Posted by sunztzhe > 2014-06-09 22:27 | Report Abuse

Don't worry too much stockoperator..I am having hell of a jolly good time interacting here with the forumers and learning & understanding their thoughts/ideas on value investment! It is a great sharing experience!!

Posted by stockoperator > 2014-06-09 22:32 | Report Abuse

You Quote: We must rise above trivialities and look forward towards the greater benefits arising from a healthy exchange of investment ideas that will eventually lead to better return on invested capital for everyone.

Very Good one ya. Ha Ha Ha.

Posted by sunztzhe > 2014-06-09 22:33 | Report Abuse

That is precisely correct sir, UNDOUBTEDLY!! HAHAHAHA

Posted by kcchongnz > 2014-06-10 12:30 | Report Abuse

Posted by sunztzhe > Jun 9, 2014 11:33 AM | Report Abuse
Why? It is very simple. As EPS grows so will its share price. If EPS drops, its share price will also drop.

Posted by kcchongnz > Jun 9, 2014 12:17 PM | Report Abuse X
A company with $10 million in net income takes on $1 billion in debt and, after interest costs, earns an additional $10 million, that will increase earnings by 100%, big jump in EPS.
The following year, borrow another 2b and double the EPS again.
So would you think the share price will grow?
Posted by sunztzhe > Jun 9, 2014 12:27 PM | Report Abuse
I will be wary of companies with excessive gearing which exceed equity capital by 2.5 X.
Besides EPS growth , increasing ROCE is also a critical info to monitor to factor in the returns from the use of debt financing.


Well at least you acknowledged that it is not as simple as just because of EPS grows, the share price will grow and vice versa.
The above example is akin to saying oh I borrow RM1m to buy a condo and I rent out for RM10,000, and I have created RM10000 extra profit from thin air. Next year I borrow another RM2m and do the same thing and I double my profit again. So my value has gone up.

Yes, it is the marginal return of capital which is important. Borrowing at 5% cost and making additional profit of 1% cannot be enhancing the value of the company and hence the stock.

But let us forget about borrowing. Two stocks A and B, similar kind of business. Company A earns 10 sen this year and it is expected that there will be no growth of its earnings. Company B earns 2 sen this year and it is expected that its earnings will grow at 20% a year for the next 10 years. Both pay out all their dividends every year.

Both are selling at RM1 a piece. Which company stock will you buy, the no growth A or high growth B?

Posted by chrisyap > 2014-06-10 13:14 | Report Abuse

company A and PPG!

Posted by sunztzhe > 2014-06-10 13:51 | Report Abuse

The above example lacks certain pertinent info such as:
- What is the Total Equity capital of the company
- What is the Total Debt of the company prior to taking on more Debt
- What is the interest rate for the company original debt and the
incremental debt
- How is the Debt being structured
- What is the debt rating for that company

Please do not under-estimate Mr Market as Mr Market is very wise to value the market price of a company. Mr Market will look into Total Debt vs Equity , ascertain whether the Total Debt/Equity mix is within comfortable confidence level or within comfortable margin of safety for the market where the incremental debt and the consequent incremental interest rate expense will not result in significant detrimental effect onto its operational earnings and increase significantly the financial risk of significant impairment to the company earnings or otherwise.

If the company continues to take on additional but significant incremental debt to obtain diminishing marginal returns to boost its EPS, Mr Market will know that the overall riskiness to the company financial health had been increased beyond normal confidence level and Mr Market will deploy its resources accordingly to value a new price for the Company appropriately in relation the potentiality of the additional but significant risk of impairing the financial health of that particular company.

Mr Market will always have its way to downgrade the earnings quality and this consequently will affect the share price value of the company even if EPS for the company increases marginally.

Posted by kcchongnz > 2014-06-10 13:54 | Report Abuse

Make it simple, both companies are debt free.

Posted by sunztzhe > 2014-06-10 13:55 | Report Abuse

What is the Total Equity capital of the company?

Posted by kcchongnz > 2014-06-10 14:04 | Report Abuse

Everything the same except the growth rate and price. KISS

Posted by sunztzhe > 2014-06-10 14:16 | Report Abuse

How do you finance the purchase of the condo? What is your equity capital to take on the loan?

Posted by kcchongnz > 2014-06-10 14:23 | Report Abuse

I borrow 100%.

Posted by sunztzhe > 2014-06-10 14:43 | Report Abuse

Well I will sell off the condos with rentals inclusive , pocket the money and relax comfortably at the beach front. LONG TERM Gearing is not good for you kcchong!! HAHAHAHA

Posted by stockoperator > 2014-06-10 14:43 | Report Abuse

Company A is marginally cheaper by 10% and better Buy.

Posted by kcchongnz > 2014-06-10 14:47 | Report Abuse

Posted by sunztzhe > Jun 10, 2014 02:43 PM | Report Abuse
Well I will sell off the condos with rentals inclusive , pocket the money and relax comfortably at the beach front. LONG TERM Gearing is not good for you kcchong!! HAHAHAHA

Good one. but you haven't answered my simple question yet, which company's stock would you buy , A or B?

Posted by stockoperator > 2014-06-10 14:53 | Report Abuse

Sunztzhe, I really cannot tahan you lah.

Posted by sunztzhe > 2014-06-10 14:53 | Report Abuse

Well I will sell off the condos with rentals inclusive , pocket the money and relax comfortably at the beach front. LONG TERM Gearing is not good for you kcchong!! HAHAHAHA

Remember what was causal factor for sub-prime crisis in USA that caused global meltdown in equity prices. Exactly what you just did. Use 100% debt financing to purchase property whereas other use 130% debt financing to purchase property in anticipation that property price will appreciate further. The whole banking system encourage the Use of more than 100% debt financing to purchase property and keep on repeating the cycle until the whole property pyramid CRASHED.

How many people lost their wealth?? How many committed suicide?? HAHAHAHA

Posted by sunztzhe > 2014-06-10 15:02 | Report Abuse

What is the dividend payout in cents per share for A and B?

Posted by stockoperator > 2014-06-10 15:03 | Report Abuse

Sunztzhe, you make KC speechless. I cant stop laughing. You make my day.

Posted by stockoperator > 2014-06-10 15:05 | Report Abuse

Sunztzhe, please ask more question ya as i also think the question is very unclear.

Posted by stockoperator > 2014-06-10 15:10 | Report Abuse

Sunztzhe, i think KC pengsan already. So long No reply.

Posted by kcchongnz > 2014-06-10 15:11 | Report Abuse

"But let us forget about borrowing. Two stocks A and B, similar kind of business. Company A earns 10 sen this year and it is expected that there will be no growth of its earnings. Company B earns 2 sen this year and it is expected that its earnings will grow at 20% a year for the next 10 years. Both pay out all their dividends every year.

Both are selling at RM1 a piece. Which company stock will you buy, the no growth A or high growth B?"

What else is not clear about the question above? Dividend payout is mentioned. What else? Just make things simple.

Posted by sunztzhe > 2014-06-10 15:30 | Report Abuse

Both selling at RM 1.00
EPS(A)= 10 cents/share Growth A=ZERO GROWTH FOR 10 Years. PE(A)=10
EPS(B)= 2 cents per share Growth, PE(B)= 50 with +20% compounded over 10 years

I could not find the divided payout per share but you said it was provided so I assume its zero dividend payout.

My decision is I will not buy both. Why?

For Value trap company max PE=4 or 5. So RM 1.00 with PE of 10 for Value trap company is very expensive for company with zero growth, not much energy shareholder cum management besides zero dividend payout.

PE(B) is Hi growth but I will ONLY buy company B during severe market correction from 20 cents to max 40 cents per share because it has compounded growth of +20% over 10 years.

Why? I want high return on my capital invested and I am willing to wait for the opportunity. Many investors are very "Kan Cheong" and got themselves burnt. I hope your name is not Kan Cheong Chong. Sorry for asking as I want to clear any misunderstanding on KC.

Posted by stockoperator > 2014-06-10 15:33 | Report Abuse

Very Good Sunztzhe, i also think the question is not good. Probably KC needs to adjust the figure a bit. Come on KC, ask one more time.

Posted by kcchongnz > 2014-06-10 15:34 | Report Abuse

So you are not buying stock B with a very high growth rate of 20%. But I thought profit growth stock price will rise?

Dividend payout is mentioned. All dividends are paid out every year. Shareholder of company A receives 10 sen, or 10%, dividend yield every year. Pay 1000, get 100 every year, also no good?

Shareholder of B receives 2 sen dividend the first year and grow by 20% every year in dividend. Sure good what? 20% growth rate you know.

But the question is which do you prefer if you were to choose one?

Posted by kcchongnz > 2014-06-10 15:41 | Report Abuse

Did I miss something here?

Posted by sunztzhe > Jun 9, 2014 11:33 AM | Report Abuse

Wow I am really impressed with the length and depth of your thoughts on Value investment but I will keep it short and sweet!!

My sole objective in investment is I want Good capital Gains over a certain period of time but certainly not eternity.

The most important criteria to realize capital gain is to look for companies which has the Prospect of INCREASING EPS Growth over a time period.

If EPS keep on increasing, I hold.
If EPS plateaus, I sell 50%
If EPS dips, I sell out completely.

Why? It is very simple. As EPS grows so will its share price. If EPS drops, its share price will also drop.

Posted by stockoperator > 2014-06-10 15:59 | Report Abuse

yape, while we are on holy grail for good business with good earning prospect. Price will determine our rate of return.

Posted by sunztzhe > 2014-06-10 16:03 | Report Abuse

What is the PE for A and B at market price of RM 1.00 each?

Posted by sunztzhe > 2014-06-10 16:10 | Report Abuse

OK make it simple.
Both market price of A & B is RM 1.00
What is the Earnings per share of Company A?
What is the earnings per share of Company B?

Posted by stockoperator > 2014-06-10 16:12 | Report Abuse

Sunztzhe, we are calculating future return Now.My calculation is to discount the ten year dividend to the present value.

Posted by sunztzhe > 2014-06-10 16:16 | Report Abuse

Sorry, I do not invest that way.
I need to know current Earnings per share to calculate PE multiple before I consider to buy.
Frankly I do not hold shares for more than max 5 years.

Posted by stockoperator > 2014-06-10 16:18 | Report Abuse

You have all the P/E and EPS correct by yourself already mah.

Posted by stockoperator > 2014-06-10 16:21 | Report Abuse

Ok lah Example above just tells you Dont invest that way and dont pay High price for growth story.

Posted by sense maker > 2014-06-10 16:25 | Report Abuse

All should come out and discuss face to face. It is more meaningful that way. Make real friends, instead of virtual.

Posted by stockoperator > 2014-06-10 16:26 | Report Abuse

It is a calculation to make you understand more. You will be doing good.

Posted by sunztzhe > 2014-06-10 16:29 | Report Abuse

No that is incorrect.
I assume earnings of 10 cents (Company A)and 2 cents(Company B) to be Earnings per share whereas Kcchong meant earnings from dividends of 10 cents and 2 cents per share.
What kcchong should correctly state is dividends of 10 cents per share (Company A)and 2 cents per share(Company B)

The EPS number for A & B is not provided by kcchong.

Posted by cheongcy > 2014-06-10 16:31 | Report Abuse

Hi Kcchong, regarding your question:

"But let us forget about borrowing. Two stocks A and B, similar kind of business. Company A earns 10 sen this year and it is expected that there will be no growth of its earnings. Company B earns 2 sen this year and it is expected that its earnings will grow at 20% a year for the next 10 years. Both pay out all their dividends every year. "

Allow me to one more assumption to your question for company B, 20% growth each year to the year of 10th and - here the assumption - no growth thereafter with EPS remain same as year 10th for the rest of its business life. If this is the case, company B is a better choice.

Here's the simple calculation, how good guaranteed 100% dividend payout for both company. As already guaranteed, so I may use the risk free rate, say 4%.

Companny A - No growth, so Value = 0.10/4% = 2.50

Company B - Start from EPS 0.02 with compound growth 20% to year 10th, at year 10th, EPS = 0.1238, and the NPV for these 10yrs is 0.48. Growth stagnant thereafter, means terminal value = 0.1238 / 4% = 3.10. Total present value 3.58.

Therefore company B is a better choice if we alrdy certain about its growth.

Posted by NOBY > 2014-06-10 16:32 | Report Abuse

Company A costs RM1 and earns 10 sen, pays out all earnings as dividends that is already 10% yield. Value trap or not, returns already better than FD hahaha..

Most investors always looking for growth, how often do you see some lousy counters share start rocketing up when news of turn around or high % increase in EPS from a very low base....

Posted by sunztzhe > 2014-06-10 16:46 | Report Abuse

Yes it is good yield at current benign interest rate environment. How would you react and decide when interest rate skyrocket as happened in the past?

If you anticipate interest rate to skyrocket , would you still be holding stocks knowing there will be severe price adjustment downward later on? Would you be cashing out , park your money in short term deposits to earn increasing interest rates and thereafter re-enter when market had bottomed?

What is the basis of your confidence that low interest rate environment will continue in perpetuity?

Posted by kcchongnz > 2014-06-10 16:47 | Report Abuse

"Company B - Start from EPS 0.02 with compound growth 20% to year 10th, at year 10th, EPS = 0.1238, and the NPV for these 10yrs is 0.48. Growth stagnant thereafter, means terminal value = 0.1238 / 4% = 3.10. Total present value 3.58."

My comments are:
1) That 3.10 you get is the terminal value at year 10, not now as what you get for company A. There is time value involves.
2) Using a fD rate to discount equity investment return may be a little liberal.
3) If you really want to use discount cash flow model, you may need to also discount all the years dividends to the present value.
4) But comparison need not be complicated, I think the comparison is very simple, just add a little addition and multiplication, no need complicated model.

Posted by sunztzhe > 2014-06-10 16:53 | Report Abuse

At current economic situation, 10 years time horizon in holding stocks is too long time period as it will undoubtedly get any investor in deep trouble as world economic situation lacks clarity for the next 10 years. I am looking at max 1.5 years ahead only and will need to recheck economic situation in future.

Posted by NOBY > 2014-06-10 16:55 | Report Abuse

Same question is would you buy company B if interest rates skyrocketed ? The question is whether company A or B, not about macro or interest rates... and my choice is clear.. my view is that bird in hand is better than 2 in the bush...

Posted by stockraider > 2014-06-10 17:07 | Report Abuse

Both selling at RM 1.00
EPS(A)= 10 cents/share Growth A=ZERO GROWTH FOR 10 Years. PE(A)=10
EPS(B)= 2 cents per share Growth, PE(B)= 50 with +20% compounded over 10 years

I could not find the divided payout per share but you said it was provided so I assume its zero dividend payout.

My decision is I will not buy both. Why?

For Value trap company max PE=4 or 5. So RM 1.00 with PE of 10 for Value trap company is very expensive for company with zero growth, not much energy shareholder cum management besides zero dividend payout.

PE(B) is Hi growth but I will ONLY buy company B during severe market correction from 20 cents to max 40 cents per share because it has compounded growth of +20% over 10 years.

Why? I want high return on my capital invested and I am willing to wait for the opportunity. Many investors are very "Kan Cheong" and got themselves burnt. I hope your name is not Kan Cheong Chong. Sorry for asking as I want to clear any misunderstanding on KC.

FOR RAIDER THOSE WHO PICK...B....WITH A PE 50X....IS A RUBBISH LOH...!!

LETS LOOK AT THE LOGIC LOH.....!!

A BIRD IN THE HAND IS BETTER THAN 2 IN THE BUSH MAH.....!!

A GIVE U 10% PA YIELD....WHEREAS B GIVE U 2% YIELD....U NEED TO WAIT ABOUT 9 YRS FOR B TO CATCH UP WITH A LOH....!!

THE CURRENT COST OF INVESTMENT IS ABOUT 6% PA....IF U BUY A IT IS CASH POSITIVE.....U BUY B....U HAVE A NEGATIVE CASHFLOW LOH.....!!

NOW AFTER 10 YRS....B GIVE EPS OF RM 0.13...CAN U IMAGINE COMPOUNDING AT 20% PA....! PRACTICAL....THE GROWTH RATE OF 20% IS NOT CAST IN STONE.....LOH......!! JUST IMAGINE HOW MUCH UNCERTAINTY U WILL FACE OVER 10 YRS LEH ?

WHEREAS A GIVE U IMMEDIATE RETURN OF 10% PA...U STRAIGHT ENJOY THE BENEFIT....NO NEED TO WAIT 10 YRS LOH....!!

Posted by cheongcy > 2014-06-10 17:17 | Report Abuse

HI Kcchong, I take back my comment. Yes, you were right, I made the wrong calculation on the terminal value. Again:

"Company B - Start from EPS 0.02 with compound growth 20% to year 10th, at year 10th, EPS = 0.1238, and the NPV for these 10yrs is 0.48. Growth stagnant thereafter, means terminal value = 0.1238 / 4% = 3.10. Total present value 3.58."

The terminal value should be approximately to 2.00 at 4% discount rate. So, in this case, both company A & B are at the similar value.

Posted by sunztzhe > 2014-06-10 17:24 | Report Abuse

stockraider,
Please read carefully. I think you read too fast and missed key salient points as appended above by you.
EPS(A) means Earnings per share but with zero dividend payout assumption.
Earnings per share means Net Profit divided by No of issued shares
Why buy a stock with PE=10 but with zero dividend payout?

I will not buy PE=50 at RM 1.00 but I will monitor this stock and buy at lower price at 20 cents(PE=10) to max 40 cents(PE=20).

If you want immediate return( buy now, get money now), there is no such thing as immediate return unless you are lucky at Genting!!!

Immediate return means that you get something immediately like investing your money in Genting. In that case, you could also risk immediate loss of capital!!

Posted by kcchongnz > 2014-06-10 17:27 | Report Abuse

stockraider, that is what I consider "Short and sweet". Right to the point.

You need 9 years for company B to catch up in EPS. 9 years with an expected growth of 20% per year!

In 9 years time, shareholders of company A would have received 90 sen in dividend, whereas shareholders of company B only receive 50 sen.

So is a company with expected high growth in EPS always be a better investment? Is high growth in EPS holy grail in investing?

No other factors required?

Posted by stockraider > 2014-06-10 17:31 | Report Abuse

that's why w buffet policy.....whenever the interest yield or bond yield...is very high say exceeding 12% pa.....who always prefer lock in....the fixed return loh....!!

the morale....of the story....is when fixed return is high....always favor it against long term growth investment mah....!! bcos u get certainty.....!!

also....in evaluation.....of investment.....the standard comparison...is always.....compare on a bond like return manner

Posted by stkoay > 2014-06-10 17:34 | Report Abuse

@kcchongnz.
I have read your article on Risk Arbitrage of Perak Corp.
What do you think happen to the SCR.
It seems it is taking longer than it should.
Any comment?
Would appreciate your response, Thanks.

Posted by stockraider > 2014-06-10 17:35 | Report Abuse

sunzthe....I notice....u always think in crooked manner....keep it simple.....!!

U have too much if n buts....loh....!!

Just tackle....the problem on a straight n direct manner....u will get a more direct n clear result mah....!!

Posted by stockraider > 2014-06-10 17:36 | Report Abuse

Koay,
BTW....what is the story on arbitrage...on Perak corp ?

If possible....paste here....let raider comment...!!

Posted by sunztzhe > 2014-06-10 17:37 | Report Abuse

well said and written to the point stockraider. However I will qualify it further "as ïn current benign interest rate environment."

What was Buffet's view when interest rate hit 18% pa as had happened in the USA in the past? Does he still subscribe to this view as stated by you?

When interest rate hit 18% what did Buffet actually decide on his investment strategy?