kiasutrader1,

Thanks you for your comment in this controversial topic. Your comment is one of the most constructive ones so far I have received.

Most of those who own V.S shares would have simply started personal attack on me as if I am here to try to pull down the share price of V.S; jealous, envy, talk cock etc. My view written is purely for sharing of knowledge purpose and so none of those previous accusation is true. I have no personal interest in V.S. I am not a promoter of whatever share, neither am I a crusader or whatever. I have no malice, for whatever I write and share is merely for learning purposes. So a statement like this is very amusing.

Posted by cjcj > Jun 3, 2015 11:29 AM | Report Abuse

this chongchong try hard to bring vs down yo, chongchong want to collect at cheaper price yo

I wrote my first article on V.S and published here on 19^th May 2015, merely two weeks ago. it share price was RM4.11. It was in fact about RM3.90 a day ago on 18^th May 2015. If closed at RM4.32 today. Thank God I didn’t bring the price down. Congrats to those who have been continuously making money investing and buying more in this stock. I am happy for you. Obviously I don’t have that power to bring down the share price of any stock, and I never dream I have that ability. I never want to bring down the share price of any stock either. I don’t have any benefit doing so, do I? No, I never intend to collect any V.S share. I don’t have that much money to buy so many stocks.

If you read carefully my use of discount cash flow analysis (DCFA) to try to get an intrinsic value for V.S, I have been trying to use more liberal assumptions, which may be wrong approach, to try to justify a higher intrinsic value for V.S in order to match its market price; the estimation of free cash flow, and the discount rate (more of this latter). So it is not a matter to pull the value down, by rather on the contrary. Nevertheless, your comment is most welcomed and I hope we can continue to discuss more online together with others so that we all can learn.

First of all at the start of my article, I have already said this article is controversial. Firstly there are many ways of doing valuations. The gentleman ks55 with his comment above already made big money buying V.S at RM1.30, just with the use of simple PE ratio and dividend yield. So do many people out there. Hence the complication of a valuation method and the size of return has not much correlation. Simplicity often works in investing.  I did use simple valuation techniques to compare companies in the same industries a number of times, including V.S. They were published in i3investor too.

I have no issue of your use of PE ratio of 11 to get a share price of RM5.537 for V.S, though I disagree with you. I do use PE as a quick and dirty way to get a ballpark number, but never as an absolute valuation technique. I have put forward my thought on why using PE of Globetronics for V.S may not be appropriate in my article below and you are most welcomed to comment on it, or criticize it.

http://klse.i3investor.com/blogs/kcchongnz/77720.jsp

In short, there is no compelling reason why V.S should command a PE ratio as Globetronics. Of course in the stock market, anything can happen. I know PE ratio is the most popular valuation technique use in the market. I would like to hear your argument why you think a PE of 11 is appropriate for V.S, why not 5, 15, or even 20. I will justify my discount rate shortly.

Posted by JT Yeo > Jun 3, 2015 10:32 AM | Report Abuse

“3. PE do not differentiate a company with net cash of 300mil or net debt of 300mil. Therefore using 'PE' and '11' the number to derive your fair value price will end up very wrong.”

I have also discussed at length the huge problem with the “E” in this ratio here:

http://klse.i3investor.com/blogs/kcchongnz/63417.jsp

Looking at the financials of V.S, it has a lot of the problems listed there, every year; high receivable, extremely high and increasing inventories way above growth in revenue, one-time-off gain, high debt, high capital expenses, no free cash flow etc. Please also note I have no problem of company taking up debt, or high debt, not at all. And being taking care of an overseas company during my career as an Engineer, where I was responsible for the bottom line, I do know what borrowings are; short-term debt, long-term debts, revolving funds etc.

It is about if the return on capital is higher than its costs, and the ability of paying interest without resorting to more issues of equity, or debt. Borrow RM1 or issue RM1 equity but return 3% is not a good corporate action. This I have illustrated with the comparison of the use of debt by Scientex and V.S respectively. Appended is a comment by a former.

Posted by bcllct > Jun 3, 2015 11:19 AM | Report Abuse

I like to add that for businesses than cannot expect to earn more than a market return of cost of capital, growth has no value at all! At best it is neutral, worse it can destroy shareholders value.
Therefore reasoning VS should fetch high multiples because of high growth is not correct.

“Why for example, did you use a discount factor of 10% which is exceptionally high given that bank deposit rates are hardly 4%. Even EPF gave only 6.75% which is quite high and may not be sustainable.”

Posted by JT Yeo > Jun 3, 2015 10:32 AM | Report Abuse

1. 10% discount rate is just a 'standard' way without going into too much details, but it isnt considered high. When you compare to bank rates or EPF rates, you have to factor in liquidity premium, risk premium etc. People willing to accept lower return in bank rates because of the 'safety'. For someone to accept equity investment, rates have to be higher to entice them.

Is a discount rate for V.S high? That is a relevant question.

Warren Buffet used to use the risk free rate as a discount rate, yeah, Warren Buffet also uses DCFA for intrinsic value estimation using owner’s earnings, something quite similar to free cash flow (FCF). I am not sure if he still uses that discount rate, which I doubt so as the risk free rate has been in a very low level for quite some time and using it could be a little too liberal, even though he is quite certain about future cash flows. One thing we must be clear why Warren Buffet does it. It is because when he acquire a company, he has all the resources and knows very well how to estimate the future cash flow of the company more precisely, and hence they are more certain. Secondly after valuing the company, he only buys if it is selling at a large discount to the IV computed, or a large margin of safety and hence this large MOS is what he bases on, not so much of the discount rate. Thirdly as he is a major shareholder, he is able to influence the mangers and the board of directors to act according to the interest of the shareholders.

I am no Buffett, and few can be Buffett. So to me, it is intuitive to have a premium above what the bank interest rate or the EPF rate as these fixed income return are more certain, or almost risk free. Investing in a company like V.S entails a lot more risk, even more risk than many other public listed companies because of the reasons I have mentioned. Hence to me a risk premium of 6% is actually very liberal. Note I have mentioned, I am trying to justify its price now, which is actually not a right thing to do, nevertheless. Personally, I would like to use a discount rate of at least 12% for V.S.

“Another point about increased gearing and expenditure on fixed assets which is affecting its cashflow. If the company is borrowing money for future income, there is no harm in doing that”

Of course your statement is relevant. My point is the moat of the business. If a company needs to consistently reinvest all its income to get going year after year, note reinvestment doesn’t just means investing in PPE but also working capitals, and no cash can be extracted from the business, I don’t know about you, if I am a business owner, I certainly am not happy about it. I don’t care how much the manager keeps on telling me how much I make, but show me the cash.

Posted by NOBY > Jun 3, 2015 08:58 AM | Report Abuse

“While I dislike the use of discounted cashflow valuation due to the myriad of assumptions that have to be made, I do not dispute the importance of free cashflow. A company with low ROE and with huge capital reinvestment needs is unlikely to be cash cow in the long term. “

Please do not mention about a company needs to borrow for business repeatedly like others. I have never disputed company using borrowings. To me, all interest bearing debts, whether short-term or long-term are debts, debts which need to be repaid. The company did seem to do very well recently in reducing the debt, no doubt about it.

“Just by comparing these figures, one can see that V S will do much better this year than last year. “
 

The statement above is true in every aspect; whether it is earnings, return on capital or cash flow. It even has good free cash flow now. In fact I was using this best FCF for the valuation exercise, not the past few year’s ones without FCF at all. This gentleman puts it quite aptly here.

Posted by Probability > Jun 3, 2015 02:44 PM | Report Abuse

“Really like this kind of discussion... Kiasutrader - give you a like! :)
For those debating that growth has no value addition when the ROIC is lesser than cost of of capital - WACC, i think the main point the others who are optimistic on V.S trying to tell is that:
1.) Investment / acquisition are taking place, and the revenue generated per unit invested capital may turn out to be higher than current in future.
2.) The Margin level of the future Sales revenue created due to the fresh investment / acquisition - PPE / human capital may start improving.
If thats true, then the future ROIC may be way way higher. Further investments of the same nature could only drive up the value..
Guess that clarifies where the DCF may fail, and the 'uncertain' room for optimism lies.”

“Past performance have no relevance to the future as business is dynamic not static”?

I have read this statement many times when people dispute what I have written basing on the financial statement. It is true, after all investing is about the future, not the past (hack, how many times I have said that?) But no relevance at all? No relevance in the financial statement which shows how the business has been performing? A company with business of low margin, low return on capital, no free cash flow in the past doesn’t matter? That it will turn into a high margin, high return on capital, high free cash flow that you are so sure of? I am not sure about that.

History doesn’t repeat but it does rhyme             Mark Twain

I am not a big time stock market player but I do have my “real” experience too. I look at financial statements as they tell me about the business. I look at them like what I have described, those important things I look at. I did miss investing in a couple of multi-baggers by too concern about their past performance but it is ok. I don’t need to make big money in so many stocks. Few can do that anyway. I was right for scores of them and avoided investing in many lemons which eventually turned out sour. For me in investing, it is not always catching the biggest thing, but some good ones, and avoiding all lemons, or potential lemons, if possible.

“Take care of the downside, the upside will take care of itself”

That is my motto in investing.

I also tend to believe what Warren Buffett says:

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Finally I append herewith one of the most useful tips in searching for stocks to invest in:

In 1992, Warren Buffett said that:

“Leaving question of price aside, the best business to own is one that over an extended period can employ large amounts of capital at very high rates of return. The worst company to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return.”

In conclusion, V.S has done much better in its latest performance, no doubt about it. Its share price has also increased by leaps and bounds, no doubt about it. However, my articles were written to share my opinions of some of the concerns about the business, and that is all. I thought it is good to present you with an opposing view. No, I don’t write article with the intention stated by someone below. Sorry to disappoint you.

Posted by cjcj > Jun 3, 2015 05:09 PM | Report Abuse

“chongchong is writing article tonight and tell us that VS will face sharp drop in share price tomorrow and close at 52w lowest.”

Thanks for your comments again. Finally this is food for thought for some of you.

“That’s because in the world of investing, being correct about something isn’t at all synonymous with being proved correct right away.”        Howard Marks

KC Chong (3^rd June 2015)

Posted by kiasutrader1 > Jun 3, 2015 04:25 AM | Report Abuse

Mr Chong, I always believed that whatever conclusions about whether to buy or sell a stock must be based on a rational approach. whether it be fundamental or technical.

I must congratulate you for your detailed work but as any corporate finance professional will admit, which you have also done, is to take assumptions of the growth rate etc. in your work to come to a fair value of V S.

That said, I am providing herein an alternative view rather than using DCF which, in a way is a lot less technical and easier to understand as to what is the possible value of V S going forward. Please note that it is not to refute your findings as we are employing different approaches to arrive at some conclusion, whether it is right or wrong, time will tell. My ego is not so big as to be right all the time, so I have no issues if I am wrong.

Firstly, I think you should pay particular attention to the discount rate which, if changed, can also change your conclusions. Why for example, did you use a discount factor of 10% which is exceptionally high given that bank deposit rates are hardly 4%. Even EPF gave only 6.75% which is quite high and may not be sustainable. I surmise that one should use a discount rate that represents an opportunity cost of capital for a normal individual investor, which should be more accurate as a measure of employment of one's capital to earn a return. Nevertheless, you are at liberty to use whatever rate you want.

Another point about increased gearing and expenditure on fixed assets which is affecting its cashflow. If the company is borrowing money for future income, there is no harm in doing that; but if it is borrowing for the sake of buying new non revenue generating assets like the latest Porsche or Mercedes, then there is definite harm to the company as a going concern.

A detailed analysis of the firm's balance sheet will show that its long term debt is falling as a result of timely repayments. A lot of its debt is short term in nature, given that it is in trading which requires trade lines and Overdrafts. Trade lines in particular are self liquidating and a very cost effective way of borrowing. Hence as long as the company continue to be prudent and do not have large amount of Bad Debts, there is no risk to the company's business at all. In this regard, there are no bad debts written off in the company's financials.

The cash in bank is also impressive at RM 201.75 Million @ 31 Jan 2015 compared to 6 months ago when it was only RM 123.464 Million. Note that the cash is more than enough to cover for its long term loans of about RM 135 Million.

In the latest unaudited results as at 31 Jan 2015, the following based on 12 months from 31 Jan 14 to 31 Jan 15 (some call this "rolling" = RM 93.8 M) are observed :

EPS on total number of shares of 205.3M = 0.4568
Current Price = 4.25 implying a current P/E of 9.30,

Just taking a P/E of 11 will equal to a share price of RM 5.02. I take the liberty of using 11 of course.

As at half year 31 Jan 15 :
The Revenue is RM 1.010 Billion (FYE 2014 12 months = RM 1.715 Billion)
Net Profit After Tax is RM 51.4 Million (FYE 2014 12 months = RM 46.67 Million)

Assuming a straight line basis, NPAT for FYE 2015 should be around RM 102.8 Million, If that is reached, its EPS will be 0.5034 and using a P/E of 11 = RM 5.537 per share

Just by comparing these figures, one can see that V S will do much better this year than last year.

Whether or not this is sustainable totally depends on their Managers' business acumen and market conditions going forward. This will be another study altogether as to whether the current Directors are up to the mark in employing their business strategies effectively. After all, at the end of the day, a business is only worth what it is, if it is run by able and capable Managers who are attuned the needs of the market place. Past performance have no relevance to the future as business is dynamic not static

Understandably, the analysis here is not akin to what you have proffered but it is a way in which we can come to a simple understanding of what the company should be trading at.

I welcome any comments from you and you can contact me at kiasutrader@gmail.c