Posted by kcchongnz > 2013-07-31 17:00 | Report Abuse

Kumpulan Fima

“Value portfolio managers buy and sell judiciously, choosing today’s ugly duckling that shows the promise of becoming tomorrow’s beautiful swan.”

Kumpulan Fima has been in my original portfolio for about 4 years now. At 2.06 now, it provides me with a total return of 220%, or a compounded annual rate of return of 34%, three times above the return of KLSE a year of 10% for the last 4 years. However, for the past one year, return has been unsatisfactory with a negative return of about 8%. Should I discard this stock now? No way!

The business
Kumpulan Fima Berhad is engaged in manufacturing and trading of security and confidential documents; bulk handling and storage of liquid products and cargoes, warehousing and transportation and customs forwarding services; Oil palm Plantation and manufacturing and packaging of food products.

It has a well diversified group of businesses. I won’t say these businesses are very great but each has reasonable growth in revenue and earnings for the last 10 years. All these businesses are durable and are expected to be around for many years to come.

Quality of the business
Kfima’s revenue and net profit has been growing at 8.2% and 23% to 487m and 104m respectively for the last 10 years. In recent years, Kumpulan Fima has been buying up plantation land for its next phase of growth. The growth in revenue is unabated but just last year, earnings has slipped by 10%, due to the low price of palm oil which makes up 30% of its revenue. All divisions remain profitable.

The good quality business of Kfima is evidenced from its high gross margin of average of 43% for the last 5 years (Table 1). Net profit margin is also high at an average of 21%. This results in good 5-year average ROE of 15% and high ROIC of 22%. Retained earnings have been growing at a CAGR of 15% a year.

Kfima’s quality of earnings is excellent as shown in Table 2 below. Its CFFOs are generally about the same as net income. There is good average free cash flow, 16% and 19% (both> >5%) of revenue and invested capital respectively for the last 5 years. It is noted that last year cash flow has deteriorated. It may be still too early to tell if they will further deteriorate.

Capital allocations
Kfima has spent quite a substantial amount of money buying plantation land, new plants and equipment for its business. 143m in total was spent for the last 5 years. The capital expenses were well spent as they yield higher earnings and better cash flows the following years. Due to the better earnings and cash flows, the company has been increasing its dividend payment from 3 sen per share five years ago to 8 sen for 2013. This gives a reasonable good dividend yield of 4%, higher than the bank fixed deposit rate.

Market Valuation
With such good business and operation performance, one would expect it would not be cheap to invest in this stock. But is it so?

AT RM 2.06, Kfima is trading at 7.2 times its earnings per share of 28.6 sen for the financial year ended 31 march 2013. Note that Kfima has an excess 272m cash or cash equivalent sitting in its balance sheet, or an excess cash of RM1.00 per share. Besides it has about 100m in investment properties and interest in associates.

Its enterprise value is less than 4 times its earnings before interest and tax, far below the industry average of more than 10 times. This translate to an earnings yield of 26%, much higher than my 10% requirement.
Hence at RM2.07 a piece, kfima will remain as a second stock in my new portfolio.

Table1: Quality of Kfima’s business
Year 2013 2012 2011 2010 2009 Average
Gross margin 44% 46% 47% 40% 39% 43%
Net margin 21% 25% 25% 14% 13% 20%
ROE 12.5% 15.5% 16.6% 16.0% 15.6% 15%
ROIC 19.2% 25.3% 25.4% 21.1% 18.6% 22%

Table 2: Cash flows of Kfima
Year 2013 2012 2011 2010 2009 Average
CFFO 52589 131052 137909 114196 56521 98453
Capex -49513 -26434 -24022 -19500 -23826 -28659
FCF 3076 104618 113887 94696 32695 69794
FCF/Revenue 0.6% 22.2% 26.4% 23.0% 8.9% 16%
FCF/IC 0.6% 25.8% 29.1% 27.7% 9.4% 19%

Posted by ipomember > 2013-07-31 17:03 | Report Abuse

Hi kc, is investment in subsidiary considered as CAPEX?

Posted by kcchongnz > 2013-08-04 10:30 | Report Abuse

Capital expenses are stuff like purchase of property, plant and equipment; increase in biological assets for plantation business, land development, buying of land for property development companies, research and development, software development for technology companies etc.

Investment in subsidiary is an investment operation. when a company has free cash flow from its ordinary operations after capex, part of it can be used to invest in a subsidiary, of a jv, buy some short-term investment like money market fund, fixed deposit, pay dividend, buy back shares.

Posted by kcchongnz > 2013-08-04 13:20 | Report Abuse

Reversed engineering in discount cash flow analysis.

Pintaras Jaya’s share price has risen by 74%, from RM3.12 to RM5.43 at the close on 2/8/2013 since my portfolio was posted on 21/1/2013 just 6 months ago. The question is after such a good run, is its share price already overvalued? I don’t think so.

We can carry out a discount cash flow analysis using financial theory postulated by John Burr Williams in his “The theory of investment value” to estimate the intrinsic value of Pintaras Jaya and compare with its present market price. The theory says the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate.

As we have discussed before in my previous estimation of intrinsic value of Kumpulan Fima and Mega First Corporation Berhad, the determination of the discount rate is easier. We just apply a reasonable risk premium over the risk-free rate. The risk premium depends on the stability and visibility of earnings of the company, and the health of its balance sheet. For a company like Pintaras Jaya, I can safety use a discount rate of 10%. What about the estimation of the future cash flows.

One way is we assume the earnings or cash flow will grow at a certain rate for the next 5 or 10 years and then a terminal rate about the same of inflation or growth in GDP. But still whatever rate of growth used is subjective. So why not we do a reversed engineering.
Reverse-Engineering DCF for Pintaras Jaya

[Discounted cash flow, however, can be put to use in another way that gets around the tricky problem of accurately estimating future cash flows. Rather than starting your analysis with an unknown, a company's future cash flows, and trying to arrive at a target stock valuation, start instead with what you do know with certainty about the stock: its current market valuation. By working backwards, or reverse-engineering the DCF from its stock price, we can work out the amount of cash that the company will have to produce to justify that price. If the current price assumes more cash flows than what the company can realistically produce, then we can conclude that the stock is overvalued; if the opposite is the case, and the market's expectations fall short of what the company can deliver, then we should conclude that it's undervalued.]

The followings are the data used for the reversed engineering DCF for Pintaras Jaya

Price on 2/8/13: RM5.43
Discount rate: 10%
Trailing twelve months EPS: 62.5 sen
Tax rate: 24%
Excess cash: 153m
No. of shares: 80.064m

From the reversed engineering DCF, it is shown that the market is expecting Pintaras Jaya’s business to shrink at a compounded annual rate of 14% per annum for the rest of its economic life. That means its earnings will be less each year by 14% forever.

So do you think this market expectation of a contraction of 14% is reasonable for Pintaras? Or put it in another way, do you expect Pintaras business will grow, stagnant, or shrink? If grow of shrink, at what rate?

Posted by kcchongnz > 2013-08-04 13:49 | Report Abuse

TanKW, use the Kfima spreadsheet, tab DCFM2 and plug in the numbers. My other assumptions are ROC at high growth 25%, stable growth 15%.

By plugging in the numbers, you will find the market price is about the intrinsic value with 5-year growth of -14%.

Posted by kcchongnz > 2013-08-05 10:54 | Report Abuse

Dissecting the return of equity (ROE) of Pintaras

DuPont equation provides a broader picture of the return on equity of a company. It tells where a company's strength lies and where there is room for improvement. It is the epic of financial statement analysis of a company. Investopedia has a very good explanation on why is it important to carry our DuPont analysis on a company’s business as shown in the link below:

http://www.investopedia.com/articles/fundamental-analysis/08/dupont-analysis.asp

Du Pont Analysis
For the trailing twelve months 2013, Pintaras has a good ROE of 18.7% which is considerably higher than 15%, a number generally acceptable to most ardent fundamental investors. Dissecting its ROE as follow reveals the strength and weakness of Pintaras.

ROE = NI/E = NI/S * S/TA * TA/E = 29.2% * 0.55 * 1.16 = 18.7%
Where NI is net income, E is equity, S is sales/revenue, TA is total assets
NI/S is the net profit, S/TA is the asset turnover, TA/E is financial leverage

The main driver of Pintaras’s high ROE is hence the high net profit of 29.2%. Few construction companies have their net profit margin in double digits, not to say anywhere close to Pintaras’s net profit margin of almost 30%. The asset turnover of 0.55 (<1) and the financial leverage of 1.16 (<1.5) are relatively low. Can Pintaras’s ROE be improved further?

Pintaras can improve its asset turnover by securing more jobs which is not a problem for them as a specialist contractor in the niche market of deep foundation for building works. It has established its name in the market and has good relationship with many developers. However, Pintaras is not keen to simply grab any job, but more careful in picking and choosing good clients and jobs of less problems. Foundation contracting works are always littered with problems of difficult soil condition, shortage of skill labour and material, short construction period etc. However, they could easily get more jobs in order to increase its asset turnover if they want, and hence its ROE.

Pintaras is a debt free company. In fact it has too much cash in its balance sheet. Hence it hardly leverages itself to do business. In order to leverage itself and improves its ROE, one thing Pintaras can do is to distribute all its cash and cash equivalent to the shareholders, RM1.91 per share as special dividend! This will increase its financial leverage as the equity is reduced and improves its ROE further without having any impact on its healthy balance sheet as it is still a debt free company, though without any excess cash now. It can even borrow some money from the bank if requires.

Dissecting the ROE of Pintaras shows that its ROE comes from a great profit margin. It has plenty of room to improve its ROE by securing more jobs, and increases its leverage without affecting the riskiness of the company.

Posted by minshome > 2013-08-05 10:58 | Report Abuse

Hi kc,

RM1.91 per share as special dividend!-this is not confirm news, right?

Posted by kcchongnz > 2013-08-05 11:11 | Report Abuse

Posted by minshome > Aug 5, 2013 10:58 AM | Report Abuse
Hi kc,
RM1.91 per share as special dividend!-this is not confirm news, right?

It will only be confirmed if Pintaras employs me as their finance director.

Posted by minshome > 2013-08-05 11:15 | Report Abuse

Hi KC,

Yes. I support you.. :)

one more thing, from stochastic; it hover around 85%++. It is signing overbought, rite? meaning it will drop soon on correction?

sorry for dumb qs.. newbie here.

Posted by tonylim > 2013-08-05 11:27 | Report Abuse

Posted by minshome > Aug 5, 2013 10:58 AM | Report Abuse
Hi kc,
RM1.91 per share as special dividend!-this is not confirm news, right?

It will only be confirmed if Pintaras employs me as their finance director.

Kcchong, and as a finance director, make sure you secure higher returns on the liquid assets and not suffer diminution as in fy2010?

Posted by yangkwang > 2013-08-05 12:13 | Report Abuse

Looks like investors r getting excited abt the potential corp exercise esp the bonus issue n the possibility of a special dividend! stock
uptrend! Could move into new highs vry soonlah! RHB TP rm7!

Posted by tonywong > 2013-08-05 12:19 | Report Abuse

Dear kcchongnz, congrats, you got the JACKPOT again. BRAVO !!!

Posted by choolooi > 2013-08-05 20:45 | Report Abuse

Yes, Kcchongnz, congrats....
Hope Kfima follow soon

Posted by tonylim > 2013-08-06 02:35 | Report Abuse

Yeah you are right.
As at market close today another 20%. Some pocket money.

Posted by kcchongnz > 2013-08-31 17:18 | Report Abuse

Pintaras Jaya announced its final 2013 financial results ending 30/6/13 on 28th August 2013. Revenue decreased marginally by 7% to 173m. Its net profit, however, increased by 24% to 52.3m, the highest in history so far. Earnings per share amounts to 65 sen. The net profit margin expanded to 30% from 23% the previous year, also the highest so far. Return on equity and Invested capital is 20% and 30% respectively.

Can anyone find another construction company having this kind of fantastic performance? It is extremely difficult for you to find one from the construction stocks in Bursa.

More importantly the quality of Pintaras earnings is great. Cash flow from operations amount to 49m. After spending 8.5m in property, plant and equipment, it has 40.5m free cash flow (FCF). This FCF is 23.5% and 29.5% of revenue and invested capital respectively. Can you find another construction company having this kind of fantastic FCF?

From the available FCF, 16m was distributed as dividends, or 20 sen per share. The rest is left in the balance sheet as cash and cash equivalent. With this abundant FCF, Pintaras has proposed a total dividend of 25 sen for financial year 2013, a 25% increase in dividend payout.

Yet at the price now of RM5.43 now, the price-earnings ratio is at just 8.3. The company holds RM155 m excess cash or cash equivalent, or equivalent to RM1.94 per share. Earnings yield (Ebit/EV) is 19%, much higher than 10% for the benchmark of a bargain price.

Don’t you think Pintaras is such a great company but trading at such a bargain price?

Posted by kcchongnz > 2013-09-12 12:46 | Report Abuse

Quantitative analysis of Pintaras Jaya Berhad (12/9/13)

The business
Pintaras is a smallish construction company with its principal activities in investment holding and undertaking of piling contracts, retaining structures, slope stabilization, civil engineering and building construction works. The company was formed by its present Chairman cum Managing director, Dr Chiu Hong Keong, a civil and geotechnical engineer who started his career in 1982 with Pilecon Engineering and later worked for Ho Hop Construction for a few years. Pintaras went public in 1994.

The Industry
Construction is a dog eat dog industry with intense competitions. Foundation engineering and construction is a field which is littered with loads of engineering design and construction implementation, contractual and bad debts problems. In order to strive, besides strong financial backing and the capability to carry out works, one must also has the strong political connections, particularly with the government as it is the biggest supplier of construction contracts. Construction players must also have good and strong relationship with the developers. One would notice few construction companies who do not possess the above have survived.

What makes Pintaras different? In other words, what moat does Pintaras possess to survive and prosper in this tough industry?

Business model and competitive advantage
One thing good about Pintaras is that it doesn’t have to rely on the political connections and government jobs to strive and survive in the market place. The strength of Pintaras lies its niche market in the complex foundation engineering works and hence the high margin it commands. It is able to provide economic design and construct heavy foundation and retaining structure works within the short time frame required for the major players in the property sector in Malaysia. Pintaras has extensive specialized plant and equipment to carry out the project in house with concerted personal involvement of the skilful management team. As far as I know, there is no other public listed company having the same technical and financial clout as Pintaras in this niche market. With its good connection with the developers and the Engineering professional bodies, the management is able to cherry pick good and profitable projects with high margins coupled with less risks. All these not only enable Pintaras to survive but strive in this industry.

Business outlook
With the continuation of the LRT extension projects and the commencement of more MRT projects, the construction industry remains robust with abundance of construction works. These projects also provide catalyst for many more property developments centered around these areas with many new property development launches. Furthermore, many mega construction and infrastructure projects, all part of the Government Economic Transformation Programme have been proposed and are likely to proceed soon. Hence Pintaras as a leading foundation player in Malaysia will be busy for at least a number of years to come.

Management
Dr Chiu Hong Keong, the chairman cum managing director provides the active leadership for the company. The board of directors is made up of another executive director, Mr Khoo Keow Pin, who is the founding member of Pintaras and is also highly qualified civil engineer specialized in geotechnical engineering and has extensive working experience in the consulting and construction environments. The other two executive directors are Dr Chiu’s wife and his son. The four executive directors are related to each other and hence Pintaras can be construed as a tightly controlled family business. There are three independent directors who are not related to the executive directors.

The major shareholders own more than 70% of the total shares of 80m of the company. The strong insider ownership ensures the proper alignment of the interest of the outside shareholders and the management and hence minimizes the agency problem. Total executive compensation in 2012 made up of only RM2.1 m, or just 1.2% (<<3%) of revenue in 2012. The directors did not overpay themselves as they are already owning a major stake in the company and there is enough incentive for them to operate the business to maximize shareholder value.

The management is also appears to be willing to share the fruits of the success with the outside shareholders. This is evidenced from the dividend payment which increases from 12 sen 5 years ago to more than double to 25 sen per share proposed for the last financial year.

Posted by kcchongnz > 2013-11-01 14:54 | Report Abuse

A 56 m piling contract! Nowadays the contract work for piling is really huge compared with say 20 years ago. Those days a 10m contract for piling works was one of the biggest one.

The Board of Pintaras Jaya Berhad ("PJB") is pleased to announce that the Company's wholly-owned subsidiary, Pintaras Geotechnics Sdn. Bhd. has, on 29th October 2013, received a Letter of Award dated 7th October 2013 from Tristar Acres Sdn. Bhd. to undertake piling works for a proposed mixed development project at Kg. Sg. Buah, Mukim Dengkil, Daerah Sepang, Selangor Darul Ehsan. The said works is to commence in November 2013 with a completion period of 14 months. The contract is valued at RM59 million.
The said contract is expected to contribute positively to PJB Group's future earnings.

I don't normally get excited when a big contract is secured by a construction firm because a big contract doesn't mean big profit. but for Pintaras with its niche market in foundation work, it is exciting.

With Pintaras's average net profit margin of 30%, the net profit comes to about 16.8m. It is about an earnings of 21 sen per share, just for one project. So how not get excited?

Posted by kcchongnz > 2013-11-12 06:11 | Report Abuse

A good writeup of Pintaras in Chinese. Pinjam and copy here.

http://ikanbilisinvestment.blogspot.co.nz/2013/11/2013-11-06-fag.html

Posted by GenghisHoe > 2014-02-21 16:59 | Report Abuse

1) Tan KW @kcchongnz
From the reversed engineering DCF, it is shown that the market is expecting Pintaras Jaya’s business to shrink at a compounded annual rate of 14% per annum for the rest of its economic life. That means its earnings will be less each year by 14% forever.

------------------------------------------------------------------------
may i know what is the formula you use to get the 14% ?
04/08/2013 13:36

2) kcchongnz TanKW, use the Kfima spreadsheet, tab DCFM2 and plug in the numbers. My other assumptions are ROC at high growth 25%, stable growth 15%.

By plugging in the numbers, you will find the market price is about the intrinsic value with 5-year growth of -14%.
04/08/2013 13:49
___________________________________________________________________________

May I have the template as I'm seeking ways to understand the method of the reverse DCF...?

TanKW or kcchongnz?

Posted by connie7i3 > 2019-08-12 22:31 | Report Abuse

Dear KCChongNZ
Ptaras financials have deteriorated for the past three to four years since Jul2013. What is your review on this stock six years later? Would you still continue to hold? Or sell the stock upon release of weak annual /quarterly reports? Thanks for your feedback.