Safer Risk

Ever wonder why companies like (NFM) The National Flour Mills of Trinidad and Tobago share prices are so low, why our stock market is so illiquid, why share holders value are destroyed. Well the explanation is not so complex when you apply some simple risk analytics to the problem.

Looking at the chart above one would see that (NFM) shares over the period March 2010 to March 2013 has declined about 40% from .96 cents to .60 cents and is trading at a 52 week low. An analysis of the company credit risk shows that the company risk grade over the same period has not improved and remains between BB and CCC which by definition is classified as noninvestment grade. This means that the asset which is NFM is a non-investment or speculative grade asset. (See explanations of grades below) There are many other risk factors other than this structured analysis and this is just a snippet. Other risk factors include market risk, strategic risk and corporate governance risk. Market risk - That is, the price of wheat globally. The last time I went to a shareholders meeting of this company the management noted that it does not hedge wheat prices which is the key input cost of the company and as everyone knows the wheat market is extremely volatile. Volatility erodes returns risk 101. Strategic risk Since the government is the majority share holder, creating shareholders wealth may not be a primary objective for the company. The company may have overriding political objectives. Governance risk The company has a number of material restatements and prior period adjustments in its audited financial statements over the years. This shows that the company has internal governance issues. Restating financial accounts is essentially rewriting the financial history of a company and could be considered to some extent stock market manipulation.

Even though I am long this company, this is a company not to invest in as the management does very little to increase noncontrolling shareholders value. To increase share holder value the company would have to: Reduce its asset risk, especially input cost. Make the government a minority shareholder. The government does not have to be a majority shareholder to have control. Streamline management and directors. Management of companies in an efficient market are judged through the companys share price and when the share drops too low the company is bought over and the management replaced. Non-Investment Grade Explanation (also known as speculative-grade) BB: An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitments. B: An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments. CCC: An obligor rated 'CCC' is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments. CC: An obligor rated 'CC' is currently highly vulnerable. C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations R: An obligor rated 'R' is under regulatory supervision owing to its financial condition. During the pendency of the regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others. SD: has selectively defaulted on some obligations D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations