heavyth

kccchongnz, is Hevea (5095) a value buy ? tq

2013-12-16 20:28

kcchongnz

I have made a comparison of some furniture companies about a month and a half ago here:

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/40360.jsp

Since then most of the furniture companies share prices have gone up considerably except of Lii Hen and Tafi.

Hevea at RM1.12 now is trading at a historic PE of 4.9, still very cheap indeed with this metric. As it has considerable debts, its enterprise value is 7.7 times ebit, not cheap any more, but 3.9 times ebitda, still cheap. Yes, Hevea has quite a bit of depreciation charges which is non cash.

Overall I would say Hevea is not expensive, but also not dirt cheap.

2013-12-17 11:34

sklyte

Kcchongnz,
I want to thank for your analysis on Ulicorp. The price has moved 6% today! I would have taken profit if not for your analysis. In fact I added more instead of taking profit. Thank you again. What do you think of Epmb? A spare parts manufacturing co. Very illiquid . Q to q result always profitable. Dividends 2%. Price 71cts. Kept the shares 2 years .
My average cost 80cts. Rto of Mex expressway did not go through. Thank you in advance.

2013-12-17 18:34

kcchongnz

EPMB a gem? What happen to the RTO of the Mex expressway?

Posted by sklyte > Dec 17, 2013 06:34 PM | Report Abuse
Kcchongnz,
I want to thank for your analysis on Ulicorp. The price has moved 6% today! I would have taken profit if not for your analysis. In fact I added more instead of taking profit. Thank you again. What do you think of Epmb? A spare parts manufacturing co. Very illiquid . Q to q result always profitable. Dividends 2%. Price 71cts. Kept the shares 2 years .
My average cost 80cts. Rto of Mex expressway did not go through. Thank you in advance.

You are lucky that Ulicorp finally moved a bit. Don't forget that you also received the 2 sen dividend which formed part of your total return.

I thought you have asked about this stock the third time already, haven't you? I was hoping someone else would respond to your query as I didn't know much about it.

When I assess if a stock is a gem, I will first look at it if it is a good company, then it is selling at a good price.

EPMB's revenue and earnings have been declining significantly for the last three years. That was why i think EPMB was trying to find other source of revenue for its business. The ttm revenue and earnings is 475m and 20m respectively, for a margin of just 4.1%. This is not very good. ROE and ROIC is about 6% and 8% respectively, certainly not good as the return is significantly less than the cost of capital. It's cash flow from operations is ok, but it requires a lot of money for capital expenses. Not much or even negative free cash flow. It has considerably high debt, with total debts of 0.7 times of equity. Hence from these I can't classify EPMB is a good company, no way.

At 71 sen, forward PE is about 6 and P/B very low at 0.4. However enterprise value is more than 10 times Ebit, not good especially with a high debt and little FCF company.

The only bright spot is its high dividend yield of more than 5%. But just wondering how long can this high dividend be sustained with little FCF and highly leveraged balance sheet.

Just my personal opinion.

2013-12-18 05:53

sklyte

Thanks Kcchongnz for the prompt analysis. The Rto of Mex Highway did not get the govt approval. Anyway the pricing was sky high! Epmb would be highly geared if they takeover Mex. thanks again.

2013-12-18 09:10

kcchongnz

Growth, growth and growth

Some people may wonder why I emphasize in value, value and value and not growth, growth and growth in investing. Is growth investing separable from value investing?

A firm with a higher growth will grow its earnings at an accelerated rate compared to a low growth firm. Assuming a firm A earns 10 sen a share a year now and it pays no dividend, with all its earnings reinvested into the business with the same return. Assuming its earnings grows at 10% a year. In 5 years time, its EPS will grow to 16 sen (10*(1+10%)^5). If the growth rate is 30%, EPS after 5 years will be 37 sen, more than double that of the growth at 10%. Table 1 below shows the EPS at different growth rate.

Table 1: Earnings growth rates
Earnings growth 5% 10% 15% 20% 30%
EPS in 5 years $0.13 $0.16 $0.20 $0.25 $0.37

So shouldn’t a stock with higher expected growth rate sell at a higher valuation? Of course it should, but that is only the first-level thinking. But one needs a second-level thinking; that is how much higher should it be? This still brings us to the concept of value investing, value, value and value; that “The value of a firm is the sum of expected future cash flows generated by the firm discounted to the present value”.

Assuming stock A above is selling at $1.00 and hence at a PE ratio of 10. Let’s say my required return investing in A is 10%. In 5 years time A’s EPS grows to 16 sen. Further assume that A is still selling at a PE of 10 in 5 years time, or $1.60. The present value of this future cash flow is also $1 (1.6/(1+10%)^5). So if you have bought the share at $1, you are paying a fair price. If you pay 1.50 for the stock now, or at a PE of 15, you are paying a high price; but you pay 50 sen for it, or at a PE of 5, you got a real bargain.

Now let us look at a stock B with present EPS of 10 sen also but a high expected growth rate of earnings of 20%. Its EPS will grow to 25 sen in 5 years time. Assuming you pay a higher price at $2 to buy B now, or a PE of 20 and after 5 years, it is still selling at a PE of 20, the price then will be $5.00 (20*0.25). If you discount this price at 10% back to the present value, it is $3.10, more than 50% above the price you pay. You got a great deal even if you pay a higher price of PE of 20 for a stock B growing at 20% for the next 5 years. Table 2 below shows the effect of growth rate and PE ratios on the fair prices of stocks.

Table 2: Effect of growth and PE ratio on stock prices
Earnings Growth PER
$1.00 5.0 10 15 20 25 30
5.0% $0.40 $0.79 $1.19 $1.58 $1.98 $2.38
10.0% $0.50 $1.00 $1.50 $2.00 $2.50 $3.00
15.0% $0.62 $1.25 $1.87 $2.50 $3.12 $3.75
20.0% $0.77 $1.55 $2.32 $3.09 $3.86 $4.64
25.0% $0.95 $1.89 $2.84 $3.79 $4.74 $5.68
30.0% $1.15 $2.31 $3.46 $4.61 $5.76 $6.92

We have seen that it is justified to pay a higher price for stock B which has a higher growth than A. If investors see the consistency of the growth in B, they may be willing to pay a higher valuation for it 5 years later. As shown from Table 2, if the rate of growth is maintained at 20%, and valuation expanded to a PE of 30, the present value of stock B is worth $4.64.

The problem is the “growth” we are talking about is the future expected growth, a forecast figure which is very difficult to predict. The growth estimate, especially those with very high rates often do not last long enough to justify the high PE. In the case of stock B, if the forecast growth rate is lower than expected, say at 10%, instead of 20%, and that the PE ratio contracted to 15 as a result, investors who have paid $2.00 initially, would have its present value dropped to $1.50 as shown in Table 2. Even analysts got their forecasts wrong most of the time. So how good is yours?

2013-12-22 07:52

bsngpg

Hi KC Chong:
it is now a beautiful morning in amazing land enjoying black coffee with no sugar. I have no special point to comment yet but will analyze your above comment after the good coffee.

There is one great news to share while expressing my thousand thanks to you is that I have preliminarily understood DCFA and known how to calculate DFCF(IV) of Presta and KFima by reverse engineering your works. There are still few points need further understanding. I will perform more reverse engineering on your works i.e. Homeritz to improve my understand on DCFA.

THOUSAND THANKS.

2013-12-22 09:12

kcchongnz

Posted by bsngpg > Dec 22, 2013 09:12 AM | Report Abuse

Hi KC Chong:

There is one great news to share while expressing my thousand thanks to you is that I have preliminarily understood DCFA and known how to calculate DFCF(IV) of Presta and KFima by reverse engineering your works. There are still few points need further understanding. I will perform more reverse engineering on your works i.e. Homeritz to improve my understand on DCFA.


That is indeed a very good news to me. See how many times I have said it is not that difficult to acquire investment knowledge. It is a matter of if you are willing to and have the time and perseverance.

With your experience and knowledge, and a few others here who have the same investing principle and mind set, we can share investment knowledge in the future.

2013-12-22 11:06

houseofordos

KC, I have just finished reading the Little Book That Builds Wealth by Pat Dorsey. In this book, the author explains how to identify economic moats in a company and how to avoid investing in companies with eroding moats. How much importance do you place on economic moats in your investment criteria. For example, how much premium are you willing to pay for wide moat company vs a narrow moat company ? Sometimes, it is important to review the qualitative aspects of the investment besides the number crunching to avoid getting ourselves into a value trap. What is your view on this aspect of investment ? Many thanks...

2013-12-22 15:42

kcchongnz

houseofordos,
When you keep on reading these investment books from proven successful investors, you have gained a lot of insights in investing and may have known more about value investing than me already. Good on you.

since you asked me about this, let me just try to put forward what I think.

Business economic moats are certainly important. Some industries can make money easier than others. For example banks which borrow money from depositors at low costs and lent to businesses with more than double the interest rate would definitely a business with moat. Notice that they also charge depositors all kind of fees in personal banking, selling financial products and earn a clean fee etc. In Malaysia, all well management banks make lots of money. It is a money generating industry.

Business services with light assets like well established Jobstreet, Prestariang etc also have wide moats. They earn high margins and ROE and have huge free cash flows.

As society becomes more affluent, health care services represent wide economic moats due to the demand of its services. Think of KPJ. There are also many other industries having wide economic moats which one should look into when investing.

On the other side, I view construction as not much of economic moat due to the competitions in this dog-eat-dog world. However, it doesn't mean we can't find one with good moat. For example, it has its niche in the foundation works. No developer who always want their foundation work to be completed would trust a new comer to complete their work in short time. They do not mind paying higher price to have a peace of mind that their project can be completed within the time.

Moat is not only judged qualitatively. It can be quantified with numbers too. For example, why could one say Pintaras because it is in construction, it has no moat when it's margins are in the 30s and ROE and ROIC also more than 30%?

Economic moat of a industry is hence important. But gain for an investment thesis to work, I believe it still have to fall back to number crunching; what is its value. and how much higher price should one pays.

2013-12-22 16:43

houseofordos

KC, thanks for your insights.... yes at the end of the day, we must see proof of these economic moats through the numbers... what u say makes perfect sense... also its very true that some businesses are just better and more profitable than others.... this is why sector like healthcare coomand much higher valuations than say industrial sector.....

2013-12-22 20:26