You sure you want this?

Posted by TeckChuan Lee > Jul 11, 2013 08:35 PM | Report Abuse
Please post a copy to me. Thanks.
Zzzchuanzzz@gmail.com

According to my record, I have sent my spreadsheet to about 130 people requesting for it. So far only one or two persons I have seen have used it. I guess most have thrown them into the dustbin.

I guess this style of fundamental investing is not appealing at all. Must be a new age of investing now. My hope of trying to solicit some good stocks to invest also didn't materialized.

Is TM CU a dead duck?

Posted by Fat Cat Tim Buddy > Jul 9, 2013 07:49 PM | Report Abuse
kcchong, rmb mat candenna ? he sure lost a lot on apple CW, the tm-cu he recommend now is basically worthless (i warned about tm-cu before)


At the close of TM share price on 12 July, 2013 at RM5.38, it does appear that TM CU shareholders would end up holding a worthless piece of paper. This is because CU now is way out-of-the-money. With an exercise price of RM6.00 , TM share price has to go up by 62 sen, or 11.5% in order to be in-the-money. And this TM share price has to accomplish it within 80 days before the expiry of CM on 30/9/2013, a short period.

If one is thinking of punting TM CU, buying 1m shares at half a sen for RM5,000, he can only make money if TM share price can move up close to the exercise price within this 80 days. The likelihood is he will probably lose all the money.

However, if something good happens to TM and its share price exhibits high volatility and move up above RM6.00, great reward can be obtained by punters. This is due to its very high gearing of 270 times and effective leverage of 28 times now. This high gearing and effective leverage (gearing*delta) means that CU moves up many times more in term of percentage gain when TM share price goes up.

Table 1 below shows the gain/loss of CU at various settlement price of TM.

Table 1: Gain/loss of CU
Uly Price 6.00 6.01 6.02 6.04 6.10 6.20 6.50
TM 11.5% 11.7% 11.9% 12.3% 13.4% 15.2% 20.8%
CU -100% -50% 0% 100% 400% 900% 2400%

Holders of CU bought at half a sen now lose all his money if TM shares does not go up to RM6.00 at expiry of CU. He would break even if TM share price goes up by 11.9% to RM6.02 at settlement. However, if a black swan event occurs when TM moves up to RM6.50, punters can make 24 times the profit, or RM120,000 with a RM5,000 punt.

Table 2 below shows the latest target prices of TM by various investment bankers with a low of RM5.30 , a high of RM6.75, with an average of RM5.90.

Table 2: Target prices of TM
HLG RHB Kenanga MIDF PBB TA Macquie Av
5.82 5.30 5.91 6.75 5.95 6.07 5.50 5.90
3/07/13 1/07/13 3/07/13 31/05/13 31/05/13 31/05/2013 31/05/13

TM traded at a high of RM6.30 before in 1st October last year. In stock trading, nothing is impossible. So it may be too early to say that TM CU is a dead duck now. It just need some spikes of volatility for TM within this 80 days.

Table 3: Appendix, conversion details of TM CU
Price Ex-Price Ex-Ratio Expiry date Premium Gearing
0.005 6.00 4.00 30/09/2013 11.9% 269

Since I started this thread, I better to a bit more responsible. So below I re-post something I have done before in i3.

Posted by kcchongnz > Oct 7, 2012 05:37 PM | Report Abuse X

Just read this article by cpteh, good one. As I myself have been writing about punting (yes punt, not invest)call warrants in i3investor, I think I need to remind readers about this educational piece. Yes, without proper knowledge about call warrants, you are extremely likely sent to Holland. Read the following research finding:

[In their 2009 paper on “option trading and individual investor performance” , Rob Bauer, Mathijs Casemans and Piet Eichholtz examine the performance and persistence of individual investors trading at a Dutch online broker. Using a database consisting of more than 68,000 accounts and eight million trades in stocks during January 2000 to March 2006, they find that the bottom tenth of performance lose more than 90% of value!]

Punting call warrant which is a form of option has more disadvantages in Bursa because SC won't protect small retailers. Market makers, insiders and big time speculators control and manipulate the market.

Do you know that every time maker makers issue new call warrants, they are selling them at extremely high price (or high volatility)? They control the bid-ask spread, the settlement price by pressing down the underlying share price at expiry of the call warrants etc.

But that doesn't mean one has no chance to beat them. To do that one must know this instrument well, understand your risks, and win against the emotion of the market participants, etc.

Yeah, without arming with all the above, stay far far away from call warrants. On the other hand, punting of call warrants may provide you with some excitement in the stock market.

Consumer staples stocks

Whether it is economic boom or bust, people are unable or unwilling to cut out of their budgets on essential foods regardless of their financial situation. The demand of consumer staples are relatively constant, regardless of their price. Hence consumer staples stocks offer an attractive investment for investors seeking slow and steady growth.

Table 1 at the appendix shows some of the mid and small capitalized consumer staples stocks listed in Bursa. Their past year growth, profitability and efficiencies as well as their market valuations are tabulated as shown. Which of them are great consumer staples companies worthy of investing?

Zhulian has the fastest growth last year with revenue and net profit growing at 26% and 23% respectively, followed by Apollo and Haio, both also experienced double digits growth in both revenue and earnings. Apollo in particular, has its net profit improved by 47% last year.

London Biscuits, however encountered contraction in its revenue and net profit, quite badly in a contraction of 23% of its bottom line.
In terms of profit margins, Zhulian again excels with the highest margins, 26% in net profit margin. The high profit margins in turn boast up the return of equity (ROE) and return on invested capital (ROIC), 26% and 39% respectively which is way above its cost of capital. Its cash return (FCF/IC) is also remarkable at 27.5%. Zhulain is obviously enhancing its shareholders value greatly with these numbers.

Haio follows closely with respectable ROE and ROIC at 17.8% and 27% respectively. Its cash return is also as good at 27%. Apollo also did well with ROE and ROIC well above its cost of capital.
YSP, Yee Lee and London Biscuits did not do well with low ROE and ROIC which are below the cost of capitals . The worst performer is clearly London Biscuits with ROE and ROIC of just 4.1% and 5% respectively. It has no free cash flows at all. In fact it never seems to have any FCF for years. Wonder why it should still be in business.

With the past year growth and the profitability and efficiencies of the companies, I would rank the companies from the best to the worst as the following Table 2:

Table 2: Ranking of companies
1 2 3 4 5 6
Zhulian Haio Apollo Yee Lee YSP LonBisc

I would expect the market would give the highest valuation for Zhulian, followed by Haio and the lowest London Biscuits; but does the market do so?

PE wise, I am indeed surprised that YSP is given the highest valuation with a PE ratio of 14.6, then only followed by Zhulian at 12.8, Haio etc as shown in Table 2 below. London Biscuit as expected ranks the lowest.

Table 2: PE ranking
1 2 3 4 5 6
YSP Zhulian Haio Yee Lee Apollo LonBisc

But a better valuation should be based on enterprise value over earnings before interest and tax (Ebit) for valuation of the whole firm, rather than just the equity. This is because some firms have low debt or even debt free such as Zhulian and Apollo, whereas Yee Lee has considerable amount of debt. London Biscuits’ debt is huge.
It is a real shocker here that London Biscuits, being the worst in terms of growth, profitability and efficiencies, is given the highest valuation in term of EV/Ebit of 11.4. In fact those companies with poorer performance are given higher valuations than those better ones as shown in Table 3 below:

Table 3: Ranking based on EV/Ebit
1 2 3 4 5 6
LonBisc Yee Lee YSP Zhulian Haio Apollo

So which company do you favour as an investment?

KC Chong (11/7/13)


Table 1 Appendix
Company Haio Zhulian YSP Yee Lee Apollo LonBisc
Growth Last Year
Revenue 12% 26% 15% -9% 11% -3%
Net profit 22% 23% -11% 14% 47% -23%

Profitability and efficiencies
Operating margin 21.9% 20.9% 12.0% 4.5% 19% 11.3%
Net profit margin 15.9% 26.0% 7.5% 3.1% 14.4% 5.4%
Return of assets 13.9% 22.1% 4.6% 4.1% 12.5% 2.2%
Return of Equity 17.8% 25.9% 6.2% 7.6% 13.9% 4.1%
Return on invested capital 29.1% 39.1% 6.4% 7.0% 17.6% 5.0%
FCF/IC 27.1% 27.5% -1% 16% 13.8% NA

Market valuations
Price on 11/7/13 2.70 3.17 1.49 1.32 4.09 0.685
PE ratio 12.8 12.5 14.6 10.5 10.3 8.4
EV/Ebit 6.9 8.5 8.7 8.8 5.8 11.4

Posted by iafx > Jul 11, 2013 01:35 PM | Report Abuse
hahahaa... kuat pusing cerita ni... hahahaa...

So you have any issue with my comments?

Oh btw, I am sure you have collected enough of my postings. Ready to tell me where have I copy and paste, bullshit etc?

I am waiting.

inwest88, only the major shareholders know exactly why he keeps on disposing the shares. If I have so much stake in the company like him, I may want to dispose some to give to my children, buy a couple of villas in Queenstown, NZ, buy a few bungalows for my children, my mistresses etc etc. And I can also diversify my investment, use the proceeds to buy Kumpulan Fima, Pintaras Jaya, Haio, GAB, or invest in some startup companies to help entrepreneurship etc etc.

The company is already distributing good dividend, which is more tangible to shareholders than share buyback. The company also need cash for capital expenses for future growth.

But for SKPRes, it is a very good company, or at least shown to be a good company in the past. Share price undervalued (I have written about this a few times) because the major shareholder still disposing his shares.

When I say pig will fly, i did not refer to SKPRes. I refer to a sicko

pig will fly

Can you tell me what is the message you want to tell us by appending the link? Do you understand what Alan Voon talks about? Do you know the website is about company warrant? Can you differentiate a company warrant and a call warrant?

Posted by divine > Jul 10, 2013 07:48 AM | Report Abuse
thank you kcchongnz
I think there was some interest in maybank-cw went yp by half ct yesterday I think. your thoughts/

Yeah, another undervalued call warrant in Maybank CW. At 25 sen while the underlying share at 10.46 now, it is trading at a discount of 2%. With a gearing of 8.4 times, the potential gain is 17%, if it is a American style option. but it is not, it is a European style option.

It is really a good punt. There is no likelihood that there is declaration of dividend for Maybank in the near term too.

house, you got all the correct assessments of call warrants as shown by your introduction of HapSeng CF. Well done.

Just one, as Hapseng CF is at a discount of 2.3%, why is your payoff at 0, and not 14.3% (2.26%*gearing of 6.2)?

Yeah, dividend is a bad thing for HapSeng. There is a dividend of 8 sen ex-dated on 23/7/2013. Normally the share price of HapSeng will be adjusted downwards by that amount. So if it is so, CF is no more at a discount but at a premium of 1.8%. Not too much considering it still has about half a year to expire.

But it is really hard to say. Will the price of Hapseng go up further until just before the dividend payment? Or the dividend is already fully reflected in the share price?

house,

You are right. I made a mistake. It must be when I changed the spreadsheet using another call warrant, i did not change the details of the warrants to Supermax CK.

So with that, all call warrants of Supermax seem to be overpriced. CK is not worth punting because the premium is 12% with one month plus to expiry. The gearing is high though at 66 times.

So there is a high probability that i am going to lose all my money in CK.

That is the reason why i try to get kakis here for punting of call warrants. They can correct my mistakes. Thanks house.

There are 4 call warrants for Supermax on 10/7/2013.

Price Ex-Price Ex-Ratio Expiry date Premium Gearing
CN 0.130 1.90 2.00 28/02/2014 8.5% 7.7
CL 0.040 2.00 3.00 20/09/2013 6.5% 16.6
CM 0.030 2.20 3.00 28/11/2013 15.1% 22.1
CK 0.015 2.00 3.00 20/09/2013 2.8% 44.2
Supermax share price at 1.99 on the close of 9/7/13

From the table we can straight away rule out CL as it has the same expiry date as CK, but it is traded at a significant premium of 6.5% compared to that of 2.8% for CK. Moreover, the gearing of CK is much higher than that of CL. The shortcoming of both warrants is that they have only 70 more days to expiry.

CN with a longer expiry date than CM and traded at a significant lower premium of 8.5% compared to 15.1% of CM and hence it is at a lower risk. In fact CN is the only call warrant which is “in-the-money”. However, punters may prefer to gamble on CM because it has a significant higher gearing than CN.

Looking at the premium, CM is the most expensive call warrant of Supermax at a premium of 15.1%. That means punters of CM will only get to make money if Supermax share price can go up by 15.1% to RM2.29 before its expiry. This may be a bit difficult considering that CM has slightly more than 4 months to expiry. So I would rate CM as the highest risk call warrant of Supermax.

Which call warrant I prefer? I personally would prefer CK which is has the lowest premium but the highest gearing. It may be a short time to expiry, but for call warrants, 70 days can be long enough for Supermax to go up by more than 2.8% for punters to make money. If Supermax share price can go up by 10% within this 70 days, CK buyers at 1.5 sen now can potentially gain 350%. If Supermax share does not go up at all, of course you lose everything.

In the stock market, nothing is impossible, though one has to weigh on the probability, and the risk-reward. And do not be too greedy to punt too much on it.

The table below shows the payoff of the call warrants when they are cash settle off at expiry for various prices of Bursa share price.

Uly Price 1.95 1.99 2.10 2.20 2.29 2.40 2.50
Supermax -2.0% 0.0% 5.5% 10.6% 15.1% 20.6% 25.6%
CN -80.8% -65.4% -23.1% 15.4% 50.0% 92.3% 130.8%
CL -100.0% -100.0% -16.7% 66.7% 141.7% 233.3% 316.7%
CM -100.0% -100.0% -100.0% -100.0% 0.0% 122.2% 233.3%
CK -100.0% -100.0% 122.2% 344.4% 544.4% 788.9% 1011.1%

leviathan,
Excellent explanation. Got more call warrants to recommend or not?

Yes, the potential return of Trop-CA depends solely on the price movement of Tropicana share price. Do you expect there is spurt of volatility in the underlying share? Is the underlying company expected to do well for the next financial year and its share price will be making positive big move? These are the considerations.

Checking the target prices given by the analysts, only two of them, the average target price is not high, just RM2.25. If Tropicana achieves this target price, the potential gain is 38%, not overly high. But if the share price movement is the other way, one can lose quite some money; for example, if Trop share price just stays at present value of 1.92, buyers of Trop-CA loses 76% at expiry; 100% if it drops below the exercise price of RM1.85.

Of course analysts' target price is just a TP. Often their TP do not turn out to be right.

So it is a risk-reward consideration.

A good advice below for those thinking about punting call warrants from fei mau:

Posted by Fat Cat Tim Buddy > Jul 9, 2013 07:49 PM | Report Abuse
i would not buy CW, because it is highly manipulate by the banks, and it can be easily done.
kcchong, rmb mat candenna ? he sure lost a lot on apple CW, the tm-cu he recommend now is basically worthless ( i warned about tm-cu before )
conclusion, i just dont find CW is worth the effort.
i dont find thrill in losing money, because my sifu g.soros told me before : “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
kikiki.

Yes, call warrants can be manipulated by the investment banks, especially those call warrants of lowly traded stocks. Bursa share may be one of them. but for those more liquid stocks like Maybank, it may not be that easily. If IB want to lower the intrinsic value of say Maybank call warrants, it has to press down its price just before expiry of a call warrant. but if the underlying share price is fairly priced or already undervalued, institution will grab the share and hence bring the price back to its fair value.

What your sifu g.soros said “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” is very true. Totally agreed.

Drachen,
The problem with most call warrants is the illiquidity. Few punters of call warrants around and hence pricing has to depend on the market makers. The market makers are generally not fair in the market making with high bid-asked spread. So punting call warrants is a disadvantage for retail punters.

But if you are bullish about a stock, and even though its call warrants are illiquid, but if their asking prices are cheap and sell at low premium and high gearing, they are worth punting.

Take for example the call warrants of Bursa which I posted acouple of weeks ago when tonylim asked me in the appended post below. If tonylim have bought C3 and CZ at 27.5 sen and 28 sen respectively, paying at a higher spread, he would have made very handsome profit because Bursa share price went up quite a bit. You can sell C3 and CZ at 35 and 34 sen respectively now as there are ready buyers at those prices. The profit would be about 25%, for a holding period of 2 weeks. Not bad at all.

Posted by kcchongnz > Jun 23, 2013 06:50 PM | Report Abuse X
Posted by tonylim > Jun 22, 2013 06:55 PM | Report Abuse
kcchong, if Bursa is in your screens, care to write some notes here on its cw.

There are 5 call warrants for Bursa on 23/6/2013.

Warrant Price Ex-Price Ex-Ratio Expiry date Premium Gearing
C1 0.265 6.30 5.00 26/08/2013 0.3% 5.7
C2 0.285 6.30 6.00 18/11/2013 5.4% 4.4
C3 0.275 6.60 4.00 28/02/2014 1.3% 6.9
C4 0.140 8.00 4.00 30/05/2014 12.6% 13.6
CZ 0.280 6.50 4.00 31/07/2013 0.3% 6.8
Bursa share price at 7.60 on 23/6/13

C1 and CZ has the same lowest premium of 0.3%. This means that if Bursa share price just go up by 0.3% from RM7.60 now at the expiry of the respective call warrant, punters who have bought C1 and CZ at 26.5 sen and 28 sen respectively would make money when they cash settle the call warrants at expiry. C1 and CZ provide the safest bets among all the call warrants due to their low premiums. However they are quite close to their expiry date now with about 1 to 2 months time.

C3 with slightly higher premium at 1.3% would be a better punt than C1 and CZ by virtue that it has a much longer expiry date of 8 more months to go, hence more chance for it go up by more than its premium of 1.3% now. I personally would prefer to punt on this call warrant.

Some punters may like the explosive, C4, as it has a much higher gearing of 13.6 times and the longest expiry date. However, it’s premium is relatively higher at 12.6%. If one anticipates that there is high volatility of Bursa share before the expiry of C4, it provides the most exciting play.

Eventually whether one can make money from punting on the call warrants is very much dependent on the rise of Bursa share price. The additional risk is that at RM7.60 now, Bursa is already above the average target price of RM7.53 by the investment banks.

The table below shows the payoff of the call warrants when they are cash settle off at expiry for various prices of Bursa share price.

Uly Price 6.50 7.00 7.60 7.63 8.00 8.20 8.40 8.80 9.35
Bursa -14.5% -7.9% 0.0% 0.3% 5.3% 7.9% 10.5% 15.8% 23.0%
C1 -84.9% -47.2% -1.9% 0.0% 28.3% 43.4% 58.5% 88.7% 130.2%
C2 -88.3% -59.1% -24.0% -22.5% -0.6% 11.1% 22.8% 46.2% 78.4%
C3 -100.0% -63.6% -9.1% -6.8% 27.3% 45.5% 63.6% 100.0% 150.0%
C4 -100.0% -100.0% -100.0% -100.0% -100.0% -64.3% -28.6% 42.9% 141.1%
CZ -100.0% -55.4% -1.8% 0.4% 33.9% 51.8% 69.6% 105.4% 154.5%

Hey, you copy and paste the link for what purpose? What does it say? What is the homework for buying warrant involved? What is the homework involved in buying ordinary share?

Can explain all the above or not? Yes, please use your own words, not just copy a link and expect others to guess what the hell is that, like the above link you copied.

Posted by leviathan > Jul 9, 2013 12:34 PM | Report Abuse
Trop-CA.....saving you some time to compare

Thanks for sharing. But could you tell us why you like to punt on Trop-CA?

Posted by Drachen > Jul 9, 2013 01:21 PM | Report Abuse
Thanks kcchongnz. Ab uno disce omnes. Very tempting. Will buy some at 36 sen. Best regards.

Just be reminded that the value of the call warrant moves minute to minute wrt the underlying share price. Before punting on call warrant, understand it first.

Yes, call warrant is nothing but for punting. It is not, I repeat an "alternative investment instrument" as mentioned by somebody.

You will likely to lose money if you don't know enough to gamble this thingy. But "guarantee will get burnt"? Not necessary. Of course if you simply hantam without knowing anything, then it is likely to lose money.

Posted by iafx > Jul 9, 2013 12:52 PM | Report Abuse
@tony, tks and no worry, being working on warrant long enough. warrant as alternate investment instrument, must not treated like gambling or guarantee will get burnt

beware forewarned those once written like a "saint", is actually a rubbish gambler underneath. wanna gamble go to genting... don't forget your 5 chop sticks

Hehe, I am no saint and never claimed to be anything. Neither I am rubbish gambler. 5 chopsticks? You know about warrants? Working long enough on warrants? Well we can go to a special thread and discuss about all these. The last time you just chicken out.

My take is that you know nuts about finance and investment, not to mention options and warrants. that was why you never have the guts because you know nothing, absolutely nothing.

tonylim, you must have a lot of money in C3. When is the treat?

If you refer to the table I just posted, you can see that C3 at 36 sen, is trading at a premium of just 1.4%. That means if you buy C3 now at 36 sen, you just need Bursa share to go up by 1.4% to RM8.04 before the expiry date of C3 on 28/2/2014, you will breakeven your cost. Hack, C3 has about half a year before expiry. Can't Bursa share go up by just 1.4% within this half year? This means C3 is hell of a good punt to me.

Looking at the payoff table again I posted. If Bursa share price can go up by 11% to RM8.80 within this 6 months, C3 can potentially make more than 53% profit.

However, the gearing of C3 is good at 5.5 times but not as high as C4 which is 15 times. That was why I prefer C4.

Posted by iafx > Jul 9, 2013 12:33 PM | Report Abuse
To make gambling more exciting go to genting. correct understanding of call warrant: http://www.investopedia.com/articles/04/021704.asp

Somebody obviously don't know anything about call warrants and the excitement of punting of call warrants.

Hey the link you appended is just the very basic of telling you what a warrant is. That is all. Do you understand it? But anyway understanding what is written there is like reading abc only.

What is important is much more than that; stuff like premium, gearing, and all those stuff I wrote about in order for you before punting in call warrants. Any questions?

tonylim,
I should thank you for asking me to look at Bursa call warrants. I made quite good profit from CZ and C4.

What do you mean by no special mention of C4. I specially mentioned C4.

Let me start with the first one, Bursa call warrants.

There are 5 call warrants for Bursa on 9/7/2013.

Warrant Price Ex-Price Ex-Ratio Expiry date Premium Gearing
C1 0.345 6.30 5.00 26/08/2013 1.5% 4.6
C2 0.300 6.30 6.00 18/11/2013 2.4% 4.4
C3 0.360 6.60 4.00 28/02/2014 1.6% 5.5
C4 0.125 8.00 4.00 30/05/2014 7.5% 15.8
CZ 0.330 6.50 4.00 31/07/2013 -1.1% 6.0
Bursa share price at 7.91 on 9/7/13

C4 has the highest premium of 7.5% while CZ is trading at a discount of 1.1%. This means that if Bursa share price just stay the same now at RM7.91 at the expiry of CZ in three weeks time, buyers of CZ at 33 sen now would gain 6.6% as the gearing is 6 times (1.1%*6). CZ provides the safest bet among all the call warrants due to its discount. However it is quite close to their expiry date now with just three weeks to expiry.

If Bursa share price goes up by 7.5% to RM8.50, holders of CZ can gain 51.5%. But if Bursa share price falls to RM7.5, CZ holders can lose 24%. This is the leverage effect of call warrants.

C4, now trading at 12.5 sen, is at the highest premium of 7.5%. Does it mean that it is the most expensive? Not necessary. C4, expiring on 30/5/2014, has the longest time to maturity and highest gearing of 16 times. If one anticipates that there is high volatility of Bursa share before the expiry of C4, which is still more than 10 months to maturity, it provides the most exciting play.

The table below shows the payoff of the call warrants when they are cash settle off at expiry for various prices of Bursa share price.

Uly Price 6.50 7.50 7.91 7.95 8.00 8.20 8.50 8.80 9.35
Bursa -17.8% -5.2% 0.0% 0.5% 1.1% 3.7% 7.5% 11.3% 18.2%
C1 -88.4% -30.4% -6.7% -4.3% -1.4% 10.1% 27.5% 44.9% 76.8%
C2 -88.9% -33.3% -10.6% -8.3% -5.6% 5.6% 22.2% 38.9% 69.4%
C3 -100.0% -37.5% -9.0% -6.2% -2.8% 11.1% 31.9% 52.8% 91.0%
C4 -100.0% -100.0% -100.0% -100.0% -100.0% -60.0% 0.0% 60.0% 170.0%
CZ -100.0% -24.2% 6.8% 9.8% 13.6% 28.8% 51.5% 74.2% 115.9%

If Bursa share price goes up by 11.3% within this ten months, buyers of C4 now at 12.5 sen can potentially gain more than 60%, or 170% if Bursa share price can go up by 18.2% to RM9.35. But if Bursa share price falls below RM8.00, holders of C4 loss everything.

Many people like to gamble in the share market. Why? This is because it is exciting. Gambling is exciting. It is human nature. That includes me.

To make gambling more exciting, why not we punt on call warrants, a leverage instrument? Make more money. Can also lose more money. But it is the excitement we are looking for.

So do you have any exciting call warrants to share?

Gadang a hidden gem? I am not sure.

Posted by houseofordos > Jul 8, 2013 10:38 PM | Report Abuse
what about gadang ? Strong balance sheet and really good free cashflows recently


house, how come you are interested in a construction company now? I thought you are not interested in investing in construction company? So am I.

I do agree with you about its strong balance sheet (After the 2/3 rights in 2010) and its strong cash flow recently (yes, just recently, but also due to delaying payment to sub-contractors?). Its trailing twelve month revenue and net income has jumped by 36% and 75% to 336m and 26m respectively. Thanks to its MRT project and new launches of its property development.

One thing I know very well which many people don’t know, or rather don’t bother, is that high revenue in construction projects doesn’t necessary translate to sound bottom line. It may translate to more problems, headaches such as poor management of works and leading to losses, labour and material problems, construction disputes and bad debts etc. Look at the segmental result of Gadang. A total turnover of 208m in construction only yield 3.8m in net profit, or less than 2%!
As far as operational efficiencies, I think Gadang did ok lah, but that was the best during last year when return of equity and invested capital is about 10% and 16% respectively.

Value wise I do agree that it is quite cheap with ttm PE ratio of about 7 and price-to-book just 0.7.

Whether Gadang can do well or not in its business depends on its 1.6b in its construction order book. However, as mentioned before it is not a totally rosy picture for this segment. So Gadang has to depend more of its future property projects, especially the Tampoi commercial and residential project.

So for me, as I don’t know about its future, but just looking at its present, I think I have better construction company share to hold than Gadang.

That is the Archillie's heel of fund management.

Posted by tralala > Jul 8, 2013 09:53 PM | Report Abuse
ya, joke... lol.. a measure of a good fund manager is consistency, i.e.: its standard deviation from its yearly target returns. Not how much money they make on average over the past x years... its useless to make 50% in the first 3 years and 0% in the following 3 years...

TTB did extremely well at the first couple years for icap compared to the market benchmark. A few years prior to the general election, he was afraid of making losses due to the GE fear and hence he kept huge amount of cash. It has proven that was a poor decision. He under-performed the market. But he can still pride himself that in NAV term, he still do better than the market, or his "target return". But is that what an investor wants?

For me, if I invest in a fund, I don't care so much of "consistency" like earning me 10% a year consistently. Why is "its useless to make 50% in the first 3 years and 0% in the following 3 years..."? If you compute the compounded annual return, it is equivalent to 14.5% a year. That is pretty good. Don't you think so? Can you tell me how many of the hundreds of funds available can outperform that?

But the point is how can a fund like icap kept so much asset in cash to time the market, for so many years already? No value stock (TTB claimed himself to be one of the greatest value investors) to invest? Anybody disagree with me for the last 3-4 years there were tons of value stocks to invest based on Greenblatt's magic formula?

Posted by keanpoh > Jul 8, 2013 09:13 PM | Report Abuse

For discussion purposes, here are my further questions:
1. When calculating WACC, we should use the company's cost of capital right? However, I understand it is not possible to know the cost of equity of the company unless we're the CFO of the company. Is my understanding correct? Or am I missing something here? If I am correct, then according to your method, you're making an assumption of 12% for cost of equity and this number can be different for each individual.

THE COST OF EQUITY OF 12% IS NOT ENGRAVED IN STONE. EVERY INDIVIDUAL HAS HIS COE. THE ACADEMIC WAY IS USING THE CAPM, OR THE CAPITAL ASSET PRICING MODEL WHICH I AM NOT FANCY OF, ACADEMIC YOU KNOW. SOME USE A RISK PREMIUM OVER THE RISK-FREE RATE AND THIS IS ALSO ARGUABLE LIKE WHAT IS THE RIGHT RISK-PREMIUM, RISK FREE RATE ETC ETC. FOR ME USUALLY I JUST USE MY OWN COE. I NEED A RETURN OF A MINIMUM OF 10% FOR MY RISK CAPITAL IN THE EQUITY MARKET, IE 5% OVER THE LONG-TERM MGS RATE OF 5%. BUT THAT ALSO DEPEND ON THE EARNINGS STABILITY, FINANCIAL SOUNDNESS AND CASH FLOWS OF THE COMPANY. SO THIS COE IS REALLY VERY ARGUABLE, BUT I THINK WHAT IS MORE APPROPRIATE IS WHAT IS YOUR PREFERENCE, WITH A GOOD REASON OF COURSE.

2. How do you know the cost of debt is 7%? It is another assumption or am I missing something again?

YOU GOT ME, I DON'T REALLY SURE OF. I AM NOT AN INVESTMENT PROFESSIONAL YOU KNOW. BUT I MAKE AN EDUCATED GUESS. MANY COMPANIES ISSUED DEBT OR HYBRID DEBT INSTRUMENT WITH THAT KIND OF INTEREST RATE, FOR EXAMPLE, PANTECH ICUL. SO I ROUGHLY HANTAM LAH. MAY BE SOMEONE CAN PROVIDE BETTER FIGURE.

BUT I NORMALLY DON'T GO INTO TROUBLE OF ESTIMATE WACC BUT JUST TAKE IT AS 10% WHICH IS IN MY OPINION A GOOD ESTIMATE ALREADY. SO THIS SAVE THE TROUBLE OF ESTIMATING THE COE AND COST OF DEBT WHICH IS GIBBERISH AND TO ME UNNECESSARY.

3. Since we're discussing about cost of capital, is there any website that we can get the beta value for each individual stocks listed in KLSE? The beta value is required to calculate an investor's required rate of return using Capital Asset Pricing Model (CAPM). I know i might be asking too much for a simple number, but just in case i'm missing something. :)

I WAS TRYING TO FIND A WEBSITE TO GET THE VALUE OF BETA TOO SOME TIME AGO, BUT IN VAIN. AFTER THAT AS EXPLAINED ABOVE, I DO AWAY WITH THIS CAPM NONSENSE. YOU CAN DO THAT IF YOU WANT BY REGRESSING THE MONTHLY RETURNS OF THE STOCK AGAINST KLSE.

4. I've looked though a lot of your previous postings and I've found that you've used ROIC and sometimes ROTC. Is it just a typo or they are different things?

WAH NOW I CANNOT SIMPLY BLUFF ALREADY. ROTC WAS A SHORT CUT AS I CAN'T POSSIBLY WORK OUT ALL THE INVESTED CAPITALS OF SO MANY COMPANIES PEOPLE ASKED ME. SO I ADD UP THE TOTAL EQUITY AND DEBTS TO COME UP WITH 'TOTAL CAPITAL' AND HENCE ROTC. I THINK ROIC IS A MORE APPROPRIATE METRIC TO USE.

Again, thanks for sharing with us.

YOU ARE WELCOMED. PLEASE FEEL FREE TO CORRECT ME IF THERE IS MISTAKE, WHICH I BELIEVE THERE WOULD BE PLENTY

is WTK a hidden gem? Nah

Posted by Jaack1 > Jul 8, 2013 02:48 PM | Report Abuse
Dear Mr KCChongnz,
CIMB issued a report on Jaya Tiasa - suggesting shortage
of Logs in the months ahead.
What is your take on WTK?
Tks/Rgsd
Jaack1

Actually I am not informed about this timber industry. This needs a lot of hard work in meeting with the management of the company to find out information and discuss about their future plan, both in their timber and palm oil plantation. How much land they have, how much crops have been planted, how long and the production of the crops at various periods of time; forecasting of future prices of timber and palm oil and their revenue and profit etc etc. Hack, I am just a small retail investor! This is a full time analyst specialized in this industry to do all the fact finding and analysis!

Nevertheless, since you ask, I still try to put forward my little-informed opinion here, basing on their performance for the past years. I have no interest in investing in this industry, company like Jaya Tiasa, or WTK. For example, huge amount of invested capital is involved for WTK in its business, 1.2b Ringgit. However return of capital is meager at 50m for the last two years, or just 4.6%, a very low figure. ROE is averaging at 4.7%, very poor indeed.

What about its price?

At the close of RM1.18 today, the PE ratio is 11, and earnings yield (Ebit/EV) is 11%, not too cheap too.

No, WTK, nor JayaTiasa is not for me.

Isn’t ECS a hidden gem?

Posted by inwest88 > Jul 7, 2013 09:08 PM | Report Abuse
Hi kschong, if you don't mind, what about ECS ICT Berhad.
ECS ICT is involved in the distribution of information and communication technology (ICT) products, the provision of ICT systems and services, as well as the provision of management, financial, accounting, warehousing and logistic services.

Since public listed less than 3 years ago, its annual revenue and net profit has been at the average of 1266m and 30m respectively. This translate to an average earnings per share of 22 sen. It has a net tangible asset backing per share of RM1.04, debt free and cash of 41 sen per share in its balance sheet. The interesting things about ECS is relatively it doesn’t need much asset to carry out its business. Its fixed asset turnover is 190 times a year. Its inventories turnover in 23 days.

Its reasonably good average ROE of 18% (>12%) which is achieved with a high total asset turnover of 4 times. More significantly, it has a very high ROIC of 25% (>12%).

Actually ECS impresses me most is its ability to generate cash. ECS generated an average of 36 m of cash flows from operations. ECS doesn’t require much capital expenses. The average free cash flow for the last three years was 34m.

Free cash on average is 30% of invested capital. Imagine that you put in money for a business and you get 50% return in hard cash a year. Isn’t that a good investment?

But what is the market valuation of ECS? With a closing price of RM1.16 on 5th March 2013, ECS is trading at a PE ratio of only 7.0, and a total enterprise value of 3.4 times EBITDA, very low indeed.

Normalized earnings account for seasonality and economic cycles. For example palm oil companies have high earnings during the up cycle of the price of palm oil, but low earnings in the down cycle owing to change in the prices and hence the margins.

Normalized earnings also exclude onetime off nonrecurring or exceptional items, or gain/loss which is not related to the ordinary business of the company. For example, a gain in revaluation of the property of the company, an exceptional gain due to disposal of assets etc, should be excluded.

In essence, normalized earnings are an indication of the true financial performance of a company.

Posted by inwest88 > Jul 7, 2013 04:12 PM | Report Abuse
Hi KC, There a few Messaq counters which are making profits consistently but the share prices do not reflect that. One is EA Holdings. what do you think of this company. Thanks.

inwest88, go to the appended link for my response:

http://klse.i3investor.com/servlets/forum/900172429.jsp

EAH, is it a hidden gem?

Posted by inwest88 > Jul 7, 2013 04:12 PM | Report Abuse
Hi KC, There a few Messaq counters which are making profits consistently but the share prices do not reflect that. One is EA Holdings. what do you think of this company. Thanks.

I still remember vividly how a famous Malaysian financial blogger posted a number of articles on the rosy prospect of EAH, with its acquisition of a RFID company, DDSB about one and a half years ago. He said EAH was so clever in acquisition of DDSB, such a fantastic company at such a cheap price. And that EAH’s business was going to rocket to the sky. At that time I was thinking myself, if DDSB is such a great company, why did they sell to EAH at such a cheap price? What is this EAH so special, a Mesdaq company?

So what happen after that acquisition? Yes, EAH’s revenue has increased from 21m to 46m from 2010 to 2012, or 122%. This is a huge increase, but the absolute revenue is still a small number. More important is what happened to its bottom line? Yes, profit also doubled from 4.1m to 8.6m for the same period, but it is still a very small number. Before the shareholders jump in joy, they must be reminded that the number of shares have increased from 155m to 425m now, about three times the number more. This increase in the number of shares was a result of a right, bonus and share split carried out two years ago.

Post acquisition of DDSB, EAH’s revenue in 2012 improved by 25% to 46m compared to that of 2011. However, its net profit has slipped by 27% from 11.8m to 8.6m. EPS is 1.84 sen. The first quarter results 2012 slipped further in profit. As for its share price, the adjusted share price has dropped badly from about 16 sen to 12 sen now.

The quality of earnings for EAH is very poor. Cash flow from operation last year is a meagre 3.7m, or 48% (<<100%) of net profit. There is little free cash flows left after capital expenses of 3.1m. One third of its net asset of 14 sen per share is made up of “Goodwill”, an over payment on the acquisition of DDSB above its book value.

So even if EAH is “cheap”, which at 12 sen, is trading at a PE ratio of 6.5 and price-to-book of 0.9, I wouldn’t want to include it in my portfolio.

"a rising tide lifts all boats" John Kennedy

"Only when the tide goes out do you discover who's been swimming naked." Warren Buffet

Ooi, hope you don't mind I explain here.

IV=(EPS*(8.5+1.5g)*4.4)/Y is the Graham growth model to estimate the intrinsic value of a stock.

IV is the intrinsic value
EPS is earnings per share. Use normalized EPS as much as possible.
8.5 is the PE ratio Graham willing to pay for a stock without growth.
1.5g is the weightage given to a growth company. Graham used 2.0 in his original form.

At that time, the long-term bond yield was 4.4%. so to adjust the formula to the present long-term bond rate, Y%, a factor 4.4/Y is used. So one can see the rationale of the formula.

One thing I realized now is this formula should not be relied too much on to get the intrinsic value of a stock because too much weigh is given to the growth g of a company. Also Graham did not include any risk premium in the formula as modern financial theory would tell you that investing in equity has a higher risk than bond.

Imagine a company earns 10 sen per share but with an expected growth rate of 15%, and using Y as 5% would have an IV of 3.40 compared with no growth of just 75 sen. Would you want to pay so such for this "expected" growth?

But I think the formula would be useful to check whether the share price is too high, or too much expectation is built on the company.

For example TSH EPS is 7.6 sen last year. Its share price is 2.39 now. Using Graham's growth formula, Y=5, iteration of the formula to get the intrinsic value equals to its share price will yield a g of 18.5%. So do you think TSH's earnings can grow at 18.5% a year for the next 5-7 years? If so, the the share price of TSH may be reasonable.

For me, to grow at 18.5% for the next 5-7 years is not an easy feat. So I think the market is paying too much for TSH's expected growth.

Below is the share price performance of MK Land for the last 5 years as compared to KLSE a couple of months ago ignore the 2 week return as they are no more relevant. It shouldn't have changed much since then:

MKLand 0.335 9/05/2013
Period 2-week 6-month 1 year 2-year 3 year 4 year 5 year
Price 0.31 0.36 0.290 0.385 0.320 0.320 0.495
Return of stock 8.1% -6.9% 15.5% -13.0% 4.7% 4.7% -32.3%
CAR 651% -13.4% 15.5% -6.7% 1.5% 1.2% -7.5%

KLCI 1769 2/05/2013
Period 2-week 6-month 1 year 2-year 3 year 4 year 5 year
Price 1713 1629 1591 1516 1333 1026 1285
Return of stock 3.3% 8.6% 11.2% 16.7% 32.7% 72.4% 37.7%
CAR 131% 17.9% 11.2% 8.0% 9.9% 14.6% 6.6%

Why MK Land performed so badly as compared to the broad market? Note that I have not compute the longer term return such as the 10-year return comparison which would paint a much worse picture on MK Land.

The article from the appended link may provide the answer.

http://www.intellecpoint.com/

Just try to offer an alternative view on MK Land here. No other motive.

Michael Burry is a great value investor. Check out the link below to find out who Michael Burry is and his accomplishments:

http://en.wikipedia.org/wiki/Michael_Burry

Below is investment strategy written by Michael Burry:

"My strategy isn't very complex. I try to buy shares of unpopular companies when they look like road kill, and sell them when they've been polished up a bit. Management of my portfolio as a whole is just as important to me as stock picking, and if I can do both well, I know I'll be successful.

Weapon of choice: research
My weapon of choice as a stock picker is research; it's critical for me to understand a company's value before laying down a dime. I really had no choice in this matter, for when I first happened upon the writings of Benjamin Graham, I felt as if I was born to play the role of value investor. All my stock picking is 100% based on the concept of a margin of safety, as introduced to the world in the book "Security Analysis," which Graham co authored with David Dodd. By now I have my own version of their techniques, but the net is that I want to protect my downside to prevent permanent loss of capital. Specific, known catalysts are not necessary. Sheer, outrageous value is enough.

I care little about the level of the general market and put few restrictions on potential investments. They can be large cap stocks, small cap, mid cap, micro cap, tech or non tech. It doesn't matter. If I can find value in it, it becomes a candidate for the portfolio. It strikes me as ridiculous to put limits on my possibilities. I have found, however, that in general the market delights in throwing babies out with the bathwater. So I find out of favor industries a particularly fertile ground for best of breed shares at steep discounts.

How do I determine the discount?
I usually focus on free cash flow and enterprise value (market capitalization less cash plus debt). I will screen through large numbers of companies by looking at the enterprise value/EBITDA ratio, though the ratio I am willing to accept tends to vary with the industry and its position in the economic cycle. If a stock passes this loose screen, I'll then look harder to determine a more specific price and value for the company. When I do this I take into account off balance sheet items and true free cash flow. I tend to ignore price earnings ratios. Return on equity is deceptive and dangerous. I prefer minimal debt, and am careful to adjust book value to a realistic number.

I also invest in rare birds asset plays and, to a lesser extent, arbitrage opportunities and companies selling at less than two thirds of net value (net working capital less liabilities). I'll happily mix in the types of companies favored by Warren Buffett those with a sustainable competitive advantage, as demonstrated by longstanding and stable high returns on invested capital if they become available at good prices. These can include technology companies, if I can understand them. But again, all of these sorts of investments are rare birds. When found, they are deserving of longer holding periods.

Beyond stock picking
I like to hold 12 to 18 stocks diversified among various depressed industries, and tend to be fully invested. This number seems to provide enough room for my best ideas while smoothing out volatility, not that I feel volatility in any way is related to risk. But you see, I have this heartburn problem and don't need the extra stress.

As for when to buy, I mix some barebones technical analysis into my strategy a tool held over from my days as a commodities trader. Nothing fancy. But I prefer to buy within 10% to 15% of a 52-week low that has shown it to offer some price support. That's the contrarian part of me. And if a stock other than the rare birds discussed above breaks to a new low, in most cases I cut the loss. That's the practical part. I balance the fact that I am fundamentally turning my back on potentially greater value with the fact that since implementing this rule I haven't had a single misfortune blow up my entire portfolio.

I do not view fundamental analysis as infallible. Rather, I see it as a way of putting the odds on my side. I am a firm believer that it is a dog eat dog world out there. And while I do not acknowledge market efficiency, I do not believe the market is perfectly inefficient either. Insiders leak information. Analysts distribute illegal tidbits to a select few. And the stock price can sometimes reflect the latest information before me, as a fundamental analyst, catch on. I might even make an error. Hey, I admit it. But I don't let it kill my returns. I'm just not that stubborn. In the end, investing is neither science nor art it is a scientific art. Over time, the road of empiric discovery toward interesting stock ideas will lead to rewards and profits that go beyond mere money. I hope some of you will find resonance with my work and maybe make a few bucks."

Pintaras has 184m retained earnings as at 31/3/2013. Outstanding number of shares is 80m.

I always opine that bonus and share split do not add value to the shareholders. How can a cake cut into pieces worth more than a whole cake? I know i know, that is just my opinion which differs from other investors. People will chase up the share because of the bonus issues.

To me, the value of Pintaras lies in its continued improvement in its business in growth, earnings, operational efficiencies and cash flows.

"PTARAS has confirmed a “Pennant” chart pattern with its 10 sen gain yesterday (RM5.01 closing price). We believe the stock is poised for yet another up-leg given the increased trading volume and bullish key indicators (MACD, RSI, Stochastic). We believe that the share price could potentially extend its gains towards RM5.97, while the downside appears capped at RM4.75."
Kenanga research and investment, 12 June 2013

Pintaras, a foundation specialist contractor's share price has run up from about RM3.00 six months ago to the close of yesterday at RM4.78, or a gain of 60%. That was a huge gain in such a short period of time. Value investors would more inclined to think that there should be a pull back of the share price in accordance to the mean reversion theory. So do I normally believe.

However, a review of Pintaras's financial performance for the trailing twelve months ended 31/3/2013 shows that there may be more to the story.

Pintaras's return of invested capital and return of equity are at very high numbers of 37% and 19% respectively. The big difference in ROIC and ROE is mainly due to the large amount of cash and cash equivalent it holds at 153m, or RM1.91 per share, and zero debt.

However, at such good numbers in operation efficiencies, at $M4.78, it is only trading at a PE ratio of just 7.6. The "cheapness" of Pintaras is more reflected in its market enterprise value of just 3.6 times earnings before interest and tax, or a fantastic earnings yield of 28%!

So in my opinion and according to the Magic Formula, even though its price has run up by 60% in such a short time to RM4.78, it is still grossly undervalued.

No, this is just my personal opinion to share, not peddling of this share though I still own it as a substantial part of my portfolio. Please make your own judgement. Opposite opinions, preferably with reasoning are very much welcomed.

plumberii, used the Magic formula and ranked his stocks. Thanks plumberii for sharing his list.

The company doing plastic molding, Technic, came up top of the list. So is Technic worthy of investing according the Magic Formula? Certainly.

Just to recall the Magic Formula. The key driving formulas used by Greenblatt for his Magic Formula are:

• Earnings Yield = EBIT / Enterprise Value
• Return on Capital = EBIT / (Fixed Assets + Net Working Capital)

Basing on the last financial year ended 31/12/2012, ROIC is 17.6%, which is above my requirement of at least 10%.

With ebit of 22.8m and enterprise value of 127m, earnings yield of Technic is 18%, way above my 12% requirement.

But how is it compared with another plastic molding company, SKP Resources? the table below shows their comparisons according to the Magic formula:

SKPRes Technic
ROIC 33.9% 17.6%
ROE 20.3% 17.4%
EY 27.3% 18.0%

So which would you prefer basing on the above?

Medainc? Never heard of.

Pinnacle, I never heard of this company until you asked. So you know my opinion will be a novice one.

Medainc's property development and its investment properties do not impress me. The mixed development in Larkin, launched in 2009 has been delayed. The service apartment in Cyberjaya is said to have sold almost all. Really ah? The developer of Summit City in Subang Jaya? I bought one unit when it was first launched, but luckily sold it off before signing S&P.

Management looking at going to pay dividend? So many property companies are paying reasonable dividend every year already. But looking at its balance sheet, Medainc has huge amount of accumulated losses from past year. So how to pay dividend? Actually Meda just started to do well last year when they earned 20m free cash flow, but too bad, had to pay down its debt of 22m. So no dividend. In the future can ah?

ROIC was quite good at 16%, quite good. But can this be maintained? I don't know.

Price wise at 79 sen, PE is 14 and price-to-book 1.8, not really that cheap considering its past performance, its business and history of operations.

Well you may know something I don't know which prompt you interested in this company. But since there are other property companies which i know better, I will give this one a pass.

Tipster, my problem with Yee Lee is its low margin business, and not impressive asset turnover. This results in low return of invested capital. It has not much growth too. I would prefer to invest in a company with at least 10% ROIC. Here was my previous comments:

Posted by kcchongnz > May 26, 2013 01:16 PM | Report Abuse X
Is Yee Lee a great company? Is it a good investment?

Yee Lee has a durable business. It is trading at very attractive valuation too as shown below. My main problem is its very low margin and ROIC. So for me I will pass.

Good company?
Good governance Yes
Durable business Yes
Growth No
ROIC No 7% >WACC
Balance sheet Yes

Screens for investing
ROIC No
P/B Yes 0.7 <2.0
PE ratio Yes 8.8 <20

house, you are good at using the spreadsheet already.

I don't know much about Keladi. Looked at it before some time ago but was not interested. This is mainly because I don't trust the management. The major shareholder Datuk Robert Wong or something owns a few smallish public listed companies and this man is notorious of share manipulation. So I stay away from him. But you don'r listen to me because I myself is not very sure about this. Just read about it somewhere.

Actually Keladi's business was so so. No growth company since 2005 until last year when revenue and profit spurts. More development projects. It was also due to a revaluation of property and some non-cash gain from an investment, about 30m. so you have to discount this one-off item in your valuation.

For me investing in a company or not, the management credibility is the most important.

"a rising tide lifts all boats" John Kennedy

"Only when the tide goes out do you discover who's been swimming naked." Warren Buffet

Posted by mrk2ca > Jul 5, 2013 02:42 PM | Report Abuse
KC, what is your opinion on PMetal?
Thanks.

Posted by kcchongnz > Jun 17, 2013 03:16 PM | Report Abuse X
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.

keanpoh, go to the link below and see my explanations of ROIC and why is it important.

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

Posted by kcchongnz > May 27, 2013 11:43 AM | Report Abuse X

Posted by Tan KW > May 26, 2013 07:05 PM | Report Abuse
@kcchongnz how you get the WACC? need to calculate by yourself?

If a company has 200m equity and 100m debts and the cost of equity you use say 12%, and after-tax cost of borrowings at 7%,

WACC=200/300*12%+100/300*7%=10.3%.

I use 12% as my required return for investing in a company with ok but not so good balance sheet and cash flow. If they have healthy balance sheet and excellent cash flow, I may use 10%.


Invested capital you have to compute yourself:

It is IC=fixed assets+receivables+inventories-payables

Return in ROIC is Ebit*(1-tax rate)/IC

steve, i don't know what figures those you use. They are not CFFO and capex of whichever year. Read my previous explanation of it which was based on the last financial statement ended 31/12/2013.

Free cash flow= cash flows from operations - capital expenses

CFFO from the cash flow statement (7636000). Capex is the purchase of property, plant and equipment (7563000)

So FCF =73,000 only

Steve, free cash flow (FCF)in a year is the hard cash left from the net cash flows from the operations after spending on capital expenses (capex). Net cash inflows less cash outflows is termed the cash flows from operations(CFFO). Capital expenses are expenses required to sustain the business, such as replacement of worn out plant and equipment, leasing of land etc. So CFFO-capex=FCF.

So can you see without FCF, a company has no money to pay down loan, do other investment, and pay dividend, unless it borrows more money from bank, or in Fitters case, used the money collected from conversion of warrants. So it is difficult for a company to survive without having any free cash flows for years.

FCF is not net cash in the balance sheet.