable valuation no matter how rosy the outlook maybe.

The author is long JNJ.

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There’s an active discussion regarding VICOM at one of the local investing forums – Value Buddies.

Let’s go through the qualitative aspects of the company first.

I think VICOM has a narrow economic moat at the very least for its vehicle testing services.

The good thing about their business is that their profits are recurring. You have to get your car certified with them at some point in your lives.

Lets look at the fundamentals of the company.

Revenue & Earnings

VICOM has been growing its bottom line really well over the past few years.

Its average annual growth rate is an astonishing 18.2%.

Financial Leverage

The great thing about VICOM is that its a very cash rich company. It has no debt on its balance sheets – a very big plus for me.

Returns on Equity

Returns on Capital are nearly identical to Returns on Equity as there are no borrowings.

Average ROE is 18.3% which is great.

Free Cash Flow Per Share


Free cash flow has also been growing at a reasonable rate – about 10% per annum since 2004.

It’s important to note that Free Cash Flow growth is sometimes slower – especially when a company is expanding it’s operations.

Conclusion:

VICOM was a real surprise find for me. High returns on capital, good growth rate, and a reasonable price all add up well.

VICOM in my opinion, wont be surprising anyone with high growth rates or sudden surges in profits anytime soon. However, if your a long term investor, VICOM will probably do quite well for you over time.

Disclaimer – The author has no position in VICOM at the time of writing.

 

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As promised, I did up a financial report of Challenger Technologies.

Let’s go through the qualitative aspects of the company first

If your living in Singapore, you pretty much know everything there is to know about Challenger. Its a simple business model – selling a wide array of electronic goods throughout the island. Loo Leong Thye has done an impressive job of growing Challenger from its store in Funan to recognizable brand around Singapore.

I really like businesses that have great franchise models (think McDonalds, Starbucks, KFC). A proven success formula is always preferable to a business model that is tested & unproven.

Now, lets look at the quantitative data –

Revenue & Earnings

Revenue & Earnings have been increasing steadily over the years. This is probably due to the expansion of Challenger Technologies into different parts of Singapore.

Return on Equity

Challenger has also done exceedingly well on this front.

Its Average Return on Equity over the past few years is 31.2%.

Financial Leverage

What really liked about Challenger was that it had almost no debt on its balance sheets.  Returns on capital are almost identical for that reason.

Free Cash Flow Per Share

Free Cash Flow – like Revenue and Earnings has grown comfortably over the past few years.

Always look out for companies with consistent and healthy free cash flow. Free Cash Flow allows companies to fund their acquisition’s/expansions/capital expenditures easily without much debt.

Always remember – Cash is King.

Conclusion:

I like Challenger Technologies a lot.  Before the run-up in price, I found Challenger trading at an extremely attractive valuation. Its price has since appreciated around 50% in the last 3 months (mainly due to the shares issue) so it offers a much smaller margin of safety than before.

Nonetheless, I recommend keeping it on a “To – Watch List” for any price dips. I think that Challenger will continue to growth steadily over the years without much hiccup.

Disclaimer:  The author is long Challenger.

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Famous for their blue & yellow Hyundai Taxis, ComfortDelGro (C52) is a household name to most Singaporeans. However, many will be surprised to learn that it is in fact one of the largest transport companies in the world. It has operations all around the globe – most notably in the United Kingdom, China & Australia.

2005 2006 2007 2008 2009
Revenue (S$’ Mil) 2497 2786 3013 3120 3052
Operating Expenses (S$’ Mil) 2192 2479 2676 2842 2702
Profit attributable to Shareholders               (S$’ Mil) 202 245 223 200 220
Return on Equity (ROE) 15.4% 17.6% 15.3% 13.2% 13.5%

 

The company has done reasonably well in the past five years considering the financial crisis (2007 -2010). Even though its core customer base in located in Singapore, it also does extensive business overseas.  It has for the past five years, delivered a solid ROE of at least greater than 13%, a definite plus point in my book.

2002 2003 2004 2005 2006 2007 2008 2009
Net Cash From Operating Activities              (S$’ Mil) 546 442 619 515 548 643 574 728
Capital Expenditures        (S$’ Mil) -380 -245 -363 -402 -386 -328 -351 -447
Average Captial Expenditures               (S$’ Mil) -348 -348 -348 -348 -378 -378 -378 -378
Free Cash Flow            (S$’ Mil) 198 94 271 167 170 265 196 350

 

Cash Flow Analysis of ComfortDelGro (2002 – 2009)

Net Cash from Operating Activities has been steadily increasing since 2002. Being a fairly capital intensive company, it ploughs back a significant portion of their cash back into capital expenditures. Free Cash Flow (Net Cash from Operating Activities – Captial Expenditures) is extremely healthy. Armed with a substantial war chest and healthy cash flows, the company has been making a string of acquisitions – the most recent being its attempted takeover of Swan Taxis Ltd in Perth.

Debt Analysis

2005 2006 2007 2008 2009
Shareholder Equity 1345 1441 1483 1557 1690
Total Assets 3,058 3,085 3,316 3,352 4,052
Financial Leverage (Total Assets/S.Equity) 2.27 2.14 2.24 2.15 2.40

 

As of 2009, ComfortDelGro has a financial leverage ratio of 2.4 – healthy by my standards. I do not foresee debt repayment to be a significant problem as the industry is relatively stable. Furthermore, strong cash flows help to facilitate interest and debt repayment for the foreseeable future.

Economic Moat Analysis

Despite the deregulation of the taxi industry in Singapore, ComfortDelGro continues to maintain its leadership status in the industry (63% as of 2009). Its subsidiaries, VICOM & SBS Transit also maintain similar market shares – a plus point. One of the biggest strength of ComfortDelGro is its sheer size and strong financial health. It enjoys significant economies of scales compared to its local competitors.

It must be noted however, that the transport industry (in my opinion) is highly competitive in nature. Consumers taking taxis tend not to have distinct preferences in the company of the cab they are flagging down.  Their competitive edge is further eroded overseas, where they have a much smaller foothold.

The Bear Case

Geographical Segment %
Singapore 56.7
UK/Ireland 24.5
China 9.3
Australia 9.1
Vietnam 0.3
Malaysia 0.1
Group 100.0

 

With local growth stagnating, ComfortDelGro has looked outwards to expand.  Despite the healthy growth of its businesses in China & Australia, the outlook is much more lackluster in the UK, Vietnam & Malaysia. As these are not main income contributors, I do not foresee a significant impact on its core business.  Rising fuel costs and currency translation effects will also continue to hamper their growth both locally and overseas.

Conclusion:

Despite the challenges ahead, I feel that ComfortDelGro will be able to leverage on its strong financial health and continue to expand overseas.  Potential investors should look forward to capital appreciation in the long run. Coupled with its dividend yield (about 3%), I feel that it remains an attractive investment at this point of time.

 

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