If you'd listended to me, You'd be a millionaire by Now!

Ok, I guess you'd need Rs. 850,000 to begin with.

Sitara Peroxide (SPL) has yielded a 17.5% return since I published my recommendation
six days ago. So if anyone had invested Rs. 851,000 in the stock at the time I published my recommendation, he'd indeed be a millionaire right now :P. The return is even more enticing given that the KSE 100 index has lost more than 5% of its value during the period. This means that the recommendations have acually beaten the market by around 22.5% during the six days ending today.

The story of Descon Oxychem (DOL), SPL's spiritual sister (spiritual since it has the same driving factors as SPL) is no different as it has yielded a similar return of 17.3% during the period.

The basis for the recommendation was simple. Increased peroxide prices would (the companies' product) result in increased gross margins. A constant cost base was also highlighted, as government changes gas prices only on a six monthly basis and the last change would not take place untill for the Septmebr quarter.

Moreover, as borrowed from a daily of SC securities, and credit duly given, decreasing finance costs in view of improved cash flows would further boost earnings.

Both the recommendations were correct and as it turned out, gross margin did increase for both the stocks and the finance costs decreased as well. Moreover, the EPS of especially DOL incerased significantly and the company recorded its highest EPS in 6 quarters.

The EPS chart along with the updated gross margin chart, which is the cornerstone of this analysis is presented below for illustration:

So whats next? My initial thesis was better still results for the September quarter due to even higher peroxide prices. The low finance costs theme should follow through as well driven by further improvement in cash flows. Gas price increase should have posed a risk for the stock since its the major raw material, but that risk has been nullified given the government's decision to deferr the same till November.

Any production and sales hiccups could however disrupt revenues and earnings potential, however if this serves as any consolation, sales and revenues have been relatively stable for the two companies given the historical trend.

Hence in view of further rise in peroxide prices, together with a calculated assumption of constant production and sales, I would still stick to my assertion of further improvement in financial performance for both the stocks for the quarter ended September 30th, 2013.

BUY DOL WHILE IT LASTS!

Buy Descon Oxychem (DOL) while it lasts! Its spiritual sister company, Sitara Peroxide had a good financial performance by predicted by me and has been on upper locks since last 2 days! However movement in DOL, while positive, has been minimal. I would suggest taking a position before the company announced the result soon!

Given the stock level is currently PKR 5.26, it represents a return of 30-50% even if just two upper locks occur! I would recommend to buy it for 6 month investment horizon.  

Sitara Peroxide FY13 Financial Result

Sitara Peroxide Announces Result

Ok Sitara Peroxide announced its result today. The company posted an EPS of Rs. 0.19 for the quarter. However, the EPS is not important as it was not part of the forecast. In my last post I had predicted an increase in gross margin based on increasing peroxide prices. The gross margin in fact did increase, up 4 percentage points month on month, to 26%. So this lends credence to the price-gross margin thesis and the same story should continue with increased effect for the September quarter . I guess Ill update the gross-margin, H2O2 Price graph for corroboration:

Not only does does this reinforce the idea of improved financial performance for next quarter, it also bodes well for Descon whose result will be announced on the 30th. It may be noted that SPL was on upper lock today and with Descon booking sizeable gains as well.

Descon Oxychem and Sitara Peroxide - Improved Financials

Descon Oxychem and Sitara Peroxide - Improved Financials

My post concerns two companies in the hydrogen peroxide industry in Pakistan. Descon Oxychem Limited (DOL) and Sitara Peroxide Limited (SPL). Both of the companies produce hydrogen peroxide that is a chemical used for bleaching, paper making, etc. Not surprisingly, the gross profit margin of these two companies follows the local of hydrogen peroxide prices as illustrated through the below graph:

Source: Business Recorder, Company Reports

Notice the absence of gross margins from the last two quarters. This is because the results pertaining to these have not been announced as of yet. Hydrogen Peroxide prices have however increased substantially during the period. Standing at Rs. 56 per kg today as opposed to Rs.44 in March-13, showing an increase of 16%.

An improvement in gross profit margins appears to be in order for the two quarters, that is, June 13 and September 13. The same analysis could be extended to operating margin due to comparatively lower administration and selling costs.

The final idea lends credit to SC Securities which says that the companies will experience declining finance costs too due to improved cash flows and lower working capital finance requirements.

I would say that a decline of 50 bps points in interest rates during the period should also help in decreasing finance costs. 

Owing to improved gross margins and lower finance costs, improvement in financial performance of the two companies, DOL and SPL appears to be in order for the quarters ending June-13 and Sep-13 .

JSIL - Freeing up cash flows

JS Investments

A behemoth in the golden age of Asset Management, with PKR 30 billion plus in assets under management and a management fee of PKR 500 million a year, the company is yet to regain its past glory. Thanks to the global financial crisis (Pakistani style) it faced significant redemptions, shriveled in size, resulting in decreased AUMs that have yet to get back up. The company’s AUM don’t matter however and this is not the story. The investment portfolio is.

As we all know, for a company, the income from an investment portfolio takes three forms. Dividends, realized gains and unrealized gains. Only the realized gains and dividends pass through the income statement affecting the EPS while the largest component, which is the latter, goes directly into equity. Due to the latter, the unrealized gains for JSIL have balooned, and BVPS is almost 2x the MVPS and is PKR 16 per share. The company is trading at a pesky PKR 8 per share.

So what if the company has so much gains. It would not do us any good (for us) unless it realizes them and converts them to cash right?

Well as a matter of fact, it has been cashing in those gains albeit a little bit. For instance the dividend is already cash and the company liquefies its investments from time to time for the realized gains. So it does have a cash flow from its investments and has been having so since long. But what does it do with them? The following excerpt from the income statement of FY12 explains:

And a little more from the latest march q accounts:

And we see that debt has fallen from PKR 1,050 million to PKR 520 million during the same period in a gradual way. 

The company will continue to have cash coming in as before. However there will be no debt to pay off any more. The only question is, what will it be doing with the money? A dividend should be easy since only PKR 100 million are needed for a PKR 1 per share dividend (13% dividend yield) given the company earns around PKR 400 million from operations and investments per year and already has sizeable investment gains. ThusDPS can turn out to be even more than PKR 1.

So whats will the company do?

Will it invest in its own units? Will it give out a dividend? Will it invest in some other stocks? Will it build a casino? I would place my bet with the former. 

ORIX LEASING 9 Month Results

ORIX LEASING 2

At the risk of sounding rude, markets are naive. It is true they value companies at PEs. If a market has a PE of 8 and a stock has a PE of say 4, the stock would be a buy. They know they have a PE in mind, all they are waiting for is the earning. So they wait for the year to end, accounts to finalize and the result to come out. and whatever the earning comes out, the price suddenly rises until it is some multiple of that earning (in this case assumed as being 8). So anyone, who can get to know that earning in advance can make money by buying the stock when the earnings do not come out (or leak out) yet. And that is where the naivete of the market lies. The naivete of the market lies in it not knowing that many a time, the annual earnings can be found by multiplying they nine month earnings by 1.33333 (ok forgive the extra 3s). This is mostly true for under-covered stocks and will be my thesis for the forthcoming analysis and a concurrent BUY rating for ORIX Leasing.

Short Term Outlook:

In my last blog post some time back, I explained how good Orix leasing was good and all. That analysis was based on 3 month accounts. I went into hybernation mode for a while and when I woke up, and decided to reopen my blog, I discovered that 9 months results had come out. The stock had also moved somewhat, going up around 20% during the period. But the thing worth noticing most was that the stock had not moved as much as dictated by financial performance. The company has not only improved financially, but in fact seems to be on the  growth trajectory. The multiple for FY13E is significantly low, standing barely at 5. The dividend is expected at at least 2, resulting in a dividend yield of 11%. Moreover, given the annual result is announced and comes out expected, the buying frenzy (forgive the hyper-lative) will push the stock to around a multiple to at least 6? if not 7 or 8?, resulting in the stock going up to 24 to say the least. Hence there is a 40% upside on the stock as the annual result gets announced. Moreover, who knows where it could end up next (remember its a growing stock).

My last analysis was based on preliminary numbers (1Q accounts) and was pretty simplistic. I presented some numbers from the last 6 years and highlighted the improving trend. Then I extrapolated annual earnings from a single quarter, by multiplying it by 4 (yes it was pretty simmplistic) and arrived at the figure of 3.2 and said that it could go higher. The stock was at 15 at the time so I said well its good buy bla bla. But there was at least some substance to my argument. While annualized earning was coming around 3.2, the earning now appears to be 3.9, based on 9Q numbers, and it might as well be 4!

Long Term Outlook:

So the stock is a good buy in the short term with sizeable dividend yield and capital gains potential. So whats in it for the long term? Or in other words, what happens when the stock achieves a level of Rs. 24 (If it does, hopefully). Well there are a number of things that make it a buy in the long term (yes guys it is a gold mine. Buy it while you can! - ok not).

Well, the first and foremost reason has already been highlighted. The business is on the upswing generally and I have already emphasized this point in my last post. Its a highly systematic stock. It fundamentals move greatly with the shape of the economy. Economy goes down, NPLs rise, disbursements slow, revenue decreases, and finally, the EPS gets affected. Here, I'll post the 6 year financials again for review:

As you can see from the above, disbursements, earnings, lease losses, dividends were all pretty badly effected by the local financial crisis of 2008. However, a review of latter numbers reveals that they have been gradually improving since then.

So we have data up till 2012. So what will 2013 look like, given some extrapolation (remember 1.333)? Lets do the math here:

Improvement in almost every quarter.

Asset Liability Risk:
Asset liability risk is probably one of the greatest risks a financial institution faces. Rising deposit costs coupled with falling revenues can prove disastrous. This holds true for the leasing industry as well and was a case in point during the FY08 financial crisis. The increased interest rates due to high inflation coupled with IMF demands put the entire industry in jeopardy. investments banks, leasers, all faced the music. So what does Orix have that can safeguard it from the future. Analysis of liabilities reveals the company has significantly high dollar borrowing with extremely low cost at L+1 etc. That is almost free! So earnings 12% and expensing 2% is like a walk in the park.

Finally, I would copy one statement here from the FS that I always pay attention to. and there is a reason for it. It is because I believe the directors report to be quite honest. Moreover, when the statement is written, 1-1.5 months have already lapsed into the quarter. The the statement is not entirely forward looking and is based on some empiricism. So here is the statement:

So FY13 is going to be a good year for ORIX LEASING.

ORIX LEASING

So its here, my foray into the frenzy that is the stock market. They say that the market is for gamblers, running on sentiments and going up and down like waves in the ocean. But It does function otherwise. Stocks DO go up in down with business prospects and if a business is expected to prosper, so will its stock. So opportunities exist for the shrewd investor who can analyze and explore the intricacies of a business and gauge its future prospects.

One such stock which catches the eye is Orix Leasing. The business is on the upswing. With interest rates coming down, and the economic conditions generally stabilizing, one can assume that it is here to reap the benefits.

A few numbers should clarify the picture:

The above financial figures already depict improvement in a number of areas such as profitability, dividend, provisioning etc. However, what matters is the upcoming FY13 earnings result since that is when the market is most expected to move (this also means that the holding period for this investment should be up till the same time period).So what to expect? Some answers can be found in the 1st quarter report a snapshot from which is presented below:

An annualized earning of 3.2 or maybe more? Seems like a good shot given it translates into a forward PE of 4.67. This not where it ends however. A high payout also merits attention. It can rightly be assumed that the company will pay at least a 60% dividend in the coming year implying a roundabout payout of Rs.2, thus translating into a dividend yield of 14% on today's prices. Hmmm... not bad.       

Moreover, it appears the company is on the growth trajectory as evident from the following statement in the directors report for the quarter:

Finally, can we really expect further growth in quarterly EPS that is, implying an EPS even higher than 3.2? If the directors of the company have any credibility, I guess the following statement can be referred to: