Stock Pick Challenge - [TIENWAH] by kcchongnz

Stock Pick Challenge 2013 2H

Stock Pick Challenge - [TIENWAH] by kcchongnz

Tan KW

Publish date: Tue, 13 Aug 2013, 11:30 AM

Tien Wah: A nobody-cares old economy printing company

“It is impossible to produce superior performance unless you do something different from the majority” Sir John Templeton

Tien Wah Press Holdings Berhad is reputed to be one of the top 5 printers in the country. It is engaged in rotogravure printing, photo lithography printing, trading and printing of tipping paper. Its major clients are in the big electronic corporations, tobacco industry etc. It has a 7 year contract to supply printed carton requirements of BAT in several locations in Asia Pacific region. This business is durable and would last for a long time to come.

Cash flows
What strikes me most about Tien Wah is the huge amount of recurring cash flows from its business. This is what I value most in a business. It is the hard cash that it produces which enable Tien Wah to reinvest for growth, to pay dividend or buy back shares, reduces debts and invest in other businesses for maximizing shareholder value.

Tien Wah’s quality of earnings is very good. Its cash flow from operations (CFFO) averages 45m, or 170% of its net income for the last 6 years (See Table 1). The CFFO for the last two years is particularly high at an average of 75m, about 190% of its net income. After capital expenses, free cash flow averages 55m. This FCF amounts to 14% and 16% of revenue and invested capital. Any amount of FCF which is more than 10% of revenue and IC is considered fantastic for me. What did Tien Wah do with the FCF?

Last year, Tien Wah distributed 12.8 sen per share in dividend, or a dividend yield of 5.1% basing on its closing price today (12/8/13) at RM2.51, much higher than the FD rate. It has been paying down its debts which gradually reduced from 176m in 2009 to just 73m now, while excess cash has also increased. These are the best forms of allocation of its FCF.

Growth
Even if the cash flow is great, investors would still hope for some growth of the business of the company, without which there will be no growth of the cash flow. It is hard to predict what would be the growth of the company in the future. But looking at its past, Tien Wah’s revenue and net profit has been growing at a commendable CAGR of 26% and 21% respectively for the past 5 years as shown in Figure 1 below and Table 2 in the appendix. I would be very happy if the growth can be just half or even a third of those achieved.

Figure 1: Growth in revenue and net profit

Quality of business: Return of equity and invested capital
What is the point chasing growth when growth destroys shareholder value? This happens if the return of capitals is lower their costs.

Table 3 below shows that ROE and ROIC has been steadily improving from mid single digits just two years ago to 14% and 12.6% respectively in 2012. These figures meet my minimum requirements. More importantly, they are improving each year.

The good ROE of 14% was achieved with improved net profit margin to 12% last year with moderate financial leverage of 1.6 and an asset turnover of 0.9. All Tien Wah needs to do is to get more contract works to increase its asset turnover, it will be on the yellow brick road to higher ROE.

Market valuations
With the great cash flow, especially in FCF, and reasonable good ROE and ROIC, we would expect Tien Wah to be traded at reasonably market value. But is it?

At RM2.51, Tien Wah is trading at a fair PE ratio of 9 times, though I expect it to be higher. Its enterprise value is also reasonable at 7.3 times its earnings before interest and tax, or a earnings yield of 14%. The enterprise value is also low at only eight tenth (<2) of its revenue. However, as there is plenty of cash flow and FCF, it may be more appropriate to look at the EV/Ebitda. Its enterprise value is particularly cheap at only 4.6 (<8) times ebitda.

So for a great business selling at a fair to low valuation, I have added its share as one of the major stocks (The seventh) in my portfolio.

Table 1: Cash Flow

Year ended 31/3/11	2012	2011	2010	2009	2008	2007	Av
CFFO	67900	80750	20190	57991	13683	30295	45135
Capex	-8933	-31344	-21119	-22551	-4280	-3610	-15306
FCF	58967	49406	-929	35440	9403	26685	29829
FCF/Revenue	14%	13%	0%	11%	5%	21%	11%
FCF/IC	18%	14%	0%	11%	3%	20%	11%
CFFO/NI	168%	210%	107%	273%	70%	198%	171%

Table 2: Revenue and profit of Tien Wah

Year	2012	2011	2010	2009	2008	2007	CAGR
Revenue	408081	388575	354666	328610	186059	129663	25.8%
EBIT	46813	47626	26686	34164	26270	15526	24.7%
Net Income	40375	38374	18901	21256	19552	15296	21.4%

Table 3: ROE and ROIC

Year	2012	2011	2010	2009	2008	2007
ROE	14.0%	14.0%	8.7%	12.2%	13.5%	11.7%
ROIC	12.2%	11.6%	6.9%	7.6%	6.6%	10.9%

Comment by kcchongnz at Aug 13, 2013 01:11 PM

What is the intrinsic value of Tien Wah (13/8/13)

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. This theory has since been extensively used in contemporary finance.

There are two major assumptions used in the computation for the intrinsic value, or the present value, of the expected future cash flows of a company; earnings growth rate and the discount rate. Slight deviations of the assumptions can yield a vast difference in the intrinsic value.

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%. As Tien Wah has a quality business as described by me previously, 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 7%, it weighted average cost of capital is about 8.9%. 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 expected growth rate. A difference in assumption of growth of just 5% will yield a completely different intrinsic value of the company. Hence when I carry out the computation of IV to decide whether to invest in a company, I would prefer to use conservative assumptions. In Tien Wah’s case, how about the assumption that its business will be stagnant, and there is no further growth?

Appended below is the valuation of Tien Wah with the data and assumptions as shown.

Revenue 000 408081
Ebit 46813
less income tax -6788
EBIT after tax 40025
Add average D&A 13234
Less average capex -17645
Normalized Ebit 35614
WACC, R 8.9%
Growth rate, g 0.0%
Enterprise value=Ad Ebit/(R-g) 402035
Add cash 35527
Other investments 14962
Less debts -73905
EPV 378619
Less minority interest -123849
EPV to common shareholders 254770
Number of shares 96495
EPV/share 2.64

MOS 5%

So using EPV, the intrinsic value of Tien Wah is RM2.64 per share. Hence there is hardly any margin of safety investing in Tien Wah at the present price of RM2.51, is there? So why bother?

The EPV above assumes that there is no more growth of the business of Tien Wah for the rest of its economic life (re-emphasized). Do you believe this conservative assumption? What about the growth of the Malaysian economy? What about inflation which will also raise prices and hence growth in accordance with GDP or inflation?

Let say Tien Wah’s business will grow at a rate even lower than the rate of inflation at 3% forever. The enterprise value of Tien Wah will increase from 402m to 608m.

Enterprise value=adj ebit/(R-g), where g is the growth rate forever.
With this EV, and after adjusting excess cash, debts, minority interest etc, the intrinsic value of Tien Wah is RM4.08, or a margin of safety of 38% if you invest in Tien Wah at the present price of RM2.51.

The following table shows a scenario analysis on the growth rate and the corresponding intrinsic value of Tien Wah.
Table 1: Scenario analysis of intrinsic value and growth rate
Growth rate 0% 1% 2% 4% 5%
IV 2.64 3.00 3.46 4.95 6.27

For example if one assumes Tien Wah’s earnings will grow by 5% for the rest of its economic life, its intrinsic value is RM6.27. If you think there is no more growth, then the IV is RM2.64. So which growth rate is the right one?

TIENWAH (7374)

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1 person likes this. Showing 50 of 169 comments

kcchongnz

You have posted 51 posts on this thread originated by me here. Every post of yours, without exception, is about how bad Tien Wah is, and how good is your New Toyo, while New Toya as you have said owns 50% of Tien Wah. So how could this be? It is not that I give a damn.

I wrote the original post on Tien Wah here and I never asked anybody to buy it nor even talked about it after the posting. Yes, its business seems to be not doing well compared to before. Since then (10 months), its share price dropped 7 sen, or 3%. So what?

When people got tired of responding to your bashing posts, you come with these types of sarcastic remarks like below:

Posted by Robert Love > May 26, 2014 09:16 PM | Report Abuse
Where are all the strong supporters of Tien Wah?
Cowards hiding and still tied to your mother's apron strings ?

Do you have a life?

2014-05-27 20:13

ccs999

haha, nice one Mr. Chong - " do you have a life?"

2014-05-27 21:08

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