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In Search of Excellence: Investing in good companies

Posted by kcchongnz at May 25, 2013 12:03 PM | Report Abuse
119 comment(s). Last comment by kcchongnz at Sep 19, 2013 7:35 PM
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necro
4611 posts

Posted by necro > May 25, 2013 3:22 PM | Report Abuse

Bro kcchong since my screening on POS and Deleum succed..
This is my stock i would like u to have a look...
1. THPLANTATION
2. YEE LEE


necro
4611 posts

Posted by necro > May 25, 2013 3:27 PM | Report Abuse

3.GADANG


Ben Gan
107 posts

Posted by Ben Gan > May 25, 2013 4:05 PM | Report Abuse

The timing makes the difference. Never overpay even for a great stock.


Ben Gan
107 posts

Posted by Ben Gan > May 25, 2013 4:07 PM | Report Abuse

I like ECS, Magni, and PRK Corp.


kcchongnz
6610 posts

Posted by kcchongnz > May 25, 2013 4:26 PM | Report Abuse

Is ECS a good company? Is it a good investment?

Good company?
Good governance Yes
Durable business Yes
Growth Neutral
ROIC Yes 25% >WACC
Balance sheet Yes

Screens for investing
ROIC Yes
P/B Yes 1.3 <2.0
PE ratio Yes 8.1 <20

Yes and Yes. Thanks Ben. I read your writeup before in your blog too.


kcchongnz
6610 posts

Posted by kcchongnz > May 25, 2013 4:34 PM | Report Abuse

Is Magni a good company? A good investment?

Good company?
Good governance Yes
Durable business Neutral
Growth Yes
ROIC Yes 23% >WACC
Balance sheet Yes

Screens for investing
ROIC Yes
P/B Yes 1.1 <2.0
PE ratio Yes 6.9 <20

Yes and yes of course.


Ben Gan
107 posts

Posted by Ben Gan > May 25, 2013 4:39 PM | Report Abuse

What's your comment on PRK Corp? At RM2, is it a good buy? Please read my post in my blog.
Thanks.


kcchongnz
6610 posts

Posted by kcchongnz > May 25, 2013 4:55 PM | Report Abuse

Ben, I have a strong opinion that Perak Corp is not a good company. for one I doubt it has good corporate governance being a state-owned company. Its business is not durable because after selling the land, what else? What kind of growth would you expect? Its ROIC is pathetic at only 6%, way below the cost of capital.

However I think it could be a great investment at this price.

Good company?
Good governance No
Durable business No
Growth Neutral
ROIC No 6% <WACC
Balance sheet Yes

Screens for investing
ROIC No
P/B Yes 0.4 <2.0
PE ratio Yes 5.2 <20


kcchongnz
6610 posts

Posted by kcchongnz > May 26, 2013 1:16 PM | Report Abuse

Is Yee Lee a great company? Is it a good investment?

Yee Lee has a durable business. It is trading at very attractive valuation too as shown below. My main problem is its very low margin and ROIC. So for me I will pass.

Good company?
Good governance Yes
Durable business Yes
Growth No
ROIC No 7% >WACC
Balance sheet Yes

Screens for investing
ROIC No
P/B Yes 0.7 <2.0
PE ratio Yes 8.8 <20


shirley1
1142 posts

Posted by shirley1 > May 26, 2013 1:40 PM | Report Abuse

yeah... yeelee yeelee yeelee


shirley1
1142 posts

Posted by shirley1 > May 26, 2013 1:42 PM | Report Abuse

guess move between 1.20 to 1.25 should not be a problem la, move to 1.70 i doubt it can happen in short term


shirley1
1142 posts

Posted by shirley1 > May 26, 2013 1:53 PM | Report Abuse

but of course don't mind it move to 1.70 .. cap eagle finally fly liao..


tonylim
4781 posts

Posted by tonylim > May 26, 2013 2:02 PM | Report Abuse

1.70 will be all time high in recent years maybe a decade or so


necro
4611 posts

Posted by necro > May 26, 2013 2:58 PM | Report Abuse

Thanks for info on YEELEE wat bout GADANG & THPLANT bro kcchong?


kcchongnz
6610 posts

Posted by kcchongnz > May 26, 2013 6:31 PM | Report Abuse

When I looked at THPlant's latest financial report ended December 2012, it gave me headache and straightaway I have the impression that this is not a good company. Why?

1) I can't understand its balance sheet, what is the share capital and the number of share outstanding in 2012?
2) 101m of "surplus over fair value of net asset acquired" last year was booked as "other income" which forms part of EBIT! WTF!

To me there are financial shenanigans involved. Get away fast is the best strategy.

However even if I ignored the above and give an assessment as below, it is still not a good investment.

Good company?
Good governance No
Durable business Neutral
Growth ?
ROIC No 3% <WACC
Balance sheet Neutral

Screens for investing
ROIC No
P/B Yes 1.4 <2.0
PE ratio No 29.2 >20


arv18
1919 posts

Posted by arv18 > May 26, 2013 7:15 PM | Report Abuse

saw a picture of the THPLANT board in starbiz. sloppy looking bunch - not buying the stock. funny how we got to same conclusion.

you're right. Yee Lee has super low margins. i'm not sure how vertically integrated, how much upstream it is involved in. its other brands (toothpaste etc) have no recognition. this company has been stagnent for some time, but you know what they say about bull markets....


necro
4611 posts

Posted by necro > May 26, 2013 8:08 PM | Report Abuse

I will recheck of what your opinion bout THPLANT bro kcchong...
Hurmm...
Hurmmm..in Plantation company what company that u like?


necro
4611 posts

Posted by necro > May 26, 2013 8:19 PM | Report Abuse

Wondering why negative view on THPLANT while EPF accumulatr THPLANT...
hurmmm....
Perhaps EPF is sohai?
Hurmmm....


risk averse
39 posts

Posted by risk averse > May 26, 2013 8:38 PM | Report Abuse

found favco an interesting company with consistent growth..appreciate your view..


shirley1
1142 posts

Posted by shirley1 > May 26, 2013 10:14 PM | Report Abuse

monitor kmloong..


kcchongnz
6610 posts

Posted by kcchongnz > May 27, 2013 11:43 AM | Report Abuse

Posted by Tan KW > May 26, 2013 07:05 PM | Report Abuse
@kcchongnz how you get the WACC? need to calculate by yourself?

If a company has 200m equity and 100m debts and the cost of equity you use say 12%, and cost of borrowings at 7%,

WACC=200/300*12%+100/300*7%=10.3%.

I use 12% as my required return for investing in a company with ok but not so good balance sheet and cash flow. If they have healthy balance sheet and excellent cash flow, I may use 10%.


kcchongnz
6610 posts

Posted by kcchongnz > May 27, 2013 2:05 PM | Report Abuse

Posted by necro > May 26, 2013 08:08 PM | Report Abuse
I will recheck of what your opinion bout THPLANT bro kcchong...
Hurmm...
Hurmmm..in Plantation company what company that u like?

Necro, these two are the plantation companies I like most. One is a high growth company SOP, the other is value company TDM. But TDM will embark on a high growth path in the near future. Below is my assessments:

SOP Good company?
Good governance Yes
Durable business Yes
Growth Yes 32% CAGR for last 7 years
ROIC Yes 18% >WACC Average
Balance sheet Yes

Screens for investing
ROIC Yes
P/B Yes 1.8 <2.0
PE ratio Yes 15.5 <20


TDM Good company?
Good governance Yes
Durable business Yes
Growth Yes 12% CAGR for last 7 years
ROIC Yes 15% >WACC Average
Balance sheet Yes

Screens for investing
ROIC Yes
P/B Yes 1.0 <2.0
PE ratio Yes 12.1 <20


necro
4611 posts

Posted by necro > May 27, 2013 5:20 PM | Report Abuse

When la will TDM Will split 5 for 1...


joe2703
124 posts

Posted by joe2703 > May 27, 2013 6:11 PM | Report Abuse

@kcchong, I'm your fan and I learn a lot of things from you, you have given a lot of useful information and advice. Thanks.

What do you think about TA Global ? Need your advice.


moven00
375 posts

Posted by moven00 > May 27, 2013 6:22 PM | Report Abuse

Bro kcChong, thumps up to you....

Thank you and appreciate your effort.


kcchongnz
6610 posts

Posted by kcchongnz > May 27, 2013 6:26 PM | Report Abuse

arv18, yeah i notice we have some common investment philosophies. This is hard to find in the finance blogger-sphere.

The low margin of Yee Lee is not a concern for me as many excellent distribution companies like Harrison, DKSH etc, supermarket chain (like Walmart) etc have low margins too. That is the nature of the business. Important companies should have high ROE. Low margin companies can achieve this with high asset turnover, meaning have high turnover, or clearer use of leverage. Companies must produce return on capital higher than the cost of capital. If not what is the purpose of using good money to chase for poor return? Yee Lee's ROE and ROIC of 7-8% is hardly encouraging.

Regarding THPlant, I highly doubt the integrity of the board and management by reading through its latest annual financial report as I have mentioned in my previous post. This is a killer in investment.


kcchongnz
6610 posts

Posted by kcchongnz > May 28, 2013 8:44 AM | Report Abuse

Is Gadang an excellent company? Is it a good investment?

necro, I have no idea about Gadang before you mentioned to me. You know lah I am just a small time retail investor, not a big timer. Neither am I a fund manager. But Gadang does seem to stir up some interest of its stock movement recently, doesn't it?

I just peeped through Gadang's past performance. It's performance has not been good until the last few quarters when trailing twelve month ROE just managed to skipped through 10%. So without knowing the company management, its future, I am not able to rate it as a good company.

But is it a good investment? Maybe. As again I don't have any insider information about it. It may well be looking at the interest it seems to have created, or is it? But this strategy is about finding a good company, then only decide if want to invest. So I won't invest in it. Below is my assessment.

Gadang a Good company?
Good governance ?
Durable business Neutral
Growth Neutral
ROTC Yes 11% >WACC
Balance sheet Yes

Screens for investing
ROTC Yes
P/B Yes 0.7 <2.0
PE ratio Yes 6.8 <20


faberlicious
542 posts

Posted by faberlicious > May 28, 2013 11:13 AM | Report Abuse

bro kcchong, how about taking a look at Gkent ? Profitable every year,pays a dividend ,healthy balance sheet. Do you think its a good company to invest in?


kcchongnz
6610 posts

Posted by kcchongnz > May 28, 2013 8:03 PM | Report Abuse

Is FAVCO a great company? Is it a good investment?

FAVCO, a crane fabricator has a good business spread all over the world. Its earnings has been growing at a fantastic CAGR of 36% over the last 6 years. ROIC is high at 17%. Yes, it is definitely a great company. But is it a good investment at the present price of RM2.64 after going up 30 sen today? I think so. Below is my assessment.

FAVCO Good company?

Good governance ?
Durable business Yes
Growth Yes 36% Net profit 6 yr CAGR
ROIC Yes 17% >WACC
Balance sheet Yes 0.23 <1.0 D/E ratio

Screens for investing RM2.64 28/05/2013
ROIC Yes
P/B Yes 1.6 <2.0
PE ratio Yes 9.1 <20


risk averse
39 posts

Posted by risk averse > May 28, 2013 8:07 PM | Report Abuse

Thanks Kcchong, appreciate much.


jtpc2006
982 posts

Posted by jtpc2006 > May 28, 2013 8:22 PM | Report Abuse

Hi KcChong, any possibility you can comment on Mercury?
thanks very much.


kcchongnz
6610 posts

Posted by kcchongnz > May 29, 2013 7:32 AM | Report Abuse

Is Kim Loong a great company? Is it a good investment?

Posted by shirley1 > May 26, 2013 10:14 PM | Report Abuse
monitor kmloong..


Yes and yes. Below is my assessment.

Good governance ?
Durable business Yes
Growth Neutral
ROTC Yes 15% >WACC
Balance sheet Yes
Cash flow Yes

Screens for investing
ROTC Yes 15% >WACC
P/B Yes 1.5 <2.0
PE ratio Yes 14.0 <20

However, as far as plantation company for investment, I still prefer TDM and SOP.


plutus
24 posts

Posted by plutus > May 29, 2013 8:21 AM | Report Abuse

hi @kcchongnz, i really like your analysis with figure and i am a fan of value investing as well.. About PE ratio <20, I know this is used as a rough guide on whether a stock is overprice.. but isn't small and mid cap company average PE ratio don't get that high? during bull sure all inflated.. but wat PE do you reckon is realistic for small cap, mid cap, growth company? thanks..


skyland
646 posts

Posted by skyland > May 29, 2013 8:29 AM | Report Abuse

how about daya recommend by cold eye?


kcchongnz
6610 posts

Posted by kcchongnz > May 29, 2013 8:40 AM | Report Abuse

plutus, this thread is about investing in a great company, not a undervalued stock. The strategy is first to find the great company; good governance, social responsible company, high return of investors capitals, durable business with lasting moat, good cash flows etc. Normally a great company's stock is sold at high valuation. Hence before investing in a great company you have found, you need to check if the valuation is reasonable. For a great company, even a PE ratio of 20 may not be high. don't you agree?

If I want to embark on a strategy to buy value stock, I will first go find a company trading at low PE ratio, say 10 (of course this ratio will depend on the sector, size and the prevailing market ratio etc), then I will check if there is other criteria which are too much compromised. For example, my value stock must have a growth of at least 5%, not so much debt say Debt-to-capital ratio <60%, that the quality of earnings is good (meaning good CFFO too) so that I am not cheated with managed earnings, etc.


Hustle
3307 posts

Posted by Hustle > May 29, 2013 8:47 AM | Report Abuse

Hi Fat Cat are you kidding JCY by cold eye? 
Then I'm pretty sure Patimas will recommend by warrent buffet :)


ulalar
76 posts

Posted by ulalar > May 29, 2013 8:56 AM | Report Abuse

alo contractor, tengok-tengok 3301......low volume, low profile, no coverage....super good management & super good dividend


kcchongnz
6610 posts

Posted by kcchongnz > May 29, 2013 9:01 AM | Report Abuse

JCY?

There is a strategy to follow for this stock; ie "Follow the Experts".


Hustle
3307 posts

Posted by Hustle > May 29, 2013 9:01 AM | Report Abuse

Yup got it 50-50 haha


Hustle
3307 posts

Posted by Hustle > May 29, 2013 9:08 AM | Report Abuse

Yup this 1 I'm totally agree,2 years is too long...else if cold eye buy in at open market & become JCY & Unisem director then possibly we will consider him as M'sia Warrant Buffet :)


plutus
24 posts

Posted by plutus > May 29, 2013 9:21 AM | Report Abuse

thanks @kcchongnz, i get your logic.. thanks for sharing..
yeah, if it is really good company with lasting moat, PE 20 sounds cheap..


ZenZenD
582 posts

Posted by ZenZenD > May 29, 2013 9:40 AM | Report Abuse

kcchongnz...wud u put a thumbs up for Century Logistics? Started to move of late. Tks


kcchongnz
6610 posts

Posted by kcchongnz > May 29, 2013 12:28 PM | Report Abuse

Posted by jtpc2006 > May 28, 2013 08:22 PM | Report Abuse
Hi KcChong, any possibility you can comment on Mercury?
thanks very much.

Wah there are really a lot of stocks in bursa which I don't know. Take for example, Mercury. I got no idea about this company at all previously. How can I comment.

Just looked at it. Mercury is a smallish industrial product supplier. Small revenue of about 50m and profit 6-7 m. No growth last year and in fact profit dropped. And as mentioned I don't know about the company at all; its corporate governance, management credibility etc. So how can I place it as a great company?

Its ROE and ROIC appears to be good though at above 15%. However, that is because of the seemingly low equity it has but with a huge accumulated loss in its balance sheet which tips its amount of equity and hence raises its ROIC. Adjusting for this accumulated loss, ROE and ROIC will be only about 7%, way below the cost of capital. Hence though it is selling cheap, but I won't be interested in it. Below is my assessment.

Mercury a Good company? at 1.33
Good governance ?
Durable business Neutral
Growth No
ROTC Yes 16% >WACC
Balance sheet Yes

Screens for investing
ROTC 6.8% <WACC
P/B Yes 1.0 <2.0
PE ratio Yes 8.5 <20


necro
4611 posts

Posted by necro > May 29, 2013 12:31 PM | Report Abuse

thanks bro..


kcchongnz
6610 posts

Posted by kcchongnz > May 29, 2013 3:15 PM | Report Abuse

Posted by faberlicious > May 28, 2013 11:13 AM | Report Abuse
bro kcchong, how about taking a look at Gkent ? Profitable every year,pays a dividend ,healthy balance sheet. Do you think its a good company to invest in?

The topic discussed in the investment strategy in this thread is about a good company. So is George Kent a good company?

George Kent involves in the water industry in Malaysia for a long time principally in manufacturing and marketing of water meters, fittings, fiberglass panel tanks and a variety of hot-stamped brass products and components. It certainly has its niche in the market. If i remember correctly, it even got a package of LRT construction recently based on its political connections though they have no experience at all in that field. Umm it relies on political connection to get big jobs like that and of course they would sublet out the work to some Chinaman companies to execute the work. Not really my kind of contractor. I prefer contractor who has its own expertise to secure jobs, good margin jobs and execute the work and have control over everything. The company which straight come into my mind is of course Pintaras Jaya.

Nevertheless, below is my assessment of GK. Not too sure if it is a good company although it meets the ROIC and cash flows requirement, but certainly it is not expensive to buy this stock. However the strategy here is to invest in good company and check to ensure the price is too high to invest. Hence for me, I will let this go.

George Kent a Good company?
Good governance No
Durable business Neutral
Growth Neutral
ROTC Yes 13% >WACC
Balance sheet Yes
Cash flow Yes

Screens for investing
ROTC Yes 13% >WACC
P/B Yes 1.0 <2.0
PE ratio Yes 8.6 <20


faberlicious
542 posts

Posted by faberlicious > May 29, 2013 4:34 PM | Report Abuse

bro kcchongnz,thanks for your comments. Actually I bought some at 86 sens bcoz it is iexpensive and there's a final 4.5 sen to look out for. Not a great company but ok for short term holding.


jtpc2006
982 posts

Posted by jtpc2006 > May 29, 2013 4:36 PM | Report Abuse

bro Kcchongnz, thank you very much on the Mercury update. Properties now heating up, and lighted on Ivory. What do you think of this counter? thanks for your feedback.


kcchongnz
6610 posts

Posted by kcchongnz > May 30, 2013 9:19 AM | Report Abuse

jtpc2006, I thought I have already rested my case about Ivory. Since you asked, I just want to reiterate that Ivory is a lemon. True true true, its share price has risen since the last time I said it is a lemon, but now I still say it is a lemon. So if it is a rotten lemon, I don't bother to look at if it is a cheap buy. A rotten lemon can't be eaten even if you get it free (just exaggerate a bit). Please read my comment below if you are interested.

Posted by kcchongnz > Mar 5, 2013 07:52 AM | Report Abuse X

Ivory has released its annual financial results ending 31/12/2012. Revenue and earnings have increased by big margins from 132m and 24.4m to 212m and 32.5m respectively. From the income statement, the revenue and profit appear to be from its ordinary business of property development and hospitality business, as there is no gain/loss of any “extra-ordinary items”. Very good so far. a huge annual growth, or is it? Earnings per share is 8.8 sen. With the present price of Ivory at 49 sen now, the PE ratio is only at 5.5. Isn’t it damn cheap? A value stock? Hold on until you look carefully into the details of financial statements.

Out of the 32.6 m profit, “other operating income” which forms part of the EBIT is RM51.3m, just what is this “other operating income”? A look at their cash flows statement may provide some clues. Cash flow from their ordinary business is negative at RM38.3m. Where is the hard cash when they declared that they made 32.5m? Digging deeper into the CFFO shows that they have booked in 36.6m in “Bargain purchase gain on acquisition of subsidiaries” as part of the EBIT, which should rightfully be an extra-ordinary gain at the bottom of the income statement. Isn’t there a conflict of the statement of income and the cash flow statement? Is it financial misstatement or financial shenanigan? Neither is credible for Ivory. I was curious about who the external auditor is. OMG, it is KPMG. This cannot be. I must have made a wrong inference.

That means for the last two years, though Ivory announced that they have made more than 10 sen per share each year, none of the year has yield any real cash from operations. In actual fact, more cash has to be found to carry out its business. Last year, a right issues was called to get 102m and borrowed another 214m from bank to carry on its business as well as paying back 220m debt. Some 26m worth of land was also sold to help in its cash flow. Ivory’s latest total debt is RM287m, or 64 sen per share. Total receivables of 177m is 0.83 times revenue, or it will take more than 8 months to collect. How much are these receivables collectible?


jtpc2006
982 posts

Posted by jtpc2006 > May 30, 2013 10:28 AM | Report Abuse

thanks bro kcChongnz. Sori, I missed your earlier update of March 5th, at that time Ivory did not come under radar.
True, a lemon is a lemon....


kcchongnz
6610 posts

Posted by kcchongnz > May 30, 2013 11:30 AM | Report Abuse

Posted by joe2703 > May 27, 2013 06:11 PM | Report Abuse
@kcchong, I'm your fan and I learn a lot of things from you, you have given a lot of useful information and advice. Thanks.
What do you think about TA Global ? Need your advice.

TA Global, property development and investment all over the world! Wow!! Don't really know much about this company but I doubt it is really that lucrative to invest all over the world where many places you are not familiar with.

Just by looking at its latest financial statement ended 31/1/2013, I don't see it meet my view of a good company. Huge outlay of total capital of 3.6 billion with debts closed to equity. Net income is just a pittance of 92m, for a ROTC of just 4%, a huge destroyer of economic value. This is one type of company I would like to avoid. Below is my assessment.

TA Global a Good company? 0.315
Good governance ?
Durable business No
Growth No
ROTC No 4% <<WACC
Balance sheet Neutral
Cash flow Yes

Screens for investing
ROTC No 4% <<WACC
P/B Yes 0.7 <2.0
PE ratio Yes 18.2 <20

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