yf, the 19533 is "Depreciation for property, plant and equipment". But in the latest figure is 20205. I probably got my 19533 when the 2012 report just came out. The new value of 20205 should be the correct one as it is from the audited account.

But there is not much difference which can affect our analysis. I reiterate that finance and investment is not an exact science.

miketyu,
Everybody is different. That is the beauty of this world.

For me, I am a fundamental investor. So my reference is the intrinsic value of the company, and the concept of margin of safety in investing in its stock. So if the share price goes beyond its intrinsic value, I definitely will sell. But if there is still 20% margin of safety, I likely will keep the stock.

yf, that operating expenses is taken from the financial statements. I did a little modification by taking out the depreciation and amortization (19553+6081=25634) which I obtained from its cash flow statements. This is for the purpose of getting the EBITDA, earnings before interest, tax and amortization. Often we use this metric for comparing between companies and to see its market valuation in relation to enterprise value.

The D&A is then deducted from EBITDA (160779)to get EBIT (135145), if you notice.

海鷗
http://www.youtube.com/watch?v=Aos26LDfmpk

Hai-O Enterprise Berhad is engaged in the wholesaling and retailing of herbal medicines and healthcare products and investment holding. The Company operates in five segments: wholesale, which include wholesaling and trading in herbal medicines and healthcare products, herbs and tea; multi-level marketing, which include operating multi-level direct marketing of health food, healthcare, wellness and beauty products; retail, including retail chain stores; manufacturing, which include manufacturing, producing and distributing pharmaceutical products and health food, and technology, which provide heat transmission and energy saving technology. The Company is also operating in leasing of machinery and equipment, licensed money lender, insurance agent, advertising services, rental income and investment holding.

During the US sublime crisis, Haio’s revenue had a fantastic rise from 374m in 2008 to 511m in 2012. Its net profit also rose in tandem from 49.1m to 71.9m. That was the time its share price rose to an all time high of RM5.40 in March 2010. Then suddenly in 2011, its revenue and net profit plunged from a cliff to 223m and 29.7m respectively, both less than half of the previous year (Table 1 below). These couple of years, the revenue of this fallen angel slowly rises from the trough to 268m last year. Its profit has risen at a much faster rate to 43.5m. Will it go back to its days of glory?

Let us refer to Greenblatt’s Magic Formula to see if Haio is a good company having a great business. Then we will do a little computation to determine if it is worth investing at the present price of RM2.72. For those who are interested in the Magic formula, you could go to the following link for the explanation.

http://klse.i3investor.com/servlets/forum/900285510.jsp

The key driving formulas used by Greenblatt for his Magic Formula are:
• Return on Invested Capital = EBIT*(1-tax rate) / (Fixed Assets + Net Working Capital)
• Earnings Yield = EBIT / Enterprise Value

From the computation based on the financial statements of Haio ended 30 April 2013, and the price of Haio at RM2.72, the following are obtained:

ROIC=43061/148000=29%
EY=58716/407967=14.4%

Hence it can be seen that Haio has a great business with a high return on invested capital of 29%, much higher than its cost of capital. Its earnings yield of 14.4% is also good as it is above my minimum 12% requirement.I would say buying the stock of Haio now at RM2.72 is a good move to invest in a good company at a reasonable price. This is the fourth stock in my portfolio.

Table 1: Revenue and net profit of Haio
Year 2013 2012 2011 2010 2009 2008
Revenue 267920 239533 223254 511064 435216 373823
Net Income 43491 35702 29710 71863 53010 49118

alibiii, you are absolutely right. But again we won't know when the ex-dividend date is getting nearer, will Maybank share price also will rise as more investors may be attracted to buy to get that dividend, do we?

Where did I say you are iafx? Show.

But you seem to admit that you are that person who praised me last time as shown in my above post.

No no no, I never said you are iafx. but you two sure are a good pair.

Posted by newbiestock > Jul 23, 2013 06:28 PM | Report Abuse
sell kfima and stop listening to that conman kcchongnz with his math. some people are muka tebal get it wrong all the time still talk alot...


tapir, why you changed you nick and opinion so fast ah?

Posted by DaveSingh > Dec 14, 2012 01:56 PM | Report Abuse
yeah@kcchongnz. good observation mate..


Posted by DaveSingh > Dec 17, 2012 08:55 AM | Report Abuse
yep@Kcchongnz.. you are right.. so dont worry fandi...Kcchongnz is telling us how valuable this company is.. he has good intentions...so we got to respect him for that.. not many people here have those motives.. most here are just selfish, greedy and play or talk politics..good on you kcchongnz.. talk more about kfima...you have valuable info we all can use...thanks for sharing..

Posted by DaveSingh > Dec 17, 2012 04:23 PM | Report Abuse
if i buy at rm1.8.. and every year gives me dividend with constant increase in dividend. i can assume next year will be up too. so this year 8 cents.. next year 10 cents.. that makes WOW more than 5% yield ah??? wow.. no wander fandi wants to buy it.. ok fandi i wont promote this anymore i am out of here.. sorry MR FANDI

Posted by DaveSingh > Dec 19, 2012 12:29 PM | Report Abuse
long live KFIMA, long live KFIMA.>>>>singh has left the house..

Posted by DaveSingh > Jan 2, 2013 03:47 PM | Report Abuse
now this is a good stock.. buy all at rm1.79 below...

Posted by DaveSingh > Jan 3, 2013 07:45 PM | Report Abuse
dont speculate short term with KFIMA... to go up there needs to be retail investors.. those investors are takut now... so chill... dont be in a hurry...KFIMA is a good counter long term with good dividends...dont talk too much about numbers here makes the stock look desperate...

Posted by DaveSingh > Jan 3, 2013 07:58 PM | Report Abuse
THIS STOCK is not my baby batukawan or united plantations... but its a great stock nonetheless....those who have these stocks will know what i mean...

Posted by DaveSingh > Jan 7, 2013 05:48 PM | Report Abuse
yes according to experts here... KFIMA is going to the skies.. we all should invest in this stock... wow amazing analysis here...

Posted by DaveSingh > Jan 7, 2013 05:58 PM | Report Abuse
KFIMA experts are wise indeed... so listen to them advice buy on KFIMA now...

Henry, have not looked at Magnum. Keck Seng yes, hell of undervalued. But I think the management won't pass any "value" to the minority shareholders. I bought at about 4.00 and sold at about 5.00. Not interested anymore.

These two jokers are exactly the same style. Shouting tipu, cheat, lie but how did i cheat? Show substantiations and proofs. Go and compute the CAGR of my portfolio, the KLSE's and the unit trusts in Fundsupermart. I have done that and all posted in i3. Go and do it yourself and check.

Posted by newbiestock > Aug 2, 2013 09:42 AM | Report Abuse
liar and cheat KCCHONGNZ aifx is right about u

Since the two buddies above kept on saying I lie, cheat, tipu, pusing, macham macham, let me take the opportunity here again to brag a bit here about the achievement of my portfolio put up by Tan KW


Posted by kcchongnz > Jul 29, 2013 08:20 PM | Report Abuse X

How is kcchongnz portfolio compared to the unit trust funds invested in Bursa stocks for the 1-year, 3-year and 5-year holding period? For unit trust funds return, please refer to the following link:

http://klse.i3investor.com/servlets/forum/900334365.jsp?fp=2

Year 1 3 5
Average Portfolio CAR 43.8% 24.6% 24.6%
KLSE CAR 10.8% 9.9% 9.3%
Unit trust, ave CAR 15.20% 12.10% 11.70%
Unit trust Max CAR 28.50% 22.00% 20.80%

It does appear that I did pretty well. Not only my portfolio beat the averages of the unit trusts for all the holding periods, the portfolio even out-performed the best of the 68 funds investing in Bursa! Hard to believe!

Jaack1, yes, it is clearly a typo mistake. The intrinsic value is 2.72, a margin of safety of 36% if you buy MFCB now at 2.74.

And for value investors they call the technique as "the greater fools theory".

Posted by justicewinwin > Aug 2, 2013 03:40 AM | Report Abuse

Hello everyone,
Buy high and sell high is considered the safest and smartest technique trader. It is not buy low and sell high.

justicewin, you may be right in stock trading, but this technique is extremely dangerous for those who don't know about technical analysis, and those people who just follow the wind.

house, cost of debt is not 0%. I used 6% before tax.

Yes, higher debts EPV higher. Perfectly make sense because cost of debt (6%) is cheaper than cost of equity (10%). Equity investor requires higher return because of higher risk. When a company goes bankrupt, debt holders has the first claim to what is left.

But there is a limit how high the debt can go, the higher the debts, the higher the chance the company can go bankrupt when the economy turns bad. So the higher the debt a company has, the higher is its increment borrowing cost.

What is the intrinsic value of MFCB?

Financial theory postulated by John Burr Williams in his “The theory of investment value” says that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate. This theory has since been extensively used in contemporary finance.

There are two major assumptions used in the computation for the intrinsic value, or the present value, of the expected future cash flows of a company; earnings growth rate and the discount rate. Slight deviations of the assumptions can yield a vast difference in the intrinsic value.

The discount rate is related to what is the required return by the equity and debt holders respectively; i.e. how much risk premium above the risk-free rate would be required. For most practical purpose, in contrast with the academic approach in capital asset pricing model, a risk premium applied is related to how stable the earnings and cash flow of the company and its financial health. The 10-year MGS rate at the moment is about 4%. MFCB earnings and cash flows have been steady for the last 7 years. It has a squeaky clean balance sheet. So it would be conservative to apply a risk premium of 6% above the MGS rate, or a required return of 10% (4%+6%). Using a before-tax borrowing rate of 7%, it weighted average cost of capital is about 9.3%. This WACC will be used as the discount rate for the valuation of the firm.

The more difficult part is the assumption of future cash flows of the company which is related to its expected growth rate. A difference in assumption of growth of 10% will yield a completely different intrinsic value of the company. For example if one assumes MFCB’s earnings will grow by 5% for the next 5 years, and 3% subsequently, its intrinsic value is RM3.67. If his assumption is 15% growth for the next 5 years, the IV is RM4.485. So which growth rate is the right one?

When I carry out the computation of IV to decide whether to invest in a company, I would prefer to use conservative assumptions in its growth rate. In MFCB’s case, how about the assumption that its business will be stagnant, and there is no further growth, not even grow with the rate of inflation? In this case I would use the Earnings Power Valuation popularized by Columbia University Professor Bruce Greenwald. For those who are interested, please refer to the following link:

http://www.scribd.com/doc/15987706/Greenwald-Earnings-Power-Value-EPV-lecture-slides

The intrinsic value of MFCB using the EPV is RM2.27 per share as shown below.

Figures in thousands
Revenue 635304
Ebit 119885
less income tax -30922
EBIT after tax 88963
Add average D&A 17093
Less average capex -22791
Normalized Ebit 83265
Cost of capital, R 9.3%
Capitalized earnings=Ad Ebit/R 892009
Add cash 126108
Other investments 117313
Less debts -68712
EPV 1066718
Less minority interest -406987
EPV to common shareholders 659732
Number of shares 242395
EPV/share 2.72

So at the close of MFCB’s share price at RM1.74 on 1/8/13, it is trading at a margin of safety of 36%.

What is the intrinsic value of Kumpulan Fima?

Financial theory postulated by John Burr Williams in his “The theory of investment value” says that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate. This theory has since been extensively used in contemporary finance.

There are two major assumptions used in the computation for the intrinsic value, or the present value, of the expected future cash flows of a company; earnings growth rate and the discount rate. Slight deviations of the assumptions can yield a vast difference in the intrinsic value.

The discount rate is related to what is the required return by the equity and debt holders respectively; i.e. how much risk premium above the risk-free rate would be required. For most practical purpose, in contrast with the academic approach in capital asset pricing model, a risk premium applied is related to how stable the earnings and cash flow of the company and its financial health. The 10-year MGS rate at the moment is about 4%. Kumpulan Fima earnings and cash flows have been steady for the last 10 years. It has a squeaky clean balance sheet. So it would be conservative to apply a risk premium of 6% above the MGS rate, or a required return of 10% (4%+6%). Using a before-tax borrowing rate of 6% for Kfima, it weighted average cost of capital is about 9.8%. This WACC will be used as the discount rate for the valuation of the firm.

The more difficult part is the assumption of future cash flows of the company which is related to its expected growth rate. A difference in assumption of growth of 10% will yield a completely different intrinsic value of the company. For example if one assumes Kfima’s earnings will grow by 5% for the next 5 years, and 3% subsequently, its intrinsic value is RM4.10. If his assumption is 10% growth for the next 5 years, the IV is RM4.95. So which growth rate is the right one?

When I carry out the computation of IV to decide whether to invest in a company, I would prefer to use conservative assumptions in its growth rate. In Kfima’s case, how about the assumption that its business will be stagnant, and there is no further growth, not even grow with the rate o finflation? In this case I would use the Earnings Power Valuation popularized by Columbia University Professor Bruce Greenwald. For those who are interested, please refer to the following link:

http://www.scribd.com/doc/15987706/Greenwald-Earnings-Power-Value-EPV-lecture-slides

The intrinsic value of Kfima using the EPV is RM3.36 per share as shown below.

Figures in thousands
Revenue 486524
Ebit, 126763
less income tax, -37766
EBIT after tax 88997
Add average D&A 21253
Less average capex -25917
Normalized Ebit 84334
Cost of capital, R 9.8%
Capitalized earnings=Nor Ebit/R 857956
Add cash 272236
Other investments 110462
Less debts -18472
EPV 1222182
Less minority interest -315821
EPV to common shareholders 906361
Number of shares 269987
EPV/share, RM 3.36

So at the close of Kfima’s share price at RM2.06 on 1/8/13, it is trading at a margin of safety of 39%.

KC Loh, is that bastard Davesingh? I just wonder why he always kachau me.

Jaack1, I remember you are the one who alerted me on MFCB a week or two ago. I have done a more detail analysis on that. Go read it. In fact I have added it in my personal portfolio.

iafx, where the f are you????? Why dare not swear ah?????

hohoho, now it is proven that who got no cock here. Just disappeared like that?

why is this iafx disappeared without doing the right thing? Where is the volunteer I was seeking? I thought i got a lot of friends here?

surfingalien, I had held Plenitude for some time too but sold off after the GE. I am sure you have your good reasons for buying Plenitude then, just as I did.

Plenitude has huge amount of cash. It has plenty of excellent land bank bought (or rather grabbed)at very low price. Hence you notice that its gross margins have been exceptionally high.

For Plenitude, in my opinion, is hell of an undervalued stock. The problem is you must know the person behind it. Is he going to share the value with you? I honestly don't know.

iafx, swear!!!!!!!!!!!!!!

I want to get some help from the somebody here. Go to the Kfima thread and look through the comments about the recent argument I and iafx have. Be a judge and see who has been cheating. Can somebody volunteer?

I kcchongnz swear I did not altered your post.

iafx, swear here that you did not delete the post and changed the word from "revenue" to "profit".

iafx, don't talk so much, swear here!!!!

Woooooi, iafx, I am waiting!

iafx, don't run away again. swear to your God here if you didn't do

swear to your God here if you didn't do. I have sworn to mine. don't pusing anymore

iafx, if you did not delete your original post and changed that word "revenue" to "profit" in that Kfima post, swear here to whichever God you believe.

iafx, you kept on saying I changed your post in Kfima's thread from "profit" to "revenue". Ok, I will cut my cock or cunt, whatever you say.

Over to you now. Do your swearing to whichever God you believe here.

iafx, the last time you said I changed you post in Kfima's thread. I have shown the evidence that you are the one who spin the story. Please lah, just keep quiet if you don't admit.

Ok let's settle once and for all. I kcchongnz, if I have changed your post in Kfima thread from "profit" to "revenue", I swear that I will ccut my cock.

Now over to you!

I recommend bad stocks? Which one? I never recommend any stock for anybody, have I? Btw, did you see how i show you that my portfolio returned 38% for the last 6 months, compared to KLSE 10%. Is my stock portfolio bad?

newbiestock,
Who the f are you? Why do you attack me so many times already? Have I done anything to you? Show me anything that I deserve to be attacked by you?

Posted by Tan KW > Aug 1, 2013 03:13 PM | Report Abuse
@kcchongnz.... congratualtion... but still far away to reach TP 1.67

Valuation is an art. Don't take that as written in Gospel.

Posted by Fat Cat Tim Buddy > Aug 1, 2013 03:14 PM | Report Abuse
kcchongnz so fast take profit?

Sorry, i may have made a mistake saying "I have just made some money". Not right. I bought this morning but only paper gain, not sold yet.

Biological assets are weapons of mass destruction used in biological warfare!

No lah, they are related to palm oil production which provides 30% of Kfima's revenue.

Hi all,just would like to inform that I have just made some money from GOB, the stock selected by OTB two days ago.

Mega First Corporation Berhad (1/8/13)

擁有一隻股票，期待它下個早晨就上漲是十分愚蠢的 Warren Buffet

Mega First Corporation Berhad (MFCB) is principally engaged in Power, Property, Limestone, Engineering and Investment Holding. The Power segment builds, owns and operates power plants.

The main earner is the power division which owns two power plants, one in China and the other in Sabah. The plants provide steady income for MFCB of 76% of the total revenue and profit of the company. It’s resource division operates one of the largest limestone hill reserves of more than 100 acres in Perak. It is also one of the country’s largest producers of lime products. This division contributes 13% and 15% of the total revenue and profit respectively. The management intends to increase capital expenses in this division in anticipation of greater demand for the limestone products in the country. Going forward, the Resource division will be contributing more to the revenue and profit of the company. The other core division in property development contributes about 5% of the total revenue and profit. These businesses of MFCB will continue to provide steady income and stable cash flows for many more years.

Quality of MFCB’s business
Years ago, MFCB has been depending on its power generation business to provide a steady and stable revenue and profit for the company. However there is not much growth in this business. Revenue and operating profit have been hovering less than 500m and 100m respectively (See Table 1). It is only about two years ago revenue and operating profit spike up to 635m and 120m respectively from the three core businesses last year. The compounded annual growth rate for the last two years is very good at 10% and 27% respectively for its revenue and operating profit.

The margins of the business of MFCB are reasonably good for its kind of industry. Last year, gross and operating margins have recovered steadily back to 26% and 19% respectively (See Table 2). Net margin deteriorated to 15% due to its losses in its investment activities and as a result affecting its return of equity. ROE of MFCB was 10% last year which is nothing to shout about but meets the minimum quality requirement. ROIC is however, much better at 18.6%, much higher the costs of its capitals.

MFCB’s quality of earnings is excellent as shown in Table 3 below. Its CFFOs are generally about the same as net income. About 30% of its cash flows from operations is spend on capital expenses. There is good average free cash flow after that, 13% and 16% (both> >5%) of revenue and invested capital respectively for the last 7 years. Last year cash flows are particularly good at 15% and 20% of revenue and invested capital respectively.

Market Valuation
There may not be high growth in MFCB’s business, but it has stable earnings and good cash flows, beside having a squeaky clean balance sheet. Hence it should be accorded with a reasonable good market valuation. But is it so?

At RM1.70, MFCB is trading at 7.1 times its earnings per share of 24 sen last year. Note that MFCB has an excess 126m cash or cash equivalent sitting in its balance sheet. Besides it has about 117m in quoted and unquoted investments and interest in associates. Despite of these quality assets, its price-to-book value is at only 0.7.

The cheapness of MFCB is more glaring from the perspective of its market enterprise value. At RM1.70, Its market enterprise value is 1.6 times its earnings before interest, tax, depreciation and amortization, far below the industry average. Earnings yield (Ebit/EV) is great at 50%, much higher than my 10% requirement.

Hence at RM1.70 a piece, I have added MFCB as a third stock in my portfolio.

Table 1: Revenue and profit of MFCB from 2006-2012
Year 2012 2011 2010 2009 2008 2007 2006
Revenue 635304 610508 523323 463103 500889 471813 478387
Gross profit 165798 145553 118934 135952 93215 111351 123305
Operating profit 119885 105838 73765 93392 46089 70915 87461
Net profit 93662 112568 99221 96188 66073 82487 77708

Table 2: Margins
Year 2012 2011 2010 2009 2008 2007 2006
Gross margin 26% 24% 23% 29% 19% 24% 26%
Operating margin 19% 17% 14% 20% 9% 15% 18%
Net margin 15% 18% 19% 21% 13% 17% 16%

Table 3; Cash flow of MFCB
Year 2012 2011 2010 2009 2008 2007 2006
CFFO 115207 102393 97420 111842 54207 92293 71955
Capex -22791 -24829 -49267 -35078 -7727 -19401 -18716
FCF 92416 77564 48153 76764 46480 72892 53239
FCF/Revenue 15% 13% 9% 17% 9% 15% 11%
FCF/IC 20% 17% 11% 19% 12% 19% 12%
CFFO/NI 123% 91% 98% 116% 82% 112% 93%

OTB, let's get real here. In cyber space, there are all kinds of people. There are people who admire your skill, and there are people no matter what, will criticize you for whatever you do, whether it is right or wrong. We should not let other people influence our own emotion.

In finance and investment, as you know, nobody can be right all the time, not even 70% of the time. Often there is no right or wrong too. Right right lah, wrong wrong lah, so what? If you lose money following my analysis and opinion, it is not my fault. It is your problem, not mine! Why should I apologize? Why should i be 100% sure of my opinion before I post it so that you won't lose money?

For me, I like people to criticize my analysis and opinion (not personal attack. Notice that if i am attacked personally, I will retaliate). That is how we can curb my cognitive bias of over-confidence. this behaviour can cause us to lose money in the stock market. I learned quite a bit from some constructive criticisms from some of the forumers here too.

That is why i gave you criticism on your interpretation of the financial statement of MTDACPI. I am very sure of my own interpretation, though I could be wrong too. Because of my confidence of my interpretation, I want you to know that you may not know that you may be wrong (you may be right too). It is not a show of "i am better than you", but "watch out, you could be wrong and lose money, I don't like to see you lose money".

Here is another friendly piece of advice. Don't take whatever things at face value when reading financial statement. You have to look behind the numbers. When using formula to compute, know the limitations.

Yeah, I know you base your trade on TA. But you have said many times that only TA+FA will make you successful in the stock market.

Posted by tonylim > Jul 31, 2013 07:29 PM | Report Abuse
Kcchong,
1. ".... element of luck. Secondly, I believe this mean reverting principle in the equity market; any market for that matter, such as the property market"
^ I have not heard of reverting principle. Is it a market phenomenon?

2. Your 5 years bursa indices, is it 31st dec figures or 12 months comparison adjusted to July 28th?

Definition of 'Mean Reversion'
"A theory suggesting that prices and returns eventually move back towards the mean or average. This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry."

The bursa data or stock price are meant to be 5 years from now, ie 28th July. It needs some time to get those prices and compute the total returns and CAR. So sometimes I curi ayam a little bit using data I computed say a week or two ago. But when you talk about 5 years total return or CAR, I don't think there is much difference.

Posted by Jyen > Jul 31, 2013 04:14 PM | Report Abuse
kcchong, why-ah?

The bank is not convinced that they are willing to chase after bad money with good money. Just my guess.

Posted by sephiroth > Jul 31, 2013 06:52 PM | Report Abuse
unaudited RM36.7m profit becomes audited RM14.88m profit (plunge by 59.45%)
http://announcements.bursamalaysia.com/EDMS/edmsweb.nsf/all/DFC547BBDBDAE80D48257BB9003914F4/$File/Announcement-Material%20Deviation%20in%20Audited%20Results%20as%20at%2031.03.2013%20(Bursa).pdf

In construction, over-recognition of work done is a very very common thing. You think you have done so much work, or entitled to some variation works, but the clients and consultants always think otherwise. There are endless disputes. There may be more skeletons in the closets.

One thing I am very skeptical about the under-provision of tax. It appears that the management was willing to pay so much tax even though they did not actually make money, but still want to recognize the write back of liquidated and ascertained damages of 30+m, which is not really a profit at all, just to show investors that they appear to make money. What kind o management is that?

I am highly convinced that MTDACPI did not turnaround at all from more than 10 years of continued losses, absolutely not.

Posted by kcchongnz > Jul 31, 2013 05:00 PM | Report Abuse X

Kumpulan Fima

“Value portfolio managers buy and sell judiciously, choosing today’s ugly duckling that shows the promise of becoming tomorrow’s beautiful swan.”

Kumpulan Fima has been in my original portfolio for about 4 years now. At 2.06 now, it provides me with a total return of 220%, or a compounded annual rate of return of 34%, three times above the return of KLSE a year of 10% for the last 4 years. However, for the past one year, return has been unsatisfactory with a negative return of about 8%. Should I discard this stock now? No way!

The business
Kumpulan Fima Berhad is engaged in manufacturing and trading of security and confidential documents; bulk handling and storage of liquid products and cargoes, warehousing and transportation and customs forwarding services; Oil palm Plantation and manufacturing and packaging of food products.

It has a well diversified group of businesses. I won’t say these businesses are very great but each has reasonable growth in revenue and earnings for the last 10 years. All these businesses are durable and are expected to be around for many years to come.

Quality of the business
Kfima’s revenue and net profit has been growing at 8.2% and 23% to 487m and 104m respectively for the last 10 years. In recent years, Kumpulan Fima has been buying up plantation land for its next phase of growth. The growth in revenue is unabated but just last year, earnings has slipped by 10%, due to the low price of palm oil which makes up 30% of its revenue. All divisions remain profitable.

The good quality business of Kfima is evidenced from its high gross margin of average of 43% for the last 5 years (Table 1). Net profit margin is also high at an average of 21%. This results in good 5-year average ROE of 15% and high ROIC of 22%. Retained earnings have been growing at a CAGR of 15% a year.

Kfima’s quality of earnings is excellent as shown in Table 2 below. Its CFFOs are generally about the same as net income. There is good average free cash flow, 16% and 19% (both> >5%) of revenue and invested capital respectively for the last 5 years. It is noted that last year cash flow has deteriorated. It may be still too early to tell if they will further deteriorate.

Capital allocations
Kfima has spent quite a substantial amount of money buying plantation land, new plants and equipment for its business. 143m in total was spent for the last 5 years. The capital expenses were well spent as they yield higher earnings and better cash flows the following years. Due to the better earnings and cash flows, the company has been increasing its dividend payment from 3 sen per share five years ago to 8 sen for 2013. This gives a reasonable good dividend yield of 4%, higher than the bank fixed deposit rate.

Market Valuation
With such good business and operation performance, one would expect it would not be cheap to invest in this stock. But is it so?

AT RM 2.06, Kfima is trading at 7.2 times its earnings per share of 28.6 sen for the financial year ended 31 march 2013. Note that Kfima has an excess 272m cash or cash equivalent sitting in its balance sheet, or an excess cash of RM1.00 per share. Besides it has about 100m in investment properties and interest in associates.

Its enterprise value is less than 4 times its earnings before interest and tax, far below the industry average of more than 10 times. This translate to an earnings yield of 26%, much higher than my 10% requirement.
Hence at RM2.07 a piece, kfima will remain as a second stock in my new portfolio.

Table1: Quality of Kfima’s business
Year 2013 2012 2011 2010 2009 Average
Gross margin 44% 46% 47% 40% 39% 43%
Net margin 21% 25% 25% 14% 13% 20%
ROE 12.5% 15.5% 16.6% 16.0% 15.6% 15%
ROIC 19.2% 25.3% 25.4% 21.1% 18.6% 22%

Table 2: Cash flows of Kfima
Year 2013 2012 2011 2010 2009 Average
CFFO 52589 131052 137909 114196 56521 98453
Capex -49513 -26434 -24022 -19500 -23826 -28659
FCF 3076 104618 113887 94696 32695 69794
FCF/Revenue 0.6% 22.2% 26.4% 23.0% 8.9% 16%
FCF/IC 0.6% 25.8% 29.1% 27.7% 9.4% 19%

Posted by ipomember > Jul 31, 2013 05:03 PM | Report Abuse
Hi kc, is investment in subsidiary considered as CAPEX?

No, capex is capital expenses on the ordinary business of the company. Investment in subsidiaries is an investment operation under the cash flow in investments of the cash flow statement.

In Kfima's case, from its CFFO, it spends certain amount in capex, such as buying biological assets, increase PPE. Then after spending on capex, what is left from CFFO is Free cash flow, or FCF. It is only from the money in FCF kfima has the money to invest in subsidiaries. Assuming that it doesn't touch its cash in its balance sheet.

Kumpulan Fima

“Value portfolio managers buy and sell judiciously, choosing today’s ugly duckling that shows the promise of becoming tomorrow’s beautiful swan.”

Kumpulan Fima has been in my original portfolio for about 4 years now. At 2.06 now, it provides me with a total return of 220%, or a compounded annual rate of return of 34%, three times above the return of KLSE a year of 10% for the last 4 years. However, for the past one year, return has been unsatisfactory with a negative return of about 8%. Should I discard this stock now? No way!

The business
Kumpulan Fima Berhad is engaged in manufacturing and trading of security and confidential documents; bulk handling and storage of liquid products and cargoes, warehousing and transportation and customs forwarding services; Oil palm Plantation and manufacturing and packaging of food products.

It has a well diversified group of businesses. I won’t say these businesses are very great but each has reasonable growth in revenue and earnings for the last 10 years. All these businesses are durable and are expected to be around for many years to come.

Quality of the business
Kfima’s revenue and net profit has been growing at 8.2% and 23% to 487m and 104m respectively for the last 10 years. In recent years, Kumpulan Fima has been buying up plantation land for its next phase of growth. The growth in revenue is unabated but just last year, earnings has slipped by 10%, due to the low price of palm oil which makes up 30% of its revenue. All divisions remain profitable.

The good quality business of Kfima is evidenced from its high gross margin of average of 43% for the last 5 years (Table 1). Net profit margin is also high at an average of 21%. This results in good 5-year average ROE of 15% and high ROIC of 22%. Retained earnings have been growing at a CAGR of 15% a year.

Kfima’s quality of earnings is excellent as shown in Table 2 below. Its CFFOs are generally about the same as net income. There is good average free cash flow, 16% and 19% (both> >5%) of revenue and invested capital respectively for the last 5 years. It is noted that last year cash flow has deteriorated. It may be still too early to tell if they will further deteriorate.

Capital allocations
Kfima has spent quite a substantial amount of money buying plantation land, new plants and equipment for its business. 143m in total was spent for the last 5 years. The capital expenses were well spent as they yield higher earnings and better cash flows the following years. Due to the better earnings and cash flows, the company has been increasing its dividend payment from 3 sen per share five years ago to 8 sen for 2013. This gives a reasonable good dividend yield of 4%, higher than the bank fixed deposit rate.

Market Valuation
With such good business and operation performance, one would expect it would not be cheap to invest in this stock. But is it so?

AT RM 2.06, Kfima is trading at 7.2 times its earnings per share of 28.6 sen for the financial year ended 31 march 2013. Note that Kfima has an excess 272m cash or cash equivalent sitting in its balance sheet, or an excess cash of RM1.00 per share. Besides it has about 100m in investment properties and interest in associates.

Its enterprise value is less than 4 times its earnings before interest and tax, far below the industry average of more than 10 times. This translate to an earnings yield of 26%, much higher than my 10% requirement.
Hence at RM2.07 a piece, kfima will remain as a second stock in my new portfolio.

Table1: Quality of Kfima’s business
Year 2013 2012 2011 2010 2009 Average
Gross margin 44% 46% 47% 40% 39% 43%
Net margin 21% 25% 25% 14% 13% 20%
ROE 12.5% 15.5% 16.6% 16.0% 15.6% 15%
ROIC 19.2% 25.3% 25.4% 21.1% 18.6% 22%

Table 2: Cash flows of Kfima
Year 2013 2012 2011 2010 2009 Average
CFFO 52589 131052 137909 114196 56521 98453
Capex -49513 -26434 -24022 -19500 -23826 -28659
FCF 3076 104618 113887 94696 32695 69794
FCF/Revenue 0.6% 22.2% 26.4% 23.0% 8.9% 16%
FCF/IC 0.6% 25.8% 29.1% 27.7% 9.4% 19%

With a lot equals to 100 shares now, not 1000 shares like before, anybody can invest in say Public Bank. Unlike before 1 lot of 1000 shares of Public Bank cost 17,220. Now retail investor can buy 1 lot of 100 shares of PBB at 1,722.

Berkshire Hathaway is a stock like Pintaras.

Posted by houseofordos > Jul 31, 2013 01:23 PM | Report Abuse
KC, no arguments there when you talk about value... but bonus issues and share splits improve the liquidity of the share and makes it more tradeable.... and liquidity does play a part in getting a share noticed by more investors and even institutional investors.

That is the cognitive bias of anchoring. Retail investors think that after the bonus issues say 1 for 1, the share is cheaper now by half. I don't disagree that behaviour finance does play a part for retail investor. But let me ask you, how much a retail investor would be investing in say Pintaras say at 5.00? RM10,000? Is there a difference if he buys 20 lots of 100 share each at RM5, or 40 lots of 100 shares at after-bonus price of RM2.50? So will it better for ratail invetor who has RM1000 to invest, whether he buys 2 lots of 100 shares at RM5.00, or 4 lots of 1000 shares at RM2.50?

Institutional investors have loads of money to invest. They don't give a damn of what the price is, whether is 5.00 or 2.50 each. they only care of stuff like PE ratio, EV/Ebit, P/B etc. Wonder why Berkshire Hathaway share price is $100 over thousand per share?

house and others,
Read this article by Professor Aswath Danamoran. Replace "earnings surprise" with "bonus issues surprise".

http://aswathdamodaran.blogspot.co.nz/2012/07/earnings-surprises-price-reaction-and.html

Actually to me the quality of bonus issues cannot match that of earnings surprise. The later adds value but not the earlier one.

Which is a better way to raise capital?

If you were to invest in a company like Amedia, what is your required return? With the unstable and poor cash flow of Amedia, I would required a minimum of 12%, 5% above a corporate bond rate. In fact, I would want a 15% for Amedia.

So the interest rate of corporate bond or bank borrowing rate is about 7% compared to the required return of equity holder of 12%-15%, which is the cheaper way to raise capital?

Have you ever wonder why Amedia does not raise the additional capital required through a cheaper mean?