2 people like this.

61 comment(s). Last comment by kcchongnz 2015-06-14 18:09

4444

1,806 posts

Posted by 4444 > 2015-06-11 09:44 | Report Abuse

What about Tenaga? It is also a high debt stock. Is it really bad? Wonder why no blue chip buy call from KC? No money to buy blue chip after losing so much money in CW and warrant as he claim can bring high return?

I agree with you YiStock. Actually not everyone qualify to have bank loan. The bank must assess you whether you can pay. Perhaps KC has poor bank record so he is unable to get loan so to him high debt stocks are not good.

YiStock

1,982 posts

Posted by YiStock > 2015-06-11 10:14 | Report Abuse

Noby,
Net Income 4.52865 3.99

Can you show your calculation to derive above figures. Thank you

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 10:25 | Report Abuse

Posted by bracoli > Jun 10, 2015 10:59 PM | Report Abuse
Kc, dont u wanna take the opportunity to focus on export stocks?


Exchange rate changes very fast. Today ringgit may be low, but nobody knows in a few months time. You can read all the academic research that nobody, including the most famous economists have correctly and consistently predicted all these macro thingy.

Next don't think all export companies will do well. Some will even do worse. For example, if they have foreign bank loans, and have to buy materials and equipment from overseas etc.

Moreover, it is a good practice to hedge foreign exchange if you do business overseas. In that case, change of exchange rates will not affect profit.

One more thing, almost every business is cyclic. Trees don't go to sky. If you buy something which has already gone up, the chance of mean reverting is very high in investing.

NOBY

937 posts

Posted by NOBY > 2015-06-11 10:32 | Report Abuse

I did some calculations on this. Please correct me if I m wrong. Lets assume the following about Company A

in RM Mils
Market Cap 100
Total debts 100
Debt interest 6%
Finance costs 6
No. shares 100

Lets say the company does a private placement to institutional investors for up 10% of share capital at 10% discount from above market cap. Lets then assume that it uses this private placement proceeds to pare down its debts and reduce finance costs.

After private placement
in RM mils
PP proceeds 9
No.shares 110
Total debts 91
Finance costs 5.46


Then lets project the impact on its bottom line from this exercise assuming we start from the same EBIT base.

in mils With PP Without PP
EBIT 10 10
Interest 5.46 6
Tax rate 25% 25%
Net Income 3.405 3
No shares 110 100
EPS 0.030955 0.03

My calculations show that EPS with PP actually increase by about 3% despite the dilution thanks to the savings from interest payments. The EPS improvement is even higher if the company was servicing higher interest debt or coupon payments. Maybe I m making an incorrect assumption somewhere, but cost of equity of 10% is what shareholders demand but in actual fact, cost of debt is the actual tangible cost to the company that affects its bottom line.. any comment ?

NOBY

937 posts

Posted by NOBY > 2015-06-11 10:33 | Report Abuse

Posted by YiStock > Jun 11, 2015 10:14 AM | Report Abuse

Noby,
Net Income 4.52865 3.99

Can you show your calculation to derive above figures. Thank you

Its a mistake. Have corrected it. But conclusion remains the same

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 10:37 | Report Abuse

Posted by ks55 > Jun 11, 2015 09:03 AM | Report Abuse

FA does not just look into the good aspects of a company, it should look at the bottom line of a 'bad' or not so good company to determine the price 'to buy' or 'to exit'.
Even for good company like Public Bank, what is the 'good price' to buy? To me definitely not at 20 ringgit in the current set of investment environment.

Probably kcchong want to give comment on my view above?



Price is not value. "Price is what you pay, value is what you get."

I won't pay RM1m of a new Honda Accord, but I will pay RM10000 for a Proton Saga.

In the short term, price often diverge from value, it is a voting machine. In the long term, price will converge to value, it is a weighing machine.

YiStock

1,982 posts

Posted by YiStock > 2015-06-11 10:38 | Report Abuse

Noby, your calculation has made lot of sense to me of why the private placement always at 10%..Perhaps that serves at threshold to balance between the cost of debt. Thank you

YiStock

1,982 posts

Posted by YiStock > 2015-06-11 10:47 | Report Abuse

Noby, i think that really free up lot of FCF which hopefully will benefit the EPS via better business expansion.

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 11:01 | Report Abuse

Noby, interesting analysis of yours.

My comment is you have included the saving of interest in your calculation, but your calculation has not factored in the cost of the extra equity.

Your calculation shows the interesting thing about increase in EPS, it will attract investors looking at that metric of P ratio.

But how do you consider the value of a company? Is it speculating on what the market will pay for it at a PE ratio?

Or do you consider the value of a company is like what John Burr Williams in his “The theory of investment value” that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate.

NOBY

937 posts

Posted by NOBY > 2015-06-11 11:03 | Report Abuse

Or do you consider the value of a company is like what John Burr Williams in his “The theory of investment value” that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate.

KC, can you elaborate with some numbers ? Wont the interest savings boil down to higher free cashflow as well ? Interest expense is a real cash expense. Unless what you are suggesting is that by reducing debt and diluting shareholdings, the discount rate is higher ?

NOBY

937 posts

Posted by NOBY > 2015-06-11 11:09 | Report Abuse

OK. Maybe you are saying that the WACC will get higher with the private placement. Agree on that. But on the flip side, if you have zero debts, the theoratical WACC is 10%. So in the end, if you wouldnt assign a lower WACC to a highly indebted company anyway. So the WACC makes no sense to me.

WACC = D/(D+E) * Kd (1-Tax rate) + E / (D+E) * Ke 


in RM mil No PP With PP No debts
Debt 100 91 0
Equity 100 110 100
Tax rate 0.25 0.25 0.25
Cost of debt 0.06 0.06 0.06
Cost of equity 0.1 0.1 0.1

WACC 7.25% 7.51% 10.00%

YiStock

1,982 posts

Posted by YiStock > 2015-06-11 11:09 | Report Abuse

Mr KC, If the growth rate can support the high PE, and with much more cash flow in, the value of company will increase too?

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 11:10 | Report Abuse

FCF is higher, yes, but discount rate is higher because equity investor demand higher rate than cost of debt.

After that you divide by a larger no. of shares. thus gives a lower intrinsic value per share.

I don't have numbers with me right now. But I guess that will be the result.

This is the basic essence of corporate finance for capital structure.

NOBY

937 posts

Posted by NOBY > 2015-06-11 11:15 | Report Abuse

Posted by kcchongnz > Jun 11, 2015 11:10 AM | Report Abuse

FCF is higher, yes, but discount rate is higher because equity investor demand higher rate than cost of debt.

After that you divide by a larger no. of shares. thus gives a lower intrinsic value per share.

I don't have numbers with me right now. But I guess that will be the result.

This is the basic essence of corporate finance for capital structure.


The above is only true if you assigned a lower discount rate to a highly indebted company compared to a net cash company purely based on theoretical WACC . If you assumed the same discount rate in your analysis (ie 10% with or without PP) and CFFO=EPS, even with the increased shareholdings, you will come up with the same conclusion as me I think.

YiStock

1,982 posts

Posted by YiStock > 2015-06-11 11:16 | Report Abuse

Mr KC, can we use higher growth rate to offset the effect from higher required rate?

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 11:17 | Report Abuse

Let us don't go too much into academic. Just ponder about this.

You are going to a business, a very good business that you will earn say 30% return a year. You need RM1 capital but you have only 500,000. Do you

1) issues shares to me with the same price so that you will share your profit equally with me, or
2) go to the bank to borrow and pay say 5% interest?

YiStock

1,982 posts

Posted by YiStock > 2015-06-11 11:20 | Report Abuse

I will sure go for (2). But if the bank see my debt level is high and refuses to loan to me, then i will go for private placement. Agree?

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 11:23 | Report Abuse

YiStock, That is also my answer. I agree with you. when you can't get loan, go to get ,money somewhere as you are positive about the future of your business.

another question. If yours is a public listed co. why don't you issue right issues to your existing shareholders, instead you go for private placement with a 10% discount?

If you business will yield high future return, why not let your existing shareholders enjoy it?

NOBY

937 posts

Posted by NOBY > 2015-06-11 11:23 | Report Abuse

KC, in your example above, I would go for the bank loan because my ROE is way above my cost of capitals. But not all companies generate 30% a year. If you do the math, you will find that the bigger the proportion of finance costs to EBIT, the more sensible approach is to go with private placements rather than debt.

in mils With PP Without PP
EBIT 30 30
Interest 5.46 6
Tax rate 0.25 0.25
Net Income 18.405 18
No shares 110 100
EPS 0.167318182 0.18

As you can see from above calculations with the same earlier assumption, when the EBIT is high, it doesnt make much sense to do a PP.

YiStock

1,982 posts

Posted by YiStock > 2015-06-11 11:27 | Report Abuse

Mr KC, have thought of that but the rights issue will enlarged share based too, and with much higher discount, isn't it?

YiStock

1,982 posts

Posted by YiStock > 2015-06-11 11:31 | Report Abuse

Furthermore, if the purpose is to reduce debt and save on interest expenses, loan or private placement may be sufficient. Investors will tends to response positively to rights issue if it is for biz expansion or acquisition. Can i interpret like that? thank you

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 11:34 | Report Abuse

The higher the ebit,the better it is to use leverage as that amplifies return, if you still can get more loan. If the ebit is very low, interest cost burdens you, and even can go into losses. But wonder if it make sense to expand your business with low ebit.

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 11:38 | Report Abuse

Posted by YiStock > Jun 11, 2015 11:27 AM | Report Abuse

Mr KC, have thought of that but the rights issue will enlarged share based too, and with much higher discount, isn't it?


The cost of equity is theoretically the same whether it is private investors or existing investors.

If the business future is good,why not let existing shareholder maintain their stakes in the company with rights issues, rather dilute it with outsider investors through private placement?

YiStock

1,982 posts

Posted by YiStock > 2015-06-11 11:39 | Report Abuse

Yes, got your point. Thank you

NOBY

937 posts

Posted by NOBY > 2015-06-11 11:42 | Report Abuse

Posted by kcchongnz > Jun 11, 2015 11:34 AM | Report Abuse

The higher the ebit,the better it is to use leverage as that amplifies return, if you still can get more loan. If the ebit is very low, interest cost burdens you, and even can go into losses. But wonder if it make sense to expand your business with low ebit.

Yes agree. My point was that private placement proceeds was being used to par down debts for a highly indebted company, not to expand the business.

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 11:49 | Report Abuse

Posted by NOBY > Jun 11, 2015 11:42 AM | Report Abuse

Posted by kcchongnz > Jun 11, 2015 11:34 AM | Report Abuse

The higher the ebit,the better it is to use leverage as that amplifies return, if you still can get more loan. If the ebit is very low, interest cost burdens you, and even can go into losses. But wonder if it make sense to expand your business with low ebit.

Yes agree. My point was that private placement proceeds was being used to par down debts for a highly indebted company, not to expand the business.


I still wonder the company needs to get private placement to pay down debt if the company has stable earnings and cash flows to meet its interest payment obligations, unless the debt is so high that there are some covenants on their debts, or the risk of bankruptcy is high,or they sense that they may face some headwinds in the future.

Private placement dilute the interest of the existing shareholders.

well,maybe it is good also not to have so much debt.

Posted by goreng_goreng > 2015-06-11 12:14 | Report Abuse

ty good article indeed

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 12:38 | Report Abuse

Posted by ks55 > Jun 11, 2015 12:12 PM | Report Abuse

kcchong -- I fully agree with you. Value is one thing, price you pay for is another. So there arises the following scenario:-

3. London Biscuit is a very lousy stock (Lemon if you want to put it).Every year asking money to top up its cash flow deficiency. Book value for NTA 2.03. Let say intrinsic value is 1.00 ringgit.To buy at 60 sen amounts to buying with a 40% margin of safety. Downside also very limited as it was already record low. I bought before at 57 sen, not because of its fundamental, but the price of 57 sen to get a ringgit worth of stuff.....

I would like to have your view on intrinsic value vs fair price vs price overpaid/underpaid. My purpose is not to miss any good investment opportunity just because the stock is not fundamentally good but present a value buy. Also live up to the title of your article above "Don’t want to lose big money in Bursa? kcchongnz". TQVM

How do you get the intrinsic value of London Biscuits as RM1.00? If it is so, it is a good buy at 60 sen, no question at all.

But NTA is not intrinsic value as it depends on what makes up that intrinsic value.

I can't use any method, no matter how much I wish to, to come up with what the IV of London Biscuits is, unless I just base on what the market is willing to pay for it, in other words, using the greater fool theory.

Posted by lookingaround > 2015-06-11 12:54 | Report Abuse

Ways to get other people's money in a business

1. Bank loan -> bank is the boss
2. Rights/Warrants -> current bosses have choice to maintain status
3. Private placement -> outsiders are the new bosses, but why not current bosses?
4. Treasury shares -> company sure is very strategy thinking

Posted by plenitude > 2015-06-11 14:17 | Report Abuse

Anyone here bought Plenitude? How much is your return?

vinext

117 posts

Posted by vinext > 2015-06-11 15:01 | Report Abuse

FCF, remember these 3 words if u wanna get rich in the stock mkt- warren buffett

Posted by goreng_goreng > 2015-06-11 15:50 | Report Abuse

btw kc, is that a picture of woman pee standing? lol

Icon8888

19,022 posts

Posted by Icon8888 > 2015-06-11 15:56 | Report Abuse

I almost spit out my coffee when I read goreng_goreng..

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 16:10 | Report Abuse

Posted by ks55 > Jun 11, 2015 02:49 PM | Report Abuse
There must be some how to assess company's IV, in what ever method -- peers comparison, revaluation of plant/machinery/land/goodwill on brand etc..etc....
NTA according to audited account is one of the easiest way, just pay slight attention to potential creative accounting and credibility of its Directors.

ks55, let me clarify why I said "I can't use any method, no matter how much I wish to, to come up with what the IV of London Biscuits is, unless I just base on what the market is willing to pay for it, in other words, using the greater fool theory." I think is appropriate for this article here since we talk about "Don't want to lose money in Bursa".

It has no FCF. Not only that, it sucks huge amount of cash each year. It needs to keep on issuing shares to people naive enough to believe that it will turn around, and borrow from banks just to keep its door open. So without FCF for so many years, I don't know how it is going to generate FCF in the future, the same management, the same modus operandi. It still spend huge amount of capex every year, last year was another huge amount of 41m, with cash flow from operation of only 12m, despite management saying they were going to curb this. so without any hint that it can generate FCF in the future, I can’t value it, doing so will result in a negative intrinsic value.

Next I can attempt to value it basing on its liquidation value. Its net asset is 345m, and with 164m share, Net asset backing per share is 2.11. Out of this 345m, 110m is receivables, 27m inventories, and a whopping 572m is property plant and equipment, and 13m intangible assets. These made up a total of 712m. How much is this worth during a liquidation sale? If 50% of this assets are impaired, or discounted in a fire sale, it has nothing left. Its value left is zero for a liquidation if it can’t get more than 50% from those assets. Is 50% asset impairment too much for London Biscuits? I highly don’t think so.

So the only valuation method to give London Biscuit a value is based on the greater fool’s theory; the comparable ratios such as PE, P/S, P/Book with other comparable companies. Is it comparable to Hup Seng, Apollo and other profitable and high cash flow companies?

Knowing how to spot these red flags is really useful in investing. If you avoid losing, half the battle is won.

Probability

13,781 posts

Posted by Probability > 2015-06-11 16:25 | Report Abuse

goreng...women want everything equal rights ma...

NOBY

937 posts

Posted by NOBY > 2015-06-11 16:52 | Report Abuse

Posted by kcchongnz > Jun 11, 2015 11:49 AM | Report Abuse

Posted by NOBY > Jun 11, 2015 11:42 AM | Report Abuse

Posted by kcchongnz > Jun 11, 2015 11:34 AM | Report Abuse

The higher the ebit,the better it is to use leverage as that amplifies return, if you still can get more loan. If the ebit is very low, interest cost burdens you, and even can go into losses. But wonder if it make sense to expand your business with low ebit.

Yes agree. My point was that private placement proceeds was being used to par down debts for a highly indebted company, not to expand the business.


I still wonder the company needs to get private placement to pay down debt if the company has stable earnings and cash flows to meet its interest payment obligations, unless the debt is so high that there are some covenants on their debts, or the risk of bankruptcy is high,or they sense that they may face some headwinds in the future.

Private placement dilute the interest of the existing shareholders.

well,maybe it is good also not to have so much debt.


Me: I think that s the whole idea of getting listed. To tap the equity market for funds. You may view it negatively due the dilution impact, but for me as long as the cashflow improvement outweights the dilution impact, isnt it a plus ? In some cases a company which is turning around or holding a high debt interest with respect to EBIT, a private placement to reduce finance costs makes perfect sense based on my calculations due to the interest savings which translates to higher free cashflows per share. Yes you mentioned about cost of equity being higher but what does that translate to in terms of DCF valuation ? WACC equation penalizes companies with low debt since cost of equity is higher than cost of debt anyway.

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 17:15 | Report Abuse

Noby,

WACC = D/(D+E) * Kd (1-Tax rate) + E / (D+E) * Ke

Consider a good company with stable earnings and cash flow, and healthy balance sheet. Cost of additional debt it can get is low, and Ke won’t change much with that additional debt. WACC is lower with the additional debt. especially because of the tax shield.

If an already high debt company with poor earnings and cash flow, Ke is higher, and Kd is also higher. When this company asks for more debts from bond investors, will the additional cost of debt still stays the same. Won’t the bond investors ask for higher return? You as the common stock investors, will you require the same Ke as before, or now you think that because the company has additional debt, it has become more risky, and hence you require a higher Ke?

Ke and Kd are not the same for different companies of different risk profiles, and they are not static.

NOBY

937 posts

Posted by NOBY > 2015-06-11 17:25 | Report Abuse

I agree that a company with higher debts deserves a higher Ke due to the risk. In that case, if the private placements is used to par down debts, wouldnt the Ke at least stay the same as before the PP if not be better ?

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 18:17 | Report Abuse

Posted by NOBY > Jun 10, 2015 09:39 PM | Report Abuse
KC, when a company needs cash. Is it better to go for private placements or take on new debt assumimg tht it doesnt yet hv the free cashflows to fund a capex etc.

Noby, lets get back to your original question above and not get loss in some theoretical argument. My answer is if your listed company can get good return say 15% in the future, why not borrow instead of issuing shares to other investors as the cost of borrowings is low in relation to what the return required by other investors? Moreover interest cost is tax deductible.

Unless of course your business is already highly levered and banks won’t want to lend you anymore, then go ahead and issue more shares to whoever willing to subscribe. People will subscribe at a certain price if they think the future is good and return more than what they require, otherwise, they also won’t subscribe.

NOBY

937 posts

Posted by NOBY > 2015-06-11 18:50 | Report Abuse

Yes. Agreed on that.

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-11 19:19 | Report Abuse

Posted by ks55 > Jun 11, 2015 04:30 PM | Report Abuse
TQVM. I have mentioned before in Lonbis thread, I bought it mostly based on TA (FA provide the basis). It is definitely not an investment grade stock. I have since exited and made 35% within 3 months.


ks55, you see you happened to made 35% from London Biscuits. It could be because you were good in some other thing like human psychology, like when you know they are giving "free" warrants and you anticipated that others would chase this share because of something given free, of which in actual case it didn't add any value to the company, but maybe a chance for those big players getting those free warrants and unloaded into the market.

Or maybe you were lucky. You know for one success story in speculating, there are scores of failures. Why do I say that? In speculating, it is a zero sum game. Whom do you think will win? The syndicates, insiders, major shareholders, investment bankers, or you? No prize for the right answer.

I am an investor, and I don't hope to be the successful one in the speculation.

cola

51 posts

Posted by cola > 2015-06-12 11:40 | Report Abuse

besides paying down debts, private placement can be used to attract strategic partners for future business growths......

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-12 16:24 | Report Abuse

Posted by vinext > Jun 11, 2015 03:01 PM | Report Abuse
FCF, remember these 3 words if u wanna get rich in the stock mkt- warren buffett

True true true. He also said:

“Most companies define “record” earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding. Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital.” – Warren Buffett 2007 letter to shareholders

necro

4,738 posts

Posted by necro > 2015-06-12 20:02 | Report Abuse

Kc i need your opinion on CCMDBIO...tq in advance

Posted by Ng Wen Qing > 2015-06-14 09:27 | Report Abuse

Is SHL a good stock?

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-14 10:48 | Report Abuse

Posted by necro > Jun 12, 2015 08:02 PM | Report Abuse

Kc i need your opinion on CCMDBIO...tq in advance


Don't know much about this stock. By looking at its annual results, and at the present price of 3.70, or PE of 13.5, healthy balance sheet and good cash flow,I doubt you can lose big in this stock.

necro

4,738 posts

Posted by necro > 2015-06-14 14:53 | Report Abuse

There were right issue that quote ex date 18.6.15 where money raise to take over its pharmaceutical parents company...ratio 1:1 that will increase share pool by 100%...since 70% of share hold by its parents subsidary which is CCM MARKETING...
Can u calculate the FV,IV & PV post right issue...

kcchongnz

6,681 posts

Posted by kcchongnz > 2015-06-14 18:09 | Report Abuse

Posted by Ng Wen Qing > Jun 14, 2015 09:27 AM | Report Abuse
Is SHL a good stock?

Don't know much of SHL too, but a look at its recent financial results, I doubt you can lose big in this company. Healthy balance sheet. Making 43 sen per share last year, a big jump from 23 sen the previous year. At RM3.32, PE is low at 7.7. PE is just a quick and dirty check. Must look closely why this jump and make sure a swallow doesn't makes the summer.

Make sure its property development projects in good locations and sell well as it has a lot of money tied up there in inventories and property development cost.

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