Posted by duitKWSPkita > 2015-01-05 17:28 | Report Abuse

Dear kcchongnz,

Thank you very much for sharing. Novice like me benefit a lot from your fundamental discussion.

I am really enjoyed reading your comments.

warmest regards,
newbie duit

Posted by NOBY > 2015-01-05 17:34 | Report Abuse

paper plane,

I looked at IQ group over the weekend, it has a good turn around story (Pitroski score 7-8 for the past 2 years) and might be the right play in 2015 due to its export exposure and positive net impact from strengthening USD. But my numbers are lower than yours based on TTM:-

@RM1.6
EV/EBIT = 6.3x
ROIC = 21.4%

As for cashflow the previous 2 years (2013 and 2014) was postive free cashflow.

A few concerns I have are:-
1. 90% held by top 30 shareholders. Only a 10% free float. This makes the share easily manipulated.
2. Director made some disposals around the RM1.80 price range.

These are not major concerns but something to ponder about.

Posted by paperplane > 2015-01-05 17:49 | Report Abuse

tHE CASH FLOW JUST dont look normal for this IQ Group

Posted by NOBY > 2015-01-05 17:52 | Report Abuse

can u elaborate more on the cashflow ?

Posted by paperplane > 2015-01-05 18:12 | Report Abuse

If i read correctly, the profit is not real cash. It is just receivables.

Posted by bgoon99 > 2015-01-05 18:27 | Report Abuse

Thanks for all these intriguing discussions. I noticed that most of the taiko here are using the formula to "counter check" their stock-picks, rather than use it as screening tools to mine the undervalued stocks. I believe it is due to the unavailability of a screener based on magic formula for all KLSE counters. Perhaps it is rather impossible for one to calculate the EY, ROIC for all counters manually... Greenblatt's book has outlined a trading "procedure" for value investors to systematically manage and rebalance their portfolios in order to make profit in the long run (12m period)....

Posted by paperplane > 2015-01-05 18:39 | Report Abuse

Actuallu the latest version of intelligent investor has highlighted the weakness of using editda, ev. Warren buffett himself argue also, is not tax not something you have to pay also. Why not include in calculation.

Posted by paperplane > 2015-01-05 18:43 | Report Abuse

Noby, i like piotroski score also. So far the best to evaluate, but it has to be applied across 5yrs at least. Sometimes, one or 2yrs can be misleading, like huayang. And also have to be applied together with gross profit margin. I notice some case piotroski score beautiful, but profit margin keep dropping year by year.

Posted by kcchongnz > 2015-01-05 18:46 | Report Abuse

paperplane,

That is why Magic formula uses Ebit, not Ebitda. As weakness of EV as mentioned by you in the book, I doubt so as it is the more logical way to measure the total value of a company, not only equity, but other things like debts, minority interest, excess cash etc. You may counter-check what you have read,

As for the cash flow of IQ Group, I saw heaps of cash flow from operations, and huge free cash flows too.

Posted by KianHin Toh > 2015-01-05 19:01 | Report Abuse

not bad. quite a detailed research here...

Posted by CFTrader > 2015-01-05 19:20 | Report Abuse

IQGROUP has a huge FCF, but it is not reflected as the cash goes into inventories and recievables, which is part of the business.

Posted by paperplane > 2015-01-06 06:00 | Report Abuse

That's the problem. Why cash not reflected as cash and hidden into receivables

Posted by kcchongnz > 2015-01-06 08:23 | Report Abuse

Posted by paperplane > Jan 6, 2015 06:00 AM | Report Abuse

That's the problem. Why cash not reflected as cash and hidden into receivables

I see their income statement making 11.6m as on 31st March 2014. Their cash flow from operations is even more at 15.2m. Their balance sheet also shows an increase in cash and cash equivalent of 10m in 2014.

So why do you say this?


Posted by paperplane > Jan 6, 2015 06:00 AM | Report Abuse

That's the problem. Why cash not reflected as cash and hidden into receivables

Posted by paperplane > 2015-01-06 08:37 | Report Abuse

I am referring to Q2 2015 report, is this not the latest?

From cashflow statement.
Profit=13,594
Operating profit/(loss) before working capital changes 18,749
Trade and other receivables ( 18,128)

ending----------
Net cash (used in)/generated from operating activities ( 1,413)

Posted by paperplane > 2015-01-06 08:38 | Report Abuse

Reduced the receivables?? I dont understand.

Posted by paperplane > 2015-01-06 08:38 | Report Abuse

Negative means increase in receivables. Income earned actually not earned yet. But they book it as income earned already.

Posted by paperplane > 2015-01-06 08:43 | Report Abuse

Is this not fishy>?

Posted by NOBY > 2015-01-06 08:48 | Report Abuse

FCF is a lumpy thing, I was referring to previous 2 financial years and it looked healthy, Its hard to draw conclusion from 2 quarters of cash flow statement.

The point you mention is perfectly normal. The cash is not there yet as the receivables may be >6 months old. You are right as it is still stuck in receivables. But they can book it as accounting profit.

Posted by kcchongnz > 2015-01-06 08:48 | Report Abuse

Income statement is prepared based on accrued accounting basis and that is the accounting rule. So income is earned once transaction is done, though cash may not have been received yet. Say if you have completed a piece of work for your client, you book that as a revenue because it is completed. Your client may have a month more to pay you and hence you have not received the cash yet, but suppose to be in a month's time.

For me normally I don't take a particular year's cash flow statement as one to look at as representative of the true picture of cash flows but a few years because cash flow is lumpy. So I never consider two quarters cash flow as truly representative.

Posted by paperplane > 2015-01-06 08:54 | Report Abuse

but fishy thing can happen just in between you see. Out of no where, suddenly sales improved, hooray. Income improve, but maybe stuck in receivables.....

This is how accounting fraud unfold sometimes. As ppl tend to ignore small little things first and assume it is normal accounting.

But yet I have to say, so far book in very healthy way without much liabilities, just some payables.

Receivables treated as an assets sometimes can be a killing things--like LIONFIB where all receivables are actually non recoverable owing by related parties. Which in turn shld be BAD DEBTS.

Posted by NOBY > 2015-01-06 09:00 | Report Abuse

you can look at their cash conversion cycle times over a extended period to understand if there is anything fishy. But cashflow cant be judged from 2 quarters, that I can tell you. Beneish M score is good way to look at manipulation of earnings

http://www.investopedia.com/terms/b/beneishmodel.asp

LIONFIB is valued based on NNWC whereby most of their assets are stuck in receivables to related parties (some hidden within trade receivables). The serious red flag for me in LIONFIB is that major shareholder keep selling the shares even though it looked very undervalued.

Posted by paperplane > 2015-01-06 10:40 | Report Abuse

haha, Noby, I agree few quarters of cashflow can't judge much. LionFIB case directors selling, and with high receivables, should raise the red flag. Yet even I have discount all receivables and inventories by 50% when I calculate, still get burnt. But I think it is totally undervalued now, assuming some amounts are recoverable, it will be extra bonus.

For IQ Group case, the directors also selling.....

Posted by NOBY > 2015-01-06 14:13 | Report Abuse

NNWC companies are easy to analyze but definitely hard to make money in short term. Sometimes we must take partial profit on any spike in price to reduce the opportunity cost.

Posted by kcchongnz > 2015-01-06 14:51 | Report Abuse

For personal investment, it often pays to invert, always invert. Instead of thinking of making big money in the short term, think about not losing big. Don't chase hypes and fads; Don't borrow to speculate. Margin financing for speculation is definitely a no no, and no. I can guess there are numerous margin calls the last few months for some people. It is definite.

"Head I win, tails I don't lose much".

Think of where is the investment pendulum now. I think that is the proper mind set of Noby.

Posted by NOBY > 2015-01-06 14:58 | Report Abuse

KC, agree with you. Again thanks for reminder on margin financing.. But for NNNWC types, I would only buy if there is a good chance value can be unlocked. If it pays a good dividend, I dont mind holding for long term but if tht is absent, I would trade it in the short term to realize some gain. Tk a look at Kuchai and PMcorp as examples.. its hard to make money here without some trading

Posted by kcchongnz > 2015-01-06 15:23 | Report Abuse

Noby,

You may think that I nag nag and nag. But I think my most useful contribution to i3investor, if any, will be this thingy.

http://klse.i3investor.com/blogs/kcchongnz/44344.jsp
http://klse.i3investor.com/blogs/kcchongnz/61822.jsp

Posted by sunztzhe > 2015-01-06 15:45 | Report Abuse

Hi guys,
Just passing though...I am very light on stocks at the moment...good FA stocks in bad times also depreciates albeit at slower rate than the the non FA types...perhaps the good FA stocks with biz minded shareholders, good management, good biz model, decent DY and with good cash flow management are worth holding onto... I will not be too gung ho about stocks now no matter how good it looks as KLSE is already in downtrend and will downtrend for a while longer...it had been on uptrend for the past 6 years and this downtrend will last for a while.....so chill out , relax and do a bit of homework...make yourself fitter for the next turnaround...there's still a lot of time though...

Posted by paperplane > 2015-01-06 16:37 | Report Abuse

what would you advise now?? Kc Chong

Posted by NOBY > 2015-01-06 17:01 | Report Abuse

Posted by kcchongnz > Jan 6, 2015 03:23 PM | Report Abuse

Noby,

You may think that I nag nag and nag. But I think my most useful contribution to i3investor, if any, will be this thingy.

http://klse.i3investor.com/blogs/kcchongnz/44344.jsp
http://klse.i3investor.com/blogs/kcchongnz/61822.jsp

KC, not at all. I see it as good reminder to keep me in check. I may have acquired a lot of FA knowledge from you but very far from your level in terms of investment psychology. This is something I cannot learn from books.

Posted by Genw > 2015-04-25 21:38 | Report Abuse

Please forgive me for posing this stupid question.

I came across explanation of ROIC formula from oldschoolvalue.com by Jae Jun. His formula on Invested capital is quite similar to yours, but he minus Excess cash at the end of his formula. Is Excess cash important?

And his formula on excess cash is so complicated that eventually he changed the formula of Invested capital to,
Invested Capital = Total Equity +Short Term Debt + Capital Lease Obligations + Long Term Debt

Can you shed some light on this? I was reading your article on ELSOFT evaluation by using ROIC, i am hoping that i can use the indicator as you did and yield the same value

Posted by johnny cash > 2015-04-25 21:48 | Report Abuse

Ringgit becoming strong,,time to sell export related counters

Posted by tjhldg > 2015-04-25 22:26 | Report Abuse

Yupsss :)

Posted by sunztzhe > 2015-04-25 22:48 | Report Abuse

Buy and/or keep improving cyclical, turnaround, growth stocks and/or fundamental stocks with good biz model that empowers the company to continue to deliver increasing positive earnings year on year or stocks that is under valued versus its intrinsic worth.

Sell deteriorating cyclical, down trending, negative growth stocks and stocks with deteriorating fundamentals that results in losses,decreasing profits, decreasing earnings per share, deteriorating ROE, ROIC or stocks that exceed their intrinsic worth or sell existing stocks in your portfolio when you have discovered better undervalue stocks versus its intrinsic worth or stocks with better top and bottom line growth potential.

Posted by kcchongnz > 2015-04-26 02:46 | Report Abuse

Posted by Genw > Apr 25, 2015 09:38 PM | Report Abuse

Please forgive me for posing this stupid question.

I came across explanation of ROIC formula from oldschoolvalue.com by Jae Jun. His formula on Invested capital is quite similar to yours, but he minus Excess cash at the end of his formula. Is Excess cash important?

And his formula on excess cash is so complicated that eventually he changed the formula of Invested capital to,
Invested Capital = Total Equity +Short Term Debt + Capital Lease Obligations + Long Term Debt

Can you shed some light on this? I was reading your article on ELSOFT evaluation by using ROIC, i am hoping that i can use the indicator as you did and yield the same value


Financial statement analysis is an art. Many people do it differently. My opinion is Jae Jun has changed his concept that it makes a hell of difference for companies with a lot of excess cash, cash which they do not need for the core operations and can be distributed to shareholders without affecting its operations. It is also not appropriate for companies having other investments. It makes the ROIC much lower and not reflecting the true picture.

Risk and return for a business and non-operating asset say cash are totally different and shouldn't be lumped together.

I tend to use his previous concept.

Posted by sunztzhe > 2015-04-26 14:39 | Report Abuse

TOTAL ASSETS= SHAREHOLDERS FUNDS + TOTAL LIABILITIES

ASSETS= Current Assets + Non Current Assets
SHAREHOLDER FUNDS= IPO Capital + Rights issue + Private Placement + Retained Earnings(Accumulated Losses)
TOTAL LIABILITIES= Current Liabilities + Non Current Liabilities

ROA is a good performance measurement of how well any company manage its total assets. Of course the ROA figures varies across industry types and varies amongst companies in similar industry type

Any company on a going concern basis will utilize its total assets to grow its top and bottom line over time and in that process generate sufficient profits, free cash flows to distribute as dividends to its shareholders. A long term shareholder would like the company management to grow its assets in the future years and consequently generate increasing ROA, increasing free cash flows with above average dividends payout to its shareholders arising from competent management of its Total Assets. If the company management has run out of ideas to generate better returns on the excess cash above the weighted average cost of its capital then the excess cash is best returned to its shareholders.

Posted by Genw > 2015-12-27 12:36 | Report Abuse

thanks for your reply kcchongnz. may i know what's the formual of Excess Cash that you are using?

Posted by kcchongnz > 2015-12-27 17:08 | Report Abuse

Posted by Genw > Dec 27, 2015 12:36 PM | Report Abuse
thanks for your reply kcchongnz. may i know what's the formual of Excess Cash that you are using?

Look at its non-cash net working capital. If positive, you may take the whole lot of cash in the balance sheet as excess cash. Or you may reserve a couple of percentage as part of the working capital requirement.

It is really an art.

Posted by koonbee9 > 2015-12-27 17:17 | Report Abuse

Very boring article...all is theory only..i wonder its work or not...not interested to read further

Posted by koonbee9 > 2015-12-27 17:32 | Report Abuse

I prefer to read icon8888 and uncle Kyy article...both article benefit me

Posted by kcchongnz > 2015-12-27 17:45 | Report Abuse

Posted by koonbee9 > Dec 27, 2015 05:32 PM | Report Abuse

I prefer to read icon8888 and uncle Kyy article...both article benefit me

I like icon8888's articles too. the other one don't forget is YiStock

Posted by bluefun > 2015-12-27 17:54 | Report Abuse

I like to read KC Chong article, to learn the fundamental analysis, thank you KC, merry Christmas and happy new year

:)

Posted by koonbee9 > 2015-12-27 17:57 | Report Abuse

Seems like icon8888 sifu is the best

Posted by kcchongnz > 2015-12-27 18:07 | Report Abuse

Posted by bluefun > Dec 27, 2015 05:54 PM | Report Abuse
I like to read KC Chong article, to learn the fundamental analysis, thank you KC, merry Christmas and happy new year

bluefun, you make my day. Not many like my articles as you can see.

Posted by koonbee9 > 2015-12-27 18:09 | Report Abuse

Kcchongz sifu, frankly, your article very boring...u may consider put some cartoon to make it interesting

Posted by koonbee9 > 2015-12-27 18:10 | Report Abuse

Because all your article same pattern and same format..and the font all same size...hopes you dont mind i gv you some feedback ya

Posted by koonbee9 > 2015-12-27 18:11 | Report Abuse

Like u go to a concert and the singer sing with same tone for all the songs...very boring...hopes u understand what am i talking

Posted by kcchongnz > 2015-12-27 18:17 | Report Abuse

koonbee9,

Thanks for your feedback.i will consider your suggestions, definitely.

Posted by bluefun > 2015-12-27 18:19 | Report Abuse

Hi KC, I am glad that I can make your day, thanks for always share v us your fundamental article, opinion and overview.

Through your article, I have learn what is CY, what is EBIT multiple.

And I realize that FCF is very important for a company to run a business and maintain their operation.

I always use it as my valuation and calculation before I invest into one stock

Although I am seldom comment to your article, but most of your article I got read and I am appreciated your effort to share v us.

You are great, my sifu, KC Chong

:)

Posted by Desa20201956 > 2015-12-27 18:47 | Report Abuse

Thanks for the education.
This web site is incomplete without you.

But I must say every ratio starts from the audited accounts....and you already know what they can do to audited accounts.

Other gurus put emphasis on other non quantifiable things such as.....business model, management, ....shareholder strengths, relationships, concept stocks. Etc etc....and this year earnings, latest q earnings. PE ratio.

Posted by Desa20201956 > 2015-12-27 19:10 | Report Abuse

At the end of the day, big money is made by buying small cap stocks with low PE and gets re rated because of increasing quarterly profits.

Ratios hardly help in this respect.....but insider information and deep understanding of the company and its environment will do the trick.

Even simple rations have too many factors behind it to use to predict the future.