Valuation of Prestariang Using free cash flow (FCF) 

kcchongnz

Valuation of Prestariang Using free cash flow (FCF)

Here I attempt to find the intrinsic value of Prestariang based on what was posted by Tan Kian Wei as appended in the following link:

http://klse.i3investor.com/blogs/kianweiaritcles/36514.jsp

First I need to explain what are the few important data and assumptions I would use for the discount free cash flow analysis as shown in Table 1 below.

Table 1: Data and assumptions
Current stock price $2.60
Share outstanding (Mil) 220000
Average present FCF $30387
Next year's FCF (mil) $33426
Growth for the next10 years 10.0%
Terminal growth rate, g 3.00%
Discount rate, R 10.0%

The average FCF of year 2012 (38.4m) and 2011 (22.4m) of RM30.4m was used as a base of free cash flow. It is assumed that FCF will grow by 10% for the next 10 years, and subsequently reduced to 3% forever. For the trailing twelve month 2013, earnings has grown by 12%. The commencement of contribution from UniMy soon would probably see its earnings and FCF growing at a faster pace. Hence I would think a 10% growth in FCF in the next 10 years is reasonable without being liberal.

For the next assumption of a discount rate, I will use 10%. This is with a risk premium of 6% above the long term MGS rate of 4%. This is reasonable as the company has steady earnings and cash flows and a very healthy balance sheet. Hence the risk of investing in Prestariang is low.

The following shows the intrinsic value of Prestariang based on the discount free cash flow analysis:

PV of FCFF of core operations $751,000
Non-operating cash $52,186
Debts ($1,371)
PV of FCFE $801,815
Less minority interest $0
FCFE $801,815
Number of shares 220000
FCF per share $3.64

The above discount cash flow analysis shows that the intrinsic value of Prestariang is RM3.64. This represents 30% margin of safety investing in Prestariang at RM2.60 now. However, if FCF grows at a faster rate at 15%, Prestariang is worth RM5.18. At the present price of RM2.60, the market is expecting its FCF to grow at 5% for the next 10 years and 3% thereafter.

So what do you think is the fair rate of growth for Prestariang’s FCF?

KC Chong in Auckland (1/12/2013)

2013-12-01 15:18

bsngpg

I am still in the process to learn more on Prestariang :
Here are some to share:
1) AR 2012 : No 20th largest shareholder: RHB Capital Nominees (Tempatan) Sdn. Bhd. Pledged Securities Account for Fong Siling(冷眼) (CEB) 1,000,000=0.46%.

2) 50% DPO

3) All non-executive directors carry great corporate background and experience. They all are 人才. Non cronyism type of company, they can stand on their own feet, compete and win. Although, it is a Bumi company but engages 3 non-Malay out of its 7 members in BOD. This indicates that the owner is not color-based but merit based. He appreciates and embraces competitiveness.

4) Total remuneration of all Directors= 945,712 only(less than 1 mil, men), delivered you 110 mil in revenue and 37 mil in PAT. This indicates the BOD is genuine to deliver and do not intent to siphon out your money.

5) No. of % shareholders >2000. Not bad.

6) There are many institutional investors as its shareholders.

2013-12-01 16:56

bsngpg

Hi KC Chong : I spent almost 2 hours trying to figure out the below, yet still 一头雾水. Would you please kindly enlighthen. Thank you.

PV of FCFF of core operations $751,000
Non-operating cash $52,186
Debts ($1,371)
PV of FCFE $801,815
Less minority interest $0
FCFE $801,815
Number of shares 220000
FCF per share $3.64

2013-12-01 17:44

kcchongnz

Table 6.2: DCFA
Year 0 1 2 3 4 5 6 7 8 9 10
Free Cash Flow, FCF $ 33426 36768 40445 44490 48939 53832 59216 65137 71651 78816
Terminal FCF, $=CFn(1+g)/(R-g) 1159722
Total FCF, $ 33426 36768 40445 44490 48939 53832 59216 65137 71651 1238538
PV of FCFF of core operations $751,000 $3.41
Non-operating cash $52,186 $0.22
Investment properties $0 $-
Debts ($1,371) $(0.01)
PV of FCFE $801,815
Less minority interest $0 0
FCFE $801,815 3.63
Number of shares 220000
FCF per share $3.64 40% higher than = $2.60

2013-12-01 17:59

kcchongnz

Valuing a Stock with the DCF Method

http://klse.i3investor.com/blogs/kianweiaritcles/36513.jsp

2013-12-01 18:03

bsngpg

Thank you very much. After jogging, I will study again. Really 头大+头痛. 不简单. Hope this time I can get thru this hurdle.

2013-12-01 18:17

kcchongnz

bsngpg, discount cash flow analysis (DCFA)requires some background knowledge in finance, more specifically time value of money. You need to understand the mathematics in discounting future cash flow to the present value.

Though the mathematics part of DCFA is precise and elegant, the assumptions aren't. And the assumptions are more important to arrive at a good present value (or intrinsic value). The assumption of future cash flows is the most tricky part, and often executing this valuation method can result in garbage in garbage out. In fact many proven value investors do not use this method. I use it just as a compliment with other valuation methods to make myself more confident if I want to invest in a company.

In fact often when I decide if I want to invest in a stock or not, I look more at the prospect of its business, its operating efficiencies in ROE, ROIC, cash flow and free cash flow which are more quantitative ways to judge the ability of the management, and if a business has wide moat. Then I look at its price and decide if the offered price is reasonable. What price I am willing to pay also depend on its operating efficiencies and cash flow.

For deciding on price to pay, I tend to use enterprise value, how high is the enterprise value in relation to Ebit, a firm based valuation, rather than just equity based metric such as PE ratio which can be skewed by its debt level.

That is how I look at it when I first write about wanting to include Prestariang as a stock in my portfolio.

Qualitative analysis of management etc is good no doubt, especially if you have a chance to talk to them in AGM. I do not think there is statistic significance that smart board of directors maximize shareholder values. This qualitative analysis can also be very subjective.

I don't care much about how much the directors are remunerated, as long as it is not too excessive, eg not more than 3% of revenue for a midcap. Just like I am indifferent about Selangor Exco getting much higher pay than before, for I think they should be remunerated adequately. They then have no excuse to act corruptly now. Same for company, if the company does well, they should be paid accordingly. We have to look at a bigger picture, I think.

Institution owing the share now may not be a good thing for investors thinking of buying the share now. It is good if nobody has discovered that it is a good company yet and if you invest, then you have higher chance of making extra-ordinary return.

Anyway as I said, qualitative things are subjective.

2013-12-01 18:35

bsngpg

“Institution owing” tells me that the company is at least not a rubbish.

“How much the directors are remunerated” is one of the indicators telling me the integrity and attitude of the BOD although it cannot tell all. I am OK for Lim Kok Tyhe(Gent) to take one of the highest pay among listed companies in Bursa, but not Puncak.

"Quality of the BOD" is very important to me as I am now working in a very competitive environment to outpace the competitors. I embrace competitiveness and creativity. I saw many of my competitors die off.

If the BOD is not competitive (smart in biz), the biz will be sidelined and obsolete. Example: 10-20 years ago, there were many furniture, garment, semicon and gloves factories in M’sia, how many left now?

Why Kossan and Top Gloves can survive till today but not Latexx Partners, Seal Polymer , Conform Rubber and many more ? Why AKN, AT dies off (I quote them as I lost in them till pant down)?

2013-12-01 22:07

bsngpg

Fundamental Analysis : THANK YOU VERY MUCH to KC Chong

I do not know if at last I can figure out how to calculate IV, but at least after knowing you since the last few months, now I start to appreciate FCF, and know how to read Cash Flow Statement(at least can understand the statement for >50%). Before this, I skip financial statement while reading Annual Report. Thank you very much.

2013-12-01 22:08

bsngpg

So far, I can follow till Total FCF. Will stop here and continue back 2 weeks later.

Decision process if to invest in a company= prospect of its business, its operating efficiencies in ROE, ROIC, cash flow and free cash flow, enterprise value. This one is much easier than DCFA, I guess.

Thank you.

2013-12-02 14:42

Fabien Wong

Hikcchong...can u assist to do similar analysis/valuation on PIE? Thanks!!

2013-12-02 15:27

kcchongnz

Fabien, you have to bear in mind that DCFA, or rather all valuation methods are very artistic. It all depends on your assumptions.

For PIE, let me take its average past 4 years free cash flow of 26.5m as a base, and assume it is going go grow by 5% a year for the next 10 years and 3% subsequently, and a discount rate of 10% (PIE has a healthy balance sheet with no debts and steady earnings and cash flows), the present value of its FCF is 451m. Adding back its 98.4m of excess cash, it is worth 550m, or RM8.58 per share.

2013-12-02 19:08

jennylee1382

Hi Kc chong can u look in to Gmutual? is this a good counter to invest.

2013-12-02 22:22

RonnieKimLondon

Prestariang is a very interesting company as it has managed to secure contracts to provide training to government and quasi- government agencies at attractive terms.

It is like UEM in the 90s without the high capex. The share price is trading at a decent discount to fair value.

2013-12-02 22:35

ProfitMan

kcchongnz, thank you for taking us through your intrinsic value calculations. Appreciate it. Just one question - does the beta value of the stock plays a role in determining your discount rate of 10%? Thank you.

2013-12-03 12:05

kcchongnz

Posted by jennylee1382 > Dec 2, 2013 10:22 PM | Report Abuse

Hi Kc chong can u look in to Gmutual? is this a good counter to invest.

Please refer to the following link:

http://klse.i3investor.com/servlets/forum/900172429.jsp

2013-12-03 12:16

nhkch

Hi kcchongz, the DCF you use for valuation.You make an assumption on the growth of future free cash flow. So does that mean the intrinsic value of RM3.64 for prestariang is the future value after 10years if the company perform according to the assumption?

2013-12-03 12:17

kcchongnz

Posted by ProfitMan > Dec 3, 2013 12:05 PM | Report Abuse

kcchongnz, thank you for taking us through your intrinsic value calculations. Appreciate it. Just one question - does the beta value of the stock plays a role in determining your discount rate of 10%? Thank you.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.

R = Rf + Beta * (Rm - Rf)

For those who like to know more can refer to the following link.

http://en.wikipedia.org/wiki/Capital_asset_pricing_model

Yes academically you calculate the required return, or the discount rate, R used for the calculation of the intrinsic value, or the present value of a stock.

No, I don't use it to get the discount rate because it doesn't make sense to me. I use a simpler reasoning, like how much I want my return to be, in this case 10%, after looking at its income statement, cash flow and balance sheet strength. It is more intuitive to me.

Or I may look at the other way, how much risk premium above the risk free rate, ie bank FD, or MGS rate etc, also after looking at its financial statements. In this case I think a risk premium of 6% is adequate.

2013-12-03 12:49

kcchongnz

Posted by nhkch > Dec 3, 2013 12:17 PM | Report Abuse

Hi kcchongz, the DCF you use for valuation.You make an assumption on the growth of future free cash flow. So does that mean the intrinsic value of RM3.64 for prestariang is the future value after 10years if the company perform according to the assumption?

I estimate the future cash flows, then used a discount rate R to discount the future cash flows back to the present. That is the present value, or the intrinsic value of the stock. It is the present value, not a future value.

2013-12-03 12:54

ProfitMan

kcchongnz, thank you for the very insightful and enlightening reply.

2013-12-03 13:29

Fabien Wong

Posted by kcchongnz > Dec 2, 2013 07:08 PM | Report Abuse

Fabien, you have to bear in mind that DCFA, or rather all valuation methods are very artistic. It all depends on your assumptions.

For PIE, let me take its average past 4 years free cash flow of 26.5m as a base, and assume it is going go grow by 5% a year for the next 10 years and 3% subsequently, and a discount rate of 10% (PIE has a healthy balance sheet with no debts and steady earnings and cash flows), the present value of its FCF is 451m. Adding back its 98.4m of excess cash, it is worth 550m, or RM8.58 per share.

Thanks kcchong!! Appreciate ur input.

2013-12-03 19:16

nhkch

Base on this intrinsic valuation, should we always check the actual growth rate in future for comfirmation of this intrinsic value beucasue the growth rate apply in the calculation is base on assumption? Let say if next year the earning growth is less than 10%, the intrinsic value need to re-calculate with new set of assumption?

2013-12-04 17:13

kcchongnz

nhkch,
When I say Prestariang's FCF grow at a compounded annual rate of 10% for the next 10 years, it is just an average. Sometimes it grow at a higher rate than 10%, sometimes less. No company grows at such a smooth and steady rate like that. Anyway the assumption of CAGR of 10% would most likely wrong too, but hopeful wrong on the positive aspect.

So don't worry too much about it. You could change your assumptions if you wish after one year, but it will remain a rough estimate anyway. One thing you must remember no company can grow at a high rate for too long. It pays to be conservative.

2013-12-04 17:30

Kukuman

This stock sure make money. It is a matter of how much and how fast. I just collected divided 1,750 for this round. Just buy depending on your affordability. don't think further

2013-12-04 17:35

bsngpg

Hi KC Chong :
I am referring to your post dated Dec 1, 2013 03:18 PM, Blog: Prestariang - kcchongnz

Would you mind to tell me where to get
i)Non-operating cash $52,186 (BS :cannot find this # in AR12)
ii) Debts ($1,371) (BS :cannot find this # in AR12)

Thank you

2013-12-23 14:36

kcchongnz

bsngpg,

Non-operating cash is cash +short-term investment

Those numbers were obtained from the latest balance sheet on 30/9/2013, not the fy 2012 one.

2013-12-23 14:47

bsngpg

Hi KC Chong : Thks for the prompt reply, I will continue the analysis.

2013-12-23 14:54

bsngpg

Hi KC Chong : I finally completed reverse engineering on your DCFA on Prestariang. Except the base FCF where I got 30446 vs yours 30387, I can reproduce all of your numbers and also knew where to get the raw data and the meaning of each assumptions.
My average FCF of 2012-2011 = (38,527+22,365)/2=30446.
I will move on to another company.
Again, thank you very much.

2013-12-23 23:05

nokenzo

Hi Mr BS, I obtained different base from both of you, my cash from AR is 61,297, and debt 1.6, base as follow: 2012 FCF: 41,945.0-(2,772)-(937)= 38,236, 2011 FCF: 26,471-(2,763)-(1,543)= 22,165. Base (38,236+22,165)= 30,200.5
Can please advise me what went wrong?

2013-12-29 12:50

bsngpg

Hi nokenzo: on vacation. Will need many days to have chance to turn on PC for the numbers.

Pls go to thread "Shall we avoid risks? - kcchongnz". It is a very good thread. No time? At least, save it for future. Would not regret.

2013-12-29 16:57

nokenzo

Hi Mr BS, enjoy your holiday, I had mine before Christmas to avoid the crowd. Please enlighten me when you come back. Happy new year.
Yes, I have read kcchongnz's "shall we avoid risks", very truly said indeed. All kcchongnz's valuation for stocks is to help us when to take risk, and when to be greedy when others are dreadful. I like to buy 'fallen knife' stock and keep.

2013-12-29 17:17

bsngpg

Hi nokenzo : pls scroll up to 23 Dec 2013.
KC Chong : "Those numbers were obtained from the latest balance sheet on 30/9/2013, not the fy 2012 one."

Good luck.

2014-01-02 15:48

nokenzo

Thank you very much BS. Shall look into it tonight. Back from holiday?

2014-01-02 16:44

bsngpg

Back to work on 6 Jan 14. Continue the learning process on 11 Jan.

2014-01-02 17:19

ctyap

Hi KC & BS,
Need your help here. I can produce all the numbers for the DCF model for Presbhd except PV of FCFF of core operations of $751,000. I get the total future value of all cash flow (10 years FCF + terminal value) of Rm1,692,441. When I convert it back to present value, the value is not %751,000. I'm using the formula of (total FCF + terminal value)/(1+0.1)^10 . Did I do anything wrong?

2014-01-09 17:04

kcchongnz

ctyap,
You have to work out the year-by-year FCF, and discount the yearly cash flow year-by-year with the formula CFn/(1+R)^n and then sum them up (including the terminal CFt). For example, the discounted year 3 cash flow will be 40445/(1+10%)^3 (see below example and my previous post).

https://users.wfu.edu/palmitar/Law&Valuation/chapter%201/1-3-3.htm

Refer to my previous posting

Posted by kcchongnz > Dec 1, 2013 05:59 PM | Report Abuse X
Table 6.2: DCFA
Year 0 1 2 3 4 5 6 7 8 9 10
Free Cash Flow, FCF $ 33426 36768 40445 44490 48939 53832 59216 65137 71651 78816
Terminal FCF, $=CFn(1+g)/(R-g) 1159722
Total FCF, $ 33426 36768 40445 44490 48939 53832 59216 65137 71651 1238538
PV of FCFF of core operations $751,000 $3.41

2014-01-09 17:58

tewnama

Kesimpulan ialah?

2014-01-09 17:59

ctyap

Dear KC, thanks. I get the calculation same with you this time. Thanks for it. But one more question, since the discount rate and growth rate are same at 10%, all present FCF values for each forecast year are same from first year to 10th year. Is it okay?

2014-01-10 09:00

kcchongnz

ctyap, it is a coincidence that the growth assumption is the same as the discount rate at 10%. Hence the present values of discounted cash flows happen to be the same as the growing cash flow.

Calculation is correct.

2014-01-10 09:25

ctyap

Ok. Noted. Thanks, KC.

2014-01-10 12:11

kcchongnz

CIMB report on 24th February 2014
Prestariang (AD, TP:RM4.45) - Looking to score with oil & gas
Newsflow could be exciting for Prestariang next month if it can wrap up the deal to build a new major oil & gas training school with a state government. Other takeaways from the FY13 results briefing are the targeted breakeven for UniMY this year and potential upside surprise for Autodesk revenue. In view of the company’s bullish growth prospects, we raise our target FY15 P/E from 14x to its regional peers’ 16x, which results in a higher target price. Positive newsflow on Petronas’s Rapid project and strong UniMY student enrolment could catalyse the stock. Prestariang remains our top small-cap pick.

Wah, CIMB suddenly came out with a target price of 4.45 basing on a PE ratio of 14x, much higher than my previous estimate of 3.64, and the price is closing on to my estimate now. But why a PE ratio of 14x, not 5x, 10x, 20x or even 30x? Strange!

Prestariang fundamentals seem to have changed with the advent of Petronas Rapid project. More so may be due to the expected turning around of its education arm in UniMY. Are we in for another multi-bagger?

2014-02-24 10:39

3stan

...with the facts and figures given I'm more assured it's a strong buy...buy on dips/retracement/correction...buy for the medium to long term...tq guys...

2014-02-24 12:20

tonylim

kcchong, did you notice many stocks covered by you ended up bonus issues and what not after the price run up.

2014-02-24 12:34

stockoperator

Help and Inti being privatized due to low valuation. Specialized Education business is a good business.

2014-03-05 21:53

kcchongnz

The share price of Prestariang now at 3.74 has already convincingly exceeded my original intrinsic value estimate of 3.64 in such a short time, with an assumption of growth in free cash flow of 10% for the next 5 years as shown in this blog.

Does it mean that the fundamentals of Prestariang has changed that the FCF for next 5 years will grow at 15%, leading to an intrinsic value of 5.60?

University making money now? A lot of demand for the oil and gas courses? sound interesting.

2014-03-24 15:54

bsngpg

Hi kcchong : congratulation on making good $ on prestariang! You are simply the BEST.

I guess the next mover would be Pintaras which again very unfortunately I do not have it in my portfolio.

Will definitely follow your next selection, do not want to miss $ boat again. When will you have your next selection ???

2014-03-25 07:40

kcchongnz

bsngpg,
Long time no hear. How are you?

The call for Prestariang is a fluke for me. It is hard to find undervalued stock any more now. My investment strategy from now on is more of preservation of capital rather than chasing for hot stocks.

2014-03-25 10:08

bsngpg

Hi Mr KC Chong : thanks for your greeting. I have been searching for my GPS in Bursa since months ago, still puzzling at a cross junction. Nevertheless your postings are still “not to miss”.

I sincerely appreciate your persistent in posting good articles on this forum. I believe there are many readers behave like me just reading your postings quietly. Please keep up your good deed. We like your postings and appreciate that.
THANK YOU.

2014-03-25 11:01

kcchongnz

bsngpg,
I used to say when everybody is making money in the stock market, and you don't, it is ok. The market is always there with its pendulum swing up and down.

I recommend you this GPS, "The most important thing illuminated" by Howard Marks.

2014-03-25 12:43

bsngpg

KC Chong: thks your advice.
I just bought in some IGBREIT, for its dividend and conservative play.

Waiting for another 20sens up, I will rescue all of my JTiasa with 3% return from Apr2012 till now. Very impressive, ha! ha!

2014-03-25 12:59