EPMB a gem? What happen to the RTO of the Mex expressway?

Posted by sklyte > Dec 17, 2013 06:34 PM | Report Abuse
Kcchongnz,
I want to thank for your analysis on Ulicorp. The price has moved 6% today! I would have taken profit if not for your analysis. In fact I added more instead of taking profit. Thank you again. What do you think of Epmb? A spare parts manufacturing co. Very illiquid . Q to q result always profitable. Dividends 2%. Price 71cts. Kept the shares 2 years .
My average cost 80cts. Rto of Mex expressway did not go through. Thank you in advance.

You are lucky that Ulicorp finally moved a bit. Don't forget that you also received the 2 sen dividend which formed part of your total return.

I thought you have asked about this stock the third time already, haven't you? I was hoping someone else would respond to your query as I didn't know much about it.

When I assess if a stock is a gem, I will first look at it if it is a good company, then it is selling at a good price.

EPMB's revenue and earnings have been declining significantly for the last three years. That was why i think EPMB was trying to find other source of revenue for its business. The ttm revenue and earnings is 475m and 20m respectively, for a margin of just 4.1%. This is not very good. ROE and ROIC is about 6% and 8% respectively, certainly not good as the return is significantly less than the cost of capital. It's cash flow from operations is ok, but it requires a lot of money for capital expenses. Not much or even negative free cash flow. It has considerably high debt, with total debts of 0.7 times of equity. Hence from these I can't classify EPMB is a good company, no way.

At 71 sen, forward PE is about 6 and P/B very low at 0.4. However enterprise value is more than 10 times Ebit, not good especially with a high debt and little FCF company.

The only bright spot is its high dividend yield of more than 5%. But just wondering how long can this high dividend be sustained with little FCF and highly leveraged balance sheet.

Just my personal opinion.

Tenaga Call Warrants 17/12/2013

Just read a report by TA Securities on Tenaga in the appended link below:

http://klse.i3investor.com/servlets/ptres/20160.jsp

TA gave a target price for Tenaga at RM13.23, up by 20.1% from the closing price today at RM11.02. This is due to the announced tariff hike by the government recently. This prompted me to look at its leveraged instruments, the call warrants of Tenaga, to see if they are some good punts.

There are presently 6 Tenaga call warrants listed in Bursa, C2 through C7 with their present prices and profiles as shown in Table 1 below:

Table 1: Profiles of Tenaga call warrants
CW Price Ex-Price Ex-Ratio Expiry date Premium Gearing
C5 0.345 9.00 6 29/08/2014 0.5% 5.3
C6 0.195 9.50 12 30/06/2014 7.4% 4.7
C7 0.115 10.50 16 15/12/2014 12.0% 6.0
C2 0.810 6.90 5 31/12/2013 -0.6% 2.7
C3 0.970 7.10 4 31/03/2014 -0.4% 2.8
C4 0.630 7.77 5 30/05/2014 -0.9% 3.5
Tenaga share price at RM11.02 at the close on 17/12/13

Which call warrant of Tenaga has the best value?

Three of the call warrants were traded at discounts. They are C2 (-0.6%), C3 (-0.4%) and C4 (-0.9%). Out of these three, C4 is obviously the better punt with the highest discount of 0.9%, the longest expiry time, and the highest gearing. Punters of these three warrants are given free time value which is valuable as they are still a long way to expiry, except for C2 which has only two weeks to expiry. Talk about free lunch in investment.

For the other three warrants, C5 is obviously better bet than C6 as it has a much lower premium at 0.5%, two months longer to expiry on 29/8/14, and a higher gearing at 5.3. C7 has the highest gearing of all at 6.0 and the longest time to expiry on 15/12/13.

One of the ways to determine which warrant of the same underlying share has better value is to use the Black-Scholes Option Pricing Model. Using a volatility of 25% for Tenaga, risk-free rate of 3.5%, and dividend of 30 sen per year, the option values and the respective premium of the three warrants are shown in Table 2 below:

Table 2: Option Pricing
CW CW price Option value Ex-ratio CW value Pre/Dis
C4 0.630 3.247 5.0 0.649 -3.0%
C5 0.345 2.200 6.0 0.367 -5.9%
C7 0.115 1.352 16.0 0.084 36.1%

The analysis shows that C5 is the best punt followed by C4 as they are traded at discount to the value obtained from the Black-Schole Option pricing Model. C7, though at the highest gearing, it requires the underlying share price of Tenaga to move in a very big way to have a positive outcome.

The following Table 3 shows the payoff of each call warrant at expiry date:

Table 3: Payoff at expiry dates
Uly Price 9.00 10.00 11.02 11.50 12.00 12.50 13.00 13.23
Tenaga -18.3% -9.3% 0.0% 4.4% 8.9% 13.4% 18.0% 20.1%
C5 -100.0% -51.7% -2.4% 20.8% 44.9% 69.1% 93.2% 104.3%
C6 -100.0% -78.6% -35.0% -14.5% 6.8% 28.2% 49.6% 59.4%
C7 -100.0% -100.0% -71.7% -45.7% -18.5% 8.7% 35.9% 48.4%
C2 -48.1% -23.5% 1.7% 13.6% 25.9% 38.3% 50.6% 56.3%
C3 -51.0% -25.3% 1.0% 13.4% 26.3% 39.2% 52.1% 58.0%
C4 -61.0% -29.2% 3.2% 18.4% 34.3% 50.2% 66.0% 73.3%

The table shows that if Tenaga share price rises up to TA’s target price of RM13.23, punting who have bought C5 at present price of 34.5 sen would have a gain of 104% when settled at the expiry date on 29 August 2014.

KC Chong (17/12/2013)

Posted by ryanc > Dec 17, 2013 05:28 PM | Report Abuse

How to have confidence in this Sifu?


Why not? Aren't you going to praise this sifu for the great performance of his portfolio set up just 10 days ago as shown below?

http://klse.i3investor.com/servlets/pfs/25099.jsp

What I can see out of the ten stocks picked, 9 went up. The average return is 8.5%, just in 10 days.

What is your cynical remarks about? Have you shown that you can do better?

Yes, houseofordos explained it clearly what and how to calculate excess cash.

Excess cash is cash not needed for the ordinary operations of a business. It can theoretically be distributed to the shareholders without affecting the business. When doing valuation using discount cash flows, I add this "excess cash" to the theoretical enterprise value of the company to give the "intrinsic value".

Excess cash is typically made up from the cash in bank, FD, short term money market fund, or even equity. To be conservative, we need to have a positive net working capital (inventories+receivables-payable). As balance sheet is a snapshot of the company's financial position at a specific time, sometimes the balance sheet shows a negative working capital, but generally not for long time.

So to be conservative, we shouldn't take all the "excess cash" as such without taking into consideration that business generally requires positive net working capital.

With the above in mind, you may now understand why the formula for excess cash, which I learned it from Jae June from the Old School Value not too long ago. It took me a while to figure out the rationale.

francis, next time when my book is published, I will let you know and be sure you buy a copy, ok?

As for the time being, what I said "in my book", it remains just a synonym.

I have made a comparison of some furniture companies about a month and a half ago here:

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

Since then most of the furniture companies share prices have gone up considerably except of Lii Hen and Tafi.

Hevea at RM1.12 now is trading at a historic PE of 4.9, still very cheap indeed with this metric. As it has considerable debts, its enterprise value is 7.7 times ebit, not cheap any more, but 3.9 times ebitda, still cheap. Yes, Hevea has quite a bit of depreciation charges which is non cash.

Overall I would say Hevea is not expensive, but also not dirt cheap.

An investment approach based on solid value is the most dependable. In contrast, counting on others to give you a profit regardless of value-is probably the least.

If you use EPV, IV is definitely exceeded as you know the conservative assumptions of EPV. If you use DCFA, it is the assumptions of growth which matters.

As you very well know this DCFA is an art. So there is nothing right or wrong, but more of your personal expectations.

For me you probably know I want to have high margin of safety in my investment. If the MOS is no more comfortable, I will move on, and I have.

Posted by asriruslan > Dec 17, 2013 10:05 AM | Report Abuse
company buy back will support any selling pressure

Questions
1) Is it the company's business to support share price?
2) Is KNM share price cheap now that company should buy back its undervalued shares?
3) If you think the share price is cheap, what metrics do you use?
4) Where does KNM get money to buy these shares?
5) Company buys back shares, are you happy the share price is not going down any more, or should you the share price to go up?
6) So is the share price going up when company announced and started share buyback, or the money just thrown in without seeing any results?
7) If the share price eventually go up (if ever), whom do you think will benefit, you as a minority shareholder, or the major shareholder?
8) Who has the control of this up and down share price of KNM?

Yeah, CBIP's share price has gone up quite a bit since 5 months ago. Its PE and EV/Ebit is certainly not low any more.

In my opinion, its share price is creeping towards its intrinsic value, but certainly not exceeded it yet.

You can check yourself with your discount cash flow analysis with some conservative assumptions.

Ofi a gem in 2014?

Posted by 爱丽斯 梦幻世界 > Dec 15, 2013 11:50 AM | Report Abuse
Kcchongnz, can help check ofi intrinsic value? Can it be 2014 gem? Thx

In the long run in a capitalist country, the return of invested capitals would be about the same as its costs of capitals. OFI is no exception. Its ROE and ROIC of about 10% speak volume.

In the long run, the capital market is somehow efficient for most stocks. That is also reflected by OFI. PE ratio of 11 times, and enterprise value 8 times ebit is a fair valuation for OFI in my opinion.

Using an assumption of required return of 10% and 3% growth forever from now on, OFI is worth about RM2.90, a 15% upside potential, just a fair margin of safety.

Fed tapering, another macro thingy?

Howard Marks on Macro

So anyway, it was very refreshing to hear Marks talk about the macro. He was asked about how macro is getting to be more important in investing in these volatile times. He said that most people think macro will determine investment results (so they pay a lot of attention to it). But he points out that in investing, there is always another side to it.

Of course, it's desirable to be able to forecast the macro to improve your investment results, but the big question is can you do it? Can it be done? Marks said that he personally doesn't believe that you can be consistently superior in macro judgements. The two key words are consistently superior.

He also noted that the smartest investors from Buffett on down don't make macro judgements; they find great values to invest in.

He was asked what he thought will happen in Europe (just after telling them that forecasting macro can't be done consistently). He said that it is a complex situation but he is sure of three things:

1. He doesn't know what will happen in Europe
2. Nobody knows what will happen in Europe
3. If you ask an expert what they think and take their advice, you're making a mistake.

He quoted Mark Twain: "It's not what you don't know that gets you into trouble, it's what you know for certain that just ain't true".

Can you know more than others? That's the real question.

Value, value and value

Almost everybody in the market has this slogan of “Buy low, sell high”., although I don’t deny that there are substantial percentage of people prefer to buy high and hope to sell higher. What does it mean by high, and low?

To me I can’t comprehend how one can accomplish the above if he doesn’t have the faintest idea of what is the intrinsic value of the stock. Do you?

I opine that for investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without it, any hope for consistent success as an investor is just that: hope.

I have just talked about the asset based valuation in Graham net-net, and negative enterprise value; buy when total market value of a company’s stock is less than the amount by which the company’s current assets exceed total liability. In theory you could buy all the stocks, liquidate the current assets, pay off the debts, and end up with the business and some cash. Pocket the cash equal to the cost, and with more left over you have paid “less than nothing” for the business.

Value investor can also look for earnings, cash flows, dividend etc and try to quantify the company’s current value and buy when cheap. The valuation can be done using earnings power valuation, Gordon constant dividend growth model, or conservative assumptions in the discount cash flows analysis. Growth investing identifies companies with bright futures in projected earnings and cash flows. The reward for accurately predicting the future is more dramatic, provided you are right about the future. For me I think it is harder to see the future than the present. Hence in my book, consistency trumps drama.

The market is a weighing machine over a long term. If you do a good job valuing a stock and buying at a significant discount to its intrinsic value, the market will eventually agree with you with asset price move towards its value. It is just a matter of time. But don’t expect immediate success. Oh yes, you have to be right of course.

An investment approach based on solid value is the most dependable. In contrast, counting on others to give you a profit regardless of value is probably the least.

Selling for more than your asset’s worth. Hoped-for the arrival of a sucker can’t be counted on. Unlike having an under-priced asset move to its fair value.

Trying to buy below value isn’t infallible, but it’s the best chance we have.

KC Chong in Auckland (16/12/13)

I can calculate the motions of heavenly bodies, but not the madness of people

-Isaac Newton who lost heavily in the South Sea Bubble.

And understand Graham's concept of Mr Market who is kind enough to serve you, if you don't let him misleading and influence you.

Prolexus has good growth in revenue and earnings for the recent past few years. It is also not expensive. Below is what I have commented before on it. Since then its price has gone up considerably when you take into its adjusted price. I think the fundamentals still remain the same.

Posted by kcchongnz > Apr 9, 2013 05:22 PM | Report Abuse X

Prolexus A growth stock?

The table below shows the 6 years revenue and earnings of Prolexus for the financial years ending 30th June. It doesn’t show that it is a high growth company in terms of revenue. It made losses in 2006 through 2008. However, after the disposal of some loss making investment in 2008, Prolexus made a turnaround. Its revenue grew at a CAGR of 8% from 2009 to 2012. Its EBIT surged by 45% a year for the three years from 2009 to 2012. The growth in EBIT and net income last year was 90% and 80% respectively. That would qualify Prolexus as a high growth company. Thanks to the growth in its garment manufacturing.

Year 2012 2011 2010 2009 2008 2007 2006
Revenue 189498 184464 136875 149998 166774 181527 174840
EBIT 11213 5886 6601 3694 -149 -2958 -1066
Net Income 10568 4906 3403 262 -2892 -5869 -1976

Prolexus closed at 1.33 on 9th April 2013. With a EPS of 28 sen per share, the PE ratio is about 5 (<<10), PEG is also very low at 0.2(<<1), a P/B of 0.9 (<1.5), and a dividend yield of 2.3%. Hence Prolexus is not only a growth stock, it is also a value stock in every aspect.

A high growth stock has a major concern; that is if the growth adds value to the firm. Growth is considered shareholder value enhancing if the growth in earnings exceeds the weighted average cost of capital of the firm. With a return of total capital of 15.2% and ROE of 16.2% last year, it has clearly demonstrated that the growth is shareholder value enhancing.

For the half year ending 31/12/2012, Prolexus has already made a net profit of 22.3 sen per share, 64% more than the same period the previous year.

So is Prolexus a free lunch for investors; one with high growth and yet selling at a very cheap price?

5204 appears to be very interesting to me. You can read about my analysis on it in i3. The more interesting thing I think there is at least a major institution accumulating it, like what happen to the price performance of 5216. Not very sure though

Posted by ccs999 > Dec 16, 2013 03:18 PM | Report Abuse

Thanks kcchongnz,would you collect any Pintaras at this level?

Pintaras will continue to prosper with the construction works going forward for the next couple of years at least in my opinion. They have the niche and skills in their industry. Management is also shareholders focus.

However I won't buy any more as it is my second largest weighting in my portfolio. I have accumulated enough since 3-4 years ago. Please read the following link you would understand me.

http://klse.i3investor.com/blogs/kianweiaritcles/43093.jsp

The intrinsic value stated is before bonus. So ex-bonus, divide by 2.

However, be reminded again intrinsic value, especially based on earnings, is an estimate only based on a number of assumptions.

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.

Short term investments are short term placement in money market fund, bank fixed deposit (normally less than a year), or even equity market investment etc as funds can be withdrawn any time.

Negative Enterprise Value Stocks

Recall the following formulae for enterprise value and the intuitive definition of excess cash.

Enterprise Value = Market Capitalization + Total Debt - Excess Cash
Excess Cash = Total Cash - MAX(0,Current Liabilities-Current Assets)

If the excess cash in cash and marketable securities exceed the cumulated market values of debt and equity, it gives you a negative enterprise value. In theory, at least, this seems to be an easy arbitrage opportunity, where you can buy all of the debt and equity in a firm and use its cash balance to cover your investment costs and keep the difference.

Like Graham net nets, typical negative EV stocks are ugly balance sheet plays often associated with pre-bankruptcy cases. They lose money; they burn cash; in other words, where the cash may or may not be there tomorrow. Frankly, that’s why normally they’re cheap. But do all negative enterprise value companies in Bursa cash burners?

Let us look at a research done in US on the return in investing in negative EV for forty years from 1972-2012 by the CFA Institute in the link below:

http://blogs.cfainstitute.org/insideinvesting/2013/07/10/returns-on-negative-enterprise-value-stocks-money-for-nothing/

The author's research showed that the average return of 26569 opportunities in 2613 stocks was 50.4% for all negative EV stocks, and 60.5% for micro stocks with limited liquidity of market caps under $50m after holding the investment for one year, not including trading costs, taxes, and so on. Not bad!.

Hence it may be a great strategy to invest in negative enterprise value stocks for some extra-ordinary return. Do you have one?

KC Chong in Auckland (15/12/13)

Is Graham net-net valuation infallible?

Graham net-net is an estimation of the liquidation value of a company as shown below.

Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities

It's the lowest form of valuation you could possibly do because it ignores everything about the business and just focuses on tangible assets. The formula states that;
• cash and short term investments are worth 100% of its value
• accounts receivables should be taken at 75% of its stated value because some might not be collectible
• take 50% off inventories, due to discounting if close outs occur.

So if one buys the stock with market capitalization below the Graham net-net value, he would very sure make money eventually. Is that so? I don’t think so.

For one thing, Graham net-net valuation still bases a heavy weighting on account receivables, 75% of the book value. For example if the company is in contracting business which I have personally involved with before, very often this “receivables” can very well vanish into the thin air, or worse still, turned out to be “payables”. There are a lot of construction disputes, endless especially if you are involved in big and complicated projects, which eventually end up in endless arbitration and court cases. The company can end up instead of receiving those “receivables”, pays liquidated damages for delay. Often settlement is made with the “receivables” evaporated. Take particular attention to the aging schedule of the receivables.

For “inventories”, think about a fashion or technology company which inventories can end up worthless, instead of selling at 50% of book value at liquidation.

What about the “cash”? Surely this is worth 100% of the value. Not necessary. Some may end up in some other people’s pocket instead of the shareholders; or burned away due to improper allocation of resources, poor business ending with persistent losses etc.

So Graham net-net valuation for sure has its shortcomings. Ever heard of another more “sure” way of asset based valuation; the negative enterprise value?

houseofordos, you got a valid point. But again you are talking about short term trading kind of stuff then, aren't you?

Yes, I also wary about small company. That is covered by Ben Graham above too in point number one. It is related to its business durability, not about its share price.

Of course all investments come with risks. A good company can be a bad investment if the price is high. What actually is risk in investment?

In academic, risk is measured as sigma, or the standard deviation of its return; or beta, a correlation of its return with the market. The higher the sigma or beta, the more risky is the stock.

But what actually is this "risk" in investing in the real world? It is the Probability that an actual return on an investment will be lower than the investor's expectations. All investments have some level of risk associated it due to the unpredictability of the market's direction.

How do I look at risk? Well I would rather follow Benjamin Graham's context of risk. A stock is less risky if it has the following characteristics:

1. Adequate Size of the Enterprise
In the world of investing, there is some safety attributable to the size of an enterprise. A smaller company is generally subject to wider fluctuations in earnings.

2. A Sufficiently Strong Financial Condition
According to Graham, a stock should have a current ratio of at least two. Long-term debt should not exceed working capital. This should act as a strong buffer against the possibility of bankruptcy or default.

3. Earnings Stability
The company should not have reported a loss over the past ten years. Companies that can maintain at least some level of earnings are, on the whole, more stable.

I deviate from this as I sometimes do look at turnarounds.

4. Dividend Record
The company should have a history of paying dividends on its common stock for at least the past twenty years.

I tend to deviate from this as I believe sometimes if needed, company should reinvest its cash flow rather than "forced" to pay a dividend.

5. Earnings Growth
To help ensure a company's profits keep pace with inflation, net income should have increased by one-third or greater on a per-share basis over course of the past ten years using three-year averages at the beginning and end.


6. Moderate Price to Earnings Ratio
For inclusion into a conservative portfolio, the current price of a stock should not exceed fifteen times its average earnings for the past three years. This acts as a safeguard against overpaying for a security.

The price to pay is the most important factor for me.

7. Moderate Ratio of Price to Assets
Quoting Graham, "Current price should not be more than 1 1/2 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5 (this figure corresponds to 15 times earnings and 1 1/2 times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)"

This can be translated to a formula used by some people here, the Graham Number.

Posted by TeckChuan Lee > Dec 14, 2013 03:22 PM | Report Abuse

MIKROMB 0112 RM0.24
MIKRO MSC BHD

Technology ACE Market

Based on June13 Report RM0.21

1. ROIC 28%
2. ROA 14%
3. ROE 17%
4. EV/EBIT 5.6
5. Earning Yield 18%
6. P/B 1.3
7. Cash Flow OK. Operation CF 164% over Net Income

Teck Chuan,
Based on your numbers, Mikromb does fit the Magic Formula. However, it is still a very small company with very small sales (<30m) and hence vulnerable; vulnerable to small customer base, loss of key customers, competitions (from China?), downturn of economy etc.

But there are many big companies now also grew from small too. In fact small company can grow faster. Just not sure if it won't subject to keen competition from those low cost producers from China.

Can invest, but I think don't place too heavy weight in your portfolio. Just my opinion.

KC Loh, do you know anything about psychology? Many of us will straightaway know he knows nothing, a really tin kosong by reading what he writes. And when we rebuke him, he just didn't have that intelligence to response and then just talked nonsense. But how come he got followers who truly believe in him, having the opinion that he is truly good and enlightening?

inwest88, a writer is always happy to have a good reader like you.

houseofordos, I am sure you notice my picks were not aimed to outperform the market during the bull, but more for the Bear. Reasons:

1) Those stocks selected were all value stocks. Value stocks generally underperformed during the bull market because investors always chase growth stocks which give them higher expectations during the Bull.
2) There is even Graham net net stock like Daiman, who knows and cares about his stupid net net? Everybody aiming for RM1 gain in a short time. Net net stocks will never give you that.
3)Almost all the stocks selected have no investment banks following. Who cares about them? When nobody cares about them, how to go up fast in price?
4) Yeah like somebody always laugh about it, no liquidity. So where got fun playing with them?

I tend to think those stocks selected will perform better relatively during bad times. Why?

1) They have steady earnings and good cash flows, even in bad times.
2) They have healthy balance sheet, and usually plenty of cash.
3) Even they are leveraged, they have good earnings and CFFO to easily cover interest.
4) They have good operating numbers.
5) Best of all, they are cheap in terms of PE, EV/ebit, P/B etc. Cheapest is the best form of financial risk management in investing.
6) They are not stocks based on hope, hope that major shareholders will goreng the stock, hope that it will strike oil, hope that the earnings will continue to grow at very high rates etc.

From the Motley Fools:

There's a scene in the documentary Enron: The Smartest Guy in the Room where Enron's HR director is asked by an employee in a 1999 meeting, "Should we invest all of our 401(k) in Enron stock?"

The HR executive laughs and blurts out, "Absolutely!" And I'm sure she meant it.

Enron stock made up more than half of Enron employees' 401(K)s when the company went bankrupt a year later, according to FINRA. Employees not only lost their jobs, but half their retirements.

Warren Buffett once said, "Diversification is protection against ignorance. It makes little sense if you know what you are doing." But a lot of investors not named Warren Buffett don't know what they're doing, and Buffett's own Berkshire Hathaway controls 55 subsidiaries in industries ranging from underpants to private jets, newspapers to industrial chemicals.

William Goetzmann of Yale once analyzed the portfolios of 60,000 investors and wrote: "The least diversified (lowest decile) group of investors earns 2.40% lower return annually than the most diversified group (highest decile) of investors on a risk-adjusted basis."

I think every investor should own at least 10 companies, if not more, from a wide range of industries. It's how you protect your wealth from the unknown. As financial planner Carl Richards puts it, diversification "means that you're willing to exchange the opportunity of making a killing for the assurance of never getting killed."

When the quality of earnings is so poor not just one year, but every year; when there is no free cash flow from the operations, not just one year, but every year; And hence borrowings keep on going up every year; one may want to ponder if they really make that much money as reported.

If anybody ask me if he should put all his money in Mui and Pm Corp, I will say "are you nuts"?

However, a good company is not necessary a good investment. If one buys a company at high price, it can become risky; because one may not get the return as anticipated.

Prestariang at 2.80 is trading at a PE of 15, also enterprise about 15 times ebit. Is it high. It seems so. But this type of service company often comes with this type of market valuation. it all boils down if Presatriang can grow its earnings at a high rate.

My opinion is the valuation is reasonable.

Posted by KC Loh > Dec 14, 2013 10:44 AM | Report Abuse
Personally I like good write ups that focuses more on the risk part. Saw a write up earlier from an investment group which states that, if they focus on knowing what the risk and potential downward price range (I think it was a marketwatch.com article) , the upwards will take care of itself with so many investment houses giving their takes!
Just a thought for potential successful bloggers/analysts/writers?

Yes, investors often think about the upside and seldom bother about the downside. But behavioral finance has shown that human being feels two and a half times sadder in losing than happy in winning. If one lose 50% of his capital, he needs to make 100% in order just to make it even. Like Buffet's rules, No. 1 never lose money, and No.2 don't forget rule no. 1.

Yes, agree with you in focusing on the risk, the upside will take care of itself. But regarding having a potential downwards price range, it may be difficult, after all all valuations are just an art. However, I suggest we look at risk of a stock this way. Take for example Prestariang.

Prestariang has 51m in cash and just 1.4m in total debts, or an excess cash of 24 sen per share. Clean balance sheet and hence low risk.

Prestariang has been making money every year since listing. Earnings in fact grew from 15m three years ago to 2013ttm 41.7m. Plenty of free cash flow of 38.4m last year, or 17 sen per share. Very little risk as plenty of cash.

Because of its cash generating business, very good dividend, growing every year, going to pay 12 sen this year. High dividend reduces risk.

umm, am I trying to do this too; to stand behind the shoulder of Benjamin Graham?

Yeah, this is exactly I am aiming for; match the general market during bull market, and outperform during the bear market.

Posted by miketyu > Dec 13, 2013 12:09 PM | Report Abuse
Dear kcchongz,
Would you regard Fitters as hiddengem?

EPS feb 2012 0.10, feb 2013 0.129, Third quarter 2013 at 0.1066.
ROE at 12% based on earnings up to third quarter, Debt to equity ratio at 0.47, PE 4.7.

Problem with this stock is it hardly distributes dividend. But seems the earnings and EPS has been increasing year by year. What would be your view on this?

If I used Greenblatt's magic formula to evaluate Fitters, it would pass the investing criteria of a good investment company as its ROIC=16%>15%, and Ebit/EV=21%>15% based on the last annual financial report. Please refer to this link here about the magic formula.

http://klse.i3investor.com/servlets/forum/900285510.jsp

However one thing I don't like about Fitters is not because of it did not distribute dividend, but its very poor cash flows. The quality of its earnings is poor with little cash flow from operations which is way below its net earnings consistently. It has no free cash flows, also consistently. Its third quarter 2013 results show the deterioration of this cash flow further.

Another thing is its business. It is now more of a property company. So I think there are many other more established and more undervalued property companies around.

No, Fitters is not a gem in my book.

Just cannot let good article being slipped away unnoticed.

Margin of Safety in Investing by Seth Klarman

Posted by yusale > Nov 25, 2013 12:14 PM | Report Abuse
Hi kcchongnz, appreciate your many sharings in i3.

Earlier in this thread :

<Discount Cash Flows Analysis (DCFA)
The followings are the major data and assumptions used for the computation of intrinsic value of Pintaras.
Trailing twelve month EBIT 55.71m
Excess cash 123m
Expected growth rate 4%
Discount rate 10%
Return of capital at stable growth 12%

....The DCFA shows that the value of Pintaras ordinary business is worth RM537m, or RM6.70 per share.>

Would be much appreciated if you could show your calculation to get to the RM537m or RM6.70/share. I'm not meant to be spoon fed, but would be truly glad if you could share. Thanks

Valuation is an art. I have said it hundreds of times. The data for Pintaras above is already outdated with the latest annual results ended 30 June 2013 with the followings:

2013 Ebit 67.15m
Excess cash 155m

I don't know if it is the new IFR requirement, the ebit for Pintaras also include the interest income, and "gain on disposal of available-for-sale investments". When I do DCFA, I don't consider these as part of the "ordinary income" of Pintaras's foundation engineering works. The assets which generate these incomes come from the cash and equity funds which I add back after getting the intrinsic value of Pintaras's ordinary business.

So I take off these income from the reported ebit and get a normalized ebit of 52.2m and carry on doing the DCFA based on this ebit. I don't think one should worry too much of the exact figure. It is an estimate anyway, not a precise science.

Using this data and one of the valuation spreadsheets by Professor Aswath Damodaran below, marked, fcffvsfcfe.xls, which is based on the assumption of all cash flows reinvested into the business, and with some assumptions of yourself, you would be able to get the value of equity, and then add back the cash and cash equivalent, the total value for equity holders.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/spreadsh.htm#valreconcile

What I get for intrinsic value of Pintaras is RM7.82. My assumptions are tax at 25%, growth rate of 4% from now and forever, and return of capital of 12% at stable growth.

You must understand the architecture of the spreadsheet though.

Posted by bsngpg > Dec 12, 2013 03:26 PM | Report Abuse

If we know how to assess good stocks just to make the same return as the broad mktg, not to mention better than the broad mktg, sell and switch is the winner.

Yes, I fully agree with you here. But one thing one must know whether his initial appraisal of the companies is wrong and hence should switch to a better company, again requiring him to know if the stock he is going to switch to has higher chance of better return.

From here I hope you don't get offended as I am going to give you some of my opinions on investing for the well being of himself. This is purely out of good intention.

When one invests his hard earned money, one should not have the mentality of hero worshiping. For example you know the boss of a company and you trust him fully and invest just because of your trust in him. It is good. But have you done some due diligence whether the company is really that good for you to switch your investment to this stock? What are the risks etc?

Another example, a very successful investor says you will be super rich investing in a certain stock because of his reasoning of this and that. He even said he needs not to know how to read income statement, balance sheet, and don't even understand what is free cash flow. He even say may be you should use leverage, or margin to boast up your return. But you trust him so much and you follow him to invest whatever he does. Is it a right thing to do? Shouldn't you have done some analysis yourself if it is a right thing to do before you switch your money to this stock?

Posted by KC Loh > Dec 12, 2013 02:45 PM | Report Abuse

actually kcchongnz, it would be interesting to try spotting gems and make a top pick in a high market! that would really test the FA investor's mettle! just saying... :)

I think the present market is not really that high yet, as compared to those days in 2006-07, 1993, 19967 etc. I really don't think the market is overvalued.

However, I already find it very hard to find companies which can give me the return I have experienced for the past one year. I think I have to learn from you now how to do it. Serious.

Just checked my EPV of Willow. Yes, it is 83 sen. It is a conservative assumption of no growth of its Ebit for the rest of its economic life. So I have sold too early, itchy fingers I guess.

That is why one must have patience in investing, the proper mind set. Sigh, I am just human.

You notice that I have started another portfolio on the initiative of Ta KW in August. In my new portfolio, I maintain Kumpulan Fima and Pintaras in the portfolio and have another 9 new stocks. I continued to ride on Pintaras's share price appreciation. Yes, I bought all those stocks I wrote about.

The new portfolio returns about 33% less than 5 months ago to now. There are some big winners such as Fibon (63%), Datasonic (174%), Willow (39%). I have sold all these, also too early as their share prices have risen up closed to my estimate of their intrinsic values, or when I thought I have other better stocks to buy. I still have some decent winners besides Pintaras (107%), such as Homeritz (42%), Daiman (21%). I have also bought some other stocks, sold some, played some derivatives etc.

So it is hard to compare whether it is better to still hold the original portfolio which returned 53%. However, a look at the gain of my investment now and a year ago, the increase in gain in that period is about that magnitude, ie 53%. Hence I think it ended up about the same, whether I still hold the original portfolio, or what I have done since.

It only added some fun to my investing experience.

When to sell?

I would like to take this opportunity to share my view on “when to sell” using my portfolio which was set up by Tan KW on 21/01/2013 11 months ago as shown in the appendix and the link below:

http://klse.i3investor.com/servlets/pfs/13147.jsp

The portfolio consist of 10 stocks picked by me generally using the principle of value investing, or buying good companies at reasonable price, and better still, at low price. Good companies in my book are those with durable business earnings high return of capitals. In additional, companies with good earnings, cash flows from operations and free cash flows, and healthy balance sheets are preferred. Good price means the market prices are significantly below their intrinsic values. Intrinsic values are either based on their assets, especially quality assets higher than market prices, and present values of future cash flows which present high margins of safety against their prices.

If all the stocks are held until to date (12/12/13), the total return of the portfolio would be 53%, out-performed the KLSE of 11.6% by more than 400%. However, I have already sold off more than half the stocks in the portfolio.

I sold off ECS ICT and SKP Resources because for a number of quarters, their performances have been deteriorating and hence their intrinsic values may have been reduced. But the main reason was because I have found better stocks to buy. These two companies are still good and safe companies to own in my opinion as they are profitable, having good balance sheets and cash flows. If the recent poor performance is just temporary, I believe they will outperform in the future.

I sold off Jobstreet, Pantech and NTPM because I thought their share prices have gone up to their intrinsic values. I did not foresee the power of Jobstreet’s continuous share buyback, and most of all its declaration of the 1 for 1 bonus issues. That really caused its share price to spike up a lot. Its business however remain as very durable with the light assets model and plenty of free cash flows. Same is for NTPM.

I bought Kimlun because of its continuous winning of jobs and the buying of the shares by its major shareholder. It has very good operating efficiencies too with ROE and ROIC above 20%. Its operating and net margins, however, are very low in single digit compared to more than 30% those of Pintaras. Kimlun has considerable amount of debts. The worst is its poor cash flows from operations and free cash flows. In term of enterprise value over ebit, it was trading at a few times higher than Pintaras. Hence I thought I may be wrong in my initial appraisal and sold off Kimlun.

I still hold Pintaras and Prestariang although their returns have more than doubled in the last 11 months and their share prices have exceeded my original estimated intrinsic values. However, their fundamentals continue to improve and their intrinsic values continue to climb.

As for Kumpulan Fima, its earnings has reduced somewhat for last year. Its share price has not moved much too. However, its fundamentals remain intact; i.e. its earnings, balance sheet and cash flows are still very good. Its share price still presents a big discount to its intrinsic value in my opinion. Hence I continue to hold this stock in my portfolio.

KC Chong 12/12/13

Appendix
Stock Name Ref Price Price now Dividend Gain % gain
Kfima 2.02 1.95 0.08 0.01 0.5%
Pintaras 3.12 6.22 0.25 3.35 107%
ECS 1.06 1.17 0.06 0.17 16.0%
Plenitude 1.85 2.60 0.06 0.81 43.8%
Jobstreest 1.20 2.40 0.06 1.26 105%
Pantech 0.78 0.99 0.06 0.27 34.6%
SKPRes 0.34 0.315 0.02 -0.01 -1.5%
NTPM 0.47 0.75 0.03 0.31 66.0%
Kimlun 1.50 1.89 0.05 0.44 29.3%
Prestariang 1.21 2.66 0.10 1.55 128%

Avearage 52.9%

High return if kept until 2020? Really? What is your basis of saying so? In relation to the broad market?

Lets check the data. The last 5 years, icap NAV rose by 100% whereas share price rose from RM1.34 to RM2.35, for 75% gain. The compounded annual rate (CAR) of return of the stock is 12%, not too bad. However, the broad KLSE grows from 876 to 1843, or 110%, or a CAR of 16%. This implies icap share price underperformed KLSE by 35% in the last 5 years, or 4% a year.

What about for the last one year? icap's NAV rose by 2.7% and its share price dropped by 0.8%. However, KLSE gains 11.6%.

So what makes you so sure that icap will provide you with high return till 2020 in relation to the broad market?

Posted by houseofordos > Dec 11, 2013 01:03 PM | Report Abuse
I was just wondering what would the basic EV/EBIT be for the calculations if we were to use EV/EBIT rather than PE for valuation method in this thread.

This sounds like an interesting statement to me. First of all, all these thing is arbitrary. For example why use the base PE of 8? Why not 10, 5, 15? But if you flip the PE ratio over, the earnings yield (E/P) is about 12%. That may be is the yield the original author of this absolute PE valuation method wants. What about EV/Ebit, what should be the base then?

All I can say is if you replace P/E with EV/Ebit, you should demand a EV/Ebit of lower than 8 above. This is because:

1) The cost of debt is lower than the cost of equity, and hence valuation using EV must be lower when compared with market capitalization.

2) The denominator Ebit has not taken tax into consideration. Hence EV/Ebit must be lower than PE.

But how much lower we must demand EV/Ebit than PE ratio? Again it is arbitrary. What about an earnings yield of 20%, or EV/Ebit of 5? Or should earnings yield be 15%, or EV/Ebit of 6.7?

It also depends on what kind of industry it is.

Posted by Fat Cat Tim Buddy > Dec 11, 2013 06:51 AM | Report Abuse
Warren Buffett says, “Diversification is protection against ignorance.”
Peter Lynch has referred to diversification as “deworsification,” especially when it came to companies diversifying into non-core businesses.
Charlie Munger says “Wide diversification, which necessarily includes investment in mediocre businesses, only guarantees ordinary results.

All the sayings here are from the great gurus in investing. Can't argue with them. But I think few are Warren Buffets and Charles Munger. For Peter Lynch he had hundreds of stocks at any time in the fund he managed last time.

Why is diversification (into 5 to 20 stocks)important for a retail investor? Now let us look at a stock portfolio set up 14 months ago by an ordinary investor in i3 at the appendix.

The portfolio consists 4 REITs and 12 other stocks. It returned an average of 30% in 14 months, 3 times that of the broad market. It is a great feat.

Say this guy likes REITS and he bought all REITS, the four of them and not diversifying into other stocks. What would be his return? He will make a loss of about 5% instead of the profit of 30%.

What if he had not include the few big gainers like Poweroot, Zhulian, Wellcall, Fiamma, Coastal and Astino? He would just made the market return.

Would he be so lucky that he just bought those big winners and made huge returns? I think it would be unlikely.

It was so happened that it was a up market for the last 14 months. What happen if it were a bear market? Could one know the market if bull or bear in advance 14 months ago?

So does diversification work?

Appendix

Reference date 12/10/2012 11/12/2013
Stock Name Ref Price Price now Change %change
Ambank 6.36 7.43 1.070 16.8%
Astino 0.83 1.17 0.340 41.0%
CMMT 1.75 1.40 -0.350 -20.0%
Coastal 1.80 3.3 1.500 83.3%
Fiamma 1.16 1.88 0.720 62.1%
Haio 2.06 2.6 0.540 26.2%
Jaycorp 0.485 0.585 0.100 20.6%
Marco 0.15 0.15 0.000 0.0%
PPBank 14.56 15.38 0.820 5.6%
Stareit 1.04 1.01 -0.030 -2.9%
Twerreit 1.45 1.50 0.050 3.4%
UOAreit 1.440 1.45 0.010 0.7%
Wellcal 2.370 3.53 1.160 48.9%
YSPSAH 1.070 1.30 0.230 21.5%
Zhulian 2.560 5.00 2.440 95.3%
Poweroot 1.020 1.83 0.810 79.4%

Average return 30.1%
dividend 3.0%
Total 33.1%

In investment, the simpler it is, the better. If PE can do the job properly, that would be wonderful. However, The E there can mean anything and hence highly unreliable. E can also be boasted with leverage, which during bad time can cut one badly. EV accounts for other stuff which P does not do such as debt and cash levels and ignore non-operating thingy. Ebit is the "middle line" and earnings at the firm level and hence should not be affected by one off items.

Hence I think EV/Ebit is good enough. Of course if you have time, do more like look at cash flow etc.

Posted by heavyth > Dec 10, 2013 08:33 PM | Report Abuse
kcchongnz...When are you posting the stock pick challenge for year 2014 ???

Is there a hurry to post the stock picks for 2014? Don't we have another three weeks to go? Besides I have already got two portfolios below, the first is not even one year yet, and the second, hardly 5 months old.

http://klse.i3investor.com/servlets/pfs/13147.jsp

http://klse.i3investor.com/servlets/pfs/21089.jsp

The Efficient Market Hypothesis (EMH) and Capital Asset Pricing Model (CAPM) postulate that in an efficient capital market, current market price reflects all available information about a security and the expected return based upon this price is consistent with its risk. As a result, it is impossible for an investor to consistently beat the market and profit from it.

Hence it is not easy to find a market beating stock, especially when most good stocks have their share prices risen so much, isn't it? Besides even if I think there is one, it will take a huge amount of time for me to analyze, value and finally write a report on it.

In my opinion, it is the thinking and analytical process of investing which is more important. I know, this stuff is boring. But haven't I been saying that I do not have the wisdom of providing stock tips which can make anyone earns huge return in a short time.

Good feedback here on the number of stocks for diversification. Yes, for a retail investor, depending on the amount of money he has to invest, a portfolio of 5 to 20 stocks would be optimal. There is this economic 'Law of Diminishing Marginal Returns'.

There is no free lunch in the real world. Diversification is the only free lunch one can get in investing.

Why diversification in a stock portfolio?

The popular adage of "Don't put all your eggs in one basket" is very much suited for investing in the stock market. It advocates diversification, a technique that reduces risk by allocating investments in a number of stocks in the portfolio. Ideally the stocks chosen should be spread over different industries that would each react differently to the same event.

For example, the portfolio of 11 stocks here consists of companies of different industries; they are construction (Pintaras), Trading and Services (Kumpulan Fima, MFCB), Consumer (Haio, Homeritz), Industrial (Fibon, CBIP, Tien Wah), Technology (Willowglen, Datasonic), and Property (Daiman). Even within each industry, the stocks there are also lowly correlated. For example for the three stocks in the Industrial category, Fibon is in advanced polymer matrix fiber composites and electrical insulators, enclosures and meter boards; CBIP in palm oil equipment and retrofitting special purpose vehicles; and Tien Wah in printing works.

Stocks diversification won’t ensure gains or guarantee against losses but strives to smooth out unsystematic risks of companies in a portfolio which are not perfectly correlated so that the positive performance of some companies will neutralize the negative performance of others.

Kumpulan Fima, one of the eleven stocks in my portfolio here was my most favoured stock. It is still my favourite now. If I were to put all my money in this stock four months ago, I would only obtain a meagre return of just 1.32% as on 11 December 2013, way under-performed the broad market. With the diversification into the eleven stocks, my return now is 32%, out-performed the market with an alpha of closed to 30% in the last four months with some luck factors.

Modern Portfolio Theory by the Nobel Laureate Harry Markowitz has shown that when you have stocks that have low correlations together in a portfolio, you may be able to get more return while taking on the same level of risk, or the same returns with less risk. The less correlated the assets are in your portfolio, the more efficient the trade-off between risk and return.

Studies and mathematical models have shown that maintaining a well-diversified portfolio of about 20 stocks will yield the most cost-effective level of risk reduction as shown in the figure below.

This principle of stock diversification will continue to guide me in my stock selection in 2014.