bsnpng, actually your calculation is correct. I forgot to key in the FCF growth from year 5 to 10 and was assuming 0 growth in my original calculation. Thanks for checking my numbers. My new FCF/Share after correction is RM2.40.

KC, thanks for the feedback. Unfortunately, with a full time job, I do not have the time to create my portfolio by end of this year... however, if I do find good stocks, I will share them on this forum.

KC, nice analysis.
A few questions :-
1. Why do you prefer Kuchai over SBAGAN or KLUANG ? Is the discount the widest for Kuchai among these 3 companies ?
2. Do you see any unwanted RPT in your study on this company ?

bsngpg, it depends on what you put as This year FCF input. This is subjective. I choose to be more conservative and put in the average 6 years FCF in my computation rather than use latest FCF number

As per the computation, add excess cash and subtract debt and minority interest before arriving at FCF/share value.

Btw, CENBOND's numbers are actually based on 2013 annual report.

Let me share my thoughts on CENBOND which I believe is a forgotten undervalued packaging company. I went through a series of checklists both qualitative and quantitative before deciding if an investment is good enough.

1. A brief business description
CENBOND operates in 3 main segments :- paper packaging, plastic packaging and contract manufacturing (MLM business). It has businesses and subsidiaries in Malaysia (packaging), Indonesia(packaging) and Singapore (mainly MLM business). Paper packaging business forms >90% and >75% of its PBT and revenue respectively based on the latest results.

2. Understanding its business
a. Products:- The paper division produces a variety of paper solutions ranging from paper bags, polymer bags, bulk bags and multi-wall bags.
b. Customers:- Its customer base should be diverse as packaging is used everywhere such as building products (cement sacks). pharmaceuticals, chemicals, food, shipping etc
c. Geographical exposure:- Mainly Malaysia, Indonesia and Singapore
d. Its business should resilient as packaging materials are always needed in any economic cycle.

3. Financial performance/metrics

The following table shows a comparison of paper packaging companies listed in Bursa based on the latest trailing 12 months financial results

Company Price NM(%) ROIC(%) EV/EBIT P/E D/E Netcash/share P/B DY
CENBOND 1.58 10% 20% 5.5 9.9 0.03 0.6 1.23 3.2%
BOX-PAK 2.36 5% 8% 10.5 9.7 0.39 -0.78 1.01 4.2%
PPHB 0.635 7% 8% 7 6.7 0.36 -0.32 0.49 0.0%
MUDA 0.875 4% 5% 17.6 6.9 0.81 -1.43 0.45 2.3%
ORNA 0.72 3% 6% 11.4 8.7 0.56 -0.71 0.45 0.0%

CENBOND clearly stands out among other paper packaging companies listed in Bursa due to its superior net margins, ROIC and cheap valuations of only 5.5 times enterprise value / EBIT. It has the strongest balance sheet among all with a net cash of RM0.6. Its Price/Book multiples is the highest but justified due to its superior metrics when compared to the other competitors. Furthermore, a lot of its assets are hard cash.

CENBOND always generated free cashflow for the past 5 years. Last year its free cashflow was 17% of its total revenue. On average, its FCF/Revenue has always been above 5% which is healthy. Its free cashflows enabled it to sustain dividend payments which is fair at around 3.2% yield.

The operational efficiency shown above clearly demonstrates that CENBOND enjoys some competitive advantage over its peers.

4. Valuation
a. DCF valuation
As CENBOND's earnings are consistent and it generates free cashflow, a discounted cash flow valuation was used. Since CENBOND's latest cashflow was exceptionally high, I decided to use the 6 years average FCF as a starting point in the analysis to avoid over-optimistic valuation results. With the assumption of a 5% growth for the next 10 years and 3% perpetuity growth, the FCF/share came up to RM2.14 which represents a 25% margin of safety.

Current stock price $1.58
Share outstanding (Mil) 120000
This year FCF $13,871
Next year's FCF (mil) $14,564
Growth for the next 5 and 10 years 5.0%
Teminal growth rate, g 3.00%
Discount rate, R 10.0%

PV of FCFF of core operations $203,000
Non-operating cash $76,865
Investment properties $0
Interest in associates $0
Debts ($4,599)
PV of FCFE $275,266
Less minority interest ($18,813) 6.8%
FCFE $256,453
Number of shares 120000
FCF per share $2.14 34% higher than = $1.58
MOS 25%

Using a reverse DCF calculation shows that at the current price, the market is expecting almost no growth in CENBOND's free cashflow at all for the rest of its life which is highly unlikely.

5. Catalysts
M&A in the paper packaging space. Oji Paper (Japan) which is one of the largest paper manufacturers in the region has made acquisitions of Malaysian companies in the past. In 2010, it took over United Kotak Bhd at price of RM1.4 representing P/B of around 1.0. In 2011, it took over HPI Resources at a P/B of 1.8. Both these companies were and are manufacturers of corrugated cartons, a similar business CENBOND is in. Based on CENBOND's tight ownership (directors indirectly own >50% of the company), it may be difficult to undertake a hostile takeover. However, based on valuations of past acquisitions and CENBOND's relatively high cash per share and superior margins, it could still be on the radar of larger expansion hungry companies.

6. Threats
a. Rise in raw material prices. Wood pulp would make the bulk of raw material costs. Rise in this commodity would erode future earnings.
b. Weakening of Rupiah. Operations in Indonesia derive income in local currency while earnings reported in MYR.

KC, thanks for your insights.... yes at the end of the day, we must see proof of these economic moats through the numbers... what u say makes perfect sense... also its very true that some businesses are just better and more profitable than others.... this is why sector like healthcare coomand much higher valuations than say industrial sector.....

KC, I have just finished reading the Little Book That Builds Wealth by Pat Dorsey. In this book, the author explains how to identify economic moats in a company and how to avoid investing in companies with eroding moats. How much importance do you place on economic moats in your investment criteria. For example, how much premium are you willing to pay for wide moat company vs a narrow moat company ? Sometimes, it is important to review the qualitative aspects of the investment besides the number crunching to avoid getting ourselves into a value trap. What is your view on this aspect of investment ? Many thanks...

KC, what you are describing sounds a lot like the Instacom case where the director also dump the warrants....

member41, that is what I heard... but of course no guarantees, buy at your own risk :)
btw, I just read the star yesterday, there seems to be a shortage of dialysis centers in Malaysia especially in rural areas... govt is also planning to promote the Peritoneal Dialysis to some patients... this would be good for Adventa...

share buy back today
http://www.bursamalaysia.com/market/listed-companies/company-announcements/1495297

Posted by hepitrade > Dec 18, 2013 04:23 PM | Report Abuse

houseofordos... thanks.. can u gip me the link?

There are so many... just go and google or look at previous posts from these 2 guys.. good luck !

of course if the growth is great, the P/E will eventually be justified... that is what I m hoping for too... No doubt there will be excellent growth in healthcare segment judging by the valuations of some healthcare counters today like IHH and KPJ, however once more information is available we still need to go down and analyze how many % of that market will Adventa capture ? How much revenue / profit will be realized ? This is the question mark now.. My opinion is that with its capabilities which are unique and judging from its high net margins, it does have a great economic moat.... am heavily invested in this one as it could end up being a cheap entry into a healthcare stock for me by entering before it exits PN17.... keeping fingers crossed !

My logic is quite simple, ADVENTA will want to maintain its listing with this major endorsement by govt for ETP projects. It's subsidiary has been endorsed by the govt to provide the automated home dialysis system and as far as I know this is a pretty niche technology so its margins will be high. In fact it will need more funds to support its capex to fulfill the orders. I m thinking this could be achieved by staying listed and doing rights issue or private placement later down the road... valuations are expensive now, but there could be some restructuring/acquisitions that could boost its earnings once it announces the restructuring plan.... Buy at your own risk... This is my personal view...

hepitrade, instead of asking others when to buy/sell... go take a look at postings by kcchongnz or other FA articles posted by TanKW on how to value stocks... this is how I slowly learn as well.. you will feel more confident after you do your own research and find out the value of the stock yourself....

Homeriz is rallying in expectation of fed tapering and stronger USD... benefit its export... Latitud should also do well with bulk of cash in had in USD as well as >90% exports to US...

KC, actually does the discount part really matter if we dont intend to keep the warrant till maturity ? If we bullish on share price direction, buying highest gearing would make the most money fastest... and we can enter and exit fast with good profit... furthermore, I notice that as expiry date approaches, the discount will always widen due to the uncertainty or manipulation by issuing bank.... I always treat these call warrants as very short term investments... not one that I would hold for months simply due its volatility....

JKing, a very optimistic projection on EPS for 2013. Based on 3Q EPS of 2.67sen, a 4.8sen FY2013 means Q4 has to be 2.1 sen. What makes you think Q4 will be that good ?

re-posting this good article on TienWah by haikeyila

http://www.slideshare.net/kennethlai376/stock-pitch-twp-v1

nokenzo, that is just an excel formula. if current liabilities > current assets, then that value needs to be subtracted from total cash to find excess cash. If current liabilities < current assets, means that current assets able to cover the current liabilities (current ratio >1) then the excess cash = total cash

thanks for sharing.. very informative

If the MOS is no more comfortable, I will move on, and I have.

KC, thanks. I get your point.

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

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...

interesting how Pintaras share price keep dropping after bonus ex date.. this happen to a few ex-bonus counters as well like GUH... totally dont understand the rationale of throwing the share after bonus since we are having exactly the same fundamentals as before.

sense maker, nice to see you here commenting. Yes looking for future growth is one way to determine fair value. But buying a stock based on the quality of its assets is also a good way to limit the downside in investing... as you know the famous saying limit the downside and let the upside take care of itself. I keep a mix of asset plays and growth plays in my portfolio for some diversification

SBAGAN and FACBIND should be -ve enterprise value stocks since their net cash & investments exceed their share price (did not actually go and calculate). However, management for these 2 companies are too stingy to share the profit with shareholders which is why I avoid investing in them.

Negative enterprise value means that net cash per share of the company exceeds the market cap of the share + minority interests + debts payable. The company could basically be privatized for free with extra change.

Yes a company with a -ve enterprise value is a safer bet than a company which share price is lower than graham net net IV. However, the same problem and questions arise is whether management is willing to share the cash with shareholders and if the company is burning up the cash ?

Hexza is an example of a graham net net that I am comfortable to stay invested. Its net cash per share is RM0.65 vs its share price of RM0.675. It is obvious that with this kind of net cash, its valuation is extremely undemanding at only EV 3.1 times EBIT. Even in a climate of reducing revenue, it has consistently able to generate good free cashflows and most importantly it shares the cash with shareholders through dividend payouts every year.

KC , yes liquidity is a concern in a short term investment horizon. In especially long bear markets, it would really take a lot of conviction and patience to stay invested in these value stocks...

kc, all your points are valid.... limiting the downside is always the best strategy... But one point I would like to make is that value stocks with small market cap sometimes suffer from limited liquidity. In such situation if there is no institutional support or support of the share price from the major shareholders, these counters could be subject to forced selling and may drop very fast in a bear market.... just my 2 cents view

Kc, your track record has shown that you grossly outperform market in the bull run for the past 5 years. It will be interesting to see how it fares in a bear market.

calvin, Pasdec doesnt qualify as graham net net to me. It is bleeding cash and it has a lot of debt. Good luck on your MUI corp. I m not touching that stock for now.

doesnt this tell us that selling is harder than buying ? haha

KC, can you advise why you sold Willow so early ? I am still holding this one among the 3 you mentioned. I thought EPV valuation for Willow was about 80 sen based on your calculation.

Mistake... actually

Basic EV/EBIT = Basic P/E (8) x (1-0.25) x (1-0.04) = 5.7x (around 6x)
Where 25% is the tax rate
and 4% is the difference between cost of equity and cost of debt (could be subjective.. assuming 6% cost of debt)

Tax rate of about 25%, cost of equity (the returns required to own the stock) of about 10%

So lets say the base EV/EBIT = Basic P/E (8) x 0.75 x 0.9 = 5.4x which is close to what you calculated

Your last statement "It also depends on what kind of industry it is." is more like relative P/E approach. In this case I would just compare the EV/EBIT for companies in the same business and put a target EV/EBIT based on the average EV/EBIT of all the companies whereas the absolute EV/EBIT method would assess the business and financial risks to come up with the target EV/EBIT. I suppose the more practical way should be the former as any take over would be justified based on relative valuations rather than absolute.

the biggest problem for me is not so much on diversification on how many stocks but how many % to allocate to stocks vs cash as a whole during a given time... should I do market based portfolio balancing or fixed schedule portfolio balancing... don't want end up with no cash once the opportunity arises...

after all if you have a very nice portfolio of stocks which gives you a return that beats the index but only allocated 30% of your total cash into those stocks then the overall return for yourself is still low....

yea I agree on that. I was just wondering what would the basic EV/EBIT be for the calculations if we were to use EV/EBIT rather than PE for valuation method in this thread.

Hi KC, I m curious if you have attempted to tweak this model to use EV/EBIT multiples rather than PE ? As u know PE numbers can be manipulated by share buybacks goodwill charges or one off gains. Thanks

Eric no problem.. we are all learning from each other

Eric, KC is using 2013 annual results, you are using trailing 12 months results perhaps...

FCF = Net cash from operations - PPE.
Whether investment properties should consider PPE is subjective depend on company's business.
We dont subtract borrowings to determine FCF. We just see if there is enough FCF to cover the debt payments/dividend payments. This should be under cashflow for financing activities.

A good reference on understanding financial statement can be found here.
http://www.oldschoolvalue.com/blog/financial-statement-analysis/

thanks.... words of wisdom... haha

KC, what you say is very practical. Considering the inaccuracies of this intrinsic value then how do you generally decide when to sell a stock ?

kc, have you do a back testing before to see if stocks valued using these DCF assumption eventually reach their intrinsic value ? For example lets say you look back at some of the blue chips today that are already mature and paying out steady dividends like BJTOTO or Dutch Lady, lets say you go back 5-10 years ago and apply the DCF based on the results back then, would you get close to the intrinsic value ?

a look at their latest cashflow statement shows that their CFFO is not able to sustain such a high dividend payout, but looks like they are doing well in their investing, they make substantial profit from the gain of the warrants conversion/sale (goreng ??) and this was able to cover the dividend... but warrants expiring soon.. not sure how after that....

-ve enterprise value means net cash per share more than share price... if the company is not tightly held... will be targetted by corporate raiders who can privatize the company for free...

dividend cant be paid till they wipe out accumulated losses from equity ? i think.

sense maker, you talk a lot of sense. may I know what counters you are invested in or feel are good companies ? Would sure like take a look at them.

Posted by sense maker > Dec 6, 2013 12:32 PM | Report Abuse
"So, the existence of a discount does not call for a buy decision unless distribution to shareholders is immiment or foreseeable."

Well said but the problem is you need insider info to know this and by that time the price would already have run up. But in general what you say makes sense... better if we found a net net counter with earnings potential and a dividend policy

Posted by sephiroth > Dec 5, 2013 11:54 AM | Report Abuse

Out of all of these 4 companies, Homeritz stands out with best gross margin, best ROE, best dividend payout ratio, decent dividend yield and its recent financial results are good. That's why it's the "most expensive" one here.

http://klse.i3investor.com/blogs/kianweiaritcles/42785.jsp

Expensive if you use P/E but note that Homeriz has the most excess cash among the 4 companies, if you exclude this excess cash which is not used in the business it is actually cheap.

Problem is I m my own account fund manager but I still need to pay 3% upfront to the investment bank... furthermore annually got charges....