Ho Lee Man

Well written article.
Simple and precise.
Its all about intrinsic value and price.
Margin of safety.
Warren Buffet value investment
Good article

2014-01-20 09:49

kcchongnz

Zhulian is a company with deep value. Revenue and net profit grew unabated at double digit rate. Huge amount of cash flow, and a squeaky clean balance sheet. It share price double from about 2.50 to above 5.00 in less than a year. At real time, its share price dropped by 20% or 92 sen from 4.61 to 3.69 now. What happen?

It can't be just because of a drop in profit for just a quarter and the fundamentals has changed so much.

In my opinion, it is because of the price and value relationship. There has been a divergence of price vs value after its steep climb to about 5.00. At 4.61, it is already fully or even overvalued.

Ultimately, price has to be close to its value. A not-so-good quarterly report has triggered that closing.

2014-01-23 09:53

keanpoh

And do you think Zhulian at RM3.73 undervalued now? Mr. Market has over-reacted to a single quarterly earnings report?

2014-01-23 10:22

kcchongnz

Let us make an estimation of the value of Zhulian using sum of parts basing on its fy ended 31 October 2012 results.

Ebit = 90.2m
Expected growth for the next 5 years=10%
Terminal growth=3%.
Cost of equity=10%

EV=1.09b, or RM2.37 per share

Net profit from subsidiary in Thailand=47m, using a PE ratio of 15, Price=705m, or RM1.53 per share. Excess cash=138m, or RM0.30 per share.

Hence total value of Zhulian is 2.37+1.53+0.30=RM4.20.

At the price of RM3.76 now, the margin of safety is 11%. Not really a lot of MOS to cater for errors in estimation and assumptions.

2014-01-23 10:42

keanpoh

Thanks for doing the calculation!!

Yes, I agree with you that MOS is rather small for the estimation error and assumptions made (growth rate of 10% for the next 5 years, cost of equity & PE ratio for contribution from subsidiary).

2014-01-23 11:38

kcchongnz

Prestariang's share price has risen from about 1.20 a year ago to 3.17 now, OMG. Is there any divergence of price and value of Prestariang?

Yes, there was, a year ago, when Pretariang's share price is really too low compared to its value.

But at 3.17 now, has the price well exceeded its value? The PE ratio is 16 and enterprise value 17 times its ebit now. I don't think so.

Prestariang's business is an asset light type of business. I love this type of business, like that of Jobstreet, Myeg etc. ROA and ROE is 36% and 47% respectively, huge. Note that its University has not even started to contribute yet.

2014-01-23 11:46

kcchongnz

Is the drop of share price of Zhulian by more than RM1.00 (Talking about making RM1) just because of a quarter's bad result overdone?

Should investors avoid selling-and preferably should buy-when fear becomes excessive when a stock of a good company crashes like this?

But before that make sure they have a strong sense of intrinsic value as I don’t know of any other thing besides this to be used as a guide. That is what I call knowing the “price and value relationship in stock investing”.

They should also have a thorough understanding of the insidious effect of psychology on the investing process at market extremes. Yes, the behavioral finance.

2014-01-23 18:45

keanpoh

The stock price shed another 5% this morning. I think investors are concerned with 'unknown' reasons for such as sudden drop in sales and profit. Will the coming quarters suffer similar lower sales and profit?

One of the thing the management can do in this kind of situation is to be as transparent as possible, disclosing all available information about how did the sales dropped so drastically in the past quarter. What exactly contributed to the drop and what is the future outlook? This way, it can clear some doubts of investors and at the same time show some quality of the management team in difficult times like this.

2014-01-24 11:24

digiuser016

Hi Kcchong,mind to demonstrate What formula you used to get 2.37?


Ebit = 90.2m
Expected growth for the next 5 years=10%
Terminal growth=3%.
Cost of equity=10%

EV=1.09b, or RM2.37 per share

Thank you

2014-01-24 23:49

kcchongnz

digiuser016,
This is based on discount cash flow analysis of a firm using WACC. The assumptions are all after tax earnings are cash flows and reinvested at the return of capitals, in super-normal growth as well as terminal growth rate after certain time, and at a fixed capital structure.

Zhulian has no debt and negligible minority interest and hence all theoretical enterprise value belongs to the equity holders.

Hopefully I got the analysis correct.

i got he spreadsheet from the web from Professor Aswath Damodaran. You can Google it.

2014-01-25 06:46

digiuser016

kcchong, which spreadsheet?

http://pages.stern.nyu.edu/~adamodar/

2014-01-25 13:29

digiuser016

At first I thought you were using dcf model to get 1.09b,it seems that I am wrong.I presume that my fcf is your ebit=90.2m and I m using the same assumtions as yours and my total present value of cash flow is $1,778,228,571 . So the intrinsic value excluding the operation of subsidary in thailand is 3.87($1,778,228,571/ 459915611.8). I got the number of shares from your computation(1.09b/2.37)

Did you deduct ebit from tax?

2014-01-25 13:50

kcchongnz

digiuser, I was doing it using sum-of-parts valuation. Part 1 is its enterprise value (exclude Thailand which is an associates), part 2 for Thailand's business, and 3, the excess cash.

The total value of equity in my computation of RM4.20 per share is not much different from your total of RM3.87 per share using the FCF, especially if you add the 30 sen excess cash.

Nobody will get the exact similar figures, considering the art of valuation. With 10-20% is close in my opinion.

2014-01-25 13:53

digiuser016

Hi Kcchong, I added some opinions in my latest comment and deleted previous comments.

If I include the value for Thailand's business and excess cash, then my intrinsic value is 3.87+1.53+0.3=5.7

2014-01-25 13:59

kcchongnz

digiuser016, if I use last years FCF and the assumptions I made previously, I would have got the exactly same answer as yours, ie RM3.89 per share for the EV. Maths can't go wrong, but the assumptions are not the same as the outcomes all the time.

Last year's FCF of 72.3m is the highest these few years. Using that to get the EV, to me, could be too liberal. I would normalize this FCF. Say if I take the average of the last 4 years, or using FCF of 59m, the EV would be RM3.17. This is still substantially higher than the 2.37 I got earlier.

The total sum of part is now 3.17+1.53+0.30=RM4.73, higher than the RM4.20 I got earlier.

I have no argument about this figure.

2014-01-25 14:35

sooncafe

kcchong is there any recommend book to learn about FCF and others formulae to find the intrinsic value of a company? thank you !

2014-01-25 14:38

digiuser016

Thank you for your opinion.

2014-01-25 14:39

kcchongnz

Posted by sooncafe > Jan 25, 2014 02:38 PM | Report Abuse

kcchong is there any recommend book to learn about FCF and others formulae to find the intrinsic value of a company? thank you !

There are a lot of internet resources which you can goggle, including in i3 where Tan KW had posted a number.

for books, I would recommend "The 5 rules in Stock Investing" by Pat Dorsey. It is quite an easy to understand book to follow fundamental investing, including economic moat identification, financial statement analysis and valuations.

2014-01-25 16:46

kcchongnz

In the final analysis, value investing means being price conscious rather than outlook conscious. You buy what is cheap and safe. Most everybody else is outlook conscious and price unconscious.
Marty Whitman

2014-03-04 14:25