So Ipomember, what do you proposed? Since you're against DCF valuation, yet all you have written are subjective i.e. good management, what valuation would you use then?

Lay it in simple facts. Every investors out there have access to more or less the same information and news of a particular stocks, I would say 99% similarity. So what differentiate one over another investor can be many factors, but namely analytical edge, psychological edge etc and so on. All these edges add up to what you call skills, or Alpha.

Where do you get your Alpha? Read, read, read and apply what you have learn and refine it over time. So if you are able to do that, your skills will improve, your return will be better than others over the long term.

When you observe someone says 'Net cash is not a good predictor of share price'. That is obviously true. It isn't. And there are indeed investors that use things like net cash, low PE, below NTA to decide a stock is undervalued. That is because they are learning, they're climbing the skills level.

"All animals with wings can fly". You know this statement is not true because you're smart. But if you are a kid I bet you won't know that because you are learning.

Same thing. We learn through attribute. Attribute is things like low PE, net cash, below NTA makes money. Same as saying all animals with WINGS can fly. Wings, PE, Cash, NTA becomes the attribute. But as learning improved, people move from attributes to circumstances. So you will say hey wings doesnt determine if an animal can fly, the wings must be aerodynamic to lift the weight of the object. Now you are applying circumstance. AKA 'it depends'.

So same thing happen here in investing world. People using attribute is in a learning process. And that is also true when the very same person says 'the best predictor of share price is earning growth". That is another attribute 'Earning growth'. So you have a person that learned an attribute (earning growth) trying to tell everyone other attribute (net cash) is not reliable. So he is half right without knowing he is wrong as well.

Earnings growth is far from an assurance of immediate outperformance. If the company cannot cover its cost of capital or market has priced in a far rosier growth, earning growth is an immediate underperformance.

I never say it is solely, im saying it is partially to mainly. Signature Kitchen use to claim that they have economic of scale in their report. I would have believe if they are Burlington North.

Yes the formula is correct, it is the numbers that goes in. It is because their clients have bargaining power, that's why they want to get it from small supplier. Where's your ability to negotiate when your supplier are bigger and your purchase only make up a small % of their sales?

I've stated enough opposing view for you. Down to you to weight the probability to each outcome. The probability to maintain current margin or revert back to the mean.

Nice wordplay by the way.

So you are saying you are not assuming because you are following an analyst report, which is 2nd hand, while im assuming because im reading a primary report release by mgt? Well fair enough, provided MIDF visit Superlon and interview them, which I doubt.

Let's say MIDF is 'accurate'. EBIT of 15%, where would ROIC be at that margin? 12.5%. Improvement to 18.6%, ROIC will reach 15.4%. Where does that leave you on your ROIC assumption of 24%?

Let's extrapolate it, Superlon hits a margin of 20%, competitors takes notice, bought the same machineries, improves their efficiency, undercut Superlon on price. What's the chance this will happen? Superlon's clients are mainly commercial, industrial and residential. They buy insulation in bulk. Superlon's clients aint fragmented buyers that doesn't have pricing power. It is good they can improve cost savings by investing in capex. But you need to figure can those savings be retained in the business itself or eventually it will flow towards the customers.

Palm oil industry is a classic example. Buying palm oil mills from CBIP to improve their operations efficiency. But so what, theyre a price taker, palm oil is a commodity. Eventually it is the end users that benefits not them.

ok typo there, I mean higher sales, shouldnt be higher sales volume.

You mention not fuel by foreign exchange, should I take your word or from quarterly report? I believe it is a mixture of both, but unless you have a good argument what state-of-the-art machineries that they bought can double NOPAT margin, the argument that they can maintain those margin is weak.

Every household will need their insulation materials - I am not quite sure what you are trying to say with that statement. Just like someone once wrote global warming should favour Superlon.

Higher sales volume has to come from either 1) Increasing pricing and/or 2) Lower cost. And you might have a point of economic of scale, but consider it is not a business heavy in fix assets, long term assets to current assets is 50:50 ratio, how would a company derive economic of scale when the fixed assets aka fixed cost is not even that huge on the balance sheet.

And if you ask me economic of scale that can double triple bottom line margin, I find it hard to believe.

I wish you can find your edge following the crowd

1. May I ask how did you get the NOPAT figure? Based on my calculation for 4 recent quarters using same tax rate, NOPAT is $14,255 or ROIC of 21%. You might have included the income earned from excess cash into the EBIT

2. ROIC is derived from turnover and NOPAT margin. Turnover remain pretty much the same. So it is the NOPAT margin expansion that fuel the ROIC growth. When you dig deeper, it is the gross margin expansion not NOPAT. The question is can they maintain a margin of 24-25%? Because based their report and historical margin, this margin is fuel by favourable exchange rate. (Hence gross margin expansion)

3. Historical margin ranged from -2% to 17% or average of 8-10%. What you are seeing now is a margin expansion that double triple the history. Let's say if they cannot hold this margin and revert close to average, say 15%, ROIC will fall back to 12.5%.

4. Although Oceancash doesn't do insulation in HVAC but they're involve in auto insulation. It is a stretch but their margin is a good reference, averaging 7.85%

4. If your upside of 35% is correct, a ROIC fall to 13% gives you a downside of 28.2%.

Nice one, anyone can mention Jack Ma or Jeff Bezos, and every mall in the world becomes dinosaur

Cost of capital is not a gimmick, it is opportunity cost. If you invest $100 in a business and it earns $5 every year. It doesnt matter if the business keep that $5 or pay you all of it, you still earns $5, a return of 5%, it's just a matter of whether it is in your hand or in the business.

Now if you realise you can put your $100 in FD and get 3%, in ASB 6%, Rental yield 5% and on and on. The fact that the business cannot match the return of other equivalent or safer investment means it is destroying value. You did not put your $100 in other investment but in the business, that's opportunity cost, and it is not a finance theories.

you're right complicated valuation method can be easily manipulated but simple valuation like PE is just as easily manipulated as well.

The E in the PE has already been manipulated by interest income & currency, therefore you get a PE of 6.

The correct question is not about "Is simple valuation better or complicated valuation better?". But "what kind of valuation is the closest to making sense of real world?"

One can ignore cost of capital using simple valuation but cost of capital is real and alive. When a company cannot generate return higher than the cost of capital, it is destroying value no matter how low the PE is. The opposite is just as true

Here you have 2 options, you can either use a 9M16 unadjusted CROIC that is inflated by interest income and currency as a benchmark, or you can look at the past 5 years poor ROIC and ask what has changed, is there any magic that makes the business suddenly flowing more cash?

No right or wrong, but you have to choose.

I am being generous to assign a fair value at book because it's ROIC is below 10%. If the cost of capital is 10%, and if SHH can't improve its ROIC beyond cost of capital in the future, they deserve book value.

Condition 1: Everything run as normal, no revaluation, no sophisticated investor (when was the last time you saw corporate activist in Malaysia?). The share price will dependent on the cash flow the business generated. Considered the past avg ROIC of below 10%. Fair value will be BV, give it $1.80

Condition 2: Corporate activist came in, tussle with board so they can takeover, break it up and distribute all money back to shareholders. Everyone happy because the share price will shoot up because of this exercise. Breakup success. BV turn into $2.65

Let's estimate the probability of condition 1, I will say 90%. Condition 2, 10% (very optimistic if you asked me)

Expected value = $1.89
$1.80 x 0.9 = $1.62
$2.65 x 0.1 = $0.265

re the land. The value of a stock is dependent on the cash flow it can generate over it's lifetime. So whatever that is sitting on top of that piece of land is generating those cash flow for SHH and shareholders already. Revaluating the land is not going to increase the cash flow or make the company more valuable, you will end up double counting.

If SHH is a property developer, that's a different story. The nature of property developer is to develop lands and sell it. The nature of SHH is manufacturing furniture. Unless you have insider information that SHH decide to do a 360 degree shift and become a developer, the odd is not in your favor.

When everyone is so freakout by big parties dumping shares and the direction of the share price, you can't find a better place that offer such great value most of the time

It depends what you want to measure. For example if you want to measure how a company can serve interest payment when it is not reinvesting money into the business, EBITDA to interest coverage is what ppl look at.

I love this one from Daniel Yap - Last qtr earn 0.059 EPS current qtr report earn 0.043 EPS, if next 2 quater earn almost the same EPS like current EPS, it earn 0.188 EPS a year. If fair value 7 P/E, price should be at leats 1.316

You should really mortgage your house, thats 300% upside

I believe preservation of capital comes from knowing what you are buying and the price you are buy, not cut loss, unless your investment thesis has changed.

In all fairness, and im not siding anyone, how can anyone correlate the relationship between an increase in the share price with KYY's promotion? How would you know how many people actually bought the share because theyve read it from KYY blog or from i3? The fact is you can't tell. Just because the opinion is strong that it is doesn't mean it is true because it is something you can never prove.

Herd mentality very strong I sense

why is everyone so obsess with KYY. I invest in the prospect of FLBHD, not KYY

I know cash and other investment grow from 60+ mil to 88 mil in 3 months hehe

Yes pingdan, company A profit margin is 25%, another company margin is 20%. Company A is better, and im using profit margin formula profit/revenue.

As what I wrote over the weekend, if you never include the forex gain previously, the result is satisfactory. I dont know what is going to happen tomorrow. But that's just the sentiment of the herd that swing left and right following MYR. The company still producing plywood, and it will continue to export plywood.

No one ever says value investing is buy and hold, that only comes from someone that dont know much about value investing

it requires that I read market trends ahead of the crowd. - The greatest fallacy of all time. You are the crowd

Gives me a type of investment philosophy that doesn't have weakness and fallacy then ill know ure BS.

Undermine confidence? Im surprise someone that never walks the path as a value investor tries to convince others what value investing is not.

Who told you intrinsic value is tangible in the first place.

I am always curious, everyone knows Gadang is that good, i dont think anyone has negative to say about the stock, but why it hasn't reach it's TP? Look at Ecoworld, a heavyweight that deserve it's own right base on its heavy valuation

it is simple. In the market you can either have information advantage, analytical advantage or psychological edge. If you cant get information faster than others then ure at a disadvantage as a trader. You probably have to improve it or consider improving your analysis or use psychologically, sit there and do nothing. And I find most people dont have psychological edge, partly because they read so much news and get influence by opinions.

If one studies Tienwah's ROIC, it is not a surprise it is selling below book, and I wonder what it deserve to sell at rm4.99 or close to 2x book just because EPS increased.

Probability I still look at both but yea ROE can be distorted by leverage or large sum of cash for example

Please continue

No opinion on valuation but trying to link global warming to how a company can prosper is stupid. It's like saying global population is growing, lets open a cafe

No doubt higher dividend stocks tend to outperform, collectively that is. But EV/EBIT is popular in matured market not because you can become a corporate raider and pressure the mgt for a change, it is because it is precisely like high dividends stocks, collectively, low EV/EBIT stocks are generally undervalued, low expectation, thus in the scenario where reversion to mean happens and the gap between price and value close, they will outperform the market. And that is proven in both matured & EM.

Technically in short term it will increase ROE but long term it will not affect ROE.

Think it this way, higher payout reduce (slow down) equity aka the denominator of ROE = earnings / shareholders equity.

That is only temporary, because the more you payout the less growth you will get. Growth in earning aka nominator of ROE will slow too, so at the end, whether your payout is high or low, everything else being equal, it does not affect ROE level.

You have to be careful with the DCF calculation. For the venture, only 20% of the DCF value is accounted for in the first 10 years, and 51% for medical. If you only go as far as 10 years, those 2 will only come up to EV of 235mil or $3.26.

My bad for seeing AAX as Airasia.

The price is higher now doesn't mean your prediction is correct make sense? You gave a PE 11, that is your prediction 6 months ago, so whether you are right or wrong is based on the PE you assign, not where the share price is right now.

I comment on most of your article isn't to criticize you, but to make you aware you are wasting your time estimating EPS or using PE. I understand your work is essentially a 'fundamental trading' but by now you should see the flaw in using PE to derive a TP and think the market will agree with you and move to that TP.

Your analysis is good but how you estimate valuation needs some changing. The thing that can move share price in a huge way is 2 things: Market expectation and ROE. Not EPS or PE.

Market expectation - Do you see why lose making companies or company that doesnt really make money, when they report a good quarter and suddenly the share price can rocket? Their PE can remain so low but you will easily make 100-300%. That is because 1) Market expectation - No one wants the stock, no one likes it, zero expectation, human become superman, the market says wow so the price skyrocket. and 2) ROE improvement - investors see ROE improvement and extrapolate. That is good news for fundamental trader.

Low market expectation x ROE improvement = Is what you need to look for.

Pick safe and rising price. How can it be safe when it is rising? Does the rising make you feel safe?

I saw you wrote Magni with RM6.90 nine months ago, now RM4.20, SAM to hit TP 10.15 6 months later which is now but just RM6.11, Latitude TP RM9 now RM5.60, SHH TP RM3.33 now just half of that.

CEPCO is not due for 6 months yet, and now Airasia. Is that why you stop assigning TP to Airasia?

When someone ask if something is a good buy, the respond will always be 'What return are you seeking?" A person seeking 5% return pa and another person seeking 20% return pa asking the same question will both get a different answer.

Kossan, the burning question remains - Is it a fair price to pay 4.3x over the book value of a company?

PE Ratio - The PE might goes up slightly but I doubt it will hit 9-10. Look it this way, this company has been making a return below cost of capital for a decade, would any investor ascribe it a higher PE because the ROE has improve just for a year? Let's see why the ROE improves to find out how real it is.

ROE - ROE is made up of margin, turnover and leverage. Leverage and turnover yoy remain pretty much the same with some improvement. So the focus is on margin. Operating margin is 1.5%. Oh but net profit margin jumped to 4% from 0.77% in 2014. Throw in high leverage, you can see why ROE rocket from 3% to 17%. But where do their get that high margin? it's not from their core business but from 'other profit' namely forex gain of 16 mil.

Dividend - For a company to distribute dividend, it has to come from somewhere, something has to give, in this case book value. Dividend reduce book value. And for a company that cannot earn more than cost of capital, it is destined to sell below book value. So if book value doesnt grow, which is the case of Pensonic ($0.7 in 2006 to $0.75 in 2016), it doesnt really matter how much dividend yield there is, you are going to 'lose money' in the long term.

I looked at the chart, marco has been a hidden gem since 10 years ago

I still hold my view that CBIP moving into plantation is not the best strategy, unless they have great justification for taking the cash they generated from palm oil mill and throw it to a commodity sector that generate dismal ROE

Should be set to zero if you only include maintenance capex in calculating FCF. And the reason of using maintenance capex only (excl growth capex) is that growth capex distort FCF.

Shinado, with DCF the devil is in capex. The number in the capex include maintenance + growth. You have to exclude the growth number. The reason being if a company takes 100% of their operating cash flow to buy PPE, in the hope of generating more future revenue, turning FCF into zero, the value of the company shouldnt be zero right?

There's no easy way to estimate what is the maintenance capex. But depreciation figure can be a starting point, and you need to set your growth and terminal rate in DCF to zero.

I think Malaysia investors are over obsessed with ringgit like how overseas investors are obsess with oil price. Nuts. Anyway foreign exchange shouldnt be factor into valuation in the first place. Like I saw some people set TP for a company with ringgit at RM4.20, so im curious if ringgit goes RM1, the company must have become freebies.

His quote is only applicable to certain circumstances not every situation. I think Mark Zuckerberg is successful, thus he is fast in making decision as per the theory. If we put him in formula 1 car and drive down the racetrack at 300km/ph he is going to die successfully.

A successful person is able to make fast decision in their respective industry where they have honed their skills for many years. That is a more appropriate way to put it. Put them in something they are not familiar with, cooking, gymnastic, skiing etc they will fail spectacularly.