Posted by faberlicious > 2013-12-23 17:31 | Report Abuse

kc,last week cheap sales I manage grab some at 2.83.

Posted by faberlicious > 2013-12-25 09:20 | Report Abuse

RM5.47 (2*2.87 ex-bonus) I think should be 5.74. Table 3 NI CAGR should be 34.3%.How come NI for 2013 in table 2 and 3 different? 49,916 and 52317?

Posted by kcchongnz > 2013-12-25 09:57 | Report Abuse

faberlicious, wah you so sharp ah.

Anyway, thinks for the corrections.

I do not how I got the 49916, NI. the annual report is 52317.

Posted by kcchongnz > 2013-12-26 20:00 | Report Abuse

Say we have a few construction companies but which is doing a better business? One way to look at them is their return on equity (ROE). It is one of the most important indicators of a firm’s profitability and potential growth. Companies that boast a high ROE with little or no debt are able to grow without large capital expenditures, allowing the owners of the business to withdrawal cash and reinvest it elsewhere. Many investors fail to realize, however, that two companies can have the same ROE, yet one can be a much better business. How do we determine that?

DuPont equation provides a broader picture of ROE of a company. It tells where a company's strength lies and where there is room for improvement. It is the epic of financial statement analysis of a company. Investopedia has a very good explanation on why is it important to carry our DuPont analysis on a company’s business as shown in the link below:

http://www.investopedia.com/articles/fundamental-analysis/08/dupont-analysis.asp

Du Pont Analysis
There are three components in the calculation of ROE using the traditional DuPont model; the net Income margin (NIM), asset turnover (AT), and the equity multiplier(EM). By examining each input individually, we can discover the sources of a company's ROE and compare it to its competitors.

ROE = NI/E = NI/S * S/TA * TA/E = NIM * AT * EM
Where NI is net income, E is equity, S is sales or revenue, TA is total assets

Table 1 below shows the dissection of ROE of some construction companies in Malaysia.

Table 1: ROE of construction companies
Company Kimlun Ptaras HSL Cresbld Gamuda IJM WCT
Net Income margin, NIM 5.5% 30.3% 15.0% 7.0% 14.2% 12.1% 22.5%
Asset turnover, AT 1.22 0.52 0.80 0.61 0.40 0.31 0.29
Equity multiplier, EM 2.66 1.22 1.58 2.92 1.92 2.07 2.85
ROE=NIM*AT*EM 18% 19% 19% 13% 11% 8% 19%
Data based on latest fiscal year results

Four of the companies have approximately the same ROE of 19%, very good as this ROE is above the cost of equity, generally from 10% to 15%, depending on the riskiness of the company, the riskier it is, the higher the required return. These companies are Kimlun, Pintaras, HSL and WCT. Gamuda and IJM have low ROE mainly because they have too much assets, so much so that even though their turnovers are high, in relation to assets, the asset turnover is still low. Crestbuilder’s ROE is just mediocre at 13% even though it uses huge leverage of 2.92, ie borrows a lot of money to operate its business, and hence riskier. This is because its net profit margin is low at only 7%. HSL appears to be in good business as its high ROE of 19% is achieved with reasonable high net income margin of 15%, and reasonable EM of 1.6.

It is not hard to see that Pintaras has the best business with ROE of 19%, achieved with very high net income margin of 30.3%, at a low equity multiplier of just 1.2. This is because Pintaras has no debt at all. Pintaras’s AT is relatively low at 0.5. All it has to do is to grab more jobs and its ROE will improve further.

Value Value Value
There is a difference between a good business and a good investment. A good business is as described above, a good investment is one which will provide you with excess return over a period of time. A good business generally will sell at a higher price but it won’t be a good investment, if the price is too high. One common metric investors use is the price to earnings ratio, PE. The lower the PE, the better the investment, all others remain the same.

Table 2 below shows the market valuations of the construction companies.

Table 2: Market valuation
Company Kimlun Ptaras HSL Cresbld Gamuda IJM WCT
Price 1.84 2.87 1.84 1.48 4.67 5.87 2.15
PE 8.9 8.8 11.8 5.1 19.6 19.3 5.6
TEV/Ebit 8.4 5.6 7.6 7.9 22.9 12.4 7.2


The PE ratio of Crestbuilder and WCT are the lowest at 5.1 and 5.6 respectively. But does it mean that they are better buys, especially for WCT with a high ROE of 19%? Not necessary. This is because WCT has relatively high equity multiplier of 2.9, one of the highest. Not to mentioned that it also have a lot of company warrant holders who would take a piece of the pie from the common shareholders when they convert to common shares.

So a better comparative valuation metric would be the enterprise value, which takes into consideration of debts and excess cash, minority interest if any. Appended below is a link in i3 describing what is enterprise value and what is its significance in valuation.
http://klse.i3investor.com/blogs/kianweiaritcles/37729.jsp
Referring back to Table 2 again, one can see that the best buy is Pintaras with its enterprise value 5.6 times its Ebit, and it also has the best business with one of the highest ROE.

Posted by Jvei > 2013-12-26 22:39 | Report Abuse

Thank you Mr.kcchongz, i learnt alot from the basic calculation of which metric should be used for construction.

Posted by JXRepcoBuffet > 2013-12-27 16:44 | Report Abuse

Hi Mr. kcchongnz, thanks for the sharing. How about Prestariang? is that still your top pick for FY2014?

Posted by kcchongnz > 2013-12-27 17:07 | Report Abuse

Posted by JXRepcoBuffet > Dec 27, 2013 04:44 PM | Report Abuse

Hi Mr. kcchongnz, thanks for the sharing. How about Prestariang? is that still your top pick for FY2014?

Prestariang is one of the stocks in my portfolio. It is a pick, but not necessary the top pick for 2014. You can read my analysis and valuation in the appended thread below if you are interested:

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/42400.jsp

Posted by ladzatz > 2013-12-27 17:09 | Report Abuse

kcchong...what's the minimum TP for kfima?

Posted by kcchongnz > 2013-12-27 17:40 | Report Abuse

Posted by ladzatz > Dec 27, 2013 05:09 PM | Report Abuse

kcchong...what's the minimum TP for kfima?

What is TP? Target Price? I don't know the target price because it is determined by the actions of the stock market players.

If you are interested in what is the estimated intrinsic value of Kfima, I have done heaps of them and written heaps of them in i3. One of the links is as below:

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/34118.jsp

You got to make your own judgement. Best of luck.

Posted by kcchongnz > 2013-12-27 17:52 | Report Abuse

Oh ladzatz, forgot to tell you that this guy asked you not to buy Kfima. You got to ask him to explain to you why is Kfima is expensive at 1.92. He is a maths wizard.

Posted by anbz > Dec 26, 2013 01:22 AM | Report Abuse

don't buy kfima...it's too expensive...look...another stock recommended

by kcchong...is pmcorp...only 21.5 cents...ask him why he recommends

lousy counters such as pmcorp..hahaha

Posted by JXRepcoBuffet > 2013-12-30 13:30 | Report Abuse

Thanks kcchongnz. Do you have any comments on plantation stocks for FY2014? i.e Kossan, Wellcall, Supermx, TSH and etc?

Posted by bluewards > 2013-12-31 19:32 | Report Abuse

hi kcchongnz, i don't seem to be able to reproduce your NI figures:

Year 2013 2012 2011 2010 2009 CAGR
Revenue 172845 185,172 125,936 105,731 130,295 7%
NI 52,317 42,149 25,682 20,737 16,053 33%

Can you help? Thanks!

Posted by kcchongnz > 2014-01-01 16:13 | Report Abuse

bluewards,

Everybody read and interpret financial statements differently. For Pintaras, as it is a favorite company of mine, I play with its numbers a lot. Especially for operating income, I tend to omit some items which are one-off, or non operating in nature. This normally I get them from the cash flow statements.

It is arguable if investment income is operating income or not, as investment is a big part of their income because they have a lot of cash, and investment in equity market. I view it as non-operating, and so I deduct that away from operating income. Even for net income, sometimes I just deduct off some amount which is one-off, such as gain in revaluation of property. So even my net income may differ a bit from what others see.

As I have said many times before, investing is an art, and the process and methods of doing it is also an art. There is no right or wrong, unlike science.

Posted by heavyth > 2014-01-04 19:54 | Report Abuse

May i know what is the fair value or TP for Pintaras tq ?

Posted by heavyth > 2014-01-16 15:27 | Report Abuse

Buy, hold or sell ???

Posted by Huang > 2014-04-18 10:08 | Report Abuse

哗KC大佬：太神了！您所选的股项，几乎百发百中。Pintaras, KFima, 肥bon，Prestariang等等。早知道一开始跟着您就行啦，何必自己如此辛苦提心吊胆的在股海浮沉。

如此功力，是该住在仙島揮揮掍，追逐小白球，看看綿羊结隊吃草。

您是最好的!