Posted by Go4Share > Mar 27, 2014 01:03 AM | Report Abuse

Dear kcchongnz, will u consider placing yr valuable 'eggs' in success, tasco and westport?

I have commented on Success before as below. You were in that forum too. I have no problem in placing Tasco as a stock in my portfolio. It is just a matter of investing with a limited amount of resources, and the competing investment such as Freight Management. Westport is too new for me. No record to show except some future expectation which is not the way I invest.


Posted by kcchongnz > Dec 16, 2013 10:45 AM | Report Abuse X

Sure, success has been successful in increasing its revenue and earnings for the last few years. Operating efficiencies in ROE and ROIC are also good, comfortably above the cost of capital.

However, it is just my personal preference. I like FCF. If there is no free cash flow for a year or two because of growth, it is ok with me; but not consecutively for 4 years. Just personal.

Asset allocation or not is a very argument subject. I believe it is good to have an asset allocation; having different assets in equity, property, bond, cash, commodity.

My problem is I don't like to invest in things without convenient yield such as gold and other commodity, and their long-term return has not been attractive. I find property investment troublesome and the long term return may not be that attractive too. I have no worry of cash as I can have lines of credit which I can use, or not to use. If I am interested in fixed income type of investment, I have alternative in stocks which some have high dividend, besides having the opportunity of capital growth.

15 months have passed. What is the performance of the portfolio so far? Here is an analysis of their share price performance as shown in appended Table 1 below.

Table 1: 15 months performance of my portfolio
Date 21/01/2013 25/03/2014
Stock Name Ref Price Price now Dividend Gain % gain
Kfima 2.02 2.34 0.08 0.400 19.8%
Pintaras 1.56 3.08 0.125 1.645 105%
ECS 1.06 1.21 0.06 0.210 19.8%
Plenitude 1.85 2.55 0.06 0.760 41.1%
Jobstreest 1.20 2.44 0.06 1.300 108%
Pantech 0.78 0.89 0.07 0.180 23.1%
SKPRes 0.34 0.315 0.02 -0.005 -1.5%
NTPM 0.47 0.855 0.05 0.435 92.6%
Kimlun 1.25 1.57 0.05 0.370 29.6%
Prestariang 1.21 3.86 0.13 2.780 230%

Avearage 66.8%
FTSE Mid70 12294 13820 369 1895 15.4%
KLSE 1632 1837 49 254 15.6%

All 10 stocks in the portfolio, except for one SKPRes have positive total returns which varies from the lowest of 20% for ECS to 230% for Prestariang. The only poor performer, SKP Resources only lost about 1.5%. The other laggard, Kumpulan Fima, is now a gainer of 20%. The average return since 15 months ago improves to 67% from 53% three months ago. The broad KLSE market has a return of 15.5% in the same period. Hence the excess return of the portfolio has widened considerably to 51.3%.

This is for discussion purpose of the benefits of using fundamental investing strategies.

Yes, I still have Cenbond. I also have other money losing stocks such as Johore Tin, Zhulian, MMode etc and some big money losing call warrants too. But they are not in this portfolio formed on 1st August 2013 and published by Tan KW in i3. Most of the stocks in this portfolio have been sold.

The purpose of referring this portfolio is for the discussions in this topic, ie the benefits of diversification of a stock portfolio. It is not for boasting or whatnot, although I am very happy with the return.

bsngpg,
I used to say when everybody is making money in the stock market, and you don't, it is ok. The market is always there with its pendulum swing up and down.

I recommend you this GPS, "The most important thing illuminated" by Howard Marks.

bsngpg,
I have no idea of Matrix. I truly believe you are good enough to analyze yourself as shown by the metrics mentioned by you. You may also refer to the following link to confirm your analysis:

http://bursadummy.blogspot.co.nz/search/label/Matrix

This guy is good.

bsngpg,
Long time no hear. How are you?

The call for Prestariang is a fluke for me. It is hard to find undervalued stock any more now. My investment strategy from now on is more of preservation of capital rather than chasing for hot stocks.

That is right, houseofordos,
OCK is a growth story. The telco towers can be an explosive business for OCK. Moreover, it has recurring income from the solar power business. I bought it at less than 80 sen when the forward P/E ratio is in the low teens. So I did not pay too much for growth expectation though. Do not expect FCF for a young and growing company at its infancy.

The intrinsic value of a stock is the expected cash flow from the future, not its history, though history rhymes.

I did not do any vigorous analysis on it though, mainly leverage on some information from others. Just a small weight in the portfolio.

I always advocate diversification. have some growth stocks, some magic formula stocks, some value stocks, some net net stocks. And also beware of downside instead of just focus on the upside.

Dear shareholders of ifc88,

Prestariang share price exploded today with a gain of 42 sen from 3.47 to 3.89 at the close today. It was fortunate that we have sold off some under-performed stocks and loaded up Prestariang recently. It is now the biggest stock in our portfolio at 23%. The gain in this stock is now 41%.

We have now exceeded our target return of 10% a year when our fund was first set up exactly 4 months ago, as compared to the return of the broad market of just 2.2% during the same period. The 10% return was achieved in 4 months actually, not one year.

Our regret was we dabble in call warrants, the weapon of mass destruction as mentioned by Warren Buffet. The loss in the call warrants have shaved off 5% from our portfolio. If not we would have achieved much better result than the 10%.

KC

In investing, it pays to be skeptical. I am skeptical about all insiders' move, especially when I find London Biscuit does not worth that much.

There are many things we don't know about the corporate moves. We can be easily deceived. That is my sincere opinion.

The share price of Prestariang now at 3.74 has already convincingly exceeded my original intrinsic value estimate of 3.64 in such a short time, with an assumption of growth in free cash flow of 10% for the next 5 years as shown in this blog.

Does it mean that the fundamentals of Prestariang has changed that the FCF for next 5 years will grow at 15%, leading to an intrinsic value of 5.60?

University making money now? A lot of demand for the oil and gas courses? sound interesting.

Icon888,
First I must say you have provided a factual report on London Biscuits. Hope you don’t mind I be the first to give you a totally opposite view on it. It is one of the most sour lemons in my list below:

http://klse.i3investor.com/blogs/kcchongnz/45373.jsp

I have also written an article depicting why I think so as below:

http://klse.i3investor.com/blogs/kianweiaritcles/40683.jsp

Let me provide my comments point by point to your article.

(1) Strong Results in the Latest Quarter
Yes, LB’s revenue and profit increased by 36% and 23% to 166m and 10.8m respectively for the last two quarters. But is that considered as a breakout? I beg to differ here.

LB sold more the last two quarters, which is good, but their margins actually reduced. ROE improves though due to the higher sales but it is still a very low at 5.8% with the annualized profit. This is despite its high financial leverage of 1.9 times. This ROE is way below my personal requirement of at least 12% for a company like LB. Why does LB needs such a high asset, especially a fixed asset of 528m to make a net profit of just 22m a year?

If they have done so much better, why is that there no significant improvement in its cash, or rather debt position?

(2) In the Process of Being Re-rated ?
“there was evidence of active buying.”? Who buys? The fund managers? I would advise anybody investing in this fund to get out quick.

Or is it speculation and frying (again) by insiders? I would think more of this.

I do not deny that one can make big money speculating this share because there are always frying of this stock, for the benefits of the retail investors.

(3) Corporate Governance Issue ?
Reaping the benefits of high capital expenses now? Again why does LB needs so much capital expenses and earned such a meagre return? Is that a good capital allocation? Is the money spent maximizing shareholder value? Not that I can see.

It is hard to prove bad governance in court. But good hints are available from the actions and the results of the actions.

(4) Gearing
These are some of the ratios regarding its balance sheet:
Interest coverage 1.8 times << 3
Current ratio 0.6 << 1.5
Quick ratio 0.5 << 1.0
I see the big problems of its high borrowings, don’t you?

(5) Conclusion
To me LB is a bad company as explained above. However, a bad company can still be a good investment also, if the price is right. With an annualized EPS of 13 sen, P/E is only 6 at 79.5 sen now. Is it really cheap? Not until you consider its debts.

At 79.5 sen, its enterprise value is 428m. At an annualized EBIT of 37m, its earnings yield (ebit/EV) is a meagre 4.3%.

I won’t touch this stock with a long pole.

Posted by miketyu > Mar 23, 2014 09:24 AM | Report Abuse

Mr Kcchongz,

May I know how u decide whether the company has certain moat in the market? Whether is it profit margin of 15% or more?

Qualitative analysis of economic moat.
http://www.morningstar.com/invglossary/economic_moat.aspx

I often determine if a company has moat based on quantitative numbers such as margins, return of capitals, and cash flow etc.

A business having a gross margin of >40%, net profit margin > 20%, and higher than its peers generally have moats.

If ROE and ROIC consistently more than 20%, say, and higher than its peers must have moat.

A company consistently produces free cash flow more than 10% of revenue, > 10% of invested capital must have some kind of economic moat.

Posted by houseofordos > Mar 22, 2014 07:20 AM | Report Abuse

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


Don't know anything about A&M. There are too many property companies seemingly under-valued. So which is more "under-valued" than the others?

Looking at the latest balance sheet of A&M, my Graham net net estimate is approximately its market price of RM1.10. I am just basing on its balance sheet number and not knowing the "true' value of the land it holds. However, the value of "Land held for property development" is only 62m, or just 17 sen per share. How much more do you think it is worth?

Its earnings is ok at 8 or 9 sen a share, but noting to shout about.

Ben Graham's investing strategy has been mainly balance sheet investing. Seth Klarmen has only two major valuation techniques; ie earnings (or free cash flow) and the other non other than asset value. Earnings based valuation is exciting no doubt. But many proven good investors are asset based investors too.

Of course the market discount a value trap like Kuchai. That is why even though its cash or cash equivalent is RM2.17, it is only trading at RM1.20, or 45% discount. I will advise to buy Kuchai at RM2.17, not even RM1.80, or RM1.60 (less than 30% margin of safety).

It is about the fair value of discount. And also the risk reward relationship.

Below is the asset of Kuchai.

Assets Amount 000 Per share, RM
Cash 36065 0.30
Equity investment 153052 1.27
Market value of shares in Sg Bagan (26%) 50644 0.42
An investment property in Singapore 22201 0.18
Total assets 261962 2.17

The net asset value per share of RM2.17 is the present value of Kuchai, not the future value in 11.5 years time. All the assets are quality assets. The major portion of the asset is in the equity investment of about RM1.70 per share as shown, and it is about the market value, or likely even more now. Why would you discount it from 11.5 years ahead?

If $1000 in equity grows at a normal rate of 10% a year, and you discount it at 10%, what would be its present value? Isn’t that equal to $1000?
Of course you may argue equity value will not grow at that “normal” rate or may even contract? But how do you know?

Though one should view investing with caution, he shouldn't paint the worst picture.

22/3/2014

As on 22 march 2014, Pintaras has secured the jobs below which would contribute to the financial results ended June 30 2014.

Date Amount, m Commencement Period, months
22/04/2013 36 30/04/2013 13
15/04/2013 20 2/05/2013 12
7/10/2013 59 Nov-13 14
19/12/2013 24 Jan-14 12
3/03/2014 24 10/03/2014 6
12/03/2014 74 17/03/2014 12
Total 237

This amount of jobs certainly is the highest for Pintaras so far. Although the contract amount is small when compared to the jobs secured by other midsized construction firm, it is the bottom-line which is more important. Pintaras net profit margin has been consistent at more than 20% for years. It has in fact reached 30% last year, a feat hardly met by any other construction company.

Warren Buffet: Why Speculation is Like Pornography

To put it clearer, here’s how Buffett differentiates investing and speculation.

You know, it’s like pornography… the famous quote and all that. I look at it in terms of the intent of the person engaging in the transaction.

…An investment operation in my view is one where you look at the asset itself to determine your decision to lay our some money now to get some more money back later on. So you look to the apartment, house, you look to the stock, you look to the fame in terms of what that will produce. And you don’t really care whether there’s a quote under it at all. You are basically committing some funds now to get more funds later on therough the operation of the asset.

Speculation, I would define, as much more focused on the price action of the stock, particularly that you buy or the indexed future or something of the sort. Because you are not really, you are counting on, for whatever factors, could be quarterly earnings, could be up or it’s going to split or whatever it may be or increase the dividend, but you are not looking to the asset itself.

And I say the real test of how you, what you’re doing is whether you care whether the markets are open. When I buy a stock, I don’t care whether they close the stock market tomorrow or for a couple of years… Now if I care whether the stock market is open tomorrow then I say to some extent I’m speculating because I’m thinking about whether the price is going to go up tomorrow or now.


Read more: http://www.oldschoolvalue.com/blog/investing-perspective/bitcoin-speculation/#ixzz2wed8QNCq

A probabilistic estimate of SCR exercise price

Based on the information given above, we can carry out a probabilistic estimate of the price for the selective capital reduction exercise as shown in Table 2 below:

Table 2
Value based on Per share Probability Wt Price
Re-valued tangible asset 12.00 0% 0
Net asset backing 5.20 20% 1.04
Offer Price of SCR 3.90 60% 2.34
Present price 3.68 10% 0.37
Before announcement 3.00 10% 0.30
Expected outcome 100% 4.05

The likely outcome of the SCR is RM4.05 per share as shown in the above table. This offers a 10% upside in three months, or an annualized expected return of 30%.

Posted by kcchongnz > Mar 21, 2014 06:37 AM
What is my hope? Yeah it may just be hope for the time being.
1. Pay reasonable dividend or special dividend more than FD, like what they started to do last year. that is good enough for me.
2. Somebody else takes over the management of the company.
3. An eventual corporate exercise to unlock value, something like the SCR for Perak Corp.

Posted by sense maker > Mar 21, 2014 02:23 PM | Report Abuse
Kuchai, Sg Bagan and Kluang have cross-holding precisely to deter hostile take-over. So, 2 and 3 are remote. Dividend has improved a bit in the past year, but that is it. Their assets and investments are mainly tied with world economic cycle, which means when recession returns, their investment value will also decline in tandem.

For (2), may be a new breed of management, the children of the controlling shareholders, like Selangor Dredging before?

For (3), How long the major shareholders will continue like that? Will one day the majority decides to just liquidate the company? Will SC force their liquidation one day because of the prolong inactivity?

Well, as I have said, we only hope. Anyway investing is a long journey, and sometimes safety of capital is more important than high expectations which may not come true.

Yes, Kuchai’s major assets are tied to world economic cycle because most of its assets are in equity investment as shown in the table below. But equity also goes up as well as goes down. Let assume a maximum up or down of 30% within the next few years. The table below depict the maximum and minimum intrinsic value of Kuchai.

My variation to the Squeezing Theorem in mathematics shows that the value of Kuchai should be between RM2.70 and RM1.67. (just a joke)

The minimum value of Kuchai, assuming 30% downside (it may also be upside) is RM1.67, still substantially higher than its present market price of RM1.20.

Maximum and minimum value of Kuchai
Asset class Amount 000 Per share, RM Up Down Max Min
Hard Cash 33962 0.281 0.000 0.000 0.281 0.281
Equity investment 156788 1.299 0.390 -0.390 1.689 0.909
Share in Sg Bagan 50644 0.420 0.126 -0.126 0.545 0.294
Investment property 22243 0.184 0.000 0.000 0.184 0.184
Total assets 263637 2.184 0.516 -0.516 2.70 1.67

Posted by sense maker > Mar 20, 2014 11:35 PM | Report Abuse
“Value trap needs corporate moves to unlock. When did you last hear of any corporate schemes in say MUI Group's companies? The wait can be forever. In a bear market, these deep-value asset-play companies will also plunge with normal companies by the same %. So, buyers beware. “

The above comment is good reminder for people investing in value traps, many of them are trading way below its asset value like some Graham net net stocks. Thanks.

My comment is that if one wants to follow this strategy, he has to invest in a portfolio of net net stocks to avoid the idiosyncratic risk of an individual stock. This strategy is proven to be a viable one as shown in the research in the US market that:

“ From 2000 to 2012, net–net stocks earned an annualized return of 18.28% vs 1.57% for the S&P500 and 5.31% for the Russell2000.”

Below is posted by calvin for the similar positive alpha from net net stocks in Singapore. This is not so credible proof though as it is not a rigorous research work.

“Posted by calvintaneng > Mar 4, 2014 12:29 PM | Report Abuse
Ms Teh Hooi Ling CFA (Spore) once compiled 3 Groups of Shares Under An Experiment. I think a One Year Time Frame.

1) First Group - 30 Companies With The Lowest P/E in Spore SGX
2) Second Group - 30 Companies With The Highest Dividends
3) Third Group - 30 Companies With The Highest Net Net Assets.

Of the 3 - The Ones With The Highest Net Net Assets Came Out The Winner! "


At home I have analyzed some net net companies in Bursa within the past one year as shown in the table below. Here are the returns of those net net stock analyzed as at to date:

21/03/2014 Ref price Now Dividend Gain/loss return
Daiman 2.63 2.89 0.12 0.38 14%
KSL 2.02 2.1 0 0.08 4%
Plenitude 2.10 2.54 0.06 0.5 24%
Insas 0.630 0.925 0.01 0.305 48%
PMCorp 0.150 0.225 0.000 0.075 50%
Hexza* 0.635 0.695 0.050 0.11 17%
Prkcorp 2.820 3.670 0.000 0.85 30%
Kuchai 1.200 1.190 0.000 -0.01 -1%

Average 1.52 1.78 0.03 0.29 23%
KLSE 1627 1818 191 12%

With less than a year, all the net net stocks made double digits return as shown above, with the exception of Kuchai (-1%), and KSL (+4%). The average return is 23%, easily double the return of the broad market.

Yes, Kuchai underperformed badly against the market, even though it is much under-valued than others because of its negative enterprise value, i.e. its net cash or cash equivalent of more than RM2 is even higher than its share price.

When will the price converge to its value? I have no idea.
Will you earn a multi-baggers investing in Kuchai? No way, not even a double bagger!

But will its price plunges as much as other companies when the market crashed? I highly doubt so.

What is my hope? Yeah it may just be hope for the time being.
1. Pay reasonable dividend or special dividend more than FD, like what they started to do last year. that is good enough for me.
2. Somebody else takes over the management of the company.
3. An eventual corporate exercise to unlock value, something like the SCR for Perak Corp.


Invert, always invert; do not always think of the upside when investing. Also must think of the downside, but let the upside takes care of itself.

The three methods Klarman was talking about for estimating the value of the stock are:

1) Net Present Value Analysis
2) Liquidation value
3) Stock Market Value

What are the problems of using Price-earnings ratio (P/E) of method no. 3?

1) The E in the ratio is an accounting number. It can mean all sorts of things, and often not necessary cash.

2) Which E are you talking about? Last year's? Next year's? 5 years later? 10 years later? Average of last 5 years? Next 5 years?

3) Is E for the next few years the same? If not, how much it is expected to change?

4) Do you rate two companies doing similar business and with the same P/E, but one with high debts and the other without any the same?

5) What is the quality of E?
a) Is there any expected growth in this E?
b) Is net cash received a lot more or a lot less than E consistently?

"Let’s promise ourselves that we will never look at the PE multiple again as a serious tool for fundamental analysis."

The above statement is what is suggested in the article as appended below:

http://www.morningstar.in/posts/23225/5-problems-with-the-pe-ratio.aspx?utm_content=buffer60972&utm_medium=social&utm_source=plus.google.com&utm_campaign=buffer

That is why there is a "risk" infront of the "arbitrage". Question is what is the risk vs the reward.

Hibiscus "found" oil recently.

Hibiscus warrant. With 4 more months to expire and the precious time value, why is Hibiscus warrant trading at a 3 sen discount?

This type of dangerous scenario happens all the time.

Ken lim,
Just get it from the cash flow statement. In Pintaras case, I probably tweaked it a little to omit some minor items which I consider as non operational. No need to be exact in an artistic endeaviour.

Posted by ulutrader > Mar 17, 2014 11:46 PM | Report Abuse

I will agree with Lembusial,,,,Hevea-wb is definitely OUT OF MONEY and holders will have to pay a high premium. Comparethis with PJDEV-wc before the recent uptrend.



“A public-opinion poll is no substitute for thought.”
― Warren Buffett

Firebird2,

Pintaras has been doing very well with just the private jobs previously. It is worth much more than its present price just for that.

However, with the breakthrough into the GLC job, viz the 74m Warisan Merdeka job recently, Pintaras has risen up to another level. It is a huge job as far as foundation and basement works are concerned, only the most capable is trusted to be able to deliver.

From now on, Pintaras has a brighter future, in my opinion.

17/3/14
What are the returns of some “lemons” after another 2 and a half months?

It can briefly be summarized as below and as shown in the table below:

1. The average return of the portfolio improves marginally to minus 6.8% compared to minus 8.7% previously, versus the return of the benchmark FTSE Midcap70 of 12.1%. This means the portfolio underperformed the bench mark and alpha is negative at minus 18.9%, still is a huge under-performance.
2. I would expect a couple of high return stocks because basically these are all the “hot” stocks chased by many people. All of the 15 stocks under-performed the market except for one, KNM, with a whopping 67% 2 and a half months ago.
3. Instead there are 5 of them in double digit losses, all more than 23%. CSL has its negative return widened to 73%, and AsiaMedia stll high at minus 33%. Smartag’s loss widened to 47.2% from 25% 2 and a half months ago.
What has changed for the star performer KNM recently for its share price to spike up?
1. KNM will get big contracts and will make big money soon?
2. Will all KNM’s financial woes be all solved?
3. Is Borsig going to list in Singapore and KNM receives huge amount of money soon?
4. Is KNM management going to reward the shareholders soon with bonus issues, “free” warrants and with what?

Or is it more likely that that generous General Lee is frying up the share price of KNM so that all small shareholders of KNM will get rich?

No. Company Ref Price 17/03/2014 Gain/loss
1 Pmetal 2.520 2.270 -9.9%
2 GCB 1.800 1.380 -23.3%
3 Ivory 0.550 0.600 9.1%
4 PW 0.720 0.760 5.6%
5 Rsawit 0.850 0.845 -0.6%
6 LonBisc 0.680 0.705 3.7%
7 KNM 0.455 0.780 71.4%
8 MPCorp 0.550 0.410 -25.5%
9 Careplus 0.315 0.350 11.1%
10 CSL 0.750 0.205 -72.7%
11 AnComLB 0.185 0.190 2.7%
12 Smartag 0.180 0.095 -47.2%
13 Amedia 0.135 0.090 -33.3%
14 NovaMSC 0.065 0.065 0.0%
15 Hibiscus 1.900 2.020 6.3%

xx Average xxxx xxxx -6.8%
xx FTSE Mid70 12294 13785 12.1%

Warrant is the "underlying asset"?
Me confused in the "call" and "put" terminology? How does this come in?

Is warrant a call or a put option?
Or are you confused with premium with moneyness?

Moneyness in option, a very basic term.

http://www.theoptionsguide.com/moneyness.aspx

After two months from the date of this article, Kfima's share price rose by 16.3% to RM2.28 now from 1.96, while the KLSE dropped by 1.1% during the same period.

Kfima at RM2.28 now is still way below its intrinsic value, in my truthful opinion.

With the underlying share at 1.26 now, Hevea warrant B, at a conversion price of RM1.00 is certainly in-the-money now. However, at an implied volatility of 41%, it is not necessary cheap.

The premium is at 32% when warrant is at 66 sen. This premium is not necessary low or high, but more depends on implied volatility Vs historical volatility of the underlying share.

Posted by matrix6050 > Mar 17, 2014 10:03 AM | Report Abuse

KC: You mentioned that you've sold of Kuchai, Cenbond and Homeriz, may I know what is the reason that you sold off these stocks? For example Cenbond and Kuchai are in your stock pick of 2014, is it because of the financial result dropping for example Cenbond. I hope you can help me to understand of the reasoning behind. Thank you very much.

If you read my letter properly, it is choices we have to make with limited resources. There is absolutely nothing wrong with those stocks which I sold, in my sincere opinion. There are still in my personal portfolio. One has to answer some questions to make choices:

1) Shall we be safe, or take a little more risks in hope of better expected gain?
2) Shall we be more concentrated in the portfolio, or more diversified?
3) Do you want more volatility or less, but with calculated risk?
4) Should we focus on earnings potential, or safety of capital?
5) etc.

Letter to the shareholders of IFC88 dated 15th March 2014

Since we first started this investment club 16 weeks ago, the foreign funds continue to exit from Bursa and most emerging markets in droves. However, with the support of the local institutions and retail investors, the KLCI index holds firm and closed 0.6% from 1794 then to 1805 at the close on 14th March 2014. Your fund did substantially better with a total return of 5.6%. The annualized absolute return would be around 17%. This is certainly a satisfactory one in my opinion. Your fund is fully invested at the moment.

As requested by some “senior” partners to reduce the number of stocks in the portfolio, I have sold off some stocks such as Homeritz, Cenbond and Kuchai, all with some profit, and loaded up a few major stocks; namely Prestariang, Kumpulan Fima, Padini and Pintaras Jaya. These major stocks did not disappoint us and have risen quite substantial during the last one month as shown in the attached Excel sheet. Another stock, OCK, did well too with 13% rise for the past two weeks. MMode disappoints with the slide of its share price after a poor quarterly result.

The call warrants, Maybank C2, Parkson Ck, and WCT CM continues to fall. The percentage losses are relatively high, average more than 40%. Although they were purchased at low implied volatility and with good gearing, it worked against us when the foreign funds retreated from Bursa and hence adversely affected the share prices of the underlying stocks. As a result, we were cut by the sharp end of the knife. Fortunately we just placed a small amount of our fund in those call warrants. The only call warrant which profit has been realized at 33% is AirAsia C8 when we sold it earlier. We added a company warrant, MRCB Wa, in anticipation of some good news in unlocking of its value within the next quarter.

I am comfortable with the diversified 7 major stocks, excluding call warrants, in our portfolio as they were selected basing on the strategy of investing in good companies at attractive prices. Please refer to my write-up of this strategy in the appended links below:

http://klse.i3investor.com/blogs/kcchongnz/45693.jsp
http://klse.i3investor.com/blogs/kcchongnz/46264.jsp
http://klse.i3investor.com/blogs/kcchongnz/46408.jsp

Attached is your latest investment account as at 16/3/2014. I wish you good health.

KC Chong in Auckland (16/3/14)

houseofordos,
According to sense maker, the MI of LT is reduced, not zero now. You got to figure out how much in percentage term is earnings attributed to MI and hence the intrinsic value of LT stock.

Most cash was held in the balance sheets of the subsidiaries which was consolidated in LT's balance sheet. After the corporate exercise and setting off, the cash balance in LT's balance sheet will be reduced accordingly. There won't be much cash in LT's balance sheet after the privatization of the subsidiaries.

I am just guessing. Sense maker is the best person here to explain that.



The Revised Purchase Consideration shall be satisfied in the following manner:-

(i) by way of set-off against the capital due to be returned to LTHB amounting to the sum of SGD46,444,200.00 following the cancellation of 186,000,000 ordinary shares in LTIGL held by LTHB pursuant to a selective capital reduction exercise proposed to be carried out by LTIGL (“Proposed SCR”) within four (4) weeks (or such other timeframe as LTHB determines in consultation with LTIGL) after the satisfaction of all the conditions precedent (“Completion Date”) as stipulated in the Offer Letter; and

(ii) the balance of the Revised Purchase Consideration of SGD2,305,800.00 to be paid in cash (“Cash Portion”) on Completion Date.

Posted by sense maker > Mar 15, 2014 08:50 PM | Report Abuse
“I think they just bought some or all MI over by taking the SGD unit private. So, cash will go down as it has been used to pay for that corporate exercise, while MI will go down or disappear. These two variables need to be used in your FCF calculation.”

Thanks for the comments.

A ballpark analysis of corporate exercise on LTIGL
The proposed acquisition of all subsidiaries of LTIGL by LT was completed on 23rd January 2014 as shown in the link below:

http://www.bursamalaysia.com/market/listed-companies/company-announcements/1524261

As at 31st December 2013, LT has a total cash of about 155m and an excess cash of 115m. That was enough to pay off the acquisition of all the subsidiaries of LTIGL of RM118m. Assuming LT maintains a debt-to-equity ratio of 0.36 as previously used for the analysis, all the present value of RM814m FCF now belongs to the common shareholders and there is no “excess cash” now as before. The computation of intrinsic value would be as follows:

PV of FCFF $814,000
Add cash $0
Less debts ($139,000)
PV of FCFE $675,000
Less minority interest $0
FCF common shareholders $675,000
Number of shares 97208
FCF per share $6.94

This intrinsic value of LT of RM6.94 is more than the previously computed figure of RM6.13 per share.

“The risks I see about LT is to understand more about the timing of the costing practiced by the management. Some companies put a lot of provision for different costs like managmeent and staff bonus, etc only in the last quarter while others in certain 2 quarters. It is unclear if LT spread all cost accrual evenly throughout the year.”

The analysis was done using the year-end financial results as at 30th June 2013. It is not annualized data from quarterly results. Hence this should not be an issue.

“The second risk is Vietnam's country risk. Its currency can be volatile and its communist government may act erratically sometimes politically.”

Volatility of Vietnamese currency works both ways. It would be good if it goes down as the cost would be lower and vice versa. We just don’t know which direction it goes. Political risk is real though.

“I expect LT's EPS to go down in next 2 quarters from the previous one. Still, it should fetch a fair value of RM3.50 a share.”

I don’t know if its EPS, and as a result its FCF will go down the next two quarters (January to June 2014), but for the first two quarters (July to December 2013) already show revenue and EPS has increased by 38% and 138% respectively compared to the previous corresponding two quarters. Best of all, its CFFO and FCF has also increased both by 26m to 42.2m and 38m respectively for the two quarters.

These improvements have not been incorporated in the analysis above.

Posted by Foresight123 > Mar 13, 2014 09:39 PM | Report Abuse

Sir KC
How do you count free cash flow?
Is it net cash from operating activities-capital expenditure (ROInvestment)?
Or what? Advise Please

CFFO=net cash from operating activities-capital expenditure

Posted by miketyu > Mar 13, 2014 10:06 AM | Report Abuse

Mr Kcchongz,

Can you elaborate how to get the figure for minority interest of 187871?


This is how I did it.

In the financial year ended 30th June 2014, Latitude Tree made 32m in net profit. 7.7m, or about 24% belongs to the minority shareholders. Hence the intrinsic value of LT computed, 24% belong to the MI.

Posted by wm83 > Mar 14, 2014 10:31 AM | Report Abuse

kcchongnz, i bought maybank-c2, and currently i think there's no hope to get back to 0.03 now. what should be the exit plan?


I have always said that buying call warrants is punting. I punt Maybank C2 with the hope that its underlying share price would go up. In this case my directional punt went against me and i am holding some paper loss now.

At 2 sen for C2 when its underlying share at 9.50 now, the implied volatility is 19% Vs its historical volatility of 13%. The premium is not low at about 12%. This means C2 appears to be expensive. However, with its high gearing of 95 times, and more than 3 months to expire, it can still be a great punt.

I find it difficult to make money from punting call warrants.

Francis, exactly

One of the biggest foundation projects I have encountered.


PINTARAS JAYA BHD

AWARD OF CONTRACT FOR FOUNDATION WORKS (DIAPHRAGM WALL, PILING AND EXCAVATION)

The Board of Pintaras Jaya Berhad ("PJB") is pleased to announce that the Company's wholly-owned subsidiary, Pintaras Geotechnics Sdn. Bhd. has, on 12th March 2014, received a Commencement Date Notice dated 12th March 2014 from PNB Merdeka Ventures Sdn. Berhad to undertake foundation works for a proposed building at Warisan Merdeka, Kuala Lumpur. The said works are to commence on 17th March 2014 with a completion period of about a year. The contract is valued at RM74 million.

The said contract is expected to contribute positively to PJB Group's future earnings.

Gordon Constant Growth Model

Assuming the FCF grows at 3% (g) forever in accordance to rate of inflation. Discount rate (r) as before at 10%, and the base FCFo of last year of RM47.8m.

PV FCF= FCFo*(1+g)/(r-g)

PV FCF= 702681
Add cash $68,487
Less debts ($98,567)
PV of FCFE $672,601
Less minority interest ($187,871) 24%
FCF common shareholders $484,730
Number of shares $97,208
FCF per share $5.00
Discount 48%

The intrinsic value of latitude is RM5.00 per share. This represent a margin of safety of 48% investing in Latitude at RM2.57 a piece.

Lii Hen may be cheap in term of valuations. But I ranked it behind Homeritz and latitude as an investment option as shown in the link below:

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

It has nothing to do with the 2004 saga but mainly because of its relatively poor cash flows, especially free cash flow due to big capital expenses last year.

But most of all when the last quarter results were announced, most furniture companies made huge increase in revenue and net profit, eg Latitude, Hevea and Homeritz, Lii Hen had its revenue and profit decreased during the same period. This could be the main reason for the relatively poor performance of its share price.

Dividend yield is not my priority in selecting stocks.

1) I adjust this operating income by deducting the "gain from disposal of financial assets", interest and dividend income. I treat these as non-operating income which may be different from accounting rules. I do this for my valuation purpose using this subjective "true" operating income.

2) I got those from cash flows from operations. Do not worry about a small difference of just 118,000. It is insignificant considering the art of interpretation of financial statement and valuation.

3) This is because of the tweaking I did as in (1) above. I like to separate interest and dividend income and "Gain in disposal of financial assets" from operating income. I treat them as excess cash and not wanting to double count incomes. Again this is an art. Noting right or wrong.

Good encouragement. Thanks.

Posted by matrix6050 > Mar 12, 2014 10:58 AM | Report Abuse

kcchongz: I will definitely buy a book from you if you publish one ;)

Posted by yfchong > Mar 12, 2014 10:18 AM | Report Abuse

I do benefit fr kcchongnz teaching on valuation is an art. it is good if Mr kcchongnz can hold finance statement analysis & valuation classes @ a reasonable tuition or least in near future publication of his works that has been well established as reference., or compilation all of his writings.

Kind words from you yfchong. But how come you can read my mind of what I intend to do?

Posted by anbz > Mar 11, 2014 09:06 PM | Report Abuse

tak sia2 wa buat personal loan mr kc...hehehehehehehehehehehehehehehehehehehe

anbz, good on you making money in Kfima, a stock you have been scorning on. However, my opinion is it is still not a very wise move to get personal loan, or use margin to invest. Why?

The long-term return of the market is about 10% a year; sometimes it is more and sometimes it is less. Sometime the market can even drop by 30% in a few months. If you borrow at 10% interest in personal loan (I don't know the rate) and the expected return is only 10%, is it a wise move? Do not forget that the stock market's inherent risks.

Few people can actually beat the market, can you? Are you better than the main players in the market such as institutional investors, funds etc? Even though you may have good knowledge of a company and have special talent in valuing company (do you?), the market may not agree with you and you may lose money, especially in the short-term.

I hope you can read my article on leverage here:

http://klse.i3investor.com/blogs/kcchongnz/44344.jsp

francis5269, yes i use the formula mentioned by you. More specifically, it is:

Excess cash = Total cash or cash equivalent- max[0,current liabilities- (current asset-cash or cash equivalent)]

Don't forget that cash also include the 46.6m "available for sales investments" in the non-current asset which is quoted shares.

A good analysis of the furniture companies, well done. A few points here for discussion:

1. Latitude income and cash flow statement is for two quarters Vs full year for others. This is not a comparison of equal period.

2. Equity accounting?
The financial statements do not seem to show that LIGL or other subsidiaries are equity accounted except for associate companies. Why do you think so? Can company deviate from the accounting rules to use equity accounting for subsidiaries?

3. “The ability of Hevea to control the cost of its raw materials helped to justify the much higher Earning Capacity (Net Profit over Market Capitalization) of an impressive 19.3%, trumping its nearest peer Liihen’s 16.3%.”
Net profit/Market cap of Hevea is high is because of the relatively high leverage used. Do not forget that high leverage can cut the other way very badly in time of economic distress. Hevea faced it in the US sublime housing crisis.

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

5. As the warrant is in-the-money now with the underlying share and warrant price at 1.29 and 70 sen respectively and a conversion price of 1.00, it is highly likely that they will be converted before expiry, although nobody is going to convert the warrant any time soon with a premium of 32% and 6 more years to expiry. However the probability of dilution of earnings is high and real has to be accounted for. One way to do it is to use the option pricing to value the warrant and deduct this value from the common shareholders.

For me the best thing about Hevea is its abundant cash flow and free cash flow which the management has been using it wisely to pare down debts. If this continues in the next few years, Hevea will be less risky with less debts and money available for distribution and other investments.