Posted by shareinvestor88 > 2016-08-12 23:32 | Report Abuse

APM was trading at 150 at its lowest point

Posted by Ricky Yeo > 2016-08-13 08:03 | Report Abuse

Shaun, you are right bondholders required return is fixed and lower than stockholders, and higher required return means lower equity value.

And no, equity doesnt become less valuable if a company is loaded with debts. Debt is a form of financial engineering and capital structure of a company does not affect valuation. Simple hypothesis, if APM is to borrow $700 mil today, equal to its market cap, and has to pay 5.5% interest or $39 mil a year, how much would you value APM? Zero?

And how about this, they borrow $700 mil and distribute all in special dividend, how much is APM worth again? Since you say loading debt makes equity worthless, maybe APM would have turn negative, but shareholders will get $3.55 in special dividend.

Then you are worry now, previously APM was net cash 250 mil, now after borrowing 700 mil, they are net debt 450 mil. Can APM possibly service $25 mil (450 mil x 5.5%) ? Yes, everything on the balance sheet that gives them the earning power of $129 mil a year still there. So would APM shares go to $0.00 if they borrow 700 mil?

Posted by Ricky Yeo > 2016-08-13 10:28 | Report Abuse

Exactly if loan doesnt create value, how would piling up debt decrease value? Im still eager for you to tell me how much APM equity should be if they borrow 700mil. Because it will be negative base on your deduction. The whole idea is for every stock, sits a safe bond within. How does one determine if a bond as safe? That has been presented on top. If apm can issue that value of bond safely, in this case 455mil, it sounds bizzare to me investors would consider current valuantion as 'unsafe'.

Posted by Ricky Yeo > 2016-08-13 11:40 | Report Abuse

Look, your hyperbolic 5 bil would not even make equity worth less than bond because 1. No one sane enough would approve such a debt against what apm has and 2. Bond would not come into existence in the first place.

So ure saying now you think the minimum value is less than 700m, after apm issue 700mil, it is worth 650mil, or 50mil reduction?

Posted by Ricky Yeo > 2016-08-13 15:57 | Report Abuse

Well Ben Graham wrote "An equity share representing the entire business cannot be less safe and less valuable than a bond having a claim to only a part thereof.” And you're not the first to disagree with him. Let me know next time if you find such scenario exist, ill be very interested to study

Posted by Jay > 2016-08-13 19:10 | Report Abuse

high loan levels cannot be assumed to create value. it's very possible to destruct value when company overspend, make wrong investment decisions etc. So when the return from the investments (from loans) is lower than the interest expenses, that's when it destroys value. One of the reason behind merger acquisition arbitrage (where people long acquireee, short acquirer) is also because acquirer usually overpays and will leverage up so the pressure is on the acquirer to deliver returns that can cover the new loan expenses and generate incremental value

Posted by Jay > 2016-08-13 19:15 | Report Abuse

and may I understand how you get the bond value of 455m? since this is used in your final valuation. and not to forget many academic theories assume perfect market but in reality it's not. APM may be able to raise 100m with 5.5%. but the next 100m maybe market will ask for 6% so on so forth. so it may not be as straightforward as your valuation implies. I have not seen the ben graham's quote before or anything like it. but sometimes the context in which the quote was written could be important, maybe u can share with us the topic he was discussing when he said that?

Posted by Ricky Yeo > 2016-08-13 19:42 | Report Abuse

You can get more here http://fundooprofessor.blogspot.com.au/2005/11/one-valuation-rule-two-paradoxes.html

Posted by Jay > 2016-08-13 22:36 | Report Abuse

I think the statement in itself is misleading. in ben graham's context, the 'equity share' is referring to debt free company. so if the debt free company load itself up with debt, it's essentially the same underlying biz so there should not be any distinction between the two. this is very academic because there are a few assumptions 1) perfect market with perfect information. in reality, for highly levered company people probably prefer the bond over equity due to its security and priority claims 2) leverage recapitalisation. in ben graham's example, he essentially assumes that the debt free company takes on debts and distribute to shareholders. in reality, even if company takes on debts, they will probably keep most of it. theoretically it belongs to shareholders but they have no access over it. and when you have more cash than you need, cash slippage tend to occur

Posted by Jay > 2016-08-13 23:03 | Report Abuse

I do understand the point you are trying to prove but market is often irrational. APM is relatively strong in cash generation compared to its lower earnings. using DCF, P/B or dividend model will probably also points to the company being undervalued. however PE wise it's expensive as earnings remain depressed. like many bursa companies, it is a value trap waiting for catalyst, which will be when the auto industry recovers. important question is when?

Posted by Ricky Yeo > 2016-08-14 03:28 | Report Abuse

oh Jay, I dont ask when. No money can be made when I know when.

Posted by Ricky Yeo > 2016-08-14 03:50 | Report Abuse

Besides it is cyclical industry, you don't enter when PE is low, thats at the peak not trough

Posted by Jay > 2016-08-15 13:01 | Report Abuse

of course u don't need to know if you are ok to leave your capital lying there, but I'm just suggesting. monitoring auto industry figures, upcoming launch schedules, PMI, IPI etc. these could give you a hint. but of course buy and patiently hold is another option. just my 2 cents

Posted by Heavenexile > 2016-09-15 21:46 | Report Abuse

Bollocks, the level of debt a company can take is independent of the equity value of the company. It does not represent a floor nor a ceiling level of a company's equity value

Posted by Ricky Yeo > 2016-09-16 07:07 | Report Abuse

of course how much debt a company can take, theoretically, is independent of EV, as long someone is willing to lent their money (where's customer yacht?). The article talks about 'safety', not the truth of floor or ceiling

Posted by Heavenexile > 2016-09-17 23:14 | Report Abuse

I suppose you mean floor when u talk about safety in the context of your write up