contemplator... agree with your explanation. Except for the part ROE decreases. ROE will not change since ROE = Net Income / Equity. The total net income and equity remains the same before and after bonus issues.

2. Bonus share

The company fork out the its treasury shares (shares that the company buy back from the stock market) and distribute them according to its shareholders by weightage of shares owned.

Regarding this, please read the Warren Buffett's letter to shareholders, the logic is all there. Thank you Warren.



Thinking back in Malaysia, although the shares buy back can be violated but the largest shareholders also receive collateral damage. Not as abusive as voracious ESOS.


I thought bonus shares were issued from retained earnings. Basically company must have sufficient reserves to issue bonus share. Treasury shares can be distributed as share dividends I believe. Company can only buy back max up to 10% of the issued shares. Anyway, the bottom line is the same, value of the company does not change.

http://www.businessdictionary.com/definition/bonus-issue.html

sunztzhe, I did not go further to value VS. To do so, will require a lot more work, understanding the industry cycles, looking at competitor valuations, estimating cashflows etc. The valuations today are not compelling enough for me to do that...

Let me try using trailing 12 months valuations....

VS (in RM thousands as of 31/1/15)
Market Cap = RM 864,800
Cash = RM 201,751
LT borrowings = RM 136,042
ST borrowings = RM 223,566
Minority interest (HKD 0.53* 56%*shares outstanding*0.47) = RM 246,506
EBIT (TTM) = RM 111,325
Enterprise value (EV) = RM 1,269,184
EV/EBIT = 11.4x


VS International Group (in RM thousands as of 31/1/15)
Cash = RM 73,248 (56% = RM41,109)
LT borrowings = RM 79,664 (56% = RM44,612)
ST borrowings = RM 84,327 (56% = RM 47,223)
EBIT (TTM) = RM 3,996 (56% = RM 2,238)


Adjusted VS Enterprise valuations (After De-consolidating 56% stake of cash, debts and EBIT that belongs to minority shareholders of VSIG from VS balance sheet)

Market Cap = RM 864,820
Cash = RM 160,732
LT Debts = RM 91,430
ST Debts = RM 176,343
EBIT (TTM) = RM 109,087
Minority interest = RM 0

EV (de-consolidated VSIG) = RM 971,861
EV/EBIT = 8.9x

My calculations are lower than KC but perhaps its because I m using TTM valuations. Would VS share price be higher or lower assuming it did not own a 44% stake in VSIG ? My take is that it would be higher as the valuations would look more attractive since VSIG from a sum of parts valuation only contributes about RM 19 mil to VS market cap.

After all investment is about future ma... forget about mean reversion... dont drive with the rear view mirror ! only amateurs do that...

Posted by Probability > May 20, 2015 03:02 PM | Report Abuse

If one can take the challenge and make V.S look like an 'NBI' ...that would be nice...anyone?

Why not ? Lets assume that FCF will grow by 50% to perpetuity based on rosy outlook by management ? Or lets make comparison with other highly overvalued companies, which trading at PE of 50x... Surely VS at 14x PE is a no brainer ?

:)

Nothing wrong with the simple valuation ratios done by KC, nothing misleading... its just a pre-screening to see if a stock warrants further analysis. Others who make a big deal out of this are just not getting the message of this article which is asking the question is VS a NBI ? Judging by the amount of qualitative and quantitative follow up analysis that is required, it really isnt a no brainer investment for me... haha

OK... but bottom line is how much is the difference in your valuation of VS with or without the minority interest consolidated...

Posted by shinebright > May 20, 2015 11:17 AM | Report Abuse

One must get certain facts right before starting on the calculations. VS Industry's financials are consolidated along with its 44%-owned subsidiary, VS International Group since FY13. VSIG has been loss making for quite a while and mind you, the high level of debt is actually at VSIG level. Hence, when consolidated, of course the cash flow and balance sheet are in depressed shape. It is NO ACCURATE to calculate the CF and items on Balance Sheet when it is consolidated judging from the fact that VS only owned 44% of VSIG. Please get the facts right before such posting.

Correction. VS owns >50% of VSIG (if less than 50% it wont be consolidated). Use enterprise valuations to evaluate to take into account the minority interest stake... I doubt it will be much more compelling

soojinhou, very well said... very well said...

Posted by ipomember > May 19, 2015 11:41 PM | Report Abuse
First you talk about FCF, please be realistic that not every industry has the luxury to enjoy FCF. The business nature of V.S is capital intensive, they need to reinvest to keep up the pace of the world's growing technology. The owner of the company knew it, those experts knew it, even the analyst who studies in detail also knew it.However, it is proven that the business is generating positive operating cash flow each year, which is more important figure to focus for me in this case.

I believe we can tolerate a few years of -ve FCF if the investment in capex would yield better returns in the future. But the business must eventually generate FCF. Otherwise it would just be a vicious cycle where the debts keep piling up and the company keeps making cash calls.



Posted by ipomember > May 19, 2015 11:56 PM | Report Abuse

futhermore, with current market cap, you might think it is expensive. However, if you are the expert and you have the vision to look beyond this, how much would you pay if you have the money to purchase the whole company? I am not saying that V.S worth morein future, but isn't it one of the factors of successful stock investment is be able to identify a value of a company while others cannot see at the moment? Cheers

Interesting you brought this up. FYI, when talking about take-overs, people seldom use the PE ratio or market cap. Someone who take over the company will need to take over the debts and minority interests in the company as well. Try calculating the EV/EBITDA or EV/EBIT for VS and compare it to its peers. You will see a whole different picture compared to PE ratio as what KC has mentioned.

ok the train is moving... lets hope it goes a bit further this time...

Turbo is moving towards the RM1.25 resistance with good volume... hopefully it will break out today...

go google yourself...

Thanks KC. Yes you are right. I just write it down here to remind myself

FCFF = CFFO + [Int expense x (1-tax rate)] - Capex

KC, would fcf/ev be a better metric ? Since free cashflow is derived from cashflow from operations, we should deduct the excess cash as it doesnt earn anything.

Should also look at price / cash flow and increasing debt to equity. Dividends hv to be paid from free cashflow. I would eliminate dividend companies tht hv poor cash flow and increasing debt to equity.

KC, maybe you should rename title to Cashflow is King instead of Cash is king... haha

Very true... very seldom you see analysts talking about cashflow or measuring a company from the health of its cashflow...

Icon this guy has written on a few NCAV candidates
http://klse.i3investor.com/blogs/netnets/blidx.jsp

Icon, NCAV is just a more conservative way of valuing the business as it assumes a liquidation scenario.

NCAV = Current assets - Total liabilities.

Assets like cash, inventories and receivables are easier to value and liquidate whereas plant and equipment may have some value, but these may have to be sold as fire-sale in distress situation. This method may be more applicable to industrial type companies where the bulk of the fixed assets are in plant and equipment which may not fetch market price. I make some exceptions if fixed assets consist of liquid assets like stakes in associates or valuable land not re-valued for ages.

As a rule of thumb when using this method, I will buy if price drops below 2/3 of NCAV. There are other factors need to consider in parallel as well to make sure its not a value trap. If you are interested to find out more about this strategy, there is a website that is dedicated to this investment style which you can refer to

http://www.netnethunter.com/about-net-net-hunter/

Cheers

just too cheap to ignore from a discount NCAV perspective...bought some today too..

Very strong momemntum... sadly i already sold 50 pct at 2.9 today...

Rosmah, the -ve cashflow is for 1 quarter only. Normally, you need to look at a few years average to get a good picture.

The profit you see in income statement is accounting earnings whereas CFFO is tracking the cash that is actually in the company's hand. In accrual acounting, the company may book the profit before actually receiving the cash, the sales actually go into account receivables.

More info here
http://www.aaii.com/journal/article/the-cash-flow-statement-tracing-the-sources-and-uses-of-cash?adv=yes

bsngpg, perhaps what KC is trying to illustrate is the perils of someone buying blindly into the cold eye portfolio from the reference date in 2012. As you said no one will know what is his cost until he announces it or it appears in the annual report. Nobody will also know when he takes profit or cuts loss. The purpose of this article is to analyze the lessons that can be learnt from those stocks that were winners and losers in the time period mentioned.

The main problem with deep value investing into cigar butts is that time is not your friend since you are looking to realize that last puff or whatever discount from liquidation. since the business doesnt grow and liquidation value stays constant, the longer it takes to reach fair value, the higher your opportunity cost. In the case of a good growing business it is theopposite since the management can compound capital over time and thus time becomes your friend. Despite this, I still prefer deep value investing, holding a large basket of them since they are easier to analyze, and most of these type of companies are already having all the negatives priced in, chances of achieving alpha is higher. With deep value buys it is better to demand at least a 30 pc margin of safety to cushion the risk on opportunity cost

matakuda, thanks for the additional info, Yes, Infineon is also one of the big players in semiconductors. I ve used their products in my product design as well

The write down of non-current assets held for sale is probably one off as its related to their factory sale to Latitud tree in Oct 2014. The write off basically removes the depreciation costs for the remaining lifespan of the PPE located in that factory which was sold. The RM 8 mil noncurrent asset held for sale in their balance sheet should be realized as extra-ordinary gain the coming quarter. At the same time, their depreciation cost may be lower moving forward.

how (just like i repeat this sentence before). You need to:

1. Review your capital allocation. Have you prepared for a crash that will happens tomorrow? Is your cash reserve enough? Do you have appropriate temperament control whereby some of your holdings will have their face value halved?

How much cash should one hold in the portfolio ? Sometimes we must set a strict limit on this, not try to venture into investments that are we do not fully understand for the sake of making the cash work harder.... I have problem in this area... simply cannot keep the cash available in times of crisis.

Just buy CIMBC50 ETF listed on Bursa, direct proxy to China H-shares

ckwan11d, yes your explanation makes sense. In other words, got to exercise caution when calculating the PE. Rather than use the weighted number of shares, should calculate out the number of shares post bonus issue in the valuation. In this case Kawan food PE is about 16x which is not cheap at all

matakuda, what is the catalyst for landmarks ? They have been loss making for 5 years in a row, with no positive cashflow either. Please enlighten me.

ckwan11d, yes I can see the share capital increase in the balance sheet per your calculation but I wonder why if I refer to page 13 of the Q4 report, it is reported that the weighted average number of shares is 126 mil shares only.

ks55. Wise words. A lot to learn from you.

ks55, thanks. I m not bullish on property sector right now. I do own some Plenitude which is a huge paper loss right now. Yes, there are a lot of undervalued property companies now cause market is discounting the future earnings.

Buy and hold strategy is sometimes the best even though I may be speaking based on hind sight. Sometimes moving around too much, keep searching for new opportunity, constantly analyzing, reduces the chances of out-performance. Simply sticking to this portfolio since 2013 would have yielded extraordinary returns (with minimal effort) despite the fact that there were many other candidates that also qualify as cheap and good between then and now.

Can someone explain why the number of shares in Q4 report only increase by 6m while there was a 2 for 1 bonus issue that went ex in Dec ?

Looking back at the threads from 2013, There were so many good and cheap stocks to buy back then. How I wish I was fully invested back then and kept holding those stocks till today

The Edge Weekly just did a piece on KESM this week. Nothing new in terms of info provided by the TA securities write up and mine but seems like this company is starting to surface....

matakuda, thanks for that information. I do agree that the barrier of entry for this business is the huge capex needs. I dont know of any listed pure burn in test provider in Malaysia aside from KESM. As I said if you look in terms of contract manufacturers like UNISEM may also provide such service but they also provide the manufacturing service so its not an apple to apple.

If looking internationally, there are 2 based on my google results, and they are pretty expensive. From Reuters

Avi-Tech Electronics (P/E=24.34x ROE:2.93%)
Trio-Tech International (TRT) (P/E=28.76x ROE=1.84%)

Been collecting slowly... net cash of 31sen limits the downside. its facilities division provides stable earnings while the environment division is doin better recently.. plus 11mp focus on green tech might be a theme play for AWC ?

I trypically look at free cashflow metrics. You can also look at price/fcf or fcf over invested capital.

Actually instead of increasing the withdrawal age from 55 to 60, EPF should customize the risk profile for all its investors and allocate its capital depending on the risk tolerance of its members. It doesnt make sense to put 80% of your capital to fix income if >50% of your members are in their 20s right ? Its an inefficient allocation of capital.

Cheap from earnings perspective.. but problem is the poor free cashflows. Quality of earnings is also poor with cashflow from operations consistently lower than net profit. No idea why since its business is retail related,

Posted by JT Yeo > Apr 23, 2015 09:40 AM | Report Abuse

Is anyone thinking with the ROE in single digit for more than 5 years. The company is growing it's way to bankruptcy?

I can see that you like good quality businesses that compound capital over time. Sadly, good quality businesses often dont come cheap. KESM is no such business. It is in a capex intensive and highly competitive industry. I am more of a deep value investor. I prefer buying beaten down stocks with strong balance sheet but not necessarily good efficiency. The point being is that mean reversion is a powerful thing and when earnings start improving from lousy to mediocre, there is chance to make profit. I am not looking to hold these type of stocks I forever.

I kind of disagree your assessment that its growing its way to bankruptcy. KESM has a very healthy balance sheet of RM1.25 per share, strong current ratio and it doesnt burn cash excessively (average FCF is positive over 3 years). The low ROE is due to its high cash holding in the balance sheet.

wintermelon, KESM is cheap for a reason. And you mentioned the correct points. My view is that its earnings are on upward trajectory, I m OK with the average ROIC for now (note the ROE is low because of the high cash holding), expecting it to improve further if their plants utilization improves in future.

The main catalysts are its acquistion of minority interest which will boost the EPS by 40% and its venture into automotive semiconductor testing which should show decent growth. P/E of 6x post acquisition is too cheap to ignore despite its mediocre ROE.

I did not run a comparison cause KESM is the only independent test house listed in Malaysia. There are others like INARI and UNISEM but these companies have other businesses also which may not make it apple to apple comparison. Furthermore, I m very sure these companies are already pretty expensive as they are widely followed.

chyokh if you think fundamental analysis can solve the problem of low returns, just look at icap.biz. Underperforming because fund manager thinks market is overvalued after performing lots of analysis. Has lots of cash now but "nothing to buy". Waiting for years for market to crash but market keeps going up. FA can also be suicidal in a market crash because it makes the investor overconfident that the stocks he/she have selected can withstand a market crash instead of cutting losses. A good example is icap.biz holding onto Parkson. Parkson went above $10 a few years ago but fund manager did not sell because he thinks it is still undervalued. Now Parkson is trading at 2.10. I rest my case.
26/04/2015 12:10

I think you mix up between true value investing vs market timers like Tan Teng Boo. A true value investor would have found many bargains to buy post 2008 financial crisis.

Icon bro, sorry I m just a half past six analyst here... but if given a P/E of 10x, then the fair value is about RM 1 assuming Polyplas can maintain similar earnings as FYE2014.

Excluding the impact from acquisition of Polyplas and with loss making subsidiaries disposed, Geshen @RM0.705 is looking at a P/E of 9.2x based on 2014 numbers.

Post acquisition of Polyplas, Judging from recent price movement, dilution from RCPS conversion looks very possible as the GeShen is way above RM 0.6 right now.
Even in a full dilution scenario, projected P/E for the enlarged GeShen will still be 6.94x which is still cheap given the expected improvement in efficiency by incorporating Polyplas. If we believe that Polyplas' 2014 results are one-off and not repeatable, PBT from Polyplas would have to fall by 40% to make the acquisition meaningless for Geshen (meaning no increase in EPS). I think that is quite unlikely as the E&E products are mostly exported to developed countries where the spending power is increasing due to weakening RM. Furthermore, Polyplas gross margins is set to improve further as its raw materials are mostly sourced locally while it derives >50% of its revenue from export markets.

I bought some CIMBC50 ETF earlier this year to get exposure to China mainland stocks. Their management fee is about 0.6%p.a and the performance of the ETF is better than active managed funds.

One of the problem with ETF is that there are limited number of units and there could be liquidity issues when you are trying to sell vs normal open ended fund. I know that there are more ETFs listed in US or Singapore with more exposure to other regions and also with lower operational costs. One of the areas I intend to explore to diversify out of Malaysia.