On the other hand, if I "learn' accounting from you, I would have followed your reasoning and buy big in KNM. Just don't know where it will lead me to.

Got meh? Where? Besides the arguable receivables and work in progress.

I don't need to learn accounting for you. Definitely not you.

How many days? Why not look at it this way. KNM made a pretax profit of just 68m last year. but the receivables is 653m, ten times more than what it earns one year! Some more there is this work in progress also tied up the money of 400m! Total money tied up in receivables and work in progress of more than 1 b, and for 68m pretax profit. So great ah?

Posted by eSdM > Sep 9, 2013 12:28 PM | Report Abuse
revenue for 2012: 2,372,264,000
Receivables 653,000,000
kindly calculate n tell how many days......

This one I know how to calculate but you don't have to test me. Just get right to the point. But I don't want to waste time calculating that.

Now my quiz now.

Fixed assets 2198m
Net working capital 542m
Invested capital 2740m
Profit before tax 68m

Use a total capital of 2740m but made just 68m. What kind of business is that?

PPE? Simply shoot? Did I? I just present you what is it the balance shit. How much do you think is the realizable value of the PPE? What is the alternative use if others buy them?

I didn't even give a figure. I just said they are not good quality assets because they are not like cash, land etc.

ok ok ok, I don't know account. I am not an accountant mah. Don't hit so hard lah.

But I do know something about receivables because I was a corporate person before. Receivables are what you think your clients owed you. You may claim this and that are additional works, variation orders etc because you think it is beyond the contracts. You may also accuse clients delay you want to claim extra money etc etc. But do your clients and their consultants agree with you for all these extra claims.

Why do I have doubts? My question is why the receivables so high? It is even more than the annual revenue and consistently year in year out. Why? Doesn't that warrant some doubts in you as a shareholder of KNM? Yeah, you may not. Good luck on you.

ok ok ok, terms are important. Any other comments about my criticisms on KNM below:

Posted by kcchongnz > Sep 9, 2013 11:27 AM | Report Abuse X

Let's talk about its present marked-to-market shit, the balance sheet just announced a few days ago.

Here is the borrowing condition of KNM:

Short term debt 738.2
Long term debt 135.1
Cash 137.6
Net borrowings 735.7

Wow, still got 736 m of net loan, equal to a net debt per share of 51 sen.

It has a total equity of 1898m, huge. But look at the quality of the assets which makes up the equity:

Inventories 75.2
Contract work in progress 398.6
Receivables 653.0
Total 1126.8

Intangible assets 1310.9
PPE 847.8
Total 2158.7

Wow, 3285m of its assets are low quality assets; intangibles is already 1311m, and receivables of 1052m. Don't know how much will be eventually collected. 848m in PPE? How much is the market value?

Mind you, this is its present shit, not the historical shit of a few years ago!

Let's not argue about the term. The quality of these assets, receivables, contract work in progress, inventories, intangibles, inventories, PPE are not that great because unlike cash, shares investment biological assets, land held for development etc which are good quality assets.

Any other comments or mistakes of what I got for the shit for KNM?

What is wrong? Don't just say its wrong.

So what is the problem? contract work in progress is money spent, but yet to receive from clients. Never mind about the term lah. Relax, no need to put so many exclamation marks. Contract work in progress is also something like that, don't know when and how much is collectible.

Any more mistakes found?

Contract work in progress 398.6
Receivables 653.0

Ok ok ok, let's not get into deep shit (Last few years balance shit). But do we talk about last few years' balance sheet?

Let's talk about its present marked-to-market shit, the balance sheet just announced a few days ago.

Here is the borrowing condition of KNM:

Short term debt 738.2
Long term debt 135.1
Cash 137.6
Net borrowings 735.7

Wow, still got 736 m of net loan, equal to a net debt per share of 51 sen.

It has a total equity of 1898m, huge. But look at the quality of the assets which makes up the equity:

Inventories 75.2
Contract work in progress 398.6
Receivables 653.0
Total 1126.8

Intangible assets 1310.9
PPE 847.8
Total 2158.7

Wow, 3285m of its assets are low quality assets; intangibles is already 1311m, and receivables of 1052m. Don't know how much will be eventually collected. 848m in PPE? How much is the market value?

Mind you, this is its present shit, not the historical shit of a few years ago!

Just curious here.

The last quarter result was expected to improve when compared to the corresponding quarter last year. However, the actual result was unexpected as revenue and profit was down by 30% and 75% respectively.

So there is now this "unexpected xxx mil project" which may be announced? Do we expect that "unexpected" announcement soon or not or not?

And this 3rd quarter result to be announced in another 2.5 months time is expected to improve? Or would it be unexpected again?

Oh yeah, btw, how you arrive your expectation that the price of at least 60 sen for KNM when the "unexpected xxx mil project" is announced?

Lesson 1: Why Value Investing Works, Stockpedia

What is Value Investing?
Value investing is extremely simple in theory, but tougher in practice. If you compare the price of a stock with a confident valuation of its true worth (intrinsic value) and find you can buy it at a considerable discount (margin of safety) then you may be onto a winner. But value investing is much harder than it looks for two reasons, firstly the real intrinsic value of a company can be tricky to calculate but also the practice of buying beaten down stocks also runs contrary to almost all human instincts. But it’s precisely these tendencies that lead to so many investors over-reacting, driving prices down so low that value stocks become so profitable in future.

We will explore each of these key principles of value investing in detail, identify actionable shortcuts to finding bargain stocks and consider five different value investing strategies that have been developed by some of the world’s most successful investors. Value Investors can be broadly defined as fitting one of two distinct categories depending on how they tackle the job at hand – they are either ‘value hunters’ or ‘value farmers’. While hunters such as Warren Buffet focus on making large, highly focused bets on single stocks, whereas the farmers from Ben Graham to Joel Greenblatt take these value investing ideas and apply them in a broader portfolio fashion in order to ‘harvest’ value-based profits from the market in a systematic fashion.

How Profitable is Value Investing?
Benjamin Graham is widely regarded as the dean of value investing as well as the whole industry of Security Analysis. This influence stems not only from his published works but also from the eventual fame and fortune of the pupils that he taught at Columbia University who included Warren Buffet. It is thanks to Graham that we have a whole catalog of quantitative bargain stock strategies at our disposal with such obscure titles as ‘Net Net Bargains’ and ‘Net Current Asset Value Bargains’ as well as a whole ream of other concepts including Margin of Safety and Mr Market.

In spite of being personally wiped out in the 1929 stock market crash, by the time the Graham-Newman partnership was closed it had delivered an average 17% annualized return to investors, outperforming the market by a considerable margin and making the elderly Graham an exceptionally wealthy man. But his pupils became even wealthier.

In a paper titled 'The Super Investors of Graham and Doddsville' Warren Buffet showed the track records of each of nine disciples of Benjamin Graham showing that they all generated annual compound returns of between 18% and 29% over track records lasting between 14 to 30 years. Is it likely that these individuals from the same school of thought could all beat the market over a generation if the stock market was a place of luck? Warren Buffet doubted it most eloquently when he said “I'd be a bum on the street with a tin cup if the market was always efficient”. Lets have a look at their profit history...

Investor No. of Yrs Annualised
Return S&P / Dow
Return
Buffett Partnership 13 29.5% 7.4 % (Dow)
Walter Schloss 28 21.3% 8.4%
Tweedy Browne 16 20% 7%
Bill Ruane 14 18.2% 10%
Charlie Munger 14 19.8% 5.0% (Dow)
Pacific Partners 18 32.9% 7.8%
Perlmeter Investments 18 23% 7.0 % (Dow)

Why does value investing work?
The human mind is split between the 'human' frontal lobes and the 'primal' limbic brain. At times of stress or excitement we fall back on primal instincts which are ill suited to the Spock-like nature we need to cultivate for investment success. Behavioral science has shown that we suffer from a range of judgmental errors including overconfidence in our abilities, herd behavior, loss aversion and anchoring on irrelevant information which push share prices to extremes of highs and lows driven by hopes and fears, elation and despair. Until the day (god forbid!) that man and machine become one and these tendencies are ‘debugged’ from our habits, value opportunities and mispricings will continue to be available to in-the-know contrarian investors.

Can't professionals do this for me?
Unfortunately, despite the huge evidence that value strategies work, it is unlikely that a well thought-through value-based investing approach is being put to work for you and your family or anyone else that saves money in an actively managed fund. The extraordinary truth is that 75% of actively managed funds underperform their benchmark over the long term due to the cost of high and often under-disclosed fees.

Individuals who do have the time and discipline to do their own research are generally going to be better off taking investing matters into their own hands. There are cheap, neglected, misjudged stocks out there and with the and with the right techniques up your sleeve it isn’t so hard to find them and profit from them.

Posted by fatinvest > Sep 8, 2013 07:42 PM | Report Abuse
I have been recording the FFB and CPO production of plantation companies for some time and the following are some findings:-
Period recorded:-6/2011 to date
Co Av production Compare previous year corresponding period
THPlant 0.81T/Hec +29%
JTIasa 0.99T/Hec +29%
Riverview 1.90T/Hec +1%
PLS 0.09T/Hec +103%
I take Riverview as the bench mark of a mature plantation, yielding 1.9T/hect per month and the yield is not increasing.
From this I believe Jtiasa and THPlant has got a lot of room for growth.

fatinvest, good way to check if a plantation company is efficient. Should use together with other things like hectare planted, age profile etc. These will provide an indication of the value of the company.

But one thing I find few people check is the price, in particular the enterprise value. Some plantation companies are cash rich but some have heavy debt. Surely they cannot be the same price if their values are approximately the same. But you probably find that the reverse is true in the market where those plantation companies having heavy debts are priced higher than an equivalent cash rich plantation company.

For plantation company, one good way to compare price is the enterprise value over Ebitda. For many plantation companies have high depreciation of PPE and amortization of biological assets which are non cash.

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

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

First I need to explain what are the few important data and assumptions I would use for the discount cash flow analysis.

Table 1 below shows the free cash flow for the last 5 years. For the starting free cash flow (FCF), I would use the five year average of 69.8m.

Table 1: FCF for the last 5 years
Year 2013 2012 2011 2010 2009 Average
FCF, m 3.1 104.6 113.9 94.7 32.7 69.8

One may query that if we consider to use the immediate past year FCF of just 3.1m which I sometimes do, then my computation will be totally out. However, if you look at the FCF of Kfima for the past 4 years before last year, there is a trend that FCF is trending upwards to more than 100m a year. Hence it would not be right to use just last year FCF which was exceptionally low. In fact Kfima has just announced its first quarter 2014 result which shows that there is about 40m FCF, just for a single quarter. Hence this confirm that using the last 5 year FCF as the starting FCF is reasonable if not conservative.

Next I need to have a reasonable assumption of what the growth rate of this FCF is for the next 5 years and thereafter. Kfima’s FCF has been growing at a CAGR of 43% before the fall of last year. If you consider the FCF for the first quarter 2014, the rate doesn’t seem to slow down. However using that rate of 43% would be grossly unjustifiable as it would be hugely liberal and would result in an exceptional high intrinsic value. What about an assumption of 5% growth for the next 5 years, and then 3% thereafter?

For the next assumption of a discount rate, I will stick to 10% as explained in my previous valuation exercise. Here the risk premium is just 6% above the long term MGS rate. This is because the company has steady earnings and cash flows and a very healthy balance sheet.
The following shows the intrinsic value of Kfima based on the discount cash flow analysis:

PV of FCF 1118m
Add cash 272.2m
Less debt 18.5m
PV of FCFE 1371.8m
Less minority interest 354.5m
PV FCF 1017.3m
Number of shares 270m
FCF per share RM3.77
MOS 48%

The above discount cash flow analysis shows that the intrinsic value of Kumpulan Fima is RM3.77. This represent 48% margin of safety investing in Kfima at RM1.96 now. Of course the market doesn't have to agree with me. Obviously it doesn't.

If you care to study the fundamentals of Zhulian then, it has all the potential to reach the present price. In my opinion, it can go higher than the present looking at its fundamentals now. Compared with Rsawit, heck, there is no comparison.

bsngpg, you know what, you were lucky to buy Zhulian then. It was at an adjusted price of about 1.70 then. It is now 3.24, almost double. You did much much better. Why do you have to envy your friend instead of yourself?

Referring to the website of Dali, Mr Koon recommended to buy Rsawit on 9th November 2011 when it is about 95 sen (adjusted). It went up to the peak of about 1.20 in February 2012. Of course your friend have made good profit selling at about that price. See the chart below.

http://sg.finance.yahoo.com/echarts?s=5113.kl#symbol=5113.kl;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

Rsawit was traded at an adjusted price above the present price for the last 6-7 years except for about one year after the US sublime crisis. Of course if one happened to buy at at its lowest at 44 sen at its trough, he will make a lot of money? My questions are:

1) How many are as lucky as your friend who happen to sell at its peak? Bear in mind that most value investor would hold the stock for at least a couple of years.
2) How many are lucky to buy at the cheap price within the one year after the crisis when its share price was above its present price for the rest of 6-7 years?

As a matter of fact, I did look at Rsawit's operations when Dali and Mr Koon strongly recommended it. I found Rsawit has nothing special compared with other plantation companies. In fact many other plantation companies are much much better. It has little earnings and cash flows. It has a lot of debts. It also has huge amount of preference shares which would convert to common shares and dilute the earnings. The basis of recommendation was just based on their plantation acreage. I am not saying I was right but they were wrong. I also acknowledge that Mr Koon is rich and a lot of his wealth was from investing in the stock market and hence he must be very savvy in investing. But must a person be always right in investing and we must always follow what he says?

hiddengem, just curious. what are the criteria that you consider Rimbunan Sawit a good stock?

I ask because for their last two quarters result, they made a loss of 30m, or 1.2 sen per share. While in their balance sheet, they have a huge net borrowing of 408m. How come can lose so much money when palm oil price is still reasonable at about RM2400? What if palm oil price drop further to say RM1500 per metric ton? Do you see any other plantation company losing money?

RSawit a good company? Then what about a random plantation company like KimLoong Resources (share price 2.30)? KL made 4.5 sen per share for the last quarter. It has a net cash of 222m, or 72 sen per share with no debt.

Posted by bsngpg > Sep 8, 2013 02:51 PM | Report Abuse
I trust Mr Koon Yew Yin very much because I follow his history. In fact those who followed his recommendation on RSawit before the bonus issue had made a very handsome return. Honestly I knew it but missed the boat as I chosen to invest in Zhulian at that time (limited fund mah) but my close friend who have money, took my hint(he did not know Mr Koon’s recommendation), invested in RSawit and made a good return at that round.

bsngpg, just curious. You said your close friend took your hint and "invested" in Rsawit at the time Mr Koon recommended the stock. When was the recommendation made and what was the adjusted price then? Did your friend really "invested" in the stock, of which invest means longer term and not trading within months of purchase? Approximately what price did he buy and what price he sell?

Posted by yungshen1 > Sep 7, 2013 04:58 PM | Report Abuse
my friend kcchongnz will u buy knm share if SMA 250 IS BELOW SMA 10.uptrend mode.

MY FRIEND YUNGSHEN1, YOU ASKED THE WRONG PERSON. BUT LET ME ASK YOU BACK. WHY SMA 250 BELOW SMA10 IS AN UPTREND MODE? WHY NOT SMA 300, 280, 230, OR 200 INSTEAD OF SMA 250? AND WHY NOT SMA 5, 12, 15, 20 INSTEAD OF SMA 10?

AGAIN I CAN'T REMEMBER HOW MANY TIMES YOU HAVE ASKED ME TO BUY KNM AND I HAVE ANSWERED WITH NUMBERS, FACTS AND FIGURES? YOU JUST WANT OT ASK FOR FUN, AREN'T YOU?

Posted by yungshen1 > Sep 8, 2013 10:03 AM | Report Abuse
that y i buy knm.i believe one day it will reach to 2.000 again.

BUYING A STOCK TO ME IS INVEST IN PART OF THE COMPANY'S BUSINESS. ONLY WHEN I BELIEVE IT IS WORTHWHILE TOO INVEST THEN ONLY I DO. TO MAKE MYSELF BELIEVE IF THE COMPANY, OR THE STOCK WILL GIVE ME GOOD RETURN, I HAVE TO LOOK AT AND STUDY ITS BUSINESS IN DETAILS. IT IS NOT JUST BLINDLY BELIEVE. BELIEVE BASING ON WHAT?

AGAIN DON'T TELL ME YOU BELIEVE GENERAL LEE WILL GORENG THE SHARE UP TO 2.00 SOON SO THAT YOU CAN SELL FOR A PROFIT. I RATHER BELIEVE THAT PIG CAN FLY.

A oil palm plantation losing money when palm oil price is about RM2400 per ton? Incredible! What is the production cost of palm oil, RM1300? So what is wrong about RSawit?

Rimbunan Sawit was strongly recommended by a popular blogger and the person he admires. Read what was the recommendation then when Rimbunan Sawit was at 83 sen.

http://malaysiafinance.blogspot.co.nz/search?q=rimbunan+sawit

That is why I never trust the valuation method basing on how much land a company has, and what is the value per hectare, or per share of the stock. there are other things like what kind of land, what is the individual production cost and margin, what kind of management etc etc.

Yeah, nobody can be right all the time, nobody. But the lesson learned is don't just treat anybody like the great sifu. There is no great sifu in investment. Nobody is infallible in the stock market.

Who said no analyst coverage for this stock. Here is One And Only One.

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/34201.jsp

It definitely has to have right issues, absolutely no doubt about it.

1) Which bank would want to continue lending to an outfit already has so much debt but not much cash flow from its operations?

2) Is any bank confident that its loan will be repaid looking at Ivory's management and operating history?

3) Is there anybody comfortable to subscribe to Ivory's debt instrument?

4) Is there any investment bank willing to underwrite any debt issue by Ivory?

5) What would be the required return of the debt instrument if so?

As a matter of fact, I wonder how many shareholders of Ivory willing to pour in money again in view of its poor performance since listing?

bsngpg, the appended website may be useful for you.

http://satisfyingretirement.blogspot.co.nz/

house, then you are talking about comparative valuation now, not absolute PE valuation.

Why then PE 8 as the basic PE? To me this is related to what is my required return investing in stock. Flip the PE over you have an earnings yield of about 12%, and that is my required return, or a risk premium of 8% over the long term MGS rate. This I think is more than adequate.

I don't fancy too much about comparative valuation though I agree it has its advantages and benefits. Reasons are shown in my questions:

1) Would two companies in the similar industry be accorded the same PE valuation if they have different capital structures; one with huge excess cash, and the other heavy debt?
2) Ditto if they have vast different in operation efficiencies?
3) ditto they have different expected growth rate?
4) Ditto if their quality of earnings are different; say one with part of the earnings from some non operating investments, or one has to spend considerably more money in working capital etc?
5) ditto one pays regular and increasing dividends while the other spend a lot of money invest this and that but with return way below than the cost of capital?
6) etc etc

In his book, "Margin of Safety", Seth Klarman stated that

Quote "While a great many methods of business valuation exist, there are only three that I find useful. The first is an analysis of going-concern value, known as net present value (NPV) analysis. NPV is the discounted value of all future cash flows that a business is expected to generate.

A frequently used but flawed shortcut method of valuing a going concern is known as private market value. This is an investor's assessment of the price that a sophisticated businessperson would be willing to pay for a business. Investors using this shortcut, in effect, value businesses using the multiples paid when comparable businesses were previously bought and sold in their entirety.

The second method of business valuation analyzes liquidation value, the expected proceeds if a company were to be dismantled and the assets sold off. Breakup value, one variant of liquidation analysis, considers each of the components of a business at its highest valuation, whether as part of a going concern or not.

The third method of valuation, stock market value, is an estimate of the price at which a company, or its subsidiaries considered separately, would trade in the stock market. Less reliable than the other two, this method is only occasionally useful as a yardstick of value.

Each of these methods of valuation has strengths and weaknesses. None of them provides accurate values all the time. Unfortunately no better methods of valuation exist. Investors have no choice but to consider the values generated by each of them; when they appreciably diverge,
investors should generally err on the side of conservatism." Unquote.

"You choose people, people also choosing you"

That is for looking for life partner. For stocks, you have an advantage. You just choose those stocks you like, and the stocks have to follow you.

So why not arm yourself with all the right tools to choose some good stocks?

Well if Plaza Rakyat is taken over by a reputable developer such as the old SP Setia, there may be some hope for the development. SP Setia used to be:
1) The top developer
2) Established good track record
3) Financial strength
4) Great management
5) Good sale force
(6) etc

Ivory? None of the above. How?

bsngpg: Hi KCChong : may I ask you a question? Why you do not use PE in evaluating a stock ? A great stock but with high selling price = High Value ? Example Zhulian at PE 8x is high value to me but PE15x is no value.

Why do you say "Zhulian at PE 8x is high value to me but PE15x is no value."?

Analysts in Bursa always give fair values to a stock based on PE ratio. For example using a PE ratio of 10, Zhulian's fair value is RM2.55 (10*0.255). But I always ask, why use PE ratio of 10? Why not 5, why not 15, 20 or even 30? Oh because historically its PE ratio ranges from 5-15. But does that historical average PE ratio any meaning to you if you are a value investor?

First of all, what is the numerator E?
1) Is it the same thing as cash?
2) Is it managed?
3) does it include one off item, non-operating item etc
4) Do you treat two companies in the same industry with the same earnings the same,one with no debt and one with high debt?
5) What about different industry having same PE, but one need heavy capital expenses?
6) etc etc.

A value investor treats investing in a stock as participation in part of the business of the company. So before investing, he must know what is the value of the business he invest in.

Warren Buffet stated that the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the business, discounted by an appropriate interest rate. This is the basis of how value investor value a company.

Incidentally, Tan Kian Wei has posted many articles on valuation of a company. For me these are the appropriate ways of valuing a company and hence its stock.

Some people ask me how to be a good value investor. In my opinion, a value investor should know that when he buys a stock, he is investing in part of the business of a company. There is a company behind the stock.

So how does one know if a company is worth investing and at what price? Isn't it logical that he must first know what is the value of that company, instead of letting the market to decide what price to invest?

To be a good value investor and know how to value a company, you need not look too far away. Just read the articles posted by Tan Kian Wei. Just now he posted so many good articles on valuation methods by Jae Jun, a very popular value investor in US. To me, these are all the methods you need to know in valuation.

Good work again Tan KW.

Katsenelson’s absolute PE

The Katsenelson approach assigns a company with PE "points" and then calculates the fair value by multiplying it with a final multiple factor. This is an absolute approach to remove the effects of market dependency and competitor bias.

The model derives the intrinsic value of the stock based on the following five conditions.
1. Earnings growth rate
2. Dividend yield
3. Business risk
4. Financial risk
5. and earnings visibility

Fair Value PE =Basic PE x [1 + (1 - Business Risk)] x [1 + (1 - Financial Risk)] x [1 + (1 – Earnings Visibility)],

where the Basic PE is the starting PE from a table which takes into consideration of the growth rate and the dividend yield. The table starts with 0% growth for stocks with a PE of 8. For every percentage of earnings growth from 0% to16%, the PE increases by 0.65 points. Once the growth rate reaches a certain level, in this case 17%, the PE value increases by 0.5 points and maxes out at 25% growth. So any stock with a PE higher than 21.9 is capped to a 25% growth rate.

Dividends are tangible to the investor whereas earnings are not. Dividends provide you with a hard return whereas you may never get to see earnings. Every dividend yield percentage receives an equivalent PE point. If the dividend yield is below 1%, give a bonus of 0.5 points.

Katsenelson’s absolute PE for Daiman
Basic PE for Daiman with a growth of 5% and a dividend yield for last year of 4.6%,

Basic PE = 8 + 0.65*5 + 4.6 = 12.9

Business risk: Daiman’s business has low efficiencies with low return of assets of just 5.3% and return o f capital of 6.5%. Cash return (FCF/IC) is also not that great at 5%. Hence the management may not be capable and there may not be much moat in its business. An arbitrary 15% discount is applied to its business risk.

Financial risk: Daiman has a very healthy balance sheet with no debt. Hence a premium of 10% is applied.

Earnings visibility: Daiman has quite stable operating profit margins of more than 30%. Its cash flow from operations is also stable though they are slightly below the net income. No premium nor discount is applied.

Hence the absolute PE for Daiman is:
Abs PE = 12.9* [1+(1-115%)] *[1+(1-90%)] * [1+(1-100%)] = 12.0

Fair value of Daiman = 12.0*0.325 = RM3.90

TanKW, Thanks for pointing out the mistake (again). I had the right absolute value formula as below:

Fair Value PE =Basic PE x [1 + (1 - Business Risk)] x [1 + (1 - Financial Risk)] x [1 + (1 – Earnings Visibility)],

But copied wrongly when i substitute the values. It should be:

Abs PE = 12.9 * [1+(1-115%)] *[1+(1-90%)] * [1+(1-100%)] = 12.0

So fair value of Daiman = 12*0.325 = RM3.90

Thanks again.

The problem is you are looking back at history of what Zhulian's PE ratio use to be, or a cognitive bias of anchoring. Too much emphasize on price rather than value. Or may be you are too dependent on a relative valuation to judge if a stock is expensive. For example you may say you would want to use a PE ratio of 10 to determine if a consumer stock is fairly valued. Now take the example of Zhulian and Yee LEE as two comparable consumer stocks. Should you use the same PE ratio to judge both companies? If not what would be the difference? The Table below shows the metrics for both the companies (note they may be slightly dated).

Company Zhulian Yee Lee
Growth Last Year
Revenue 26% -9%
Net profit 23% 14%

Profitability
Operating margin 20.9% 4.5%
Net profit margin 26.0% 3.1%
ROE 25.9% 7.6%
ROIC 39.1% 7.0%
FCF/IC 27.5% 16.0%

Balance sheet Net cash Heavy debt

When the major shareholders keeps on buying the shares, it could only mean one thing; that he believe the share is undervalued.

Most investors when deciding to invest in a stock, they look up and think of how much they would make if the stock price rise to certain level. What if the expectation does not come true?

However, risk averse investors should instead look down; think of how much the most they can lose if things do not turn out the way they anticipated.

Graham net net is a good way of investing if you are risk averse. The floor value of a company should not be less than the net net value; the cash and the value of its land and properties which are unlikely to depreciate in a long term basis. The table below shows the wide margin of safety of up to 31% to their net net asset value.

Table 1: Graham net-net valuation of Daiman
Company Price NTA Net-net Discount
Daiman 2.63 4.85 3.76 -30%
KSL 2.02 3.13 2.47 -18%
Plenitude 2.10 3.35 3.04 -31%

The values of their assets and hence the derivation of their NTAs and net net are all from the balance sheets, usually based on historical values of the land and properties which generally have appreciated considerably. If there is a private takeover, it is extremely hard to justify to pay shareholders with value less than the book value.

Meanwhile shareholders can ride on the profit the companies earn and dividends declared as all these companies are making money with positive cash flows and free cash flows every year. In fact these companies shares are also selling cheaply, and even very cheaply, in relation to the earnings they make as shown below:

Table 2: Market valuation based on earnings
Company Price PER EV/Ebit EV/Sales
Daiman 2.63 8.0 4.5 1.7
KSL 2.02 6.1 5.2 2.4
Plenitude 2.10 7.4 2.0 0.9

Is it a good capital allocation to buy back shares when:
1) You have a total debts of 820m but just 32m cash in your balance sheet.
2) After spending money for capital expenses, you have no free cash flow left from the operations?
3) Some more pay dividends of 37m
4) some more spend money to buy 125m of "financial assets", shares?

To me, this is an extremely poor way of capital allocation.

Graham Net-Net Investment Strategy and some property companies

In 1932 at the bottom of the Great Crash, Ben Graham wrote an article on Forbes about the cheapness of the market and how companies are being quoted in the market for much less than their liquidating value, as if they were all destined to be doomed. He called these types of stocks, "net nets", companies that sell for less than its net current asset value, or net net working capital. Graham used the following formula to compute the liquidation value of a company.
Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities
It's the lowest form of valuation you could possibly do because it ignores everything about the business and just focuses on tangible assets. The formula states that;

• cash and short term investments are worth 100% of its value
• accounts receivables should be taken at 75% of its stated value because some might not be collectible
• take 50% off inventories, due to discounting if close outs occur

Net net comparison of some property companies
Three companies from Bursa; Daiman, Plenitude and KSL’s latest balance sheets were used to compute their net tangible asset and Graham net net values. Besides cash, the net net values of land, development costs and investment properties owned are also taken as 100% of the book value. This is a fair assessment as it is believed that these assets are likely to worth more than their book value than otherwise. Note that tax assets, property, plant and equipment, Goodwill and “other assets” are taken as worth nothing.

Table 1 below shows the prevailing share prices of the three property companies at the close in the morning on 6 September 2013, their net tangible assets and Graham net net per share.

Table 1: Graham net-net valuation of Daiman
Company Price NTA Net-net Discount
Daiman 2.63 4.85 3.76 -30%
KSL 2.02 3.13 2.47 -18%
Plenitude 2.10 3.35 3.04 -31%

The table shows that Plenitude, with a share price of RM2.10, is trading at the highest discount of 31% to its Graham net net value of RM3.04. Daiman at RM2.63, follows closely at a discount of 30%. It is noted that both Plenitude and Daiman has no debts at all while KSL has a debt to equity of 0.21. Plenitude also has its highest holding in cash at RM1.44, or 37% of the total assets. Daiman’s cash holding is RM1.23 per share, or 20% of total assets. KSL on the other hand has most of its value in land held for development of 36% of total assets. KSL’s net cash is only 47m, or less than 3% of the total assets.


Earnings based comparison
Table 2 below shows the market valuation based on earnings at the latest year end results.


Table 2: Market valuation based on earnings
Company Price PER EV/Ebit EV/Sales
Daiman 2.63 8.0 4.5 1.7
KSL 2.02 6.1 5.2 2.4
Plenitude 2.10 7.4 2.0 0.9

KSL’s PE ratio of 6.1 appears to be the lowest valuation while there is not much difference between Plenitude and Daiman with PE between 7.4 and 8.0. However based on enterprise value, Plenitude has the best value with its market enterprise value (EV) only twice the earnings before interest and tax (Ebit). EV is even less than sales at 0.9 times.

Enterprise Value = Market Capitalization + Minority interest + Total Debt - Cash

KSL is the most expensive when enterprise value is taken into consideration. Its EV is 5.2 times Ebit, basically because it is the only one utilizing a fair bit of debts.

Conclusions
All three property companies above show that they are trading at steep discounts to their net tangible assets. They are even traded at substantial discounts to their Graham net net asset values, ranging from 18% to 31%. Of the three, Plenitude appears to be a better bargain with a Graham net net discount of 31% and enterprise value only twice its Ebit and less than its annual sales.

“Never try to teach a pig to sing; it wastes your time and annoys the pig.”

A Dozen Things I’ve Learned About Investing From Peter Lynch
-Tren Griffin


1. “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.” It is far more productive for an investor to focus their time and energy on systems which are potentially understandable in a way which might reveal a mispriced asset. George Soros said once: “Unfortunately, the more complex the system, the greater the room for error.” The simplest system on which an investor can focus is an individual company. Trying to understand something as complex as an economy in a way which outperforms the markets is not a wise use of time and is unlikely to happen.



2. “The way you lose money in the stock market is to start off with an economic picture. While you don’t want to be oblivious to the state of the economy, listening to talking head pundits and incessantly following the news cycle is actually counterproductive to profitable investing. Instead, focus on the companies you chose to follow.



3. “The GNP six months out is just malarkey. How is the sneaker industry doing? That’s real economics.” The difference between the predictive power of microeconomics and macroeconomics is “night and day” since with the former vastly fewer assumptions are required and the systems involved are far less complex. The best investors make investing as simple as possible, but no simpler. Lynch is saying he may pay attention to the economics of an industry, but only to understand the economics of the companies he chooses to follow.



4. “To make money, you must find something that nobody else knows, or do something that others won’t do because they have rigid mind-sets.” It is mathematically certain that you can’t beat the market if you *are* the market. You must find bets that are mispriced, be right about that mispricing and when you do find a mispriced bet, by definition, your view will be contrarian.



5. “A share of a stock is not a lottery ticket. It’s part ownership of a business.” Many people love to gamble since it gives their brain a dopamine hit. They gamble even though it is a tax on people with poor math skills. The right thing for an investor to love is the process of investing, not the bet itself. The right process for an investor is to understand the value generated by the underlying business.



6. “Investing without research is like playing stud poker and never looking at the cards.” You can’t understand a business and its place in an industry without doing research. And in doing research you must find something that the market does not properly discount into the price of the stock or bond.



7. “Owning stocks is like having children—don’t get involved with more than you can handle. The part-time stock picker probably has time to follow 8-12 companies.” If you work at a day job and you have a life, only so much time is left to follow stocks and bonds. It is better to be a mile deep in understanding 8-12 companies than an inch deep on many more.



8. “Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.” Addition, subtraction, multiplication and division is all the math skill you need.


9. “People seem more comfortable investing in something about which they are entirely ignorant.” Suspending disbelief about an investment is easier for many people for some reason when you know less rather than more, especially if the story is well crafted and told by the promoter.


10. “If you can’t convince yourself ‘When I’m down 25 percent, I’m a buyer’ and banish forever the fatal thought ‘When I’m down 25 percent, I’m a seller,’ then you’ll never make a decent profit in stocks.” and “Bargains are the holy grail of the true stock picker. We see the latest correction not as a disaster, but as an opportunity to acquire more shares at low prices. This is how great fortunes are made over time.” Also, don’t put yourself in a position where you may need to sell at the wrong time.

11. “A market player has 50 percent of his portfolio in cash at the bottom of the market. When the market moves up, he can miss most of the move.” Markets over long period of time inevitably rise. They always have and always will. That is the good news. The bad news is that you can’t “time” when the rise in a market will happen.


12. “Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future.” Peter Lynch said once: “Small investors tend to be pessimistic and optimistic at precisely the wrong times.”

Portfolio return as at 31/8/2013

The portfolio of this generally small capitalized stocks was started at the beginning of August 2013. As at the end of the month, the portfolio suffered a negative return of 0.23% (See computation below). For the same period, KLSE dropped 2.59% from 1773 to 1727. For simplicity, the portfolio return is compared with the return of KLSE in this period.

In a down market, the performance of small capitalized stocks generally perform worse than the overall market, and vice versa. However, this portfolio still returns 2.4% better than the broad market in this downturn.

Again, the actual performance of a portfolio should be viewed in a long term basis in terms of years, not months.


Ref data Now
New 1/08/2013 31/08/2013
Pintaras 4.99 5.43 0.000 0.440 8.8%
Kfima 2.060 1.950 0.000 -0.110 -5.3%
MFCB 1.700 1.790 0.000 0.090 5.3%
Haio 2.670 2.550 0.000 -0.120 -4.5%
Fibon 0.330 0.355 0.000 0.025 7.6%
CBIP 2.830 2.690 0.000 -0.140 -4.9%
Tien Wah 2.510 2.420 0.000 -0.090 -3.6%
Homeritz 0.430 0.410 0.020 0.000 0.0%
Willow 0.530 0.475 0.000 -0.055 -10.4%
Daiman 2.530 2.630 0.000 0.100 4.0%
Datasonic 3.350 3.370 0.000 0.020 0.6%

Average -0.23%
KLSE 1773 1727 -46.000 -2.59%
Alpha 2.4%

inwest, allow me to correct you. I selected the counters for my own investment. As I do analyze those companies I invested in quite thoroughly as you are aware. I already got a lot of things in my spreadsheet. The extra work I need to do is to write the stuff up.

So I just share my thoughts with you guys, also for learning and educational purpose. It is never meant as a challenge with OTB. You should know OTB is a professional, and I am just a novice in the stock market. How dare i challenge him?

TanKW, generally I buy and hold. Buy a stock when it is selling at a good margin of safety, then sell if it has gone up close to its intrinsic value. But often easy said than done. My fingers are itchy. The other thing is I can't possibly keep on buying. Often I have to sell some in order to buy what I think is a better stock.

inwest88, you are right. I am too bullish on Pintaras and Kfima.

inwest88, this is my suggested proportion. Just a suggestion. I am actually heavy on Kfima and Pintaras which I think is not so balanced.

Company Industry % holding
Pintaras Construction 15%
Kfima Trading/Services 20%
MFCB Trading/Services 5%
Haio Consumer 10%
Fibon Industrial 5%
CBIP Industrial 5%
Tien Wah Industrial 10%
Homeritz Consumer 5%
Willow Technology 5%
Daiman Property 10%
Datasonic Technology 10%
100%

“三梯次買進法” is something like dollar cost averaging. It is a popular investing strategy but make sure those you buy are good stocks like what is mentioned in the article. Never dollar cost averaging on lap sap.

Notice this strategy is the opposite of buy high sell higher used in TA. However, this $ cost averaging method is more of a risk reduction strategy to me. Although you can buy more with this method if the market is going down, but if the stock price is rising, you pay higher and higher price. In general stock price moves higher as time goes by. there is an upward drift in stock price.

In academic, dollar cost averaging has been debunked.

I have already bought the stocks before I posted them, some of them long time ago. This is not just talk only, but with conviction.

No, I don't use timing. All purchases were based on fundamentals; ie investing in great companies at a margin of safety.

Oh yeah, all valuation of intrinsic value was solely done by myself. I have never referred to any analysts reports. So these are all non-professional analysis and views.

TanKW, this will be my apportionment.

Company Industry % holding
Pintaras Construction 15%
Kfima Trading/Services 20%
MFCB Trading/Services 10%
Haio Consumer 10%
Fibon Industrial 5%
CBIP Industrial 10%
Tien Wah Industrial 10%
Homeritz Consumer 5%
Willow Technology 5%
Daiman Property 10%
100%

Posted by kcchongnz > Sep 2, 2013 12:28 PM | Report Abuse X

Datasonic, A Rule breaker for risk takers.

Below is the financials for Datasonic for the last few years.

Year 2010 2011 2012 1st half 2013
Revenue, m 39.6 78.4 178.7 118.3
Net profit, m 7.6 15.9 28.1 35.6
EPS 8.4 17.6 36.85 39.6

What do you see?

Assuming an annualized EPS of 80 sen,at 3.36 now, isn't it cheap? Yeah I know. Its price has shot up by 65% from RM2.00 since 4 months ago.

Datasonic has 10m copies Mycard to issue for 2013. It is also awarded 5 year contract to supply 10m polycarbonate passport. Think about that. there is very strong earnings visibility. Most of all, it is not expensive.

I would take this as my only stock for the challenge going on now.