Portfolio analysis and cash flows

1. Portfolio Analysis and Cash Flows
Presented by: Gerry O. Gatawa

2. Some dose of Propan TLC

3. What investment is right for you?
 Own a franchise?
(20million to 40 million)

4. What investment/business is right for
you?
 Own a mining company?
(38 billion)

5. What investment/business is right for
you?
 Own a bank?
Rural Bank (5 Million to 100 Million)
Commercial Banks (2 Billion to 15 Billion)
Universal Banks (3 Billion to 20 Billion)

6. What investment/business is right for
you?
 Own a TV/Radio/Broadcasting network?
(65 Billion)

7. What investment/business is right for
you?
 Own a real estate business/mall?
(100 Billion)

8. Did you know that you can invest in all of
these with your:

9. How?
Empty the 20 piso bills and
below in your pocket or wallet
every night and throw it into a
jar/can/aquarium. At the end of
the year use your
“throwaway” money in
investment.

10. With your
P 20.00 x 365 = 7,300.00
Coins 1,119.00
Total 8,419.00
you can
construct a
portfolio
Stock
Minimum
Board Lot Price Cost
Average
Industry
Growth
Future Values
10 Years 20 Years 30 Years
Jollibee Foods Corp. 10 249.00 2,490.00 12% 7,733.56 24,019.27 74,600.21
Philex Mining Corp. 100 9.00 900.00 5% 1,466.01 2,387.97 3,889.75
Banco de oro (BDO) 10 127.80 1,278.00 10% 3,314.80 8,597.75 22,300.34
ABS-CBN 10 40.60 406.00 3% 545.63 733.28 985.47
SM 100 33.45 3,345.00 8% 7,221.60 15,590.90 33,659.59
Totals 8,419.00 8% 20,281.60 51,329.17 135,435.36

11. With your
you can
construct a
portfolio
“The only person responsible in taking care of you when you are old is
the strong person you are now, throw your 20 Piso bills”

12. What is your risk tolerance grid?
Please refer to self-check A.4
 Low risk tolerance
 Below-average risk tolerance
 Average/moderate risk tolerance
 Above-average risk tolerance
 High risk tolerance

13. What is portfolio is right for you?
Please refer to T.ROWE PRICE MATRIX
YourRiskTolerance
Your Time Horizon
3-5 years 6-10 years 11 + years
Higher
Strategy 2
20% Cash
40% Bonds
40% Stocks
Strategy 3
10% Cash
30% Bonds
60% Stocks
Strategy 5
100% Stocks
Moderate
Strategy 1
30% Cash
50% Bonds
20% Stocks
Strategy 2
20% Cash
40% Bonds
40% Stocks
Strategy 4
20% Bonds
80% Stocks
Lower
All Cash
100% Cash
Strategy 1
30% Cash
50% Bonds
20% Stocks
Strategy 3
10% Cash
30% Bonds
60% Stocks

14. Selecting a Portfolio Strategy
Active Portfolio Strategy
 Use of earnings, dividends, P/E ratio
LPZ

15. Double Dragon Properties (Ticker: DD)
(Price Earnings Ratio)
Take Note: The P/E Ratio is
high, which means the stock is
overpriced.
Rule: High P/E ratio means the
stock is expensive. Benjamin
Graham said buy stocks with
less than 20 P/E ratio
You are willing to PAY this at
Php. 60.80.
Assessment: NOT HEALTHY

16. Selecting a Portfolio Strategy
Passive Portfolio Strategy
 Marketplace will reflect all available
information in the price paid for securities.
Bullish
Bearish

17. Selecting a Portfolio Strategy
Passive Portfolio Strategy (Example)
 Lopez Holdings Corporation (LPZ)
Bearish

18. Selecting a Portfolio Strategy
 Lopez Holdings Corporation (LPZ)
 Beta = 1.24x Best Case = 1.24x PSEi ; Worst Case = 1.24x PSEi

19. Megaworld
Beta: 1.71

20. Constructing the Portfolio
An efficient portfolio is one that provides
the greatest expected return for a given
level of risk, or equivalently, the lower
risk for a given expected return (Fabozzi and
Markowitz, 2002).
1.O Objectives –Time, return, risk, industry preference
2.P Parameters –Limits, percentages
3.E Establishment or Construction
4.R Review and Rebalancing -Diversification
5.A Assessment or Evaluation

21. General Rule in the Stock Market
There are two rules in the
Stock Market:
Rule#1: Don’t lose money
Rule#2: Refer to Rule#1

22. Portfolio of Cash Flows
An investment’s / project’s value is
relative to future costs and revenues
that are forecasted on the basis of
current economic climate and demand.
Economic parameters such as IRR, NPV,
CLU and PB period shall be generated.

23. 23
The Essence of Finance
23
 Cash Flows:
 Theory of Wealth
Preference
 “Want more rather than
less”
 Risk:
 Theory of Risk Preference
 “Want less rather than
more”
 Time:
 Theory of Time Preference
 “Want now rather than
later”
 Present Value:
 Fundamental Asset
Valuation
 “The fair value today”
iCF
 1 r
i
0
T
i 
PV of Asset 

24. 24
The Essence of Risk Management
24
 Cash Flows:
 Theory of Wealth
Preference
 “Want more rather than
less”
 Risk:
 Theory of Risk Preference
 “Want less rather than
more”
 Time:
 Theory of Time Preference
 “Want now rather than
later”
 Present Value:
 Fundamental Asset
Valuation
 “The fair value today”
iCF
 1 r
i
0
T
i 
PV of Asset 

25. Valuation of Securities/Projects
Please refer to your excel file:
a. Stock Valuation
b. Bond Valuation
c. Project Valuation

26. The Boston Matrix
A star is a project where costs are
reducing over time.
The question mark (or problem child) is
a project where cost reductions are
unlikely.
The cash cow is a project which is a
cash provider.
The dog may be a project that is a drain
on company’s finances and resources.

28. The Scenario Analysis
When undertaking a scenario analysis
the key variables are identified
together with their values (Flanagan and Norman, 1993)

29. Present
Observablequantity
Past Future
Empirical data,
past performance
Scenario Driver
Scenario A
Scenario B
Scenario C
Scenario D
Scenario E
Discontinuity

30. MEG: Megaworld

31. The Scenario Analysis
Please refer to:
Stock Scenario Analysis
Project Scenario Analysis

32. Diversification
Financial Axiom: “Do not put all your eggs
in one basket”.
Caveat: “Investing in several securities
may not always mean reducing risk”
It’s a strategy to lower (optimize risk)
without significantly affecting return.
Some funds will go to low-risk, fixed-
interest, easily liquidated savings accounts
or securities, and some might go to high-
income capital growth securities.

33. Diversification
Diversification of Risk
Projects with strong revenues may
offset and diversify the risk on those
that have less robust cash flows.

34. Portfolio Risk Management
Rationale:
1. Risks inherent in projects cannot be
separated from the aspects of general
business management.
2. All projects are unique, therefore risk
and uncertainty belong to a significant
part of project business.

35. Portfolio Risk Management
Project Risk Management
1. Risk identification
2. Risk classification
3. Risk analysis
4. Risk response

36. Portfolio Risk Management
 Benefits
1. Reduces the cost of capital by managing
portfolio risk rather than individual project
risks
2. Reduces the risk of projects from developing
their own inertia and boundary definition
3. Increases awareness of the critical risks by
senior managers
4. Reduces project overrun and overspend
5. Identifies which risks exploit competitive
advantage
6. Protects and enhances shareholder value

37. Portfolio Risk Management
 Bundling Projects
 Bundling is the grouping of projects or services
within one project structure in a manner which
enables the group to be financed as one project.
 Benefits:
1. Single contract for construction
2. Simplified monitoring
3. Simplified payment
4. Effective use of resources, one project team, one
set of advisers
5. Simplified chain of reporting/command
6. Economies of scale
7. Spread procurement and transaction costs.

38. Portfolio Risk Management
Considerations
1. Different commencement times
2. Partial completion
3. Partial termination
4. Variations

39. Portfolio Risk Management
A project or a bundle of project could
be funded by one “lead bank”.
Lead Bank
Syndicated Loan
BUNDLE
Projects 1 - n

40. Cross-collateralisation
The use of funds by one project with
strong cash flows within a portfolio, to
fund another project within the same
portfolio, which may be experiencing
cash flow difficulties and defaulting on
debt payments.

41. Cash Flows
 Cash flows are a measure of a project’s health.
 Cash flow management is to avoid extended
cash shortages, specifically lack of liquidity at
any given time over the project life cycle.
 Economic parameters can be computed:
• NPV
• IRR
• PB
• Maximum CLU
• Discounted net return
• Discounted PB period
• Discounted CLU

42. Cumulative cash flow curves
CCF
CLU
D.CLU
D. Payback
Payback
NPV (r=0)
D. NPV (r=8)

43. Cash Flows
Reasons for Choosing Cash Flow Curves
Financial management hinges on the
management of cash flows rather than
profitability. Profitability is dependent
on cash flow (liquidity).

45. Cash Flows
Projects Generating Multiple IRRs
 Projects generating positive IRRs and
positive NPV is considered to be
commercially viable.

46. Cash Flows
 Model Cash Flow
1. Compile the base case cash flow simply by
adding the costs and revenue over the entire
life cycle of the project or contract.
2. Refine the base case cash flow to take
account of delays between incurring a
commitment and paying or receiving the
money,
3. Calculate the resulting cost and benefit
together with the investment required.
4. Consider the risk and uncertainty.
5. If necessary, examine the implications of
inflation.

47. Cumulative cash flow curves
CCF
Base
Worst
Best
Time
Risk Envelope

48. An Example of Portfolio Modelling
1. Set each year’s cash flow as a
forecast.
2. After completing a simulation of cash
flow forecasts for each year a trend
chart illustrating the certainty ranges
of all the forecasts can be prepared.
3. The choice of certainty bands can be
determined to suit requirements.

49. An Example of Portfolio Modelling
1. Financial Instruments
 Debt-to-equity, Financial Data
2. Development of the Mechanism
 CLU, NPV, IRR, PB
3. Spreadsheets
Use of Microsoft Excel

50. Final Remarks
Your future depends on
YOU not your employer.
Manage your finances
well and INVEST WISELY