Pintaras Jaya and Buffett’s Market Tenets

We have discussed the four financial tenets of Buffett on Pintaras Jaya in the thread below:

http://klse.i3investor.com/blogs/kcchongnz/53944.jsp

The financial tenets we discuss thus far shows that Pintaras meets all the financial tenets of Buffett convincingly as below.

1. It has a high and rising return of equity of 20% achieved with zero debt and huge amount of excess cash
2. It consistently growing its Owner Earnings in tandem with its high growth in earnings
3. It has high and growing margin of 30%, far ahead of its peers in the same industry.
4. The company created RM3.72 in market value for RM1.00 retained, a huge shareholder value enhancement

Finally it leads to one decision point: buying or not buying shares in a company. There are basically two factors to consider:

1. What is the value of business of Pintaras?
2. Can the business be purchased at a significant discount to its value?

This is where you determine whether the company is a good value and should be purchased.

What is the value of the company?

Most of us are flooded with analyst reports on what stocks to buy and what the target prices are everyday. Most of the analysts are fond of using various shorthand methods, Price-earnings ratio being the most common, PE of 10, 15 or whatever. What why PE 10, 15, and why not 5, 20, 30 etc?

This is where John Burr Williams’ Theory of Investment Value comes into play: 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.

Buffett estimates the future Owner Earnings expected over the life of the business, and then discount by a rate equivalent to the long-term risk-free rate of the government bond. We must bear in mind that Buffett knows the business very well and he is more certain about the future cash flows and he generally has a control over the business he acquires.

Value of Pintaras

The value of Pintaras Jaya is computed using the 2013 financial data and assumptions below:

Revenue: RM184.4m

Net Income: RM55.4m

Net capital expenses: 5.0m

Growth: The next 3 years: 15%, 5% subsequently

ROE at stable growth: 15%

Discount rate: 10%

The present or intrinsic value of Pintaras Jaya is estimated to be about RM6.50 per share.

Can it be purchased at a significant discount to its value?

Graham thought Buffett the importance of buying a stock only when the difference between its price and its value represents a margin of safety (MOS). The MOS helps us in two ways. First, it protects us from downside price risk. We could have appraised the future cash flows incorrectly and hence the intrinsic value obtained may not be right. Secondly the MOS provides opportunities for extra-ordinary returns by buying outstanding business at a significant discount to its intrinsic value.

Pintaras at the close of RM4.08 on 11^th June 2014, provides a wide margin of safety of 37% from its intrinsic value.  

K C Chong  (12^th June 2014)