Highlights

Random Thoughts on Investing

Author: ajim102   |   Latest post: Tue, 7 Nov 2017, 09:32 PM

 

The Poor Man's Guide To Market Assessment

Author: ajim102   |  Publish date: Tue, 7 Nov 2017, 09:32 PM


 

 

 

 

Source : The Most Important Thing (Howard Marks)

 

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Sharing on Chapter 7 of The Most Important Thing by Howard Marks - Controlling Risk

Author: ajim102   |  Publish date: Sun, 1 Oct 2017, 05:45 PM


 

 

Howard Marks is the Co-Founder and Co-Chairman of Oaktree Capital Management which have $99 Billion Assets Under Management (AUM) as at 2017. Oaktree Capital is the largest distressed investor in the world meaning that they invest mostly on company that is near or currently going through bankrupcy. If you think investing in Bursa is risky imagine investing in these distressed companies. 

If you look at Oaktree Capital's Historical Assests Under Management you will see that there's a big jump from $30 Billion in 2005 to $83Billion in 2010 a 170% in 5 years and the notice that the amount is in Billions. Oaktree Capital had been investing aggressively in 2008 where everybody else in the world believe that it is the end of the world. As Warren Buffet says "Be fearful when others are greedy and greedy when others are fearful".There is no other person in my opinion who's more qualified to talk about risk other than Howard Marks. 

We are very very blessed to be living in the internet age because Howard Marks has been writing memos on his thoughts regarding the investment world since 1990 and the best part is it is available for everyone to read at (www.oaktreecapital.com/insights/howard-marks-memos) and his book The Most Important Thing, Uncommon Sense for the Thoughtful Investor is freely available on the internet just type The Most Important Thing.pdf and you can dowload,save it in your phone and read it on the go. Today i would like to share my reading with all of you on chapter 7 of the book - Controlling Risk

 

 

 

 

 

I find Figure 7.1 and Figure 7.2 is very powerful if you can understand and fully grasp its meaning. The Benchmark can be anything you want to compare your portfolio to. It can be the KLSE, Mutual Funds portfolio, your friend's portfolio,your neighbour's portfolio even  sifu OTB or uncle KYY in you wish to benchmark your portfolio againts theirs.

I hope you, the reader benefit from my sharing today

 

 

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My Thoughts on Superlon Holdings Berhad

Author: ajim102   |  Publish date: Sun, 24 Sep 2017, 06:39 AM


 
 
 
 
 
 
 
Superlon Holdings Berhad is Malaysia's leading manufacturer of high quality thermal insulation materials used mainly in the Heating, Ventilation, Air Conditioning and Refrigeration (HVAC&R) system of residential, commercial and industrial buildings. The company’s thermal insulation products are used as vapor barrier for the prevention of condensation or frost formation on cooling systems, chilled water and refrigeration lines and heat loss reduction for hot water plumbing, heating and dual temperature piping (Annual Report)
 
Super Holdings Berhad just announced its latest Annual Report for Financial year 30 April 2017 in August with revenue and net profit increased by about 17.5% and 43.2% to 106.3m and 23.7m respectively. Net profit margin remains very high at about 22%. I have plot the growth net profit for Superlon Holdings Berhad for a better view on its performance.
 
 
Figure 1: Growth in Net Profit
 
 
 
 
Growth in net profit begins to improve exponentially from 2013 after management move out from its loss making business of Steel Pipes manufacturing and focus on its core business. Profit growth from 2008 to 2017 recorded a compounded annual growth rate (CAGR) of 13% which is good but if we calculate from 2013 to 2017 its CAGR is at staggering 42.74% and all of this growth is organic which means it comes from the business itself not from M&A, one-off gains or any other extraordinary income.
 
 
Figure 2 : Gross Profit Margin
 
 
 
Figure 3 : Net Profit vs ROE
 
 
 
Figure 2 shows the trend in Revenue to Cost of Sales to Gross Profit which we can see an exponential increase in its Gross Profit Margin especially if we observe from 2012 to 2017 (16% to 41%) a threefold increase in Gross Profit Margin which derives its value from high growth in revenue while keeping the cost under control. For me this is a sign of a quality growth company with efficient business operation in place.
 
The same can be observed for its Net Profit margin and Return On Equity increasing in tandem with the revenue and Gross Profit Margin's growth from its lowest point of -1.06% Return on Equity in FY2012 to 21.96% Return on Equity in FY2017, far exceed any return on fixed income or safer investment vehichles. This spectular growth with achieved with no debt and even better it keeps generating a healthy amount of cash flow to fuel the growth.
 
 
 
"Never take your eyes off the cash flow because it's the life blood of business"
Richard Branson
 
 
Looking solely at a company's profit growth does'nt tell its quality if the company fails to generate cash from its business especially free cash flow which the company can then use for busniess expansion, buying back shares or distributing dividends
 
 
Table 1 : Cash Flow of Superlon
 
  2,013 2,014 2,015 2,016 2,017 Average
Net Profit 4,001,613 5,850,480 9,380,590 16,660,089 23,714,774 11,921,509
CFFO 9,393,602 10,516,133 11,525,241 25,131,142 16,224,959 14,558,215
Capex 494,714 3,140,327 2,932,470 5,382,982 12,346,997 4,859,498
FCF 8,898,888 7,375,806 8,592,771 19,748,160 3,877,962 9,698,717
FCF/Profit 222% 126% 92% 119% 16% 115%

 

Table 1 above shows that Superlon Holdings Berhad is a cash generating company with an impressive 5-year FCF/Profit averaging to 115%,more than its net profit. FY 2017 FCF/Profit is the lowest among the 5-year (16%) due to high Capex spending for the new warehouse and its coming factory in Vietnam. It confirms the quality of the spectacular growth shown in Figure 1-3 above.

 

Valuation of Superlon Holdings Berhad using Free Cash Flow

 

At current price of 2.83 as at 21th September 2017,is Superlon still cheap and worth to invest in? 

 

"Price is what yo pay value is what you get"

Warren Buffet

"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"

John Burr Williams

 

Using the average FCF from 2012 to 2017 of 9.6m, assuming growth rate of 20% for the first 5 years, 15% the next 5 years and a 5% untill forever(terminal value).Discount rate of 10% as it has a reasonable healthy balance sheet, the FCF attributed to common shareholders is RM3.39 per share. This represents margin of safety of 17% investing in Superlon Holdings Berhad at RM2.83 at the close on 21th September 2017. Notice that i make a pretty consevative assumptions on the growth rate of 20% compared to the company's recorded net profit CAGR of 42.74% to minimise the impact if my assumptions turn out to be wrong “Heads, I win; tails, I don’t lose much.”

 

With an excellent management team that has a proven track record over the years where they was able to turn around a loss making company to an excellent company in 5 years , Superlon Holding Berhad is in my opinion an investment that can give its investor a good night sleep.

 

 

Disclaimer : This article is only for sharing purpose . It is not a buy or a sell call. Please do your own analysis before buying or selling

 

 

 

 

Labels: SUPERLN
  sonny7088 likes this.
 
ongkkh Your writting style similar to KCChong sifu....
24/09/2017 10:42
RainT Already up so much

Now only come out hoo ha hoo ha
24/09/2017 11:51
ajim102 ongkkh, i am one of KCChong sifu's online course student thus im very much influenced by him plus i find that his writing style is very organize and neat.
24/09/2017 16:46
ongkkh 2.83 now
24/09/2017 20:18
ajim102 RainT Already up so much

Now only come out hoo ha hoo ha

Last i check there are no rules saying that we cannot do a write up for a company thats already up so much.

And how much up is so much?100% increase?200%?500%? The most important thing is to know the value of a company and pay a lot less. The DCF valuation shows that a current price of 2.83 there is still a margin of safety in Superlon's valuation. But in the end,every analysis or valuation is just an opinion and assumptions based on the writer's point of view. Its not meant to fit with everyone's view.

The stock market is ultimately a game of probability. Whether one speculate,trade or invest and in this game of probability one must always keep risk under control. As far return is concern,u can get 100%,200% or any other percentage that you can imagine.But if one ignores risk (intrinsic value,margin of safety,business quality etc) he will surely lose in the long run
24/09/2017 21:42
ajim102 Thank you ongkkh.i wanted to edit the comment but end up deleting it.i posted it back with the current price edited.cheers
24/09/2017 21:44
lkoky is easy to use excel to extrapolate future income n earning to justify the high prices u pay now.
27/09/2017 07:55
Ricky Yeo FYI. 20% growth rate is not pretty conservative. It is ultra aggressive.
27/09/2017 14:28
ajim102 lkoky is easy to use excel to extrapolate future income n earning to justify the high prices u pay now.
27/09/2017 07:55

I agree with your statement. In the end assumptions is still assumptions no matter what number we put in. But we must based our assumption on a good reason. and in the case of Superlon is its record to produce healthy cash flows
27/09/2017 16:19
ajim102 Ricky Yeo FYI. 20% growth rate is not pretty conservative. It is ultra aggressive.
27/09/2017 14:28

Thank you for your feedback.First of all i would like to say that im a fan of your work Ricky Yoe. I find all of your posts informative and full of value.

I admit that 20% growth rate is on the high side of the assumption. I should have have made a range of valuation with different growth rates.so here goes:

First 5-years Next 5-years Terminal years IV
20% 15% 5% 3.39
15% 10% 5% 2.32
10% 8% 5% 1.75

"Its better to be roughly right than precisely wrong"
John Maynard Keynes

Looking at today's closing price of RM2.32 i would say that it is fully valued now and further drop in price is an opportunity to get the stock at a wider Margin of Safety. The profit drop in its recent quarter report doesnt really change my views of superlon due to

1.My analysis is based year-on-year basis not on quarterly or daily basis
2.The company's fundamental is still intact(clean balance sheet,strong brand recognition,good management team)
3.The construction of new plant in Ho Chi Minh City to expand its manufacturing capacity which in my opinion is an excellent business decision as Vietnam is the largest contributer of export revenue for Superlon.

I like to think Superlon as an Antifragile company.Nassim Nicholas Taleb describe Antifragile as Things that gain from disorder. An antifragile entity will becomes stronger,better,improved when it is faced with difficulty. Superlon had already proven its antifragilitiness when it manage to comeback from a loss making company in 2012 to what it is right now and i dont think that the company had lost its antifragility just by looking at the latest quarter result.
27/09/2017 18:41

My Thoughts on Cocoaland Berhad

Author: ajim102   |  Publish date: Sat, 26 Aug 2017, 11:09 AM


 

 

Cocoaland Berhad's share price had gone up from RM1.86 to RM2.93 in one year's time (from 23/8/16-23/8/17) a 58% increase.An excellent result for a company in which business is manufacturing and trading of candies, beverages and other related food stuffs. But what drives the rise in share price of Cocoland?does it comes from the business performance or is it just an effect from current bull market?

 

“Growth is never by mere chance; it is the result of forces working together.”

James Cash Penney

 

 

 

Lets look into the company's performance to see whether the rise in share price is justified by the business performance or not. Figure 1 shows the trend in revenue,cost of sales,profit and capex for Cocoaland Bhd from 2010-2017. I decided to take 2010 as the base year because in 2010, Fraser & Neave Holdings Bhd (F&N) becomes the 2nd largest shareholder in cocoland (and still the 2nd largest shareholder as per latest annual report)

 

                                                                  Figure 1

  

 

We can clearly see that revenue is on an upward trend rising exponentially from for the first 4 years and stagnate for the next 3 year but increase back in 2016.Cost of sale is rising in tandem  with revenue for the first 4 years but starts to fall afterwards. This trend can also be seen in profit and capex, figure 2 shows a clearer picture of  the relationship between capex, profit and its free cash flow                  

                                        

                                                                  Figure 2

 

We know that  prior to 2013,Cocoaland Bhd had been spending a lot on capex to expand its production line in rawang thus its free cash flow (FCF) is in the negative territory.But since then we can see that capex drops significantly,profit and FCF start to rise as the company's investment  starts to bear its fruit. Similar improvement can be observed with Return on Equity (ROE) and net profit margin (NP) 

 

 

Cash Conversion Cycle (CCC) is a metric used to gauge the effectiveness of a company's management and, consequently, the overall health of that company. The calculation measures how fast a company can convert cash on hand into inventory and accounts payable, through sales and accounts receivable, and then back into cash (Investopedia) , the lower the days the better.

CCC = DIO + DSO - DPO
 
Days Inventory Outstanding (DIO) refers to the number of days it takes to sell an entire inventory. A smaller DIO is preferred. Days Sales Outstanding (DSO) refers to the number of days needed to collect on sales, or accounts receivable. A smaller DSO is also preferred. Days Payable Outstanding (DPO) refers to the company's payment of its own bills, or accounts payable. By maximizing this number, the company holds onto cash longer, increasing its investment potential. Thus, a longer DPO is preferred (Investopedia)

I know we are supposed to look at a company's CCC in comparison with its peer but lets look at the trend over the years as shown below.

 

 

Cocoaland Bhd's CCC has been increasing from 80 days prior 2013 to 90 days. Is it a bad omen for Cocoaland Bhd? A sign of dark days ahead? Not so fast folks, it is normal for a company to extend credit to their customer especially during its expansion/growth phase, the percentage of impairment of account receivable is very low with an average of 6% for the past 7 years.It shows that the management is very cautious in extending credit term to its customer. The increase in ROE, Net profit and FCF further justify the increase of Cash Conversion Cycle.

 

                                                      

 

Geographical segments  
Malaysia 44%
Eastern Asia 27%
South East Asia 15%
Middle East 11%
Others 3%
  100%

 

Back in 2010, Cocoaland's revenue comes only from Malaysia and China but had since then diversify its revenue steam from various region and is planning to penetrate more market in coming years. This shows that the management is hard at work in expanding the business to capture more market overseas,this shows tht cocoaland is a good consumer stock with worldwide presence 

 

 

Leverage Success Sdn Bhd a company controlled by the company's director which in turns control 38.04% of Cocoaland Berhad and Frazer & Neave Holding Bhd. controls 27.19, this shows that the management holds substantial interest in the company and with F&N as second largest shareholder it will  definitely  brings strategic synergy to Cocoaland because F&N being in the consumer industry itself will not simply invest its money for the sake of capital appreciation or dividend income.The effect of this synergy can been seen in the development and improvement of Cocoaland's business over the years

 

 

 

From my opinion the appreciation in Cocoaland Bhd's share price is justified by the business performance and furthermore current utilization rate is only at 55% and the company is planning to boost it to 80% in the next 3 years,there is a lot of room for growth which is what we want to see in a growth stock, the ability to generate more revenue.

Beside growth,the company had been paying dividen constantly with an average of 50% payout ratio and average dividend yield of 4% while maintaining clean balance sheet (net cash) and healthy cash flows. This is a hallmark of a good management team.

Action speaks louder than word.Refer back to figure 2 (Profit vs Capex vs FCF) and you will understand the quality of the company. Revenue, profit and FCF is picking up, cost of sales is going down despite high volatility in its raw material price,high CAPEX spending is over and now its time to focus on growing the company forward.

ROE is at 19%,ROIC at 20%,Net profit margin 16%, FCF yield 5%, 30sen cash per share (net cash position) Cocoaland Bhd is on its way toward a steady and consistent growth. Cocoland is suitable for investor with a long term horizon (more than 1 year) not for those who seek instant gratification on their stock picks. 

 

Disclaimer : This article is only for sharing purpose but any feedback is most welcome

 

 


 

For further reading i strongly suggest looking at Donkey Stock earlier post 

https://klse.i3investor.com/blogs/donkeystocks/113053.jsp

 

And recent news for Cocoaland Berhad:

http://www.theedgemarkets.com/article/cocoaland-focus-more-overseas-markets

http://www.theedgemarkets.com/article/cocoaland-focus-more-overseas-markets

Labels: COCOLND
  2 people like this.
 
Flintstones It is up because grandpine gang promoted it gao gao la
26/08/2017 11:24
MATB if no good, what for grandpine promote ?
26/08/2017 17:12
DonkeyStock We still think Cocoaland still has great potential as Indonesia is really a big market for Cocoaland to stretch her arms
27/08/2017 00:58
Flintstones DonkeyStock, better stick to your academic teaching slides. We dont need a undergrad guy with zero investing track record to teach us about investing
27/08/2017 08:14
Flintstones Learn to be humble. "We still think Cocoaland still has great potential as Indonesia is really a big market for Cocoaland to stretch her arms". <---- LMAO

who do you think you are? do you think your idea is somewhat a big deal??
27/08/2017 08:15
ajim102 thank you donkey stock for your excellent work.i was inspired by your infographics to write this article.
27/08/2017 13:57
ajim102 Flintstones Learn to be humble. "We still think Cocoaland still has great potential as Indonesia is really a big market for Cocoaland to stretch her arms". <---- LMAO

who do you think you are? do you think your idea is somewhat a big deal??
27/08/2017 08:15

i think DonkeyStock must have a valid reason for the statement.do you mind sharing with us here DonkeyStock?
27/08/2017 15:12
joetay my logic very simple.

i remember chief joker icap's ttb promoted the stock when it was ard 40c and went quiet shortly afterwards.

since then, i figured out either i buy the counters that he get out early or counters that he promoted but didnt touch such as cocoaland.

best examples of selling out too early r hai-o, petdag, uplant and umw

he only got 2 golden hits of padini and pie in his icap's 11 yrs life.

his misses r mieco, tong herr, poh kong and of cos parkson.
27/08/2017 20:13


 

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