Kc, very interesting comments.
1. For year 0, I think 32m is reasonable estimate cause the number you put into your analysis (38.5m) assumed 0 capex which is probably not the case.
2. I use a guideline of between 8% to 15% depending on company financial health
3. Yes the income statements show that the growth is good. In fact I have split up the revenue growth according to segment so that it is clearer. See below.

Revenue (m) 2012 2011 2010 2009 2008 2007 CAGR
PO milling 340.46 265.057 240.38 229.958 271.893 256.349 5.84%
SPV/Others 179.891 57.554 25.506 35.224 83.181 9.325 80.75%
Plantation 0 0 78.431 69.654 54.221 25.715


PBT (m) 2012 2011 2010 2009 2008 2007 CAGR
PO milling 76.299 47.237 38.351 35.403 33.388 34.482 17.22%
SPV / Others 15.392 2.833 4.915 4.637 5.963 -0.054 26.75%
Plantation 0 0 20.528 14.623 21.025 12.837

Contribution of each division to PBT (%)
2012 2011 2010 2009 2008 2007
PO milling 83.21 94.34 60.12 64.77 55.30 72.95
SPV / Others 16.79 5.66 7.70 8.48 9.88 0.00
Plantation 0.00 0.00 32.18 26.75 34.82 27.16


Question is how to relate that to cash flow ? Maybe use the FCF/Revenue or FCF/Net income ratios ?

Also interested to see how you include those excess cash or investments into the calculation.

Assuming the following
Current stock price = RM2.5
Shares outstanding =272mil
Latest free cashflow = 32m(take 6 years average)
Discount rate = 8%
Cash flow growth rate (year 1-3) =5%
Cash flow growth rate (year 4-10) =8% (plantation starts to generate income)

Total DFCF = 313.288m
Total discounted perpetuity value = 659.2m
Total equity value = 972.48m
Equity per share value = RM3.57
Margin of safety = 30%

Overall the result of the intrinsic value will be very sensitive to the discount rate...
A 10% discount rate instead of 8% will bring the intrinsic value to 2.48 which implies no margin of safety. So i think this model can be really inaccurate for companies that do not have a stable/mature business that generates FCF.

ok I get it, the RoR is sort of like a margin of safety which should be increased depending on the financial strength of the company. So this is where it becomes very subjective

For DCF method, i do not know how to project the growth. If you look at their FCF, its quite lumpy even though positive. So its not really stable, and I would say eventually the FCF growth estimate will be anybody's guess. I have the spreadsheet and I will post tonight. Lets see if the number comes close with the other valuation methods.

kc, thanks, have learnt a lot from your posts especially on cashflow analysis.
Regarding the formula, I was referring the RoR in your formula not the ROE average. I feel that RoR of 15% would justify the risk to invest in stocks.
As for the 5% growth in my EPS assumption, its based on the fact that planting activities for their newly acquired land in Indonesia will eat up their earnings.

Just out of curiosity, what is your estimate for intrinsic value of CBIP using the DCF method ?

yes i agree on that...
Btw, if I use your equation but change RoR to 15%, the intrinsic value comes up to RN2.3 only suggesting that this stock is over-valued at this point based on my RoR.

Now using Benjamin Graham's formula for intrinsic value

V* = [EPS * (8.5 + 2g) * 4.4] / Y
= [0.36 * 8.5 + 2*5% * 4.4 /4
= 3.41

Overall, the intrinsic value is around RM 3 - Rm3.5.

i think taking the average equity for the year = (beginning + end) /2 is fair.. i ve seen a lot of finance book propose to do it this way.

yes that's why i said 2011 and 2012 numbers are correct. I was referring to cashflow numbers for the earlier years (2007-2010) when plantation divisions was still part of continuing operations.

Thanks for that clarification on definition for capex. That really cleared things up for me.

I believe that the plantation contribution is 0 starting 2011 so the cash flow analysis makes sense for 2011 and 2012. But plantation division was contributing 20-30% to PBT numbers from 2007 - 2010. Based on cashflow statement, CFFO was derived from the PBT numbers, these PBT numbers included plantation earnings, hence it will be distorted from 2007 -2010. Hence, it makes more sense to separate cash flows from manuf and planatation during the early years, i dont know how to do it, maybe just discount the CFFO by a factor of the plantation contribution to earnings.

I think this company is hard to value using DCF method. The FCF is too volatile. DCF method seems more suitable for companies which are more stabe and able to pay out most of their earnings as dividens like BJTOTO, BAT, AMWAY etc.

If I use Warren Buffett's intrinsic value calculator with the following assumptions for 2013 :-
EPS = RM0.36 (assume a conservative 5% growth)
DPS = RM0.12 (30% of FY13 EPS)
Equity/share = RM1.88
CAGR (5y) of equity/share = 10% (conservative because the current year equity is starting from a high base due to the disposal gain)

Using 3% FD rate as a base
Intrinsic value = RM3.2
Current price = RM2.51
Margin of safety = 21%

The model doesnt take into account the dividend growth that will come with EPS growth so the margin of safety could be larger.

kc, thanks for the detailed sharing. A few questions :-
1. You assume capex for 2012 is 0 because the info is not clear ?
2. When you look at historical earnings, do you exclude plantation earnings since this wont be recurring for at least another 3 years-4years ? I notice that for 2010, you exclude plantation revenue but you included it for all the other years ?
3. When looking at historical FCF, is it fair to exclude capex from plantation activities like planting costs if you are taking CFFO that includes the earnings from plantations (again i notice that for 2010, you seem to exclude something)? Also if we are projecting into future, these planting costs will eat into the cashflow which is why I dont understand why we dont just take that whole chunk of cash used for investment and subtract off the CFFO rather than only subtracting PPE costs.

Long questions but appreciate your advise. Thanks.
house

kc, have you done the intrinsic value analysis on CBIP ? What's your thought ?

Lets discuss about financial health assessment, when we look at the finacials , a few ratios that come to mind is the D/E and the current ratio (ability to service the current liabilites). We generally look for companies that have 0 or less than 0.5 D/E as good financial health indicator. Yet, if you look in the market today, there are many blue chip counters like BAT, YTL which has very high D/E ratio but yet manage to gain institutional interest. What makes these counters still attractive even though their debt is sky high ?

KCChongz, thanks for the clarification on the capex. Yes I did include the full amount of cash used for investment there which is incorrect ? So my understanding is that we should exclude any other investments and only the capex used to sustain the business in FCF calculation ?

Btw, I am using Q4 report from bursa for the 2012 numbers. You need to scroll down the Acc tab to find the cashflow statement. The quarterly report is not very specific on the cashflow section for investment and it doesnt break down to amount used for PPE (Property plant and equipment)

Hi KC lets talk about CBIP. Note that below is compilation I made so there could be mistakes so lets compare and see

2012 2011 2010 2009 2008 2007
Revenue 520,351 322,611 344,317 331,468 409,295 289,819
NI 91,775 69,515 69733 42304 62,851 46,710
Equity 512,267 389,056 298,766 255,295 229,466 187,208
NTA 1.86 2.83 2.22 1.84 1.64 1.34
ROE 17.92 17.87 23.34 16.57 27.39 24.95
EPS* 34.23 25.93 51.96 29.79 44.61 33.84

2012 2011 2010 2009 2008 2007
CFFO 38,578 68,236 78,991 64,907 58,690 7,277
Capex* (51,671) (38,540) (60,804) (25,739)(159,165)(13,244)
FCF (13,093) 29,696 18,187 39,168 (100,475) (5,967)
FCF/Rev -2.52 9.20 5.28 11.82 -24.55 -2.06


* Excludes disposal gain

Segment revenue 2012 2011 2010 2009 2008 CAGR (%)
Palm oil milling 340,460 265,057 240,380 229,958 271,893 3.82
SPV/Others 179,891 57,554 25,506 35,224 83,181 13.72

Segment PBT 2012 2011 2010 2009 2008 CAGR (%)
Palm oil milling 76,299 47,237 38,351 35,403 33,388 14.77
SPV / Others 15,392 2,833 4,915 4,637 5,963 17.12

I find it hard to value using cash flow due to volatility caused by acquisitions. I m looking at segment based PBT and looks like their growth in PBT is pretty good for the 2 remaining divisions. Still havent figure out how to value this other than using a target P/E method with 1 year projection based on current unbilled sales.

So what's your view on the intrinsic value ? Can you still predict based on cash flow ? I m interested to know.

Alright guys... thanks for all the feedback....

ok i understand what it means now, so the ROE for common shareholders should be calculated excluding minority interests / non-controlling interests..

iafx, if I buy the stock, I am considered owner of the company right (even if its 0.0001%)? what is the difference between owner of the company and common share holder ?

kcchongz, actually i m an engineer like you except i m an electrical engineer who is looking for some extra income to supplement my low pay :-P

I initially thought CBIP is good as well until I look at their cashflow. Generally I m a bit reserved here until I can predict their future cash flow because estimates on planting cost for their newly acquired plantations range from 25m to 80m per annum depending on how aggresive which I think will result in -ve free cashflow for at least another 3 years till plantations start yielding judging from their CFFO average. I m not sure why they want to go upstream, perhaps they are looking for some stable recurring income.

Desmond, agree... FA is more like the initial filter to look for good stocks. I dont look specifically at TA but use volume spread analysis (VSA) to look for entry and exit points. Price and volume are 2 information that will not lie and allows you to understand the smart money movement.

iafx, can you elaborate the difference and give some example ? me beginner here.. thanks

Missed out some words "This company is mainly involved in palm oil milling equipment and retrofitting of special purpose vehicles."

KCchongz, have u looked at CBIP before ? This company is mainly involved in Analysts compare the PER of 7x (at Rm2.5) against plantation average of 9x to be cheap but I dont consider this to be plantation yet as they have yet to derive any earnings from plantation till 2015 after they sold their subs in Sarawak. The revenue and PBT growth of their palm oil mill and SPV business is good but these are contract based and not really recurring.

FCF analysis is difficult for this counter becuase of the long trail of acquisitions over the years (mainly buying plantation land) makes FCF lumpy. I m curious to find out how you value such companies. Is it possible to look at DFCF from a segmented perspective (separete DCF for each segment) ? Also is DFCF method of valuation really applicable to all companies and is this the only method you use for valuation ?

hey KC, thanks again for correcting me... i got it wrong initially. My statement came from reading dynaquest which said for most malaysian companies ROE tends to be less meaningful due to asset over valued. Means that low ROE doesnt mean less quality company since it could just be the assets in BS are inlfated. So need to look at profitability as well such as FCF, EPS and growth.

I have a general question, ROE is calculated by shareholder equity = Assets - Liabilities. Couldnt the ROE numbers look better if companties over-value their assets.

kcchongz, what is your opinion on CSCSteel ? Steel stocks are in a downtrend now and this company seems to be the most financially stable one among all the steel counters. At current price of RM1.2, no debts with cash/share of RM0.62. Margins have been squeezed in recent years due to influx steel from China.

This stock meets criteria 4 and 5 set by author of this thread.

3 sign of strength observed using tradeguider (I think 2 weeks back)

KCChongz, agree with you too. From a fundamental standpoint, I cannot find fault with it, own some shares myself since middle of last year. But what I feel is that while waiting for such gems to be discovered its always nice to have a decent dividend yield to guarantee some good yearly returns. Their dividend of 8cents this year translates to only 3-4% yield on my entry cost at RM1.8 which is not good enough. Perhaps at a lower price I will top up further or even sell on strength towards next resistance. Nice sharing.

My opinion is that ability to pay dividends depends of FCF as this is where the money comes from. If a company does not grow its FCF every year then the dividend payout is not sustainable in future. I can see this with a lot of high yielding dividend play companies which I researched from Dynaquest. Then again, I still feel that KFIMA should distribute more of their cashpile to shareholders as they can afford to do so. Looking at their capex, its quite low, and I dont see what they are planning to do with the money.

Hi KC, thanks for the advise. Do you apply DCF analysis for all your studies or are there other methods you deploy depending on stock ? For example , I read about absolute P/E method of valuation from the book Active value investing in range bound market. What's your opinion on that method (If you;ve read the book) ?

I agree on that part on the favaroble age profile but feel that upstream earnings this year may be challenged based on report I read from CIMB regarding the new expoert tax structure which tend to favor refiners (downstream) more. OSK's report put a lot of hype on SOP's downstream operations but I wonder how much downstream operations actually contributes to their bottom line. I cant find this information anywhere. Any idea ?

hi KCchongz, I know that DCF valuation method is suitable toderive intrinsic value for companies with stable postive cashflow every year. How would you value companies with volatile cashflow swinging between +ve and -ve (eg in early growth stages with a lot of acquisition etc in play) ? Appreciate your advise, I m looking at evergreen fibreboard as an example.

Hi kcchongz, what is your view on SOP ? Do you have any projections on the intrinsic value ?

Alright sifu, I guess my analysis is less accurate then, I m still learning. So do you have a EPS projection for 2013 ?

I m basing it on yearly ASP not just last quarter. Take a look at the historicals, CPO ASP from 2011 to 2012 drop by 8% only (3237 to 2946) but EPS drop from 66sen to 41sen (38% drop). You can check all the way back to 2009 before you accuse ppl of shooting. Anyway, I m not condemning this stock, just prefer a larger margin of safety. I m not sure why you are so defensive.

My estimate on the FY13 EPS is at best 30 sen based on assumption of CPO ASP at Rm2400/tonne derived from historical EPS of this stock vs CPO average selling price since 2009. This brings forward P/E of TDM to 11.13x at current price of RM3.34 which is not really cheap yet for mid cap plantation. Perhaps entry at around RM2.9 to RM3 is better. The healthcare division only contributes about 10% of its earnings so I think this stock is still largely a plantation counter. Any comments ?

Careful... noticed some weakness recently upthrusts... wide spread closing on the low