Posted by MG9231 > 2013-11-09 20:49 | Report Abuse

Kc Chong
For graham net-net, I have 2 more stocks with similar feature,
1) suiwah bhd
2) choo bee industry bhd

Posted by kerenie > 2013-11-12 14:06 | Report Abuse

Dear Mr kcchongnz, I've been following your posts since I've discovered this forum.. Do you mind to share with me the template that you used for calculations? I've no accounting background but have been learning from the postings here.. My email add is kirstenkl.v@gmail.com Thank you.

Posted by miketyu > 2013-11-13 12:28 | Report Abuse

In the net net valuation for Insas why PPE are taken only 30% percent to its value instead of 50%?

Posted by kcchongnz > 2013-11-13 12:58 | Report Abuse

miketyu, you are one of the very very few who spots my "mistakes". That shows you did look into the details of my analysis. This is good for me because as a lone ranger doing all these stuffs, there are bound to be mistakes everywhere. Correcting the mistakes would be good for me too as if not, I won't even know I have made wrong analysis. Thanks first.

However in this case, I didn't really went into very detail of finding what this "PPEs" are. So I just use an arbitrary lower percentage, ie 30%. I just want to be conservative when I want to invest in this share. You could very well use 50% or 75%, nothing right or wrong. But in this case, it doesn't make any difference, may be a sen more in net net value.

Similarly for other assets like receivables, may be one should go into details of what these receivables are more substantial, you would be more certain what value is more appropriate to use and come out with a better net net value.

Posted by coolio > 2013-11-13 14:32 | Report Abuse

Dear Kcchongnz, please share the calculation template as well. My email address is fonseka_82@hotmail.com. Thanks

Posted by houseofordos > 2013-11-13 15:45 | Report Abuse

KC, please take a look at AWC. (found this out courtesy of faberlicious)


Graham net net valuation for AWC
Graham net-net BS value Wt Liq value Per share
Cash and cash equivalent 63766 100% 63766 0.28
*Other investments 2061 100% 2061 0.01
Inventories 11341 50% 5670.5 0.03
Trade Account Receivables 52986 75% 39739.5 0.18
Property, plant and equipment 8700 0% 0 0.00
Intangible assets/tax recoverable16477 0% 0 0.00
Total assets 155331
Total liabilities 60087 100% 60087 0.27
Total equity 95244 0
Number of shares 225352 100000
Net tangible asset per share 0.42 0.23

At a price 0.265, we re only paying 0.035 for its business assuming net-net. Most of their assets are in hard cash with RM0.28 per share. The earnings are not great, earnings and FCF are lumpy. However, 80% of their income is derived from facilities management in Malaysia which is recorded strong growth last year due to revision in the concession rates. This division is also expanding into the biomedical maintainence services segment to reduce dependance on concession based income. The slowdown in middle east adversely impact earnigs from environment business Loss making technology segment was disposed in 1Q13.

The dividend payout historically has been between 1.5 to 2.5 sen and they have the cash to continue supporting this payment. This translates to a dividend yield between 5.7 to 9.4% which is great.

Posted by kcchongnz > 2013-11-13 18:43 | Report Abuse

house, AWC doesn't qualify as a Graham net net play as although it has high excess cash per share, it has relatively high total liabilities.

However AWC can be a great investment if you look at it from the angle of a good company (good ROIC and good cash flow) selling at a low price (earnings yield). And also from the angle of high dividend yield investing strategy.

Try that and let me know.

Posted by houseofordos > 2013-11-13 18:56 | Report Abuse

kc, u re assuming. that only cash can be used to pay liabilities... that may be bit conservative... receivables do have some value as it is part of working capital

Posted by kcchongnz > 2013-11-13 19:06 | Report Abuse

I did not treat receivables and inventories as zero value. I will use 75% and 50% of the book values respectively as by Graham. You add up the assets then subtract total liabilities and divide by the number of shares. That will give you the net net working capital. You then compare with the share price to see if it is higher than the share price. Read the following article:

http://klse.i3investor.com/blogs/kianweiaritcles/38350.jsp

Posted by houseofordos > 2013-11-13 19:14 | Report Abuse

kc that is what i did... graham net net is 23 sen... see my analysis above

Posted by kcchongnz > 2013-11-13 19:30 | Report Abuse

Yes, Graham net net working capital is 23 sen according to your computation. This is still lower than the share price of 26.5 sen. Hence the share price is higher than the Graham net net working capital. Hence it is not qualified as a net net investment. And you cannot say you are paying just 3.5 sen for its business. The business needs those working capital such as receivables and inventories and PPE etc.

But actually I think you haven't net off the minority interest which is quite a high proportion.

Posted by Avocado_C > 2013-11-13 19:32 | Report Abuse

KC, do you have any reservation by assigning 100% factor to land and properties? In the original Graham's formula, real estate property seems like not part of the equation. When I compute the net net value, I still assign 100% value to land & properties if the company doesn't adopt a revaluation policy in its balance sheet, I feel safe to assign 100% when these properties are recorded at cost compared to revalued amount.

Posted by kcchongnz > 2013-11-13 19:35 | Report Abuse

Avocado,
Graham net net is used for mostly manufacturing companies at Graham's era. So properties were not in the formula.

I agree with you about your rational about properties percentage used. That is what I did.

Valuation is an art.

Posted by houseofordos > 2013-11-13 20:03 | Report Abuse

kc, thanks for the explanation. So if there is significant minority interests means that i should shave off that percentage from the Net net value right ?

Minority interest = 25%
Net net value = (1-25%) * 0.23 = RM0.17

you are right..not a graham net net play... I think only qualify as high dividend yield play.

Posted by kcchongnz > 2013-11-13 20:14 | Report Abuse

house, look through the angle of "In search of excellence" and let me know.

Posted by ctw101 > 2013-11-14 08:25 | Report Abuse

Dear kc, I have been following your posting for a while. I find that you re truly a real gentleman and genuinely willing to share and teach. You are a very good mentor. Can I also ask for your calculation template? Pls do allow me to communicate with you via email. My email add ctw101my@yahoo.com.thanks heap. Anne

Posted by steph94 > 2013-11-14 09:29 | Report Abuse

dear mr kcchongnz
i appreciate your posting and calculation. we cant bog you down with each counter ..pls help...email me the calculation template...teach us how to fish rather than give us the fish...thank you. my email
janng_59@yahoo.co.uk..

Posted by ongpeter99 > 2013-11-14 10:24 | Report Abuse

dear Mr kcchongnz
i appreciate if you can email me the calculation template......thanks. my email ongpeter99@gmail.com

Posted by faberlicious > 2013-11-14 11:24 | Report Abuse

kc,dividend yield for Hexza not 6.5 %. The 10% dividend less tax is only 4 sens.So at the price of 77.5 sen yield is only 5.10%Still ok lah.

Posted by miketyu > 2013-11-14 13:58 | Report Abuse

Thanks Mr kcczhongz. I only had 8 months of trading experience and my losing is more than earning so far. Hence i would like to learn the art of value investing from you.

Posted by kcchongnz > 2013-12-04 11:10 | Report Abuse

Three months ago I wrote about the Graham net net valuation of the following three companies as shown below:

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

At that time Daiman and Plenitude are clearly more undervalued than KSL by a wide margin and hence those two companies were preferred to invest than KSL.

Since then Daiman and Plenitude has gone up in prices by 25% in three months as shown below, whereas KSL share price has only gone up by 3%.

Company 6/09/2013 4/12/2013 Change
Daiman 2.62 3.28 25%
Plenitude 2.10 2.67 27%
KSL 2.02 2.09 3%

Since then they have also released their latest quarterly results as at 30/9/13. Has anything changed? Yes, there is.

KSL's latest balance sheet shows its net tangible asset has increased from RM3.13 to RM3.30, and its Graham net net also increased by 6% from 2.47 to 2.61. The following table shows the comparison of the revised net net, the share price now and the discount of the share price to the net net:

Company Price NTA Net-net Discount
Daiman 3.27 5.02 3.82 -14%
KSL 2.08 3.30 2.61 -20%
Plenitude 2.67 3.44 3.11 -14%

Now due to the revised net net and the present share price of each, the investment preference is reversed with KSL more favourable at 20% discount to its net net compared to 14% of the other two.

Moreover the three quarter results shows the EBIT of KSL has improved by 85% to 250m.

So KSL, at RM2.09 appears to be a better buy.

Posted by francis5269 > 2013-12-06 01:52 | Report Abuse

Hi, mr.chong... im so impressive of your using graham method to value a company...thx for sharing... I think I have long way to learn... by the way ... can give some tips abt hw to start it... tis my email address. francislsf@hotmail.com... hope can get u reply...thx aagain...

Posted by kcchongnz > 2013-12-06 09:41 | Report Abuse

francis5269, Graham net net valuation is not a holy grail in investing. As a matter of fact, there is no holy grail in my opinion.

Graham net net is only used for asset based valuation. It is a safer method as compared to forecasting of future cash flow in earnings based valuation. You have to look at the company's balance sheet and make some judgement as shown in the valuation of KSL below:

Graham net-net BS value Wt Liq value Per share
Cash and cash equivalent 112739 100% 112739 0.29
Land held for property development 588706 100% 588706 1.51
Investment properties 445459 100% 445459 1.14
Property development costs 234452 100% 234452 0.60
Inventories 81227 50% 40614 0.10
Trade and other receivables 184173 75% 138130 0.35
Property, plant and equipment 157707 0% 0 0.00
Other assets 27379 0% 0 0.00
Total assets 1831842 xxxx 1560099 3.99
Total liabilities 541,320 100% 541320 1.39
Total equity 1290522 xxxx 1018779 2.61
Number of shares 390548 xxxx 390548 xxxx
Net tangible asset per share 3.30 xxxx 2.61 2.61

Posted by francis5269 > 2013-12-06 12:12 | Report Abuse

hi，mr.chong. may i know how to get "Net-net Discount"? is it "Net Net Working Capital/ outstanding share"?

Posted by sense maker > 2013-12-06 12:32 | Report Abuse

Discount in market price from net asset or net current asset values as per book is such mostly because investors discount the possibility of value trap. This is often found in companies that do not have a formal dividend policy normally due to poor ongoing operating business. It is also found in companies sitting on loads of cash, but unable to deploy it for new biz or biz expansion in a timely manner.

So, the existence of a discount does not call for a buy decision unless distribution to shareholders is immiment or foreseeable.

Posted by ipomember > 2013-12-06 13:48 | Report Abuse

well said sense maker

Posted by houseofordos > 2013-12-06 14:09 | Report Abuse

Posted by sense maker > Dec 6, 2013 12:32 PM | Report Abuse
"So, the existence of a discount does not call for a buy decision unless distribution to shareholders is immiment or foreseeable."

Well said but the problem is you need insider info to know this and by that time the price would already have run up. But in general what you say makes sense... better if we found a net net counter with earnings potential and a dividend policy

Posted by sense maker > 2013-12-06 14:20 | Report Abuse

Our money is hard earned. So, as minority shareholder, the safest is to value the investee company from all angles and all methods (i.e. dividend yield, GP, ROE, ROA, PE, net cash position, net tangible asset backing, DCF, capacity expansion potential).

Insider information is quite impossible to obtain in a timely fashion. Management integrity on the other hand may be assessed based on past records.

We invest only if all areas prove good which in combination represents good value proposition.

We try to spot catalyst and buy 3 to 6 months ahead and before others. Determining fair value is important as it guides you on what price and when to sell.

Posted by houseofordos > 2013-12-06 14:23 | Report Abuse

sense maker, you talk a lot of sense. may I know what counters you are invested in or feel are good companies ? Would sure like take a look at them.

Posted by sense maker > 2013-12-06 14:31 | Report Abuse

Companies that I have bought in in the past 3 years till now as I wrote earlier: ILB, Prolexus, Wellcall, Liihen, Latitude, etc. I have sold some since then and held on to some.

ILB is an asset play when I bought it back in 2011 as I like their Chinese assets value, but not Dubai operation.

I normally assign a score for all companies and will buy with conviction if it exceeds 90 points. 80 to 85 points are borderline buy which means I will buy but in smaller amounts. I sell when the points drop below 80 points.

Posted by sanchez > 2013-12-06 14:48 | Report Abuse

thank you for sharing us the knowledge. i am just a newbie who want to earn some money. dont want to take any money from parents any more. so,can i get extra information on The Absolute PE Method and DCF method. when should we use these 3 methods in value a stock. can e-mail me the template as well? thanks a lot. waihau93@hotmail.com

Posted by sense maker > 2013-12-06 16:39 | Report Abuse

Thanks for inviting, TAN KW.

As a practice, I recommend only companies with 20 to 50% upside (ie rated 80 to 85 points by me) or with more than 50% upside (i.e. 90 points or above).

I am currently awaiting some catalysts for certain shares under my radar and will recommend only after they have come and I have bought in.

I am comfortable still holding some of those shares I mentioned above for now.

Posted by kcchongnz > 2013-12-06 17:53 | Report Abuse

Posted by sanchez > Dec 6, 2013 02:48 PM | Report Abuse

thank you for sharing us the knowledge. i am just a newbie who want to earn some money. dont want to take any money from parents any more. so,can i get extra information on The Absolute PE Method and DCF method. when should we use these 3 methods in value a stock. can e-mail me the template as well? thanks a lot. waihau93@hotmail.com

Absolute PE method by Vitaliy Katsenelson

http://klse.i3investor.com/blogs/kianweiaritcles/36512.jsp

DCF Method, one of them

http://klse.i3investor.com/blogs/kianweiaritcles/32308.jsp

Graham net net valuation

http://klse.i3investor.com/blogs/kianweiaritcles/24112.jsp

Don't forget about this private market comparison method using enterprise value over Ebit which I find very useful:

http://klse.i3investor.com/blogs/kianweiaritcles/37729.jsp


You see you can get all kind of fundamental valuation method resources from i3 website, all by the courtesy of Tan KW. What a pity if you don't read them if you are interesting in fundamental investing.

I have used all of the methods mentioned above in my stock picks. Read them if you are interested. Very boring ones.

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

Posted by jennylee1382 > 2013-12-07 23:02 | Report Abuse

Kcchongnz Thank you for yr help of Gmutual and Pmcorp. Yr analysis are very details and clear.
can you look at PW(7134) current share px 0.86 Pe 5.04 and "Nta 3.53"?

Posted by kcchongnz > 2013-12-08 15:09 | Report Abuse

Posted by jennylee1382 > Dec 7, 2013 11:02 PM | Report Abuse

Kcchongnz Thank you for yr help of Gmutual and Pmcorp. Yr analysis are very details and clear.
can you look at PW(7134) current share px 0.86 Pe 5.04 and "Nta 3.53"?

I have looked into PW con financial statements a few months ago and my conclusion is for me to stay far far away from this stock. I mean for me.

Just looked at it again and my opinion has not changed a bit. The quality of its assets is very poor. So I don't pay attention to its low price-to-book. Earnings wise it has been very poor, mostly losing money. Not sure about its recent huge improvement in earnings. I didn't want to waste time to study it.

I know i know i know, its price seems to be flying now. I better stop here before people say i am wrong again. Yes, I always wrong about the future share price of stocks. I am poor in predicting stock prices.

Posted by sklyte > 2013-12-08 18:36 | Report Abuse

Kcchongnz, what u think of Epmb stock? Low volume, making money most quarters. Price about 70cts. Dividend 2cts per year. A similar co, Ingress was privatized this year. Thanks.

Posted by jennylee1382 > 2013-12-08 23:26 | Report Abuse

Kcchongnz Thank you for yr speedy reply. I'm agree with you. I also will stay far far away fm this stock. TQVM.

Posted by sanchez > 2013-12-08 23:40 | Report Abuse

kcchongz thank you again. i will try to understand it once i finish my exam.

Posted by kcchongnz > 2013-12-15 17:57 | Report Abuse

Is Graham net-net valuation infallible?

Graham net-net is an estimation of the liquidation value of a company as shown below.

Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities

It's the lowest form of valuation you could possibly do because it ignores everything about the business and just focuses on tangible assets. The formula states that;
• cash and short term investments are worth 100% of its value
• accounts receivables should be taken at 75% of its stated value because some might not be collectible
• take 50% off inventories, due to discounting if close outs occur.

So if one buys the stock with market capitalization below the Graham net-net value, he would very sure make money eventually. Is that so? I don’t think so.

For one thing, Graham net-net valuation still bases a heavy weighting on account receivables, 75% of the book value. For example if the company is in contracting business which I have personally involved with before, very often this “receivables” can very well vanish into the thin air, or worse still, turned out to be “payables”. There are a lot of construction disputes, endless especially if you are involved in big and complicated projects, which eventually end up in endless arbitration and court cases. The company can end up instead of receiving those “receivables”, pays liquidated damages for delay. Often settlement is made with the “receivables” evaporated. Take particular attention to the aging schedule of the receivables.

For “inventories”, think about a fashion or technology company which inventories can end up worthless, instead of selling at 50% of book value at liquidation.

What about the “cash”? Surely this is worth 100% of the value. Not necessary. Some may end up in some other people’s pocket instead of the shareholders; or burned away due to improper allocation of resources, poor business ending with persistent losses etc.

So Graham net-net valuation for sure has its shortcomings. Ever heard of another more “sure” way of asset based valuation; the negative enterprise value?

Posted by sephiroth > 2013-12-15 18:19 | Report Abuse

kcchongnz, graham net net should better reflect co like hexza with only 25.7m receivable out of total assets 240.6m and homeritz receivable of only 11.8m out of total assets 13.8m. both co. have strong quality asset like hard cash

Posted by kcchongnz > 2013-12-15 18:41 | Report Abuse

Negative Enterprise Value Stocks

Recall the following formulae for enterprise value and the intuitive definition of excess cash.

Enterprise Value = Market Capitalization + Total Debt - Excess Cash
Excess Cash = Total Cash - MAX(0,Current Liabilities-Current Assets)

If the excess cash in cash and marketable securities exceed the cumulated market values of debt and equity, it gives you a negative enterprise value. In theory, at least, this seems to be an easy arbitrage opportunity, where you can buy all of the debt and equity in a firm and use its cash balance to cover your investment costs and keep the difference.

Like Graham net nets, typical negative EV stocks are ugly balance sheet plays often associated with pre-bankruptcy cases. They lose money; they burn cash; in other words, where the cash may or may not be there tomorrow. Frankly, that’s why normally they’re cheap. But do all negative enterprise value companies in Bursa cash burners?

Let us look at a research done in US on the return in investing in negative EV for forty years from 1972-2012 by the CFA Institute in the link below:

http://blogs.cfainstitute.org/insideinvesting/2013/07/10/returns-on-negative-enterprise-value-stocks-money-for-nothing/

The author's research showed that the average return of 26569 opportunities in 2613 stocks was 50.4% for all negative EV stocks, and 60.5% for micro stocks with limited liquidity of market caps under $50m after holding the investment for one year, not including trading costs, taxes, and so on. Not bad!.

Hence it may be a great strategy to invest in negative enterprise value stocks for some extra-ordinary return. Do you have one?

KC Chong in Auckland (15/12/13)

Posted by houseofordos > 2013-12-15 18:44 | Report Abuse

Negative enterprise value means that net cash per share of the company exceeds the market cap of the share + minority interests + debts payable. The company could basically be privatized for free with extra change.

Yes a company with a -ve enterprise value is a safer bet than a company which share price is lower than graham net net IV. However, the same problem and questions arise is whether management is willing to share the cash with shareholders and if the company is burning up the cash ?

Hexza is an example of a graham net net that I am comfortable to stay invested. Its net cash per share is RM0.65 vs its share price of RM0.675. It is obvious that with this kind of net cash, its valuation is extremely undemanding at only EV 3.1 times EBIT. Even in a climate of reducing revenue, it has consistently able to generate good free cashflows and most importantly it shares the cash with shareholders through dividend payouts every year.

Posted by houseofordos > 2013-12-15 18:54 | Report Abuse

SBAGAN and FACBIND should be -ve enterprise value stocks since their net cash & investments exceed their share price (did not actually go and calculate). However, management for these 2 companies are too stingy to share the profit with shareholders which is why I avoid investing in them.

Posted by sense maker > 2013-12-15 20:35 | Report Abuse

The situation of Nta or net cash or net current assets being higher than market capitalisation is only part of our consideration in determining t fair value of the company unless profit distribution is imminent. It represents the safety net of a company, not its fair value. The more important consideration is projected earnings in next 5 years.

Posted by calvintaneng > 2013-12-15 20:41 |

Post removed.Why?

Posted by houseofordos > 2013-12-15 22:06 | Report Abuse

sense maker, nice to see you here commenting. Yes looking for future growth is one way to determine fair value. But buying a stock based on the quality of its assets is also a good way to limit the downside in investing... as you know the famous saying limit the downside and let the upside take care of itself. I keep a mix of asset plays and growth plays in my portfolio for some diversification

Posted by tsurukame > 2013-12-15 22:08 | Report Abuse

kcchongnz,
I am rather lukewarm towards property companies in ISKANDAR Region in view of the recent Budgetary measures (more of an overkill) to curb property speculation and the re-introduction of Sunday as a work day in Johor state. Johore will not be so hot going into the future unless changes are made to address to real business needs. Meanwhile there is time (not in hurry)to focus on property companies that has sizeable land banks in Greater Klang Valley area who are potential beneficiaries of more MRT projects coming on-stream in the future and later on the High Speed Railway to Singapore(which maybe a bit far off in the future).

For 2014 I am scouting for TURNAROUND companies in WATER INDUSTRY for Investment in 2014 and beyond. I have identified YLI as a potential turnaround stock. Its financials is nothing to shout about but it has just turned the corner and its is one of the beneficiaries of the WATER INDUSTRY . The TA of YLI is very good and it is on UPTREND. Its FA is nothing much to shout about now but will turnaround when the WATER INDUSTRY Project kicks off in 2014. What is your take on YLI?

Posted by iWarrants > 2013-12-15 23:45 | Report Abuse

kkchongz, may i know what do you use for short tern investmens for the companies you analysed? can you give an example?

Posted by kcchongnz > 2013-12-16 09:57 | Report Abuse

Short term investments are short term placement in money market fund, bank fixed deposit (normally less than a year), or even equity market investment etc as funds can be withdrawn any time.

Posted by Fabien Wong > 2014-03-04 11:06 | Report Abuse

There are some decent net net stocks out there. But most of the time they have a lazy balance sheet. Stocks like Oriental and Keck Seng springs to mind. Often these stocks are shuned by the market due to lack of value creation. They need catalyst like corporate exercise to unlock the value but then again not all are favourable to the minority shareholders recent case of Perakcorp as an example.