kcchongnz blog
Relative Valuations of V.S Industry Berhad kcchongnz
This article is for sharing of knowledge in investing. It doesn’t constitute a buy or a sell call.
There are a number of aspects of the company a smart investor has to look at before investing in its stocks. I have written about them in the link below, following the twelve tenets of Warren Buffet written by Robert G. Hagstrom:
http://klse.i3investor.com/blogs/kcchongnz/52152.jsp
Basically when buying a stock, you should take the same approach as you would if you were buying an entire business. The only difference is that instead of buying the whole of the business, or a partnership in the business, you are only buying a tiny share.
Smart and savvy businessmen when buying a business will seek answers to the questions below to check if that is a good business:
- Is the business simple and understandable?
- Does the business have a consistent operating history?
- Does the business have favourable long term prospects?
- How good is the management?
- What is the return on equity?
- What are the profit margins?
- How healthy is its balance sheet
- Does it have good cash flows, free cash flows in particular
The above is just part 1 of the exercise to determine if that business is a good business. I have dealt with this in a number of my articles in i3investor. Table 1 in the Appendix also has summarized some of the numbers. However, this was what Peter Lynch said:
“Wonderful companies become risky when people overpay for them.”
Those who have invested in Amazon in the year 2000 at the adjusted price of about $85 then, which went down to $7 less than two years’ latter, would have to wait for another 10 years for them, just to recoup their losses, forget about the huge interest and other opportunity costs lost.
Go ahead to chase share price following the greater fool theory, ignore value at your own peril.
To decide on to buy or not to buy shares, there are basically two factors to consider:
- What is the value of its business?
- 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. For this I have attempted to do a discounted cash flows analysis (DCFA) to obtain its absolute intrinsic value from its structural growth assumptions as shown in this article below:
http://klse.i3investor.com/blogs/kcchongnz/86545.jsp
My conclusion from the DCFA was,
“The present value of free cash flow for the firm was obtained by summing up those of first 5 years of supernormal growth value of RM121.3m, and the terminal value of RM1425.4m, totalling RM1546.7m. After adding the excess cash of RM243.7m, and deduction all debts of total RM412.2m, ignoring the minority interest, it gives the intrinsic value of V.S attributed to common shareholders at RM1378m, or RM1.20 per share. This shows V.S is overvalued by 34% at a market price now of RM1.60 apiece as on 20th November 2015.”
The business of V.S Industry?
VS Industry is one of the top 50 Multi-products OEM contract manufacturers in the world, specializing in Plastic Injection Moulding, Plastic Secondary Finishing, Tools design and fabrication, PCB assembly via Surface Mount Technology(SMT), Auto Insertion(AI), Chips on Board(COB), Manual Insertion(MI), and Final Product Box Build. It also involves in the production of a wide range of Remote Control units – ODM/OEM, Printers, Vacuum Cleaners, Home Appliances, White Goods, Audio, Video, DVD products for world class companies in full turnkey, pseudo-turnkey and consigned mode.
Figure 1: V.S Share price movement
Like someone said, a picture paints a thousand words. The share price of V.S has had a phenomenon rise since a year ago. It went up from the adjusted price of 50 sen to RM1.60 within a year at the end of last year, before falling back to RM1.32 at the close just before the 2016 Chinese New Year on 5th February 2016 as shown in Figure 1 above.
The total gain of investors, including the free warrants, will be one of the best short-term gains in Bursa for the last one year. How one wishes he has invested in this company a year ago!
The more pertinent question is, at RM1.32 now, is it still a good investment in the future?
Here I will share my relative valuations of V.S and leave it to individual to decide if he still wishes to invest in this stock.
Relative valuations of V.S Industries.
In this analysis, I attempt to use some simpler relative market valuation techniques to value V.S, and compare with the largest contract manufacturer in the world, Hong Hai Precision Ind Co Ltd listed in Taiwan. For the time being, we ignore the claim of the warrant shareholders of V.S which could reduce the value attributed to the common shareholders.
Table 1 in the Appendix shows some operating efficiencies, and the health of balance sheets of both companies.
Leaving those who just focus on price instead of value aside, most investors will look at the market valuations metrics of a company as shown in Table 2 below. The relative valuation metrics of V.S were worked out based on its latest trailing twelve month financial results ended 31st October 2015.
Table 2: Some simple valuation ratios of V.S
All metrics above show Hon Hai, the largest contract manufacturer in the world at NT76.70, is a much cheaper investment compared to V.S, even though Hon Hai is a much bigger company then V.S and has better operating efficiencies and healthier balance sheet as shown in Table 1 in the Appendix.
Hon Hai has a PE ratio of 8.0, compared to the 9.7 of V.S at RM1.32 at the close today on 5th February 2016. Price-to-book, price-to-CFFO and price-to-sales wise, Hon Hai also appears to be much cheaper investment. Hon Hai has very good dividend yield at 4.7%, four times better than the 1.2% of V.S. The Peter Lynch price-earnings ratio to expected growth ratio of Hon Hai at 0.8 also appears to be cheaper.
Compared to its historical PE ratio of V.S over the years as shown in Table 3 below, the PE ratio now at 9.7 now doesn’t appear to be cheap too. V.S has been most of the time trading at single PE ratio as extracted from Dynaquest’s Stock Performance Guide.
Table 3: Historical PE range of V.S
|
|
|
|
|
|
Year |
Low |
High |
Average |
|
2010 |
5.8 |
11.1 |
8.5 |
|
2011 |
4.8 |
8.8 |
6.8 |
|
2012 |
7.5 |
8.9 |
8.2 |
|
2013 |
4.6 |
5.6 |
5.1 |
|
2014 |
4.8 |
9.1 |
7.0 |
2015 4.3 13.0 8.7
As V.S has substantial debts amount to 46% of equity, and also substantial minority interest, the valuation metrics as shown in Table 1 above just base on equity are not good enough. Table 4 below shows the more appropriate valuation metrics based on the whole enterprise value (EV).
Table 4: Enterprise valuation
|
Company |
V.S |
Hon Hai |
|
EV/EBITDA |
7.7 |
5.5 |
|
EV/EBIT |
9.9 |
7.8 |
|
EV/Sales |
1.1 |
0.23 |
|
CY=FCF/P |
Negative |
14.7% |
The EV of V.S at 7.7 times earnings before interest, tax, depreciation and amortization, EBITDA, as shown in Table 4 above is 40% more expensive than Hong Hai’s 5.5. It is five times more expensive than Hon Hai in term of Sales. In absolute term, V.S’s EV of 9.9 times of its earnings before interest and tax, EBIT, is also higher than Hon Hai.
What about its cash yield for equity shareholders, or FCF/Price I talked about here?
http://klse.i3investor.com/blogs/kcchongnz/76694.jsp
V.S had a negative free cash flows, FCF, of RM53m the latest financial year. In fact it has no free cash flow for the last four years. Hence this valuation metric is not applicable because there is negative FCF, whereas for Hon Hai, the cash yield is very high at 14.7%. I am not too sure if this figure extracted from a public website is correct or not though, as it looks too good.
Is V.S a great company? Is it a great investment?
V.S has had a good round in its business performance with some great improvement for the last twelve months in terms of earnings and growth. I would say it is the best 12 months in its history of listing. Its share price has also risen in tandem. This is due to its growth in revenue and earnings the last couple of years, coupled with doubling of its ROE from its historic 7% to 14% in the last 12 months. Its ROE of 13.9% is now, for the first time, higher than the cost of equity.
V.S’s Achilles’s heel is its poor cash flows, and in particular its very poor FCF, which have been negative for the last 4 four years. I do understand growing companies sometimes have poor FCF for a year or two as cash is required for working capital and capital expenses for growth, but eventually, they have to produce cash inflows, otherwise the company may grow itself to bankruptcy when an economic or a financial crisis hits.
“Investment success doesn’t come from “buying good things,” but rather from “buying things well.””
Buying well means buying it when it is selling at a big discount to its intrinsic value, and relative to its peers in the same industry. At the present price of RM1.32, V.S appears to be selling above its intrinsic value (ignoring warrants) and much more expensive in every aspect compared to the largest contract manufacturer of the world, Hon Hai.
In order to have a higher probability of success in investing, one should know how to determine if a company is good, and whether it is selling at reasonable or better still, cheap price, before investing. There is no other way besides understanding the language of business, and how to do valuations, in my opinion.
For those who do not have the knowledge and wish to learn about it, or wish to have another opinion of a stock you are interested in before pouring tens or hundreds of thousands, or million Ringgit into it, you may contact me at
With this last article before the lunar new year 2016, I wish everyone a happy and prosperous Chinese New Year.
K C Chong (6th February 2016)
Appendix
Table 1: Operating efficiencies, growth and health of balance sheet
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Discussions
3 people like this. Showing 45 of 45 comments
KC criticise VS for its poor cashflow
At the same time, he buys stocks that has strong cash flow
Because of that, I know he is sincere in his view about free cash flow and that he is not criticizing out of personal differences
2016-02-06 16:03
Hi kcchongnz. By the way, happy chinese new year. I disagree what you are talking about vs industry. This is because the example you use is unfair and unreasonable to vs industry. As all we know, Hon Hai market value is far more greater than vs industry and Hon Hai is top 1 OEM manufaturer in Asia. The example you use is something like you use bank of Amerika compare to maybank. Does it make sense?
Like what Mr koon yew yin said, we should have businessman insight.Vs industry will have more contract this year and also the tppa winner.
What I believe is the future of vs is brilliant. Therefore, i find it unfair to vs industry. Thank you!
2016-02-06 16:09
I like this statement:
Posted by Icon8888 > Feb 6, 2016 03:59 PM | Report Abuse
I don't agree with KC on everything, but I seldom have reason to critucise his articles
The main reason is because he applies the same principles to his own stocks as well as other people's stocks
Some people I know don't do that. They criticise your stocks for certain weaknesses. But when come to their own stocks, those weaknesses become acceptable
That is the part that I find objectionable
KC criticise VS for its poor cashflow
At the same time, he buys stocks that has strong cash flow
Because of that, I know he is sincere in his view about free cash flow and that he is not criticizing out of personal differences
2016-02-06 16:15
Lee David, just in case you don't know, bigger companies generally command higher valuation than smaller companies, not the other way around. Therefore, Hon Hai should command higher valuation, not lower, than VS, purely base on market capitalization.
2016-02-06 16:21
Happy cny to kcchongnz. Wish you prosperous years ahead. Your contributions to i3 are immense, benefitting many in the proces.
2016-02-06 16:55
Thank soojinhou for ur knowledge. And how everyone think about vs industry? Do it right timw to collect?
2016-02-06 17:09
Posted by Lee David > Feb 6, 2016 04:09 PM | Report Abuse
Hi kcchongnz. By the way, happy chinese new year. I disagree what you are talking about vs industry. This is because the example you use is unfair and unreasonable to vs industry. As all we know, Hon Hai market value is far more greater than vs industry and Hon Hai is top 1 OEM manufaturer in Asia. The example you use is something like you use bank of Amerika compare to maybank. Does it make sense?
Like what Mr koon yew yin said, we should have businessman insight.Vs industry will have more contract this year and also the tppa winner.
What I believe is the future of vs is brilliant. Therefore, i find it unfair to vs industry. Thank you!
Posted by Lee David > Feb 6, 2016 05:09 PM | Report Abuse
Thank soojinhou for ur knowledge. And how everyone think about vs industry? Do it right timw to collect?
David, happy Chinese New Year to you too. You notice what I have shared with you are all facts and figures from public information. I do not twist, or at least attempt not to twist any figure. I just shared my view and have no personal interest in this company. So I find it strange why you said it is unfair in my report.
I know nothing about the future of V.S. I have no so-called "businessman insight" of V.S. Most of all, I know nothing about how its share price will perform in the future.
Soo Jin Hou has aptly answered one part of your questions. Market leader does command a premium in valuation, as its earnings and cash flows generally are more stable and predictable, and business is more resilient.
If you believe VS will have more contracts, more importantly makes more money, a lot more the next few years than this year, and that its future is "brilliant", go ahead and invest in it. You need to have an independent mind to make extra-ordinary return from the market.
But my advice is make sure you are certain about it, with some analysis done by yourself, and not just merely believe what others, including me, said.
2016-02-06 18:53
Just for curiosity sake. How come it's fCf is negative while it's cash balance is 300+ mil? Any ideas? Cheers
2016-02-06 19:09
Let's give export stocks a break. Revisit them 10 years from now. It's time to switch to other theme play.
2016-02-06 19:32
Posted by coolinvestor > Feb 6, 2016 07:09 PM | Report Abuse
Just for curiosity sake. How come it's fCf is negative while it's cash balance is 300+ mil? Any ideas? Cheers
Cash in the balance sheet can be from financing activities, i.e. company can borrow more money from banks, or issues more shares to get cash.
Free cash flows is what is left behind after capital expenses of net inflows of cash from its core operation, and not from additional borrowings and issuance of new shares, which was precisely what V.S did.
2016-02-06 23:00
Posted by Koon Bee > Feb 6, 2016 05:41 PM | Report Abuse
This kcchong very small heart always wanna cari pasal with KYY
Great man discusses about issues, sharing of knowledge. Only small heart man talks about personality, and attacking people.
2016-02-06 23:11
But kc got numbers to show. Unless the numbers are fake or the company he compare w s fake. Otherwise no challenge pls
2016-02-06 23:14
Lee David Hi kcchongnz. By the way, happy chinese new year. I disagree what you are talking about vs industry. This is because the example you use is unfair and unreasonable to vs industry. As all we know, Hon Hai market value is far more greater than vs industry and Hon Hai is top 1 OEM manufaturer in Asia. The example you use is something like you use bank of Amerika compare to maybank. Does it make sense?
Like what Mr koon yew yin said, we should have businessman insight.Vs industry will have more contract this year and also the tppa winner.
What I believe is the future of vs is brilliant. Therefore, i find it unfair to vs industry. Thank you!
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
I beg to differ. Whatever KC shown in article above are not the number but ratio and percentage. KC is talking about PE,EV/EBIT, Cash Yield, ROA, ROE and so on. Is he telling everyone kedai runcit is bad business because it earned only 100rm per day but AEON could earn 10m per day, so AEON is better? NO.
If the kedai runcit is using 10RM of cost to earn 100rm but AEON is using 10b of cost to earn 10m per day. Which one is a better business? I am pretty sure RATIO and PERCENTAGE are pretty "fair" to judge, isn't?
And like what soo said, generally big cap company generally with high valuation. Like Google, it has much higher valuation because everyone BELIEVE they could be better than other smaller cap. So, maybe you are right that it is unfair. But it is unfair to Hon Hai, perhaps.
2016-02-06 23:48
kcchongnz Posted
"Great man discusses about issues, sharing of knowledge. Only small heart man talks about personality, and attacking people."
How aptly said.
Thank you kcchongnz for this valuable and well-presented analysis.
2016-02-07 11:00
Good info too. In this case it will be nice to enter around the price of 1.20. But warrants are way too expensive for me. 0.40! Crazy
2016-02-07 16:04
Skp have a PE ratio of 26......i think you should write more about skp not vs.....
2016-02-10 21:36
Posted by goreng_kaki > Feb 10, 2016 09:36 PM | Report Abuse
Skp have a PE ratio of 26......i think you should write more about skp not vs.....
I don't know about every stock in Bursa. But I do know a little about V.S as a retail investor, and I find this stock very interesting,and hence I write quite a bit about it to share with people like you. I notice many who hold this stock, and still holding, and those contemplating buying this stock, do have interest reading about what I have written about V.S.
Sharing is caring mah. Of course I don't force you to read if you don't wish to.
So far, what is the problem you have about me writing about this stock? Have I got facts and figures wrongly presented? Have I twisted any fact? Please let me know and I will correct them, asap.
2016-02-10 22:47
Ycbang. u are very rude.If u don"t like his articles ,u don't need to scold him lah. Have some respect .
2016-02-11 23:09
how silly, one keeps raising doubt about Vs ,from a year back , while investors witnessing price picking up from 2.00 at (1$ par value)to 8.00,then split into 20sen par value) , now corrected down to 1.20 , equacalent 6.00 (,20sen x5), it is time to reconsider somebody valuation method which obviously contain much flaws.
2016-02-15 12:03
Posted by enning22 > Feb 15, 2016 12:03 PM | Report Abuse
how silly, one keeps raising doubt about Vs ,from a year back , while investors witnessing price picking up from 2.00 at (1$ par value)to 8.00,then split into 20sen par value) , now corrected down to 1.20 , equacalent 6.00 (,20sen x5), it is time to reconsider somebody valuation method which obviously contain much flaws.
It will be more fruitful for discussions here if you can identify the "flaws" in these valuation techniques and deliberate your thoughts here, rather than just just say they "contain much flaws" without any basis.
I will be very happy to hear from you.
Be aware that in stock market, price isn't equate to value.
2016-02-15 12:11
This forum is a platform to share Information & Opinions. Kcchongnz and others are just unselfishly sharing his analysis and opinions.It is not a recommendation to buy or sell.
Learn from that. If you think you have a different perspective to add, please do so. Lets Agree to Disagree.
Great minds discuss IDEAS. Small minds discuss PEOPLE.
2016-02-15 12:21
Posted by handsomejong > Feb 15, 2016 05:49 PM | Report Abuse
JUST NOT SURE HOW U COME OUT WITH DY OF 1.2%. ARE U SURE?
I think I got it from a public website. But the dividend of 1.5 sen is for the interim dividend 2016. So the DY stated as 1.2% which should be based on the whole year is not right. It should be higher.
Thanks for pointing out.
2016-02-15 18:09
Posted by handsomejong > Feb 15, 2016 06:25 PM | Report Abuse
IT'S 12.1% TO BE EXACT. SO IT'S NOT THAT BAD AFTER ALL.
Your number is most likely wrong too.
2016-02-15 18:30
Posted by handsomejong > Feb 15, 2016 06:36 PM | Report Abuse
OK WAITING FOR YOUR CORRECT FIGURE
Posted by handsomejong > Feb 15, 2016 06:25 PM | Report Abuse
IT'S 12.1% TO BE EXACT. SO IT'S NOT THAT BAD AFTER ALL.
I think you probably use the pre-split price as the base of your computation.
2016-02-15 18:42
Posted by Lee Yih Yeong > Feb 15, 2016 06:39 PM | Report Abuse
the ROIC is damn high 13.4%, which is good for company future.
You are not wrong. ROIC is not bad.
2016-02-15 18:43
TOTAL DIVIDEND LAST YEAR=14.4C, LAST PRICE=1.19
0.144/1.19=12.1%
CORRECT ME IF I'M WRONG
2016-02-15 22:30
handsomejong TOTAL DIVIDEND LAST YEAR=14.4C, LAST PRICE=1.19
0.144/1.19=12.1%
CORRECT ME IF I'M WRONG
Yes, you are wrong.Those dividends were given for the last year before the split. Hence you need to divide by 5.
2016-02-15 23:28
we are investing on the future business/incomes of VS and Hon Hai.
hon hai is too big to grow bigger but vs has plenty of room to grow bigger.
we should use the FIV (future intrinsic value) and not past/current intrinsic value if we are investing for future gain.
2016-02-16 11:26
Posted by SC > Feb 16, 2016 11:26 AM | Report Abuse
we are investing on the future business/incomes of VS and Hon Hai.
hon hai is too big to grow bigger but vs has plenty of room to grow bigger.
we should use the FIV (future intrinsic value) and not past/current intrinsic value if we are investing for future gain.
I didn't know there is such thing as past/current and future intrinsic value of stock.
The intrinsic value of a stock is the the discounted value of all its future cash flows to the investors.
2016-02-16 16:44
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Icon8888
I don't agree with KC on everything, but I seldom have reason to critucise his articles
The main reason is because he applies the same principles to his own stocks as well as other people's stocks
Some people I know don't do that. They criticise your stocks for certain weaknesses. But when come to their own stocks, those weaknesses become acceptable
That is the part that I find objectionable
2016-02-06 15:59