KC would you consider investment in associates to be invested capital ? How bout that also being part of capex in fcf calculation?

Not bad 18% returns on my warrants in less than 1 week...

just curious, is the RTO more or less confirmed ? From the news in FocusM looks like it will be completed by Q4 this year ? With a cash hoard of 33sen, RTO price will definitely need to be higher than current price wont it ?

PP to JhoLow... hahaha

thank you KC.

hng33, any idea how much treasury shares they have ? Already hit 10% ? If yes, cant hope for share buy back already. Cause last Feb I believe it was at 9.8% so already close to threshold.

KC what is your opinion on YTLPOWR-WB ? Gearing about 3x. Premium is only about 12% with 4 years to expiry. The good thing is that this company very aggressive in share buy back.

its been a good ride but the volume has just been too crazy today... cleared all and moving on !

impressive... 30 % return in 3 months... totally outperformed the market...

here we go...

break new high

KC, thanks for all your explanation. The idea is clearer to me now... Just to clarify then, how do you gauge if the 12.3% implied volatility is considered low ?

KC, I ran a similar exercise with PJDEV-WC with following conditions :-

Underlying price = RM1.45
Strike price = RM 1
Ex- ratio =1
Days to expiry = 2435
Annual volatility = 25.6%
Div yield = 3.4%

I was very surprised to find the black-schole intrinsic value for warrant to be only RM0.49 considering the significant time to expiry and only 15% premium. I found BSM valuation to be extremely sensitive to dividend yield input. A 0% DY assumption increased intrinsic value to RM0.74. Would PJDEV-WC still be a good investment in your opinion and why ?

KC, informative write up.

What is the purpose of looking at implied volatility instead of just premium to determine good entry price for warrant ? Would implied volatility of the option relative to the historical volatility provide any more useful information ? Hope you can enlighten. Thanks

sense maker, go to this link and screen for it. Sometimes not that accurate cause its based on TTM...
http://www.klsescreener.com/v2/

definitely oversold... excluding the deferred tax charge, its operating margins are still healthy. EBT was actually still higher than last year. Excess cash of RM0.25 per share, P/E =6.8x, EV/EBIT of only 3.3x... loaded up more today....

Haha are your "lines of credit" interest free :) If yes I would like to know how to get that too... :)

do you keep any portion in cash at all ? or all fully invested ? I believe asset allocation is just as important as diversification

http://www.bfm.my/breakfast-grille-low-chin-guan-adventa-bhd.html

KC, OCK does not seem like your kind of stock (value stock). No free cashflows and debt is increasing. It may be a growth story since the industry its in renewable energy and telco towers for LTE/4G is good business. Also transfer to main board is another catalyst. What is your investment thesis on OCK and fair value ?

It looks like your bigger cap picks have done better than the micro caps like CENBOND, KUCHAI etc. Might be good to diversify to some of these better known companies.

sense maker , thanks for the clarification.

Thanks for your insights, both KC and sense maker... no joke... RM 5 per share just for Carey Island land... that is seriously undervalued.... the only thing about this company is family tightly owned so expect the usual issues with transparency and minority interests....

KC, I think some companies just don't bother to revalue their land as revaluation gains are subject to tax ? I think in this case, it is safe to assume that the asset value is going to be a lot higher than the books due to the absence of revaluation for over 20 years...

KC, what is your opinion about A&M ? Looks very undervalued with lands and property not revalued for 20 over years...

I like this risk arbitrage.... bought before scr announced and after as well.. The problem is if scr doesnt go through and no new offer, prepare to sell fast or hold it long term... Look at Ireka after scr rejected.... better ready to offload some before egm to protect some profit...

KC what is your view on the persistent selling by the directors recently ?

I think warrant being in/out the money vs warrant premium/discount are 2 different terminologies.
http://www.investopedia.com/terms/w/warrantpremium.asp

Warrant premium =[(warrant price + exercise price - current share price) / current share price] * 100

Warrant is considered in the money if warrant exercise price < mother share price and out of money if vice versa.

I would be more concerned about warrant premium rather than in/out of money.

KC,

Was actually waiting for sense maker to clarify on that point of minority interests not being 0. My understanding is that minority interests only exists if there are non-100% controlled subsidiaries. But from the org chart of Latitud, LTIL was the only subsidiary which LTH did not fully control, so if LTH was buying up the remaining stake, then why is there still minority interest ?

The following adjustments made to KC's second attempt of valuation.
1. Cash holding adjusted to RM36.6mil based on sense makers comments on the total acquisition cost.
2. Debt maintained
3. Minority interest set to 0

"Table 2: Discount cash flow analysis of Latitude Tree
after acquring LTIH"

PV of FCFF 814000
Add cash 36644
Less debts -98567
PV of FCFE 752077
Less minority interest 0
FCF common shareholders 752077
Number of shares 97208
FCF per share 7.74
Margin of safety 68%

sense maker,

Thanks for explanation. But I m still a bit blurr about some of your comments

1) Consolidated Cash balance of LT had gone down by RM26.3m (117.7*22.38%), post privatisation of LTI. LT had paid this RM26.3m to MI of LTI. The SCR was done to move all subsidiaries from LTI to LT directly, to disburse the money to MI of LTI and to subsequently close LTI thereafter. The S$2.3m cash settlement was just to take care of the upward revision in offer price of LTI's privatisation.

So you re saying that the cashpile will only reduce by RM26.3m + SGD 2.3m instead of SGD48.7m ? That means the offer of SGD48.7m was referring to the entire stake of LTI and not just the 22.38% stake that LTH does not own ?


3) MI in LTI was 2.41*63.5m*22.38%= RM34.3m as at 31.12.13. MI will therefore go down from RM54.5m to RM20.2m post privatisation of LTI.

I thought that LTI was the only direct subsidiary of LTH that wasnt 100% controlled. In this case if LTH buys over remaining 22.38% stake, wont be minority interest for LTH be 0 ?

KC,
According to BursaD article, Latitude will only need to pay SGD2.3mil cash for the acquisition, the balance of SGD46.4mil will be settled by way of set-off against the capital due to be returned to Latitude Tree.

http://bursadummy.blogspot.com/2013/12/furniture-stocks-draw-attention.html

My understanding is that the SGD2.3mil is probably the goodwill as a result of the acquisition ? Overall, Latitud Tree cash holding will still deplete as what you explain ? I dont believe that the whole acquisition exercise will only cost SGD2.3 mil ? What is set off against capital ?

Nice write up... With HEVEA's debts reducing, its EV/EBIT is also becoming cheaper at 6.3 based FY2013 earnings. As earnings are mainly contributed by RTA section right now, I am excited on the potential of the particle board section which is growing very fast as debt gets pared down (This section is contributing lower now due to the USD denominated loan impact). Looking at the EBIT, it has more than doubled compared to 2012. I have retaken position in HEVEA.

KC,
4. Discount to market price
Could you elaborate the “discount” as shown in the table? What is the basis of valuation?
Market price Discount to NTA

Mr Koon, well written articles and sharing. You said you owned some MFCB. Know that you are an expert in terms of power plants. I also own some MFCB, what do you think about MFCB ? What are its prospects for growth considering that some of its concessions are expiring soon ?

One thing I can state is that in this market environment, its not easy to find a business with an earnings yield of 30% as what KC mentioned or selling at EV/EBIT < 3.3

"The revenue received in USD goes entirely toward paying off KfW Bank whilst Hevea gets to enjoy the sweet fruits of a weakening Ringgit. This is evidenced by the record of an unrealized gain in foreign exchange of RM 4.897m in FY2013 against a loss of RM 4.417m in FY2012"

Actually the RM4.9mil is an unrelaized forex loss FY2013 against a forex gain in FY2012 as stated in the notes of the 4Q report. With that said, it still looks very positve for the Particle board section since it was still able to record a significant improvement in its bottom line despite the forex loss. So as its loan gets paid back, this number will only compound higher assuming it can maintain its high margins and strong cashflow...

Just to add, based on an article in the Edge about 3 weeks back, MFCB has bought back about 8.2% of its total share base so far. Shy of 1.8% to upper 10% limit... Bonus issue / share dividend coming soon ?

KC, what is the likelihood that Kuchai will trade closer to its net asset value in the future ? For me, looking at these type of Graham net net there must be some catalyst that would unlock its value or else we could be stuck very long time holding them with significant opportunity cost. For example, is there any chance for hostile take over / activist shareholder to come in and make management change its ways ? What is likelihood of privatization/more dividends or is management just satisfied doing nothing ? Lets say the price will remain depressed for years, what can we fall back on, if there is a good dividend payment, at least shareholders will still get some return and feel some of the excess cash... With that said, holding a basket of graham net net reduces risk of under performance since some of these companies do get their values unlocked in the end... so diversification would help when dealing with Graham net net situations...

result out already meh ?

haiya... was away today.... didnt manage to sell some close low pulak

Thank you KC

KC, what is your view on MMODE recently announced Q4 results as you mention you are holding some ?

A few things :-
1. One off very high deferred tax charge caused net profit to plunge to only RM490k.
2. Operating margins also plunged to only 10% due to higher operational costs.
3. The only bright spot is its high net cash holding of RM0.25 per share due to its healthy cashflows.

Expecting a turn around soon.

1. Last Q losses before interest and tax already narrowed to -1M. Excluding forex losses, they would have posted a small positive EBIT. EBITDA has slowly recovered and doubled between Q3 2013 and Q3 2012.

2. Bulk of receivables are denominated in USD. Should bode well in current low RM vs USD environment

2. Cash flow from operations was positive for 9 months in 2013 compared to negative cashflow in 2012.

KC,

Thanks for your comments. I used DCF method in view of the high free cashflows generated by Hexza. Even assuming very low growth or no growth I still found a large margin of safety from investing in it.

"I do not consider EV because I do not have control over it as I am not acquiring the controling interest."

That 's the whole idea of valuation in my opinion. Acting like business owners. Think about how attractive the price to privatize Hexza is with its excess cash already close to share price. The owner would be able to privatize for almost free after deducting excess cash and minority interests.


"Take out the Accounts Receivable and most of Property Plant and Equipment, and the net asset backing will shrink dramatically."

You re assuming that Hexza will not be able to collect any receivables and its PPE is worthless... all this by just looking at account receivables being 75 days old ? A bit too far fetched in my opinion. Have you actually seen evidence of significant bad debts being written off in the cashflow to make this claim ? How about other companies in similar industry. I m interested to know as well. The fact that its CFFO is positive for all these years already tells me that this is quite unlikely ?

Anyway, its good to hear your opposite views to keep my optimism in check.

sense maker, why do you only look at market cap over FCF instead of enterprise value over FCF ? Think about it. Market cap only considers share price but Hexza has tons of excess cash and zero debt making its enterprise value very low.

Enterprise Value = Market Cap + Debt - Excess Cash

sensemaker
1. Earnings was flat or declining for past 5 years but FCF was still healthy and even expanding due to the dep
2. Dividend payments are supported by FCF. If business turns around, it can afford to pay more.
3. Hexza does not incur high capex for the past 5-6 years averaging about RM2-3mil. Eventually Hexza may need to replace its PPE, however as long as no major damaging acquisition is made, its cashflows should remain healthy.

Hexza is not a growth stock. It is a run down stock operating in a difficult environment, The investment thesis of investing in Hexza its limited downside due to its balance sheet strength and strong cash generation capabilities.

KC, nice article. If you have time, please go to HEXZA thread and comment on valuation I ve done for HEXZA using DCF method

http://klse.i3investor.com/servlets/stk/3298.jsp

Guys, I m also holding this stock, since the price is not moving much and the stock is not so hot yet, I d like to share my view on the intrinsic value of Hexza which I have studied.

kcchongnz has already done a most conservative valuation on Hexza using Graham net net as shown in this link, A Graham net net valuation is most suitable for a company that has a high amount of quality assets. Hexza has a whole load of that with its excess cash of RM0.65 per share.

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/40677.jsp

From his analysis, Hexza is worth at least RM0.81.


Hexza is no doubt in tough period with the chemical industry going through some consolidation However, take note the its depreciation charges is high (around RM5-6mil per year) relative to earnings. Since depreciation is a non-cash expense, Hexza actually generates very high amount of free cashflows from its business (15% of total revenue last year) even though EPS looks poor. If Hexza were to be valued based on PE ratio, its PE would be 15.5x whereas if we look at Hexza from enterprise value perspective its EV/EBIT ratio its only 2.3x based on closing price of RM 0.655. No wonder nobody is looking at this stock ! Everyone is so focused on PE ratio.

As Hexza is consistently generating high free cashflows in bad and good times, lets take a look at Hexza's valuation using a Discounted cash flow method :-


Table 6.1: Assumptions
Current stock price $0.66
Share outstanding (Mil) 200380
This year FCF $12,726
Next year's FCF (mil) $13,362
Growth for the next 5 and 10 years 5.0% 5%
Teminal growth rate, g 3.00%
Discount rate, R 15.0% 10.0%

PV of FCFF of core operations $124,000
Non-operating cash $129,290
Investment properties $0
Interest in associates $0
Debts $0
PV of FCFE $253,290
Less minority interest ($11,607) 4.6%
FCFE $241,683
Number of shares 200380
FCF per share $1.21 84% higher than = $0.66
MOS 46%

Using a FCF base of RM12.7 mil (average from 6 years since last year's FCF was exceptionally high), and using a discount rate of 15%, Hexza's valuation based on the assumption of 5% growth in FCF for the next 10 years and 3% thereafter. is RM1.21 which presents a 46% margin of safety.

What is the market expectation of Hexza's cashflow growth based on its current price. The fact that Hexza holds so much excess cash per share, Hexza's FCF would have to decline by a rate of 50% per year for the next 10 years to justify its share price at current levels. We should ask ourselves if this is a realistic scenario thus presenting how undervalued this stock really is.

This is the actual report which was omitted from the Public Invest Research article

"Undervalued. Having met our estimates last year and assuming the same for FY14F, KFima is deserving of a higher valuation. The group is trading at 6.8x PE multiple despite the group encompassing 5 core business segments. KFima has been trading on an uptrend post elections, but has lost its momentum only from softer market sentiment."

TP is RM2.45 not RM1.51.

"Besides, you have to keep in mind that SCIENTX is a larger company compared to TGUAN (RM1.1bil vs RM230mil). One should compare companies with similar sizes too. "

Using EV/EBIT solves this problem of comparing companies of different sizes but I found its a bit hard to do sum of parts EV/EBIT valuation as the annual report doesn't break down the assets detail enough for me to do that.

Anyway, KENANGA has already done an interesting write up on SCIENTX based on the SOP method based on PE and RNAV. Yes I would agree that at current PER=10x is not too expensive considering its moats and growth prospects. However, my concern is that the property division is been contributing a higher percentage of the EPS than manufacturing despite higher revenue of the latter. If property segment slows down (considering that FY13 has already been a record year), then the manufacturing division will need to compensate for the drop in earnings to justify the current PE.

KC, i have re-posted your reply in SCIENTX thread, perhaps we can continue the discussion there once I have done my own valuation...