Posted by kcchongnz > Mar 22, 2013 07:32 PMX

Guan Chong Berhad 
Let us evaluate a stock, GCB as recommended by Cold Eye with his own 5 yardsticks. 

Yardstick 1: ROE 
GCB reported an earnings of 118.8m, or EPS 23.7 sen for the year ended 31/12/2012 (note that I don’t use the term “ordinary business” here). With its net asset backing per share of 73 sen, ROE is about 34%, fantastic. 

Yardstick 2: Cash flow and free cash flow 
The cash flow from operations (CFFO) is only 9.2m for year ended 2012, or just 8% of its net profit. This demonstrates its extremely poor quality of its earnings. Is there financial shenanigans involved? Highly probable in my opinion. Its trade receivables and inventories jumped by 43% and 14% to 214m and 513m respectively while turnover increased only by 4%. GCB spent 100m in capital expenses, distribute 51m in dividend, acquired another subsidiary for 14m. Where did GCB got this money to do all these? You got it right. Borrow more from bank in the amount of 191m last year. Its total debts now is 625m, or a debt-to-equity ratio of 1.8 times. It didn’t pay interest for its short term loan in a whopping amount 512m but just rolled over it. Some money was obtained from the conversion of its warrants and hence the dilution of its earnings per share. GCB failed miserably in this important yardstick. 

Yardstick 3: PER 
Yeah a lousy company can still be a good investment if the price is dirt cheap. Does GCB meet this criterion? EPS last year was 24.8 sen Vs its price now 1.80. A PE of 7.2, damn cheap right? Is that E in that equation “real” as discussed in yardstick 2 above? If it is not, what is its PE now? 

Yardstick 4: Dividend yield 
GCB paid 12.5 sen per share to its shareholders last year. This translate to a dividend yield of 7%. Very good right? That depends on where the money for dividend comes from. 

Yardstick 5: NTA 
GCB’s NAB per share is 73 sen. With a price of 1.80, the price-to-book value is 2.5 times. Moreover, its total debt of 625m is equivalent to a debt of 1.31 sen. Its total receivables and inventories of 746m is equivalent to 1.56 per share. How much is the true value of them? 

GCB seems to satisfy 3 out of the 5 yardsticks used by Cold Eye to evaluate if it is justified to buy the stock, namely ROE, PER and dividend yield. However with the extremely poor quality of its earnings as shown in its cash flow, I suspect it doesn’t even meet a single one of the yardsticks. Well I have nothing against GCB at all. I am not trying to press down its share price so that holders of GCB sell to me cheaply. For I will never buy GCB share, whatever price it is as I follow WB’s rules. I can’t short sell it too as it is not allowed in Bursa. I still got utmost respect for ColdEye, just I don’t understand him for recommending GCB.