Posted by bracoli > 2015-11-20 20:53 | Report Abuse

thanks kc

Posted by little_snake > 2015-11-20 22:49 | Report Abuse

so complex... try to make ur investment simple lol

Posted by pisanggoreng > 2015-11-20 23:02 | Report Abuse

A wonderful write up. I have learnt a new thing. Before this I indeed have problem dealing with negative cash flow. Now the cloud is cleared. Thank sifu KC.


your generous sharing of knowledge will definitely further enhance most of us here the skill of stock valuation


May I ask you some questions?

1.About Intrinsic Value, should we adjust the figure after every quarter result?

2. In Graham formula, the no growth PE is 8.5 and 2 times est growth rate, may I know what is the rationale behind these figures ( 8.5 & 2). Are these figures suitable to apply in malaysian market.

THANKS

Posted by NOBY > 2015-11-20 23:10 | Report Abuse

KC, why is minority interest 0 ?

Posted by xyxy8 > 2015-11-20 23:15 | Report Abuse

Have no fear, kc. VS Industries has good revenue, a lot of fixed assets and a good product. Do you know that a lot of people hate statistics, bec you can use it to twist things in two different ways. You will not lose if you buy vs at the current price. Just don't wait too long to jump in. My sincere advice.

Posted by pisanggoreng > 2015-11-20 23:39 | Report Abuse

Why it should be a fear, it is not a buy call or sell call

I had bought vs before, I had made enough. Now it is your turn to make more if you think you can.

Sharing of view and knowledge should not bring fear

When you told us a lot of people hate statistic, we do not fear, but I am very interested and it seem new to me how your statistics can be twisted and turned into different stories. That is really interesting, I want to learn also. My teacher had never taught me, can you teach me? Please.

Posted by saschl > 2015-11-20 23:39 | Report Abuse

Well....anyway, will buy some more....

Posted by pisanggoreng > 2015-11-20 23:48 | Report Abuse

Go ahead. Nobody stop you.

Posted by kcchongnz > 2015-11-21 03:24 | Report Abuse

Posted by NOBY > Nov 20, 2015 11:10 PM | Report Abuse
KC, why is minority interest 0 ?


I have a dilemma in the minority interest here.

Book wise V.S has substantial MI. If I deduct the MI from the total value of the company to get the value attributed to equity shareholders of V.S, the balance is much less.

However, in aggregate, the subsidiary companies are making losses and not contributing to the value of the company for the time being.

Hence I took an arbitrary decision to exclude that.

Posted by kcchongnz > 2015-11-21 03:53 | Report Abuse

Posted by pisanggoreng > Nov 20, 2015 11:02 PM | Report Abuse
May I ask you some questions?
1.About Intrinsic Value, should we adjust the figure after every quarter result?
2. In Graham formula, the no growth PE is 8.5 and 2 times est growth rate, may I know what is the rationale behind these figures ( 8.5 & 2). Are these figures suitable to apply in malaysian market.

1) A company's fundamentals generally doesn't change so fast as per quarter, or two quarters, or even a year. Besides there is this seasonality; one quarter earnings and cash flow may be better or worse, Hari Raya sometimes occurs in the first quarter, sometimes in the second quarter, third quarter or the fourth quarter. Managers sometimes have the discretion of recognizing revenue at different period. They can even do smothering of those numbers.

Having said that, it doesn't mean one shouldn't watch over those quarterly numbers.

2) Graham's growth formula was made during his time, when growth is generally very slow.

A no-growth factor in the formula of 8.5 means a reasonable PE of 8.5, assuming long-term corporate bond rate at 4.4%. Flip it over, you get an earnings yield, E/P of about 12%, something Graham willing to pay for a company without any growth. If you use a growth assumption of say 30% for a very fast growth company, the "fair" PE is 68.5! Are you willing to pay a fast growth company with a PE of 68.5? Not me, not even haf of it.

Growth in the formula is the expected growth for the next 5-7 years. It is a forecast number. But how sure are you is the future growth prediction?

Research has shown that analysts have been poor in growth prediction, very poor indeed, not to mention retail investors like ourselves.

Hence I rarely use this to value a stock although I have shared this formula before. I do use it sometimes to check if the market price is reasonable, like doing a reverse engineering.

Posted by kcchongnz > 2015-11-21 12:07 | Report Abuse

Posted by little_snake > Nov 20, 2015 10:49 PM | Report Abuse
so complex... try to make ur investment simple lol

It is really not that "complex" if one cares to digest it. It is just that like other thing, when someone sees something which is unfamiliar will straightaway dismisses it as "complex".

It is just an intrinsic value estimation using discount cash flows, a method which should be commonly used by analysts, but not most analysts.

The difference is rather than simply project a growth, it uses a growth based on fundamental determinants, from how growth is driven by return on capital, and reinvestment needs arising from that.

No need to "lol". I didn't say you must use this. It is like an additional wedge club in a good golfer's bag.

There are many golfers, already very good golfers themselves, who like to improve their games with some additional special wedges, like this one below.

Posted by pisanggoreng > Nov 20, 2015 11:02 PM | Report Abuse
A wonderful write up. I have learnt a new thing. Before this I indeed have problem dealing with negative cash flow. Now the cloud is cleared. Thank sifu KC.
your generous sharing of knowledge will definitely further enhance most of us here the skill of stock valuation

Posted by pingdan > 2015-11-21 14:44 | Report Abuse

Kcchongnz: Nice article. Anyway the dividend paid during the year (12+6+3+3 *1,163,000/5)= RM55.8mil. In my opinion, it should be included in the calculating in free cash flow. If included the dividend, the FCF is positve rm2.9mil during the year. Also, one of the reason VS priced so high due to they generous in paying dividend. Just for discussion. I would like to heard your opinion on this . I not holding this shares neither. Thanks you

Posted by kcchongnz > 2015-11-21 15:06 | Report Abuse

Posted by pingdan > Nov 21, 2015 02:44 PM | Report Abuse
Kcchongnz: Nice article. Anyway the dividend paid during the year (12+6+3+3 *1,163,000/5)= RM55.8mil. In my opinion, it should be included in the calculating in free cash flow. If included the dividend, the FCF is positve rm2.9mil during the year. Also, one of the reason VS priced so high due to they generous in paying dividend. Just for discussion. I would like to heard your opinion on this . I not holding this shares neither. Thanks you


Pingdan, good question.

FCF is what is left from the net inflow of cash in the ordinary business less capital expenses. Dividend is paid normally from FCF. You can refer to some of my articles explaining what FCF is in the links below.

http://klse.i3investor.com/blogs/kcchongnz/48173.jsp

http://klse.i3investor.com/blogs/kcchongnz/76694.jsp

http://klse.i3investor.com/blogs/kcchongnz/78262.jsp

http://klse.i3investor.com/blogs/kcchongnz/83903.jsp

Alternatively, you can refer to some explanations here;

http://www.investopedia.com/terms/f/freecashflow.asp

So it is not right to add dividend to calculate FCF. It would amount to double counting for a company with actual FCF and pay dividends.

For company which doesn't have FCF like V.S, dividend is not paid through FCF, as there is no FCF. Dividends for V.S shareholders came from additional borrowings, money from private placements and ESOS which you can see from increase number of shares, additional long-term and short-term loans.

Is that really good when a company borrows to pay dividends? Or increase number of shares and hence diluting earnings per share with the private placements at a discount?

Tell me your opinion.

Posted by pingdan > 2015-11-21 15:15 | Report Abuse

Thx kcchongnz. Thanks you for your answer. Appreciate it!! Keep it up to write more article!!

Posted by sunztzhe > 2015-11-22 08:55 | Report Abuse

For simplicity, I will use this WACC of 10% as a discount rate for getting its intrinsic value for the firm.
--------------------------------------------------------------------
kcchong,
WACC= Cost of Equity + Cost of Debt
Please do advise what is the actual WACC based on your computation of the company's actual cost of equity and its actual cost of debt and the risk premium that you had decided over the actual WACC. Thank you.

Posted by kcchongnz > 2015-11-22 11:46 | Report Abuse

kcchong,
WACC= Cost of Equity + Cost of Debt
Please do advise what is the actual WACC based on your computation of the company's actual cost of equity and its actual cost of debt and the risk premium that you had decided over the actual WACC. Thank you.

WACC is the "weighted" average cost of capital. There is no "actual" cost of equity, only estimated. Same for cost of debts, it should be the market value which is also estimated, and hence no such thing as "actual" WACC.


WACC = E/V * Re + D/V * Rd * (1-Tc)

E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
Tc = corporate tax rate

E 1846784
D 412208
V 2258992
Tc 24.0%
Re 12%
Rd 5%
WACC 10.5%

Posted by sunztzhe > 2015-11-22 21:47 | Report Abuse

Calculating cost of Debt is straightforward. Is 12% a realistic expectation of the Cost of equity for VS shareholders in the industry it competes in??

Posted by kcchongnz > 2015-11-23 11:46 | Report Abuse

Posted by sunztzhe > Nov 22, 2015 09:47 PM | Report Abuse
Calculating cost of Debt is straightforward. Is 12% a realistic expectation of the Cost of equity for VS shareholders in the industry it competes in??


Re is also tied to the health of the balance sheet, the stability of its earnings and cash flows. So what is your expectation?

To me Re of 12% for V.S is a little too liberal.

Posted by sunztzhe > 2015-11-23 15:23 | Report Abuse

Re is estimating the Cost of Equity Capital and the estimate may vary. Lets assume for discussion sake...there are three companies A, B and C with the same Debt Equity structure in percentage and absolute value amount. Assume that they are in the same industry.

Lets say company A had patchy earnings record and somehow due to management effort consistently deliver increasing EPS in the future, what Re would u yourself as an investor impute a value for Re?

Imagine Company B had erratic earnings in the past and continue to deliver erratic earnings in the future.....what Re would u impute for company B?

Imagine company C used to deliver consistent results in the past but somehow deliver erratic earnings currently and also in the future years........what Re would u impute for company C?

Please advise your decision criteria and the input factors and weightage ascribed to these factors(if applicable) in imputing the Re value for the 3 companies above.

Thank you.

Posted by kcchongnz > 2015-11-23 18:06 | Report Abuse

sunzthe,

Investment is more of an art than a science. There are a lot of judgment involved; the more experience one has, the better the judgment.

There will be no end to this discussion, and no point to carry on.

Posted by thec16 > 2015-11-23 20:27 | Report Abuse

Dear kcchongnz,
Can you show me how to calculate the market value of the firm's debt for VS?
I only know how to get the book value.
Thanks

Posted by Money Face > 2015-11-23 20:34 | Report Abuse

When the price was RM 4, Sifu said expensive, now the price is RM 8, Sifu is still saying price is overvalued by 34% using his sophisticated formula. You can continue to write your article and the price will continue to rise.

Posted by pisanggoreng > 2015-11-23 21:06 | Report Abuse

isn't it good for you, every time he writes, every time KYY and his gang will push up the price to prove him wrong

share trading is a rich man game, please learn.

KC had said so many times already, " a good company is not necessary a good bet ( investment)"

pisang goreng says : a debt ridden company like VS , may not be a bad bet .

in share market, sometimes common sense does not work

why ?

because there are SHARKS, CROCODILE, IKAN BILIS, LEMBU, BEAR , ETC.

I have a lawyer friend, he doesn't know a shit thing about share valuation, but made ten of million just follow his tycoon friends to buy and sell

how you explain?

Posted by pisanggoreng > 2015-11-23 21:55 | Report Abuse

sunztzhe,

I am not an accountant, I am a roadside selling pisang goreng man.

your question has indeed aroused my interest and curiosity to learn. I immediately checked the investopedia just now, then ,frankly speaking , i feel that you question is not appropriate to ask.

why?

what is re? re , according to investopedia, it is the cost of equity

what is cost of equity?

it is the expected return on their investment in the company by by the

shareholder.

so where got exact and fixed amount .

you ask me , I want 10%, you ask KC , he want 12%, you ask yourself, may

be you want 20%...........

so you see,

who can answer your question other than pisang goreng.

right?


Posted by sunztzhe > Nov 22, 2015 09:47 PM | Report Abuse

Calculating cost of Debt is straightforward. Is 12% a realistic expectation of the Cost of equity for VS shareholders in the industry it competes in??


you talk about realistic figure,

I think you come to help me sell pisang goreng.

Posted by sunztzhe > 2015-11-23 23:19 | Report Abuse

pisanggoreng,
Since u r already a roadside pisang goreng seller...You are very capable of selling pisang goreng by now...and making good money and have the spare cash to invest..syabas to u...hahahaha

Every investor has different expectation of their expected return from their equity investment say in a listed company called "Pisang Goreng."

The ONLY objective in using DCF Model on "Pisang Goreng" company is to determine the Intrinsic Value of "Pisang Goreng" and ascertain whether the market price is at a premium or discount to its Intrinsic value(IV). If the market price is at discount below IV, the Value investor would consider buying. Likewise if market price is above the IV, the Value investor will wait for a significant price correction below its IV.

So different investor has different expectation of Re and that implies that the Intrinsic valuation of "Pisang Goreng" company varies from "OVERVALUATION" to "UNDERVALUATION" in the eyes of different investors with different Re at any given point in time.

Herein lies the question.."WHAT IS THE INTRINSIC WORTH OF PISANG GORENG COMPANY?"

Why do u say u want 10% for Re??

I am sure you are already aware by now that estimating a High value for Re will result in lower NPV whereas estimating a lower value of Re will result in higher IV. If u want very extremely high Re..u will not buy any stocks...hahahaha

So what is a realistic expectation of the ART OF ESTIMATING a value for Re for "PISANG GORENG" Company.

Besides estimating an artful "Re value" for "PISANG GORENG" company, u MUST FIRST need to estimate a fair estimate of the future cash flows of "PISANG GORENG" as well...

Estimating a fair IV would assist u to make the "BUY" or "SELL" decision if u really want to be a Value Investor or "WARREN BUFFET WANNABE"

Posted by pisanggoreng > 2015-11-24 00:02 | Report Abuse

Why make it so complicated?

Choose the figures that you are comfortable with will settle all problem

Isn't it more realistic.

Posted by pisanggoreng > 2015-11-24 00:22 | Report Abuse

Oh..... ya.

You talk about iv

Tell you frankly

I myself dare not believe 100% the value I have calculated is real

But it does help me to decide whether it is a good buy or not and plan my selling strategy

Posted by pisanggoreng > 2015-11-24 00:29 | Report Abuse

I am a pisang goreng man not a joke

I learnt all the tricks and treat from KC

If you are also one of his followers

Then you should know even the sharpest analyst also

can go wrong in their assumption

Posted by sunztzhe > 2015-11-24 00:29 | Report Abuse

Make it less complicated...just focus on the EPS..if E
PS keep on improving..hold...if EPS starts to deteriorate..sell

Posted by pisanggoreng > 2015-11-24 00:37 | Report Abuse

That is KYY strategy

Definitely not sufficient for a value investor who have a little extra from KC

Posted by sunztzhe > 2015-11-24 00:43 | Report Abuse

Assets of any company will generate a return n postive returns will contribute to retained earnings n pay dividends or give bonus issue ...so earnings growth will drive share price up..likewise earnings decrease will drive share price down..so focus on Earnings per share..and simple PE multiple...of course others may choose IV, EV/EBITA etc etc..but i keep it simple ..just EPS, What PE multiple..what is forward EPS n forward PE multiple based on current price

Posted by pisanggoreng > 2015-11-24 00:46 | Report Abuse

Selling pisang goreng is hard earned money

I am more careful

So I learnt and apply a little more constraints to safe guard my money

Posted by sunztzhe > 2015-11-24 00:48 | Report Abuse

Of course for a highly leverage company one must also use Return on Total assets as another benchmark on performance besides EPS and PE multiple

Posted by sunztzhe > 2015-11-24 00:54 | Report Abuse

So please share what you have learnt to safeguard your hard earned money?

Posted by xyxy8 > 2015-11-24 01:08 | Report Abuse

Posted by pisanggoreng > Nov 24, 2015 12:37 AM |

That is KYY strategy
Definitely not sufficient for a value investor who have a little extra from KC
................................................................

This clever pisanggoreng forgot that KYY has earned millions from the stock market and has donated fifty million to USM just recently. Please tell us how much you have made in the stock market.

Posted by kcchongnz > 2015-11-24 02:36 | Report Abuse

Posted by thec16 > Nov 23, 2015 08:27 PM | Report Abuse
Dear kcchongnz,
Can you show me how to calculate the market value of the firm's debt for VS?
I only know how to get the book value.
Thanks


Generally it is good just to use the book value of debts as it won't be much different when the stock is selling at a price not that big difference from its book value, and the debt is not that high.

If you want to calculate the market value, here is one piece I have written before.

http://klse.i3investor.com/blogs/kcchongnz/71783.jsp

Posted by kcchongnz > 2015-11-24 02:54 | Report Abuse

Posted by xyxy8 > Nov 24, 2015 01:08 AM | Report Abuse

This clever pisanggoreng forgot that KYY has earned millions from the stock market and has donated fifty million to USM just recently. Please tell us how much you have made in the stock market.


Making a lot of money from the stock market is nothing great. It doesn't contribute anything positive to the society. In speculating in the stock market, everybody wants to make big money. But there are people who make, and there are people who lose. Think about who normally make, and who are those who lose in this game, and what normally they do in order to ensure that I win, you lose.

Go ahead to worship those who make big money from the stock market if you wish, and follow whatever strategies they use to think of making big money too, but don't have to ridicule people sharing their strategies which are different.

Donating money for any good cause is definitely a great thing to do. Everyone will respect that. But that is an entirely different topic.

Posted by xyxy8 > 2015-11-24 06:29 | Report Abuse

By kc "...Go ahead to worship those who make big money from the stock market if you wish, and follow whatever strategies they use to think of making big money too, but don't have to ridicule people sharing their strategies which are different."

..... Precisely kc. Never ridicule people with different strategies, and especially those who make posts here with great sincerity to help investors just like you I must add.

Posted by pisanggoreng > 2015-11-24 09:14 | Report Abuse

xyxy8,

I like KYY because he is willing to share part of his profit with the poor and needy.
I like KYY because he is brave to speak up the wrong doings of the government.
I believe him because he is a successful businessman
I praise him because all the stocks he bought go sky high
I curse him because when quietly cabut I still gong-gong hold




Posted by xyxy8 > Nov 24, 2015 01:08 AM | Report Abuse

This clever pisanggoreng forgot that KYY has earned millions from the stock market and has donated fifty million to USM just recently. Please tell us how much you have made in the stock market.

Posted by mitras > 2015-11-24 11:35 | Report Abuse

i dah makan pisang goreng...tak begitu sedap
tak puas hati makan "gong gong" pisang goreng
di mana boleh makan pisang goreng yg " tak gong gong"

hahahaha huhuhuhuhuhu

Posted by shinado > 2015-11-24 22:23 | Report Abuse

kcchongnz, great article. Here's an idea (don't shoot me if it's stupid): How about replacing non existent FCF with owner's earnings? Although I have yet to try it, let me know what you think about it. Thanks.

Posted by kcchongnz > 2015-11-25 06:35 | Report Abuse

Posted by shinado > Nov 24, 2015 10:23 PM | Report Abuse
kcchongnz, great article. Here's an idea (don't shoot me if it's stupid): How about replacing non existent FCF with owner's earnings? Although I have yet to try it, let me know what you think about it. Thanks.

Haha, shinado, you are humorous. Have i branded anyone "stupid" before? You are a good investor yourself.

If you read what Buffett's owner earnings below, it seems to me there is little difference with the estimation of FCF in this article.

What do you think?


“If we think through these questions, we can gain some insights about what may be called “owner earnings.” These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N’s items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c) . However, businessesfollowing the LIFO inventory method usually do not require additional working capital if unit volume does not change.)” – 1986 Berkshire letter

Posted by shinado > 2015-11-25 10:09 | Report Abuse

From my understanding of FCF, it calculates the amount of 'free cash' generated from a company's own cash from operation after deducting CAPEX.

Whereas for owner's earnings, it has to include depreciation, amortization into calculation while deducting changes to working capital & CAPEX.

I think for a company that needs a lot of working capital, FCF will be low or non-existent.

There is actually an interesting discussion on whether to use FCF or Owner's earnings in DCF: http://www.oldschoolvalue.com/forum/discussion/970/when-to-use-fcf-vs-owner-earnings-in-dcf-analysis/p1

Posted by pisanggoreng > 2015-11-26 08:22 | Report Abuse

shinado,

can you please kindly give an example to illustrate you point

KC had already used FCF to calculate IV and it is about 1.3

if you can kindly present the calculation using owner's earning then we can see the different, why there is a difference and which one is more reliable to use to reflects on the strength of the company

thanks.

Posted by shinado > 2015-11-26 14:07 | Report Abuse

pisanggoreng, I would love to but I have yet to learn about DCF.

I do not know if using FCF or owner's earnings is more accurate to calculate IV using DCF method. But I do know in general FCF is used in calculating DCF.

I am merely seeking kcchongnz's view on substituting FCF with OE since VS's FCF is virtually non-existent as we can see from his examples above.

Cheers.

Posted by chhngtan > 2016-02-09 11:09 | Report Abuse

Hi KC. thanks for your great article. I like it. I found there is a minor mistake in table 2 of NOPAT. table 2's NOPAT can't be the same as table 3 NOPAT because table 3 FYs are descending, whereas table 2 FYs are in ascending. thus the RR in table 2 might not accurate. thanks for your great job.

Posted by kcchongnz > 2016-02-09 15:50 | Report Abuse

Posted by chhngtan > Feb 9, 2016 11:09 AM | Report Abuse
Hi KC. thanks for your great article. I like it. I found there is a minor mistake in table 2 of NOPAT. table 2's NOPAT can't be the same as table 3 NOPAT because table 3 FYs are descending, whereas table 2 FYs are in ascending. thus the RR in table 2 might not accurate. thanks for your great job.

Thanks for the correction. In Table 2, I have mistakenly pasted in the future NOPAT, instead of the historical NOPAT.

I have corrected it.

This means the average reinvestment rate in the past 6 years is 183%,and not 82%. I will just maintain this RR. Somehow and eventually, the management has to keep the RR below NOPAT and do it quick. Otherwise the company has to continuously find some cash somewhere to keep its doors open.

Posted by chhngtan > 2016-02-11 11:00 | Report Abuse

Thanks KC. You did a great job. I feel all your articles are very helpful. Keep it up. Wishing you to have a prosperous year and be healthy. Gong Xi Fa Chai.

Posted by Jester > 2016-02-11 11:03 | Report Abuse

Great article again KC. Happy CNY. Gong Xi Fa Chai!

I feel like during this difficult times, your stocks will be perform better than average people out there.

Posted by kcchongnz > 2016-02-11 11:40 | Report Abuse

Posted by chhngtan > Feb 11, 2016 11:00 AM | Report Abuse

Thanks KC. You did a great job. I feel all your articles are very helpful. Keep it up. Wishing you to have a prosperous year and be healthy. Gong Xi Fa Chai.


Posted by Jester > Feb 11, 2016 11:03 AM | Report Abuse
Great article again KC. Happy CNY. Gong Xi Fa Chai!
I feel like during this difficult times, your stocks will be perform better than average people out there.


Thank you very much. These make my day. Whether my stocks will perform better doesn't matter, yet to know. But sharing (of knowledge, whether you agree or not) to me is better.