Is It Possible For An Equity Fund Price To Be Zero - 7 Mar 2009


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Is It Possible For An Equity Fund Price To Be Zero - 7 Mar 2009

  1. 1. Is it possible for a Equity Fund’s Price to be Zero?
  2. 2. How much would you pay for the Entire Company below? <ul><li>Fixed Assets RM 120 Million </li></ul><ul><li>Current Assets RM 6 Million </li></ul><ul><li>(excl. Cash & Shares) </li></ul><ul><li>Cash & Shares RM 244 Million </li></ul><ul><li>Total Assets RM 370 Million </li></ul><ul><li>(-) Total Loans RM 115 Million </li></ul><ul><li>(=) Net Worth RM 255 Million </li></ul>
  3. 3. Price vs Value <ul><li>If you take the Company’s cash and shares and minus the loans, you would have a Net Cash of RM 129 Million. </li></ul><ul><li>Since there are 313,620,000 shares outstanding (as at 30 th June 2008), each share would have a Net Cash of RM 0.411 per share. </li></ul><ul><li>Meaning, if you buy a share at a price RM 0.411 per share, you’re paying RM 1.00 to get RM 1.00 of cash & shares + all the other assets (on the book worth RM 0.98 FREE ! </li></ul>
  4. 4. Halim Stock Price From 1 st Jan 2008 to 17 th Sept 2008
  5. 5. Analysis <ul><li>If you have bought the stock 3 weeks after the announcement was made (on the report) on the 17 th Sept 2008, at a price of RM 0.40 per share, </li></ul><ul><li>Is it a good deal? </li></ul><ul><li>For the next 2 weeks, the price trades at around RM 0.31 to RM 0.34 per share. </li></ul><ul><li>Do you lose money ? </li></ul>
  6. 6. Analysis <ul><li>Should you be concerned if the next day, someone “foolish” is offering to buy/sell the share for RM 0.20 per share? </li></ul><ul><li>At a low enough price, even a mediocre company is a good investment!. </li></ul><ul><li>However, at a high enough price, a Good company might turn out to be a bad investment! </li></ul>
  7. 7. After 6 months…. <ul><li>6 Months later, the CEO (who is also the major shareholder) offers to Privatize the entire company for RM 0.60 per share, valuing the entire company at RM 184 Million, which he’ll own a Net Cash of RM 156 Million and Fixed Assets of RM 106 Million. </li></ul><ul><li>In other words, he’s paying RM 28 Million for the company’s Fixed Assets of RM 106 Million, and company’s Goodwill comes free!. </li></ul>
  8. 9. Conclusion <ul><li>Equity Funds invest in many Stocks/ Shares of Big, well established companies with consistent track record chosen by Professional Fund Managers. </li></ul><ul><li>Stocks represents fractional ownership of a business. </li></ul><ul><li>These businesses owns Buildings, Plants, Machineries, Shares of other companies and Cash in the bank! </li></ul>
  9. 10. <ul><li>Companies also owns Goodwill (like Coke, Mc Donalds, Gillette, Microsoft, etc.), </li></ul><ul><li>Given the same price, most people would rather buy from these companies rather than an unknown company. </li></ul>
  10. 11. <ul><li>Thus, a particular share of a BAD company (e.g. companies that’s Liabilities is more than the Assets) might go Zero in value, but it’s rare that a a GOOD company might go down Zero in value. </li></ul><ul><li>It’s impossible for a well diversified Equity Fund (that do not borrow to invest) to be Zero in value. </li></ul>
  11. 12. <ul><li>Putting it another way, would you sell your house for Zero ? </li></ul><ul><li>Even if your house is burned down entirely, your land still have value. </li></ul><ul><li>Is it possible for all houses of our relatives combined be worth Zero ? </li></ul>
  12. 13. <ul><li>The End </li></ul>
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