Posted by kcchongnz > Apr 9, 2013 06:18 PM

Cold Eye’s 5 yardsticks for Prolexus 

Yardstick 1: ROE 
Prlexus reported an earnings of 9.7m for the common shareholders, or EPS 28 sen for the year ended 30/6/2012. With its net asset backing per share of 1.53, ROE is 18% which is better than the benchmark of 15%. This was achieved with no debts. 

Yardstick 2: Cash flow and free cash flow 
The cash flow from operations (CFFO) last year was 26.6m. This is 253% of its earnings of 9.7m. This shows the quality of the earnings is good. After spending 3.5m in capital expenses, there is a free cash flow (FCF), or owner’s earnings of 23.2m. 1.2m dividend was paid out from the FCF . 11.5m was used to pay down debts. This FCF is at 12% (>>5%) of its revenue or 54% (>>12%) of its invested capital. I can only use one word to describe this; Fantastic. 

Yardstick 3: PER 
Prlexus is trading at 1.33 at the close on 9th April 2013. With EPS of 28 sen, the PE ratio is only 4.8 (<<10). This is a reasonably low PE and considering that it has a healthy balance sheet with excellent earnings and cash flows. 

Yardstick 4: Dividend yield 
Prlexus paid a dividend of 3 sen for last financial year, or a dividend yield of 2.2%, not great but it is ok. Prlexus has not been paying any dividend for a long time already. 

Yardstick 5: NTA 
The net asset backing per share of Prlexus is 1.53. Hence at a share price of 1.33, the price-to-book value is only 0.9 (<1.5). It is inexpensive. 50% of its assets is hard cash. 

Yardstick 6 (Non Cold Eye yardstick): Growth 
The CAGR of Prlexus’s revenue and EBIT for the last three years was 8% and 45% respectively. Last year’s growth in EBIT and NI was 91% and 78% respectively. This is a very high growth. 

Prlexus with the exception of dividend yield, meets all criteria of Cold Eye as an investment grade stock by a wide margin. But again one would expect a low dividend yield for high growth stock.

Additional Comments

Posted by houseofordos > Apr 12, 2013 12:27 AM

kc, I took a closer look at Prolexus, 

Looking at the gross margins, its really tight (at the most around 5-6%) and their revenue growth isnt really that great the past 2 years (2011 and 2012). Their free cahsflow for 2012 was great but it was -ve in 2011 so the high FCF in 2012 could be due to lower receivables. 

What's your valuation for this company ? And also did you have time to look at Willow ?

Posted by kcchongnz > Apr 12, 2013 09:01 AM

house, prolexus gross margin is 15%. The 5-6% you are talking about is the net profit margin. Yeah, you are right in most of your other comments. The performance and cash flows last financial year ending 31/7/2012 was exceptionally good, spike up in ROE to 16.3% due to higher margin from 3% to 5.1%, high EPS, almost double to 24.2 sen. Great cash flows because of lowering of receivables which is a very good sign. Balance sheet improved a lot with 10m debts retired. Yeah this good performance may not repeat in the future. But do you notice that for the last 6 months, it has already made 22 sen EPS? 

Using a simple ROE valuation with a required return of 12%, Prolexus is worth RM1.91 per share. That is basing the performance of last year.