Eric, what I see is the earnings per share of 13.2 sen. I don't know where you get 28 sen.

The cash flow statement of the audited account is so different from the unaudited account. From the audited account, I see CFFO of 37.6m but it was a negative of 39m in the original unaudited account.

In the audited account, I don't understand items like "Reversal of impairment losses on investment in associates" and "operating financial assets" as part of CFFO. It looks messy to me.

If one needs to sell a stock just to buy a new handbag, I think it is not wise to buy the stock in the first place.

What a good and original analogy from sense maker. Never heard before. But I will cite this analogy the next time people ask me when to sell. I also sell when the following situations occur:

1. When I realize I am wrong in my appraisal
a. I can’t be right all the time
2. When my evaluation of the stock has been realized
a. Price reaches my appraised intrinsic value
b. When too many people agree with my appraisal
3. Fundamentals significantly change
a. Change of management or deterioration of management decision.
b. Competitions creep in.
c. Significant deteriorating operating numbers
4. When we identify better uses of our capital

Often talk is easier than done. But it pays to be discipline.

Brem, what, another property company?

Posted by Eric Wong > Dec 9, 2013 09:44 PM | Report Abuse

guys, how about this Brem since someone shared it in Blogs.

Brem, another property company and its details are written here:http://klse.i3investor.com/blogs/kianweiaritcles/43001.jsp

Based on 2013 Financial Reports:
1. ROE = 11% which less than 15%; all five years ranged from 6.5 to 14%
2. FCF = 48.5m , minus out with short term borrowing still got balanced of 38m? Or we have to consider non current liabilities?
3. PE = 5, still very low
4. DY% > 5%
5. NTA = 2.54 compared to current price 1.4.

Basically, high debts company, almost same kind as Cresbld if i'm not mistaken.

kcchongz, please correct me.

I have not much knowledge about Brem, especially its concession in PNG and hence dare not venture in this company. Moreover, I have enough property companies for me to chew.

But just comment on your numbers here. Not sure how you get your numbers. Can you show how you get them? My calculation based on the same March 2013 results show totally different figure from yours.

1)ROE=22443/466596=4.8%
2)There wasn't any CFFO for 2013, how did you get your FCF? FCF=CFFO-capital expenses, nothing to do with borrowings
3) How did you get your PE of 5? EPS is 13.2 sen and price now is 1.4?

Posted by sephiroth > Dec 9, 2013 12:19 PM | Report Abuse
kcchongnz, need yr help to do a quick FA on property counter Keladi Maju(6769). Thanks a lot
cash rich RM143.32 m with no borrowings, positive CFFO for many quarter

LOOKING AT WHAT YOU MENTIONED ABOVE AND WHAT THE GENTLEMAN BELOW HAS ANALYZED, KELADI DOES SEEM TO BE A GOOD INVESTMENT AT 26 SEN NOW. IT MEETS MY FAVORITE MAGIC FORMULA; HIGH ROIC OF 19% WHICH IS MUCH HIGHER THAN THE COST OF CAPITAL, AND HIGH POTENTIAL RETURN AS SHOWN BY THE EARNINGS YIELD OF 26% (>15%).

HOWEVER ONE THING ABOUT PROPERTY COMPANY IS THAT IS THE EARNINGS CONSISTENT ESPECIALLY IN THE FUTURE? THIS I THINK YOU HAVE TO LOOK AT ITS LAND BANK AND FUTURE DEVELOPMENT. THERE ARE ALSO MANY OTHER GOOD PROPERTY COMPANIES TO INVEST. SO IS KELADI BETTER THAN OTHERS?

ANOTHER THING IS A GOOD COMPANY IS GOOD FOR LONG TERM INVESTMENT BUT BE WARY OF THE INSIDER/MAJOR SHAREHOLDER; IS HE A SHARE MANIPULATOR, IF SO THEN IT IS NOT GOOD FOR BUYING IT FOR SPECULATION. FOR EXAMPLE YOUR ANOTHER FAVORITE STOCK MARCO, INVESTING IN IT I THINK IS OK BECAUSE OF ITS REASONABLE DIVIDEND, BUT SPECULATORS FOR THIS STOCK DON'T END UP WELL BECAUSE I THINK THERE IS FREQUENT MANIPULATION OF STOCK PRICE BY A MAJOR SHAREHOLDER. I DON'T KNOW IF THIS MAJOR SHAREHOLDER OF MARCO THE SAME OF THAT KELADI. IF SO BETTER DON'T GAMBLE WITH HIM.

Posted by houseofordos > Jul 5, 2013 12:10 AM | Report Abuse
How about Keladi Maju ?
Property developer with projects mainly in Kedah as well as some business in palm oil upstream activities.

Based on 2013 annual report:-
• Earnings Yield = 26%
• ROIC = 19%

Using the magic formula, the effects of the one-off gains from re-measurement of associates recently were excluded and still showing good value ?

EV/EBIT=3.2
FCF/Rev = 15%
CFFO/NI=28%
Div yield = 1.9% (kind of poor)

Cash backing of RM0.16 per share
Net asset backing of RM0.32 per share

Looks like value buy for me ? Any comments ?

houseorordos, you have done a lot of discount cash flow analysis yourself and you should know it is an art. There are many assumptions used based on the prevailing condition then; eg its business then, the interest rate environment, etc. All these things change as the company business changes, and home and world economy is a dynamic one. No, I don't think the back testing will prove the analysis right, not at all. It is just an estimation. I would think the outcome will be off by a wide margin. Hence the concept of margin of safety must always be applied.

One thing I am quite sure is when you use conservative assumptions, the outcome should generally be positive, and likewise if too optimistic assumptions are used, and inadequate margin of safety is applied, investor will generally have negative outcome.

Posted by aunloke > Dec 4, 2013 07:11 PM | Report Abuse

I not only look for NNWC must be higher than the share price but also pay more attention to the finer point that the value must be the continuously increased and I find KSL has its NNWC increased continuously quarter by quarter. I feel that KSL has the potential to have a better price.


Yes, KSL has more and more retained earnings each year. In fact the growth of its retained earnings, and hence its equity attributed to the common shareholders, has been increasing at a very high rate as shown in the table below.

NAB per share increased from 1.65 in 2007 to 3.30 in 2012, or a compounded rate of 15% a year! Last year alone, NAB grow by 88.2 sen, or 36%. I guess this is due to the unlocking of the value of its land bank.


Year 2012 2011 2010 2009 2008 2007
Total equity 1290522 946063 858728 729730 653070 585949
Net Assets Per Share 3.304 2.422 2.199 2.053 1.837 1.648
Change in equity 0.882 0.224 0.146 0.216 0.189
Dividend 0 0 0.05 0.05 0.05
Total change 0.882 0.224 0.196 0.266 0.239 1.806

Valuation of Homeritz using free cash flow (9/12/13)

Here I attempt to find the intrinsic value of Homeritz using discount free cash flow method.

First I need to explain what are the few important data and assumptions I would use for the discount free cash flow (FCF) analysis as shown in Table 1 below.

Table 1: Data and assumptions
Current stock price $0.600
Share outstanding (thousand) 200000
This year FCF $11,932
Next year's FCF (thousand) $12,648
Growth for the next 5 and 10 years 6.0%
Terminal growth rate, g 3.00%
Discount rate, R 10.0%

The average FCF of 11.9m is taken from the average of the last four years since Homeritz was listed. It is assumed that FCF will grow by 6% for the next 5 years, and subsequently reduced to 3% forever. The growth rate of 6% taken is the CAGR for the last four years since listed as shown in the appendix below which in my opinion is reasonably conservative.

For the next assumption of a discount rate, I will use 10%. This is with a risk premium of 6% above the long term MGS rate of 4%. This is reasonable as the company has steady earnings and cash flows and a very healthy balance sheet. Hence the risk of investing in Homeritz is low.

The following shows the intrinsic value of Homeritz based on the discount free cash flow analysis:

PV of FCFF of core operations $199,000
Non-operating cash $34,710
Investment properties $0
Debts ($2,672)
PV of FCFE $231,038
Less minority interest ($15,503)
FCFE $215,535
Number of shares 200000
FCF per share $1.08
Margin of safety 44%

The above discount cash flow analysis shows that the intrinsic value of Homeritz is RM1.08. This represents 44% margin of safety investing in Homeritz at RM0.60 now. However, if FCF grows at a faster rate at 10% for the next 5 years, Homeritz is worth RM1.25. At the present price of RM0.60, the market is expecting its FCF to contract at 2% forever from now which is unlikely.

So what do you think is the fair rate of growth for Homeritz’s FCF and hence its intrinsic value?

Appendix
Year 2013 2012 2011 2010 Average CAGR
FCF 17665 18925 -3695 14832 11932 6.0%

A month has passed since I wrote a comparison of three furniture companies in Bursa, they are Homeritz, Latitude and Lii Hen. I have stated my preference on Homeritz due to its high margins, efficiencies and reasonably priced as compared to others.

Since then Latitude has released its latest quarterly report on 30/9/2013. Its revenue and net profit for the first quarter 2014 jumped by 27% and 63% to 531m and 30m respectively. The market also reacted positively with its share price rises by a whopping 38% from RM1.31 to RM1.81 at the close on 8/12/13. What a windfall for shareholders of Latitude. Another furniture company, Poh Huat also rode on the wave and its share price increased by 25% from 73 sen to 91 sen. Not sure why was that so as Poh Huat’s financial results are not impressive at all. On the other hand, the share price of Homeritz and Lii Hen remain unchanged from the same period.

Let us review the comparison on investing in those furniture companies again with the updated results. Also included are another four more furniture companies; Hevea, Eurospan, Poh Huat and Tafi.

Market valuation
First we examine which has the cheapest market valuation of all the furniture companies here with their latest prices and their twelve months trailing financial results as at 8th December 2013 as shown in Table 1 below:

Table 1: Market valuations of furniture companies
Company Homeriz Lii Hen Latitude Eurospan Hevea Poh Huat Tafi
Price 0.575 1.650 1.810 0.510 0.950 0.910 0.270
PE Ratio 7.7 5.9 4.3 6.8 4.2 5.9 NA
EV/Ebit 4.3 3.4 3.7 3.3 7.1 4.2 NA
EV/Ebitda 3.9 2.8 2.7 3.0 3.6 3.1 5.4

All except Tafi were making good profit for the past one year. We will rule out Tafi as an investment option because of its losses. They are selling cheaply too as all PE ratios are single digit with the lowest at 4.2 for Hevea and Latitude. Homeritz appears to be the most expensive at 7.7. In term of enterprise value, Hevea appears to be the most expensive at EV 7.1 times it Ebit. This is mainly due to its heavier debt burden. For the rest, EV is not much different from each other and they are all in a very low and tight range of 3.3 to 4.3 Ebit and 2.8 to 3.9 times Ebitda. However, Lii Hen and Latitude appeared to be the preferred choice as far as market price is concerned. Let us look at their operation performance for the past one year to see which company is indeed a better investments.
Margins and efficiencies

Table 2 below shows the margins of the business of each furniture company.

Table 2: Margins of furniture companies
Margins Homeriz Lii Hen Latitude Eurospan Hevea Poh Huat Tafi
Gross Margin 45.0% 15.1% 15.3% 21.1% 13.4% 16.7% 14.5%
Operating Margin 18.3% 6.7% 9.1% 5.7% 7.0% 5.7% -1.6%
Net Profit Margin 15.9% 5.3% 7.4% 5.6% 5.5% 3.8% -0.3%

All furniture companies have low to moderate gross margin in the teens and operating and net profit margin in the higher single digits. The exception is Homeritz with each of its margin from double to triple of the rest. For example its gross margin is 45%, three times that of Laitude and Lii Hen. Net profit margin shows the same difference. Thanks to its niche which differs from others in its design and manufacture of upholstered home furniture. It also has its own brand Eritz. Homeritz high margin business has return on invested capital in ROE and ROIC of 21% and 30% respectively, outperformed the rest of the furniture companies by a wide gap as shown in Table 3 below.

Table 3: ROE and ROIC of furniture companies
xxxxx Homeriz Lii Hen Latitude Eurospan Hevea Poh Huat Tafi
Net profit margin 15.9% 5.3% 7.4% 5.6% 5.5% 3.8% -0.3%
Asset turnover 1.1 1.6 1.1 1.2 0.9 1.5 0.5
ROA 17.3% 8.6% 8.5% 6.5% 5.2% 5.7% -0.1%
Leverage 1.2 1.3 1.5 1.2 1.8 1.6 1.1
ROE 20.6% 11.4% 13.1% 7.8% 9.3% 9.3% -0.2%
ROIC 29.9% 14.5% 16.7% 11.5% 8.5% 9.8% 4.8%

Two other companies, Latitude and Lii Hen also garnered ROE and ROIC comfortably above the cost of capitals above 10%, while the rest are marginally acceptable with the exception of Tafi. Wondering why some people chose Tafi. They must have something we don’t know.

Conclusions
Taken all into considerations, I still favour Homeritz as the top pick in furniture company to invest in. Although it has a slight higher enterprise value over its ebit, its margins and operational efficiencies are way above the rest. My personal top three ranking of the market valuations is as follow based on their respective market price now:

1. Homeritz
2. Latitude
3. Lii Hen

So which furniture company do you favour as an investment?

KC Chong in Auckland (8/12/13)

Posted by jennylee1382 > Dec 7, 2013 11:02 PM | Report Abuse

Kcchongnz Thank you for yr help of Gmutual and Pmcorp. Yr analysis are very details and clear.
can you look at PW(7134) current share px 0.86 Pe 5.04 and "Nta 3.53"?

I have looked into PW con financial statements a few months ago and my conclusion is for me to stay far far away from this stock. I mean for me.

Just looked at it again and my opinion has not changed a bit. The quality of its assets is very poor. So I don't pay attention to its low price-to-book. Earnings wise it has been very poor, mostly losing money. Not sure about its recent huge improvement in earnings. I didn't want to waste time to study it.

I know i know i know, its price seems to be flying now. I better stop here before people say i am wrong again. Yes, I always wrong about the future share price of stocks. I am poor in predicting stock prices.

Eric, that is correct.

The statement of cash flows from operations gives you the CFFO of 104.3m and that is it, CFFO. CFFO includes the Depreciation and Amortization added back to the net profit as D&A is non-cash items. You don't minus that from CFFO to get your CFFO.

Only you want to get the free cash flow, you minus the "purchase of property, plant and equipment" or PPE from the statement of "cash flow from investing activities".

Posted by Eric Wong > Dec 8, 2013 10:47 AM | Report Abuse

#kchongz - Can i have your email? Want to ask your advices and guidance for FCF calculations and others.

Eric, you may not get the right person to give you advice. I am just an ordinary retail investor, not a professional, nor am I an accountant. A lot of things i pick up myself through reading books and other forumers here. There are a lot of knowledgeable here like sense maker, houseofordos etc.

However, if you need my opinion, just post here or those places (this thread is ok as it was started by me)you are reading through, like in my posts where I used cash flow and FCF etc. I will try to answer you if possible. It is just sometimes people asked too general a question, it is hard for me to answer.

By discussing in i3, I would be able to learn from others too. Frankly, I am not sure what I am talking is correct or not sometimes.

Posted by sanchez > Dec 6, 2013 02:48 PM | Report Abuse

thank you for sharing us the knowledge. i am just a newbie who want to earn some money. dont want to take any money from parents any more. so,can i get extra information on The Absolute PE Method and DCF method. when should we use these 3 methods in value a stock. can e-mail me the template as well? thanks a lot. waihau93@hotmail.com

Absolute PE method by Vitaliy Katsenelson

http://klse.i3investor.com/blogs/kianweiaritcles/36512.jsp

DCF Method, one of them

http://klse.i3investor.com/blogs/kianweiaritcles/32308.jsp

Graham net net valuation

http://klse.i3investor.com/blogs/kianweiaritcles/24112.jsp

Don't forget about this private market comparison method using enterprise value over Ebit which I find very useful:

http://klse.i3investor.com/blogs/kianweiaritcles/37729.jsp


You see you can get all kind of fundamental valuation method resources from i3 website, all by the courtesy of Tan KW. What a pity if you don't read them if you are interesting in fundamental investing.

I have used all of the methods mentioned above in my stock picks. Read them if you are interested. Very boring ones.

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

ysleong8, I don't have a list. I am just a small time retail investor living far far away from home. I am not a professional analyst nor working in any investment bank.

I normally get tinkers from the forumers in i3 and do some net net valuation for fun. You can refer to some of them at the link below. There are some good comments lately there too.

http://klse.i3investor.com/servlets/forum/600036493.jsp?ftp=1

francis5269, Graham net net valuation is not a holy grail in investing. As a matter of fact, there is no holy grail in my opinion.

Graham net net is only used for asset based valuation. It is a safer method as compared to forecasting of future cash flow in earnings based valuation. You have to look at the company's balance sheet and make some judgement as shown in the valuation of KSL below:

Graham net-net BS value Wt Liq value Per share
Cash and cash equivalent 112739 100% 112739 0.29
Land held for property development 588706 100% 588706 1.51
Investment properties 445459 100% 445459 1.14
Property development costs 234452 100% 234452 0.60
Inventories 81227 50% 40614 0.10
Trade and other receivables 184173 75% 138130 0.35
Property, plant and equipment 157707 0% 0 0.00
Other assets 27379 0% 0 0.00
Total assets 1831842 xxxx 1560099 3.99
Total liabilities 541,320 100% 541320 1.39
Total equity 1290522 xxxx 1018779 2.61
Number of shares 390548 xxxx 390548 xxxx
Net tangible asset per share 3.30 xxxx 2.61 2.61

Now I remember this.

Posted by 爱丽斯 梦幻世界 > Dec 6, 2013 07:47 AM | Report Abuse
i hv some pick before :
http://klse.i3investor.com/servlets/pfs/13861.jsp

爱丽斯 梦幻世界, your portfolio did very well indeed, returning about 28% (including dividend) in 9 months. Your portfolio beats the broad market by about 16% as shown below.

Well done.

Reference date 1/03/2013 4/12/2013
Stock Name Ref Price Price now Change %change
Pantech 0.72 0.97 0.250 34.7%
YTLP 1.52 1.81 0.290 19.1%
NTPM 0.47 0.74 0.270 57.4%
Affin 3.30 4.3 1.000 30.3%
PWRoot 1.48 1.86 0.380 25.7%
MKH 2.05 2.63 0.580 28.3%
Perisai 1.01 1.5 0.490 48.5%
SKPRes 0.34 0.32 -0.020 -5.9%
DRBHcom 2.57 2.61 0.040 1.6%
PPB 12.4 15.16 2.760 22.3%

Average return xxxx xxxx xxxx 26.2%
KLSE 1654 1825 171 10.3%
Alpha xxxx xxxx xxxx 15.9%

Good news, London Biscuits (LonBis)is seeking mandate for buying back its own shares in the coming AGM.

http://www.bursamalaysia.com/market/listed-companies/company-announcements/1483769

Company uses its free cash flow from its ordinary operations to buy back its own shares to reduce the number of outstanding shares in the market when it is selling at a discount. This increases its earnings per share (EPS) and hence good for shareholders. So great job by the management, or is it? Let us see where does LonBis gets its money to buy back shares.

Last financial ended 30/6/13, LonBis made a net profit of 12.4m. Yeah there is money to buy back shares. Are you sure? The net inflow of money (collected from debtors and paid creditors), or cash flow from operations (CFFO) is 18.4m. LonBis had to pay a interest of 12.2m for its loan of 263m from this amount, leaving behind 6.2m. It then spent 22m to purchase property, plant and equipment (PPE). So it needs 15.8m from somewhere just for capital expenses. It has to get money just to do that. Where do they get money to buy back share? May be it has heaps of money in its balance sheet to do that. Let us see.

As mentioned, it has a total 263m debts, or a high of 63% of its equity. Its solvency risk is so high with current ratio of just 0.6. So want to borrow more to buy back its shares, or are they intending to call for a right issue to do that? By the way, is its share cheap?

At the close of 68.5 sen today (5/12/13), it is trading at a PE ratio of 8 times. Isn’t that cheap? Not until you realize that it has huge debt as discussed above. In term of enterprise value (EV), it is trading at an EV of 12 times it earnings before interest and tax. Is that cheap?

With the kind of poor quality earnings, precarious balance sheet, and consistently negative free cash flows for donkey years, I won’t even pay an EV/Ebit of 2 times!

What kind of management LonBis has? Instead of wasting your time preparing the document and talking nonsense about share buyback, why don't you spend time improving your business?

Posted by Tan KW > Nov 30, 2013 07:31 PM | Report Abuse

@kcchongnz, interesting to start 2014 stock picks?

i am thinking to create a new thread for year 2014 stock... count you in,ok?

may i know who is interested to join in? do let me know...

Yes, I would like to share my investment strategies and at the same time obtaining great investment ideas and knowledge from everyone here.

Is Bursa efficient? Experience of a top regional equity fund manager, Nomura International.

Posted by houseofordos > Dec 4, 2013 01:27 PM | Report Abuse
kc, my opinion is that some markets are more efficient than others. I suppose in US market is more mature and there is information readily available everywhere market becomes more efficient. However I agree with you that in general there is always some inefficiency which we retailers could benefit from. The inefficiency I m talking about will mainly exist in the smaller cap stocks which go unnoticed by the fund managers due to restrictions for them to invest in such low cap stocks.

Let us look at a portfolio of Malaysian stocks picked by Nomura for 2013 on 18/12/2012 here:

http://klse.i3investor.com/servlets/pfs/12379pub.jsp

The stocks are the favorite of most fund managers. They are mostly the big capitalized stocks in Bursa. Most funds own them. All stocks are closely followed by many analysts and investment bankers. Tons of research papers. Closely followed by equity trackers etc. And what is the return of the portfolio to date?

The average return of the stocks in the portfolio is just 7.7% as shown in the table appended. Assuming the prices do not include any dividend, the total return is about 10%. That is exactly the return of KLSE from the same period.

If you don't do something different from the crowd, it is impossible for you to earn extraordinary return. Of course you must be right.

Reference date 18/12/2012 4/12/2013
Stock Name Ref Price Price now Change %change
DIGI 5.04 4.86 -0.180 -3.6%
TM 5.85 5.3 -0.550 -9.4%
Axiata 6.58 6.72 0.140 2.1%
PBB 16.00 18.38 2.380 14.9%
Maybank 9.04 9.88 0.840 9.3%
Sime 9.13 9.5 0.370 4.1%
AirAsia 2.61 2.45 -0.160 -6.1%
WCT 2.35 2.29 -0.060 -2.6%
SKPetro 2.97 4.39 1.420 47.8%
CIMB 7.6 7.67 0.070 0.9%
Genm 3.54 4.15 0.610 17.2%
Media 2.230 2.65 0.420 18.8%
MMCorp 2.650 2.82 0.170 6.4%

Average return xxxx xxxx xxxx 7.7%
dividend xxxx xxxx xxxx 2.3%
Total xxxx xxxx xxxx 10.0%

KLSE 1659 1822 163 9.8%

nhkch,
When I say Prestariang's FCF grow at a compounded annual rate of 10% for the next 10 years, it is just an average. Sometimes it grow at a higher rate than 10%, sometimes less. No company grows at such a smooth and steady rate like that. Anyway the assumption of CAGR of 10% would most likely wrong too, but hopeful wrong on the positive aspect.

So don't worry too much about it. You could change your assumptions if you wish after one year, but it will remain a rough estimate anyway. One thing you must remember no company can grow at a high rate for too long. It pays to be conservative.

Is Bursa efficient?

Still not satisfied? Here is another portfolio with reference date on 18/1/2013. As I can see, this is another portfolio selected based on fundamental analysis.

Public Watchlist: The Edge 2013: 10 offbeat dividend-paying stocks

http://klse.i3investor.com/servlets/pfs/13154pub.jsp

The average return of the stocks is 39.5% in less than a year, against KLSE of 8.7% of the same period. The alpha of this portfolio is 30.9%.

Reference date 18/01/2013 4/12/2013
Stock Name Ref Price Price now Change %change
Pantech 0.78 0.97 0.190 24.4%
Mediac 1.16 0.91 -0.250 -21.6%
Ireka 0.64 1.02 0.385 60.6%
Apollo 3.29 5.37 2.080 63.2%
NHFatt 2.35 2.93 0.580 24.7%
Deleum 1.98 4.23 2.250 113.6%
Oldtown 2.26 2.45 0.190 8.4%
Takaful 5.8 10.42 4.620 79.7%
LafMsia 9.7 9.83 0.130 1.3%
Gasmsia 2.66 3.75 1.090 41.0%

Average return xxxx xxxx xxxx 39.5%
KLSE 1676 1821 145 8.7%
Alpha xxxx xxxx xxxx 30.9%

Is Bursa efficient?

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.

Let us look at another Bursa portfolio by a blogger, felicity here:

http://www.intellecpoint.com/p/position.html

His fund was set up about two and a half years ago. He invests based on fundamental analysis searching for good business model and willing to pay reasonable prices for them.

The total return of his fund now is 229% since then, beating the KLCI by 8 times a year. Are his spicks risky and hence the high return? I don't think so.

Generally capital repayment for underlying shares will result in lowering of exercise price, I think. It depends on the details in the warrant issuing document.

Three months ago I wrote about the Graham net net valuation of the following three companies as shown below:

Table 1: Graham net-net valuation of Daiman
Company Price NTA Net-net Discount
Daiman 2.63 4.85 3.76 -30%
KSL 2.02 3.13 2.47 -18%
Plenitude 2.10 3.35 3.04 -31%

At that time Daiman and Plenitude are clearly more undervalued than KSL by a wide margin and hence those two companies were preferred to invest than KSL.

Since then Daiman and Plenitude has gone up in prices by 25% in three months as shown below, whereas KSL share price has only gone up by 3%.

Company 6/09/2013 4/12/2013 Change
Daiman 2.62 3.28 25%
Plenitude 2.10 2.67 27%
KSL 2.02 2.09 3%

Since then they have also released their latest quarterly results as at 30/9/13. Has anything changed? Yes, there is.

KSL's latest balance sheet shows its net tangible asset has increased from RM3.13 to RM3.30, and its Graham net net also increased by 6% from 2.47 to 2.61. The following table shows the comparison of the revised net net, the share price now and the discount of the share price to the net net:

Company Price NTA Net-net Discount
Daiman 3.27 5.02 3.82 -14%
KSL 2.08 3.30 2.61 -20%
Plenitude 2.67 3.44 3.11 -14%

Now due to the revised net net and the present share price of each, the investment preference is reversed with KSL more favourable at 20% discount to its net net compared to 14% of the other two.

Moreover the three quarter results shows the EBIT of KSL has improved by 85% to 250m.

So KSL, at RM2.09 appears to be a better buy.

Posted by AyamTua > Dec 3, 2013 01:00 PM | Report Abuse

kcchongnz - what's your thoughts on GrandFlo potentiality, thanks.

AyamTua, you know much more than me about GrandFlo. I don't anything about it until I read a little about it from its financial statements after you asked me.

No, I don't have an opinion on it.

jennylee, PMCorp made a lot of people lost a lot of money 20-30 years ago sliding from RM18 (?) to the present 26 sen. So I really dare not say it is a good company. I have no insight about the company.

If there is no change in the company, in its business, management etc then I would stay away form this company. However, its has some good net assets amounting to more than its market capitalization as shown in my Graham net net valuation of about 30 sen per share. So I don't know if PMCorp is a good or bad company now, but even a bad company can be a good investment if the price is right, agree?

It would be good if the company just liquidate and return the net asset to the shareholders, then shareholders will straightaway have a 20%+ more than its share price. That is short term but quite a low risk one because of its asset compared with its price.

However the company is not going to do that. It would use most of its liquid asset to try to build up its chocolate business. If successful, it may provide better return for shareholders in the future. It all hinges on the prospect of its business. Is the business going to flourish? Is the management capable? More important, is the management credible? That you have to make your own judgement, may be by reading more about the company, and also all the discussions in the PMCorp thread in i3.

Each valuation method is suitable for a particular type of company. I don't use Graham net net valuation for company like Prestariang, Datasonic, JobStreet etc because they are basically asset light company but make high earnings and cash flow. For them I will use discount cash flows methods. PMCorp type of company has negligible earnings at the present moment and hence earnings based such as private market comparable valuations, DCFM are not suitable. Of course unless you can estimate its future earnings with confidence. Some companies have a lot of cash in the balance sheet and good amount of cash flows but may not earn much earnings may be suitable to use Gordon dividend growth model if the dividend is stable and growing. Some companies like Daiman, Plenitude, Gromutual have a lot of quality assets but also steady earnings and cash flow. So you can use many methods to counter-check, such as net-net, DCFM, EV/Ebit etc.

Whatever method you use, you will get the estimated intrinsic value. Make sure the right method is used. Buy if the price is way below the intrinsic value, say 30% or more; and sell if the price rises close to intrinsic value, or if you need money to buy other better stocks.

That is my personal preference.

According to the Modern Portfolio Theory, it's possible to construct a optimal investment portfolio offering the maximum possible expected return for a given level of risk, or equivalently minimum risk for a given level of expected return, with a combination of cash holding. Harry Markowitz won a Nobel Prize out of his theory. In actual investing, it is also intuitive to have some cash in the portfolio as a financial risk management.

No, I do not follow this theory although it is a Nobel Prize winner. In actual fact i learned a lot about financial theories but most of the time I don't agree with the theories.

I have a fixed amount of money invested in the stocks. So if I have found some more very good stocks to invest in, I can get money “outside” of this invested sum to buy it. But most probably, I will sell off some not-so-attractive-anymore stocks in the portfolio to get money to buy the new and more attractive one.

I don’t put all my money in the stock market no matter how attractive the market is. You will never know if there is a sudden turn for the worse because of some black swan event. I must have readily cash to survive for a few years without having to force sell my stocks.

houseofordos,

good analysis.

Posted by nhkch > Dec 3, 2013 12:17 PM | Report Abuse

Hi kcchongz, the DCF you use for valuation.You make an assumption on the growth of future free cash flow. So does that mean the intrinsic value of RM3.64 for prestariang is the future value after 10years if the company perform according to the assumption?

I estimate the future cash flows, then used a discount rate R to discount the future cash flows back to the present. That is the present value, or the intrinsic value of the stock. It is the present value, not a future value.

Posted by ProfitMan > Dec 3, 2013 12:05 PM | Report Abuse

kcchongnz, thank you for taking us through your intrinsic value calculations. Appreciate it. Just one question - does the beta value of the stock plays a role in determining your discount rate of 10%? Thank you.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.

R = Rf + Beta * (Rm - Rf)

For those who like to know more can refer to the following link.

http://en.wikipedia.org/wiki/Capital_asset_pricing_model

Yes academically you calculate the required return, or the discount rate, R used for the calculation of the intrinsic value, or the present value of a stock.

No, I don't use it to get the discount rate because it doesn't make sense to me. I use a simpler reasoning, like how much I want my return to be, in this case 10%, after looking at its income statement, cash flow and balance sheet strength. It is more intuitive to me.

Or I may look at the other way, how much risk premium above the risk free rate, ie bank FD, or MGS rate etc, also after looking at its financial statements. In this case I think a risk premium of 6% is adequate.

Can you see the power of leverage on call warrants of Tenaga?

Tenaga's share price went up from RM9.58 yesterday to 11.16 now, or 16.5%.

Let us just take one of its call warrants, C2 which went up from 58 sen to 83.5 sen now, or 44%, 2.7 times more.

Posted by jennylee1382 > Dec 2, 2013 10:22 PM | Report Abuse

Hi Kc chong can u look in to Gmutual? is this a good counter to invest.

Please refer to the following link:

http://klse.i3investor.com/servlets/forum/900172429.jsp

GroMutual a hidden gem? It does look like one to me.

Posted by jennylee1382 > Dec 2, 2013 10:22 PM | Report Abuse

Hi Kc chong can u look in to Gmutual? is this a good counter to invest.

Using my usual Graham net net valuation, Gromutual is worth 73 sen. This represents 38% margin of safety investing in Gromutual the close of 45.5 sen.

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/36493.jsp

Moreover GMutual's earnings has been very good the last few quarters. It earns 8 sen per share for the last 4 quarters, very good. PE would be 5.7 only. It has been making consistent profit each year supported by good cash flows.

Not only that, dividends 3 sen a year. So dividend yield is 6.6%, very good also.

Is the stock market efficient?

If you go and study finance in University, there is a major topic in the Efficient Market Hypothesis (EMH)and the Capital Asset Pricing Model(CAPM).

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.

Let us look at another Bursa portfolio by a blogger, Bursa Dummy here:

Core Portfolio
Stocks Average Latest G/L (%)
TAMBUN 0.77 1.42 84.4

Satellite Portfolio
Stocks Average Latest G/L (%)
GTRONIC 2.43 3.15 29.6
INARI 0.73 1.54 111.0
LATITUD 1.49 1.55 4.0
MATRIX 2.86 3.22 11.8
PANTECH 0.98 0.99 1.0
SCIENTEX 5.47 5.61 2.6
TAMBUN-WA free 0.81 n/a
TROP 1.89 1.34 -29.1
YOCB 0.69 0.87 26.1

http://bursadummy.blogspot.co.nz/2013/12/my-portfolio-nov13.html

His portfolio of 10 stocks yield a total return of 53.5% as compared to about 2.5% of the KLSE from July to end of November 2013. He has none of his stock similar to anyone of mine.

Sure he may be lucky from the huge gain from a couple of outliers too in Inary (+111%) and Tambun (+84.4%), and he also has one big loss in Tropicana (-29%). Anyway he has just this one in the negative territory and another under-performer in Pantect (+1%). But does anybody knows anybody who can get all their stocks picking right? I would say this portfolio produces results none other than, excellent.

Is his portfolio risky and hence explanation of the good results by EMH and CAPM? Academic wise I don't see many of his stocks are having high beta, a measure of volatility against the market in CAMP, except may be Inary, Tambun(?). All of his stocks are fundamental stocks with good earnings, balance sheet and cash flows. So why risky?

So is the market really efficient, especially in Bursa?

Fabien, you have to bear in mind that DCFA, or rather all valuation methods are very artistic. It all depends on your assumptions.

For PIE, let me take its average past 4 years free cash flow of 26.5m as a base, and assume it is going go grow by 5% a year for the next 10 years and 3% subsequently, and a discount rate of 10% (PIE has a healthy balance sheet with no debts and steady earnings and cash flows), the present value of its FCF is 451m. Adding back its 98.4m of excess cash, it is worth 550m, or RM8.58 per share.

I now know that you are interested in longer duration call warrants such as C1 and CZ. They are trading at about the same premium. I prefer CZ over C1 because of the better profile of CZ then C1. It has a higher gearing too. But of course liquidity in warrant trading is also very important. In this case, C1 is better.

Looking at the rest of the call warrants of DRB, I personal prefer CW because of its low premium of 0.7% only. Its profile is also very good with the second lowest volatility. Gearing is also high at 18 times. It still has more than one and a half month to expire.

CT is even more exciting if you can get it for 1.5 sen. I doubt you can get it. It has only one more day to trade. After that you just have to wait for the settlement prices for another 3 days.

Maybank Call warrants as at 2 December 2013.

The following Table 1 shows the prices of Maybank and its call warrants at 4.00pm:

Table 1: Prices of call warrants of Maybank
Warrant Price Ex-Price Ex-Ratio Expiry date Premium Gearing
C1 0.065 9.400 10.000 10/01/2014 2.4% 15.1
C2 0.045 10.500 5.000 30/06/2014 9.3% 43.6
C3 0.055 10.500 8.000 22/07/2014 11.5% 22.3
C4 0.085 9.500 12.000 24/10/2014 7.2% 9.6
CY 0.250 8.900 4.000 28/02/2014 0.9% 9.8
CZ 0.175 9.000 6.000 21/03/2014 2.4% 9.3

*CY has the lowest premium at 0.9% and 3 more months to expire. This warrant has the lowest risk. However it has one of the lowest gearing at about 10 times.

*C2 and C3 has approximately the same time to expiry. However C2 is trading at lower premium (9.3%) and a much higher gearing at 44 times. Hence C2 is a better risk and reward punt than C3.

*C1 and CZ has the same premium at 2.4%. C1 has a much higher gearing at 15 times than CZ at 9.3 times and is more exciting to punt. Note CZ has a longer expiry date though. It is individual preference which to choose.

*C4 has the longest time to expiry and a lower premium at 7.2% than C2 of 9.3%. However, its gearing is relatively lower at 9.6.

A risk averse punter will choose CY if he is bullish about Maybank share price. This is because of its very low premium of less than 1%. Moreover CY still has a relatively long time of 3 months to expire. I would say there is high chance for CY punters to make money on this leveraged bet.

A risk taker will prefer to punt on C2. This is because it has a very high gearing of 44 times. It has a long time of 7 more months to expire. If Maybank share price can go up by 9.3% before the expiry of C2, punters of C2 will be highly rewarded because of its high leverage nature. I personal will prefer to punt on C2. I think the chance for Myabank share price to be above RM10.50, the exercise price of C2 is reasonably high.

Appended Table 2 below is the gain/loss of each Maybank call warrant with different prices of Maybank at the expiry of the respective warrants.

Table 2: Warrants payoff
Maybank 9.000 9.490 9.81 9.920 10.05 10.73 11.00 11.50 12.00
share gain -8.3% -3.3% 0.0% 1.1% 2.4% 9.3% 12.1% 17.2% 22.3%
C1 -100% -86.2% -36.9% -20.0% 0.0% 104% 146% 223% 300%
C2 -100% -100% -100% -100% -100% 0.0% 122% 344% 567%
C3 -100% -100% -100% -100% -100% -48.9% 13.6% 127% 241%
C4 -100% -100% -69.6% -58.8% -46.1% 20.1% 47.1% 96.1% 145%
CY -90.0% -41.0% -9.0% 2.0% 15.0% 82.5% 110% 160% 210%
CZ -100% -53.3% -22.9% -12.4% 0.0% 64.3% 90.5% 138% 186%

KC Chong

Posted by tsurukame > Dec 2, 2013 11:03 AM | Report Abuse

kcchongnz,

Besides the above questions, What will be your preferred approach in valuation of "turnaround stocks and growth stocks" apart from DCF to arrive at NPV basis i.e stocks with not so good financials at the moment but could be double or triple baggers in the future. Would appreciate your artful input on the rationale of making assumptions on required rate of returns, assumption of dividend growth rate, minimum hurdle rate required, assumption of EPS growth rate in the above models..

As I have said, the three methods above are the appropriate method of valuations. What other method for "turnaround stocks and growth stocks"?

It all boils down to what you consider that particular company is turning around, or growing very fast? Is its revenue going to grow at a fast rate again? What rate you reckon? Is its margin which has been falling makes a turnaround of higher margin, higher ebit etc? What margin you expected? Are all your assumptions here realistic? etc.

So you put in all these optimistic assumptions, and may be use a higher discount rate, and do the DCFM and see what the new intrinsic value will be. If you are sure of the "turnaround" and put in correctly (where got always correctly one) and then you will get a higher intrinsic value, hence incorporated in your turnaround story.

tsurukame, base on your above post, you have already shown you know which valuation method is suitable for which type of company. I would like to reiterate that valuation is an art.

If you read the write up of my stock picks in i3, you would notice I use a lot of private market valuation, ie how much is the market enterprise value of the firm compared with its earnings before interest and tax, and compared with similar transactions. I normally want EV/Ebit to be less than 8, depending on the type of business. For example it is hard to find a good asset light service company like JobStreet and Prestariang selling at EV/Ebit of less than 10. And for some asset heavy companies, a EV/Ebit higher than 10 would be relatively expensive. You do notice that this type of valuation requires an earnings.

I use a lot of discount cash flow method (DCFM) with many variations of them to estimate the intrinsic value of a company. This is the most accepted valuation method by the professionals, I think, as it makes the most sense. I just used this for valuing Prestariang here using free cash flows. Of course the company valued must have earnings, FCF etc depending which DCFM you use.

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/42400.jsp

But if there is no or little earnings, how to use the above two methods? that is where I use the assets based method such as Graham net net, for example on PM Corp.

The more interesting thing for some companies is not only they are qualified as a Graham net net company, meaning their quality asset is more than the market price, they are also qualified as a good investment using earnings based valuations (low EV, high margin of safety against their intrinsic value etc) such as those below:

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/36493.jsp

How far can one goes wrong with this?

Let us refer to the quarterly report ended 30 September 2013, and concentrate on the ordinary business of PMCorp, i.e. the manufacturing and sales of chocolate.

Revenue for the quarter is 18.9m only, and ignoring those one time off item in sales of assets, there is a small operating profit of just 46k. The table below summarize its financial performance.

Revenue 18907
Cost of sales -12777
Gross profit 6130
Administration expenses -2771
Selling and distribution cost -3313
Operating profit 46

How is it possible that PM Corp can make big money with this type of miserable sales volume and little profit? Not until you try to look into its business now and its assets in place.

The cost of sales in the period is 12.8 m, and this gives a gross profit of 6.1m, or a gross margin of 32%. To me a business with a gross margin of 32% is a good business, one with 40% and over is a great business. But that 12.8m sales is very small. In term of PMCorp’s asset turnover, it is a miserable 0.2. But its operating costs amount to 6.1m. So to me if PMCorp wants to make money, it has to do either/or two things; increase sales, or cut operating costs. The more effective one of course is to increase its sales.

If sales is increased, it would be fantastic because its gross margin is high at 32% and hence the bottom-line would greatly improve. Let us look at the following scenario. We assume that PMCorp can increase its sale by 30%, costs of sales 10%, selling and distribution cost by 5%.

Revenue 24579 30%
Cost of sales -14055 10%
Gross Profit 10524
Administration expenses -2771
Selling and distribution cost -3479 5%
Operating profit 4275

With the increase in revenue to 24.6m in a quarter, its operating profit would be 4.3m, or 17%. If annualized, it would be 17m. But with 773m shares outstanding, EPS is just about 2.2 sen. That is not attractive, is it? Not until you look at its excess cash (about 20 sen per share) it is holding now and its other non-operating assets.

Imagine if the company sell off some of its non-operating assets and distribute part of the proceeds as special dividend, say 10 sen only. Your cost of buying PMCorp at 26 sen is only 16 sen then. So pay 16 sen and earn 2.2 sen is not that bad after all. More so if there is a good growth in the future.

So everything hinges on what is the prospect of its business; is the chocolate in demand? Is it selling well? Is there a good prospect of growth? How does the management allocate its resources etc.

For me I am positive about it after reading what is posted by calvin, unless he takes us for a ride which I don't think so.

Posted by wayne1982 > Nov 29, 2013 04:32 PM | Report Abuse
Keep on issue ESOS, director getting big fat pay, hold large pile of cash, do nothing, also never reward shareholder with bonus or higher dividend, so can only buy when it is low

5 years ago if you have bought Kfima at about 70 sen then, you would be a very happy investor. For in the last 5 years, the management has created huge shareholder value for you as follow:

Year 2013 2012 2011 2010 2009 Total
Book value growth 0.19 0.31 0.23 0.25 0.13 1.13
Dividend 0.08 0.08 0.07 0.05 0.03 0.31
Book value growth plus dividend 0.27 0.39 0.30 0.30 0.16 1.44
Owner's earnings 0.01 0.28 0.28 0.24 0.08 0.89
EPS 0.29 0.31 0.27 0.22 0.18 1.26

From the table above you can see the management has made a total of RM1.26 a share for you in that 5 years, and had increased the book value by RM1.13, and had paid you 31 sen in dividend.

And if you were one of those in the management, what would you say. Most probably you would complain that you have made so much money for shareholders but you are only getting peanut. How unfair is it to you!

Yes, the directors in total was paid only RM2.2m last year, or just 0.4% (<<3%)of the turnover of close to RM500m.

Kfima ESOS up to 26.3m (10%) shares was proposed in August 2011 for the purpose of aligning the interest of the employees of Kfima and the shareholders; ie giving the staff the option to buy the company stock at RM1.48. At that time, that exercise price was probably about 10% below the market price. Since then Kfima's price has risen to 2.00 now, plus about 20 sen of dividend payment.

So what is the cost of this option to the company? What is the value in relation to the revenue and profit made? Do you want the management to be fairly rewarded and work hard to maximize your value, or you want a management to be poorly paid and hopefully they work hard for you also and won't think of making money themselves in other ways detrimental to you well being as a shareholder?

Big pile of cash doing nothing? Don't they buy more and more land for palm oil plantation?

Never reward shareholders with bonus? What is the bonus for? How it increase shareholder value when a cake is cut half but still is one cake? No dividends? How many companies in Bursa pay a dividend yield of 4% or more?

January RM2, now also RM2? Too bad, you didn't buy it five years ago like I did, or even 2 years ago I still bought. But you also get the 8 sen dividend if you have bought in January, won't you?

Can't you see the forest instead of focusing on the tree?

bsngpg, discount cash flow analysis (DCFA)requires some background knowledge in finance, more specifically time value of money. You need to understand the mathematics in discounting future cash flow to the present value.

Though the mathematics part of DCFA is precise and elegant, the assumptions aren't. And the assumptions are more important to arrive at a good present value (or intrinsic value). The assumption of future cash flows is the most tricky part, and often executing this valuation method can result in garbage in garbage out. In fact many proven value investors do not use this method. I use it just as a compliment with other valuation methods to make myself more confident if I want to invest in a company.

In fact often when I decide if I want to invest in a stock or not, I look more at the prospect of its business, its operating efficiencies in ROE, ROIC, cash flow and free cash flow which are more quantitative ways to judge the ability of the management, and if a business has wide moat. Then I look at its price and decide if the offered price is reasonable. What price I am willing to pay also depend on its operating efficiencies and cash flow.

For deciding on price to pay, I tend to use enterprise value, how high is the enterprise value in relation to Ebit, a firm based valuation, rather than just equity based metric such as PE ratio which can be skewed by its debt level.

That is how I look at it when I first write about wanting to include Prestariang as a stock in my portfolio.

Qualitative analysis of management etc is good no doubt, especially if you have a chance to talk to them in AGM. I do not think there is statistic significance that smart board of directors maximize shareholder values. This qualitative analysis can also be very subjective.

I don't care much about how much the directors are remunerated, as long as it is not too excessive, eg not more than 3% of revenue for a midcap. Just like I am indifferent about Selangor Exco getting much higher pay than before, for I think they should be remunerated adequately. They then have no excuse to act corruptly now. Same for company, if the company does well, they should be paid accordingly. We have to look at a bigger picture, I think.

Institution owing the share now may not be a good thing for investors thinking of buying the share now. It is good if nobody has discovered that it is a good company yet and if you invest, then you have higher chance of making extra-ordinary return.

Anyway as I said, qualitative things are subjective.

Valuing a Stock with the DCF Method

http://klse.i3investor.com/blogs/kianweiaritcles/36513.jsp

Table 6.2: DCFA
Year 0 1 2 3 4 5 6 7 8 9 10
Free Cash Flow, FCF $ 33426 36768 40445 44490 48939 53832 59216 65137 71651 78816
Terminal FCF, $=CFn(1+g)/(R-g) 1159722
Total FCF, $ 33426 36768 40445 44490 48939 53832 59216 65137 71651 1238538
PV of FCFF of core operations $751,000 $3.41
Non-operating cash $52,186 $0.22
Investment properties $0 $-
Debts ($1,371) $(0.01)
PV of FCFE $801,815
Less minority interest $0 0
FCFE $801,815 3.63
Number of shares 220000
FCF per share $3.64 40% higher than = $2.60

k = Required rate of return for equity investor

This is a subjective matter. But it is very important as a change in K will yield a different value of P.

You can look at it from various angles.

1) The equity market has been providing an average of 10% return historically.

2) What is the risk premium do you require in investing in the stock market? How much the return should it be higher when compared with alternative investment? The bank deposit gives you 4% now say, is a 6% premium adequate for you? Or are you contented with 4% risk premium, or k of 8%, in which case Prestariang stock price should worth much more? Or you are very risk averse and you want a risk premium of 10%, or k of 14%, in which case it is hard for you to find stocks to invest in?

3) what has been the risk premium in the stock market? 6% risk premium is probably at the higher end historically.

4) As interest rate goes up, obviously k will be higher

5) Other risk considerations such as a higher risk premium if the balance sheet and cash flow has been bad, etc

Haven't I said again and again, investing is not a exact science, it is an art?

Valuation of Prestariang Using free cash flow (FCF)

Here I attempt to find the intrinsic value of Prestariang based on what was posted by Tan Kian Wei as appended in the following link:

http://klse.i3investor.com/blogs/kianweiaritcles/36514.jsp

First I need to explain what are the few important data and assumptions I would use for the discount free cash flow analysis as shown in Table 1 below.

Table 1: Data and assumptions
Current stock price $2.60
Share outstanding (Mil) 220000
Average present FCF $30387
Next year's FCF (mil) $33426
Growth for the next10 years 10.0%
Terminal growth rate, g 3.00%
Discount rate, R 10.0%

The average FCF of year 2012 (38.4m) and 2011 (22.4m) of RM30.4m was used as a base of free cash flow. It is assumed that FCF will grow by 10% for the next 10 years, and subsequently reduced to 3% forever. For the trailing twelve month 2013, earnings has grown by 12%. The commencement of contribution from UniMy soon would probably see its earnings and FCF growing at a faster pace. Hence I would think a 10% growth in FCF in the next 10 years is reasonable without being liberal.

For the next assumption of a discount rate, I will use 10%. This is with a risk premium of 6% above the long term MGS rate of 4%. This is reasonable as the company has steady earnings and cash flows and a very healthy balance sheet. Hence the risk of investing in Prestariang is low.

The following shows the intrinsic value of Prestariang based on the discount free cash flow analysis:

PV of FCFF of core operations $751,000
Non-operating cash $52,186
Debts ($1,371)
PV of FCFE $801,815
Less minority interest $0
FCFE $801,815
Number of shares 220000
FCF per share $3.64

The above discount cash flow analysis shows that the intrinsic value of Prestariang is RM3.64. This represents 30% margin of safety investing in Prestariang at RM2.60 now. However, if FCF grows at a faster rate at 15%, Prestariang is worth RM5.18. At the present price of RM2.60, the market is expecting its FCF to grow at 5% for the next 10 years and 3% thereafter.

So what do you think is the fair rate of growth for Prestariang’s FCF?

KC Chong in Auckland (1/12/2013)

Seth Klarman, the oracle of margin of safety in investing.

Posted by houseofordos > Nov 30, 2013 08:04 PM | Report Abuse

KC good job on your picks. What is ur view on holding small caps in a bear market ? Would the portfolio be as resilient ? It s been sometime since we ve seen one. I believe that small caps tend to outperform in bull market and get beaten down more in bear market.

I am not aware of any academic research showing "small caps tend to outperform in bull market and get beaten down more in bear market".

My intuition is whether it is a big cap or a small cap, all undervalued stocks will slowly creep up on their share price when the market is on the way to the bull market, and all overvalued stocks will have their valuations lowered as the bear takes over. Those small caps which have weak fundamentals or with high expectation built in would naturally suffered more when the market turns bearish.

When the market is on the way to bullish, only good fundamental stocks will perform. do you see those stocks like KNM, Smartag, Amedia, XDL, Patimas, HBGLOB, GCB, Ivory etc etc outperforming during this bull market?

Yes some rubbish stocks appear to perform, but they are more of syndicate plays. It is only when the tide goes down you can see who is swimming naked.