Posted by bigFAT > Feb 12, 2014 10:49 PM | Report Abuse

I suggest to Kcchongnz ...i admire him very much with his data...yet i never see him writes about risks for kfima's business. why not write something valuable this time about risk management and downside probability with data like what he explained wonderfully, such as graham net-net or 5 criterias to invest in a stock.

Sometimes we must be optimistic ...not continuously ....sometime must be pessimistic. That's what u call fair and free from any interest.


Yes, risk management is very important in investing. But do you think there is much risks in this company, Kfima?

1) Do you see much risk in a company which continuously making profit for the past 40 quarters risky?
2) Do you consider a company which continuously having free cash flows (note not only cash flows from operations) for the last 10 years risky?
3) Do you consider a company with huge net cash and little borrowings risky?
4) Do you wish that i fabricate some risks for Kfima just to satisfy you?

Or are you thinking about alpha, beta, sigma and gamma? If so you can refer to the link below and have fun on them:

http://klse.i3investor.com/blogs/kcchongnz/44336.jsp
http://klse.i3investor.com/blogs/kcchongnz/44334.jsp

You copied and pasted an outdated report from an investment bank, changed their target price from 2.45 to 1.50, but can't explain how a PE of 14 leads to your changed TP of 1.50. What is your purpose?

It has nothing to do whether it is for Kfima or any other company, but a malicious act, attempting to mislead others.

Don't have say sorry that you have upset me. Why should I be upset? Kfima does not belong to me. I am just an investor.

By the way, how did you get the target price of RM1.51 extracted from the PublicInvest report as shown in your statement below? What is your estimated forward (or backward or whatever)earnings for Kfima?

"TP RM 1.51 leads to PER at 14.0 for year 2014"

First of all you should look at return of invested capital rather than return of equity as Kfima has a lot of excess cash. ROE can also reduce if E increases with high retained earnings (which is good), even if earnings increases (which is also good).

There was a reduction of ROIC just last year from 22% to 17%. Before that ROIC has been increasing steadily for more than 6 years. A reduction in return of capital from a high level (22%) doesn't mean the business is no longer good. More important is the marginal ROIC higher than the costs of capitals? That will show if the company has allocated its capital properly.


"and please don't forget that earning per shares has decreases 7 quarters in a row...and don't tell us that no company can moves up in straight line pattern."

Are you sure EPS decreases 7 quarters in a row as shown in your statement above? And show us which companies, especially plantation companies which have its EPS goes up in a straight line pattern?

I just wonder what is the motive of somebody who copied and pasted an investment report of Kfima which is outdated by half a year, and at the same time changed the content of the report drastically regarding its valuation?

Why does he want to do that malicious act? Very curious.

nokenzo,

Your computation of FCF for the first two quarters fy 2014 should be correct. Generally most investors compute FCF like you do though there may be a little variation when you pursue the academic way.

In Fima's case, don't forget that increase in biological assets is a capital expenses though there is none as at the end of second quarter. So your computation is still correct.

Hence my view is there is nothing wrong in your computation. I do not know how the FCF was computed in the article written.

Alphabeta, good comments.
I would like to say that I agree fully with most of the content. However, I would like to share some thoughts of some differences in opinions in some areas as a follower of value investing. My comments are in capital letters just to differentiate those from Alphabeta.

Posted by Alphabeta > Feb 7, 2014 10:03 PM | Report Abuse

A portfolio that generates 20% or more CAGR on capital invested consistently year after year is only possible through margin financing.

FIRST I DISAGREE WITH THIS STATEMENT. THERE WERE A NUMBER OF INVESTORS WHO HAD OBTAINED MORE THAN 20% RETURN FOR A LONG PERIOD OF TIME CONSISTENTLY WITHOUT USING LEVERAGE; WARREN BUFFET, PETER LYNCH, JOEL GREENBLATT, GUY SPIER, MOHNISH PABRAI, DAVID EINHORN ETC. THERE ARE FEW THOUGH. FOR THE LAST 5 YEARS (MAY NOT BE LONG ENOUGH) WHEN THE MARKET IS FAVOURABLE, A NUMBER OF FUNDS IN THE BURSA ALSO MANAGED TO ACHIEVE THAT; PHILIP MASTER CAPITAL FUND, KENAGA GROWTH FUND, AND MAAKL-HDBS FLEXI FUND. I AM SURE THERE ARE A NUMBER OF INDIVIDUAL INVESTORS ALSO MANAGED TO ACHIEVE THAT.

IT IS COMMON FOR PEOPLE TO BOAST ABOUT MAKING EXTRA-ORDINARY RETURN THROUGH LEVERAGE, BUT WHAT IS THE PERCENTAGE OF THOSE WHO MADE THAT? MY HUNCH IS THAT A GREAT MAJORITY OF INVESTORS LOST THEIR PANTS BECAUSE OF THE USE OF LEVERAGE. OVER RISK TAKING MAY BE GOOD FOR ENTREPRENEURSHIP, BUT DEFINITELY IS SHOULD NOT BE ENCOURAGED FOR PUNTING IN THE STOCK MARKET. I COULD NOT THINK OF ANY TRULY SUPERINVESTOR ENCOURAGING RATAIL INVESTORS USING LEVERAGE TO INVEST/PUNT IN THE MARKET.

In the above example, the RM 12 return less RM 2 interest (RM 50x4%) will yield RM10 net profit after interest which represent 20% return on your RM 50 seed capital. The risk is loosing 10% of your capital if the share price will not go below 95 cent, any price below that may risk margin call. It will be more complicated with more open trading positions.

A VALUE INVESTOR GENRALLY MAKES ESTIMATIONS OF WHAT IS THE VALUE OF THE STOCK HE INTENDS TO INVEST, AND THEN COMPARE WITH THE MARKET PRICE IF IT IS WORTH INVESTING. WITHOUT COMING OUT WITH AN ESTIMATED VALUE, I DON’T KNOW HOW ONE CAN CONSIDER IF A STOCK IS CHEAP OR NOT. HENCE IT IS STRANGE FOR HIM TO HAVE A STOP LOSS. IF A STOCK WAS CHEAP WHEN HE BOUGHT IT, HOW CAN IT BE EXPENSIVE (AND SELL) WHEN IT HAS DROPPED 10% (WITHOUT ANY CHANGE OF FUNDAMENTALS). SIMILARLY IT DOESN’T MAKE SENSE FOR HIM TO TIME THE MARKET; FOR EXAMPLE SELL IT WHEN UP BY 10%, AND THEN BUY BACK WHEN IT DROPS BACK TO 5% BECAUSE IT IS SIMPLY NOT EASY TO DO THAT. INSTEAD MY EXPERIENCE IS I COULD NOT EVEN GET TO BUY BACK THE STOCK AT THE PRICE I SOLD. MY OWN CASES OF EXAMPLES ARE DATASONIC, JOBSTREET, NTPM, PRESTARIANG ETC. CAN ONE SEE THE LOGIC OF SAY BUY DATASONIC AT 3.50; SELL AT 4.00; BUY BACK AT 6.00 AND SELL AT 7.00; BUY AGAIN AT 9.00 AND SELL AT 10.00?

One of the well known fund manager, Mr.Tan Teng Poh - MD of Capital Dynamics Asset Management has achieved around 14.73% CAGR with its RM 140 million Closed-end fund since inception (19/10/05) til now in term of NAV. 11.44% CAGR in term of share price over same period (approximate 9 years). The CAGR was much better until he decided to hold more cash.

THAT IS PRECISELY WHAT I WAS TALKING ABOUT; THE PERIL OF MARKET TIMING. IT IS VERY STRANGE TO ME THAT A SELF-PROCLAIMED VALUE INVESTOR DOING MARKET TIMING. IT IS HIS ARCHILLES HEEL.

However, if you dared to pick up undervalue stocks with strong fundamental during crisis period like the 1998 Asia meltdown and 2008 global financial crisis. My experience concurred with Mr Koon that you will have very good chance of doubling your monies in three years time.

AGREE WITH THIS STATEMENT, BUT ARE YOU TALKING ABOUT THE “VERY GOOD CHANCE” IN THE ENVIRONMENT IN 2008, OR NOW? THERE IS A HUGE DIFFERENCE HERE.

Icon8888,

Good analysis. At least someone has shown some figures to show the value of this company so that we can compare with the price to see if the stock is truly undervalued.

Just a question here. Why do you use a PE ratio of 13 to value JayaTiasa, and not 5, 10, 15 or 20, or even 50? What is the basis?

nokenzo,
There is nothing seriously wrong about your computation of ROIC for Homeritz except that you are using the audited account for 2012, whereas i used the latest unaudited account ended 31 March 2013.

check your computation of NOPAT

NOPAT=EBIT*(1-tax rate)=EBIT*[1-(Tax/EBT)]

I got ROIC of 28.5% as i tweak the Ebit a little, for example to exclude interest income etc, but it doesn't matter that much as it involves art of interpretation. Your 25.4% is close enough.

Below is the little tweaking I made for the 2012 income statement.

Revenue 103246
Cost of sales -56924
Gross profit 46322
Admin expenses -13410
Other expenses -13217
Other operating income 424
EBITDA 20119
Depreciation -2524
Profit from operation, EBIT 17595
Financing cost -166
Interest income 244
EBT 17673
Taxation -923
Net Income 16750

Attributed to:
Equity holders of the company 14700
Minority interest 2050
16750

Posted by digiuser016 > Feb 5, 2014 12:05 PM | Report Abuse
Hi Kcchong,
In the sixth year, the eps will grow to 53 sen. Why you discount only 5 years instead of 6 years?
5.3/(1+10%)^5.

My assumptions are a 5-year holding period, and PE at year 5 is based on forward earnings. Discount is still for the end of 5 year, not 6.

You can use last financial year EPS of 50.5 sen, nothing wrong, except you get a slightly lower intrinsic value.

Posted by puripuri > Feb 5, 2014 08:39 AM | Report Abuse
KC Chong: Regarding the CROIC, how do you benchmark it? >10% or >15% is considered passing your requirement?

Good question. How I wish I can just give you a one word answer, but no, I can't. This is how I view it here.

If I invest in a stock, say I am happy to pay for something with a PE ratio of 10, for simplicity sake. But that E is just accounting number, not hard cash. Moreover most business needs to reinvest. So the actual cash left over is normally less than E, and often it is much less than that.

Free cash flow is hard cash received net of outflow, and it is after capital expenses for more future growth in earnings, presumably. So I would be happy enough is FCF is more than 5% of invested capital as it is hard cash left over after all expenses. 10% would be great. If it is 20%, I would pawn my house, my car, Jewelry etc and put all the money into the stock. No, just kidding but at least that stock will form a heavy weighting in my portfolio.

Again it depends on industry. Light asset type of business like Jobstreet, Prestariang, Datasonic etc normally have higher CROIC. But for conventional business like Kfima with average of more than 20% for the last 5 years is very rare.

Posted by yfchong > Feb 5, 2014 08:04 AM | Report Abuse
Bro KC Chong How do you get the figure PV of price 3.29. ? Is it comes from EV/EBIT ?? thks for sharing .

Kfima's EPS was assumed to grow at 12% for the next 5 years, and then 5% after that. The 28.64sen EPS will grow at 12% to 50.5 sen [28.64*(1+12%)^5}.

You intend to sell it after holding 5 years. At that time, it is expected that it will earn 53 [50.5*(1+5%)] sen the coming year (6th year). And assuming the market awards a PE ratio of 10. So the selling price would be 5.30 (0.53*10). 5.30 is worth 3.29 at today's money at a discount rate of 10%. 5.3/(1+10%)^5.

Posted by digiuser016 > Feb 2, 2014 10:35 PM | Report Abuse
And Kcchong,
How do you evaluate growth stocks? If I am not mistaken, Kfima is a threebagger/fourbagger for you since you started investing this stock a few years ago. Mind to tell me your experience on evaluating a growth stock?

For me evaluating growth stock or value stock is the same. For example using a hybrid DCF, if I assume Kfima's earnings will grow by 12% a year for the next 5 years, and its dividend by 10% each year with the following data.

Latest earnings per share $0.2864
Initial dividend $0.080
Initial PER 6.7
Dividend growth 10%
5-year Earnings growth 12%
Earnings growth after 5 years 5.0%
Earnings in 5 yrs $0.505

The dividends and their discounted value using a discount rate of 10% are shown as below:
Year 0 1 2 3 4 5
Dividend XXX $0.09 $0.10 $0.11 $0.12 $0.13
PV of dividend XXX $0.080 $0.080 $0.080 $0.080 $0.080
Sum of PV of dividend 0.400

And assuming you want to sell it after 5 years and the market gives a PE ratio of 10 to it:

EPS after 5 years, RM 0.530
PE ratio 10.0
Price 5.30
PV of price 3.29

Total PV 3.69
Price now $1.92
Margin of safety 48%

As you can see the total present value of the dividends and selling price is RM3.69. That is the intrinsic value of Kfima.

If you want to estimate the intrinsic value of a growth stock which does not have much earnings or cash flow at present, it is much harder and will involve a lot more tough assumptions. If you are interested, you can refer to the link below:

http://aswathdamodaran.blogspot.com/2011/11/are-you-ready-to-value-groupon.html

tiffanie,

I am amazed of your language and communication skill, and above all your mature thinking about investment. Keep improving yourself by reading the books and articles by the investment giants such as Warren Buffet (Letters to shareholders of Berkshire Hathaway), Charles Munger, Peter Lynch (One up wall street), Joel Greenblatt (you can be a stock market genius too), Howard Marks (the most important thing illuminated), Seth Klarman (Margin of safety), Philip Fisher (Common stocks and uncommon profit), Aswath Damodaran on valuations etc.

Also I encourage you to read some of my articles below:
http://klse.i3investor.com/blogs/kcchongnz/45373.jsp
http://klse.i3investor.com/blogs/kcchongnz/45226.jsp
http://klse.i3investor.com/blogs/kcchongnz/45032.jsp
http://klse.i3investor.com/blogs/kcchongnz/44995.jsp
http://klse.i3investor.com/blogs/kcchongnz/44344.jsp

CROIC or cash return on invested capital is simply the ratio of Free cash flow over invested capital.

CROIC=FCF/IC

FCF=CFFO-capital expenses

IC=PPE+net working capital

Net working capital = receivables+inventories-payable

As capital expenses are lumpy, take the average of CROIC over a few years as a representative figure.

Posted by digiuser016 > Feb 2, 2014 10:35 PM | Report Abuse
And Kcchong,
How do you evaluate growth stocks? If I am not mistaken, Kfima is a threebagger/fourbagger for you since you started investing this stock a few years ago. Mind to tell me your experience on evaluating a growth stock?

Yes, Kfima is one of the stocks which provided me with the best returns over the last 5 years. Despite its share price lethargy for the past twelve months, the 5-year CAGR is still more than 20%, double that of the broad market, and with low risk.

When I bought Kfima 4-5 years ago, i bought it for its value against a low price offered. In another words there was plenty of margin of safety investing in this stock then. It had been a fantastic growth stock before then, but I didn't have to pay for the growth. Meaning that when I estimated its intrinsic value then, I did not use a high growth assumptions, but just a normal one. As it business grows, I see its fundamentals have improved a lot and hence it is still a "good stuff, cheap" at the present price.

Investing in a growth stock is definitely enticing, absolutely. But growth and value is inseparable, and you need to know what is the intrinsic value, or what comparative valuations you are talking about, in order to invest wisely, not merely saying it is a high growth stock. Not all high growth stocks are good investment. Similarly, not all good companies are good investment, unless its price is low as compared to its value.

For example you intend to invest in a high growth plantation stock which has planted a lot of trees. You know the age profile of the trees, and you can estimate the production quite closely. From there you have to estimate your normalized gross profit, and then deduct operating expenses to arrive at your normalized operating profit for a number of years. From there you have to deduct what is due to the debt holders, the minority interest etc, to arrive at what is due to the common shareholders.

I don't really know how one can judge if a stock is undervalued or not just by saying there is growth in profit prospect without giving numbers. How much is the growth? How much is it translated to profit? How much is it belong to shareholders and in per share basis, etc, bearing in mind that these cash flows have to be shared among all stakeholders?

Yes, valuing a low growth or a high growth stock is the same. You have to make estimates of its future growth in revenue, and use the normalized margin to arrive the cash flows, and discount those cash flows back to the present value, and then compared with the share price. What is the margin of safety. Or some other form of valuations, with numbers.

tiffanie,
Reading your post I have the view that you have a good future in investing. I appreciate your view here as a young person which is very relevant to Padini. But as a young person, you should first strive to safe and invest (wisely). Saving is not an easy thing to do in this high inflation environment.

Few people read the annual report like you do. Many "seasoned investors" don't even bother about the business of the companies they invest in. Yes the chairman's statement is important as you can have a grasp of where he will lead the company to in the future and facing competition which is inevitable in a capitalist country.

During this Chinese New Year, I have the opportunity to walk around MegaMall a couple of times. I personally could see there were more shoppers in Uniqlo than Padini stores. Talking to my young children, they seem to prefer Uniqlo then Padini. So I am not sure if it is a trend among the youngsters. If so, there certainly are stiff competitors for Padini. But Padini has more stuff than Uniglo and H&M.

If there is this stock of Uniqlo and Padini with everything equal, I may invest in Uniqlo rather than Padini. But there is no Uniglo stock (unless one invests through Wing Tai). And there is this price issue. There is no price-value relationship for Uniqlo, whereas there is for Padini as described in this blog. Secondly with the proven management capability of Padini, and reading through the Chairman's statement, I don't think they will sit still and do nothing to improve their business.

Hence I still think Padini is a good investment in view of its high efficiencies and reasonable price, and a proven capable management.

Posted by Horsefield > Jan 31, 2014 12:17 PM | Report Abuse

Joonism, you can refer to the links posted by Tan KW before. It explains your doubt above.

http://klse.i3investor.com/blogs/kianweiaritcles/44139.jsp
http://klse.i3investor.com/blogs/edu_morg_star/31605.jsp
http://klse.i3investor.com/blogs/edu_morg_star/31670.jsp

Below is excel template readily in Internet. Please do some modification for the said debt & minority interest adjustment.
http://www.focusinvestor.com/DiscountedCashFlows.xls


Excellent recommendation from Horsefield, especially the articles from Morning Star which explains in detail the discount cash flow analysis, the estimation of future cash flows and discount rate.

Well done.

Posted by yfchong > Feb 3, 2014 12:45 PM | Report Abuse
Today is holiday, may I have your opinion., should I release the poor performing mutual fund n redivert to
1. Kfima
2. Padini
Both of the stock have double digit ROE., both also pays good dividend many thks

yfchong, what do you mean by "poor performing mutual fund" of yours? Did it under-perform the market? If so then you were unlucky to have picked the wrong fund as in the article below, the average return of the unit trusts investing in Bursa out-performed the broad market (to my surprise). Please read my article below:

http://klse.i3investor.com/blogs/kcchongnz/45121.jsp

My view is that one shouldn't base the performance of the fund for short-term horizon. The ability of the fund managers is important, whether they have been consistent alpha achievers in the long-term. Short-term out-performing or under-performance is not the true indicator of their ability.

Whether you should switch your fund and directly invest in Kfima and Padini, I really don't know as I have no crystal ball in front of me to see the future share prices of them. Bear in mind the pitfall of individual investors as described in the same article above.

But you have done some homework on them about their ROE and DY. You have to make your own judgement and I believe you are capable of doing that based on the above. You can also read my writeup above those two stocks in the link below but be forewarned that in the equity market, the outcome may not be the same as expectation, especially in the short term.

http://klse.i3investor.com/blogs/kcchongnz/45203.jsp
http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/34118.jsp

"Good stuff, cheap"

There are more than a thousand stocks in Bursa. Surely there are many cheap and good stuff. Please share here.

To recall from the article, attributes of good stuff are:
1) High return of ROE, ROIC, showing efficiency in operations
2) Good cash flow, free cash flow available for distribution of dividends which is sustainable, share buyback, paying down debts, making new investments.
3) High growth expectation

Attributes of cheapness:
1) Low PE ratio
2) Low enterprise value over earnings before interest and tax
3) Undervalued quality assets against its market price

Please share with your cheap good stuff for discussions here. Quantify as much as possible why you think it is a cheap good stuff.

An example here about Homeritz (RM0.665) recommended by ayamtua:

Good stuff:
1) ROE 21%, >>12%
2) ROIC 30%, >>10%
3) Both ROE and ROIC improving last two years
4) CFFO average 112% of Net income last two years, >100% good quality earnings
5) Plenty of FCF, FCF=16% of revenue (>10%), FCF/IC=29% (>>10%)

Cheapness:
1) PE=8.8 inexpensive
2) Earnings yield (Ebit/EV)=19.4% (>>12%) very cheap

It is beyond my ability to do all these for many stocks. Hope we can combine our effort to scout for good cheap stuff as well as learning from each other.

Some resources in i3:

http://klse.i3investor.com/servlets/forum/900214344.jsp
http://klse.i3investor.com/servlets/forum/900285510.jsp
http://klse.i3investor.com/blogs/kianweiaritcles/37729.jsp
http://klse.i3investor.com/blogs/kcchongnz/45296.jsp
http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/36493.jsp

此子可教也

anbz, as I am many years your senior in UM, I want to give you another piece of advice here again.

Try not to get yourself into debts. The only things which you should borrow money to do is buying a house as your permanent shelter. Or may be a car if necessary. The Crown Finance for Christians also teach their followers to avoid debts at all costs.

I have been there, done that. When I first came up to work, I have no money left after all those debts; car loan, co-operative loan, personal loan from friend, credit card debt etc. Despite earning more than four thousand ringgit a month in today's money as a bachelor, I have no money to give to my parents as a token show of gratitude. Yes debt is a killer to your financial well being.

I also encourage you to read my blog below regarding leveraging in investment and try to understand what I am trying to convey:

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

anbz, i am your senior in UM, many years before you. so allow me to give you some advice.

Give respect to elder people, especially one who has contributed a lot to the society. You have no right to criticize him, as he has never say anything bad about you. And I seriously do not think he is trying to promote his stock so that he can sell high to anyone in i3. i3 doesn't have that clout. And he doesn't need to do that.

Ok back to business.

ok kcchong selesai masalah..only 3 problems now
1. esos
2. decreasing profit (also fimacorp with decreasing profit)
3. not enough upward force

My answers to you has nothing to do with Kfima, and I am not promoting the stock here, as I have said, i3 has no clout to jack the share price up for me to sell. the answers apply for general cases.

1) I have explained about this many times to you in i3 but you just refused to listen. ESOS is a way for the company to align the interest of the shareholders and the management. The employees are often rewarded with ESOS for them to work hard and increase the value of the company, and hence the stock price. With ESOS, employees are also rewarded, so are the shareholders when the company does better in its performance. As long as it is not abused, ESOS is a good move for the company.

2) Decreasing profit
No company can increase its profit every year. There is this economic cycle, boom and bust. But in the long term, good companies will have their profit improving, but in a long-term basis. there is still up and down in the short-term of 1 year, two years or even three years. As palm oil contribute about 30% of its revenue and profit, and as plam oil prices were down the last couple of years, it is inevitable that Kfima's bottom line will be affected. Do you realize that many plantation companies have their profit slashed by more than 50%, some even went into losses, but Kfima still managed to earn good profit from palm oil?

3) Not enough upward forces? Here my advice is again, don't every time talk about share prices if you are really doing investing and not speculating. Buy good companies well (at cheap price)and then wait for the market to realize it. In the short term (even a few years), the market is a voting machine, but in the long run, it is a weighing machine.

Posted by digiuser016 > Feb 2, 2014 10:18 PM | Report Abuse

Kcchong, the books recommended by you are good(the most important thing uncommon sense for the thoughtful investor> more on philosophy, five rules for succesful investing> more on technical sides, teach you how to evaluate a stock in different industry). Can you recommend more books? Thanks.

I like this guy digiuser016. He is willing to learn, not talking about share price everyday, go up ah, go down ah etc, like most people. Yes reading good books is very important to improve oneself.

I have a postgraduate degree in Master of Finance with distinctions from NZ. Sorry not boasting here. I thought I knew a lot about fiance and investment. Actually it was not true. What we learn in university are all academic. I talked a lot of nonsense about efficient market, CAPM, Sharpe ratio, efficient frontier, Black-Scholes OPM etc. Actually they are not much use in investing in the stock market. The only subject which I think was useful is applied finance, where I learn some excel skill, valuations and some useful practical corporate finance.

What I found most useful is to stand behind the shoulders of investing giants; Warren Buffet, Peter Lynch, Philip Fishers, Charlie Munger, Seth Klarman, Joel Greenblatt, Howard Marks etc. Read their books and learn their philosophies. Apply them using what you learn either from University, or through quantitative finance books or internet resources say from Professor Aswath Damodaran, Jae Jun of Old School Value etc on valuations. Then I believe one would improve his chance of better return from investing in the market. Just my opinion.

Recently I read another book, "The Manual of Ideas" by John Mihaljevic. A pretty good book too where one can find some ideas of what kind of things to invest.

anbz, why are you so particular about the financial position of Kumpulan Fima or its subsidiary Fima Corp? Fima Corp is cash rich, plenty of cash. Why are you so petty about 167 thousand held on liens for some banking facilities for Fima (I think it is) when it has hundreds of millions in cash in its balance sheet? 167m held on liens? Are you sure? Why you add so many zeros behind it? Just want to show how bad is Kfima?

All business uses some kind of banking facilities, even they have heaps of cash. Oh, btw, cash includes all cash, including fixed deposit, investment securities, not merely paper money. And also try understand what consolidated account is. But I really think you need to attend my lectures on financial statement analysis.

"so what would be the intrinsic value of kfima for every 10 cents increase in fimacorp? sorry for asking"

anbz, valuation not like that one. Intrinsic value of Kfima has nothing to do with the increase in share price of its subsidiary Fima Corp, not even its own share price. And intrinsic value is an estimate. It is not cast in stone like the Ten Commandments. Btw, do you understand what intrinsic value is or not? You really need to attend my course on valuations someday.

Hate ESOS again? I know, I know, I know. You are a contrarian investor. You prefer a stock like NovaMSC which make losses every year, and not giving ESOS to its employees, instead of a company rewarding both the shareholders and employees for the stellar performance of the company business like Kfima. For NovaMSC, because NovaMSC every year loses money, how to reward its employees? Instead they should be fired, shouldn't they?

My method too difficult? As I have said, it is much much easier than statistics and calculus. Where did you graduate for your maths degree, and what year was that?

Posted by anbz > Feb 2, 2014 01:31 AM | Report Abuse
Cash and bank balances (Note 23) = 272,236k
Total loans and receivables = 395,828k
haha page 130 annual report 2013
wah hutang banyak
as if now i have 27k in hand but i owe the bank 39k !!! kikiki

On this third day of the Lunar Chinese New Year of the Horse, somehow I have good mood as the horse has special meaning in my life. So let me teach you something about financial statement analysis using your favorite example of Kumpulan Fima which you like to pour scorn on continuously.

First let’s look at the balance sheet. There are three parts of the balance sheet; assets, current and non-current; liabilities (current and non-current); and what is left behind after deducting total liabilities from the total assets is the equity for shareholders (and minority interest).

Cash and cash equivalent, receivables, inventories, PPE etc are assets; while bank loans, trade payables etc are liabilities. Receivables are what others owe the company and to be paid to the company, not a liability which has to be paid to others. So don’t mix up asset and liabilities as shown in your statements.

I do not know what your sarcastic remarks are about its balance sheet. As shown in its financial statements ended 30 March 2013, Kumpulan Fima has a total asset of 971m while its total liabilities are only 139m, leaving equity of 832m. After considering the minority interest, its net asset backing per share is RM2.26. Its total cash is 272m while its total debt is only 18.5m. My conclusion is instead of pouring scorn on something you don’t know nor understand, try learning about it.

Total receivables did increase considerably in 2013 than 2012, good observation. I did mention this somewhere if you have paid attention to learn something from me (even though I am not an expert). However, I have also mentioned later than my concern was unfounded as the higher receivables were mostly collected in the first quarter 2014 as shown in their quarterly report.

Esos, your favorite contempt about Kfima? I have also put forward my opinion before. If you are an employee of Kfima and you work hard and achieve good results for Kfima, and hence increasing shareholder value, don’t you think you should be fairly rewarded too by the company? By the way, how much this ESOS cost is involved in relation to the market capitalization of 530m over a period of 5 years of that exercise? This is called alignment of the shareholder interest with that of the management.

The article written by me reposted by you here is a good speculation piece. You can see how the value of a corporation can be unlocked in one of the ways, a speculation though as qualified by me. Thanks for reposting it.

Posted by anbz > Feb 2, 2014 03:42 AM | Report Abuse
so have all the receivables , the loans , and many more have excluded while the intrinsic value of kfima being calculated...
gosh 90 cents cash..excluded the loans..haha

Yes, the loan of 18.5m, no matter how meager is it, has been taken into consideration when calculating the intrinsic value of Kfima, if you are talking about my calculation. Receivables? Does it come into the picture of that calculation? Do you understand my calculations of the intrinsic value of Kfima? I am sure you, as a mathematics graduate, will if you care for your own benefits and take the trouble to learn from me. It is so much easy than differentiation and integrations etc.

Let me offer you some lectures on finance and investments soon. I will teach you financial statement interpretation and valuations. These in my opinions are the most important things to learn in investment. I hope you can join in to learn and then improve your chance of making good return in the stock market. Will you?

hiddengem, zuliana, thanks for the wishes. Yes, happy, good health are more important than others.

I am happy if you guys benefit from my stock analysis. But frankly speaking, I would be happier if you guys can appreciate my other writeup such as avoiding pitfalls, shun personal leverage in investing, appreciate risks, run far away from "hot" tips, and be very careful of investing with empty hopes.

With this happy Chinese New Year to everybody, yes everybody including Muslims, Hindus, Christians. Bring back the good old days when all races and religions coexist happily without prejudice. Reject all politics of racial polarization, for a better and progressive nation.

Posted by Joonism > Jan 30, 2014 12:59 AM | Report Abuse
hi kcchongnz,
thankss for your interesting analysis article. Btw would you mind show the exact way of calculating the intrinsic value based on the theory of investment value (formulation) that have been stated? Much appreciated!

Financial theory postulated by John Burr Williams in his “The theory of investment value” says that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate.

The theory and the mathematics of it are actually not that difficult. Let us apply it for Padini with its free cash flow (FCF) of the firm of RM68777 thousands last financial year ended 30 June 2013. Let’s assume this FCF will grow at g=12% for the next 5 years and 3% forever after that. Finally we use R=10% discount rate or the cost of capital for the firm. The table below shows the growth and its FCF each year (CFn) and the present value of free cash flow (PV FCF):

Year, n 0 1 2 3 4 5
FCF each year, CFn xxx 77030 86274 96627 108222 121209
PV FCF=CFn/(1+R)^n xxx 70027 71301 72597 73917 75261

The sum of the PV FCF is added up and equals to RM363103 thousands. This is the PV of FCF for the first 5 years. The subsequent FCF, or terminal FCF is given by the formula:

Terminal FCF, $=CFn(1+g)/(R-g)=121209*(1+3%)/(10%-3%)=1783498

The discounted terminal FCF = 1783498/(1+10%)^5=1107412

Hence total PV FCF of firm=363103+1107412=1470515

There is an excess cash of 206226 which is presumably not required for the ordinary operations and we have to add to the PV FCF. Furthermore, this PV FCF does not belong to the common shareholders alone. It is shared with the debt holders and minority interest, if any. Assuming the market value of the debts is same as the book value (which need not necessary true), the PV FCF attributed to common shareholders is,

1470515-35964+206226=1460777

Divide this value by the number of share of 657910, the PV FCF, or intrinsic value of Padini is RM2.49 per share. At the present price of RM1.60, the margin of safety is 36%.

Theory and mathematics of valuation is straight forward. However, the judgments on the future cash flows and the discount rate are the more important parameters.

Posted by Fabien Wong > Jan 28, 2014 09:47 AM | Report Abuse

Kcchongnz why don't u have a look at Thong Guan. Thong Guan is market leader in industrial packaging in Asia pacific. Their growth outlook looks promising..strengthening of USD and expanding production capacity will drive earnings. It's profit margin are much better than Scientex. I believe thong guan will able to yield explosive returns in the future.

Are you sure Tguan's profit margins are much better than Scientex? As far as I can see, Scientex margins are consistently twice that of Tguan. For example in the last financial year, Scientex operating and net profit margin are 11.9% and 9.2% compared to 4.7% and 4.4% respectively fo Tguan. It is exactly the opposite as what you said.

Scientex's ROIC of 20% is way above that of 12% of Tguan. No fight at all. I also prefer the two major earners for Scientex in property development and industrial packaging rather than the only one for Tgaun. The thin net profit margin can have great negative effect on Tguan when material cost increases and company unable to transfer that cost to the clients.

Pricewise at the close of today at 2.19, Pe ratio of 8.6 is lower than 9.5 of Scientex at 5.02. Ev/Ebit of Tguan at 6.7 is also lower than about 10 for Scientex.

So in my opinion, Scientex quality way excel that of Tguan, but quality does come with a higher price.

Frank,
Looks like you (rather we) are wrong about KNM. Its share price rose another 5.5 sen today to day's high at 62.5 sen now. For me I am often wrong about the share price. So this is nothing new.

I really MCC (Mong Cha Cha) and can't imagine why its share price has been going up, especially after the announcement of the par value reduction and now the reasoning of eSdM as it is very clear that KNM needs money again from the shareholders. But actually I know very well why the share price going up like that, and I believe you are very clear too.

The stock market is really amazing. There are so many suckers around, amazingly so many, so naive. When old suckers gone, new ones appear.

Posted by Sapphire > Jan 29, 2014 04:44 PM | Report Abuse
HI KCCHONG , MAY I KNOW WAT IS UR FIRT MAJOR SHARE IN UR PROFILE?

Not very sure of what your question is, but if you mean the highest weightage in my portfolio, then it is Kumpulan Fima. And also it is the only one which made a loss, though a very small one.

It actually surprised me considering its fundamentals.

Wow, a profit of 745m just to do this par value reduction exercise. Frank, that was why KNM's share price has been running up recently. That is how "investors" think. OMG!

Oh, the par reduction thingy is for making it easy for fund raising, or right issues. And ESOS. Great! Should be another round of share price appreciation. to 1.50? 3.00?

A higher growth company deserves a higher PE, that is logical and intuition. That is also according to the very basic principle of “The value of a firm is the sum of expected future cash flows generated by the firm discounted to the present value”

A firm with higher growth will have more earnings each year going forward, and assuming this earnings are cash flow, the present value will be higher than one of low growth company.

However, the actual PE a company is worth is all theoritical (though logical). It depends on industries as you have rightly pointed out, the market sentiment prevailing, the risks etc and many other factors. I don't think there should be an exact answer to your question. Finance is an art, not science.

Scientex has very good growth after acquisition of GW Plastic and became one of the world's leaders in industrial packaging. So at RM5.04, the PE and EV/Ebit of about 10 is attractive. This business will take over its property development as a major earner very soon.

Using a super-abnormal growth assumption of 10%-12% for the next 5 years, the average intrinsic value I got for Scientex is about RM7.00. I think it may worth more than this in vies of its growth and heaps of FCF.

Posted by Elwin Kai Kai > Jan 27, 2014 01:33 AM | Report Abuse

mr.kcchongnZ if want to learn how to calculate intrinsic value what kind of method or book would you recommend....new here would like to learn from pros like you....

There are plenty of e-resources in the net. Book wise try this one "the 5 rules for successful stock investing" by Pat Dorsey.

Ayam Tua
A lot of people miss you. I have written a number of posts recently. Hope you can read them and provide some feedback.

Is Fimacorp a good investment?

As usual, when I want to determine if a company is a good company, I look at its business and return of capitals, and cash flows. The two major income generators of Fimacorp are its manufacturing and printing of security papers (66%) and palm oil (33%). They appear to be good and durable business to last for some time.

The table below shows Fimacorp’s return of capitals for the last few years:
Year 2013 2012 2011 2010 2009 2008 2007 2006
ROE 12.5% 16.5% 20.9% 19.2% 23.3% 14.8% 13.8% 17.8%
ROIC 23.1% 32.5% 44.0% 31.4% 32.9% 16.5% 38.0% 34.9%

Return of equity has been all the time in double digit. Last two years ROE has retreated somewhat but it was still good. By the way, tell me which company with palm oil as a major earner has not got its profit and ROE reduced last two years? Some of them have even gone into losses. The lower ROE last year of 12.5% could also be because of its build up of excess cash in its balance sheet.

A better measure of its efficiency is hence ROIC, taking the whole firm into consideration. You can see ROIC is always very high, even up to 44% in 2011. Even the lower ROIC of last year of 23.1% is still well above the cost of capital of 10%-12%.

Yes the lower ROE and ROIC last year is because of the drop of profit. Again can you tell me which company, especially in the cyclical commodity business can grow its profit every year unabated?
Fimacorp’s cash flow from operations is above its net income on average. It always has free cash flow, averaging more than 20% of revenue. What else can you ask for?

After determining that Fimacorp is a good company due to its high return of capitals and good cash flows, the next thing I look into is if the price is good. You can’t make good return if you don’t know the value and simply pay exorbitant price for it as your return is determined by the price you pay.

At the close of RM6.40 last Friday on 24th January 2014, and with earnings of 72.4 sen in year ended March 2013, the PE ratio is 8.8, not expensive in my book, especially considering its high efficiencies. But as it has a lot of excess cash and also a substantial interest in an associate company, a better metric is enterprise value. It EV is just 3.7 times its ebit, or an earnings yield of 27%, fantastic.

So with this I would conclude that Fimacorp is a great company selling at bargain price. Do I need to consider its growth? I don’t think so, but if good growth comes, it will be extra bonus. But is Fimacorp really a no-growth company as opined by some people?

From the table below, one can see that Fimacorp’s revenue and net income has been growing at a CAGR of about 10% a year from 2006 to 2013. That is a reasonable high and sustainable growth rate. I don’t know much about its future but I do read about Fimacorp has quite a lot of land in Indonesia which has not planted yet. I thought I also read that they have been buying plantation land too. And according to the article in Chinese, its FFB production has been increasing. Its margins are also much higher than many other plantations.

So Fimacorp is definitely a good stock to invest in my opinion. But as I have already invested in Kumpulan Fima which holds 60% of Fimacorp, I do not want to put in money in Fimacorp again. By the way, Kumpulan Fima has a more diversified business and it is also more undervalued in term of EV.


Year 2013 2012 2011 2010 2009 2008 2007 2006
Revenue 305145 300174 298479 279110 223465 176788 157312 157190
Net income 61899 78917 84757 64570 59481 31372 27631 32208

Posted by Elwin Kai Kai > Jan 25, 2014 07:48 PM | Report Abuse

kcchongnz in your opinion how would you determine a shares intrinsic value？ i think every investors problem is dunno which is a good buy and when is a great price to sell


Intrinsic value of a company and its stock is the sum of all discounted future cash flows, or in finance we call it the present value. That is the very basis of valuation.

So whether you buy a good quality stock, or a poor quality stock, what is important is the present value. Is the present value higher than the price now? if so it is a good buy, if not, it isn't.

If you pay a high price for a quality company with estimated intrinsic value lower than the price you pay, is it a good buy?

How to estimate intrinsic value? Please refer to my latest comment on 25th January 2014 in the appended link below:

http://klse.i3investor.com/blogs/kcchongnz/45032.jsp

Investment success doesn’t come from “buying good things,” but rather from “buying things well.”

If you buy something for its fair value, you can expect a return that is fair given the risk. So buying something at its intrinsic value is no great shakes. And paying more than something’s worth is clearly a mistake; it takes a lot of hard work or a lot of luck to turn something bought at a too-high price into successful investment.

Buying something for less than its value. The most dependable way to make money. Buying discount from IV and having asset price move towards its value doesn’t require serendipity; it just requires that market participants wake up to reality.

Howard Marks: The most important thing illuminated

Posted by sooncafe > Jan 25, 2014 02:38 PM | Report Abuse

kcchong is there any recommend book to learn about FCF and others formulae to find the intrinsic value of a company? thank you !

There are a lot of internet resources which you can goggle, including in i3 where Tan KW had posted a number.

for books, I would recommend "The 5 rules in Stock Investing" by Pat Dorsey. It is quite an easy to understand book to follow fundamental investing, including economic moat identification, financial statement analysis and valuations.

Frank, yes, history may not repeat itself, but it rhymes. Mark twain

Incidentally, you are one of the characters mentioned in my post above, a smart one who left the dead horse and ride on a young and energetic one and hunt for a bountiful load of harvest.

Tessa, damansara eagle, glad you like my writing. Any writer would feel happy if appreciated.

digiuser016, if I use last years FCF and the assumptions I made previously, I would have got the exactly same answer as yours, ie RM3.89 per share for the EV. Maths can't go wrong, but the assumptions are not the same as the outcomes all the time.

Last year's FCF of 72.3m is the highest these few years. Using that to get the EV, to me, could be too liberal. I would normalize this FCF. Say if I take the average of the last 4 years, or using FCF of 59m, the EV would be RM3.17. This is still substantially higher than the 2.37 I got earlier.

The total sum of part is now 3.17+1.53+0.30=RM4.73, higher than the RM4.20 I got earlier.

I have no argument about this figure.

digiuser, I was doing it using sum-of-parts valuation. Part 1 is its enterprise value (exclude Thailand which is an associates), part 2 for Thailand's business, and 3, the excess cash.

The total value of equity in my computation of RM4.20 per share is not much different from your total of RM3.87 per share using the FCF, especially if you add the 30 sen excess cash.

Nobody will get the exact similar figures, considering the art of valuation. With 10-20% is close in my opinion.

"Hopefully you won't have to find out the hard way that buying a good company for too high a price is still better than buying a poor company - even at what you may think is a bargain price."

"No matter how low it may be, a company that doesn't meet the quality requirements will always be too expensive - at any price!"

A new tiny 800cc Myvi cost 10,000. A new 2500cc Honda Accord costs Rm300,000. Which would you buy?

A house with untidy garden, some broken windows, tiles is selling 500k. A nice looking house in the neighborhood, everything in good conditions selling at 1m. Which house would you buy?

Hope, a psychological pitfall

Hope, begging, blind faith, wishful thinking etc. Whatever you want to call it, it deserves no place in your portfolio. It is a dangerous pitfall one should avoid.

In Investing, Hope = Hopeless.

Let us look at KNM, a “shining star” in this portfolio of lemons.
There are people who have bought KNM at an adjusted price of more than RM4.00 less than 5 years ago with the wonderful promises given by the management, exaggerated by the bullish reports of many analysts. At that time KLSE was just recovering from the US Sublime crisis with the index at 1072. Since then KLSE has risen about 80%, whereas KNM kept on falling in price to the lowest of less than 40 sen half a year ago. Since then it has risen a little and closed at 56.5 sen on 24 January 2014. The loss is more than 80%.

How can investors accept the fact that a high flier KNM loss 80% and the broad market rose by 80% in the same period? It can’t be. It would sure to recover, if not to RM4.00, must be at least RM1.50. So they hope for the following:

1. KNM will get big contracts soon. But did they read the comment by one forumer here who said he worked in tendering jobs for KNM before and the prospective gross (note gross, not net) margin is 5%, or even zero %. So how could big projects securing, if any cure the problem of KNM?
2. KNM is getting 300 m Euros in loan. So all KNM’s financial problems (big one) would be all solved? I don’t know if this is true or not because if I am a banker, I won’t want to lend to them knowing their prospect and balance sheet.
3. Ringgit is weaken so good for KNM. Really? Is KNM earnings and getting big cash flows from USD or Euro, or is it likely it is going to pay higher interest, or to fund the losses in overseas operations from money remitted from Malaysia because of the lower exchange rate?
4. Borsig is going to list in Singapore soon. So all financial problems would be solved. Really? But how does it improve KNM’s business? The proposed listing has been talking for ages, why is it still not listed? Any problems?
5. KNM management is going to reward the shareholders soon with bonus issues, free warrants (of course also have to buy the right issues also lah). Are they really “free”? Or just free for the insiders who can benefit from the exercise?
6. This is the best. General Lee is going to privatize KNM (with his backside). All shareholders can redeemed their shares for RM1.37, its net asset backing per share.

Yeah, these are all the hopes. But think and analyze, what is the probability of any of this hopes to be realized?

It is also hard to sell losers as it would confirm your loss. But is it better to sell out and put your money to work in a better investment opportunity?

Whatever the outcome, you should heed a prime rule of investing: You don’t have to make it back the way that you lost it. – Buffett

Posted by miketyu > Jan 24, 2014 05:13 PM | Report Abuse
Mr Kcchongz,
Two of your stock picks, MFCB and Tien Wah have been sold down recently.
MFCB massively sold by one of the directors while Tien Wah sold by the Army Fund. Although the fundamentals seems has not been deteriorating, would it be the sign that insiders know something we don't?

First Mega First, just check the share price performance, it has risen by 23% since it was picked in less than half a year ago, whereas the KLSE gained only about 1.3% in the same period. So I guess you have no issue about its share price performance, do you?

Regarding the selling, the one selling is Lim Tian Soo,just a major shareholder. I don't see his name in the list of management. He has sold about 165,000 shares out of its indirect interest of 50m this year. Do you have an issue about that? The one who has been buying is Goh Nan Kioh, the executive chairman. So do you still have an issue about insider selling or buying?

Now for Tien Wah, its share price went up only 1.8%, still better than the KLSE of 1.3%. Ok lah isn't it?

Regarding the selling of Tien Wah by the Army fund, i don't really pay much attention. It is a big institution managed by many people, some with political and other interest. They buy and sell very often. Unless you tell me Tan Teng Boo is selling like hell, then may be I may pay some attention.

digiuser016,
This is based on discount cash flow analysis of a firm using WACC. The assumptions are all after tax earnings are cash flows and reinvested at the return of capitals, in super-normal growth as well as terminal growth rate after certain time, and at a fixed capital structure.

Zhulian has no debt and negligible minority interest and hence all theoretical enterprise value belongs to the equity holders.

Hopefully I got the analysis correct.

i got he spreadsheet from the web from Professor Aswath Damodaran. You can Google it.

This is a true letter, almost word-by-word except for a couple of small changes, for example the actual name instead of the word "client (s)". Fund manager? No, or may be not yet. There are strict rules form SC about this.

When I suspect I was caught by insiders' manipulation of LBS when the there was a discount in this warrant and later share price fell back, I usually would just get rid of it and move on. I will never do averaging down in such circumstances. However I do not follow any strict technical rules. It depends on further developments of its fundamentals.

Anyway i bought a little of this because of discount, assuming that the market price of LBS was "correct" based on efficient market hypothesis, and some write-up about its big profits from the sale of its land in China. I never did any analysis, nor was I able to, about the value of LBS, hence its warrants. I normally don't place too much importance on what others say about the value of its land bank this or that.

When to sell?
Posted by cykoay > Jan 24, 2014 02:54 PM | Report Abuse
i love to read your writings but did you have your own criteria for selling? Do you mind to share?

This is my principle

http://klse.i3investor.com/blogs/kianweiaritcles/43016.jsp

First level thinking: I am going to buy a couple of potential big winners to earn superior return. Borrow money also to leverage and amplify my return to a few hundred percent, or even thousands percent in the year.

Second level thinking: I am going to avoid big losers from my diversified portfolio and with that hopefully I can get above average return from my portfolio.


So how to avoid big losers in a portfolio?

You must have a good idea of what the thing you’re considering buying is worth. There must be cash on the books and the value of the tangible assets; the ability of the company or asset to generate cash; and the potential for these things to increase.

Rather than buying based on rumours, the next "hot" stocks, and hope that others would push up the price for you to make money.

"When you locate a bargain, you must ask, 'Why me, God? Why am I the only one who could find this bargain?'" - Charlie Munger

In investing, there are simply too many variables with high level of abstractions; the unpredictable and unknowable future; the highly emotional of human being of greed and fear.

Often investment analysis (if any done) projects a detailed and complex world onto a smaller subspace. But extrapolation in the smaller space can be unreliable.

Unlike in Science you’re playing against God, and He doesn’t change His laws very often. Here I would agree that for success, there is “99% perspiration, 1% inspiration.”

In finance and investment, you’re playing against God’s creatures, agents who value assets based on their ephemeral opinions. “sharp analysis with experience in this particular field” may help in the outcome though.

Investment analysis is not the physics of markets. It is not even close to that. Similarly speculating with the believe that knowledge of a stock’s past behaviour can help to predict its probable future behaviour to me is even more abstract.

In my humble opinion, luck must play a bigger role in investing.

“Learn to be honest with yourself about your success and failures. Learn to recognize the role of luck has played in all outcomes. Learn to decide which outcomes came about because of skill and which because of luck. Until one learns to identify the true source of success, one will be fooled by randomness”.
Paul Johnson