Hi Uncle,
I want to share with you some investment stuff here.
Company A is listed in Bursa Malaysia
Background
The company is involved in the business of importing and wholesaling of original equipment manufacturer (OEM) parts and replacement tractor parts of leading Italian brands commonly used for Caterpillar and Komatsu equipment. By 1988, Company A had become a reputable dealer of spare parts for tractor and heavy equipment.
Last year, Company A has signed a joint venture with China-based Shandong Shantui Machinery Ltd, which is the third largest producer of bulldozers in the world, marking its entry into China. The company is expecting bigger growth from its China operation. Currently, overseas market contributes about 48% to revenue, with Malaysia making up the balance. The level of activities of the company is significantly dependent on the state of the economy and in particular the construction and timber sectors.
WHY I like this company
1. Money making business- Company A has been making profits for the last ten years, even during Asian Financial Crisis 97-98.
2. Improving dividend yields- It pays dividend of 4.5 sen (dividend return of about 4.5%) per year for past 2 years (2005-06), and 4 sen (2002-04). I expect the same dividend payment of 4.5sen for 2007. Therefore, dividend yield is 5% (0.045/0.90), still higher than Fixed Deposit of about 3.7%.
3. Prudent Management- Shares are tightly held with family holding around 52%. The company is now managed by the son of the founder, so succession plan is not a problem.
5. Cash per share of RM 0.42 – This level of cash should ensure dividend payments for the next few years are almost guaranteed.
6. Low debt ratio – Low level of debt means more able to withstand uncertainties such as recession. Company with high level of debt would suffer during bad times such as recession or economic downturn.
7. Low downside potential- a company with a value of RM1.40, being priced at RM0.90 is a steal, even if the stock continues downward, I will accumulate more. As Mohnish Pabrai said, based on his trading experiences, stock price will catch up the intrinsic value of the company in less than 18 months. Mohnish Pabrai is a value investor and his fund had outperformed 99% of the mutual funds in US, with a compounded annual return of 28% (after fees) for more than five years.
8. Margin of Safely – If the company is liquidated now, being more conservative, the liquidation value will be about RM1.40 compared to stock price of RM0.90. So, return on investment would be 55%.
Reasons of low price
1. Liquidity is a problem. The shares of the company are mostly held by institutional investors and fund management firms (about 36%) plus the family holding of 52%, therefore balance of only 12% available in the market. The stock turnover ratio is low i.e not many trades are done every day.
2. Market is not always efficient. Market hates uncertainly! If there is recession coming, people begins to unload their shareholdings, therefore lowering the stock prices. Fear causes market to become less efficient some of the times, the same applies to greed. Current market situation is a good example.
Financial data
1. Liquidity is a problem. The shares of the company are mostly held by institutional investors and fund management firms (about 36%) plus the family holding of 52%, therefore balance of only 12% available in the market. The stock turnover ratio is low i.e not many trades are done every day.
2. Market is not always efficient. Market hates uncertainly! If there is recession coming, people begins to unload their shareholdings, therefore lowering the stock prices. Fear causes market to become less efficient some of the times, the same applies to greed. Current market situation is a good example.
Financial data
Formulas/ calculations
Book Value or Net Tangible Asset = (SE– Intangible assets)/ No. of shares outstanding
Market Cap = the price the market gives you = Price*No of shares outstanding
= RM 0.90 * 87.2 million
= RM 78. 5 million
Share Price 21/1/2008= RM 0.90
Debt to equity = total borrowings / shareholders’ equity
Company with low debt to equity is preferable because it is more resilient during bad time. Generally, company with a lot of debts will suffer during bad time or recession.
Return on Equity (ROE) is the return to shareholders. This is a very important financial indicator that every investor should consider when investing. A high ROE is preferable.
Book Value = Shareholders equity (SE) = owners’ earnings = the value of the company
Conclusion
Company A appears UNDERVALUED to me. At a price of RM0.90, I can buy this company with a value of RM2.03 in 2006. Price is what I pay, value is what I get. Currently, the value goes up to RM2.11, therefore the margin of safety has increased slightly. Also we can see from the table, the price of the company (i.e market cap) seems little changed, even though the sales and profits has been increasing tremendously!! This is one of the valuation methods that I used to evaluate stocks. One thing you have to know is that there are only a few companies like company A being priced at such a low price with good fundamental. And it’s what I like being a value investor.
Quotes from Warren Buffett- the world’s greatest investor
1. “The market is there to serve us, not to instruct us”.
2. “Look at market fluctuations as your friends rather than your enemy; profit from folly rather than participate in it.”
3. “Price is what you pay, value is what you get”
4. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1
5. Time is the friend of the wonderful business, the enemy of the mediocre
6. Be fearful when others are greedy and be greedy when others are fearful
7. If a business does well, the stock eventually follows.
8. Risk comes from not knowing what you’re doing.
9. Only when the tide goes out do you discover who’s been swimming naked.
10. It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.
And one of my favorites:
“When there is nothing to do, do nothing.”
Regards.
21/1/2008
___________________________________________________
Comments: Book Value or Net Tangible Asset = (SE– Intangible assets)/ No. of shares outstanding
Market Cap = the price the market gives you = Price*No of shares outstanding
= RM 0.90 * 87.2 million
= RM 78. 5 million
Share Price 21/1/2008= RM 0.90
Debt to equity = total borrowings / shareholders’ equity
Company with low debt to equity is preferable because it is more resilient during bad time. Generally, company with a lot of debts will suffer during bad time or recession.
Return on Equity (ROE) is the return to shareholders. This is a very important financial indicator that every investor should consider when investing. A high ROE is preferable.
Book Value = Shareholders equity (SE) = owners’ earnings = the value of the company
Conclusion
Company A appears UNDERVALUED to me. At a price of RM0.90, I can buy this company with a value of RM2.03 in 2006. Price is what I pay, value is what I get. Currently, the value goes up to RM2.11, therefore the margin of safety has increased slightly. Also we can see from the table, the price of the company (i.e market cap) seems little changed, even though the sales and profits has been increasing tremendously!! This is one of the valuation methods that I used to evaluate stocks. One thing you have to know is that there are only a few companies like company A being priced at such a low price with good fundamental. And it’s what I like being a value investor.
Quotes from Warren Buffett- the world’s greatest investor
1. “The market is there to serve us, not to instruct us”.
2. “Look at market fluctuations as your friends rather than your enemy; profit from folly rather than participate in it.”
3. “Price is what you pay, value is what you get”
4. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1
5. Time is the friend of the wonderful business, the enemy of the mediocre
6. Be fearful when others are greedy and be greedy when others are fearful
7. If a business does well, the stock eventually follows.
8. Risk comes from not knowing what you’re doing.
9. Only when the tide goes out do you discover who’s been swimming naked.
10. It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.
And one of my favorites:
“When there is nothing to do, do nothing.”
Regards.
21/1/2008
___________________________________________________
One of the potent shortcomings in this letter is I tend to emphasize on the strong points and ignore all the weak points of the company. (Remind me of Charlie Munger who said, “All I want to know is where I’m going to die, so I’ll never go there.)
I was wrong on the dividend forecasted here. Company A announced a dividend of 2.5sen only.
The share price has recovered from a low of RM0.80 to RM0.92 now. Has the stock price reach its bottom? Who knows? I once heard that you just have to take care of the downside, the upside will take care of itself.
Patient is the key for value investing.
3 comments:
What's the name of the company ? I would like to get more details.
I seldom dabble in KLSE nowadays. Just curious, what company that you highlighted?
Hi foowin and kris,
This article is my view on how to adopt the principles of value investing in selecting stock to purchase. According to Benjamin Graham, a stock is considered undervalued if it is selling at less than 2/3 of its Net Current Asset. Company A has fulfilled this criteria (UNDERVALUED).
This is only one of many ways to value a company. I personally prefer stocks with good track records before even look deep into it. Think of a stock as a piece of business. As Graham said, "Investment is most intelligent when it is most businesslike".
Regarding the stock name, I can only tell it sounds like a lingerie brand. :)
Disclaimer: This is not a recommendation to BUY/SELL. Always invest at your own risk.
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