Posted by kcchongnz > 2013-03-24 09:21 | Report Abuse

What is explained on owner's earnings here is the same as free cash flow (FCF)defined as below from Investopedia:

A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.

Let me show the example on Kumpulan Fima below:

Year 2012 2011 2010 2009 2008
CFFO 132346 139552 116823 59792 67049
Capex -26434 -24022 -19500 -23826 -32009
FCF 105912 115530 97323 35966 35040
FCF/share 0.40 0.44 0.37 0.14 0.13

For example for the financial year ended 31/3/2012, Cash flow from operations amount to 132.3m. After spending 26.4 m in capital expenses, the FCF is 105.9m, or 40 sen per share. The FCF is quite consistent in the last three years.

Now if you come up with 1.86 to invest in a company, and the company makes 40 sen in hard cash a year (not an accounting earnings). Is this a good business to invest in?

Sorry ah, I use this Kfima again as example. This is because I love this company very much. For those who hate me for hard selling, please don't invest in Kfima. Btw, this writeup is for education purpose, ok?

Posted by tptan45 > 2013-03-24 11:13 | Report Abuse

A quick google showed EPS (TTM) vs
TTM 1 year ago =-1.5913
That is negative growth.
Is there any cause for concern?
Otherwise all figures and charts look solid.

Posted by Zuliana > 2013-03-24 11:20 | Report Abuse

Kcchongz,
the company makes 40 sen in hard cash a year (not an accounting earnings). Is the free cashflow the same as net earnings of a company?

Posted by kcchongnz > 2013-03-24 11:33 | Report Abuse

tptan45, you got the right observation. Not only that, cash flow from operations also reduced together with free cash flow. Is that a concern? Good question. Different people look at it differently. This is how I look at it.

Kfima's CAGR in revenue and earnings for the last 6 years was 10% and 20% respectively as shown below:

Year 2012 2011 2010 2009 2008 2007
Revenue 470753 431884 411432 369070 308712 294477
Net Income 116543 107502 86433 70627 43274 40649

This is a long record of high growth. Growth was so steady every year without a single year of negative growth. This is too good. My opinion is that whatever company, growth is seldom so steady like that because of many reasons; economic cycle, cyclic palm oil price (Kfima has 30% revenue from here), etc. Hence earnings would bounce around year-to-year but more important is the trend. Again as a company grows bigger, it is harder for it to grow at the same rate as before.

No, I won't say in Kfima's case it is not a concern, but I don't see it as abnormal, at least not right now. But it may be something to watch out for.

Posted by kcchongnz > 2013-03-24 11:44 | Report Abuse

Zuliana,

No, FCF is different from EPS. In Kfima's case, EPS last year was 30.5 sen but FCF was 40 sen per share. Actually both these numbers are not comparable. FCF is for the whole firm; common shareholders, debt holders as well as minority interest. EPS of 30.5 sen is just for the common shareholder.

FCF is calculated as:

EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure

It can also be calculated by taking operating cash flow and subtracting capital expenditures.

Note that when FCF is computed, we use EBIT, and not Net income. EBIT is for all stakeholders, whereas Net Income is just for equity holders.

Posted by Zuliana > 2013-03-24 11:55 | Report Abuse

Thank you Kcchongz, u make it very clear to me.

Posted by tptan45 > 2013-03-24 12:15 | Report Abuse

Looks like Kfima's negative growth was mainly because of a relatively poor Q1FY12/13. Since then it has picked up with Q3 better than the corresponding quarter last FY.
That's reassuring.
BTW know anything about the controlling family? Are they...you know...very or too connected politically?

Posted by kcchongnz > 2013-03-24 12:21 | Report Abuse

gark and Najib Zamry know better.

Kfima is controlled by the Bazir family. I think they are great business people, not depending on political connection. Credible management too. Don't seem to see any irregularity by looking at their actions in the annual reports. Hardly any RPTs.

Actually I would like to know more about this too. Hopeful NZ and gark can enlighten us.

Posted by houseofordos > 2013-03-24 23:34 | Report Abuse

I have a general question, ROE is calculated by shareholder equity = Assets - Liabilities. Couldnt the ROE numbers look better if companties over-value their assets.

Posted by kcchongnz > 2013-03-25 10:16 | Report Abuse

ROE=net income/equity

If assets are overvalued, with the same E, ROE will be smaller, not looked better.

Yes, there is this shortfall in ROE also, if the assets are not the true market value. It distort ROE. But for banks' assets and liabilities, they are marked to market and hence ROE is most suitable to value banking stocks.

Posted by iafx > 2013-03-25 11:01 | Report Abuse

shareholder equity is not assets - liabilities, don't mix up ROE to ROTA

Posted by kcchongnz > 2013-03-25 12:42 | Report Abuse

houseofordos

equity = Assets - Liabilities.

With assets overvalued, it means equity will be bigger. As ROE=NI/Equity,

Hence ROE will be smaller, hence not looked better.

Posted by houseofordos > 2013-03-25 12:57 | Report Abuse

hey KC, thanks again for correcting me... i got it wrong initially. My statement came from reading dynaquest which said for most malaysian companies ROE tends to be less meaningful due to asset over valued. Means that low ROE doesnt mean less quality company since it could just be the assets in BS are inlfated. So need to look at profitability as well such as FCF, EPS and growth.

Posted by houseofordos > 2013-03-25 13:05 | Report Abuse

KCchongz, have u looked at CBIP before ? This company is mainly involved in Analysts compare the PER of 7x (at Rm2.5) against plantation average of 9x to be cheap but I dont consider this to be plantation yet as they have yet to derive any earnings from plantation till 2015 after they sold their subs in Sarawak. The revenue and PBT growth of their palm oil mill and SPV business is good but these are contract based and not really recurring.

FCF analysis is difficult for this counter becuase of the long trail of acquisitions over the years (mainly buying plantation land) makes FCF lumpy. I m curious to find out how you value such companies. Is it possible to look at DFCF from a segmented perspective (separete DCF for each segment) ? Also is DFCF method of valuation really applicable to all companies and is this the only method you use for valuation ?

Posted by houseofordos > 2013-03-25 13:18 | Report Abuse

Missed out some words "This company is mainly involved in palm oil milling equipment and retrofitting of special purpose vehicles."

Posted by iafx > 2013-03-25 13:30 | Report Abuse

sigh, don't mix up owner equity to shareholder equity, wrong roe calculation can lead to Holland... of cos, not for those with "agenda"

:D

Posted by kcchongnz > 2013-03-25 14:01 | Report Abuse

houseofordos, haha I am just an armchair investor living in a far away land, not an analyst working for an investment bank. Never practice in the financial industry. Btw, I am a civil engineer. And looking at your statements; equity, assets and liabilities, ROE are the precise terms accounting professional use. You are a knowledgeable finance person, probably even practice in the industry, my guess. Anyway, I like to share knowledge with you and hopefully can learn something from you too.

My impression on CBIP is it is a very good company. Without knowing the details of the company business myself now, I will treat its palm oil milling equipment and retrofitting of special purpose vehicles as mentioned by you as it ordinary business. I will now treat its palm oil plantation as an investment operation first. So the money spend on investment in palm oil plantation is under cash flow from investment, not affecting the cash flow from operations. So the CFFO less capital expenses in PPL, excluding money spend on buying plantation, will give you free cash flow (FCF). FCF may be lumpy as mentioned by you. What I will do I may take the average of its FCF for the last 5 years (arbitrary) and then project a growth using the past growth, but be conservative. Then I will discount this FCF of the firm to the present value. Then you can separate out those belong to debt holders, minority shareholders and warrant holders, if any before getting those belong to common shareholders. I will ignore its cash flow from the future plantation business, may be just add the investment amount back to the present value.

Discount cash flow is the "exact" way of finding the present value of a firm in academic finance, but not necessary it is the "correct" way in real life investment, in my opinion. There are many other ways which you can read from what I have done in some of the threads in i3. I like using ROE too, Value=ROE/Required return*NAB per share is one of my favorite. Simple and intuitive. I sometimes use PE ratio, relative or absolute (We talked about them before). I have used Graham growth model frequently. Earnings power valuation, is another method. Even discount cash flow there are different models; discount cash flow of firm, owner's earnings, dividend growth plus terminal PE ratio etc.

As I have said, I thought CBIP is a good company to invest in. May be we can look at its valuation together. What say you?

Posted by houseofordos > 2013-03-25 14:05 | Report Abuse

iafx, can you elaborate the difference and give some example ? me beginner here.. thanks

Posted by Desmond Liew > 2013-03-25 14:10 | Report Abuse

I still prefer to be a TA but use FA as my TP .. We can predict/forecast 1 or 2 months matters but we dont know what will be happening in 3 years & above matter..

Posted by houseofordos > 2013-03-25 14:15 | Report Abuse

Desmond, agree... FA is more like the initial filter to look for good stocks. I dont look specifically at TA but use volume spread analysis (VSA) to look for entry and exit points. Price and volume are 2 information that will not lie and allows you to understand the smart money movement.

Posted by houseofordos > 2013-03-25 14:31 | Report Abuse

kcchongz, actually i m an engineer like you except i m an electrical engineer who is looking for some extra income to supplement my low pay :-P

I initially thought CBIP is good as well until I look at their cashflow. Generally I m a bit reserved here until I can predict their future cash flow because estimates on planting cost for their newly acquired plantations range from 25m to 80m per annum depending on how aggresive which I think will result in -ve free cashflow for at least another 3 years till plantations start yielding judging from their CFFO average. I m not sure why they want to go upstream, perhaps they are looking for some stable recurring income.

Posted by Desmond Liew > 2013-03-25 14:39 | Report Abuse

i have been trading since last year oct... i chose stocks based on indicators but i failed... After my review, my failure was not bcos of indicators' failure, it was i who always loved to derail from the Rules. It was i who lacked of strong discipline.. So using this GE "break", i got to brainstorm myself to be more discipline, adhere to own Rules.. I will be a successful trader when time goes along... DL Boleh!!!

Posted by iafx > 2013-03-25 15:10 | Report Abuse

understand first r u a common share holder, or owner of the company? should the answer is obvious, so is the inappropriate use of e=a-l above

Posted by kcchongnz > 2013-03-25 15:20 | Report Abuse

I am speechless!!!!!

Posted by houseofordos > 2013-03-25 16:09 | Report Abuse

iafx, if I buy the stock, I am considered owner of the company right (even if its 0.0001%)? what is the difference between owner of the company and common share holder ?

Posted by iafx > 2013-03-25 16:29 | Report Abuse

really? think again. there's a section in bs about shareholders funds, learn fr there what common shares mean, what right u have vs the owner

Posted by kcchongnz > 2013-03-25 16:39 | Report Abuse

Year 2012 2011 2010 2009 2008
CFFO 132346 139552 116823 59792 67049
Capex -26434 -24022 -19500 -23826 -32009
FCF 105912 115530 97323 35966 35040
FCF/share 0.40 0.44 0.37 0.14 0.13

Think about it, the example I gave above about FCF/share value for the common shareholders of Kfima is not correct. The FCF worked out is actually for the firm, which include the common shareholders, the debt holders as well as the minority interest. And FCF for the common shareholders is the owner's earnings. Unless Kfima has no debts and no minority interest, then only FCF of the firm is the FCF for the common shareholders, or owner's earnings.

Posted by kcchongnz > 2013-03-25 16:47 | Report Abuse

I am totally, completely speechless now!!!!!!!! What about you, houseofordos?

Posted by houseofordos > 2013-03-25 16:47 | Report Abuse

ok i understand what it means now, so the ROE for common shareholders should be calculated excluding minority interests / non-controlling interests..

Posted by kcchongnz > 2013-03-25 17:44 | Report Abuse

houseofordos, keep it simple. You are totally right to say the shareholders are owners' of the company. Normally there is no minority interest unless the company has a subsidiary company which it has consolidated the subsidiary company's account into the account of this company. Whether there is minority interest or not, the shareholders are the sole owners of the company, unless there are preferred shareholders or ICULs who can convert to the common shares. There are no other "owners".

Your equation of ROE=NI/E is perfectly correct. I will give you 100 marks. In this case, don't bother about if there is any minority interest, you take E as the NI attributed to common shareholders; and E is the total common equity.

Keep in simple man.

Posted by iafx > 2013-03-25 18:06 | Report Abuse

house, u can find the correct def & use of roe with the trading tools, e.g equities tracker etc.

believe it or not, the above is flaw. a hint already given: total shareholders funds, some study u will findout the truth. already, he is using yr words to cover his ass

Posted by houseofordos > 2013-03-25 19:03 | Report Abuse

Alright guys... thanks for all the feedback....

Posted by tptan45 > 2013-03-25 19:16 | Report Abuse

Yeap, keep things simple.
Just google....

Posted by kcchongnz > 2013-03-25 19:21 | Report Abuse

google also must explain what you have googled mah. Don't just hint this hint that. How would others know what you hint? One head full of dew water!

Posted by tptan45 > 2013-03-25 19:37 | Report Abuse

house, investopedia will have most of the definitions you need. I am sure you will find it useful.

Posted by iafx > 2013-03-25 20:54 | Report Abuse

investopedia is fine: http://www.investopedia.com/terms/r/returnonequity.asp

read it 4 yrself is the best!

Posted by houseofordos > 2013-03-25 23:59 | Report Abuse

Hi KC lets talk about CBIP. Note that below is compilation I made so there could be mistakes so lets compare and see

2012 2011 2010 2009 2008 2007
Revenue 520,351 322,611 344,317 331,468 409,295 289,819
NI 91,775 69,515 69733 42304 62,851 46,710
Equity 512,267 389,056 298,766 255,295 229,466 187,208
NTA 1.86 2.83 2.22 1.84 1.64 1.34
ROE 17.92 17.87 23.34 16.57 27.39 24.95
EPS* 34.23 25.93 51.96 29.79 44.61 33.84

2012 2011 2010 2009 2008 2007
CFFO 38,578 68,236 78,991 64,907 58,690 7,277
Capex* (51,671) (38,540) (60,804) (25,739)(159,165)(13,244)
FCF (13,093) 29,696 18,187 39,168 (100,475) (5,967)
FCF/Rev -2.52 9.20 5.28 11.82 -24.55 -2.06


* Excludes disposal gain

Segment revenue 2012 2011 2010 2009 2008 CAGR (%)
Palm oil milling 340,460 265,057 240,380 229,958 271,893 3.82
SPV/Others 179,891 57,554 25,506 35,224 83,181 13.72

Segment PBT 2012 2011 2010 2009 2008 CAGR (%)
Palm oil milling 76,299 47,237 38,351 35,403 33,388 14.77
SPV / Others 15,392 2,833 4,915 4,637 5,963 17.12

I find it hard to value using cash flow due to volatility caused by acquisitions. I m looking at segment based PBT and looks like their growth in PBT is pretty good for the 2 remaining divisions. Still havent figure out how to value this other than using a target P/E method with 1 year projection based on current unbilled sales.

So what's your view on the intrinsic value ? Can you still predict based on cash flow ? I m interested to know.

Posted by kcchongnz > 2013-03-26 09:09 | Report Abuse

Intrinsic value is not a prediction. It is just an opinion of the fair value of a company based on some assumptions of its future cash flow discounted to present value. Forecasting its future cash flow in particular is extremely hard and hence the intrinsic value one gets is highly imprecise. Hence the use of the concept of margin of safety.

I tried to look at the financial statements of CBIP. Can you tell me where to get its latest balance sheet and cash flow statement ended 31/12/2012? The financial results from Bursa only show income statement and movement o equity in a spread sheet. How come there is no balance sheet and cash flow statement? But you got it somehow.

From the audited account 2011 and 2010, I did get some cash flow adjusted for discontinued operation as below:

Year 2011 2010
CFFO 68236 66775
Capex -9497 -40001
FCF 58739 26774

I don't know how you get yours. They are different from mine, especially your Capex. The only capex I used is the money spent on PPL. I don't know if you use other investments as capex or not. Acquisition of a subsidiary in palm oil plantation is not a capex. Capex is for its ordinary operations in "palm oil milling equipment and retrofitting of special purpose vehicles".

So FCF is for its ordinary business which you can to use to estimate the its enterprise value of this ordinary business. If it is lumpy, then take an average. You can then add the value of its investments in subsidiaries and jv to its total intrinsic value. This a the opinion of a novice investor.

If you can let me know how can I get hold of its latest balance sheet and cash flow statement, I may attempt to value it. On surface, CBIP appears to be an interesting company to invest in.

Posted by Desmond Liew > 2013-03-26 09:23 | Report Abuse

Hi kcchong, may i ask u questions as below:-

1) how long have u been trading FA
2) how effective is FA
3) how many times have u hit your own targets exiting with 50% profits by using FA?
4) the longest waiting times is how long?

appreciate if u can ask bcos these are the curious questions that i have been asking myself but of course i cant answer. Do i have times to wait bcos when we talk FA, we have to wait for maybe 5 years to harvest our yields.tqvm

Posted by mansor80 > 2013-03-26 09:25 | Report Abuse

and question no

5) how much your average profit every year

Posted by kcchongnz > 2013-03-26 09:39 | Report Abuse

Desmond,
1) I am not a trader (sometimes I trade too, that is because my fingers always touch itchy powder). How long? I started to dabble in the market in the 1980s. First simply buy based on what other people said, or from reading recommendations from magazines, newspapers etc. Onlt using my own FA less than 10 years ago.

2) Put it this way. When I listened to what other people tell me to buy, I lost money most of the time. for the last 10 years, especially the last 5 years, I have made return much more than the market return.

3) Never count how many times. Exceeding 50% returns say in 2-3 years is not a problem. But seldom, very seldom exceeding 50% in less than 1 year. Of course not all the time earns extra-ordinary return, but seldom, very seldom lost big.

4)Never keep track on this. Anyway, earnings of a company, and hence its corresponding rise in share price is not a static thing.

Extra answer here. Why do I use FA rather than listen to market talk? Why is it necessary to invest with a long-term horizon? Believe me, there is no way a small time retail investor can earn a decent return on his investments in long term if he doesn't look at the business of a company if there is future, and then buy at a significant discount to its intrinsic value. 90% of other punters and traders lose money. This is not a wild statement. There is enough academic studies to support this.

Posted by kcchongnz > 2013-03-26 09:41 | Report Abuse

Mansor,
My annual return on my investment should be around 15%. The last three four years were better, probably around 17%. Nothing to shout about. But it is above the market return.

Posted by houseofordos > 2013-03-26 09:42 | Report Abuse

KCChongz, thanks for the clarification on the capex. Yes I did include the full amount of cash used for investment there which is incorrect ? So my understanding is that we should exclude any other investments and only the capex used to sustain the business in FCF calculation ?

Btw, I am using Q4 report from bursa for the 2012 numbers. You need to scroll down the Acc tab to find the cashflow statement. The quarterly report is not very specific on the cashflow section for investment and it doesnt break down to amount used for PPE (Property plant and equipment)

Posted by Desmond Liew > 2013-03-26 09:48 | Report Abuse

tqvm for your prompt reply & i just wanna get some ideas how effective is FA?

Posted by kcchongnz > 2013-03-26 10:00 | Report Abuse

Desmond, I recommend you a book by Joel Greenblatt, "The little book that beats the market". He explained to you why smaller capitalized stocks often beat the market. He uses the metric of

Enterprise value/Ebit

as a way to search for value stocks that beat the market. He will show you all the academic research on it too.

Posted by Desmond Liew > 2013-03-26 10:08 | Report Abuse

noted with tq & i will look for that book as per your recomm...

Posted by kcchongnz > 2013-03-26 11:22 | Report Abuse

If you watch the video on owner's earnings, you would notice that the presenter actually favours another metric to gauge a company's "true" earnings. He emphasizes on the value of growth in book value plus dividend as a measure of investor's "true" earnings. Quite intuitive.

I will use Kfima as an example (sorry again ah for those who hate Kfima and hate what I write).

Table below shows the three measures, EPS, Owner's earnings (OE) and growth in book value+dividend (GBD) per share for the last 5 years.

Year 2012 2011 2010 2009 2008
Book value growth 0.31 0.23 0.25 0.13 0.05
Dividend 0.08 0.07 0.05 0.03 0.025 Total
Book value growth plus dividend 0.39 0.30 0.30 0.16 0.08 1.24
Owner's earnings 0.28 0.28 0.24 0.08 0.07 0.95
EPS 0.31 0.27 0.22 0.18 0.12 1.09

Notice that in generally, OE is lower than EPS, similar to the example of Wall Mart by the author. But on contrary, GBD is generally higher than EPS. This could mean that $1 reinvested in the business for growth yields more than $1 on return. This is what Buffet is also looking for.

Posted by houseofordos > 2013-03-27 00:31 | Report Abuse

kc, have you done the intrinsic value analysis on CBIP ? What's your thought ?

Posted by iafx > 2013-03-27 11:03 | Report Abuse

Posted by kcchongnz > Mar 25, 2013 03:20 PM | Report Abuse

I am speechless!!!!!

Posted by kcchongnz > 2013-03-27 11:13 | Report Abuse

Yes, I was speechless when I read the following statement.

Posted by iafx > Mar 25, 2013 03:10 PM | Report Abuse
understand first r u a common share holder, or owner of the company? should the answer is obvious, so is the inappropriate use of e=a-l above

Btw any person fluent in accounting would be speechless when someone who knows nuts criticize others continuously like that.