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Enterprise value valuation: A case study on Pintaras Jaya kcchongnz
Enterprise value valuation: A case study on Pintaras
We have used both the relative and absolute PE ratio to value Pintaras as shown in the link below:
http://klse.i3investor.com/blogs/kcchongnz/46422.jsp
From that article, we found that Pintaras at RM2.98 appears to be selling at a good discount to its value.
Limitations of PE ratio
The simplistic relative PE ratio and the somewhat more sophisticated absolute PE ratio are useful as crude screening tools but they have serious limitations. One such limitation is they do not take into considerations of one-time off and non-recurring items such as gain/loss in asset sales, foreign exchange, non operating items etc. Another is they ignore the balance sheet items. These can materially misrepresent the earnings yield of a business.
We have also attempted to look at its cash or cash equivalent holding and discussed about how we should deal with them when valuing the stock as shown in the link below:
http://klse.i3investor.com/blogs/kcchongnz/46492.jsp
However, we have not dealt with the debts and minority interest and other non-consolidated item, if any, of the company. Surely two similar companies making the same earnings, but with different amount of borrowings cannot be equal as computed from PE ratio. This brings us to the valuation method using enterprise value.
Enterprise value (EV) and earnings before interest and tax (EBIT)
Enterprise value is the price that you would have to pay to acquire a company free and clear. The enterprise value should really be called enterprise price because it has nothing to do with what the company is worth. The link below has a very good explanation of enterprise value and why we should one use it instead of market capitalization, or price.
http://classicvalueinvestors.com/i/2010/03/so-what-is-this-enterprise-value/
Investors should make the ratio of a company’s EV/EBIT a primary tool to evaluate its earnings power and to compare it to other companies instead of P/E ratio (or Market Cap/Net Profit). This is the ratio that Joel Greenblatt uses for his Magic Formula and that Buffett appears to use when evaluating a business. Buffett has said that he will generally pay 7x EV/EBIT for a good business that is growing 8-10% per year.
We will use this metrics to compare the attractiveness of investing in Pintaras as compared with some other construction companies in Malaysia.
Comparison of EV with EBIT of some construction companies
Table 1 below shows the comparison of PE and EV/EBIT ratios of some construction companies in Malaysia. We have discussed about PE ratio in the link below and hence will not deal with it again here:
http://klse.i3investor.com/blogs/kcchongnz/46422.jsp
Table 1: P/E and EV/EBIT of some construction companies (16th February 2014)
|
Company |
Kimlun |
Ptaras |
HSL |
Cresbld |
Gamuda |
IJM |
WCT |
|
Price |
1.71 |
2.98 |
1.74 |
1.47 |
4.45 |
5.74 |
2.1 |
|
PE |
8.3 |
9.1 |
11.2 |
5.1 |
18.7 |
18.9 |
5.5 |
|
EV/Ebit |
7.9 |
5.9 |
7.0 |
7.7 |
21.6 |
12.4 |
7.1 |
Table 2 below shows the computation of Pintaras using the equation:
Enterprise Value = Market Value of Equity + Minority Interest + Debt – Excess Cash
For those who are interested in what minority interest is and why should it be added to the EV, please refer to the following link:
http://www.ibankingfaq.com/interviewing-technical-questions/enterprise-value-and-equity-value/what-is-minority-interest-and-why-is-it-in-the-enterprise-value-formula/
Table 2: computation of EV for Pintaras
|
Price |
$2.980 |
|
No of shares outstanding |
$160,128 |
|
Market capitalization |
$477,181 |
|
Total debt |
0 |
|
MI |
0 |
|
Excess cash |
155459 |
|
EV |
$321,722 |
It is shown that Pintaras has the lowest EV/EBIT of 5.9, or the cheapest among the construction companies by quite a big margin. As Pintaras has one of the highest returns on equity among the companies as shown in Table 3 in the appendix, it is against the common logic that it should instead be traded at the highest valuation, or highest EV/EBIT.
So at a price of RM2.98, and high financial performance as evidenced from the return on equity (as well as return on invested capital), don’t you think Pintaras at EV/EBIT of 5.9 is undervalued?
K C Chong (18th February 2014)
Appendix
Table 3: Performance of some construction companies
|
Company |
Kimlun |
Ptaras |
HSL |
Cresbld |
Gamuda |
IJM |
WCT |
|
Net profit margin, NPM |
5.5% |
30.3% |
15.0% |
7.0% |
14.2% |
12.1% |
22.5% |
|
Asset turnover, AT |
1.22 |
0.52 |
0.80 |
0.61 |
0.40 |
0.31 |
0.29 |
|
Financial leverage, FL |
2.66 |
1.22 |
1.58 |
2.92 |
1.92 |
2.07 |
2.85 |
|
ROE=NPM*AT*FL |
18% |
19% |
19% |
13% |
11% |
8% |
19% |
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Discussions
Be the first to like this. Showing 16 of 16 comments
Mr. Chong, Thank you for the write-up on Pintaras..
Can you please explain what is MI??? How does MI affect the EV value or etc??? is MI so important???
2014-02-19 10:02
Posted by miketyu > Feb 19, 2014 12:00 AM | Report Abuse
Dear Mr Kcchongz,
How would you evaluate companies like Kossan, Hupseng Topgloves etc as their present EV/Ebit value is more than 7. Which method or (EV/Ebit value of 15 or 20) would you use to determine their fair value at the moment?
If you want to value a company in absolute EV/EBIT term, you should think about flipping the metric over to EBIT/EV, which we call the earnings yield (EY). So what do you think you personally require? 10%, 12% 15% or 20% of EY? Please note that EBIT/EV is before tax, unlike P/E which is after tax.
The above article mentioned that,
"Buffett has said that he will generally pay 7x EV/EBIT, or an earnings yield of about 14%, for a good business that is growing 8-10% per year."
EV/EBIT is more useful to compare companies within the same industry; for example glove companies of Topglove, Kossan, Supermax, Harta etc, better than using PE ratio. However, it is not infallible as it still have not taken into consideration of the growth prospect, efficiencies etc of different companies.
2014-02-19 10:15
Hi mr.chong, your excess cash is from the formula "excess cash=total cash - max(0,current liabilities- current asset)". may i know how you classify the "total cash" from? i add up "Short-term deposits","Cash and bank balances", but cant get your amount Excess cash 155459.then i add up other asset also has variance of it... may i know what category should classified in "total cash"?
2014-03-11 22:58
francis5269, yes i use the formula mentioned by you. More specifically, it is:
Excess cash = Total cash or cash equivalent- max[0,current liabilities- (current asset-cash or cash equivalent)]
Don't forget that cash also include the 46.6m "available for sales investments" in the non-current asset which is quoted shares.
2014-03-12 04:56
Hi mrchong, i think i know why has variance...bcs i see u posting the date is in 18feb14. so i thought u using 31dec13 financial statemenet. but actual, u r using 30jun13. u r right...
and EV/EBIT should be 4.79 because EBIT i check is 67152.
2014-03-12 11:05
hi mr.chong, i think i know y 5.9... bcs EBIT minus the dividend n disposal income... bcs this ady add in into excess cash so they should not included EBIT...otherwise they will duplicate...am i right?
2014-03-12 21:36
Mr Kcchongnz, there's something I would like ask regarding EV.
In the US, EV is calculate by:
EV = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments.
When translated to MY, it means:
EV = Market Value of Equity + Minority Interest + Debt – Excess Cash
Here's the question, when we speak of Excess Cash, do we refer to Cash and Bank Balances? Or do we refer to Cash and Cash Equivalents in Bursa?
Thank you for your time and explanation in advance.
2015-10-02 21:39
Excess cash is cash not required for the ordinary operations of the company. It can be just taken out without affecting the core business, and EV is about the core business.
So for me, excess cash is not only cash in the balance sheet, but investment in equity, investment in property for a non-property firm, investments in associates, JV etc.
Posted by Ezra_Investor > Oct 2, 2015 09:39 PM | Report Abuse
Mr Kcchongnz, there's something I would like ask regarding EV.
In the US, EV is calculate by:
EV = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments.
When translated to MY, it means:
EV = Market Value of Equity + Minority Interest + Debt – Excess Cash
Here's the question, when we speak of Excess Cash, do we refer to Cash and Bank Balances? Or do we refer to Cash and Cash Equivalents in Bursa?
Thank you for your time and explanation in advance.
2015-10-03 05:47
Posted by kcchongnz > Oct 3, 2015 05:47 AM | Report Abuse
Excess cash is cash not required for the ordinary operations of the company. It can be just taken out without affecting the core business, and EV is about the core business.
So for me, excess cash is not only cash in the balance sheet, but investment in equity, investment in property for a non-property firm, investments in associates, JV etc.
----------------------------------------------------------------------
Thank you KC. Just to confirm, if I get what you're saying right, in my case it should be "Cash and Cash Equivalents" instead of "Cash and Bank Balances", right? Because it's not only cash in the balance sheet.
2015-10-03 16:11
Posted by Ezra_Investor > Oct 3, 2015 04:11 PM | Report Abuse
Thank you KC. Just to confirm, if I get what you're saying right, in my case it should be "Cash and Cash Equivalents" instead of "Cash and Bank Balances", right? Because it's not only cash in the balance sheet.
You are right.
2015-10-03 16:54
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Dear Mr Kcchongz,
How would you evaluate companies like Kossan, Hupseng Topgloves etc as their present EV/Ebit value is more than 7. Which method or (EV/Ebit value of 15 or 20) would you use to determine their fair value at the moment?
2014-02-19 00:00