Always look out for good quality companies

It is good that my blog has some traction and in fact some have started to email me - which is good. I will try my best if I can to provide my opinion. When I started this blog, I wanted to sort of be different. My personal journey into stocks have brought me to like and trying to understand companies, financials as well as the intricacies of beautiful businesses.

Beautiful businesses can be very hard to find. Many have sort of asked opinions on all kinds of sectors. Sorry to say that I am no expert in many sectors in fact although I am learning by the day. No one can know all industries. All I can say is that my journey into world stocks especially US have provided me with a steeper and faster learning curve. It is actually tougher than Malaysia as we probably have the least volatile market.

Anyway, one should always be on a lookout for healthy fantastic businesses. They can be overpriced though - which we should avoid. One may ask, why good quality businesses and not just look for cheap ones which are undervalued? After all Benjamin Graham's principles have been to look for that moat, margin of safety. If a company we find after our valuation is worth RM1 billion for example, the margin of safety of 20% will cause us to buy at below RM800 million valuation.

Well, let me take out a company which I do not buy but it is a beautiful business nevertheless. I do not buy it because it is expensive and I think I can find better value elsewhere - Maxis.

Let's just pullout the latest balance sheet. See below - imagine yourself looking at the balance sheet without knowing the name of the company. If I do not show you the name of the company, you would probably be thinking that it is insolvent!!! Intangible assets at RM11.13 billion while equity at RM7.246 billion. If we are doing a debt / (equity - intangibles), what would your result be? The NTA is actually negative (RM7.246b - RM11.13b)

Asset and Liability portion

Look at the cash to borrowings. The borrowings is close to 6x its cash. Again, imagine if you do not know it is Maxis. But yet, people are valuing the company today at almost RM50 billion - i.e. one of the Top 10 largest company in Malaysia??? It is not that overvalued. Look at the borrowings, it is still growing. Which bank would lend to a company with this balance sheet. But yet it is borrowing more than RM6.7 billion with a negative NTA.

Equity portion

Still, I think the CFO has one of the easier job in Malaysia. He is probably only worried whether the dividend amount is sustainable but definitely not losing sleep over the debt number... Why?

Again cashflow and the predictability of the cash that it can bring in. The second part is more important - predictable cashflow. And bear in mind, Maxis is paying more than RM2.5 billion dividends a year. Only consistent cashflow and the predictability of it can pull that out. Imagine a business that generates free cashflow of RM2.5 billion in one year and another year it generates negative cashflow. What would a bank (or bond subscribers) do?

Now ever wonder why a quality company with good consistent cashflow is important. It does not need to keep the current portion of the cash in fact - and people still believe in the company.