The year 2017 is drawing to a close. It is time to reflect and recap the investing lessons learnt. The largest loss on a single stock this year is Triyards, which has been suspended. In addition, Ezion is also suspended and First Ship Lease Trust (FSL) looks like it is on the edge after failing to refinance its debts on schedule. There are 3 valuable lessons learnt from these episodes, namely, (1) know your customers well, (2) watch out for restricted cash, and (3) understand value-in-use.
Know Your Customers Well
The expenditure of an upstream customer is the revenue of a downstream customer. Hence, it is extremely important to know your customers well. If the customers are doing well, likely the suppliers will also do well. Conversely, if the customers are not doing well, likely the suppliers will also fare poorly. This relationship is most evident in the Oil & Gas (O&G) industry, as troubles at upstream customers affect downstream suppliers. An example is Triyards, which is affected by the woes at Ezion, which is one of its major customers. See Know Your Customers Well!
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Having cash on the balance sheet is good, but if the cash is restricted or pledged to the banks, it is of limited use to the company (except for setting off debts owed to the bank that restricts the cash). A case in point is Ezion, which has USD93.5M in cash and cash equivalents as at end Jun 2017. However, USD89.7M of this was "earmarked by the banks for various facilities granted". In other words, it only had USD3.8M as usable cash. Ezion promptly suspended trading of its shares upon announcement of the financial results.
Likewise, Triyards reported it had USD19.8M in cash as at end May 2017, of which USD16.8M was restricted cash. Another company that has restricted cash is Hyflux. Out of SGD222.0M in cash as at end Sep 2017, SGD73.7M is restricted bank balances.
For investors in FSL, value-in-use (VIU) would be a familiar concept, because it has an important implication on whether the trust could survive the shipping downturn. When a company buys an asset, it is recorded at historical cost. However, the carrying value of the asset is dependent on (1) the price that the market is willing to pay for it, or (2) the cashflow (on a discounted basis) that the asset can bring over its economic lifespan. When the market is depressed, such as in the shipping and O&G industries, the market value and revenue that the asset can earn are depressed, affecting the VIU. This in turns affects the Loan-to-Value ratio, interest rate payable and whether banks are willing to refinance when the loans fall due. The company will also have to take an impairment charge on the asset.
VIU is not a concept unique to FSL or the shipping or O&G industries. It is applicable to all companies and is worth watching, especially for companies facing a downturn in their business conditions.
The above are the investing/ accounting lessons learnt for 2017. Let's hope that I will learn the lessons well and have better performance next year.
It is Christmas season this weekend. Wishing all readers Merry Christmas!
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