Posted by Fat Cat Tim Buddy > Jun 17, 2013 10:32 PM | Report Abuse
kcchong.. how you get all this information? u key in one by one or...?

All information is in the Bursa website; the annual reports and quarterly financial reports etc. Yes for the three spreadsheets of "Income statement, balance sheet and Cash flows", I have to key in the figures from the reports one by one, adjusting the figures a bit to suit the spreadsheet, and to suit the analysis and valuations. The analysis and valuation spreadsheets have to be created mostly by myself, for example the ratio analysis, EPV, hybrid PER valuation, Altman Z-score, Pitroski Score, sustainable growth etc. For the spreadsheet on "strategies", I have the "Peter Lynch famous numbers" and the strategies of investing basing high dividend, low PE, EV/Ebitda, P/B, growth strategy stock strategy which I summarize after reading the books from "One Up Wall Street", and Books and valuation materials from Professor Aswath Damodaran and a US finance blogger Jae Jun etc. I have borrowed a couple of valuation spreadsheets from Aswath too, with some modifications to suit my analysis.

Generally if you want to use the spreadsheet, you have to key in the numbers in the financial statements, may have to make some adjustments, then the ratio analysis, valuations, strategies etc may come up automatically, hopefully.

So as I have said the spreadsheets were done by a non-professional like me; both in the sense of accounting and IT, there are bound to to mistakes and errors here and there and some features may not be properly linked to each other. That is why I appreciate feedback so that I can improve it. I particularly happy to see this post below:

Posted by Bzzing > Jun 17, 2013 11:01 PM | Report Abuse
Dear KC,
forward me a copy please. Based on my knowledge, I should have be able to give you some precious suggestion.
My email: alvinphang@hotmail.com

Hi all, Tan KW has been posting many good articles on fundamental investing in i3investors. Very good start for those who want to embark on doing investing basing on fundamental analysis. What I have been doing my spreadsheet are based on those theories, principles and practices.

Another great opportunity to make low risk profit from Maybank CW?

At the close of Maybank and CW at 10.38 and 24 sen respectively today, CW is trading at a discount of 1.7% with an effective leverage of 8.5 times. This means that if you think Maybank share price has a chance of going up in the next few months before CW expires on 30/9/13, you will make a lot more money buying CW. Each percentage point up for Maybank results in 8.5X increase in price of CW. Even though Maybank share stays the same at the present price at expiry of CW, one would make 15% as it is at a discount of 1.7%. Of course if Maybank share price goes down, then it is a different story. But with this discount and if one buys CW now at 24 sen, you will only start to lose money of Maybank share goes below 10.20, and lose all if below 9.00.

Yes, it is indeed a good opportunity to punt on CW.

Now that many of i3invetors have received my spreadsheet for Kumpulan Fima, any mistakes have you found? I am sure there are. Any suggestions for improvement? Any thing you want to discuss about the spreadsheet? Any questions? Have you discovered any good stocks to invest using the spreadsheet for analysis? Please share.

KC

Posted by chengyee > Jun 16, 2013 07:04 PM | Report Abuse
Kcchongnz, have you done study on LBALUM and PMETAL before? Please share if you have. I am interested to know your valuation on them. Thanks.

No, I haven't before you mentioned here. In fact I don't know what this LBALUM is also. But since you asked, I have a look at P Metal.

I saw a "big Head Devil" here. PMetal has impressive projects in Sarawak, the huge aluminum smelting plant which is in full operation now, and a few huge operations in China. Appeared to be very impressive. However, after normalizing its earnings to just about 100m last year (this year doesn't appear to be better), its ROE is only about 7%, way below my required return of 15% for this company.

PMetal has an astronomical amount of debts, 2.6b against its equity of just 1.4b. So yearly interest payment alone is 108m last year. So Pmetal didn't even earn enough to pay interest payment alone! Worst of all, it has no positive cash flow at all from its operations for at least the last two years(mind you I am not taking about free cash flow). So how? I jsut wonder how Pmetal could pay 6 sen a share dividend last year???

Since you want my valuation, I just give a shot. I use a simple but very useful valuation method basing on its ROE. My requirement of return for this kind of financial is at least 15%. With a NTA of 2.52 per share, I value Pmetal equal to 7%/15%*2.52 or just RM1.20 per share, against its market price of RM2.52 now.

Is Willowglen MSC a good company? Is it a good investment?

First I look at the business of the company if there is economic moat. Two important attributes of economic moat is the durability and the quality of the business. A durable business is whether the business is a good one and will still persist many years in the future. High quality business has good cash flows, high margins compared to its competitors and provide excess returns to its capital providers.

Willowglen MSC Berhad is engaged in the research, development and supply of computer-based control systems. Its supervisory control and data acquisition (SCADA) system is used in security monitoring, building management and environmental control systems that has been showing promising growth trends in recent years. Its operations are mainly carried out in Malaysia and Singapore with the Indonesian market in the developing stage. In the Klang Valley, there are some key areas that will lead to the increase in the demand for SCADA and Security Systems applications, such as the High Speed Rail System, MY Rapit Transit andSewerage Non-River. In Singapore, there will also be more business opportunities in line with the Government’s initiative in construction of new infrastructure, facilities for transportation and utilities such as power, water and sewerage plants. This will directly or indirectly provide opportunities for growth and demand for SCADA and Security Systems. This shows the durability of Willow’s business which will continue to exist and prosper for years to come.

From the past years from 2005 to 2012, revenue and net profit of the company was quite flattish at an average of 50m and 8.5m respectively. However the last financial year saw revenue and net profit jumped by 60% and 80% to 83.4m and 15.4m respectively. This good performance continues in the first quarter of 2013. For the past 5 years, cash flows from operations has been about the same as net income and free cash flows abundant at 89% and 34% of revenue and invested capital. This is despite that they were pulled down by the poorer CFFO and FCF last year as a result of its 60% increase in revenue. The net profit margin of Willow has been quite consistent at an average of 18% (>15%) which is pretty good to me. This is also shown in the high ROE and ROIC of 18% and 37% respectively. All these demonstrate that the quality of the business is great.

The Board of directors is strangely just made up by one executive director who is the Managing Director, Puan Sri Khor Chai Moi, age 60, and an accountant by training. There are 4 independent directors. The business appears to be fully controlled by the major shareholder. The composition of the Board is very lean indeed. Total management compensation for last year was only RM512000, or about 0.6% (>>3%). Anyway, the major shareholder Puan Sri Khor and her family hold 52% of the shares and hence the interest of shareholders and management appears to be aligned.

So taking all these into considerations, I would rate Willow as another above average company. What how about its price? We have discussed before that a good company may not be a good investment if it is very pricey.

At the price of 48 sen now, Willow is trading at a PE ratio of just 7.7 (<20). Market Enterprise Value is only 4.6 times EBIT (<8). Price-to-book is only at 1.6 (<2). I would say a good company of Willow is selling very cheaply.

Is Muar Ban Lee a good company? Is it a good investment?

Posted by houseofordos > Jun 15, 2013 05:21 PM | Report Abuse
KC, Nice sharing... I think Muar Ban Lee, Willowglen also fits nicely into this criteri

First I would look at the business of the company if it is durable. A durable business is whether the business is a good one and will still persist many years in the future.

MBL is principally engaged in three core businesses: the design and manufacture of oilseed expellers and ancillary machinery for oilseed crushing plants; the design, fabrication, installation and commissioning of oilseed crushing plants, and the manufacture and sale of spare parts. It has evolved from a small scale manufacturer to the current position as one of the top manufacturers of oil seed expellers in Malaysia. It went public listing on 11 January 2007.

MBL being closely tied to the palm oil industry which is a durable business. Cheap palm oil is the cooking oil of choice in many parts of the world, and accounts for more than 30% of the world’s vegetable oil production . Palm oil exports bring Indonesia and Malaysia US $40 billion a year.

Secondly I would like to see the quality and credibility of the management of MBL. Dato’ Chua Ah Ba, aged 67, the Executive Chairman is the founder of our Group and has accumulated more than 39 years experience and expertise in the design and manufacture of oil seed expellers, ancillary machinery and spare parts. He is incharge of the overall business operations and strategic planning of the group. He is training his son Chua Heok Wee to take over his place. The business seems to be tightly held and controlled by the Chua family, with a couple independent directors. There doesn’t seem to be any unfair related party transaction.

Total management compensation for last year for the 5 executive directors of RM4.142m, or about 5% (>3%) of the revenue appears on the high side. That may be because the company is small with revenue less than 80m. If we gauge from the profits they made at 17m, or a net profit of 22%, it may be justifiable.

Next important thing for me is the quality of the business. The gross margin and net profit margin of MBL of 43% and 22% is pretty good to me. This is also shown in the high ROE and ROIC of 21% and 36% respectively. The high EBITDA/IC of 40% also demonstrates the high quality of its business.

Fourthly regarding the growth of its business. Revenue and profit has grown by 46% and 26% a year for the last three years since listing. This is a very good growth indeed. Actually if a good company can have a growth rate of 5-10%, I would be happy enough.

So taking all these into considerations, I would rate MBL as a above average company. What how about its price? We have discussed before that a good company may not be a good investment if it is very pricey.

At the close of RM1.15 on 14/6/2013, MBL is selling at a PE ratio of just 6.2. Market Enterprise Value is only 3.7 times EBITDA. Price-to-book is only at 1.3 (<2). I would say a good company of MBL is selling very cheaply.

Yeah, the first quarter result 2013 has shown MBL’s revenue and profit dropped substantially by 35% and 55% respectively. But that has not result in overvaluation of MBL even basing on this “bad” results. Not yet.

So I would say MBL fits in very well as a good company worthy of investing for long term.

Posted by houseofordos > Jun 15, 2013 05:21 PM | Report Abuse
KC,
Nice sharing... I think Muar Ban Lee, Willowglen also fits nicely into this criteria... To add...
P/B ratio of 2 may not be too expensive if we are looking at asset light companies so again comparison to sector average or peers will tell a better picture
P/E ratio of 25 is a good starting point, P/E =25 = earnings yield of 4% which exceeds FD rate. P/E ratio should be further compared to the sector or index average before decision is made..
Other screens I normally use are :-
Debt to equity < 0.5
Dividend yield > 5%

house, agree with you regarding your P/B=2 and P/E=25 are not high for investing in a good company. I am emphasizing "good" companies here.

Regarding your screen for D/E<0.5, and DY>5%, I am afraid you may lose out some fantastic companies to invest in if you put your requirements too stringent. Many good companies can leverage high with D/E even much higher than 1 to earn good ROE. A good business is good to have more debt because for good business, leverage enhances return to equity holders. I did not study good companies like Nestle, Carlsberg, BAT, Maxis, GAB etc, but i think they make good use of leverage to enhance ROE. Also a good company with steady cash flows have no worry of paying interest payment.

The other DY which at the start I have mentioned that there is no statistically evidence to show that high DY companies provide high total return. Think about it, a company pays out too much dividends is because they have nothing better to do with the money. A growth company which pays out too much dividend will suffer lower growth rate if less money is reinvested in the business.

Almost miss these cynical comments until I notice the writer.

Posted by Lucky88 > Jun 14, 2013 04:55 PM | Report Abuse
Hm.. I think CSL could beat all your PE, ROE, NTA, ...

Posted by iafx > Jun 14, 2013 10:14 PM | Report Abuse
@lucky, good point u got there. :)

What is wrong with these comments. Nothing. On the contrary they are useful. I make cynical comments too once a while but with some good intentions.

Yes, one has to be cynical when hearing and reading rumours, market experts, real or pretend, telling them to buy this share and that share. Try evaluate yourself; what they say so, what is their reasoning, motive etc. Ultimately it is yourself to take full responsibility of your own actions.

Is P&O a good comapny? Is it a good investment?

Posted by Darren Kho > Jun 15, 2013 02:33 PM | Report Abuse
kcchongnz,
Please have a look at P&O, is it a good company and worth for long term investment? Appreciate your comment so much and thank you for that :)

Sorry Darren, I don't know how much about insurance business. But that won't stop me from giving an opinion too, will it?

Warren Buffet acquired a good insurance company in Geico. It gives him a lot of money paid upfront to invest and earns great return for Berkshire Hart away. So I guess insurance business is a durable one. But once and while insurance company get hit badly too when there is a natural disaster.

P&O makes good ROE and ROIC too and so this is a plus as a good company. However, I don't expect much growth. don't know why cash flows is not good. So this is a minus.

So overall i guess P&O is ok lah as a company. Lets look at whether it is a good investment.

Screens for investing
ROTC ok 17% >WACC
P/B Yes 1.5 <2.0
PE ratio Yes 10.0 <20

apparently P&O meets my requirement as an investment as shown above.

Posted by Tan KW > Jun 15, 2013 08:27 PM | Report Abuse
received. thank you very much!
what is Piotroski?

Appended below is a link explaining what Pitroski Score is.

http://www.grahaminvestor.com/articles/quantitative-tools/the-piotroski-score/

It is similar to the Altman Z-score, used to check the likelihood that a company can go bankrupt. If one buys the stocks of good companies, this is not a concern. But if one hunts for low price stocks which have been in persistent downtrend for a long time,speculating in the market, following the daily hot stocks and listening to market rumours, he should check the stock with this Pitroski Score first before risking his money. Use it to check stocks like KNM, Patimas, Smartag, Amedia, Tiger, Lion, Leopard etc, even for Ivory, Perisai, London Biscuits etc.

The thing is if there is a high likelihood that that company may face trouble, why invest in it when there are thousands of other opportunities?

Posted by plutus > Jun 14, 2013 11:22 PM | Report Abuse
Hi @kcchongnz, if you don't mind, could you send a copy of your FA worksheet to achilles_hee@hotmail.com? Many thanks.

I have hard time calculating ROIC actually, according to morningstar definition you based upon, ROIC=NOPAT/IC
The issue is how to judge IC (invested previous year) like you do..
Can I interpret it as
Total asset -
(free cash flow at the end of last year?) -
(non-interest bearing current liabilities ex:payable, provision, deferred tax) - (other liabilities ex: pension fund etc.?)

Plutus, invested capital means capital invested in the ordinary business. This equals to Total assets-non interest bearing current liabilities-excess cash-investments not consolidated in the account.

Excess cash is cash not needed for the ordinary business. this is equal to cash and cash equivalent less Max[0, (current liabilities-current assets)], not including cash and cash equivalent.

Investment in associates, jv, properties etc not consolidated in the account is less off from invested capital

Or the other way is IC=fixed asset (PPE+prepaid lease payment+biological assets)+net working capital (account receivables+inventories-account payable)

You will be able to see how I obtain the invested capital in the spreadsheet I have sent to you.

Cheers.

calvinwky168,
I think you lost you way? This thread is about in search of excellence; looking for good company to invest for long term. How could you consider a PN17 company which has been making persistent losses in the last few years; making only 15 m for the last two quarters; while having a total debt of 1.6b and annual interest payment of more than 100m to pay, a good company?

arv18, give me your email address.

Thanks for all the constructive comments. I particularly appreciate xingxian's input regarding Lii Hen's RPT issues which I myself have not paid particular attention to. This is a very important issue, I agree.

What Jonathan said is also very true. He helps me to forewarn others what I have written is a guide and each and everyone has to make his own decision.

arv18, I have my own "template" for analysing a company's business. I made it up myself. However, it is not user friendly. One needs to do quite a bit of work like input all the financials; income statement, balance sheet and cash flow statement. Once input these information, you can get the ratios and some metrics. Let me know if you are interested.

Is CSL a value stock?

Posted by Lucky88 > Jun 14, 2013 04:55 PM | Report Abuse
Hm.. I think CSL could beat all your PE, ROE, NTA, ...

Yeah Lucky, thanks for your contribution here. CSL is definitely a value stock if you use Cold Eye's 5 yardsticks. Actually I didn't do any computation and i already know. Why?

Let me show you the return you can get if you buy CSL at various point of time since it listed more than a year ago as tabled below:

CSL 0.300 14/06/2013
Period 2-week 6-month 1 year Since listing
Price 0.36 0.78 1.42 1.00
Return of stock -16.7% -61.5% -78.9% -70.0%
CAR -99% -85.2% -78.9% -60.4%
Dividend 1.1% 21.0%
Stock price appreciation -99% -85.2% -80.0% -81.4%

The table shows it doesn't matter when you purchase CSL, you would have lost money. the loss is heavy, for example, if you have bought CSL 1 year ago, you would have lost 78.9%! So investors of CSL have to sing the song "Cry Me A River" by Julie London. Have you ever wonder why?

http://www.youtube.com/watch?v=BO_g5Ocr4K0

Alan, you have done your homework, unlike many others. And you don't owe me any explanations. I have nothing against Smartag. I will never buy Smartag and so forget about thinking I try to scare anybody to sell me cheap. Neither can I short Smartag. I don't have facts like you do because i have no interest on it and by looking at how it has performed the last two years, both financially and the share price performance, it doesn't appear to be good to me.

A company can announce and say anything; what contracts they have sign, how much they anticipated to make, what future plans they have etc etc. I know some people even constantly write to Smartag and question why the share price keeps dropping. They have given positive answers; what projects they going to get, what big plans they have etc etc. I place little value of what they said, unless I can see the results. Why is the share price dropping like that? Why is the directors selling the shares if it is so good? And so many other whys as I have stated?

There are so many good companies to invest in Bursa, and why in a company which has so many question marks?

For you since you have hard facts and you think you can strike big from this investment, go ahead and you may be right eventually.

Posted by sbzk > Jun 14, 2013 11:10 AM | Report Abuse
you cant analyze with all the above points if this is a goreng stock! totally not applicable!

So you buy a stock and hope that the insiders will "goreng" the share price up for you? Good on you.

But looking at its share price performance, unfortunately its share price has been "goreng" down (not up) from 42 sen two years ago to only 9.5 sen yesterday. So how much have you made from waiting for the insiders to 'goreng"? Actually I am very curious how many people have made money from your "goreng" stock compared to those who lose money.

I know many stocks have risen many folds since two years ago because they have good business and growth prospects. I know none of any stocks which have made money due to insiders "gorenging" for you. Yes making money for themselves (the insiders) are aplenty.

arv18, sorry i don't know of any book with Excel templates to calculate those ratios and metrics. I think if you Google, you may find some in the net to do some simple computations.

I do it myself starting from the financial statements from Bursa website. One must of course have some basic knowledge of reading and interpreting financial statements and know how to use Excel spreadsheets. If one doesn't have that it may be a little difficult at the beginning. But they aren't difficult to learn and then practice to make perfect. If not, he also can use calculator to compute those numbers.

Which is a better stock, Lii Hen or Latitude Tree?

I have stated that Lii Hen meets all the requirements of a value stock and that there is also reasonable growth in the business and it is also not a risky stock basing on its balance sheet. But how is it compared to Latitude Tree, a comparable furniture exporter and also a value stock if you analyze its financial?

Lii Hen Latitude
Growth Trailing twelve months
Revenue 22% -1.0%
NI 92% 122.2%

Lii Hen has a nice growth of its revenue of 22% the last twelve month whereas the revenue for Latitude is basically flat. However, Latitude's net income grew at a higher rate. Between the two, I will prefer Lii Hen which has a good revenue growth which is a higher quality growth and also has a good growth in earnings.

It is such a coincidence that both Lii Hen and Latitude has similar kind of margins as shown below.

Margins Lii Hen Latitude
Operating margin 7.9% 7.9%
NI Margin 6.2% 6.4%

But which is more efficient?

Efficiencies Lii Hen Latitude
NI Margin 6.2% 6.4%
Asset turnover 1.75 1.25
Leverage 1.47 1.55
ROE 15.9% 12.5%
ROIC 17.3% 13.1%


The winner for ROE is Lii Hen with ROE of 15.9%, higher than my requirement of 15%. You can see from the dissection of ROE above that Lii Hen wins in the metric of asset turnover, meaning more sales in relation to assets it holds, even though it has a lower net profit margin and financial leverage.

Lii Hen's return of invested capital at 17.3% is also substantially better than that of Latitude Tree.

One would think that due to the efficiency of Lii Hen, it should be valued higher than latitude, but is it?

Market valuation Lii Hen Latitude
PE ratio 4.6 3.7
EV/Ebit 3.2 4.1

In term of PE ratio, yes, Lii Hen is valued higher than Latitude. But PE ratio is not a true reflection of whether it is cheaper, especially when debts is involved. A better comparison should be the enterprise value over earnings before interest and tax to account for both capital providers. In term of EV/EBIT, it is surprised that Latitude is valued higher at 4.1 compared to 3.2 of Lii Hen. Anyway, both stocks are value stock using this metric.

Alan, I don't have that kind of bullishness you have for Smartag. My opinion is that Smartag's fundamentals are not good. On the contrary, I think its fundamentals are pretty bad.

Smartag was listed about a couple of years ago. Since then it has been talking about that single potential custom contract, huge potentials of revenue and profits. But besides this seemingly political connection for this job, what else does it have? My doubts are listed below:

1) When is this "contract" going to be sealed, as it talks about it too long already?
2) If this fail, what else does Smartag has? What its future lies?
3) Since listing, Smartag has little revenue and incurring losses and has been burning its cash raised from IPO, it won't last another two years. If nothing comes about now, right now, Smartag will have to raise money from shareholders again.
4) Why would custom want to pay such a high price to Smartag? How do they account for that?
5) Even if such a high price is paid, what are the kickbacks? How many layers of these kickbacks? And after all these kickbacks, how much left for the shareholders, the minority shareholders?
6) If such custom contracts is so lucrative, how come no other political strong players trying to get a piece of the cake? There are many others who are better in REID technology.

No, seriously I don't know much about Smartag. Those are my wild guesses from looking at its financials for the past two years since listing; and its dismay share price performance since then when new lows were formed when other shares are forming new highs. And why would insiders (directors) sell their shares if it has such a promising future?

Well, I could be wrong. You don't have to listen to me.

The way I look at the share price movement of a company like Smartag, when the market is good, this share is able to be pushed up to higher price by the manipulators because there are retail investors (punters is the right word) willing to part their money to buy at high price. The insiders will distribute their shares to the willing buyers at this high price. When the market is down, this type of shares will drop sharply because those retail investors who bought get panicky and just throw away the shares like hot potatoes, often at a big loss as there is no more buyers to support. The share price of this type of company falls to lows when the market is flat or declining.

Joshua,
You may be right. Very good point. Its earnings grow may be due to higher value product.

The surge in net income actually just happened last year when NI jumped from 26.7m to 41.3m (actually about 35m, the rest from sales of assets). The management discussion did mention about "better product mix". In the future, sales has to increase too to maintain that kind of growth.

Actually Globetronics is capable of distributing that 17 sen dividend last year because it has 106m cash and no debt at all. More debt can be assumed and cash obtained from debt can be distributed as dividend too. However for this high dividend to continue, it really has to earn much more in the near future as it pays out more than it earns last year. Moreover, it needs money for capital expenses which they acknowledge that it is necessary as shown in their statement below:

"Moving forward, the Group will continue to focus on escalating up the value chain and riding on the R&D initiatives in new products’ design and development."

Does Globetronic fit in a high dividend strategy?

Posted by necro > Jun 12, 2013 10:13 AM | Report Abuse
Have a look on GTRONIC...

Posted by Johari > Jun 12, 2013 04:34 PM | Report Abuse
yes GTRONIC will give you at least 7% yield this year with 20% growth in earnings. No brainer.

Globetronic paid out a dividend of 46m, or 17 sen per sharelast year. At 2.08 now, the dividend yield is 8.2%, more than twice the FD rate. Yes Globetronic is definitely a high dividend stock. But does it meet the requirement of a high dividend investing strategy?

Globetronics earned 41.3 m last year. Hence the dividend payout ratio is 46/41.3 or 110%. This means that Globetronic dug into its cash in its balance sheet to pay the dividend which is more than what it earned last year. It has an excess cash of 106 m in its balance sheet as at 31/12/2012. So unless Globetronic can make much more money than last year, its high dividend may not be sustainable. Don't forget that in order to maintain its competitiveness, it also has to spend money for capital expenses.

Although its compounded annual earnings growth for the last 4 years is ok at 17% a year, its revenue growth is not impressive at all at only 1.3% a year. High earnings growth without the corresponding growth in revenue is also not sustainable.

Hence for me, Globetronics doesn't fit in my high dividend yield strategy.

MG9231,
By looking at the rise of stock price of Pintaras recently which is rising unabated, it does appear to me something is brewing for this company. Yes, it has proposed its enlargement in share capital some time ago. I tend to believe in your proposition that those with insider information, viz the investment bankers are acting in advance of any corporate exercise.

By the way, as you are a long time investor in this company, appreciate if you could continue to contribute to this thread.

arv18, again this thread is about a investing strategy on high dividend stock. As Prolexus only pay a dividend of 3 sen, and at 2.12, the dividend yield is just a pittance of 1.4%. So it does not fit here. However somebody did ask me about this stock in my thread of investing in a growth stock, "Do you have a valued growth stock?". I posted my reply as follow. appreciate your feedback.

Posted by kcchongnz > Apr 9, 2013 05:22 PM | Report Abuse X

Prolexus A growth stock?

The table below shows the 6 years revenue and earnings of Prolexus for the financial years ending 30th June. It doesn’t show that it is a high growth company in terms of revenue. It made losses in 2006 through 2008. However, after the disposal of some loss making investment in 2008, Prolexus made a turnaround. Its revenue grew at a CAGR of 8% from 2009 to 2012. Its EBIT surged by 45% a year for the three years from 2009 to 2012. The growth in EBIT and net income last year was 90% and 80% respectively. That would qualify Prolexus as a high growth company. Thanks to the growth in its garment manufacturing.

Year 2012 2011 2010 2009 2008 2007 2006
Revenue 189498 184464 136875 149998 166774 181527 174840
EBIT 11213 5886 6601 3694 -149 -2958 -1066
Net Income 10568 4906 3403 262 -2892 -5869 -1976

Prolexus closed at 1.33 on 9th April 2013. With a EPS of 28 sen per share, the PE ratio is about 5 (<<10), PEG is also very low at 0.2(<<1), a P/B of 0.9 (<1.5), and a dividend yield of 2.3%. Hence Prolexus is not only a growth stock, it is also a value stock in every aspect.

A high growth stock has a major concern; that is if the growth adds value to the firm. Growth is considered shareholder value enhancing if the growth in earnings exceeds the weighted average cost of capital of the firm. With a return of total capital of 15.2% and ROE of 16.2% last year, it has clearly demonstrated that the growth is shareholder value enhancing.

For the half year ending 31/12/2012, Prolexus has already made a net profit of 22.3 sen per share, 64% more than the same period the previous year.

So is Prolexus a free lunch for investors; one with high growth and yet selling at a very cheap price?

Yes, the share price of Pintaras has surged ahead too fast, too furious in such a short time. You can see the return of investing Pintaras in the short and long term below:

Pintaras 5.01 12/06/2013
Period 2-week 6-month 1 year 2-year 3 year 4 year 5 year
Price 3.68 3.14 2.80 2.35 1.60 1.20 1.40
Return of stock 36.1% 59.6% 78.9% 113.2% 213.1% 317.5% 257.9%
CAR 304505% 154.6% 78.9% 46.0% 46.3% 42.9% 29.0%
Dividend 2.7% 4.0% 6.8% 6.4% 6.3% 10.0% 7.1%
Stock price appreciation 304503% 150.6% 72.1% 39.6% 40.0% 32.9% 21.9%

Is it still a good investment?

If you want to talk about its share price, I really don't know. There is two school of thought; one is the theory of mean reversion and the other is momentum investing. The former suggests that prices and returns eventually move back towards the mean or average. The latter may mean an uptrend will continue. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values. So which one do you believe in?

So may be the best thing to do is to do some valuation using various methods to see if the price of Pintaras has surpassed its intrinsic value; and what is the margin of safety if it hasn't.

Value Investing. Does Lii Hen satisfies the 5 yardsticks of Cold Eye?

The table below details the 5 metrics of Lii Hen compared with the yardsticks:

5 yardstick of investing by Cold Eye for Lii Hen
1 ROE 15.9% >15%
Net profit 21363
Equity 134697
2 Cash flows OK
CFFO 19063 89% CFFO/NP
FCF 6899 Positive OK
3 PE ratio 4.6 <10
Price 1.64
EPS 0.357
4 Dividend yield, % 7.3 >3.5
Dividend , sen 12.0
5 Price/NTA 0.76 <1
NTA 2.16

It appears that Lii Hen meets all the requirements of a value stock. However we need to check to ensure that there is at least a growth in line with the growth of the overall economy and the company is not too risky to invest in.

The company’s revenue and net profit has been growing at a CAGR of 16% and 45% respectively for the last 7 years. Together with the anticipated housing recovery in the US where the company has been exporting its furniture product to, we can say the growth will still be there for some years.

With a total debt-to-capital ratio of 0.17, we can safely say that there is little risk of bankruptcy for this company.

It is concluded here that Lii Hen is a great value stock to invest in.

Does Boustead fit the high dividend yield investment strategy?

Posted by aunloke > Jun 9, 2013 12:17 PM | Report Abuse
If Bjtoto is good then Bstead is better.

Boustead paid a dividend of 36 sen last year with a dividend yield of 6.7%. This is about twice one can get from FD. So Boustead is definitely a good investment, or is it? Below is the summary of the short and long -term total return for Boustead:

Bstead 5.39 11/06/2013
Period 2-week 6-month 1 year 2-year 3 year 4 year 5 year
Price 5.34 4.98 5.20 5.60 3.40 3.40 4.10
Return of stock 0.9% 8.2% 3.7% -3.8% 58.5% 58.5% 31.5%
CAR 27% 17.1% 3.7% -1.9% 16.6% 12.2% 5.6%
Dividend 6.9% 6.4% 6.1% 5.4% 4.4%
Stock price appreciation 27% 17.1% -3.3% -8.3% 10.5% 6.9% 1.2%

As you can see, the total return of Boustead is not really that impressive after all. For example, though its three and four year compounded annual return of 16.6% and 12.2% is just comparable to the return of KLCI, its 1, 2 and 5-year CAR of 3.7%, -1.9% and 5.6% respectively is way underperformed the market. Another disappointment for a high dividend yield stock.

Boustead share price performance is better than Berjaya Toto though as the shareholders of BJToto join Julie London and sing "Cry me a river" below:

http://www.youtube.com/watch?v=_iMTN1YS7H4

Management and corporate governance of a good company. A Look at Pintaras Jaya.

Most investors view the value of management as reflected by its stock price. There is some truth to this over the long run, but strong performance in the short run doesn't guarantee good management. One of the best example in Bursa is KNM group. Everyone is familiar with how the flamboyant CEO has been doing to jack up its share price by repeatedly issuing misleading statements about its future, engaging in company share buybacks to jack up the share price, engaging in acquisition spree all over the world which destroy value etc, instead of concentrating in improving the operation efficiencies and the bottom-line of the business. One better example is the failed Enron Corporation in this book, “Conspiracy Theory: the True Enron Story”.

Both the key man in Pintaras Jaya, Chairman and Managing Director Dr Chiu Hong Keong, aged 58, the founder of Pintaras , and Ir Khoo Keow Pin, aged 56, an Executive Director, are geotechnical engineer by training and have worked in the construction industry, in particularly the geotechnical works involving design and construct heavy foundation and retaining structure works for the whole of their career. The valuable specialized knowledge they possess ensures the effective operations and management of the company.

The management is compensated fairly with their salary each year. Total management compensation for last year was RM2 million, just about 1% of its turnover last year. There has been no options granted to anybody in the management before. Dr Chiu who holds the position of both the Chairman and Managing Director paid himself for less than RM800k a year, even though the company made a profit before tax of RM54m last year.

In actual fact, Dr Chiu and his management team does not required to be paid high salary for their commitment to the company. Dr Chiu and his spouse hold about 73% of the total of 80 m shares in Pintaras. When a dividend of 20 sen was paid last year, they pocketed about RM12m. So why is there a need to have high salary and compensation from the company? This high percentage of insider holding in itself aligns the interest of shareholders and the management and hence minimize the agency problem in a corporation.

In corporate governance, the Board comprises 4 Executive Directors, a Non-Independent Non-Executive Director and 3 Independent Non-Executive Directors. They have a vast range of experience and knowledge in the areas of business, engineering and finance. The Independent Non-Executive Directors do not form part of the management and are not connected with major shareholders. They provide a fair representation of the shareholder’s interest. So far, there have not been any unfair related party transactions in the company.

The management also has a focus strategy in its business. It concentrates in what the company can do the best, i.e. to embark on design and construction works of its niche market in deep foundation and basement work with less competition and higher margins, rather than engaging in every kind of construction work where the competition is keen and margin is low.

The above are some of the high quality of management I think one should focus on when investing in a company.

Does Berjaya Toto meets the requirements of a high dividend yield strategy?

Posted by Hafiz Millip > Jun 9, 2013 11:57 AM | Report Abuse
Buy bjtoto lar for dividend and stable price...no brainer....bjtoto get tons of money everyday....from gamblers...

Posted by Hafiz Millip > Jun 9, 2013 12:03 PM | Report Abuse
Bjtoto give above 20 cents dividend for the past donkey years....in fact you already get back your capital and enjoy the dividend by now....cash cow one....no neec to kanchong2 play stock...

Everybody seems to think that a high dividend payment company is a great investment. Why not? Look at Berjaya Toto. Pay high dividend every year. "Investors already got back their capital in a few years." Is it really true that Berjaya Toto is so good.

I must emphasize here again that dividend forms just part of the return for investing in a company. The other part is the capital gain on the stock which comprises of earnings growth and expansion of the price-earnings ratio when it is sold later. Together they form the total return of a stock.

Total return = Dividend + Capital gain (Earnings growth + PE change)

Below I have summarized the total return of each period and the compounded annual return for each holding period for BerJaya Toto since 5 years ago. Judge yourself if this high dividend yield was a good investment.

BJToto 4.36 11/06/2013
Period 2-week 6-month 1 year 2-year 3 year 4 year 5 year
Price 4.18 4.39 4.20 4.18 4.10 4.55 4.43
Return of stock 4.3% -0.7% 3.8% 4.3% 6.3% -4.2% -1.6%
CAR 199% -1.4% 3.8% 2.1% 2.1% -1.1% -0.3%
Dividend 6.1% 5.0% 3.9% 8.7% 4.9%
Stock price appreciation 199% -1.4% -2.3% -2.9% -1.8% -9.8% -5.2%

Is TSH a good company? Is it a great investment?

Posted by KY Lau > Jun 8, 2013 01:17 AM | Report Abuse
how u think mkh n tsh?

TSH is a darling stock for most investment bankers and analysts. Phillip Capital is one of them who has been continuously recommending this stock since three years ago. They expect TSH will have explosive growth for the next 20 years for its palm oil production! Analysts have projected the planting and increased in acreage in its palm oil crop and I believe they have done a thorough job.

We will let the job of projection to the analysts as this is their rice bowl. But we just peep through the recent past and see how TSH has been doing in its business. The Table below shows it revenue and net income from 2006 to 2012.

Year 2012 2011 2010 2009 2008 2007 2006 CAGR
Revenue, m 984 1134 910 989 1110 862 625 8%
EBIT, m 112 167 115 89 101 117 74 7%
Net Income, m 84 130 92 64 85 110 73 3%
EPS, sen 9.1 14.4 10.3 6.7 9.8 11.5 8.6

I personally don’t see the “explosive growth in this company, especially the last three years since Phillip Capital started to make the projection. Do you? Ok I know I know, it is the future, the next 17 years. It is just that I am a suspicious person who doesn’t easily believe anything until I have seen it.

The following table shows the cash flow of TSH for the past few years.

Year 2011 2010 2009 2008 2007 2006
CFFO, m 17 153 120 147 15 48 91
Capex -225 -225 -225 -225 -225 -225 -225
FCF -208 -71 -104 -78 -209 -177 -134
CFFO/NI 20% 118% 131% 230% 18% 43% 124%

What is the problem with its cash flow? Why is the quality of earnings so bad last year with CFFO only 20% of net income? Do you see any positive free cash flow, even in a single year?

How is its balance sheet then? The table below shows how its debt has been increasing each year and it is now closed to a billion ringgit of total debt now.

Year 2012 2011 2010 2009 2008 2007 2006
Total debt, m 975 740 722 603 468 261 186

How is its performance for the past years in term of ROE, ROIC? Do you find them impressive?

Year 2012 2011 2010 2009 2008 2007 2006
ROE 8.5% 13.7% 10.9% 7.8% 11.6% 15.2% 13.9%
ROIC 5.4% 8.5% 6.9% 6.0% 8.2% 11.6% 10.6%

What about its valuation with its share price closing at RM2.50 today? Judge yourself from my assessment below.

TSH a Good company? 2.500
Good governance ?
Durable business Yes
Growth ?
ROE No 9% <12%
ROTC No 6% <WACC
Balance sheet No 1.10 D/E>1
Cash flow No No FCF for years

Screens for investing
ROTC No 6% <WACC
P/B No 2.4 >2.0
PE ratio No 27.4 >20

does Hap Seng Consolidated meets the requirements of a high dividend yield strategy as mentioned in this thread?

Posted by gordan85 > Jun 9, 2013 02:33 AM | Report Abuse
thank you kc, as FCM100 said, do you mind to comment on hapseng?

Hap Seng paid a dividend of 10.5 sen last year. It is expected that the dividend payment will be the same of higher this year. Hence the dividend yield is 0.105/1.96=5.4%, higher then the FD rate of 3.5%. Hence Hap Seng meets the first criterion, ie

1. Does the dividend yields exceed the bank fixed interest rate, currently about 3.5%.

As Hap Seng earns 19.6 sen last year, the dividend payout ratio

b=10.5/19.6=54% which is less than the criterion as stated below:

2. Dividend payout ratio should be less than a cut-off, say 65-80% to have growth.

Hence it is assumed that adequate amount of money is spent on capital expenses, and hence future expected growth.

I don't know what is the expected growth rate of Hapseng for the next 5 years. That is the job of analysts to analyze and find out. However from the past 5 years, Hap Seng's revenue and profit has been growing at a CAGR of 6% and 8% respectively which meets the third criterion below:

3. Reasonable growth rate in earnings at least matches the overall economy, say >4%.

Hence overall Hap Seng meets all the three criteria as a stock for the high dividend yield strategy stipulated by me.

Is KPJ really worth RM6.50 a share?

Posted by ZenZenD > Jun 2, 2013 09:43 AM | Report Abuse
Many tks, kcchongnz. Appreciate ur comments. Can I hv ur coments on KPJ as to whether it is fully valued at this current price?

This thread is about whether a company is a good company or not, and if it is, then only we check if it is still worthwhile to invest at the market valuation. It is not so much if the stock is undervalued or not.

Everybody seems to think that KPJ is a very good company; great business, stable and growing in revenue and profit, good cash flows, good governance, and high return in capital etc, but is it really that fantastic?

I would say ok lah at this stage because KPJ's growth has slowed down considerably. It borrows quite a bit of money with debt higher than equity now. However its return of total capital is just about 10%, slightly higher than the cost of capital.

But what do you think of its market valuation? For me I won't pay for a stock with a PE ratio of 31 and a price-to-book value of 3.7. Obviously the market is expecting that the fantastic growth of KPJ will continue for a long long time. No, a good company is not a good investment if the price is too high. Not for me.

Good to have feedback from many people here. However, if you read my post at the top, i mentioned that investors should concern about the total return of their investments, not just the dividend yield, which is just part of the total return. I also mentioned that "Research studies in the US market concluded that while raw returns from buying the top dividend paying stocks is higher than the index, adjusting for risk and taxes eliminates all the excess return". This could be due to the low capital reinvestment and hence lower or no growth for the company. I also showed some high dividend stocks in Bursa actually result in investors losing huge amount of money.

So I would appreciate that when you recommend a high dividend stocks, first check the criterion number 1 since you are interested in high dividend:

1. Does the dividend yields exceed the bank fixed interest rate, currently about 3.5%.

In order to check that the company does not pay too much dividend and sacrifices capital reinvestment and resulting in slow or no growth, check criterion no.2 below:

2. Dividend payout ratio should be less than a cut-off, say 65-80% to have growth.

Then what do you think whether there is any growth in the future for this company which pays high dividend by checking criterion 3 below:

3. Reasonable growth rate in earnings at least matches the overall economy, say >4%.

So a high dividend yield strategy has to meet all the three criteria above before the stock is a good candidate. Please show your reasoning about the stock meeting all the above criteria, if you can. It is hard for just one person to do all these.

arv18, I don't know much about the US housing market. Felicity has talked about it quite extensively in his report you mentioned. That is one of the best source of independent information and view point. Of course if the positive report is true, there is heaps of opportunity for company like Lii Hen. But again one may be unwise to rely too much on any positive report for that matter. Just like the previous sublime housing crisis, few people took the heed of the housing bubble just before it burst.

As far as investing in Lii Hen is concerned, whether one is using the high dividend yield strategy as discussed in this thread, or a strategy for high growth stock, or even the value investing strategy (the Cold Eye 5 yardsticks), Lii Hen remains a stock to invest in all these strategies.

I only concern about the corporate governance, the credibility of its management and manipulation of insiders, if any, which I am no knowledge about. I am still awaiting for input on these from others.

azie99, does KNM meets what Warren Buffet said about think long-term when investing in a company? Read the whole thing carefully.

Think long-term.
'Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.'
Source: Chairman's Letter, 1996

No, I won't give encouragement to anybody buying KNM. It does no good to anybody in my personal opinion. And I am not trying to pour cold water or rubbing salt into people's injury. I want to have conscious to forewarn people so that they won't fall into the predicament of some of the shareholders of KNM here. Human being tends to have this cognitive bias of over-confidence, if not told, would not be good for them. I know a lot of people don't like what I say.

Of course I could be wrong too. I am also a normal human being.

Is investing in Lii Hen fit the high dividend investment strategy?

Posted by aunloke > Jun 8, 2013 11:55 PM | Report Abuse
Liihen,
div. for 2010,2011,2012 :- 14.5 ,8 and 12 ( will pay 4sen interim div. for 2013 and extra 3 sen for final 2012 div. next month so that for the year 2012 the total should be 15 sen ). Earning quite good ,can see from the low PE of less than 5 and the pay out ratio is about 40-50%. At the moment market price is 159 cum div. of 7 sen.

Lii Hen Industries Berhad (LHIB) is engaged in the manufacture of furniture, and processing and kiln drying of rubber wood and timber. It exports most of its products overseas.

Lii Hen is definitely a high dividend stock. At RM1.59 per share and dividend of 14.5 sen as stated by aunloke, the dividend yield is 9.1%, three times that of FD rate. The dividend payout ratio is also quite low at 41%, leaving plenty of money for capital expenses for future growth (hopefully it is used for future growth and not wasted away). The cash flow coverage of 2.2 times is also good.

But did the reinvestment yield reasonable growth for Lii Hen? Yes indeed if you look at its long-term trend. Growth in revenue and earnings are both in double digits. Hence Lii Hen meets all the requirements below as an investment for a high dividend strategy.

1. Dividend yields exceed the bank fixed interest rate, currently about 3.5%.
2. Dividend payout ratio should be less than a cut-off, say 65-80% to have growth
3. Reasonable growth rate in earnings at least matches the overall economy, say >4%.

I thought I read something about something not good about Lii Hen in corporate governance issues on some kind of manipulation by the insiders. Can anyone enlighten?

Is Uchitech meets the requirements of a high dividend strategy?

Posted by houseofordos > Jun 8, 2013 07:31 AM | Report Abuse
Uchitec is one example of high dividend yield stock.. no doubt its earnings growth is not great but its 100% dividend payout policy is sustainable considering its strong cash position

Uchitech distributed 12 sen per share as dividend for the last few years. At RM1.33, the dividend yield is extremely good at 9%, a very good company to invest in if one needs stable income each year from his investment.

UCHI Technologies Berhad is engaged in manufacturing of mixed signal microprocessor-based application and system integration products, and trading of complete electronic module and saturated paper for printed circuit board (PCB) lamination.

The business is definitely a good business. In fact Uchitech was doing extremely well before the sublime crisis in growth and profitability. Revenue was 157m in 2007 and EPS of 21 sen. It was hard hit by the crisis in 2008. Since then it never seems to recover to its glory days. This is probably because its big clients are mostly in Europe which the economy has been in doldrums for a long time. Revenue and EPS has dipped to 92m and 12 sen in 2012.

Uchitech distributed all its earnings as dividend with no reinvestment (except for last year) and hence no growth. Hence it doesn't satisfy criteria 2 and 3 below as a high dividend strategy.

1. Dividend yields exceed the bank fixed interest rate, currently about 3.5%.
2. Dividend payout ratio should be less than a cut-off, say 65-80% to have growth
3. Reasonable growth rate in earnings at least matches the overall economy, say >4%.

Is Thong Guan a good company? Is it a good investment?

Posted by faberlicious > Jun 7, 2013 08:09 AM | Report Abuse
bro kcchong, I'm looking at Tguan which looks cheap in terms of PER but not sure if it is a good company to invest in. I'd appreciate it very much kc if you take a closer look at it .

Thong Guan Industries Berhad is principally engaged in trading of plastic and paper products. The Company's business segments include plastic products, food and beverages, and consumable products and machinery. It carries its operations in Malaysia and China.

Faberlicious, don't know too well about Thong Guan but looking at its business, I think it is a ok business. TG was doing quite well before the sublime crisis in its growth and profitability. It was hit quite hard during the crisis. Since then it has recovered nicely with revenue growing rapidly in double digits albeit with much slower growth in profit especially for last year at just 1% for shareholders.

Operating efficiency wise it is ok with ROE and ROIC at about 10%, closed to the cost of equity and total capital.

So personally I would rate Thong Guan as a slightly above average company. As investment wise, yes, it is very cheap and hence could be an excellent investment. Below is my assessment:

Thong Guan a Good company? 1.640
Good governance ?
Durable business Yes
Growth Yes
ROE ok 11% close to 12%
ROTC ok 9.6% about WACC
Balance sheet Yes D/E 0.2
Cash flow Yes good CFFO/NI>100%

Screens for investing
ROTC ok 10% about WACC
P/B Yes 0.7 <2.0
PE ratio Yes 6.3 <20

KC Loh, no I did not do any analysis on AirAsia. I think the kind of information and qualitative analysis of yours is more important and useful than number crunching. Many good analysts including those without any conflict of interest ones are also bullish about Air Asia's business model. I hope you and them are right as I have said, I am punting on the call warrants of AirAsia.

Hi KC Loh, the next pot of gold in AirAsia? I hope you are right although I am not in the underlying AirAsia share, but I am in the call warrants CX and CY. I did make some money in AirAsia CY, it was lucky as AirAsia share price was going up until just before the end of last week. Bought some, sold some and bought again at higher prices a number of times. It was exciting punting the call warrants. For example CY with an effective leverage of 4.2 times but negligible premium, whatever increase in price in AirAsia, CY's price would increase by 4.2 times, and vice verse.

Many analysts give good report for AirAsia, but I personally don't like the company as a long-term investment. Below is a recent comment of mine in a finance blog regarding AirAsia giving my reasons.

K C said...

•“Never invest in anything that eats or needs painting.” Billy Rose

I have been reading your articles and found them very useful in my quest of uncovering good investment candidates. Close to all of those stocks you have recommended are good ones, and many of them have proven to be so. But I just could not comprehend your liking on AirAsia, precisely for the reasons you have given for disposing your AirAsia shares in this article. But I am just a small time retail investor and who am I to say AirAsia is not a good company to invest in, while so many other professionals from investment bankers, analysts, people like you etc recommended them strongly, showing all the data and projections and information they have collected.

In this case is a classic return of owner's earnings, where is the return to the shareholders in hard cash (not just accounting number), when all earnings have to go to buying planes, now and in the future and other heavy capital expenses? I am surprised AirAsia even give dividends, quite handsomely recently. Where does this money come from? One must know that without any free cash flow (may year 2011 is the only exception), this dividend has to come from somewhere, whether ask shareholders for more money through right issues, private placement, or borrow more from banks or issue debt securities. One can see the net borrowing of AirAsia has been increasing consistently to 7b + now from just 58m 7 years ago. Of course if one uses some modern financial theory to show that these continuous borrowing can be “converted” to owner’s earnings (not free cash flows of the firm). But that is not according to the book of established and respectable investor like Warren Buffet. I tend to agree with WB more than those financial theorists.

June 03, 2013

Let me start with a high dividend yield strategy with Pintaras Jaya. Please bear with me for using Pintaras as an example again as an easy way out because I have readily available data for it.

Note from the following table that dividend has been growing steadily at a CAGR of 15% from 10 sen in 2007 to 20 sen last year. My expected dividend for 2013 is 23 sen per share. At the close of market on 7/6/2013, the dividend yield worked out to be 4.8%. This is higher than the FD rate and meeting the first criteria. Hence Pintaras may be a good candidate for this strategy. With a payout ratio of 38% last year which is way below 65%, it meets criterion 2. There will be more than enough money retained for capital expenses, and hence prospective future growth. In actual fact, Pintaras is able to distribute even higher dividend without adversely affecting its growth. This can be deduced from its last 5 year CAGR of 16% in net profit as shown in the table below.

Not to forget that on top of all these, Pintaras is a debt free company and has an excess cash RM153m or RM1.91 per share in its balance sheet.

So don’t you agree that Pintaras is a prospective candidate for the strategy of investing basing on high dividend yield?

Year 2012 2011 2010 2009 2008 2007 CAGR
Revenue, m 185 126 106 130 165 147 5%
Net profit, m 42 26 21 16 26 20 16%
EPS, sen 53 32 26 20 33 25 16%
Dividend per share, sen 20 19 15 10 12 10 15%
Payout ratio 38% 59% 58% 50% 37% 39%

High dividend yield, a popular investment strategy

One can see that dividend payment of a company is an important consideration for people in i3investors here for investing in a stock. Isn’t it logical that one should invest in stock if that stock provides a dividend yield higher than the interest earned from fixed deposit in bank? However, dividend forms just part of the return for investing in a company. The other part is the capital gain on the stock which comprises of earnings growth and expansion of the price-earnings ratio when it is sold later. Together they form the total return of a stock.
Total return = Dividend + Capital gain (Earnings growth + PE change)

The US equity market provided a compounded annual total return of 10.4% from 1900 to 2000 which was made up of 5% in dividend yield, 4.8% from earnings growth and just 0.6% due to change in the PE ratio (John Bogle of Vanguard). One can see that dividend yield made up the highest portion in the total return. The important question is, “Is a company which pays high dividend a more attractive investment ?”

Let’s look at a high dividend stock in Bursa and its total return over the last 5 years, my favorite, Pintaras Jaya, a specialist foundation construction company as shown in Table 1 below.

Table 1: Return of share price from 2008 to 2013
Period 1 year 2-year 3 year 4 year 5 year
Dividend, sen 19 15 10 12 10
Adj. Price, RM 2.80 2.35 1.60 1.20 1.40
Total return 72.1% 105.1% 201.3% 301.7% 244.3%
CAR 72.1% 43.2% 44.4% 41.6% 28.1%
Dividend yield 6.8% 6.4% 6.3% 10.0% 7.1%
Capital gain 65.4% 36.8% 38.2% 31.6% 20.9%
Share price of Pintaras Jaya at the close on 7/6/2013 is RM4.82
CAR is compounded annual rate of return

Pintaras has been paying dividend which has been growing from 10 sen in 2008 to 19 sen in 2012. The average dividend yield through the years is about 7.3%, which is one of the highest dividend yield companies in Bursa. It has been providing a total return of 244% since 5 years ago which works out to be a CAGR of 28%, about 3 times the annual return of KLCI. The CAGR of its return are even more impressive in the order of more than 40% for the last 2-4 years, and 72% for the past one year. So does it prove that a high dividend stock would provide a higher total return? Not necessary.

Let us look at some other high dividend companies from Bursa as shown in Table 2 below.

Table 2: Some high dividend yield stocks
Price 1 year Dividend Price now DY Cap gain Total gain
HB Global 0.550 0.038 0.155 6.9% -71.8% -64.9%
JCY 1.500 0.09 0.59 6.0% -60.7% -54.7%
MEGB 1.08 0.0558 0.545 5.2% -49.5% -44.4%

If you have bought some of the stocks above a year ago because they give high dividend yield, you would have lost quite a lot of money of up to 50% or more if you were to sell them now.

Of course we can’t just pick a few stocks and prove that a high dividend yield stock will provide investors with higher or lower return like that. Research studies in the US market concluded that while raw returns from buying the top dividend paying stocks is higher than the index, adjusting for risk and taxes eliminates all the excess return. (McQueen, Shields and Thorley, 1997, Does the Dow-10 Investment Strategy beat the Dow statistically and economically?; Hirschey 2000, The “Dogs of the Dow” Myth).

High dividend payment may not be good for the company if there is inadequate normalized earnings and free cash flows. It is especially so if there is none excess cash in its balance sheet. This dividend payment is hence unsustainable as the company has to borrow or issues new shares in order to pay dividend. Paying too much dividend also negatively affect growth as less money is spent on capital expenses for the growth of the business in the future.

However investing in high dividend stocks is still a viable strategy with the following checks:
1. Dividend yields exceed the bank fixed interest rate, currently about 3.5%.
2. Dividend payout ratio should be less than a cut-off, say 65-80% to have growth
3. Reasonable growth rate in earnings at least matches the overall economy, say >4%.

Do you have such a company in mind for this high dividend yield strategy? Please share.

K C Chong (07/06/2013)

jeffthen, you are right. The dividend yield of SOP is a pittance. But when you invest in a company, are you looking for a total return or just high dividend yield? A high growth company cannot achieve its growth of high growth if most of its earnings is distributed to shareholders each year. High growth company need money for capital expenses and hence less free cash flow for distribution to shareholders. In SOP's case, it needs money for capital expenses without having to keep on borrowing money and issues new shares to increase its land bank, biological assets. Hopefully with these capital expenses, its revenue and income grows as time goes on with more earnings and hence increases its share price.

Btw, investment also depend on luck also. No doubt about it. But I think my Pintaras is not so much luck if you read my analysis and reasoning in i3.

anbz, you are a maths graduate right? Do you understand what I talked about annualized return?

Over-confidence in investing can kill.

http://www.investopedia.com/university/behavioral_finance/behavioral9.asp

Posted by crawler > Jun 6, 2013 11:18 AM | Report Abuse
all thes are all bullshit statement made to portray a good image..that's the thing that mislead investors..


Hohoho, I rest my case. Good luck to you.

We are talking about financial statements; income statement, balance sheet, cash flows statement. These are statutory required reports to Bursa. From there you can see if a company makes money, got money coming in or not, and is its financial health etc. We can also interpret the credibility of the management by looking at how they present themselves, if they waste company resources, manipulate financial reports, how they allocate resources etc etc. They are all there for you to see. It is not based on internet or not; neither it is based on feelings.