Stock Pick Year 2014 - kcchongnz

Stock Pick Year 2014 - kcchongnz - PTARAS

Tan KW
Publish date: Mon, 23 Dec 2013, 12:20 PM
Tan KW
0 432,099
Stock Pick Year 2014 from kcchongnz (http://klse.i3investor.com/servlets/cube/kcchongnz.jsp)

Portfolio: http://klse.i3investor.com/servlets/pfs/25718.jsp

TOC: http://klse.i3investor.com/blogs/stock_pick_2014/42879.jsp
Following Message

 

Pintaras Jaya

I have just bought some more Pintaras Jaya shares at RM2.87 last week. It is still my second major shareholding in my portfolio.

I first bought Pintaras three and a half year ago at RM1.60 on 28 June 2010. Since then I have received 79 sen per share in dividends. The total return of the stock ex-bonus now is RM4.93 (2*2.87+0.79-1.60), or 308%. Why do I still buy the stock when it has gone up by 308% just three and a half years ago? Trying to follow the theory of the greater fool; buy high and hope to sell higher?

Before I buy Pintaras, I have a few questions to be answered first, none of those is about whether the price has run up and by how much.

  1. Do I understand the business?
  2. Is the business durable?
  3. Does it have any competitive advantage in the industry?
  4. What is the quality of its business?
  5. How does management allocate capital?
  6. What is its value versus price?
  7. Is there any growth in the business?

 

  1. Do I understand the business

I have personally worked in the construction industry in particular the deep foundation works before from project management level to the higher level in marketing and taking care of the performance of a overseas subsidiary company of a pioneer public listed foundation company in Malaysia. Life in this industry is tough and littered with all sorts of problems from economic downturn, shortage of materials, skill and unskilled labour, payment collection, contract disputes etc. Many players have come and gone. However, the reward can be enormous for some who have the expertise. Foundation works are typically fast moving and the first part of the construction of any project.

 

  1. Is the business durable?

There are many good construction companies which have been surviving and thriving in the market for decades; Gamuda, IJM, WCT, Sunway, CMSB, etc. Deep and heavy foundation works are always involved in those projects such as shopping malls, condominiums, MRT, LRT and many other construction works. Not many are specialized in deep foundation like what Pintaras does. Maybank Investment Bank has just presented a report last month overweighting the construction industry. It is believe that this industry will continue to exist for many years to come, and hence its durability. Those companies with the niche and competitive advantage would continue to thrive.

http://research.maybank-ib.com/pdf/documentrg/Construction_201113_3217.pdf

 

  1. Does it have any competitive advantage in the industry?

The strength of Pintaras lies its niche market in the complex foundation engineering works. It is able to design and construct heavy foundation and retaining structure works for the major players in the property sector in Malaysia. It has extensive specialized plant and equipment to carry out the project in house with concerted personal involvement of the skilful management team. As far as I know, there is no other public listed company having the same technical and financial clout as Pintaras in this niche market. With its good connection with the developers and the professional bodies, the management is able to cherry pick good and profitable projects with high margins coupled with less risks.  All these not only enable Pintaras to survive in this dog-eat-dog industry but continue to strive.

 

  1. What is the quality of its business?

As a specialist contractor, the margins of Pintaras’s business are miles ahead of other contractors, big boys like Gamuda, IJM, WCT etc in the industry included. Profit margin are in the thirties (Table 1 in appendix) compared to the low teens or single digits for most construction companies, large or small included. This results in very high ROE and ROIC of 19% and 38% for the fy 2013 results. More interestingly, these operating numbers keep on improving in recent years.

Pintaras’s quality of earnings is excellent. Its CFFOs are generally more than net income. There is good free cash flow, 30% and 27% of revenue and invested capital respectively for last twelve months (Table 2 in appendix). The five-year average FCF was great too at 14% of both revenue and invested capital. As FCF is normally less than net earnings for most companies, any company with FCF amounting to more than 10% of revenue or invested capital is a great company.

 

  1. How does management allocate capital?

Pintaras has spent quite a substantial amount of money from its free cash flows buying new plants and equipment for its foundation business. 80m in total was spent for the last 5 years (Table 2). The capital expenses were well spent as they yield higher earnings and better cash flows the following years. Due to the better earnings and cash flows, the company has been increasing its dividend payment from 10 sen per share five years ago to 25 sen for 2013. This gives a reasonable good dividend yield of 4.4%.

In the last general meeting, the shareholders have approved the proposal of share buyback by the company. This will further enhance the shareholder value with its huge amount of cash in its balance sheet. I like buy backs. This is common sense. If you are – at this very moment – putting your own money into a stock, then you obviously want the company to do the same.

 

  1. Is there any growth in the business?

The revenue grew at a reasonable rate at 7% for the last 4 years. Its earnings however, grew at a much higher pace at 33% (See Table 3). Though these numbers are great, I would not place much weight on them as construction is a cyclic business.

I’m not good at estimating future growth. Hence I don’t like to pay for growth. When I make an investment, it needs to be justified even if the business doesn’t grow. If it does grow, then it is an additional bonus for me.

 

  1. What is its value versus price?

With such good operating performance of Pintaras recently, one would expect it would not be cheap to invest in this stock. But is it so, even though its share price has risen by 308% in just 42 months?

 

AT RM5.47 (2*2.87 ex-bonus) at the close on 20 December 2013, Pintaras is trading at 8.8 times its latest earnings per share of 65.3 sen. Note that Pintaras has 155m cash or cash equivalent sitting in its balance sheet, or an excess cash of RM1.94 per share (Pre-bonus). Its enterprise value is less than 5.8 times its earnings before interest and tax, far below the industry average of more than 10 times. This translate to an earnings yield of 17%. Any company with earnings yield more than 15% measured in terms of EV is a fantastic buy, especially for a company with great operating numbers like Pintaras.

So at RM2.87 a piece, I have added more of Pintaras into my portfolio for 2014.

 

KC Chong (23/12/2013)

 

Table 1: Durability and quality of business

        

Year

2013

2012

2011

2010

2009

Average

Gross margin

35%

29%

24%

21%

17%

26%

Operating margin

30%

27%

25%

24%

15%

26%

Net margin

30%

23%

20%

20%

12%

21%

ROE

19%

18%

12%

11%

9%

14%

ROIC

30%

29%

19%

20%

17%

25%
             

Table 2: Cash flows (000)

            

Year

2013

2012

2011

2010

2009

Average

CFFO

61641

54,592

24,352

12,846

33,298

37,346

Capex

-9501

-20,298

-30,292

-10,137

-1,581

-14,362

FCF

52140

34294

-5940

2709

31717

22984

NI

49,916

42,149

25,682

20,737

16,053

30,907

CFFO/NI

123%

130%

95%

62%

207%

121%

FCF/Revenue

30%

19%

-5%

3%

24%

14%

FCF/IC

27%

-4%

2%

32%

13%

14%

 

Table 3: Growth (000)

Year

2013

2012

2011

2010

2009

CAGR

Revenue

172845

185,172

125,936

105,731

130,295

7%

NI

52,317

42,149

25,682

20,737

16,053

33%

 

PTARAS (9598)
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Discussions
Be the first to like this. Showing 16 of 17 comments

faberlicious

kc,last week cheap sales I manage grab some at 2.83.

2013-12-23 17:31

faberlicious

RM5.47 (2*2.87 ex-bonus) I think should be 5.74. Table 3 NI CAGR should be 34.3%.How come NI for 2013 in table 2 and 3 different? 49,916 and 52317?

2013-12-25 09:20

kcchongnz

faberlicious, wah you so sharp ah.

Anyway, thinks for the corrections.

I do not how I got the 49916, NI. the annual report is 52317.

2013-12-25 09:57

kcchongnz

Say we have a few construction companies but which is doing a better business? One way to look at them is their return on equity (ROE). It is one of the most important indicators of a firm’s profitability and potential growth. Companies that boast a high ROE with little or no debt are able to grow without large capital expenditures, allowing the owners of the business to withdrawal cash and reinvest it elsewhere. Many investors fail to realize, however, that two companies can have the same ROE, yet one can be a much better business. How do we determine that?

DuPont equation provides a broader picture of ROE of a company. It tells where a company's strength lies and where there is room for improvement. It is the epic of financial statement analysis of a company. Investopedia has a very good explanation on why is it important to carry our DuPont analysis on a company’s business as shown in the link below:

http://www.investopedia.com/articles/fundamental-analysis/08/dupont-analysis.asp

Du Pont Analysis
There are three components in the calculation of ROE using the traditional DuPont model; the net Income margin (NIM), asset turnover (AT), and the equity multiplier(EM). By examining each input individually, we can discover the sources of a company's ROE and compare it to its competitors.

ROE = NI/E = NI/S * S/TA * TA/E = NIM * AT * EM
Where NI is net income, E is equity, S is sales or revenue, TA is total assets

Table 1 below shows the dissection of ROE of some construction companies in Malaysia.

Table 1: ROE of construction companies
Company Kimlun Ptaras HSL Cresbld Gamuda IJM WCT
Net Income margin, NIM 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
Equity multiplier, EM 2.66 1.22 1.58 2.92 1.92 2.07 2.85
ROE=NIM*AT*EM 18% 19% 19% 13% 11% 8% 19%
Data based on latest fiscal year results

Four of the companies have approximately the same ROE of 19%, very good as this ROE is above the cost of equity, generally from 10% to 15%, depending on the riskiness of the company, the riskier it is, the higher the required return. These companies are Kimlun, Pintaras, HSL and WCT. Gamuda and IJM have low ROE mainly because they have too much assets, so much so that even though their turnovers are high, in relation to assets, the asset turnover is still low. Crestbuilder’s ROE is just mediocre at 13% even though it uses huge leverage of 2.92, ie borrows a lot of money to operate its business, and hence riskier. This is because its net profit margin is low at only 7%. HSL appears to be in good business as its high ROE of 19% is achieved with reasonable high net income margin of 15%, and reasonable EM of 1.6.

It is not hard to see that Pintaras has the best business with ROE of 19%, achieved with very high net income margin of 30.3%, at a low equity multiplier of just 1.2. This is because Pintaras has no debt at all. Pintaras’s AT is relatively low at 0.5. All it has to do is to grab more jobs and its ROE will improve further.

Value Value Value
There is a difference between a good business and a good investment. A good business is as described above, a good investment is one which will provide you with excess return over a period of time. A good business generally will sell at a higher price but it won’t be a good investment, if the price is too high. One common metric investors use is the price to earnings ratio, PE. The lower the PE, the better the investment, all others remain the same.

Table 2 below shows the market valuations of the construction companies.

Table 2: Market valuation
Company Kimlun Ptaras HSL Cresbld Gamuda IJM WCT
Price 1.84 2.87 1.84 1.48 4.67 5.87 2.15
PE 8.9 8.8 11.8 5.1 19.6 19.3 5.6
TEV/Ebit 8.4 5.6 7.6 7.9 22.9 12.4 7.2


The PE ratio of Crestbuilder and WCT are the lowest at 5.1 and 5.6 respectively. But does it mean that they are better buys, especially for WCT with a high ROE of 19%? Not necessary. This is because WCT has relatively high equity multiplier of 2.9, one of the highest. Not to mentioned that it also have a lot of company warrant holders who would take a piece of the pie from the common shareholders when they convert to common shares.

So a better comparative valuation metric would be the enterprise value, which takes into consideration of debts and excess cash, minority interest if any. Appended below is a link in i3 describing what is enterprise value and what is its significance in valuation.
http://klse.i3investor.com/blogs/kianweiaritcles/37729.jsp
Referring back to Table 2 again, one can see that the best buy is Pintaras with its enterprise value 5.6 times its Ebit, and it also has the best business with one of the highest ROE.

2013-12-26 20:00

Jvei

Thank you Mr.kcchongz, i learnt alot from the basic calculation of which metric should be used for construction.

2013-12-26 22:39

JXRepcoBuffet

Hi Mr. kcchongnz, thanks for the sharing. How about Prestariang? is that still your top pick for FY2014?

2013-12-27 16:44

kcchongnz

Posted by JXRepcoBuffet > Dec 27, 2013 04:44 PM | Report Abuse

Hi Mr. kcchongnz, thanks for the sharing. How about Prestariang? is that still your top pick for FY2014?

Prestariang is one of the stocks in my portfolio. It is a pick, but not necessary the top pick for 2014. You can read my analysis and valuation in the appended thread below if you are interested:

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/42400.jsp

2013-12-27 17:07

ladzatz

kcchong...what's the minimum TP for kfima?

2013-12-27 17:09

kcchongnz

Posted by ladzatz > Dec 27, 2013 05:09 PM | Report Abuse

kcchong...what's the minimum TP for kfima?

What is TP? Target Price? I don't know the target price because it is determined by the actions of the stock market players.

If you are interested in what is the estimated intrinsic value of Kfima, I have done heaps of them and written heaps of them in i3. One of the links is as below:

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/34118.jsp

You got to make your own judgement. Best of luck.

2013-12-27 17:40

kcchongnz

Oh ladzatz, forgot to tell you that this guy asked you not to buy Kfima. You got to ask him to explain to you why is Kfima is expensive at 1.92. He is a maths wizard.

Posted by anbz > Dec 26, 2013 01:22 AM | Report Abuse

don't buy kfima...it's too expensive...look...another stock recommended

by kcchong...is pmcorp...only 21.5 cents...ask him why he recommends

lousy counters such as pmcorp..hahaha

2013-12-27 17:52

JXRepcoBuffet

Thanks kcchongnz. Do you have any comments on plantation stocks for FY2014? i.e Kossan, Wellcall, Supermx, TSH and etc?

2013-12-30 13:30

bluewards

hi kcchongnz, i don't seem to be able to reproduce your NI figures:

Year 2013 2012 2011 2010 2009 CAGR
Revenue 172845 185,172 125,936 105,731 130,295 7%
NI 52,317 42,149 25,682 20,737 16,053 33%

Can you help? Thanks!

2013-12-31 19:32

kcchongnz

bluewards,

Everybody read and interpret financial statements differently. For Pintaras, as it is a favorite company of mine, I play with its numbers a lot. Especially for operating income, I tend to omit some items which are one-off, or non operating in nature. This normally I get them from the cash flow statements.

It is arguable if investment income is operating income or not, as investment is a big part of their income because they have a lot of cash, and investment in equity market. I view it as non-operating, and so I deduct that away from operating income. Even for net income, sometimes I just deduct off some amount which is one-off, such as gain in revaluation of property. So even my net income may differ a bit from what others see.

As I have said many times before, investing is an art, and the process and methods of doing it is also an art. There is no right or wrong, unlike science.

2014-01-01 16:13

heavyth

May i know what is the fair value or TP for Pintaras tq ?

2014-01-04 19:54

heavyth

Buy, hold or sell ???

2014-01-16 15:27

Huang

哗KC大佬：太神了！您所选的股项，几乎百发百中。Pintaras, KFima, 肥bon，Prestariang等等。早知道一开始跟着您就行啦，何必自己如此辛苦提心吊胆的在股海浮沉。

如此功力，是该住在仙島揮揮掍，追逐小白球，看看綿羊结隊吃草。

您是最好的!

2014-04-18 10:08

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