FPI and The Gordon constant Growth Model

The intrinsic value of a stock can be estimated by discounting a future series of dividends that grow at a constant rate in perpetuity to the present value.

Price P = D / (k-G)

Where:
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
For FPI, let us use a required rate of return k=10%
G=4% in accordance to the rate of inflation

Hence P = 0.06 * (1+4%) / (10%-4%) = 1.04

1. Is the required rate of return reasonable?
2. Is the growth rate of 4% for dividend for FPI reasonable?

FPI has a clean balance sheet with an excess cash of 21 sen per share. It has shown to have consistent earnings and cash flow every year. For the last 10 years, the dividend of FPI has grown from 3 sen to 6 sen last year, or a compounded annual growth rate of 7%.

However the dividend payment has not been a consistent growth.

The return from the stock market for the last 5 years

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”
- Robert G. Allen

一生能夠積累多少財富，不取決於你能夠賺多少錢，而取決於你如何投資理財，錢找人勝過人找錢，要懂得錢為你工作，而不是你為錢工作 Warren Buffet

In the last 5 years soon after the world economies recovered from the US sublime housing crisis, investing in the equity market provides fantastic returns for long term investors.

The KLSE index rose from 838 to close at 1813 on 29th November 2013 from 5 years ago for a total gain of 116%. On average, the compounded annual growth (CAGR) each year is 11%, more than double the 3%-4% return from fixed deposit in banks.

The active Malaysian unit trust funds investing in the equity market on average returned 1% to 2% more than the broad market, with the best 5% of the funds returned double that of the broad market. This shows the value added in active fund management in the last 5 years in Malaysia.

Investors would do well to learn from deer hunters and fishermen who know the importance of “being there” and using patient persistence-so they are there when opportunity knocks.
Charles Ellis Investment Policy

I would like to take this opportunity to share with you my experience and philosophies in investing in Bursa for a long-term basis. This is merely for sharing and discussing of investing ideas and not for any other purpose.

Most would know that I invest base on fundamental approach in value investing. When I talk about value investing in the stock market, I am talking about buying stocks of good companies with intrinsic values (IV) at a comfortable margin of safety (MOS), and then sell them when the price of the stocks have risen closed to the intrinsic values, or when I have found another better stock to invest in. Time is needed for that to happen, and we are talking of a time horizon of years, not days, weeks or months. So to see the performance of a portfolio of stocks, we have to look at the CAGR for years as compared to the broad market. My investing experience does appear to show that value investing works. In actual fact it appears to work extremely well.

Tan Kian Wei, one of the major contributors in i3 has put up my long term portfolio some time ago as shown in the following link:

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

Table 1 below shows the prices of the stocks in the portfolio for various years ago. The prices obtained from Yahoo Finance shown have adjusted for any dividend paid, and any corporate exercise such as bonus and right issues. Some of the prices are missing mostly because of their short period of public listing.

Table 2 below shows that all 10 stocks in the portfolio have positive CAGR every year except for one stock, SKP Resource of just one year of negative return, i.e. last year of -8.6%. Taking off this return of last year, it actually have done extremely well with average CAGR of more than 30% each year. A incredible phenomenon is that almost all CAGRs for each stocks and each year are in double digit number. The best performer is Pintaras Jaya with CAGR each one to five years of more than 40%.

The average CAGR of the portfolio is 30% each year as shown in Table 3, out-performs the broad market of 11% by a whopping 300%. On average, the excess return over the broad market is about 19% each year.

I have to admit that there are portfolios by others which are better than the above performance. However, the purpose of this sharing is to show that when one does value investing, i.e. buying a stock at a comfortable MOS and hence taken care of risk, the upside will take care of itself.

Table 1:
Stock Name Code Price now 1 2 3 4 5
Kfima 6491 1.98 1.78 1.74 1.33 0.830 0.375
Pintaras 9598 6.20 3.13 2.30 1.96 1.46 1.15
ECS 5162 1.2 1.07 0.833 0.735 xxxx xxxx
Plenitude 5075 2.74 1.77 2.030 2.13 1.35 0.865
Jobstreest *0058 2.15 1.17 1.400 1.440 0.715 0.625
Pantech 5125 0.99 0.705 0.465 0.615 0.792 0.363
SKPRes 7155 0.320 0.35 0.180 0.150 0.113 0.057
NTPM 5066 0.700 0.44 0.500 0.555 0.520 0.2667
Kimlun 5171 1.84 1.61 1.520 1.040 xxxx xxxx
Prestariang 5204 2.60 1.09 xxxx xxxx xxxx xxxx
KLCI KLSE 1813 1611 1489 1501 1270 838

Table 2 30/11/2013 xxxx xxxx xxxx Years xxxx xxxx
Stock Name Code Price now 1 2 3 4 5
Kfima 6491 1.98 11.2% 6.7% 14.2% 24.3% 39.5%
Pintaras 9598 6.20 98.1% 64.2% 46.8% 43.6% 40.1%
ECS 5162 1.20 12.1% 20.0% 17.8% xxxx xxxx
Plenitude 5075 2.74 54.8% 16.2% 8.8% 19.4% 25.9%
Jobstreest *0058 2.15 83.8% 23.9% 14.3% 31.7% 28.0%
Pantech 5125 0.99 40.4% 45.9% 17.2% 5.7% 22.3%
SKPRes 7155 0.320 -8.6% 33.3% 28.7% 29.6% 41.4%
NTPM 5066 0.700 59.1% 18.3% 8.0% 7.7% 21.3%
Kimlun 5171 1.84 14.3% 10.0% 20.9% xxxx xxxx
Prestariang 5204 2.60 138.5% xxxx xxxx xxxx xxxx

Table 3:
Year 1 2 3 4 5 Average
Average Portfolio CAR 50.4% 26.5% 19.6% 23.1% 31.2% 30.2%
KLSE CAR 12.5% 10.3% 6.5% 9.3% 16.7% 11.1%
Excess return 37.8% 16.2% 13.1% 13.8% 14.5% 19.1%

As usual an excellent article. I thought I hear so many people want to learn fundamental analysis?

Prestariang

“Only after you understand the business can you understand the stock.”

Prestariang has reported its 3nd quarter 2013 results ending 30 September 2013. Its revenue basically remained unchanged but net profit jumped by 21% compared to the corresponding quarter the previous year. This was achieved through higher contribution from its ICT training. For the trailing twelve months, Prestariang’s revenue and net income increase by 3% and 12% to RM113.2m and RM41.7m respectively. It continues to secure new contracts especially in the oil and gas training programmes for the government as well as the private sector.

Prestariang is an asset light company with low capital intensity. It has plenty of excess cash amounting to 52m and negligible debt in its balance sheet. Hence it earns very high return on invested capital of 150%. It has ample cash flow from operations and free cash flow (FCF), something I like the most about a company. Last year, FCF was 38.4m, or 35% of its revenue. FCF amounts to 17.4 sen per share. It is a cash generating machine.

Despite its fantastic operating performance and cash flows, at RM2.60, it is trading at an undemanding PE ratio of just 13, and market enterprise value of approximately the same value.

Prestariang consistently pays a dividend of about 3 sen a quarter and it is expected to pay a total dividend of 12 sen this year, or a dividend yield of 4%. This yield is higher than the fixed deposit rate from the bank. This payout ratio is less than 60%. Hence it has retained a healthy amount of earnings for capital expenses intended for growth in the future.

Its education arm UniMy, a new university college is still running at a small loss presently. It would soon begin to contribute to its top and bottom line. Once that happens on top of its highly profitable ICT training and software distribution business, Prestariang revenue and earnings will be elevated to the next level.

For the above, I have added more of Prestariang as a stock in our portfolio at RM2.50. this price is more than what I paid about a year ago.

KC Chong in Auckland (30/11/13)

Posted by nokenzo > Nov 30, 2013 11:44 AM | Report Abuse

Hi sifu KC, me too would like to learn your way of doing FA, can I also have your spreadsheet? My email address is nokenzo@hotmail.com. Thanking you in advance.

That spreadsheet is the not-user-friendly Kfima spreadsheet which I sent to many some time ago. I think you have one too.

But I think if one wants to learn about FA, he has to first understand reading and interpreting financial statements, no short cut about it. Then read good books about fundamental investing and follow some time tested philosophies, and practice, practice and practice.

I know some people made a lot of money without knowing how to read financial statements. It is possible, especially if one follows some good philosophies. But then he must have a lot of capital to begin with and the chance is slimmer, in my opinion.

Posted by sephiroth > Nov 29, 2013 07:49 PM | Report Abuse
kcchongnz, need yr help to analyse this cash rich Formosa Prosonic Industries(FPI) if it is a graham net net counter. thanks a lot

From its latest financial report as at 30/9/13, its NAB is 99 sen. Cash per share is only about 45 sen. Its other major assets are in PPE (101m) and inventories (41m). Its total liabilities is 154.5m, or 62.5 sen per share. Hence at the price of 75 sen now, FPI cannot qualify as a Graham net net, far from it.

Posted by sephiroth > Nov 29, 2013 08:17 PM | Report Abuse
FPI seems bleeding cash from "net changes in working capital" but cash level remains high at RM110m (44.7 sen per share) and div for FY10/11/12 is 6/4/6 sen

Working capital increases doesn't mean bleeding cash, just that a lot of earnings is tied up. Yes, the cash flows from operations is bad for the last 9 months due to that. CFFO for the 9 months is negative of 8m, not very good.

However have to see the following quarters if this improves. FPI has have very good CFFO prior to this.

Just spotted this post.

Posted by sephiroth > Nov 10, 2013 09:57 AM | Report Abuse

Teck Chuan Lee spotted this hidden gem 4 months ago but stop posting since sept. He might be a student of kcchongnz. His FA counters include Luxchem/FPI/SUPER/SEAL/FLBHD (Star performer, he spotted at price 0.72)/EKSONS. The other counter might be zzzz now but eventually will wake up

When Teck Chuan emailed me about wanting to learn FA, he knew nothing about investment. He is a lorry salesman as he told me. However, after getting my spreadsheet, he made use of it and keeps on practice doing financial statement analysis. He emailed me directly and asked me a lot of questions, initially very simple questions, very persistently, to the point I was like telling him off, that he should post in in i3 so that others can discuss and all of us can learn from each other.

Yes, he becomes very good in FA now through learning and practising. Yes Sephiroth has testimony that Teik Chuan has on his own, has discovered many good companies to invest in at good prices. I even got some ideas from him like Homeritz, Scicom etc. Very happy about this good learner.

Just wondering where is he now?

Exactly four months have passed since we first started our portfolios. May be it is time to review the monthly performance of our portfolios now.

In this four months, KLCI has risen from 1773 to 1813, or 2.3%. But how have our portfolios performed?

kcchongnz's portfolio of 11 stocks has gained a capital appreciation of 32.9% in the last four months as shown in the link below.

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

With dividend amounts to about RM1700, or 1.7% received in the period, the total return of the portfolio is 34.6%. That means the portfolio has returned an alpha of 32.3% using the KLCI as a benchmark. All the eleven stocks, including dividends, made positive return with eight of them in double digit percentage. They are Datasonic (178.3%), Fibon (73.4%), Pintaras (14.3%), Homeritz (40%), Willowglen (38.5%), CBIP (19.6%), MFCB (10.5%) and Daiman (25.4%).

The outlier is the rule breaker Datasonic with a return of 178.3%, something which I have never expected to be truthful. Even if we ignore this outlier, the total return is still well above 20% in this four month period.

What about Ooi Teik Bee's portfolio return?

Ooi Teik Bee's portfolio of 10 stocks returned a respectable 15.1% in the four months perriod, or an alpha of 12.8%. There are equal number of winners and losers. Its big gainers are all warrants, some leveraged instruments. They are Hap Seng warrant (91.7%), LBS W (50%), Punchak warrant (44.1%). It has a couple of double digit losers through Lii Hen (-10.8%) and Triple at -26%.

The performance of both the portfolio exceeds the return of the broad market by a wide double digit margin in the last four months. The performance of each portfolio may not be comparable as one portfolio was constructed using fundamental analysis for long term investing, whereas the other used technical analysis and may involve frequent trading.

KC Chong (29 November 2013)

Hexza and The Gordon constant Growth Model

The intrinsic value of a stock can be estimated by discounting a future series of dividends that grow at a constant rate in perpetuity to the present value.

Stock Price P = D / (K - G)

Where:
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
For Hexza, let us use a required rate of return k=10%
G=4% in accordance to the rate of inflation

Hence P = 0.05 * (1+4%) / (10%-4%) = 0.87, or 87 sen

1. Is the required rate of return reasonable?
2. Is the growth rate of 4% for dividend for Hexza reasonable?

Hexza has a clean balance sheet with huge amount of cash. It has shown to have consistent earnings and cash flow every year. For the last 10 years, the dividend of Hexza has grown from 0.6 sen to 5 sen last year, or a compounded annual growth rate of 24%, 6 times the assumption of future growth.

Hexza 291113

“There are old investors, and there are bold investors, but there are no old bold investors.”

There are basically two fundamental investment philosophies, one cares more of making money who invest basing on the projection of future earnings and hence focus on the income statement, or future cash flows; and the other cares more of avoiding losses, who invest base on the minimum one can lose by looking at its latest balance sheet. All the rest are speculators.

The earnings based investors aim to harvest bountiful return by buying stocks of companies which would grow their earnings, and yes they would be rewarded if their forecast of the future earnings is correct.

The conservative balance sheet investors have their utmost concern in risk management. They believe that if risk is minimised, which they are more sure of, the return will take care of itself. They follow Warren Buffet’s philosophy, Rule No. 1, Don’t lose money, Rule No. 2, Don’t forget rule No. 1.

Graham net net is nothing about whether its earnings will grow, its equity investment will continue to provide positive return. As a matter of fact, nobody can predict the future of the stock market correctly and consistently. Graham net net is about the minimum value of its asset based on its latest balance sheet, and its equity investment follows a random walk.

Valuation, any method, is an art. Earnings based valuation will subject more to uncertainties than asset based. Market may not agree with your valuation, it often doesn’t. But like what Buffet used to say,

“In the short term the market is a voting machine, but in long term it is a weighing machine”.

It is hard nowadays to find Graham net net in the stock market. It is even harder to find a net net with consistent earnings and cash flows, albeit not that high. It is extremely difficult to find a Graham net net which pays high dividend, sustainable dividend payment due to its consistent positive cash flows from operations and free cash flow and high cash holding. That is Hexza.

So would Hexza share price rise above its NAB, or net net value soon in the future? I really have no idea.

But if you buy this net net story, don’t forget not to put all your eggs in the same basket. This maxim should never be ignored.

david,

I have written about KSL before and compared its value with two other of my favorite property companies, Daiman and Plenitude. I used two methods to compare, earnings based as well as asset based. It is shown in the following link:

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

I sincerely believe that one must know about the value of a company first and then use that value to compare with the market price of a stock.

Long time never visit here. The last time I was here they were talking about Ivory acquire the Plaza Rakyat and I made some skeptical comments about it.

Now Ivory just released its three quarters result ended 30 September 2013. Revenue increased by 79% to 214.4m. But net profit dropped by 80+% to just 5.7m, with EPS at 1.4 sen per share for 9 months.

The main reason was the significant drop in the "other operating income" from 49.6m to just 14.2m. What is this "Other operating income"? If I remember correctly it was some revaluation surplus, or gain from some funny stuff, or more specifically a one time non cash useless item. So is this year's "other operating income" of 14.2m the same stuff? If it is so, the 5.7m net profit would quickly transformed to a loss of 8m+ then.

A look at the cash flow statement which shows as usual, negative cash flow from operations, this year of -45m, huge negative CFFO. Every year Ivory said they make money, but where is the cash?

It is not easy to confirm what the answer is by looking at the balance sheet. The net total borrowings has increased again, as usual, by 35% to 309m now.

Interestingly, people still buy its share at 60 sen, though its NAB is 83 sen, the quality of its assets are very poor. Most of the NAB is made up of PPE, receivables and inventories.

The crowd keeps on cheering.


Year 2013 2012 Change
Revenue 214442 119754 79%
Other income 14232 49581 -71%
Net profit 5745 32780 -82%
EPS, sen 1.37 9.68 -86%

CFFO -45070 -30468
Capex 0 0
FCF -45070 -30468

Cash 66226 58070 14%
Total debt 375564 287993 30%
Net borrowing 309338 229923 35%

Wonderful article, like like like. So punters of Instacom, Sumatec, and even EAH etc, what do you think of this great article?

What is a cynic? A man who knows the price of everything, and the value of nothing.

Oscar Wilde, Lady Windermere’s Fan

Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.
Peter Lynch

“Building long-term wealth is like driving an automobile. If you narrowly focus on the stretch of road a few feet in front of your car, you risk making unnecessary adjustments and over steering. Only when you lift your eyes to focus further down the highway will you successfully reach your destination.”
Christopher C. Davi

Benjamin Graham would probably gang up with some private equity or hedge funds and gain control of FACB. Then they would strip of and pocket the cash more than they pay, and then still own a call option on the company for free.

The above is just for academic purpose. Yeah how the management handles the cash is important. I do no have the privilege to know that.

Good point, houseofordos

If Benjamin Graham is still alive today, he will definitely invest in FACB. He is the pioneer is valuing company basing on balance sheet.

The quality of assets of FACB is excellent, mostly in cash and cash equivalent. That alone and after net off all liabilities, is still much more than the present share price.

For the record, I have never said nor "endorsed" PMCorp as a gem. If you read my analysis well on PMCorp, you would understand why did I buy it at less than 20 sen, and sold it at 34 sen (not 35 sen). I did buy it again when it fell back, and if you read my valuation about PM Corp, you would understand my rationale.

Mui? I glanced through its balance sheet last night. It is much more complicated than PM Corp and I won't be able to value it with the Graham net net accurately. One really needs to know very well what are those balance sheet items which I couldn't. So I have no opinion on it.

Posted by nightrader > Nov 27, 2013 08:38 PM | Report Abuse
kc if a company hv no free cash flow does that mean they are selling their product at loss ?

No, this statement is more or less correct, but it is not a good statement to talk about FCF. Go goggle and read about cash flow from operations and free cash flows. Or if you wish, you could read what I talk about this in the title article in this thread what they are and what are their significance.

http://klse.i3investor.com/blogs/5_rules_cold_eye_kcchongnz/34595.jsp

For me to invest in a business (not talking about stock trading here), the least I expect the company's core business must have a net cash inflow each year (CFFO). Not only that, the inflow of cash must be at least equal to the net profit (NP) the company says it makes. Show me the cash. It is alright once a while the CFFO is not as much as NP, because maybe due to big increase in revenue and hence the requirement of increased working capital.

The company also need to spend money to maintain its business, or even expands to make more money in the future. This is what we called capital expenses (capex). So after spending for capex, the company would have some money left behind to pay dividend, share buyback, invest in another business, pay down its debts. It is alright if the company spend money with capex even higher than CFFO, and hence having negative FCF. The money spent must produce future benefits with return of capital higher than the cost.

But eventually the company must mature and start to have positive FCF. Otherwise it has to continue borrow more and more money and it becomes more risky when there is a severe downturn. Worse still, the company doesn't seem to reap any benefits spending on the capex.

I have talked too much about GCB and have shown figures and numbers. So much so the lovers of GCB will hate me more for talking about it. No, I don't like to talk bad other people's favorite counters and be a party spoiler. Do your homework to find out the following:

1) How is GCB's CFFO for the last say 5 years? Or is the quality of its earnings good?
2) What is the percentage of this CFFO to NP? Is it close to 100% on average?
3) Is there even negative CFFO, bear in mind what I said about the disastrous effect of negative CFFO?
4) How much is its FCF? Or is there any FCF at all for GCB for the last few years?
5) If there is no FCF, where does the company get money to carry on its business? Hint, check its balance sheets for the last few years.

Posted by hongchai > Nov 27, 2013 06:49 PM | Report Abuse
Hi Kc,
Can you have a look at AWC again since the quarterly result just announced?
This time without dividend.
Thanks.

I normally do not too much on quarterly result. Take for example AWC. Its 1st quarter 2014 results appear to be very good, positive compared to loss the corresponding quarter last year. But that is just EPS of 0.16 sen. In fact AWC's quarterly always bouncing around, too much to my comfort of which I just noticed.

Same as its cash flows. The thing which makes me feel uncomfortable this quarterly result is relatively poor cash flow.

Why do the results of AWC vary so much, in earnings, cash flow? I am not too happy with this.

I guess one who is interested in investing in this company must do more due diligence, including examining the actions of the management for the last few years.

RGB, a fallen angel out from the dream gate of heaven? A gambling machine?

Posted by Eric Wong > Nov 23, 2013 07:01 PM | Report Abuse
kcchongz, u missed out this --RGB

"Posted by w2sin > Nov 21, 2013 08:46 AM | Report Abuse
Hi kcchongnz, need your advice on RGB, thanks in advance."

RGB International Bhd. (RGB) mainly involves in the sales and marketing of gaming and amusement machines and systems and related products. It is trotting around the regions, a high flier?
Looking at its latest audited account, very messy indeed. Very difficult for me to understand its mode of operations and to estimate its value.

Revenue, depreciation, “others” (what the hell is this?), “other gain/expense” (Yeah, what the ?), “foreign exchange gain/loss” and net profit , all behave like a boy jumping up and down on a trampoline. Very dangerous and can easily fall down, and so I scared. Also high debts.

I don’t understand its business, have no clue of how it makes money, speechless of how it does its accounting etc.
So do you have any compelling reason to invest in RGB? I hope you don’t tell me there is this rumours going on, or you saw a beautiful chart.

Yeah, before I forget, I won’t know about its future share price performance. Don't next time RGB share price go up to RM1.00 and you come back and blame me for giving this comment. Just joking, no joke no fun.

The use of hedging in commodity prices and foreign exchange rate is a good practice used by companies to smooth out the volatility of the price of commodity used for their business and combat the volatility of exchange rate, such as cocoa for GCB.

But hedging is financial risk management tool, using the right hedge ratio and appropriate rolling contracts in commodity and currency forward contracts or options. If properly done, there will be no big swing in earnings of the company whatever happen to commodity price or exchange rate.
So if the business of GCB is good as it appeared to be, there should not be big swing in earnings. There should be reasonable cash flows

Looking at the financial statements of GCB for the last few years, the company reported high earnings every year and pay good dividends too. However many things did not appear right. Cash flows are extremely poor. Every year there is no free cash flow, flow resulting companies keeps on borrowing more and more money and its debts level keeps on ballooning.

I have been doubtful about it for a long time already; why is that you are making money year in year out but the balance sheet is getting from bad to worse? Where is the beef?

Now that GCB suddenly reported a very bad quarter with heavy losses. I think "the paper just can't wrap the fire any more". I suspect that for the last few years, derivatives have been used to mask the true picture of the company performance.

Anyway, this is just a suspicion. I do not have any evidence. I could be wrong in my assessment.

FastMoneyMaker,

Stay out of call warrants. It would most probably be a fast money loser for you.

sephiroth,

MFCB's 9 month result shows a slight dip in revenue of 2.5%. However its ebit and pretax profit increase by 25%. This was due to higher margin especially in power generation. The bottom line hence very good. But more importantly, its share price has risen by 16% (including dividend) since 4 months ago when it was RM1.70. So is it too expensive now? Bear in mind that a good company is not a good investment if the price is not right.

My opinion is it is not expensive at all. In contrary, MFCB is dirt cheap in relation to its earnings, especially if you measure by its enterprise value. As earnings increases, EV/Ebit becomes even lower.

Posted by tptan45 > Nov 25, 2013 07:39 PM | Report Abuse
On the other hand...
a look at the performance of AWC over the past 5 years did not show any steady increase in revenue or earnings. The only parameter which seemed to increase was the dividends. But what was the payout ratio?
A quick google showed a payout ratio of over 200%. It is nice to return the money to the shareholders but is it sustainable?
So for me I will pass.

tptan, thanks for the comments. I know this does not suit you because I know you are a growth investor. I am a value investor. I prefer to pay for free growth potential.

Many companies have just the right capital structure, certain proportion of debt and equity just right for the business. So this type of companies should not pay dividend above its earnings, otherwise future growth is difficult.

Some companies has a lot of excess cash, cash not needed for the ordinary operations. AWC is one of them. Its cash holding can be used continuously for years to pay dividends, without affecting its ordinary business.

Anyway, dividend payout ratio is just one of the ways to look at it. The other way, which I am more concern about is FCF. It is from the FCF that dividend is sustainable. AWC has huge amount of FCF last year. Check it out.

Posted by houseofordos > Nov 25, 2013 08:32 PM | Report Abuse

KC AWC cash is high but so is the debts.. I asked u b4 bout this stock in the graham net net thread...

houseofordos,
Yeah you asked me before whether AWC is a Graham net net investment and below was my response.

AWC doesn't qualify as a Graham net-net because the net net value is less than the market price. It is because it has some substantial total liabilities which you need to less off from its asset value, not because of its high debt. AWC has very little debts compared to its cash.

I also asked you to look into investing in AWC from another angle, not as a net net.


Posted by kcchongnz > Nov 13, 2013 06:43 PM | Report Abuse X

house, AWC doesn't qualify as a Graham net net play as although it has high excess cash per share, it has relatively high total liabilities.

However AWC can be a great investment if you look at it from the angle of a good company (good ROIC and good cash flow) selling at a low price (earnings yield). And also from the angle of high dividend yield investing strategy.

Try that and let me know.

Posted by Ryan Leong > Nov 23, 2013 12:11 AM | Report Abuse
KC ,How do you think of AWC Berhad..Price 0.27 but with cash around 0.25..almost buy its business for free

Posted by Ryan Leong > Nov 23, 2013 10:55 PM | Report Abuse
Dear Kc Chong
Hi KC ..how do you think of AWC with dividen Yield 9% and a lot of cash worth 0.25 cents but share price o.27 only..is it the good stock to buy?

Ryan, from your numbers, don't you think AWC is a great stock to invest in? I certainly would think so.

A small company AWC has a net cash of 60m in its balance sheet. It makes about 5.6 m net profit, and the quality of its earnings is good with very good CFFO. On average, the last two years provide good free cash flow too. ROE is not good at 6% but that is because of its high excess cash. A better metric for measurement of efficiency is ROIC. ROIC of AWC is 11.6%. Not too bad as it is above the cost of capital. So it is quite a good company. But more important is it expensive?

With the closing price today (25/11/13) at 27 sen and its latest earnings of 2 sen per share, PE ratio is 13.5. This is not cheap in view of a small company like that. But again it is because it has relatively too much cash. So a better metric is enterprise value. EV is actually very low at about 2.5, or an earnings yield of 40%, which is much higher than my requirement of 15%. So AWC is actually very cheap at 27 sen.

So with the relatively huge amount of cash in the balance sheet and good amount of FCF, AWC is able to pay generous dividend.
With the above, I would like to invest in AWC too.

When I try to find good companies to invest in, it is always not an easy task. First of all it is very hard to predict the future. Secondly past performance is just a guide to the future performance.

After you have found a good company, the price may not be right. Or even after you have done a thorough analysis and find that there is huge margin of safety to invest in the stock, ie the intrinsic value is way above the market price, you buy it but find that the price never moves up, or even goes down. You may be wrong in your assessment or the market simply does not agree with you. That is the peril of trying to find a company to invest in.

However, after I have analysed and find that a company is a lemon and not worthy of investing. It normally, with very high probability that I am right.

I think Guan Chong has proven my point, and many other counters do.


Posted by kcchongnz > Oct 10, 2013 05:47 AM | Report Abuse X

Posted by cytew > Oct 4, 2013 03:30 PM | Report Abuse
Guan Chong CEO and COO both are my kampong mates, they are very bright

Posted by cytew > Oct 4, 2013 05:47 AM | Report Abuse
Please do not worry about the fluctuation of cocoa bean price and US dollar, Guan Chong has HEDGED both in derivative market,that is why when JB foods and Petra foods making losses, Guan Chong still manage to make profit.

When I invest in a company, I prefer credible managers rather than bright managers. I always ponder this “bright” CEO and COO are clever in maximizing their own wealth or the profit of all shareholders. GCB is a classic example.

I have seen nothing good about the business performance of GCB. I doubt the accounting profit. It is not in sync with its financial health as shown in the balance sheet with growing debts. The cash flows of the company greatly diverges from what is reported earnings. It never has any free cash flows for years and yet it keeps on buying this and that investments and yield return of capitals, paying not-bad dividends and even buy back its own shares (?). It is warning signs all over.

Hedging should be a good practice by a company like GCB. But I really wonder are they doing the hedging of commodity price, or gambling with derivatives. I sense that they are doing the latter.

Long time never look at call warrant already, especially AirAsia's.

Posted by FastMoneyMaker > Nov 25, 2013 12:30 PM | Report Abuse
All trading master, anyone have monitor Airasia-C4, can keep me some comment also teach me how's the conversion show like??? Thanks a lots.

Wow, there are so many call warrants of AirAsia, all trading at a few sens. Investment banks must have made a bundle from these.

Dabbling in call warrants is really a gambling endeavor. Many uninformed punters lose a lot of money. There is no doubt about it.

So for AirAsia call warrants, there are so many. Which is a good punt (if you still insist to punt)?

Yeah C4 is a good choice; high gearing at 40 times. But with a premium of 35%, make sure you know at expiry in 6 months time, AirAsia must go up by that percentage before you can make money. Of course you can sell any time before expiry of the CW if you can make money.

If you are not that risk taking type, you can buy C8 instead which has a lower premium of 19.3%. But it is not that exciting as its gearing is only 10 times. Actually 10 times gearing is also quite high already.

CW Price Ex-Price Ex-Ratio Expiry date Premium Gearing
C4 0.020 3.150 3.000 30/05/2014 34.9% 40
C8 0.080 2.600 3.00 31/10/2014 19.3% 10

KESM?
Posted by aaron69 > Nov 21, 2013 09:42 AM | Report Abuse
Hi,kcchongnz,could you please give some comment on KESM?High NTA of 5.473 and net cash of nearly RM1.70/share.Thanks in advance.

Sorry this question has been hanging for a while. You see I don't know a lot of things, including this KESM. But I still would like to have a look at it since aaron asked about it. And he also provided some numbers, yes great numbers worthy to have a look.

You see I use "look" but really in order to know about a company to decide if want to invest or not, it really needs some effort to read its annual reports, do some analysis here and there. It is not easy to get any other information for a illiquid stock like KESM. So please bear with me that some time I take quite long to respond to any of your question. As you know I am just an arm-chair investor (often teased by a fortune teller here, and another). I am no analyst, never work in any investment environment, and also living so far away.

Yes, after spending some time (quite a lot of time actually), I concur with aaron that KESM is undervalued. Benjamin Graham, if he is still alive, he surely will invest in it. Below is my assessment.

KESM Industries Berhad is engaged in the provision of semiconductor burn-in services, testing and assembly.The Company also operates in China.

KESM’s revenue has not changed much since 7 years ago. It hovers around 210m a year. However, its net profit margin has contracted drastically from 15% in 2008 to just 1.8% last year. The good news is it did not have a single year of losses through a complete economic cycle from 2006 to now.

After the US sublime housing crisis, its efficiency has dropped drastically. Return of equity dropped from 16.5% in 2008 to a mere 1.9% in 2013. ROIC is equally bad at 2.6%. Wondering why should it still in business with this kind of efficiency.

At the close of the market on 22nd November, 2013 at RM2.04, PE ratio is 19.2, not cheap at all. However in term of enterprise value, KESM is quite good actually with EV just 5.5 times its ebit, or an earning yield of 18%, far better than my requirement of 12%. This is because KESM has plenty of non operating assets in cash and quoted investments. Yes, we must look at its assets to see if it is a good investment. As I have said, a poor company can be a good investment if it is selling cheap.

Referring to KESM’s latest balance sheet as at 31 July 2013, KESM has a net tangible asset backing of RM5.47, more than twice its market price. But just how good is the quality of its assets? The liquidation value of KESM is computed using the Graham net net is shown in Table 1 below:

Table 1: Graham net-net valuation of KESM

Cash and cash equivalent 147256 100% 147256
Trade Account Receivables 59542 75% 44657
Inventories 16035 50% 8018
PPE 135662 50% 67831
Other assets 7186 0% 0
Total assets 365681 xxx 267761
Total liabilities -99617 100% -99617
Net asset 266064 xxx 168144
Minority interest -30636 100% -30636
Net asset common share 235428 xxx 137508

Number of shares 43015 xxx 43015
Net net per share 5.47 xxx 3.20

The net-net valuation of KESM is shown to be RM3.20, which is also much higher than its price.Isn’t KESM an undervalued stock as shown above? Wait until we perform some basic checks.

3 Basic Checks to Perform for a Net Net
For a net net to be investable, it should have
• a solid balance sheet, preferably more cash than inventories and receivables.
• is not bleeding cash. At least breaking even or positive in net profit.
• positive EBITDA

The first check shows that KESM has most of its net-net assets in high quality assets in cash and cash equivalent amount to RM3.42 per share. Hence we can safely confirm that the quality of the assets is excellent. Just not sure why each year, only 3 sen dividend is distributed.

KESM has been profitable for the last 7 years with average net income of 16.5m. CFFO has been always very high in relation to net profit because of high depreciation. However, the business of KESM requires very high capital expenses too. After incurring capital expenses, there are years of positive FCF and years of negative FCF. On the optimistic side, on average, FCF tends to be on the positive side.
Hence the above checks show that KESM is investible as a Graham net net.

Conclusions
KESM has its business performance deteriorated severely after the US Sublime crisis. Its share price has also dropped quite significantly from RM5.60 at the peak of internet euphoria to just RM2.04 now as a result. However, it has high quality assets which makes it a good investment at the present price of RM2.04. There is sign that there may be a significant improvement of its performance as evidence from the vast increase in net income recently.

Posted by nightshade > Nov 25, 2013 11:29 AM | Report Abuse

Maybank-C2, gearing > 40, expiry next year June, ratio 5:1

strike at RM 10.50....it is possible in my view....

Gearing will reward you very well provided you are right about the direction of the underlying. Gearing cuts both ways. I prefer a safer bet on CY, gearing lower at 10 times but it has better chance of positive return as the underlying share just needs to go up by 1.2% within the expiry time of 3 months for me to make money. Unless you are very positive about the underlying share price going up more than 10% in 7 months time, then C2 may be more exciting.

It is a matter of risk reward ratio and a game of probability.

Warrant Price Ex-Price Ex-Ratio Expiry date Premium Gearing
C1 0.065 9.400 10.000 10/01/2014 3.2% 15.0
C2 0.050 10.500 5.000 30/06/2014 10.4% 39.0
C3 0.055 10.500 8.000 22/07/2014 12.3% 22.1
C4 0.080 9.500 12.000 24/10/2014 7.4% 10.1
CY 0.240 8.900 4.000 28/02/2014 1.2% 10.1
CZ 0.170 9.000 6.000 21/03/2014 2.9% 9.5

The power of leverage in investing: Warrants

Although many people like to use leverage to amplify return from the stock market, there are equal or may be even more of them scorn it. Yes, investing with leverage cuts both ends. So as a self proclaimed prudent investor, why do I advocate the use of leverage in investing in warrants?

The theoretical value of warrant depends on the price of the underlying share, the exercise price, time to expiry, its volatility, dividend payment of the underlying and the risk-free rate.
Let us take a warrant PJ Development Warrant C (WC) as an example how a leveraged instrument can be used as a financial risk management in investing rather than punting.

Wc has an exercise price of 1.00 and expire in 7 years time on 4th December 2020. At the latest closing price of PJD and Wc at 1.28 and 35.5 sen respectively, the leverage or gearing is 3.6 times. Wc is in-the-money now but it is trading at a premium of 6%. This means that if you buy Wc at 35.5 sen and pay RM1.00 to send it to convert to PJD share, you are overpaying to own PJD shares by 6%. But who would be so stupid to do that ? There is precious time value in Wc which you won’t want to lose it by converting Wc to PJD share now.

Let say I am bullish about PJD that the company will do well in the next 7 years and I believe that its share price will go up to RM2.00 within this 7 years before the expiry of Wc. Let say I first intend to invest in 10,000 shares of PJD for RM12800. If PJD share price goes up to RM2, I will sell it for a profit of RM7200, or 56%. Now instead of placing RM12800 at risk, what if I spend just RM4000 to purchase 11200 shares of Wc, or just a third of capital layout?

I would achieve my goals if PJD really goes up to RM 2.00 within this 7 years as I would convert Wc and then sell in the market of the converted share of PJD for RM2.00. I would make the same amount of money, i.e. RM7200, with much lower capital layout and my return is now 182%.

Of course the reverse is also true. If PJD share price goes down by 6% to RM1.20 and as the warrant is still in-the-money, I have to convert Wc as it is expiring, I would lose 44%. What if there is a major economic disaster and PJD goes bankrupt? One will lose all his money whether you are in PJD or Wc. But PJD shareholders lose RM12800, whereas Wc investors lose only RM4000.

Yes, the beauty about warrant investors is warrant holders has the right but not the obligation to convert to the underlying share when it is out-of-the-money, i.e. when PJD share price is below RM1.00, the conversion price. Hence the downside risk of warrant is lower and limited to the lower cost of you investment in warrants.

The table below shows the payoff of Wc with various prices of the underlying share price.

PJD 1.00 1.20 1.40 1.60 1.80 2.00
Wc 0.00 0.20 0.40 0.60 0.80 1.00
Gain PJD -22% -6% 9% 25% 41% 56%
Gain Wc -100% -44% 13% 69% 125% 182%

KC Chong (Auckland 24 November 2013)

What is Value Investing? (Stockopedia)

Value investing is extremely simple in theory, but tougher in practice. If you compare the price of a stock with a confident valuation of its true worth (intrinsic value) and find you can buy it at a considerable discount (margin of safety) then you may be onto a winner. But value investing is much harder than it looks for two reasons, firstly the real intrinsic value of a company can be tricky to calculate but also the practice of buying beaten down stocks also runs contrary to almost all human instincts. But it’s precisely these tendencies that lead to so many investors over-reacting, driving prices down so low that value stocks become so profitable in future.

How Profitable is Value Investing?
Benjamin Graham is widely regarded as the dean of value investing as well as the whole industry of Security Analysis. This influence stems not only from his published works but also from the eventual fame and fortune of the pupils that he taught at Columbia University who included Warren Buffett. It is thanks to Graham that we have a whole catalogue of quantitative bargain stock strategies at our disposal with such obscure titles as ‘Net Net Bargains’ and ‘Net Current Asset Value Bargains’ as well as a whole ream of other concepts including Margin of Safety and Mr Market.

In spite of being personally wiped out in the 1929 stock market crash, by the time the Graham-Newman partnership was closed it had delivered an average 17% annualised return to investors, outperforming the market by a considerable margin and making the elderly Graham an exceptionally wealthy man. But his pupils became even wealthier.

In a paper titled 'The Super Investors of Graham and Doddsville' Warren Buffett showed the track records of each of nine disciples of Benjamin Graham showing that they all generated annual compound returns of between 18% and 29% over track records lasting between 14 to 30 years. Is it likely that these individuals from the same school of thought could all beat the market over a generation if the stock market was a place of luck? Warren Buffett doubted it most eloquently when he said “I'd be a bum on the street with a tin cup if the market was always efficient”.

Why does value investing work?
The human mind is split between the 'human' frontal lobes and the 'primal' limbic brain. At times of stress or excitement we fall back on primal instincts which are ill suited to the Spock-like nature we need to cultivate for investment success. Behavioural science has shown that we suffer from a range of judgemental errors including overconfidence in our abilities, herd behaviour, loss aversion and anchoring on irrelevant information which push share prices to extremes of highs and lows driven by hopes and fears, elation and despair. Until the day (god forbid!) that man and machine become one and these tendencies are ‘debugged’ from our habits, value opportunities and mispricings will continue to be available to in-the-know contrarian investors.

Can't professionals do this for me?
Unfortunately, despite the huge evidence that value strategies work, it is unlikely that a well thought-through value-based investing approach is being put to work for you and your family or anyone else that saves money in an actively managed fund. A mountain of research suggests that active fund management is riddled with bad decision making, herd behaviour and excessive compensation leading to significant underperformance. The extraordinary truth is that 75% of actively managed funds underperform their benchmark over the long term due to the cost of high and often under-disclosed fees.

Individuals who do have the time and discipline to do their own research are generally going to be better off taking investing matters into their own hands. There are cheap, neglected, misjudged stocks out there and with the right techniques up your sleeve it isn’t so hard to find them and profit from them.

Stockopedia

Unimech, is this "hi" referring to me?

Posted by saloma > Nov 21, 2013 07:50 PM | Report Abuse

hi, how bout unimech?

Unimech Group Berhad is engaged in system design, fabrication, manufacturing and distribution of all kinds of valves, instrumentation and fittings; heat and steam engineering, manufacture of electronic products and components and other related products; pumps, and others.

The revenue and earnings of Unimech is quite steady at about 200m and 20m respectively. At RM1.58, PE ratio and P/b of about 9 and 1 respectively are undemanding.

ROE at 13% is ok, not too bad. However it has considerable debt with D/E ratio of 0.5. Hence its ROIC, which I think is a better metric to measure efficiency, at less than 8% (<10%), is not good for me.

Actually its Achilles heel is its cash flow, very poor. There wasn’t any cash from the operations for the last two years. Hence it has to continue to borrow more money to fund its operations, and even more for capital expenses.

For me I won’t invest in this type of company.

This is what I, as a non accounting professional do when computing free cash flows of the firm:

FCF = Cash flow from operations - capital expenses

Cash flow from operations in the cash flow statements already added back non cash items such as depreciation and amortization into the net profit. These are for existing equipment and intangible assets. And also change in working capital etc.

Capital expenses are money spent on new plant and equipment, properties for the business etc. There may be some variation as what to use as capital expenses, whether growth capital expenses to be omitted here.

I as an investor just like to keep it simple to use the above formula directly abstracted from the cash flow statement

Depreciation as a cost of the business is the depreciation of existing machinery. It is not capital expenses.

Capital expenses is money spend to maintain or increase the efficiencies of the production,new line of production, buy new machinery, new parts for increased production.

Capital expenses is capitalized in balance sheet for the benefits of many years to come in the future. It is not reflected in P&L. P&L only take out part of the cost as expense each year.

Hi Robert, nice to hear you talking about your New Toyo and now Amvig (?). Now for a start, you haven’t responded to my questions in the post below questioning you for promoting New Toyo by talking down Tien Wah continuously. Could you go back to this post and give us some response, instead of deleted all your previous posts?

Posted by kcchongnz > Nov 14, 2013 09:26 AM | Report Abuse X


YOUR FOLLOWING TWO POSTS BASICALLY TALK ABOUT THE MACRO ECONOMY, AUSSIE $, SMOKING BAN ETC WHICH I DON’T KNOW WHAT TO SAY. IT IS BEYOND OUR CONTROL.

Posted by Robert Love > Nov 21, 2013 03:29 PM | Report Abuse
Posted by Robert Love > Nov 21, 2013 03:29 PM | Report Abuse

TIEN WAH SHARE PRICE SHOULD RETREAT TO 2.2 TO 2.3 THEN ONLY SUSTAINABLE? RATIONALE? REASONS? ANALYSIS? CHARTS?

Posted by Robert Love > Nov 21, 2013 04:09 PM | Report Abuse
Given the above outlook, Tien Wah should retreat back to below its NAV, probably 2.2 to 2.3 RM range. this is more sustainable price range.

OH, THE LAST TIME I TOLD YOU WITHOUT TIEN WAH WHICH IS PROVIDING THE PROFIT AND CASH FOR NEW TOYO, NEW TOYO GOT TO CLOSE SHOP ALREADY. THAT INFORMATION WAS OBTAINED FROM YOUR POST. THAT WAS WHAT THE ARTICLE SAID.

BUT WHY SHOULD WE CARE ABOUT NEW TOYO? ARE WE TALKING ABOUT WORLDWIDE INVESTING? I DON’T KNOW ABOUT OTHERS, I HAVE NO SUCH ABILITY TO DO SO.

NEW TOYO IS THE MASTER OF TIEN WAH? WHO CARES.

Posted by Robert Love > Nov 22, 2013 11:04 AM | Report Abuse
The thing about New Toyo better than Tien Wah is that it has its own specialty paper segment which has picked up strongly with the new contract with PMI, the biggest tobacco player in the world.

If you noticed that although New Toyo only owns 54% of Tien Wah equity, it has more than 70% of Tien Wah's group profit. This is because of the JV called MEIL, which allows New Toyo to cream off profits. MEIL is a money spinner for New Toyo.

Tien Wah's master is New Toyo. This is the truth.

AS I HAVE TOLD YOU, I AM NOT AN EXPERT. THE REST DON’T SEEM TO BE EXPERTS TOO. YOU TELL US THE BELOW THEN.

Posted by Robert Love > Nov 22, 2013 04:45 PM | Report Abuse
Who are the other "top printers" in Malaysia? What is Tien Wah's share of the markets? What is Tien Wah's competitive advantage over other printers?

AMVIG? WHAT THE HELL IS THAT? WHO CARES? IS THAT ALL YOU CAN PROVE AMVIG IS SO MUCH BETTER, THE JUST A FIGURE OR TWO WITHOUT ANY OTHER THINGS?

AMCOR SOLD OFF ITS STAKE IN TIEN WAH MANY YERS AGO? THEY MUST BE REGRETTING NOW LIKE HELL AS YOU KNOW TIEN WAH’S REVENUE AND EARNINGS HAS INCREASED FOUR FOLDS SINCE 5 YEARS AGO.

Posted by Robert Love > Nov 23, 2013 09:02 AM | Report Abuse
A good comparator for Tien Wah is Amvig (listed in Hong Kong).

a. Amvig gross profit margin is the region of 30% while that for Tien Wah is barely 20%.

b. Amvig is constantly undertaking printing capacity expansion for future growth while Tien Wah has already stopped installing new capacity since 2011. This is because demand for Tien Wah’s printing has already stagnated while Amvig is still growing its market share in China.

c. With much better GPM than Tien Wah, Amvig’s P/E is only 8. Should Tien Wah trade above this P/E level? I think not likely. If I am investor, I would rather buy Amvig than Tien Wah. Amcor has a big stake in Amvig but sold off its stake in Tien Wah many years ago.

AGAIN BELOW YOU NEVER SUBSTANTIATE WHAT DO YOU MEAN BY “VALUATION RICH”. MUCH BETTER COUNTER AROUND? OF COURSE. PLEASE SHARE WITH SOME GOOD ANALYSIS.

Posted by Robert Love > Nov 23, 2013 10:58 AM | Report Abuse
Tien Wah "WAS" attractive had one bought it below 2.0 RM but not now. The valuation is quite rich. this is my humble view. There are much better counters out there.

BUT THERE ARE ALSO OTHER COMPANIES DOING BUSINESS IN CHINA MUCH MUCH BETTER THAN AMVIG, SUCH AS XDL. XINGGUAN, CSL ETC.

Posted by Robert Love > Nov 23, 2013 12:10 PM | Report Abuse
We all know that doing business in China is very competitive, and yet Amvig is able to extract much higher gross profit margin than Tien Wah (30% versus 20% or 50% much higher for case of Amvig).

What does this tell us about the level of productivity of Amvig versus Tien Wah? From experience, I would say Chinese are definitely more "hard-working".

WHO SAID TIEN WAH IS SO GOOD? WHERE? BUT I KNOW FOR SURE AMCOR MUST BE BANGING THEIR BALLS NOW FOR DISPOSING TIEN WAH AS TIEN WAH’S REVENUE AND EARNINGS HAS INCREASED BY 4 FOLDS, IN JUST 5 YEARS!

Posted by Robert Love > Nov 23, 2013 12:31 PM | Report Abuse
One should ask the hard truth . Why does Amcor divest its stake in Tien Wah if Tien Wah is so good ? Amcor is the one of the biggest players in the printing sector in this part of the world

How much FCF is considered satisfactory?

This is individual. For me if I invest $100,000 in a business with a turnover of $100000 a year and it earns $20,000, a net profit of 20%. Say in term of hard cash the business receives $22,000 (CFFO) because there is some non-cash item such as depreciation, and then it requires $15,000 for capital expenses for maintenance as well as growth, leaving behind $7000 cash (FCF) into my pocket. My cash return will be 7%. The cash is also 7% of the revenue. The capital expenses provides me with some growth in earnings say.

I will be happy about that. In general, I am happy if a business has over FCF of 5% over the revenue as well as invested capital. It is hard cash.

I like this one. Investing exercise should follow a proper approach like this. Good effort.

Posted by miketyu > Nov 22, 2013 09:58 AM | Report Abuse
Prlexus
Graham's number: (81158/74200)*0.1156*22.5)^0.5 = 1.68, current price 1.08. I used quarter EPS 0.1156 instead of whole year eps 0.40.

Net net: Cash = 28900 100% 28900
Trade & receivables 23744*0.75 =17808
Inventories = 17903*0.5 = 8951.5
PPE= 41435*0.5 = 20717.5
Total Liabilities=33774
Net net = 1.14
Current price 1.08
NTA 1.09

Mr Kcchongz. can u kindly review the above valuations either it is correct?
Because the business seems undervalued so far.
Note 3 sen dividend has been declared. Due 13/12/13

First of all, you got to realize that there was a split of the shares after the last financial report and hence you have to adjust accordingly.

When you use the Graham number, EPS should be the annual figure, or 21 sen. Please note this valuation though simple, it should be used as a rough guide only.

Good to see you use net net valuation now. I feel this is a very useful valuation for a lot of companies with a lot of good assets but little earnings. I also believe that this knowledge could provide good return for investors if used correctly. In the US markets, net net is very hard to find now. But in Bursa, the market is more inefficient and hence net net valuation could be very useful.

You got the right net net valuation. However, you have to adjust for the share split. Hence the net net value is just half of what you got now, or 54 sen.

For me Prolexus is a value stock. An earnings based valuation model is more appropriate.

I use ColdEye's 5 yardsticks to evaluate Prolexus if it is worth investing as below:

Cold Eye’s 5 yardsticks for Prolexus
I will refer to the latest financial result ending 31/7/2013 for Prolexus for this exercise. The metrics are adjusted for the split of the shares a couple of months ago.

Yardstick 1: ROE
Prlexus reported an earnings of 15.3m, up from 10.0 m from the previous year for the common shareholders, or EPS 41.6 sen (pre-split) for the year ended 31/7/2013. With its net asset backing per share of 2.27, ROE is 23% which is better than the benchmark of 15%. This was achieved with little debts. Tick.

Yardstick 2: Cash flow and free cash flow
The average cash flow from operations (CFFO) last two year was 18.9. This is 110% of its earnings of 17.1m. This shows the quality of the earnings is good. After spending average 5.1m in capital expenses, there is a free cash flow (FCF) of 13.8m. This FCF is at 4.6% which is satisfactory.

Yardstick 3: PER
Prlexus is trading at 1.06 at the close on 22nd November 2013. With EPS of 21 sen, the PE ratio is only 5.1 (<<10). This is a reasonably low PE and considering that it has a healthy balance sheet with little debts.

Yardstick 4: Dividend yield
Prlexus paid a dividend of 3 sen for last financial year, or a dividend yield of 2.8%, not great but it is ok. Prlexus has not been paying any dividend for a long time already.

Yardstick 5: NTA
The net asset backing per share of Prlexus is 1.1. Hence at a share price of 1.06, the price-to-book value is only 0.9 (<1.0). It is inexpensive.

Prlexus generally meets all criteria of Cold Eye as an investment grade stock.

Posted by houseofordos > Nov 22, 2013 02:49 PM | Report Abuse

KC,

With regards to your post on SHL, I have a few questions :-

1. How did you get earnings yield=18%. Did you also exclude investment properties besides the cash in the EV calculation ? At least that s what it took for me to get similar earnings yield as you.

YES I DID. BUT THAT COULD BE A LITTLE LIBERAL, OR CONSERVATIVE. IT WILL BE HIGHLY ARGUABLE WHATEVER % ONE USES UNLESS HE GOES INTO DETAIL TO CHECK THOSE PROPERTIES AND THEIR ACTUAL MARKET VALUE.

2. Do you have any concern on the lower property development costs shown in the balance sheet for Q2 ? It seems like cashflow is high cause they already billed all their sales. The property development costs is the lowest for 3-4 years. Could mean slowdown in development ?

DIDN'T GO INTO DETAILS. BUT THE FCF THAT YEAR WAS PARTICULARLY HIGH. MAYBE SHOULD TAKE AVERAGE OF THE TWO YEARS. BUT THEN THE EARNINGS YIELD STILL OK AT DOUBLE DIGIT.

3. When you do graham net net and say that its net net value is close to RM2, I m assuming you put a high pecentage in its PPE which are mostly vacant land with appreciating value ?

NO I WILL NEVER USE HIGH PERCENTAGE FOR PPE BECAUSE OFTEN THIS PPE, IF THEY ARE NOT UNDERVALUED LAND, AND IF ARE MOSTLY MACHINERY AND PLANT, THEN THE LIQUIDATION VALUE WOULD BE LOW. I NORMALLY USE 50%.

THE HIGH NET NET COULD BE ME USING 100% FOR INVESTMENT PROPERTIES, PROPERTY DEVELOPMENT COST ETC. AGAIN THEY MAY BE TOO LIBERAL.

4. I find ROIC is not good metric to evaluate property companies with high land bank / assets. Unless we exclude non-business related assets in the IC calculation to see the true operational efficiency.

ROIC FOR PROPERTY COMPANIES NORMALLY LOW BECAUSE I INCLUDE LAND HELD FOR DEVELOPMENT, PROPERTY DEVELOPMENT COSTS ETC AS PART OF INVESTED CAPITAL. AGREE WITH YOU HERE.

I THINK FOR SHL WE HAVE TO TAKE THE WHOLE THING INTO CONSIDERATION TO DECIDE IF IT IS WORTH INVESTMENT. EG, NET NET OK AND CASH FLOWS, EARNINGS, FINANCIAL PERFORMANCE AVERAGE, THEN MAY BE OK.

THIS VALUATION IS AN ART. IN FACT ANY VALUATION METHOD IS ARGUABLE.

Careplus hidden gem, or charcoal?

Posted by wajatimur_28 > Nov 21, 2013 06:54 AM | Report Abuse

mr kcchongnz...you are very kind and smart in stock investment based on FA...can u pls make some review on CAREPLUS stock (ace market)...it's a hidden gems stock or not?...based on EPS...-VE..but..the NTA of the company in gain so much..i think they us their profit to buy new asset..what do u think mr. market?...tq..

Me smart in stock investment? Didn't you see there is this fortune teller every time posting saying I am wrong in this stock, wrong in that stock? But actually I never like him forecast stock prices like a fortune teller. Because I can't make forecast of future stock price, period. So I usually talk about value and then compared with its prevailing stock price to see if worthwhile investing. Same thing for this stock. Since you asked me, I just give you my personal opinion what do i think about its business, not future stock price.

Ok good that you mentioned about it is losing money. So it can't qualify as a earnings kind of value, ie we can't gauge its value through earnings. So many gloves companies are making money. Wonder why its business is so bad.

So it leaves us to see its assets. However, I got a shock that such a small ACE company owes banks so much money, 53m, same amount as its total equity, and has only 3m cash. Wow!

And what kind of quality of its assets? PPE 76m and how much does it really worth if goes into liquidation?

Receivables, yes people owe them 8.5m, and 31.2m by a related party (what?), inventories, 14.7m. Wow!

Net tangible asset 18.5 sen and still trading at 33 sen. Are those people out of their mind?

Cash flow how? What cash flow? When is the next right issue or private placement or whatever.

No lah, they must have heard of news insiders going to goreng the stock.

Good points bsngpg, that should be the way in investing. Find out yourself if a stock is really worth investing, rather than just hearsay.

But I am not sure you got the right person to ask or not. My hunch is a definitely not. I have no knowledge of the palm oil machineries industry. I didn’t even know what does MBL stands for when somebody asked me about this stock here. I thought it stands for 無本利, and so I bought the stock.

Does the nut crushing plant has to be high tech and sophisticated to do a business like MBL? I don’t know. But I did like those postings written by a former named gark about the industry and MBL’s niche. I thinkt what he said about the good things on MBL made sense.
I did write a few postings talking about what I think about investing in MBL, basing the circumstances at that time. As I remember, MBL showed all the characteristics of a great company; good profit and growth, high profit margins, great quality of earnings and FCF, ROE, ROIC etc. And best of all it was selling at great price at around 90 sen then.

Whatever strategy I used, whether the ColdEye 5 yardsticks, value investing, growth investing, Greenblatt magic formula, high dividend yield strategy, they all tick. It meets all criteria as an investment at that time.

The EPS for last year was 18.6 sen. But for the last two quarters, it is only 4.1 sen, quite a drop. Assuming annualized EPS of 8.2 sen, and at the closing price of 1.06 yesterday, PE would be about 12, and dividend about 4%.

Has the business deteriorated so badly? Is the price too high? I don’t think so. Bear in mind this industry which is related to the palm oil plantation is resilient but is cyclic in nature. Tides come tides go.

Will MBL make more or less profit in coming years? I don't know. But I believe things revert to the mean often.

Directors remuneration too high compared to profit? Does it mean that companies losing money directors shouldn’t be paid at all? It should be related to the revenue of the company. Yes even that the fees and remuneration is a little too high at 5.3% last year’s revenue. But MBL is small company with small revenue. Does it mean that directors should be paid just a few tens thousands a year only?

These are just my personal opinions.

LCTH? Yes a typical Graham net net.

Posted by sephiroth > Nov 20, 2013 12:42 PM | Report Abuse

kcchongnz, need yr help to check the fundamental of LCTH, thanks in advance

this is a major turnaround company

firstly the red flags, high receivable RM75m , losses for 2-3 years, negative cash flow from operations

the company have taken drastic steps to return to profit. To free itself from depreciation charges and lease commitment and improve cost effectiveness, the company have execute a sub-tenancy agreement to let out majority part of the factory to the puchaser Flextronics Technology and thus improve asset utilisation

and now the GREEN FLAG

As at 30 Sept 2013
Debt RM86,000

Cash RM67.225m
Short term investment RM8.975
Total liquid asset RM76.2m or 21.16 sen per share

Recurring income
every quarter receive RM1.8 to 2m cash from interest income/dividend/investment income

A company which continues to make losses every year including up to 30/9/2013. Its value lies only in its assets.

As I am not sure about the quality of the assets in its investment properties, and investment in associates, I just assign 75% for properties and 50% for associates, receivables and inventories. Note the receivables grew a lot recently.

The net net value of LCTH is 25.5 sen, as compared with its closing price of 20.5 sen. Good buy.

However some caveats below:

1) It is bleeding cash. CFFO negative. So hopefully the net net value will not be eroding in the future.
2) What is the quality of this receivables which has been increasing so much recently? Is the allowance of 50% adequate?

LCTH may be better dead than alive for its shareholders. Just my personal opinion.

EAH? Very hot oh! One famous investment blogger keeps on recommending it woh!

Posted by The Picker > Nov 19, 2013 03:22 PM | Report Abuse
Hi KC, thanks for the Kuchai feedback.
I have another counter is EAH (ACE Market) & would like to seek for your advice.
This counter listed in year 2010 with IPO price RM0.250, now RM0.185 which even lower than IPO price. Technology counter with NTA 0.160, cash 7 mil but no debt. I have no idea if their business is consider good business.

Mind to share your opinion?

No lah, I don't know much about it lah. But again since you asked, just give my opinion just by looking at its financial statements only, yeah arm chair opinion ok?

EA Holdings Berhad is engaged in the provision of software solutions mainly in the business intelligence and data warehousing solutions and automated invoices processing solution; research and development, sales and distribution of radio frequency identification (RFID)-based tracking systems and the provision of access control systems, and the provision of information and communication technology (ICT) services mainly in system and infrastructure integration services and ICT consultancy services.

Business sounds very high tech. With the hoha hoha, I would expect it to have very high performance metrics. But only really that great lah. Latest report shows net profit margin, annualized ROE and ROIC in their teens only. OK lah but not that great, especially for this type of business.

Price wise at the close of 18 sen today, ok lah not expensive. PE less than 10 (assuming forward earnings 7-10sen per share) and enterprise value also not high at 5 or 6 times ebit.

Ok lah but I won't scream buy buy buy that loud.

Sorry just my personal novice opinion.

Posted by mikekong55 > Nov 21, 2013 11:46 AM | Report Abuse

kcchong,your write up on most of the socks suit my style of investing(medium/long) came across WILLOW yesterday, and inwest88 told me analysis again done by you. Q3 financial result out yesterday EPS for Q3 2.22 for 9 months 5.32. my question is can buy now and keep another 10/12 months. think another gem in the making.thank you and hope not taking to much of your precious time.

Yes, I have written an analysis of Willow as shown in the link below:

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/35487.jsp

In that post I have also made a valuation of Willow based on simple Gordon dividend growth model using an assumption that dividend will be growing at 3% forever, and a discount rate of 10%. The intrinsic value is 83 sen. And that was based on the result of last financial year.

Now three quarters have passed and willow's earnings has grown by 30%. So do you think the assumption of growth of dividend just 3% a year sustainable? Or may can it even grow at a higher rate which will give a higher intrinsic value of Willow?

So you have to make that judgement yourself.

house, this is a two way thingy. Remember I got a number of good companies to buy from you, and some from others here too?

Many brains is better than just one, agreed?

Go for the one which I have done before first. Insas

Posted by hello > Nov 21, 2013 10:23 AM | Report Abuse

sifu kcchong, can have a look at insas? your comment is greatly appreciated :)

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

Posted by joe2703 > Nov 21, 2013 11:02 AM | Report Abuse

Good morning Kcchongnz, I've read most of your post and I know that you usually don't predict stock prices or give any recommendation, you are just sharing your thoughts based on the FA of the companies.

I just want to know do you think at the price of 0.28 now, PMCORP is still considered inexpensive? Although the was just 0.15 in September and it's almost double now.

joe2703,
We should look at the value of a company now and in the future, not the past. Market price normally reflects its present value. So even if the stock price has risen a lot, market may not have memory of the past price. However, the market price may correct a bit due to the steep rise. That is the psychological part of it. It may not be because the price has risen above its true value.

My personal opinion that PM Corp at 28 sen is not expensive. Please read my Graham net net valuation based on its assets a couple of days ago in this thread.

However mktwatch has correctly pointed out that I may have underestimated its true net net value as I have ignored the PPE of 31.5m which I initially thought they are some old machinery and plant, but they are actually valuable assets like properties which could even be undervalued. And I have also ignored the treasury shares which if omitted could have given even higher net net value of PM Corp.

Posted by mktwatch > Nov 20, 2013 10:06 AM | Report Abuse

kcchongnz, I like to explore the concept of Book Value (BV), n esp as it applies to PMC. Can a company's BV be considered as it's break-up value, ie when a company closes its business operations n sells-off all its tangible assets n pays-off its liabilities. The BV per share would then be the amount a shareholder would expect to get back in such an event isn't it? This being the case, can we regard the difference one pays for the share (P) and the BV as a margin of safety?

So, in my earlier calculation, I added the per share value of PPE N Investment Property of PMC (0.046) to your N/N Working Cap/Share of 0.294 to arrive at 0.34 as the BV of PMC. Let's say I bought PMC yesterday @ 0.27 (P). Can my MOS be (0.34-0.27) ie 0.07 or 25.9% of P.
The P/BV ratio is 0.794 (79.4%). In other words, I got a discount of 20.6% for the shares compared to its BV (or Break-Up Value), and this is also another view of MOS?


mktwatch, after reading your post above, I thought about my Graham net net valuation of PMCorp again and have the opinion that my net net of 29.4 sen may be very conservative.

First of all, I totally ignored the 31.5m of it PPE. How could I give a zero value to this. This is no ordinary old plant and machinery, but much of it are properties, like the warehouse in Singapore just sold, the penthouse in Singapore which is way undervalued etc. there could be a lot of value here.

The investment part also may be undervalued as what calvin said is true, like the investment in Luarel Asley (? not sure of the name) etc.

So the net net value of PM Corp can be much higher than that. For me I always like to take a conservative approach when deciding if want to invest in a company. I seldom just listen to hearsay. I could be wrong here.