Posted by kcchongnz > 2013-03-27 11:13 | Report Abuse

Yes, I was speechless when I read the following statement.

Posted by iafx > Mar 25, 2013 03:10 PM | Report Abuse
understand first r u a common share holder, or owner of the company? should the answer is obvious, so is the inappropriate use of e=a-l above

Btw any person fluent in accounting would be speechless when someone who knows nuts criticize others continuously like that.

Posted by kcchongnz > 2013-03-27 15:32 | Report Abuse

CBIP
CBIP’s revenue and earnings grew steadily in the last 6 years. Revenue of continuous operations grew at a compounded annual growth rate (CAGR) of 15%, from 229m in 2006 to 520m last year. Earnings before interest and tax (EBIT) grew in tandem from 35.8m in 2006 to 88.9m last year. Net income grew even at a faster rate of CAGR of 20% as shown in Table 1 below.

Table 1: Growth in revenue and earnings for CBIP
Year 2012 2011 2010 2009 2008 2007 2006 CAGR
Revenue 520351 322611 270893 331468 409903 289819 228811 15%
EBIT 88878 49910 40363 60422 68146 50462 35829 16%
Net Income 91775 69515 50237 42304 62933 46710 31474 20%

The table below shows the cash flow from the ordinary business of CBIP in design and manufacturing of a wide range of palm oil mill processing equipment and related spare parts; undertaking of palm oil mill engineering and turnkey projects and fabrication; and manufacturing of transportation and construction equipment, concrete moulds and general engineering fabrication.

Cash Flow of CBIP from 2006-2012
Year 2012 2011 2010 2009 2008 2007 2006
CFFO 38578 68236 66775 64907 45858 7277 52299
Capex 0 -9497 -40001 -17596 -32355 -220 -12238
FCFF 38578 58739 26774 47311 13503 7057 40061
FCFF/Revenue 7% 18% 10% 14% 3% 2% 18%
CFFO/NI 42% 98% 133% 153% 73% 16% 166%

CBIP produces consistent cash flow from operations for the last 7 years, with an average of 50m. After spending an average of 16m in capital expenses each year, the free cash flow for the firm (FCFF) produced is about 34m a year. This FCFF is about 10% of its average revenue for the last 7 years, very good indeed. For the more recent 4 years , average FCFF is 43m.

So what is the intrinsic value of CBIP and what is the margin of safety in investing in CBIP?

Posted by houseofordos > 2013-03-27 19:46 | Report Abuse

kc, thanks for the detailed sharing. A few questions :-
1. You assume capex for 2012 is 0 because the info is not clear ?
2. When you look at historical earnings, do you exclude plantation earnings since this wont be recurring for at least another 3 years-4years ? I notice that for 2010, you exclude plantation revenue but you included it for all the other years ?
3. When looking at historical FCF, is it fair to exclude capex from plantation activities like planting costs if you are taking CFFO that includes the earnings from plantations (again i notice that for 2010, you seem to exclude something)? Also if we are projecting into future, these planting costs will eat into the cashflow which is why I dont understand why we dont just take that whole chunk of cash used for investment and subtract off the CFFO rather than only subtracting PPE costs.

Long questions but appreciate your advise. Thanks.
house

Posted by houseofordos > 2013-03-28 00:52 | Report Abuse

I think this company is hard to value using DCF method. The FCF is too volatile. DCF method seems more suitable for companies which are more stabe and able to pay out most of their earnings as dividens like BJTOTO, BAT, AMWAY etc.

If I use Warren Buffett's intrinsic value calculator with the following assumptions for 2013 :-
EPS = RM0.36 (assume a conservative 5% growth)
DPS = RM0.12 (30% of FY13 EPS)
Equity/share = RM1.88
CAGR (5y) of equity/share = 10% (conservative because the current year equity is starting from a high base due to the disposal gain)

Using 3% FD rate as a base
Intrinsic value = RM3.2
Current price = RM2.51
Margin of safety = 21%

The model doesnt take into account the dividend growth that will come with EPS growth so the margin of safety could be larger.

Posted by kcchongnz > 2013-03-28 05:47 | Report Abuse

house, thanks for pointing out so many discrepancies in my interpretation of the financial statements of CBIP. I really appreciate it very much. It was not a thorough job of me as I did not go into the details of management discussions to see the breakdown of revenues and profits. Luckily you didn’t say I bullshit. Well think of it, who am I? I am not an accountant, not a finance professional either; but just a engineer like you trying to learn finance and investment. With more people like you, I would be able to learn better.

I look at the ordinary business of CBIP as “Design and manufacturing of a wide range of palm oil mill processing equipment and related spare parts; undertaking of palm oil mill engineering and turnkey projects and fabrication; and manufacturing of transportation and construction equipment, concrete moulds and general engineering fabrication.” I will only use this cash flow to estimate the enterprise value of CBIP. It has gone into some palm oil plantation only in recent years. CBIP has spent some money in the planting of palm oil but the expenses were only capitalized and there is no profit from it yet; except for the sales of certain palm oil plantation which I consider as extra-ordinary gain. I excluded this EOG from its EBIT, NI and also cash flow in order to evaluate its more representative intrinsic value. I would also exclude this sale of the plantation from revenue, which I probably failed to do so in 2012, and also in other years. It invested in some subsidiaries and jv which also involve in oil palm plantation but these are “investments” which I do not consider as its ordinary business and hence I don’t consider the expense as a capital expense. If you look at its cash flow statement, you will notice that cash flows from these investments have been deducted out from its CFFO. I would separately value the present value of these cash flows and then add up to its “enterprise value” mentioned above. Or I simply add the book value, or market values of these investments to the “enterprise value’.

So this is my view of your three questions above.

1. Yes, the information is not available. So if I were to do a DCFA, I will use an average of past years capital expenses, not 0 capex.

2. There is no earnings from plantation, except for the extra-ordinary gain of the sale of plantation. Am I right? If so I would even ignore all the revenues from plantation.

3. I ignore the planting cost as capex because CBIP’s plantation has not earned a sen yet. The benefits of this expenditure can only be derived in the future and hence it should be capitalized, although actual cash has spent. It distorts the actual cash flow situation if we do so. It is different from say Kumpulan Fima, which it has been earning income from its plantation division and hence all capex in oil palm must be considered. CBIP, like before may just sell off that plantation before it matures like what it has done previously and make a gain, a big one last year, which the cash flow of this gain I would also not considered as a cash inflow in the ordinary business when determining its intrinsic value. Cash flows from investment is not capital expenses alone. You cannot take the whole of cash flow from investment as capital expenses. That I am very sure is not right.

Those are my opinion. I am sure there will be something which is not right. I would appreciate if you correct me.

Posted by houseofordos > 2013-03-28 09:16 | Report Abuse

Thanks for that clarification on definition for capex. That really cleared things up for me.

I believe that the plantation contribution is 0 starting 2011 so the cash flow analysis makes sense for 2011 and 2012. But plantation division was contributing 20-30% to PBT numbers from 2007 - 2010. Based on cashflow statement, CFFO was derived from the PBT numbers, these PBT numbers included plantation earnings, hence it will be distorted from 2007 -2010. Hence, it makes more sense to separate cash flows from manuf and planatation during the early years, i dont know how to do it, maybe just discount the CFFO by a factor of the plantation contribution to earnings.

Posted by kcchongnz > 2013-03-28 09:47 | Report Abuse

house, has CBIP got any palm oil to harvest or to sell at the present moment? I don't think so. To me there is not yet ant revenue nor profit from the plantations. So the so called turnover and revenue and cash flow for plantation is only the sale of certain plantation asset. Go look at the segmental results for 2010 and 2011 in the audited account 2011. CBIP has separated these earnings of sale after the "profit after tax of continuous operations" for both the years. So when you take the NI, take these figures and ignored the earnings from the discontinued operations which is one-off event.

Similarly for cash flows, the first line in the cash flow statement has separated the Profits for continued and discontinued operations (which is the plantation land sold). So take the cash flow for the continuous operations only and ignored the discontinued operations because this is one-off event. I don't know why CBIP include the discontinued operation in its revenue. I won't because this is misleading and distorts its "actual" revenue. This in only my opinion. as I have said, I am no accountant, nor am I a financial analyst and likely I am wrong. But I think doing this way to see the revenue, profit and cash flow this way is more appropriate for its "ordinary business". After all our purpose later is to evaluate the enterprise value of its ordinary business, then only add the value of others to this enterprise value.

Posted by houseofordos > 2013-03-28 10:24 | Report Abuse

yes that's why i said 2011 and 2012 numbers are correct. I was referring to cashflow numbers for the earlier years (2007-2010) when plantation divisions was still part of continuing operations.

Posted by kcchongnz > 2013-03-28 11:42 | Report Abuse

A simple valuation of CBIP using ROE.

Year 2012 2011 2010 2009 Average
NI 85603 68343 48775 40381 60776
Ave Equity 439423 334542 268276 233179 318855
ROE 19.5% 20.4% 18.2% 17.3% 18.9%

To calculate, the equity of the year is taken as the average of equity beginning and end of the year. The ROE computed is quite steady at an average of 18.9%. The net income used for calculation of ROE excludes the one time gain item in disposal of assets.

Hence with a net asset backing of 1.83, the fair value of CBIP is computed as equal to

ROE/Rr*NAB =18.9%/10%*1.83=RM3.45 per share.

The required return Rr is taken as 10%, a 6% premium over the MGS rate.

Posted by iafx > 2013-03-28 12:16 | Report Abuse

now become "the equity of the year is taken as the average of equity beginning and end of the year"... my goodness!



Posted by kcchongnz > Mar 27, 2013 11:10 AM | Report Abuse

[In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists. In an accounting context, Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.] Wikipedia

It doesn't mean everything Wikipedia says is correct but for this very simple accounting concept, of course Wiki won't go wrong.

It means clearly equity=assets-liabilities

When there is no preferred shareholders, as in most if not all the companies in Bursa, common shareholders equity (or just equity) are the only shareholder or stockholder equity.

http://klse.i3investor.com/servlets/forum/900218979.jsp?fp=3

Posted by kcchongnz > 2013-03-28 12:31 | Report Abuse

That is right, here I used the average of the beginning and the end equity. For equity for calculation of ROE, some use end of year and some use just the beginning of the year, and some do like I do here. There are all not wrong. I can also tell you the merits of which one to use. There is a valid reason I used the average here. If you want to know I can tell you why.

Btw, it is good you follow me everywhere. Trust me, you will learn a lot about finance and investment by following me. But please for heaven sake, don't be a bloody fool to ridicule me; because you do not know enough to do that, and you are just making a fool of yourself.

Posted by iafx > 2013-03-28 12:38 | Report Abuse

Posted by kcchongnz > Mar 27, 2013 11:13 AM | Report Abuse

Yes, I was speechless when I read the following statement.

Posted by iafx > Mar 25, 2013 03:10 PM | Report Abuse
understand first r u a common share holder, or owner of the company? should the answer is obvious, so is the inappropriate use of e=a-l above

Btw any person fluent in accounting would be speechless when someone who knows nuts criticize others continuously like that.

Posted by kcchongnz > 2013-03-28 12:41 | Report Abuse

So you re-post my post to remind others that you are making yourself a fool? If not what are you trying to say? Hey, nobody can read mind, especially yours.

Posted by iafx > 2013-03-28 12:43 | Report Abuse

Posted by kcchongnz > Mar 27, 2013 10:22 AM | Report Abuse

Posted by iafx > Mar 27, 2013 09:27 AM | Report Abuse
make no mistake, shareholders equity is NOT equal to Assets - Liabilities!

Somebody just Google and find the formula a bit different and declares everywhere about the above statement. He doesn't understand what is preferred shares, and hence why the difference of the formula. For heaven sake don't make a fool of yourself everywhere.

http://klse.i3investor.com/servlets/forum/600027117.jsp?fp=3

Posted by kcchongnz > 2013-03-28 12:46 | Report Abuse

Posted by kcchongnz > Mar 28, 2013 12:41 PM | Report Abuse X

So you re-post my post to remind others that you are making yourself a fool? If not what are you trying to say? Hey, nobody can read mind, especially yours.


Hey go to the thread I specially created for us. Don't go everywhere. Other people want to discuss more useful things.

Posted by iafx > 2013-03-28 12:50 | Report Abuse

Posted by kcchongnz > Mar 25, 2013 12:42 PM | Report Abuse

houseofordos

equity = Assets - Liabilities.

With assets overvalued, it means equity will be bigger. As ROE=NI/Equity,

Hence ROE will be smaller, hence not looked better.

Posted by kcchongnz > Mar 28, 2013 11:42 AM | Report Abuse

...bs...bss ..bs..

To calculate, the equity of the year is taken as the average of equity beginning and end of the year.

p.s: what load of BS

Posted by kcchongnz > 2013-03-28 12:52 | Report Abuse

That is right, here I used the average of the beginning and the end equity. For equity for calculation of ROE, some use end of year and some use just the beginning of the year, and some do like I do here. There are all not wrong. I can also tell you the merits of which one to use. There is a valid reason I used the average here. If you want to know I can tell you why.

Btw, it is good you follow me everywhere. Trust me, you will learn a lot about finance and investment by following me. But please for heaven sake, don't be a bloody fool to ridicule me; because you do not know enough to do that, and you are just making a fool of yourself.

Posted by kcchongnz > 2013-03-28 13:02 | Report Abuse

Posted by iafx > Mar 25, 2013 08:54 PM | Report Abuse

investopedia is fine: http://www.investopedia.com/terms/r/returnonequity.asp

read it 4 yrself is the best!


Just follow the link you provided above. But you got to read all of it, not just the beginning and understand all of them. Well I don't use any other thing to justify what I said, but the link you provided above. Just to copy and paste part of it in your link as below. I didn't know at first there is this explanation there.

[ Investopedia explains 'Return On Equity - ROE'
The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income - preferred dividends / common equity.

2. Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period. ]

Posted by kcchongnz > 2013-03-28 13:05 | Report Abuse

See aren't you making a bloody fool of yourself; putting your foot into your mouth?

Posted by iafx > 2013-03-28 13:07 | Report Abuse

Posted by kcchongnz > Mar 27, 2013 10:22 AM | Report Abuse

Somebody just Google and find the formula a bit different and declares everywhere about the above statement....

Posted by houseofordos > 2013-03-28 13:16 | Report Abuse

i think taking the average equity for the year = (beginning + end) /2 is fair.. i ve seen a lot of finance book propose to do it this way.

Posted by kcchongnz > 2013-03-28 13:25 | Report Abuse

house, yes that is theoretically more appropriate. However it is not wrong too if you use end of year equity, many people do that too. Especially if you are comparing ROE of different company, all using the same benchmark.

The reason I used the average ROE here is because you notice the the equity jumped by 31% from beginning of the year of 381m to 498m at the end of the year. So using the end of year will make the ROE lower, a distortion. Think about it, return of money invested in % in the year should be based on initial capital, ie at the beginning of the year, rather than the end of year, isn't it?

Posted by houseofordos > 2013-03-28 13:43 | Report Abuse

yes i agree on that...
Btw, if I use your equation but change RoR to 15%, the intrinsic value comes up to RN2.3 only suggesting that this stock is over-valued at this point based on my RoR.

Now using Benjamin Graham's formula for intrinsic value

V* = [EPS * (8.5 + 2g) * 4.4] / Y
= [0.36 * 8.5 + 2*5% * 4.4 /4
= 3.41

Overall, the intrinsic value is around RM 3 - Rm3.5.

Posted by kcchongnz > 2013-03-28 14:11 | Report Abuse

house, you are really learning very fast. I have been saying again and again that valuation is an art, not a science. Nothing is right or wrong. Formula is precise but assumptions aren't; and to me the appropriate assumptions used are more important.

I think you are a conservative investor and it is good, because if you are conservative, you will not go to Holland. Not going to Holland is more important consideration than making a lot of money for not knowing the risk.

You use ROE of 15%, to me is conservative because as detailed by me above, the average ROE is 18.9% for the last 4 years. Average for the last 6 years was 21%. None of the years has a ROE of less than 17%.

I am very happy that somebody is using Graham's growth model to value a company. My comment again is that the g you used for the growth rate for the next 5-7 years of 5% is also conservative. Remember I have detailed its growth for the last 6 years in net income of a CAGR of 20%? No I am not saying you are wrong. In fact good practice to be conservative.

Posted by iafx > 2013-03-28 15:15 | Report Abuse

if roe can flip like that to fit occasion, what is the basis of the analysis? non-sense!

"...So using the end of year will make the ROE lower, a distortion."

warning: absolutely misleading!


Posted by kcchongnz > Mar 25, 2013 12:42 PM | Report Abuse

houseofordos

equity = Assets - Liabilities.

With assets overvalued, it means equity will be bigger. As ROE=NI/Equity,

Hence ROE will be smaller, hence not looked better.

Posted by kcchongnz > Mar 28, 2013 11:42 AM | Report Abuse

...bs...bss ..bs..

To calculate, the equity of the year is taken as the average of equity beginning and end of the year.

p.s: what load of BS

Posted by houseofordos > 2013-03-28 15:19 | Report Abuse

kc, thanks, have learnt a lot from your posts especially on cashflow analysis.
Regarding the formula, I was referring the RoR in your formula not the ROE average. I feel that RoR of 15% would justify the risk to invest in stocks.
As for the 5% growth in my EPS assumption, its based on the fact that planting activities for their newly acquired land in Indonesia will eat up their earnings.

Just out of curiosity, what is your estimate for intrinsic value of CBIP using the DCF method ?

Posted by kcchongnz > 2013-03-28 15:28 | Report Abuse

RoR, are you talking about required return? Then I would say you are really very conservative, which is good also.

But I use different requirement for different risk. CBIP has strong balance sheet now. Excess cash is 191m, or 70 sen per share. It always has positive CFFO and FCF. So when I use 10% required return, it is already conservative in my opinion. This is the risk premium of equity in the US market shows 6% risk premium is already on the high side. But if I were to invest in a counter like Ivory, I would use a required return of more than 20%, because it has shitty balance sheet, and no cash flows. Besides it appears that there is financial shenanigan in its financial statement.

Are you interested to do your own DCFA of CBIP and we discuss first. I have mine. I need to organize and write it up.

Posted by houseofordos > 2013-03-28 15:44 | Report Abuse

ok I get it, the RoR is sort of like a margin of safety which should be increased depending on the financial strength of the company. So this is where it becomes very subjective

For DCF method, i do not know how to project the growth. If you look at their FCF, its quite lumpy even though positive. So its not really stable, and I would say eventually the FCF growth estimate will be anybody's guess. I have the spreadsheet and I will post tonight. Lets see if the number comes close with the other valuation methods.

Posted by kcchongnz > 2013-03-28 19:08 | Report Abuse

house, when i talk about required return, R (I am not sure if it is your RoR), I am talking about the return I want for an investment. for example if I invest in a good corporate bond, I may want a R of say 7%, a 3% over the MGS bond rate of 4%, because the risk of a good corporate bond may not be that high. But if it is a junk bond, I may want a risk premium of say 8%, or a R of 12%(8%+4%). If I invest in a high risk stock, I may want a risk premium of 15%, or a R of 19% (15%+4%).

A R for discounting the future cash flows to present is about the same principle. If the earnings and cash flow are steady, or increasing, and the balance sheet is strong, I may just use a R of 10%, meaning a risk premium of just 6%. But if the earnings and cash flow are questionable and the balance sheet is weak, I may use a R of 20%. This difference in R values yield a present value of vast difference.

Margin of safety is another concept by Benjamin Graham. After you get the intrinsic value of a stock using the cash flow and required return assumptions, you compare this intrinsic value with the market price. The margin of safety is (Intrinsic value-market price)/intrinsic value.

The reason you want to use a margin of safety is because the assumptions you use may be wrong. So you want to have certain protection against it.

Yes, all this stuff is subjective, but they are intuitive. Don't you think so?

Posted by gark > 2013-03-28 19:15 | Report Abuse

I calculate intrinsic value from FCF using risk free return, then only add safety margin. Risk free return for me is 1 year govt bond, in this case MGS with about 3%.

The trickiest part is always to assume the future growth.. if in doubt i use inflation growth.

Posted by kcchongnz > 2013-03-28 19:22 | Report Abuse

gark, don't you find the intrinsic value you get, say for Kfima, is extremely high using that low a discount rate, even if you use conservative future cash flow like the growth according to inflation?

I think Warren Buffet does like you do, but the intrinsic value will be very high for most of the stocks you hold.

Posted by gark > 2013-03-28 21:46 | Report Abuse

I use a reasonable risk free rate, which is currently low due to low interest. However i also heavily discount the cagr. Kfima long term cagr i assume to be only 5%. Also i require a wide margin of safety like around half the intrinsic value .

Posted by houseofordos > 2013-03-28 22:39 | Report Abuse

Assuming the following
Current stock price = RM2.5
Shares outstanding =272mil
Latest free cashflow = 32m(take 6 years average)
Discount rate = 8%
Cash flow growth rate (year 1-3) =5%
Cash flow growth rate (year 4-10) =8% (plantation starts to generate income)

Total DFCF = 313.288m
Total discounted perpetuity value = 659.2m
Total equity value = 972.48m
Equity per share value = RM3.57
Margin of safety = 30%

Overall the result of the intrinsic value will be very sensitive to the discount rate...
A 10% discount rate instead of 8% will bring the intrinsic value to 2.48 which implies no margin of safety. So i think this model can be really inaccurate for companies that do not have a stable/mature business that generates FCF.

Posted by 66300 > 2013-03-28 22:49 | Report Abuse

Kcchongnz, houseofordos,
Really appreciate your sharing here. TQ

Posted by kcchongnz > 2013-03-29 05:41 | Report Abuse

house, excellent job. Hehehe, now I have kaki in i3 doing discount cash flow analysis. I fully agree with your statement "So i think this model can be really inaccurate for companies that do not have a stable/mature business that generates FCF." Maths is precise but assumptions aren't. Despite what finance says this is the correct method of valuing a company, it is not a holy grail in investing.

Let me comment on your analysis first before I post mine. Believe me when I post mine you would have heaps of comments too on my assumptions and analysis.

First I talked about the maths. The FCF you get is the free cash flow of the firm, or FCFF, not free cash flow for equity holder (FCFE) alone. This FCFF doesn’t belong to the common shareholders alone. They have to share with the debt holders and minority interest. The FCFF you have obtained ignored the expenses in plantation development; but in your estimation of intrinsic value, you have estimated FCFF also grow with plantation. In my opinion, you may have over-estimated the intrinsic value by having that benefit, but with no cost involved. So does it mean that the intrinsic value (theoretical emphasized here) will be lower than what you have estimated? I don’t think so.

Your FCFF has excluded the cash from its investment in subsidiaries and jv, 22.5m for last year (look at its cash flow statement). No, I am not saying that you must include this in your analysis of FCFF in its ordinary business. This amount is very substantial. You notice that this investments yield good return, with an average of 17m a year for the last three years. The return of investment is high; for example an investment of about 80m in subsidiaries yield an average of 14m a year in net profit, or ROI of 18%. Hence you may have to value these investment separately and its value to be added to the enterprise value of its ordinary business you obtained. Besides CBIP has 46.6m as an asset in plantation development expenses; expense it has incurred but its benefit will only be derived in the future and hence this expense is capitalized. Another thing is not to forget that CBIP has an excess cash of 191m, or 70 sen per share. This excess cash can be used to do other investments which could bring future benefits to the shareholders; or just distribute all to the shareholders without affecting its ordinary business. Next we will examine your assumptions.

1. FCFF for the year 0
a. The FCFF in thousands for the last 6 years is shown below:

Year 2012 2011 2010 2009 2008 2007 Av
FCFF 38578 58739 26774 47311 13503 7057 31994

Would you agree with me that you may be a bit too conservative by taking the average of 6 years as recent years FCFF are substantially higher than previously?

2. Discount rate
a. I never use a discount rate of less than 10% for investing in stock. I want to be a bit safer although it is definitely not wrong to do so. Warren Buffet knows the business he is going to invest very well and he uses a very low discount rate, close to risk-free rate. For CBIP, as I have argued before, I don’t use too high a discount rate too.

3. Growth of future cash FCFF
a. The following table shows that growth of EBIT of its ordinary business (exclude plantation, investment in subsidiaries, jv) for the last few years

Year 2012 2011 2010 2009 2008 2007 2006 CAGR
Revenue 520351 322611 270893 331468 409903 289819 228811 15%
EBIT 88878 49910 40363 60422 68146 50462 35829 16%
Net Income 91775 69515 50237 42304 62933 46710 31474 20%

I would think your assumption that its ordinary business will grow by 5% only for the next few years a little bit conservative. Forecasting FCFF from its plantation is difficult as it has no history yet.

Anyway, one can see that there are so many variables, assumptions in this DCCF analysis rendering it very subjective. Hence it is really an art. Is it really useful? Why do we do it then? Food for thought and fodder for discussions. Sorry for the “cheong hee”.

Posted by houseofordos > 2013-03-29 08:09 | Report Abuse

Kc, very interesting comments.
1. For year 0, I think 32m is reasonable estimate cause the number you put into your analysis (38.5m) assumed 0 capex which is probably not the case.
2. I use a guideline of between 8% to 15% depending on company financial health
3. Yes the income statements show that the growth is good. In fact I have split up the revenue growth according to segment so that it is clearer. See below.

Revenue (m) 2012 2011 2010 2009 2008 2007 CAGR
PO milling 340.46 265.057 240.38 229.958 271.893 256.349 5.84%
SPV/Others 179.891 57.554 25.506 35.224 83.181 9.325 80.75%
Plantation 0 0 78.431 69.654 54.221 25.715


PBT (m) 2012 2011 2010 2009 2008 2007 CAGR
PO milling 76.299 47.237 38.351 35.403 33.388 34.482 17.22%
SPV / Others 15.392 2.833 4.915 4.637 5.963 -0.054 26.75%
Plantation 0 0 20.528 14.623 21.025 12.837

Contribution of each division to PBT (%)
2012 2011 2010 2009 2008 2007
PO milling 83.21 94.34 60.12 64.77 55.30 72.95
SPV / Others 16.79 5.66 7.70 8.48 9.88 0.00
Plantation 0.00 0.00 32.18 26.75 34.82 27.16


Question is how to relate that to cash flow ? Maybe use the FCF/Revenue or FCF/Net income ratios ?

Also interested to see how you include those excess cash or investments into the calculation.

Posted by houseofordos > 2013-03-29 08:29 | Report Abuse

If we look at the growth and revenue for only the manufacturing divisions (excluding plantations for the past 5 years)

Year 2012 2011 2010 2009 2008 2007 CAGR
Revenue 520.351 322.611 265.886 265.182 355.074 265.674 14.39%
EBIT 91.691 50.07 43.266 40.04 39.351 34.428 21.64%

Year 2012 2011 2010 2009 2008 2007
CFFO 38578 68236 66775 64907 45858 7277
Capex 0 -9497 -40001 -17596 -32355 -220
FCFF 38578 58739 26774 47311 13503 7057
FCFF/Revenue 7% 18% 10% 18% 4% 3%

The average FCFF/Revenue over the past 5 years is 10%
Assumning revenue in 2013 grows by a rate 14% which is the CAGR,
Revenue in 2013 = 593.2m
FCCF in 2013 = 59.32m

Applying the same calculations as before but excluding the predicted plantations contribution to cashflow

Current stock price 2.5
Shares outstading (mil) 272
Next year free cash flow (mil) 59
Perpetuity growth rate (g) 3%
Discount rate ( R) 10%
Cash Flow growth rate 5%

Sum of discounted FCF (RM mil) 458.2145445
Discounted perpetuity value (RM mil) 545.2018684
Total Equity value (RM mil) 1003.416413
Per share value (RM) 3.689030929

Margin of safety based on current share price 32.23152509%

Posted by kcchongnz > 2013-03-29 08:41 | Report Abuse

house, CFFO is nowadays required to be shown in the cash flow statement. This CFFO is that for the ordinary business. I kept on emphasizing "ordinary business" which you must understand that this does not include investments in subsidiaries and jv, investment in properties if any, investment in unit trust if any etc. In CBIP's case, the investments in subsidiaries and jv is not considered as its ordinary business. This you can see from its cash flow statement that the cash flow from these subsidiaries and jv is deducted from the statement before arriving the value of CFFO. FCFF is of course the value arrived after taking off the capital expenses, which is purchase of PPE. I don't include plantation development expenses as capex yet because it is not yielding any cash flow yet, not now but may be a few years later.

As explained the cash flow form investment in subsidiaries and other investment is not included in the FCFF. The enterprise value you got above is just for the ordinary business; ie “Design and manufacturing of a wide range of palm oil mill processing equipment and related spare parts; undertaking of palm oil mill engineering and turnkey projects and fabrication; and manufacturing of transportation and construction equipment, concrete moulds and general engineering fabrication.” The present value of other cash flows must be added back to the enterprise value you obtain from the above valuation. The enterprise value you obtained doesn't include the value of these subsidiaries. Again I add back the excess cash as excess cash is not need for the ordinary business. This cash can use for other investments to yield more benefits in the future, or it can just be distributed without affecting the "ordinary business" of CBIP.

Why wouldn't I use the growth of its FCFF as a guide to its future growth, instead I prefer growth in EBIT? A company at its growing phase needs a lot of capital expenses to grow its ordinary business and hence FCFF is small in relation to its EBIT, unlike a mature company like BAT, GAB etc. It is already good that CBIP while its ordinary business has grown at 16% for the last 6 years, it still has substantial FCFF. Many growing companies don't even have any FCFF. CBIP when it becomes a more mature company, its FCFF will then be substantial.

Hope I have clarified myself.

Posted by kcchongnz > 2013-03-29 08:59 | Report Abuse

ok house if I were to use your data and assumptions as below:
Next year FCFF 59m
Growth of FCFF next 10 years at 5%
Discount rate 10%

I got an FCFF or enterprise value of 958m, very close to what you get. Remember this is for the ordinary business of CBIP in palm oil mill manufacturing and contracting works, for all the stakeholders in CBIP; ie common shareholders, debt holders and minority interest. You got to add those investments in subsidiaries and jv and also add the excess cash to what you get above. Then you got to subtract out those for debt holders and minority interest. After that only you divide the remainder with the number of shares outstanding, giving you FCFE/share.

Posted by kcchongnz > 2013-03-29 10:15 | Report Abuse

Earnings Power Valuation for CBIP

Valuation is really a very tough task to carry out. It has to be a forward looking exercise. That means we have to make some forecast of a company’s future cash flows. However forecasting is a very hazardous endeavour and it has been proven again and again that forecasting of future cash flows, especially the optimistic ones often run out by huge errors.

Earnings Power Value (EPV) was postulated by a Columbia University Professor and proven successful investor Bruce Greenwald. It is an estimate of the value of a company from its ongoing operations only. First we would assume that current revenue is sustainable. We then normalize the earnings to the business cycle. This eliminates the effects on profitability of valuing the firm at different points in the business cycle. This means that we are considering the average % operating profit over 5-8 years. This average would then be applied to current sales. The beauty of EPV, for value investors, is that the numbers used to calculate it are no growth free cash flows. By using no growth free cash flows we eliminate the predictions of future growth and as such arrive at a number which we can be fairly certain of. This isn't to say that some companies can't expect significant growth, but as value investors we refuse to pay for it.

The next step is to subtract non-interest bearing debt and the cash not required to run the business; and any other investment which has not been unconsolidated into its results, and any minority interest.

The final step in calculating Earnings Power Value is to divide the final cash flow number by the cost of capital. This gives us the present value of a perpetuity without any estimation of growth. That is the Earnings Power Value. For more detail, please follow the link below:

http://www.wikinvest.com/wiki/Earnings_Power_Value

Lets carry out a valuation exercise of CBIP here using its latest revenue for its ordinary business for year ended 2012. The EPV is shown below:

Table 1: EPV of CBIP (000)
Revenue 2012 520351
EBIT 85765 16% average 7-year margin
NOPAT=EBIT*(1-tax rate) 78272 9% tax rate
Average maintenance capex -15987
Add average D&A 8910
Normalised EBIT 71195
Cost of capital, R 10%
Capitalized earnings=Nor Ebit/R 722644
Add cash 191145
Add subsidiaries & JV, plantation 152148
Less debts -17644
EPV 1048293
Less minority interest -70499 7%
EPV to common shareholders 977794
Number of shares 272008
EPV/share 3.59
Margin of safety 30%

If one looks properly at the derivation of Normalized EBIT above, it is actually the owner’s earnings as stated by Warren Buffet in one of his letter to shareholders of Berkshire Hathaway.

Posted by gark > 2013-03-29 10:56 | Report Abuse

Do you all subtract out the cash portion for intrinsic valuation and only evaluate the ongoing business?

The reasoning is that the cash is static and should not be a part of the evaluation. After removing the cash portion, you find that a lot of cash rich company have very high margin of safety.

Intrinsic valuation is all dandy when evaluating companies that perpetually increase earnings, but there are some situation when the companies' wrong move will bring drastic changes and could result in loss position. Once a company enters a loss position, all valuation metrics are out of the window.

Posted by kcchongnz > 2013-03-29 13:13 | Report Abuse

gark, in DCFA, the enterprise value (EV) of a company is obtained by discounted future FCF from its ordinary business. Then the excess cash, or cash not needed for the operations is added to this EV. Not only excess cash, its investments in other things such as subsidiaries, jv, properties etc which their account has not been consolidated into the company's financial statement are added to the EV to give the total EV, or TEV of the company. This TEV is compared to the total market enterprise value (TMEV) which is the market capitalization plus total debt plus any minority interest to see if there is any margin of safety investing with the market price and how much is the MOS.

Posted by gark > 2013-03-29 13:22 | Report Abuse

Lets say for instance Kfima.. it's net cash value is about RM 1/share. Share price 1.85. If we take out the RM 1 of net cash and evaluate based on RM 0.85 (bushiness value), the results are too good no matter how we tweak the numbers.

Posted by gark > 2013-03-29 13:23 | Report Abuse

Since it's too good... sometimes i wonder if there is any 'kap nga' jumping around. LOL...

Posted by houseofordos > 2013-03-29 14:45 | Report Abuse

kc, nice sharing... the subjective part in the valuation is the cost of capital (risk). but at least there is no uncertainty in trying to project future earnings.... I like this method

Posted by kcchongnz > 2013-03-29 15:43 | Report Abuse

gark, we can look at Kfima's value according your angle, a simple PE ratio but with the adjustment of excess cash. Table below shows the

Kfima made a total net income of 116.5m last year, of which 6.6m is interest income. We deduct this interest income and we then get a n adjusted NI of 109.9m. The minority interest as a result of consolidation of Fimacorp's financial account into Kfima's account amounts to 33.6m. Hence the NI attributed to common share holders of Kfima is 76.3m (109.9-33.6), or 28.8 sen per share. At a share price of 1.87 now, 67 sen is cash attributed to common shareholder, the PE ratio is (1.87-0.67)/0.288=4.2

For a company with good, increasing and quality earnings year after year, a healthy balance sheet and good cash flows, isn't a PE ratio of 4.2 a very attractive investment?

Posted by kcchongnz > 2013-03-29 16:18 | Report Abuse

house, yeah often a simpler method is a better method. The R I used above is the average cost of capital and the cost of debt was taken 5.5% and cost of equity 10% as before. This is not really that subjective if you view it as a personal required return of 10% is quite reasonable from the reasons we have discussed before.

Note that this EPV assumes the revenue and margin is sustainable at the present amount with no growth incorporated. Hence I would say this method of valuation is conservative. What do you think?

Posted by iafx > 2013-03-29 16:35 | Report Abuse

Posted by kcchongnz > Mar 25, 2013 03:20 PM | Report Abuse

I am speechless!!!!!

Posted by houseofordos > 2013-03-29 17:32 | Report Abuse

kc, using the current year revenue as a base to calculate the EBIT might be too optmistic, dont you think. The growth from 2011 to 2012 was 60% for the revenue, do you think this repeatable ? Perhaps use something like a median number from the past 5 years on the revenue is safer... just my opinion.

Posted by kcchongnz > 2013-03-29 17:38 | Report Abuse

house, this EPV assumes no growth. It just hope that the revenue is sustainable at 520m, next year, the year after, and ten years later. The EBIT margin is calculated using its 7 years average margin of 16%. Normalized EBIT of 71m is for next year, the year after and 10 years later. Do you think it is too liberal? Or do you think that the business of CBIP will contract next year, the year after and 10 years later in the future?