Wednesday, September 21, 2011

Manchester United IPO in Singapore

Manchester United – The most popular football club, the team that has the most fans around the globe had applied for approval from the Singapore Exchange to launch an IPO. You all know what an IPO is right? If not read it here

Well, the good news is that the Singapore Exchange has approved Man U’s request to launch its IPO in the Singapore Stock Market.

Millions of loyal fans of the club would be eager to invest in its shares. But, is it a good idea to invest in the Man U IPO? Read on to find out…

Should you Invest?

As per the information that is currently available to the public, I would say Probably Not. Don’t jump into the bandwagon right away. Man U has to officially release its offer document and only then can we decide firmly. But at the outset, it doesn’t look to be a profitable investment for investors.

If you are someone that says, Man U has 350 million fans across the globe. They have star players and are one of the most famous clubs. Why wouldn’t investing in them be profitable?

Well my friend, unfortunately fame and fans isn’t enough to generate profits or revenue.

What makes a company’s stock attractive?

The two main things that make a stock attractive are: The Revenue generated by the company and the Profits generated by the company.

In case of Manchester United, the Revenue may be there, but the profits are not there.

Reasons that make Man U’s shares not so attractive:

1. Manchester United’s Debt:

Currently Manchester United’s debt stands at nearly ₤ 500 million. This is a very large number. They have annual revenue of about ₤ 300 million but as you can see the debt is nearly twice as much as their revenue.

2. Player Salary

Think of all the big names that play for Manchester United. Wayne Rooney, Rio Ferdinand, Dimitar Berbatov and the list is long. Now, think of the salary they get paid every year. This is going to eat out a very big chunk of their annual revenue. Don’t you think so?

3. Interest Payment on Debt & Debt repayment

The debt they owe is nearly ₤500 million. Even if we assume they pay a 5% interest every year they have pay nearly ₤25 million as interest. In all practical cases, the interest will be much higher and so the interest payment is going to be substantially higher. (The actual numbers from the previous year are available in the next paragraph)

Plus, they have to repay the original loan principal amount. Don’t they? So, assuming they would like to pay off atleast 10% of their debt to ensure they repay all their debt in 10 years, another ₤50 million is wiped out from the revenue.

Combine all those numbers that we saw in the previous paragraphs. You may end up with net total revenue of probably ₤50 million or lesser.

What is the actual Revenue & Payment History of Manchester United?

• In financial year 2008-2009 they reported a profit of ₤48 million (This was after they sold Christiano Ronaldo for ₤80 million). So, they were making a loss and a last minute sale ended up putting the net profit in green.
• In financial year 2009-2010 they reported a loss of nearly ₤84 million
• The amount of payments they have made in the last year were:
oThey paid nearly ₤40 million a interest payment in 2010
o Termination of Interest Rate Swaps cost another ₤40 million
o Interest payment on their ₤220 million “Payment In Kind (PIK)” loans which have since been paid off, took away another ₤30.2 million
o Forex losses amounted to ₤19 million
o Good will amortization costs was ₤35 million
o Plus – Add the salary they paid all their star players
• Eventually they declared a whopping loss of nearly ₤178 million
• The net revenue in the financial year 2010-2011 was around ₤280 million.

Now, do you think that they would have enough money out of the ₤300 million revenue to post profits and pay dividends to share holders?

What is the purpose of this public issue?

Manchester United is trying to raise US$1 billion (S$1.26 billion) which they say is around 30% of the company’s net value. Do you think they are really worth US$3.3 billion?

Trivia: Forbes magazine estimates the clubs value to be around US$1.8 billion.

Most company release IPO’s to raise fund for expansion of their business and to generate more revenue and profits. Unfortunately in case of Man U, the primary objective is to repay the debt. So, the net amount that would be used to generate profit and revenue is under serious question.

Some Last Words

All is not lost still. Manchester United will probably come up with a clear offer document that will clearly outline their revenue numbers, the purpose of the IPO and what they intend on doing with the money they raise.

So, until then, it is better to wait and watch. You can buy their tee-shirts, caps and other merchandise and cheer them rather than invest your hard earned money right now.

Disclaimer: The author does not advise for or against investment in Manchester United IPO. All numbers mentioned were picked up through internet search and investors are advised to do their own research before deciding on investing in the IPO.

Tuesday, September 13, 2011

Retirement Planning Series - How much money will I need?

In the previous article in our Retirement Planning series, we learnt how important it is to plan for retirement and have a sizeable retirement corpus.

The next big question anyone would have is "How much money do I need to retire?"

The answer to this question contains both good news and bad news.

As always, lets look at the bad news:

There really is no single number that would guarantee everyone an adequate retirement. It depends on many factors, including your desired standard of living, your expenses (including any medical costs) and your target retirement age.

That being said, lets get to the good news part.

It's entirely possible to determine a reasonable number for your own retirement needs.

All it involves is answering a few questions and doing some calculations. As long as you plan ahead and estimate conservatively, it's entirely possible for you to accumulate a nest egg sufficient to last you through your retirement years.

There are several key tasks you need to complete before you can determine how much money you'll need in order to fund your retirement. That includes:
1. Decide the age at which you want to retire.

2. Decide the annual income you'll need for your retirement years. It may be wise to estimate on the high end for this number. Generally speaking, it's reasonable to assume you'll need about 80% of your current annual salary in order to maintain your standard of living. (We are talking about value in todays money value without considering Inflation)

3. Add up the current market value of all your savings and investments.

4. Determine a realistic annualized real rate of return (net of inflation) on your investments. A realistic rate of return would be 6-10%.

5. If you have a company pension plan, obtain an estimate of its value from your plan provider.

A Sample Calculation

Let us consider the hypothetical case of Mr. Ramesh a 40 year old man earning Rs. 6 lakhs per year after taxes. Let us take a look at his key factors:
1. He wants to retire at 65 years
2. He will need around 5 lacs or more of annual income post retirement
3. He currently has Rs. 10 lacs in investment & savings
4. He will receive company pension of Rs. 20,000 per month (Assuming he retires at one grade higher than his current grade, which we will assume he will do so in the next 25 years)

Now, we determined that Ramesh needs around 5 lacs per year which comes to roughly 40,000 rupees per month. If we subtract his company pension, he will need to fund Rs. 20,000 from his own pocket to retain his current standard of living.

Additional Consideration: Ramesh is in good health and has a family history of longevity. He also wants to make sure he can pass along a sizable portion of wealth to his children. As a result, Ramesh wants to establish a nest egg large enough to enable him to live off of its investment returns - and not eat into his principal amount - during his retirement years.

We will assume that Ramesh should be able to earn 6% annualized returns (after considering inflation), he will need a nest egg of at least 41 lacs or more (2.5 lacs / 0.06).

As you can see – Ramesh needs to accumulate around 40 lacs before he retires in order to be able to fund the Rs. 20,000 he will need every month after retiring.

Note: We haven’t considered any taxes he would have to pay on the income he will earn. We will come to it later.

The Big Problem – Inflation:

Now, remember that all these numbers are in today's rupees. Since we're talking about a time period spanning several decades in future, we'll need to consider the effects of inflation.

In India the current Inflation is running above the 10% mark but is has been around the 8% range over the past many years. So, for our calculation we are going to keep inflation at 8%.

In Ramesh’s case he needs 40 lacs as of todays money 25 years from now. So to include inflation, we will multiply that number by 1.08, 25 times.

Inflation Adjusted Value = 40 lacs * (1.08 ^ 25) = 273 lacs or 2.7 crores

As you can see, the nest egg of 2.7 crores is a much much higher number than the 40 lacs we saw just in the previous paragraph. . This is because of the effects of inflation, which causes purchasing power to erode over time and wage rates to increase each year. Twenty-five years from now, Ramesh won't be spending 5 lacs per year - he'll be spending 17 lacs per year

If we consider Inflation @ 6%, then the nest egg required will be only 1.71 crores. A 2% increase in inflation every year has increased the nest egg requirement by 1 crore.

To explain in other words, a 40 lac nest egg and a yearly budget of 5 lacs in todays rupees is the same as 2.7 crore nest egg and a yearly budget of 17 lacs 25 years from now, assuming that inflation will run amock at 8% per year for 25 years.

The key is that we assume that savings will grow at a real rate of return of 6% annually. The numbers would actually be growing at 14% annually, but inflation would be running at 8%, so the growth in purchasing power would actually be 6% per year.

You don't need to worry about this too much for your retirement plan, but just keep inflation in mind when you determine how much you want to save for your nest egg every month.

Saving 2000 rupees every month now might look like a breeze now, but 25 years from now, your grandson will probably have more pocket money per week than 2000 rupees.

As you continue with your retirement plan year after year, simply check the inflation number each year and revise your contributions accordingly. Provided you do this, you should be able to grow your capital at your estimated real rate of return and reach your target nest egg.

Other Factors:

There are other factors that might affect your retirement plan for example:

1. You may choose to work part-time and make a smaller amount of money (when compared to what you are earning now) and that could help you maintain a better standard of living
2. You may purchase a residential or commercial property and rent it out to generate a steady source of income every month
3. You may decide to retire a few years early. In that case you may have to increase your monthly contribution to your nest egg (while you are working) to accumulate the same amount you wanted to do so as per the original plan
4. Best of all – The Government may come up with a scheme similar to Social Security to help the millions of Indians as a whole…

Happy Retirement Folks!!!

Retirement Planning Series - Why Plan for Retirement?

Before we even begin discussing how to plan for a successful retirement, we need to understand why we need to plan our retirement in the first place. This may seem like a trivial question, but you might be surprised to learn that the key components of retirement planning run contrary to popular belief about the best way to save for the future.

The following are some key reasons as to why you need to plan for Retirement.

Note: All the details below are with respect to India unless stated otherwise.

Lack of Schemes Social Security

This is probably the most important reason. India is one of the fastest growing/developing nations but we still do not have a strong scheme that can be compared to the Social Security System in the United States.

If we had such a scheme, do you think thousands of old aged people languish in old-age homes and in orphanages without proper food or shelter or medical facilities?

Unfortunately, we can’t blame our government because they do not have the money or the means to provide retirement income to everyone. If you ask me why cant they, then ask the same question to people around you when you see them not paying taxes. In the United States, Social Security is available to everyone who paid their taxes promptly and paid their Social Security contribution on a timely basis. Do people around us do so? When people don't pay the government what is due (in terms of taxes) we can’t expect the government to pay us back when we are old. Isn’t it?

Coming back to topic, at the end of the day, we are forced to save up money for our own future and unless we save money for our retirement, we are going to find it extremely difficult to survive post our official retirement.

Unforeseen Medical Expenses

As we get older, our medical requirements become more significant. A man in his 60’s will have far more medical expenditure than someone in his 20’s or even 30’s. so, when we cross that age of 60 and need money for our medical expenses, where will we go? We would need a retirement corpus that we can dig into at such times.

If you are someone who says, India is a land of culture where parents are treated with utmost respect and our children will take care of us, go back to the previous paragraph and read the trivia. Do you think we will have thousands of old aged people suffering in orphanages and old-age homes if this was the case? They are suffering without proper medical care because they don't have the resources for it. We shouldn't be in such a state. Or do you want to be in such a state?

Old age typically brings medical problems and increased healthcare expenses. Without your own nest egg, living out your golden years in comfort while also covering your medical expenses may turn out to be a burden too large to bear - especially if your health (or that of your loved ones) starts to deteriorate.

However, to prevent any unforeseen illness from wiping out your retirement savings, you may want to consider obtaining medical insurance, to finance any health care needs that may arise.

Financial Security of our Children & Grand Children

Moving on to a more positive angle, let's consider your family and loved ones for a moment. Part of your retirement savings may help contribute to your children or grandchildren's lives, be it through financing their education, passing on a portion of your nest egg or simply keeping sentimental assets, such as land or real estate, within the family.

Without a well-planned retirement nest egg, you may be forced to liquidate your assets in order to cover your expenses during your retirement years. This could prevent you from leaving a financial legacy for your loved ones, or worse, cause you to become a financial burden on your family in your old age.

Wouldn't you want to fund your grandsons dream to study his Masters degree in the United States? How proud would you feel if you can do it?

Flexibility & Peace of Mind

As we know, life tends to throw unexpected bouncers every now and then. Unforeseen illnesses, the financial needs of your dependents are but a few of the factors at play.

Regardless of the challenges you may face post retirement, a sizeable retirement corpus could be just what the doctor ordered for a peaceful life post retirement!!!

Sneak Peak: The Next article in the Retirement Planning Series is going to be about how much money would you actually need to retire...

Happy Retirement Planning!!!

Friday, September 9, 2011

Has the Indian Stock Market Recovered Already?

This is a valid question that might come up in your mind if you are someone who follows the Indian stock market regularly and you have seen the market movement over the past few weeks.

Is it true? Has the recovery started?

Actually NO. Just don't jump into that bandwagon yet. Yes, it is true that the markets have moved upwards over the past few weeks but this is Temporary and may not last long.

The worldwide economic situation is still uncertain and it's difficult to accurately predict which way the markets will move.

So, what must we do now?

Don't lose faith in the markets but dot over-invest. Don't invest in penny stocks. Invest in solid companies, blue-chips and well managed mutual funds. Keep equity exposure at around 50-60% of your net new investments at Max and keep the rest in safe instruments

Happy Investing!!!!!
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