Instead of forecasting, we will analyse market expectation by using reverse DCF.

With the current EPS of $0.14-0.15 and market price of $5.06. Someone buying the stock at current price would expect the company to grow at a rate of 15% per annum. In another words, investors expect the company to double its revenue in about 5 years (72/15). Current revenue of $8+ bil so it will hit $16 bil. by 2022. Conservative or aggressive? You have to decide.

High is never about the movement of the price, but relative to its fundamental. Fooled by randomness

@wikioon You are correct, everything depends on market conditions and investment is inherently probabilistic not deterministic. So I am saying the probability of me making a satisfactory return at the given price of PMetal is low. I didn't say it never will or you will lose money for sure. I am just saying the odds is not in my favour. If you bought it at an extremely low price, you will have a great odds that no matter what happens it will still be a good investment. It is relative.

So as I point out to Bizfuneng, I prefer an outward-inward analysis because that reduce my bias. That is I start by looking other aluminium producers, similar or larger than PMetal and ask what makes PMetal so special that others cannot copy or replicate? If I can't identify then the normalised ROE should be similar to other producers, not what PMetal is telling you right now at 25%. Since other producers can barely hit 15% long-term. You have to identify normalised earnings. Latitude earnings in 2015 is not normal, inflated by forex as an example. But many use that as a base to extrapolate.

And back to your point, you are right everything depends on market condition. But in some situation odds will be in my favour. Say due to low commodity price, the commodity producer ASP is running below replacement cost. Even if I can't predict exactly when the trend will reverse, but I can forecast that it will not last. The situation has a good chance of normalising upward. I can still be wrong but my downside is somewhat protected from low market expectation.

So for point 1-3, they are all potential reasons that explain why PMetal has such a high ROE compare to competitors. But they are hypothesis to be tested. Electricity, transportation cost and economic of scale are not related to capex, those are savings, capex is the result of high fixed assets. To give an idea, PMetal 10 years accumulate depreciation is $1.5 bil +/- vs Earnings of $1.8 bil (Gurufocus). That is 85-90% of earnings going into capex for maintaining revenue (not including growing). They spent $4.8 bil in capex over 10 years for maintenance and growth.

@Bizfuneng see that's really good. You know more about the details than me. The way I would do it is I will pick 5-10 public listed (https://www.thebalance.com/the-10-biggest-aluminum-producers-2012-2339722) Alcoa comes to mind as one of the well run ones. Looks at their long-term ROIC/ROE level (most 10-15%) and start asking "Why is PMetal register 17-25% ROE/ROIC when others can't?" Drill into the details, what is the advantage, is it sustainable. Because the last thing you want is to think "PMetal is different than other" without knowing the specific. Once you have a rough idea of long-term ROIC, you would know on ballpark the cash flow it can generate and hence the valuation.

Again just to say since there seems to be many investors fanatical about the stocks they own. I have doubt earnings a satisfactory return at the current price point. But at a certain low enough price, considering if I dont have a better opportunities out there, I'll be loading up on PMetal. But not at this price.

@wikioon - You are right, before it reaches 'fair value'. So I think I partly explained my uneasiness on above reply to Happy123, especially when it come to what implies fair value, since everyone have access to the same information. Which means if the current price of $20 bil is considered 'undervalued', then that means the consensus is wrong (since the crowd haven't priced in everything yet), and anyone that willing to buy at this price needs to be right.

So some opinions on your analysis.
1. You are on point with this, it is driven by Al price. Then again, who can predict where will the Al price be 3, 5, 10 years from now? Paying 20x imply one is betting this trend will stay this course for at least 5 years or more. Because if this trend only lasted for a year, the extra cash flow generate from this brief boom of AL price will have a low chance to justify a 20x valuation.

2. During the great mining boom in 2004-2009, analysts predict China's appetite will keep iron ore price continue well into 2020. Bankers queued up to lend cheap credits to mining companies to open more mining sites and to shipping companies to build more bulk ships. At present, 6 years after the bust, shipping companies are still limping along with no recovery in sight. Bankers are not that different from investors, when things are going up they lend more money. The contrary is just as true, in general, when capital (debt or equity) flows into an industry, the ROE of the industry falls, and vice versa. But I must point out PMetal is smart (nothing to do with how good theyre) to ask for funding at time like this when credit is cheap and the share price is high.

3. Point 3 on inclusion as blue chip has no effect on fundamentals so I don't think that's worth a discussion.

4. Dividend. Yes if ROE continue at this high level, assume no eye-sore competitions who wants to take some share from PMetal and assume Al price will continue this trend - 2 things that I have many doubts - then yes they will pay out higher dividend. But do keep in mind. Pmetal operates in a heavy capex industry. How much they can pay dividend ultimately goes back to long-term ROE.

But overall these are healthy discussions of seeing things from multiple viewpoints.

@Happy123 - That's my qualms. 1. The ability to predict macroeconomics i.e oil, currency, commodities is at best as flipping coin. I haven't know many ppl can do that. And if he does, he will have a better success trading commodity futures i.e CPO futures. 2. Looking at AL price trend is easy, we extrapolate in linear term, hence the share price surge. But how many can answer if the current valuation has already incorporate the expectation of AL price? So these 2 things, the inability to predict future Al price and the challenge of differentiating between fundamental from market expectation means I have a lot of reservation paying at this price.

We don't need to travel far back to understand our inability to predict macroeconomic. Look at forex trend on furniture stocks in 2015. Many stocks run up 100-300% during the depreciation in MYR against USD, but guess what most of them plunged 50% or more thereafter despite little movement in MYR vs USD - which sits at MYR4.2=USD1, not far from the peak of MYR4.5. Remember those that bought FLBHD at $3 and Latitude at $9?

This shows two things. The sensationalism of stock market (in short-term). The market tend to magnify (exaggerate) the effect of macroeconomic. Riding the trend is fun as long you don't get caught when the music stops. This also shows the non-linearity of market. Al price can continue to trend up but there's many more things that can kill you than you would expected.

Why would that be a shock when one cannot sit down and discuss matter? I am yet to hear anything about your analysis on PMetal. I have listed out my reasons why I would not buy PMetal at this price (not any other price). I put it in simple words to avoid in case someone calling me arrogant or trying to be too intellect. Yes I acknowledge you are humble, you never listen to others when investing, so why is it so hard for me to hear your investment thesis? Is it too much to ask? Should we all just come in here and hurray hurray, is this realistic?

And @ telusdansuci, sounds like you are not willing to state your thesis. I am not sure why it is such a guarded secret but anyway. Oh yes, im shocked when telusdansuci says 'Masa itu emas , oleh itu jangan membuang masa dengan melayan yang bukan-bukan'. As if because masa itu emas, so everyone should pat yourself and congratulate one another. And again I am stating my view, without being arrogant, in case I getting called that again, you are welcome to tell me your viewpoint. I think if masa itu emas, then I think I would spend some money and buy 'Thinking, Fast and Slow' by Daniel Kahneman, What I learned losing a million dollar by Jim Paul, and spend more time reading than congratulating one another.

Hi Tianjin, since you are a genuine investor and understand ROE, so you surely understand a stock is a sell at one price and a buy at another price. Investment thesis should be tested and discussed and even more so when someone has a different viewpoint from you. So don't treat this like it is an insult to your family member; your favorite football club or the phone brand you are using. Because from the way you write things, you're personalizing and internalizing investment just like the way people associate themselves with their own religion. Insulting the religion is to insult the person. You are carrying yourself in dangerous territory.

2. Your net return is definitely commendable. But if you realize you are again 'personalizing' your investment by letting the movement of the share price influencing you when analyzing a company. You surely know you don't mix business fundamentals with market price. Mixing both is a recipe for psychological misjudgment. Hence my serious advice is to avoid checking daily share price. Especially since you call yourself genuine investor, which I presume long-term investor. We can give ourselves label however we like i.e value investor, genuine investor, conservative etc but the stock market judge you by the attitude you carry in the market not by labels. The danger is when a gambler think he is a speculator; a speculator think he is an investor.

3. I am in no way seeking for explanation. I am interested to understand other investors viewpoints. Unless you are here so others can support your ego, to suffer confirmation bias because everyone will agree with you, then you are walking a dangerous path again.

4. I lay out PMetal's historical figure, which is fact. So I will appreciate someone can layout thesis like economic of scale, aluminium price etc. You know, more intelligent discussion.

5. Happy123 is an example of a more sensible discussion. You are right, margin has gone up, especially this year ROE are highest in 10 years, so that's the point, what's the cause and how sustainable it is. My skepticism stem from 1) a sudden surge in return coming from margin expansion where there hasn't been any track record to back it up 2) PMetal in a commodity industry as a price taker (not giver) 3) The mercy of aluminium price which no one can possibly predict 4) A current valuation of $20 bil (EV) on an earnings of $500 mil? That feels a bit hard to swallow at 20x especially when margin is at all time high, unless this is the new normal. This is a bit of deva ju when Latitude is heading towards $10 and everyone is catching at the top of ROE/margin expansion.

I'm not saying PMetal will suffer the fate of Latitude hence the discussion right now for the benefits of everyone. I prefer intellectual honesty. Not willful ignorance.

Hi Bizfuneng, how have you been? What's their key points to support a higher valuation for PMetal?

Yes I am interested to know. Pmetal earning growth looks impressive from $20 mil to $480 mil in the span of 10 years but that tells us nothing. It's like saying I ran 20km yesterday. Certainly impressive, but how long did it take? 1 hour? 24 hour?

Over the past 10 years, Pmetal injected approx $5 bil capital into the business (equity + debts), so measured it this way against their earning growth, the incremental return over 10 years averaging 9%+ is nothing to shout about. Hence I curious to know why someone regard Pmetal has great management for generating 9% long-term return. Comparatively, there are companies that consistently generated 15-20% long-term return.

telusdansuci - Care to elaborate more how do you define 'very good teams'? Because the share price has run up? The earnings? Or something else. As my understanding, share price sometimes has little correlation with the capability of management

Part 1 sums up a point: The incremental gain of an additional piece of information is approaching zero, possibly negative value when factor in time loss, overconfidence and risk taking that are normally associated with investors that acquire a lot of information (which are 99% noise) compare to those that don't.

Superpanda, and of course, when something happens, and there's more things that can happen than we like to think, your friend will be the one that get killed. And I further believe your friend has 'cut-loss strategy', most likely a momentum/trend trader, which makes it even worse when the collapse comes. By the way, his $100K paper gain tells you nothing about how good he is. Many traders can do well for many years and blow up in one day, whether that day is 1987, 1997, 2000 or 2007 or the next one. Again, it is not about how well one does when wind is on his back; it is about how well one can prevent blow up when the tide goes out. Just as we see true character in adversity; not in glory.

But you are right, switching stocks because the one you hold has not moved for sometime is a silly mentality. Concentrated portfolio can be 'diversified', say if you own a conglomerate or a Berkshire that has dozens of unrelated business, while it can also go against you when there's a black swan, things you cannot foresee no matter how good the FA is, think Wells Fargo.

Diversified portfolio can be 'concentrated' if 20 stocks are involved in the same industry or all of them are in the same country that gets hit by a Black Swan.

I think instead of having more argument here. It is a better use of time if everyone pick up a set of Incerto by Nassim Taleb and start learning how market randomness fool you, how luck fool you into overconfidence, and how hindsight bias makes you think you can predict what's coming.

Superpanda, care to explain why 8-10 is considered 'a lot'?

Thanks probability. But good to learn your viewpoint as well. : )

I would regard taking into account the invisible cashflow of land to be more of a contextual theories than ignoring it, even under the context where lands are held by a property developer such as Tropicana with GDV 52 bil against $2.5 bil in EV since they can readily be deployed for productive use i.e building properties. No one ignore the value of the land, but it is about understanding the role the land plays as one of the assets that indirectly sustain the business operation and generate operation cash flow. Without the land, the business can still survive by placing it in another piece of land. Without the business, the land itself is just a piece of solid ground that does not generate any value unless being exploited for productive use. So the real disagreement here is taking into account the invisible cash flow and subject it to a 10% growth. That land would be larger than the whole economy in perpetuity.

If you want my practical answer, 10k/acre. Why should I anchor my valuation on the unknown? Yes I can touch the land, it is real, but unless I have a clue what it is worth in 20 years time to do a reliable DCF today, what is the meaning of doing it? Not to mention the growth rate of the land can be plucked from the skies to justify any present value. If I'm going to sell the entire plantation next month, yes I should value the land now, but not in 20 years when I sell it, and needless to say not in the case of the business running in perpetuity either. So Im not sure where we find the confidence to add another 50% extra value on Hengyuan when no one knows whether there's a bird, or if it will ever appear.

Raider if you want to say Aswath Damodaran (who live and breath DCF) and everyone else like KC that they either conveniently overlook or due to computation error, well, what can I add more to it.

So what you and Raider are saying is: You want to count the NPV of land, which technically can only be taken out in a liquidation, and add that with the value of the business right? But how on earth can both co-exist together? If you liquidate the whole business, then you will get the NPV of land, but you won't get all the cash flows after that. In contrast, if you keep the business as going concern, you will never get the NPV of land, which is included in the NPV of the business anyway.

You probably have done so many time DCF valuation yourself. Maybe far from calling it a gold standard, but it is a robust tool to value a stock. Or else Aswath Damodaran won't have use it in every lecture. So have you thought about why DCF valuation doesn't come with a label that says "Please add assets after you derive the final value"? We are not taking small matter here. If DCF valuation exclude assets, we are looking at a gap of 30-50% of miscalculation in intrinsic value. Why? Why everyone that does DCF only use the business cash flows?

Why when KC Chong does a DCF on MFCB (https://klse.i3investor.com/blogs/kcchongnz/47535.jsp) he never add 'operating assets" after PV of core operations? MFCB got assets in the name of power plants. This is just one example. You can pull out all the DCF he has ever done in i3, can you find out why he never adds any lands or assets into the final figure to derive a fair value? Think about your probability of being right and your probability of being wrong. Think about it.

@ probability I don't think I make it complicated. Plus I provide a link for more clarification in case my explanation is too complex. I never talk about terminal value either. All of these needs to be explained without COC, NPV, demands etc.

Now look at your statement "NPV of any asset is the sum of the discounted cash flow to take place in future during the time frame of the cash flow analysis still holds 100% true."

So you are right, NPV is the sum of future DCF, so when is the land generating cash flows? IF the land is worth $50 and the entire business is $100? How much is the whole business? $150? For real? If I sell the land for $50, I can't get the $100. If I keep the business at $100, I will never get the $50. This is the logic.

For everyone's reading pleasure, I will paste the comments from the link here. Keep this open. Get this until everyone is on the same page.

"You're valuing the assets in reference to their future expected cash flows. Those assets are valuable insofar as they provide a future benefit. That benefit is calculated and measured in currency. Valuing the assets + their respective cash flows, if it were possible to even do this at all (since the assets can only be valued by referring to their expected cash flows), would constitute double counting."

"The book values are irrelevant when it comes to the actual value of those assets; book values represent past economic conditions. In other words, those values no longer represent the future benefit stream of the underlying asset."

"a DCF using unlevered free cash flows will give you the enterprise value of the business, which already takes into account the value of *operational assets* - the value of a firm's core, operational assets is embedded in the cash flows that the business produces."

"The simple way to think about this - say I have a business which produces widgets and I have one machine which lasts forever, costs nothing to run, and produces $10 of widgets per year. At a 10% discount rate, using a perpetuity DCF, the business is worth $100. Suppose the machine cost $50 and I could sell it at any time for $50. That doesn't matter - the value of the business as a going concern (as an operating company) is still only $100, because we can't sell the machine and yet still collect $10 per year in cash flow. On the other hand, we could liquidate the business (sell the machine) and get $50, but in this case the business is worth more as a going concern. But the key principle is that adding the liquidation value of the firm's assets to your DCF output would be double counting those assets."

"The rule of thumb is - if you are including the income generation of the asset in your projected cash flows for the DCF, then you shouldn't add it (that would be double counting). If, on the other hand, it's an excess asset not accounted for your DCF, then it should be added to determine the value of the firm's securities."

@ probability - You call it invisible cash flow for a reason, land does not generate cash flows that can be TAKEN OUT by the owner no matter how many times the land value appreciates.

This is a 'Either Or' Logic.
The owner of the business either liquidate the whole business NOW to unlock the land value and lump sum cash flow. Doing this will terminate all future cash flow.

Or the owner continue the business as a going concern into the future and the invisible cash flow from land appreciation will never be taken out.

Read more: https://www.wallstreetoasis.com/forums/how-dcf-accounts-for-assets-value

Keep this thread open until we come to a clear understanding. This needs to be a win-win situation where we all learn.

Point three. When you analyze the profit or cash flows of a business, you have already factor in what is inside the balance sheets, the assets and everything. Going back and add them is double counting. That is not different from saying "I have a property that generate $24K in rental income (cash flows) a year, at 20x it should worth $500K, but I have not include the land, which should worth another $250K, therefore the whole property is worth $750K!". What kind of logic is this.

ROA return on assets form one of the pillars of Return on Equity ROE. When the land is valued at cost, ROA will be higher, same as ROE, compared to if it get revalued, the ROA and ROE will be lower. In other words, how much is the land actually worth is irrelevant as it has been reflected inside the ROE, which is not a hidden information from the public market. Point two.

Let's think about this. The indisputable truth on how much a business should worth is dependent on the cash flows it can generate over its entire lifetime. What produce those cash flows? Assets. Assets create value. Assets namely property, plants and equipment or PPE. So does revaluing the lands changes the cash flows? No. Those machinery would not suddenly spin faster after the land become more valuable. This is point one.

A few years ago someone wrote on i3 saying Public Bank should worth more than what it was selling back then given that all the lands they own under their branches have not been revalued for 20 years, perhaps more.

Leaving price aside, positive cash flow in any of the past year has little determining factor on the quality of management and business. A company with poor cash flow or FCF can be the result of poor management, or the dynamic of the industry or perhaps, the company reinvest large amount in capex and working capital with the expectation of generating great future return/cash flow. This is often the case for growing companies and possibly the case for cyclical industry i.e construction, property development

The market is forward looking as well. If market has reasonable expectation that a company with past 10 years negative cash flow can generate a large positive cash flow in future and over its entire lifetime, it will receive high valuation i.e Amazon, Uber or other venture capitalist businesses.

Profit and Cash flow will come to be more or less the same over the long term. And while cash flow is a shorthand to judge or value a business, what matters is the return on capital - that is how much can be generated for every dollar reinvested into the business. If a business can achieve high compounded return for the foreseeable future at the cost of negative cash flow, that is a great news.

FYI. 20% growth rate is not pretty conservative. It is ultra aggressive.

The more a person talks the more it reveals his ignorance.

Rule of thumb: When someone sees 100k as peanuts and thinks size of capital has anything to do with skills, you know he doesnt know a thing.

Probability, here are the 2 hypothesis:

1. Either you are right, the market has yet to catch up on the new reality and multiple expansion from current PE is waiting to happen, and there's an arbitrage opportunity or perhaps long-term opportunity

2. Or the market is right, that all future cash flows discounted back to present value is more or less equal to current valuation despite current massive cash flow generation.

Probability, yes it isn't hard to forecast the present crack-spread futures, just as it isn't hard to estimate present palm oil future vs palm oil production per qtr, or present MYR vs USD exchange rate vs total export of a company, but you are talking about present, while stock market is forward looking. Did anyone forecast today's crack spread 2 years ago?

Let's summarize this whole article into one sentence - Crack spread. If anyone can get that correct, you probability to make a good return is high. That's a big if. Suddenly everyone start getting quite intelligent with predicting macroeconomic.

Thanks for the reply chinesetea. My concern is not with your uncle or friends nor has anything to do with how good or bad they are (even if one of them is Warren Buffett). The key is you taking their recommendation without knowing their thought process.

“You’re not going to win by trying to get what the next tip is – what’s going to be good and what’s going to be bad. You’re definitely going to lose.” - Ray Dalio

My apology if I am being too straight. Buying based on recommendation from uncle and friends are bad investment process, regardless of how 'so far so good' the performance is. Do that long enough, you will not survive.

Investing is like sex, everyone is so sure of themselves that they are better than TTB.

'Every job looks easy when you're not the one doing it' - Jeff Immelt, GE Corp

i3 is a good place if you want a laugh, not if you are serious about investing.

Just to give a balanced view here. Getting the ICULS is far from a 'sure gain'. Yes theoretically you can pay $10.99 for ICULS, convert immediately and sell at market price, but if all the ICULS subscribers collectively think this way, the market price will hit $10.99 in no time. Perhaps the 'early queue sellers' managed to make some gains, but it is far from absolute that every seller will.

2nd, there's a 3 years time risk built into ICULS. If something causes the share price to fall below what the true value of the business is over the next 3 years, you will be forced to convert at a price lower than $10.99. And there's the opportunity cost that had you never subscribe ICULS and something happen to the market, you get to buy the mother share cheaper than ICULS price.

3rd, as I've posted previously I'll repost again. This is something to take into consideration.

https://mpra.ub.uni-muenchen.de/12764/1/MPRA_paper_12764.pdf

The key point of the paper is that - they found that most ICULS issued in Malaysia are either overpriced and underpriced, or 50/50. Buying underpriced ICULS by right should result in superior return however that's not the case.

And of course, I think everyone already mentioned, if you don't subscribe, dilution on your ownership is a sure thing.

Just to clarify. If I have 100 share = 200 ICULS, with conversion of RM10.99, how much are we paying for each ICULS?

I have no doubt it will get to 10b, just a matter of time. But present gain lower future return, hence I'm confused when people get excited it is going up.

Why is everyone so excited that the share price is going up? So you can subscribe ICULS at a high price?

I wish someone can tell me there's no difference between owning Public Bank shares at $1 or $1,000, since quality is all that matters

I think lots of comments here telling Karex what to do are totally non-sensible coming from misguided expectation

Karex- Where values come from

http://musingzebra.com/karex-where-value-comes-from/

you have to be careful when you are not thinking too much. A stock is of great value at one price, fair value at another, and expensive in yet another.

Please understand the dynamic of banking industry is different from MYEG. Banking is heavily regulated hence most banks will continue to do well now and in the future. MYEG has a monopoly, but its monopoly is entirely dependent on gov is the mother of all risk. It is like jumping out of the plane knowing your parachute only opens 99% of the time.

Alexchin, you are correct, Tenaga is priced at 10x because future growth is slow, whereas MYEG is considered 'high growth' hence priced at 39x. So anyone that buy at this price literally mean his expected return is the same as buying Tenaga 10x because MYEG growth has been priced in.

This is investing 101.

Why is it so fascinating that a stock can fall despite reporting profit? Given this valuation level, obviously the market is expecting way more than what MYEG has delivered, hence it dropped. Same goes for stocks that can go up after announcing losses. This is investing 101

Anyone wants to ask "Why sell down despite good profit"? I can answer you that

I don't disagree with what KYY wrote that business sense is important, that is part of fundamental analysis anyway. Financial analysis is a part of fundamental analysis and there's a valid reason for most investors to start from financial because that is the easiest place to start learning, before branching out to learn more about the industry and business as a whole.

And if financial analysis is not enough, suffice to say the golden rule (current Q eps has to be higher than previous Q eps), which is build on the entirety of financial analysis, mislead investors as well.