What happened will happen again. People that went into O&G stocks at the peak, went into palm oil stock at the peak, furniture stocks at the peak, and now into construction and steel counters at the peak.

of course how much debt a company can take, theoretically, is independent of EV, as long someone is willing to lent their money (where's customer yacht?). The article talks about 'safety', not the truth of floor or ceiling

Ks55, you're quite confident APM will bounce in 52 weeks

Wow valuelurker calling names, calm down. So you're saying because of compounding, therefore growth > no growth.

Before we examine if that is true, please note you are pinpointing on my example, which uses a 10% growth rate and 10% discount rate.

Now we are clear from confusion. So, if you say a company that grows at 10%, from $100 to $260 in 10 years (that is 10% compounding p.a.) is worth MORE than a company that has 0% growth, earning $100 for the next 10 years,

THEN

You have your valuation wrong. I welcome you to show me your DCF anyday anytime.

Clearly in my example, both companies ROIC is 10%. So it is beyond me why a company can worth more because they choose to grow. How does a company grow? Printing money?

You can compound all you like to the end of time, but what do you get when you divide 10% with 10%?

10% / 10% = ? Simple math.

I must admit I know something, but not everything. When I don't know something, I don't write. But when I write, that's because I know what I'm writing.

Ben gets excited when something goes up ie Masteel, without asking any question, when things come down, he will dig into why mgt is selling shares and happy to stay on the side line. No right and wrong

If FLBHD can continue to generate $10 mil of cash flow annually, valuation sits at least RM2. Done.

I'm seriously fed up with ppl talking about 'growth vs no growth' crap. A company can reinvest all they want but if the return on incremental investment is the same as previous reinvestment, that means no changes to cash flow, means valuation will be the same whether there are growth or no growth diao.

Sorry if im being blunt here, and you might have a noble intention. But my view is listing all your stocks out here as an intention of 'sharing' so everyone can make money (if they are lucky) is nonsense. Every sane man know lucks run out in the long run, so it is far from your 双赢 objective, unless your objective is short term joy at the cost of long term losees. But this is plainly planting the seeds of speculating and gambling in someone's mindset, which in due time, they will lose it all back to the market, not just what they gained, but all their capitals.

I think valuation comes down to the value creation. Winning new contract is only beneficial when the return is good, as in higher than previous project the company pursuit.

Icon you seems very confident on Affin?

I will debunk your myth now.

Company A
Year 1: Revenue $100, Profit $10 (10% margin). Reinvest 100% (or $10)
Year 2: Revenue $110 (10% growth), Profit $11 (10% growth).

Company B
Year 1: Revenue $100, Profit $10 (10%). Reinvest 0% (or nil)
Year 2: Revenue $100 (0% growth), Profit $10 (0% growth)

So in example above, im sure you will love company A over B, and A worth more than B, but can that be true?

If you are an owner of A, year 1 net cash flow is $0, because you reinvest everything to buy machines, yes you get a 10% growth in year 2, but your return is still the same for both years. 10%!

If you are an owner of B, there is no growth for year 2, but year 1 you have cash flow of $10, you CHOOSE not to reinvest the capital and declare dividend, all $10 back to shareholders.

So when someone say growth is better, they forget that growth doesn't come from thin air. You need capital to grow. Where do you get capital? From profit of course. So if profit, or return is the same for A and B, which is 10%, why should A worth more than B?

A is only worth more than B WHEN the capital reinvested can generate a higher return, in this case above 10%.

If A decide to reinvest and earn 5% return instead of 10% like in year 1, is growth good?

it is a myth because you don't have a clear understanding of valuation. And I already raise many example from Public bank to Dutch lady.

Invest from business perspective yet ignore net cash flow, if business is not build to deliver cash flow, which is the hallmark of valuation, then what is the purpose of a business?

Younginvestor92 - he believes in the myth of growth

The myths that investors like to believe in:

1. What is growth
How do you define 'growth'? That's 1st question. If a company grow revenue at 10%, that's growth, if 9.9%, not growth? or 6.7%? or 4.6%? Where's the cut off point? This lead to 2nd myth.

2. Growth stocks, good buy; no-growth stocks, don't buy.
You should tell investors that holds Nestle, Dlady, or even PBB to sell their stocks because these stocks are no-growth. Look at PBB, at most 5% a year slow growth. If you think PBB can grow more than 10% a year, then you need come out of dream world. But why all these 3 are selling at such a high valuation (PE & P/B)? Isn't someone upstairs mention no growth stocks should sell below PE 10? Obviously, blind man explaining how elephant looks like.

3. PE 10 investors
These are the ones that love to x10 to whatever EPS they love to estimate. But the strange thing is, if x10 works well, obviously he will make a lot money, and if everyone believe this works, there will be no stocks selling below PE 10. Conclusion, PE 10 is an illusion that those believe in it likes to trick themselves into thinking that's the 'right' price. If you ask them what's PE 10, they will say worth 10x. Why worth 10x? Not 9x, or 13x, then they will go back to myth no1. Blind man explaining elephant.

Quiet hard to find any useful comments in here.

@clarencebak - so you called forex, log price as a change of fundamentals. Your so called fundamental must be changing every Q

I like the maximum pessimism here. A good sign

Hypothesis 1: Market is irrational, share price did not react to Q results
Evidence: Q result improved with record high dividend

Hypothesis 2: Market is rational, Q result did not exceed market expectation
Evidence 1: Current PE is ascribe to Pensonic because they have consistently low return over past 3-5 years to long-term shareholders.
Evidence 2: Dividend is a function of cash flow, which is the R of ROE. IF ROE is persistently the same, yes dividend is preferable, because company is destroying value, but will have minimal impact on valuation.

Hi Bizfuneng, you're right, if no changes to the underlying fundamentals, and that's a hard thing to find out unless you've a good knowledge of the industry Gtronic operates in. There are many ways to invest but mainly you have 2 big categories - Balance sheet & income statement. For B/S, it is 'one bird in the hand', things on B/S has high certainty i.e. assets & liabilities, you are not trying to predict but rather finding MOS in B/S. This is good if you don't have a great knowledge of the business. But normally stocks only reaches B/S 'cheapness' in very depress condition.

On the other hand, you can study income statement, or the earning power. Means if you have a good knowledge of the industry ie industry profit margin, competitors, industry forces, entry barrier, how they compete, how buyers select suppliers etc, then you'll have a good idea about the earning power of a business, and you can use DCF to do estimates.

But many times, most analysis consist a mixture of B/S and I/S. So when you do DCF, you'll need to be able to pick apart the components inside DCF, namely revenue, profit margin, ROIC, reinvestment rates etc and explain how you come up with those numbers.

Hi Citychew, the market can do anything to any stock. If your entry price is low, that should protect your downside.

Besides it is cyclical industry, you don't enter when PE is low, thats at the peak not trough

oh Jay, I dont ask when. No money can be made when I know when.

You can get more here http://fundooprofessor.blogspot.com.au/2005/11/one-valuation-rule-two-paradoxes.html

Well Ben Graham wrote "An equity share representing the entire business cannot be less safe and less valuable than a bond having a claim to only a part thereof.” And you're not the first to disagree with him. Let me know next time if you find such scenario exist, ill be very interested to study

Look, your hyperbolic 5 bil would not even make equity worth less than bond because 1. No one sane enough would approve such a debt against what apm has and 2. Bond would not come into existence in the first place.

So ure saying now you think the minimum value is less than 700m, after apm issue 700mil, it is worth 650mil, or 50mil reduction?

Exactly if loan doesnt create value, how would piling up debt decrease value? Im still eager for you to tell me how much APM equity should be if they borrow 700mil. Because it will be negative base on your deduction. The whole idea is for every stock, sits a safe bond within. How does one determine if a bond as safe? That has been presented on top. If apm can issue that value of bond safely, in this case 455mil, it sounds bizzare to me investors would consider current valuantion as 'unsafe'.

Shaun, you are right bondholders required return is fixed and lower than stockholders, and higher required return means lower equity value.

And no, equity doesnt become less valuable if a company is loaded with debts. Debt is a form of financial engineering and capital structure of a company does not affect valuation. Simple hypothesis, if APM is to borrow $700 mil today, equal to its market cap, and has to pay 5.5% interest or $39 mil a year, how much would you value APM? Zero?

And how about this, they borrow $700 mil and distribute all in special dividend, how much is APM worth again? Since you say loading debt makes equity worthless, maybe APM would have turn negative, but shareholders will get $3.55 in special dividend.

Then you are worry now, previously APM was net cash 250 mil, now after borrowing 700 mil, they are net debt 450 mil. Can APM possibly service $25 mil (450 mil x 5.5%) ? Yes, everything on the balance sheet that gives them the earning power of $129 mil a year still there. So would APM shares go to $0.00 if they borrow 700 mil?

Mjy88, if the gloves industry can boost their capacity to meet the 7-8% growth of disposable gloves market, and go beyond to the point of oversupply, 4.8% is not a problem.

The key question isn't "Can state of the art machinery boost revenue?" but "Can Tguan prevent Scientex or any other film manufacturer from spending 20mil to get that machinery, thereby ensure them earning a superior margin?' As the theory goes, if anyone can get their hands on the machine, who stand to gain the most? Tguan? Scientex? Or food packaging companies?

But Ben your discount rate needs to confirm with the majority in order for the price to move to 2.17 right?

Dividend is a function of ROE earned by a company, just like Earth circles the Sun, and same goes for profit margin. Margin is indeed higher than furniture stocks but ROE is pretty much in line with FLBHD, Latitude etc because of lower turnover.

Using ROE 13% and payout of 90%, the growth for EPS is 1.3% pa. If dividend is 13 cents, there will be close to no growth unless ROE increases. And what is the basis that a 10 cents dividend would justify a fair price of $2.06? How much a company should worth is the expected future cash flow discounted back to present. IF CIMB is indeed correct it is a low-growth industry, which explain why they have a high payout, the stock would act more like a bond that pays out perpetual income.

Using DCF of 13 cents in perpetual and 1.3% growth for next 10 years, the value is $1.42. Unless one believe CSB can growth at 5-6% pa for next 10 years, then $2.06 is warranted. If they want to grow at 5% pa without reducing 90% payout rate, how much the ROE needs to be? About 50% ROE. That would rival Dlady, considering that they use leverage. To get 50% ROE, CSB's margin either have to go through the roof or sell more frames to increase turnover, but how do you increase turnover when the industry isn't growing?

So you are buying it because recent quarter result is better yoy?

I like Affin

of course ill be bullish, i know price has deviated from fundamentals, and im preparing my bullets

he lost it

oh yes i love wasting time. I love to sit there and do nothing while i watch lemmings in and out

As a shareholder I can be bias, but I feel that this post is rife with assumption without providing any supporting facts. If I would bring the author back to year 2013, you would have buy Favco without thinking because their outstanding contracts are growing for years before that, you would extrapolate it just like how you are doing it now that Favco is going downhill. Unless you are able to see the tipping point when the O&G industry begin to collapse, how would you know when will this downtrend is going to reverse? You don't. Me either. My confidence lies in their ability to ride through this trough because of their cash position. I have no insight how M&A or their servicing division will perform but they have the best opportunity during crisis like now to do things others can't especially when the rest is saddled with debts.

The crane industry is cyclical as it rides on construction up/downtrend. So you have to decide if you want to go in during the peak or trough.

you are right, if everyone practice value investing i would be the first to declare it is dead. The fact that value investing is a minority group as you mentioned, that's how it will continue to work. And need to thank you too for creating the volume. So keep doing at what you are doing.

didnt know you need a force to be reckon with to make money in market

"how do you reconcile the above two facts?" - I dont have to answer for what others paid.

Hi TiongBahru thanks for the reminder, I've added a few more comments on that. If you are interested to read more http://latticework.com/hidden-champions-asia/

Not quite sure when did I suggest Pensonic or Taan.

ive no idea what do you mean by 90pct of them.

of course i do think 15 cents div is unlikely to continue, but that's not because of profit going down, even at 10 cents dividend, it will still take 6 years to deplete the current excess cash.

So an article written by someone that runs 'flip your way to riches' workshop. I suppose it would be suicide for her career and life to say something out of ordinary.

It is a win-win if they successfully done so. Plenty of research have proven that these corporate actions yield nothing but a distraction to the actual business. Again investors aren't that 'dumb' because of liquidity issue theyre willing to give up the chance of owning the stock, the reverse is true too that investors aint 'dumb' too just because liquidity has been solved suddenly the stock valuation will improve.

It is not surprising to find company management talking about trying to be a 1 billion company, share price undervalued, let's do bonus or share split etc.

Does all these really that matter? The role of mgt is to be a great capital allocator. To ensure they can continue to earn economic profit aka widening spread between ROIC and WACC. As long the market is not rigged, market force in due time will ascribe the right price to the stock.

I've never heard Dlady complained they have tight liquidity for their 64 mil outstanding shares. This isn't a critic about the company doing something bad on the business end, but rather a critic on the mindset of mgt once they started to see their company is doing well.

You are right, it is past. Isn't the whole ball game of investing about predicting? You need the past in order to improve your accuracy of the future right? How well I run in the past of course doesn't determine how well I run in the future but it is a starting point nonetheless. If I tell you im gonna start floating tomorrow, be careful, thats a wonderful growth story.

Looking at the past is not about extrapolating past figures into future, it is about understand the 'WHY', the WHY of all the value drivers, namely the main one is ROIC. And value investing as a whole is never about avoid predicting the future, but rather be conservative about it, have a margin of safety knowing human made errors in judgement. And again, if investing is not forecasting, what is it then?

I have no idea who get all this crap of looking at the past because you want to extrapolate the future. By the way thats what ppl does when they apply PER to the most recent EPS, so called people trying to predict future earning and despise ppl trying to look into the past.

Looking at the past is about asking more question and finding what make things as it is, it isnt about accepting everything you see. It is about studying why the company can achieve such a profit, and reverse engineering to ROIC, margin, revenue growth and looking at the industry forces from supplies, substitute products, buyers forces, rivalry within the industry. Looking at the past is about triangulate the analysis of your past and your estimation of the future so you dont get yourself over your head and have an ounce of skepticism, which is rather lacking in this forum.

It is a bit hard to believe that many still believe it is future earnings that drive share price. That is only half the story but plenty is willing to take it as the truth.

That's a bit like saying 'hey i ran for 5 hours yesterday at the park' but I leave out the most important part - How many km did I run.

It is the ROIC that determine the share price silly.

I must admit Felicity is good. But take an example her analysis on Ecoworld, well all the reasons she stated aint anything new, but you will be bewildered how would she derive to value that Ecoworld should be worth more than 3 bil. She is good but the whole post is more like a good story telling. I can story tell and come up thinking Ecoworld is worth 10 bil. As Stockmanmy says, gut feelings mah. Why do so many valuation, just look at management, wah Datuk Liew, sure 10 bil.