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Stock Pick: Mega First Corporation Berhad kcchongnz
Stock Pick: Mega First Corporation Berhad (02/03/2014)
Mega First Corporation Berhad (MFCB) just announced its annual financial results ended 31st December 2013. Revenue decreased marginally by 1% to 629m whereas net profit increased by 14% to 107m compared to the previous year. Earnings attributed to common shareholders increased by 29% from 26 sen to 33 sen per share.
Historical share price performance of MFCB
Figure 1 below shows the share price performance of MFCB since the year 2000. It shows a steady long-term rising trend, notwithstanding the sublime financial crisis in 2008. At the close of RM2.24 on 28/2/2014, the compounded annual return since 14 years ago is at 8%.
Figure 1:
The business
MFCB is principally engaged in Power, Property, Limestone, Engineering and Investment Holding. The Power segment builds, owns and operates two power plants, one in China and the other in Sabah. The plants provide steady income for MFCB of 77% of the total operating revenue and profit of the company. It’s resource division operates one of the largest limestone hill reserves of more than 100 acres in Perak. It is also one of the country’s largest producers of lime products. This division contributes 15% of the total operating revenue and profit. Going forward, the Resource division will be contributing more to the revenue and profit of the company. The other core division in property development contributes about 8% of the total operating revenue and profit. These core businesses of MFCB will continue to provide steady income and stable cash flows for some years to come.
Quality of MFCB’s business
Growth
Years ago, MFCB has been depending on its power generation business to provide a steady and stable revenue and profit. However operating revenue and operating profit have been hovering less than 500m and 100m respectively. It is only about three years ago after it ventured into the limestone business then its operating revenue and operating profit spike up to 600m and 142m respectively for year ended 31st December 2013. It continues to pursue future power generating and other business in South East Asia such as Cambodia and Laos to enhance its future earnings.
Profit margin
The margins of the business of MFCB are reasonably good for its kind of industry. Last year, gross and operating margins improved further from 26% and 19% to 27% and 22% respectively. Net margin also improved to 17% from 15%. Return in equity (ROE) also improved in tandem from 10% to 11.5%. As MFCB has a lot of excess cash, a more appropriate measurement of performance in Return in invested capital (ROIC) is much better at 16%, which is much higher the costs of its capitals.
Financial strength
MFCB has been paying down its debts from 132m three years ago to just 72m last financial year. Its total debt is less than 10% of its equity, and with a high current ratio of 2.5 and hence low solvency risk.
Cash flows
MFCB’s quality of earnings is excellent as shown in Table 3 below. Its cash flows from operations (CFFO) are generally about the same as net income. About 30% of its cash flows from operations is spend on capital expenses. There is good average free cash flow of 12% and 15% (both> >5%) of revenue and invested capital respectively for the last 8 years. With the free cash flows (FCF), MFCB pays a reasonable dividend of 8 sen, or a dividend yield of 3.6%, commensurate with the bank fixed deposit rate. It has been paying down its debts and buying back large amount of its own shares. Its capital expenses and investments are all funded with this abundant FCF.
Market Valuation
There may not be high growth in MFCB’s business in the future, but it has proven long-term records of stable earnings and good cash flows, beside having a squeaky clean balance sheet. Hence it should be accorded with a reasonable good market valuation. But is it so?
At RM2.24, MFCB is trading at 7.3 times its earnings per share of 30.5 sen last year. Note that MFCB has an excess 157m cash or cash equivalent sitting in its balance sheet. Besides it has about 71m in quoted and unquoted investments, 40m interest in associates and 50m in land held for property development. Despite of these quality assets, its price is only o.8 times its book value.
The cheapness of MFCB is more glaring from the perspective of its market enterprise value (EV). At RM2.24, Its EV is less than three times its earnings before interest, tax, depreciation and amortization (Ebitda), far below the industry average. Earnings yield (Ebit/EV) is great at 30%, twice my 15% requirement. MFCB is indeed traded at a low price in the market.
Business Valuation of MFCB: Intrinsic value (IV)
Financial theory postulated by John Burr Williams in his “The theory of investment value” says that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate. For those who are interested in this methodology, please refer to the following link:
http://klse.i3investor.com/blogs/edu_morg_star/31605.jsp
There are two major assumptions used in the computation for the intrinsic value, or the present value, of the expected future FCF of a company; FCF growth rate and the discount rate.
The discount rate is related to what is the required return by the equity and debt holders respectively; i.e. how much risk premium above the risk-free rate would be required. For most practical purpose, in contrast with the academic approach in capital asset pricing model, a risk premium applied is related to how stable the earnings and cash flow of the company and its financial health. The 10-year MGS rate at the moment is about 4%. MFCB earnings and cash flows have been steady for the last 8 years. It has a squeaky clean balance sheet. So it would be conservative to apply a risk premium of 6% above the MGS rate, or a required return of 10% (4%+6%). Using a before-tax borrowing rate of 6%, it weighted average cost of capital (WACC) is about 9.7%. This WACC will be used as the discount rate for the valuation of the firm.
The more difficult part is the assumption of future cash flows of the company which is related to its normalized FCF this year and its expected growth rate. When I carry out the computation of IV to decide whether to invest in a company, I would prefer to use conservative assumptions. In MFCB’s case, I start off with a normalized FCF of 66.7m being the average FCF of the last 8 years and a perpetual growth rate of 3% from now on, in accordance to the rate of growth of GDP and inflation.
The intrinsic value attributed to the common shareholders of MFCB is found to be RM3.48 as shown in Table 2 in the appendix. This represents a margin of Safety of 36% investing in MFCB at RM2.24, or an upside potential of 55%.
Conclusions
MFCB is a good company as shown in its long history of stable earnings and cash flows. It has a clean balance sheet and hence risk is low. More importantly, it is even selling at low market valuation. The Discount Free Cash Flow Analysis shows that it is trading at a wide margin of safety to its intrinsic value. It is a low risk, high return bet. Heads, I win; tails, I don’t lose much. Hence at the closing price of RM2.24 on 28th February 2014, MFCB continues to remain as a stock in my portfolio.
K C Chong in Auckland (2/3/14)
Table 1; Cash flow of MFCB
|
Year |
2013 |
2012 |
2011 |
2010 |
2009 |
2008 |
2007 |
2006 |
|
CFFO |
122429 |
126062 |
102393 |
97420 |
111842 |
54207 |
92293 |
71955 |
|
Capex |
-67329 |
-22791 |
-24829 |
-49267 |
-35078 |
-7727 |
-19401 |
-18716 |
|
FCF |
55100 |
103271 |
77564 |
48153 |
76764 |
46480 |
72892 |
53239 |
|
FCF/Revenue |
9% |
16% |
13% |
9% |
17% |
9% |
15% |
11% |
|
FCF/IC |
9% |
19% |
15% |
10% |
18% |
11% |
20% |
14% |
|
CFFO/NI |
114% |
135% |
91% |
98% |
116% |
82% |
112% |
93% |
Table 2: Discount FCF analysis
|
PV of FCFF of core operations |
$1,028,000 |
|
Non-operating cash |
$156,619 |
|
Investment in quoted shares |
$70,889 |
|
Interest in associates |
$38,631 |
|
Debts |
($71,779) |
|
PV of FCFE |
$1,222,360 |
|
Less minority interest |
($377,878) |
|
FCFE |
$844,482 |
|
Number of shares |
242455 |
|
FCF per share |
$3.48 |
|
Margin of safety |
36% |
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| Chart | Stock Name | Last | Change | Volume |
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Discussions
4 people like this. Showing 34 of 34 comments
My advice to u all is don't listen to any financial advisors or any report that is the motif is to benefit the writer who already bought mfcb earlier ..
Here they would paint as if its a super company , and very undervalue, which sorry to say I don't think mfcb is a good company ..
It's business in Cambodia and Laos can easily go into trouble and if not careful can bankrupt the company .. As its having a lot of debt
Again if u jump in now maybe later may get guillotine once the writer and his buddies start selling
2014-03-02 14:54
Why substantial shareholder Lim Thian Soo keep selling for past 3 months?
http://klse.i3investor.com/servlets/stk/annchsh/3069.jsp
http://www.bursamalaysia.com/market/listed-companies/company-announcements/1549833
2014-03-02 16:13
Mega First Corporation Bhd is another Great Growth Stock I bought for RM1.40 years back. Already sold some time ago. I remember MFCB is also a substantial shareholder of an even better Growth Stock called Rock Chemical Industries (RCI). I had bought all the highly profitable cement cos. & RCI is selling white cement.
One fine day MFCB(my remisier called it My Father Comes Back.) took RCI private. So I think kk123 knows next to nothing about MFCB. I really wonder so many who know next to nothing talking so much nonsense like this kk123.
Anyway, I don't own any My Father Comes Back share now.
2014-03-02 18:03
well one need to look and evaluate a company base on its fundamentals , and not base on "vested interest"..
If the main intention of writing is so that u get everyone into buying this stock - then u better don't write cause once u sell others may suffer losses .. It's a zero sum game, somebody win , somebody will lose ..
I would avoid mfcb as in my opinion there are so many other better companies than this one
So not worth even for me to look or buy in :)
2014-03-02 19:24
Interesting! Name one share better than MFCB. Since I didn't buy MFCB you can now share your better Stock Pick here.
2014-03-02 19:51
Just to add, based on an article in the Edge about 3 weeks back, MFCB has bought back about 8.2% of its total share base so far. Shy of 1.8% to upper 10% limit... Bonus issue / share dividend coming soon ?
2014-03-02 22:17
It is still a very good habit to ask before i invest if there is any better alternative. If there is no better alternative we cant force ourselves to diversify just to diversify. That is why Warren portfolio is so concentrated.
2014-03-02 22:29
So it is a power business, the regulated business. Are we going to benchmark it against market leader like MMC, TNB or YTL Power? Or KC has concluded that it has better cash management and efficiency than those mentioned? Is this regulated business still going to get higher margin like before? As at the moment, YTL Power share perfomance for past 10 years is languishing. If your business model is so much regulated even comes to begging for contract/price revision/better terms, the owner might always boast about their business model. I just shake my head in disbelief.
2014-03-02 22:43
Lots of analyst like KC, like me, like everybody else is looking for great NEW company. But we simply dont know where to find a great NEW one. Sometimes we have no alternative but to read all paper reports and analyse half-tinted reports. And even hope for upcoming Bonus issues. BUT In everybody hearts we know the great company is NOT coming through analysing of its data/reports.Yes Reports is confirming your belief. BUT YOU DONT IT THE OTHER WAY ROUND. But it is so hard to look for great company right? So we do it the other round.
If it is a great Business, you know it is a great Business. You know you have just come across a great business that will come through test of time stronger and stronger. If you dont know, then you just dont know. If you know then you really really know. Appreciation is a Gift from above.
2014-03-02 22:58
One thing I can state is that in this market environment, its not easy to find a business with an earnings yield of 30% as what KC mentioned or selling at EV/EBIT < 3.3
2014-03-02 23:02
Sometimes there is still no great company around. So the investment house has no alternative but to comes up with THEME play. So if suddenly there is a theme play on Power sector, what can i say? Good for market liquidity.
2014-03-02 23:08
We always respect the market as its price has discounted future cash flow for next 20 years. Price is as such for a good reasons. We have to respect it if it is Top price as it is top priced for good reason. We also respected it if it is lower priced, it is lower priced for good reasons as well.
2014-03-02 23:32
I don't like to say it is undervalued or overvalued. We have to respect market as the way it is priced.
2014-03-02 23:33
Whether it is market efficient or not, learn to respect the market first. Dont trade or invest like we own the company or we are market maker.
2014-03-02 23:41
Probably tc2012 comments will shed some light on the so-called lower priced issue. Also, anybody knows about china power plant contract? Any favourable term or bad term on its expiry? Any risk associated with this kind of foreign investment? Who knows right?
2014-03-03 00:06
So it is going to be a professional speculation again whereby lots of investor betting on lower priced and hoping for Big gain. That is nothing wrong if You are professional and risk-controlled and more importantly you are not addicted and knows when to take profit and get out. SINCE very few great company around nowadays and very few people interested in investing anyway.
2014-03-03 00:14
Posted by kk123 > Mar 2, 2014 02:54 PM | Report Abuse
My advice to u all is don't listen to any financial advisors or any report that is the motif is to benefit the writer who already bought mfcb earlier ..
WHEN I SPENT SO MUCH TIME ANALYZING AND WRITING A POST LIKE THIS ABOUT A COMPANY, DON'T YOU THINK THAT I HAVE THE COMMITMENT IN ITS STOCK AND HAVE INVESTED IN IT? WHAT IS WRONG ABOUT IT IF I OWN THE STOCK AND WRITE ABOUT IT? SO THAT I CAN SELL TO A SUCKER LIKE YOU AT A PRICE 55% (ITS UPSIDE POTENTIAL) HIGHER? SO WHEN CAN I WRITE ABOUT THIS STOCK? BEFORE I BUY IT? WHY?
Here they would paint as if its a super company , and very undervalue, which sorry to say I don't think mfcb is a good company ..
GOOD POINT. BUT PLEASE ILLUSTRATE HOW I "PAINT" IT? AND WHY DO YOU THINK MFCB IS NOT A GOOD COMPANY? SHOW US SOME NUMBERS OR QUALITATIVE JUSTIFICATION. NOT JUST WILD SHOOTING.
It's business in Cambodia and Laos can easily go into trouble and if not careful can bankrupt the company .. As its having a lot of debt
MFCB HAVING A LOT OF DEBTS? CAN GO BANKRUPT? PLEASE JUSTIFY.
Again if u jump in now maybe later may get guillotine once the writer and his buddies start selling
"GET GUILLOTINE" ONCE THE WRITER AND HIS BUDDIES START SELLING? WHAT IS THIS?
2014-03-03 14:12
KC has been genuine and has contributed so much in this forum and has provided us with so much insight and learning curve. Anyway a person preference in stock selection is much various than food selection or music preference. It is amazingly different taste.
2014-03-03 16:38
There is why there is always Buyer and Seller. Because always one side say Boom One side say Bust. No mater at what price One side would say sell and the other side would say Buy. Once everybody understands this, there is no need to be angry and argue.
2014-03-03 16:45
Dont believe me. Look at everyday volumn it is amazing. Everyday there are people selling Nestle, Public, LPI. It is amazing.
2014-03-03 16:47
so there is different mindset and approach in investment and speculation by asking ourselves few questions below:
1. Have I ever Hold any stock more than 10 years?
2. Do I read the market price on daily basis OR only on MONTHEND closing price? Well sometimes I reckon that price might drop 20% in a month right?
3. Do i always calculate my profit and loss or stock performance even on yearly basis?
4. Do i welcome stock drop more than 20%?
5. Do I always look for undervalue stocks instead of Great Business? Well now we know that all good company has fetched higher price, so we have no alternative But to look for undervalued company?
So I guess most of us are just speculators. BE a professional one then. Be sure to know when you are wrong and when to get out.
2014-03-03 16:59
IF nobody can be a saint then be a good man faithful to the family right? If nobody can be a Great investor, then be more professional speculators. Right? So we better list down all comprehensive risk associated with this Business and more importantly our capital downside risk as at times price moves before fundamental changes=insider trading.For example below Rm2 we cut loss that is 10% downside. Well nowadays there is 20% gap down then you lose 20% at market open and you still need to cut...
2014-03-03 17:15
Kkchongnz I strongly back you for posting the article on i3. Without people like you and Uncle Koon, the forum is nothing but idle talks (including me) which sounds something like this : "lai Liao lai Liao", or "tomorrow sure up", or "buy buy buy, wave 4 coming, wave 5 coming", or "any news why it is up?".
You have done a great service to this forum by posting so much information here. I believe most of the people here are savvy and matured enough to ascertain whether your points are genuine or not.
Carry on the great work !!!!!
2014-03-03 21:51
# Icon8888 - strongly concur with your comments. These are my thoughts all this while.
2014-03-03 22:21
It's a good fundamental company generating stable profit and paying decent dividend every year.
2014-03-03 22:39
As i advised instead of saying i am right and market is wrong, respect the price as the way it is. Understand why it is lower priced first.
There are at least 3 things that we could not understand/estimate:
1. The magnitude of forces that keeps price at low range; How Big is the forces behind that would be able to keep price at lower range? Can you fight it?
2. The amount of effort of past 10 years that has been put in to push up the price But fail, dont you know everyday people has been trying for the past ten years by all means?
3. What is the right catalyst for the situation? If you dont know the diagnosis, how do you know the medicine right?
2014-03-04 00:46
I'm quite new in i3, but already detect a virus forumner that keep spreading bad comments everywhere he goes. Can't this guy at least come up with good analysis to counter any detail analysis done by other forumner? Have you gained any respect so far by trashing other people analysis?
2014-03-04 01:17
dividend plus stock performance could be 10% return company as its business is as such.
2014-03-04 10:39
Hi Kcchong,
When you evaluate a construction company, do you include property development cost and land held for porperty development as your invested capital?
Refers to the below link, If I take the figure of PPE and exclude property development cost and land held for property development, my ROIC >100%
http://postimg.org/image/k52uwbulp/
Thank you.
2014-03-04 12:38
Posted by digiuser016 > Mar 4, 2014 12:38 PM | Report Abuse
When you evaluate a construction company, do you include property development cost and land held for property development as your invested capital?
This is one of the best questions someone asked me. For sure you will never learn this in your financial accounting, investment, undergraduate or post graduate, or even in your CFA courses. Hence I am not 100% (not even 60%) sure my reply here is correct or not. Nevertheless I wish to simulate the interest of anyone who is interested in this subject to put forward his opinion to share.
I presume you are interested in invested capital (IC) to determine if the return (net income)of a company is good in relation to IC, or the percentage of free cash flow is high relative to IC etc. For me, the return of invested capital, or FCF/IC are some of the most important metrics to determine if a company is good, or has certain moat.
So you have to start from return (or FCF or whatever), what is the return made up of. Does is include profit from its property development. If so the development cost, especially the current development costs, should logically be included in the IC.
What about "land held for property development"? To me there is no immediate development of the land and hence no return yet from it now. It is a non-operating asset (for the moment). Inclusion of this asset in IC will unjustifiably lower the return from IC. Hence it should not be included in the IC.
So the principle is whether there is activity on the asset and return from it. Is it part of the ordinary business now? If the net profit includes incomes from those activities, the assets should be included in the IC.
The other thing is you must find out what this "return" is. You should also eliminate the one-time-off or non-recurring return to get a realistic picture of the true performance.
2014-03-04 13:23
Your interpretation of land held for development is correct .
If the land is held for development purposes, its value shall be carried at cost, less than any accumulated impariment losses.
This is persuant to Financial Reporting Standard 201, an accounting standard that also requires that land held for property development be classified as a non current assset, where no developent activities have been carried out or development acitivities are not expected to be completed within the nomral operating cycle.
2014-04-20 21:01
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tc2012
Hi kcchongnz,If I am not mistaken , the contract will be expire sometime in 2017 for sabah power plant.What is the impact on the valuation ?
2014-03-02 14:40