Stock Pick Challenge 2013 2H
Stock Pick Challenge - [CBIP] by kcchongnz
CBIP
I just went through some announcements in Bursa regarding CBIP. It has recently secured a number of contracts for supplying of equipment and engineering works for a number of palm oil mills, supply, deliver, install, test and commission of Prime Mover vehicles, manufacturing of transportation and construction equipment, concrete moulds and general engineering fabrication for a number of clients at home and abroad in Columbia, Guatemala. Is CBIP going to make a lot of profit from these projects? Is CBIP a good company to invest in? If so is the present price right to enter?
For me to determine if I want to invest in a company, I look at four important aspects; durability, quality, value and growth, their importance roughly follow that order.
Durability
A durable business is likely to exist still and still be doing the same thing many years in the future. Palm oil and palm kernel oil are among the world’s most versatile raw materials for a variety of consumer products such as margarine, cereals, crisps, sweets and baked goods, to soaps, washing powders, cosmetics and also in animal feedstuffs and as a bio fuel. As CBIP is mainly tied to the palm oil industry, we would expect the business of CBIP will last for many years to come.
Quality
There are a lot of ways to measure business quality. I tend to look at the margins of the business, the return of capitals, and cash flows, all are of equal importance to me.
The margins of CBIP have been reasonably high and most of all considerable consistent throughout the last cycle of 5 years. Average gross margins is good at 22%, and operating and net profit margins great at the mid to high teens (See Table 1).
The ROE is great, averaging about 21% and achieved through the high net profit margin and little leverage. With more contracts in hand now and hence a higher asset turnover, its ROE will likely improve further. Its ROIC is fantastic, averaging 20% for the last 5 years, 29% for last year. this is more than twice the costs of capitals.
The quality of CBIP’s earnings is good too with cash flow from operations about that of net profit. Free cash flow were abundant at double digit percentage of revenue and invested capital. There is plenty of free cash flows each year for it to distribute annual dividends, and carry out some other investments to enhance shareholder value. CBIP has been enhancing shareholder value for all these years as shown in Table 2 below:
Table 2: Change in book value plus dividend
| Year | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 |
| Change in book value | 0.89 | 0.675 | 0.289 | 0.222 | 0.297 | 0.252 |
| Dividend | 0.55 | 0 | 0.048 | 0.048 | 0.048 | 0.017 |
| Change in BV+dividend,RM | 1.44 | 0.675 | 0.337 | 0.27 | 0.345 | 0.269 |
Last year, dividend distributed plus the change in book value amount to a whooping RM1.44, more than half its present share price of RM2.84. Other years were consistent and bad at all when comparing with the share price.
Growth
I normally do not pay too much emphasis on growth. I hope to buy a stock which comes with growth potential for free. This is because rosy growth projections often do not come true. Looking at Table 3 in the appendix, it does show that there were good growth for CBIP for the last 6 years. Weren’t there?
CBIP’s revenue and earnings grew steadily in the last 6 years. Revenue of continuous operations grew at a compounded annual growth rate (CAGR) of 15%, from 229m in 2006 to 520m last year. Earnings before interest and tax (EBIT) grew in tandem from 35.8m in 2006 to 88.9m last year. Net income grew even at a faster rate of CAGR of 20%. Though this is history, with the recent contracts secured, it is likely that this growth will continue for some time.
Value
With such good performance of CBIP and the proof of shareholder enhancement for the past 5 years, one would expect CBIP to trade at a reasonably good market valuation. But is it?
At the present price of RM2.84, CBIP is selling at a PE ratio of 7.7. The enterprise value is just 5 times Ebit, way below my 8 times maximum. This is equivalent to an earnings yield of 20% (>>10%), Hence the price of RM2.84 is not expensive at all.
I have added more CBIP shares into my portfolio. This is the 6th stock in my portfolio.
Table 1: Quality business of CBIP
| Year | 2012 | 2011 | 2010 | 2009 | 2008 | Average |
| Gross margin | 20% | 22% | 23% | 24% | 21% | 22% |
| Operating margin | 17% | 15% | 15% | 18% | 17% | 16% |
| Net margin | 18% | 22% | 19% | 13% | 15% | 17% |
| ROE | 19.50% | 20.40% | 18.20% | 17.30% | 27.80% | 21% |
| ROIC | 28.90% | 28.40% | 9.80% | 14.70% | 17.40% | 20% |
| CFFO/NI | 42% | 98% | 133% | 153% | 73% | 100% |
| FCF/Revenue | 7% | 18% | 10% | 14% | 3% | 11% |
| FCF/IC | 14% | 34% | 7% | 13% | 4% | 14% |
Table 3: Growth in revenue and earnings for CBIP
| Year | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | CAGR |
| Revenue | 520,351 | 322,611 | 270,893 | 331,468 | 409,903 | 289,819 | 228,811 | 15% |
| EBIT | 88,878 | 49,910 | 40,363 | 60,422 | 68,146 | 50,462 | 35,829 | 16% |
| Net Income | 91,775 | 69,515 | 50,237 | 42,304 | 62,933 | 46,710 | 31,474 | 20% |
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Discussions
1 person likes this. Showing 18 of 22 comments
大佬：I am really a non financial guy. Frankly speaking, I hv this stock in my database since months ago, but it is not in an active list. I have a reason to keep it in cold storage. Then how, do u want me to throw spanner into KC's each recommendation and become a two faces bad guy who pours cold water while on the other hand benefiting from his hard work? This time I choose to be silence. Thks
2013-08-06 20:15
Hi Friends : I would like to invite you to my post, title GTronic, on 4Aug13(pg7 as at now, Question: how to seach for an old topic ?). I would like to hear your comments.
Tan KW : in my opinion, GTronic is a 莺莺美黛子 in a smaller scale. I need longer time to validate.
LPI is my portfolio is a real 莺莺美黛子, which I even do not check for its closing price most of time when i browse for mkt update.
Please drop comments.
Thks.
2013-08-06 21:39
It is hard to get 莺莺美黛子, not to mention with high growth potential especialy at the current high mkt. I do not have many 莺莺美黛子 in my portfolio. I am a very faithful guy who loves the selected counters for very long term, majority of them were collected since 2009 till today.
2013-08-06 22:26
Posted by plumberii > Aug 6, 2013 07:06 PM | Report Abuse
Informative and interesting. Thanks.
AA
Interested to know whether the sales and EPS growths in the past 5 years have been on steady increase. Bingo if they are.
BB.
I got different CAGR (12, 14 & 17), maybe something wrong with my formula (Xlast/Xfirst)^(1/no of years) -1. Please help.
Below is the seven-year revenue and profits of CIBP posted by me earlier on.
6-yr 5-yr
Year 2012 2011 2010 2009 2008 2007 2006 CAGR CAGR
Revenue 520351 322611 270893 331468 409903 289819 228811 15% 12%
Profit from operation, EBIT 88878 49910 40363 60422 68146 50462 35829 16% 12%
Net Income 91775 69515 50237 42304 62933 46710 31474 20% 14%
If you take my data, the 6-year CAGR were correct at 15%, 16% and 20%. 6-yr CAGR you have to compute using 2012 and 2006 data. for 5-yr CAGR, you have to take the 2012 and 2007 data, and mine are 12%, 12% and 14%.
If you look at my data, the growth is not steady each year. There was a drop from 2006 to 2009 before the US sublime crisis. but the interesting thing is it is recovering since then.
For for computation of growth, it is good to take a complete economic cycle, and the 7-year data I posted may be a good representative. And the 6-year CAGR is as what I have posted, which is good enough for me. In fact I have been saying out of the 4 factors, growth consideration ranks the lowest for me.
2013-08-07 08:16
bro kcchongnz, how about kseng? Can't remember if you did a coverage on that?
2013-08-07 08:20
Pathew, somebody just asked my opinion about Keck Seng yesterday.
Posted by kcchongnz > Aug 6, 2013 04:34 AM | Report Abuse X
Posted by choolooi > Aug 5, 2013 10:11 PM | Report Abuse
Kcchongnz , could you please check Keck Seng ?
Keck Seng is a deeply undervalued stock. However, the major shareholders don't treat minority like partners. they don't have the record of sharing with others.
Posted by kcchongnz > Mar 6, 2013 03:37 PM | Report Abuse X
Keck Seng is an asset play. It's NTA is RM5.10 made out by RM3.46 of hard cash. Besides other valuable assets which book values of 65 sen per share is much lower than the current value such as land held under development and investment properties. Hey, I have not talked about its property, plant and equipment, Property development costs, inventories, receivables etc of about 800m yet. Whereas its total liabilities is only 108m. It is definitely a Graham net-net counter. Besides it has a profitable palm oil manufacturing work and plantation, property development, hotels etc and other business which are doing quite ok with positive free cash flows. It has about RM1.00 per share dividend which is tax imputable and has to be given out by this year. It seems it won't go wrong investing in this stock at current price now (RM4.22). You don't have to follow me.
2013-08-07 08:35
Posted by bsngpg > Aug 6, 2013 08:15 PM | Report Abuse
大佬：I am really a non financial guy. Frankly speaking, I hv this stock in my database since months ago, but it is not in an active list. I have a reason to keep it in cold storage. Then how, do u want me to throw spanner into KC's each recommendation and become a two faces bad guy who pours cold water while on the other hand benefiting from his hard work? This time I choose to be silence. Thks
If I only want praises I might as well join a cult. Once I joined a forum. I read about people there all praising about a couple of stocks which in my opinion (which could be wrong) that those are rubbish stocks. So I placed my genuine personal comments that those stocks are not as good as they think. I provided them with my financial statement analysis, the doubts I had about their business models, and the suspect I had in their financial statement, and my negative comments about those stocks. Guess what I got in return? Some of them scolded me of "pouring cold water" and angry fight with me. Guess what? those stocks are still in doldrums while the KLSE and other good stocks have gone up handsomely.
Nobody there is interested in what I wrote about fundamentals of investing. All are interested which stock is going to be fried, to go high etc, which i know nothing at all. Everybody is so nice to each other. No opposite views. And see what is the consequence.
2013-08-07 09:02
Not sure about its PE unless I take time to look at its financial statements. But should look at KSeng in enterprise value which I think must be very cheap in relation to its ebit because it has so much cash and other investments. Keck Seng is more of an asset play, good asset play as explained by me above.
2013-08-07 09:51
KC : Pls do not get me wrong. I am very interested on your fundamental analysis. I did not put up comment on CBIP is because that reason (discomfort) on CBIP is not strong. I did not go back to dig it out from the cold storage but from my memory, it was something related to its business model. I dislike the non-recurring income or project basic income.
A small but real story happened to me: “nowadays, business environment is very competitive; everybody is doing cost cutting. The supporting industry (such as CBIP which design and build oil mill for others) is difficult to get recurring orders as the manufacturer (buyer) will get your first unit and then finding creative ways to cut cost by either getting others to build the same with lower cost or build it in-house or press your cost down for the subsequent order.”
As I prefer companies which are safer and for longer term, I opt not to follow up CBIP, even thought my return is slower.
Whereas for Fibun, to me, it is very risky. As I am not good in English writing, it is hard for me to express my view accurately in detail. But the below are something in point forms, hopefully you can connect the points by yourself:
i) close family, high risk to screw up your money, nobody to check and balance.
ii) All family members, indicate shallow mindset of the owner, unlikely to grow in creativity , efficiency etc.
iii) Close family, risk to have inner fighting among them
iv) Close family, difficult to attract talents
v) Many companies cheated on numbers especially this type of close family and small one
vi) Too small, cannot stand big blow such as financial tsunami if there is any or internal company crisis.
vii) Marginal profit : can easily swing to negative if something wrong i.e. one or two big clients do not pay you and run away
viii) Their education background and experience : not professional, can do small business but unlikely to grow big
Thank you.
2013-08-07 10:19
CBIP earnings surprise?
http://aswathdamodaran.blogspot.co.nz/search?q=earnings+surprise
2013-11-14 16:00
KC, what s ur view on CBIP at the current price ? Has it exceeded its intrinsic value yet ? At RM3.19 close, if we annualize the 2013 earnings so far its PE is about 14 and EV/EBITT=8.9. Its palm oil venture will take at least more than 3-5 years to start showing profit and will eat up its free cashflows next few years...
2013-12-17 07:17
Yeah, CBIP's share price has gone up quite a bit since 5 months ago. Its PE and EV/Ebit is certainly not low any more.
In my opinion, its share price is creeping towards its intrinsic value, but certainly not exceeded it yet.
You can check yourself with your discount cash flow analysis with some conservative assumptions.
2013-12-17 10:32
KC, mind to share what is your intrinsic value for CBIP ? In my calculations, it has far exceeded the intrinsic value whether using DCF or EPV calculations
2013-12-17 10:38
If you use EPV, IV is definitely exceeded as you know the conservative assumptions of EPV. If you use DCFA, it is the assumptions of growth which matters.
As you very well know this DCFA is an art. So there is nothing right or wrong, but more of your personal expectations.
For me you probably know I want to have high margin of safety in my investment. If the MOS is no more comfortable, I will move on, and I have.
2013-12-17 10:48
If the MOS is no more comfortable, I will move on, and I have.
KC, thanks. I get your point.
2013-12-17 11:47
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plumberii
Informative and interesting. Thanks.
AA
Interested to know whether the sales and EPS growths in the past 5 years have been on steady increase. Bingo if they are.
BB.
I got different CAGR (12, 14 & 17), maybe something wrong with my formula (Xlast/Xfirst)^(1/no of years) -1. Please help.
Cheerio.
2013-08-06 19:06