Thursday, April 04, 2024

Fortinet - Cybersecurity Play

It was reported that Singapore lost >SGD500m to cybercrime in 2023. Imagine, our small country of a few million people, losing that much. What would that number be in China, US and Europe? Based on population sizes, it could be 300x more ((China’s 1.3bn + US’ 300m + Europe’s 500m) / Singapore’s 6m = 300). That’s USD150bn!

The company we are discussing today is one of the cybersecurity play listed in the US. Recently, the firm published some good quarterly investment materials and we shall be highlighting many of the key slides here starting the one on Total Addressable Market. The company estimates that its TAM is currently USD125bn but will grow to USD200bn by 2027.

Cybersecurity is big business!

Next, let’s take a look at the simple financials. It is also worth noting that the company has generated high teens growth to sometimes 30% YoY growth for more than 10 years. 

Simple financials (Dec 2024 estimate, USD)

  • Sales: 5.5bn
  • EBITDA: 1.7bn, EBIT 1.5bn
  • Net income: 1.2bn, FCF: 1.7bn
  • Debt: -1.0bn (net cash), Mkt Cap 38.7bn
  • ROE >100%, ROIC 70%
  • EV/EBITDA 21.7x (Dec 24), PER 29.9x (Dec 24)
  • Past margins: OPM 15-20%
  • FCF yield 4-5% (4.4% based on no.s here)
As one the leaders in the cybersecurity space, the company has also enjoyed stable high margins, extraordinarily high ROICs and good Free Cashflow. Due to its recent earnings weakness, shared price collapsed, presenting an opportunity for us to buy. That said, it is still not cheap with PER at close to 30x based on consensus no.s although it looks better with c.5% FCF yield.

1. Fundamentals

Cybersecurity is a megatrend with hackers being way more sophisticated vs 20 years ago and companies and individuals needing more software and solutions to protect themselves. The company has projected market growth to be c.12% but its own revenue has grown close to 20% over the last 15 years.

The company has implemented its own rule of 40 stating that revenue growth and operating margins should exceed 40 in any given year. As we can see, it has comfortably achieved this over the last 5 years. Management is also focused on Free Cashflow and it started generating billion dollar FCF in 2021 and looks like it should hit USD2bn this year.

The company we are discussing today is Fortinet (FTNT US) and we have the following investment thesis:

Fortinet is a leader in network security and is a key beneficiary of the ever-growing cybersecurity megatrend. It is a differentiated player in its space with unique technology which has allowed the firm to build a strong and diversified customer base across geographies. It also boasts higher margins and stronger FCF growth vs its peers.

Fortinet is a network security specialist with 70% of revenue coming from its security network business. The firm is the only cybersecurity vendor with its own SPU or security processing unit with application specific design multi-core processor that has supported generations of secure infrastructure with every iteration. Its main product FortiGate Firewall has 20 years of track record and helped the firm expanded its business portfolio to encompass more recurring revenue and value added services such as SASE*.

Today, Fortinet has an another 20% of revenue coming for universal SASE and 10% from security operations. While its business is entirely related to network security, Fortinet has diversified its business across customer types, geographies and industries. The following charts provide the breakdowns showing how its businesses are evenly split.

*SASE or Secured Access Service Edge, extends networking and security capabilities allowing work-from-anywhere and remote workers, to take advantage of firewall as a service, secure web gateway and zero-trust network access and a medley of threat detection functions. 

Continuing increase in penetration of secured networks: Networking used to be simple installations. We only needed LAN cables but with the advent of cloud and increased cybersecurity threats, network has become increasing complicated and needed to be secured. Starting from a few years ago, secured network installation picked up globally and penetration stands at 40% of all networks today. This is expected to grow to more than 52% in 2030 i.e. more than half of all networks are secured networks. Fortinet stands to benefit from this trend as the leading player in the field.

High recurring gross profits: The nature of the cybersecurity business calls for monitoring, service and support. As such, c.65% of Fortinet’s gross profits comes from service and such high recurring gross profits look set to grow as we can see from the chart below:

As its installed base grows, cost is spread across to a bigger revenue pie and use cases are learnt and reapplied to solve similar problems with other clients. The strengthens Fortinet’s moat and widen the knowledge gap between the company and its smaller competitors. We shall revisit this point later.

Strong shareholder returns via share buybacks: Fortinet’s business is highly FCF generative and it has spent a significant sum in share buyback over the years, repurchasing 214m shares (c.20% of outstanding shares) for USD5.8bn. Fortinet’s current buyback until Jan 2024 will be accretive at current valuation and providing further downside support for share price.


High growth markets are naturally highly competitive and cybersecurity is no different. Fortinet needs to compete with its bigger and more prominent peer - Palo Alto Networks alongside a slew of US and global competitors. It is unclear if the firm can maintain its high margins indefinitely.

At the same time, behemoths like Microsoft, Google and Apple would also be keen to enter this space given its importance to their core business. These are trillion dollar companies that have all the resources to compete. Fortinent’s own slide below illustrates the risk we are discussing well.

Mitigating factor: Fortinet has USD5bn of revenue in its space, second only to Palo Alto (as shown above) and should be strong enough to compete against the peers listed above. On the other hand, if Google or Microsoft is looking for something to acquire in cybersecurity, then Fortinet will also be interesting as a target. So as long as management continues to execute well, earnings and share price should do okay.


Fortinet is founded in 2000 by two brothers: Ken Xie (60) and Michael Xie (54) and together they still own c.20% of the company. Ken is Chairman and CEO while Michael is President and CTO. Needless to say, Fortinet will not be here today without them and while the management team is professional and strong, Ken and Michael will be instrumental to Forinet’s continuing growth.

2. Technicals

The following chart shows how Fortinet has traded over the last 5 years. Recall that Mar 2020 was an important point in time for many stocks as it reflected maximum fear at the height of the pandemic but looking at Fortinet’s stock price, it is probably not relevant and we see a stronger support near today’s share price of USD52.

Without looking at valuations (just pure technicals), the risk reward seemed to suggest USD50 at the downside and USD80 on the upside, as marked by its historical high. But if we want to be more conservative, the next support at USD30 marked around 2020-21 could be used. The math would then be 40% downside (USD 52, today’s share price / USD30 support) vs 60% upside (USD80, historical high/52, today’s share price).

To be clear, this is a first-cut rudimentary exercise using just technicals and we shall revisit this later with valuations which is more reliable.

The other important point to note with technicals is the drawdown. As we can see, drawdowns have been treacherous at close 50% twice just looking at the last 2 years. As our past investments have shown, it is not inconceivable that share prices plunge 50% even when our analysis shows everything is cheap. Just look at Idea #11 - Bayer!

So, I would caution that we size slowly with Fortinet given its business nature, share price volatility and high valuation.

3. Valuation

As a cybersecurity play, Fortinet does not come cheap and our usual valuation table below shows marginal upside. To recap, earnings are represented by Free Cashflow, EBITDA and Net Income.After ascribing the respective high multiples (20-25x) and adjusting for cash on its balance sheet, we are just getting USD54-61 which is quite far away from its historical high share price of USD80.

Compared to its peers (table below), Fortinet trades at a slight discount but it’s still not cheap. Again, this is a name that we should size small initially to adjust for its high valuation. If share price declines and valuation becomes reasonable, Fortinet could also become a take out candidate. As mentioned, megacaps like Google, Microsoft or even its peers might be keen to acquire Fortinet should it trade cheaply.

Intrinsic Value 

 There are two ways to think about Fortinet’s intrinsic value. We can take the average of the three intrinsic values, that gives us USD57 or c.10% upside. Or we can use the FCF IV of USD61 which has 19% upside. Personally I think the latter better reflects the cybersecurity growth opportunity. 

Now that we have the valuation numbers, let’s do the risk reward analysis again. On the downside, if we take down the valuation multiples by 5 turns across the three metric, we get -4 to -19% downside. As mentioned, the upside would be 19%. This shows that risk reward is just balanced. Not asymmetrical with a lot of upside and little downside but I would say that’s good enough.

Putting everything together, I would be initiating a small position at current share price of USD51. 

Huat Ah!

This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.

Thursday, March 28, 2024

[Globe Newswire] Fluence Expands Presence in Asia-Pacific Region, Opens Local Office in Taiwan

This is a collaboration post with Globe Newswire which provides earnings update and salient financial news globally. 

TAIPEI, Taiwan, March 15, 2024 (GLOBE NEWSWIRE) -- Fluence Energy, Inc. (“Fluence”) (NASDAQ: FLNC), a leading global provider of energy storage products, services, and optimization software for renewables and storage, has expanded its presence in the Asia-Pacific region, opening a local office in Taiwan to further engage in the country's energy storage market. According to the Energy Administration, Ministry of Economic Affairs, by the end of 2023, Taiwan's cumulative installed renewable energy capacity had reached 17,916 MW, an increase of 150% from 2019. This consistent year-over-year growth in renewables to meet the country’s ambitious clean energy targets is positioning Taiwan as a prime regional market for energy storage.

“We are proud to announce our expansion in Taiwan, a key market for energy storage in the Asia-Pacific region. Having already successfully collaborated with local partners to complete 10 storage projects in Taiwan, this expansion underscores our long-term commitment to the region,” said Jan Teichmann, SVP & President APAC at Fluence. “Harnessing our cutting-edge energy storage technology and leveraging our extensive field experience, we are committed to enhancing the reliability and stability of Taiwan's power grid. Together with our customers, we aim to accelerate the pace of the energy transition, contributing to a more sustainable and resilient future for the region.”

To date, Fluence has been selected to deliver over 2 GW energy storage projects within the Asia-Pacific region to help enhance grid stability and promote the region’s clean energy transition. Globally, Fluence has deployed and contracted 8.7 GW of energy storage projects.

About Fluence

Fluence Energy, Inc. (Nasdaq: FLNC) is a global market leader in energy storage products and services, and optimization software for renewables and storage. With a presence in 47 markets globally, Fluence provides an ecosystem of offerings to drive the clean energy transition, including modular, scalable energy storage products, comprehensive service offerings, and the Fluence IQ Platform, which delivers AI-enabled digital applications for managing and optimizing renewables and storage from any provider. The company is transforming the way we power our world by helping customers create more resilient and sustainable electric grids.

Full article:

Friday, March 15, 2024

Diageo - the luxury spirits compounder

When we first started out a year ago, we discussed the goal to write one investment idea per month and ultimately getting to 30 ideas. Well time files and we are now at the 15th idea. This is a good one as can be seen in the numbers below (company has FY ending in Jun):

Simple Financials (Jun 2024 estimate, USD)

  • Sales: 21.0bn 
  • EBITDA: 7.2bn 
  • Net income: 4.5bn 
  • FCF: 3.2bn 
  • Debt: 19bn, Mkt Cap 84bn

Financial Ratios

  • ROIC: 13% and ROE: 40%! 
  • EV/EBITDA 13.4x 
  • PER 16.8x 
  • Past margins: OPM 27-31% 
  • FCF yield: 2.4-3.7%

This is another one of the highest quality companies amongst those we have discussed and therefore do not come cheap with average FCF yield in low single digits. It has not traded above 5% FCF yield in the last 10 years and the reason is in the world map below. The company has enjoyed good growth in most geographies (with the exception of North America and Russia), partially supercharged by the pandemic. It also operates in a consumer market segment that has a lot of pricing power as a result of strong brand marketing, the perceived glamour and luxury that comes with the consumption of its products and just strong global demand as the world normalizes from COVID-19.

The company we are discussing today is Diageo (DGE on the London Stock Exchange), the world’s largest spirits maker alongside China’s Kweichow Moutai by revenue but trading at less than half Moutai’s market cap. Diageo owns a few of the most recognizable alcoholic brands such as Johnnie Walker, Guinness, Smirnoff, Tanqueray, Bailey and Casamigos. Share price has compounded nicely over the last 20 years, up more than 4x from GBP6.9 to GBP30.6 today.

In the last few years, Diageo has enjoyed some strange and ironic growth. When the pandemic hit, it was thought that Diageo will be impacted negatively as on-premise drinking died down but revenue grew because people drank more at home! With nothing better to do during covid, they emptied their bottles of whiskies and tequilas and bought some more. Diageo’s revenue skyrocketed.

As air travel resumed, people started moving again and when they roamed the duty free shops at airports with spare foreign currencies they have to spend, they bought more spirits and so Diageo grew some more! Although we are seeing the backlash now and share price has corrected in the recent months.

1. Fundamentals

We have written about Diageo on the original infosite and the investment thesis has not changed much:

Diageo is a global leading spirits company with 200 brands and footprint in 180 countries that has compounded growth steadily since its inception in 1997. Its strong brands, coupled with good marketing, high market share and strong global distribution has enabled the firm to generate consistent, steady free cashflow (FCF) and high ROIC on the back of both pricing and volume growth. The stock has compounded well in the past and shareholders have benefited from both capital appreciation and dividend growth, an important aspect that management has focused on. Investors can expect Diageo to continue to compound at 5-7% going forward.

In the past, Diageo was synonymous with Johnnie Walker, its largest brand with the most amazing story and heritage. Scotch was c.25% of revenue but closer to 35-40% in terms of profit contribution. There is an old 6 min plus Youtube video taken in one shot casting Robert Carlyle who narrated the Johnnie Walker story brilliantly. Every Diageo current and future investor should watch the video. It is just fascinating! Since then, as depicted in the pic above, Diageo has successfully diversified its portfolio from Scotch over the last few years into other spirits.

Today, Diageo’s revenue breakdown is relatively simple to understand. The following pie chart from its latest annual report provides the breakdown which roughly works out to be 22% Scotch / Johnnie Walker, 18% Beer / Guinness, 16% Vodka / Smirnoff while Tequila, Rum and Gin makes up high single digits. Together, its spirits portfolio is the largest in the world and accounts for 70% of market share based on Diageo’s own measure of market segments it competes in. Of course, if we sliced it differently, the market share might be lower, but still, we cannot deny Diageo is dominant in spirits.

In terms of margins, Scotch enjoys one of the highest margins in the portfolio at 35-40% operating margin alongside Tequila and Vodka while Beer and Ready to drink are lower at 15-20%. Well, alcohol is just good business. As per the usual, let’s discuss the few positives on top of the fundamental thesis:


Growth in TAM via volume and premiumization: According to Diageo, the growth in the spirits addressable market is phenomenal and while Diageo has not grown in its North America region this year, the US market is resilient and I believe it also reflects the global growth opportunity for Diageo as 600m consumers come of age and look to drink better and are willing to pay up for that.

The chart below shows how spirits have grown 6% CAGR by taking share from beer and wine in the US and more importantly how the market has premiumised with the ultra premium and super premium categories growing rapidly. This phenomenon is likely global because as middle class consumers increase their income and spending, they seek out the best offering and will not hesitate to pay up to get. In the world of luxury handbags, our better halves only want the best and the most popular: Hermes and LV. Similarly in watches, it’s Patek and Rolex. In the Singapore food scene, it’s either Michelin star restaurant, or the longest queue in the hawker centre’s bak chor mee (minced pork dry noodle) store or Hainanese chicken rice store.

As such, Diageo, with the most recognizable whisky brand globally and a growing portfolio of desirable spirits and beer brands, has benefitted from having both the best and the most popular choices in the spirits space and will continue to do so. This is perhaps the key reason behind management’s confidence and promise to keep growing 5-7% annually.

Distribution prowess: With its long term track record in distribution prowess starting with ship captains more than 150 years ago to the current footprint in 180 countries, Diageo has insurmountable clout in putting its products across the globe in every imaginable shelf. We see Diageo’s spirits prominently in airports, supermarkets, convenient stores, bars, restaurants and online. Diageo tracks inventory at its distributors religiously and make sure its whole supply chain chugs along and delivers.

Strong Financial Metrics: The third positive for Diageo is reflected in the numbers. We have discussed the high OPMs in the various spirits segments. With scale, Diageo has been able to do businesses with less capex (c.5% capex to sales), generating high ROIC and extraordinarily high ROE. Diageo used to generate GBP1bn in FCF a decade ago but that has bumped up to GBP2-3bn.

Its return metrics are best in class with ROICs averaging teens while ROEs are in the 20-40% range with just modest use of leverage. Capex to sales has creeped up in the last two years to high single digit percentage. On average, this should be a mid single digit capex to sales business. The following shows its FCF generation capabilities and ROICs over the last 5 years.

Similar to Thai Beverage, the other alcoholic company we analyzed, the strengths of companies show through in numbers and Diageo’s margins, free cashflow generation, ROEs and ROICs speak for itself. This is a world class business and a classic compounder.


Diageo was helmed by Ivan Menezes who built the company over the decade to 2023 but he unfortunately passed away this year. His legacy is passed to Debra Crew who was appointed Chief Executive this June and she seemed well-supported by a diversified team with varied experience to lead Diageo to greater heights.

Diageo exemplifies the future where corporates balance profitability and growth against environmental and social concerns. While selling alcohol, the company also advocates responsible drinking and is focusing on being a responsible employer for its 28,000 global staff.


Most investments have risks. That is how the game works. The only risk free investment is the first idea introduced - invest in Treasury bills which now gives 3.8%. This is risk free, as per textbooks’ definition. But it is predicated on the continuing existence of Singapore and our government. As such, nothing is without risk. For Diageo, two risks are tepid growth into 2024 and its geographical exposures.

Tepid growth: As discussed earlier, Diageo has enjoyed strong growth going into the pandemic and then going out of the pandemic as air travel resumed. Good times will always end and 2024 is now looking weak. We are seeing inventory piling up at its distributors and adjustment may well run a few quarters. Investors are ultimately short term minded and without growth, Diageo’s high valuation is not sustainable and hence we are seeing its share price correcting from its high at c.GBP40 to current GBP30.6 and looks like we may break that psychological barrier of GBP30.

Geographies: While Diageo is a global company, US ultimately drives revenue and earnings. The chart below shows how North America accounts for majority of sales and Operating Profit (OP) and needless to say, recession in the US will negatively impact Diageo. However, as market goes, hiccups in China, Africa and Latam will also affect share price when short-term investors look at large companies with exposures to these geographies and short them on sentiments.

2. Technicals

Diageo share price chart shows the nice compounding curve that we are familiar with and it recently hit its all-time high at GBP40 before correcting to the recent GBP30 level. At the pandemic low, it was at GBP25 which is, as previous ideas, a strong technical support.

The risk reward profile for Diageo as dictated by technicals is therefore 25/30 vs 40/30 which translates to c.20% downside vs c.30% upside. This means there is almost no skew either way which is usually the case for strong consumer names. It is worth noting though Diageo has had larger drawdowns at 25-30%. So it is not inconceivable that it drops closer to GBP18-20, which is the next strong technical support below GBP25. But let’s look at fundamental valuations for a better picture.

3. Valuations

Diageo trades at a slight discount to peers on PE but is right smack in peers’ average on EV/EBITDA and trades at a slight premium on FCF yield. Its OPM (blended at mid 20s) and ROIC (teens according to the company above) are inline with peers while ROE is exceptionally high. Overall, peer valuation comparison does not suggest Diageo is undervalued.

Next we look at Diageo’s valuations based on the usual three metrics: Free cashflow (FCF), EV/EBITDA and Price Earnings Ratio (PER). The Earnings row is simply FCF (GBP 3bn), EBITDA (GBP 6bn) and Net Income (GBP4bn) respectively and if we apply the appropriate multiples, we get to Intrinsic Values (IV) between GBP33.3 to 35.6 which suggest that Diageo has some upside to its IV but not by a whole lot. There is no big margin of safety buying today.

This corroborates with both peer valuation comparison and technicals and hence it may be prudent to wait for a better opportunity to buy, perhaps closer to GBP25. However, this high quality name rarely gives a big open window for investors to buy a lot at the price we want. If we can establish that GBP25 is a screaming buy, so do other investors and hence it won’t get there. One other angle to look at is dividends. Diageo is considered a UK Dividend Aristocrat, a small group of stocks listed on LSE with increasing or stable dividend for the last 10 years. The following bullet points provide more details:

Diageo's dividends 

  • Track record of increasing dividend since 2001 and in the last few years, consistent dividend growth between GBp1.5-3.8 annually 
  • Enhanced shareholder return with further share buybacks 
  • Paid out c.GBP5 in dividends over the last 7 years which accounts 16% of today’s share price 
  • Current dividend yield of GBP 0.8/30.6 = 2.6%

With that in mind, I would ascribe the higher IV of GBP36 for Diageo which implies high teens upside but would look to buy more closer at GBP25.

Huat Ah!

This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.

Friday, March 08, 2024

The Property Strategy

There are two topics that dominate social conversations in Singapore. Children’s Education and Real Estate. Nothing else seemed to loom as large.

In one of the earlier post on this substack, we discussed the important pieces of an investment portfolio. But we did not talk about property. Given that this would be a huge monetary outlay for most families, we believe property deserves a separate discussion. This post is an attempt to address this big topic in our lives.

I have to caveat that I have not gotten it very right with Singapore property. All the posts in the original infosite detailed my read about Singapore’s favorite investment topic and how wrong I have been by being somewhat bearish. That said, I have nonetheless benefited through luck, timing and some simple strategies which I do hope to share in the post.

This discussion is not about predicting where Singapore property will go from here or how the cycle will transpire. Like trying to time the stock market or forecast macro trends, it is just too difficult. Nobody thought property can rally the way it did during and after the pandemic. Just when we think the property sector was too hot and bound to cool, things heated up further in Singapore’s previous swamp site (see below).


A few months ago, we have a crazily popular project launched in Jurong, which was a swamp in the 1950s. People queue hours to ballot for units. When their no.s were called, it was as if they struck lottery. Winners celebrated when they have to write a million dollar check to buy a 99-year lease of a Mickey Mouse condo unit in a former swamp site. Only time will tell if they would actually make money.

I had a chance to look at proprietary data of many property transactions in the past thanks to a good agent friend. Properties that we know today that we thought should had done so well, e.g. The Sail (see below), people have lost their family fortunes. These sad datapoints with a lot of money lost can be seen across almost all condos in Singapore.


The Sail @ Marina Bay had 30 unprofitable transactions and 27 profitable transactions. At the time of writing, the leasehold condominium has 28 unprofitable and 28 profitable transactions over a 12-month period.



So, please remember, it is very difficult to predict anything. Nobody can consistently and successfully predict the markets, nor macro trends (recall that everyone said 2023 will see a recession, but it didn’t happen) nor elections and certainly not property cycles. It is important to invest in ways such that you will never risk the house. I cannot emphasize more on this point. We must be very careful with large % of net worth, with leverage and margins, with savings we cannot afford to lose and needless to say, with property investment due to its size.

This is so important, I feel I must repeat, be very careful with:
  • large percentage of net worth
  • leverage and margin trading / financing
  • savings we cannot afford to lose
  • property investment  
To me, property discussion should also be in different basket because of the sheer size of the investment and how it functions as a life utility rather than financial instrument especially when we are talking about the first property. If we view property more as an investment and lump it in with our other investments, rather than part of our lives, things can get really complicated as we shall discuss.

I have dissected the discussion into the following sub-topics which we will delve into for the rest of the post:
  1. Thoughts on the first property 
  2.  Rent and mortgage 
  3.  Second property in Singapore 
  4.  Overseas properties
1. First property

The first property is not an investment and it is best not to lump this property together with the rest of the investment portfolio. It is difficult because the capital outlay is huge and if we ignore this capital outlay and simply look at what’s left of the investment portfolio plus savings, sometimes it doesn’t make sense intuitively because what is left is too small to matter.

However, it is an important segregation because when we see property as an investment vehicle and less as a shelter over our heads, we might be enticed to make the wrong decisions. The trick could be to buy a property we can afford (i.e. HDB in Singapore). Once we have secured the shelters over our heads, we can think more clearly about investments.

Recently, there was a video where Charlie Munger (RIP Charlie..) spoke about his view on his first property. I think it is very apt to share it here. I have paraphrased it though.


The property you live in also dictates how your family will live and behave. It is not simply an investment or a shelter. So if you see your property as such then the following logic should naturally hold - buy your first property and do not trade it. If you want to upgrade, do so in accordance to the way you want to live your life and always try to upgrade when dollar psf are at lower points (not easy) so that you can buy the bigger house at a relatively lower valuation.

On the flipside, when we do not have a property, we are essentially shorting the property market. As seasoned investors would be reminded, shorting something has unlimited downside. We may end up in a situation where we have to pay rent for years and the market rises and rises. The cost can be unbearably painful.

This is a good segue to talk about rent and mortgage.

2. Rent and Mortgage

I hate paying rent. You pay a significant amount of your salary to someone else and help him pay his mortgage. Shouldn’t we then buy the property and pay the mortgage ourselves? Then at the end of the day, we will own the property vs paying rent which we get nothing ultimately. When we first start out in our careers, it is difficult because the capital outlay is just too big. Yes, it is not an easy discussion. There are times when you cannot help it and you have to pay rent. For example:
  • Working in a foreign city for just a few years
  • Rent is subsidized or has other benefits (e.g. tax)
  • The rent is way lower than mortgage and we can arbitrage rent (i.e. renting out our purchased property and staying somewhere else paying a lower rent)
Otherwise, if things checked out well, we should always strive to buy our first property well and pay mortgage.

We can have a whole debate about mortgage. But going by our logic that we should always treat our first property as a utility, then we should strive to pay down mortgage asap. We can take our time when interest rate is low. But as 2022-23 showed, interest rates can spike rapidly and we might get caught paying 4-5% on mortgage which is ridiculous. So always buy an affordable first home and strive to have a manageable mortgage.

Remember, when you are paying mortgage, the bank owns the house, not you. People talk about using mortgage and financially engineer profits with property’s leverage. I would suggest doing that with a lot of prudence with the first property.

3. Second property in Singapore

When we have the shelter over our head well covered, then we are eligible to think about second properties and how they factor into the investment portfolio. Here we can think about asset allocation and compare returns but property differs largely due to leverage. Based on just equity returns, without leverage, property usually generate mid to high single digits over time. This is not too different from stocks and just a tad higher than T-bills. Therefore, money should be deployed into real estate only if our analysis shows that the equity return on some particular property investment is better than the alternatives. The chart below is enlightening.

In the earlier post, we established that we could 2-4x our money if we can compound the portfolio at a high single digit return over 10-20 years. Property can achieve that because of leverage. However we do require many other elements to work as well. We are talking about good agents (cannot emphasize their importance more here), bank lending, support from family (parents, significant other etc) and legal and tax advice!

In Singapore today (early 2024), we need to do a lot of legal gymnastics because individuals are not allowed to own multiple properties without paying significant amount of taxes. For married couples, we need to “de-couple” legally so that husband and wife can own one property each. For foreigners, unless you have money to burn, it really doesn’t make sense because you need to pay 60% tax on buying the first Singapore property!

As such, investing in second properties in Singapore is not something we can just execute by clicking the buy button on the Interactive Broker platform. It requires a lot more effort.

4. Overseas properties

Overseas properties can be even trickier since we need to handle everything remotely. The biggest barrier is to find the right person / agent on the ground whose interest is aligned. If you have dealt with enough property agents you know that good agents who really have your interest at heart are like unicorns, very rare.

To sum things up: 

  •  Don’t trade your first and only property 
  •  Use mortgage wisely and try to pay down as much and as soon as possible 
  •  Weigh second properties against the investment portfolio well and 
  •  Don’t buy overseas properties

These are my views inherited from very smart people who had successfully navigated life in Singapore with some based on my own experience. 

They are definitely not gospel truths and I would welcome further discussion.

Huat Ah!

Friday, March 01, 2024

Thoughts #33: Negotiating Power

Events in 2023 have prompted some initial thoughts about negotiation and how it affects the situations, our lives and the world. Life is indeed a game of chess, and we need good strategies and there is also timing, environment and our fellow community to help. Or in Chinese, 天时,地力,人和.

The Russia-Ukraine war comes to mind. It was reckless to start the war and reasons back then are no longer relevant today. This is very much like life. The person we were just a few years ago, is actually not us today. Events that has happened just last year may no longer be relevant today. The Russia-Ukraine situation has evolved so much that everything can be now at stake. The following factors provide worrisome boost to a bleak future which may further escalate:

  • If Trump becomes President, US may stop its aid to Ukraine and Russia can win. This was unthinkable just a year ago.
  • The second war in Israel is putting further pressure on US and its allies on resources and political will to fight internal battles.
  • China, its allies and North Korea are run by dictators and can move much faster than the US can.
To not escalate this further, US and Ukraine may need to go to the negotiating table faster and from a position of weakness. Without this, there is a real risk things unravel for the worse and pave the way for WWIII. 

In a similar life situations, one must always understand the dynamics so as to move advantageously.

Position of strengths

  • The situation does not warrant any third party negotiator
  • Options to move in different directions in position of strength (strong offensive power, strong internal defense, strong bargaining chip or chips)
Position of weakness
  • The situation requires a strong third party negotiator especially at a critical juncture
  • Optionality is restricted, there are no catalysts on the horizon (e.g. Biden continues to be President)
  • Nuclear options (literally pressing nuclear button, or more soft approaches like media influence or use of international laws against the enemy)
Shareholders have some negotiating power. Especially in recent years, activists have turned the tables against companies and their management. With just a few percent stake, they can:
  • Demand changes in the board of directors, which can decide the fate of the company's C-suite
  • Use media to drum up support for their cause, rally other shareholders to vote with them
  • Use lawsuits against companies who may do things can give activists the leeway to sue
  • Make public strategic campaigns and propose that management execute them to generate higher returns for shareholders
These are strong tactics that have good track record of successes. Sadly, as a minority retail shareholder, we are always in a position of weakness. We have nothing to fight against management. We can go AGM and make noise but it will not change anything. As such we must always remember, there is only one option which is to sell when things are not looking good. Yet, we tend to hold on to losses for too long.

Therefore it is very important to always look for good businesses and good compounders. Check on the quality of management and simply avoid situations that stack the odds even more against us.

Huat Ah!

Friday, February 16, 2024

Podcast - Inflation and Interest Rates

Welcome to our podcast, as mentioned, we shall discuss further about the impact of inflation.

Inflation is real and happening today. Everything in sunny Singapore has become a lot more expensive.

Food court meals was $5 and now we have to pay $10. 

The cheapest car cost almost $200,000 which is enough to buy a house in most countries.

The cheapest condo... I wouldn't even want to go there. 

You get the idea, inflation has taken us by storm.

The hardest hit people are people in the lower income households and those with debt.

Interest cost is rising and if one is not careful, one might get caught with over-indebtedness.

It is very scary, it may cause bankruptcy and then all we worked for is gone.

So please be very careful with debt. 

Lower income households did not ask for this but yet they will suffer. It is imperative for society and the more well-off to help.

Inflation benefits savers a lot. Because the interest earned can more than offset the rise in cost of living.

Let us discuss a simple example:

The cheapest meal in Singapore can still be $3. Not in the cities but in neighbourhood stalls. Yes, it will not taste as good but it is cheap. 

It will fill the stomach and one can survive with $270 for a month. That is about $3,240 per year.

Now that we can get 3% from banks, it is possible to have some savings and the interest pays for all these meals. 

The math is roughly $90,000. If you have $90,000, your interest can pay for an entire year of meals.

Although the same $90,000 cannot even buy half a car.

This is the strange world we live in now.

But to low income households, everything has changed, they don't have $90,000 in the bank and they wonder why people are driving fast cars.

It is very warped and there are no easy solutions.

Some say the solution could be war.

It is not inconceivable.

So back to the tenet of this podcast, while we earn 3-4% interest, if we can help, we should help the lower income households, in whatever way we can.

Hope you have enjoyed listening. See ya!

Friday, February 02, 2024

Thai Beverage - Singapore's compounder

This third Singapore name has been a strong compounder since its IPO c.17 years ago, almost quadrupling its share price back then. With STI barely up over the same time period, this is an idea that has worked out and I think the share price is not expensive today. As usual, the simple financial numbers below:

Simple financials (Sep 2024 estimate, SGD)
  • Sales: 11.7bn
  • EBITDA: 1.9bn
  • Net income: 1.2bn
  • FCF: 1.5bn
  • Debt: 4.7bn, Mkt Cap 25.1bn
Financial Ratios
  • ROIC: 10% and ROE: 16%
  • EV/EBITDA 11.4x (Sep 24)
  • PER 11.5x (Sep 24)
  • Past margins: OPM 12-14%
  • FCF yield: high single digit for last few years

Interestingly, share price has stagnated since 2020 and we are not far from the Mar 2020 low today. Recall that this was at the height of COVID-19 when the markets capitulated. Compare now to 2020, things has improved so much, yet the stock is trading as if we are still in the worrisome heydays of the pandemic. This warrants a closer look!

The company in question is Thai Beverage (ticker: THBEV), the spirits, alcohol and beverage conglomerate controlled by the Charoen Sirivadhanabhakdi’s family listed on SGX. It is the largest spirits producer in Thailand and the second largest beer producer and has expanded its empire into Vietnam, Myanmar and Singapore as well as into other business segments.

1. Fundamentals

Thai Beverage’s investment thesis is predicated on the alcohol being an inherently high ROE and sticky business as people enjoy drinking and the markets in which THBEV operates in continue to see strong growth. Thailand is still seeing mid single digit growth in the spirits market while beer is also seeing strong growth with Vietnam's volume surpassing pre-COVID era. Margins have also been stable with EBIT* margins for spirits at 20+% and beer at close to 10% (while it was closer to 5% in 2017). As the dominant player in various markets, THBEV will continue to generate above market growth and investors stand to benefit from this compounding.

*EBIT = Earnings Before Interest and Tax

Thai Beverage has been acquisitive and currently owns c.80% of Oishi, green tea business acquired in 2008, c.65% of soft drink maker Sermsuk (2011) and c.28% of F&N and Fraser Property (2012) and c.53% of Sabeco, the largest Vietnam beer company (2021). It generated c.SGD1.5bn in FCF last year (FY ending Sep 2022) and is on track to sustain FCF at SGD1.5bn, which implies that we can buy it now at the magical 10% sustainable FCF yield today!

10% sustainable FCF yield is magical because technically, you never need to sell. If an investment gives 10% yield you get back your capital in 10 years or less. If you sell it then at cost, you just made 100%. But chances are, you can sell for higher, so this investment will probably give you 3x. If the FCF compounds, then the sky is the limit, it could be a ten bagger. Or a moonshot, or a fat pitch. You get the idea. That is why 10% FCF yield is magical.

THBEV is also one of the larger companies listed on the SGX at c.SGD14bn market cap today. It has compounded value since its listing and management continues to look for ways to increase value. The company intended to spin off 20% its beer business in 2020 as a separate listing but unfortunately that did not work out. Recently, the company talked about privatizing its food business which would make it a pure beverage manufacturer (both alcohol and non-alcoholic drinks) and eliminate the conglomerate discount on its valuation. More on this later.

For now, let’s discuss the few positives layering on top of the fundamental thesis:


High and growing market share: THBEV has very high market share in Thai's spirits market (c.80% share) and has maintained that edge over the last decade driven with strong local brands. With high market share, THBEV enjoys economies of scale and lower cost per unit which has contributed to its good margins at c.20+% EBIT margins vs c.10% for its beer business.

EBITDA and EBIT margin snapshots:
  • Spirits: EBITDA margin 24-25%, EBIT margin 20-22%
  • Beer: EBITDA margin 13-16%, EBIT margin 10-12%
  • Non-alcoholic beverages: EBITDA margin 13-14% EBIT margin 10-11%
  • Food: EBITDA margin 10-13% EBIT margin 7-10%
Its beer market share in Thailand and Vietnam has remained stable at c.30-35% for both markets. In Thailand, it has impressively grown its market share from 27.4% in 2012 to 33.4% in 2021 and targets to displace the #1 leader Singha going forward. The following chart from its investor presentation deck shows the contribution from the various business segments:

In Vietnam, while Heineken has grown rapidly in Vietnam with its strong Tiger Beer brand capturing the bulk of the demand growth, we believe THBEV's market share should stabilize going forward. Sabeco’s iconic Vietnamese brands such as Saigon beer and 333 beer should see further recovery as the pandemic subside and tourists visit the country again and going forward, the Vietnamese demand comes back as the population embrace local brands.

Transformation: Thai Beverage intends to continue to transform into an ASEAN multi-national empire with potential to further focus on its core, divesting the legacy property business from F&N. While not executed, its 2022 move to spin off BeerCo and current intent to privatize its food business are testimonies of how the group is constantly thinking about value creation. We believe the company can continue to improve margins and ROICs for lower performing business as it has done with its beer business.

The strengths of companies show through in margins, ROE and ROA and we see THBEV doing well with overall teens EBIT margins and teens ROEs. It has also maintained high ROA at 6+% despite the pandemic.

Recovery: The third and final positive is simply recovery back to pre-pandemic demand. Consumption has not fully resumed to levels seen in 2018-19 but historical volume growth points towards mid single digit growth going forward. Interestingly, only 20% of consumption is off-premise in Thailand which means that on-premise demand rebound will greatly benefit THBEV.


Management has a strong and proven track record in building strong businesses. The founder family tsar Charoen Sirivadhanabhakdi (79) and his son continues to run the company efficiently and has created a strong culture which is reflected in the numbers such as strong margins and ROICs discussed above. His business empire spreads across retail, food and other asset classes with property being prominent as well. His daughter runs the property business arm. THBEV’s M&A track record has also been stellar, buying Singapore's F&N and Vietnam's Sabeco well and has created value after the acquisitions. His wealth is estimated to be USD12.7bn.

Charoen’s third son Thapana Sirivadhanabhakdi (48) is the CEO of Thai Beverage today, a role he stepped in since 2008. While having more a decade of management under his belt and holding directorships in a variety of businesses, he undoubtedly has less of a free rein in running THBEV’s business with his father still in the Chairman role and probably calling the key shots. But he is definitely smart and more than capable to run an oligopolistic alcoholic beverage business.


Key man risk: While the company culture seemed strong, key man risks will be inevitable. The question about what happens when the father is no longer around will always linger. The son must build his own team and appoint key lieutenants before that. As of today, the management team seemed capable having staffed with high calibre people and we should expect the ship to continue to sail forward.

Minority shareholder risk: Alongside the key man risk is how they treat minority shareholders. Unfortunately, Asian businessmen had a weak track record of being fair to minority shareholders and one has to be always mindful that we will receive the shorter end of the bargain if the owners can get away with it. The family still owns c.62% of Thai Beverage. So far, they have not been unscrupulous and the share price reflects that as well.

Regulatory risk: Thailand, as a Buddhist country, with restriction on alcohol consumption has been a risk to the investment thesis since the IPO of the company. Part of the share price weakness today reflects the recent concern that the new Thai government may implement stricter rulings such as no alcohol consumption in public premises outside 11am-2pm and 5pm-midnight. In my experience, when share price corrects on such news, it is often good times to buy because people just want to drink and regulations do not deter them drinking less. They will just drink more when it is permissible to drink.

2. Technicals

THBEV became a public company in 2006 and the following chart shows the share price movement over this past 17 years. While it is a FMCG company, drawdowns are frequent and not easy to stomach. Its largest drawdowns are 30-35% usually over the course of 6-12 months and the most recent one is c.20% which brought it close to its pandemic low.

The pandemic low was SGD0.45 which means that we have c.15% downside if it ever revisits that level. On the upside, the stock hit its all-time high of SGD0.84 in 2019 which implies c.50% upside. So by just looking at technicals, we already have favorable risk rewards. But that’s not enough. Let’s look at valuation.

3. Valuations

Thai Beverage trades at a significant discount when compared against its global peers although that’s partially due to its lower margins as a conglomerate with food and non-alcoholic beverage businesses and lower ROEs and ROICs as we can see below.

That being said, the valuation gap is too big to be ignored. If we apply slight discount to the average valuation on the various metrics (except for FCF where we are applying a crazy discount at 20x vs 40x), we will still get significant upside as shown below:

Recall that the stock hit its all-time high at only SGD0.84, the lowest value amongst the three intrinsic value (ie SGD0.90 with 57% upside) might be a better estimate while keeping in mind that this has been a compounder and it would not be surprising that the stock hit SGD1.11 (almost doubling for today’s price) on the back of its strong free cashflow someday.

Huat Ah!

This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.

Thursday, January 18, 2024

2024 Dividend List - SGX

The start of the year brings fresh aspiration, perspectives and ideas. This year, we start early with the dividend list using Poems' screener. It is quite basic but allows us to screen using ROE, ROA, Dividend along with the usual market cap and valuation cut-offs. So we tried the following:
  • Market cap > SGD 500m
  • ROE > 10%
  • ROA > 4%
  • Dividend Yield > 3% 
  • PE < 25x
As we know, the Singapore Government 6 month Treasury Bills currently gives us 3.7%. So to be buying for dividends, we would actually require a much higher yield (perhaps 5% or more), otherwise we should just buy T-bills right? However, with high yielding stocks, if they are not generating high enough returns (which is why ROE is important), they are basically paying out their equity base. One of the stocks we discussed actually exhibited this:

Overseas Education pays a 7-9% dividend over the past years, but as there was no growth (revenue did not grow and ROE was only 3-4%), the stock price simply falls by that amount annually as exemplified by the share price chart above. But anyways, that's enough digression. Let's look at the list (sorted by market cap) today:

The first section of the list shows the blue chip names and we have Thai Beverage and SGX discussed in depth on our platforms. It is also interesting to note that most names are trading at teens PE which alludes to the cheapness we see in the Singapore market today. As for other noteworthy names, Raffles Medical is definitely on the cards.

The second portion of the list shows names going down the market cap ranking quickly. Since we cut it off at SGD500m, the last name appears to be Vicom, which is also discussed on this platform. If we remove that filter, we can another 57 names with the last name at just SGD6m market cap. Well, these are not primarily our concern. The interesting names that popped up are the watch distributors Hour Glass and Cortina, with double digit ROAs and trading at single digits PE and give close to 5% dividend, they are worth studying!

Friday, January 12, 2024

[Globe Newswire] Fraser Institute News Release: Hong Kong plummets to 46th spot in latest Human Freedom ranking

This is a collaboration post with Globe Newswire which provides earnings update and salient financial news globally. Please click on the links after the introductory excerpts for their full articles.

TORONTO, Dec. 19, 2023 (GLOBE NEWSWIRE) -- As a result of increasing restrictions on liberties in Hong Kong—once among the freest places on earth—it now ranks 46th in the latest Human Freedom Index report, released today by Canada’s Fraser Institute and the U.S.-based Cato Institute.

As recently as 2010, Hong Kong was the 3rd freest jurisdiction on earth. Mainland China has always been less free than the territory and this year, China ranks 149th out of 165 jurisdictions.

“Freedom has suffered a precipitous decline in Hong Kong, but its tragic descent into oppression provides important lessons about the value of freedom,” said Fred McMahon, resident fellow at the Fraser Institute and co-author of this year’s report.

The index measures personal freedom—the rule of law, safety and security, identity and relationships (i.e. the freedom to choose your relationship partner), freedom of movement, speech, assembly and religion—alongside economic freedom, the ability of individuals to make their own economic decisions.

This year’s report ranks 165 jurisdictions around the world. It finds that from 2019 to 2021 (the latest year of available data), 89.8 per cent of the world’s population experienced a decline in freedom.

Full article:

Friday, January 05, 2024

Happy New Year! Live Nation!

This post first appeared on

Happy New Year! We shall start 2024 with a deep dive into this company!

This company is not our typical strong financials, high ROE and high margin company. Its net income is barely positive and this makes the Price Earnings Ratio (PER) and Return on Equity (ROE) numbers look erratic. But FCF generation is strong and growing which makes the stock worth looking at. Again, let’s start with the financials. 

Simple financials (Dec 2023, USD)

  • Sales: 19.1bn
  • EBITDA: 1.7bn
  • Net income: 0.2bn
  • FCF: 1.0bn
  • Debt: 4.9bn, Mkt Cap 20.4bn


  • ROIC 8.0%
  • EV/EBITDA 11.7x (Dec 24)
  • PER 78.5x (Dec 24)
  • Past margins: OPM 5%
  • FCF yield: mid to high single digit for the last few years 

Before 2009, the company was generating negative FCF as it just started building its moat and it only started generating three digit million FCF from around 2012. But when the pandemic hit in 2020, FCF turned hugely negative to -USD1.3bn but has since recovered strongly. Analysts expect FCF to be USD1-2bn in the next 3 years. 

The company is Live Nation and it goes by the ticker LYV and is listed on the NYSE. Live Nation is the world’s largest concert promoter organizing 40,000 events for almost 100m fans globally. Its ticketing platform, Ticketmaster sold over 485m tickets to music, sporting and other events. It also provide artists management services to c.500 artists.

1. Fundamentals

Live Nation is the leading live entertainment ticketing sales and marketing company and has one of the world’s largest music advertising networks for corporate brands. The company is a platform connecting fans, venues, tickets, artists and advertisers and operates a growth flywheel based on the above which we shall describe later.

Live entertainment is a huge megatrend because so much of our lives are now with screens, in-screens or for screens, like taking pics of our food before every meal for Instagram. So very ironically, we treasure every sliver of live interaction and will pay an arm and a leg to see our favourite artists “live” with friends and family.

The last three paragraphs pretty much summarized the investment thesis. Next, I would point you to the following link to better understand LYV’s flywheel since the blogger has done a much better job than I could ever do:

I would simply add what has since transpired has further strengthened the LYV flywheel starting with 

Fans → Tickets → Venue → Artists → Advertisers → Platform 

churning out Cash and Compounding even more Growth as we speak. Let’s go through them. 

Fans and tickets: With no live concerts for the last couple of years no thanks to the pandemic, LYV has accumulated a lot more fans in 2022 due to the pent up demand. It was 60m in 2015 and it is 100m now. Similarly, LYV has sold much more tickets, from 150m in 2015 to over 450m today! People just cannot get enough of live concerts. 

Venues: LYV has been building this moat for years. All counted (below), it has over 300 venues in operations, both owned and leased. It has full ownership of 30 venues including 10 amphitheaters which are most conducive for music concerts. It also has 100 international venues. This makes LYV one of the largest venue operators in globally alongside ASM Global (unlisted), its main rival and partner.

Artist and Advertisers: Similarly, LYV has continued to grow its clout with artists and advertisers further enhancing its platform to grow revenue from its successful flywheel model. Its key artists include: Aerosmith, Beyonce, P!nk and Twice, the Korean girl band, amongst many others:


Oftentimes the people make the business and for LYV, this is an important element to discuss. In this sense, LYV is not our consumer staples or razor blade model where the business economics triumph management. Fortunately, LYV is helmed by strong managers, starting with John C. Malone, who built a media empire with various companies, most notably Liberty Global and is the largest private landowner in the US. 

Live Nation, being part of the the Liberty media group of companies, enjoys advantages such as not being penalized for having too much debt and prioritizing free cashflow over net income. Liberty companies are known for the above and LYV’s CEO Michael Rapino, John Malone’s trusted lieutenant and LYV’s CFO Joe Berchtold have mastered the art of managing for cashflows. 

Both have served more than 10 years. Michael was appointed as CEO since Aug 2005 and has led the company through two crises: GFC and COVID-19. Looking through the 10K pages on managers, there is a mix of young and experienced managers, not necessarily in the right pecking order, which perhaps says something about Michael Rapino. But tough managers run great businesses, fortunately or unfortunately. That’s life.


Interestingly LYV lists personalities and relationships as its #1 risk. The ability to secure popular artists for concerts and the ability to sign new artists onto LYV’s platform relies the soft skills of agents, promoters and special relationship managers that represent artists. So while LYV has built the network, flywheel and all, it can be a brother, uncle or friend of the artists who decides that the star should work with somebody else and not Live Nation. As such, LYV believes relationships are its key risk, which may be true.

The mitigating factor is that as LYV grows, it will have more clout, it can provide better economics and it has the best venues which means that musicians have limited choice but to work with LYV. Sometimes, Live Nation could provide the best option and pay the highest dollar and money talks. So, the stubborn brother, uncle or friend will get overruled by economics. As such, over time, this risk should diminish.

The second biggest risk in my opinion could be the firm’s balance sheet. LYV has c.USD6bn of net debt and cost of servicing this debt is 4.7% which works out to be USD128m. This is c.15% of its operating income and FCF which is not small. Should earnings dropped significantly like what happened during the pandemic, LYV could run out of equity and need financing. 

As a matter of fact, it has very little equity. As of Dec 22, its total equity was USD93m. The mitigating factor is that as a Liberty / John Malone company, banks, analysts, suppliers know that someone will back things up if LYV really gets into trouble. That said, it is not ideal and the hope is that its strong FCF generation at c.USD1bn (which can be used to pay down debt) will make this problem go away in a few years.

Other risks would include Pandemic Part II, injuries at events, cybersecurity and legal risk related to Ticketmaster which we have little visibility. It happens when it happens and we assess then whether it’s actually a good chance to add more. The Ticketmaster legal risk is worth monitoring as the DOJ recently fined the firm USD10m, which is inconsequential but not insignificant as it sets the precedent. As the incumbent monopoly, it will always be targeted and we need to be vigilant in monitoring the legal / regulatory risk. Next, we talk about technicals.

2. Technicals

LYV became a public company in 2006 and the following chart shows the share price movement over this past 17 years. In the early years, as it was still small, share price was quite volatile and drawdown could be treacherously big. From the peak in 2007 to the trough in 2009, it collapsed 80%. More recently, it crashed 45-50% in 2020 and 2022, partly due to the high debt problem we highlighted.

So this is not a stock for the weak stomach. We cannot rule out a huge drawdown but we can try to establish a bottom and better triangulate that using valuation in the next section. At the height of the pandemic, it hit $40 and the recent low in 2023 was $66.23 as shown on the chart above. Let’s see which number works better using robust valuation methodologies.

3. Valuations

LYV’s valuation has always been tricky. It is not an easy company to value given the complexity around little net income, highly leverage balance sheet and inexplicably, negative equity before minority interest. I have used the same methodologies from past analyses below to triangulate its intrinsic value and the results are mixed.

As expected, for PER, there is no upside even if we used a generous net income assumption of USD800m, a level I hope it can achieve at a sustainable state in the future. This year’s net income, as mentioned, was below USD200m and analysts are looking at USD400m in Dec 2024. so USD800m is a lot higher. 

We do have some upside using FCF of USD1bn and EBITDA of USD1.8bn and ascribing the respective multiples. But there is no margin of safety with intrinsic value at just 20-23% above today’s share price. We need 30-40%. Co-incindentally, LYV’s share price hit all time high at $120 (just 31% above today’s share price), during the meme stock mania in the middle of the pandemic, which is not far from our first cut intrinsic values of $110-112.

Next let's look at the bear case:

If we cut earnings by half while maintaining the same multiples (FCF at 25x, EV at 15x and PER at 25x), we see downside of 40-52% which was similar to the drawdowns in the past two years. 

Putting the two scenarios together, we have the risk at -50% but the reward at only 20%. The risk reward is therefore skewed towards the downside and it may not be a great idea to buy at current price.

4. Intrinsic value

The most important ratio in any stock analysis is the ROIC or ROE but it is difficult to establish that number for LYV since its net income has been negative for the majority of the years it was listed. Last year’s ROIC miraculously hit 8% but it could be just one off. 

I have used FCF divided by invested capital (net debt plus equity) instead to try to determine a sustainable ROIC and narrowed that to a range of 8-10% which seemed reasonable. A simple illustration is that LYV’s average FCF for the last decade was USD400m while its average invested capital (average net debt plus equity) was USD4.6bn. Dividing the former by the latter gives us c.9% ROIC. 

Simplistically, this means that LYV can compound its capital at 9% per annum and if we are willing to look out two years, LYV’s intrinsic value is then $112 x (1.09)^2 = $133. At today’s price of $91, the risk reward is still not great but if we get in at $70, the risk reward becomes $40/$70 vs $70/$133 which is -43% vs 90%. And that’s ideal. 

So do monitor this name closely at $70! My portfolio will be adding at $70. In fact, the team held it since 2016 when it was $20. The hope is that this could be a ten bagger some day.

Huat Ah!