Thursday, May 20, 2010

May updates 2010

With German Chancellor Angela Merkel ban on short selling and Wilmar's VAT tax dispute, Asian markets took a tumble. This goes to show the weakness of holders.

Anyway,  shorts are in fact a form of feedback mechanism to ensure the health of the financial markets. The way they are going after hedge funds, shortists and financial institutions is somewhat like a witch hunt to which no purpose entails.

Now Wilmar has been accused of tax fraud

  • Amount outstanding is US$ 341 to 550 mil from various sources
  • According to UBS and Indonesian tax laws, total amount payable is 400% of outstanding
  • So total amount they have to cough out tentatively is US$1.3-2.2 bn 
  • Mkt value of Wilmar dropped 
    • Day 1 - dropped S$0.43 or S$2.75 bn 
    • Day 2 - dropped S$0.23 or S$1.47 bn 
    • Ill update later dates accordingly 
So, if you look at it,
Wilmar lost S$4.22 bn of market value for fines of approx possible fines of S$ 1.89-3 bn.
Then some questions come to mind: 
  1. Why did it drop so much? 
  2. Why Indonesia govt stepped in on tax of a sudden?
After much reading, it appears that everyone is concerned that 
  1. There may be more than just that amount of fines (Possible, since it is early to tell and its Indonesia)
  2. Wilmar is trading at pretty lofty valuations
    • Currently its at 13x PER for a firm that is not massively cashflow generative 
    • Although it is in a dominant trading/processing position in terms of agri produce
    • It previously went to $7 per share on news of a HK spin off of its China arm (which is now cancelled)
    • The china arm was reported to have earnings of over 50% of Wilmar's share and the long run price only retreated to S$6.19 as of news of tax fraud was announced
  3.  Govt is stepping up taxes as 
    • It appears theres a political reason to do so against current candidate SBY, Read Jakarta Global
    • Apparently another firm, coal miner Bumi resources is under the radar as well 

Now it seems theres a high probability that the amount will rise and Wilmar may be deeper in the hole. 
Higher valuations also hints that this is not a good price level to buy in as yet.

On the portfolio
My accumulation of Roxy will be put on hold unless it goes even lower for better accumulation. 
Entry of other counters will be put on hold as well, in the meantime, I will do more research and put up the ideas just before I get into the positions. 

With Europe reaching for the money printing press to save Euro zone, seems like a decade of fiat currencies will be unavoidable. You can protect yourself by 

  1. Buying gold or related securities
  2. Buy companies with strong, moat like earnings, sustainable for the long run or lastly
  3. Stop investing and get involved with hard, brick and mortar enterprises with strong pricing power
  4. Get out of fiat currencies as mentioned in my previous posts on sovereign risks
Do note your writer here do not full agree with gold as an investment class. I agree with Warren Buffett in that gold itself has little intrinsic value. 


Xiaozhuang said...

Mervyn, for your first question, if there is tax fraud, it undermines confidence in the firm's management, thus the price can over-adjust in that sense. BP, RIG and G-man are similar cases in the US side


Mervyn Teo said...

Yes, you hit that spot on.
In the case of BP, it is also evident that throughout its life of business operation, they have been compromising on quality of equipments and on the safety know how of employees too. That is not evident in Wilmar.

Do note that its worth looking but not a definite buy as you may end up catching a falling knife.


Nice informative updates.

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