kcchongnz blog
Pintaras Jaya Vs Econ Piling kcchongnz
I just wrote an article on Dividend Discount Model using Pintaras Jaya as an example. It was never meant for peddling the stock of Pintaras Jaya, although I have invested in this stock for a very long time. The article as you can see, is to share my thoughts on how to value a stock based on dividends. In fact, I have written many articles to share here using Pintaras Jaya as an example.
I want to reiterate again here. I am just a small time retail investor. Yes, I did write a number of articles in i3investor this couple of years, 165 articles all together, in twenty months, or equivalent to one article on alternate day. In all these articles, I am just trying to share some fundamental knowledge about investing, which belong to the school of fundamental value investing.
Have I peddle any stock in my articles? No, I don’t because I have humility. I know no matter how much analysis I do, how much I know about a company, there is still a chance that I could be wrong, especially its future which is unknowable and unpredictable. And that is why I never try to be a hero and tell you which stock to buy, which stock to sell. I know there are better investors out there who can confidently tell you which stock to buy, which stock to sell. But sorry, I am not as good as them.
Hence for this comment below, I agree with it. I owe him nothing. I never say he owes me anything. If he is disappointed, I don’t think it is my problem.
[Posted by Newbhere > Oct 8, 2015 05:02 PM | Report Abuse 
Thanks KC for your sense of sarcasm and effort in replying to my simple request and suggestion. An ordinary investor wouldn't have bothered to write so many articles in I3 and even offer to educate interested people in value investing. I am disappointed. But let's move on, as neither of us have any real obligation to one another.]
Yes, let us move on. I would like to write something as requested by these people below here. Again, it is just sharing. We used to give different opinions about some companies and even criticize each other on the subject matter, not personally of course. We have different opinions, but I respect his sharing, and I think he values and respects my views too. Hopefully I am right.
[Posted by JN88 > Oct 6, 2015 10:14 PM | Report Abuse
Possible Econbhd like PTaRas in future?keke..
Posted by icon8888 > Oct 6, 2015 10:15 PM | Report Abuse
Ha ha I am just about to ask the same question
Got little bit of econpile also
Posted by icon8888 > Oct 6, 2015 10:22 PM | Report Abuse
my analysis shows that econpile is not a dividend stock, but it can double very soon]
The question is, which foundation company is a better company? And which company is a better investment? These companies are Pintaras Jaya, which I have written many articles on purely to share investing knowledge, and Econ Piling, a newly listed company doing exactly the same business.
The foundation construction industry
Both Pintaras and Econpile are engaged in heavy foundation works, specializing in design and build piling, retaining structures, and basement construction. There is another niche player in Sunway Construction which has a strong geotechnical division, besides a couple of foreign established players and a number of smaller but also capable individual players in this market. Pintaras is the longest public listed foundation company, and probably the most well-known player in the market now. Econpile has been in the market for a long time too, but just got public listed about a year ago. The pioneer in this industry, Pilecon Engineering, has gone into oblivion.
Being construction companies, foundation contractors are living in a dog-eat-dog world. Coupled with the difficulties in foundation engineering in bored piling which works are done underground and can’t be seen, and with different and difficult soil conditions of granite residual soil with boulders, limestone cavities, soft marine clay, it is the toughest kind of construction works. Throughout the years, I have seen many companies, even good companies have gone bust, and many of them just after the boom years when they overly committed, overly aggressive and overly-geared in their operations. Pintaras is one of the very few which still left standing, and standing tall with increasing earnings and positive free cash flows every year, even during the crisis, as I have described in my last article.
http://klse.i3investor.com/blogs/kcchongnz/83959.jsp
I can’t say much about Econpiling as its history of listing is just too short but I guess they are as competent. Let’s make a comparison of the performance of these two companies as requested.
The growth in revenue and net profit
Since listing, Econpiles revenue has increased by a modest 2.5% to RM429m for the financial year ended 30th June 2015. Its net profit, however, has increased by a whopping 50.3% to RM46.6m, a very good news for the shareholders of Econpiles. Pintaras revenue increased by 20% to RM243m for the year ended 30th June 2015. This revenue, however is just 43% that of Econpiles. Pintaras net profit, however, dropped by 4% compared to last year to RM51.9m. this was due to a particular challenging job they have done last year in Merdeka Square, I think.
But do you notice that even though Pintaras’s revenue is only 43% that of Econpiles, and its net profit has dropped, the net profit of Pintaras is still 11.4% higher than that of Econpiles?
That is the reason of the return on capitals, the topic I have been emphasizing all this while.
Many investors look at profit and profit growth as their only criterion in investing. They swear that is the only investing strategy that works. That is perfectly okay if that it always work for them, after all, everyone has his own strategy which works. I have my own way of looking at how a good company looks like, that is basing on the return on capital.
In his book, “the Warren Buffett Way”, Robert Hagstrom wrote this:
“Customarily, most investors measure annual company performance by looking at earnings per share (EPS). Did they increase over last year? Are they high enough to brag about? For his part, Buffett considers EPS a smokescreen. Most companies retain a portion of their previous year's earnings as a way of increasing their equity base, so he sees no reason to get excited about record EPS. There is nothing spectacular about a company that increases EPS by 10%, if at the same time, it is growing its equity base by 10%. That's no different, he explains, from putting money in a savings account and letting the interest accumulate and compound. Worse still, there are many companies borrow huge amount of money to improve EPS, but the marginal return is way below its borrowing costs.
The test of economic performance, he believes, is whether a company achieves a high earnings rate on equity capital ("without undue leverage, accounting gimmickry, etc."), not whether it has consistent gains in EPS. To measure a company's annual performance, Buffett prefers return on equity or ROE. -- The ratio of operating earnings to shareholders' equity.”
DuPont Analysis of Pintaras Vs Econpiles
Let us examine the dissection of ROE of the two companies using their latest financial statement of 2015 ended June 2015. For those who are interested in this topic, please refer to the link below:
http://klse.i3investor.com/blogs/kcchongnz/49969.jsp
Table 1 below shows how the return on assets, ROA, and return on equity,ROE of Pintaras was achieved versus that of Econpiles for the financial year ended June 2015.
Table 1: Dissection of ROE for Pintaras and Econpiles
It is clear from the above that Pintaras has a higher net profit margin twice that of Econpiles, whereas Econpiles has much more work, or higher asset turnover than Pintaras. Their equity multipliers are about the same. The emphasis of each company’s is different; Pintaras on margins, and Econpiles on turnover, and the end results are they both achieve about the same return on assets average of 13% (>10%), and return on equity average of about 15.5% (>12%). Both metrics are good for both companies. Bear in mind Pintaras has a lot of cash and Econpiles some debts in their balance sheet.
Construction is a tough industry. Foundation construction works is worse with numerous technical and resources problems. When there are a lot of works, you have the problems shortage of workers, supervisors, engineers. You often have the problems of shortage of materials, steel bars, concrete especially. You often meet foundation problems; hitting limestone cavities, boulders, collapsible bored holes, machines breakdown, temporary retaining structures give way and roads sink, nearby buildings settle and walls crack, slope collapse and all other kinds of headaches. Hence as a foundation contractor, I really prefer less work so that I can focus and manage well, but still earn good return because of the higher margins.
Many investors like profit and profit growth. They want their companies they invest in make a lot of earnings. They talk about it all the time, as I talk about return on capitals. They don’t care if this earnings may be smokescreen, such as growing receivable, or clients owe and dispute with them. They don’t mind the money the company makes has to be continuously put into the business by buying more plants and equipment. No cash never mind. Have to put in more money never mind, as long as the management tell them they make profit.
For me, like a broken record, and like usual, I want the company I invest in to earn cash, not just accounting profit. No money no talk. Isn’t this what most businessmen think? Am I the only exception? What is your preference, earn cash or accounting profit?
Cash flows
Table 2 below shows the cash flows of Pintaras Jaya Vs Econpiles
Table 2: Cash flows
Pintaras’s cash flows from operations is 35% above its net profit signifying the good quality of its earnings. It produces RM41m in free cash flow, FCF, in 2015, after spending RM29m in buying more plant and equipment. This FCF amounts to 17% of revenue and 24% of its invested capital. I have written many articles about the importance of cash flows. For those who are interested of what these number mean, please refer to the link below:
http://klse.i3investor.com/blogs/kcchongnz/83903.jsp
On the other hand, CFFO of Econpiles is way below its earnings at 59%. It has no FCF for 2015. Is this that bad for Econpiles? Not necessary in my opinion. A company just after its listing and on an expansion plan may need to buy machines for its projects on the pipeline, and that may be good. Piling and auxiliary machineries are expensive. Hopefully the capital expenses will yield further profit, and some FCF soon.
However, Pintaras has purchased much more machineries than Econpiles recently. It has spent RM63 million in capex the last two years, and yet it still has plenty of FCF. Like what has been described in the previous article, it has ample FCF every year, not only last year. For some investors, the past history has no relevance. But for me, history rhymes loud and clear, and it is the only thing which I can depend on confidently. With all the new machineries they have acquired, it is a matter of getting some jobs which is lacking now.
Conclusions
Both companies, Pintaras Jaya and Econpiles have done equally well in last year’s financial performance in terms of ROA and ROE. However the thing I like most is cash flow and a history of good performance. In this case, Pintaras way excel Econpiles. Hence my preference of which is a good company is quite clear.
However, a better company doesn’t mean is a better investment. It all depends on the price. That will be the next topic of discussion.
K C Chong
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Discussions
7 people like this. Showing 34 of 34 comments
KC,
Would you mind to share your views regarding the outlook/future profitability of Pintaras Jaya?
Do you think that Pintaras is able to maintain its FCF of RM 40+ million a year in the next few years?
If Pintaras FCF is halved to RM 20 million, should we put a new valuation on it?
2015-10-08 21:50
Mr. Chong, the subtitles have some mistake ~ DuPont Analysis of Pintaras Vs Kimlun.
I think it is better to use the ROIC instead of ROE as pintaras invested capital is way below the equity.
2015-10-08 22:04
I only have one question.. Both doing similar thing, you do piling, other ppl also doing piling, and they both no longer new company. Why one is giving 20% margin and another 10%?? I wonder why.
2015-10-08 22:06
It is like both selling cakes, one can earn rm10, another rm20, the size, the materials , the workman hours same! Still one return lower! Why?
It is like u teach 2 students, one understand it in 1day, another students need 10days! Why?
I think for this case, another company is purely INCOmpetent!!!
2015-10-08 22:08
KC,
I wish to add. Your breakdown of Pintaras cashflow and valuation is indeed commendable. It serves as a good education for aspiring investors. I must thank you on behalf of all learning fundamental investors.
However, one thing that is inherent in every investment analysis is the analysis of risk. To me, your educational article is incomplete. Although past financial performance is a solid base for predicting future cashflow, it is by no means the ultimate grail to precise valuation derivation.
For this, I recommend you to watch a video by Aswath Damodaran, a valuation professor from Stamford University about his recent investment in Vale that did not end well. The video link titled "No happy ending? My Vale Journey" is available here https://www.youtube.com/watch?v=O69Rnb_lESs
Damodaran laid out his investment thought process articulately in this video. One of the most striking mistake that Damodaran made throughout the whole investment process is his disregard or lack of awareness about Vale's future profitability and the risks surrounding the business. And throughout the video, viewers could see Damodaran revising his valuation of Vale with a lower and lower FCF.
KC, your analysis of Pintaras fundamental valuation is as good as flawless. But what I am interested is your thoughts about Pintaras business outlook as a whole and the dynamics of the construction business that are qualitative in nature.
2015-10-08 23:20
Thanks KC haha...good sharing ....a very good case study for value investor.....
2015-10-08 23:29
Nice new article and thanks, KC, for highlighting me in your new article.
First of all, I think you really have an issue reading and understanding people's comments. I am not sure whether it is genuine oversight or pure arrogance or ego at play.
Anyway, FYI, in my previous suggestion I said "On a side note, it would be great if we could have write-ups on Industry plays, cyclical plays, penny stock plays.". This was merely to compliment valuelurker's remark, which I am aware you were very defensive of as well.
Everyone in I3 has learn a lot from your articles, sharings, comments etc. But, you have a tendency to repeat over and over again on some topics and analysis. My only sincere wish or perhaps most reader’s as well is that we wish for you to write different topics which are of value to both the new and veteran investors (e.g refer to my above-mentioned suggestion. You can write anything else that you fancy).
Did I indicate in any way that you are a peddler? Did I request for you to give me a suggested stock to invest/trade?
What is the rational for my suggested topic? There are over 1,000 counters in Bursa, categorised into various industries (e.g O&G, Banking, plantation) and modes of investment (e.g warrants, iculs). A new investor or even some veterans are not aware of this. All they see or hear from are those individual counters highlighted in the news, I3, rumours and recommendations from friends and family etc. I thought perhaps an Educator or Investment Guru like yourself who has been in the market for quite a while could easily write such a topic, educating us of such matters including the risk involved and how they usually trade in Bursa (e.g due to seasonal/cyclical, GLC impact). You may not be an expert, but does it matter? What matters is that you take the trouble to research and share with us your thoughts in layman’s terms.
We acknowledge you as a teacher in value investing whether you like it or not. Regardless of whether you are a small time retail investor and whether you exercise humility or not, I believe you can do more to educate everyone out there. I hope you take this as a sign for you to step-up and grow yourself to the next level. Your students will grow along with you.
Of course you do have a choice to ignore me and my suggestion. Life needs to go on either way as well. But if you with your education, skills and experience can afford to make a difference now and for the future for the readers and for all aspiring valuer investors, then I would suggest not to turn a blind eye.
2015-10-09 01:05
Newb...just as neutral observer here...its very likely you have not understood KC well. And more importantly the fundamental he was teaching.
When u related EPS with DPS...it seems to me there is fundamental flaw in your understanding....despite saying KC had been repeating the same articles. I think...he had been teaching what he is good at...and I believe everyone should do just that...do what your best at.
Again...i think you should start with your understanding of DCF. I think without this super basic understanding...there is not point venturing to understand any other aspects of investments.
And trust me its not that simple....till u understand it...:)
2015-10-09 01:35
Posted by TylerDurden > Oct 8, 2015 09:50 PM | Report Abuse
KC,
Would you mind to share your views regarding the outlook/future profitability of Pintaras Jaya?
Do you think that Pintaras is able to maintain its FCF of RM 40+ million a year in the next few years?
If Pintaras FCF is halved to RM 20 million, should we put a new valuation on it?
Nobody can tell you that, not even Dr Chiew of Pintaras Jaya. Revenue will likely to drop the coming year but construction industry seems still to be okay, but not forever.
I am a small retail investor, and I have no resources to predict the future, or make a comprehensive study of the company, its risks which also concern the industry risks. That will answer your next question. Tons of research has shown that even analysts are very poor in predicting the future. They often even got the direction wrong. Hence I don't place emphasis on anyone who says he is good in predicting the future.
2015-10-09 05:11
Posted by Intelligent Investor > Oct 8, 2015 10:04 PM | Report Abuse
Mr. Chong, the subtitles have some mistake ~ DuPont Analysis of Pintaras Vs Kimlun.
I think it is better to use the ROIC instead of ROE as pintaras invested capital is way below the equity.
II, thanks for the correction. I have amended it in the article.
Yes, ROIC will be more appropriate but let us just keep it simple here.
2015-10-09 06:13
How come Pintaras can always get high margin jobs n these good customers r paying very fast too resulting in high CFFO, related party is it?? Kindly give d reasons Thank you.
2015-10-09 07:37
Newbhere,
You should know that KC style is bottom up and numbers driven. He places great emphasis on understanding what the numbers in the financial statements tell us before looking at the qualitative aspects. What he shares in the articles can easily be applied to most of the 1000 over companies on bursa to know if they are gems or germs. Dont expect him to understand every industry and its cycles, what you should do is take that knowledge and apply it yourself into businesses that you are familiar with as what KC has done with Pintaras.
There is a wealth of information if you take a look at all the articles posted before in his blog. There are even long term portfolios set up with the rational of owning the stocks in those portfolios. I suggest you start looking there.
2015-10-09 09:05
Thanks Probability and Noby for your kind comments. I appreciate them.
I have read 45 of KC’s recent articles and comments given by the readers and himself in each post. I plan to read the entire remainder.
With regards to my question on DDM and DCF, all I wanted was just a simple direction or hint if my understanding was correct. In substance they are both unique and different. In form, I believe they use the same formula. I am fine if KC chose not to reply or chose to point me to somewhere which can confirm my understanding. But he chose to be sarcastic about it, which was an absolute turn-off to me.
On my proposal, I don’t expect KC to be an expert in everything, but at least try to work out something to share based on his experience. I am well aware there are a lot of other visible or invisible veterans in I3. From their constructive comments and views, don’t you think everyone and including KC will be well rewarded?
Perhaps, it is a lot to ask from some simple request. But, as I said before, he has neither the obligation to respond in kind given his current circumstances.
I am not a writer, teacher or an educator. But, I am very hungry for knowledge and experience. I have read quite a number of books, formed discussion groups, signed up for courses, prepared templates and have been investing/trading. I acknowledge KC’s efforts in I3 and thank him for that. I would also like to thank those Sifu’s who gave their 2 cents comments on his post. I find a lot of their sharings were of great value based on their experience and wisdom.
I would like to conclude that a Teacher must evolve and grow as well. He may be comfortable repeating the same things in different topics, over and over again. But truly is that his only potential or can he be more?
2015-10-09 09:36
Posted by Newbhere > Oct 8, 2015 02:10 PM | Report Abuse
Hi KC, based on the formula and example you quoted above for DDM, am I right to say that if we substitute the Div amount with EPS, this would then equate to a DCF computation? Both DDM and DCF uses mostly the same data.
Posted by kcchongnz > Oct 8, 2015 03:15 PM | Report Abuse X
I started the article with this quote below which is self-explanatory.
“A stock dividend is something tangible-it is not earnings projection; it is something solid, in hand. A stock dividend is a true return on the investment. Everything else is hope and speculation.”
I tried to answer you with the quote above, that "A stock dividend is a true return on the investment. Everything else is hope and speculation.”
You can use anything for DCFA, whether it is free cash flows, owner's earnings, dividends, a hybrid FCF and a terminal earnings multiples etc. What I mean is EPS is not cash flow, unless it is converted to real "cash" because earnings often are hidden in additional working capital, and the need for capital expenses, and often little cash is left behind like what I have written here.
http://klse.i3investor.com/blogs/kcchongnz/83784.jsp
So EPS will not be what you will receive eventually, unlike dividends, FCF.
I thought you would understand what I meant by
"A stock dividend is a true return on the investment. Everything else is hope and speculation.”
But instead you came with this statement:
Posted by Newbhere > Oct 8, 2015 05:02 PM | Report Abuse
Thanks KC for your sense of sarcasm and effort in replying to my simple request and suggestion. An ordinary investor wouldn't have bothered to write so many articles in I3 and even offer to educate interested people in value investing. I am disappointed. But let's move on, as neither of us have any real obligation to one another.
Anyway, thanks Intelligent Investors and Noby for being very courteous and patient in explaining on my behalf. i am proud of you guys.
2015-10-09 10:24
KC, thanks for trying. As I said, I understand the difference clearly on what is cash and not. I was only focusing on the formula and the on the theoretical concept of what is possible. Anyway, you have already given me an indirect answer, thanks.
I am sure you have forgotten why I came out with the comment on the sarcastic part in the first place. So here’s a refresher.
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kcchongnz Posted by Newbhere > Oct 8, 2015 04:27 PM | Report Abuse
"KC, I understand what the articles says. But a straightforward reply on whether DPS can be replaced with EPS to change DDM to DCF wouldn't have been too difficult?"
No, that would not be difficult at all. But it has not much use to you since you don't need to think.
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I find your 2nd sentence really sarcastic and insulting. A totally different persona from the writer or educator I thought you to be. But it matters not now. Please carry on with your good work and ignore me. Cheers.
2015-10-09 11:32
Posted by paperplane2 > Oct 8, 2015 10:06 PM | Report Abuse
I only have one question.. Both doing similar thing, you do piling, other ppl also doing piling, and they both no longer new company. Why one is giving 20% margin and another 10%?? I wonder why.
Posted by paperplane2 > Oct 8, 2015 10:08 PM | Report Abuse
It is like both selling cakes, one can earn rm10, another rm20, the size, the materials , the workman hours same! Still one return lower! Why?
It is like u teach 2 students, one understand it in 1day, another students need 10days! Why?
I think for this case, another company is purely INCOmpetent!!!
No, I don't agree with you. It is just a preference for each company. Pintaras focus on getting higher margin for his jobs, whereas Econpile is looking for higher turnover. The end result is the same, a high return on equity. Pintaras has a better reputation in the market. So it can afford to choose and pick its jobs.
Of course I am not ruling out Pintaras may be more efficient in its works. However, in a capitalism market, it is difficult to persist as competition will crop in. As you can see Econpiles has been grabbing most of the jobs now, and Pintaras margin has decreased last year, but still at high margin.
2015-10-09 12:29
Mr KCChongnz, you could have been so much more. Yet you choose to stay at your level, instead of greatness. Television or radio, as well as a true audience for those who see value investing as the only method for equity investments. You could have contributed to the Malaysian investing community, and have your name mentioned in the same breath as Cold-Eye, TTB etc, perhaps even the start to a fund. Of course, for that to happen, requires a paradigm change, in thought process, in the way things are done, in one's business model. I am giving you this advice, for free, eventhough I would very much like to do it myself. The difference? I do not have the following and I am not here to reinvent the wheel. Don't limit yourself to small-time subscribers. Be better than the Gap.
2015-10-09 13:32
KC,
I must admit your answer on Pintaras' business outlook is underwhelming. It seems to me that you lack understanding of Pintaras business fundamentals. You dont even understand the overall industry. Anyway, one man's meat is another man's poison. I say good luck with your fundamental value investing.
2015-10-09 19:53
Yeah, regardless of what, I will say p8ntaras is better! Better margin, better profit, better book! At least they did not get sued by their clients!
Why they kena sued? Bad service, lcly I guess???
2015-10-09 21:02
The more icon said the more it shows how inc9nfident he is! Avoid icon stocks and econbhd all cost!
2015-10-09 21:11
Investment is a longterm commitment, don't buy if not plan to hold at least 10yrs...
2015-10-09 22:18
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Thanks KC for your study of econpile. I have a bit
I was just joking when i said econpile will double. I will be more than happy if it can reach 1.20
2015-10-08 21:34