Wow, OTB, I didn't know that this Cheebai who was so critical about you just not long ago, has turn around and say such good things of you which you truly deserve, especially in this KHSB stock. Good on your human touch. Well done.

KC Loh, your AA rose by 4.1% but my AA Cy rose by 21.7%, hehehehe, one more "he" than yours.

Great maths. You have plenty of future in the stock market!

sohai? When you point a finger to someone, 4 point at yourself.

Posted by Charles Ang > Jun 28, 2013 11:43 AM | Report Abuse
Agree with KC. But you can produce 9 babies by making 9 women pregnant in 9 months. Same end product. No??

Yes, but you still need nine months, not one month.

No sifu here. Want to find sifu, go up to Liang San

wan fast money? Wrong place. Go Genting.

"No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant."

One of Ah Fet's teaching is:

"No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant."

Najib, Cenbond? Yes and Yes!

Posted by kcchongnz > Jun 3, 2013 10:26 AM | Report Abuse X

Cenbond, is it a good company? Is it a good investment?

By looking at how its share price jumped from 90 sen to RM1.61 at the close of the market on 31/5/2013, there must be something about this company, isn’t it?

Cenbond business includes paper packaging, plastic packaging, contract manufacturing and packing sale of household care products and adhesive products, and investment and property holding.

Revenue for fy ending March 31 2013 shows an improvement of just 3% from 182m to 187m. However its net profit jumped by 32% to 20.6m. Margin improved by 2.6% which is substantial for this type of industry which could positively affect its bottom line. This helps in its return of total capital which improved from 15% to 17%, way above its cost of capital.

Is Cenbond reasonably priced after the jump in its share price recently. Yeah of course. Below is my assessment whether Cenbond is a good company and a good investment.

Cenbond a Good company? 1.610
Good governance ?
Durable business Yes
Growth Yes
ROE Yes 13% >12%
ROTC Yes 17% >WACC
Balance sheet Yes D/E 0.03
Cash flow Yes

Screens for investing
ROTC Yes 17% >WACC
P/B Yes 1.3 <2.0
PE ratio Yes 10.1 <20

Ooi,
This was my previous comment on magni and prolexus. After their quarterly result recently, my view remains the same.

Posted by kcchongnz > Apr 16, 2013 04:11 PM | Report Abuse X

The old fashion garment manufacturing industry seems to see some light recently when their financial performance is improving for the last couple of years.

Magni Prolexus
Revenue 43% 61%
EBIT 38% 78%
NI 40% 25%
Equity 18% 31%

Both Magni and Prolexus grow at very high rate both in terms of revenue and profit last year as shown in the table above. Prolexus appears to grow at a higher rate, mainly because of its smaller size.

Profitability Magni Prolexus
Gross Margin 14.5% 15.4%
EBIT margin 8.3% 7.5%
NI margin 6.4% 6.9%
ROE 17.1% 18.7%
ROIC 22.1% 34.0%

In terms of profitability, both companies did very well with ROIC and ROE well above 15%. Again Prolexus appear to do slightly better, mainly because of its tax credit benefits from losses some years before. What about their market valuations?

Market stats Magni Prolexus
No. of shares 108488 40000
Price 1.53 1.36
Mar Cap 165986.64 54400
MEV 87818 34471
EPS $0.322 $0.311
P/E 4.7 4.4
MEV/EBIT 1.9 2.0
DY 3.9% 2.3%
P/B 0.81 0.82

Again both companies present superb investing opportunities with their low market valuations; PE less than 5; P/B <1.0, and extremely low EV/Ebit <2. Both companies also have healthy balance sheet. So which would you prefer?

I personally prefer Magni because of its more stable return and longer history in operations. It has a higher market capitalization and has been giving higher and good dividend yield for a long time.

Posted by tonylim > Jun 28, 2013 10:06 AM | Report Abuse
Kcchong who master fet.

My master Ah Fet? some call him Ah Buf too.

Does Bonia meets the Magic Formula? Yes, it does.

Posted by Wei Xin > Jun 27, 2013 08:21 PM | Report Abuse
I can see Bonia is potential. But price is too high...EPS 28.29 for 6 quarters

Bonia's return of invested capital has been quite steady at about 19% (>12%) for the last few years, much hihger than its cost of capital. At the close of 2.40 yesterday, and 2012 EBIT of 73.5m, its enterprise value (after adding its total debts and less excess cash), the earnings yield (EBIT/EV) is 15.3% (>10%).

“Building long-term wealth is like driving an automobile. If you narrowly focus on the stretch of road a few feet in front of your car, you risk making unnecessary adjustments and over steering. Only when you lift your eyes to focus further down the highway will you successfully reach your destination.”

Christopher C. Davi

This stock has proven that a risk arbitrage strategy is a worthwhile endeavor if the potential reward is high enough. Recalled the time when it was trading at about 50-60 sen and people were doubtful and fearful even after the announcement of the takeover was made. Joel Greenblatt, a top fund manager in US (Gotham Capital)has been beating the Dow (with a return of 50% a year) for more than a decade. For those who are interested in some of those profitable strategies, read his book, "You can be a stock market genius".

For KHSB, as it is closed to its initial offer price of 76 sen now, is it still worthwhile to sell, hold or buy some more? Of course it depends on if the offer price will be raised, if so by how much, or stays the same.

Hearing from someone who appears to have some insider information, it appears that it may still worthwhile to hold, or even buy some more. You know it is not easy to get an annualized return of more than 20% a year with that kind of risk. I hope you understand what "annualized" means.

Posted by Ismel > Jun 25, 2013 05:13 PM | Report Abuse
Sold already and buy smartag to cover loss.

Classic punter and herd mentality. Bunker-to-bunker and hope to get a birdie.

With the good performance of Magni in term of ROIC, and selling that cheap at an earnings yield of 31% with the price of 2.03, I would want to make Magni a significant part of my holding. Joel Greenblatt will also definitely use his magic formula to buy this stock to form part of his portfolio.

Yeah no point spread into so many stocks if amount of investment not so much. Then you have to look "chun chun".

Fat Cat, good on you. I am not that kind of person who will ask you to buy or sell a stock. I think you very well know that. That is because capital market is so unpredictable. What if I ask you to buy and the share price plunges? Or ask you to sell and the next day the share price limit up? This type of thing can happen any time because the share market is so unpredictable. The share price can remain undervalued for years; or the fundamentals and business environment, competitions of a company can change without us knowing; Or the management can play tricks on a good business; the macro-economy, interest rate, inflation rate at home and abroad can change etc. There are simply too many factors determining the business of a company and its share price.

I can nevertheless examine the company's business, looking at the rear mirrors at its financial performance and management actions to determine if a company has a moat quantitatively, and hopefully qualitatively to see if it is a good company worthy of investing. If it is so, it is a good bargain with wide margin of safety. Yeah History may not repeat itself but it rhymes.

Another thing is I don't underestimate the power of diversification; holding about say 10 stocks, rather than banging on just a few stocks. If you look at my portfolio posted by Tan KW in i3, and if I just hold say three stocks SKPRes, Kfima and ESC, I will be banging my balls just staring at other stocks which have risen so much and the three so little. SKPRes even losing money!

So whether if you top up your Magni or not, you have to gauge yourself. I know I know, another long winded reply. (but at least with separate paragraphs)

Fat Cat,

An ROIC of 24% (>>>12%) and an earnings yield (Ebit/Ev) of 31%! What do you think? Can you find one with that kind of performance but selling at that cheap? I challenge you to find me one.

YS1, I consulted my master Ah Fet about your question, he told me this:

“The most important thing to do if you find yourself in a hole is to stop digging.”

I scratched my head. When he saw me scratching my head, he clarified:

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

YS1, no no no, not me. You are "The One". You are the left hand man of General Lee. KC Loh, Frank, tonylim etc, everyone is looking up at you.

sori, Ah Loh Goh. That KC Loh

I then said, wtf I got money to buy right issues some more. He said, lon wolly, sell off your bloody AA shares, one share can buy three KNM right issues (right issue price going to be RM1.00). If still not enough money, get from that A Long Koh

I asked General Lee WTF the company get money to do the f share buy back from you. He said lon wolly, we are going to have a right issue soon. So double happiness, we buy back share and jack up that bloody KNM share price to RM2.00, and you got extra share some more.

More fun talking to you guys than those boring "Magic Formula", "In Search of excellence", "5 sticks" etc.

Magni meets the magic formula? Absolutely.

Magni just reported its year ended 30/4/2013 financial results.

Return of invested capital is 24%, fantastic. But how much is it selling in the market?

Its market enterprise value is only 3.2 times ebit, or a earnings yield of 31.4%. Can you imagine that!

While tonylim wa nippling with KNM

KC Loh, I took my AirAsia plane (I own part of AA) this morning from Auckland and attended the AGM. That was how I got this piece of info.

[The Board of KNM Group Berhad ("KNM") wishes to inform that the shareholders of KNM had, at the 11th Annual General Meeting ("AGM") held on 27 June 2013, approved all the resolutions as set out in the Notice of AGM dated 5 June 2013.]

One of the main resolutions passed was the approval from the shareholders to buy back shares from the open market(from General Lee?)because the share price of KNM, with such great prospect, is way undervalued, using the "The Greater fool Theory". General Lee is kind enough to share his wealth with all the shareholders of KNM.

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%

Benalec Holdings - Slowly turning sand into gold. Really?

Posted by Steve Jub > Jun 22, 2013 07:26 PM | Report Abuse
Kcchong, what do you think benalec and azrb fundamental? I check it look good to me. I bot some benalec but azrb not yet.

All the three investment banks covering Benalec, CIMB, Kenanga and AMMB have target price of over RM2.00 for Benalec in their most recent analysis. The average target price is RM2.20. Most forumers in i3investors here are also bullish about Benalec. So what can go wrong with this high flier?

There are lots of interior land in Malacca, Johore and other states. Why is “manufactured land” which requires high cost to “manufacture” so valuable? Is this model of reclaiming the land first with your own cost and then hopefully sell to others a durable business?

Benalec’s revenue for the trailing twelve months 2013 has grown by 34% to 210m but its net profit dropped 21% to 65m. Net profit margin plunged from 53% to just 31%. Return of total capital deteriorated from 19% to 13%, just about the cost of capital. It did not produce any positive cash flow from operations for the last two years. Hence Benalec is hardly a “good” company in my book.

At the close of its share price at RM1.37 on last Friday, 21/6/2013, it is trading at a forward PE ratio of 16.7 (>10) and a price-to-book value of 2 (>1.5). Hence it is also hardly a value stock in my definition. Nothing interesting about Benalec for me.

What about CBIP? Was there a problem before it plunged 82 sen from 2.75 to 1.93?

CBIP has a huge ROIC of 24% last year, ignoring its profit from sales of plantation. So this meets Greenblatt's high return of capital.

Before the plunge on last Friday, at 2.75, it has an enterprise value of 422m. With an Ebit of 89m, earnings yield

Earnings yield=Ebit/EV=89/422=21% (>>12%)

Hence CBIP meets Greenblatt's Magic Formula even before its big drop last Friday.

So I don't see any problem with CBIP as a long-term investment.

Does Coastal satisfies Greenblatt’s Magic Formula?

Coastal Contracts was one of the few stocks bashed up at the close of last Friday. It dropped 62 sen, or 30% to RM1.48! Is there something fundamentally wrong about this company?

Coastal used to be one of my most favorite stocks. If you look at its financial performance of the past, it would be easy to understand why.

Year 2012 2011 2010 2009 2008 2007 2006 2005 CAGR
Revenue 764372 719133 675053 466058 348059 291757 159288 102770 33%
Net Income 118588 190637 199951 162444 96514 69317 34017 16172 33%
Profit margin 16% 27% 30% 35% 28% 24% 21% 16%

The shipbuilder’s order book rose from about 100m a year to 764m last year since 7 years ago. That is equivalent to a CAGR of 33%. The net profit rose at the exactly similar rate from just 16m to 119m last year. The net profit margin used to be in the fabulous thirties a couple of years ago. This performance of Coastal in the past definitely will qualify it as a growth stock. However, profit margin plunged to just 16% last year. This results in a drop of its profit by 38%, though its revenue still rose by just 6%. This clearly demonstrated that an exceptional margin is not sustainable in a capitalist market where competitions would come in. This is also clearly reflected in its operating efficiencies as shown below:

Year 2012 2011 2010 2009 2008 2007 2006 2005
ROE 15.4% 31.6% 43.6% 52.7% 45.0% 46.3% 29.2% 13.9%
ROIC 18.6% 40.4% 53.6% 63.9% 63.8% 53.0% 29.9% 14.9%

Coastal used to have fantastic, unmatchable by its competitors in its ROE and ROIC in the past. What happened last year? ROIC and ROE plunged by more than half last financial year to 18.6% and 15.4% respectively. Is this the reason that the market finally waken up to this reality and throw its stocks in droves? Does it still worth investing as a value stock according to Greenblatt’s magic Formula?

Yes, that is my opinion. The return of capital, ROIC is still very good at 18.6% (>12%). At RM1.48, the enterprise value worked out to be 518m and the earnings yield

Ebit/EV=117.5/518=23% is way above 12%.

I don’t think anyone can purchase Coastal share at the beaten down price of RM1.48 come Monday on 24/6/2013. Even if you buy it at the pre-beaten price of RM2.10, its enterprise value is 880m, or an earnings yield of 14%, is still a reasonable figure to invest. It also has a high cash return (FCF/IC) of 14% (>>5%), and FCF/Revenue of 12% (>>5%).

Posted by tonylim > Jun 22, 2013 06:32 PM | Report Abuse
kcchong, are you heavy in favco?

tonylim, I don't own any Favco share. I have given very positive comments of many stocks because people asked for my opinion, not because I own the share. I am not that rich btw.

tonylim,
Maybank CW at 23.5 sen when the underlying share at 10.26 now is still trading at a discount of .83%. With a good effective leverage of 8.6 times, it is still a good punt. Something I really can't understand why such a situation exist perpetually, besides the market doesn't agree with the price of the underlying share.

Just came back from a golf outing. will look at other call warrants soon. The thing is this punting of call warrant have to constantly look at the market prices and sentiment. The situation is dynamic and changes every now and then.

Posted by Hafiz Millip > Jun 22, 2013 06:29 PM | Report Abuse
kcchongnz...would like you advise on CSL which receive bad sentiments from local investors. Is it a bad counter?

Hafiz, what does the stock price of CSL below tell you?

CSL 0.3 14/06/2013
Period 2-week 6-month 1 year Since listing
Price 0.36 0.78 1.42 1.00
Return of stock -16.7% -61.5% -78.9% -70.0%
CAR -99% -85.2% -78.9% -60.4%
Dividend 1.1% 21.0%
Stock price appreciation -99% -85.2% -80.0% -81.4%

wayne1982, I have looked into Hapseng if it meets my strategy of investing as a high dividend stock. It may serve as a guide for you.

Posted by kcchongnz > Jun 10, 2013 06:25 PM | Report Abuse X

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

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

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

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

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

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

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

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

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

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

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

Is Favco a hidden gem?

Posted by kcchongnz > May 28, 2013 08:03 PM | Report Abuse X

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

FAVCO, a crane fabricator has a good business spread all over the world. Its earnings has been growing at a fantastic CAGR of 36% over the last 6 years. ROIC is high at 17%. Yes, it is definitely a great company. But is it a good investment at the present price of RM2.64 after going up 30 sen today? I think so. Below is my assessment.

FAVCO Good company?

Good governance ?
Durable business Yes
Growth Yes 36% Net profit 6 yr CAGR
ROIC Yes 17% >WACC
Balance sheet Yes 0.23 <1.0 D/E ratio

Screens for investing RM2.64 28/05/2013
ROIC Yes
P/B Yes 1.6 <2.0
PE ratio Yes 9.1 <20

For a highly liquid share like Maybank, it is difficult to manipulate, I think. This type of stock because of active participation of local and foreign funds, its share price is generally fairly valued. If investment bank wants to press down its share price to lower the value of call warrant, funds and other investors will buy the mother share if they think they are undervalued. So at the end they may end up a bigger loser.

It all boils down to probability. If call warrant is trading when there is no premium when there is substantial time to expiry, the probability of winning in punting in call warrant is high. As CW is even trading at a good discount, the probability of winning is very high.

Theoritically warrant price follows underlying share price; when underlying share price goes up, warrant price goes up. Sure CW price doesn't necessarily goes up when Maybank price goes up, because this call warrant is the European style option which you can only settle off with cash at expiry of CW, unlike the American type option when you can settle any time. But theoritically it has to because eventually CW will be settle for cash at expiry.

You can only make 15% gain if the discount to your original purchase price (24 sen) stays the same at this level of 1.7%, ie at expiry, the 5-day volume weight average Maybank share price at 10.38. If Maybank share price is higher than 10.38, your % gain will be higher, and if Maybank share is below 10.38, your gain will be lower, and even a loss if Maybank share price falls below 10.20 at expiry of CW.

Just some mathematics.

When Maybank is at 10.38 and CW at 24 sen, CW has the following valus:

Warrant Price Ex-Price Ex-Ratio Expiry date Premium Gearing
CW 0.240 9.000 5.000 30/09/2013 -1.7% 8.7

If you buy CW at 24 sen, your payoff based on the above at various prices of Maybank will be as follows wehn you cash settle your CW at expiry on 30/9/13:

Maybank Price 9.000 10.200 10.380 10.500 10.800 11.000 11.200 11.500 12.000
Gain in Maybank -13.3% -1.7% 0.0% 1.2% 4.0% 6.0% 7.9% 10.8% 15.6%
Gain in CW -100.0% 0.0% 15.0% 25.0% 50.0% 66.7% 83.3% 108.3% 150.0%

So if Maybank stays at 10.38 on 30/9/13, and if you have bought CW at 24 sen, the discount to your original price stays at 1.7%. You will make 15% then. How would I know if it stays at 10.38 in the future? How can it be sure about that? If it drop below 10.20, then you start to lose money. And if it drop below 9.00, CW holders lose everything.

But Maybank share could also go up too, right? If it goes up to 10.80, the average target price of the analysts, then you make 50%. This is all because of the leverage. And in warrant play, the higher the leverage, the more fun is it to punt.

Let us try again here:

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)

Ebit is earnings before interest and tax

Enterprise value = market cap (no. of shares*share price)+minority interest (if any)+total debts-excess cash-other non-current assets not related to the ordinary operations such as investments, properties held for non-property company etc

Fixed asset=property, plant and equipment + biological assets (for palm oil company which has consolidated its palm oil business)

Net working capital=receivables+inventories-payable

TSH again? A great company? Not in my book.

Posted by fatinvest > Jun 18, 2013 08:10 PM | Report Abuse
I think TSH can be classified as a potential good stock simply because it has >110,000 hectares of land , of which only about 50,000 hectares had been planted ( with relatively young oil palm trees ).
Its planted acreage now is roughly the same as United Plantation, whereas the profit is only about one third of United Plant.
If it has fully planted all the 110,000 hectares of land and only making 80% of what United Plant makes, the profit will still be 5x what it makes now.
I see potential in this company.
KC mind to share your view on this?

This was what I posted some time ago.

Posted by kcchongnz > Jun 10, 2013 07:30 PM | Report Abuse X
Is TSH a good company? Is it a great investment?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How come there is no contributions for this investment strategy basing om Joel Greenblatt's Magic formula?

I have read many strategies of investing, including many academic research papers. Many of those strategies such as low P/B, low P/E, January effect, high dividend stocks, high growth stocks, stable earnings, good companies, contrarian, momentum etc, existed initially but they tend to go away when more people are aware and make use of them to invest for excess return from the market. However, this Magic Formula seems to persist in the most recent time. This I believe is its plausibility; invest in good companies which are selling cheap.

So I hope we can share information and knowledge here together. For all you know, we may be able to earn some excess return from the market from this sharing. Are you game?

Is Classic Scenic a good company? Is it a good investment?

Posted by fookchng > Jun 18, 2013 06:04 PM | Report Abuse
Dear KC, have you studied on PESTECH and CLASSIC SCENIC BHD before? I am interested to know your valuation on them. Thanks.

No, I have not studied those stocks before you mentioned here. But since you ask, I will try to look into one of them. And since you ask in this thread which discusses about searching for a good company, i will give my opinion if this is a good company worthy of investing also, before I attempt my valuation here.

Classic Scenic is engaged in the manufacturing of wooden picture frame moldings, and wooden pallets. Operations are carried out in Malaysia, North America, Australia, Europe and other Asian countries.

The business appears to be boring, isn't it? But often a boring traditional business is a good business. It's business has a high net profit margin of about 20% and provides a return of 16% (>12%) of invested capital. The quality of its earnings is good. Free cash flow is abundant at 20% of revenue (>>5%) and 16% (>>5%) of invested capital. That is why it can distribute a high dividend of 9 sen, (DY=8.1% at RM1.11). The only shortcoming is its business is quite stagnant with not much growth at a CAGR of only 4% fro the last 7 years. It is not that bad though as it is still growing in tandem with the broad economy. Last year's growth in revenue of 19% was great. So I can certainly say CScenic is a good company.

At RM1.11, its PE ratio is 10 (<20), EV/Ebit=6.7 (<8) and price-to-book of 1.4 (<2). So it is not expensive and hence may offer investors a good investment.

CScenic's valuation is quite straight forward as its revenue and earnings are quite stable. Assuming CScenic continues to grow in tandem with the economy at 3%, CScenic at RM1.11 is already fully valued as shown below, unless its business can continue to grow at last year's rate for a few more years.

Revenue 62329
Ebit 14753 24%
less income tax -3388 23%
EBIT after tax 11366
Add average D&A 2738
Less average capex -5983
Normalized Ebit 8121
Cost of capital, R 10%
Growth rate 3%
Capitalized earnings=Ad Ebit/R 116007
Add cash 21724
EPV 137731
Number of shares 120500
EPV/share 1.14 >

Fat Cat, this thread aims to find good companies trading at cheap price using Greenblatt's Magic Formula, a quantitatively approach. It is not about Kfima. I used the Kfima's example because many readers here including you have a copy. Hence you may be able to try to use it to find an investment candidate and to share with us, if you wish.

I have numerous argument with you regarding Kfima. I have my views which I have expressed extensively before. I am not going to argue with you here. Thanks for your "public non-confidence" here and your points are noted, and you may also get your Davesingh to support you here. Every point of view is welcomed.

Lucky, yeah you are right. Speculating in Patimas, Benalec, Octagen, Luster, CSL etc is more lucrative in value investing. No need to know what the business the company is doing, how they are doing, what price the share is selling. Just tikam and make money. Why waste time?

Does Kumpulan Fima fits the Magic Formula of value investing?

The 5-year average ROIC of Kumpulan fima is 21.3%. This is double the return of its cost of capital of about 10%. This demonstrates quantitatively Kfima is a good company.

At the close of 2.10 today, the earnings yield is 24%, twice my benchmark of 12%. So Kfima is theoretically selling at a below-average price.

Hence I would say Kfima fits the Magic Formula.

In his The Little Book that Beats the Market, Joel Greenblatt describes a Magic Formula to beat the market. His magic formula is basically “a long-term investment strategy designed to buy a group of above-average companies but only when they are available at below-average prices”. I have read the book. Everything in the book is very easy to understand. The concept is simple, the explanation is simple, but most important of all, the execution for investors is simple enough to do on their own. For more detail explanation of the Magic Formula of Greenblatt, refer to the link below:

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

So how well the Magic Formula worked? The table below shows that the Magic Formula outperformed the S&P500 by a wide margin for the 22 years from 1988 to 2009.

The Maigc formula outperformed S&P 17 out of the 22 years and achieved a CAGR of 23.8% as compared to the 9.6% of S&P. $10000 invested 22 years ago in 1988 has grown to 1.09m by the end of 2009, even after the US sublime crisis in 2008-2009. This is by no means a small feat. What is the secrete?

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)

As you can see the principle behind the Magic Formula is to buy good companies (high return of capital) with below-average price (low EV/Ebit, or high Ebit/EV).

So are you interested to get rich? Can we make use of this Magic Formula to scout for stocks in Bursa for our investing strategy? Let us get started, shall we?

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arv18, to assess the good governance criteria and management quality, it is mostly qualitative, time consuming and highly subjective. If I am interested in a company and think of investing in it, what I try to do is to read its financial reports and assess accordingly. Tan KW has posted a good article below which you can refer to:

http://klse.i3investor.com/blogs/edu_morg_star/31571.jsp

I have recently commended on the thread "In Search of Excellence" about the management of Pintaras, Willowglen, MBL etc which is a small part of what is posted in the article above.

http://klse.i3investor.com/servlets/forum/900255072.jsp

Hence I tend to rely more on quantitative criteria by reading its annual reports to watch out things below:

1) Any regular RPT not at arm-length?
2) Any financial shenanigans in their financial reports?
3) Is the interest of management aligned with shareholders? Do they own substantial shares in the company? How do they reward themselves, too much pay, too many options granted etc?
4) How well they have been creating shareholder value in term of earnings growth, how much dividends paid out and how equity to shareholders increases throughout the years? Creating free cash flows? How much is the cash return?
5) How well is the asset allocation? Simply invest and destroy value? Increase value by proper capital expenses?
6) Efficiency in operations. ROE, ROIC? Do they earn return above cost of capital? Above cost of equity?
7) etc