tag:blogger.com,1999:blog-77630227472351031562024-03-19T07:39:22.253+08:00Investing For Value-ACCELERATE YOUR LEARNING CURVE-zer0zer0http://www.blogger.com/profile/08811311481894661474noreply@blogger.comBlogger176125tag:blogger.com,1999:blog-7763022747235103156.post-8175407050808111202024-03-17T08:37:00.005+08:002024-03-17T08:43:28.570+08:00Is MBSB an investment opportunity?<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Value Investing Case Study 49-1. A fundamental analysis of MBSB to see whether it is an investment opportunity. There are better opportunities elsewhere for a fresh investor. But for someone who is already invested in MBSB with a low investment cost, it is better to hold. </span></div>
<div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDFV_8KXD4TOVsdJ-9-e0l2qE7jpS3WIHb6M_zHnU0qASrpRp-QPAwfD9fQ8AA7I0YbndSfWKGVb-7P8paYy6SJrzBQSJqb4EsG0DG-KC6ZVxQo7er4aEVNxRh_XczIfB5xIC6GDoGREHkPGyMMUknxf27fVIOSdxSdAnCBI9pn0GnqCpuKkKKJHUV8fI/s333/Pic%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is MBSB an investment opportunity?" border="0" data-original-height="333" data-original-width="255" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDFV_8KXD4TOVsdJ-9-e0l2qE7jpS3WIHb6M_zHnU0qASrpRp-QPAwfD9fQ8AA7I0YbndSfWKGVb-7P8paYy6SJrzBQSJqb4EsG0DG-KC6ZVxQo7er4aEVNxRh_XczIfB5xIC6GDoGREHkPGyMMUknxf27fVIOSdxSdAnCBI9pn0GnqCpuKkKKJHUV8fI/s16000/Pic%201-min.png" title="Is MBSB an investment opportunity?" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">I first invested in MBSB in 2015 at RM 1.53 per share. Over the next few years, I continued to build up my investment whenever the share price dropped below my estimate of its intrinsic value.</div><div style="text-align: justify;"><div><br /></div><div>My average purchase price is today RM 0.74 per share compared to its tangible Book Value of RM 1.17 per share. MBSB ranks No 19 (from the top based on purchased cost) among the stocks in my portfolio.</div><div><br /></div><div>My current total return is about 7.8 % CAGR. Not too bad considering that the market price as of 19 Feb 2024 was RM 0.78 per share. In other words, there is still room for prices to go higher when compared to the tangible Book Value.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/oSrMmIKXv50" width="320" youtube-src-id="oSrMmIKXv50"></iframe></div><br /><div>Given that the market price is close to my average purchase price, should I continue to build up my investment in MBSB? This of course presupposes that MBSB is not a value trap but an investment opportunity.</div><div><br /></div><div>Join me as I assess MBSB's performance and argue why it may not be an investment opportunity. </div><div><br /></div><div>Should you go and sell it if you are already an investor? Well, read my Disclaimer. </div><div><br /></div><h2>Contents</h2><div><ul><li><b>MBSB background</b></li></ul><ul><li><b>My investment in MBSB</b></li></ul><ul><li><b>MBSB performance</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Is MBSB an investment opportunity?</b></li></ul><ul><li><b>Investment thesis</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html" target="_blank">Learn more</a>.</i></div></td></tr></tbody></table></div></td></tr></tbody></table></div><div><br /></div></div><h2>MBSB background</h2><div>Malaysia Building Society Berhad (MBSB or the Group) has evolved from being the first property financier to a financial provider that offers a spectrum of innovative products and services throughout its branch network nationwide.</div><div><br /></div><div>It is a financial services pioneer with roots that can be traced back to the Federal and Colonial Building Society Limited founded in 1950. The Federal and Colonial Building Society Limited was then rebranded to Malaya Borneo Building Society Limited in 1956.</div><div><br /></div><div>In 1970, the business was transferred to the newly incorporated MBSB. MBSB was listed on the KLSE, now Bursa Malaysia on 14 March 1972. </div><div><br /></div><div>MBSB was defined as a Scheduled Institution under the repealed Banking and Financial Institution Act 1989 (BAFIA). The status of an Exempt Finance Company was granted to MBSB on 1 March 1972 by the Ministry of Finance. This allowed MBSB to undertake a financing business in the absence of a banking license.</div><div><br /></div><div>On 6 November 2017, MBSB entered into the Share Purchase Agreement with the shareholders of Asian Finance Bank Berhad (“AFB”) for the proposed acquisition by MBSB of the entire equity interest in AFB. </div><div><br /></div><div>This was for an aggregate purchase consideration of RM 645 m to be satisfied by way of cash amounting to RM 397 million and the issuance of 225 million Consideration Shares at an issue price of RM1.10 per Consideration Share.</div><div><br /></div><div>Under the aforementioned acquisition, AFB became a wholly owned subsidiary of MBSB on 7 February 2018. AFB undertook a rebranding exercise and on 2 April 2018, it changed its name to MBSB Bank Berhad.</div><div><br /></div><div>The acquisition was a defining moment for MBSB as it propelled MBSB Bank to become Malaysia's second-largest standalone Islamic bank. </div><div><br /></div><div>Subsequently, in Oct 2023, MBSB announced the acquisition of the entire equity interest of Malaysian Industrial Development Finance Berhad (MIDF) from Permodalan Nasional Berhad (PNB).</div><div><br /></div><div>The purchase consideration of RM 1.01 billion was settled by the issuance of 1.05 billion new MBSB shares at RM 0.9652 per share (Final Consideration Shares), which were allotted to PNB on 2 October 2023.</div><div><br /></div><div>Through this merger, MIDF is now a wholly-owned subsidiary of MBSB and PNB emerges as a substantial shareholder of MBSB with an equity stake of 12.78%. The Employees Provident Fund’s (EPF) shareholding in MBSB was reduced from 65.78% to 57.45%.</div><div><br /></div><div>These acquisitions have transformed MBSB from a mainly property financier to an Islamic bank. MBSB has also grown in terms of size:</div><div><ul><li>Over the past 10 years, its total assets grew from RM 38 billion in 2013 to RM 58 billion in 2023.</li></ul><ul><li>Its shareholder funds in 2023 are about 4 times that in 2013.</li></ul></div><div><br /></div><div>But bigger does not automatically mean better. For example, its total revenue in 2023 is only a bit larger than that in 2013. The PAT in 2023 of RM 391 million is smaller than that in 2013 of RM 598 million. </div><div><br /></div><h3>Journey 25</h3><div>In 2019, MBSB introduced its long-term vision to bring MBSB to the next level i.e. continued strategies and targets for the future - the Journey 25 (J25). The Bank described J25 as follows:</div><div><br /></div><div>“It sets out our plans and activities up to FY2025 to be a fully-matured Islamic Financial Institution by 2025...Under the J25, we intend to strengthen the business by going into new business streams, and frontiers and be more focused on our trade finance offerings. For operations, we aim to maintain the current level of cost-to-income ratio by managing our cost in a regimented way and process improvements which leads to efficiency….”</div><div><br /></div><div>You can see that J25 has revenue growth as well as productivity/efficiency improvement goals. Refer to Chart 1.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOH8sv4a5jRta9rw0OVRLaD7-Ec_EaDdsYM2INlzrZYbdereojk-7tLIuAVDzy-AFvMht_mGZzTHYF4RcN2n7IW3eU9Nwaq0dArGbflBtSsadxp-UX7swtFvk07RERTjWzMLJoqmXYRSWzAYxAVEYw_cgoBXU9NY_E95xidLY82v_9CZTBw3mCQR6jGHM/s601/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MBSB Chart 1: Journey 25 Aspirations" border="0" data-original-height="601" data-original-width="597" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOH8sv4a5jRta9rw0OVRLaD7-Ec_EaDdsYM2INlzrZYbdereojk-7tLIuAVDzy-AFvMht_mGZzTHYF4RcN2n7IW3eU9Nwaq0dArGbflBtSsadxp-UX7swtFvk07RERTjWzMLJoqmXYRSWzAYxAVEYw_cgoBXU9NY_E95xidLY82v_9CZTBw3mCQR6jGHM/s16000/Chart%201-min.png" title="MBSB Chart 1: Journey 25 Aspirations" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Journey 25 Aspirations</td></tr></tbody></table><div><br /></div><div><h2>My investments in MBSB</h2><div>I first bought MBSB in 2015 at RM 1.53 per share. At that juncture, it had a Book Value of RM 1.73 per share (end 2014). Its past 5 years average EPS was RM 0.31 per share.</div><div><br /></div><div>From a simple valuation perspective, the Group was trading at about a Price-earnings multiple of 5. It looked like a bargain to me from both the Asset Value and Earnings Value perspective.</div><div><br /></div><div>I have increased my investments in MBSB since then. Apart from subscribing for the excess rights in 2016, I also bought some shares in 2020 when the price was around RM 0.60 per share. Today my investments in MBSB ranked No. 19 (from the top in terms of purchase cost) in my 34-stock portfolio.</div><div><br /></div><div>In terms of total returns, this was a reasonable investment as the market price today is a bit higher than my average purchase cost. Refer to Table 1. </div><div><br /></div><div>Over the years, I have achieved a 7.8 % CAGR in the total return. Note that the average holding period is about 4.9 years due to my 2020 purchases.</div><div><br /></div><div>This is a good return compared to the interest rate I could have received by placing my money in fixed deposits with the bank. The bulk of the returns have been due to the dividends received.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitQtqK3rt9lEJqaV0bYzuYSiHhjsi1KnXt0yCZ8CFfTXJUQuFk7oUKN1FnotIWPQ30orZvUjiXngm0ACsga_8MofVVnXmqYhQcAqUfnp9A21ecVpo6awJLj89beVzIgfgQHh_lmJAk-AnuPYusAfuqeYjyqdrHjU547qdJFvU3mtvxNOwBY4cbVHs58qY/s769/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 1: My MBSB investment return" border="0" data-original-height="233" data-original-width="769" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitQtqK3rt9lEJqaV0bYzuYSiHhjsi1KnXt0yCZ8CFfTXJUQuFk7oUKN1FnotIWPQ30orZvUjiXngm0ACsga_8MofVVnXmqYhQcAqUfnp9A21ecVpo6awJLj89beVzIgfgQHh_lmJAk-AnuPYusAfuqeYjyqdrHjU547qdJFvU3mtvxNOwBY4cbVHs58qY/s16000/Table%201-min.png" title="Table 1: My MBSB investment return" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: My MBSB investment return</td></tr></tbody></table><div><br /></div><div><h2>MBSB performance</h2><div>In my <a href="https://www.i4value.asia/2024/02/is-affin-value-trap.html#more" target="_blank">Affin Bank</a> article, I compiled the performance of the Bursa Malaysia banks. Refer to Table 2. I will use these as the basis to compare MBSB's performance.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhM5AvOMzEOxRJB-4LQ7NdwPxuXzfJbzE8QAbjIjOk3VpD2at9vE2QUH_dvsr1N4Joi1gDgdIN8A_Eq9iT8p-zkH7IfRdcgD07T1SxKlPSb-l1ph3BalzEe0Q9fxhNMciimHIS_cyduUN-38nBmoJHrVOwYXbVxNXZpFpklTvhaAqjwMSsQLHc2PShGQJE/s506/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MBSB Table 2: Bursa banks" border="0" data-original-height="378" data-original-width="506" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhM5AvOMzEOxRJB-4LQ7NdwPxuXzfJbzE8QAbjIjOk3VpD2at9vE2QUH_dvsr1N4Joi1gDgdIN8A_Eq9iT8p-zkH7IfRdcgD07T1SxKlPSb-l1ph3BalzEe0Q9fxhNMciimHIS_cyduUN-38nBmoJHrVOwYXbVxNXZpFpklTvhaAqjwMSsQLHc2PShGQJE/s16000/Table%202-min.png" title="MBSB Table 2: Bursa banks" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Bursa banks</td></tr></tbody></table><div><br /></div><div><div>For details on how I compiled the sector data, refer to my Affin article. The data for the quantitative analysis of MBSB was extracted from the TIKR.com platform.</div><div><br /></div><div>In this article, I will use the terms “peer” and “sector” interchangeably to refer to the 10 Bursa banks </div><div><br /></div><div>I compared MBSB performance based on the following 4 parameters:</div><div><ul><li>Returns.</li></ul><ul><li>Efficiency.</li></ul><ul><li>Loan performance.</li></ul><ul><li>Capital adequacy.</li></ul></div><div><br /></div><h3>Returns</h3><div>I look at both the ROE and ROA. Refer to Chart 4. Both metrics are essential for assessing a bank's financial health. While ROE is more centred on shareholders' interests, ROA provides a broader view of the overall efficiency of the bank's operations. </div><div><br /></div><div>In absolute term, from 2018 to 2023, MBSB achieved an average ROE of 5.9 %. This is low compared to its cost of equity of 9.3 % (Source: Finbox 20 Feb 2024). This meant that MBSB did not create shareholders value since the acquisition of MBSB Bank. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-yfIX5Fo5bj-Xrvd62wgMoy1kOm0Cr2509DxcxT6dEIfZHcaW9sN-MwcTEtxswTX9Qhz3KW9IWsjxHeCiNcRis8hqBONoSDh2gBnyWhjtJ2p4S8CA_X8hlD4qJhgilYPLBMIDf84qaIc0ufza6cqSzTX9-Q8GD9kELjML-V0vgRjEtzwaMmTZogPzbEA/s903/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MBSB Chart 2: Returns" border="0" data-original-height="265" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-yfIX5Fo5bj-Xrvd62wgMoy1kOm0Cr2509DxcxT6dEIfZHcaW9sN-MwcTEtxswTX9Qhz3KW9IWsjxHeCiNcRis8hqBONoSDh2gBnyWhjtJ2p4S8CA_X8hlD4qJhgilYPLBMIDf84qaIc0ufza6cqSzTX9-Q8GD9kELjML-V0vgRjEtzwaMmTZogPzbEA/s16000/Chart%202-min.png" title="MBSB Chart 2: Returns" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Returns</td></tr></tbody></table><div><br /></div><div><div>MBSB performance in the first half of the past 15 years was better than the sector median performance. In the second half of the period, MBSB performance dropped to below the sector median. The main reason for this 2-period performance was the acquisition of AFB in 2018. </div><div><br /></div><div>In the context of J25, I would expect MBSB to at least match the sector median for the vision to be achieved.</div><div><br /></div><h3>Net interest margins and efficiency</h3><div>I considered 2 metrics here: </div><div><ul><li>The net interest margin (NIM) is a key determinant of a bank's overall profitability. A higher margin suggests that the bank is more efficient in earning interest income compared to its funding cost.</li></ul><ul><li>The efficiency ratio evaluates how well it manages its operating expenses relative to its revenue. The higher the ratio, the less efficient the bank.</li></ul></div><div><br /></div><div>The challenge for MBSB is that a big part of its interest income was derived from Islamic financing. The definitions of interest income, net interest income, and revenue are different from those of non-Islamic banking companies.</div><div><br /></div><div>For example, under the TIRK.com platform, a big part of MBSB’s Islamic financing activities was classified as non-interest income. </div><div><br /></div><div>Given the possible differences in the definition of interest income, we would not be comparing apples to apples when comparing the NIM of other banks. We have the same issue when it comes to the Efficiency ratio. This is defined as non-interest expenses/total revenue. In the case of MBSB, we have an issue with what constitutes revenue.</div><div><br /></div><div>TIKR defined the revenue as the interest income + non-interest income. For MBSB, the non-interest income came from Islamic financing. </div><div><ul><li>For 2022, TIKR had MBSB total revenue of RM 1.4 billion.</li></ul><ul><li>In the MBSB Annual Report, the 2022 revenue was reported as RM 2.7 billion.</li></ul></div><div><br /></div><div>Given these issues, I do not think it is appropriate to compare MBSB NIM and Efficiency ratio with the sector. Nevertheless, the trends of the NIM and Efficiency ratio can be an indication of how MBSB is achieving the Journey 65 goals. </div><div><br /></div><div>As can be seen from Chart 3, there were declining performances. The NIM over the past few years was lower than before the 2018 acquisition. We see similar trends for the Efficiency ratio where a higher % meant higher expenses relative to revenue. </div><div><br /></div><div>I would not consider MBSB's performance as good. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWEO8Si3iupqB4HwV3oiTXHY15-ki5DBp2k1EpvqX91Iw50VK2kLgMZzhnrS4esqbfA-66SMaBVNBVXXDXF4SGLTLFncavsefe1VMI4L-Ak0fZzN-vmo5OJ809xksHT7Q2MjUDaBt-pL87bTeZCvXo4d3qiX6cwIHgK30uzP7qCr5UB3LBLJW3xbHPF7I/s903/Chart%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MBSB Chart 3: Net interest margins and efficiency" border="0" data-original-height="272" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWEO8Si3iupqB4HwV3oiTXHY15-ki5DBp2k1EpvqX91Iw50VK2kLgMZzhnrS4esqbfA-66SMaBVNBVXXDXF4SGLTLFncavsefe1VMI4L-Ak0fZzN-vmo5OJ809xksHT7Q2MjUDaBt-pL87bTeZCvXo4d3qiX6cwIHgK30uzP7qCr5UB3LBLJW3xbHPF7I/s16000/Chart%203-min.png" title="MBSB Chart 3: Net interest margins and efficiency" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Net interest margins and efficiency</td></tr></tbody></table><div><br /></div><div><h3>Loan performance</h3><div>I looked at two metrics to assess how MBSB performed when it came to loans. </div><div><ul><li>Loan to deposit ratio. A higher ratio implies that the bank is relying more on loans for its operations and may have a lower liquidity buffer.</li></ul><ul><li>Non-performing loans (NPL) ratio. A higher NPL ratio suggests a larger proportion of the bank's loan portfolio is at risk of default.</li></ul></div><div><br /></div><div>Looking at Chart 4, I would conclude that while there are improving trends, </div><div><ul><li>MBSB's non-performing loan ratio was worse than the sector median. </li></ul><ul><li>It also had a higher loan deposit ratio than the sector.</li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJU8efRBzeNcPFUpEeak2xwlT2mg9VGYorPjyklrKunpmnYsAlPURbpv6HTDJpgGe-NWxSk7S2tQ1Vv1nal-OZJJNLJ47l6kQNQ__EPHtd9HJXS448ohaeOhhGuhUnfnMS0DTHXjcY0O-eh2tGe2i4PdxNg8xYhE3zUVw1nOiy7O1lzMxsyZGlIY0zhV4/s903/Chart%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MBSB Chart 4: Loan performance" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJU8efRBzeNcPFUpEeak2xwlT2mg9VGYorPjyklrKunpmnYsAlPURbpv6HTDJpgGe-NWxSk7S2tQ1Vv1nal-OZJJNLJ47l6kQNQ__EPHtd9HJXS448ohaeOhhGuhUnfnMS0DTHXjcY0O-eh2tGe2i4PdxNg8xYhE3zUVw1nOiy7O1lzMxsyZGlIY0zhV4/s16000/Chart%204-min.png" title="MBSB Chart 4: Loan performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Loan performance</td></tr></tbody></table><div><br /></div><div><div>A higher loan deposit ratio implies that a larger percentage of MBSB’s deposits are being utilized for lending purposes. Here are some implications associated with a higher ratio:</div><div><ul><li>Risk and Profitability: A higher ratio can potentially lead to higher profits through interest income from loans. But it also exposes the bank to a greater risk of loan defaults if economic conditions deteriorate.</li></ul><ul><li>Liquidity Risk: A higher ratio can indicate lower liquidity for the bank. </li></ul></div><div><br /></div><h3>Capital adequacy</h3><div>I looked at 2 ratios - Tier 1 capital adequacy ratio and total capital adequacy ratio. These measures are used to assess a bank's capital adequacy. However, they differ in the components of capital they consider. Refer to my Affin article if you want to know more about the differences between them. </div><div><br /></div><div>As MBSB was only considered a bank after the 2018 acquisition, its capital adequacy data was only available from 2018. As can be seen from Chart 5, MBSB has better ratios than the sector median for both metrics.</div></div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGBFAz6xS1f4yrFr0tFfdsbFB9laUCLfp5dg4Irjd5-T61yVjOo_6M0KhAsKX7vixj-a0iaesI7W83npDdV6SJtznASxc6RseDaIVUYW8mGf9OSFvUOT1myXHHYPYJWNYmno0ZxlfOsEygQSJyrPWp0rqrLL38u5HI0D_A39aha9-VRD-kxP2ngCM4UOY/s903/Chart%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MBSB Chart 5: Capital adequacy" border="0" data-original-height="270" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGBFAz6xS1f4yrFr0tFfdsbFB9laUCLfp5dg4Irjd5-T61yVjOo_6M0KhAsKX7vixj-a0iaesI7W83npDdV6SJtznASxc6RseDaIVUYW8mGf9OSFvUOT1myXHHYPYJWNYmno0ZxlfOsEygQSJyrPWp0rqrLL38u5HI0D_A39aha9-VRD-kxP2ngCM4UOY/s16000/Chart%205-min.png" title="MBSB Chart 5: Capital adequacy" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Capital adequacy</td></tr></tbody></table><div><br /></div><div><h3>Summary of MBSB performance</h3><div>Based on the above, I would not rate MBSB's performance as fantastic. </div><div><ul><li>Its average ROE post-2018 acquisition was lower than its cost of equity. It did not create shareholders value.</li></ul><ul><li>There was hardly any revenue growth over the past 10 years.</li></ul><ul><li>MBSB returns were lower than the sector median. </li></ul><ul><li>There were no improving trends in its NIM and Efficiency ratio.</li></ul><ul><li>It had a higher loan deposit ratio and NPL than the sector.</li></ul><ul><li>On the positive side, it had better capital adequacy ratios than the sector. </li></ul></div><div><br /></div><h3>Did it meet its strategic goals?</h3><div>In the context of J25 goals, </div><div><ul><li>There is no improving ROE trend.</li></ul><ul><li>The lack of improvement in the Efficiency ratio implies that its cost-income ratio (CIR) goal is not met by 2023.</li></ul><ul><li>The 2023 revenue is lower than that in 2019 when MBSB unveiled the J25 vision.</li></ul></div><div><br /></div><div>Of course, we are still in 2023 and there are another 2 more years to go. But it looks very challenging.</div><div><br /></div><div>The Group reported the following in its 2022 Annual Report:</div><div><br /></div><div>“Our Journey 25 Roadmap (J25) represents our long-term business strategy to realize MBSB Bank’s vision of becoming a mature Islamic financial institution by 2025… In 2023, we plan to dive into the following focus areas which are aligned to our strategy…” Refer to Chart 6.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvZ9Rd5ORrmgPsPpO0HqBDlwLENHqnY-i1GssbujPCxY2ehnr_YXwlHz3qecF1RpJd0r7m7-6N3d9fJjRdWS_RbF1E0T3I5TsG3TnoIzYVGtaT9VEhYmof4ctAkTnbLr5L7kBEXvz3oRx3k9tLz4hyxDZRtfyjDMsubo3BLZzoTbh76hw1jKb_GziNF3c/s564/Chart%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 6: MBSB 2023 Plans" border="0" data-original-height="519" data-original-width="564" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvZ9Rd5ORrmgPsPpO0HqBDlwLENHqnY-i1GssbujPCxY2ehnr_YXwlHz3qecF1RpJd0r7m7-6N3d9fJjRdWS_RbF1E0T3I5TsG3TnoIzYVGtaT9VEhYmof4ctAkTnbLr5L7kBEXvz3oRx3k9tLz4hyxDZRtfyjDMsubo3BLZzoTbh76hw1jKb_GziNF3c/s16000/Chart%206-min.png" title="Chart 6: MBSB 2023 Plans" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: MBSB 2023 Plans</td></tr></tbody></table><div><br /></div><div><div>I look forward to MBSB reporting progress on these plans. </div><div><br /></div><div>Reading in between the lines, I would say that there has not been very significant achievement under J25. If there were, I am sure that MBSB would have shouted about them in the Annual Report. I hope to be proven wrong.</div><div><br /></div><h2>Valuation</h2><div>In my Affin article, I compared the values of the various banks based on the following:</div><div><ul><li>Earnings value (EV) derived from 3 DCF methods – dividends, notional dividends, and residual income.</li></ul><ul><li>Asset value (AV) based on its tangible book value.</li></ul></div><div><br /></div><div>For details of the valuation, refer to the Affin article. Table 3 summarizes the margins of safety for the Bursa banks.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiv-GbUHdOLU2RSoe3FtembjCih_8Tu5pnnRiZk3ErgjS1lO3yMDUUcln0lGfq_WYD_tK_L5okg3YIQEHhS5k-A7ysERZPnsSaJGiqBnyxKTiGe1a7Xa5y68tXFAKiKlr6jk2yMb85jHrNV9_JHBZ7iRPQrMXviXEJ1u9hGWQuJ1xeWDymrYuWFko2bD4o/s506/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MBSB Table 3: Margins of safety" border="0" data-original-height="349" data-original-width="506" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiv-GbUHdOLU2RSoe3FtembjCih_8Tu5pnnRiZk3ErgjS1lO3yMDUUcln0lGfq_WYD_tK_L5okg3YIQEHhS5k-A7ysERZPnsSaJGiqBnyxKTiGe1a7Xa5y68tXFAKiKlr6jk2yMb85jHrNV9_JHBZ7iRPQrMXviXEJ1u9hGWQuJ1xeWDymrYuWFko2bD4o/s16000/Table%203-min.png" title="MBSB Table 3: Margins of safety" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Margins of safety</td></tr></tbody></table><div><br /></div><div><div>I valued MBSB in the same manner. The main difference between MBSB and the Bursa banks was the period used in deriving the average values.</div><div><ul><li>In the case of the Bursa banks, the average was based on 2009 to 2023.</li></ul><ul><li>In the case of MBSB, the average was based on 2018 to 2023. This was because of the 2017 acquisition that transformed MBSB into a bank. </li></ul></div><div><br /></div><div>The Earnings Value of MBSB was estimated to be RM 0.50 per share compared to its tangible Book Value of RM 1.17 per share. Refer to Table 4 for the valuation details.</div><div><br /></div><div>With the market price of RM 0.78 per share (19 Feb 2024), you can see that there is no margin of safety based on the Earnings Value. But there is more than a 30% margin of safety based on the Asset Value. </div><div><br /></div><div>In the context of the margin of safety, MBSB is similar to most of the other Bursa banks as shown in Table 3. Most of them have margins of safety from the Asset Value rather than the Earnings Value.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhsIwbBI0UUEUpfx1H-1LiJbuAUZZ8N5vdMyxt44ZGUT1hX0RrzgyCy8uefzDYkCPQsMZ3dPw0mc7z9r4RJpBgCRvujJEyikzE7uch_xQoYm-LHa4FxfGVxpCuUWiv-v8WafD_NlxPrB7eEruY6kgzVhHLiCYdnrXxr7RCcN8-QJr-p3COmVpDlbLLs34w/s591/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MBSB Table 4: Valuation of MBSB" border="0" data-original-height="508" data-original-width="591" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhsIwbBI0UUEUpfx1H-1LiJbuAUZZ8N5vdMyxt44ZGUT1hX0RrzgyCy8uefzDYkCPQsMZ3dPw0mc7z9r4RJpBgCRvujJEyikzE7uch_xQoYm-LHa4FxfGVxpCuUWiv-v8WafD_NlxPrB7eEruY6kgzVhHLiCYdnrXxr7RCcN8-QJr-p3COmVpDlbLLs34w/s16000/Table%204-min.png" title="MBSB Table 4: Valuation of MBSB" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: Valuation of MBSB</td></tr></tbody></table><div><br /></div><div><br /></div><div><div style="text-align: left;"><div style="text-align: justify;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div>According to Investopedia, Islamic finance is banking, lending, and saving practices that comply with Islamic law.</div><div><div><br /></div><div>The concept of risk sharing is central to Islamic banking and finance. It is essential to understand the role of risk-sharing in raising capital. At the same time, Islamic finance demands the avoidance of riba (usury) and gharar (ambiguity or deception).</div><div><br /></div><div>Because of these differences, you may wonder whether there are common metrics to assess the performance of Islamic banks and conventional banks. </div><div><br /></div><div>When I asked Chat GPT this question, it listed the following common metrics</div><div><ul><li>ROE and ROA.</li></ul><ul><li>Net interest margin and Efficiency ratio.</li></ul><ul><li>Loan deposit ratio and non-performing loans.</li></ul><ul><li>Capital adequacy ratios.</li></ul><ul><li>Liquidity ratios.</li></ul><ul><li>Cost-to-income ratio.</li></ul></div><div><br /></div><div>You can see that these are metrics that I have used for the Bursa banks. Of course, Chat GPT advised, “…that certain metrics may be interpreted differently or given more emphasis in the context of Islamic banking.”</div><div><br /></div><div>From a business perspective, you should not be surprised that there are many common metrics. After all, businesses are about making money and how you assess efficiency and productivity should not differ.</div><div><br /></div><div>If you are a newbie trying to figure out what are the important metrics to use, there is nothing like looking at what experts have done. In this context, sites like <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha</a>* are a good source of such information. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.</div></div><div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div></div><div><h2>Is MBSB an investment opportunity? </h2><div>I have shown that MBSB's performance is below the sector average. However, it is still a profitable bank with good capital adequacy ratios. But it is not an efficient bank when compared to other Bursa banks. </div><div><br /></div><div>You may think that it is a value trap rather than an investment opportunity. A value trap is a company that appears cheap but is cheap because it has fundamental issues. </div><div><br /></div><div>Islamic banking is relative when new compared to traditional banking. According to <a href="https://www.fitchratings.com/research/banks/malaysian-islamic-banks-dashboard-2023-09-02-2023#:~:text=Fitch%20expects%20the%20growth%20of,higher%20financing%20rates%20sap%20demand." target="_blank">Fitch</a>, Malaysia is the world’s third-largest Islamic banking market, with Islamic financing making up about 41% of local banking-system loans at end-2022 (end-2021: 38%). </div><div><br /></div><div>Fitch expects the growth of Islamic financing to moderate in 2023 following robust growth of 13% in 2022. MBSB is fortunate to be in growing sector. There is of course the threat of digital banking, but MBSB as has also addressed this under its J25.</div><div><br /></div><div>MBSB is not in a sunset industry. The main challenge for MBSB is improving its operating efficiency and productivity. While it has embarked on its J25, there are not significant results yet.</div><div><ul><li>There are no obvious improving productivity and efficiency trend.</li></ul><ul><li>There is no significant revenue growth.</li></ul></div><div><br /></div><div>On the face of it, these look like fundamental issues for MBSB. The other metric in assessing whether it is a value trap is the margin of safety. </div><div><ul><li>There is not enough margin of safety based on the Earnings Value.</li></ul><ul><li>There is a 50 % margin of safety based on the Asset Value.</li></ul></div><div><br /></div><div>As a financial institution under Bank Negara's oversight, the Asset Value provides a floor value. But the market tends to look at Earnings Value. </div><div><br /></div><div>So MBSB is not cheap stock from the Earnings Value perspective. At the same time, it has not been able to improve its operations. This does not make MBSB an investment opportunity if you are a fresh holder.</div><div><br /></div><div>I would define a good investment opportunity as a company with good business fundamentals and good margin of safety from an earnings perspective. MBSB does not fit this definition.</div><div><br /></div><div>But I am already a shareholder of MBSB. I would rather hold onto my shares and see whether the achievement of J25 will cause the market to re-rate it. </div><div><br /></div><div>But what if you are a fresh investor looking at MBSB? If you look at Table 3, there are other banks with better margins of safety from both the Asset Value and Earnings Value. It is a question of whether there are better investment opportunities. And there is. </div><div><br /></div><h2>Investment thesis</h2><div>Over the past decade, MBSB has transformed itself from a property financier into an Islamic bank. While it had become a much bigger group in terms of equity and total assets, there has not been much revenue growth. The PAT in 2023 was lower than that in 2013.</div><div><br /></div><div>The lower profits with higher equity and assets resulted in a declining ROE and ROA. The declining returns are supported by declining NIM margins and higher expense ratios. Compared to the Bursa banks, MBSA did worse.</div><div><br /></div><div>There is a margin of safety based on the Asset Value. But there is no margin of safety based on its Earning Value. Together with the lack-lustre fundamentals, there are better bank stocks if you are a fresh investor. However, given an existing shareholder like me with a relatively low investment cost, it makes sense to hold. </div><div><br /></div><div><br /></div></div><div><br /></div></div><div><br /></div><div><div><div><br /></div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. 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The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><br /></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br style="text-align: left;" /></div></div></div><div><br /></div></div><div><br /></div><div><br /></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-50482547786876483972024-03-10T08:43:00.004+08:002024-03-10T08:55:57.758+08:00Is Suria Capital a value trap?<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Value Investing Case Study 48-1. A fundamental analysis of Suria Capital to see whether it is a value trap. This post summarized my investment thesis on why I should not wait for the market price to hit its asset value before I exit.</span></div>
<div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidzrEputF540Ykj8c_gjtj8YbBcFvm2UOGF3tSw7Q9RYV-OrWxYW2RJ8Nrr7GWKw45gWXmZAyQmwTEgvTB5CZBcLL91J98pa2rigWryk8KmY-fv_WyEOmjD5SDTrJoa3YmoCROia0dX6B8TQvEUMdkocI-RliSHRLebf_OBO2gEblTTARvgOEojGC-3Ww/s317/Pic%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Suria Capital a value trap?" border="0" data-original-height="317" data-original-width="239" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidzrEputF540Ykj8c_gjtj8YbBcFvm2UOGF3tSw7Q9RYV-OrWxYW2RJ8Nrr7GWKw45gWXmZAyQmwTEgvTB5CZBcLL91J98pa2rigWryk8KmY-fv_WyEOmjD5SDTrJoa3YmoCROia0dX6B8TQvEUMdkocI-RliSHRLebf_OBO2gEblTTARvgOEojGC-3Ww/s16000/Pic%201-min.png" title="Is Suria Capital a value trap?" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">I first invested in Suria Capital (Suria Cap or the Group) in 2017 on the basis that it had both port operations and property development. The Malaysian property market was booming at that juncture and Suria Cap had a few years earlier formed joint ventures to develop residential and commercial properties around the port area in Kota Kinabalu. </div><div style="text-align: justify;"><div><br /></div><div>Over the next few years, I built up my stake in Suria Cap via new purchases and bonus issues. If I rank my stock portfolio in terms of total purchase cost, Suria Cap is somewhere in the middle.</div><div><br /></div><div>The Malaysian property market peaked around 2018/19 followed by Covid-19. One of the property JVs was mutually terminated due to this.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/Nt4SPcMEqN8" width="320" youtube-src-id="Nt4SPcMEqN8"></iframe></div><br /><div>I thought it was time to re-look at my investment as the share price of Suria Cap is now trending upwards having reached the bottom in 2020.</div><div><br /></div><div>In this article, I assessed the performance of Suria Cap to see whether I should continue to hold onto my shares. At the same time, if you are new to Suria Cap, you would be interested to know whether it is a value trap.</div><div><br /></div><div>Join me as I show why I should continue to hold onto my investments and why it is not an investment opportunity for a fresh investor. </div><div><br /></div><div>Should you go and buy it? Well, read my Disclaimer.</div><div><br /></div><h2>Content</h2><div><ul><li><b>Background </b></li></ul><ul><li><b>Performance</b></li></ul><ul><li><b>Financial strengths</b></li></ul><ul><li><b>Peer comparison</b></li></ul><ul><li><b>My investment in OSK</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Investment Thesis</b></li></ul><ul><li><b>Conclusion </b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html" target="_blank">Learn more</a>.</i></div></td></tr></tbody></table></div></td></tr></tbody></table></div><div><br /></div></div><h2>Background</h2><div>Suria Cap was incorporated in 1983 and has steadily grown into a diversified entity. Listed on the Main Market of Bursa Malaysia since 1996, it today provides port services and facilities in Sabah. </div><div><br /></div><div>Suria Cap has also widened its business into logistics, bunkering, property development, construction, and seaport passenger gateway.</div><div><ul><li>Suria Cap has been the main port operator in Sabah since the port privatization exercise in September 2004. It operates eight (8) ports in Sabah. </li></ul><ul><li>The Group diversified into property development to capitalize and maximize the value of its land assets located at the waterfront of the Central Business District of Kota Kinabalu. </li></ul></div><div><br /></div><div>In terms of revenue and profit contribution, the port operation is the largest contributor. Refer to Chart 1. Over the past 12 years, the port operations accounted for about 88 % of the Group revenue and 91 % of the consolidated EBIT.</div><div><br /></div><div>The next biggest contributor is the property development segment. Over the past 12 years, this accounted for about 7 % of the Group revenue.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSsywaSc5vzPNEPsen8-eYtg3UCXgvuPZfCKjs2RL-siP-bh_IGUFnvUrCDWM4NJpLZcjPborwu4MAOZ61GNe1IhlelfcU7yuCpdSVVPaRMhBWpwMrnEAtCgaeaknn1yYp3_YEWEeaVXUw2uyt-xIojamYIrY7HPXYoiyK-5nd_e23RrHv0K6zH1gO6SE/s903/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Suria Capital Chart 1: Segment revenue and profit" border="0" data-original-height="271" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSsywaSc5vzPNEPsen8-eYtg3UCXgvuPZfCKjs2RL-siP-bh_IGUFnvUrCDWM4NJpLZcjPborwu4MAOZ61GNe1IhlelfcU7yuCpdSVVPaRMhBWpwMrnEAtCgaeaknn1yYp3_YEWEeaVXUw2uyt-xIojamYIrY7HPXYoiyK-5nd_e23RrHv0K6zH1gO6SE/s16000/Chart%201-min.png" title="Suria Capital Chart 1: Segment revenue and profit" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Segment revenue and profit</td></tr></tbody></table><div><br /></div></div><div style="text-align: justify;"><h3>Port Operations</h3>Suria Cap holds the concession for the operation and management of the major ports in Sabah for 30 years commencing from 1 September 2004 to 31 August 2034. On 22 November 2022, the State Cabinet of Sabah approved the extension of the ports’ concession period for a further 30 years to 31 August 2064.</div><div style="text-align: justify;"><br />Extending the concession period would enable better planning of expansion projects for the ports.<br /><ul><li>With a longer concession, Suria Cap will be in a better position to obtain financing facilities to build and invest in port infrastructures. </li></ul><ul><li>The depreciation of assets will also be adjusted accordingly and this would generally have a positive impact on the Group’s bottom line.</li></ul><ul><li>The extension will pave the way for the proposed collaboration with strategic partners to entice investments into the State.</li></ul></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwEOuaUXC-T_8mUi4_lEe0DjglDQn37YGhvT6ibvlKBLbm_In7_Gv_XfLWZJVR47Irh8q7cafTZdHa4hvZiJUSosZ-d7rCaaq-7EmgoEBZ8cAMG04ZYbqPM63XeoKssZX-OcG6SUeWUkhcE6wsGHwJQmaD15oKdWGeNfFCZHv0PS6MFsgnzlAYn2BFEP4/s889/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Suria Capital Chart 2: Port throughput" border="0" data-original-height="499" data-original-width="889" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwEOuaUXC-T_8mUi4_lEe0DjglDQn37YGhvT6ibvlKBLbm_In7_Gv_XfLWZJVR47Irh8q7cafTZdHa4hvZiJUSosZ-d7rCaaq-7EmgoEBZ8cAMG04ZYbqPM63XeoKssZX-OcG6SUeWUkhcE6wsGHwJQmaD15oKdWGeNfFCZHv0PS6MFsgnzlAYn2BFEP4/s16000/Chart%202-min.png" title="Suria Capital Chart 2: Port throughput" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Port throughput</td></tr></tbody></table><p style="text-align: justify;">The Group focuses mainly on the streamlining of port operations, planning, and acquisition of new cargo handling equipment. It also builds port infrastructure to ensure efficient port services and business sustainability. Its ports handle passengers and all types of cargo including container, liquid cargo, dry bulk, Roll-on Roll-off, and general cargo, as well as storage facilities. </p><div style="text-align: justify;">As can be seen from Chart 2, the port activities have increased over the years. The extension would enable Suria Cap to build on this trend.<br /><br /><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div><h3 style="text-align: left;">Property and Commercial Developments</h3>Suria Cap had on 23 September 2016 received the sub-divided title of the master land title for the 23.25 acres of Kota Kinabalu port land. With the subdivision, the separate parcels of title would consist of:<br /><ul><li>16.25 acres for the Jesselton Quay, a joint venture with SBC Corporation Berhad (SBC).</li></ul><ul><li>7.0 acres for the One Jesselton Waterfront joint venture with Gabungan AQRS Berhad.</li></ul> <br />JQ Central, the first phase of the Jesselton Quay development was completed with an occupation certificate obtained on 19 January 2022. JQ Central comprises two towers of commercial suites, one tower of i-office adaptable as a 24-story hotel tower in the future, 218 units of Gallery Shoppes, a podium that houses a recreation club called BeachClub, and a seven (7) story carpark.</div><div style="text-align: justify;"><br />Phase two, which is also the last phase of the JQ project to be developed on the remaining land parcel is expected to complete in 2030. It consists of hospitality towers, high-end residences, and a low-rise heritage precinct.</div><div style="text-align: justify;"><br />As a result of the Covid-19 pandemic which had hindered the implementation of One Jesselton Waterfront, the joint venture agreement With Gabungan AQRS was mutually terminated on 30 September 2021. </div><div style="text-align: justify;"><br />In Feb 2024, Suria Cap announced that it had entered into a JV with EXSIM Development Sdn Bhd to develop two parcels of prime land within the Kota Kinabalu Port area.<br /><ul><li>One parcel measuring approximately 2.543 hectares held under Town Lease 017561974 appears to be the original One Jesselton Waterfront plot.</li></ul><ul><li>The other parcel of 11.69 hectares held under Country Lease 015722791, was alienated to Suria Cap by the State Government of Sabah in 2017 for the proposed development of an international cruise terminal. </li></ul></div><div style="text-align: justify;"><div><br /></div><div><div style="text-align: left;"><div style="text-align: justify;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div>Ports act as crucial nodes in the global economic system, connecting regions and countries and fostering a conducive environment for economic expansion. They are crucial nodes in the broader transportation network. </div><div><div><div><div><br /></div><div>The efficient functioning of ports is closely linked to economic growth through the facilitation of trade, job creation, infrastructure development, and the attraction of investments. </div><div><br /></div><div>Suria Cap was my first port investments and it was a challenge to get background information on ports when I first started. </div><div><br /></div><div>Today it is no longer the case. For example, there are the following articles from Seeking Alpha</div><div><ul><li>Hutchison Port Holdings Trust: Our Ugly Duckling Is Getting Prettier.</li></ul><ul><li>China Merchants Port: Sell down Post Tariff Cuts Overdone.</li></ul><div><br /></div></div><div>Moral of the story? If you are a newbie, sites like <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha</a>* have articles that can provide an overview on what to look for when analysing companies in sectors that you may not be too familiar with. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.</div></div></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div><div style="text-align: left;"></div></div><h2>Performance </h2><div>To get an overview of Suria Cap’s performance, I looked at 3 metrics – revenue, PAT, and gross profitability (gross profits/total assets). The left part of Chart 3 illustrates the trends for these 3 metrics.</div><div><br /></div><div>This is not a growth company. From 2012 to 2023, revenue and PAT grew at 1.6 % and 1.0 % CAGR respectively. You can see a revenue and profit spike in 2015. This was due to a one-off sale of the land to its joint venture partner. </div><div><br /></div><div>Note that over this period, the revenue from the port operations only grew at 1.9 % CAGR. You should not be surprised given the low growth rate of the annual cargo throughput of 0.7 % CAGR from 2012 to 2022. Refer to Chart 2. </div><div><br /></div><div>Of course, the cargo growth was impacted by Covid-19. But even considering the growth between 2012 to 2018, the annual cargo throughput only grew at 4.3 % CAGR. </div><div><br /></div><div>The other concern I have is the declining gross profitability. The gross profitability in 2023 was 13 % lower than that in 2012. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRzRzSAvwWLx9yaA-c8pB8NEXLWCq9P-w3SgJPOasfIHuxS-LbRFjCGgM0iM5wM42w5Ur0XZ3oKKD2Mz_MlNqfHkc_B6oj9wqSZUiF551UoPrd1YXNXD1t_RmldtcJ4vEwdUJRFG5eY_rMhIMjTmvbpuR5CvERbysR8VKsVTdd6ah-W_iO6yQTcAhqkBQ/s903/Chart%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Suria Capital Chart 3: Performance Index and Returns" border="0" data-original-height="268" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRzRzSAvwWLx9yaA-c8pB8NEXLWCq9P-w3SgJPOasfIHuxS-LbRFjCGgM0iM5wM42w5Ur0XZ3oKKD2Mz_MlNqfHkc_B6oj9wqSZUiF551UoPrd1YXNXD1t_RmldtcJ4vEwdUJRFG5eY_rMhIMjTmvbpuR5CvERbysR8VKsVTdd6ah-W_iO6yQTcAhqkBQ/s16000/Chart%203-min.png" title="Suria Capital Chart 3: Performance Index and Returns" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Performance Index and Returns</td></tr></tbody></table><div><br /></div><div><div>We can see a similar spike pattern in returns. The troubling sign is the declining returns in the ROE and ROA. The ROE and ROA in 2023 were lower than those in 2012.</div><div><br /></div><div>The only positive sign is that the operating return (NOPAT / total capital employed) in the past 2 years was higher than that in 2012. A DuPont analysis showed that this was due to the higher NOPAT margin over the past 2 years.</div><div><br /></div><h2>Financial strengths</h2><div>Suria Cap is sound financially. I would consider it a cash cow.</div><div><ul><li>As of the end of Sep 2023, it had RM 245 million in cash and short-term investments. This is about 16% of its total assets. </li></ul><ul><li>It has a DE of 0.06 as of Sep 2023.</li></ul><ul><li>It currently has an interest coverage ratio of 118. I defined this as EBIT/interest. This is equal to a AAA (Fitch) synthetic rating as per the Damodaran approach.</li></ul><ul><li>Over the past 12 years, it generated positive cash flow from operations every year. Over this period, it generated RM 1 billion of cash flow from operations compared to its RM 694 million PAT. This is a very good cash conversion ratio.</li></ul><ul><li>It had a good capital allocation plan. As can be seen from Table 1, its cash flow from operations was able to fund its CAPEX and dividends.</li></ul><div><br /></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAWLHbZ4x3YD5G3On-ccN_ufozZVCd6zVnhYpXtC1j1Uww2dwidCt_8EoquhcmuUO2X96iFAm5D9P6TwFdcYxrNlnOlgzab9KCV5EG6iSOLwNp1NdTHiKntrStqTe7iT5uHQy-TlLzddaofDLn38J8EtPo-IEIMU2yptSruGd3SVacADACMmENZJKFGYc/s517/Table%201.png" style="margin-left: auto; margin-right: auto;"><img alt="Suria Capital Table 1: Sources and Uses of Funds 2012 to 2023" border="0" data-original-height="227" data-original-width="517" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAWLHbZ4x3YD5G3On-ccN_ufozZVCd6zVnhYpXtC1j1Uww2dwidCt_8EoquhcmuUO2X96iFAm5D9P6TwFdcYxrNlnOlgzab9KCV5EG6iSOLwNp1NdTHiKntrStqTe7iT5uHQy-TlLzddaofDLn38J8EtPo-IEIMU2yptSruGd3SVacADACMmENZJKFGYc/s16000/Table%201.png" title="Suria Capital Table 1: Sources and Uses of Funds 2012 to 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Sources and Uses of Funds 2012 to 2023</td></tr></tbody></table><div><br /></div></div><div style="text-align: justify;"><h2>Peer comparison </h2><div>I compared Suria's performance with the following Bursa port companies:</div><div><ul><li>Bintulu Port Holdings Berhad (BIPORT). </li></ul><ul><li>Perak Corporation Berhad (PRKCORP).</li></ul><ul><li>Westports Holdings Berhad (WPRTS).</li></ul></div><div><br /></div><div>This is not a growth sector as can be seen from Chart 4. </div><div><ul><li>From 2012 to 2022, Perak Corp's revenue declined at a 0.5 % compounded rate.</li></ul><ul><li>The revenue for the market leader, Westport, grew at 3.3 % CAGR.</li></ul><ul><li>Suria Cap and Bintulu revenue grew at 1.4 % and 4.5 % CAGR respectively. </li></ul></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghC58xiQf2WTZmQlXC9cmBYAIPb4kBhTSdjkViKTDlUmULhIw2u-viulq5uGCNlPAkWoSytcbfcIfGk16QJ2YiWh6aYObcEWLBR6OlQY0pGkcV8FJ4xBe6z9qFMscKDdUgPF1qB58my3scp9Bs0iAoPYRZa6OSeA1cYN_uk3E7DrrP8cNFenS5xxHyeZc/s907/Chart%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Suria Capital Chart 4: Peer Revenue" border="0" data-original-height="360" data-original-width="907" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghC58xiQf2WTZmQlXC9cmBYAIPb4kBhTSdjkViKTDlUmULhIw2u-viulq5uGCNlPAkWoSytcbfcIfGk16QJ2YiWh6aYObcEWLBR6OlQY0pGkcV8FJ4xBe6z9qFMscKDdUgPF1qB58my3scp9Bs0iAoPYRZa6OSeA1cYN_uk3E7DrrP8cNFenS5xxHyeZc/s16000/Chart%204-min.png" title="Suria Capital Chart 4: Peer Revenue" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Peer Revenue</td></tr></tbody></table><div><br /></div><div><div>You can see from Chart 5 that Suria Cap had the worst ROA over the past few years. The best performance was from Westport with an average ROA of around 10% over the past 12 years. </div><div><br /></div><div>Suria Cap poor ROA performance was because it had the worst gross profit margin. Refer to Chart 6. </div><div><br /></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhY27fuaKXPBJPNO2_gtDZfkT465vgP61TJ9-pG2YjeSvpXgFd_Qa4Y0KAwjlTKt-hj1FRaA3MKkV_JgE4VESf6cWW-A7icZEqLntUblbaOJSJ9VaoIhSDVdAt2fT68O1jDjhf1vve98fTS6BPzTlRQ5V2TBrnn5vIMKuL2Ift3hobXNmQu6eg0_DS1EJY/s907/Chart%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Suria Capital Chart 5: Peer ROA" border="0" data-original-height="350" data-original-width="907" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhY27fuaKXPBJPNO2_gtDZfkT465vgP61TJ9-pG2YjeSvpXgFd_Qa4Y0KAwjlTKt-hj1FRaA3MKkV_JgE4VESf6cWW-A7icZEqLntUblbaOJSJ9VaoIhSDVdAt2fT68O1jDjhf1vve98fTS6BPzTlRQ5V2TBrnn5vIMKuL2Ift3hobXNmQu6eg0_DS1EJY/s16000/Chart%205-min.png" title="Suria Capital Chart 5: Peer ROA" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Peer ROA</td></tr></tbody></table><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUtjymRmUgxQjNAinFXK_a93SvZfqj6dvdXpwEuuQMG_KmAEZ_BhsUB6A2r7pRTi50BQ19q9cHbKf6w8ViJsUDfhaGSvcA55_zfiK9vA_nP876njUSBZ1gbxTjFs6OqfPE6QfHtAU8JEcKeZ5eUrPJ5CbWtM92XSH4eG2SJhWDtIOH32gZuRpAeEG1wPU/s907/Chart%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Suria Capital Chart 6: Peer Gross profit margins" border="0" data-original-height="354" data-original-width="907" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUtjymRmUgxQjNAinFXK_a93SvZfqj6dvdXpwEuuQMG_KmAEZ_BhsUB6A2r7pRTi50BQ19q9cHbKf6w8ViJsUDfhaGSvcA55_zfiK9vA_nP876njUSBZ1gbxTjFs6OqfPE6QfHtAU8JEcKeZ5eUrPJ5CbWtM92XSH4eG2SJhWDtIOH32gZuRpAeEG1wPU/s16000/Chart%206-min.png" title="Suria Capital Chart 6: Peer Gross profit margins" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Peer Gross profit margins</td></tr></tbody></table><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><h2>My investment in Suria Cap</h2><div>I first invested in Suria Cap in 2017 at RM 2.13 per share compared to its NTA of RM 3.24 per share. From a value investing perspective, I thought that the Asset Value offered a good margin of safety. </div><div><br /></div><div>I then increased my investment over the next few years so that together with the bonus issue, my average purchased cost was RM 1.77 per share. </div><div><br /></div><div>I estimated that my average holding period till the end of Dec 2023 was 6.33 years. The market price as of the end of 2023 was RM 1.93 per share. </div><div><br /></div><div>Taking into account the bonus issue, my investment had generated a total return of 3.8 % CAGR. Refer to Table 2. This is about the same as keeping my money in a fixed deposit. </div><div><br /></div><div>You can see that dividends accounted for about 2/3 of the total gain. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNGerEEHOiFD0ViG2Nw0fZDK5yvN8_nRVUTvfW9bAt6GwgUjtLZnGkgk4HCQn_voZvAa6x1h2uB_ku34Wc7vQPfX6EDSm29xkMlNLP29QBZ1-ciAXbh2xT0dyyWiG-KOTiTQob_mBl2paZPwsmSg-qJU6_FzbPup_50hm6VdG-_eWdXyepab8NE_woy5Y/s757/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Suria Capital Table 2. Estimating my total return" border="0" data-original-height="276" data-original-width="757" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNGerEEHOiFD0ViG2Nw0fZDK5yvN8_nRVUTvfW9bAt6GwgUjtLZnGkgk4HCQn_voZvAa6x1h2uB_ku34Wc7vQPfX6EDSm29xkMlNLP29QBZ1-ciAXbh2xT0dyyWiG-KOTiTQob_mBl2paZPwsmSg-qJU6_FzbPup_50hm6VdG-_eWdXyepab8NE_woy5Y/s16000/Table%202-min.png" title="Suria Capital Table 2. Estimating my total return." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2. Estimating my total return</td></tr></tbody></table><div><br /></div><div><div>The market price of Suria Cap has been declining since 2017 to reach the bottom in Jul 2020. Since then, the market price has been trending up. Refer to Chart 7.</div><div><br /></div><div>When you look at the trend of Suria Cap ROE as per Chart 8, you can see that since reaching its bottom in 2020, the ROE has been trending up. This is probably one of the reasons why the share price is trending up. </div><div><br /></div><div>If you follow this logic, this means that if Suria Cap can continue to improve its ROE, we may yet see higher share prices.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifds3wLkY4KD3h8RH8NduXap4kOg2nfgTd67m_JaJX8gEfXW5OtbOfh1TLatoalnXiWVPELYi2ko8T8DrY1jk5YYvBANg-2PjEdl5VlrHIpmIbmDuuqHFSAwBpVGbrtcS9g06e3fbgeZKMpFw5WvJ_em9wApIUNjErRWqf-gXADDRRxseJRDRHd9Jin3Q/s907/Chart%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 7: Suria Capital share price" border="0" data-original-height="382" data-original-width="907" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifds3wLkY4KD3h8RH8NduXap4kOg2nfgTd67m_JaJX8gEfXW5OtbOfh1TLatoalnXiWVPELYi2ko8T8DrY1jk5YYvBANg-2PjEdl5VlrHIpmIbmDuuqHFSAwBpVGbrtcS9g06e3fbgeZKMpFw5WvJ_em9wApIUNjErRWqf-gXADDRRxseJRDRHd9Jin3Q/s16000/Chart%207-min.png" title="Chart 7: Suria Capital share price" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Suria Capital share price</td></tr></tbody></table><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0OCYj9KKbmUwEXhvhmbeOmlJ7UWKL0JH1gxCKaIjgEEiruaNfEVwcLsABa4_w6RjSb-2D8zQrCQFRA5je4NQxqrAYlphEODl5UGD9AWFiJ816_eXbPrY5dF3YIwsw7NBQYF3nKj7EitI99e2igM8ENNpTivoP31wrgxXQX5LhcLMl6hwKkDoXtBrOi_M/s903/Chart%208-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 8: Suria Capital ROE" border="0" data-original-height="329" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0OCYj9KKbmUwEXhvhmbeOmlJ7UWKL0JH1gxCKaIjgEEiruaNfEVwcLsABa4_w6RjSb-2D8zQrCQFRA5je4NQxqrAYlphEODl5UGD9AWFiJ816_eXbPrY5dF3YIwsw7NBQYF3nKj7EitI99e2igM8ENNpTivoP31wrgxXQX5LhcLMl6hwKkDoXtBrOi_M/s16000/Chart%208-min.png" title="Chart 8: Suria Capital ROE" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: Suria Capital ROE</td></tr></tbody></table><div><br /></div><div><h2>Valuation </h2><div>I valued Suria Cap based on its Asset Value and Earnings Power Value.</div><div><ul><li>I broke down its Asset Value of RM 3.49 per share into its Graham Net Net, NTA, and Book Value.</li></ul><ul><li>I broke down its Earnings Power Value of RM 2.17 per share into non-operating assets and operating assets. The non-operating assets comprised cash and investments in securities. </li></ul></div><div><br /></div><div>Chart 9 summarizes the value of Suria Cap compared to its market price of RM 2.18 (as of 9 Feb 2024). You can see that there is no margin of safety based on the Earnings Power Value. But there is more than a 30% margin of safety based on the NTA or Book Value. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjv9GCAiEL_UTl8uuct0FHyMeH38Knn2FhClxySD4oZWjlRr5r93RrM7BlCpCaNe-eDCyYpLmpq1_uRnIi2NiPile8meVsufBtXIWUPze458Lz8GqrgQdxagr_5CKvA2uNpUl4YED2u8MOwEySUuMDjyeikkXsg50n_I3xE-xDdRIwggzUQwvvNwYXQEvc/s658/Chart%209-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Suria Capital Chart 9: Valuation" border="0" data-original-height="397" data-original-width="658" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjv9GCAiEL_UTl8uuct0FHyMeH38Knn2FhClxySD4oZWjlRr5r93RrM7BlCpCaNe-eDCyYpLmpq1_uRnIi2NiPile8meVsufBtXIWUPze458Lz8GqrgQdxagr_5CKvA2uNpUl4YED2u8MOwEySUuMDjyeikkXsg50n_I3xE-xDdRIwggzUQwvvNwYXQEvc/s16000/Chart%209-min.png" title="Suria Capital Chart 9: Valuation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Suria Capital Chart 9: Valuation</td></tr></tbody></table><div><br /></div><div><div>The lower Earnings Power Value suggests that the assets are under-utilized. You should not be surprised given the low ROE and ROA. Unless Suria Cap can improve the earnings from the port operations, I am not sure how the Earnings Power Value can increase. </div><div><br /></div><h3>Valuation model</h3><div>Because of the low growth history, it is more appropriate to value Suria Cap based on its Earnings Power Value ie assumed zero growth.</div><div><br /></div><div>My Earnings Power Value was based on the average of 2 valuation methods:</div><div><ul><li>A Free Cash Flow to the Firm model as per Damodaran.</li></ul><ul><li>A Residual Income model as per Penman.</li></ul></div><div><br /></div><div>In both cases, I used the 12-year time-weighted average values to represent the normalized performance.</div><div><br /></div><div>The WACC of 8.0 % was based on the Damodaran build-up approach where the Beta was built up based on the various sectors Suria Cap was operating. </div><div><br /></div><h3>Limitations and risks</h3><div>In interpreting the valuation results, you should consider the following:</div><div><ul><li>Historical performance.</li></ul><ul><li>Payment for land in SBC JV.</li></ul></div><div><br /></div><div>My Earnings Power Value assumes that the past is a good representation of the future. You may think that with the extension of the port concession period, the depreciation and amortization would be lower. In other words, better profits in the future. But this is an accounting perspective that would not change the Free Cash Flow. </div><div><br /></div><div>This is because the Free Cash Flow is based on deducting Reinvestments from the NOPAT. And I have added back the depreciation and amortization in determining the Reinvestments.</div><div><br /></div><div>When Suria Cap formed the joint venture with SBC in 2013, SBC was to pay Suria Cap for the land. RM2 million was received upon execution of the JVA in 2013.</div><div><br /></div><div>The remaining estimated proceeds of RM322 million were to be received in tranches within 7 years from the presentation date of the instrument of 3rd party charge on the said land. This was presented in 2018. </div><div><br /></div><div>In 2021 and 2022, Suria Cap signed two supplemental letters with SBC agreeing to vary the mode and timing of payments from SBC in the form of cash and property. </div><div><br /></div><div>On 30 November 2022, Suria Cap signed an Amended and Restated Agreement with SBC whereby the outstanding debt due from SBC of RM 206 million would be fulfilled by RM 32 million in cash and RM174 million in-kind in the form of completed commercial properties.</div><div><ul><li>RM 75 million of the Gallery Shoppes were transferred in 2022. The estimated fair value of these properties in 2022 was RM 82.8 million. </li></ul><ul><li>There was an increase in the Capital pre-payments (classified as other assets under the long-term assets) to RM 138.4 million in 2022.</li></ul><ul><li>For agreeing to vary the mode of payments and other terms, the Group received additional entitlement in the form of car park units from SBC valued at RM 28.8 million. These car park units were recognized as property, plant, and equipment in 2022. Consequently, Suria Cap's profit before tax for the year increased by RM 28.8 million with the additional entitlement.</li></ul></div><div><br /></div><div>With these variations, it is very hard to estimate the earnings from property development. From a conservative perspective, I would say that the various property-related part of the Asset Value is a better reflection of the value of the property segment.</div><div><br /></div><div>In other words, a better estimate of the intrinsic value of Suria Cap is for a sum-of-parts valuation.</div><div><ul><li>The property business should be valued based on its Asset Value.</li></ul><ul><li>The port and other non-property operations would be based on its Earnings Power Value.</li></ul><ul><li>The intrinsic value of Suria Cap is then the sum of these 2 values.</li></ul></div><div><br /></div><div>On such a basis, I estimated the value of Suria Cap to be RM 2.20 per share. Refer to Table 3. This is lower than the Asset Value but marginally higher than the Earnings Power Value. </div><div><br /></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisI8TGXlUM1Oqi15XaM33BDrC7tFAUhJ2YfToMB9IElvqQIab_bWcr0YFGgQV6nu-A7GJF62wUJr8j3GszYadJfmdM_TCNOiTo1DHlUuREBDSIdsmGnDTJe3ObskiqqQQVk_ktEYNJlcvDmDM2Gl4eTFxpqDVO2zuoEmWPZJdbQrGufUy11kVRpkQ2H6g/s388/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Suria Capital Table 3: Sum-of-parts valuation" border="0" data-original-height="176" data-original-width="388" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisI8TGXlUM1Oqi15XaM33BDrC7tFAUhJ2YfToMB9IElvqQIab_bWcr0YFGgQV6nu-A7GJF62wUJr8j3GszYadJfmdM_TCNOiTo1DHlUuREBDSIdsmGnDTJe3ObskiqqQQVk_ktEYNJlcvDmDM2Gl4eTFxpqDVO2zuoEmWPZJdbQrGufUy11kVRpkQ2H6g/s16000/Table%203-min.png" title="Suria Capital Table 3: Sum-of-parts valuation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Sum-of-parts valuation<br /><div style="text-align: left;"><i>Notes</i></div><div style="text-align: left;"><div><i>a) As of Sep 2023.<span style="white-space: pre;"> </span></i></div><div><i>b) Land held for property dev, investment prop, and other assets as of Sep 2023.</i></div><div><i>c) Assumed that all the operating liabilities accrue to the port and non-property ops.</i></div></div></td></tr></tbody></table><div><br /></div></div><div><h2>Investment Thesis</h2><div>Suria Cap is the concession holder for all the major ports in Sabah. These port operations accounted for 91 % of the consolidated EBIT over the past 12 years. But this is not a high-growth sector as the growth in annual cargo throughput was 0.7 % CAGR from 2012 to 2022.</div><div><br /></div><div>The Group tried to extract value from its port land in Kota Kinabalu by developing it into a residential and commercial centre. This was carried out via joint ventures with other established property developers. Over the past 12 years, this contributed only about 7 % of the Group revenue.</div><div><br /></div><div>The result is that the Group only achieved an average ROE of 5.8 % over the past 12 years. It is not a fantastic performance compared to its WACC of 8 %. Among the 3 other port operators in the country, Suria Cap achieved the worst performance over the past few years.</div><div><br /></div><div>Given the above, the Earnings Power Value of Suria Cap is much lower than the Asset Value. At the current market price of RM 2.18 (as of 9 Feb 2024), there is no margin of safety based on the Earnings Power Value. This is not an investment opportunity. </div><div><br /></div><h2>Conclusion </h2><div>From a fundamental perspective, Suria Cap has a mixed performance. While it is financially sound, its operating results are nothing to shout about.</div><div><ul><li>It has low revenue growth in line with those of its peers.</li></ul><ul><li>Its ROE is lower than its cost of funds. This meant that it did not create shareholders' value.</li></ul></div><div><br /></div><div>While there is a margin of safety based on its Asset Value, this is because a big part of the Asset Value came from its cash, securities, and property assets. </div><div><br /></div><div>Furthermore, a large part of the value of the property assets came from the sale of its land to its JV partner. While this was recognized as profits when it was first sold in 2015, a significant part was to be paid in kind some of which has yet to be developed.</div><div><br /></div><div>From a conservative perspective, I would rely more on the Earnings Value as a better estimate of its intrinsic value. There is no margin of safety on such a basis.</div><div><br /></div><div>As such I would not consider this an investment opportunity for a fresh investor. Since the market price is not cheap, I do not think the question of the value trap is relevant.</div><div><br /></div><div>In the context of my investments, I have currently achieved a 3.8 % compounded annual return. About 2/3 of the gain came from dividends. </div><div><br /></div><div>To achieve a higher return of say 8 % CAGR, the market price will have to be around RM 2.60 per share. </div><div><ul><li>This does not look impossible given the current market price of RM 2.18 and the price uptrend. </li></ul><ul><li>Furthermore, at RM 2.60 per share, it is still below its Book Value. </li></ul><ul><li>And the recent announcements about its new property JV may be a catalyst for a re-rating. </li></ul></div><div><br /></div><div>You can understand why I will wait till it reaches this level to exit. </div><div><br /></div><div><br /></div><div> </div></div><div><br /></div><div><br /></div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div><div style="text-align: center;"><br /></div></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><br /></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br style="text-align: left;" /></div></div></div><div style="text-align: justify;"><br /></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-61207382717923461212024-03-03T09:35:00.001+08:002024-03-03T11:05:45.551+08:00Is OSK a value trap?<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Value Investing Case Study 47-1. A fundamental analysis of OSK to see whether it is a value trap. This post summarized my investment thesis on why I should continue to hold it.</span></div>
<div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhId1wTGzqMxlRpOErbMxABjD0ucFRcS1PnpmtNY1iZL8R_dbff6hHyAWh2bZvzj0DJJjTq3cA-Qo2BnNoraZkeE0BU34M5gPUSyNCMMq2lqvVce0vQA4lWjXcnEnNKwauFZOxRnZOp6QOavauZ1JclgxxcxAbqXeCGqklSAlNwkXN2O44K2q3sCMQlNs8/s402/Pic%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is OSK a value trap?" border="0" data-original-height="402" data-original-width="279" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhId1wTGzqMxlRpOErbMxABjD0ucFRcS1PnpmtNY1iZL8R_dbff6hHyAWh2bZvzj0DJJjTq3cA-Qo2BnNoraZkeE0BU34M5gPUSyNCMMq2lqvVce0vQA4lWjXcnEnNKwauFZOxRnZOp6QOavauZ1JclgxxcxAbqXeCGqklSAlNwkXN2O44K2q3sCMQlNs8/s16000/Pic%201-min.png" title="Is OSK a value trap?" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">I first bought into OSK Holdings (OSK or the Group) in 2013. At that juncture, OSK had just undertaken a corporate exercise that saw it disposing of its investment banking arm to RHB Capital Bhd. </div><div style="text-align: justify;"><div><br /></div><div>OSK then ended up with a 9.8 % stake in RHB Capital Bhd. I saw this as a proxy for owning shares in the banking sector. At that juncture, OSK only had a small property arm, the bulk of which was in investment properties.</div><div><br /></div><div>Since then OSK has undertaken another corporate exercise to build up its property development segment. While still having about a 10% stake in RHB Capital, OSK today is a different animal compared to when I first bought it. </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/mQXpcrWj0Sw" width="320" youtube-src-id="mQXpcrWj0Sw"></iframe></div><br /><div>This article is an assessment of the current business of OSK to see whether I should continue to hold onto my shares. At the same time, if you are new to OSK, you would be interested to know whether it is a value trap.</div><div><br /></div><div>Join me as I show why I should continue to hold onto my investments and why it is an investment opportunity for a fresh investor. It is not a value trap.</div><div><br /></div><div>Should you go and buy it? Well, read my Disclaimer.</div><div><br /></div><h2>Content</h2><div><ul><li><b>Background</b></li></ul><ul><li><b>Performance</b></li></ul><ul><li><b>Financial strengths</b></li></ul><ul><li><b>Peer comparison</b></li></ul><ul><li><b>My investment in OSK</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Investment Thesis</b></li></ul><ul><li><b>Conclusion </b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html" target="_blank">Learn more</a>.</i></div></td></tr></tbody></table></div></td></tr></tbody></table></div><div><br /></div></div><h2>Background</h2><div>OSK began operations in 1963 as a small stockbroking company which then grew into a regional investment bank. In 1997, OSK diversified into properties. </div><div><br /></div><div>As OSK Investment Bank became a Bank Negara-regulated entity in 2007, the property arm was divested from the Group due to regulatory requirements. </div><div><br /></div><div>On 28 May 2012, OSK Investment Bank merged with RHB Investment Bank. Following some corporate restructuring exercises towards the end of 2012, OSK became a majority shareholder in RHB with a 10% equity interest in RHB Capital Berhad.</div><div><br /></div><div>OSK subsequently embarked on a corporate exercise on 15 October 2014, to merge PJ Development Holdings Berhad (PJD) and OSK Property Holdings Berhad (OSKP) into the Group. </div><div><br /></div><div>PJD was established in 1965 as a plantation and property development company. Over the years, PJD divested its plantation business and grew its business in four key areas:</div><div><ul><li>Property development.</li></ul><ul><li>Construction. </li></ul><ul><li>Manufacturing of building materials under the Acotec and Olympic Cables brands.</li></ul><ul><li>Hospitality under the Swiss Garden International and SGI Vacation Club brands.</li></ul></div><div><br /></div><div>OSK is now a property company in Malaysia with over 89% interest in PJD and 100% interest in OSKP. The Group today has over 2,000 employees with business operations in Malaysia and Australia.</div><div><br /></div><div>Chart 1 shows the structure of the Group as of the end of 2022.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEin0_j2Zl0guNph1rPPz1JfctrQVRRer8iEHgGC8tGWlV_X332UPsQeWQd6eaPJ8yF6CNg0Tr4O7WfthZCblHZ8Z_e-Visj_aUPghV6WDkTh5XwBAi1o_P0XuHqWSex454wCPVI8QGwF6stTItwPOOX_s7mHKsHainfxtSngjUdZUvOAvIWr53JUhOkKv8/s665/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Chart 1: Group structure" border="0" data-original-height="366" data-original-width="665" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEin0_j2Zl0guNph1rPPz1JfctrQVRRer8iEHgGC8tGWlV_X332UPsQeWQd6eaPJ8yF6CNg0Tr4O7WfthZCblHZ8Z_e-Visj_aUPghV6WDkTh5XwBAi1o_P0XuHqWSex454wCPVI8QGwF6stTItwPOOX_s7mHKsHainfxtSngjUdZUvOAvIWr53JUhOkKv8/s16000/Chart%201-min.png" title="OSK Chart 1: Group structure" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Group structure</td></tr></tbody></table><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div>The Group today has 5 major business segments:</div><div><ul><li>Financial Services. This segment includes a substantial stake in RHB Capital Berhad, Malaysia’s 4th largest banking group. This arm also provides venture capital and private equity via its affiliate company, OSK Ventures International Berhad, and moneylending and capital financing via OSK Capital Sdn Bhd.</li></ul><ul><li>Property. This is a core business interest of the Group. Represented by OSK Property, the property division is formed through the integration of OSK Property Holdings and the property arm of PJD Holdings.</li></ul><ul><li>Construction. Established in 1979, the segment has constructed and built multiple residential and commercial properties and infrastructure projects in Malaysia. Currently, this segment focuses on in-house projects.</li></ul><ul><li>Hospitality. Swiss-Garden International is the home-grown hospitality brand under the Group and comprises the hotels business and the vacation club business.</li></ul><ul><li>Industries. This segment is involved in the manufacturing and sale of high-quality cables and Integrated Building Systems wall panels.</li></ul><div><br /></div></div><div>While the Financial Services segment employed the largest amount of the net assets, its revenue contribution was small. This was because a big part of the net assets was for its investment in RHB. Refer to Table 1.</div><div><br /></div><div>The biggest revenue contribution came from the Property and Construction segments. I have grouped the Construction business with the Property one as the majority of the Construction projects are in-house ones. As such there was not much external revenue from the Construction segment.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzaKtO_CP8z-LWSGcAmhSDjWY70AzBZf2_GqUp0CcpF66saTdl1YrUTwDuCcIFCQ1glgpcXiLAkmvyWKV3kfEamcKzs8o5knCltBLpdn4c9gQo3h-_6wvx9fDPBsWGlz0mlHMcakoOgHNxL8iisY3mPYCu3FsCg9Jj9rrjjCoK0it4EJvYMGg0KZBvOEU/s630/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Table 1: Segment Profile" border="0" data-original-height="182" data-original-width="630" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzaKtO_CP8z-LWSGcAmhSDjWY70AzBZf2_GqUp0CcpF66saTdl1YrUTwDuCcIFCQ1glgpcXiLAkmvyWKV3kfEamcKzs8o5knCltBLpdn4c9gQo3h-_6wvx9fDPBsWGlz0mlHMcakoOgHNxL8iisY3mPYCu3FsCg9Jj9rrjjCoK0it4EJvYMGg0KZBvOEU/s16000/Table%201-min.png" title="OSK Table 1: Segment Profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Segment Profile <br /><div style="text-align: left;"><div><i>Notes</i></div><div><i>a) Revenue for FYE 2022.</i></div><div><i>b) Net Assets as of FYE 2022. The total added up to SHF + MI.</i></div></div></td></tr></tbody></table><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div><div style="text-align: justify;"><h2>Performance </h2><div>Due to the 2014 corporate exercise, it is more appropriate to look at OSK's historical performance from 2015. Note that in this analysis, 2023 performance was based on the Sep 2023 LTM performance.</div><div><br /></div><div>To get an overview of OSK's performance, I looked at 3 metrics – revenue, PAT, and gross profitability (gross profits/total assets). The left part of Chart 2 illustrates the trends for these 3 metrics:</div><div><ul><li>From 2015 to 2023, revenue and PAT grew at 8.8 % and 10.9 % CAGR respectively. But as shown in the left part of Chart 2, a big part of the revenue growth was in the past 3 years. </li></ul><ul><li>The jump in profits in 2019 was attributed to the turnaround of the Financial Services segment and improvements in the Property Development segment. And of course, in 2020 we had Covid-19.</li></ul></div><div><br /></div><div>The only concern I have is with the comparatively lower growth of 3.5 % CAGR for gross profitability. You can see that over the past 3 years, despite the high revenue and profit growth, there was not much growth in gross profitability.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDvcAJcDDIPQUiKkpUxbpNRmfCmRQ6UGbNOCULA7G3sehw71fcRCIOtu51mUKbtcVOjEErc0ktIJZrIdSowjsXPkZWNonOMIvDtY7wgZBeFkf5sQTavb189Z0atw8p4u0qHhApwFLdz-XnYCyv3JXpmPIB0CaQAYf5VTLA4aZ-vLnK7I3RuuZxAo-6zlc/s903/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Chart 2: Performance" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDvcAJcDDIPQUiKkpUxbpNRmfCmRQ6UGbNOCULA7G3sehw71fcRCIOtu51mUKbtcVOjEErc0ktIJZrIdSowjsXPkZWNonOMIvDtY7wgZBeFkf5sQTavb189Z0atw8p4u0qHhApwFLdz-XnYCyv3JXpmPIB0CaQAYf5VTLA4aZ-vLnK7I3RuuZxAo-6zlc/s16000/Chart%202-min.png" title="OSK Chart 2: Performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Performance</td></tr></tbody></table><div><br /></div><div><div>OSK has an unusual business model in that a significant part of its PAT came from its investments in associates and JV. You can see this clearly from the right part of Chart 2. </div><div><br /></div><div>Over the past few years, the contribution from the investments in associates and JV (especially from its investment in RHB) was much larger than its operating profits.</div><div><br /></div><div>One characteristic of this is that the ROE was much higher than the Operating return (NOPAT / Total Capital Employed) as shown in the left part of Chart 3.</div><div><ul><li>ROE represents the profits inclusive of those from investments in associates and JV. It averaged 6.6 % over the past 9 years.</li></ul><ul><li>The Operating return is from the operations before accounting for the contribution from the associates and JV. This averaged 2.2 % from 2015 to 2023.</li></ul><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKGt3LuhdnkTmmXk1dHey3Vtp4fv8HgHVDIHyueRu43KXaeFNgnECABdNAQEeE8lr4mKWcSHS7hRAlYNRHrHuTloH3U3KPlBQb-HXImYVKoQc9IzexAdZCS_2cVBtHByqsFccESKkBAHOoBSyFCjuk_h1_FG4REkDJUoVuvPcH9LzAW_l6BhgyEGI2BVI/s903/Chart%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Chart 3: Returns and DuPont Analysis" border="0" data-original-height="265" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKGt3LuhdnkTmmXk1dHey3Vtp4fv8HgHVDIHyueRu43KXaeFNgnECABdNAQEeE8lr4mKWcSHS7hRAlYNRHrHuTloH3U3KPlBQb-HXImYVKoQc9IzexAdZCS_2cVBtHByqsFccESKkBAHOoBSyFCjuk_h1_FG4REkDJUoVuvPcH9LzAW_l6BhgyEGI2BVI/s16000/Chart%203-min.png" title="OSK Chart 3: Returns and DuPont Analysis" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Returns and DuPont Analysis</td></tr></tbody></table><div><br /></div></div><div><div>From an operations perspective, the Op returns are more important as it is a measure of the capability of management. In this context, a DuPont Analysis of the Op Return (refer to the right part of Chart 3) showed that:</div><div><ul><li>There has not been much improvement in Asset turnover. You should not be surprised as this is in line with the low growth in gross profitability.</li></ul><ul><li>Leverage has declined because debt grew at faster rate than equity or total assets. This is not a good sign. </li></ul><ul><li>The operating margins over the past few years were lower than that in 2015. </li></ul></div><div><br /></div><div>From a fundamental perspective, I would rate OSK as average as the negative points were balanced by the plus points. </div><div><br /></div><h2>Financial strengths</h2><div>OSK is not so sound financially as there were both negative and positive points. Positive points included the following:</div><div><ul><li>As of the end of Sep 2023, it had RM 640 million cash. This is about 6% of its total assets. </li></ul><ul><li>It has a DE of 0.52 as of Sep 2023 compared to my cut-off of 1.0.</li></ul><ul><li>It currently has an interest coverage ratio of 5.4. I defined this as EBIT/interest. This is equal to a - A (Fitch) synthetic rating as per the Damodaran approach.</li></ul></div><div><br /></div><div>The negative points included the following:</div><div><ul><li>From 2015 to 2023, it managed to generate a cumulative RM 140 million Cash flow from Operations compared to a cumulative PAT of RM 3.7 billion. This is a very low cash conversion cycle. Part of the reason was that about RM 2.0 billion of the PAT came from its associated/JV.</li></ul><ul><li>Over the past 9 years, there was negative Cash flow from Operations 1/3 of the time. </li></ul><ul><li>It did not have a good capital allocation plan. As can be seen from Table 2, it had to resort to debt to fund its CAPEX and dividends.</li></ul><div><br /></div></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4IjsjuZ51g_qcRtJCAHE85coB8ktIeBv11fJGf1f6vCCBhCCmgPfosjxXFPAMpckWghvXsEiMWSjGNmKmugY2EvIU10Dn9JQitQavDJp5MmRFl2p3BtxOsHbIFww-oJz7YpSe2pSrc6PQFWxnai0ina0uJ1GHOwc5YPVjyNj2cqlhxQL3cqRU7pdqba0/s630/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Table 2: Sources and Uses of Funds 2015 to 2023" border="0" data-original-height="251" data-original-width="630" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4IjsjuZ51g_qcRtJCAHE85coB8ktIeBv11fJGf1f6vCCBhCCmgPfosjxXFPAMpckWghvXsEiMWSjGNmKmugY2EvIU10Dn9JQitQavDJp5MmRFl2p3BtxOsHbIFww-oJz7YpSe2pSrc6PQFWxnai0ina0uJ1GHOwc5YPVjyNj2cqlhxQL3cqRU7pdqba0/s16000/Table%202-min.png" title="OSK Table 2: Sources and Uses of Funds 2015 to 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Sources and Uses of Funds 2015 to 2023</td></tr></tbody></table><div><br /></div><div><h2>Peer comparison </h2><div>OSK currently has a shareholders’ fund of RM 6.0 billion (as of Sep 2023). I thus compared its performance with property companies with shareholders’ funds greater than RM 1 billion.</div><div><br /></div><div>The sector performance was based on the base rates data presented in my article "<a href="https://www.i4value.asia/2021/06/will-malaysian-property-industry-turn.html#more" target="_blank">Will the Malaysian Property Industry turn around by 2024? </a>". They covered the 2010 to 2020 period. </div><div><br /></div><div>As I was looking at OSK performance from 2015, I had to revise the peer data to cover only 2015 to 2022. Table 3 compares the performance of OSK with those of its peers for this period. </div><div><br /></div><div>Except for revenue growth, OSK underperformed the sector for the other metrics. It is not a good endorsement of management. </div><div><br /></div><div>According the Warren Buffett, there are 2 key criteria to assess management. One is to see how well they do relative to their peers and the next is how they have allocated capital. OSK did not do well on both of them.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh25MPm9gGhGaJ-qW3vDgp3odDz2kTc44id_CUo1SzyenVMD3M46d1gzaoRHbJBLGUSYxUxJG5DSCZpfjlGuwwFf3h4Z1T03_gVLwMOWNb-trwiEgRFKleY3Aj5SnF9thjSUIq80u8yLF4ZlGgx8wBB0jmmiriQGGojgPbh03iW6SW89ngn-5bv_3AdJ4Y/s630/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Table 3: Comparative performance" border="0" data-original-height="153" data-original-width="630" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh25MPm9gGhGaJ-qW3vDgp3odDz2kTc44id_CUo1SzyenVMD3M46d1gzaoRHbJBLGUSYxUxJG5DSCZpfjlGuwwFf3h4Z1T03_gVLwMOWNb-trwiEgRFKleY3Aj5SnF9thjSUIq80u8yLF4ZlGgx8wBB0jmmiriQGGojgPbh03iW6SW89ngn-5bv_3AdJ4Y/s16000/Table%203-min.png" title="OSK Table 3: Comparative performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Comparative performance<br /><div style="text-align: left;"><i>Note: The sector performance was based on the median for the sector.</i></div></td></tr></tbody></table><div><br /></div></div><div style="text-align: justify;"><h2>My investment in OSK</h2><div>I first invested in OSK in 2013 at RM 0.99 per share. I then increased my investment over the next few years so that together with the bonus issue, my average purchased cost was RM 1.16 per share. </div><div><br /></div><div>I estimated that my average holding period till the end of Dec 2023 was 8.2 years. The market price as of the end of 2023 was RM 1.33 per share. </div><div><br /></div><div>I estimated that taking into account the bonus issue, my investment had generated a total return of 6.5 % CAGR. Refer to Table 4. This is much better than the returns from keeping my monies in a fixed deposit. </div><div><br /></div><div>You can see that dividends accounted for about ¾ of the total gain. The current market price reflects that soft market situation. As such I am confident that there is potential for further capital gain. In other words, the 6.5 % CAGR looks like a good base. </div><div><br /></div><div>OSK is an example of differentiating between a good company and a good investment. This is differentiating the business fundamentals from the investment returns.</div><div><ul><li>A good company is one with strong fundamentals.</li></ul><ul><li>A good investment is one that can enable you to make money.</li></ul></div><div><br /></div><div>OSK is a good investment because I managed to buy it at a cheap price. It may not be a wonderful company in the Warren Buffett sense of being able to compound business returns. </div><div><br /></div><div>But it is not a loss-making one. Just that its business returns as measured by the ROE are in single-digits.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVx6nxNcd6aTjUjTt6ffqcdfoo27Y1IgpdMf43TiAMu9WGwGmcr-AqAwbAV_VMxLF0UInAZjNcqohgfQg1QQ-Tsk2RHPUeTmw6KZmLvgxLb7RLLAvzNhEcvPA8KWzSmSFx2xsuS0NIbIGIGWOAJmO55tyxnnBHnEla7YFFeAP6BcKuRJZcoFut51d-rfc/s903/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Table 4. Estimating my total return" border="0" data-original-height="258" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVx6nxNcd6aTjUjTt6ffqcdfoo27Y1IgpdMf43TiAMu9WGwGmcr-AqAwbAV_VMxLF0UInAZjNcqohgfQg1QQ-Tsk2RHPUeTmw6KZmLvgxLb7RLLAvzNhEcvPA8KWzSmSFx2xsuS0NIbIGIGWOAJmO55tyxnnBHnEla7YFFeAP6BcKuRJZcoFut51d-rfc/s16000/Table%204-min.png" title="OSK Table 4. Estimating my total return" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4. Estimating my total return</td></tr></tbody></table><div><br /></div></div><div style="text-align: left;"><h2 style="text-align: left;">Valuation </h2><div style="text-align: justify;">The value of a company = value to operating assets + value of non-operating assets. Normally, </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Value of operating assets = present value of the cash flow generated by the operating assets.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Value of non-operating assets = book value.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In the case of OSK, we should not follow the normal approach for the non-operating assets because of its large contribution to the profits. This is especially true for the investments in RHB. Rather it would be more appropriate to estimate the intrinsic value of RHB.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Value of OSK = value of operating assets + value of RHB + value of other non-operating assets.</div><div><br /></div><h3 style="text-align: left;">Valuation of operating assets plus other non-operating assets</h3><div style="text-align: justify;">Looking at the right part of Chart 2, you can see that from 2015 to 2023, there was hardly any operating EBIT growth. Over this period the NOPAT grew at 0.6 % CAGR. Given this, it makes more sense to value the operating assets on an EPV basis. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I estimated the value of the operating assets plus other non-operating assets to be RM 0.96 per share. Refer to the valuation model in Table 5.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMq9NyeLm7BwOW98iqeuyBG6igXVMnN_rJ3oUG9Mpj7_UD066Hom65hnABH1X8-A4g4UAfvMXrS6ecqiviEqGeG-nRyzDnMA4qe7BY0T5uuPOVLHfpA_qUiHZ17CT3U23V480AJXsC43QigJ4DS5MIaJ5QgWQUtUKrqDPqfh2MBq_vpqWJsQS3bFhnsnA/s872/Table%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Table 5: Earnings value of operating assets plus other non-operating assets" border="0" data-original-height="629" data-original-width="872" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMq9NyeLm7BwOW98iqeuyBG6igXVMnN_rJ3oUG9Mpj7_UD066Hom65hnABH1X8-A4g4UAfvMXrS6ecqiviEqGeG-nRyzDnMA4qe7BY0T5uuPOVLHfpA_qUiHZ17CT3U23V480AJXsC43QigJ4DS5MIaJ5QgWQUtUKrqDPqfh2MBq_vpqWJsQS3bFhnsnA/s16000/Table%205-min.png" title="OSK Table 5: Earnings value of operating assets plus other non-operating assets" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 5: Earnings value of operating assets plus other non-operating assets</td></tr></tbody></table><div><br /></div><div><h3 style="text-align: left;">Value of RHB</h3><div style="text-align: justify;">I estimate the Earnings Value of RHB based on the average values of 3 methods</div><div><ul style="text-align: left;"><li style="text-align: justify;">Actual dividend. Refer to Table 6. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">Notional dividend. Refer to Table 7. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">Residual income. Refer to Table 8.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For details of the method, refer to “<a href="https://www.i4value.asia/2024/02/is-affin-value-trap.html#more" target="_blank">Is Affin a value trap?</a>”</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2Hw-ICDSLrx-03KwxvNdPWnd-Sk96T7XlUR_Gd1_Qeu4NbDxDbd4-CjwtKZlK4X6cHWSFoPPTWS8wlMVFvqb6NSV-jtZhxpTc4jEbv4_k7C9da9lhFta8hMAkCr14-oauto3vt1VM6CPEjxIc3NIwX95tTGs5hBpswY9NRiyfh6iY1fK1PvoGg4zujJY/s791/Table%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Table 6: Valuation based on actual dividends" border="0" data-original-height="176" data-original-width="791" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2Hw-ICDSLrx-03KwxvNdPWnd-Sk96T7XlUR_Gd1_Qeu4NbDxDbd4-CjwtKZlK4X6cHWSFoPPTWS8wlMVFvqb6NSV-jtZhxpTc4jEbv4_k7C9da9lhFta8hMAkCr14-oauto3vt1VM6CPEjxIc3NIwX95tTGs5hBpswY9NRiyfh6iY1fK1PvoGg4zujJY/s16000/Table%206-min.png" title="OSK Table 6: Valuation based on actual dividends" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 6: Valuation based on actual dividends</td></tr></tbody></table><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwN4ljqbbhB9mhMdzTBSdcN1mrtqEcsrWQwBFK92Umip5bLRbSfnFvAIeq3HLqV65weH6aQoEvwKa0feYFgPv69sdoAQZaB1Tk6rm-mx6PupiVn8AgBhWwlezn9piWmtVzGpt_3IYx9Hw0-GdWWrK5PzKGYkOFaoYCFV85VlEUsmGhgL11iUHFVB5mJBI/s791/Table%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Table 7: Valuation based on notional dividend" border="0" data-original-height="175" data-original-width="791" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwN4ljqbbhB9mhMdzTBSdcN1mrtqEcsrWQwBFK92Umip5bLRbSfnFvAIeq3HLqV65weH6aQoEvwKa0feYFgPv69sdoAQZaB1Tk6rm-mx6PupiVn8AgBhWwlezn9piWmtVzGpt_3IYx9Hw0-GdWWrK5PzKGYkOFaoYCFV85VlEUsmGhgL11iUHFVB5mJBI/s16000/Table%207-min.png" title="OSK Table 7: Valuation based on notional dividend" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 7: Valuation based on notional dividend</td></tr></tbody></table><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEeP90qDSEcPawcmitX2VmV8Mqx9BJreR0uOZYQfyf1RUmoLjiK7KOpS5W52d1OQOaz3i5mR5vlkh2nZ77hgR_jbY8ZmdtIGoWx3uQatN57oroZdImF6fMhT5k9EXvwZX5b6lr61lWH6T6ldV-R83PipmK6j_yFAF9ieyP5W8y9KQzJVJihOqB_VgKwqM/s791/Table%208-min.png" style="margin-left: auto; margin-right: auto;"><img alt="OSK Table 8: Valuation based on Residual income" border="0" data-original-height="147" data-original-width="791" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEeP90qDSEcPawcmitX2VmV8Mqx9BJreR0uOZYQfyf1RUmoLjiK7KOpS5W52d1OQOaz3i5mR5vlkh2nZ77hgR_jbY8ZmdtIGoWx3uQatN57oroZdImF6fMhT5k9EXvwZX5b6lr61lWH6T6ldV-R83PipmK6j_yFAF9ieyP5W8y9KQzJVJihOqB_VgKwqM/s16000/Table%208-min.png" title="OSK Table 8: Valuation based on Residual income" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 8: Valuation based on Residual income</td></tr></tbody></table><div><br /></div><div><div style="text-align: justify;">I then assumed that the Earnings value of RHB is the average of these 3 values. This came to RM 7.59 per share or RM 32,331.5 million.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In 2022, OSK had a 10.18 % interest in RHB. This is equal to RM 3,291 million or RM 1.60 per share.</div><div><br /></div><h3 style="text-align: left;">Sum-of-parts value</h3><div style="text-align: justify;">The value of OSK then becomes:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">RM 0.96 + RM 1.60 = RM 2.56 per share.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The market price of OSK as of 7 Feb 2024 is RM 1.50 per share. There is thus a 70 % margin of safety.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You can see that the biggest contributor is its investment in RHB. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The book value of OSK as of the end of Dec 2023 was RM 2.92 per share. You can see that the sum-of-parts value is lower than the book value. You should not be surprised by this as OSK had low returns. </div><div><br /></div><h3 style="text-align: left;">Limitations and risks</h3><div style="text-align: justify;">In interpreting the valuation results, you should consider the following:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Cyclical sector.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Larger contribution from associates and JV.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The property sector is cyclical. For more details on this, refer to “<a href="https://www.i4value.asia/2023/02/is-glomac-value-trap.html#more" target="_blank">Is Glomac a value trap?</a>” The latest property cycle was from 2009 to 2022. As such I should be using the average contribution margin during this period. Unfortunately, there is not enough history for OSK. As such, I would consider the intrinsic value of the operating assets as an optimistic one.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I have shown that the bigger earnings contribution was from its investment in RHB. This is reflected in the sum-of-parts valuation. The bigger portion of the Group value came from the non-operating assets.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">OSK's investment in RHB of about RM 3.4 billion is about 40% of the total capital employed. Over the past 3 years, this 40% contributed about 56% of the profits. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As far as I can tell, OSK management has no operating role in RHB. We have a situation where the bigger contribution came from an operation where management does not have a role. In the operations controlled by management, the business return was not fantastic.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">It is a poor reflection of management. Does it mean that when the investment in RHB becomes overpriced, we should divest our stake in OSK?</div></div></div><div><br /></div><div><div style="text-align: justify;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div>According to <a href="https://www.investopedia.com/terms/s/sumofpartsvaluation.asp" target="_blank">Investopedia</a>, </div><div><div><div><div><br /></div><div>“…a sum-of-parts valuation is a process of valuing a company by determining what its aggregate divisions would be worth if they were spun off or acquired by another company.”</div><div><br /></div><div>It is an approach to valuing a firm by separately assessing the value of each business segment or subsidiary and adding them up to get the total value of the firm. </div><div><br /></div><div>The value of each business unit or segment is derived separately and can be determined by any number of analysis methods.</div><div><br /></div><div>The sum-of-parts approach is suitable for the following situations:</div><div><ul><li>Companies that report different business segments or divisions.</li></ul><ul><li>Holding companies or conglomerates with many different companies.</li></ul><ul><li>Companies with distinct assets.</li></ul></div><div><br /></div><div>It is probably not suitable for:</div><div><ul><li>Companies with a single line of business.</li></ul><ul><li>Companies that don’t disclose any segments and where that information can’t be found.</li></ul></div><div><br /></div><div>If you are a newbie, this is probably only useful after you have learned several different valuation approaches. One way to cut down the learning time is to look at what others have done. One site with such analysis is <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha</a>*. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.</div></div></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div><div><h2 style="text-align: left;">Investment Thesis</h2><div style="text-align: justify;">Over the past 8 years, OSK has transformed itself from a financial services company to a property group. While OSK's main operation is property development, a big part of the profits came from its investment in RHB. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">From an operations perspective, the Group is not strong fundamentally. I have concerns about its financial standing. As a property company, the Group did not perform as well as its peers. Its ROE was boosted by the investments in RHB.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">OSK is trading below its Earnings Value and Asset Value. While part of the reason for this could be due to market sentiments, I think that its operation result has a role. Nevertheless, there is a large enough margin of safety so that OSK is not a value trap but an investment opportunity.</div><div style="text-align: justify;"><br /></div><h2 style="text-align: left;">Conclusion </h2><div style="text-align: justify;">There are two general questions value investors ask before investing in a company:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Is it a good company? In other words, is it fundamentally strong? </li></ul><ul style="text-align: left;"><li style="text-align: justify;">Is it a good investment? I assess this by looking at whether there is a sufficient margin of safety (> 30 %) at the current price.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">OSK does not meet the first test. But it did well on the second test. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">From a value investor perspective, there is a sufficient margin of safety. OSK is trading at a price equivalent to the value of its investment in RHB. In other words, the market is ascribing zero value to its property operations. This is too pessimistic.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">While it may not be the best company from a fundamental perspective, it does not look like a company whose operations are going to collapse. As such I would see OSK as an investment opportunity even for a fresh investor. It is not a value trap. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I originally invested in OSK as a proxy for investing in the Bursa banking sector. I think that this is still a good proxy. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The market price of RHB is RM 5.60 per share. Based on the value of RHB of RM 7.59 per share, there is a 36 % margin of safety. The margin of safety for OSK is much larger at 70%. You can see why I think OSK is still a good proxy for investing in the Bursa banking sector.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">At the same time, OSK now has a property arm. But I think that there are better property counters from a fundamental perspective. When the margin of safety for RHB disappears, I would divest my stake in OSK. In other words, I would not wait for the 70% margin of safety in OSK to disappear before selling my stake. </div></div><div><br /></div><div><br /></div><div><div><br /></div><div><div><br /></div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div><div style="text-align: justify;"><div style="text-align: center;"><br /></div></div></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><br /></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div><div><br style="text-align: justify;" /></div></div></div></div></div><div style="text-align: left;"><br /></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-71310835311762712922024-02-25T08:11:00.002+08:002024-02-26T16:18:33.469+08:00Is AmBank a value trap?<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Value Investing Case Study 46-1. A fundamental analysis of Ambank to show that it is not a value trap</span></div>
<div style="text-align: left;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEja7knufp_Y7YKCcwtAphWzQ-pS_sBDLFVr-RtPiqSkPjPFouERTpGGaDflS3iZT4oWEd1k51PLdvGGcjryvIOeRHjpYBxu1CuBkvDq5l12rqrp3U8vukWBCc5oEwl610XGnOOh9J_dia6pP9dYFHnBwJsIzWFGEGh5eX6CDSCQZ9Uc1dW3tcKMbbsZYag/s443/Pic%201.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is AmBank a value trap?" border="0" data-original-height="189" data-original-width="443" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEja7knufp_Y7YKCcwtAphWzQ-pS_sBDLFVr-RtPiqSkPjPFouERTpGGaDflS3iZT4oWEd1k51PLdvGGcjryvIOeRHjpYBxu1CuBkvDq5l12rqrp3U8vukWBCc5oEwl610XGnOOh9J_dia6pP9dYFHnBwJsIzWFGEGh5eX6CDSCQZ9Uc1dW3tcKMbbsZYag/s16000/Pic%201.png" title="Is AmBank a value trap?" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">There are currently 10 Bursa Malaysia banks. AmBank (or the Group) is one of them. </div><div style="text-align: left;"><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I first invested in AmBank in 2016 at RM 4.42 per share. Over the next few years, I continued to build up my investment. Today it is among the top 5 investments (in terms of market capitalization) in my portfolio.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">My average purchase price was RM 4.39 per share compared to the current market price of RM 4.28 per share (29 Jan 2024). But the book value of AmBank as of Sep 2023 was RM 5.60 per share. </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/6RTe84NA8m0" width="320" youtube-src-id="6RTe84NA8m0"></iframe></div><div><br /></div><div style="text-align: justify;">You can imagine the questions going through my mind:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Is the low price due to market sentiments or business issues?</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Is this a value trap that would prevent new investors from buying?</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Should I continue to hold or exit?</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If you have been following my blog, you will see that they are similar questions in my review of <a href="https://www.i4value.asia/2024/02/is-affin-value-trap.html#more" target="_blank">Affin Bank</a>. How did AmBank perform relative to Affin?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Join me as I assess AmBank's performance and valuation by comparing them with those of its peers and Affin. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">My conclusion is that AmBank is not a value trap and there is potential for the market to re-rate higher. I will continue to hold.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Should you go and buy it? Well, read my Disclaimer. </div><div><br /></div><h2 style="text-align: left;">Contents</h2><div><ul style="text-align: left;"><li><b>AmBank background</b></li></ul><ul style="text-align: left;"><li><b>My investment in AmBank</b></li></ul><ul style="text-align: left;"><li><b>AmBank performance</b></li></ul><ul style="text-align: left;"><li><b>Composite performance </b></li></ul><ul style="text-align: left;"><li><b>Valuation</b></li></ul><ul style="text-align: left;"><li><b>Method</b></li></ul><ul style="text-align: left;"><li><b>AmBank is not a value trap</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html" target="_blank">Learn more</a>.</i></div></td></tr></tbody></table></div></td></tr></tbody></table></div><div><br /></div></div><h2 style="text-align: left;">AmBank background</h2><div style="text-align: justify;">There are currently 10 banks listed under Bursa Malaysia. </div><div><ul style="text-align: left;"><li style="text-align: justify;">In terms of market capitalization, they ranged from RM 5 billion to RM 109 billion.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">In terms of total assets, they ranged from RM 70 billion to RM 1,001 billion with an average of RM 359 billion.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In terms of both market cap and total assets, AmBank ranks among the smaller banks.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbwjouQfYZ4gkZMnrwia1KJ30pO38iyzJJxZGwLO-jE3GJn27sD3DizsbA8YEQxRYWAJusacMLrsM1J5K6AN-rXcPXLpMbdZ1qmbxljBNC4EqBgkD_3J5CudbU6qJcHDMcbOWgPfyiMIKYpkcFvJVlTA40IxVCfRjzjwvfiit3PVA_k8uAnmjHr19zS1A/s903/Chart%201.png" style="margin-left: auto; margin-right: auto;"><img alt="Ambank Chart 1: Bursa Malaysia banks size" border="0" data-original-height="269" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbwjouQfYZ4gkZMnrwia1KJ30pO38iyzJJxZGwLO-jE3GJn27sD3DizsbA8YEQxRYWAJusacMLrsM1J5K6AN-rXcPXLpMbdZ1qmbxljBNC4EqBgkD_3J5CudbU6qJcHDMcbOWgPfyiMIKYpkcFvJVlTA40IxVCfRjzjwvfiit3PVA_k8uAnmjHr19zS1A/s16000/Chart%201.png" title="Ambank Chart 1: Bursa Malaysia banks size" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Bursa Malaysia banks size</td></tr></tbody></table><div><br /></div><div><h3 style="text-align: left;">AmBank</h3><div style="text-align: justify;">The Group is a leading financial services group with over 40 years of expertise in supporting the economic development of Malaysia. As of 2023, the Group has over three million customers and employs over 8,000 employees. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The Group provides services in wholesale banking, business banking, retail banking, investment banking, and related financial services. The latter includes Islamic banking, insurance, family takaful, stock broking, futures broking, investment advisory, and asset management services.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The Group reported its 2023 performance based on the following segments:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Retail Banking that continues to focus on building mass affluent, affluent, and small business customers. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">Business Banking that focuses on small and medium-sized enterprises.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Wholesale Banking that comprises Corporate Banking, Group Treasury and Markets. Corporate Banking offers a full range of products and services to wholesale banking clients. Group Treasury and Markets includes proprietary trading. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">Investment Banking includes corporate finance, M&A advisory, equity and debt capital markets, private banking, and stockbroking services.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Fund Management manages a broad range of investment mandates and unit trust funds. This segment also manages Private Retirement Schemes and Exchange Traded Funds.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Insurance. The continuing operations include a broad range of general insurance, life insurance, and takaful products. The discontinued ones include a broad range of general insurance products.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Group Funding and Others comprise activities to maintain the liquidity of the Group as well as support operations of its main business units and non-core operations.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In 2023, the Retail Banking segment was the biggest revenue contributor, accounting for about half of the consolidated revenue. In terms of PBT, the Wholesale Banking segment was the biggest contributor with 60% of the consolidated PBT. Refer to Chart 2. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYhi2HwGn9koREaEfOqVpYNJ2BDFWeiWCuD-lnePtaeMDZaGUCGuir9KPmuGxsz-xqwakh_W8aI8Zugw89N-Yn11jn3Gb5U7FSyRuxTybRLm8kBEqfldeQOhvOGcaCUNpEMREKiU23LZZqbUzPaAwa_OEfWfJUxokZYFLI38-IdfYr8KrTWApcWt8jvWY/s903/Chart%202.png" style="margin-left: auto; margin-right: auto;"><img alt="Ambank Chart 2: 2023 Segment Revenue and PBT" border="0" data-original-height="264" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYhi2HwGn9koREaEfOqVpYNJ2BDFWeiWCuD-lnePtaeMDZaGUCGuir9KPmuGxsz-xqwakh_W8aI8Zugw89N-Yn11jn3Gb5U7FSyRuxTybRLm8kBEqfldeQOhvOGcaCUNpEMREKiU23LZZqbUzPaAwa_OEfWfJUxokZYFLI38-IdfYr8KrTWApcWt8jvWY/s16000/Chart%202.png" title="Ambank Chart 2: 2023 Segment Revenue and PBT" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: 2023 Segment Revenue and PBT</td></tr></tbody></table><div><br /></div><div><div style="text-align: justify;"><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div><div style="text-align: justify;"></div></div><div><h3 style="text-align: left;">Revamping its operations</h3><div style="text-align: justify;">In Nov 2015, the Group appointed Dato’ Sulaiman Mohd Tahir as the new Group CEO. In the 2016 Annual Report, the Group unveiled its “four aspirations” plans to be achieved by 2020.</div><div><ul style="text-align: left;"><li style="text-align: justify;">To be Top four in its growth segments – mass affluent, affluent, SME, and mid-corporate.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">To be Top four in four key products – cards, transaction banking, markets, and wealth management.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">To sustain the Top four positions in its current engines – corporate loans, debt and capital markets, and asset management.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">To be a Top four employer in Malaysia.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">With the completion of AmBank's Top 4 Strategy in 2020, the Group unveiled the Focus 8 strategies that are to be achieved by 2024.</div><div><ol style="text-align: left;"><li style="text-align: justify;">Attaining a Return on Equity (ROE) of ≥10%.</li><li style="text-align: justify;">Sharpening its segment play.</li><li style="text-align: justify;">Delivering holistic customer value proposition and leveraging a collaborative culture and partnerships.</li><li style="text-align: justify;">Pushing capital-light revenue.</li><li style="text-align: justify;">Ramping up the next wave of digital initiatives.</li><li style="text-align: justify;">Future-proofing the workforce.</li><li style="text-align: justify;">Integrating Environmental, Social, and Governance (ESG) considerations into its business.</li><li style="text-align: justify;">Exploring digital banks.</li></ol></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Some of the above are quantitative and I will refer to them when I review Ambank’s performance.</div><div><br /></div><h2 style="text-align: justify;">My investments in Ambank</h2><div style="text-align: justify;">I first bought AmBank in 2016 at RM 4.42 per share. At that juncture, it had a Book Value of RM 5.05 per share. Its past 5 years' average EPS was RM 0.54 per share.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">From a simple valuation perspective, the Group was trading at about a Price Earnings multiple of 8.2. It looked like a bargain to me.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">At the same time, the Group has just recruited a new Group CEO and the plans that he laid out to move the bank forward made sense. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To make a long story short, I built up my investments over the next few years so that today AmBank is among the top 5 stocks (in terms of market cap) in my portfolio.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In terms of total returns, this has not been a great investment as the market price today is below my average purchase cost. Refer to Table 1. Over the past 7 odd years, I have achieved a 2.6 % CAGR in the total return. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This is well below the interest rate I could have received by placing my money as a fixed deposit with the bank. The bulk of the returns have been due to the dividends received.</div><div style="text-align: justify;"><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgx7wSHVa2XQDLR3_yp5DOp_AVuKA6Pa2Ev-Gyetdr7vPFXfMt3jLu0XsHCvTbEAA6OmkHDiczmO9rAB7Dl0gWqhWAYZ5a8Yb25nWJNT2xtKe2QU3asM5h1CBumpwdy63PnOYeDdwgn3rDzJAYlTzubPGddjgAe8AnQxxuhmMsYcw52wh7wectFb6SF8Ko/s803/Table%201.png" style="margin-left: auto; margin-right: auto;"><img alt="Ambank Table 1: My AmBank investment return" border="0" data-original-height="233" data-original-width="803" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgx7wSHVa2XQDLR3_yp5DOp_AVuKA6Pa2Ev-Gyetdr7vPFXfMt3jLu0XsHCvTbEAA6OmkHDiczmO9rAB7Dl0gWqhWAYZ5a8Yb25nWJNT2xtKe2QU3asM5h1CBumpwdy63PnOYeDdwgn3rDzJAYlTzubPGddjgAe8AnQxxuhmMsYcw52wh7wectFb6SF8Ko/s16000/Table%201.png" title="Ambank Table 1: My AmBank investment return" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: My AmBank investment return</td></tr></tbody></table><div style="text-align: justify;"><br /></div><div><h2 style="text-align: left;">AmBank performance</h2><div style="text-align: justify;">In my Affin Bank article, I compiled the performance of the Bursa Malaysia banks. I will use these as the basis to compare AmBank's performance.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In this article, I will use the terms “peer” and “sector” interchangeably to refer to the 10 Bursa banks including AmBank. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I classified the performance of the banks into 4:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Returns.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Efficiency.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Loan performance.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Capital adequacy.</li></ul></div><div><br /></div><h3 style="text-align: left;">Returns</h3><div style="text-align: justify;">I look at both the ROE and ROA. Refer to Chart 3. Both metrics are essential for assessing a bank's financial health. While ROE is more centred on shareholders' interests, ROA provides a broader view of the overall efficiency of the bank's operations. </div></div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirKPURzena2pMYcpi2Bu6GSTnkE8WBxbSiskhjxPUyNMSJ8RBPvhgEZwgjPHreuK00Ce34LbT_VqXCtJh3Hf9mvqkFZk0uCvxeFuZeMlDK9PSJF9xCdejlMqU8pdF96HTEEUA-Z6jtVDWxLi4pNStz1Z6gZslxC81vRQ7ywEutckDcwQJHx6scOI9qIX8/s903/Chart%203.png" style="margin-left: auto; margin-right: auto;"><img alt="Ambank Chart 3: Returns" border="0" data-original-height="266" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirKPURzena2pMYcpi2Bu6GSTnkE8WBxbSiskhjxPUyNMSJ8RBPvhgEZwgjPHreuK00Ce34LbT_VqXCtJh3Hf9mvqkFZk0uCvxeFuZeMlDK9PSJF9xCdejlMqU8pdF96HTEEUA-Z6jtVDWxLi4pNStz1Z6gZslxC81vRQ7ywEutckDcwQJHx6scOI9qIX8/s16000/Chart%203.png" title="Ambank Chart 3: Returns" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Returns</td></tr></tbody></table><div><br /></div><div><div style="text-align: justify;">AmBank performance for the past 15 years was about the sector median performance. The sharp drop in 2021 was due not just to Covid-19, but also to one-off losses comprising:</div><div><ul style="text-align: left;"><li style="text-align: justify;">RM 2.83 billion settlement for the 1MDB issues.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">RM1.79 billion goodwill impairment for its conventional and investment banking businesses.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">RM148 million impairment on its investment in an associate (REIT Impairment).</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The positive sign is that both the ROE and ROA appeared to have turned around over the past 2 years.</div><div style="text-align: justify;"><br /></div><h3 style="text-align: left;">Net interest margins and efficiency</h3><div style="text-align: justify;">I considered 2 metrics here: </div><div><ul style="text-align: left;"><li style="text-align: justify;">The net interest margin (NIM) is a key determinant of a bank's overall profitability. A higher margin suggests that the bank is more efficient in earning interest income compared to its funding cost.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The efficiency ratio evaluates how well it manages its operating expenses relative to its revenue. The higher the ratio, the less efficient the bank.</li></ul></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrw_oJG2a423gy2S_9NzmU4wmMKECnF_kUft965YCXp_P710hy8a8IGNP4Npnp1L18wxfpi_OTRAk6fEdmwz9KICmMYICwwCt_Yr-bvh_6ouphupO3vxe1a8eMOT21RmnUORQy9pJO4eCKrCZLYwkkwx7LFdpieAFQz2lXFSMfFTPTmcOSpLH5tJaGQSk/s903/Chart%204.png" style="margin-left: auto; margin-right: auto;"><img alt="Ambank Chart 4: Net interest margins and efficiency" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrw_oJG2a423gy2S_9NzmU4wmMKECnF_kUft965YCXp_P710hy8a8IGNP4Npnp1L18wxfpi_OTRAk6fEdmwz9KICmMYICwwCt_Yr-bvh_6ouphupO3vxe1a8eMOT21RmnUORQy9pJO4eCKrCZLYwkkwx7LFdpieAFQz2lXFSMfFTPTmcOSpLH5tJaGQSk/s16000/Chart%204.png" title="Ambank Chart 4: Net interest margins and efficiency" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Net interest margins and efficiency</td></tr></tbody></table><div><br /></div><div><div style="text-align: justify;">While AmBank followed the sector trends for both metrics, its lower NIM and higher Efficiency ratio suggest that it did worse than the sector median. </div><div><br /></div><h3 style="text-align: left;">Loan performance</h3><div style="text-align: justify;">I looked at two metrics to assess how AmBank performed when it came to loans. </div><div><ul style="text-align: left;"><li style="text-align: justify;">Loan to deposit ratio. A higher ratio implies that the bank is relying more on loans for its operations and may have a lower liquidity buffer.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Non-performing loans (NPL) ratio. A higher NPL ratio suggests a larger proportion of the bank's loan portfolio is at risk of default, indicating potential credit risk and deteriorating asset quality.</li></ul></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQdTNIAuw7zvFsu11f97xZy5yHJNC1PnEK-rsJWfpmj7ldY3Poh_TK92e9hrqBQQx0ojFPCynWAy4j1L-oFFE47IocgUmsru3kiEC-F8UURqtF3PoMdMc2eJJD83g2Pf6PduO1oCLpZmqyhsOapR-ml9mWWdK9vFFLlthyphenhyphenuJ-C4ktzD_TBSLkkr-RD4IM/s903/Chart%205.png" style="margin-left: auto; margin-right: auto;"><img alt="Ambank Chart 5: Loan performance" border="0" data-original-height="265" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQdTNIAuw7zvFsu11f97xZy5yHJNC1PnEK-rsJWfpmj7ldY3Poh_TK92e9hrqBQQx0ojFPCynWAy4j1L-oFFE47IocgUmsru3kiEC-F8UURqtF3PoMdMc2eJJD83g2Pf6PduO1oCLpZmqyhsOapR-ml9mWWdK9vFFLlthyphenhyphenuJ-C4ktzD_TBSLkkr-RD4IM/s16000/Chart%205.png" title="Ambank Chart 5: Loan performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Loan performance</td></tr></tbody></table><div><br /></div></div><div><div style="text-align: justify;">Looking at Chart 5, I would conclude that while initially, AmBank did worse than the sector, over the past few years, it has matched the sector's performance. This is a good sign. </div><div><br /></div><h3 style="text-align: left;">Capital adequacy</h3><div style="text-align: justify;">I looked at 2 ratios - Tier 1 capital adequacy ratio and total capital adequacy ratio. These measures are used to assess a bank's capital adequacy. However, they differ in the components of capital they consider. Refer to my Affin article if you want to know more about the differences between them. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHP4aLu1btA77ZAUdK6QoLntzhcGDow3PornKXFWba-bKfGdOuubl-HyBS4z-F1oIGz1BVfKtj_cktO7bi9hA2Nb9Lhe4iOjNNd5l9kxRHKynzu6qvJwvIix87UhYb7bcqKRnIuO7p2_6M_-1iz850mFrmbb46q5Q52RpFq5OC53C0uvbIaLbJCD0xJjM/s903/Chart%206.png" style="margin-left: auto; margin-right: auto;"><img alt="Ambank Chart 6: Capital adequacy" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHP4aLu1btA77ZAUdK6QoLntzhcGDow3PornKXFWba-bKfGdOuubl-HyBS4z-F1oIGz1BVfKtj_cktO7bi9hA2Nb9Lhe4iOjNNd5l9kxRHKynzu6qvJwvIix87UhYb7bcqKRnIuO7p2_6M_-1iz850mFrmbb46q5Q52RpFq5OC53C0uvbIaLbJCD0xJjM/s16000/Chart%206.png" title="Ambank Chart 6: Capital adequacy" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Capital adequacy</td></tr></tbody></table><div><br /></div><div><div style="text-align: justify;">AmBank had lower ratios compared to the sector median. The sector had improving trends for both ratios. In the case of AmBank, there was only an improving trend for the Tier 1 capital ratio. There was no significant trend for the total capital ratio. </div><div><br /></div><h3 style="text-align: left;">Summary of Ambank's performance</h3><div style="text-align: justify;">Based on these 4 categories of metrics, I would rate AmBank's performance as below the sector median. </div><div><ul style="text-align: left;"><li style="text-align: justify;">If you take into consideration the 2019 one-off losses, AmBank’s average returns for the past 15 years were lower than the sector.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">While AmBank followed the sector trends for both metrics, its lower NIM and higher Efficiency ratio suggest that it did worse than the sector.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Over the past few years, AmBank has improved its loan performance compared to the sector.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">AmBank had lower capital adequacy ratios compared to the sector.</li></ul></div><div style="text-align: justify;"><br /></div><h3 style="text-align: left;">Did it meet its strategic goals?</h3><div style="text-align: justify;">In the context of 2016 goals, the Group reported the following in its 2020 Annual Report:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">“…continues to deliver a solid performance, largely due to efforts in driving the Group’s Top 4 Strategy (FY2016-FY2020) that focused on our growth segments, key products, and sustaining our position in current engines. In FY2020, compared to other industry players, we consistently ranked Top 3 in terms of growth across most of our key performance metrics. Moreover, we ranked first for Net Interest Income (NII) growth, Cost-to-Income (CTI) ratio improvement, and Profit Before Provision (PBP) growth in Malaysia.”</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I do not have the statistics for the segments and key products. But Chart 7 below shows the total revenue and interest income trends. It does not look like AmBank improved its total revenue or interest income relative to the sector median.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Note that in my comparisons, I am looking at the Bursa banks. There are other non-bursa banks that AmBank may have used in the comparison panel eg HSBC, and Standard Chartered.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Nevertheless, I would give the bank the benefit of the doubt as I am sure they would not report wrong numbers. One conclusion I can draw is that despite achieving the Top 3, this did not contribute much to growing revenue or interest income.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To be fair to AmBank, it did achieve the following comparing 2020 with 2016 for the Bursa banks;</div><div><ul style="text-align: left;"><li style="text-align: justify;">It has the highest CAGR in interest income.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">It ranked No. 4 in terms of improving the efficiency ratio.</li></ul><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOVfP35Oca7b_cqutzzR78eNZULiCMKpzZEx_M96bjA89PyfofOWrarK6K64ZBBdD4TCOfpeu-f28k82I9w914-NdI_2EzOSByV8p0YZQxWr-7elWipjJpdwuDR2riUe6M1OwjUcv9qvAO3WaKDrFJkdbJdtDvE2xdQdXIBNm0BhgLyS6R5zObQ22pwaw/s903/Chart%207.png" style="margin-left: auto; margin-right: auto;"><img alt="Ambank Chart 7: Top line" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOVfP35Oca7b_cqutzzR78eNZULiCMKpzZEx_M96bjA89PyfofOWrarK6K64ZBBdD4TCOfpeu-f28k82I9w914-NdI_2EzOSByV8p0YZQxWr-7elWipjJpdwuDR2riUe6M1OwjUcv9qvAO3WaKDrFJkdbJdtDvE2xdQdXIBNm0BhgLyS6R5zObQ22pwaw/s16000/Chart%207.png" title="Ambank Chart 7: Top line" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Top line<br /><div style="text-align: left;"><i>Note: The total revenue comprised net interest income and non-interest income. The interest income shown is before interest expenses ie it is not net interest income.</i></div></td></tr></tbody></table><div style="text-align: justify;"><br /></div></div><div style="text-align: justify;"><div>In the context of the Focus 8 strategies, there is still one more year to go. However, there are 2 quantitative metrics – ROE and capital light revenue that are appropriate here.</div><div><ul><li>AmBank might just meet the 10% ROE target. Its 2023 ROE was 9.6 %.</li></ul><ul><li>I am not sure of the appropriate metric to measure the capital-light revenue. However, when I looked at the revenue / total equity ratio, I found that it was 20 % in 2022. Its 2023 ratio was 22 %. In other words, more revenue was generated relative to the total equity. This is a good sign of better capital efficiency.</li></ul></div><div><br /></div><h2>Composite performance</h2><div>In the previous section, I compared AmBank's performance based on individual metrics. To provide a comprehensive overview of performance across different metrics, I used the Z-scores. </div><div><br /></div><div>I first calculated the Z-scores for each metric and then averaged them to determine the overall Z-score. This score then represents the “composite” performance. Refer to the Method section for the details.</div><div><br /></div><div>The Z-score represents the number of standard deviations a particular data point is from the mean of a distribution. It is a measure of how far and in what direction an individual data point deviates from the mean of a set of data.</div><div><ul><li>The mean is represented by a Z-score of 0.</li></ul><ul><li>A negative Z-score denotes a below-average performance. The more negative a Z-score, the worse the performance. </li></ul><ul><li>A positive Z-score denotes an above-average performance. The larger the positive score, the better the performance.</li></ul></div><div><br /></div><div>Table 2 summarizes the Z-scores for three banks. </div><div><ul><li>You can see that overall AmBank did worse than Affin. </li></ul><ul><li>Both AmBank and Affin did worse than the average. </li></ul><ul><li>PBB did better than the average.</li></ul></div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtbVv9_rQdxhCUU6LlEyUy3Lrq6IRP9lsfa1JgirR1ZIXIu8x-5Qp9bQbJoCUTEFA9i-bmp4t7Y6d_Qf18ujo1wdLFuaBgdP4ele_7igUwlNUXnPNiVrSZjzc8MZqfzqBPX9PTlJf7Q9y4yb6W_jpMrx_adz7YoF-C36J82mPpFn53emho3Rrj4DhuN7g/s590/Table%202.png" style="margin-left: auto; margin-right: auto;"><img alt="Ambank Table 2: Comparative Z-scores." border="0" data-original-height="320" data-original-width="590" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtbVv9_rQdxhCUU6LlEyUy3Lrq6IRP9lsfa1JgirR1ZIXIu8x-5Qp9bQbJoCUTEFA9i-bmp4t7Y6d_Qf18ujo1wdLFuaBgdP4ele_7igUwlNUXnPNiVrSZjzc8MZqfzqBPX9PTlJf7Q9y4yb6W_jpMrx_adz7YoF-C36J82mPpFn53emho3Rrj4DhuN7g/s16000/Table%202.png" title="Ambank Table 2: Comparative Z-scores." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Comparative Z-scores.<br /><div style="text-align: left;"><i>Notes. The Efficiency ratio and NPL are in opposite direction to the other metrics. In other words, the higher the ratios or %, the worse the performance. For the other metrics like ROE, the higher the ratios or %, the better the performance. To aggregate them, the Efficiency ratio and NPL needed to be in the same direction as the others. This was achieved by multiplying their respective Z-scores with a negative 1.</i></div></td></tr></tbody></table><div style="text-align: justify;"><br /></div></div><div><h2 style="text-align: left;">Valuation</h2><div style="text-align: justify;">I compared the values of the various banks based on the following:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Earnings value (EV) derived from 3 DCF methods – dividends, notional dividends, and residual income.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Asset value (AV) based on its tangible book value.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For details of the valuation, refer to the Affin article. Table 3 summarizes the margins of safety for the Bursa banks.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You can see that AmBank is about to meet the 30% margin of safety based on the Asset Value. However, it does not have a sufficient margin of safety based on its Earnings Value.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You should not be surprised by the Earning Value as the performance of Ambank is not exactly the best. </div><div style="text-align: justify;"><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgc8Hj7-ymsUU2wquuClvaFyIJ7SbW8oNc3YC5Jtp7tcpysbbjC35UJmcvfn-sR_x25qxs4rYSavcw1dDjb8RP_HQLvdPGnjTzM7pX9E0v75LJw79tEE-a0Lbc5fU9Z8cIFjq2zH64BFJ93f9iVRdSAJ742qFEAytGMdFCVB0lxkn6TOVB_tjzEfQ6L2b0/s506/Table%203.png" style="margin-left: auto; margin-right: auto;"><img alt="Ambank Table 3: Margins of safety" border="0" data-original-height="349" data-original-width="506" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgc8Hj7-ymsUU2wquuClvaFyIJ7SbW8oNc3YC5Jtp7tcpysbbjC35UJmcvfn-sR_x25qxs4rYSavcw1dDjb8RP_HQLvdPGnjTzM7pX9E0v75LJw79tEE-a0Lbc5fU9Z8cIFjq2zH64BFJ93f9iVRdSAJ742qFEAytGMdFCVB0lxkn6TOVB_tjzEfQ6L2b0/s16000/Table%203.png" title="Ambank Table 3: Margins of safety" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Margins of safety</td></tr></tbody></table><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><h2>Method</h2><div>The data for my analysis were extracted from the TIKR.com platform. While the platform provided data as far back as 2002, not all the banks were in operation for that long. As such the starting year for the analysis was pegged to the year when all the 10 banks had information ie 2009</div><div><br /></div><div>Secondly, not all the banks had the same financial year-end. I took the reporting year as presented by TIKR.com as the calendar year. In this context, for 2023 some banks had their financial year end as Dec 2023. When I started on this analysis, these banks had yet to announce their 2023 results. As such I used the Sep LTM results as the 2023 results.</div><div><br /></div><div>I first computed the relevant metrics eg ROE for each company. Then for each metric, I tabulated the 2009 to 2023 performance for all 10 companies. I then use the appropriate EXCEL function to derive the quartiles, median, and mean for each year. </div><div><br /></div><h3>Z-Scores</h3><div>Z-scores, also known as standard scores, are a measure of how far away a particular data point is from the mean of a group of data. They are used to standardize and compare data points from different distributions.</div><div><br /></div><div>Z-scores allow you to take data points drawn from populations with different means and standard deviations and place them on a common scale. This standard scale lets you compare observations for different types of variables that would otherwise be difficult. </div><div><br /></div><div>The formula for calculating a z-score for a data point (X) in a distribution with mean (μ) and standard deviation (σ) is given by:</div><div><br /></div><div>Z = (X− μ) / σ</div><div><br /></div><div>The resulting z-score represents the number of standard deviations a data point is from the mean. A positive z-score indicates that the data point is above the mean. A negative z-score indicates that the data point is below the mean.</div><div><br /></div><div>Z-scores are useful for comparing scores from different distributions that may have different units or scales. They provide a standardized way to assess the relative position of a data point within its distribution. </div><div><br /></div><div>In a standard normal distribution (a normal distribution with a mean of 0 and a standard deviation of 1), a z-score of 1 corresponds to a data point that is one standard deviation above the mean. Similarly, a z-score of -1 corresponds to a data point that is one standard deviation below the mean.</div><div><br /></div><h3>Computing the Z-scores for the banks</h3><div>I computed the Z-score for each metric in the following manner</div><div><ul><li>For each metric, I calculated the average values for each bank from 2009 to 2023. I treat the average values as representative of the performance of each company over the past 15 years.</li></ul><ul><li>I then determined the mean and standard deviation for the metric based on the various representative performances (the average from 2009 to 2023 for each company).</li></ul><ul><li>The Z-Score for AmBank was = (Ambank average – mean) / standard deviation.</li></ul></div><div><br /></div><div>I then derived the composite score by averaging the Z-scores for the various metrics. Note that in this approach I assumed that all the metrics have the same weights. In other words, they each contribute equally to the composite score.</div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div><div>What are Composite Scores? </div><div><div><br /></div><div>According to <a href="What are Composite Scores? According to Statistics Solutions a composite score is a single variable or data point that represents a combination of information from multiple variables or data points. In other words, it is a single score derived from multiple pieces of information. Composite scores are commonly used in the social sciences to represent variables or concepts that are difficult or impossible to directly measure with a single data point. From a statistical standpoint, the main advantage of using a composite score is that it allows us to reduce multiple data points into a single data point. A single variable is generally simpler to analyze than multiple variables. The results of the analysis are easier to interpret. Also, fewer variables could mean fewer analyses are needed, which reduces the probability of Type I errors. A statistical disadvantage of composite scoring is that information from the individual items that make up the composite score is lost. As such subsequent analyses of the composite score are less able to account for measurement error. Generally, composite scores should only be made from sets of items that are strongly related. Items that are not conceptually related should not be combined into a composite score. I have a quantitative background so it is natural for me to use quantitative techniques in my company analysis. But company analysis consists of both quantitative and qualitative analysis. They complement each other. If you are a newbie and trying to figure out the balance required, I suggest that you look at what other experience analysts have done. One site with such analysis is Seeking Alpha. " target="_blank">Statistics Solutions</a> a composite score is a single variable or data point that represents a combination of information from multiple variables or data points. In other words, it is a single score derived from multiple pieces of information.</div><div><br /></div><div>Composite scores are commonly used in the social sciences to represent variables or concepts that are difficult or impossible to directly measure with a single data point.</div><div><br /></div><div>From a statistical standpoint, the main advantage of using a composite score is that it allows us to reduce multiple data points into a single data point. A single variable is generally simpler to analyze than multiple variables. The results of the analysis are easier to interpret. Also, fewer variables could mean fewer analyses are needed, which reduces the probability of Type I errors. </div><div><br /></div><div>A statistical disadvantage of composite scoring is that information from the individual items that make up the composite score is lost. As such subsequent analyses of the composite score are less able to account for measurement error. </div><div><br /></div><div>Generally, composite scores should only be made from sets of items that are strongly related. Items that are not conceptually related should not be combined into a composite score. </div><div><br /></div><div>I have a quantitative background so it is natural for me to use quantitative techniques in my company analysis. But company analysis consists of both quantitative and qualitative analysis. They complement each other.</div><div><br /></div><div>If you are a newbie and trying to figure out the balance required, I suggest that you look at what other experience analysts have done. One site with such analysis is <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha</a>*. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.</div></div></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>Is AmBank a value trap? </h2><div>I have shown that Ambank's performance is below the sector average. While its NIM and Efficiency ratio are not as good as the sector, there are some positive signs.</div><div><ul><li>Interest income and revenue were growing. </li></ul><ul><li>Returns seemed to be turning around.</li></ul><ul><li>Loan performance seemed to be improving.</li></ul><ul><li>Capital adequacy is holding although there is room for improvements.</li></ul></div><div><br /></div><div>It is not a bank with dire fundamentals. Management had taken steps to improve the performance with first the Top 4 plans and currently the Focus 8 strategies.</div><div><br /></div><div>A value trap is a company that while appearing cheap is cheap because it is facing fundamental issues. While AmBank has not been performing well relative to its peers, it is not a loss-making bank. While it has low returns, it has been profitable every year except for the extraordinary losses in 2019. </div><div><br /></div><div>The other metric in assessing whether it is a value trap is the margin of safety. </div><div><ul><li>There is not enough margin of safety based on the Earnings Value.</li></ul><ul><li>There is a 28 % margin of safety based on the Asset Value.</li></ul></div><div><br /></div><div>As a financial institution under Bank Negara's oversight, the Asset Value provides a floor value. Given the valuation and fundamental picture, AmBank is not a value trap. </div><div><br /></div><div>While it may not be a value trap, you may be overpaying for the bank based on its Earnings Value. The reality is that the market places more emphasis on the Earnings Value rather than the Asset Value. So, if you are investing hoping for a re-rating, there must be some expectation of better performance.</div><div><br /></div><div>I do not see any catalyst at this stage. As such if you have not invested in AmBank, you may think that this is not good enough to overcome the small margin of safety (from an EV perspective).</div><div><br /></div><div>But I am already a shareholder of AmBank. I would rather hold onto my shares and see whether the achievement of Focus 8 will cause the market to re-rate it. </div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><div><br /></div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: left;"><div style="text-align: justify;"><div style="text-align: center;"><br /></div></div></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><br /></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div><div><br /></div></div></div><div><br /></div><div><br /></div></div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div></div><div><br /></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-53272085588229836312024-02-18T08:11:00.004+08:002024-02-21T21:01:34.309+08:00Is MNRB a value trap?<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Value Investing Case Study 45-1. A fundamental analysis of MNRB shows that it is a value trap. If you are not yet an investor in MNRB, there are better options elsewhere. </span></div>
<div style="text-align: justify;"><br /></div><div style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj755ro9pa4ihfKhwVUm_AMGsAQVu2Pi5n2NC01QC0ngh4_TBsFG8K3v3VHM6pHt8JEMdE0WB8lLK-0o9OkglK3oN020ephkVPu22wRiKip1iP0Fn4hSZHsBu204c5AztXEVL5S7CpvddS7MEFJJqG7DGW6J5nxNG-Zslwtn2PuWxoKUuw56MAyZT4TqwE/s194/Pic%201-min.png"><img alt="Is MNRB a value trap?" border="0" data-original-height="147" data-original-width="194" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj755ro9pa4ihfKhwVUm_AMGsAQVu2Pi5n2NC01QC0ngh4_TBsFG8K3v3VHM6pHt8JEMdE0WB8lLK-0o9OkglK3oN020ephkVPu22wRiKip1iP0Fn4hSZHsBu204c5AztXEVL5S7CpvddS7MEFJJqG7DGW6J5nxNG-Zslwtn2PuWxoKUuw56MAyZT4TqwE/s16000/Pic%201-min.png" title="Is MNRB a value trap?" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">MNRB Holdings Berhad (MNRB or the Group) is Malaysia’s national reinsurance company. You would think that given this stature it would be a stock market darling.</div><div style="text-align: justify;"><div><br /></div><div>Unfortunately, it is currently trading at about 1/3 its Book Value. As a financial institution, MNRB comes under the purview of Bank Negara. As such I am very confident that all its financial assets and liabilities are marked to market. In other words, the Book Value is a good reflection of its net asset value.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/WL91Rta-BwM" width="320" youtube-src-id="WL91Rta-BwM"></iframe></div><div><br /></div><div>So why is MNRB trading at such a huge discount to its Book Value? This is because the market tends to focus on Earnings Value. And MNRB failed in this respect. For example, its average ROE over the past 12 years was only 7%. </div><div><br /></div><div>However, MNRB is not a company facing financial losses. Nor is it operating in a sunset sector. Is there an investment opportunity or is it a value trap?</div><div><br /></div><div>Join me as I argue the following:</div><div><ul><li>If you are thinking of MNRB as a fresh investor, there are better Bursa insurance companies to consider.</li></ul><ul><li>If you are already an investor, whether to hold or cut loss depends on your entry price. I belong to this category and I will show you why I am holding onto MNRB.</li></ul></div><div><br /></div><div>If you are currently a shareholder, should you hold like me or sell? Well, read my Disclaimer. </div><div><br /></div><h2>Content</h2><div><ul><li><b>Investment Thesis</b></li></ul><ul><li><b>MNRB’s background</b></li></ul><ul><li><b>My investment in MNRB</b></li></ul><ul><li><b>Method</b></li></ul><ul><li><b>Bursa Malaysia insurance companies</b></li></ul><ul><li><b>Industry Overview</b></li></ul><ul><li><b>Peer comparison</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Is MNRB a value trap?</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html" target="_blank">Learn more</a>.</i></div></td></tr></tbody></table></div></td></tr></tbody></table></div><div><br /></div></div><h2>Investment Thesis</h2><div>While MNRB had been able to grow its revenue at 5.2 % over the past decade, PAT only grew at about half the rate. When I compared MNRB's performance with those of the other Bursa insurance companies, I found that it is at best just below the sector average.</div><div><br /></div><div>MNRB's problems are more about poor operating fundamentals – profitability, underwriting performance, and investing its float. There is no indication of improving trends. Most of the historical trends point in a deteriorating direction.</div><div><br /></div><div>While the Asset Value provides more than a 30% margin of safety, there is no margin of safety based on its Earnings Value. As such I think that there a better Bursa insurance companies to look at. Is it a value trap then? Yes.</div><div><br /></div><div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div></div><div><h2>MNRB’s background</h2><div>Malaysian National Reinsurance Berhad, the country’s national reinsurer was set up in 1972 to reduce the outflow of reinsurance premiums overseas. The Company commenced operations on 19 February 1973.</div><div><br /></div><div>In 2005, as a result of a restructuring exercise within the MNRB Group, the Company’s reinsurance license, business, and assets were transferred to its subsidiary company, Malaysian Reinsurance Berhad. Under the restructuring, Malaysian National Reinsurance Berhad became an investment holding company and changed its name to MNRB Holdings Berhad. Today, MNRB is listed on the Main Market of Bursa Malaysia.</div><div><br /></div><div>The Group comprises a leading wholesale provider of reinsurance and takaful as well as two takaful operators. Its reinsurance subsidiary stands tall among the top reinsurers in the region, writing lines of general businesses locally and abroad. In Malaysia, its takaful operators are amongst the pioneers in the provision of financial protection services based on the takaful system.</div><div><br /></div><div>The Group today has the following key subsidiaries:</div><div><ul><li>Malaysian Reinsurance Berhad that underwrites all classes of general reinsurance business. It also underwrites general and family retakaful businesses through its retakaful division.</li></ul><ul><li>Takaful Ikhlas Family Berhad offers a comprehensive range of family takaful products.</li></ul><ul><li>Takaful Ikhlas General Berhad offers a comprehensive range of general takaful solutions which comprises motor and nonmotor general takaful protection products.</li></ul><ul><li>Malaysian Re (Dubai) Ltd is engaged in developing business for its sister company, Malaysian Reinsurance Berhad in the Middle East. </li></ul></div><div><br /></div><div>In 2023, the Reinsurance business accounted for about 60% of the Group’s premiums. The Takaful operations accounted for 38 % of the Group’s premium with the balance of 2% from the Retakaful operations.</div><div><br /></div><h2>My investment in MNRB</h2><div>I first bought MNRB in 2012 at RM 2.60 per share on the basis that it was trading well below its then Book Value of RM 3.30 per share. I assumed that because of Bank Negara's oversight, the Book Value would be a good representation of its intrinsic value. I further argued that as the national reinsurance company, it would probably have some monopoly power.</div><div><br /></div><div>Over the next couple of years, I built up my shareholdings from a combination of new purchases, bonus issues, and rights issues. Today it is among my top 5 shares in terms of cost in my stock portfolio.</div><div><br /></div><div>My current total return from the investment in MNRB is about 4.2 % CAGR. Refer to Table 1. You can see that the bulk of the returns came from dividends.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO2nUOGukO8p14HFmE78RoZFe9S9qxQR1C11QevFnYC6L89XIT2cybf5PhSypXILSmO4FDNS92aDFwCiNyYQmkmV7cIK4iMUOKds3kpTI8s6ExQRbSVW2LtysZGfUGWHb0Qwg22YgW5y9tsLS1Hj9YXnQeJVDwXnPtM56zB2XJmg-bC9N32Lcq9Ks60zE/s868/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Table 1: My investment returns." border="0" data-original-height="233" data-original-width="868" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO2nUOGukO8p14HFmE78RoZFe9S9qxQR1C11QevFnYC6L89XIT2cybf5PhSypXILSmO4FDNS92aDFwCiNyYQmkmV7cIK4iMUOKds3kpTI8s6ExQRbSVW2LtysZGfUGWHb0Qwg22YgW5y9tsLS1Hj9YXnQeJVDwXnPtM56zB2XJmg-bC9N32Lcq9Ks60zE/s16000/Table%201-min.png" title="MNRB Table 1: My investment returns." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: My investment returns.</td></tr></tbody></table><div><br /></div><div>It is not a fantastic return as there had not been much upside in the share price as shown in Chart 1. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvMwvnYpKRhTMkC7HOU-yzi4yeZOnBvoym3B4Iotv9lxLdXec6ifMF5EU7ta9oAdr2rqAViafhyphenhyphenRJrYoqrM5yGx4pkZHJtCjn1Z1fjVCeAWaaJlwuSpcoo84E3FeEUcwCe-yUtBL17wBpcj0B6lxCanQYudcGfc5C8F7VEN39-bIsN3fkpApOhUAL-sqY/s903/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 1: MNRB share price trends" border="0" data-original-height="372" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvMwvnYpKRhTMkC7HOU-yzi4yeZOnBvoym3B4Iotv9lxLdXec6ifMF5EU7ta9oAdr2rqAViafhyphenhyphenRJrYoqrM5yGx4pkZHJtCjn1Z1fjVCeAWaaJlwuSpcoo84E3FeEUcwCe-yUtBL17wBpcj0B6lxCanQYudcGfc5C8F7VEN39-bIsN3fkpApOhUAL-sqY/s16000/Chart%201-min.png" title="MNRB Chart 1: MNRB share price trends" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: MNRB share price trends</td></tr></tbody></table><div><br /></div><div><h2>Method</h2><div>I hope that the data I present in the following sections can:</div><div><ul><li>Serve as base rates when looking at the performance of Bursa Malaysia insurance companies. For further info on base rates, refer to my article on the Bursa Malaysia banks titled “<a href="https://www.i4value.asia/2024/02/is-affin-value-trap.html#more" target="_blank">Is Affin a value trap?</a>”</li></ul><ul><li>Be a basis to assess MNRB performance relative to the median values of the panel. </li></ul></div><div><br /></div><div>In my peer comparison for MNRB, I compared MNRB with the panel median values. The panel in this context refers to all 8 companies including MNRB.</div><div><br /></div><div>This is a purely quantitative analysis. I have not assessed the qualitative aspects such as the adoption of digital technology, customer satisfaction, and brand performance. </div><div><br /></div><div>In this article, I used the word “peer”, “panel” and “sector” interchangeably to mean the 8 Bursa Malaysia companies listed in Table 2.</div><div><br /></div><div>The data for my analysis were extracted from the TIKR.com platform. While the platform provided data as far back as 2002, not all the insurance were in operation for that long. As such the starting year for the analysis was pegged to the year when all 8 companies had information ie 2012.</div><div><br /></div><div>Secondly, not all the companies had the same financial year-end. I took the reporting year as presented by TIKR.com as the calendar year. In this context for 2023, some companies had their financial year end as Dec 2023. When I started on this analysis, these companies had yet to announce their 2023 results. As such I used the Sep LTM results as the 2023 results.</div><div><br /></div><div>I first computed the relevant metrics eg ROE for each company. Then for each metric, I tabulated the 2012 to 2023 performance for all 8 companies. I then use the appropriate EXCEL function to derive the quartiles, median, and mean for each year. </div></div><div><br /></div><div><h2>Bursa Malaysia insurance companies</h2><div>The Malaysian insurance sector is characterized by a competitive landscape of both domestic and international players. It encompasses life and non-life insurance, with a growing focus on digitalization to enhance customer experience and operational efficiency. </div><div><br /></div><div>Regulatory frameworks, such as the Malaysian Financial Services Act, govern the sector, ensuring stability. Key players include Prudential, Allianz, and Great Eastern. The sector is adapting to evolving consumer needs, offering diverse products, including health and motor insurance. </div><div><br /></div><div>As of Jan 2024, there were 8 Bursa Malaysia insurance companies. </div><div><ul><li>They ranged from RM 1.1 billion to RM 25.1 billion in terms of total assets. In terms of market capitalization, they ranged from RM 0.1 billion to RM 5.0 billion. Refer to Table 2.</li></ul><ul><li>In terms of products and services, they cover both life and general insurance companies. MNRB is the only one with significant reinsurance activities. </li></ul></div><div><br /></div><div>In terms of total assets and market cap, MNRB is ranked among the top 3.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj51zgz-_v19I6OkJJjBF4p3vPiSHXQ4-nQOwumjCDsYy9ghm0g8u9yo9eEpqCigYPrxtUMyMjUOb-I-pu9-mEuzgFXw_TrjY82-oXeftGZfwbY5iYxEaPH-wl4FhKAJsEvMOs98bvFnq67LoEaIPa2IqkRWZ_ySvy8g6-eU8A8igFSptsXiW9pZy_jETM/s572/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Table 2: Profile of Bursa Malaysia insurance companies" border="0" data-original-height="291" data-original-width="572" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj51zgz-_v19I6OkJJjBF4p3vPiSHXQ4-nQOwumjCDsYy9ghm0g8u9yo9eEpqCigYPrxtUMyMjUOb-I-pu9-mEuzgFXw_TrjY82-oXeftGZfwbY5iYxEaPH-wl4FhKAJsEvMOs98bvFnq67LoEaIPa2IqkRWZ_ySvy8g6-eU8A8igFSptsXiW9pZy_jETM/s16000/Table%202-min.png" title="MNRB Table 2: Profile of Bursa Malaysia insurance companies" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Profile of Bursa Malaysia insurance companies</td></tr></tbody></table><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div><div>While banks and insurance companies are financial institutions, they don’t have much in common. The differences between them can be grouped under the following:</div><div><div><ul><li>Primary function.</li></ul><ul><li>Risk management.</li></ul><ul><li>Products and services.</li></ul><ul><li>Financial intermediaries.</li></ul><ul><li>Regulation.</li></ul></div><div><br /></div><div>These differences can be significant factors influencing the decision of universal banks to divest their insurance businesses.</div><div><br /></div><div>From an investment perspective, the way you analyse banks would be different from the way you analyse insurance companies. </div><div><br /></div><div>For a newbie, one way to see these differences is from sites such as <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha</a>* which has good analyses on both types of financial institutions. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.</div></div></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>Industry Overview</h2><div>The Malaysian insurance industry especially the takaful sector is not a sunset one. I provide 2 sets of quotes to illustrate my point.</div><div><br /></div><div>The first is from the Jan 2024 <a href="https://www.asiainsurancereview.com/Magazine/ReadMagazineArticle?aid=46354" target="_blank">Asia Insurance Review.</a></div><div><br /></div><div>“According to the Malaysian Takaful Association (MTA), the takaful industry posted strong growth in 2022…with family takaful seeing a penetration rate of 20.1% last year compared to 18.6% in 2021. Meanwhile, general takaful business generated… a year-on-year increase of 21.1% over 2021.”</div><div><br /></div><div>“Statistics from the General Insurance Association of Malaysia (PIAM) also showed a similar trend for the insurance industry. Nonlife insurers recorded an increase in gross direct premiums of 10% to MYR19.4bn for the full year 2022 compared to 2021.”</div><div><br /></div><div>The second quote is from the Deputy Governor of Bank Negara at the Malaysian Life Reinsurance Group Berhad Retakaful Launch in Dec 2023, </div><div><br /></div><div>“Malaysia’s takaful industry has also expanded nearly three times to where it was a decade ago… the aspiration to achieve 4.8% to 5% insurance and takaful penetration rate out of GDP has been outlined in the Financial Sector Blueprint 2022-2026.”</div></div><div><br /></div><div><h2>Peer Comparison</h2><div>I looked at the following groups of metrics to assess MNRB performance relative to the peers.</div><div><ul><li>Revenue</li></ul><ul><li>Returns</li></ul><ul><li>Underwriting performance</li></ul><ul><li>Investments</li></ul><ul><li>Float</li></ul><ul><li>Solvency</li></ul></div><div><br /></div><div>Note that in the following charts, the left part shows the sector performance. The right part compares the sector performance with that of MNRB. </div><div><br /></div><h3>Revenue</h3><div>Revenue came from premiums, dividends, and investment income. Over the past 12 years, premiums accounted for 82% of the revenue for the sector. In the case of MNRB, premiums averaged 87 % of its revenue over the past 12 years.</div><div><br /></div><div>Revenue and premiums for the sector and MNRB showed uptrends. From 2012 to 2023:</div><div><ul><li>The sector median total revenue grew at 5.6 % CAGR whereas MNRB only achieved 5.2 % CAGR. Refer to Chart 2.</li></ul><ul><li>The sector’s median premiums growth of 6.8 % CAGR was much higher than the MMRB growth rate of 4.9 %. Refer to Chart 3.</li></ul><div><br /></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjumQ8rbbR9QfSEsoiWsC22oKO_TlUxcGU1FNdnnLMlJLB6arAyQBd968eQ8ch4BqvAKPdtaq4xImxWKkM3naXE6fD-VKy243u4PK4AYoFqK278rN9R71Fs9sfX_H6Lmw0v5aAQIbYZYIrj1ThwcD_ZzM7G_bdRqmBYC6xm0m5akKHxpFwHpAyzznVB384/s903/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 2: Revenue" border="0" data-original-height="268" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjumQ8rbbR9QfSEsoiWsC22oKO_TlUxcGU1FNdnnLMlJLB6arAyQBd968eQ8ch4BqvAKPdtaq4xImxWKkM3naXE6fD-VKy243u4PK4AYoFqK278rN9R71Fs9sfX_H6Lmw0v5aAQIbYZYIrj1ThwcD_ZzM7G_bdRqmBYC6xm0m5akKHxpFwHpAyzznVB384/s16000/Chart%202-min.png" title="MNRB Chart 2: Revenue" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Revenue</td></tr></tbody></table><div><br /></div><div><div>Compared to the sector median, MNRB's total revenue and premiums were much larger. </div><div><br /></div><div>You can see that there was a drop in MNRB’s revenue and premium in 2019. These were due to lower gross premiums and contributions from both the reinsurance and takaful subsidiaries. This resulted from a conscious decision not to renew some unprofitable businesses.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiD-Zq5xuPl_oxpFQfEyRMAQCVDfRDnFB00umMwKrDxwV5uxR5oHSvkQdpjM4tFaq1N28C_kS4lww8FjoJRHUSq8g_-gLOVqdpYi0wUiNYae7Mux1B_5L32o7QTCeLeBJO-Zr4Y0RDoljDLue1kMAxkNAKU7Vrdc7-deYkhOd9UaRMkTLxAe9eDSGKxBDU/s903/Chart%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 3: Premiums" border="0" data-original-height="269" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiD-Zq5xuPl_oxpFQfEyRMAQCVDfRDnFB00umMwKrDxwV5uxR5oHSvkQdpjM4tFaq1N28C_kS4lww8FjoJRHUSq8g_-gLOVqdpYi0wUiNYae7Mux1B_5L32o7QTCeLeBJO-Zr4Y0RDoljDLue1kMAxkNAKU7Vrdc7-deYkhOd9UaRMkTLxAe9eDSGKxBDU/s16000/Chart%203-min.png" title="MNRB Chart 3: Premiums" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Premiums</td></tr></tbody></table><div><br /></div><div><h3>Returns</h3><div>Despite the growth in revenue and premiums, the sector experienced declining returns over the past 12 years. As can be seen from Charts 4 and 5, both the ROE and ROA declined. </div><div><br /></div><div>As will be shown in the latter sections the declining returns were due to declining underwriting margins coupled with declining investment yields. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgljj_1pqG9QM3iL7oKd96smcxZDTfF0Zz5wn8zKT0p2Hlu5a7fVIjcqDJJEXwm1snjE3MoGZ6B8okJYIgbLKmnkm-7hYh8U5syF45JHYSKKKuQ7RToUKxgeqqANBM7SpHiHUAQVCoyX2x15Y1YU7zIIzWfEOH8N02-UylOkQlYDcLQqVDu1xDi5bptU6c/s903/Chart%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 4: ROE" border="0" data-original-height="268" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgljj_1pqG9QM3iL7oKd96smcxZDTfF0Zz5wn8zKT0p2Hlu5a7fVIjcqDJJEXwm1snjE3MoGZ6B8okJYIgbLKmnkm-7hYh8U5syF45JHYSKKKuQ7RToUKxgeqqANBM7SpHiHUAQVCoyX2x15Y1YU7zIIzWfEOH8N02-UylOkQlYDcLQqVDu1xDi5bptU6c/s16000/Chart%204-min.png" title="MNRB Chart 4: ROE" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: ROE</td></tr></tbody></table><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjP45tyuMfCFmeyugdU2kyk4HXczeJr3eTJe9eFX3Z6D-Krwn-WariIhDxD5uztJxnnHT0RG7zllG76fPmiYtjdmK_u26VmGgDFVzC6awY7GlSCp-WudVjMTlXU_xcmMT9OrDQM33pQegf9TI1oko4vqUsm0-jgqajS3EbgYQ7wS42kgZ72vYucIgC9xys/s903/Chart%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 5: ROA" border="0" data-original-height="266" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjP45tyuMfCFmeyugdU2kyk4HXczeJr3eTJe9eFX3Z6D-Krwn-WariIhDxD5uztJxnnHT0RG7zllG76fPmiYtjdmK_u26VmGgDFVzC6awY7GlSCp-WudVjMTlXU_xcmMT9OrDQM33pQegf9TI1oko4vqUsm0-jgqajS3EbgYQ7wS42kgZ72vYucIgC9xys/s16000/Chart%205-min.png" title="MNRB Chart 5: ROA" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: ROA</td></tr></tbody></table><div><br /></div><div><div>MNRB even experienced a negative return in 2016. This was because it incurred a net loss due to:</div><div><ul><li>Abnormally higher claims from the overseas business and an exceptionally higher number of large domestic claims. The Group suffered significantly high claims from explosions at the Port of Tianjin in China, the Taiwan Earthquake, and South Indian floods.</li></ul><ul><li>The takaful business included one-off adjustments made during the period. </li></ul></div><div><br /></div><div>But you can see the Group bouncing back to profitability in the following year. Nevertheless, that the Group ROE and ROA performances were lower than the sector medians. </div><div><br /></div><div>At the same time, its ROE over the past 12 years averaged 7.0 %. %This is about half its cost of equity of 13.0 % (as estimated by Finbox). In other words, it failed to create shareholders’ value.</div><div><br /></div><h3>Underwriting performance</h3><div>I looked at 2 key metrics here – underwriting margin and claims ratio.</div><div><br /></div><div>The underwriting margin is a measure of the profitability of an insurance company's underwriting operations. It represents the difference between the premiums earned by the insurer and the total costs associated with underwriting, primarily incurred losses and underwriting expenses.</div><div><br /></div><div>I determined the underwriting margin from the following formula.</div><div><br /></div><div>Underwriting Margin = 100 % − Combined Ratio.</div><div><br /></div><div>Combined ratio = (Claims and expenses) / (Premiums and annuity) X 100.</div><div><br /></div><div>Note that the expenses included Selling, General, and Administration expenses, salaries, and loan losses as classified by TIKR.com. They excluded interest expenses, asset write-downs, and forex losses.</div><div><br /></div><div>You can see from Chart 6 that the Bursa insurance companies incurred negative margins most of the time. Over the past 12 years, the sector median underwriting margin averaged negative 7.0 % compared to MNRB’s average of negative 6.0 %.</div><div><br /></div><div>This meant that the bulk of the profits were contributed by the investments.</div></div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWfLui9x61uBeJ7iF6prFexALSZCFx3o6p3SaUzF4OUkBEfEn6YA2qa6RT-xaojU5kxQ0vq1OjeT67ow6RH59ZuHLQtAB6ehjAR8BACbJ-KOagnD46PXOb1l63EUKrBMbgZzGT3_a9f5ZSxQCa6wE0UkWJGQLNfIx9R-pZEl0zyO2cF_Zyn49XZ3k1xv8/s903/Chart%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 6: Underwriting margins" border="0" data-original-height="266" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWfLui9x61uBeJ7iF6prFexALSZCFx3o6p3SaUzF4OUkBEfEn6YA2qa6RT-xaojU5kxQ0vq1OjeT67ow6RH59ZuHLQtAB6ehjAR8BACbJ-KOagnD46PXOb1l63EUKrBMbgZzGT3_a9f5ZSxQCa6wE0UkWJGQLNfIx9R-pZEl0zyO2cF_Zyn49XZ3k1xv8/s16000/Chart%206-min.png" title="MNRB Chart 6: Underwriting margins" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Underwriting margins</td></tr></tbody></table><div><br /></div><div><div>The claims ratio, also known as the loss ratio, is a measure of how much of the premium income is used to cover claims. It is an indicator of an insurer's underwriting performance and the efficiency of its claims management. It reflects the insurers’ ability to manage and price risks effectively.</div><div><br /></div><div>The claims ratio is calculated using the following formula:</div><div><br /></div><div>Claims or Loss % ratio = incurred losses/premiums X 100</div><div><br /></div><div>In the context of the TOKR.com platform, this is the item categorized under “policy benefits”.</div><div><br /></div><div>Chart 7 shows the claims ratio trend for the sector and MNRB over the past 12 years. You can see that the claims ratio for the sector median reduced in the middle of the past decade but has since deteriorated (gone higher).</div><div><br /></div><div>In the case of MNRB, we see an opposite pattern where it got worse in the middle of the past decade before improving a bit in the past few years. Overall, MNRB had a higher claim ratio than the sector median.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8iVg6Dx5ejUcp5Dq8TaJdM2agLOFFNufkPkiIohxUIR5MH1jfMEJdoJ2MJAVEGWuB5Tt3JpLz4XGj-UKApGUQuyln2Asmxd8r1op5HGF4m1pO5BrRZYf8g5xr7UzFrhxfWLSKMn7s-DbR6iVIAnccU0bMQY5rqVi1fEDRnvQp2oU0Cj0s1H-PCCNvXgs/s903/Chart%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 7: Claims or loss ratio" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8iVg6Dx5ejUcp5Dq8TaJdM2agLOFFNufkPkiIohxUIR5MH1jfMEJdoJ2MJAVEGWuB5Tt3JpLz4XGj-UKApGUQuyln2Asmxd8r1op5HGF4m1pO5BrRZYf8g5xr7UzFrhxfWLSKMn7s-DbR6iVIAnccU0bMQY5rqVi1fEDRnvQp2oU0Cj0s1H-PCCNvXgs/s16000/Chart%207-min.png" title="MNRB Chart 7: Claims or loss ratio" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Claims or loss ratio</td></tr></tbody></table><div><br /></div><div><h3>Investment performance</h3><div>My first metric here is the investment yield. This is a measure of the return generated from an insurance company's investment portfolio relative to its total invested assets. </div><div><br /></div><div>In the context of the TIKR.com platform,</div><div><br /></div><div>Investment yield = total dividend and interest income from the P&L / total investments from the Balance Sheet. </div><div><br /></div><div>A higher investment yield is generally favorable, as it indicates that the insurer is earning a higher return on its investment portfolio.</div><div><br /></div><div>Chart 8 shows the investment yield for the past 12 years. There were slight deteriorations of 1.7 % CAGR for the sector median and 1.3 % for MNRB. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaYqjWApR8GLuQmUOL7AYgVL5KSlCMkUklKgjiOEoszPpMbqHAQ6uoPqefGtvsA65mXweoChc7ogjA8V58UQ0na1LZ2WL7Gc614WTFVKtak2xtmgnTEu6x6zRkAWsXnrzjvB8ZB770epXBpg_qstwZVarFZ_0PHH5fhaG-OvqAAXVj3-3OteYt_FiBdlw/s903/Chart%208-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 8: Investment yield" border="0" data-original-height="268" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaYqjWApR8GLuQmUOL7AYgVL5KSlCMkUklKgjiOEoszPpMbqHAQ6uoPqefGtvsA65mXweoChc7ogjA8V58UQ0na1LZ2WL7Gc614WTFVKtak2xtmgnTEu6x6zRkAWsXnrzjvB8ZB770epXBpg_qstwZVarFZ_0PHH5fhaG-OvqAAXVj3-3OteYt_FiBdlw/s16000/Chart%208-min.png" title="MNRB Chart 8: Investment yield" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: Investment yield</td></tr></tbody></table><div><br /></div><div><div>My second metric here is the investment income ratio. This ratio measures the relationship between investment income and premiums earned. It helps assess the contribution of investment activities to an insurance company's overall income.</div><div><br /></div><div>In the context of TIKR.com, I computed this ratio from the P&L as follows:</div><div><br /></div><div>Investment income ratio = total interest and dividend income/premium and annuity revenue</div><div><br /></div><div>As shown in Chart 9, the investment income is becoming a bigger contributor as time goes by. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiscqxiqfjzk7X1-i6KtOG4g9fDk2NtRYuQWH86WUZVTCY4IXlp2g4mSmBfbNGeBgdy91T8EjNZjjabMS_ijIpvFby53oAZb5Ix2FCQLel8CuG5f2KutELpjTXaOxTbXn3Y4zCtBYOlwi1BjM82GdTizkUeC7pK7zknR35Ed1jfyAVCYXpgkAtQ5LrPaxQ/s903/Chart%209-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 9: Investment Income ratio" border="0" data-original-height="265" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiscqxiqfjzk7X1-i6KtOG4g9fDk2NtRYuQWH86WUZVTCY4IXlp2g4mSmBfbNGeBgdy91T8EjNZjjabMS_ijIpvFby53oAZb5Ix2FCQLel8CuG5f2KutELpjTXaOxTbXn3Y4zCtBYOlwi1BjM82GdTizkUeC7pK7zknR35Ed1jfyAVCYXpgkAtQ5LrPaxQ/s16000/Chart%209-min.png" title="MNRB Chart 9: Investment Income ratio" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 9: Investment Income ratio</td></tr></tbody></table><div><br /></div><div><h2>Float</h2><div>I first came across the concept of float when reading about Warren Buffett's investment history. He famously said that insurance companies got it wrong when they classified a lot of the insurance payables as liabilities. To him, these are “free” money that can be used to generate returns. </div><div><br /></div><div>He referred to his company's substantial insurance float as "the engine that has propelled our expansion since 1967." Berkshire Hathaway has used its insurance float to make significant investments in various businesses.</div><div><br /></div><div>Float represents the funds provided by policyholders that are temporarily held by the insurer. It is a critical component of the insurance business model and is essentially the difference between the premiums collected from policyholders and the claims paid out.</div><div><br /></div><div>In the context of TIKR.com, I estimated the float from the Balance Sheet as = insurance and annuity liabilities, unpaid claims, and unearned premiums. </div><div><br /></div><div>I look at the following float metrics.</div><div><ul><li>Size of the float.</li></ul><ul><li>Investment income to float ratio.</li></ul><ul><li>Float turnover.</li></ul><ul><li>Float leverage</li></ul></div><div><br /></div><div>As shown in Chart 10, the float for the sector and MNRB had been trending up. You should not be surprised as premiums and annuities have been trending up.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCgYhId85lFrfNQ7gfLpwtD2QhtmBLF_Wxgc76nMNikRyyWWFgA6ZosPeJfTyn8iEJI4RkjDOLVGJctkfCHQBCYKKZGjWoMPogVKM3Qala0A0bT-now1U-9uPXNsBuA1cyn_S_r02OVYGhL8_GOf8RialLglpRu7YuzJTXu4D4gtbshu2kL_8Rzxwq8IM/s903/Chart%2010-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 10: Size of the float" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCgYhId85lFrfNQ7gfLpwtD2QhtmBLF_Wxgc76nMNikRyyWWFgA6ZosPeJfTyn8iEJI4RkjDOLVGJctkfCHQBCYKKZGjWoMPogVKM3Qala0A0bT-now1U-9uPXNsBuA1cyn_S_r02OVYGhL8_GOf8RialLglpRu7YuzJTXu4D4gtbshu2kL_8Rzxwq8IM/s16000/Chart%2010-min.png" title="MNRB Chart 10: Size of the float" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 10: Size of the float</td></tr></tbody></table><div><br /></div><div><div>The investment income to float ratio measures the relationship between the investment income and the size of its insurance float. This ratio provides insights into how efficiently the insurer is using its float to generate investment income.</div><div><br /></div><div>The ratio for the sector and MNRB is shown in Chart 11. It does not show a good picture as the sector has not been able to improve the ratio. Furthermore, MNRB performance is only about similar to the sector median despite having a much bigger float. </div><div><br /></div><div>I would say that the sector and MNRB do not have a “Warren Buffett” in their investment team. Of course, I have not considered the broader context of the economic situation or the changes in the risk profile of the investments.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyyne1FVWfRQCtyscC-GFyJ555hkJ1O4ACPQbK-u3hxXYamLl8pvfIjTO3SL7Zz5zHKgEHOl8g4CTQpZq_FITmIMVLtRUBIbFTJxYY0pkEuufVdY2hZ5Pxn_kBovke-KO_uYcDbgRDlwR6ljtgfc8Fax3As8rQh6T8Lqddhm0HTsgS6L_hin0YFG87SIg/s903/Chart%2011-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 11: Investment income to float ratio." border="0" data-original-height="264" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyyne1FVWfRQCtyscC-GFyJ555hkJ1O4ACPQbK-u3hxXYamLl8pvfIjTO3SL7Zz5zHKgEHOl8g4CTQpZq_FITmIMVLtRUBIbFTJxYY0pkEuufVdY2hZ5Pxn_kBovke-KO_uYcDbgRDlwR6ljtgfc8Fax3As8rQh6T8Lqddhm0HTsgS6L_hin0YFG87SIg/s16000/Chart%2011-min.png" title="MNRB Chart 11: Investment income to float ratio." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 11: Investment income to float ratio.</td></tr></tbody></table><div><br /></div><div><div>The float turnover measures how many times the float is replenished over a specific period. A higher float turnover suggests that the company is efficiently using the float to underwrite new business.</div><div><br /></div><div>It is calculated as:</div><div><br /></div><div>Float Turnover = Premiums Written / Average Float</div><div><br /></div><div>Chart 12 shows that the sector is facing a deteriorating float turnover. Again, this is not a good sign for the investment team. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtrTzJ8h_toDt3jzbzL84Iy2WyVC5HZFwIUHvg2IgI55x-hTmQAr5esJaf4lr3sZOipuC5ytq6YM2sA7rD8HIdca3jhKk2_V7btnA08nuJUYoOre3LOa8-3WYG8MVD_S3F-1L3-2j6AhoYj1EQxxElVtNcmjfRXdSATMRlACz-2S9N_YMSX_UDEE3qJjY/s903/Chart%2012-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 12: Float turnover" border="0" data-original-height="269" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtrTzJ8h_toDt3jzbzL84Iy2WyVC5HZFwIUHvg2IgI55x-hTmQAr5esJaf4lr3sZOipuC5ytq6YM2sA7rD8HIdca3jhKk2_V7btnA08nuJUYoOre3LOa8-3WYG8MVD_S3F-1L3-2j6AhoYj1EQxxElVtNcmjfRXdSATMRlACz-2S9N_YMSX_UDEE3qJjY/s16000/Chart%2012-min.png" title="MNRB Chart 12: Float turnover" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 12: Float turnover</td></tr></tbody></table><div><br /></div><div><div>My final float metric is the float leverage. This is a ratio computed as float divided by the total float and total equity. This ratio is used to assess the degree to which an insurance company relies on float, relative to its total equity, as a source of funds for its operations and investments.</div><div><br /></div><div>Chart 13 shows that the float leverage for the sector and MNRB has been relatively stable over the past 12 years. On average the float is about 78% of the float and equity. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9nodQaEtuCFtNWlj3xz67INzCi1p37sA2hm8Zfn6Qe_cPDFmYKzMew_E0-cKv2o0m-HjWPIm9gExNVckRgtMHzgEXWhFWl6_3aWeGj3R1cgwBqenKyb_ZNKUfqbH7RIJREUdLvwOW9D4Rk1ESbWPDk1XH21WOBPgRclxRRfT9jbdgOeZjg5jOkJcE0dc/s903/Chart%2013-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 13: Float leverage" border="0" data-original-height="265" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9nodQaEtuCFtNWlj3xz67INzCi1p37sA2hm8Zfn6Qe_cPDFmYKzMew_E0-cKv2o0m-HjWPIm9gExNVckRgtMHzgEXWhFWl6_3aWeGj3R1cgwBqenKyb_ZNKUfqbH7RIJREUdLvwOW9D4Rk1ESbWPDk1XH21WOBPgRclxRRfT9jbdgOeZjg5jOkJcE0dc/s16000/Chart%2013-min.png" title="MNRB Chart 13: Float leverage" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 13: Float leverage</td></tr></tbody></table><div><br /></div></div></div><div><h3>Solvency</h3><div>I assessed the insurance companies' long-term solvency using the Debt Equity ratio. Refer to Chart 14. </div><div><br /></div><div>MNRB has a much higher Debt Equity ratio than the sector. The only good sign is that the MNRB ratio today is much lower than that in 2012.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHBxd65xHkqqqJzFovBQKKMpc941sSx4UV6nJPHFvUlpxGSMVRgNbr5k6L7BxagJflnH8MI_TYSMyjuiL9wsq1Bq1j791nl6iS9gMSew-fnpM6Zjn4VOTfSM9hDn1umeu_-OrH484iTQ9lOTlwctSQOyicF-KhaHXtOy-Qh5K8Rp0jbKB13_-0IpT3W7Q/s903/Chart%2014-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 14: DE ratio" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHBxd65xHkqqqJzFovBQKKMpc941sSx4UV6nJPHFvUlpxGSMVRgNbr5k6L7BxagJflnH8MI_TYSMyjuiL9wsq1Bq1j791nl6iS9gMSew-fnpM6Zjn4VOTfSM9hDn1umeu_-OrH484iTQ9lOTlwctSQOyicF-KhaHXtOy-Qh5K8Rp0jbKB13_-0IpT3W7Q/s16000/Chart%2014-min.png" title="MNRB Chart 14: DE ratio" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 14: DE ratio</td></tr></tbody></table><div><br /></div><div><div>The cash flow margin is defined as cash flow from operations/revenue. I normally use this margin to indicate a company's ability to convert its sales into cash. It provides insights into the efficiency and sustainability of its core business operations. A higher operating cash flow margin generally indicates that a company is effectively managing its working capital, covering operating expenses, and generating positive cash flow from its primary activities.</div><div><br /></div><div>You can see the sector margins improving from 2013 but it dropped recently. MNRB had lower margins than the sector median. Refer to Chart 15.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaXlSWIJtlHswL43GkwRjSH5l5BwDU7CZaJ0k0jKGMCuJIg4rljKrdQnf1k5ebh-cEU7GIWPJq1jFQB_aAs6x8Sy_DV4u5wU3oGf9XXtM-ZV-CoJGlc_aSAou87C45DvykghU_sebJKj6CO-1_pkojmH6cK54MWtBXOJmehGDxn0y8rffaAFQklwRfTIA/s903/Chart%2015-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Chart 15: Cash Flow from Operations/Revenue" border="0" data-original-height="269" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaXlSWIJtlHswL43GkwRjSH5l5BwDU7CZaJ0k0jKGMCuJIg4rljKrdQnf1k5ebh-cEU7GIWPJq1jFQB_aAs6x8Sy_DV4u5wU3oGf9XXtM-ZV-CoJGlc_aSAou87C45DvykghU_sebJKj6CO-1_pkojmH6cK54MWtBXOJmehGDxn0y8rffaAFQklwRfTIA/s16000/Chart%2015-min.png" title="MNRB Chart 15: Cash Flow from Operations/Revenue" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 15: Cash Flow from Operations/Revenue</td></tr></tbody></table><div><br /></div><div><h3>Summary of MNRB performance</h3><div>While the sector and MNRB had revenue growth, they experienced deteriorating operating performance. In most cases, MNRB shares the same trend as the sector median. </div><div><br /></div><div>I would rate MNRB's performance as below average relative to the sector based on the following:</div><div><ul><li>It has lower revenue growth rates.</li></ul><ul><li>Both its ROE and ROA were lower than the sector median returns. </li></ul><ul><li>While its underwriting is a bit better than the sector median, MNRB had a higher claims ratio.</li></ul><ul><li>On the investment side, MNRB did marginally worse than the sector median.</li></ul><ul><li>At best, I would say the MNRB float performance was comparable to the sector median.</li></ul><ul><li>It had worse solvency ratios.</li></ul></div><div><br /></div><div>I would not rate MNRB as a wonderful company. But I also would not consider it as having poor fundamentals. </div><div><br /></div><h2>Valuation</h2><div>The challenges in valuing insurance companies are very similar to those in valuing banks. For a more comprehensive discussion on these, refer to “<a href="https://www.i4value.asia/2024/02/is-affin-value-trap.html#more" target="_blank">Is Affin a value trap?</a>”</div><div><br /></div><div>As such I used the same approach as that in valuing Affin ie</div><div><ul><li>The Asset Value is based on the Book Value.</li></ul><ul><li>The Earnings value is based on the average of the values obtained from estimating the present value of dividends, notional dividends, and residual income. </li></ul></div><div><br /></div><div>Table 3 summarizes the margins of safety for the 8 insurance companies. I look for a 30% margin of safety. </div><div><br /></div><div>Only TunePro met the 30% margin of safety under both the Asset Value and Earnings Value perspective.</div><div><br /></div><div>In the case of MNRB, there is no margin of safety under the Earnings Value. You should not be surprised given its low and declining returns. But there is more than a 30% margin of safety under the Asset Value.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4gOtYaFK9RRKBjUmDD5ruGrpUNiSQ9_SQilgc8y04YO87evndv7sSXiw-ZMKyEU_aMnuCfrLpeSc54GDr2k-ZM8EWPZfPvVmcBoQ69tdi9bCw6FEd6kn4Q8dUhMJcLey79tniTi80EUpv0EPVIEkuMu3uBu8y9lF8zmjvB7LceGKWJkLxSMwAMNlvSno/s517/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="MNRB Table 3: Margins of safety" border="0" data-original-height="291" data-original-width="517" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4gOtYaFK9RRKBjUmDD5ruGrpUNiSQ9_SQilgc8y04YO87evndv7sSXiw-ZMKyEU_aMnuCfrLpeSc54GDr2k-ZM8EWPZfPvVmcBoQ69tdi9bCw6FEd6kn4Q8dUhMJcLey79tniTi80EUpv0EPVIEkuMu3uBu8y9lF8zmjvB7LceGKWJkLxSMwAMNlvSno/s16000/Table%203-min.png" title="MNRB Table 3: Margins of safety" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Margins of safety<br /><div style="text-align: left;"><i>Note: The cost of equity used to estimate the Earnings Value was all taken from Finbox</i>.</div></td></tr></tbody></table><div><br /></div><div><h2>Is MNRB a value trap?</h2><div>A value trap is a company that appears cheap but is cheap because it is facing fundamental problems.</div><div><br /></div><div>While it is not a wonderful company, MNRB is not a loss-making one. The insurance and reinsurance sectors are not sunset sectors. MNRB problems appear to be more operational – declining efficiencies, worsening insurance risk management, and deteriorating investment performance. </div><div><br /></div><div>But until it delivers these improvements, I think it would be difficult for the market to rerate it even though it is trading at a significant discount to its Asset Value. The market tends to focus on Earnings Value. </div><div><br /></div><div>Given these, MNRB is a value trap. There are better insurance companies to consider.</div><div><br /></div><div>However, if you are like me which an existing investor in MNRB, the picture is different. As shown earlier, I had obtained a compounded annual return of 4.2 %. The bulk of the return was due to dividends. I think that it is not difficult to get some capital gain. This is especially true when I can see a long-term price uptrend as per Chart 1. I will continue to hold. </div></div></div><div><br /></div><div><br /></div><div><br /></div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: left;"><div style="text-align: justify;"><div style="text-align: center;"><br /></div></div></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><br /></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div><div><br /></div></div><div><br /></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-48413382378897367372024-02-04T08:51:00.005+08:002024-02-04T09:06:16.445+08:00Is Affin a value trap?<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Value Investing Case Study 44-1. A fundamental analysis of Affin Bank to show that it is not a value trap.</span></div>
<div style="text-align: left;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-3NYseRa6WNw2Fela91CY8t_WwkbYY1i4TkiSop-p7_xgs4ncB72_J28zQEsayjXpQJPbQqbFRsQR6x-_He4wzspcPb_ztmge1pyPtErKz8IimvFCkGtL28kb9z3E54gCXxD4DUrxEtkfeewevGoycNUJ9kt-lc02DCIFpNiKibydXP2vTlNZQ9xiF68/s443/Pic%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Affin a value trap?" border="0" data-original-height="108" data-original-width="443" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-3NYseRa6WNw2Fela91CY8t_WwkbYY1i4TkiSop-p7_xgs4ncB72_J28zQEsayjXpQJPbQqbFRsQR6x-_He4wzspcPb_ztmge1pyPtErKz8IimvFCkGtL28kb9z3E54gCXxD4DUrxEtkfeewevGoycNUJ9kt-lc02DCIFpNiKibydXP2vTlNZQ9xiF68/s16000/Pic%201-min.png" title="Is Affin a value trap?" /></a></div><span><a name='more'></a></span><div style="text-align: left;"><span style="text-align: justify;">There are currently 10 Bursa Malaysia banks. Affin Bank (Affin) is one of them. </span></div><div style="text-align: justify;"><div><br /></div><div>I first invested in Affin in 2017 at RM 2.17 per share. Over the next few years, I continued to build up my investment. Today it is among the top 5 investments (in terms of market capitalization) in my portfolio.</div><div><br /></div><div>My average purchase price was RM 2.66 per share compared to the current market price of RM 2.39 per share (as of 10 Jan 2024). But the book value of Affin as of Sep 2023 was RM 4.79 per share. You can imagine the questions going through my mind:</div><div><ul><li>Is this a value trap that would prevent new investors from buying?</li></ul><ul><li>Is the low price due to market sentiments or business issues?</li></ul><ul><li>Should I continue to hold or exit?</li></ul></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/4W7Lnw_hT0w" width="320" youtube-src-id="4W7Lnw_hT0w"></iframe></div><div><br /></div><div>Join me as I assess Affin's performance and valuation by comparing them with those of its peers. I hope that the various data that I have compiled here for the banks can serve as base rates when I look at other banks.</div><div><br /></div><div>My conclusion is that Affin is not a value trap and there is potential for the market to re-rate it higher. I will continue to hold.</div><div><br /></div><div>Should go and buy it? Well, read my Disclaimer. </div><div><br /></div><h2>Contents</h2><div><ul><li><b>Introduction</b></li></ul><ul><li><b>My investment in Affin</b></li></ul><ul><li><b>Base Rates</b></li></ul><ul><li><b>Peer comparison</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Method</b></li></ul><ul><li><b>Affin is not a value trap</b></li></ul><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html" target="_blank">Learn more</a>.</i></div></td></tr></tbody></table></div></td></tr></tbody></table></div><div><br /></div></div></div><div><h2>Introduction</h2><div>The Malaysian banking system is a linchpin in the nation's economic architecture. Under the oversight of Bank Negara Malaysia, Malaysia's financial institutions have evolved into a dynamic and sophisticated network.</div><div><br /></div><div>The Malaysian banking landscape is characterized by a diverse array of institutions. These ranged from domestic giants to international players. This diversity not only promotes healthy competition but also ensures a broad spectrum of financial services, catering to the varied needs of businesses and individuals. </div><div><br /></div><div>There are currently 10 banks listed under Bursa Malaysia. </div><div><ul><li>In terms of total assets, they ranged from RM 70 billion to RM 1,001 billion with an average of RM 359 billion.</li></ul><ul><li>In terms of market capitalization, they ranged from RM 5 billion to RM 109 billion.</li></ul></div><div><br /></div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAluwjDmldVuqD3DbcH02eWJzo54fHqvB3VLogxrY-daKkjS9baQKxOkpW4FgPcNCwuH7lqDeCssu_Uhyphenhyphen4_HKxG8quYn6W4wu3cPu0QzHgt5g0Ir0A1yU-DimK88DqTyiVFfhIpKG-UwNyLhfvweU9aSMU583GahMeVsV1Yd6xPZ3O2oXGG4J0fZu5u_8/s506/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Table 1: Bursa Malaysia banks size" border="0" data-original-height="378" data-original-width="506" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAluwjDmldVuqD3DbcH02eWJzo54fHqvB3VLogxrY-daKkjS9baQKxOkpW4FgPcNCwuH7lqDeCssu_Uhyphenhyphen4_HKxG8quYn6W4wu3cPu0QzHgt5g0Ir0A1yU-DimK88DqTyiVFfhIpKG-UwNyLhfvweU9aSMU583GahMeVsV1Yd6xPZ3O2oXGG4J0fZu5u_8/s16000/Table%201-min.png" title="Affin Table 1: Bursa Malaysia banks size" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Bursa Malaysia banks size</td></tr></tbody></table><div><br /></div><div>In global terms, except for CIMB and Maybank, the Bursa Malaysia banks are small. To give you a sense of the scale on a global basis, I used HSBC as a reference. </div><div><br /></div><div>HSBC's presence in Malaysia dates back to 1884 when the Hongkong and Shanghai Banking Corporation Limited established its first office in the country. HSBC in Malaysia has a network of more than 50 branches.</div><div><br /></div><div>HSBC Holdings Ltd which is listed on the LSE has a total asset of RM 1,581 billion and a market cap of RM 718 billion. </div><div><br /></div><div>Secondly, many of the Bursa-listed banks are universal banks. Universal banks diversify their offerings beyond traditional banking services. They may provide retail banking services (loans, deposits, and basic financial services), insurance products, investment banking services (underwriting, mergers and acquisitions), and stock broking services.</div><div><br /></div><div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div></div><h2>My investments in Affin</h2><div>Affin Bank is a commercial bank and the financial holding company of Affin Islamic Bank, Affin Hwang Investment Bank Berhad and Affin Moneybrokers.</div><div><br /></div><div>Generali Life Insurance Malaysia (formerly known as AXA Affin Life Insurance) and Generali Insurance Malaysia (formerly known as AXA Affin General Insurance) are the associate companies of Affin Bank.</div><div><br /></div><div>Affin’s operations are principally conducted in Malaysia and comprises the following main segments:</div><div><ul><li>Commercial banking. Its activities are generally structured into three key areas, corporate banking, enterprise banking and community banking. In 2022, this segment accounted for RM 1,507 million of the group PBT (before inter-company elimination).</li></ul><ul><li>Investment banking. This segment focuses on business of a merchant bank, stock-broking, fund and asset management. In 2022, this segment accounted for RM 55 million of the group PBT (before inter-company elimination).</li></ul><ul><li>Insurance. This segment includes the business of underwriting all classes of general and life insurance businesses in Malaysia. In 2022, this segment contributed RM 9 million to the group PBT (before inter-company elimination).</li></ul><ul><li>Others. This includes operation of investment holding companies, money-broking and other related financial services. In 2022, this segment accounted for RM 2 million of the group PBT (before inter-company elimination).</li></ul></div><div><br /></div><div>I first bought Affin in 2007 when I first started to learn about value investing and wanted to have a bank stock as part of my portfolio. At that juncture, the bank was part of Affin Holdings Berhad. </div><div><br /></div><div>There were 3 reasons for choosing Affin:</div><div><ul><li>In 2007 Affin Holdings Berhad entered into a strategic partnership with The Bank of East Asia, Limited (BEA). This was largest independent local bank in Hong Kong. BEA had the expertise and technical know-how to help position the group as a major player in the financial services industry. Affin’s vision then was not just to be a Malaysian bank but also to expand regionally to meet the challenges of a liberalized banking arena.</li></ul><ul><li>Being new to value investing, I felt that the BEA purchase price could serve as a benchmark for the valuation of Affin Holdings.</li></ul><ul><li>I happen to know one of the Directors of Affin Holdings and that gave me confidence about its corporate governance practices.</li></ul></div><div><br /></div><div>To make a long story short, I built up my investments over the next few years so that today Affin is among the top 5 stocks (in terms of market cap) in my portfolio.</div><div><br /></div><div>In terms of total returns, this has not been a great investment as the market price today is below my average purchase cost. Refer to Table 2. Over the past 11 years, I have achieved a 2.1 % CAGR in the total return. </div><div><br /></div><div>This is well below the interest I could have received by placing my money as a fixed deposit with the bank. The bulk of the returns have been due to the dividends received.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRvQz6El67JpDWm78xtxs9dVeYh65vhYgmet-0CaDd0wkOMMkCueLpG6w_YUaXfFIDdDHz5ueF1z5zOygi1WX9WVreTLECGs22CPXq6ytBmxTRmmZs0tIs-bHzsqeYHw0X9EJ5BG-sSMnSmzN0I-5FJMNCakx_pzvmhwQLIbPx9NcaSabsyzU7oD6Wgbg/s837/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Table 2: My Affin investment return" border="0" data-original-height="233" data-original-width="837" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRvQz6El67JpDWm78xtxs9dVeYh65vhYgmet-0CaDd0wkOMMkCueLpG6w_YUaXfFIDdDHz5ueF1z5zOygi1WX9WVreTLECGs22CPXq6ytBmxTRmmZs0tIs-bHzsqeYHw0X9EJ5BG-sSMnSmzN0I-5FJMNCakx_pzvmhwQLIbPx9NcaSabsyzU7oD6Wgbg/s16000/Table%202-min.png" title="Affin Table 2: My Affin investment return" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: My Affin investment return</td></tr></tbody></table><div><br /></div><div><h2>Base rates</h2><div>Daniel Kahneman, a Nobel Prize-winning psychologist, and behavioral economist, introduced the concepts of "inside view" and "outside view". These concepts are particularly relevant in understanding how individuals approach forecasting and estimating the likelihood of future events.</div><div><ul><li>The inside view refers to an individual's subjective, often biased perspective when making predictions or decisions about a specific future event. People tend to focus on the unique details and circumstances of the particular situation at hand, relying heavily on specific information and factors that are directly in front of them.</li></ul><ul><li>The outside view involves taking a more objective and detached perspective by considering general information and statistical base rates. Instead of focusing on the specifics of the current situation, individuals using the outside view look at similar past situations and consider the broader trends and probabilities associated with those cases.</li></ul></div><div><br /></div><div>Kahneman emphasizes the importance of incorporating base rates - general statistical information about the likelihood of an event occurring - when taking the outside view. Base rates provide a benchmark or reference point for understanding the probability of an outcome based on historical data.</div><div><br /></div><div>Kahneman recommends combining the inside view with the outside view. This involves considering both the specific details of the current situation (inside view) and the general probabilities derived from base rates (outside view).</div><div><br /></div><div>Integrating base rates helps to balance the tendency to be overly influenced by unique circumstances and allows for a more realistic assessment of the likelihood of success or failure.</div><div><br /></div><div>I hope that the data I present in the following section can serve as base rates when looking at the performance of Bursa Malaysia banks.</div><div><br /></div><h2>Peer Comparison</h2><div>I am a long-term value investor holding onto stocks for 6 to 8 years. As such I am more interested in how the sector and Affin performed over the past decade. I thus covered the performance of the banks from 2009 to 2023. For more details on the computation, refer to the Method section. </div><div><br /></div><div>In my report, I used the terms “peer” and “sector” interchangeably to mean the 10 Bursa banks including Affin. </div><div><br /></div><div>I classified the performance of the banks into 4:</div><div><ul><li>Returns.</li></ul><ul><li>Efficiency.</li></ul><ul><li>Loan performance.</li></ul><ul><li>Capital adequacy.</li></ul></div><div><br /></div><h3>Returns</h3><div>I look at both the ROE and ROA. Both metrics are essential for assessing a bank's financial health. While ROE is more centred on shareholders' interests, ROA provides a broader view of the overall efficiency of the bank's operations. </div><div><br /></div><div>I wish to point out that in their 2012 research paper “<a href="https://academicjournals.org/article/article1380811107_Ong%20and%20Teh.pdf" target="_blank">Factors affecting the profitability of Malaysian commercial banks</a>”, the authors concluded that ROA is the best profitability indicator.</div><div><br /></div><div>You can see from the left part of Chart 1 that the sector ROE grew from 2009 to peak in 2010/11. It then began to decline to reach the bottom in 2020/21. Compared to the peers, Affin's performance was worse than the peer median ROE. Refer to the right part of Chart 1. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEip0SOJQm40C0k-09JZBXMXtwAmN5ocwrapEX36wf85yqkO3yeKIukD1fwUzMyXkeC3_mvHziZU3OUV_cEMKsOlbKQSGR_zM1G7cy6nBj3vOd5qugZXAOpbwoLMzl40Y-clUcI2_eW58OfxKluPlS273TyBI0AUeIcGB5zvV7E-ZDt54LCUS93NTF44jXs/s903/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Chart 1: ROE" border="0" data-original-height="269" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEip0SOJQm40C0k-09JZBXMXtwAmN5ocwrapEX36wf85yqkO3yeKIukD1fwUzMyXkeC3_mvHziZU3OUV_cEMKsOlbKQSGR_zM1G7cy6nBj3vOd5qugZXAOpbwoLMzl40Y-clUcI2_eW58OfxKluPlS273TyBI0AUeIcGB5zvV7E-ZDt54LCUS93NTF44jXs/s16000/Chart%201-min.png" title="Affin Chart 1: ROE" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: ROE</td></tr></tbody></table><div><br /></div></div></div></div><div style="text-align: justify;"><div>The main reason for the declining trend was the declining macroeconomic environment. The following extracts from Affin's Annual reports give you a picture of this:</div><div><br /></div><div>“…The banking industry continued to be pressured by compressed net interest margins (NIMs) which, along with competition, created a challenging business environment…” 2013 Annual Report.</div><div><br /></div><div>“…declining export revenues, capital outflows, and weaker investor sentiments towards Malaysia. For the banking sector, all of these translated into less than favorable domestic demand, softer loan growth, greater pressure on earnings, and concerns over asset quality from the possible rise in impaired loans.” 2015 Affin Annual Report</div><div><br /></div><div>“…private consumption contracted…which was also reflected in the services sector…This translated into lackluster domestic demand, easing loan growth, greater pressure on earnings, and concerns over asset quality from the possible rise in impaired loans.” 2017 Annual Report</div><div><br /></div><div>“…Macroeconomic conditions remained volatile and the banking sector continued to accommodate and adjust to regulatory and industry changes. Business and household lending were tepid, while deposits growth moderated further…” 2019 Annual Report</div><div><br /></div><div>Given the poor macroeconomic situation, you should not be surprised to see similar patterns for the ROA. Refer to Chart 2. </div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgb1OKYZT4JPUbCD7zejwNbKwyq6hl490GL-GazXFcNiNL2r8_A7lPjeqITT08UQJ-zEAz0RUls8S_DHlqNrzvTssrGzhDIrfIeIRtUTfYgehK_KWv0hsOgAdIxMtkOYICJEfLjYvSv6JmnYjo0E4QaWAYqYDGtvYrewcHZZdb1dj0So9qGLKge8ls2OAM/s903/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Chart 2: ROA" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgb1OKYZT4JPUbCD7zejwNbKwyq6hl490GL-GazXFcNiNL2r8_A7lPjeqITT08UQJ-zEAz0RUls8S_DHlqNrzvTssrGzhDIrfIeIRtUTfYgehK_KWv0hsOgAdIxMtkOYICJEfLjYvSv6JmnYjo0E4QaWAYqYDGtvYrewcHZZdb1dj0So9qGLKge8ls2OAM/s16000/Chart%202-min.png" title="Affin Chart 2: ROA" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: ROA</td></tr></tbody></table><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><h3>Net interest margins and efficiency</h3><div>The net interest margin (NIM) is a key determinant of a bank's overall profitability. A wider margin suggests that the bank is more efficient in earning interest income compared to its funding costs.</div><div><br /></div><div>Banks with a higher NIM may have a competitive advantage in the market, as they can potentially offer more attractive deposit rates or more competitive loan terms while maintaining profitability.</div><div><br /></div><div>I also looked at another efficiency metric – the efficiency ratio. This measures the operational efficiency of a bank by evaluating how well it manages its operating expenses relative to its revenue. It is expressed as a percentage and provides insights into the cost-effectiveness of a bank's operations.</div><div><br /></div><div>Chart 3 shows the sector and Affin NIM. You can see that the NIM in 2023 was lower than that in 2009. The drop in 2011 was explained by Affin as follows:</div><div><br /></div><div>“…lower net interest income following a contraction in net interest margin as Bank Negara Malaysia raised the Overnight Policy Rate by 25 basis points.” 2011 Annual Report.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHMWrMLaEQGA1jZ5FeDa_LZHM-KCA_NINGbgSfw11fN8DYJdJGLMsKNcwszVU7rQKdqJ45bNWXeP2Ee_TGHjU8qSWFr1Im_nz7x-cB5sbDKmpXFPVaugYmsI7HneFxFSNdpJF0E6dWCKWLGSBA_xpxmAb55Nm0M1Tyq5X2K-xmXOHfexTYnlRSH_ZzESk/s903/Chart%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Chart 3: Net Interest Margins" border="0" data-original-height="266" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHMWrMLaEQGA1jZ5FeDa_LZHM-KCA_NINGbgSfw11fN8DYJdJGLMsKNcwszVU7rQKdqJ45bNWXeP2Ee_TGHjU8qSWFr1Im_nz7x-cB5sbDKmpXFPVaugYmsI7HneFxFSNdpJF0E6dWCKWLGSBA_xpxmAb55Nm0M1Tyq5X2K-xmXOHfexTYnlRSH_ZzESk/s16000/Chart%203-min.png" title="Affin Chart 3: Net Interest Margins" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Net Interest Margins<br /><div style="text-align: left;"><i>Note: Net interest margin (NIM) computed as net interest income/net loan.</i></div></td></tr></tbody></table><div><br /></div><div><div>One of the reasons for the declining net interest margin was the higher cost of funds. Chart 4 shows the trends in the deposit interest rates. You can see that the rates from 2011 to 2019 were higher than that for 2009.</div><div><br /></div><div>But while the rates in 2022 were comparable to that for 2009, there was no significant improvement in the NIM for 2022.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiYfGClKRLo6PJ02LngWRHx9228PSaepsXXpaif5d7cIshRHech35xo0M8GTZsXnrl9SxAcZf-4CHbFE-ILSC95I152OAMT3q5GBW-k8K7BWbAZZJ7iQIS7CoQehW2O_JLPQn1WYhz7wCCU37NM6QVhsDmcFnCUQN6GyU9AqvsWKoapUd232K2y4iFxfA/s503/Chart%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Chart 4: Deposit interest rates." border="0" data-original-height="347" data-original-width="503" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiYfGClKRLo6PJ02LngWRHx9228PSaepsXXpaif5d7cIshRHech35xo0M8GTZsXnrl9SxAcZf-4CHbFE-ILSC95I152OAMT3q5GBW-k8K7BWbAZZJ7iQIS7CoQehW2O_JLPQn1WYhz7wCCU37NM6QVhsDmcFnCUQN6GyU9AqvsWKoapUd232K2y4iFxfA/s16000/Chart%204-min.png" title="Affin Chart 4: Deposit interest rates." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Deposit interest rates. Source: <a href="https://www.statista.com/statistics/738387/malaysia-deposit-interest-rates/" target="_blank">Statista</a></td></tr></tbody></table><div><br /></div></div><div style="text-align: justify;"><div>When you look at the operating efficiency, you can see from the left part of Chart 5 that there were no significant trends for the sector. However, Affin experienced a deteriorating efficiency ratio. Its non-interest expense as a ratio of its net revenue was higher in 2023 compared to that in 2009.</div><div><br /></div><div>With the worst NIM and efficiency ratio of its peers, it does not look good for Affin. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOI5phzeWo76ZQlVClCmaAnGK-zrW8gWlSaNm0ZWsRTJ1CdiMxPsYxBRVNwcNg9qsCDXWShfI6_l-YEhZAv6780NFrSvUJ23eNP62B_yjejlkxtuLPu1Y-YLeD0E41LuOa8YWKqzHuHqvQHT-yADUEgJjbjyVlq3a-HDd3tbzTHcIjkxhPayAtB6x5Wo4/s903/Chart%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Chart 5: Efficiency ratio" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOI5phzeWo76ZQlVClCmaAnGK-zrW8gWlSaNm0ZWsRTJ1CdiMxPsYxBRVNwcNg9qsCDXWShfI6_l-YEhZAv6780NFrSvUJ23eNP62B_yjejlkxtuLPu1Y-YLeD0E41LuOa8YWKqzHuHqvQHT-yADUEgJjbjyVlq3a-HDd3tbzTHcIjkxhPayAtB6x5Wo4/s16000/Chart%205-min.png" title="Affin Chart 5: Efficiency ratio" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Efficiency ratio<br /><div style="text-align: left;"><i>Note: Efficiency ratio computes as total non-interest expenses/net revenue.</i></div></td></tr></tbody></table><div><br /></div><div><h3>Loan performance</h3><div>I looked at two metrics here:</div><div><ul><li>Gross loan-to-deposit ratio (GLDR).</li></ul><ul><li>Non-performing loans (NPL) ratio.</li></ul></div><div><br /></div><div>The GLDR is an important indicator for assessing a bank's liquidity and risk exposure. A lower GLDR suggests that the bank has a higher proportion of deposits compared to loans, indicating a more conservative approach to lending. In contrast, a higher GLDR implies that the bank is relying more on loans for its operations and may have a lower liquidity buffer.</div><div><br /></div><div>A higher GLDR may indicate a higher risk for the bank, as it suggests a larger portion of the bank's funds are tied up in loans. If a significant portion of these loans becomes non-performing (defaulted), the bank may face challenges in meeting its obligations.</div><div><br /></div><div>The GLDR can also provide insights into a bank's sensitivity to changes in interest rates. If a bank has a higher proportion of fixed-rate loans and interest rates rise, the interest income from these loans may not increase as quickly as the interest expense on deposits, potentially impacting the bank's profitability.</div><div><br /></div><div>Looking at the left part of Chart 6, you can see that over the past 15 years, there was an increase in the GLDR in 2015. This ratio then remained about the same over the next 8 years. </div><div><br /></div><div>We see the same pattern for Affin. But as shown in the right part of Chart Chart 6, Affin’s ratio was consistently lower than the sector median ratio. </div><div><br /></div><div>I could not find any explanation from the Affin, AMMB, CIMB, or Maybank Annual Reports for 2015 on why there was an increase in the GLDR.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvOY-QkecZxFLtl_LECbJBqUjm_TK_81FmtSdSJetKawDRWNGoMUynmYlnCckaeabGGb02Qqp7BJydeqQokr6AjVfLrTF_y-ME7t6wUCp0QQoIEQm3vBjLKbFACHdQMp0M7AJGmcTSYMM-l8dwEueC2DsOtOpffklbZ70LPM1d4X4l1f2VDw_yIj24p_o/s903/Chart%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Chart 6: Gross Loan to Deposit ratio" border="0" data-original-height="265" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvOY-QkecZxFLtl_LECbJBqUjm_TK_81FmtSdSJetKawDRWNGoMUynmYlnCckaeabGGb02Qqp7BJydeqQokr6AjVfLrTF_y-ME7t6wUCp0QQoIEQm3vBjLKbFACHdQMp0M7AJGmcTSYMM-l8dwEueC2DsOtOpffklbZ70LPM1d4X4l1f2VDw_yIj24p_o/s16000/Chart%206-min.png" title="Affin Chart 6: Gross Loan to Deposit ratio" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Gross Loan to Deposit ratio</td></tr></tbody></table><div><br /></div></div><div style="text-align: justify;"><div>While the GLDR focuses on the quantity of loans in relation to deposits, it doesn't directly address the quality of the loans. </div><div><br /></div><div>I thus look at the NPL ratio. This is a key indicator of a bank's asset quality. A higher NPL ratio suggests a larger proportion of the bank's loan portfolio is at risk of default, indicating potential credit risk and deteriorating asset quality. </div><div><br /></div><div>A rising NPL ratio may indicate weaknesses in the bank's credit risk management practices. </div><div><br /></div><div>A high NPL ratio can negatively impact a bank's financial health and profitability. If a significant portion of loans becomes non-performing, the bank may face challenges in meeting its obligations and maintaining regulatory capital adequacy.</div><div><br /></div><div>The positive sign is that when you look at the NPL ratio performance over the past 15 years, we see an improving trend. Refer to the left part of Chart 7. </div><div><br /></div><div>Unfortunately for Affin, its NPL ratio increased from 2017 to peak in 2020 before declining. Overall Affin did worse than the sector median. </div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhb6FBkOclHZFkK2qOfFtwGXsl9vqMjYSQMKaoF6cnGiOoU8pvArD6C2MDMYDOTHjrQxb09zs3qhFo4fNt8EbS5sRe8gzh9HmIn6dv_pPExwmRGrJkoJzjJ_Af_zmALaU0mbz7tmme2QF4Kyiuf3099AfZ2rKTrXH8TOKn9aQnZ6q5EPD7rhyXY91jiNEk/s903/Chart%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Chart 7: NPL ratio" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhb6FBkOclHZFkK2qOfFtwGXsl9vqMjYSQMKaoF6cnGiOoU8pvArD6C2MDMYDOTHjrQxb09zs3qhFo4fNt8EbS5sRe8gzh9HmIn6dv_pPExwmRGrJkoJzjJ_Af_zmALaU0mbz7tmme2QF4Kyiuf3099AfZ2rKTrXH8TOKn9aQnZ6q5EPD7rhyXY91jiNEk/s16000/Chart%207-min.png" title="Affin Chart 7: NPL ratio" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: NPL ratio<br /><div style="text-align: left;"><i>Note: NPL ratio = Non-performing loan/total loan.</i></div></td></tr></tbody></table><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><h3>Capital adequacy ratio (CAR)</h3><div>I looked at 2 ratios - Tier 1 capital adequacy ratio and total capital adequacy ratio. These measures are used to assess a bank's capital adequacy. However, they differ in the components of capital they consider. Table 3 highlights the key differences.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjamcck6DLAN9RvbwbCoThRzhA86F5H0_lBA4qsPnaLQwvtjtg8ZMIY6XGMwxTWmsJS61fLVKRmb-8a1XaoS_nu35Keq8ARXqU9lKElyzhRJyu_h5C4yeZsPmQB8lOCtHBSorgCP0V8zY7LjyVEyXoC8g_VNvOOwOxL-2Z9X062tUpYXhEuJDvcWQcAag8/s903/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Table 3: Comparing Tier 1 and Total Capita" border="0" data-original-height="489" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjamcck6DLAN9RvbwbCoThRzhA86F5H0_lBA4qsPnaLQwvtjtg8ZMIY6XGMwxTWmsJS61fLVKRmb-8a1XaoS_nu35Keq8ARXqU9lKElyzhRJyu_h5C4yeZsPmQB8lOCtHBSorgCP0V8zY7LjyVEyXoC8g_VNvOOwOxL-2Z9X062tUpYXhEuJDvcWQcAag8/s16000/Table%203-min.png" title="Affin Table 3: Comparing Tier 1 and Total Capital" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Comparing Tier 1 and Total Capital</td></tr></tbody></table><div><br /></div><div><div>The denominator in the capital adequacy formula is risk-weighted assets, which account for different levels of risk associated with various types of assets. This makes the capital adequacy ratio a risk-adjusted measure, reflecting the bank's capital in relation to its risk exposure.</div><div><br /></div><div>Investors, analysts, and rating agencies often consider the Tier 1 CAR when evaluating a bank's financial health and risk profile. A strong Tier 1 CAR is generally seen as a positive indicator of a bank's stability and prudential risk management.</div><div><br /></div><div>In this context, the Tier 1 capital adequacy ratio for the Malaysian listed banks has been improving over the past 15 years. Refer to the left part of Chart 8. We also see improvements for Affin where since 2019, the Affin ratio was better than the median of its peers. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyVJbOPP2ns9YB7-fuV7BJfYikGlSBu8BVR-81d5Sf-NQkc07EGZoPZqh2XrSOJCZTrBPb8wWy3T55gp9hDH2Nk_O_2IbABSk0bMg0tJeDKtKve2Pi52xuvZxD5C6E8-BieLzckhzXgYfiPqW1ZHemnt43sSK3UlbgFyv0Fb_X2mTKMLAxuI5XjtLaCOs/s903/Chart%208-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Chart 8: Tier 1 capital adequacy ratio" border="0" data-original-height="266" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyVJbOPP2ns9YB7-fuV7BJfYikGlSBu8BVR-81d5Sf-NQkc07EGZoPZqh2XrSOJCZTrBPb8wWy3T55gp9hDH2Nk_O_2IbABSk0bMg0tJeDKtKve2Pi52xuvZxD5C6E8-BieLzckhzXgYfiPqW1ZHemnt43sSK3UlbgFyv0Fb_X2mTKMLAxuI5XjtLaCOs/s16000/Chart%208-min.png" title="Affin Chart 8: Tier 1 capital adequacy ratio" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: Tier 1 capital adequacy ratio</td></tr></tbody></table><div><br /></div><div><div>As can be seen from Table 3. the total capital adequacy ratio is a financial metric that measures a bank's overall capital adequacy and its ability to absorb potential losses arising from various risks. </div><div><br /></div><div>It is a regulatory requirement to ensure that banks maintain a sufficient level of capital relative to their risk exposures. The Total CAR takes into account both Tier 1 and Tier 2 capital, providing a comprehensive assessment of a bank's capital strength.</div><div><br /></div><div>You should not be surprised to see that the trends for the total capital adequacy ratio show a similar pattern as that for the Tier 1 capital adequacy ratio. Refer to Chart 9.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhytUhcGs-AtkcF-YYXhw7NoYkjdXDGBx9915xwyY4hYyuVH9jeoVtEPdzTNUVHZ0hkD9Ib5yKBf-o7Oh2C0cz0POIRnwD5FyhB4pyfkVFKUC41J6flMSupIwETo34bvoxXhIoUxnxw73yA-eJy89aTxFMcQJdZlSZr1fNhhloL4SMqngPWy24IkVqbTrk/s903/Chart%209-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Chart 9: Total capital adequacy ratio" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhytUhcGs-AtkcF-YYXhw7NoYkjdXDGBx9915xwyY4hYyuVH9jeoVtEPdzTNUVHZ0hkD9Ib5yKBf-o7Oh2C0cz0POIRnwD5FyhB4pyfkVFKUC41J6flMSupIwETo34bvoxXhIoUxnxw73yA-eJy89aTxFMcQJdZlSZr1fNhhloL4SMqngPWy24IkVqbTrk/s16000/Chart%209-min.png" title="Affin Chart 9: Total capital adequacy ratio" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 9: Total capital adequacy ratio</td></tr></tbody></table><div><br /></div><div><h3>Affin’s performance</h3><div>Based on these 4 groups of metrics, I would rate Affin's performance as below the sector median. </div><div><ul><li>The gap in the returns between Affin and its peers widened over the past 18 years.</li></ul><ul><li>While the gap in the NIM did not widen over the past 18 years, we cannot say this for the efficiency ratio. Affin was a less efficient company in 2023 compared to 2018.</li></ul><ul><li>Affin was more conservative than its peers when it came to lending. However, this did not prevent it from incurring higher NPL from 2017 to 2020.</li></ul><ul><li>The only positive sign was that Affin's capital adequacy ratio had improved relative to its peers over the past few years. </li></ul></div><div><br /></div><div>From an outsider's perspective, I would say that while this is a safe bank from a capital adequacy perspective, it is not well run. There is room for significant improvements.</div><div><br /></div><div>I hasten to add that because of their universal banking model, we may not be comparing apples to apples by looking at NIM and loan performance. </div><div><br /></div><div><h2>Valuation</h2><div>According to <a href="https://pages.stern.nyu.edu/~adamodar/pdfiles/papers/finfirm09.pdf" target="_blank">Damodaran,</a> there are 2 challenges in valuing banks:</div><div><ul><li>The cash flows to a bank cannot be easily estimated, since items like capital expenditures, working capital, and debt are not clearly defined. </li></ul><ul><li>Most financial service firms operate under a regulatory framework that governs how they are capitalized, where they invest, and how fast they can grow. Changes in the regulatory environment can create large shifts in value.</li></ul></div><div><br /></div><div>He argued that financial service firms are best valued using equity valuation models, with actual or potential dividends, rather than free cash flow to equity. The two key numbers that drive value are:</div><div><ul><li>The cost of equity, which will be a function of the risk that emanates from the bank’s investments.</li></ul><ul><li>The return on equity, which is determined both by the bank’s business choices as well as regulatory restrictions.</li></ul></div><div><br /></div><div>As such I will compare the values of the various banks based on the following:</div><div><ul><li>Earnings value (EV) derived from 3 DCF methods – dividends, notional dividends and residual income.</li></ul><ul><li>Asset value (AV) based on its tangible book value.</li></ul></div><div><br /></div><div>I would say that since the bank's assets and liabilities are marked to market, the tangible book value serves as a floor value. This is especially true if the banks have been profitable every year.</div><div><br /></div><h3>Dividend discount model</h3><div>The Earnings Value under the dividend discount model was derived from the following equation:</div><div><br /></div><div>EV = Dividends X (1+g) / (Cost of equity – g).</div><div><br /></div><div>Dividends per share = average past 15 years' total dividends / 2023 number of shares.</div><div><br /></div><div>g = growth rate. I assumed this to be 3%.</div><div><br /></div><div>Cost of equity = This was based on Gurufocu's cost of equity as of 10 Jan 2024.</div><div><br /></div><div>The computation for Affin is shown in Table 4.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoj6xU6QnWSYCokXu5ZkydNJvcQ9ttghiKFgQDwVgunkRsIGEqRuR_2Hl5eGZZk1ZN8nna6KQ51GccKEXkafsj6sSFHFACW476cLMW7WlxFtojkUWIORaS1OStIJMB3xJtnBz1Aj9LphCS7TlptQpfYaWPJ_DvBkIjMiyBfGGcmEhyOl0tVol7FNpjFpI/s791/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Table 4: Dividend discount model for Affin" border="0" data-original-height="234" data-original-width="791" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoj6xU6QnWSYCokXu5ZkydNJvcQ9ttghiKFgQDwVgunkRsIGEqRuR_2Hl5eGZZk1ZN8nna6KQ51GccKEXkafsj6sSFHFACW476cLMW7WlxFtojkUWIORaS1OStIJMB3xJtnBz1Aj9LphCS7TlptQpfYaWPJ_DvBkIjMiyBfGGcmEhyOl0tVol7FNpjFpI/s16000/Table%204-min.png" title="Affin Table 4: Dividend discount model for Affin" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: Dividend discount model for Affin</td></tr></tbody></table><div><br /></div><div><h3>Notional dividend discount model</h3><div>In this model, the cash flow is the notional dividend.</div><div><br /></div><div>I first computed the 2009 to 2023 average ROE.</div><div><br /></div><div>I next derived the normalized PAT = average ROE X 2023 Equity.</div><div><br /></div><div>The notional dividend payout = 1 – (growth / average ROE).</div><div><br /></div><div>Notional dividend = normalized PAT X notional dividend payout.</div><div><br /></div><div>The intrinsic value is then estimated following Table 4 using the notional dividend.</div><div><br /></div><h3>Residual income</h3><div>This is based on Penman’s method where the value:</div><div><br /></div><div>= 2023 Equity + (Present value of Residual income).</div><div><br /></div><div>I first estimated the Residual income for each year from 2009 to 2023.</div><div><br /></div><div>Residual income for each year = PAT to equity holders – Capital charge.</div><div><br /></div><div>Capital charge = Equity X Cost of equity.</div><div><br /></div><div>I then estimated the present value using the single-stage valuation model with the average Residual income as the cash flow item. </div><div><br /></div><h3>Margin of safety</h3><div>Once I have determined the intrinsic value with each of the above 3 methods, I took the simple average as the Earnings value. </div><div><br /></div><div>I next estimated the margins of safety under the Earnings value and Asset value.</div><div><br /></div><div>The margin of safety = (value / market price) – 1.</div><div><br /></div><div>Table 5 summarizes the margins of safety for the 10 banks. I look for a 30% margin of safety. </div><div><ul><li>Only BIMB, HLFG and RHB meet the 30% margins of safety under the Earnings value.</li></ul><ul><li>Some banks have negative margins of safety under the Asset Value.</li></ul></div><div><br /></div><div>In the case of Affin, there is not enough margin of safety under the Earnings Value. You should not be surprised given its low and declining returns. But there is more than a 30% margin of safety under the Asset Value.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhArMxnEUeP3he7T5sOJyYLOXOQI1qLQ9RiVWZEpkse5UUcG6fO6JYBwEd9FsVzui0pKnF7BME87Hu9LITbDwaPpg_drX90gGi3ofgzOP5_1UbFkFG8nd5_vKt5aDaskP0SofFmUnsE8Z4GPy-cejS18J9U5tuo3ti1O0kUmiSmOqVI8c9VqD9JCWatW4s/s506/Table%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Affin Table 5: Margins of safety" border="0" data-original-height="349" data-original-width="506" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhArMxnEUeP3he7T5sOJyYLOXOQI1qLQ9RiVWZEpkse5UUcG6fO6JYBwEd9FsVzui0pKnF7BME87Hu9LITbDwaPpg_drX90gGi3ofgzOP5_1UbFkFG8nd5_vKt5aDaskP0SofFmUnsE8Z4GPy-cejS18J9U5tuo3ti1O0kUmiSmOqVI8c9VqD9JCWatW4s/s16000/Table%205-min.png" title="Affin Table 5: Margins of safety" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 5: Margins of safety</td></tr></tbody></table><div><br /></div></div></div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div><div>Valuing banks can be a complex task due to the unique characteristics of the financial industry. Some of the challenges associated with valuing banks can be grouped under:</div><div><ul><li>Intangibles and Goodwill. Banks often have significant intangible assets, such as brand value, customer relationships, and goodwill.</li></ul><ul><li>Regulatory Environment. I have already mentioned this earlier.</li></ul><ul><li>Complex Financial Instruments. Banks often use complex financial instruments, such as derivatives and structured products, in their operations. Valuing these instruments accurately can be challenging, and they may introduce additional uncertainties into the valuation process.</li></ul><ul><li>Capital Structure and Capital Adequacy. Determining the appropriate discount rate and assessing the sufficiency of a bank's capital to absorb potential losses are integral components of the valuation process.</li></ul><div><br /></div></div><div>Given these challenges, valuing banks often requires a combination of financial modeling, industry expertise, and a deep understanding of the macroeconomic and regulatory landscape. </div><div><br /></div><div>Analysts may use various valuation approaches, such as discounted cash flow (DCF), comparable company analysis (CCA), and precedent transactions, to arrive at a comprehensive and well-informed valuation.</div><div><br /></div><div>If you are a newbie, you may be overwhelmed by them. My advice is to look at what others have done. Sites <span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha</a>* are good sources. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.</div></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>Method</h2><div>The data for my analysis were extracted from the <a href="https://app.tikr.com/register?ref=0omlzm" target="_blank">TIKR.com</a> platform. While the platform provided data as far back as 2002, not all the banks were in operation for that long. As such the starting year for the analysis was pegged to the year when all the 10 banks had information ie 2009.</div><div><br /></div><div>Secondly, not all the banks had the same financial year-end. I took the reporting year as presented by TIKR.com as the calendar year. In this context for 2023, some banks had their financial year end as Dec 2023. When I started on this analysis, these banks had yet to announce their 2023 results. As such I used the Sep LTM results as the 2023 results.</div><div><br /></div><div>I first computed the relevant metrics eg ROE for each company. Then for each metric, I tabulated the 2009 to 2023 performance for all 10 companies. I then use the appropriate EXCEL function to derive the quartiles, median, and mean for each year. </div><div><br /></div><h3>Limitations</h3><div>Affin is a universal bank. In 2022 it reported the following PBT (before elimination):</div><div><ul><li>Commercial banking - RM 1,507 million.</li></ul><ul><li>Investment banking - RM 55 million.</li></ul><ul><li>Insurance - RM 9 million.</li></ul></div><div><br /></div><div>The above is the profile for Affin. The other banks will have their respective profile. My analysis, especially on the NIM, loan performance and capital adequacy focus on the commercial banking metrics. You can argue that it is not the full picture.</div><div><br /></div><div>Even on the commercial banking side, I have not dug deeper to look at other banking ratios such as the CASA ratio (current account and savings account), loan deposit ratio.</div><div><br /></div><div>Similarly, I have not assessed the qualitative aspects such as the adoption of digital technology, customer satisfaction and brand performance. </div><div><br /></div><h2>Affin is not a value trap</h2><div>A value trap is a company that while appearing cheap is cheap because it is facing fundamental issues.</div><div><br /></div><div>While Affin has not been performing well relative to its peers, it is not a loss-making bank. While it has low returns, it has been profitable every year. If the dividends paid are less than the profits, the equity of the bank will continue to grow. </div><div><br /></div><div>The other metric in assessing whether it is a value trap is the margin of safety. Affin has a margin of safety of over 30% based on its tangible book value. However, there in not enough margin of safety based on its Earnings Value. </div><div><br /></div><div>While it may not be a value trap, you may be overpaying for the bank based on its Earnings Value. The reality is that the market places more emphasis on the Earnings Value rather than the Asset Value. So, if you are investing hoping for a re-rating, there must be some expectation of better performance.</div><div><br /></div><div>In this context, I would like to point out The Edge article on 8 Jan 2024 titled “Affin Bank touches five-year high as Sarawak explores stake increase.”</div><div><br /></div><div>The gist of the article is that the Sarawak state government is looking to increase its stake in Affin from 4.94 % currently by another 15%. If this transaction goes through it will become another major shareholder in Affin. </div><div><br /></div><div>As such there may be a potential change in the management. At the same time, there are considerable infrastructure projects in Sarawak. Affin could be a beneficiary of this project if the Sarawak state government is a major shareholder.</div><div><br /></div><div>I see this as a potential catalyst for improving the business performance of Affin. </div><div><br /></div><div>If you have not invested in Affin, you may think that this is not good enough to overcome the negative margin of safety (from an EV perspective).</div><div><br /></div><div>But I am already a shareholder of Affin. I would rather hold onto my shares and see whether this change of ownership would happen. If it does, I think it can be a catalyst for a re-rating.</div></div><div><br /></div></div><div><br /></div></div><div><br /></div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: left;"><div style="text-align: justify;"><div style="text-align: center;"><br /></div></div></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><br /></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div><div><br /></div></div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-57898866096178015112024-01-28T08:37:00.002+08:002024-01-28T09:03:17.482+08:00Case study on how to manage a stock picking portfolio<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: bold; letter-spacing: 0.6px; text-decoration-line: none;">Fundamentals 20-1: You are unlikely to invest in only one stock. Rather you would probably invest in several stocks that were selected based on value investing principles. Essentially this is your stock picking portfolio. This article is a case study on how to construct and maintain such a portfolio. It also serves as the jump point to the various quarterly updates of the portfolio. Revision date: 28 Jan 2024</span></div>
<div style="text-align: justify;"><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhlnmOtNbsGpSJ289Ms0bmE3ug7N15c0zgPhxS9VbA6Dh84ZNGW7vlDNSyj05jpP2J9I_mSgS1izWYX-JqSPE4zdvk9ydeMkOW3wokUNqxWB34muRdXUdC29m5vMxt3B_VrG-Z9Y6k4J-CNyt6K2RBX32Q3oSeDpNxjS4I2Y2qWZUJoKoRjCHUSBOm6=s625" style="margin-left: 1em; margin-right: 1em;"><img alt="How to construct a winning portfolio for 2020" border="0" data-original-height="441" data-original-width="625" height="282" src="https://blogger.googleusercontent.com/img/a/AVvXsEhlnmOtNbsGpSJ289Ms0bmE3ug7N15c0zgPhxS9VbA6Dh84ZNGW7vlDNSyj05jpP2J9I_mSgS1izWYX-JqSPE4zdvk9ydeMkOW3wokUNqxWB34muRdXUdC29m5vMxt3B_VrG-Z9Y6k4J-CNyt6K2RBX32Q3oSeDpNxjS4I2Y2qWZUJoKoRjCHUSBOm6=w400-h282" title="How to construct a winning portfolio for 2020" width="400" /></a></div><br /></div><span><a name='more'></a></span><div style="text-align: justify;">I first wrote this article in Dec 2022 but have updated it quarterly since then.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As of Dec 2022, I had analyzed and valued about 23 companies (hereinafter referred to as “panel”). As my valuation is based on a long-term view of the business, I am confident that the values of these companies are still valid today (Dec 2022).</div><div style="text-align: justify;"><div><br /></div><div>As such I thought it might be instructive to see how I could construct a stock picking portfolio based on these companies. I would then track their performance over the years. This should provide some insights into how to establish and manage a portfolio.</div><div><br /></div><div>I have a short video to give you an overview of how to construct and maintain a stock portfolio without having to resort of Modern Portfolio Theory.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/V0mRhKn-okY" width="320" youtube-src-id="V0mRhKn-okY"></iframe></div><div><br /></div><div><div>I will provide quarterly updates as well as periodically share insights about managing a stock picking portfolio.</div><div><br /></div><div>The focus is not on individual stocks but rather the portfolio. For those who are not familiar with my portfolio concepts, search for the following articles:</div><div><ul><li><a href="https://www.i4value.asia/2021/01/baby-steps-in-constructing-stock.html" target="_blank">Baby steps in constructing a stock portfolio</a>.</li></ul><ul><li><a href="https://www.i4value.asia/2021/01/baby-steps-in-maintaining-stock.html" target="_blank">Baby steps in maintaining a stock portfolio</a>.</li></ul></div><div><br /></div><div>At the same time, if you want to know about the individual stocks covered here look up the specific posts in my blog. You can jump to the appropriate company from the “<a href="https://www.i4value.asia/p/index-of-companies-analyzed.html" target="_blank">Index of Companies Analyzed</a>” page.</div><div><br /></div><div>Disclaimer. This post is to illustrate how to construct a stock picking portfolio. While I have used real-life companies to illustrate how to established a such a portfolio, it is not a recommendation to invest in them.</div></div><div><br /></div><h2>Contents</h2><div><ul><li><b>Stock picking strategies</b></li></ul><ul><ul><li><b>Can stock picking beat the market.</b></li></ul></ul><ul><ul><li><b>Is stock picking worth it.</b></li></ul></ul><ul><ul><li><b>Stock-picking portfolio vs MPT.</b></li></ul></ul><ul><li><b>Constructing the stock picking portfolio.</b></li></ul><ul><ul><li><b>Portfolio parameters.</b></li></ul></ul><ul><ul><li><b>How to select the stocks.</b></li></ul></ul><ul><ul><li><b>Portfolio for 2022.</b></li></ul></ul><ul><ul><li><b>Ensuring diversification and low correlation.</b></li></ul></ul><ul><ul><li><b>Which countries to focus on</b></li></ul></ul><ul><ul><li><b>Pulling it all together.</b></li></ul></ul><ul><li><b>Maintaining the stock picking portfolio.</b></li></ul><ul><ul><li><b>Reviewing performance.</b></li></ul></ul><ul><ul><li><b>Risk-adjusted returns.</b></li></ul></ul><ul><ul><li><b>Dividends.</b></li></ul></ul><ul><ul><li><b>Why quarterly review.</b></li></ul></ul><ul><ul><li><b>How to grow the portfolio value.</b></li></ul></ul><ul><li><b>Portfolio updates.<br /></b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html" target="_blank">Learn more</a>.</i></div></td></tr></tbody></table></div></td></tr></tbody></table></div><div><br /></div></div><div><h2>Stock picking strategies</h2><div>Stock picking strategies are approaches that investors use to select individual stocks for their investment portfolios. These strategies aim to identify stocks that have the potential for strong performance and to maximize returns while managing risks. </div><div><br /></div><div>I would classify some of the common stock picking strategies into the following:</div><div><ul><li>Fundamentals – value investing, growth investing and income investing</li></ul><ul><li>Technical – those who use charts, trend followers and those using technical indicators.</li></ul><ul><li>Behavioural – using social media to identify market sentiments, following insiders buying</li></ul></div><div><br /></div><h3>Can stock picking beat the market?</h3><div>I am a stock picking value investor as I believe that this will enable me to beat the market.</div><div><br /></div><div>While beating the market consistently is challenging, it's not impossible. Some of the challenges and how I have addressed them include the following:</div><div><ul><li>Market efficiency. The Efficient Market Hypothesis suggests that stock prices already incorporate all available information. But we know that markets are not always efficient. It is a question of being patient and finding opportunities when the market in not efficient.</li></ul><ul><li>Transaction costs. Frequent buying and selling of stocks can result in transaction costs which can erode returns. But I am not a trader. I invest for the long term and my average annual stock turnover is in single digits.</li></ul><ul><li>Behavioural biases. Emotional decision-making, overconfidence, and other behavioural biases can lead to suboptimal decisions. I try to have a standard template and investment process to reduce the behavioural biases.</li></ul><ul><li>Risk. Beating the market requires not only generating higher returns but also managing risk effectively. I have a 3-level risk mitigation process to address this. Having a stock-picking portfolio is part of this risk mitigation measures.</li></ul></div><div><br /></div><h3>Is stock picking worth it?</h3><div>I am a bottom-up stock picking value investor. Chart 1 below shows the performance of my portfolio compared to that of the Bursa Malaysia Index (KLCI). I think it is an index beating track record. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicSCeEql1voG5HIesCJVkMB9QQ941m07wYVJuXl8N0iYdnR0c8jgOKOCzFytSHV26Gmp6j7z7LmlID4SPNuQHG5E6Ur0so16ou9KPEtKpLDulIx5Ys2oXAXdPBBhfj3TLhUczoBa_GwcGPRn89rO2mKmp9i1Jce091YlrfLgACcWamPJovaQu2UE91itE/s552/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 1: My Portfolio Performance" border="0" data-original-height="323" data-original-width="552" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicSCeEql1voG5HIesCJVkMB9QQ941m07wYVJuXl8N0iYdnR0c8jgOKOCzFytSHV26Gmp6j7z7LmlID4SPNuQHG5E6Ur0so16ou9KPEtKpLDulIx5Ys2oXAXdPBBhfj3TLhUczoBa_GwcGPRn89rO2mKmp9i1Jce091YlrfLgACcWamPJovaQu2UE91itE/s16000/Chart%201-min.png" title="Chart 1: My Portfolio Performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: My Portfolio Performance</td></tr></tbody></table><br /><div>Now whether stock picking is worth it depends on individual circumstances, goals, and preferences. </div><div><br /></div><div>Here are some factors to consider when deciding if stock picking is the right approach for you:</div><div><ul><li>Time and Effort: Stock picking can be time-consuming and requires research, analysis, and ongoing monitoring. </li></ul><ul><li>Risk Tolerance: Stock picking can be riskier than passive investment strategies like index funds because individual stocks can be more volatile. </li></ul><ul><li>Expertise and Knowledge: Successful stock picking often requires a good understanding of financial markets, accounting, and the specific industries you are investing. You need the skill sets.</li></ul><ul><li>Emotional Discipline: Emotional discipline is crucial in stock picking. </li></ul></div><div><div><br /></div><div>Ultimately, the decision to be a stock picker should be based on your individual circumstances and preferences. </div><div><br /></div><h3>Stock picking portfolio vs MPT</h3><div>I have a stock-picking portfolio because I am a stock-picker. I am a stock-picker because I believe that this will enable me to beat the market. </div><div><br /></div><div>The stock-picking portfolio results from my stock-picking investment approach. I cannot be a stock-picker yet follow MPT when it comes to portfolio construction.</div><div><br /></div><div>A stock-picking portfolio and one based on MPT are two different approaches to constructing a stock portfolio. </div><div><br /></div><div>Stock-picking portfolios are based on the belief that an investor can identify and select individual securities that will outperform the market. Stock picking can be more subjective and relies heavily on individual judgment, while MPT is based on quantitative analysis and objective measures of risk and return.</div><div><br /></div><div>For more details on the differences between a stock-picking portfolio and that based on the MPT, refer to "<a href="https://www.i4value.asia/2023/10/stock-picking-portfolio-vs-mpt.html#more" target="_blank">Stock picking portfolio vs MPT</a>."</div></div><div><br /></div><div><h2>Constructing the stock picking portfolio</h2><div>I have called this a stock picking portfolio to emphasize that it is constructed from stocks selected one-by-one based on value investing principles. This is to differentiate it from a portfolio constructed based on the Modern Portfolio Theory.</div><div><br /></div><div><div>MPT, developed by Harry Markowitz in the 1950s, is a framework for constructing and managing investment portfolios. It is one of the cornerstones of contemporary finance and provides a systematic approach to optimizing the trade-off between risk and return when building a diversified investment portfolio. The key principles of MPT include:</div><div><ul><li>Diversification.</li></ul><ul><li>Efficient Frontier and Capital Market Line.</li></ul><ul><li>Risk and return.</li></ul><ul><li>Correlation and covariances.</li></ul><ul><li>Systemic and non-systemic risks.</li></ul><ul><li>Asset allocation.</li></ul></div><div><br /></div><div>There are criticism and limitations with MPT. Critics argue that it makes simplifying assumptions such as returns that follow a normal distribution and that correlations remain constant. Additionally, MPT doesn't consider factors like behavioural biases or individual investor preferences, which can influence investment decisions.</div><div><br /></div><div>In the context of a stock-picking portfolio, there are several factors to consider when constructing one:</div></div><div><ul><li>Investment Goals. I am looking at the portfolio from a value-investing perspective.</li></ul><ul><li>Risk Tolerance. I am a conservative investor. </li></ul><ul><li>Diversification. I target 30 stocks as a balance between risk and return.</li></ul><ul><li>Research and Analysis. I am a bottom-up stock picker.</li></ul><ul><li>Monitoring and Rebalancing. I review the portfolio quarterly. </li></ul></div><div><br /></div><div>To illustrate the various issues involved in constructing and maintaining a stock picking portfolio, I will first show how to construct such a portfolio. I will then show you how to track portfolio performance via quarterly reviews.</div><div><br /></div></div><h3>Portfolio parameters</h3><div>I defined a stock picking portfolio as a collection of stocks that an investor has selected. This then raises the following questions when it comes to constructing the stock picking portfolio:</div><div><ul><li>How do you select the stocks? I am a value investor so my stocks are selected based on value investing principles. </li></ul><ul><li>How many stocks should you have? I target 30 stocks in my portfolio. Studies have shown that the benefits of diversification become marginal when you go beyond 30 stocks.</li></ul><ul><li>How much to invest in each stock? As a first cut, I allocated the same $ amount to each stock. As the stock picking portfolio becomes more established, I could allocate a bigger $ amount to those whom I have more conviction. But this is something to consider later.</li></ul></div><div><br /></div><div>To start, let us assume that we have USD 100,000 available for investment. Based on 20 stocks and assuming the same level of conviction in these stocks, the plan is to allocate USD 5,000 per stock.</div><div><br /></div><div>The stocks are from 3 different regions - Malaysia, Singapore, and the US. For ease of comparison, I will report all values in USD based on the following exchange rates:</div><div><ul><li>USD 1 to RM 4.20.</li></ul><ul><li>USD 1 to SGD 1.36.</li></ul><ul><li>USD to AUD 1.39.</li></ul></div><div><br /></div><div>I have assumed that the transaction cost for each purchase or sale is equal to 0.5 % of the market price.</div><div><br /></div><div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div></div><h3>How to select the stocks</h3><div>The first step is to compile some basic statistics of the panel as shown in Table 1. The parameters I have chosen - region, sector, investment type, and size - are those that I used to assess portfolio diversity.</div><div><ul><li>Region. I have used the stock exchanges where the companies are traded as the geographical location.</li></ul><ul><li>Sector. As most of the companies operate in a number of industries, I have used the main operating sector of each company as the reference.</li></ul><ul><li>Investment type. I classified my investment into several categories:</li></ul><ul><ul><li>Turnarounds refer to those that are experiencing some temporary problems relative to their peers. </li></ul></ul><ul><ul><li>Compounders are those that can compound their value. These will have a moat and have Earnings Value with growth > Asset Value. You will note that there are no Compounders in the panel. </li></ul></ul><ul><ul><li>Cyclicals refer to those in cyclical sectors such steel companies. If the company is experiencing some issues on top of the cyclical ones, I would classify the company as a Turnaround.</li></ul></ul><ul><ul><li>Quality Value companies refer to fundamentally sound companies that are undervalued.</li></ul></ul><ul><li>Size. I have used the market capitalization on the review date as the measure of size. In this case, the market capitalization is based on the number of shares outstanding and prices as of 31 Dec 2021. For an apple-to-apple comparison, I have converted all to USD. Note that the information for this parameter was extracted from <a href="https://app.tikr.com/register?ref=0omlzm " target="_blank">TIKR.com*</a> stock platform.</li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhzStnbZ0cYoUalBqhCTkTfjXax-RuOnAVl09pn96xvLhNwIaN_OiCut2FndgkLc00ncKrydgDjJ8YuDKYO6LM5pTd7-7Gj1wXtOg_98e2Ln1SR7DuR0QUI04MdThzUED02MqK-5pbd_wfyytLkIvoKD_jImNZaVPna1fWbqX0TVP_fgvr9tY4yKbGW=s602" style="margin-left: auto; margin-right: auto;"><img alt="Panel profile" border="0" data-original-height="602" data-original-width="477" src="https://blogger.googleusercontent.com/img/a/AVvXsEhzStnbZ0cYoUalBqhCTkTfjXax-RuOnAVl09pn96xvLhNwIaN_OiCut2FndgkLc00ncKrydgDjJ8YuDKYO6LM5pTd7-7Gj1wXtOg_98e2Ln1SR7DuR0QUI04MdThzUED02MqK-5pbd_wfyytLkIvoKD_jImNZaVPna1fWbqX0TVP_fgvr9tY4yKbGW=s16000" title="Panel profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Panel Profile</td></tr></tbody></table><div><br /></div><div><h4>Selection process</h4><div>I am a bottom-up value investor. This meant that the stock picking portfolio comprises of stocks that were selected based on my value investing approach. </div><div><br /></div><div>I do not plan my portfolio profile and go and look for stocks. Rather the portfolio profile is the results of the individual stocks that I have picked. As such my portfolio construction process can be summarized as follows:</div><div><ul><li>Identify and invest in individual stocks.</li></ul><ul><li>When I have about more than a dozen stocks, I then review the stock portfolio for diversity.</li></ul><ul><li>I have several portfolio guidelines to assess that I have the balance between risk and return.</li></ul></div><div><br /></div><div>The first step to decide whether a stock is an investment candidate is to determine the intrinsic value of each of the stocks as summarized in Table 2. In the table, I have summarized the various values based on the analyses posted in my blog. </div><div><ul><li>AV. This is the Asset Value. In most cases, this is the Book Value.</li></ul><ul><li>EPV or Earnings Power Value. This is based on a Free Cash Flow to the Firm model assuming zero growth.</li></ul><ul><li>EV with growth. This is based on either the single-stage Free Cash Flow to the Firm model or the Residual Income model. In both cases, I have assumed steady growth in perpetuity.</li></ul><ul><li>Magic F or “Magic Formula”. This is a term used to describe the investment strategy explained in “The Little Book That Beats the Market” by Joel Greenblatt. </li></ul><ul><li>Acquirer’s M or Acquirer's Multiple. This is a metric favoured by Tobias Carlisle.</li></ul><div><br /></div><div>If you want to know more about each of the valuation terminology, refer to the <a href="https://www.i4value.asia/2020/05/definitions.html" target="_blank">Definitions</a> post in my blog.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEh8e2CiN9LiKCXaKZUZUSxjS-EV81tDoh8xLHhgeXbnKoFSAgPPn1gs3qNUCjfR_xEHbsbqq3qA0_p9D3kxSo1ERCiFviQTNFjzjtRe3AKoiKtniXN5DDa-_khfFCFzpQFVsdFp9A9lp1ivvJe-xfVOruSghaR7nd5T8MTh34tEbLoRITQdq8caVcAI=s707" style="margin-left: auto; margin-right: auto;"><img alt="Panel valuation" border="0" data-original-height="602" data-original-width="707" src="https://blogger.googleusercontent.com/img/a/AVvXsEh8e2CiN9LiKCXaKZUZUSxjS-EV81tDoh8xLHhgeXbnKoFSAgPPn1gs3qNUCjfR_xEHbsbqq3qA0_p9D3kxSo1ERCiFviQTNFjzjtRe3AKoiKtniXN5DDa-_khfFCFzpQFVsdFp9A9lp1ivvJe-xfVOruSghaR7nd5T8MTh34tEbLoRITQdq8caVcAI=s16000" title="Panel valuation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Panel Valuation<br /><div style="text-align: left;"><div><i><span style="font-size: x-small;">Notes: </span></i></div><div><i><span style="font-size: x-small;">EV with g. In some cases, these are Optimistic EPVs. If there are conservative and optimistic growth scenarios, I used the optimistic one.</span></i></div><div><br /></div></div></td></tr></tbody></table></div></div><div><div><br /></div><div>I then determined the margin of safety for each metric as summarized in Table 3.</div><div><br /></div><div>The margin of safety in % = [ (Value / Price) - 1] X 100.</div><div><br /></div><div>I am looking for at least a 25 % margin of safety. My first choice is to look for a margin of safety based on the EPV. Most of the companies under Bursa Malaysia and SGX met this criterion.</div><div><br /></div><div>However, I have chosen to invest in all the Bursa Malaysia and SGX companies shown irrespective of whether they met the EPV criterion. The rationales for selecting those that do not meet the EPV > 25 % margin of safety are:</div><div><ul><li>For those undergoing a turn around, I would consider a margin of safety based on the Asset Value. That is why I have chosen to invest in Boustead Plantation and New Toyo Int. If the Turnaround is a Graham Net-Net, I would ignore the EPV. That is why I have chosen to invest in Eksons.</li></ul><ul><li>For the cyclical companies I have relied on both the Asset Value and Earnings Value with growth for the margin of safety. Examples are Petron Malaysia and Dayang.</li></ul><ul><li>For the Quality Value companies like K FIMA and Dominan, I have relied on the Asset Value as I do not believe that there will be any impairment of assets. </li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEi7lYY6BIt7jc24889ueRBUKM_g1_D2dAW9gL89Mc7eaC4QfbTjpH0t23mov6qn8mXpG9ABBmCVoCfpJQLmXjCKTSEAlgtkYk61pxbwqpy7XlFl4jBBZ_OUcYX3fHoMCWrTs-33Ny5P9X0A5lJaM-SNdFmSEYJ9uXFZUXy_gkSOvmhMgf3eYl8sx5Fu=s602" style="margin-left: auto; margin-right: auto;"><img alt="Panel margin of safety" border="0" data-original-height="602" data-original-width="599" src="https://blogger.googleusercontent.com/img/a/AVvXsEi7lYY6BIt7jc24889ueRBUKM_g1_D2dAW9gL89Mc7eaC4QfbTjpH0t23mov6qn8mXpG9ABBmCVoCfpJQLmXjCKTSEAlgtkYk61pxbwqpy7XlFl4jBBZ_OUcYX3fHoMCWrTs-33Ny5P9X0A5lJaM-SNdFmSEYJ9uXFZUXy_gkSOvmhMgf3eYl8sx5Fu=s16000" title="Panel margin of safety" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Panel Margin of Safety<br /><div style="text-align: left;"><div><span style="font-size: x-small;"><i>Notes: </i></span></div><div><span style="font-size: x-small;"><i>EV with g. In some cases, these are Optimistic EPVs. If there are conservative and optimistic growth scenarios, I used the optimistic one.</i></span></div><div><br /></div></div></td></tr></tbody></table><div><br /></div></div><div><div>For the companies in the US, Table 3 shows that almost all do not meet the EPV > 25 % guideline. The only exception is Timken Steel.</div><div><br /></div><div>However, I would still invest in the Quality Value ones such as Leggett & Platt and Cummins. This is because they have margins of safety under the Earnings Value with growth.</div><div><br /></div><div>Note that the US companies all have negative margins of safety based on the Asset Value. This is because of their stock buyback programme.</div><div><br /></div><h3>Portfolio for 2022</h3><div>The stock picking portfolio investment plan based on the stocks chosen is summarized in Table 4. I have assumed that the minimum number of shares that can be bought or sold under Bursa Malaysia and SGX is 100 shares. For the US, I assumed that you can buy 1 share.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjuy-Xgo5c_OwZE0WtY8VdEHQEXCwSsJm7-A_mf0LcgpCrETliqDEmb3601MRmyV3XPRrc-8f1XPdclxYb7GDpwtRf2tGB56H98Xyxm7U4YjawlRkC-ATixxm3tMF2wzw2UT5H4f7FpudpTSX_bKF1-FpbFlyu--yYADM-YD6qfZ75vEqaFhyqHwewW=s522" style="margin-left: auto; margin-right: auto;"><img alt="Portfolio investment plan" border="0" data-original-height="522" data-original-width="522" src="https://blogger.googleusercontent.com/img/a/AVvXsEjuy-Xgo5c_OwZE0WtY8VdEHQEXCwSsJm7-A_mf0LcgpCrETliqDEmb3601MRmyV3XPRrc-8f1XPdclxYb7GDpwtRf2tGB56H98Xyxm7U4YjawlRkC-ATixxm3tMF2wzw2UT5H4f7FpudpTSX_bKF1-FpbFlyu--yYADM-YD6qfZ75vEqaFhyqHwewW=s16000" title="Portfolio investment plan" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: Investment Plan<br /><div style="text-align: left;"><i><span style="font-size: x-small;">Note</span></i></div><div style="text-align: left;"><i><span style="font-size: x-small;">Assumed that we can buy individual shares in the US companies</span></i></div></td></tr></tbody></table><div><br /></div><div><div><br /></div><div>To estimate the number of shares that can be bought, I divide the equivalent of USD 5,000 by the total transaction cost. Remember that my portfolio guideline is to have USD 5,000 per company.</div><div><br /></div><div>For example, for Eksons with a market price of RM 0.65 per share, the total number of shares that can be purchased </div><div><br /></div><div>= [Amount allocated in RM] / [Purchased cost].</div><div><br /></div><div>= [ USD 5,000 X RM 4.20 exchange rate ] / [ price of 0.65 X 1.005 ] = 32,147.</div><div><br /></div><div>Factor 1.005 is to cater to the 0.5 % transaction cost associated with each purchase.</div><div><br /></div><div>The number of shares to buy is then 32,100 based on rounding down.</div></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><div>According to <a href="https://www.investopedia.com/financial-advisor/steps-building-profitable-portfolio/" target="_blank">Investopedia</a> your best bet for consistent long-term growth is to have a diversified portfolio. They recommended the following process for establishing a stock portfolio:</div><div><ul><li>First, determine the appropriate asset allocation for your investment goals and risk tolerance.</li></ul><ul><li>Second, pick the individual assets for your portfolio.</li></ul><ul><li>Third, monitor the diversification of your portfolio, checking to see how weightings have changed.</li></ul><ul><li>Make adjustments when necessary. Buy other underweighted securities with the proceeds from selling the over-weighted ones.</li></ul><div><br /></div></div><div>As you can see, the concepts are relatively straightforward. The challenge is in the details. I have shown one way to establish a portfolio in this post. I am sure that there are other ways.</div><div><br /></div><div>If you are a newbie trying to make sense of what to do, I would suggest that your first step is to focus on the stock selection process. If you get this wrong, the benefits of diversification would be reduced.</div><div><br /></div><div>If you have yet to master stock-picking but still want to invest based on fundamentals, one way is to depend on third-party advisers. Several financial advisers who provide such analyses. </div></div></div><div style="text-align: justify;"><div><br /></div><div><span style="text-align: start;">Those who do this well include people </span><span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.</div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h3>Ensuring diversification and low correlation</h3><div>If I follow MPT, I will have to look for uncorrelated stocks based on the variances and co-variances. It is a statistical/quantitative process. For a retail investor, this is not a practical approach. </div><div><ul><li>Firstly, you do not have the computation power to calculate the variance and co-variances for 20 to 30 stocks. </li></ul><ul><li>Besides, variances and covariances are not static and change over time. So even if you could compute them, there is the question of their validity. </li></ul><ul><li>MPT computes variance and co-variances based on stock prices. In other words, correlation is based on stock price movements. There are other ways to look at correlation.</li></ul></div><div><br /></div><div>The goal is to have several uncorrelated stocks. Instead of looking at this numerically, I looked at it qualitatively. I established a way to assess diversity. My view is that the more diversified the stock picking portfolio, the less the correlation between the various stocks. </div><div><br /></div><div>To ensure diversification, I assessed the degree of concentration under several criteria. I focused on the following criteria.</div><div><ul><li>Regions as represented by the stock exchanges.</li></ul><ul><li>Sectors or industries.</li></ul><ul><li>Market cap or size.</li></ul><ul><li>Business performance - Turnarounds, Compounders, Cyclicals.</li></ul></div><div><br /></div><div>The idea is to select stocks based on different factors. These could be economic, political, technological, and even market sentiment factors.</div><div><br /></div><div>For each criterion, I classified the stocks in the portfolio into several groups and use this as the basis to assess diversification. My rules of thumb for diversification are:</div><div><ul><li>Single stock concentration - the market value of a stock should not be more than 10% of the market value of the total portfolio.</li></ul><ul><li>Group concentration - the market value of the stocks within a group should not be more than 30% of the market value of the total portfolio.</li></ul></div><div><br /></div><div>I then analysed the stock picking portfolio based on the various groupings as illustrated below. Note that the grouping is based on the information from Tables 1 and 4. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEg7tN_U9qXnIVln25Sg0VkzrLlMCrOHhQgWIBwJKHkc_XB6S3tRV2SXE6_n_c2etK-D4EUUZqiblN2XB-0v-XonWHllVFbsLfmVVYh6na828VkR7zytCoU6Td81_iJVtjqSPMJB6tTMleg-LpauKhrHjmejZouC-iDMNYlgU_KNdU2Qm3cpkmvKhtAX=s614" style="margin-left: auto; margin-right: auto;"><img alt="Portfolio profile by region" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/a/AVvXsEg7tN_U9qXnIVln25Sg0VkzrLlMCrOHhQgWIBwJKHkc_XB6S3tRV2SXE6_n_c2etK-D4EUUZqiblN2XB-0v-XonWHllVFbsLfmVVYh6na828VkR7zytCoU6Td81_iJVtjqSPMJB6tTMleg-LpauKhrHjmejZouC-iDMNYlgU_KNdU2Qm3cpkmvKhtAX=s16000" title="Portfolio profile by region" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Portfolio Profile - Region/Stock Exchanges</td></tr></tbody></table><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjB2Zy17xakL-ojVkyVEs16hvpzSdA4WYnCe_OSdJiXgOjutR69lT5mXlWyhdKltDpPH1tLHIhkywf1TiNvgHS-w5HUGyeUChkBBgzt3d2K1sHVfbDeRYti_zrK4UZ6p-tXZyvnYdxsxcSEpVof0GI3x4E_OHc8e4K8NFEVfiK_x2Sj-A_DJkf_TIv9=s614" style="margin-left: auto; margin-right: auto;"><img alt="Portfolio profile by investment type" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/a/AVvXsEjB2Zy17xakL-ojVkyVEs16hvpzSdA4WYnCe_OSdJiXgOjutR69lT5mXlWyhdKltDpPH1tLHIhkywf1TiNvgHS-w5HUGyeUChkBBgzt3d2K1sHVfbDeRYti_zrK4UZ6p-tXZyvnYdxsxcSEpVof0GI3x4E_OHc8e4K8NFEVfiK_x2Sj-A_DJkf_TIv9=s16000" title="Portfolio profile by investment type" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Portfolio Profile - Investment Type</td></tr></tbody></table><div><br /></div><div>As an example, the 25% for the Turnarounds is computed as follows:</div><div><br /></div><div>Total investments in the Turnaround stocks are:</div><div><br /></div><div>= Investments in Eksons, White Horse, Parkson Holdings, Boustead Plantations, and New Toyo International.</div><div><br /></div><div>= USD 4,993 + USD 4,992 + USD 4,997 + USD 4,993 + USD 4,997. Refer to Table 4.</div><div><br /></div><div>= USD 24,972.</div><div><br /></div><div>Total investments in Turnarounds as % of the total amount allocated = USD 24,972 / USD 100,000 = 25 %.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgoOOeJhxjZP0xZo0T0xUefIPfi6NZPgpLuvmA1fzk9RAoO277OUT2RiwwEDjL_8tvFE2W2SSYzFDaSd-fo6C_TY92uz7-r7lgGTSt6g_Njy2npmJV3oCtkxF9OeoyfPcDCVEAO39cLoqAuzKdUm_Ne1iie1wJtq6vZOX4rZGgPio0Uf-1VjKXoxpCt/s614/Market%20cap%20R-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Portfolio profile by market cap Revised" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgoOOeJhxjZP0xZo0T0xUefIPfi6NZPgpLuvmA1fzk9RAoO277OUT2RiwwEDjL_8tvFE2W2SSYzFDaSd-fo6C_TY92uz7-r7lgGTSt6g_Njy2npmJV3oCtkxF9OeoyfPcDCVEAO39cLoqAuzKdUm_Ne1iie1wJtq6vZOX4rZGgPio0Uf-1VjKXoxpCt/s16000/Market%20cap%20R-min.png" title="Portfolio profile by market cap Revised" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Portfolio Profile - Market Cap or Size</td></tr></tbody></table><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEghzBcBndrO0K-4F9FxUZzLIrbZTBEj2Qudt3yIHhOp9xEOg49QLh7X8qmaM3Y8icnNL5kAy1QtaIYpN6pLb7QxmtCsmtDUIaYmDAtfeLzUp_MuK7jwwsRku-MeeOXVhVpZazJmQseGq7imtLNIkOpSBnxHODcn6BAiBOQsj3xQaiuB8PjORoTMiP6o=s614" style="margin-left: auto; margin-right: auto;"><img alt="Portfolio profile by sector" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/a/AVvXsEghzBcBndrO0K-4F9FxUZzLIrbZTBEj2Qudt3yIHhOp9xEOg49QLh7X8qmaM3Y8icnNL5kAy1QtaIYpN6pLb7QxmtCsmtDUIaYmDAtfeLzUp_MuK7jwwsRku-MeeOXVhVpZazJmQseGq7imtLNIkOpSBnxHODcn6BAiBOQsj3xQaiuB8PjORoTMiP6o=s16000" title="Portfolio profile by sector" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Portfolio Profile - Sector</td></tr></tbody></table><div><br /></div><div>Note that I have computed the % based on the total amount allocated rather than the total amount invested of USD 79,549. This is because I will also be investing all the balance cash when I find other investment opportunities.</div><div><br /></div></div><div><div>You can see that by allocating the same amount to each stock in a 20 stocks portfolio, I am not likely to exceed the 10% single stock criteria. However, there may be a possibility of this if I allocate more to the ones with higher conviction. At this juncture, there is not something to worry about. </div><div><br /></div><div>In terms of group concentration, to a certain extent, this is also governed by the number of groups for each criterion. For example, for the Region criteria, I only have 3 groups - Bursa Malaysia, SGX, and US. In theory, if all the regions have the same amount allocated, we will have 33 % in each group. The point I am making is that when assessing diversification, we have to take this into account. </div><div><br /></div><div>At this juncture, the following have exceeded the group criteria:</div><div><ul><li>Region. Bursa Malaysia accounted for 50 % of the portfolio. To reduce this, I will have to look for more US and SGX stocks in the future. At this juncture, since I am very familiar with the situation in Malaysia, I am happy to have 50 % allocated to Malaysia. </li></ul><ul><li>Investment type. The Quality Value stocks accounted for 35 % of the portfolio. I am prepared to live with this % as these represented the less risky stocks among the various categories of investment types. </li></ul></div><div><br /></div><div><h3>Which countries to focus on</h3><div>When it comes to allocating the portfolio funds to different locations, I would focus on those countries with better growth track record. This is will ensure that there are better prospects of a faster re-rating.</div><div><br /></div><div>To give you a sense of this, from the end of 2010 to 2023, the CAGR for the various stock market indices were:</div><div><ul><li>S&P 500 (US) – 10.8 %.</li></ul><ul><li>Nifty 50 (India) – 10.2 %.</li></ul><ul><li>SSE (China) – 0.4 %.</li></ul><ul><li>KLCI (Malaysia) – negative 0.3 %.</li></ul></div><div><br /></div><div>In this context, I would focus on the US. The reasons for the higher growth rate for the US index are as follows:</div><div><br /></div><div><b>Economic Size and Development</b>. The United States has one of the largest and most developed economies globally. Its economic size and diversification across various sectors contribute to a more resilient stock market. </div><div><br /></div><div><b>Global Market Integration</b>. The US stock market is highly integrated into the global economy, attracting international investors and benefiting from a more extensive range of investment opportunities. </div><div><br /></div><div><b>Technology and Innovation.</b> The US is a global leader in technology and innovation. The presence of major tech companies on the US stock exchanges has been a significant driver of growth. These companies often experience rapid expansion, contributing to overall market growth. </div><div><br /></div><div><b>Political Stability and Regulatory Environment.</b> The US has historically been viewed as politically stable. With a well-established regulatory framework, it can attract more investors compared to markets with perceived instability.</div><div><br /></div><div><b>Market Maturity and Investor Sophistication</b>. The US stock market has a longer history and is considered more mature compared to the other Asian stock markets. Investor confidence and sophistication tend to grow with market maturity. This can positively impact market performance.</div><div><br /></div><div><b>Currency Factors</b>. Currency exchange rates can influence investment decisions. The US dollar is a widely used global currency, making US assets attractive to international investors. </div><div><br /></div><div><b>Market Liquidity</b>. The US, being larger and more liquid, may provide investors with greater ease in buying and selling securities.</div><div><br /></div><div>Financial Infrastructure. The US is seen as having a more efficiency and sophisticated financial infrastructure. This can impact the ease of doing business and investing.</div><div><br /></div><div><b>Interest Rates and Monetary Policy.</b> Differences in interest rates and monetary policies between the US and other countries can affect the cost of capital and influence investment decisions.</div></div><div><br /></div><h3>Pulling it all together</h3><div>If you knew which stock would give the best return, you would be an idiot not to put all your money into this one stock. In reality, you do not know the future so you spread your money to several stocks. You hope that if one does badly, the others will do well enough to offset the bad performing one. This is the rationale for having a portfolio of stocks.</div><div><br /></div><div>The more stocks you have, the lower the risk, but also the lower the amount of gain. Portfolio construction is thus getting a balance between risk and return.</div><div><br /></div><div>Return is relatively straightforward to assess. I look at return as = total gain (capital gain + dividend) as a % of my investment.</div><div><br /></div><div>On the other hand, risk is a bit more challenging as I do not follow the volatility school. Rather I view risk as a permanent loss of capital. </div><div><br /></div><div>To minimize the investment risk, I first look for stocks that will have a low probability of a permanent loss of capital. That is why my stocks were selected based on value investing concepts. </div><div><br /></div><div>At the same time, since I cannot foresee the future, I invest in several stocks. This post is an example of how I have constructed a stock portfolio. I will be tracking the performance of the stock portfolio to illustrate how to manage it.</div><div><br /></div><div>I hoped that you will use what I have done as a reference to construct your stock portfolio.</div><div><br /></div><div>There are of course other risk mitigation strategies. I just covered selecting stocks based on value investing concepts and having a stock portfolio as examples. If you want to know more about other risk mitigation strategies, look up the following: </div><div><ul><li><a href="https://www.i4value.asia/2020/05/how-to-mitigate-against-risks-when.html" target="_blank">How To Mitigate Against Risks When Value Investing</a></li></ul><ul><li><a href="https://www.i4value.asia/2021/06/the-best-way-to-reduce-investment-risk.html#more" target="_blank">The best way to reduce investment risk</a></li></ul><ul><li><a href="https://www.i4value.asia/2020/10/baby-steps-in-assessing-permanent-loss.html#more" target="_blank">Baby steps in assessing permanent loss of capital</a></li></ul></div><div><br /></div></div><div><h2>Maintaining the stock picking portfolio</h2><div>There are two aspects to maintaining the stock picking portfolio.</div><div><ul><li>Keeping track of the various transactions. I suggest that you set up an EXCEL worksheet to do this. This can then provide the transaction history.</li></ul><ul><li>Reviewing and interpreting the results. This should be the main focus. By having a standard EXCEL worksheet, you can then spend time thinking about this rather than on the mechanics of tracking the various transactions.</li></ul></div><div><br /></div><div>Refer to “<a href="https://www.i4value.asia/2022/04/mac-2022-review-of-winning-stock.html#more" target="_blank">Mac 2022 review of the stock picking portfolio</a>” for details on how I track the various transactions and estimate the returns.</div><div><br /></div><h3>Reviewing performance</h3><div>There are 2 objectives for each quarterly review:</div><div><ul><li>To determine the portfolio return.</li></ul><ul><li>To ensure that the portfolio still meets the diversity criteria.</li></ul></div><div><br /></div><div>When it comes to returns, you have the following options:</div><div><ul><li>Look at absolute returns.</li></ul><ul><li>Compare your returns with those of the benchmarks.</li></ul><ul><li>Compare the returns on a risk-adjusted basis.</li></ul></div><div><br /></div><div>When it comes to the fund or stock picking portfolio, the return is complicated by the following situations:</div><div><ul><li>During the period, some of the stocks could be losing money. You could have a negative total gain if a capital loss is larger than the dividends.</li></ul><ul><li>You could have sold off some stocks and been holding cash. Alternatively, you could be holding onto some dividends in cash form rather than have them reinvested during the review time.</li></ul><ul><li>You could have also allocated additional cash to the funds. In other words, the amount set aside for investment is bigger not because of any gain, but because of additional funds.</li></ul></div><div><br /></div><div>To cater to such situations, I define the total gain and return in the following manner. </div><div><ul><li>Total Gain = current value - previous value + dividends.</li></ul><ul><li>The returns for the period = gain divided by the previous value.</li></ul><ul><li>The value here includes any un-invested cash ie the fund value.</li></ul></div><div><br /></div><div>I used the market value of the stocks in the stock picking portfolio to calculate the portfolio value. It is the sum of the market value of the respective stocks. The current and previous values refer to the value of the stock picking portfolio assuming it is liquidated. </div><div><br /></div><div>When it comes to checking diversity, I look at the profile of the portfolio based on the 4 characteristics - region, investment type, market cap, and sector. I check that the profile still follows my rules of thumb.</div><div><br /></div><div>Refer to the Jun 2022 review titled “The stock picking portfolio has lost money – do not panic” for illustrations of the above issues. </div><div><br /></div><h3>Risk-adjusted returns</h3><div>When assessing returns, I prefer to look at absolute returns as well as in comparison with some benchmarks. </div><div><br /></div><div>But if you view volatility as risk, you can include volatility in your assessment of the performance. In practice, there are 4 such measures:</div><div><ul><li>Treynor ratio.</li></ul><ul><li>Sharpe ratio.</li></ul><ul><li>Jensen alpha.</li></ul><ul><li>Information ratio.</li></ul></div><div><br /></div><div>I consider risk as a permanent loss of capital. Nevertheless, I view volatility, as represented by Beta as one proxy of risk. I use the CAPM concept, especially the Beta in determining the cost of capital. As such I also assess the portfolio performance using the Information ratio and the Jensen alpha.</div><div><br /></div><div>In my Sep 2022 review, I provided examples of how to calculate the Information ratio and Jensen alpha. Refer to “<a href="https://www.i4value.asia/2022/11/the-winning-stock-portfolio-dipped-but.html#more" target="_blank">The stock picking portfolio dipped but buy more</a>”.</div><div><br /></div><h3>Dividends</h3><div>The gains from the portfolio come from 2 sources:</div><div><ul><li>Capital gains. This comes from the increase in the share price compared to the purchased cost.</li></ul><ul><li>Dividends. These are a share of the business profits distributed by the company.</li></ul></div><div><br /></div><div>Dividends are not paid monthly. The most common practice is twice a year although some pay dividends quarterly.</div><div><br /></div><div>Dividends are lump sum additions to the fund. For each computation, I incorporate dividends into the return assessment only at the end of the year.</div><div><br /></div><div>In my year-end review, I illustrate how to account for dividends. Refer to” <a href="https://www.i4value.asia/2023/01/the-first-annual-review-of-winning.html#more" target="_blank">The first annual review of the stock picking portfolio.</a>”</div></div><div><br /></div><div><h3>Why quarterly review? </h3><div>I differentiate between reviewing the stock picking portfolio and reviewing individual stocks.</div><div><ul><li>When I review individual stocks, the goal is to look for selling signals. I focus on the individual stock and do not worry about how it links to other stocks.</li></ul><ul><li>When I review the stock picking portfolio, I am looking at the collection of stocks as a whole. I would consider how one particular stock relates to other stocks.</li></ul></div><div><br /></div><div>As such, the frequency for reviewing the stock picking portfolio differs from that for reviewing individual stocks. </div><div><br /></div><div>How often you review the stock picking portfolio is related to what you do in the review. My portfolio review goals are:</div><div><ul><li>Tracking performance. This is a “mechanical” process and is not dependent on the frequency of the review.</li></ul><ul><li>Checking diversity. Based on the past year’s results stock diversification does not change frequently. Checking every 3 months seemed sufficient. If you have a very volatile situation, you may need to check more frequently.</li></ul><ul><li>Checking for investment mistakes. I define an investment mistake as a stock that did not provide an acceptable return after 5 years. An acceptable return is at least equal to the bank’s fixed deposit rate. Returns depend on company performance as well as market sentiments. Since company results are announced quarterly, the most frequent review is every quarter.</li></ul></div><div><br /></div><div>For these reasons, I have chosen to review the portfolio quarterly. You could argue that we could have reviewed the portfolio every 6 months instead of quarterly. This is debatable.</div><div><br /></div><div>For details refer to the March 2023 review “<a href="https://www.i4value.asia/2023/04/how-often-do-you-review-winning-stock.html#more" target="_blank">How often do you review the stock picking portfolio?</a>”</div><div><br /></div><h4>Why the 4 diversity factors</h4><div>I have chosen 4 factors – location, sector, investment type, and size – to assess diversity. </div><div><br /></div><div>These were chosen because I believe that the stock prices for each group within a factor are not correlated. I have illustrated the correlation in the March 2023 review. </div><div><br /></div><h3>How to grow the portfolio value</h3><div>There are 2 ways for the portfolio value to grow over time:</div><div><ul><li>The market price of the stocks in the portfolio increases over the years in line with the improvements in the business fundamentals. The assumption here is that you do not sell these stocks as they are still underpriced. In other words, their intrinsic values have also increased such that the latest market prices are < updated intrinsic values.</li></ul><ul><li>You sell the overpriced stocks and reinvest the proceeds in other underpriced stocks. </li></ul></div><div><br /></div><div>Warren Buffett’s current approach is represented by the former – his ‘forever” stocks. I must admit that I don’t have his investing skills and have not found any “forever” stocks. </div><div><br /></div><div>Rather I rely on the latter approach. The challenge is then identifying the overpriced situations and selling to lock in the gains. </div><div><br /></div><div>For details on the various issues with growing the portfolio value, refer to the Jun 2023 review titled “<a href="https://www.i4value.asia/2023/07/how-to-grow-stock-picking-portfolio.html#more" target="_blank">How to grow the stock portfolio value?</a>”</div><div><br /></div><h2>Portfolio Updates</h2><div>In this section, I present the latest picture of stock returns and diversity. This is the position at the end of Dec 2023.</div><div><ul><li>The portfolio in 2022 did not perform as well as the benchmark. But in the following two quarters, the portfolio outperformed the benchmark. The portfolio performed better in 2023 beating the benchmark every quarter as well as for the year. Refer to Table 5.</li></ul><ul><li>In the context of risk management, I am satisfied that the portfolio at the end of Dec 2023 is still diversified. However, I have re-allocated the funds to reduce the Bursa Malaysia exposure in favour of a bigger exposure for the US.</li></ul><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAmXGwxz4LUGgJb_Qx3T1bi2fU-_DNiOtVzyj7xZUHxJxptqqbjtUVlRL5uoO2A_rFEJGn888zCg1d2fnX1KryXIoQjzi5Jcb_0kRE7IZ3rqotggrky_b0H4Kc3GSozGw_01OE2vDNC9EWo7UwS1CjNwajtu8nxZGTElYuOfkrYTOXbfiCXD3kg14a3UM/s903/Table%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 5: Portfolio returns as of the end of Dec 2023" border="0" data-original-height="303" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAmXGwxz4LUGgJb_Qx3T1bi2fU-_DNiOtVzyj7xZUHxJxptqqbjtUVlRL5uoO2A_rFEJGn888zCg1d2fnX1KryXIoQjzi5Jcb_0kRE7IZ3rqotggrky_b0H4Kc3GSozGw_01OE2vDNC9EWo7UwS1CjNwajtu8nxZGTElYuOfkrYTOXbfiCXD3kg14a3UM/s16000/Table%205-min.png" title="Table 5: Portfolio returns as of the end of Dec 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 5: Portfolio returns as of the end of Dec 2023<br /><div style="text-align: left;"><i>Note: I have highlighted the Benchmark as the total return for the KLCI was a guesstimate.</i></div></td></tr></tbody></table><div><br /></div></div><div>Note that I started the portfolio with USD 100,000 at the end of Dec 2021. But towards the end of Dec 2022, I added USD 10,000 to the fund. The returns of the fund should then be based on USD 110,000.</div><div><div><br /></div><div>During the past 21 months, I have sold some stocks and added new ones. For the details refer to each of the quarterly reviews.</div><div><br /></div><div>The portfolio diversity shown in Table 6 reflects not only changes in the stock prices but also the sales and purchases. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilKr4D7Zaf4alHzfuvACEOg-fVBCP0oZ1DVRLI3aTcLLCUOQV2ZYm0rGH6KJYDGWu3ixbklE7ren64d6K5rqY1MnKNjh-buMrjdtb-rqTuEc7AU9C8DMhwrID5Bc1b87PFJrq9YY1QUnZZ8bMvmZJhF91ZUIFVZTW3HHJzaXSq0snXkYV2imrMZSsvNBI/s896/Table%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 6: Diversity profile as of the end of Dec 2023" border="0" data-original-height="896" data-original-width="714" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilKr4D7Zaf4alHzfuvACEOg-fVBCP0oZ1DVRLI3aTcLLCUOQV2ZYm0rGH6KJYDGWu3ixbklE7ren64d6K5rqY1MnKNjh-buMrjdtb-rqTuEc7AU9C8DMhwrID5Bc1b87PFJrq9YY1QUnZZ8bMvmZJhF91ZUIFVZTW3HHJzaXSq0snXkYV2imrMZSsvNBI/s16000/Table%206-min.png" title="Table 6: Diversity profile as of the end of Dec 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 6: Diversity profile as of the end of Dec 2023</td></tr></tbody></table><div><br /></div></div><div>To see the details of the analysis and calculation for each of the reviews, you can refer to the respective articles as shown in the following links.</div></div><div><br /></div><div><div style="text-align: left;"><div><table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: none; mso-border-alt: solid windowtext .5pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 1184;"><tbody><tr><td style="border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Review date</p></td><td style="border-left: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p>Reference </o:p></p></td><td style="border-left: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Title/Links</p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Mac 2022</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">20-2</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><a href="https://www.i4value.asia/2022/04/mac-2022-review-of-winning-stock.html#more" target="_blank">Mac 2022 review of the stock picking portfolio</a></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Jun 2022</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">20-3</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><a href="https://www.i4value.asia/2022/07/the-winning-stock-portfolio-has-lost.html#more" target="_blank">The stock picking portfolio has lost money – do not panic</a></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Sep 2022</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">20-4</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><a href="https://www.i4value.asia/2022/11/the-winning-stock-portfolio-dipped-but.html#more" target="_blank">The stock picking portfolio dipped but buy more</a></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Dec 2022</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">20-5</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><a href="https://www.i4value.asia/2023/01/the-first-annual-review-of-winning.html#more" target="_blank">The first annual review of the stock picking portfolio</a></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Mac 2023</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">20-6</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><a href="https://www.i4value.asia/2023/04/how-often-do-you-review-winning-stock.html#more" target="_blank">How often do you review the stock picking portfolio?</a></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Jun 2023</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">20-7</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><a href="https://www.i4value.asia/2023/07/how-to-grow-stock-picking-portfolio.html#more" target="_blank">How to grow the stock picking portfolio value?</a></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Sep 2023</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">20-8</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><a href="https://www.i4value.asia/2023/10/stock-picking-portfolio-vs-mpt.html#more" target="_blank">Stock picking portfolio vs MPT</a></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Dec 2023</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">20-9</p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><a href="https://www.i4value.asia/2024/01/the-second-annual-review-of-stock.html#more" target="_blank">The second annual review of the stock picking portfolio</a></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><br /></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><br /></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p></td></tr><tr><td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 53.75pt;" valign="top" width="72"><p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"></p></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 81pt;" valign="top" width="108"></td><td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 316.05pt;" valign="top" width="421"><br /></td></tr></tbody></table></div><div><br /></div></div><div style="text-align: left;"></div></div><div>Table 7: Links to stock picking portfolio articles in my blog</div><div><br /></div><div><br /></div><div><br /></div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: left;"><div style="text-align: justify;"><div style="text-align: center;"><br /></div></div></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><br /></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div><div><br /></div></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com1tag:blogger.com,1999:blog-7763022747235103156.post-14840649331489985382024-01-28T08:24:00.004+08:002024-01-28T08:24:49.346+08:00The second annual review of the stock picking portfolio<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Fundamentals 20-9: This is the Dec 2023 review of the stock-picking portfolio that was first established at the start of 2022. It is also the second annual review of the portfolio. I also elaborate of why you should focus on the US.</span></div>
<div style="text-align: left;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhffYAdyx8sNmgeFF29nANvrBhgMAR2qKWqK3JIw-x05Jyzm7xpTxeTLqSmA0Qw4sjpKrGC3lZi0DmZpwbmtczCcbMtvsSfdhsB42AvC16yq3BC1H2Uk4Ao6Ee3aqeb4IVKjRuvpPk6EOz6BiuSZGchqTvXWNjbHbOJbFlcfKEHBN03lJJtModXA4qoT60/s481/Pic%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="The second annual review of the stock picking portfolio" border="0" data-original-height="381" data-original-width="481" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhffYAdyx8sNmgeFF29nANvrBhgMAR2qKWqK3JIw-x05Jyzm7xpTxeTLqSmA0Qw4sjpKrGC3lZi0DmZpwbmtczCcbMtvsSfdhsB42AvC16yq3BC1H2Uk4Ao6Ee3aqeb4IVKjRuvpPk6EOz6BiuSZGchqTvXWNjbHbOJbFlcfKEHBN03lJJtModXA4qoT60/s16000/Pic%201-min.png" title="The second annual review of the stock picking portfolio" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">In Jan 2022, I constructed a stock portfolio based on the companies that I had analyzed and valued over the past year. The goal was to track the portfolio performance to provide insights into establishing and managing a stock portfolio.</div><div style="text-align: justify;"><br /></div><div><div style="text-align: left;"><div style="text-align: justify;">This is my eighth quarterly cum second annual review. The goals of each portfolio review were:</div><div style="text-align: justify;"><ul><li>To determine the portfolio return.</li></ul><ul><li>To ensure that the portfolio still meets the diversity criteria.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This post builds on the data from the various tables presented in my earlier articles in this series. To benefit from this article, you should first read the following (in chronological order):</div><div style="text-align: justify;"><ul><li><a href="https://www.i4value.asia/2022/01/how-to-construct-winning-stock.html#more" target="_blank">Case study on how to manage a stock picking portfolio</a></li></ul><ul><li><a href="https://www.i4value.asia/2022/04/mac-2022-review-of-winning-stock.html#more" target="_blank">Mac 2022 review of the stock picking portfolio.</a> </li></ul><ul><li><a href="https://www.i4value.asia/2022/07/the-winning-stock-portfolio-has-lost.html#more" target="_blank">The stock-picking portfolio has lost money – do not panic.</a></li></ul><ul><li><a href="https://www.i4value.asia/2022/11/the-winning-stock-portfolio-dipped-but.html#more" target="_blank">The stock picking portfolio dipped but buy more.</a></li></ul><ul><li><a href="https://www.i4value.asia/2023/01/the-first-annual-review-of-winning.html#more" target="_blank">The first annual review of the stock picking portfolio.</a></li></ul><ul><li><a href="https://www.i4value.asia/2023/04/how-often-do-you-review-winning-stock.html#more" target="_blank">How often do you review the stock-picking portfolio?</a></li></ul><ul><li><a href="https://www.i4value.asia/2023/07/how-to-grow-stock-picking-portfolio.html#more" target="_blank">How to grow the stock-picking portfolio value?</a></li></ul><ul><li><a href="https://www.i4value.asia/2023/10/stock-picking-portfolio-vs-mpt.html#more" target="_blank">Stock picking portfolio vs MPT</a></li></ul></div><div style="text-align: justify;"><br /></div><h2 style="text-align: justify;">Contents</h2><div style="text-align: justify;"><ul><li><b>Tracking performance</b></li></ul><ul><li><b>End Dec 2023 Returns</b></li></ul><ul><li><b>End Dec 2023 Diversity</b></li></ul><ul><li><b>Where to diversify to</b></li></ul><ul><li><b>Conclusion</b></li></ul></div><div style="text-align: justify;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><h2 style="text-align: justify;">Tracking performance</h2><div style="text-align: justify;">To recap, I started in the end of 2021 with a USD 100,000 investment fund. I then added another USD 10,000 at the end of 2022. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I did not use all the money when I established the portfolio. There is some balance cash. When looking at performance, I will look at it from the fund perspective rather than just the stock portfolio perspective. For the avoidance of doubt:</div><div style="text-align: justify;"><ul><li>The portfolio refers to the stocks that I invest in.</li></ul><ul><li>The fund refers to both the value of the stock portfolio and the unutilized cash.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The total fund value as of the last review date (end of Sep 2023) was USD 121,375 as per Table 1. </div><div style="text-align: justify;"><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggjoFVp-jsrS1k1axLn0vEI9p5dQx_pMDdQH3cSlN1HhH1wRfyonJZBkL2aG8xrI1WR6A03VBshvY7c1xMRi5X6Q-l8Po504p5LCvCfZ4GmQuVfYZ_Bf1YCsfYZh-5CuvH366Y2hoC1gQdD-h-Uk_cFhgbZhWdP6zahNxC4jSuUTXVrsb5ocl5S4IAKfI/s324/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock picking portfolio Table 1: Total Fund Value as of the end of Sep 2023" border="0" data-original-height="146" data-original-width="324" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggjoFVp-jsrS1k1axLn0vEI9p5dQx_pMDdQH3cSlN1HhH1wRfyonJZBkL2aG8xrI1WR6A03VBshvY7c1xMRi5X6Q-l8Po504p5LCvCfZ4GmQuVfYZ_Bf1YCsfYZh-5CuvH366Y2hoC1gQdD-h-Uk_cFhgbZhWdP6zahNxC4jSuUTXVrsb5ocl5S4IAKfI/s16000/Table%201-min.png" title="Winning stock picking portfolio Table 1: Total Fund Value as of the end of Sep 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Total Fund Value as of the end of Sep 2023</td></tr></tbody></table><br /><div style="text-align: justify;">From 1st Oct 2023 to the end of Dec 2023, I bought Smurfit Kappa (SKG). This is a packaging company listed on the LSE that is undertaking a takeover of WestRock Company, a US packaging company. Refer to “<a href="https://seekingalpha.com/article/4657432-smurfit-kappa-and-westrock-exploring-the-value-of-synergy" target="_blank">Smurfit Kappa And WestRock: Exploring The Value Of Synergy.</a>” </div><div style="text-align: justify;"><div> </div><div>This affected the value of the portfolio as of the end of Dec 2023 as shown in Table 2. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxS8VP7cqSEYqEwu3J5KcstZevQGVY7zAHIXT4uDvVfL5yAIBoP9S5Fe5f741HxXsVfkcFVDozIecTo0yGDpcGXTvtgqs-Jmp0Q7pYEuwIZAl8vvq8Qv6SRi7P3rJBOypKFMAsc2ujCJ50-FWoYt4TH1RZYO54XLWubsgfGtu4e-vynwpjSo32jgI4Vf4/s1120/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 2: Portfolio as of the end of Dec 2023" border="0" data-original-height="1120" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxS8VP7cqSEYqEwu3J5KcstZevQGVY7zAHIXT4uDvVfL5yAIBoP9S5Fe5f741HxXsVfkcFVDozIecTo0yGDpcGXTvtgqs-Jmp0Q7pYEuwIZAl8vvq8Qv6SRi7P3rJBOypKFMAsc2ujCJ50-FWoYt4TH1RZYO54XLWubsgfGtu4e-vynwpjSo32jgI4Vf4/s16000/Table%202-min.png" title="Winning stock portfolio Table 2: Portfolio as of the end of Dec 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Portfolio as of the end of Dec 2023</td></tr></tbody></table><br /><div>At the same time, there were changes to the cash positions as shown in Table 3. You can see that the cash had reduced to USD 15,138 at the end of Dec 2023 compared to USD 16,329 at the end of Sep 2023. </div><div><div><br /></div><div>The changes were due to the purchase of SKG and accounting for all the dividends received in 2023.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEfkKgeILdkvifhxIdmLldAYVDDoDCdH3__cJYiujnPMKiajQfF2XPMSHF-xg9DNQg0Mz-w8BTCSzFq1F-RprQjUBe_CdfVpzVu1ZnfO6RM1MZmYsItqd1XKh0XQVPF-IzIv6actlyZJnvGwIhs-4r5c9fWSMxO5kk-ENVQk__RAH9ITffGL1AZGVW9Cs/s903/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 3: Cash Position as of the end of Dec 2023" border="0" data-original-height="418" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEfkKgeILdkvifhxIdmLldAYVDDoDCdH3__cJYiujnPMKiajQfF2XPMSHF-xg9DNQg0Mz-w8BTCSzFq1F-RprQjUBe_CdfVpzVu1ZnfO6RM1MZmYsItqd1XKh0XQVPF-IzIv6actlyZJnvGwIhs-4r5c9fWSMxO5kk-ENVQk__RAH9ITffGL1AZGVW9Cs/s16000/Table%203-min.png" title="Winning stock portfolio Table 3: Cash Position as of the end of Dec 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Cash Position as of the end of Dec 2023</td></tr></tbody></table><div><br /></div></div></div><div style="text-align: left;">The total fund value at the end of Dec 2023 then became USD 134,571 as per Table 4.</div><div style="text-align: left;"><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibzgpjn6sNmDTFL7JwGeuOA6Onz3GUjfz8pcTd9WhKeX9eFKMSa1ocGBWe8qvJP-K2JOCvIcMjITvp9C2Hobf61TawM8K0CcB1G7PxufVhx76whFwIUEjOdyxEKnhB715VzvwsGKXLaHa8YDDltDOZrFrDbhZNC3xBVyeIsjv4rt_ZIPg3kh0LKFj0c08/s379/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 4: Total Fund Value as of the end of Dec 2023" border="0" data-original-height="146" data-original-width="379" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibzgpjn6sNmDTFL7JwGeuOA6Onz3GUjfz8pcTd9WhKeX9eFKMSa1ocGBWe8qvJP-K2JOCvIcMjITvp9C2Hobf61TawM8K0CcB1G7PxufVhx76whFwIUEjOdyxEKnhB715VzvwsGKXLaHa8YDDltDOZrFrDbhZNC3xBVyeIsjv4rt_ZIPg3kh0LKFj0c08/s16000/Table%204-min.png" title="Winning stock portfolio Table 4: Total Fund Value as of the end of Dec 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: Total Fund Value as of the end of Dec 2023</td></tr></tbody></table><div style="text-align: left;"><br /></div><div style="text-align: justify;">Note that to derive the portfolio value in USD, I used the updated forex rates as per Table 5.</div><div style="text-align: left;"><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqMSH_zTrx_lFAaMaNkvD9FMaQbkTX9OtZlC7VSl0vkY8rIgmJ0ye1ml8_WWsHTjupNJWiHypFsTgUM70CG68XWTwiHeHQgeZmbai5xbarFamyho269tFtqMsNyoo9U1b9ip_IE07ZdPIsCda44k3CXzXThZgOxa0ePph-Ix8ef4RCk_GD-HY5WBza_IM/s332/Table%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 5: Forex Rates at the end of Dec 2023: 1 USD to the respective currencies." border="0" data-original-height="146" data-original-width="332" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqMSH_zTrx_lFAaMaNkvD9FMaQbkTX9OtZlC7VSl0vkY8rIgmJ0ye1ml8_WWsHTjupNJWiHypFsTgUM70CG68XWTwiHeHQgeZmbai5xbarFamyho269tFtqMsNyoo9U1b9ip_IE07ZdPIsCda44k3CXzXThZgOxa0ePph-Ix8ef4RCk_GD-HY5WBza_IM/s16000/Table%205-min.png" title="Winning stock portfolio Table 5: Forex Rates at the end of Dec 2023: 1 USD to the respective currencies." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 5: Forex Rates at the end of Dec 2023: <br /><div style="text-align: left;"><i>Note: 1 USD to the respective currencies</i>.</div></td></tr></tbody></table><div style="text-align: left;"><br /></div><div style="text-align: left;"><h3 style="text-align: left;">Recap</h3><div style="text-align: justify;">When it comes to assessing performance, I consider the following 3:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Look at absolute returns.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Compare the returns with those of the benchmarks.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Compare the returns on a risk-adjusted basis.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">When it comes to the fund or stock portfolio, the return is complicated by sales, additional funds, and cash taken out. Refer to the earlier articles for specific examples.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To cater to such situations, I define the total gain and return in the following manner. </div><div><ul style="text-align: left;"><li style="text-align: justify;">Total Gain = current value - previous value + dividends.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The Total Returns for the period = Total Gain divided by the previous value.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The fund value includes any un-invested cash.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I used the market value of the stocks in the portfolio to calculate the portfolio value. It is the sum of the market value of the respective stocks. The current and previous values refer to the value of the portfolio assuming it is liquidated. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The market value of a particular stock = number of shares held × market price. The number of shares held currently may be different from the number of shares held before. This could be due to bonus issues and or other corporate activities.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To ensure that I am comparing apples to apples, I also include any dividends or money that I have received that has not been reinvested. </div><div><ul style="text-align: left;"><li style="text-align: justify;">The dividends refer to all the dividends received during the annual review period. Since there is a likelihood that I may reinvest the dividends, I look at the after-tax value of the dividends received.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The cash on hand could be money pending reinvestment or money taken out.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I hope that I have shown you how to handle various situations through the past few articles. I have provided work examples so that you can see the “mechanics” of the computation.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To ensure a meaningful comparison, I recommend considering quarterly performance excluding dividends. Then on an annual basis, I would consider a total return basis ie including dividends.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Along the same lines, I would assess the Information Ratio and Jensen Alpha only on an annual basis.</div><div> </div><h2 style="text-align: left;">End Dec 2023 Returns</h2><div style="text-align: justify;">The fund gain for the quarter ended Dec 2023, before accounting for the dividends,</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">= 134,571 – 3,642 = 130,929. Refer to Tables 3 and 4. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The fund returns (before accounting for dividends) for the quarter ended Dec 2023 </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">= (130,929 – 121,375) / 121,375 = 7.9 %. Refer to Table 6. The quarterly returns ignored dividends. I have earlier mentioned that I considered dividends on an annual basis. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The annual return inclusive of the dividend</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">= (134,571 – 108,026) / 108,206 = 24.6 %</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Note that the USD 108,026 included the additional funds and 2022 dividends at the start of 2023. A summary of the quarterly and annual returns over the past few quarters is shown in Table 6. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUzawpNCG_BAgTktAzoOezEmM6-0DQdlw_Mto2yiKlL1q8TopyO4bkR4bGjsJdC99hMakdvKnuIxKViJ6pZ3EaEFhwpUZfUt4yKMSL7BZgN7RO6n4K4wxq90wo-AXvdqyee86gUSupg2-ovjHlwTWvTXsrc2mFrPW50ZYlLzu4vvLEmPrPPQiyy04xabs/s624/Table%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 6: Fund Performance" border="0" data-original-height="378" data-original-width="624" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUzawpNCG_BAgTktAzoOezEmM6-0DQdlw_Mto2yiKlL1q8TopyO4bkR4bGjsJdC99hMakdvKnuIxKViJ6pZ3EaEFhwpUZfUt4yKMSL7BZgN7RO6n4K4wxq90wo-AXvdqyee86gUSupg2-ovjHlwTWvTXsrc2mFrPW50ZYlLzu4vvLEmPrPPQiyy04xabs/s16000/Table%206-min.png" title="Winning stock portfolio Table 6: Fund Performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 6: Fund Performance<br /><div style="text-align: left;"><div><i>Notes<span style="white-space: pre;"> </span></i></div><div><i>a) Quarterly Return = (End of quarter / End of the previous quarter) -1.</i></div><div><i>b) Annual Return = (End of year / End of previous year) -1.</i></div><div><i>c) The end of the previous quarter or year values are after accounting for any additional funds and/or changes in investments.</i></div></div></td></tr></tbody></table><div><br /></div><div><h3 style="text-align: left;">2023 dividends</h3><div style="text-align: justify;">The dividend information for each stock was obtained from Investing.com. These were based on the dividends received in 2023. To be consistent with what I did last year, I followed the following protocol:</div><div><ul style="text-align: left;"><li style="text-align: justify;">I would exclude dividends that were declared in Dec 2023 but payable in 2024. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">I would also include those declared in 2022 but payable in 2023.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For those stocks purchased during the year, the dividends would depend on whether the stock was in the portfolio on the ex-payment date. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Table 7 summarizes the dividends received in 2023. You can see that in total the portfolio received USD 3,642 in 2023. I assumed that this was all in cash thereby increasing the cash position as shown in Table 3.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqm6QbID-peFxMGMm2Xry_hZhxjS81LhOLrGbMoML4KAtW-F-rl8MnTdf0Wo9TgTzp2ouUF7oHx_eMVTB6UIk_ifGKMm4vzip6IKMdhibqTQzcBHvPV1wEpkULQXN69WKPvhZpvD3qMYvVpiLNqiBw02FXUYPz4M7nliwmhcnpC8-Zw5TNZGRvVp6zX7U/s1161/Table%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 7: 2022 Dividends" border="0" data-original-height="1161" data-original-width="356" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqm6QbID-peFxMGMm2Xry_hZhxjS81LhOLrGbMoML4KAtW-F-rl8MnTdf0Wo9TgTzp2ouUF7oHx_eMVTB6UIk_ifGKMm4vzip6IKMdhibqTQzcBHvPV1wEpkULQXN69WKPvhZpvD3qMYvVpiLNqiBw02FXUYPz4M7nliwmhcnpC8-Zw5TNZGRvVp6zX7U/s16000/Table%207-min.png" title="Winning stock portfolio Table 7: 2022 Dividends" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 7: 2022 Dividends<br /><div style="text-align: left;"><i>Note: The grey-shaded items are for those who did not receive the full dividends for the year. These could be because of sales and/or purchases during the year.</i></div></td></tr></tbody></table><div><br /></div></div><div><h3 style="text-align: left;">Benchmarking returns</h3><div style="text-align: justify;">You can see that the portfolio gained when looking at the latest quarter. Now whether this is a good performance can only be gauged by comparing it with some reference performance or benchmark. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In my previous article, I created a benchmark based on the following:</div><div><ul style="text-align: left;"><li style="text-align: justify;">KLCI for Bursa Malaysia.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">STI for SGX. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">S&P 500 for the US.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">FTSE100 for the London Stock Exchange.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The weights for each benchmark are the value of funds allocated to the respective stock exchange at the beginning of the period. Refer to Table 8 which estimated the benchmark return for the quarter.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMK6hJ77mOieWWnCtux9QJ8p0CnwD6P7oj0lCgBsRnz8-2leEkoCRQIHQR7xaT1KvRB2srEdvZi5f7jdkH0NXwGWSrFOEr1A1CG7QZmBDFTb5NxmAEIE4Y7PCtjucMU1s5BdixMulqoMm3wt2r6zYaGA8nMDMtDloAFK8W7laWCTgSngnZRkrIFZ5YbOU/s903/Table%208-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 8: Computing the Quarterly Gains for the Benchmark" border="0" data-original-height="220" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMK6hJ77mOieWWnCtux9QJ8p0CnwD6P7oj0lCgBsRnz8-2leEkoCRQIHQR7xaT1KvRB2srEdvZi5f7jdkH0NXwGWSrFOEr1A1CG7QZmBDFTb5NxmAEIE4Y7PCtjucMU1s5BdixMulqoMm3wt2r6zYaGA8nMDMtDloAFK8W7laWCTgSngnZRkrIFZ5YbOU/s16000/Table%208-min.png" title="Winning stock portfolio Table 8: Computing the Quarterly Gains for the Benchmark" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 8: Computing the Quarterly Gains for the Benchmark<br /><div style="text-align: left;"><div><i>Notes<span style="white-space: pre;"> </span></i></div><div><i>(a) Index as of the end of Sep 2023.</i></div><div><i>(b) Index as end Dec 2023 as per Yahoo Finance.</i></div><div><i>(c) Gain computed as per the formula shown.</i></div><div><i>(d) This is the % investment of the respective items at the start of the period ie end of Sep 2023.</i></div><div><br /></div></div></td></tr></tbody></table><div><div style="text-align: justify;">You can see that the benchmark gained 4.21 % for the quarter compared to the fund gain of 7.9 %. I would consider this a good performance for the fund. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I have not attempted to compute the benchmark return from the start of the fund for this quarter. This was because of the following:</div><div><ul style="text-align: left;"><li style="text-align: justify;">The quarterly total gains for the benchmarks are difficult to find.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The weights used in the benchmark quarterly review differ from quarter to quarter. Refer to the previous post “<a href="https://www.i4value.asia/2023/04/how-often-do-you-review-winning-stock.html#more" target="_blank">How often do you review the stock picking portfolio?</a>” for an illustration.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For these reasons, when it comes to estimating the benchmark returns, I differentiate between the following:</div><div><ul style="text-align: left;"><li style="text-align: justify;">The quarterly returns where I have ignored dividends.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The annual returns which are based on a total return basis ie with dividends.</li></ul></div><div style="text-align: justify;"><br /></div><h3 style="text-align: left;">Annual returns</h3><div style="text-align: justify;">When comparing annual returns, you must be careful to compare apples with apples. If the benchmark is on a total return basis (ie including dividends), your fund should be on a total return basis. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Table 9 shows the calculation for the annual benchmark return excluding dividends. </div><div><br /></div><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZd20TsR0wUR3pgkQBwcGFc2Z6UdfhDuOaFhrb44C8f86vZnCuQvy-tLpFHjdK-tce8MjeoMx1OFAlk63EtymhWCQ6BATA7KlkfisFUHya56R-CLmId0mgHU3xVuB39XVr-TyC3dEG6W9mg7PIHWbdr1YY_f-YrCX21NGNO1ZUWHjlOpQfohOdLQTucds/s903/Table%209-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 9: Computing the Annual Gains for the Benchmark (before dividends)" border="0" data-original-height="220" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZd20TsR0wUR3pgkQBwcGFc2Z6UdfhDuOaFhrb44C8f86vZnCuQvy-tLpFHjdK-tce8MjeoMx1OFAlk63EtymhWCQ6BATA7KlkfisFUHya56R-CLmId0mgHU3xVuB39XVr-TyC3dEG6W9mg7PIHWbdr1YY_f-YrCX21NGNO1ZUWHjlOpQfohOdLQTucds/s16000/Table%209-min.png" title="Winning stock portfolio Table 9: Computing the Annual Gains for the Benchmark (before dividends)" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 9: Computing the Annual Gains for the Benchmark (before dividends)<br /><div style="text-align: left;"><div><i>Notes<span style="white-space: pre;"> </span></i></div><div><i>(a) Index as at end Dec 2022.</i></div><div><i>(b) Index as end Dec 2023 as per Yahoo Finance.<span style="white-space: pre;"> </span></i></div><div><i>(c) Gain computed as per the formula shown<span style="white-space: pre;">.</span></i></div><div><i>(d) This is the % investment of the respective items at the start of the period ie 31 Dec 2022.</i></div></div></td></tr></tbody></table><div style="text-align: justify;"><br /></div><div style="text-align: justify;">A more appropriate comparison is on a total return basis ie including dividends. Table 10 illustrate the computation of the total return for the benchmark. On such a total return basis, the fund in 2023 gained 24.6 % compared to the benchmark of 10.9 %. Again, a good performance for the fund.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3WFUPOYn7P62jmDz-z9Y8sbjnoofCNrLbETP9Mz3bPq-Wyoym3gE3wnIpxTGV_DSr2NqT7YsJAuzcXOuYUdkVyUJ8ZDGadK1_vw6kOG3zzGnK6lQuv0t4K8b-cerRd9IloQa9v7OJq4j4GtaDHkZeMnc1NVMaNVPpiBN9ytFL3rgACrZlnVChKpNSb4U/s763/Table%2010-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 10: Computing the Annual Gains for the Benchmark (total returns" border="0" data-original-height="262" data-original-width="763" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3WFUPOYn7P62jmDz-z9Y8sbjnoofCNrLbETP9Mz3bPq-Wyoym3gE3wnIpxTGV_DSr2NqT7YsJAuzcXOuYUdkVyUJ8ZDGadK1_vw6kOG3zzGnK6lQuv0t4K8b-cerRd9IloQa9v7OJq4j4GtaDHkZeMnc1NVMaNVPpiBN9ytFL3rgACrZlnVChKpNSb4U/s16000/Table%2010-min.png" title="Winning stock portfolio Table 10: Computing the Annual Gains for the Benchmark (total returns)" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 10: Computing the Annual Gains for the Benchmark (total returns)<br /><div style="text-align: left;"><div><i>Notes:</i></div><div><i>a) At the start of 2023.</i></div><div><i>b) Incl dividends.</i></div><div><i>c) Guesstimate with 3% dividend yield.</i></div><div><i>d) From SGX.</i></div><div><i>e) From Slickchart.</i></div><div><i>f) From Financial Times.</i></div><div><br /></div></div></td></tr></tbody></table><div><h3 style="text-align: left;">Risk-adjusted returns</h3><div style="text-align: justify;">I assess my performance here using the Information ratio and the Jensen alpha. Refer to my previous articles on the discussion of risk-adjusted returns. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The risk-adjusted returns for 2023 are:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Information ratio = 1.29.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Jensen Alpha = 15.01</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Note the following limitations when looking at these risk-adjusted metrics</div><div><ul style="text-align: left;"><li style="text-align: justify;">I did not include dividends. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">There were changes to the composition of the portfolio during the year. However, the metrics assumed that there was no change.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The metrics assumed volatility as risk. The Jensen Alpha is very dependent on the values of Beta. </li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Details for the computation of these 2 metrics are presented in the following 2 sub-sections. </div><div style="text-align: justify;"><br /></div><h4 style="text-align: justify;">Information ratio</h4><div style="text-align: justify;">Table 11 illustrates the data for the computation of the Information ratio.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgz6CGqkFdwrODkiQq226FM0a0YRTV4DX6jsmIvur9juRQMiP4CzTHw5t9N3YSbz1U6_N79jy3xygNiQpOKrboEHLwtfSN0EglYINVPJPULKZaS064Owk-sBJXq4R6DX-oNo6VuTODLC-lMPQ3Uo46tN0Za6XTVhdiNoRor4ntIPTKwF_2M4nlR-Kp9Qhc/s624/Table%2011-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 11: Computing the Information Ratio" border="0" data-original-height="233" data-original-width="624" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgz6CGqkFdwrODkiQq226FM0a0YRTV4DX6jsmIvur9juRQMiP4CzTHw5t9N3YSbz1U6_N79jy3xygNiQpOKrboEHLwtfSN0EglYINVPJPULKZaS064Owk-sBJXq4R6DX-oNo6VuTODLC-lMPQ3Uo46tN0Za6XTVhdiNoRor4ntIPTKwF_2M4nlR-Kp9Qhc/s16000/Table%2011-min.png" title="Winning stock portfolio Table 11: Computing the Information Ratio" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 11: Computing the Information Ratio</td></tr></tbody></table><div><br /></div><div><div style="text-align: justify;">Fund relative performance = fund return - benchmark return = 5.0 % - 1.4 % = 3.6 %.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Tracking error = Standard deviation of the differences = 2.8 %.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Information ratio = 3.6 % / 2.8 % = 1.29</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This information ratio is interpreted as the fund overperforming the benchmark by 1.29 per unit of volatility over the past 4 quarters. </div><div style="text-align: justify;"><br /></div><h4 style="text-align: justify;">Jensen alpha</h4><div style="text-align: justify;">The alpha is one way to determine if a portfolio is earning the proper return for its risk level. The formula for calculating the alpha as per Investopedia is based on the Capital Asset Pricing Model:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Alpha = R(i) - [ R(f) + B × { R(m) - R(f) } ].</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Where: </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">R(i) = the realized return of the portfolio.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">R(m) = the realized return of the appropriate market index or benchmark.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">R(f) = the risk-free rate of return.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">B = beta of the portfolio for the chosen market index. The portfolio beta is the weighted average betas of all the stocks and cash in the fund. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The alpha for the fund in 2023 was derived as follows:</div><div><ul style="text-align: left;"><li style="text-align: justify;">The fund return is 21.1 %.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The Benchmark return is 6.51 %.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The risk-free rate of return for the year based on USD is 3.88 % (based on 10 years treasure rate as of Dec 2023).</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The portfolio beta is computed to be 0.84. Refer to Table 12.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Alpha = 21.1 - [ 3.88 + 0.84 × {6.51 – 3.88} ] = 15.01.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The alpha represents the amount of the portfolio return that is attributable to my stock-picking ability. As you can see, there was a great deal of Alpha in 2023. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If you look at Table 12, you can see some of the shortcomings with the Alpha. This is because:</div><div><ul style="text-align: left;"><li style="text-align: justify;">I assumed the risk-free rate to be based on that at the end of the year. In 2023 because of the FED action, the rates changed during the year.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">I used the year-end values for the stocks in estimating the portfolio Beta. You can see that the stocks sold during the year did not have any contribution. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">The Beta used were the year-end values.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">My point is that you should use the Alpha as a rough measure. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpZMYuQQxJle4K1SG1w9ZwT94-lO2aAjfcBox5GqK_U4Qs6Q-0QFNwSnZy__4JuQWT1InBLH0e00fjCABbmC49Bq09zhYdUQO_P53gl2pKHs36Y3IxwCT1aXDOjQN8DQ4qZsrou6B8PUU5nwI_nSjKkRfaEpL3q_b6DSoZQIrgP7B-XcG7bQXgvSH_2WE/s1065/Table%2012-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 12: Computing the Fund Beta" border="0" data-original-height="1065" data-original-width="683" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpZMYuQQxJle4K1SG1w9ZwT94-lO2aAjfcBox5GqK_U4Qs6Q-0QFNwSnZy__4JuQWT1InBLH0e00fjCABbmC49Bq09zhYdUQO_P53gl2pKHs36Y3IxwCT1aXDOjQN8DQ4qZsrou6B8PUU5nwI_nSjKkRfaEpL3q_b6DSoZQIrgP7B-XcG7bQXgvSH_2WE/s16000/Table%2012-min.png" title="Winning stock portfolio Table 12: Computing the Fund Beta" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 12: Computing the Fund Beta<br /><div style="text-align: left;"><div><i>Notes</i></div><div style="text-align: justify;"><i>a) Market value of the stocks as of the end of December 2023.</i></div><div style="text-align: justify;"><i>b) Value / Total Value.</i></div><div style="text-align: justify;"><i>c) This was taken from Investing.com as of the end of Dec 2023. Note that the beta of cash = 0 as per Investopedia.</i></div><div><br /></div></div></td></tr></tbody></table><div><h2 style="text-align: left;">End Dec 2023 Diversity </h2><div style="text-align: justify;">The goal of a portfolio is to have about 20 to 30 uncorrelated stocks. You will have difficulty computing the covariances required to determine the correlations. As such, I used a rule of thumb to ensure diversity. </div><div><ul style="text-align: left;"><li style="text-align: justify;">Single stock concentration - the market value of a stock should not be more than 10% of the market value of the total portfolio.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Group concentration - the market value of all the stocks within a group should not be more than 30% of the market value of the total portfolio.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Refer to my earlier post on this series for the details. The diversity profile at the end of Dec 2023 is presented in Table 13. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You can see that cash increased in this quarter compared to the other quarters. But the concentration within each group reduced in this quarter.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The other feature from Table 13 is that over the past 2 years, I have reduced the exposure to Bursa Malaysia from 50% when I first started to 36 % currently. At the same time, I have increased the exposure to the US from 15 % at the end of 2021 to 31 % currently. The rationale is explained in the next section.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJCkilkvEh3XKlLSvx8yjojHATAxemrqV_Ao9AOXsgdkQbR4a9Cm4t7grTaZSPoABwcTbfWSOirfz6pFs3_HZhto5NIrp5D5UeLLvGUPODJe_G7oqhHuzTccivNyW9FFSqg5e4UnEj4FtiiDjWWd7oG1M-iJtf-vF8aubvmRgEjKXffWOU9Qwr93YSXHo/s860/Table%2013-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 13: Diversity Profile" border="0" data-original-height="860" data-original-width="686" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJCkilkvEh3XKlLSvx8yjojHATAxemrqV_Ao9AOXsgdkQbR4a9Cm4t7grTaZSPoABwcTbfWSOirfz6pFs3_HZhto5NIrp5D5UeLLvGUPODJe_G7oqhHuzTccivNyW9FFSqg5e4UnEj4FtiiDjWWd7oG1M-iJtf-vF8aubvmRgEjKXffWOU9Qwr93YSXHo/s16000/Table%2013-min.png" title="Winning stock portfolio Table 13: Diversity Profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 13: Diversity Profile</td></tr></tbody></table><div><br /></div><div><h2 style="text-align: left;">Where to diversify to</h2><div style="text-align: justify;">The portfolio gained USD 5,315 in 2023 whereas for 2022, there was a loss of USD 6,876.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Table 14 breaks down the gain or loss by location. You can see that for both years, the losses from Bursa Malaysia and SGX were offset by the gain from the US. The US delivered better returns than Bursa Malaysia.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhI9O_lZpALN-QZ__XSdbYYSuM7963x64pw6bK7Bv50eUGMYCjDLuCBcG-YfKKYEVuQC-hXrUStQRIIAEoMi5k1kUs8ZFUAlHehmsdwX8TAblowJ7uwuByPJ3BssSt239R_CZOq1sY8zirdLhF-dQe0ZxodkPycmoPOdRY5hsGC8QzWQzByjXBEOufUFQY/s485/Table%2014-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Winning stock portfolio Table 14: Composition of the gain/loss" border="0" data-original-height="175" data-original-width="485" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhI9O_lZpALN-QZ__XSdbYYSuM7963x64pw6bK7Bv50eUGMYCjDLuCBcG-YfKKYEVuQC-hXrUStQRIIAEoMi5k1kUs8ZFUAlHehmsdwX8TAblowJ7uwuByPJ3BssSt239R_CZOq1sY8zirdLhF-dQe0ZxodkPycmoPOdRY5hsGC8QzWQzByjXBEOufUFQY/s16000/Table%2014-min.png" title="Winning stock portfolio Table 14: Composition of the gain/loss" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 14: Composition of the gain/loss</td></tr></tbody></table><div><div><br /></div><div style="text-align: justify;">I have in my previous articles discussed how diversification can help to reduce risk. But I want to highlight a different perspective here. This is in the context of where you should place most of your money. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">At the end of 2023, the US accounted for about 31% of the funds whereas Malaysia accounted for about 36 %. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The stocks in both countries were selected based on value investing principles. They all had their respective margins of safety. The difference in the returns for the US suggests that the re-rating occurred earlier than those in Malaysia. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Over the past 25 years, the KLCI grew at 3.9 % CAGR whereas the S&P 500 grew at 5.8 % CAGR. It makes more sense to allocate more to the US. </div><div style="text-align: justify;"><br /></div><h3 style="text-align: justify;">Why the US?</h3><div style="text-align: justify;">The reasons for the higher growth rate for the US index are as follows:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Economic Size and Development</b>. The United States has one of the largest and most developed economies globally. Its economic size and diversification across various sectors contribute to a more resilient stock market. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Global Market Integration</b>. The US stock market is highly integrated into the global economy, attracting international investors and benefiting from a more extensive range of investment opportunities. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Technology and Innovation</b>. The US is a global leader in technology and innovation. The presence of major tech companies on the US stock exchanges has been a significant driver of growth. These companies often experience rapid expansion, contributing to overall market growth. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Political Stability and Regulatory Environment</b>. The US has historically been viewed as politically stable. With a well-established regulatory framework, it can attract more investors compared to markets with perceived instability.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Market Maturity and Investor Sophistication</b>. The US stock market has a longer history and is considered more mature compared to the other Asian stock markets. Investor confidence and sophistication tend to grow with market maturity. This can positively impact market performance.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Currency Factors</b>. Currency exchange rates can influence investment decisions. The US dollar is a widely used global currency, making US assets attractive to international investors. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Market Liquidity</b>. The US, being larger and more liquid, may provide investors with greater ease in buying and selling securities.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Financial Infrastructure.</b> The US is seen as having a more efficiency and sophisticated financial infrastructure. This can impact the ease of doing business and investing.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Interest Rates and Monetary Policy</b>. Differences in interest rates and monetary policies between the US and other countries can affect the cost of capital and influence investment decisions.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If you are thinking of maximizing the returns, you should allocate more funds to those countries with better stock market performance. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In the context of diversification, I would suggest that instead of Bursa, I would select an Asian stock market with a better growth track record such as China or even India. To give you a sense of this, from the end of 2010 to 2023, the CAGR for the various stock market indices were</div><div style="text-align: justify;"><ul><li>S&P 500 (US) – 10.8 %.</li></ul><ul><li>Nifty 50 (India) – 10.2 %.</li></ul><ul><li>SSE (China) – 0.4 %.</li></ul><ul><li>KLCI (Malaysia) – negative 0.3 %</li></ul></div><div style="text-align: justify;"><br /></div><h2 style="text-align: justify;">Conclusion</h2><div style="text-align: justify;">There are 2 key questions when reviewing and interpreting the results of the portfolio review:</div><div style="text-align: justify;"><ul><li>How did we perform?</li></ul><ul><li>Are we still well diversified?</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What I said in my previous article is still valid:</div><div style="text-align: justify;"><ul><li>Compare quarterly returns excluding dividends to assess how well the fund has performed during the year.</li></ul><ul><li>Compare annual returns on a total return basis to assess how well the fund has performed year-to-year.</li></ul><ul><li>Use the Information Ratio and Jensen Alpha on an annual basis.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Based on this, the portfolio in 2023 did better than the benchmark.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In the context of risk management, I am satisfied that the portfolio at the end of Dec 2023 is still diversified. However, I would start to look for other Asian stock exchanges to substitute for Bursa Malaysia.</div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div></div><div style="text-align: justify;"><div><br /></div><div><div><br /></div><div><div><div><div style="font-weight: bold;"><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div style="font-weight: bold;"><div style="text-align: center;"><br /></div></div><div style="font-weight: bold;">- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div style="font-weight: bold;"><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div style="font-weight: bold;"><br /></div></div><div style="font-weight: bold;"><br /></div></div></div></div></div><div><div style="font-weight: bold;"><br /></div><b><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span></b><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div style="font-weight: bold;"><br /></div></div><div style="font-weight: bold;"><br /></div></div></div></div></div><div style="text-align: justify;"><br /></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-79107308405337469352024-01-21T08:48:00.001+08:002024-01-21T08:59:59.703+08:00Is Deleum a value trap?<script type="application/ld+json">
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"description": "A fundamental analysis of Deleum showed that it had turned around its poor performance resulting from low crude oil prices. It is now fundamentally sound with a good margin of safety. It is not a value trap",
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Value Investing Case Study 43-1. A fundamental analysis of Deleum to show that it is not a value trap.</span></div>
<div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgV39EJGleqIstfNQSaxdL7hchFTRpza9qjSkUX9cElB9x7kfhenlNufP4sU-qhmeACu_QkoHnKnKYMEeT0IMQNa1fOMnfiI-lwSC7VltKP-gAB-lSuuqNDTvK6quuQmVUw5x3BPy1mc5MTqvO9Mbwftve3ClIsvgFqckiedSlrXGsXhVCQ5Y6XKAlsw0E/s298/Pic%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Deleum a value trap?" border="0" data-original-height="298" data-original-width="230" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgV39EJGleqIstfNQSaxdL7hchFTRpza9qjSkUX9cElB9x7kfhenlNufP4sU-qhmeACu_QkoHnKnKYMEeT0IMQNa1fOMnfiI-lwSC7VltKP-gAB-lSuuqNDTvK6quuQmVUw5x3BPy1mc5MTqvO9Mbwftve3ClIsvgFqckiedSlrXGsXhVCQ5Y6XKAlsw0E/s16000/Pic%201-min.png" title="Is Deleum a value trap?" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">Crude oil prices are cyclical. Over the past 12 years, crude oil price declined from its 2012/13 peak to reach the bottom in 2016. Then the uptrend was affected by COVID-19 that resulted in another sharp drop that bottomed in 2020. Oil prices are today more than double the 2016 bottom prices.</div><div style="text-align: justify;"><div><br /></div><div>Given the cyclical prices you should not be surprised to see yo-yos in the fortune of many Bursa oil and gas companies. There were some that went into financial trouble because of this. </div><div><br /></div><div>But those who survived are probably in a better shape to take advantage of the upturn.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/WVC1fVZzyaw" width="320" youtube-src-id="WVC1fVZzyaw"></iframe></div><br /><div>This article delves into the performance of Deleum Bhd (Deleum or the Group), a Bursa oil and gas services company. I am happy to note that following my fundamental analysis and valuation, Deleum is not a value trap but is an investment opportunity. It is one of the better Bursa stocks.</div><div><br /></div><div>Should you go and buy it? Well, read my Disclaimer.</div><div><br /></div><h2>Contents</h2><div><ul><li><b>Investment thesis</b></li></ul><ul><li><b>Business background</b></li></ul><ul><li><b>Operating trend</b></li></ul><ul><li><b>Financial position</b></li></ul><ul><li><b>Risks</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Deleum is not a value trap</b></li></ul><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="background-color: white;" /></div></div><div><h2>Investment Thesis</h2><div>Deleum provides a range of products and services to the Malaysian oil and gas exploration and production sector. And as such its prospects are tied to the performance of the sector. </div><div><br /></div><div>The Group did well when crude oil prices were high. But when oil prices were in the trough part of the cycle during 2015 to 2019, the company performance deteriorated. Its performance improved over the past 2 years due to the better crude oil prices. </div><div><br /></div><div>Over the cycle, the Group delivered average returns that were greater than its cost of funds. The Group is also financially sound.</div><div><br /></div><div>A valuation based on the performance over the cycle, showed that there is more than 30% margin of safety. Given the improving crude oil prices and Deleum strong fundamentals, this is an investment opportunity. </div><div><br /></div><h2>Business background</h2><div>The Group provides a diverse range of supporting specialised products and services to the oil and gas industry, particularly in the exploration and production sector. It has 3 business segments:</div><div><ul><li>Power & machinery. The sales of gas turbine packages and after-sales support and services accounted for 81 % of this segment revenue in 2022. The balance came from valves and flow regulators.</li></ul><ul><li>Oilfield services. In 2022, 95% of this segment revenue came from slickline and other well services.</li></ul><ul><li>Integrated corrosion services.</li></ul></div><div><br /></div><div>The Power & machinery segment is the biggest revenue and earnings contributor over the past 12 years. Refer to the Chart 1. In 2022, it accounted for about 72 % each of the Group revenue and EBIT.</div><div><b><br /></b></div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhirPdzG-xXgG1s2qb2Uz1mu5Hk1QmDM6rUi7f1Bl_3zIR1qMF2-Z1odD6JZp4R14Kb3-fJoxf5d_Mhd9uvua2g8EYMabaFysva-cj0dMNO9ZYJQmp48D9_qcIBDOR5og90ocUVsSDnOlajwcaSEhFikHNBRqSC-qktrG4-CDU_a8IfKn43CovIU82X8JM/s903/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Deleum Chart 1: Segment Revenue and EBIT" border="0" data-original-height="266" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhirPdzG-xXgG1s2qb2Uz1mu5Hk1QmDM6rUi7f1Bl_3zIR1qMF2-Z1odD6JZp4R14Kb3-fJoxf5d_Mhd9uvua2g8EYMabaFysva-cj0dMNO9ZYJQmp48D9_qcIBDOR5og90ocUVsSDnOlajwcaSEhFikHNBRqSC-qktrG4-CDU_a8IfKn43CovIU82X8JM/s16000/Chart%201-min.png" title="Deleum Chart 1: Segment Revenue and EBIT" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Segment Revenue and EBIT</td></tr></tbody></table><br /></div><div>Not all the segments were pulling the same weight. Refer to Table 1 where I have estimated the return (based on EBIT/TCE) from each segment.</div><div><div><ul><li>The Power & machinery segment used the most capital and delivered the best return.</li></ul><ul><li>Although the Oilfield services segment used the next highest amount of capital it delivered the worst operating return.</li></ul><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-XOE0QWuVrSphHFnhURZZ1z5nDpdRZoMadQWsWNZov2f-k-B9OI2Tnlp5spJrMX6xV_mPXvPRtLDycrINaat8fbVd1yFIIyldA00j5BZZgF0Enl7Z3v4PJHZ4dICoJ_jShrtKVSqFFd1nOqj9zsdRR5G3oLlZWtIfPCuRevupLi-R7LGnQe902zCFL3M/s903/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Deleum Table 1: Segment performance" border="0" data-original-height="151" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-XOE0QWuVrSphHFnhURZZ1z5nDpdRZoMadQWsWNZov2f-k-B9OI2Tnlp5spJrMX6xV_mPXvPRtLDycrINaat8fbVd1yFIIyldA00j5BZZgF0Enl7Z3v4PJHZ4dICoJ_jShrtKVSqFFd1nOqj9zsdRR5G3oLlZWtIfPCuRevupLi-R7LGnQe902zCFL3M/s16000/Table%201-min.png" title="Deleum Table 1: Segment performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Segment performance<br /><div style="text-align: left;"><div><i>Notes to Table 1</i></div><div><i>a) TCE = 2022 Total capital employed = Equity + Debt. I apportioned the Debt for the segment based on the segments’ interest expenses.</i></div><div><i>b) The revenue and EBIT were based on the past 12 years (2011 to 2022) weighted average values.</i></div></div></td></tr></tbody></table><div><br /></div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: justify;" /></div></div></td></tr></tbody></table></div><div><h2>Operating trends</h2><div>I looked at 3 metrics to get an overview of the overall performance – revenue, PAT, and gross profitability (gross profits / total assets). Refer to the left part of Chart 2.</div><div><br /></div><div>Revenue over the past 12 years showed a cyclical pattern growing at 5.8 % CAGR. The revenue spike in 2019 was due to growths in the Power & machinery and Integrated corrosion segments. Refer to Chart 1.</div><div><br /></div><div>As an oil & gas services company, the performance of Deleum would be correlated to the crude oil prices. Refer to the right part of Chart 2. From 2012 to 2022:</div><div><ul><li>There was a negative 0.25 correlation between revenue and Brent crude oil for the same year.</li></ul><ul><li>There was a negative 0.84 correlation between current year revenue and Brent crude oil in the following year. </li></ul></div><div><br /></div><div>I would not consider any correlation less than 0.7 as significant. While there is some correlation, it is not so straight forward as there is some time lag issue. But it shows that Deleum performance is tied to crude oil prices. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGUi2-yjKyL8OAjEeJj5Hys_eU-W26ZUSE2-SZvGsZz9YU37pVRrfmnXpQyll3S_illDmR8-uFXVn3lZgNw3nE5XoXFl-kKBeJwZasjqIHN_aRZCfqgiXpy5aeVdcGQ6y8aRxeWw_cHrTl5VLUgH7ACResp61KFIQ13cG6wEOulmZ0lgbrvSv3jxuQ68g/s903/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Deleum Chart 2: Performance Index and Revenue vs Crude Oil" border="0" data-original-height="271" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGUi2-yjKyL8OAjEeJj5Hys_eU-W26ZUSE2-SZvGsZz9YU37pVRrfmnXpQyll3S_illDmR8-uFXVn3lZgNw3nE5XoXFl-kKBeJwZasjqIHN_aRZCfqgiXpy5aeVdcGQ6y8aRxeWw_cHrTl5VLUgH7ACResp61KFIQ13cG6wEOulmZ0lgbrvSv3jxuQ68g/s16000/Chart%202-min.png" title="Deleum Chart 2: Performance Index and Revenue vs Crude Oil" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Performance Index and Revenue vs Crude Oil<br /><div style="text-align: left;"><i>Note that the 2023 values were based on the Sep 2022 LTM results. </i></div></td></tr></tbody></table><div><br /></div><div><div>PAT was relatively volatile peaking in 2014 before trending down for many years to reach the bottom in 2020. It started to recover post 2020. But even then, the profit in 2023 is lower than the 2014 peak. </div><div><br /></div><div>The declining PAT given the increasing revenue was because of declining gross profit margins. </div><div><ul><li>In 2012 to 2014, the average gross profit margin was 24%. </li></ul><ul><li>This declined to an average of 18 % from 2018 to 2020. The company attributed this to the declining price environment. </li></ul></div><div><br /></div><div>Given the declining gross margins, you should not be surprised to see gross profitability declining. It started to decline from 2012 but appeared to have recovered so that in 2023 it was back to the 2012 level. </div><div><br /></div><div>The key takeaway here is that Deleum looks like a stock that have managed a turnaround. </div><div><br /></div><h3>Returns</h3><div>Given the “U” shape pattern of the PAT, you should not be surprised to see similar patterns for the returns as illustrated in the left part of Chart 3. Over the past 12 years, </div><div><ul><li>ROE ranged from 4.1 % to 23.2% with an average of 13.4 %.</li></ul><ul><li>Operating return (after tax EBIT / Total capital employed) ranged from 6.7 % to 26.8 % with an average of 15.3 %.</li></ul><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggnVerB7_5Z4WLFzd_zzDot1fH4Ici43Mg1Bcj6Yp5CAjsT_Q1iArvpSNkHpsHsqOGc90Nr37YG6qN6gJn53X1DybLM5dUlPEUpY-_1R_qfMh_mjKIL1Ax-c4QaHx4OvwkqHWzYRGDmVPWhb_pNfawDlRU2iBsCFzMYy9R1bhLPHyGrMnsQfKPjwj44z0/s903/Chart%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Deleum Chart 3: Returns and DuPont Analysis" border="0" data-original-height="269" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggnVerB7_5Z4WLFzd_zzDot1fH4Ici43Mg1Bcj6Yp5CAjsT_Q1iArvpSNkHpsHsqOGc90Nr37YG6qN6gJn53X1DybLM5dUlPEUpY-_1R_qfMh_mjKIL1Ax-c4QaHx4OvwkqHWzYRGDmVPWhb_pNfawDlRU2iBsCFzMYy9R1bhLPHyGrMnsQfKPjwj44z0/s16000/Chart%203-min.png" title="Deleum Chart 3: Returns and DuPont Analysis" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Returns and DuPont Analysis</td></tr></tbody></table><br /><div>A DuPont analysis showed that the uptrend in the Operating return post 2021 was due to better operating margin, asset turnover and leverage. Refer to the right part of Chart 3.</div></div><div><div><br /></div><h3>Competitive profile</h3><div>There are about 2 dozen Bursa listed companies under the Energy Infrastructure, Equipment & Services sector. </div><div><br /></div><div>In my Nov 2022 article, I provided a summary of the sector performance from 2013 to 2022. Refer to “<a href="https://www.i4value.asia/2022/11/are-there-opportunities-in-bursa-energy.html#more" target="_blank">Are there opportunities in the Bursa Energy Services sector?</a>”</div><div><br /></div><div>I compared Deleum revenue and return with the sector median. Overall, Deleum delivered better performance than the sector. Refer to Chart 4. </div><div><ul><li>Deleum had better revenue growth compared to the sector median revenue. While there was revenue growth for Deleum, the sector revenue in 2022 was lower compared to that for 2013.</li></ul><ul><li>Deleum delivered better ROE over the period compared to the sector.</li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiuqdXGbw9QSawQP9i83dL9LJFUuP_hlV1im1IdUYbKkIZq_lG0PPbSdIJbUPJQpyjcNqsCFLdzJkPx2a_22SFwMmwqdBr3jOaLyaWhC7cSB-NlMdwgn8zQobfNsEP7h3xE7Gubmkyn8HCwNSL9YlEIUsalyBzXPWDq4kYajy-tlckRS3wVEElxvBOwd08/s903/Chart%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Deleum Chart 4: Sector comparison" border="0" data-original-height="271" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiuqdXGbw9QSawQP9i83dL9LJFUuP_hlV1im1IdUYbKkIZq_lG0PPbSdIJbUPJQpyjcNqsCFLdzJkPx2a_22SFwMmwqdBr3jOaLyaWhC7cSB-NlMdwgn8zQobfNsEP7h3xE7Gubmkyn8HCwNSL9YlEIUsalyBzXPWDq4kYajy-tlckRS3wVEElxvBOwd08/s16000/Chart%204-min.png" title="Deleum Chart 4: Sector comparison" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Deleum Chart 4: Sector comparison</td></tr></tbody></table><div><br /></div></div></div><div><h2>Financial position</h2><div>I would rate Deleum as financially sound based on the following:</div><div><ul><li>As of the end of Sep 2023, it had RM 230 million cash. This was equivalent to 36 % of its total assets.</li></ul><ul><li>It had a debt-equity ratio of 4 % as of Sep 2023. </li></ul><ul><li>Over the past 12 years, it generated positive cash flow from operations every year. </li></ul><ul><li>Over the past 12 years, it generated RM 748 million cash flow from operations compared to RM 536 million of PAT. This is a very good cash conversion ratio.</li></ul><ul><li>The Group also had a good capital allocation track record as shown in Table 2. You can see that its cash flow from operations was well deployed for CAPEX and dividends.</li></ul><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPaVoIMxJLcozpMWSsKRGTnDWBctMMbcQjUo4UFjH0EJdp_oE0Ujh5EUuF7puj7aie5ZV2NvmUBUHkW4zz-9MrYRFEJqoi4s8K2E6HCM-g9q99atSQJoBe8J5YWQtFoU8eeAOT9BDoz2c6VUEhIy9s4bElOO5g6G8IrmlUjp-DmPfGwcto8QoNiOTeMsc/s505/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Deluem Table 2: 2012 to 2023 Sources and Uses of Funds" border="0" data-original-height="251" data-original-width="505" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPaVoIMxJLcozpMWSsKRGTnDWBctMMbcQjUo4UFjH0EJdp_oE0Ujh5EUuF7puj7aie5ZV2NvmUBUHkW4zz-9MrYRFEJqoi4s8K2E6HCM-g9q99atSQJoBe8J5YWQtFoU8eeAOT9BDoz2c6VUEhIy9s4bElOO5g6G8IrmlUjp-DmPfGwcto8QoNiOTeMsc/s16000/Table%202-min.png" title="Deluem Table 2: 2012 to 2023 Sources and Uses of Funds" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: 2012 to 2023 Sources and Uses of Funds</td></tr></tbody></table><div><br /></div></div></div></div><div><h3>Reinvestment </h3><div>Growth needs to be funded and one metric for this is the Reinvestment rate. This is defined as:</div><div><br /></div><div>Reinvestment with acquisitions = CAPEX & Acquisitions – Depreciation & Amortization + Net Changes in Working Capital.</div><div><br /></div><div>I then determined the Reinvestment rate = Reinvestment / after-tax EBIT.</div><div><br /></div><div>Acquisitions are an integral growth driver for the company. As such I have included the annual acquisition expenditure as part of the CAPEX.</div><div><br /></div><div>Over the past 12 years, the total Reinvestment amounted to RM 104 million. The after-tax EBIT for the same period came to RM 472 million. This resulted in a Reinvestment rate of 22 %. This is a good rate.</div><div><br /></div><div>Note that the low Reinvestment rate was because of the low Reinvestments. This in turn was because there were several years when the Depreciation & Amortization far exceeded what was spent on CAPEX and Net Changes in Working Capital.</div><div><br /></div><h3>Shareholders’ value creation</h3><div>I looked at the following metrics when assessing shareholders’ value creation:</div><div><ul><li>Comparing returns with the cost of funds.</li></ul><ul><li>Comparing the gains by an investor who bought a share at the end of 2011 with the cost of equity.</li></ul><ul><li>Looking at the Q Rating which is based on several valuation metrics. A high score relative to the panel meant that the company had the potential to create shareholders’ value.</li></ul></div><div><br /></div><div>Deleum created shareholders' value as all the metrics exceeded the appropriate cost of fund. Refer to Table 3.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidSRatiwDnpZzOQ8C2STY49h29POI7zkrQo0hknvqEBP-9v4PzpUQXwed6fwWAYQfM1Uc81lFUCJ5Af3Hne-sArXvp8F_k31w6kOERXg1SwjaZtu5uED9xOdz4BaXEs585TxnmiUQY3p94-gy_0IPTLpXy21seqDV08XcimyZ5qZfpDZSwtmY-nu-Oq_Q/s646/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Deleum Table 3: Shareholders’ value creation" border="0" data-original-height="101" data-original-width="646" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidSRatiwDnpZzOQ8C2STY49h29POI7zkrQo0hknvqEBP-9v4PzpUQXwed6fwWAYQfM1Uc81lFUCJ5Af3Hne-sArXvp8F_k31w6kOERXg1SwjaZtu5uED9xOdz4BaXEs585TxnmiUQY3p94-gy_0IPTLpXy21seqDV08XcimyZ5qZfpDZSwtmY-nu-Oq_Q/s16000/Table%203-min.png" title="Deleum Table 3: Shareholders’ value creation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Shareholders’ value creation<br /><div style="text-align: left;"><div><i>Notes</i></div><div><i>(a) Based on 2012 to 2023 average.</i></div><div><i>(b) This looked at how the SHF at the end of 2008 would have grown by the end of 2021 assuming that no dividend was paid. I compared it with the cost of equity.</i></div><div><i>(c) Computed assuming that an investor bought 1 share at the end of 2011 and held onto it till the end of 2023. His gain is shown in the Table 4 below.</i></div></div></td></tr></tbody></table><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxAZ-k511jiRLMd65oPZ65sUhUs9ZfJfoobyRVjLsSZpBfy0hbm2kviIfakNBNn1fdOfXoq84lfOQ1l-crFllmlvOjGrGfsQI2P6weSYw-oKCfqt77dOf-co4L8mYQFPpfhabbhyphenhyphenYULyUBkC9cZ4OdPizzUNeYupJDquDz03uF7BcMORH4ch-Mqnex3mI/s393/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Deleum Table 4. Estimating the shareholders’ gain" border="0" data-original-height="176" data-original-width="393" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxAZ-k511jiRLMd65oPZ65sUhUs9ZfJfoobyRVjLsSZpBfy0hbm2kviIfakNBNn1fdOfXoq84lfOQ1l-crFllmlvOjGrGfsQI2P6weSYw-oKCfqt77dOf-co4L8mYQFPpfhabbhyphenhyphenYULyUBkC9cZ4OdPizzUNeYupJDquDz03uF7BcMORH4ch-Mqnex3mI/s16000/Table%204-min.png" title="Deleum Table 4. Estimating the shareholders’ gain" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4. Estimating the shareholders’ gain</td></tr></tbody></table><div><br /></div><div>At the same time, Deleum had an overall Q Rating of 0.47. This places it at the average position among the panel companies. You can see that it did well in the risk and financial ratings. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCqj-47vds4m7ms55gP7__6O4k0BJZ2pYo_Rbi57SQ9Ufbh8zU-WbLxLyzLWfjGRV76Hb0azbMvRR1gungsW0-GlInXaNugBa4Eac6RlVVAN6kQGFn34KZ2x4Xzw1I6a3SRQ-2mfHIW87HLSqHB0bGhCjF6CqDENEXODFj_F1Q2zqD7xlLBEsl_NUeSDU/s614/Chart%205-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Deluem Chart 5: Q Rating" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCqj-47vds4m7ms55gP7__6O4k0BJZ2pYo_Rbi57SQ9Ufbh8zU-WbLxLyzLWfjGRV76Hb0azbMvRR1gungsW0-GlInXaNugBa4Eac6RlVVAN6kQGFn34KZ2x4Xzw1I6a3SRQ-2mfHIW87HLSqHB0bGhCjF6CqDENEXODFj_F1Q2zqD7xlLBEsl_NUeSDU/s16000/Chart%205-min.PNG" title="Deluem Chart 5: Q Rating" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Q Rating</td></tr></tbody></table><div><br /></div><div><h2>Risks</h2><div>I look at risks through the following lenses:</div><div><ul><li>Crude oil prices.</li></ul><ul><li>Privatization.</li></ul><ul><li>Depletion of Malaysian oil reserves.</li></ul></div><div><br /></div><h3>Link to crude oil prices</h3><div>Oil prices have been cyclical as can be seen from Chart 6. While prices in 2023 have been high, it was not the historical high which occurred in 2012/14.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhs9ec_of87ZNMe_4KdfdyUonJbb0POdxOzZq7gp9rMX3-fCswWce_563RXmgHAcfTwfAeIpbvW2YsTnsqEbbZ5NPdPSt0CFD6l9rM778udVze6cJN3FpIAB4Ksk8JIgnrGEA4y1d8gjQzHcW2USLYCn4-FOo59cPLqpDHwhK2wpiKMDbP47bPcK7FQ3Y/s803/Chart%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Deleum Chart 6: Brent Crude Oil Price." border="0" data-original-height="493" data-original-width="803" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhs9ec_of87ZNMe_4KdfdyUonJbb0POdxOzZq7gp9rMX3-fCswWce_563RXmgHAcfTwfAeIpbvW2YsTnsqEbbZ5NPdPSt0CFD6l9rM778udVze6cJN3FpIAB4Ksk8JIgnrGEA4y1d8gjQzHcW2USLYCn4-FOo59cPLqpDHwhK2wpiKMDbP47bPcK7FQ3Y/s16000/Chart%206-min.png" title="Deleum Chart 6: Brent Crude Oil Price." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Brent Crude Oil Price. Source: <a href="https://www.statista.com/statistics/262860/uk-brent-crude-oil-price-changes-since-1976/" target="_blank">Statista</a></td></tr></tbody></table><div><br /></div><div><div>Crude oil prices and CAPEX by oil and gas companies are interrelated. When oil prices are high, companies are more likely to increase their CAPEX to take advantage of the favorable pricing environment and expand their operations. </div><div><br /></div><div>Conversely, in periods of low oil prices, CAPEX tends to be reduced to manage costs and conserve capital. These dynamics can contribute to the cyclical nature of the oil and gas industry and have a significant impact on the performance of the oilfield services companies.</div><div><br /></div><div>The <a href="https://capex.com/en/overview/oil-price-prediction" target="_blank">US Administration </a>expects the average Brent crude prices to be:</div><div><ul><li>USD 61 per barrel in 2025.</li></ul><ul><li>USD 88 per barrel in 2035.</li></ul><ul><li>USD 91 per barrel in 2045.</li></ul></div><div><br /></div><div>Looking at the above forecast for the price of crude oil, it does not look much different from the past 12 years. The Group should not do any worse than what it achieved over the past 12 years.</div><div><br /></div><div>Secondly, we should look at the performance over the cycle when determining the margin of safety. </div><div><br /></div><h3>Privatization</h3><div>In the case of Deleum, I would rate the privatization risk as low. If the controlling shareholder had any plans to privatize it, it would have been more cost effective to do so in mid-2021. At that juncture, the share price was around RM 0.50 per share compared to the current share price (25 Dec 2023) of RM 0.96 per share.</div><div><br /></div><h3>Depletion of Malaysian oil reserves</h3><div>Deleum business is very dependent on the performance of the Malaysian oil & gas sector. </div><div><br /></div><div>The main concern here is the depletion of Malaysian oil & gas reserves. The positive side is that the Malaysian oil reserves can probably provide the Group with another decade-plus of work. This should give it time to seek alternative ventures.</div><div><br /></div><div>For further discussions on the Malaysia reserves, refer to my article “<a href="https://www.i4value.asia/2023/11/is-dayang-one-of-better-bursa-stocks.html#more" target="_blank">Is Dayang one of the better Bursa stocks?</a>”</div><div><br /></div></div><div><h2>Valuation</h2><div>My value of Deluem is summarized in Chart 7.</div><div><ul><li>I estimated its Asset Value as RM 0.99 per share broken down into Graham Net Net, NTA, and Book value. Note that the Book value is value close to the NTA due to the small intangibles.</li></ul><ul><li>I estimated its Earnings Value as RM 1.75 per share. You can see that the non-operating assets accounted for about 41 %of this value. A significant part of the balance came from its Earnings Power Value.</li></ul></div><div><br /></div></div><div><div>At RM 0.96 per share (25 Dec 023), Deleum is trading significantly below the Earnings Power Value. There is more than a 30% margin of safety. </div><div><br /></div><div>Over the past 5 years and even currently, the market price of Deleum share has been below the Earning Power Value. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVVcHZe_E4rZS_YbNWBmYEPhQp09LBf_n42OVP1TJNrr4vJg_AsHAg3Toib5zoUzT2C6S2dH0MNUTk1ZHpyax22NGfEK0SLOUF8fHmp1dtKh0TBCcIcZ-UhLDE30-Q4TnbKpJEFi8j0G3kcxN93m6GBxyMr54eIFIEuztqhanzcPgQCKv16CvERwiPhp8/s614/Chart%207-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Deleum Chart 7: Valuation" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVVcHZe_E4rZS_YbNWBmYEPhQp09LBf_n42OVP1TJNrr4vJg_AsHAg3Toib5zoUzT2C6S2dH0MNUTk1ZHpyax22NGfEK0SLOUF8fHmp1dtKh0TBCcIcZ-UhLDE30-Q4TnbKpJEFi8j0G3kcxN93m6GBxyMr54eIFIEuztqhanzcPgQCKv16CvERwiPhp8/s16000/Chart%207-min.PNG" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Valuation </td></tr></tbody></table><div><br /></div><div><h3>Valuation model</h3><div>My Earnings Value of the company was derived based on the average values from 2 valuation approaches:</div><div><ul><li>Free Cash Flow to the Firm model as per Damodaran.</li></ul><ul><li>Residual Income model as per Penman.</li></ul></div><div><br /></div></div><div>For both models, I used the past 12 years’ time-weighted average value to represent the normalized value. </div><div><br /></div><div>The cost of capital used in the model was based on the Capital Asset Pricing Model. I followed Damodaran’s approach to determine the Beta and the risk premiums. </div><div><br /></div><div>These resulted in 8.0 % each for the cost of equity and WACC. Note that the values for both are about the same due to the low debt situation.</div><div><br /></div><h3>Valuation risks and limitations</h3><div>There are 3 critical assumptions in my valuation.</div><div><ul><li>Cost of capital.</li></ul><ul><li>Turnaround.</li></ul><ul><li>Cyclical sector.</li></ul></div><div><br /></div><div>The cost of capital was derived based on the risk-free rate and equity risk premium as of 2022. We currently have the Ukraine invasion and the Israel-Gaza conflict. The parameters do not reflect the higher-risk situation. </div><div><br /></div><div>As such you should see the Earnings Value as an optimistic one. The only mitigating point is that the margin of safety is sufficiently large. </div><div><br /></div><div>Deleum seems to be coming out of a turnaround. My valuation model assumes that the past 12 years' performance is a good reflection of the future. In a company coming out of a turnaround, this is a very conservative picture. </div><div><br /></div><div>Finally, I assumed that Deleum is a cyclical stock. According to Damodaran</div><div><br /></div><div>“Cyclical and commodity companies share a common feature, insofar as their value is often more dependent on the movement of a macro variable (the commodity price or the growth in the underlying economy) than it is on firm-specific characteristics…the biggest problem we face in valuing companies tied to either is that the earnings and cash flows reported in the most recent year are a function of where we are in the cycle, and extrapolating those numbers into the future can result in serious misvaluation.”</div><div><br /></div><div>To overcome the cyclical issue, we have to normalize the performance over the cycle. I have assumed that the 2012 to 2023 period is a good representation of the business performance over the cycle.</div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div><div>Valuation of cyclical companies can be challenging due to the inherent volatility in their financial performance. Here are key issues to consider when valuing cyclical companies:</div><div><div><br /></div><div><b>Economic Sensitivity</b>: Cyclical companies are highly sensitive to economic conditions. </div><div><br /></div><div><b>Revenue and Earnings Volatility:</b> Cyclical companies often experience wide fluctuations in revenues and earnings. Valuation models need to account for this volatility by incorporating longer-term trends. </div><div><br /></div><div><b>Operating Leverage:</b> Many cyclical companies have high fixed costs and operating leverage. During economic downturns, a decline in revenue can lead to a disproportionately large decline in earnings. Understanding the company's cost structure is crucial for accurate valuation.</div><div><br /></div><div><b>Capital Expenditure Cycles:</b> Cyclical industries often require significant capital expenditures, and the timing of these expenditures can impact cash flows. </div><div><br /></div><div><b>Commodity Price Exposure</b>: Companies in cyclical industries such as mining, energy, and agriculture may be heavily influenced by commodity prices. </div><div><br /></div><div>Valuing cyclical companies requires a careful consideration of these factors. If you are a newbie, you may be overwhelmed by them. My advice is to look at what others have done. Sites <span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha</a>* are good sources. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.</div></div></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><h2>Deleum is not a value trap</h2><div>My analysis of Deleum showed that it had turned around its poor performance resulting from the low oil prices.</div><div><br /></div><div>The company is fundamentally sound based on the following: </div><div><ul><li>It is financially sound with a strong cash holding and a good cash conversion ratio.</li></ul><ul><li>The returns are showing uptrends. The average returns were greater than the cost of funds indicating that it had been able to create shareholders value. Note that the average returns were based on its performance over the cycle.</li></ul><ul><li>Despite going through the trough of the 2015 to 2019 crude oil cycle, there were no significant asset written off. </li></ul></div><div><br /></div><div>It is a cyclical business and I value it as such. My valuation showed that there is more than 30% margin of safety based on the Earnings Power Value. </div><div><br /></div><div>You may be concerned that this is a value trap. A value trap is a company that looks cheap but is cheap for a fundamental reason. The trap springs after you bought it.</div><div><br /></div><div>This is not the case with Deleum. It has strong fundamentals. The comparatively low market price is due to market sentiments rather than business performance.</div><div><br /></div><div>Deleum’s intrinsic value is greater than the market price. This is a value estimated on its performance over the cycle. As such I do not consider Deleum a value trap. Rather, it is one of the better Bursa companies to invest in. </div></div></div><div><br /></div><div><br /></div><div><br /></div></div></div></div><div><div><br /></div><div><div><div><div><div><div style="font-weight: bold;"><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div style="font-weight: bold;"><div style="text-align: center;"><br /></div></div><div style="font-weight: bold;">- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div style="font-weight: bold;"><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div style="font-weight: bold;"><br /></div></div><div style="font-weight: bold;"><br /></div></div></div></div></div><div><div style="font-weight: bold;"><br /></div><b><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span></b><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div style="font-weight: bold;"><br /></div></div><div style="font-weight: bold;"><br /></div></div><div><br style="text-align: left;" /></div></div><div><br /></div></div></div><div><br /></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-87370885216120178902024-01-14T08:01:00.003+08:002024-01-20T13:49:47.615+08:00Do you want to know how to value growth companies? <script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Fundamentals 22. Growth is one of the key inputs when valuing companies. </span><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">This post looks at the various issues to consider when valuing growth companies. Revision date: 14 Jan 2024</span></div>
<div style="text-align: justify;"> </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWs7RNdufaIRj6lj_fz8v3icple1MhnwaHT6WNZRDgZvNdxE66tdBpynimIqCPsJtww5XT94jgFuFczDLHqjB1zuq6S7nZWS57crktes6XkQrP4xCAxwrZfgBI4VL5MKe2zwimhDha5cjHpI8laNyI63sc1PHVA4wiUe79YD3n0_N9hgINYpCjLZa4/s245/Pic%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Do you want to know how to value growth companies?" border="0" data-original-height="175" data-original-width="245" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWs7RNdufaIRj6lj_fz8v3icple1MhnwaHT6WNZRDgZvNdxE66tdBpynimIqCPsJtww5XT94jgFuFczDLHqjB1zuq6S7nZWS57crktes6XkQrP4xCAxwrZfgBI4VL5MKe2zwimhDha5cjHpI8laNyI63sc1PHVA4wiUe79YD3n0_N9hgINYpCjLZa4/s16000/Pic%201-min.png" title="Do you want to know how to value growth companies?" /></a></div><div style="text-align: justify;"><span><a name='more'></a></span><div style="text-align: left;"><span style="text-align: justify;">One of the challenges in valuation is how to bring growth into the picture. This will vary depending on your financial model. </span></div><div style="text-align: left;"><div><ul><li style="text-align: justify;">If you have a detailed financial model, you could have different growth rates for revenue and earnings.</li></ul><ul><li style="text-align: justify;">But if you are using a simple single-stage valuation model, what do you use to represent growth? Do you use the growth in revenue or the growth in earnings? They are not necessarily the same.</li></ul><ul><li style="text-align: justify;">And if you are using a multi-stage valuation model, there is the question of the terminal value. What should you use for the terminal growth rate?</li></ul><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/5t3Cu0V2Pwg" width="320" youtube-src-id="5t3Cu0V2Pwg"></iframe></div><br /><div style="text-align: justify;">The above is just one aspect of the issue. The more important one is how do you ensure that the growth rates you use are realistic? Then there is the issue of organic growth vs growth via acquisitions. Do you need to distinguish them?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In the context of fundamental analysis, growth is more than just looking at changes in a parameter. Digging into the drivers of growth can also provide insights that can help you formulate your investment thesis.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Join me as I illustrate the various growth issues based on some companies covered in my blog. Should go and buy them? Well, read my Disclaimer!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Note: This is an updated article that pulls together the following articles in my blog.</div><div style="text-align: justify;"><ul><li>Focusing on the assumptions of perpetual growth model.</li></ul><ul><li>How to value high growth companies.</li></ul><div>If you are tried to access the above 2 articles, you would be redirected here.</div></div><div style="text-align: justify;"><br /></div><div><h2>Contents</h2><div><ul><li><b>Life cycle</b></li></ul><ul><li><b>Valuation models</b></li></ul><ul><li><b>DCF models</b></li></ul><ul><li><b>Greenwald approach</b></li></ul><ul><li><b>Estimating growth</b></li></ul><ul><li><b>Estimating WACC</b></li></ul><ul><li><b>Single-stage valuation examples</b></li></ul><ul><li><b>2-stage valuation examples</b></li></ul><ul><li><b>Multi-growth valuation example</b></li></ul><ul><li><b>Greenwald return example</b></li></ul><ul><li><b>Conclusion</b></li></ul></div></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="background-color: white; text-align: justify;" /></div></div><div><h2>Life cycle</h2><div style="text-align: justify;">All businesses go through several stages in their corporate life. Damodaran has one framework for this as illustrated in Chart 1.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKGdHIkHiSQ8w-ThhVkWNL4BmD9y9X3p8h_WHnaTBeh1Jik6UaCUh9boz80gpdKkYQMWMtMl1dcj0GKrCodyI86U2juL_bFEB7J6f9Af0y4wvvDXEac-6sFDz7we_Wtm4ohArf8UWHG1Mpn1zbGxLIeso_kDwaW9kTGQUEH7uPhyphenhyphentEF5kOXXTgUSRzEvs/s793/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 1: Corporate life cycle" border="0" data-original-height="462" data-original-width="793" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKGdHIkHiSQ8w-ThhVkWNL4BmD9y9X3p8h_WHnaTBeh1Jik6UaCUh9boz80gpdKkYQMWMtMl1dcj0GKrCodyI86U2juL_bFEB7J6f9Af0y4wvvDXEac-6sFDz7we_Wtm4ohArf8UWHG1Mpn1zbGxLIeso_kDwaW9kTGQUEH7uPhyphenhyphentEF5kOXXTgUSRzEvs/s16000/Chart%201-min.png" title="Chart 1: Corporate life cycle" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Corporate life cycle Source: Damodaran</td></tr></tbody></table><div><br /></div><div><div style="text-align: justify;">In his corporate life cycle model, there are 6 stages from Start-up to Decline.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In this model, growth companies are those that have gone beyond the Start-up stage but have yet to reach the Mature stage. It is relatively easier to identify the Mature stage. This is one where the growth rate is at best the GDP growth rate.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In real life, some established companies continue to deliver high growth rates. In the Damodaran corporate life cycle framework, you would classify them as being in the Mature-Growth stage.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To value a company from the Start-up to Decline stages, you need to capture the free cash flow at every stage. At the same time, you need different discount rates for each stage. This is because the discount rate is also intended to reflect the risk of the cash flow. This will differ for different stages of the life cycle.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">It would be very challenging to project the cash flows and discount rates over the life of the company. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In practice, I seldom need to do this. I don't invest in Start-ups and Young Growth companies. This is because I don't know how to project their cash flows. As such, I focus on the High Growth, Mature Growth, and Mature Stable ones.</div></div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: justify;" /></div></div></td></tr></tbody></table></div><div style="text-align: justify;"><h3>What to look for when valuing growth companies</h3><div>The challenge for valuing companies at the growth stage is projecting the duration and the growth rates. Damodaran suggests that you need a narrative to help you do this. He then uses a DCF valuation approach to value such companies.</div><div><br /></div><div>Bruce Greenwald believes that this sustainable growth characteristic is only applicable to "franchises". These are companies with some economic moat that enables them to sustain high growth rates.</div><div><br /></div><div>He suggests an Asset Value vs Earnings Power Value comparison (AV-EPV comparison) to identify them. High-growth companies are those where the EPV far exceeds the Asset Value. He then verifies them by looking at their economic moats or competitive advantages.</div><div><br /></div><div>According to Greenwald, the high growth duration depends on the strength of the moat. One way to gauge this is to see how long it would take for the competitive advantage to compete away.</div><div><br /></div><div>If a company has moats that can provide "protection" for more than 2 or 3 decades, then it makes sense to determine the value of growth.</div><div><br /></div><div>However, Greenwald believes that there are too many uncertainties when using a DCF model. Instead, he suggests that you look at the return space rather than the value space when figuring out the margin of safety.</div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div><div>According to Professor Damodaran:</div><div><br /></div><div>“With both historical and analyst estimates, growth is an exogenous variable that affects value but is divorced from the operating details of the firm. The soundest way of incorporating growth into value is to make it endogenous, i.e., to make it a function of how much a firm reinvests for future growth and the quality of its reinvestment.”</div><div><br /></div><div>Consider the fundamental growth equation:</div><div><br /></div><div>Growth = Reinvestment rate X Return.</div><div><br /></div><div>The Reinvestment rate measures how much a firm is ploughing back to generate future growth. The Return is often based on the firm's return on existing investments. </div><div><br /></div><div>There are three separate scenarios of growth.</div><div><ul><li>The first is when there is a stable Reinvestment rate and Return over time. This is the case of using the equation as it is.</li></ul><ul><li>The second is when the Return is expected to change over time. In this case, the expected growth rate for the firm will have a second component. This will increase the growth rate if the Return increases and decrease the growth rate if the Return on capital decreases. For details refer to Damodaran’s article.</li></ul><ul><li>The third is the general scenario where revenue, operating margins, and other parameters change over time. You should not use the fundamental growth equation here. The better approach is to build a detailed financial model where the various parameters such as revenue and profit margins are specifically modeled. </li></ul></div><div><br /></div><div>As you can see, you must understand what you are doing. If you are a newbie, seeing how others have handled growth can be a useful source of learning. Sites <span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha</a>* are good sources. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.</div></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div><div style="text-align: justify;"><h2>Valuation models</h2><div>The intrinsic value of a company is the present value of the cash flow generated by a company over its life. You first need to determine the cash flows.</div><div><br /></div><div>Then to determine the present value of the cash flows, you have to discount them using different discount rates for each stage of the life cycle. This is because the discount rate not only reflects the time value of money but also the risk associated with the cash flow. The risks would be different for different stages.</div><div><br /></div><div>The cash flows in turn depend on the growth pattern. There are 3 ways to incorporate growth into the cash flows according to the 3 common DCF valuation models.</div><div><br /></div><div>You will notice that the 3 models assume that the company does not go into the Decline stage. If you accept the corporate life cycle concept, it must mean that the values determined by my valuation model are on the high side as it ignores the Decline stage.</div><div><br /></div><div><h3>Single-stage model</h3><div>This is generally applicable to companies in the Mature Stable stage. At this stage, growth is assumed to be some low and steady rate.</div><div><br /></div><div>I generally use this model for established brick-and-mortar companies that are not facing any disruption to their business. Examples of such companies include those in the steel sector, home builders, and household products.</div><div><br /></div><div>I am not saying that there is no product obsolescence. Rather I am assuming that such companies will continue to develop new products to replace the obsolete ones.</div><div><br /></div><div>You can understand my concern with using this model to value tech companies where the threat of decline is common. Think of Yahoo, Nokia, and BlackBerry and you will understand what I mean.</div><div><br /></div><h3>2-stage model</h3><div>This divides the company's future cash flows into two distinct stages, each characterized by different growth rates as illustrated by the top picture in Chart 2. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0lk1o09N3SAXsBMNPyvqtED5jYVBwcEgdJJMRzj-O0bm81H0mvy-e5pdRgwiBZX6enro9PfY90xNF7bOAXLkmxmvAUldnMvSscr_Jt-OeMXRGiZkVVQnoIZPWu2pSlkAfsPf_376eCm-AdnsfTt4AyMvWN5q-2wASnIApStzW6i44xW2ps4WbaXgKTg4/s405/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 2: Growth models" border="0" data-original-height="405" data-original-width="318" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0lk1o09N3SAXsBMNPyvqtED5jYVBwcEgdJJMRzj-O0bm81H0mvy-e5pdRgwiBZX6enro9PfY90xNF7bOAXLkmxmvAUldnMvSscr_Jt-OeMXRGiZkVVQnoIZPWu2pSlkAfsPf_376eCm-AdnsfTt4AyMvWN5q-2wASnIApStzW6i44xW2ps4WbaXgKTg4/s16000/Chart%202-min.png" title="Chart 2: Growth models" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Growth models</td></tr></tbody></table><div style="text-align: left;"><br /></div><div><div>The two stages typically include:</div><div><ul><li>A high growth stage. Here the company is assumed to experience rapid growth that may last for a certain number of years.</li></ul><ul><li>A stable growth stage. After the high growth stage, the company is assumed to transition to a more stable and mature phase. It is often assumed to be in perpetuity and lower than the long-term GDP growth rate</li></ul></div><div><br /></div><div>I use this model for companies going through distinct growth phases. A good example of this is companies going through a high growth phase due to acquisitions before settling down to lower organic growth. </div><div><br /></div><h3>H-model or variable-growth model</h3><div>There is also another model known as the H model where the growth rate drops gradually over time. Refer to the bottom image in Chart 1. This is often referred to as a "fade" in the growth rate.</div><div><br /></div><div>The fading high growth rate is to reflect that a company's growth may be unsustainable at the initial high levels. And is likely to slow down as it matures or faces increased competition</div><div><br /></div><div>There are standard formulae to determine the intrinsic values for these models. </div><div><br /></div><div>In the past, it was difficult to calculate the intrinsic values for other growth patterns. But with EXCEL, this is not an issue anymore. </div><div><br /></div><div>It is a simple matter to develop a variable growth model. In my DCF examples, I have different growth patterns for revenue, margins, and capital efficiency. I then computed the present values of the FCFF from the first principles.</div></div><div><br /></div><div><h2>DCF models</h2><div>When you look at discounted cash flow (DCF) models, you either look at the cash flow to the firm or the equity holders. </div><div><br /></div><div>I prefer to look at the firm model. There are a few key ideas behind this approach:</div><div><ul><li>Discounting to account for both the time value of money and risk.</li></ul><ul><li>Using FCFF as the cash flow.</li></ul><ul><li>Differentiating between operating and non-operating assets.</li></ul><ul><li>The value of the firm accrues to all providers of capital.</li></ul></div><div><br /></div><div>There are 3 valuation gurus that I follow:</div><div><ul><li>Discounted Free Cash Flow to the Firm (FCFF) model as per Damodaran.</li></ul><ul><li>Discounted Residual Income model as per Penman.</li></ul><ul><li>Greenwald return method.</li></ul></div><div><br /></div><div>Each will have its strengths and issues. If your assumptions are consistent, both the FCFF and RI valuation models will give you the same answer. </div><div><br /></div><div>In practice, the model I used for a company depends on the information available. I prefer the Residual Income model as it breaks down the firm value into 2 components. The first component is due to the Book Value while the other is due to excess earnings. </div><div><br /></div><div style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihuf-7uMFvnAZeMh-4gdYh_0zXDZ6Br8zM7RBgUzzl4GCTqmHR7YImSA17PawoHGjEefgo0PHrs2ul0hgq5iGDqxTr6NKt-v_x-Km-JpvFGrftNuqXQBK71fmSxHu7R_Ty6E7Onu995wfZPTGbfvPlLcuCNb9o8liGyreWE-tod7zzcG7MkeSyc1if3_o/s199/Pic%202-min.png"><img alt="FCFF model" border="0" data-original-height="153" data-original-width="199" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihuf-7uMFvnAZeMh-4gdYh_0zXDZ6Br8zM7RBgUzzl4GCTqmHR7YImSA17PawoHGjEefgo0PHrs2ul0hgq5iGDqxTr6NKt-v_x-Km-JpvFGrftNuqXQBK71fmSxHu7R_Ty6E7Onu995wfZPTGbfvPlLcuCNb9o8liGyreWE-tod7zzcG7MkeSyc1if3_o/s16000/Pic%202-min.png" title="FCFF model" /></a></div><div><br /></div><div><h3>FCFF model</h3><div>For the single-stage discounted FCFF valuation model, the value can be represented by the equation: </div><div><br /></div><div>Value = FCFF × (1+g) / (r-g).</div><div><br /></div><div>Where: </div><div><br /></div><div>FCFF = the Free Cash Flow to the Firm</div><div><br /></div><div>g = steady growth rate.</div><div><br /></div><div>r = Discount rate = WACC.</div><div><br /></div><div>It is referred to as the single-stage model because there is only one growth rate and one discount rate. It assumes that the FCFF increases annually by the same "g". It also assumes that the discount rate for the various periods is multiples of the same base WACC.</div><div><br /></div><div>Note that the above model is a formula derived from the following present value equation.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMWZXGycQIQbojFgiA-j_SQ9tw3BV8VUIWiYI7kqcgbNt4zgqfJzQyy-aPUp5MywSNLGOVvSaQlz3OuEQCXeJ_w7Y-bh9EBlrpMZ3-8eSQ5HNFnkwUfNCXK0FzpBWywyupy6ugcHYY52LqNlTPk-6wJLfZ9RzC0S2Srlnqy1ZaDrJjFsCkgwRyWKVWviM/s453/Value-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Valuation formula" border="0" data-original-height="42" data-original-width="453" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMWZXGycQIQbojFgiA-j_SQ9tw3BV8VUIWiYI7kqcgbNt4zgqfJzQyy-aPUp5MywSNLGOVvSaQlz3OuEQCXeJ_w7Y-bh9EBlrpMZ3-8eSQ5HNFnkwUfNCXK0FzpBWywyupy6ugcHYY52LqNlTPk-6wJLfZ9RzC0S2Srlnqy1ZaDrJjFsCkgwRyWKVWviM/s16000/Value-min.png" title="Valuation formula" /></a></div><br /><div>You can see that it assumes the same growth rate and discount rate for all the years. It also assumes that the growth rate is an annual one. In other words, it increases once a year.</div><div><div><br /></div><div>More importantly, the model assumes that the base year FCFF together with the growth rate is a good representation of the future cash flows.</div><div><br /></div><div>Because of this, I spend considerable effort establishing the base FCFF. Sometimes I use the latest value. Sometimes I use the normalized value. </div><div><br /></div><div>The FCFF can be thought of as the after-tax cash flow available to the providers of capital after accounting for CAPEX and increases in working capital. This is similar to what Warren Buffet calls "owners’ earnings". The "owners" here refer to all the providers of funds used by the company.</div><div><br /></div><div>In practice, this FCFF is derived by first determining the earnings before interest and taxes (EBIT). You then act as if you paid taxes on the EBIT even though in real life, companies pay taxes after deducting interest charges. </div><div><br /></div><div>You thus get the amount EBIT × (1-t) that is commonly written as EBIT(1-t) where "t" represents the tax rate. You next deduct any CAPEX and increases in Working Capital and add back Depreciation & Amortization. </div><div><br /></div><div>Mathematically the FCFF can be represented by:</div><div><br /></div><div>FCFF = EBIT(1-t) × (1-Re).</div><div><br /></div><div>Where:</div><div><br /></div><div>EBIT = earnings before interest and taxes.</div><div><br /></div><div>t = tax rate.</div><div><br /></div><div>Re = Reinvestment rate.</div><div><br /></div><div>In principle, you can also determine the FCFF by deducting the Reinvestment items from EBIT(1-t). </div><div><br /></div><div>I have carried out valuations where I first determined the actual FCFF for every year. I then determined the base FCFF as the average FCFF of the various years.</div><div><br /></div><div>You should not be surprised that the base FCFF derived from this average method is different from that derived based on EBIT(1-t) x (1-Re).</div><div><br /></div><div>Which is more appropriate? I don't think there is an answer. Each is based on a different set of assumptions.</div><div><br /></div><div>I prefer to use the one based on EBIT(1-t) × (1-Re) because I can link the growth rate to EBIT. If I use the average FCFF approach, I would have to link the growth rate to the growth in the FCFF. </div><div><br /></div></div><div><h3>Residual Income Model </h3><div>In the Residual Income approach, the intrinsic value of the firm is the Total Capital Employed (TCE) plus the present value of the Residual Income.</div><div><br /></div><div>Residual Income (RI) is defined as the after-tax EBIT minus a Capital charge. The relevant cash flow here is the Residual Income.</div><div><br /></div><div>TCE = Shareholders Funds + Minority Interests + Debt - Cash & Other Non-operating Assets.</div><div><br /></div><div>For consistency, the TCE should be the capital employed to generate the EBIT. </div><div><br /></div><div>The Capital charge is represented by WACC × TCE.</div><div><br /></div><div>RI = EBIT(1-t) - (WACC x TCE).</div><div><br /></div><div>Both the FCFF and RI models value the operating assets. To determine the value of the firm, you have to add the value of the non-operating assets.</div><div><br /></div><div>My valuation models focus on the value of the firm. To determine the value to equity holders, I then deduct the value of debt and minority interests. </div><div><br /></div><h3>Operating and non-operating assets</h3><div>EBIT is generated by the operating assets. </div><div><br /></div><div>Examples of operating assets are plant & machinery and net working capital. It excludes cash, investment in associates, and investment in securities as these are generally not considered part of the normal business operations.</div><div><br /></div><div>Given this, the intrinsic value of the firm = Value of operating assets + Value of non-operating assets.</div><div><br /></div><div>In other words, you have to add the value of cash and other non-operating assets to the value obtained from discounting the FCFF.</div><div><br /></div><div>This would require you to determine the values of the various non-operating assets. For example, for investments in other companies, you should use the appropriate portion of the intrinsic values of these companies.</div><div><br /></div><div>In practice, I take cash and other non-operating assets at their Book Values. I assumed that they are small components of the total intrinsic value. Determining the intrinsic value of these non-operating assets would not make a big difference to the total intrinsic value. </div></div><div><br /></div><div><h3>Value to all providers of capital.</h3><div>In both the FCFF and RI model, the value obtained by adding the operating assets and non-operating assets belongs to all the providers of funds. </div><div><br /></div><div>To determine the value to the equity holders you have to deduct what is due to the other providers of funds. These are the portion due to the minority shareholders and those providing Debt. </div><div><br /></div><div>Technically Debt should be based on the market value of Debt rather than the Book Value. There are theoretical ways to determine the market value of Debt but this is a story for another day. In practice, if the amount is small eg DE ratio is less than 1, I assumed the Book Value.</div><div><br /></div><div>Similarly, I also use the Book Value when considering the value of the Minority Interests.</div><div><br /></div><div>You can see that assumptions are made from the start - the stages of the life cycle, Value of non-operating assets, Value of Debt, and Value of Minority Interests. This is even before considering parameters used to determine the value of the operating assets.</div></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div><div>According to the <a href="https://www.managementstudyguide.com/single-stage-FCFF-model.htm" target="_blank">Management Study Guide,</a></div><div><br /></div><div>The FCFF valuation model is almost analogous to the Gordon model except that it uses other components as inputs to the calculation.</div><div><br /></div><div>But there are some differences between them:</div><div><ul><li>The single-stage FCFF model uses Free cash flow to the firm as an input whereas the Gordon growth model uses dividends as an input.</li></ul><ul><li>The single-stage FCFF model discounts the cash flows with the WACC. The Gordon model discounts the dividends with the cost of equity.</li></ul><ul><li>The single-stage FCFF model has to make adjustments to include the after-tax cost of debt while calculating the weighted average cost of capital.</li></ul></div><div><br /></div><div>Many models can be used to value companies. As a newbie, you can be overwhelmed by the many choices. My advice is to use the simplest ones given the many assumptions required. An alternative is to look at what others have done. Sites <span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha</a>* are good sources. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.</div></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>Greenwald Return approach </h2><div>There are 3 steps in Greenwald approach:</div><div><ul><li>Using the AV-EPV comparison to identify the high-growth companies.</li></ul><ul><li>Verifying then with competitive analysis. </li></ul><ul><li>Determining the Returns. </li></ul></div><div><br /></div><div>According to Greenwald, EPV > AV can only be sustainable if there is some moat. You verify this via a competitive analysis.</div><div><br /></div><div>As for the Returns, Greenwald classifies them into 3:</div><div><ul><li>Cash returns. These are from Dividends and buybacks.</li></ul><ul><li>Returns from reinvestments. For this to have value, the return has to be greater than the cost of capital.</li></ul><ul><li>Organic growth This comes from the general economic growth and Greenwood considers them as "free".</li></ul></div><div><br /></div><div>Greenwald formula contains 3 components. The first component is for the cash returns. The second component refers to the returns from reinvestments. The last is for organic growth.</div><div><br /></div><div>Expected return = b(E/P) + (1-b)(E/P)(ROE/r) + g</div><div><br /></div><div>Where:</div><div><br /></div><div>b = portion of earnings distributed.</div><div><br /></div><div>E = Earnings per share.</div><div><br /></div><div>P = Price per share.</div><div><br /></div><div>ROE = Return on Equity</div><div><br /></div><div>r = Cost of Equity.</div><div><br /></div><div>g = growth.</div><div><br /></div><div>Based on the historical data, you determined the amount set aside for Dividends and share buybacks. </div><div><br /></div><div>You then estimate the Return from this component by dividing it by the EPS. This is your first Return component. Let us assume that this is Y %.</div><div><br /></div><div>You next estimate what is available for Reinvestment by deducting the portion for Dividends and share buybacks. You then determine the reinvested Return. This is not merely dividing by the EPS. Let us assume that the return with this simple division is Z %.</div><div><br /></div><div>Rather he estimates whether the reinvested Return would be higher or lower than Z %. He does this by comparing the marginal return on capital with the marginal cost of capital.</div><div><br /></div><div>For example, if the return is 15% compared to the 10% cost of capital, it means that for every dollar invested, the company gets 1.5 dollars of return. He then assumed the reinvested Return to be 1.5Z %.</div><div><br /></div><div>From what I could see, Greenwald considers that there is no need for any investment to generate organic growth. </div><div><br /></div><div>However, instead of using the long-term GDP growth rate as the organic return, he makes certain adjustments.</div><div><ul><li>He adds 1% if the company serves the luxury market.</li></ul><ul><li>He deducts 3% if the company serves the mass market.</li></ul><ul><li>He deducts 0.5 % if it sells goods rather than services. </li></ul></div><div><br /></div><div>In his example, the long-term US GDP growth rate of 4 % translates to 0.05 % organic Return after the above deductions.</div><div><br /></div><div>We now have the 3 components to estimate the total Return = cash Return + reinvested Return + organic growth.</div><div><br /></div><div>In our example, this = (Y + 1.5Z + 0.05) %.</div><div><br /></div><div>Greenwald then compares this with the cost of capital to look for the margin of safety.</div><div><br /></div><div>The amount of margin of safety should be linked to the strength of the moat. If you have a moat that takes a decade to be eroded, you want a higher margin than one with 5 decades of protection.</div></div><div><br /></div><div><h3>Limitations of the Return Approach </h3><div>According to Greenwald, the main problem with the Return approach is that there is no dollar estimate of the intrinsic value. As such it is more difficult to determine when it is overvalued. </div><div><br /></div><div>According to Greenwald, investors such as Warren Buffet and Seth Klarman set some guidelines. Warren Buffet supposedly holds the stocks forever. Seth Klarman has some PE cut-offs. </div><div><br /></div><div>I would have thought that a reasonable sell guideline would be when the total Return is half of the cost of capital. Unfortunately, I do not have sufficient such types of investments to see whether this guideline is workable.</div><div><br /></div><h3>Organic Return</h3><div>There are 2 issues here:</div><div><ul><li>What is the organic return?</li></ul><ul><li>What is the Reinvestment required for the organic return?</li></ul></div><div><br /></div><div>I have discussed how Greenwald treated the organic return as one with zero reinvestment. But then he adjusts the long-term GDP growth rate to derive the organic growth rate.</div><div><br /></div><div>I have seen a Greenwald article where he used the long-term growth rates in productivity and profit margin as the free organic return.</div><div><br /></div><div>The logic of the free organic return can be seen from the dividend discount model.</div><div><br /></div><div>P = D/(r - g).</div><div><br /></div><div>Return = D/P + g.</div><div><br /></div><div>However, I saw an article where some reinvestment was deducted to get the return from organic growth.</div><div><br /></div><div>If you look at the Greenwald return formula, you can see that the organic growth rate can have a significant impact on the total return. As such I would take a conservative estimate and not use the full GDP growth rate.</div><div><br /></div><div>Damodaran has suggested that the long-term growth rate for the terminal value be set at the risk-free rate. I think this is a good rate. </div><div><br /></div><div>The best way is to think of the growth that can be achieved without any investment. Examples are:</div><div><ul><li>If you are a retailer, this could be same-store sales.</li></ul><ul><li>Improvement in operating margins by being more efficient.</li></ul><ul><li>Changes to higher margin product mix to get better margins.</li></ul><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXupdtk08T3ERtQLk199IWL_w2NgVBRykeksIXZpQMDXqJyATbPrxk3slL0oExtGG8mo9tmU0HCI34w4ocUa_s37LJbUFCqui0cK9pSJ_j3AGe96DROKqny6Mq8sQ1lZx2Us_ykZUGx8UcnjWU-z6YD1AhVbYfRpSYX-l8tI96IuzTrKI0LYEFZ0bW3Ks/s262/Pic%203-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Estimating growth" border="0" data-original-height="183" data-original-width="262" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXupdtk08T3ERtQLk199IWL_w2NgVBRykeksIXZpQMDXqJyATbPrxk3slL0oExtGG8mo9tmU0HCI34w4ocUa_s37LJbUFCqui0cK9pSJ_j3AGe96DROKqny6Mq8sQ1lZx2Us_ykZUGx8UcnjWU-z6YD1AhVbYfRpSYX-l8tI96IuzTrKI0LYEFZ0bW3Ks/s16000/Pic%203-min.png" title="Estimating growth" /></a></div><div><br /></div></div><div><h2>Estimating growth</h2><div>The growth rate you choose will significantly impact the valuation of the company. Here are some key steps and factors to consider:</div><div><br /></div><div><b>Historical Growth.</b> I look at the company's historical revenue growth rates to identify trends. </div><div><br /></div><div><b>Industry Benchmarks</b>. For high-growth situations, I also consider the overall growth prospects of the industry and whether the company is expected to outperform or underperform its peers.</div><div><br /></div><div><b>Management guidance.</b> Some analysts rely on the company's management regarding future growth prospects. This can include official guidance, earnings calls, or analyst presentations.</div><div><br /></div><div><b>Market research</b>. I also look at industry reports and growth projected by market research houses. </div><div><br /></div><h3>Insights from Reinvestments</h3><div>Reinvestments can also provide insights into the long-term growth rate. The underlying assumption here is that the long-term growth rate will be less than the discount rate. Next, growth is assumed to be the same in perpetuity. </div><div><br /></div><div>For this to be realistic, the growth rate has to be smaller than the GDP growth rate. Damodaran has even suggested that it should be the risk-free rate.</div><div><br /></div><div>Growth in this context comes from the fundamental growth equation where:</div><div><br /></div><div>Growth = Return X Reinvestment rate.</div><div><br /></div><div>In the context of the firm, </div><div><br /></div><div>Return = EBIT(1 – t) / Total Capital Employed</div><div><br /></div><div>t = tax rate</div><div><br /></div><div>Total Capital Employed = Equity + Debt – Cash</div><div><br /></div><div>Reinvestment = CAPEX + Acquisitions – Depreciation & Amortization + Net Changes in Working Capital</div><div><br /></div><div>Reinvestment rate = Reinvestment / EBIT(1-t) </div><div><br /></div><div>In using the fundamental growth equation, you need to ensure that you are consistent. If growth is based on Total Assets, then the return should be based on Total Assets. If growth is based on the Total Capital Employed, the return should be based on the same metric.</div><div><br /></div><div>Even when using the fundamental growth equation, you have to check that the growth is realistic. This is because growth is dependent on the Reinvestment rate and Return. You have to check that what you assumed for these is realistic. </div><div><br /></div><div>There are a few ways to carry out such a sanity check. Look at the historical performance. Look at industry performance. I also look at market research reports to get a sense of the revenue growth rate. And don’t forget to cap the terminal growth at the long-term GDP growth rate.</div></div></div><div><br /></div><h4>Estimating the TCE</h4><div><div>The challenge here is determining the TCE. To estimate the TCE, I first determine the average TCE/Revenue ratio for the company.</div><div><br /></div><div>With this ratio, I then determine the TCE for the projected Revenue. We can then use this to derive the corresponding Return. Thereafter we can derive the Reinvestment rate.</div><div><br /></div><div>The key assumption here is that the Reinvestment rate is constant. In many cases, you will find that the actual historical Reinvestment rate differs from the derived rate.</div><div><br /></div><div>This is partly because CAPEX is a lumpy expenditure in real life. Secondly, management has some discretion in managing working capital. </div><div><br /></div><div>The other assumption is that there is some fixed ratio between TCE and Revenue.</div><div><br /></div><div>The TCE/Revenue ratio is similar to the inverse of the Asset Turnover. In the DuPont analysis, there is a link between the ROE and Asset Turnover. We can imagine a similar relationship between the Return defined here and the TCE turnover.</div><div><br /></div><div>If we assume that the Return is stable, then the TCE/Revenue ratio should also be stable. </div><div><br /></div><h2>Estimating WACC</h2><div>Because I am looking at the cash flows to the firm, the discount rate used is that for the firm. This is commonly called the weighted average cost of capital (WACC) as it takes into account the cost of equity as well as the cost of Debt.</div><div><br /></div><div>The cost of equity is derived from the Capital Asset Pricing Model (CAPM). This requires assumptions about the risk-free rate, the risk premium, and the risk. </div><div><br /></div><div>Risk in this context is measured by the Beta of the firm. In other words, you assumed that volatility = risk.</div><div><br /></div><div>The cost of Debt is based on viewing all the Debt as equal to a single bond. It is not the Book Value of Debt. </div><div><br /></div><div>According to Investopedia, one way to calculate the after-tax cost of Debt = (risk-free rate + credit spread) × (1-t). </div><div><br /></div><div>You will appreciate that there are assumptions to derive the cost of Debt. Damodaran has a good write-up on the WACC. Refer to “<a href="https://pages.stern.nyu.edu/~igiddy/articles/wacc_tutorial.pdf" target="_blank">The weighted average cost of capital – NYU Stern</a>”</div><div><br /></div><div>In practice, I sometimes derive the WACC following Damodaran's approach. But for US companies there is a lot of readily available information. As such I used the average value based on a Google search of the WACC. </div><div><br /></div><div>A good example is how I derived the WACC for the building materials distributor BlueLinx as shown in Table 1.</div><div><br /></div><div>The key point is that there are several assumptions in estimating the WACC. As such, there is no one figure for the WACC. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirWB12xkyenfcFwh6Ts995mvMJARRClhxkOWoWXOA9TgqdzzPGuLyejN-JENX0ykY6LiFnW4Bffvzv0tva-9iwA_RdOY5-aFbyCLv25W170xrp0uZRtoDaN6Oervb1UIXl8oWjmJOShzHOfGsYTH-TwLNrmnt6wGEmNBjkqaUMvn6iB3F540WmS1bwyp0/s250/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 1: Estimating the WACC for BlueLinx" border="0" data-original-height="162" data-original-width="250" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirWB12xkyenfcFwh6Ts995mvMJARRClhxkOWoWXOA9TgqdzzPGuLyejN-JENX0ykY6LiFnW4Bffvzv0tva-9iwA_RdOY5-aFbyCLv25W170xrp0uZRtoDaN6Oervb1UIXl8oWjmJOShzHOfGsYTH-TwLNrmnt6wGEmNBjkqaUMvn6iB3F540WmS1bwyp0/s16000/Table%201-min.png" title="Table 1: Estimating the WACC for BlueLinx" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Estimating the WACC for BlueLinx</td></tr></tbody></table><div><br /></div></div></div><h2 style="text-align: justify;">Single-stage valuation examples</h2><div style="text-align: justify;"><div>For this example, I used the valuation of Tempur-Sealy, a US bedding company as shown in Table 2. For details refer to “<a href="https://seekingalpha.com/article/4567875-tempur-sealy-a-cyclical-company-and-should-be-valued-as-such" target="_blank">Tempur Sealy Is A Cyclical Company And Should Be Valued As Such</a>”</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTG6kQeSQAIJH1hM9r1a9NCxWDP_T-dsxxe_I1ALTvCQTyO6T28YVc1JRfLF8jAI8KfUyHj3VrsXF6oPDXF5p-BVez-uJIHPYSI2cu91KkdXXugL3uda4DwaWdJRa3yS4pKJiNSSZvFB8hgpg40Vydwdx5DTfDqMIqen4h90xSzTiBrXwtq18_wsWvJrw/s612/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 2: Estimating the Value of Tempur-Sealy" border="0" data-original-height="482" data-original-width="612" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTG6kQeSQAIJH1hM9r1a9NCxWDP_T-dsxxe_I1ALTvCQTyO6T28YVc1JRfLF8jAI8KfUyHj3VrsXF6oPDXF5p-BVez-uJIHPYSI2cu91KkdXXugL3uda4DwaWdJRa3yS4pKJiNSSZvFB8hgpg40Vydwdx5DTfDqMIqen4h90xSzTiBrXwtq18_wsWvJrw/s16000/Table%202-min.png" title="Table 2: Estimating the Value of Tempur-Sealy" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Estimating the Value of Tempur-Sealy</td></tr></tbody></table><br /><div>Table 2 illustrates how I computed the intrinsic value based on the single-stage discounted FCFF. It takes into account the value of the operating and non-operating assets. It deducts Debt and minority interests to get to the value to the equity holders.</div><div><div><br /></div><div>I determined the value of the operating assets as UDS 6,852 million - item “p” in Table 2. </div><div><br /></div><div>I then added the non-operating assets – item “s” in Table 2. </div><div><br /></div><div>But I have seen arguments that if companies have a bad track record in deploying cash, there should be a discount to the Book Value. This is especially true if the cash component is significant.</div><div><br /></div><h3>EBIT</h3><div><div>The starting point in my valuation model is how I derive the FCFF. This in turn depends on how I derive the EBIT. </div><div><br /></div><div>The assumptions used to derive the EBIT are generally tied to the company's characteristics. This will differ from case to case. As such I will just cover the general assumptions here.</div></div><div><br /></div><div>There are several ways to derive the EBIT. In the model shown in Table 2, the EBIT was derived based on Gross Profit less SGA expenses. Refer to item “f” in Table 2.</div><div><br /></div><div>Gross Profit = Revenue × Gross Profit margin.</div><div><br /></div><div>SGA = Revenue × SGA margin.</div><div><br /></div><div>The Revenue, Gross Profit margin, and SGA margin are "normalized" values. How I derived the "normalized" values would depend on the company. In the Tempur-Sealy case as per Table 2, the normalized values were based on:</div><div><ul><li>The current revenue. This is to reflect the current size of the company.</li></ul><ul><li>The normalized gross profit margins and SGA margins. These were based on the values over the cycle. The cycle period was assumed to be from 2014 to 2022 based on the Housing Starts cycle.</li></ul></div><div><br /></div><div>In the case of Housing Starts, the actual peak-to-peak was 2005 to 2022 as shown in Chart 3. But unfortunately, Tempur-Sealy in its current form came into the picture in 2013. Thus, the only data available for determining the average values was from 2014 to 2022. The assumption is that this period is a good representation of the cycle.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNv3_l1yhwFW-fDilCO6DLeYdTqBnWoD13GHZRkeoF_nUoYspT31p2YaWmn31S3uyNbYSRtMcO9JNPbORc5lQ1og0ycdPjXMgaTdzT-jza2YF_crRu89lGFgIDSpb77pfrrPvAKXv9o3JkDNHHNujmyosCuHCOsJv_GUw9vJuZd5fUSweLY-JXINk0438/s710/Chart%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 3: US Housing Starts. Source: Trading Economics.com" border="0" data-original-height="337" data-original-width="710" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNv3_l1yhwFW-fDilCO6DLeYdTqBnWoD13GHZRkeoF_nUoYspT31p2YaWmn31S3uyNbYSRtMcO9JNPbORc5lQ1og0ycdPjXMgaTdzT-jza2YF_crRu89lGFgIDSpb77pfrrPvAKXv9o3JkDNHHNujmyosCuHCOsJv_GUw9vJuZd5fUSweLY-JXINk0438/s16000/Chart%203-min.png" title="Chart 3: US Housing Starts. Source: Trading Economics.com" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: US Housing Starts. Source: Trading Economics.com</td></tr></tbody></table><div><br /></div><div><div>As can be seen, the starting point for my valuation was Revenue. The value for this metric will depend on the situation.</div><div><br /></div><div>In my <a href="https://seekingalpha.com/article/4565101-steel-dynamics-the-margin-of-safety-is-in-the-aluminum-venture" target="_blank">Steel Dynamics</a> analysis, I determined Revenue by looking at the shipping tonnage and then relating this to the long-term average revenue per ton. Steel is a cyclical commodity and while unit prices vary widely throughout the cycle, the shipment quantity is more "stable". Growth came from the shipment tonnage rather than the cyclical prices.</div><div><br /></div><div>In my <a href="https://seekingalpha.com/article/4563698-boise-cascade-cyclical-stock-value-as-such" target="_blank">Boise Cascade</a> analysis, I pegged Revenue to the long-term average annual Housing Starts. This is because while House Starts are cyclical, there is no growth in the long-term average annual Housing Starts of about 1.5 million units. The Revenue is for the year when the Housing Starts was 1.5 million units.</div><div><br /></div><div>The underlying assumption here is that the margins are stable within the range of Revenue considered. We know that certain items in the cost of sales eg depreciation and staff costs do not vary per unit of output. Rather they have stepped changes. But we act like they are continuous variables. This is a reasonable assumption if the volume is far above the breakeven level. </div><div><br /></div><div><h3>Tax rate</h3><div>According to Damodaran, we should use the nominal tax rate rather than some average of the actual tax rate. This is because we are taking a long-term view whereas actual tax rates may be affected by short-term tax adjustments.</div><div><br /></div><div>Using a nominal rate works if the company operates in only one country. However if the company operates in several countries with different tax codes, I find it difficult to determine a nominal rate. In such cases, I used the actual average tax rate.</div><div><br /></div><div>In practice, changes in the tax rate are not as significant as changes in the FCFF or WACC on the intrinsic value.</div><div><br /></div><h3>SGA</h3><div>Selling, general, and administrative expenses generally have step changes. Even if you consider them variable, they should only apply to a particular Revenue range. </div><div><br /></div><div>In the example shown in Table 2, I have assumed that the SGA is a variable linked to the Revenue. That is why I used the SGA margin.</div><div><br /></div><h3>Alternative EBIT approaches </h3><div>The model illustrated in Table 2 is not the only way to determine the base year EBIT or normalized EBIT. The template shown is a general one. But there are other ways involving different assumptions as illustrated by the following.</div><div><br /></div><div>In my Leggett & Platt analysis, the EBIT was based on the EBIT/Total Asset ratio. The growth was then the growth in Total Assets. This was because it was difficult to estimate the Gross Profit margin or SGA margin. Refer to “<a href="https://seekingalpha.com/article/4544078-leggett-and-platt-limited-financial-benefits-from-ecs-acquisition" target="_blank">Leggett & Platt: Limited Financial Benefits From ECS Acquisition</a>”</div><div><br /></div><div>In the case of Stelco, I used the average EBITDA and then deduct Depreciation & Amortization to derive the EBIT. In that case study, there was not enough information to derive the Gross Profit margin. Refer to “<a href="https://seekingalpha.com/article/4540638-stelco-holdings-grossly-underpriced-cyclical-growth-company" target="_blank">Stelco Holdings: Grossly Underpriced Cyclical Growth Company</a>”</div><div><br /></div><div>In the Timken Steel analysis, I estimated the Gross Profit for the base year directly by taking the average Gross profit. I then deducted SGA to arrive at the EBIT. This was because the company was operating below breakeven levels for most of the period. For the base year, I wanted the intrinsic value if it operated above this breakeven level. Refer to “<a href="https://seekingalpha.com/article/4538327-timken-steel-underpriced-stock-even-through-cyclical-lens" target="_blank">TimkenSteel: Under-Priced Even Through A Cyclical Lens”</a></div><div><br /></div></div><div><h2>2-stage valuation examples</h2><div>Here, I would use <a href="https://www.i4value.asia/2022/09/is-cbip-money-making-opportunity-find.html#more" target="_blank">CBIP </a>to illustrate the valuation. Refer to the blog article for the details of the company. </div><div><br /></div><div>I first invested in CBIP in 2017. I had considered this a compounder based on the following: </div><div><ul><li>From 2007 to 2016 revenue grew at 8.0 % CAGR and PAT at 10.2 % CAGR. </li></ul><ul><li>ROE averaged 20.6 % from 2007 to 2016.</li></ul><ul><li>Shareholders’ funds grew at 17. % CAGR from 2007 to 2016. This was mainly from retained earnings. While there were several rounds of bonus issues, there was no call for additional paid-up capital. </li></ul></div><div><br /></div><div>I would not go into the details on why I think CBIP is a good company here. Refer to my blog article if you want the details.</div><div><br /></div><div>I use CBIP as the case study to illustrate the various computations. Table 3 summarizes the key parameters required for the valuations. They cover the key value drivers as per Damodaran.</div><div><ul><li>Revenue and the growth rates.</li></ul><ul><li>Gross profit and SGA margins. I also assumed that these would change over time.</li></ul><ul><li>Capital efficiency as measured by the TCE/Revenue and the growth rates.</li></ul><ul><li>Some measures of how to fund the growth. I generally use the Reinvestment rates.</li></ul><ul><li>The discount rates. I have derived the Cost of Equity and the WACC based on the Damodaran build-up method.</li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiciICh6dekTV0FdjP9i4Z6jJ_rpIMYYXguFQgwb5wdBsi2_CaZbWhNBRxnwQ9GJdZX2m8qxFRvI5DEIsSFlfIAehaLGdGPG5EIyxmpFw7IWZJW89p9PVKPmcQjx3ROvzW4C4j3KBn5qJuguiNdORlr9KhUa_sNzDb4j9eGdvfW6xRGVsa_p2MCPM0sYwc/s597/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 3: CBIP Parameters" border="0" data-original-height="402" data-original-width="597" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiciICh6dekTV0FdjP9i4Z6jJ_rpIMYYXguFQgwb5wdBsi2_CaZbWhNBRxnwQ9GJdZX2m8qxFRvI5DEIsSFlfIAehaLGdGPG5EIyxmpFw7IWZJW89p9PVKPmcQjx3ROvzW4C4j3KBn5qJuguiNdORlr9KhUa_sNzDb4j9eGdvfW6xRGVsa_p2MCPM0sYwc/s16000/Table%203-min.png" title="Table 3: CBIP Parameters" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: CBIP Parameters</td></tr></tbody></table><br /><div>For this case study, I will assume that there is some growth narrative that matches the numbers shown in Table 3. I will not cover the narrative but focus on the computation aspects.</div></div><div><div><br /></div><div>I will illustrate how I determined the intrinsic value of CBIP using both the FCFF model as well as the Residual income model.</div></div></div><div><br /></div><div><h3>FCFF valuation</h3><div>I used a 2-stage FCFF model to value CBIP where there is a high revenue growth stage followed by a lower long-term revenue growth rate. </div><div><br /></div><div>Table 4 and the accompanying notes illustrate the computation.</div><div><br /></div><div>I assumed that the high revenue growth stage to be 5 years. The model assumes that the low-growth stage continues in perpetuity. In other words, I do not factor in any decline. </div><div><br /></div><div>I have also assumed growth for other parameters – margins and capital efficiency. If you look at columns b, c, and f for the various years, you can see the changes.</div><div><br /></div><div>The key parameters for each stage are the FCFF and the WACC. The FCFF for each stage in turn depends on the EBIT, tax rate, and Reinvestment rate. </div><div><br /></div><div>As in my earlier article, I assumed that growth is determined by fundamentals. </div><div><br /></div><div>g = Return × Reinvestment rate.</div><div><br /></div><div>Return = EBIT(1-t)/TCE. Note that I used the TCE of the previous period.</div><div><br /></div><div>So if I can determine the TCE for each year I can then determine the Return for each year. Thereafter I can determine the Reinvestment rate for each year.</div><div><br /></div><div>Conceptually I am determining the FCFF for each period and then discounting it to the present value ie year = 0. </div><div><br /></div><div>The intrinsic value is the sum of all the individual discounted values. Note that the value of the mature stage is also discounted to the present value.</div><div><br /></div><div>Based on this model, the intrinsic value of CBIP is RM 1.81 per share compared to the market price of RM 1.80 per share. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtGP4VABWndIfyvC3_gh51ORra-DpIR0eZcL4yDKZAWrE3qu6zjsctkRzOIs0xlpWaQnR4n3t_V9xVgPYmh26tKxjQlIFvV-fm0kcRdH-QdxuFv_ldfPPptwXDz0qSrQ3Fd5wTwSn39LgIYXq-LhsqJLidOmBITHnOToSfGB-OGAA0OcMpDo2pgvFQCxw/s977/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 4: FCFF Valuation of CBIP" border="0" data-original-height="322" data-original-width="977" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtGP4VABWndIfyvC3_gh51ORra-DpIR0eZcL4yDKZAWrE3qu6zjsctkRzOIs0xlpWaQnR4n3t_V9xVgPYmh26tKxjQlIFvV-fm0kcRdH-QdxuFv_ldfPPptwXDz0qSrQ3Fd5wTwSn39LgIYXq-LhsqJLidOmBITHnOToSfGB-OGAA0OcMpDo2pgvFQCxw/s16000/Table%204-min.png" title="Table 4: FCFF Valuation of CBIP" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: FCFF Valuation of CBIP<br /><div style="text-align: left;"><div><i>Notes. Their alphabets refer to those in Tables 4 and 5.<span style="white-space: pre;"> </span></i></div><div><i>a) Revenue = Previous year revenue X (1 + high growth rate).<span style="white-space: pre;"> </span></i></div><div><i>b) GP margin = Previous year GP margin X (1 + GP margin growth rate).<span style="white-space: pre;"> </span></i></div><div><i>c) SGA margin = Previous year SGA margin X (1 + SGA margin growth rate).<span style="white-space: pre;"> </span></i></div><div><i>d) EBIT(1-t) = a(b-c) X (1 - tax rate).<span style="white-space: pre;"> </span></i></div><div><i>e) Growth = [ Current EBIT(1-t) / Previous year EBIT(1-t) ] - 1.<span style="white-space: pre;"> </span></i></div><div><i>f) TCE/Revenue = Previous year TCE/Revenue x (1 + TCE/Revenue growth rate).<span style="white-space: pre;"> </span></i></div><div><i>g) TCE = a X f.<span style="white-space: pre;"> </span></i></div><div><i>h) Return = EBIT(1-t) / TCE of the previous period.<span style="white-space: pre;"> </span></i></div><div><i>i) Reinvestment rate = Growth / Return.<span style="white-space: pre;"> </span></i></div><div><i>j) FCFF = EBIT(1-t) X (1 - Reinvestment rate).<span style="white-space: pre;"> </span></i></div><div><i>k) Discount factor = Previous year factor / (1 + WACC).<span style="white-space: pre;"> </span></i></div><div><i>l) Present value = FCFF X Discount factor.<span style="white-space: pre;"> </span></i></div><div><i>m) Capital charge = TCE of the previous period X WACC.<span style="white-space: pre;"> </span></i></div><div><i>n) Residual income = EBIT(1-t) - Capital charge.<span style="white-space: pre;"> </span></i></div><div><i>o) Value of op assets = Sum of PV including those from the Terminal Value.<span style="white-space: pre;"> </span></i></div><div><i>p) Value of non-op TCE. This is to account for the difference between the actual TCE and the one used in the model.<span style="white-space: pre;"> </span></i></div><div><i>q) Value of Firm = Value of op assets + Cash + Value of non-op TCE.<span style="white-space: pre;"> </span></i></div><div><i>r) Value of Equity = Value of firm - Debt - MI.<span style="white-space: pre;"> </span></i></div><div><i>s) Equity per share = Value of Equity / Number of shares.<span style="white-space: pre;"> </span></i></div></div></td></tr></tbody></table><div><br /></div><div><h3>Residual Income valuation.</h3><div>In this model, the key parameters for each year are the TCE and the WACC. This will enable us to determine the Residual Income for each year.</div><div><br /></div><div>Table 5 illustrates the computation. I have assumed the same parameters for CBIP as those in the FCFF valuation example.</div><div><br /></div><div>Based on the TCE/Revenue ratio, I then projected the TCE for each year. Given the WACC, I then determined the Capital charge for each year. Note that I used the TCE for the previous period to determine the current period Capital charge.</div><div><br /></div><div>I then determined the Residual Income and the corresponding Terminal Residual Income. I determined the Terminal Residual Income using the perpetual growth formula.</div><div><br /></div><div>The value of the operating assets to the Firm = current TCE + total present of the Residual Income.</div><div><br /></div><div>Based on this model, the intrinsic value of CBIP is RM 1.94 per share compared to RM 1.81 per share from the FCFF model. </div><div><br /></div><div>In theory, both approaches should give the same answer if the assumptions are consistent. The difference meant that I had some inconsistencies in my assumptions. In practice, I seldom get the same answers so I generally take the average of both models as the final intrinsic value. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9rqDMRRR_5vfbiL_lnxC7bqj-S9gu5ZTZ1Ryg100Tiwz7QJG2G2kjQT6kgjaVkOZ8Op3BPFJwC9-1DSeXNL4BtY50abLPIz1adf0qbF8MA_xt_uaxRBG1ty2MspW7Pc58jyr6aatSDuNoXRtjRJ-nQFczO2nc195eaAhLU2Rpsic3WbgJ0tH1Og1FvPo/s902/Table%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 5: Residual Income Valuation of CBI" border="0" data-original-height="322" data-original-width="902" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9rqDMRRR_5vfbiL_lnxC7bqj-S9gu5ZTZ1Ryg100Tiwz7QJG2G2kjQT6kgjaVkOZ8Op3BPFJwC9-1DSeXNL4BtY50abLPIz1adf0qbF8MA_xt_uaxRBG1ty2MspW7Pc58jyr6aatSDuNoXRtjRJ-nQFczO2nc195eaAhLU2Rpsic3WbgJ0tH1Og1FvPo/s16000/Table%205-min.png" title="Table 5: Residual Income Valuation of CBI" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 5: Residual Income Valuation of CBIP<br /><div style="text-align: left;"><i>Refer to the Notes in Table 4 for the explanations of each of the alphabet notes. </i></div></td></tr></tbody></table><div><br /></div></div></div><div>If I assumed that all the growths – revenue, margins, capital efficiency – are zero, we have the Earnings Power Value (EPV). This is RM 1.68 per share. </div><div><br /></div><h2>Multi-growth valuation example</h2><div>For this example, I will use my analysis of Leggett & Platt, a US components company. Refer to the following for details:</div></div><div><ul><li><a href="https://seekingalpha.com/article/4407896-leggett-platt-specialty-foam-potential" target="_blank">Leggett & Platt: The Specialty Foam Potential.</a></li></ul><ul><li><a href="https://seekingalpha.com/article/4544078-leggett-and-platt-limited-financial-benefits-from-ecs-acquisition" target="_blank">Leggett & Platt: Limited Financial Benefits From ECS Acquisition</a>.</li></ul></div><div><div><br /></div><div>LEG growth was via a combination of organic growth and non-organic growth. Growth via acquisitions is quite significant. From 2015 to 2022, revenue grew at a 4.2 % CAGR, while EBIT grew at 3.6 % CAGR.</div><div><br /></div><div>To further confuse the matter, total assets grew at a CAGR of 10.1 %. The point is that there are many growth components. </div><div><br /></div><div>Given that there were many different growth rates, the best way to model LEG is to develop a financial model with the various growth parameters.</div><div><br /></div><div>The endpoint is to determine the Free Cash Flow to the Firm (FCFF) for various periods. The value of the firm is then the total discounted values of each period FCFF including the terminal value. </div><div><br /></div><div>One format is shown in Table 6 where there are main two growth phases:</div><div><ul><li>A high growth one from year 1 to year 10.</li></ul><ul><li>A terminal phase based on a single-stage growth model. The FCFF for the terminal value is based on the final year value of the high growth phase.</li></ul><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMlieh-sFHforls2yCqDrJwNeSxcDUi7Z1vzas4oGTD7IoUYjV-_PxV1VY7MaPEKUMkm1nwPSCEH0HFXSESpAKgxj2WbGH0UZQ5evqnSh23FQMTZH1KyL1jPbK0A854jUr_rnREWIDz7kS7UBCdAE4Uh_FEOY8QJ-PqA3eEwUKq5FQ3l9TihtwakDhm6w/s522/Table%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 6: Example of a Multi-growths Financial Model" border="0" data-original-height="265" data-original-width="522" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMlieh-sFHforls2yCqDrJwNeSxcDUi7Z1vzas4oGTD7IoUYjV-_PxV1VY7MaPEKUMkm1nwPSCEH0HFXSESpAKgxj2WbGH0UZQ5evqnSh23FQMTZH1KyL1jPbK0A854jUr_rnREWIDz7kS7UBCdAE4Uh_FEOY8QJ-PqA3eEwUKq5FQ3l9TihtwakDhm6w/s16000/Table%206-min.png" title="Table 6: Example of a Multi-growths Financial Model" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 6: Example of a Multi-growths Financial Model</td></tr></tbody></table><div><br /></div></div></div><div><div>You can see from Table 6 that you could have different growth rates for the various parameters. In the example in Table 6, I assumed the following:</div><div><ul><li>4.1 % annual growth for revenue.</li></ul><ul><li>The gross profit margin improved by 1% every year.</li></ul><ul><li>The SGA margin improved by 2% every year.</li></ul><ul><li>A stable Reinvestment rate of 42.8 %.</li></ul><ul><li>The terminal growth rate of 2 % in perpetuity.</li></ul><ul><li>The same discount rate for all the years.</li></ul></div><div><br /></div><div>While theoretically correct, the above requires you to make assumptions about the various growth rates. The challenge is not the development of the financial model. It is whether the assumptions about the growth rates for the various parameters are realistic.</div><div><br /></div><h2>Greenwald return example</h2><div>In this section, I illustrate how I used the Greenwald approach to determine the return for CBIP using the following formula.</div><div><br /></div><div>Return = b(E/P) + (1-b)(E/P)(ROE/r) + g</div><div><br /></div><div>Table 7 illustrates how I derived the values for each component.</div><div><br /></div><div>Based on this approach, I estimated the total return = 15.1 %. If I compare this with the Cost of Equity of 11.5 %, there is a 30.8 % margin of safety.</div><div><br /></div><div>On this basis, I concluded that there is a margin of safety. This was even though there is no margin of safety based on the DCF approach.</div><div><br /></div><div>In my work example, I have assumed that organic growth is the GDP growth rate. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEir8P3a71AL5b_vGbY_D_UtF6ehTwdMqCdP-__WXnNdD-ygn9edEGzkEycZVhrGKXu9xgka8rtzDA3PswRC2OK1ylCA83fQe-vZch0HCE_IMFtz9xfQlzuvtX74Uo3gNzKkPQlrBcqgyUmTMdUnh71vH5xh550B46OfdjIw85kwqRruNeVHZmROf3tgrIo/s564/Table%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 7: Estimating the Returns for CBIP based on the Greenwald Method" border="0" data-original-height="322" data-original-width="564" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEir8P3a71AL5b_vGbY_D_UtF6ehTwdMqCdP-__WXnNdD-ygn9edEGzkEycZVhrGKXu9xgka8rtzDA3PswRC2OK1ylCA83fQe-vZch0HCE_IMFtz9xfQlzuvtX74Uo3gNzKkPQlrBcqgyUmTMdUnh71vH5xh550B46OfdjIw85kwqRruNeVHZmROf3tgrIo/s16000/Table%207-min.png" title="Table 7: Estimating the Returns for CBIP based on the Greenwald Method" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 7: Estimating the Returns for CBIP based on the Greenwald Method<br /><div style="text-align: left;"><div><i>Notes: Refer to the alphabet notes for the steps in the calculation</i></div><div><i>aj = cost of equity based on Damodaran</i></div><div><i>ar = number of shares</i></div><div><i>at = market price at the end 2017</i></div><div><br /></div></div></td></tr></tbody></table><div><h2>Conclusion</h2><div>All valuations are based on assumptions. There are several types of assumptions involved:</div><div><ul><li>The valuation model used.</li></ul><ul><li>The values of the non-operating assets.</li></ul><ul><li>The values of Debt, Minority Interest, and other non-equity provider of funds.</li></ul><ul><li>The values of the key parameters to determine the FCFF.</li></ul></div><div><br /></div><div>The point is that it is not just the assumptions to derive the FCFF. As shown in this article there are other assumptions. With so many assumptions you could be forgiven for doubting the accuracy of the value obtained.</div><div><br /></div><div>I agree. That is why we have a margin of safety. </div><div><br /></div><div>Given the many assumptions you may also wonder why to bother with the DCF method when relative valuation is much simpler. However, when you use relative valuation, you are pretending that there is no assumption. In reality, the assumptions are implicit.</div><div><br /></div><div>With the single-stage discounted FCFF model, the assumptions are explicit and can be easily challenged. I rather know that they are based on assumptions than not knowing what has been assumed as with the relative valuation method.</div><div><br /></div><div>In valuing companies, we make many choices and the intrinsic value obtained reflects the choices made. That is why different people will get different intrinsic values even though they all use the same single-stage discounted FCFF approach.</div><div><br /></div><div>Damodaran and Greenwald have proposed different valuation approaches for high-growth companies.</div><div><ul><li>Damodaran approach with the narrative and FCFF model applies to companies coming out of the start-up stage. With these companies, there is hardly any operating history. At the same time, the lack of historical data may make AV-EPV comparison difficult.</li></ul><ul><li>Greenwald approach is more suitable for established companies with growth rates far over the GDP growth rates. His AV-EPV comparison is a good starting point for identifying such high-growth companies. You then verify them by identifying the competitive advantages. </li></ul></div><div><br /></div><div>Note that in Greenwald’s approach, the high growth rate is not the main metric. Greenwald looks at the return space to determine the margin of safety.</div><div><br /></div><div>I hope I have made a case for both to be in your valuation toolbox. </div><div><br /></div></div></div></div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><div><div><div><div><div style="font-weight: bold;"><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div style="font-weight: bold;"><div style="text-align: center;"><br /></div></div><div style="font-weight: bold;">- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div style="font-weight: bold;"><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div style="font-weight: bold;"><br /></div></div><div style="font-weight: bold;"><br /></div></div></div></div></div><div><div style="font-weight: bold;"><br /></div><b><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span></b><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div style="font-weight: bold;"><br /></div></div><div style="font-weight: bold;"><br /></div></div><div><br style="text-align: left;" /></div></div><div><br /></div></div><div><br /></div><div><br /></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-28601612639015316022024-01-07T09:00:00.004+08:002024-01-12T18:20:53.042+08:00Are you looking for US stocks to make money? <script type="application/ld+json">
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<a></a><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); color: #171717; font-size: 15px; font-weight: bold; letter-spacing: 0.04em; padding-bottom: 10px; padding-top: 10px; text-align: justify; text-decoration: none;">Tips B<span style="letter-spacing: 0.6px;"> - Other Stock Exchanges. A summary of the fundamental analysis of my curated US-listed companies. I also used to blog about US companies but in Oct 2023 I have unpublished and redirected them here. <a href="https://www.i4value.asia/2020/07/how-to-cut-down-your-investing-time.html#more">Look here</a> if you want to see the summaries of my curated Bursa Malaysia companies. Revision date: 7 Jan 2024</span></div>
<div><br /></div><div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0Gpm6OnGP8zDgpbDMP2bWSidMdqypHjgpzTeG16a3EvulKGbkp-doK9mag4iKRFLDF7em0LV-lB7ndQ7EWKPKt4QAVRUNiBU4518dtiKPsAMR8zziv6-x4cJm0HlDuEpeMm20IU_EY6_QUYchZZKZK6UE5Ru5sIAUFI_2-AKt87AGSxTxUqFlpmXFH9k/s388/US%20stocks-min.png" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img alt="Are you looking for US stocks to make money?" border="0" data-original-height="388" data-original-width="385" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0Gpm6OnGP8zDgpbDMP2bWSidMdqypHjgpzTeG16a3EvulKGbkp-doK9mag4iKRFLDF7em0LV-lB7ndQ7EWKPKt4QAVRUNiBU4518dtiKPsAMR8zziv6-x4cJm0HlDuEpeMm20IU_EY6_QUYchZZKZK6UE5Ru5sIAUFI_2-AKt87AGSxTxUqFlpmXFH9k/s16000/US%20stocks-min.png" title="Are you looking for US stocks to make money?" /></a></div><div style="text-align: justify;"><span><a name='more'></a></span></div><div style="text-align: justify;"><div>In addition to looking at Bursa Malaysia stocks, I also looked at stocks in other countries. These are mainly US stocks as it has probably the largest stock exchange in the world. The rationale for this is diversification as part of my risk management.</div><div><div><br /></div></div><div><div>I have a 3-min video summarizing on why I look beyond Bursa Malaysia.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/CPtsfLAnaEc" width="320" youtube-src-id="CPtsfLAnaEc"></iframe></div><div class="separator" style="clear: both; text-align: center;"><br /></div></div><div>I define a good US stock as one that can enable you to make money. This will usually be a company with strong fundamentals and a sufficient margin of safety.</div><div><br /></div><div>The first thing that all investors learn is that you have to think in terms of the risk-reward ratio when looking at a particular investment. While every investment has its upside, there is also a potential downside.</div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">One way to take care of the downside when you invest in the stock market is to have a diversified portfolio. There are several perspectives on diversification.</div><div style="text-align: justify;"><ul><li>You can diversify by spreading your investment to different industries and different market caps.</li></ul><ul><li>I also spread my investments based on the various business economic situations faced by companies eg turnarounds and compounders.</li></ul><ul><li>Another common diversification plan is to invest in both local and global companies.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Geographical diversification can be quite nuanced. It is not necessarily about investing in companies that are listed in stock exchanges other than those in your country.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For example, if you are in the US and you invest in NYSE-listed The Coca-Cola Company, you are investing globally as a significant part of The Coca-Cola's revenue are from non-American sources.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Accordingly, while the infographics in this post covered companies that are listed in other stock exchanges (from a Malaysian perspective), it does not necessarily mean that they do not have operations in Malaysia.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Should you go and invest in them? Well, ready my Disclaimer.</div><div style="text-align: justify;"><div style="text-align: left;"><div style="text-align: justify;"><div><div><div><div><div><span style="background-color: white;"><h2>Contents</h2><div><div style="text-align: left;"><div style="text-align: justify;"><div>1. Alcoa <br />2. Arconic<br />3. BlueLinx<br />4. Boise Cascade</div><div><a href="#5. Builders FirstSource (BLDR)" style="text-align: left;">5. Builders FirstSource (BLDR)</a><br />6. Capstone Green Energy <br />7. Century Aluminum<br />8. Constellium<br />9. Cummins</div><div><a href="#10. D.R. Horton (DHI)" style="text-align: left;">10. D.R. Horton (DHI)</a></div><div>11. eXp World Holdings<br />12. Generac <br />13. Graphic Packaging<br />14. Innovative Industrial Properties</div><div><a href="#15. Installed Building Products" style="text-align: left;">15. Installed Building Products</a><br />16. Kaiser Aluminum<br />17. KB Home<br />18. Leggett & Platt<br />19. Lennar </div><div><a href="#20. Martin Marietta" style="text-align: left;">20. Martin Marietta</a><br />21. Masonite (DOOR)<br />22. MDC<br />23. Meritage Homes <br />24. M/I Homes</div><div><a href="#25. NVR" style="text-align: left;">25. NVR</a><br />26. Orion Office REIT<br />27. Pulte <br />28. Reliance Steel & Aluminum<br />29. Ryerson Holding</div><div><a href="#30. Stelco" style="text-align: left;">30. Stelco</a><br />31. Steel Dynamics<br />32. Summit Materials<br />33. Tempur-Sealy<br />34. Timken Steel </div><div><a href="#35. Toll Brothers" style="text-align: left;">35. Toll Brothers</a><br />36. TopBuild Corp<br />37. Universal Steel & Stainless<br />38. US Steel<br />39. Vulcan</div><div><a href="#40. Walgreen Boots Alliance" style="text-align: left;">40. Walgreen Boots Alliance</a><br />41. Worthington Industries<br />42. Olympic Steel (Zeus)</div></div></div></div></span></div><div><span style="background-color: white;"><b><br /></b></span></div><div><span style="background-color: white;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></span></div></div><div><div><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><p>When I value a non-Malaysian company, I have to use different data for computing the cost of capital. The differences are for the following parameters:</p><p></p><ul><li>Risk-free rate. The risk-free rates for the US would be much lower than those in Malaysia.</li></ul><ul><li>Rating and coverage ratio. I use the rating and coverage ratio from Damodaran to determine the cost of debt. Damodaran has a different set of data for the US compared to the emerging markets.</li></ul><ul><li>Equity risk premium. This is a function of the country's stock market performance and different countries will have different premiums.</li></ul><ul><li>Beta. Although I adopt the build-up Beta approach, Damodaran has a different set of Beta data for the US and the emerging markets. </li></ul><p></p><div><br /></div><div>So you should not be surprised to see a different cost of capital for a US company compared to a Malaysian company even if both companies are in the same industry, of the same size with the same debt to equity level, and have similar risks.</div><div><br /></div><div>For beginners, it can be challenging to take into account these differences when valuing companies from different countries. If you still want to invest in companies in other countries based on fundamentals, and you are not familiar with the adjustments to be made it may be better to rely on third-party analyses. </div><div><br /></div><div>Several financial advisers provide such analyses. <span style="text-align: start;">Those who do this well include people like </span><a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment. Then as you become more experienced, you can phase them out. </div><div><br /></div><p></p></div></td></tr></tbody></table></div><div class="separator" style="clear: both; text-align: left;"><br /></div></div></div></div></div><div class="separator" style="clear: both; text-align: left;"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: justify;" /></div></div></td></tr></tbody></table><div style="text-align: justify;"></div></div><div class="separator" style="clear: both; text-align: left;"><div><div><h2>1. Alcoa</h2><div><div class="separator" style="clear: both;"><div><div><div><div style="text-align: justify;">Alcoa is a producer of bauxite, alumina, and aluminum. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Aluminum prices are cyclical. Alcoa’s earnings would be cyclical given the strong correlation between aluminum prices and Alcoa's gross profitability.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Alcoa could generate significant operating profits under various aluminum price scenarios. However, over the past 9 years, Alcoa had a very heavy tax burden. There were taxes even if it was loss-making. During profitable years, tax rates ranged from 45 % to 108%.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">There are two ways to explain the high tax rates.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Based on the tax reconciliation, the high tax rate is due to large changes in the valuation allowances.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Another explanation is that the high tax rate is due to arithmetic issues. The losses in the Domestic operations resulted in lower overall profits. The tax rate is then magnified.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To reduce the high effective tax rate, Alcoa needs to focus on changes in valuation allowances and make the Domestic operations profitable.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For details, refer to the following Seeking Alpha articles:</div><div><ul><li style="text-align: justify;">May 2023 - “<a href="https://seekingalpha.com/article/4601192-alcoa-aa-taxes-are-killing-the-value" target="_blank">Alcoa: Taxes Are Killing The Value</a>”</li></ul><ul><li>Jun 2023 – “<a href="https://seekingalpha.com/article/4611030-alcoa-exploring-the-mystery-of-high-tax-rates" target="_blank">Alcoa: Exploring The Mystery Of High Tax Rates</a>”</li></ul></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3LbPEvT6wMWA831ZZZu91gQaSukKJJzvOQY5fJKBq8DPh_kZvl2HPNFow6xiMmZObHHFgRans-LHXr-0qZyHhsF-rsANQugX1hXrm7L-L5E1hM2rEPSrOnV_d_k1IZ1QMIiyYQBI06PMjVUoYBTp_71alDdVK6oiOn1CkletzBoGXMDyUpdLMKLUZPic/s2000/Alcoa.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Alcoa" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3LbPEvT6wMWA831ZZZu91gQaSukKJJzvOQY5fJKBq8DPh_kZvl2HPNFow6xiMmZObHHFgRans-LHXr-0qZyHhsF-rsANQugX1hXrm7L-L5E1hM2rEPSrOnV_d_k1IZ1QMIiyYQBI06PMjVUoYBTp_71alDdVK6oiOn1CkletzBoGXMDyUpdLMKLUZPic/s16000/Alcoa.png" title="Alcoa" /></a></div></div><span><!--more--></span><div><br style="text-align: justify;" /></div></div><div style="text-align: justify;"><h2 style="text-align: left;">2. Arconic</h2><div>Arconic was listed in 2020 following the split of its parent company into 2 public-listed companies. It comprised the rolled aluminum products, aluminum extrusions, and architectural products of the parent company.</div><div><br /></div><div>During its 3 years as a public-listed company, Arconic had not been profitable. While revenue had grown by about 2/3 since then, it had incurred losses for the past 3 years. But this is a misleading picture as a significant part of the losses were due to one-off asset write-downs and restructuring charges. Without these, it would be profitable.</div><div><br /></div><div>This is not a growth stock. There are also concerns about its financial strength and the strategic value of 2 of its business segments.</div><div><br /></div><div>ARNC is a cyclical company. Despite its short history, its performance and valuation should be based on a cyclical lens. On such a basis and even assuming no further one-off charges, there is no margin of safety.</div><div><br /></div><div>For details, refer to my May 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4607269-arconic-arnc-fundamental-issues-coupled-with-no-margin-of-safety" target="_blank">Arconic: Fundamental Issues Coupled With No Margin Of Safety</a>”</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihjzw-9YGJb5A1TqYTq9mfGCCFJpv37LlmR_W0U7Sx4WMq5OC-Ij27UQEznXj-I9umwc7KAPskng-W9MuHXMFTDZAYzgPSP-T0T4GTJk7cD4hTzYMOG2r5YI8yhyFZPsyF8LUZZY4hAYN9LYmUWWktA7NvwbqsK0lVBWsHSDY36S_L_dQ2OHrOIL80kDY/s2000/Arconic.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Arconic: Fundamental Issues Coupled With No Margin Of Safety”" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihjzw-9YGJb5A1TqYTq9mfGCCFJpv37LlmR_W0U7Sx4WMq5OC-Ij27UQEznXj-I9umwc7KAPskng-W9MuHXMFTDZAYzgPSP-T0T4GTJk7cD4hTzYMOG2r5YI8yhyFZPsyF8LUZZY4hAYN9LYmUWWktA7NvwbqsK0lVBWsHSDY36S_L_dQ2OHrOIL80kDY/s16000/Arconic.png" title="Arconic: Fundamental Issues Coupled With No Margin Of Safety”" /></a></div><span><!--more--></span><div><br /></div><a style="text-align: left;"></a><div><h2>3. BlueLinx</h2><div>There is a strong correlation between BXC revenue and US Housing Starts. Housing Starts is cyclical and BXC should be analyzed and valued as a cyclical company.</div><div><br /></div><div>While BXC's past 2 years’ performance has been record-breaking, it does not represent its performance over the cycle. The Housing Starts has started its downtrend and I would expect the revenue of BXC to follow suit. However, the market is not pricing BXC as a cyclical company.</div><div><br /></div><div>The real valuation challenge is then what to use as the cyclical values. I have shown that if you use the historical averages, there is no margin of safety.</div><div><br /></div><div>But if you ignore the cyclical picture and use some projected values, you can have a margin of safety. The real question is whether it is appropriate to use such projected values for cyclical companies. </div><div><br /></div><div>I have mentioned about the limitations of my analysis. For example, a 20 % lower WACC could match the current market price. My point is that even with this, there is not enough margin of safety.</div><div><br /></div><div><span style="text-align: left;">From a conservative perspective, I would not invest in BXC currently. In other words, it is not a good US stock. For details refer to my Jan 2023 Seeking Alpha article</span><a style="text-align: left;"> “</a><a href="https://seekingalpha.com/article/4570558-bluelinx-market-not-pricing-cyclical-company" target="_blank">BlueLinx: The Market Is Not Pricing This As A Cyclical Company</a>”</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAlw9QcV8Wd0qGPgDoo_9TMKUKxv2PWAd0i1eEs9CHXATmeVxeAkloRgJszLf9EXBjalFjg-haykZ4VAx6LyxgBy33TrCcM5gfGZDbNzpIUUVSCY7gYsAWu7H39aRtjGihrHKLHANGT_GMP-Ne_rjrISOBaIa6n4j9BKeGY1jHGFFwIcFxjDyuOHhW/s2000/BlueLinx-min.png" style="margin-left: 1em; margin-right: 1em;" target="_blank"><img alt="BlueLinx: The Market Is Not Pricing This As A Cyclical Company" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAlw9QcV8Wd0qGPgDoo_9TMKUKxv2PWAd0i1eEs9CHXATmeVxeAkloRgJszLf9EXBjalFjg-haykZ4VAx6LyxgBy33TrCcM5gfGZDbNzpIUUVSCY7gYsAWu7H39aRtjGihrHKLHANGT_GMP-Ne_rjrISOBaIa6n4j9BKeGY1jHGFFwIcFxjDyuOHhW/s16000/BlueLinx-min.png" title="BlueLinx: The Market Is Not Pricing This As A Cyclical Company" /></a></div><span><!--more--></span><div><br /></div></div><div style="text-align: justify;"><h2>4. Boise Cascade</h2><div>Boise Cascade (BCC) is a US NYSE-listed company in the Lumber & Wood Production Industry that I classify as a good company.</div><div><br /></div><div>It is financially strong with the industry average debt-to-capital ratio while having a higher than industry cash position. Revenue is trending up through a combination of organic growth and M&A exercises.</div><div><br /></div><div>Management has been able to perform better than its peers from an operational perspective. However, there are issues with capital allocation. Over the past 8 years, the Wood Products segment investment has doubled the segment's operating income for the same period.</div><div><br /></div><div>At the current price, BCC is overpriced. The investment thesis is that while waiting for the price to decline to below the EPV level, BCC must also improve the business economics. Otherwise, there is no margin of safety at this level. </div><div><br /></div><div>This requires both a change in the capital allocation approach as well as improvements in the returns. Or else it could be a potential value trap. You should not be surprised that I have concerns about this US stock.</div><div><a href="goog_1991067338"><br /></a></div><div><span style="text-align: left;">Over the years, I have also contributed articles to Seeking Alpha about BCC. Refe</span><a style="text-align: left;">r to </a><div><a style="text-align: left;"></a><ul><a style="text-align: left;"></a><li><a style="text-align: left;"></a><a href="https://seekingalpha.com/article/4399814-boise-cascade-overpriced-and-potential-value-trap" target="_blank">Boise Cascade: Overpriced And A Potential Value Trap</a> - Jan 2021</li></ul><ul><li><a href="https://seekingalpha.com/article/4417143-boise-cascade-better-prospects-still-not-time-to-buy" target="_blank">Boise Cascade: Better Prospects But Still Not Time To Buy</a> - Apr 2021</li></ul><ul><li><a href="https://seekingalpha.com/article/4497167-boise-cascade-the-risk-is-in-the-valuation" target="_blank">Boise Cascade - The Risk Is In The Valuation</a> - Mac 2022</li></ul><ul><li><a href="https://seekingalpha.com/article/4563698-boise-cascade-cyclical-stock-value-as-such" target="_blank">Boise Cascade Is A Cyclical Stock - Value It As Such</a> - Dec 2022</li></ul></div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhM5gpwBOJsc-lG-e7q5TkXT8mXApKmskuSp5EI3tngFj7EuablgLwqUtz_yxuB-zXSoLK-8KeynRLnj_v3r_VO_vweIHqpQfy-j0YDbMYfGYVL2yy52Ke1wk1yjkUVgkUTAwyTiz3gbBo/s2000/Boise+Cascade+-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Boise Cascade a growth stock or a value stock?" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhM5gpwBOJsc-lG-e7q5TkXT8mXApKmskuSp5EI3tngFj7EuablgLwqUtz_yxuB-zXSoLK-8KeynRLnj_v3r_VO_vweIHqpQfy-j0YDbMYfGYVL2yy52Ke1wk1yjkUVgkUTAwyTiz3gbBo/s16000/Boise+Cascade+-min.png" title="Is Boise Cascade a growth stock or a value stock?" /></a></div><span><!--more--></span><div><br /></div></div><div style="text-align: justify;"><h2 style="text-align: left;"><a id="5. Builders FirstSource (BLDR)">5. Builders FirstSource (BLDR)</a></h2><div>Builders FirstSource achieved tremendous double-digit growth over the past few years. But this was the result of acquisitions and one-off extraordinarily high product prices. </div><div><br /></div><div>Its 2022 revenue is about 6.5 times larger than that in 2015. While revenue has grown, there are no clear improvements in the margins or asset utilization.</div><div><br /></div><div>Its strong performance was in the past 2 years. These were due to the tailwinds from the one-off price spike. Washing out the effects of the price spike and looking at its performance over the cycle, it is not a high-growth stock.</div><div><br /></div><div>While financially sound, BLDR’s performance is tied to the homebuilding sector, which is cyclical. As such, BLDR should be analyzed and valued as a cyclical company. On such a basis, there is no margin of safety at the current price.</div><div><br /></div><div>A Greenwald analysis showed that is not a “franchise” with a moat. There is no margin of safety based on the Greenwald return formula.</div><div><br /></div><div>Refer to the following Seeking Alpha articles:</div><div><ul><li><a href="https://seekingalpha.com/article/4575242-builders-firstsource-dont-be-mesmerized-by-the-past-few-years-performance" target="_blank">Builders FirstSource: Don't Be Mesmerized By The Past Few Years' Performance</a> - Feb 2023.</li></ul><ul><li><a href="https://seekingalpha.com/article/4586767-builders-firstsource-not-a-growth-stock-viewed-through-the-greenwald-lens" target="_blank">Builders FirstSource: Not A Growth Stock Viewed Through The Greenwald Lens</a> - Mac 2023.</li></ul></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitI088NQyr5mmGX0Z-d1t3s9jeQqFKPELr_DIhmOrOf4zwknvF21x2aL4cl-pSE6xRnHEC6WZDUjms9cn7270R1wBGN0lLaOu8UitBub4MQnB83ZGa84NHS2i4tHnjcmnIuMTYydTCmT7AnsTQLdqm4wSh70EGOG7uYqkkHDJ-3-1qFnzeB_N-cs13IE4/s2000/BLDR-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Builders FirstSource" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitI088NQyr5mmGX0Z-d1t3s9jeQqFKPELr_DIhmOrOf4zwknvF21x2aL4cl-pSE6xRnHEC6WZDUjms9cn7270R1wBGN0lLaOu8UitBub4MQnB83ZGa84NHS2i4tHnjcmnIuMTYydTCmT7AnsTQLdqm4wSh70EGOG7uYqkkHDJ-3-1qFnzeB_N-cs13IE4/s16000/BLDR-min.png" title="Builders FirstSource" /></a></div><span><!--more--></span><div><br /></div><div><h2>6. Capstone Green Energy</h2><div>CGRN is an ailing US microturbine manufacturer that has not been profitable since its IPO in 2000.</div><div><br /></div><div>There are 2 challenges facing CGRN. It has to strengthen its Balance Sheet and turn the business into a profitable one. It would need additional funding to solve the first. But to do this, it has to convince investors and/or financial institutions that it can deliver the second.</div><div><br /></div><div>But for CGRN to interest investors and/or other providers of Debt, it needs to show that the business is viable. This is not impossible as it has a products and distribution network. The market is growing and there is the possibility of extending its offerings to the air-bearing market.</div><div><br /></div><div>The historical losses are because it is operating below the break-even levels. There is a growing market but it needs time to rebuild back its sale volume. The current market price is below its Reproduction Value. </div><div><br /></div><div>All these are positive factors in seeking additional funding. It also makes CGRN an attractive acquisition target. But the funding has to be substantial. </div><div><br /></div><div>There is value to the business. I estimated that at the current price, CGRN is fairly valued. I would go in if the price drops to USD 1. I do not consider this a good US stock.</div></div><div><br /></div><div>For details, refer to my Oct 2022 Seeking Alpha article, "<a href="https://seekingalpha.com/article/4544777-capstone-green-energy-all-is-not-lost" target="_blank">Capstone Green Energy: All Is Not Lost</a>".</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvrQ3aLi9z1EG5sHVPr0POq7GwOICchS8oxwU2RbKncfCl9imV63AaM3eQfNySlqCy6PIyyK4swzydXCdTuUIwKs9Sdd0b8oXot56tfAHkgwrA-kUCLA00gkOk3u_ih1oEn2U4hrftV9L3300lgOef7NhjuPA5jo5qj_2qMUJBeAdgWZeo0cfP59DG/s2000/Capstone%20Green-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Capstone Green Energy- all is not lost" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvrQ3aLi9z1EG5sHVPr0POq7GwOICchS8oxwU2RbKncfCl9imV63AaM3eQfNySlqCy6PIyyK4swzydXCdTuUIwKs9Sdd0b8oXot56tfAHkgwrA-kUCLA00gkOk3u_ih1oEn2U4hrftV9L3300lgOef7NhjuPA5jo5qj_2qMUJBeAdgWZeo0cfP59DG/s16000/Capstone%20Green-min.png" title="Capstone Green Energy- all is not lost" /></a></div><span><!--more--></span><div><br /></div><div><div><h2>7. Century Aluminum</h2><div>Century Aluminum (CENX) is a global producer of primary aluminum. It operates 3 aluminum smelters in the United States and one in Iceland.</div><div><br /></div><div>CENX revenue grew faster than the demand for aluminum. Together with a 2 PBV multiple, you could think that this is a growth stock. But it is not.</div><div><br /></div><div>Revenue growth was partly due to the 2021/22 spike in commodity prices. But this is a sector with cyclical prices. The long-term aluminum price growth is only 1 % CAGR.</div><div><br /></div><div>PAT had not grown over the past 12 years. Gross profit margins were volatile without discernible growth trends. Production had to be curtailed.</div><div><br /></div><div>There are no fundamental reasons to support a growth picture. Also, a Greenwald Asset Value vs EPV analysis show that this is not a growth stock.</div><div><br /></div><div>For details, refer to my Apr 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4598286-century-aluminum-not-a-growth-stock" target="_blank">Century Aluminum Is Not A Growth Stock</a>”</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgt9OSO5dQrFxw47r_yiCmX4xiGpRMdiUbMa5z-wI0XR9L9WAoBw-T3_FCm4eG_z-E4wviAaa2GMwAV_9Rx08k8kikPHGLSmxEydaYPWKCVs_gejcUK_s87J30x3pnUgHqF_oASu0e9mlxVfrKvtlpyjF37AySfjuYjjY6mwGqfAWOn5l6ODEMJNpZAcpY/s2000/Century%20Aluminum.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Century Aluminum Is Not A Growth Stock" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgt9OSO5dQrFxw47r_yiCmX4xiGpRMdiUbMa5z-wI0XR9L9WAoBw-T3_FCm4eG_z-E4wviAaa2GMwAV_9Rx08k8kikPHGLSmxEydaYPWKCVs_gejcUK_s87J30x3pnUgHqF_oASu0e9mlxVfrKvtlpyjF37AySfjuYjjY6mwGqfAWOn5l6ODEMJNpZAcpY/s16000/Century%20Aluminum.png" title="Century Aluminum Is Not A Growth Stock" /></a></div><span><!--more--></span><div><br /></div></div><div><h2 style="text-align: left;">8. Constellium</h2><div>Constellium CSTM is a global leader in the development, manufacture, and sale of highly engineered, value-added specialty rolled and extruded aluminum products. The company has 3 major business segments with major operations and markets in Europe and North America.</div><div><br /></div><div>Constellium IPOed in 2013. It had a challenging performance during the first few years. But the past few years' results seem to suggest that it has turned around.</div><div><br /></div><div>Constellium's 6.8% CAGR in revenue over the past 10 years hides the low shipment growth. Its growth in selling price was also very much lower than that of aluminum.</div><div><br /></div><div>CSTM is a cyclical company, and any analysis and valuation should be based on its performance over the cycle.</div><div><br /></div><div>On such a basis, there is no margin of safety. I also have concerns about its profitability and financial strength. As such, this is not an investment opportunity.</div><div><br /></div><div>For details, refer to my May 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4606035-constellium-fundamental-issues-no-margin-of-safety" target="_blank">Constellium: Fundamental Issues Coupled With No Margin Of Safety</a>”</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDF0GuX8PUo2IeNWuILJ0Pzo1nQ-_BqwvaOM6hFe-PysFyw1GnKJnwkDzy6cp8lXKVeP0iWDW_K5GdsAGffR7-fuGnwEaQIfCyuUbUwNvL6FU9YFSbkZd4-FMHYxh3GpnCD6YkE6n4yRw1WBIO3rGpRRRIgydocEPa8zSaLL_6sJbuIBR4unrz80GAOY4/s2000/Constellium.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Constellium: Fundamental Issues Coupled With No Margin Of Safety" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDF0GuX8PUo2IeNWuILJ0Pzo1nQ-_BqwvaOM6hFe-PysFyw1GnKJnwkDzy6cp8lXKVeP0iWDW_K5GdsAGffR7-fuGnwEaQIfCyuUbUwNvL6FU9YFSbkZd4-FMHYxh3GpnCD6YkE6n4yRw1WBIO3rGpRRRIgydocEPa8zSaLL_6sJbuIBR4unrz80GAOY4/s16000/Constellium.png" title="Constellium: Fundamental Issues Coupled With No Margin Of Safety" /></a></div><span><!--more--></span><div><br /></div></div><div><h2>9. Cummins</h2><div>Cummins (CMI) designs, manufactures, distributes and services a wide range of engine-related products worldwide. These included diesel, natural gas, electric and hybrid powertrains and, powertrain-related components.</div><div><br /></div><div>CMI is fundamentally strong.</div><div><ul><li style="text-align: justify;">It has a very low net Debt-Equity ratio.</li></ul><ul><li style="text-align: justify;">It has achieved an average 23 % ROE from 2010 to 2020.</li></ul><ul><li style="text-align: justify;">It has been able to achieve a revenue CAGR of 4.1 % from 2010 to 2020. </li></ul><ul><li style="text-align: justify;">The Group had changed its business direction to take into account the market trends.</li></ul><ul><li style="text-align: justify;">Management is both a good operator as well as a capital allocator. </li></ul><ul><li style="text-align: justify;">The Group has a track record of creating shareholders value. </li></ul></div><div><br /></div><div>CMI has a good margin of safety. This comes from assuming that it can deliver high growth rates over the next 10 years. These are single digits growth rates just a few % points above the US long-term GDP growth rates. The numbers are not some mind-boggling growth rates.</div><div><br /></div><div>I would conclude that there is an investment opportunity here and that CMI is one of the better NYSE stocks to invest in. It is a good US stock. </div><div><br /></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjb5yCoMel-pXGjKjjLF56Al5LkCZOiXJCBwt24eO6-WMowUQHdPYdlGTQ5Kp90yLgdtxNfDyzlArQ2f7kftK-9QHTbfTCLaEw4VSRiw96HjzFLtIj-vy1XZivO9V1nvmT7HOgZyQMjti98Oa_zDbdkag0ClwjIeWfpXmTRQNLQERQWPsoZliQs47XJ=s2000" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Cummins one of the better NYSE stocks?" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/a/AVvXsEjb5yCoMel-pXGjKjjLF56Al5LkCZOiXJCBwt24eO6-WMowUQHdPYdlGTQ5Kp90yLgdtxNfDyzlArQ2f7kftK-9QHTbfTCLaEw4VSRiw96HjzFLtIj-vy1XZivO9V1nvmT7HOgZyQMjti98Oa_zDbdkag0ClwjIeWfpXmTRQNLQERQWPsoZliQs47XJ=s16000" title="Is Cummins one of the better NYSE stocks?" /></a></div><span><!--more--></span><div><br /></div></div></div><div><h2><span style="background-color: white;"><a id="10. D.R. Horton (DHI)" style="text-align: left;">10. D.R. Horton (DHI)</a></span></h2><div><span style="background-color: white;">DHI has been the largest homebuilder by volume in the United States since 2002 and has closed more than 1,000,000 homes in its 45-year history.</span></div><div><span style="background-color: white;"><br /></span></div><div><span style="background-color: white;">Despite its size and geographic spread, DHI had not been able to improve its gross profitability over the cycle. I would also rate its financial position as average.</span></div><div><span style="background-color: white;"><br /></span></div><div><span style="background-color: white;">From 2005 to 2022, its revenue grew at a CAGR of 5 %. During this period there was a strong correlation between its revenue and Housing Starts.</span></div><div><span style="background-color: white;"><br /></span></div><div><span style="background-color: white;">Housing Starts are cyclical. But over the past 70 years, there was no growth in the long-term annual average Housing Starts. As such, you should view DHI as a cyclical company, but with a small growth path.</span></div><div><span style="background-color: white;"><br /></span></div><div><span style="background-color: white;">I assumed that the cycle performance is represented by the 2005 to 2022 performance. This is pegging it to the latest peak-to-peak Housing Starts cycle.</span></div><div><span style="background-color: white;"><br /></span></div><div><span style="background-color: white;">My valuation of DHI on such a basis showed that I could not get a 30 % margin of safety even with various ways to calculate the gross profit margins. This is based on the view that there is no growth in the long-term annual average Housing Starts.</span></div><div><span style="background-color: white;"><br /></span></div><div><span style="background-color: white;">Even if I assumed that there is a 1/3 increase in the long-term annual average Housing Starts, the margin of safety is still lower than my 30% cut-off.</span></div><div><span style="background-color: white;"><br /></span></div><div><span style="background-color: white;">For details refer to my July 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4617295-dr-horton-cyclical-company-despite-size-geographical-spread" target="_blank">D.R. Horton: Still A Cyclical Company Despite Its Size And Geographical Spread</a>"</span></div></div><div><br /></div><div><div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhv-JkkwfSHKgdLqzXCmVEDYO0j9JMMzD3ZuXVudVPus5iiaqUnqhkW434UqkpNeFVHGdJpmEsvBz8s5KnkQW5GmPZ3_xAziWePW8NnaDHvYQ-nEjJLilfwJ_jHSGVh7jaKT501quQqGvBD-aPe-sU0z38Xo1xfGwoD0i_QrHIpSKDdX6dT1U8mHCgfwsxU/s2000/DR%20Horton%202023-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="D.R. Horton (DHI)" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhv-JkkwfSHKgdLqzXCmVEDYO0j9JMMzD3ZuXVudVPus5iiaqUnqhkW434UqkpNeFVHGdJpmEsvBz8s5KnkQW5GmPZ3_xAziWePW8NnaDHvYQ-nEjJLilfwJ_jHSGVh7jaKT501quQqGvBD-aPe-sU0z38Xo1xfGwoD0i_QrHIpSKDdX6dT1U8mHCgfwsxU/s16000/DR%20Horton%202023-min.png" title="D.R. Horton (DHI)" /></a></div><div style="background: white; line-height: normal; margin-bottom: 0cm;"><span><!--more--></span><br /><h2>11. eXp World Holdings</h2>EXPI was listed on Nasdaq in 2018 as a cloud-based residential real estate brokerage serving North America. Since then, the company has entered the international real estate brokerage business. It has also positioned itself as a technology platform that enables businesses to operate remotely.</div><div style="background: white; line-height: normal; margin-bottom: 0cm;"><br />Not only has EXPI increased the number of agents, but it also managed to improve the number of transactions per agent. This lead to increased revenue that translated to increased EBIT.</div><div style="background: white; line-height: normal; margin-bottom: 0cm;"><br />The company of course ascribe the revenue and earnings growth to its technology platform. The platform enables it to lower its operating costs and provide a better share of the commissions to the agents. It has also touted its training and coaching programs.</div><div style="background: white; line-height: normal; margin-bottom: 0cm;"><br />Despite the hype about its technology platform, the current performance of EXPI suggests that: <br /><ul><li>It is more of a realty brokerage that is leveraging technology, than</li></ul><ul><li>A technology platform making money from fees from an expanding network of users.</li></ul><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; line-height: normal; margin-bottom: 0cm;"><br /></div>The realtor business has experienced significant growth in the number of agents and revenue in the past five years, but signs of slowing growth are emerging.</div><div style="background: white; line-height: normal; margin-bottom: 0cm;"><br />The valuation of the realtor business does not provide a margin of safety, and the value of the technology platform is uncertain.</div><div style="background: white; line-height: normal; margin-bottom: 0cm;"><br />Refer to my 25 August 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4631177-exp-world-holdings-more-of-a-realtor-leveraging-on-tech" target="_blank">eXp World Holdings: More Of A Realtor Leveraging On Tech Than A Tech Platform Business”</a></div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDDOEQLrxNXqz7NyUIM2QTN3bU1j_HeOpWWkBq-CjZZHzNgi4rXhBEBlVgIQQ-vHipvxEnta-WcxDwXe9hfAs7rAETv2jNzzkLSKv1hgApGEP6mvo1N5j-jMhZ1gkGJz5zBn4ma3l4JDgwPYJ_h5n_wY-qOT0XKHoTUG_qPIWiTS9643i73lODJ3y3_CX_/s1500/ExP-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="eXp World Holdings: A Realtor Leveraging On Tech" border="0" data-original-height="1500" data-original-width="1000" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDDOEQLrxNXqz7NyUIM2QTN3bU1j_HeOpWWkBq-CjZZHzNgi4rXhBEBlVgIQQ-vHipvxEnta-WcxDwXe9hfAs7rAETv2jNzzkLSKv1hgApGEP6mvo1N5j-jMhZ1gkGJz5zBn4ma3l4JDgwPYJ_h5n_wY-qOT0XKHoTUG_qPIWiTS9643i73lODJ3y3_CX_/s16000/ExP-min.png" title="eXp World Holdings: A Realtor Leveraging On Tech" /></a></div><span><!--more--></span><div><br /></div><h2>12. Generac</h2><div>Power generation and storage are the key focus of the Group. Its success is built on its engineering expertise, manufacturing excellence, and innovative approaches.</div><div><br /></div><div>The analysis showed that GNRC is fundamentally strong. </div><div><ul><li style="text-align: justify;">It is financially healthy with a 0.6 Debt Equity ratio as of Jun 2021. The Group had been able to increase its ROE from 13 % in 2010 to 24 % in 2020. </li></ul><ul><li style="text-align: justify;">It achieved a 15.4 % CAGR in revenue from 2010 to 2020. About 1/3 of this has been from organic growth. The Group has been able to fund its growth from internally generated funds. </li></ul><ul><li style="text-align: justify;">The generator industry is not a sunset one. There are still prospects for growth. But the bigger growth will be from the international market where GNRC has a small presence.</li></ul><ul><li style="text-align: justify;">Management has a good track record for operations and capital allocation. </li></ul><ul><li style="text-align: justify;">It has been able to create shareholders’ value.</li></ul><ul><li style="text-align: justify;">The main risk - new acquisitions - seemed manageable.</li></ul></div><div><br /></div><div>Unfortunately, the current market price does not provide any margin of safety. The market is pricing GNRC at a growth rate that is not realistic. I would conclude that GNRC is a growth trap. It does not look like a good US stock to invest in.</div><div><br /></div><div>I have also written about this company in Seeking Alpha. Refer to:</div><div><ul><li><a href="https://seekingalpha.com/article/4506158-generac-not-running-on-full-power" target="_blank">Generac: Not Running On Full Power As The Earnings Seem To Be From Generators</a> - May 2022</li></ul><ul><li><a href="https://seekingalpha.com/article/4516740-generac-what-to-do-if-you-have-bought-it-at-a-high-price" target="_blank">Generac: What To Do If You Have Bought It At A High Price</a> - Jun 2022.</li></ul></div><div><br /></div></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgvRaK5vHo6Tc4M9xA1D-w--nEcXyGYwTK0xPaMbL4nqNwj35Gvj0iuvDANZWEbqYZ3YxMp9j28F6tqBm8ArubmLVYd-3LxgGDPZkXi8I5JCefxjRCBrkfFzIl5hlvkfojOWSLIHP5gwNj7jPXNdAZdMIxAEL7GhjGk4LCWM-Qtj8MrzX5cPk5oPKba=s2000" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Generac Holdings a growth trap?" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/a/AVvXsEgvRaK5vHo6Tc4M9xA1D-w--nEcXyGYwTK0xPaMbL4nqNwj35Gvj0iuvDANZWEbqYZ3YxMp9j28F6tqBm8ArubmLVYd-3LxgGDPZkXi8I5JCefxjRCBrkfFzIl5hlvkfojOWSLIHP5gwNj7jPXNdAZdMIxAEL7GhjGk4LCWM-Qtj8MrzX5cPk5oPKba=s16000" title="Is Generac Holdings a growth trap?" /></a></div><span><!--more--></span><div><br style="text-align: left;" /></div><div><h2>13. Graphic Packaging </h2><div>Graphic Packaging (GPK) is a leading provider of sustainable fiber-based packaging solutions to the F&B, and other consumer products companies. It has 3 reportable business segments.</div><div><br /></div><div>While GPK had achieved revenue and profit growths over the past 8 years, these were driven by acquisitions rather than efficiency or productivity improvements.</div><div><br /></div><div>There are limits to this growth by acquisitions. Firstly, the Reinvestments to drive growth are at an unsustainable Reinvestment rate. Secondly, it has resulted in high leverage.</div><div><br /></div><div>The packaging sector is not a high-growth one. I think the company is nearing a stage where the tough part of Vision 2025 - productivity-driven margin improvement – has a central role. But there is no trend of such efficiency and productivity improvements over the past 8 years.</div><div><br /></div><div>My analysis and valuation showed that there is only a margin of safety if there are efficiency and productivity improvements. Revenue growth alone is not sufficient.</div><div><br /></div><div>You can understand why I do not consider GPK stock an investment opportunity as I have yet to see a track record of productivity-driven margin improvements.</div><div><br /></div><div>For details refer to my 7 Sep 2023 article on Seeking Alpha “<a href="https://seekingalpha.com/article/4633649-graphic-packaging-to-deliver-productivity-driven-margin-improvement-vision-2025" target="_blank">Graphic Packaging: Yet To Deliver The Productivity-Driven Margin Improvement Of Vision 2025</a>”</div><div><br /></div></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhuWVwDcW6PMGf06dv-Xnt1tfefxrpxrIJI0WJzuHtaM1qXOR0ls1UzbOALU5HxGqtr5YYHcZ1yrrykAa-AkZQv3pe0W4HYauTTHpOwNEUreh8kZeO1hetfEzG0jf1794fMnn5x1yhLTuGwdSRWVsn6G7vggktnJMv6UlSik3gY6K3zR89pzrxjJT8iMIF2" style="margin-left: 1em; margin-right: 1em;"><img alt="GPK - still waiting for Vision 2025" data-original-height="1500" data-original-width="1000" src="https://blogger.googleusercontent.com/img/a/AVvXsEhuWVwDcW6PMGf06dv-Xnt1tfefxrpxrIJI0WJzuHtaM1qXOR0ls1UzbOALU5HxGqtr5YYHcZ1yrrykAa-AkZQv3pe0W4HYauTTHpOwNEUreh8kZeO1hetfEzG0jf1794fMnn5x1yhLTuGwdSRWVsn6G7vggktnJMv6UlSik3gY6K3zR89pzrxjJT8iMIF2=s16000" title="GPK - still waiting for Vision 2025" /></a></div></div><span><!--more--></span><div><br /></div><div><div><h2 style="text-align: left;">14. Innovative Industrial Properties</h2><div>Innovative Industrial Properties (IIPR) is the first publicly traded company on the New York Stock Exchange to provide real estate capital to the regulated cannabis industry. </div><div><br /></div><div>This is an investment where I cautioned about going in currently based on the following:</div><div><ul><li>IIPR had grown its lettable area and AFFO per share 6 to 7 folds since its IPO in 2016. </li></ul><ul><li>While the company has grown significantly, this was driven by its financing strategy rather than operating or marketing strategies. </li></ul><ul><li>Its property acquisitions were funded by equity that benefited from increasing share prices. AFFO per share growth was due to the rents increasing at a faster rate than the number of shares.</li></ul><ul><li>The current economic situation is different. It will be more challenging to fund its acquisition via equity given the lower share price. The lower share price also meant more shares issuance which will affect the AFFO per share.</li></ul><ul><li>Given the high-interest rate, the decline in IIPR share price, and the potential recession, this model is no longer tenable. IIPR would find it challenging to grow its lettable areas as well as grow its AFFO per share.</li></ul><ul><li>Looking at IIPR through a no-growth lens, there is no margin of safety at the current market price</li></ul></div><div><br /></div><div>You can understand why I don’t consider this company a good US stock. For details refer to:</div><div><ul><li><a href="https://seekingalpha.com/article/4528252-innovative-industrial-properties-iipr-stock-growth-challenging" target="_blank">Innovative Industrial Properties: Growth Will Likely Be More Challenging</a> – Seeking Alpha, Aug 2022.</li></ul></div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhD6iXZGw9thDVF5KZeicG5eAHcJES9supw4iiK0FQuuew3WZeKlzJetG3CyFj4FvSpGt2r25uVlulxUc4_qAN4-vYtA1DxNrU_Ae5FJnrUJzjFn82mrA7zAHLq4RCcdrkr5NBu6RuCLHD2nbkQJFRlhNsEB5TB-Ga3TYvPVzbrtMBcrWEwG7UU3eDz/s2000/IIPR-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Innovative Industrial Properties" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhD6iXZGw9thDVF5KZeicG5eAHcJES9supw4iiK0FQuuew3WZeKlzJetG3CyFj4FvSpGt2r25uVlulxUc4_qAN4-vYtA1DxNrU_Ae5FJnrUJzjFn82mrA7zAHLq4RCcdrkr5NBu6RuCLHD2nbkQJFRlhNsEB5TB-Ga3TYvPVzbrtMBcrWEwG7UU3eDz/s16000/IIPR-min.png" title="Innovative Industrial Properties" /></a></div><span><!--more--></span><div><br /></div></div><div><h2><a id="15. Installed Building Products" style="text-align: left;">15. Installed Building Products</a></h2><div>Installed Building Products (IBP) IPOed in 2014 as the second largest new residential insulation installer in the US. </div><div><br /></div><div>Over the past 9 years, IBP benefited from the growth in total construction spending. There was a multiplier effect as IBP also had an acquisition program that benefited from the growth in construction spending.</div><div><br /></div><div>The company used the construction spending tailwinds to grow its revenue and profits manyfold. </div><div><br /></div><div>But profit growth was driven more by improvements in margins rather than improvements in capital efficiency. But further margins improvement will be difficult when revenue growth declines.</div><div><br /></div><div>The total construction spending is cyclical and the company has positioned itself to mitigate the cyclical impact.</div><div><br /></div><div>But its growth was driven by an unstainable Reinvestment rate. This meant that growth will have to slow down. I expect a reduction in acquisitions. But this is manageable as most of the acquisitions are small-sized ones.</div><div><br /></div><div>Historically, acquisitions accounted for a larger part of the growth. When there is a reduction in acquisitions, I would expect growth to slow down a lot.</div><div><br /></div><div>The issue is its current stock price. Based on an optimistic valuation model and assuming a slowdown in growth, there is no margin of safety.</div><div><br /></div><div>For details, refer to my 18 Aug 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4629559-installed-building-products-not-a-sustainable-reinvestment-rate" target="_blank">Installed Building Products: Not A Sustainable Reinvestment Rate”</a></div></div><div><br /></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEiUq_Gdqh05peBi1cyBiht3nWY2I9iPl-eAHC3FG3d1P5aADMiD4UizLBbzbnEoU8AgTdNa1NI7l_gzLxpk0AwzEmO99X6yVd46OpX86TaBRfzJwbfItEegIfTf0UTqKbD4eYQURkolk0azRLcOUC_DHkGZu38pxG84VI0Uxcr9oL6emeyWS5n4QOZpl5wM" style="margin-left: 1em; margin-right: 1em;"><img alt="IBP has an unsustainable reinvestment rate" data-original-height="1500" data-original-width="1000" src="https://blogger.googleusercontent.com/img/a/AVvXsEiUq_Gdqh05peBi1cyBiht3nWY2I9iPl-eAHC3FG3d1P5aADMiD4UizLBbzbnEoU8AgTdNa1NI7l_gzLxpk0AwzEmO99X6yVd46OpX86TaBRfzJwbfItEegIfTf0UTqKbD4eYQURkolk0azRLcOUC_DHkGZu38pxG84VI0Uxcr9oL6emeyWS5n4QOZpl5wM=s16000" title="IBP has an unsustainable reinvestment rate" /></a></div></div><span><!--more--></span><div><div><div><br /></div><h2>16. Kaiser Aluminum</h2><div>Kaiser Aluminum (KALU) serves the cyclical aluminum sector. But it tries to negate the cyclical impact with its “metal price neutral” approach using Conversion Revenue as the key top-line metric.</div><div><br /></div><div>There is a 0.85 correlation between Conversion Revenue and aluminum prices making KALU a cyclical company. Any analysis and valuation should be based on its performance over the cycle.</div><div><br /></div><div>However, only the GE product is cyclical. To value KALU, I had to consider the various products that perform differently. I used a sum-of-parts approach to consolidate them.</div><div>On such a part cyclical lens, there is not enough margin of safety. There is only a margin of safety if you ignore the evidence that it is a part cyclical company.</div><div><br /></div><div>For details, refer to my May 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4603560-kaiser-aluminum-stock-q1-earnings-metal-price-neutral-approach-not-working-fully" target="_blank">Kaiser Aluminum: The Metal Price Neutral Approach Is Not Working Fully</a>”</div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMPhUKnB0QrByAzfdRyiB8BJ5FNQcIwm5Ec1x_kcsboWVy0SjJH68SDKgZ7BUkqyEDm9-NMzbNNJX58Hqz7tlBU_ACJAqyRknRk5dmLyP-gjZppCXbH15_uORiOhesZ86eLzvPzUtFzYD-rYjjlJIzZu6nvKoZ4eKRcM3bXVk5Cme_sLqEbMvCmMr9ylQ/s2000/Kaiser%20Aluminum.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Kaiser Aluminum: The Metal Price Neutral Approach Is Not Working Fully" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMPhUKnB0QrByAzfdRyiB8BJ5FNQcIwm5Ec1x_kcsboWVy0SjJH68SDKgZ7BUkqyEDm9-NMzbNNJX58Hqz7tlBU_ACJAqyRknRk5dmLyP-gjZppCXbH15_uORiOhesZ86eLzvPzUtFzYD-rYjjlJIzZu6nvKoZ4eKRcM3bXVk5Cme_sLqEbMvCmMr9ylQ/s16000/Kaiser%20Aluminum.png" title="Kaiser Aluminum: The Metal Price Neutral Approach Is Not Working Fully" /></a></div><span><!--more--></span><div><br /></div></div><div><h2>17. KB Home (KBH)</h2><div>KBH is a mid-sized US homebuilder with a concentrated geographical coverage. Its homebuilding operations span only 9 states.</div><div><br /></div><div>KBH has not achieved any revenue growth over the past 18 years and has poor financial position and low returns.</div><div><ul><li>Its revenue shrank from 2005 to 2022.</li></ul><ul><li>It incurred losses from 2007 to 2012.</li></ul><ul><li>It did poorly on 2 of the financial metrics – cash on hand and Debt Equity ratio.</li></ul><ul><li>It has not been able to achieve a return over the cycle that is greater than the cost of funds.</li></ul><ul><li>It has not been able to deliver the asset efficiency part of its KB Edge strategy. There was no improvement in gross profitability and asset turnover.</li></ul></div><div><br /></div><div>KB Home is a cyclical company with a strong correlation between its revenue and housing starts. Any analysis, and valuation of KBH should be based on its performance over the cycle.</div><div><br /></div><div>I assumed that the cycle is represented by the 2005 to 2022 performance. This is pegging it to the latest peak-to-peak Housing Starts cycle.</div><div><br /></div><div>The EPV of KBH on such a basis showed that there is no margin of safety under all the 3 Scenarios. I would not invest in KBH from both the margin of safety and business fundamentals perspective.</div><div><br /></div><div>For details refer to my Aug 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4625188-kb-home-revenue-shrank-over-the-cycle" target="_blank">KB Home: Revenue Shrank Over The Cycle</a>"</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZQlVetcM4CoLhzjWfAQ6CjyVG6tFtf11Td0beWvEHDrrInCS_JJZDLQh54JwDUCnaAqVAde2FNhuR_6Yl2XEUbe5Dr5MGEs0Z2-zpfbbtvb8K9eYS15JLlZKW-8vNOrAxw5PmEXIXjG8X5IIv5ODTrrVcV82RJepbWT-Nsq5aM1-2Pz8lTBAHLRhY8LO1/s2000/KB%20Homes%202023-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="KB Home" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZQlVetcM4CoLhzjWfAQ6CjyVG6tFtf11Td0beWvEHDrrInCS_JJZDLQh54JwDUCnaAqVAde2FNhuR_6Yl2XEUbe5Dr5MGEs0Z2-zpfbbtvb8K9eYS15JLlZKW-8vNOrAxw5PmEXIXjG8X5IIv5ODTrrVcV82RJepbWT-Nsq5aM1-2Pz8lTBAHLRhY8LO1/s16000/KB%20Homes%202023-min.png" title="KB Home" /></a></div><span><!--more--></span><div><br /></div><div><div><h2>18. Leggett & Platt</h2><div>LEG is a pioneer in sleep technology. Today the Group conceives, designs, and produces a diverse array of products that can be found in most homes, offices, and vehicles. </div><div><br /></div><div>By analyzing LEG as comprising a Special Foam division and a Classic LEG division, you can see the growth potential for LEG.</div><div><ul><li style="text-align: justify;">The Classic LEG division is a “steady” business with revenue growing at a CAGR of 2.2 % from 2010 to 2019.</li></ul><ul><li style="text-align: justify;">The Specialty Foam division is in a growth sector with double-digit revenue growth in 2019.</li></ul></div><div><br /></div><div>LEG management has extolled the Specialty Foam contribution to LEG's bedding business. The question is whether it will be able to transform the Group into a growth stock. For this to happen, the following must occur:</div><div><ul><li style="text-align: justify;">The Specialty Foam division growth must result in double-digit growth for the Group.</li></ul><ul><li style="text-align: justify;">The intrinsic value of the Group must far exceed the current market price.</li></ul></div><div><br /></div><div>The revenue growth for the Group in the first quarter of 2021 barely touched 10%. The Group has not reported whether this growth was driven by the Specialty Foam division. At the same time, there is no conclusive evidence that the Group can sustain an overall growth rate of more than 10 % for several years. </div><div><br /></div><div>There is currently no margin of safety even if you viewed the Specialty Foam Division as a growth segment. At the current price, LEG is a growth trap. Why would you consider this company a good US stock?</div><div><br /></div><div>I have also written about LEG for Seeking Alpha. Refer to:</div><div><ul><li><a href="https://seekingalpha.com/article/4407896-leggett-platt-specialty-foam-potential" target="_blank">Leggett & Platt: The Specialty Foam Potential</a> - Feb 2021</li></ul><ul><li><a href="https://seekingalpha.com/article/4544078-leggett-and-platt-limited-financial-benefits-from-ecs-acquisition" target="_blank">Leggett & Platt: Limited Financial Benefits From ECS Acquisition</a> - Sep 2022</li></ul></div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkUT3Il9Kf51hncL0iJQrUxD4sFNvyDmLTQb40w9bsoWwDiK6OYwgcYqftr_0P1vB4T2cAQhZV9JTUL2FbOjYlyVuCXyQbM75W_1VymuBkI_Btnd7IN1YmJVvURmj4itrz-Iu7u43pVRU/s2000/Leggett+%2526+Platt-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Leggett & Platt a growth trap?" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkUT3Il9Kf51hncL0iJQrUxD4sFNvyDmLTQb40w9bsoWwDiK6OYwgcYqftr_0P1vB4T2cAQhZV9JTUL2FbOjYlyVuCXyQbM75W_1VymuBkI_Btnd7IN1YmJVvURmj4itrz-Iu7u43pVRU/s16000/Leggett+%2526+Platt-min.png" title="Is Leggett & Platt a growth trap?" /></a></div><span><!--more--></span><div><br style="text-align: left;" /></div></div><div><div><div><h2 style="text-align: left;">19. Lennar</h2><div>The homebuilding sector is cyclical. There is a 0.6 correlation between the US Housing Starts and LEN's revenue. </div><div><br /></div><div>Any valuation of LEN should be based on its cyclical performance, adjusted by the impairment. But the size of the impairment would depend on the duration and depth of the downtrend.</div><div><br /></div><div>The challenge is in determining LEN’s cyclical value. This is because Lennar is a different entity today compared to the pre-2017 periods due to the acquisitions. At the same time, there is uncertainty about the duration and the peak-to-trough values of the cycle.</div><div><br /></div><div><div>To overcome these issues, I had covered Lennar twice over the past few years. The general conclusion remains the same.</div><div><br /></div><div>Taking all these into consideration, there is no margin of safety. For details refer to my Seeking Alpha articles:</div></div><div><ul><li><a href="https://seekingalpha.com/article/4561320-lennar-no-margin-of-safety-from-cyclical-perspective" target="_blank">Lennar: No Margin Of Safety From A Cyclical Perspective</a> - Nov 2022.</li></ul><ul><li><a href="https://seekingalpha.com/article/4609737-lennar-the-market-isnt-considering-the-cyclical-evidence" target="_blank">Lennar: The Market Likely Isn't Considering The Cyclical Evidence</a> - June 2023.</li></ul></div></div><div class="separator" style="clear: both; text-align: center;"><br /></div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIhQWdViQCtBFOSihhxFmgmV7lqF49VvzrgSVmVOwpySkSGNDnF_50-tG34Kv-hqxxo0VmPsHr3UR7wnbX2xmJB4-Am2FriLdc7GAGVx4MfWW0StSCdMShwvOgQsmwIn8_6miWZD8mDtcDdd7tX6SwL7LCADfOT3NleDqj4G0ufMCULHj1DKrYexbfRGk/s2000/Lennar%20-%20cyclical%20series.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Lennar: The Market Likely Isn't Considering The Cyclical Evidence" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIhQWdViQCtBFOSihhxFmgmV7lqF49VvzrgSVmVOwpySkSGNDnF_50-tG34Kv-hqxxo0VmPsHr3UR7wnbX2xmJB4-Am2FriLdc7GAGVx4MfWW0StSCdMShwvOgQsmwIn8_6miWZD8mDtcDdd7tX6SwL7LCADfOT3NleDqj4G0ufMCULHj1DKrYexbfRGk/s16000/Lennar%20-%20cyclical%20series.png" title="Lennar: The Market Likely Isn't Considering The Cyclical Evidence" /></a></div><span><!--more--></span><div><br /></div></div><div><div><h2><a id="20. Martin Marietta" style="text-align: left;">20. Martin Marietta</a></h2><div>Martin Marietta Materials Inc has managed to grow its revenue at a faster pace than total construction spending over the past 17 years. This was via a combination of acquisitions and changes in the product mix. </div><div><br /></div><div>MLM serves a low-growth cyclical construction sector. The growths and changes did not translate into positive trends for all the metrics that drove returns. ROE declined. Gross profitability also declined. Capital efficiency got worse.</div><div><br /></div><div>A Greenwald "Asset Value vs. EPV" analysis indicates that this is not a "franchise”. This is not a growth stock. The appropriate valuation metric is EPV. On such a basis there is no margin of safety at the current price.</div><div><br /></div><div>Refer to the Feb 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4580533-martin-marietta-materials-revenue-growth-hides-real-picture" target="_blank">Martin Marietta Materials: Revenue Growth Hides The Real Picture</a>”</div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJ8Xb5k68BKBAFTaAGBrc80LVbHv0c_9eP0jHo7l8Y2gyQQRAqhhJO7iUFmkN_MxqdadVO9yyQ1DWn9SG08mVJiQuk781DZWwiWwnIENXZsFRZeSQ2QxuGHad4csiCNhWTk85OMiX-cxPoZfPZwQgtPpBoL-fd1P1zHoSDg2gYYe9NVonexBGqHlMV8Rs/s2000/MLM-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Martin Marietta" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJ8Xb5k68BKBAFTaAGBrc80LVbHv0c_9eP0jHo7l8Y2gyQQRAqhhJO7iUFmkN_MxqdadVO9yyQ1DWn9SG08mVJiQuk781DZWwiWwnIENXZsFRZeSQ2QxuGHad4csiCNhWTk85OMiX-cxPoZfPZwQgtPpBoL-fd1P1zHoSDg2gYYe9NVonexBGqHlMV8Rs/s16000/MLM-min.png" title="Martin Marietta" /></a></div><span><!--more--></span><div><br /></div></div><div><div><h2 style="text-align: left;">21. Masonite (DOOR)</h2><div>Masonite International Corporation (NYSE: DOOR) is a cyclical company. Its recent good performance was due to being in the uptrend leg of the cycle. There is a strong correlation between DOOR revenue and the US Housing Starts. As such I would peg DOOR's cyclical performance to that of Housing Starts. </div><div><br /></div><div>There is also a strong correlation between revenue, gross profit margins, and gross profitability. When revenue declines so will these margins and returns. At the same time, SGA appears “sticky”.</div><div><br /></div><div>While it delivered a 30 % ROE for FYE Jan 2023, its long-term performance and value should be viewed through a cyclical lens.</div><div><br /></div><div>Based on the cyclical lens, there is no margin of safety at the current market price. The market is pricing DOOR as if it can continue to grow revenue and improve its margins.</div><div><br /></div><div>For details, refer to my Mac 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4590017-masonite-international-market-not-pricing-cyclical-company" target="_blank">Masonite International: The Market Is Not Pricing This As A Cyclical Company</a>”</div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtp9Dnz2l22V8jyipv25JWNU3hUjGnfxXW-L-Fdz9mZAg1bWPsjK8MTdftI55T_4wOlbXA-6HYHwmlvLFvJKOgQbk9bAxoxyjs2fxXirrOlveSTsYpg8lCX1h0nYrglXSzfK8ph4jY3BsJ9jB8RJVO4631bPba-B2vuRBTrLjrQw_HfIWwTVTu68-dfOQ/s2000/DOOR-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Masonite" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtp9Dnz2l22V8jyipv25JWNU3hUjGnfxXW-L-Fdz9mZAg1bWPsjK8MTdftI55T_4wOlbXA-6HYHwmlvLFvJKOgQbk9bAxoxyjs2fxXirrOlveSTsYpg8lCX1h0nYrglXSzfK8ph4jY3BsJ9jB8RJVO4631bPba-B2vuRBTrLjrQw_HfIWwTVTu68-dfOQ/s16000/DOOR-min.png" title="Masonite" /></a></div><span><!--more--></span><div><br /></div></div><div><div><h2>22. M.D.C. Holdings (MDC)</h2><div><div>I first covered MDC is Jan 2022 where I concluded that there was not margin of safety. This is an updated analysis of MDC. </div><div><br /></div><div>MDC is no-growth company in a no-growth cyclical sector. </div><div><ul><li>MDC had hardly any revenue growth over the past 18 years and should be valued based on its cyclical Earnings Power Value.</li></ul><ul><li>MDC is a cyclical company as its performance is tied to US Housing Starts, where there was no growth in the long-term annual average over the past 70 years.</li></ul></div><div><br /></div><div>Any analysis, and valuation of MDC should be based on its EPV over the cycle.</div><div><br /></div><div>I assumed that the cycle is represented by the 2005 to 2022 performance. This is pegging it to the latest peak-to-peak Housing Starts cycle.</div><div><br /></div><div>My valuation of MDC on an EPV basis and over the cycle showed that there is a 16% to 41 % margin of safety depending on how you calculate the gross profit margins. This is based on the view that there is no growth in the long-term annual average Housing Starts.</div><div><br /></div><div>If you assumed that there is a 1/3 increase in the long-term annual average Housing Starts, the margin of safety would be greater than my 30% cut-off.</div><div><br /></div><div>For details, refer to:</div><div><ul><li style="text-align: justify;"><a href="https://seekingalpha.com/article/4491712-mdc-holdings-is-a-cigar-butt-opportunity" target="_blank">MDC Holdings Is A Cigar-Butt Opportunity</a> – Seeking Alpha, Mac 2022.</li></ul><ul><li style="text-align: justify;"><a href="https://seekingalpha.com/article/4615923-mdc-not-best-financially-has-margin-of-safety" target="_blank">M.D.C. Holdings: Not The Best Financially But Has A Margin Of Safety</a> – Seeking Alpha, July 2023</li></ul><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_qj_lQxAoWXfvL6jgMVjDKVhEiDjyDqj7ue7MEKhOBYYnDekzAKGNk9jasIUGG7hZ9WPGgsKEnFgREX5Lc6e17eNyHShuww3h-gztg8nCxSn3dvTbJ1YkYLzxOwfqECISLCA4Var-cwZzy73YQTeTxHBDPDU8n_gYJyYGUFaOGaK6HP1RqDkRrrgB69vg/s2000/MDC%202023-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="MDC" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_qj_lQxAoWXfvL6jgMVjDKVhEiDjyDqj7ue7MEKhOBYYnDekzAKGNk9jasIUGG7hZ9WPGgsKEnFgREX5Lc6e17eNyHShuww3h-gztg8nCxSn3dvTbJ1YkYLzxOwfqECISLCA4Var-cwZzy73YQTeTxHBDPDU8n_gYJyYGUFaOGaK6HP1RqDkRrrgB69vg/s16000/MDC%202023-min.png" title="MDC" /></a></div></div><span><!--more--></span><div><br /></div></div><h2>23. Meritage Homes</h2><div><div><div>I first covered Meritage Homes (MTH) in Nov 2022 and concluded that there was likely no margin of safety even though the current market price at USD 84 per share was below the Asset Value.</div><div><div><br /></div><div>I was also worried about this company being a good US stock. The positive point was that MTH is financially sound and would probably be able to withstand the impact of a downtrend.</div><div><br /></div><div>In this update, I maintained that it is a cyclical company with average fundamentals. </div><div><ul><li>Its revenue from 2005 to 2022 was strongly correlated with Housing Starts. Any analysis, and valuation of MTH should be based on its performance over the cycle.</li></ul><ul><li>I would rate MTH's performance and financial position as average. It had not been able to improve its gross profitability over the cycle.</li></ul></div><div><br /></div><div>I assumed that the cycle is represented by the 2005 to 2022 performance. This is pegging it to the latest peak-to-peak Housing Starts cycle.</div><div><br /></div><div>My valuation of MTH on such a basis showed that I could not get a 30 % margin of safety even with various ways to calculate the gross profit margins. This is based on the view that there is no growth in the long-term annual average Housing Starts.</div><div><br /></div><div>But if you assumed that there is a 1/3 increase in the long-term annual average Housing, there would be more than a 30% margin of safety. I do not view this as realistic.</div><div><br /></div><div>For details, refer to my Seeking Alpha articles:</div><div><br /></div><div><ul><li><a href="https://seekingalpha.com/article/4558077-meritage-homes-look-at-its-performance-over-the-cycle" target="_blank">Meritage Homes: Look At Its Performance Over The Cycle</a> – Nov 2022</li></ul><ul><li><a href="https://seekingalpha.com/article/4619011-meritage-not-an-investment-opportunity" target="_blank">Meritage - Not An Investment Opportunity</a> – July 2023</li></ul></div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4D3NeJTZUyp468-heQ5ufRNllCL9TMsQaoEO_zdyW5zeUS6qUMtiW0psfurMN6vuJDytcFg0IhFYQlTmCjJHC0A_rFt6C-470I38P5OWqGYF-GMS0d8vM-FHLdZ10fsxHloClGM9ghpxx-OD-JdHWNtYbDagZDcn6xJG7wGo1C6RpPUycn6KoRJbvGJwI/s2000/Meritage%202023-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Meritage" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4D3NeJTZUyp468-heQ5ufRNllCL9TMsQaoEO_zdyW5zeUS6qUMtiW0psfurMN6vuJDytcFg0IhFYQlTmCjJHC0A_rFt6C-470I38P5OWqGYF-GMS0d8vM-FHLdZ10fsxHloClGM9ghpxx-OD-JdHWNtYbDagZDcn6xJG7wGo1C6RpPUycn6KoRJbvGJwI/s16000/Meritage%202023-min.png" title="Meritage" /></a></div></div><span><!--more--></span><div><br /></div></div><div><h2>24. M/I Home (M/I)</h2><div>M/I is a small-sized US homebuilder operating in 9 states.</div><div><br /></div><div>From 2005 to 2022, there was a 0.71 correlation between the homes delivered by M/I and Housing Starts. Housing Starts are cyclical making M/I a cyclical company.</div><div><br /></div><div>In 2022, M/I was a much bigger company compared to that in 2005. Its 2022 revenue was 3 times bigger while its Net Income was almost 5 times larger. Unfortunately, its capital efficiency as measured by the gross profitability did not improve. I would also rate M/I's financial position as poor.</div><div><br /></div><div>About 1/3 of its revenue growth was driven by growth in house prices. As such, I valued M/I as a cyclical company, but with a growth path capped at the US long-term GDP growth rate of 5%.</div><div><br /></div><div>A valuation of M/I on such a basis with different gross profit margin assumptions showed that there is not enough margin of safety even under the most optimistic scenario. </div><div><br /></div><div>For details refer to my July 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4621880-mi-homes-no-margin-of-safety" target="_blank">M/I Homes: No Margin Of Safety Even With Optimistic Scenarios</a>”</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrHj-5Hck2qmqnd94N4iBFRK94neISqbv8KZsR2YvniMDN7uHnMPMFM9vu4iv2WVUMpC6OcxqyYs4RKs70j8b7SiqaGAXLy9YNGKBmVaYQXEKqqYuWwZzaeJukm1C35IEpto_nr_MKYxq93PQWxACmIr66djwdfSSEMEn5nq5nwOLBesyx-RGezwQja3Wz/s2000/MI%20Homes%202023-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="M/I Homes" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrHj-5Hck2qmqnd94N4iBFRK94neISqbv8KZsR2YvniMDN7uHnMPMFM9vu4iv2WVUMpC6OcxqyYs4RKs70j8b7SiqaGAXLy9YNGKBmVaYQXEKqqYuWwZzaeJukm1C35IEpto_nr_MKYxq93PQWxACmIr66djwdfSSEMEn5nq5nwOLBesyx-RGezwQja3Wz/s16000/MI%20Homes%202023-min.png" title="M/I Homes" /></a></div><span><!--more--></span><div><br /></div><div style="text-align: left;"><div style="text-align: justify;"><h2><a id="25. NVR" style="text-align: left;">25. NVR</a><span style="text-align: left;"> </span></h2><div>I first covered NVR in 2022 and found that the market price of NVR had declined to USD 3,951 per share as of 28 Jun 2022. Despite the decline in the share price, there is still a good margin of safety. As such I would consider NVR as one of the better NYSE stocks to invest in. In other words, it is a good US stock.</div><div><br /></div><div>This is an update of NVR. </div><div><br /></div><div>I would rate NVR as financially sound, with strong performance over the past cycle - 2005 to 2022 (peak-to-peak).</div><div><br /></div><div>But I would not consider it a high-growth one. NVR is a low-growth cyclical company as its performance is tied to US Housing Starts where there was no growth in the long-term annual average over the past 70 years.</div><div><br /></div><div>Given this and that it is a cyclical company, any analysis, and valuation of NVR should be based on its performance over the cycle.</div><div><br /></div><div>I assumed that the cycle is represented by the 2005 to 2022 performance. This is pegging it to the latest peak-to-peak Housing Starts cycle.</div><div><br /></div><div>My valuation of NVR over the cycle showed that there is no margin of safety. The crux of my valuation is that there is no long-term annual average Housing Starts growth.</div><div><br /></div><div>Even if you assumed that there is a 1/3 increase in the long-term annual average Housing Starts, my analysis showed that there is only a 12% margin of safety if I assumed that it would take 5 years to reach this increased level. This is not sufficient as my target is a 30% margin of safety.</div><div><br /></div><div>There is also not enough margin of safety if you assumed that NVR is a non-cyclical company and that the past 2 years’ performance represented its future.</div><div><br /></div><div>For details, refer to the following:</div><div><ul style="text-align: left;"><li style="text-align: justify;"><a href="https://seekingalpha.com/article/4502607-nvr-good-jockey-high-inflation-environment" target="_blank">NVR: A Good Jockey On A Strong Horse Riding Into A High Inflation Environment</a> – Seeking Alpha, Apr 2022.</li></ul></div><div><ul><li><a href="https://seekingalpha.com/article/4614783-nvr-lots-of-cash-but-no-margin-of-safety" target="_blank">NVR: Lots Of Cash But No Margin Of Safety</a> – Seeking Alpha, July 2023</li></ul></div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh58Zcb0STPbstPDSmZ1FhIe65LPbETG39AAZt5U_EsxXC1UiQEfMPMonrN6puqpXmLYihrl0rQWfqN2JhJnrdsVguqP_380LN4WDdP2SXCgJfAo56sBfkXkqKRs0MIBOtqaum4ziAEX63_NvOSOINGQ_xUswW3RTIoV0FxqoGTQ7Qo_7LAaZuVahe_JBJl/s2000/NVR%202023-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="NVR" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh58Zcb0STPbstPDSmZ1FhIe65LPbETG39AAZt5U_EsxXC1UiQEfMPMonrN6puqpXmLYihrl0rQWfqN2JhJnrdsVguqP_380LN4WDdP2SXCgJfAo56sBfkXkqKRs0MIBOtqaum4ziAEX63_NvOSOINGQ_xUswW3RTIoV0FxqoGTQ7Qo_7LAaZuVahe_JBJl/s16000/NVR%202023-min.png" title="NVR" /></a></div><span><!--more--></span><div><br style="text-align: justify;" /></div><div><div><h2>26. Orion Office REIT</h2><div style="text-align: justify;">Orion Office REIT is a newly established REIT focusing on the single-tenant suburban office market. It started life at a time when the US economy was experiencing high inflation with signs of a recession. This resulted in asset impairments.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">About half of the leases will be maturing between 2022 to 2024. It had not been able to renew some of those maturing in 2022. Growth via new properties may also be challenging. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">ONL has challenges with the lease renewal. It also had to contend with asset impairments. As such you should not be surprised that the current market price is about half of its “IPO” price. But it has over-shot on the way down as there are margins of safety from a worst-case NAV and FFO perspectives. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The market has overreacted. A conservative analysis shows that the market price is significantly below a worst-case estimate of the NAV and FFO. This is a deep-value investing opportunity with a margin of safety for its current 4% dividend yield. I would rate this REIT as a good US stock.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For details, refer to my Nov 2022 Seeking Alpha article “<a href="https://seekingalpha.com/article/4553009-orion-office-reit-value-opportunities" target="_blank">Orion Office REIT: Value Opportunities</a>”</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu2zTxbaQrVlqjBwuYFuwQFOFJrknn92g3_jMa9tZMBzv5wpqCM1irmKdvPHmyxTwzfEdWqDCFOOQynIvc7NtPES_IuW6ebd1YLCn2-9b4p3w9kMRcNH05A3zb3Efz22ljAo_bOtpZjFUEX6ST_NUm2QIZViEambiGLik3s4sItr4TEvgDZuwk9-u_/s2000/Orion%20REIT-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Orion Office REIT: Value Opportunities" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu2zTxbaQrVlqjBwuYFuwQFOFJrknn92g3_jMa9tZMBzv5wpqCM1irmKdvPHmyxTwzfEdWqDCFOOQynIvc7NtPES_IuW6ebd1YLCn2-9b4p3w9kMRcNH05A3zb3Efz22ljAo_bOtpZjFUEX6ST_NUm2QIZViEambiGLik3s4sItr4TEvgDZuwk9-u_/s16000/Orion%20REIT-min.png" title="Orion Office REIT: Value Opportunities" /></a></div><span><!--more--></span><div><br style="text-align: justify;" /></div></div><h2>27. Pulte</h2><div><div style="text-align: justify;">Pulte is a US homebuilder. While I would rate Pulte as financially sound, I would not consider it as a growth one.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">During the latest Housing Starts cycle from 2005 to 2022 (peak-to-peak), there was hardly any growth in Pulte's revenue. This was despite several acquisitions in 2016, 2019, and 2020.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Over the past 70 years, there was no growth in the long-term annual average Housing Starts. However, there was growth in the Housing Price Index. I would not consider the sector as a growth one.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As such I valued Pulte based on its Earnings Power Value. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I assumed that the cycle is represented by the 2005 to 2022 performance. This is pegging it to the latest peak-to-peak Housing Starts cycle.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">My EPV of Pulte over the cycle showed that there is no margin of safety. The crux of my valuation is that there is no growth in the long-term annual Housing Starts.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Even if you assumed that there is a 1/3 increase in the long-term annual Housing Starts, my analysis showed that there is not enough margin of safety since it would take time to reach this increased level.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">There is only a margin of safety if you assumed that Pulte is a non-cyclical company and that the past 2 years’ performance represented its future. This is not a realistic view given the evidence presented.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For details refer to my June 2023 Seeking Alpha article “P<a href="https://seekingalpha.com/article/4613473-pultegroup-no-margin-of-safety-based-on-a-cyclical-perspective" target="_blank">ulteGroup: No Margin Of Safety Based On A Cyclical Perspective</a>”</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcX9D7S8VWNlowbc2nYqcPoOC_1YyzV0-v5bvcZN-8jWqv_rVgA4HllCUNuauiOlC0WhMc3pgmF5PM2M6qSs0zD29vzVLYbIPMTqpfqTrscFSQhLbbido3CgyYy8uePRrV69aMnlCkqn3AUvlYAKa-6En7hulsVMCiZVlPUbyckFEeZQzLiyQtfFRGtfa8/s2000/Pulte%202023-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Pulte Group" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcX9D7S8VWNlowbc2nYqcPoOC_1YyzV0-v5bvcZN-8jWqv_rVgA4HllCUNuauiOlC0WhMc3pgmF5PM2M6qSs0zD29vzVLYbIPMTqpfqTrscFSQhLbbido3CgyYy8uePRrV69aMnlCkqn3AUvlYAKa-6En7hulsVMCiZVlPUbyckFEeZQzLiyQtfFRGtfa8/s16000/Pulte%202023-min.png" title="Pulte Group" /></a></div><span><!--more--></span><div><br /></div><div><h2>28.Reliance Steel & Aluminum</h2><div style="text-align: justify;">Reliance Steel & Aluminum, (RS) is a leading diversified metal solutions provider and the largest metals service center company in North America.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This is not a high-growth company. Over the past 12 years, shipment tonnage grew at 2.6 % CAGR. Growth was driven more by changes in selling price than tonnage. Growth was also due to organic and acquisition growth. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This is not a high-growth sector but rather a mature one. It is also a cyclical sector. </div><div><br /></div><div style="text-align: justify;">The company attempted to dampen the effects of the cycle by offering different metals, serving customers in different sectors, and going international. However, my analysis has shown that both the top line and bottom line are still cyclical</div><div><br /></div><div style="text-align: justify;">Over the cycle, it has been able to improve its operating efficiencies. It is also financially sound. There were improvements in the net margins. But the improvements for other operating parameters such as leverage, gross profitability, and inventory turnover were not so clear-cut.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">A valuation of RS over the cycle, taking into account the improvements, showed that there is no margin of safety.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For details refer to my 22 Sep 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4636803-reliance-steel-aluminum-not-high-growth-despite-acquisitions" target="_blank">Reliance Steel & Aluminum: Not A High Growth Company Despite Acquisitions”</a></div><div style="text-align: justify;"><br /></div></div><div style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgIxhsI-n50PCecGWxR2W-3lzdusQT2U3hmYr0LSS_yFTwLXM61C2FaSJuaawqBz3KRPYORmqcfVW65y65x7aEltEvV2wkkqGcQei7wnBNdZS7UI4gHq6wlQJjKr40y6p_2x-zohNtRA1gyslISQwkNy7eqNvwkHBcGeJp5-lPMo0FsYwroIFlxhc0oOsn2" style="margin-left: 1em; margin-right: 1em;"><img alt="RS is not a high growth company" data-original-height="1500" data-original-width="1000" src="https://blogger.googleusercontent.com/img/a/AVvXsEgIxhsI-n50PCecGWxR2W-3lzdusQT2U3hmYr0LSS_yFTwLXM61C2FaSJuaawqBz3KRPYORmqcfVW65y65x7aEltEvV2wkkqGcQei7wnBNdZS7UI4gHq6wlQJjKr40y6p_2x-zohNtRA1gyslISQwkNy7eqNvwkHBcGeJp5-lPMo0FsYwroIFlxhc0oOsn2=s16000" title="RS is not a high growth company" /></a></div></div><span><!--more--></span><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><h2>29. Ryerson Holding</h2><div>While Ryerson (RYI) also has operations in Canada, Mexico, and China, the US accounted for about 91 % of the revenue in 2022. The company is a key intermediary between metal producers and end users of metal products.</div><div><br /></div><div>From 2014 to 2022, its revenue grew at 7.1 % CAGR. But this was due more to changes in the selling price as there was hardly any tonnage growth despite its acquisitions.</div><div><br /></div><div>The price growth, especially the price spike in the past 2 years, enabled it to generate strong earnings. But RYI is a cyclical company. This is despite its efforts to mitigate the cyclical effect by distributing a variety of metals and serving customers in diverse sectors.</div><div><br /></div><div>As such it is more appropriate to analyse and value its performance over the cycle. Over the cycle, it has been able to improve its operating efficiencies. There is a sufficient margin of safety based on its performance over the cycle. As such I would consider RYI an investment opportunity.</div><div><br /></div><div>For details refer to my 18 Sep 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4635756-ryerson-made-hay-while-the-sun-shone-but-is-the-sun-still-shining" target="_blank">Ryerson Made Hay While The Sun Shone. But Is The Sun Still Shining?”</a></div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_xsYlxhahKA-qdCG44Ic7q1dM4GwLKboEbZhtSBHuTbVIm9YTtQQIzp5nb00XtZdGNEZN1Z4kRPF5IQsPRyoXML48YrBP72jZV1pmpdQNpZferJch-pe49RU_ybiKFvMId4sNMDtzmyYoBXzFPtntBC0Fi6kscd74Z4bWX12t7dc4jcTMjaW0TNFM6KhX/s1500/Ryerson-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="https://seekingalpha.com/article/4635756-ryerson-made-hay-while-the-sun-shone-but-is-the-sun-still-shining" border="0" data-original-height="1500" data-original-width="1000" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_xsYlxhahKA-qdCG44Ic7q1dM4GwLKboEbZhtSBHuTbVIm9YTtQQIzp5nb00XtZdGNEZN1Z4kRPF5IQsPRyoXML48YrBP72jZV1pmpdQNpZferJch-pe49RU_ybiKFvMId4sNMDtzmyYoBXzFPtntBC0Fi6kscd74Z4bWX12t7dc4jcTMjaW0TNFM6KhX/s16000/Ryerson-min.png" title="https://seekingalpha.com/article/4635756-ryerson-made-hay-while-the-sun-shone-but-is-the-sun-still-shining" /></a></div><span><!--more--></span><div style="text-align: justify;"><br /></div><div><h2 style="text-align: justify;"><a id="30. Stelco" style="text-align: left;">30. Stelco</a><span style="text-align: left;"> </span></h2><div style="text-align: justify;">Stelco is a Canadian integrated steel manufacturer that was at one time part of the US Steel Group. Its present corporate set-up followed its divestment by US Steel and a re-structuring and 2017 IPO.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Stelco is in a cyclical sector. As such, I analyzed and valued Stelco based on its performance over the cycle. The challenge with Stelco is that data was only available from its IPO year of 2017. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Given this, I took the 2018 to 2020 average values to represent the performance over the cycle. This is based on looking at the past 20 years’ steel cycle pattern and ignoring the past year or so prices.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Stelco is fundamentally strong with a strong growth track record. </div><div><ul><li style="text-align: justify;">It is financially sound. As of Jun 2022, Stelco has a Total Capital Employed of CAN$ 2.6 billion. About ¾ of this is funded by equity. The company is cash rich with cash accounting for about 57% of the Total Capital Employed. </li></ul><ul><li style="text-align: justify;">It has a good track record. Compared to the top 4 US steel companies, Stelco’s revenue growth and ROA stand out as illustrated in Charts 3 and 4.</li></ul><ul><li style="text-align: justify;">It has a Piotroski F Score of 8 for 2021.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">There are margins of safety based on its EPV over the cycle matches the current market price. There are other upsides because of Stelco’s growth track record. At the same time, the steel demand is expected to grow given the recently passed infrastructure plan. This is a good US stock.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For details, refer to my Seeking Alpha articles:</div><div><ul><li style="text-align: justify;"><a href="https://seekingalpha.com/article/4540638-stelco-holdings-grossly-underpriced-cyclical-growth-company" target="_blank">Stelco Holdings: Grossly Underpriced Cyclical Growth Company</a> - Sep 2022.</li></ul><ul><li style="text-align: justify;"><a href="https://seekingalpha.com/article/4594783-stelco-the-benefits-from-high-steel-prices-are-likely-over" target="_blank">Stelco: The Benefits From High Steel Prices Are Likely Over</a> – Apr 2023.</li></ul></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_CRZ-iPK6wzAh_lVRYleKzbtjXrh28tZgU2VRcn9gSj1iPU6WTGIqICAWf77kFsc30YabY285bjBrQyXIPEmDeUjJaT9kRO2U-kJzD1_Ujd4rIr8HVVnXV7WJVtGihoflUHQZ11WP7E5NcIrhHdQJ5bdDghjrkt8oThiE-XTu2bmh52mV_TTNZkFO/s2000/Stelco-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Stelco Holdings: Grossly Underpriced Cyclical Growth Company”" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_CRZ-iPK6wzAh_lVRYleKzbtjXrh28tZgU2VRcn9gSj1iPU6WTGIqICAWf77kFsc30YabY285bjBrQyXIPEmDeUjJaT9kRO2U-kJzD1_Ujd4rIr8HVVnXV7WJVtGihoflUHQZ11WP7E5NcIrhHdQJ5bdDghjrkt8oThiE-XTu2bmh52mV_TTNZkFO/s16000/Stelco-min.png" title="Stelco Holdings: Grossly Underpriced Cyclical Growth Company”" /></a></div><span><!--more--></span><div><br style="text-align: justify;" /></div></div><div><h2 style="text-align: justify;">31. Steel Dynamics</h2><div style="text-align: justify;">Nasdaq-listed Steel Dynamics Inc (SDI or the Group) is an iron and steel Group that can be considered a good company because of the following:</div><div style="text-align: justify;"><ul><li>It is financially strong. The Group has the industry average debt-to-capital ratio while having a higher than industry cash position.</li></ul><ul><li>Both the Steel and Steel Fabrication segments are generating returns that appear to be higher than the cost of funds. While the Metal recycling segment has not performed, it may have contributed to the Steel segment's performance.</li></ul><ul><li>SDI physical steel external shipment has grown at a CAGR of 7.4 % over the past 10 years compared to the USA steel consumption CAGR of 2.3 %. SDI has increased its market share in the USA market. </li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">At the current market price, it is obvious that SDI is not a value trap as it is not cheap from the perspective of the past 12 months' prices. What is the investment thesis then?</div><div style="text-align: justify;"><ul><li>This is Group with a strong growth track record and a leadership team that is a good operator and capital allocator.</li></ul><ul><li>The Biden administration will unfold an economic stimulus plan that will spur the demand for steel. I expect the trade protection measures to continue to provide import replacement opportunities. </li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The main investment risk at the current price is that even for a 7% margin of safety, you have to assume that SDI can grow according to the long-run US GDP nominal growth rate.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">However, I believe that SDI will report a declining profit in 2021/22 with the opening of the new mill. I do expect the market to have a knee-jerk reaction that will provide you with a better buying opportunity. I consider this a good US company.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div>Over the years, I have also written about Steel Dynamics for Seeking Alpha. Refer to:</div><div><ul><li><a href="https://seekingalpha.com/article/4397743-steel-dynamics-wait-for-coming-price-decline" target="_blank">Steel Dynamics: Wait For The Coming Price Decline</a> - Jan 2021</li></ul><ul><li><a href="https://seekingalpha.com/article/4412044-steel-dynamics-stock-still-not-time-to-buy" target="_blank">Steel Dynamics: Still Not A Time To Buy</a> - Mac 2021</li></ul><ul><li><a href="https://seekingalpha.com/article/4415024-steel-dynamics-how-to-flesh-out-the-real-valuation-insights" target="_blank">Steel Dynamics: How To Flesh Out The Real Valuation Insights.</a> - Mac 2021</li></ul><ul><li><a href="https://seekingalpha.com/article/4565101-steel-dynamics-the-margin-of-safety-is-in-the-aluminum-venture" target="_blank">Steel Dynamics: The Margin Of Safety Is In The Aluminum Venture</a>. - Dec 2022</li></ul></div></div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7LSEFdvAld22FhtgDJkHq242uQPMEGts3r6AwOEUUT2VmfQrMHQnCTHesyc7W21F8oxEbmY9inMHg6iqdcDVdrhTqa05FBibynvK_ggbHTvetSL-5jMEczHGslpppgAoInF4FetLAYVXZ/s2000/Steel+Dynamics-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Steel Dynamics a reverse value trap?" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7LSEFdvAld22FhtgDJkHq242uQPMEGts3r6AwOEUUT2VmfQrMHQnCTHesyc7W21F8oxEbmY9inMHg6iqdcDVdrhTqa05FBibynvK_ggbHTvetSL-5jMEczHGslpppgAoInF4FetLAYVXZ/s16000/Steel+Dynamics-min.png" title="Is Steel Dynamics a reverse value trap?" /></a></div><span><!--more--></span><div style="text-align: justify;"><br /></div></div><div style="text-align: justify;"><div><h2>32. Summit Materials</h2><div>Summit Materials Inc. IPOed in 2015. Its rapid growth before that was due in large part to its acquisitions which were funded with Equity and Debt.</div><div><br /></div><div>Post-IPO, SUM continued with the same acquisition strategy. But it had managed to reduce its Debt level partly through new Equity as well as Cashflow from Ops.</div><div><br /></div><div>Revenue growth benefited from being in the uptrend part of the construction cycle. Revenue growth did not translate into better operating performance. Without the one-off gains, the current ROE would be in single digits.</div><div><br /></div><div>Sadly, this growth has not created shareholders’ value due to its poor business performance. Until SUM can improve its returns, there is no margin of safety for the retail investor</div><div><br /></div><div>The market priced SUM as a growth stock. Alternatively, the market thinks that the value of the reserves is not accounted for. In either case, the market is wrong.</div><div><br /></div><div>Refer to my Mac 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4585547-summit-materials-a-growth-trap-for-the-retail-investor" target="_blank">Summit Materials: A Growth Trap For The Retail Investor”</a></div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9CWpWss-ze5fJFPnTKYrpt7vtaX019o4uf6bnJd_rx42_QByvlikYvXQm5cEMuZkpjEi6GsH0az1Mw2WbuTUf-rpt4trg8DPqSvfhRomlfayP2EdCQI0k_7u2UnMe9mevfw9pTdHRLE4VCHzccjEKnsHIRyRCGtkFwU8GxBoYOyVuCXXT-0zLtNAS4pQ/s2000/Summit%20materials-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Summit Materials" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9CWpWss-ze5fJFPnTKYrpt7vtaX019o4uf6bnJd_rx42_QByvlikYvXQm5cEMuZkpjEi6GsH0az1Mw2WbuTUf-rpt4trg8DPqSvfhRomlfayP2EdCQI0k_7u2UnMe9mevfw9pTdHRLE4VCHzccjEKnsHIRyRCGtkFwU8GxBoYOyVuCXXT-0zLtNAS4pQ/s16000/Summit%20materials-min.png" title="Summit Materials" /></a></div><div><span><!--more--></span><div><br /></div></div><div><div><h2 style="text-align: left;">33. Tempur-Sealy</h2><div>Tempur-Sealy International Inc (TPX) is an NYSE-listed global bedding company. The Group is one of the top 2 bedding industry leaders in the US market. </div><div><br /></div><div>The bedding industry is not a sunset industry. TPX's two business segments - North America and International - still have organic growth prospects. The industry growth in the US seemed to have been driven by the growth in Housing Starts. But this is not long-term sustainable growth. </div><div><br /></div><div>My investment thesis is that TPX is a growth trap.</div><div><ul><li style="text-align: justify;">TPX achieved a lower revenue growth rate compared to the industry.</li></ul><ul><li style="text-align: justify;">In the past 3 years, EBIT/TCE employed averaged 19 %. This is commendable at it is above the cost of funds. But TPX Return on Assets is the worst among its peers.</li></ul><ul><li style="text-align: justify;">While it has created shareholders' value, the share buyback plan was carried out at prices that were greater than the intrinsic value.</li></ul><ul><li style="text-align: justify;">The current market price far exceeds the EPV. </li></ul></div><div><br /></div><div>The market is pricing TPX as if it was a high-growth stock. I have shown that it has short-term revenue boosters ie from Housing Starts and anti-dumping. But the long-term outlook is likely to be growth at the US long-term GDP rates.</div><div><br /></div><div>The current business economics of the Group is good. It is a good US stock. In the short run, it can even overshadow some of the non-value-adding decisions. But if management does not take advantage of this to make the necessary changes, TPX may not have a bright future in the long run.</div><div><br /></div><div>Over the years, I have also written about the Group for Seeking Alpha. Refer to </div><div><ul><li><a href="https://seekingalpha.com/article/4402477-tempur-sealy-time-to-exit" target="_blank">Tempur-Sealy: Time To Exit</a> - Feb 2021</li></ul><ul><li><a href="https://seekingalpha.com/article/4427181-tempur-sealy-still-not-the-time-to-buy" target="_blank">Tempur Sealy: Still Not The Time To Buy</a> - May 2021</li></ul><ul><li><a href="https://seekingalpha.com/article/4567875-tempur-sealy-a-cyclical-company-and-should-be-valued-as-such" target="_blank">Tempur Sealy Is A Cyclical Company And Should Be Valued As Such</a> - Jan 2023</li></ul></div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3CNl7np1MLaMFEN49lezFXVstYGaHDdqs3bxGg-QNUHpt0jBomgpmBkKemAwflzXWt3D-6P0EipVOz0jH59MXKAYXxFHOcqEkD08WTgqtPMAZ8zqFFuMTXJyyKvXMlkNiG4xQqPcl5QY/s2000/Tempur+Sealy-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Tempur-Sealy a growth trap?" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3CNl7np1MLaMFEN49lezFXVstYGaHDdqs3bxGg-QNUHpt0jBomgpmBkKemAwflzXWt3D-6P0EipVOz0jH59MXKAYXxFHOcqEkD08WTgqtPMAZ8zqFFuMTXJyyKvXMlkNiG4xQqPcl5QY/s16000/Tempur+Sealy-min.png" title="Is Tempur-Sealy a growth trap?" /></a></div><span><!--more--></span><div><br /></div></div><h2>34. Timken Steel</h2></div></div></div></div><div><div><div>Except for its IPO year of 2014, Timken Steel (TMST) had not been profitable since then. However, the Group is financially strong, and a breakeven analysis showed that the poor performance is due to its operating below its breakeven levels.</div><div><br /></div><div>The prospects of lower fixed costs, higher selling prices, and larger sales volume meant TMST would be able to be profitable. Given TMST's technical expertise and customer relationships, if it can get align its cost structure with the cyclical product prices, it would be able to turn around.</div><div><br /></div><div>There is a new CEO/President starting work in Jan 2021. This could be a catalyst to turn the Group around. </div><div><br /></div><div>The Investment Thesis is that TMST would be able to turn the Group around. If this is achieved there is a sufficient margin of safety at the current market price.</div><div><br /></div><div>If it failed, the current market price is 1.1 times the Book Value. This would limit the downside if the turnaround is not successful. It is a good US stock. </div><div><br /></div><div>I have now several updates in Seeking Alpha:</div><div><ul><li><a href="https://seekingalpha.com/article/4448801-timken-steel-time-to-go-in" target="_blank">TimkenSteel - Time To Go In As The Worst Is Behind It</a> - Aug 2021</li></ul><ul><li><a href="https://seekingalpha.com/article/4538327-timken-steel-underpriced-stock-even-through-cyclical-lens" target="_blank">TimkenSteel: Under-Priced Even Through A Cyclical Lens</a> - Sep 2022</li></ul><ul><li><a href="https://seekingalpha.com/article/4592562-timkensteel-has-a-new-cost-structure-to-be-profitable" target="_blank">TimkenSteel Has A New Cost Structure To Be Profitable</a> – Apr 2023</li></ul></div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEg0QxL3ccS_ScqXVCJo739vBCm_Mp55ETj_oLcz71WNVX82BHg41VEHbysl6danRZ7I8e7mAo3w8BqceeOPv2Zp0ZTceC6MPCyYqW5873vIP8u3xSxzo84Ad66ZzVA1PdXCzpoWQVhw0QonUKP3egaED735uxLqSt8P77dY_2XHSSpYQ7ZPk8p9ZrId=s2000" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Timken Steel one of the better NYSE stocks?" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/a/AVvXsEg0QxL3ccS_ScqXVCJo739vBCm_Mp55ETj_oLcz71WNVX82BHg41VEHbysl6danRZ7I8e7mAo3w8BqceeOPv2Zp0ZTceC6MPCyYqW5873vIP8u3xSxzo84Ad66ZzVA1PdXCzpoWQVhw0QonUKP3egaED735uxLqSt8P77dY_2XHSSpYQ7ZPk8p9ZrId=s16000" title="Is Timken Steel one of the better NYSE stocks?" /></a></div><span><!--more--></span><div><br /></div></div><div><div><h2><a id="35. Toll Brothers" style="text-align: left;">35. Toll Brothers</a></h2><div>Toll Brothers is US homebuilder and hence a cyclical company. Any analysis and valuation should be based on a cyclical lens. </div><div><br /></div><div>During the latest Housing Starts cycle from 2005 to 2022 (peak-to-peak), its revenue grew at 3 % CAGR. But this was due to a combination of 1.1 % CAGR in Deliveries while unit selling price grew at 1.8 % CAGR. Part of the growth was due to the 2014 acquisition.</div><div><br /></div><div>Over the past 70 years, there was no growth in the long-term annual average Housing Starts. However, there was growth in the Housing Price Index. I would not consider the sector as a growth one. But TOL is financially sound.</div><div><br /></div><div>A valuation of TOL over the cycle on such a basis showed that there is no margin of safety. Even if you assumed that there would be a 1/3 increase in the long-term annual average Housing Starts, the margin of safety is not sufficient.</div><div><br /></div><div>For details, refer to my May 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4612156-toll-brothers-no-margin-of-safety-uptick-average-housing-starts" target="_blank">Toll Brothers: No Margin Of Safety Even With Uptick In Long-Term Annual Average Housing Starts</a>”</div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjb7kOt8_gs1cCGs8EwU6JSZrrlow3ZOLB-j1VaIgQtljSxkiAX7MxC8dmG_WzjnFwd8K9MfpMdlxZJO8PKYI1rFbO8yhZBPLY1s_DYwgnVjv4ru9itSLRiliQwIk5Gg5LpugplucjrEQ4Owoy4LIrVZYabeJrjKIIzO1psYGyPfr1mSdkIaynMHWoTvTE/s2000/TOLL%20-%20cyclical%20series.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Toll Brothers: No Margin Of Safety Even With Uptick In Long-Term Annual Average Housing Starts”" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjb7kOt8_gs1cCGs8EwU6JSZrrlow3ZOLB-j1VaIgQtljSxkiAX7MxC8dmG_WzjnFwd8K9MfpMdlxZJO8PKYI1rFbO8yhZBPLY1s_DYwgnVjv4ru9itSLRiliQwIk5Gg5LpugplucjrEQ4Owoy4LIrVZYabeJrjKIIzO1psYGyPfr1mSdkIaynMHWoTvTE/s16000/TOLL%20-%20cyclical%20series.png" title="Toll Brothers: No Margin Of Safety Even With Uptick In Long-Term Annual Average Housing Starts”" /></a></div><span><!--more--></span><div><br /></div></div></div><div><h2>36.TopBuild Corp</h2><div style="text-align: justify;">TopBuild Corp (BLD) is a leading installer and distributor of insulation and other building material products for the US and Canadian construction sectors.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Over the past 8 years, BLD has benefited from the growth in total construction spending. The company used the tailwinds to grow its revenue and profits. But the profit growth was driven more by price (margins) growth rather than improvements in capital efficiency.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">All seems rosy because of the growing total construction spending. The construction sector is cyclical, and the company has positioned itself to mitigate the cyclical impact:</div><div style="text-align: justify;"><ul><li>It had reduced the contribution from the residential market.</li></ul><ul><li>It had improved its gross profit and SGA margins.</li></ul><ul><li>Its higher market share meant wider reach.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But I have some concerns about its financial position. If the construction sector continues to be strong over the next few years, this financial position would not be an issue because of its strong cash generation ability.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But while fundamentally sound, the market has overpriced the stock. Based on an optimistic 2-stage valuation model, there is no margin of safety.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For details, refer to my 15 Aug 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4628320-topbuild-corp-benefiting-growing-construction-spending-no-margin-of-safety" target="_blank">TopBuild Corp.: Benefiting From Growing Construction Spending, But I See No Margin Of Safety”</a></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcMbCPztns-RWo0Pvwzros5BS60xp0d4fYwyky5OuQ9Pu4AV7cDQ9jeIJEBIl1VZ-wwXqATzGrkrNNPO0LUsGe7BvCScIO6SUCBZ02BzGb4xQw6dt5vsjqu9PabWzcZbXfn-ADBuaMzdvbNQ6hFDfIuR4OmDuUebrJPh4xrbuFrunfL0omxFzVCYgbJuLO/s1500/TopBuild-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="TopBuild benefited from construction tailwinds" border="0" data-original-height="1500" data-original-width="1000" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcMbCPztns-RWo0Pvwzros5BS60xp0d4fYwyky5OuQ9Pu4AV7cDQ9jeIJEBIl1VZ-wwXqATzGrkrNNPO0LUsGe7BvCScIO6SUCBZ02BzGb4xQw6dt5vsjqu9PabWzcZbXfn-ADBuaMzdvbNQ6hFDfIuR4OmDuUebrJPh4xrbuFrunfL0omxFzVCYgbJuLO/s16000/TopBuild-min.png" title="TopBuild benefited from construction tailwinds" /></a></div><span><!--more--></span><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><h2>37.Universal Steel & Stainless</h2><div>Universal Steel & Stainless (USAP) manufactures and markets semi-finished and finished specialty steel products.</div><div><br /></div><div>Over the past 11 years, USAP was not able to grow its revenue. Its profits were volatile. The company faces challenges in operating above its break-even shipment levels and improving its Contribution (revenue minus variable cost). On a cumulative basis, the company just broke even.</div><div><br /></div><div>I also have concerns about its financial strengths. At first sight, it is not a fundamentally sound company. But I wanted to see whether there are turnaround opportunities.</div><div><br /></div><div>My analysis shows that to be profitable, the company needs to address its shipment tonnage and improve the Contribution.</div><div><br /></div><div>At the same time, it must be able to grow. This probably meant a growing shipment tonnage. If the company can deliver these, there will then be a margin of safety. The Contribution improvement does not look far-fetched. But the shipment tonnage target is a big challenge. </div><div><br /></div><div>There is no track record to suggest that this shipment target is sustainable. You can understand why I would not invest in USAP.</div><div><br /></div><div>For details, refer to my 4 Sep 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4632934-universal-stainless-alloy-products-operating-below-break-even" target="_blank">Universal Stainless & Alloy Products: Its Problem Is That It Is Operating Below Break-Even”</a></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXpTssdnn1w7QXhS5UNgzmntWK2fPCzt7BZ0FG6-KjfLDZRxFWXlVLkxBRisny2hFDGyyL_i-hinOZ7GCJY3QHA65TMIuNOR739-gC7PfywBu2cW7lk3hL4eVF0cawbQzMClDxGC5m7DofhPvh91UuJMD6RZpr9P245stvA8C9nEyGY1bHBnF_RhfDqYzI/s1500/Universal%20stainless-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Universal Stainless is not profitable" border="0" data-original-height="1500" data-original-width="1000" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXpTssdnn1w7QXhS5UNgzmntWK2fPCzt7BZ0FG6-KjfLDZRxFWXlVLkxBRisny2hFDGyyL_i-hinOZ7GCJY3QHA65TMIuNOR739-gC7PfywBu2cW7lk3hL4eVF0cawbQzMClDxGC5m7DofhPvh91UuJMD6RZpr9P245stvA8C9nEyGY1bHBnF_RhfDqYzI/s16000/Universal%20stainless-min.png" title="Universal Stainless is not profitable" /></a></div><span><!--more--></span><div><br /></div></div></div></div></div></div><div><h2>38. US Steel</h2><div>United States Steel Corporation (X) has transformed itself over the past 10 years. It has reduced its capacity to match its demand and diversified to making steel via EAF mini-mills. Apart from improving its business operations, X has today a stronger balance sheet. </div><div><br /></div><div>Any analysis and valuation of X should be based on this “transformed” profile. At the same time, steel is a cyclical sector. A valuation of X on such bases shows that there is a margin of safety at the current price of USD 25.50 per share (as of 6 June 2022). It is a good US stock.</div><div><br /></div><div>I also analysed X from another perspective. X can be considered of comprising 3 divisions – the US, Tubular, and Europe. The US division covers the company’s US flats and the mini-mill segments. The Tubular and Europe divisions are the US tubular and USSE segments</div><div><br /></div><div>From 2013 to 2021, the main contributor has been the US division. The Tubular division has not generated any cumulative returns. Europe, while profitable, currently faces market and supply risks due to the Ukraine invasion.</div><div><br /></div><div>The market price has already priced in the downside from Europe. I reached this conclusion based on a sum-of-parts valuation of X.</div><div><br /></div><div><div>For details refer to the following:</div><div><ul><li><a href="https://seekingalpha.com/article/4517974-us-steel-stock-stronger-cash-generation-than-9-years-ago" target="_blank">U.S. Steel: A Different Group Than 9 Years Ago</a> – Seeking Alpha, June 2022.</li></ul><ul><li><a href="https://seekingalpha.com/article/4532480-us-steel-value-is-there-even-without-any-contribution-from-europe" target="_blank">U.S. Steel: Value Is There Even Without Any Contribution From Europe </a>- Seeking Alpha, Aug 2022.</li></ul><ul><li><a href="https://seekingalpha.com/article/4595580-united-states-steel-better-positioned-coming-recession" target="_blank">United States Steel: Better Positioned For The Coming Recession</a> – Seeking Alpha, Apr 2023.</li></ul></div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHnRX9bBO_oTOuvUj1hMl5DJB5Iw_5OxsZ5qpJ7ju_txZjRXrwpT59_juibTLDh8l1b61s9W9txwJarmvx7zTKOfLEWAVFk590SOS6N1bPCkmc3fTUb3aMLVDBwBfpOr3AH6LqMW069ZmkbIuGyYxMuTq1hJPqdBDiESQIZAEKruMBimUPvi4qPlywJg/s2000/US%20Steel-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="US Steel - a case study on getting insights from Annual Reports" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHnRX9bBO_oTOuvUj1hMl5DJB5Iw_5OxsZ5qpJ7ju_txZjRXrwpT59_juibTLDh8l1b61s9W9txwJarmvx7zTKOfLEWAVFk590SOS6N1bPCkmc3fTUb3aMLVDBwBfpOr3AH6LqMW069ZmkbIuGyYxMuTq1hJPqdBDiESQIZAEKruMBimUPvi4qPlywJg/s16000/US%20Steel-min.png" title="US Steel - a case study on getting insights from Annual Reports" /></a></div><div><span><!--more--></span><div><br /></div></div></div><div><h2>39. Vulcan</h2><div>Vulcan Materials Company is the largest construction aggregates company in the US. The demand (tonnage) for aggregates in the US is cyclical. While it delivered credible performance over the past 2 years, VMC’s performance over the cycle is lower than the current results.</div><div><br /></div><div>Notwithstanding its acquisitions, it did not achieve significant growth in its market share. Shipment tonnage over the past 15 years was stagnant and revenue growth was driven by growth in prices. At the same time, it had unsustainable Reinvestment rates.</div><div><br /></div><div>Based on its valuation over the cycle, there is no margin of safety at the current price. This low value is due to the low cyclical margins, low revenue base, and low cyclical asset turnover.</div><div><br /></div><div>Refer to my Feb 2023 Seeking Alpha article “<a href="https://seekingalpha.com/article/4577178-vulcan-materials-stock-overvalued-sell" target="_blank">Vulcan Materials: No Fundamental Basis For The High Price</a>”.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBmwFjIPVnQqmJFWbIzcMu8NaHXyBmauzrTJGBQfU9qxO66lTZ7MHGywq-Z1ueNBsZQMPjOzB-TBGsHLhM8HiS5cgvYqJoTKeeN5-oOk9utHIOfb6NyWXkaPos8rMheu1GTiF8wtJmpq77AMhxBEf1caNBMnFBWIAc7DU7adJx62gl30CXhYIsoZKWQtA/s2000/Vulcan-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Vulcan" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBmwFjIPVnQqmJFWbIzcMu8NaHXyBmauzrTJGBQfU9qxO66lTZ7MHGywq-Z1ueNBsZQMPjOzB-TBGsHLhM8HiS5cgvYqJoTKeeN5-oOk9utHIOfb6NyWXkaPos8rMheu1GTiF8wtJmpq77AMhxBEf1caNBMnFBWIAc7DU7adJx62gl30CXhYIsoZKWQtA/s16000/Vulcan-min.png" title="Vulcan" /></a></div><div><span><!--more--></span><div><br /></div></div></div><div><div><h2><a id="40. Walgreen Boots Alliance">40. Walgreen Boots Alliance</a><span> </span></h2><div>Walgreen Boots Alliance (WBA) today is very different from what it was in 2014. Apart from being about 2 ½ times bigger in size in terms of Total Assets, it had just diversified into local clinical care services. There were also additional expenses associated with its Cost Transformation Program (Cost Program). </div><div><br /></div><div>I would consider WBA as a company in transition. The current performance does not capture the full benefits of the new business segment as well as the cost savings. </div><div><br /></div><div>There are 2 drivers of change:</div><div><ul><li>The venture into the business as represented by the US Healthcare segment.</li></ul><ul><li>The Cost Program.</li></ul></div><div><br /></div><div>Management has committed to the benefits of the Cost Program. There is a strong operating track record to suggest that it would be successful in its transformation. It is also financially strong to give it time to realize the results</div><div><br /></div><div>Assuming that both are achieved, then there is a margin of safety at the current price.</div><div><br /></div><div>However, the success of the US Healthcare segment is still to be proven. I do not expect the US Healthcare segment to be a failure given the management track record. But even if this happens, there is enough margin of safety. It is a good US stock.</div><div><br /></div><div>For details, refer to my Oct 2022 article in Seeking Alpha “<a href="https://seekingalpha.com/article/4546534-walgreens-boots-alliance-company-in-transition" target="_blank">Walgreens Boots Alliance - A Company In Transition” </a></div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPjtxF5wR4otcdbf1KqPLss8lkR7dYkKNYhKujKOaRxuqeNVuXhxcYo_Ho662KR3BvWR6p_9O_6mBnnkjU5Jt4tJDN02-iFFhwbe--jlsDQ1Vgoc5Z9S02TRe-2BAkPIbFPfDlyByNxh5-z6bMnCCTKJSPoKplu2ft3HhZgmfDrCIv-DwbU53sJ-32/s2000/Walgreen%20Boots-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Walgreen Boots Alliance - a company in transition" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPjtxF5wR4otcdbf1KqPLss8lkR7dYkKNYhKujKOaRxuqeNVuXhxcYo_Ho662KR3BvWR6p_9O_6mBnnkjU5Jt4tJDN02-iFFhwbe--jlsDQ1Vgoc5Z9S02TRe-2BAkPIbFPfDlyByNxh5-z6bMnCCTKJSPoKplu2ft3HhZgmfDrCIv-DwbU53sJ-32/s16000/Walgreen%20Boots-min.png" title="Walgreen Boots Alliance - a company in transition" /></a></div><span><!--more--></span><div><br /></div></div><div><div><div><h2 style="text-align: justify;">41. Worthington Industries</h2><div style="text-align: justify;">The Group today has 2 major business segments - Steel Processing and Pressure Cylinders. The analysis suggested that WOR is a good company.</div><div><ul><li style="text-align: justify;">It has been profitable over the past 11 years. This covered 2 hot-rolled steel price cycles and the Covid-19 pandemic. </li></ul><ul><li style="text-align: justify;">It is financially sound with a Debt Equity level lower than the industry average. As of Feb 2021, cash represented 29 % of the total capital employed.</li></ul><ul><li style="text-align: justify;">It has a good track record of growing shareholders’ value. </li></ul><ul><li style="text-align: justify;">The sustained excess returns and the EPV > AV scenario suggested that it has a sustainable competitive edge.</li></ul><ul><li style="text-align: justify;">While there may be limited opportunities for high growth in the US, there is a global demand for its Pressure Cylinder segment products.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">At the current price, there is no margin of safety from the EPV perspective. I would argue that there is also no margin of safety from a Conservative Earning with a 2 % growth perspective.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For the price to go higher and hence project some justification for buying, you would have to view WOR as a growth stock.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But the analysis did not provide any evidence of a high growth phase. If you invest based on a high growth expectation, it would be investing in a growth trap. Would you consider company this a good US stock?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I have the following updates:</div><div style="text-align: justify;"><ul><li><a href="https://seekingalpha.com/article/4497527-worthington-industries-a-sufficient-margin-of-safety-even-as-a-cyclical-company" target="_blank">Worthington Industries - A Sufficient Margin Of Safety Even As A Cyclical Company</a> – Mac 2022 in Seeking Alpha.</li></ul><ul><li><a href="https://www.i4value.asia/2022/05/wor-is-still-one-of-better-nyse-stocks.html#more" target="_blank">WOR is still one of the better NYSE stocks</a> – May 2022 in i4value blog.</li></ul><ul><li><a href="https://seekingalpha.com/article/4593459-worthington-industries-sum-of-parts-is-greater-than-the-whole" target="_blank">Worthington Industries: Sum Of Parts Is Greater Than The Whole</a> – Apr 2023 in Seeking Alpha.</li></ul></div><div style="text-align: justify;"><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdhdOBmllO3ShY5HRKxZeOvNLUQHl6u1ExD85kCKrfQ_S-7Xljr0Hj9RyBLO-cF1_I64axu9vQ7WIK8YK_bjACIjPzWmwIj9XO2FIF5p7CeQ546u1gEceh-HkCzw3yj_bacSsWyxjfFNQ/s2000/Worthington-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Worthington Industries a growth trap?" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdhdOBmllO3ShY5HRKxZeOvNLUQHl6u1ExD85kCKrfQ_S-7Xljr0Hj9RyBLO-cF1_I64axu9vQ7WIK8YK_bjACIjPzWmwIj9XO2FIF5p7CeQ546u1gEceh-HkCzw3yj_bacSsWyxjfFNQ/s16000/Worthington-min.png" title="Is Worthington Industries a growth trap?" /></a></div><span><!--more--></span><div><br /></div><div><div style="text-align: justify;"><h2 style="text-align: left;"><a></a></h2><h2 style="text-align: left;">42. Olympic Steel (Zeus)</h2><div>Zeus is a leading metals service centre that provides metals processing and distribution services for a wide range of customers. </div><div><br /></div><div>In Oct 2021, I concluded that Zeus had poor business economics. Zeus was in a cyclical sector and as such, the fundamental analysis should be based on its performance over the cycle.</div><div><br /></div><div>The sector is currently in the uptrend part of the cycle and as such you would expect relatively good results compared to its past. But cyclical sectors mean revert.</div><div><br /></div><div>My valuation showed that the EPV is only 1/6 of the Asset Value. There is only a margin of safety based on the Asset Value The low EPV relative to the Asset Value implied that the Group had not been effective in using its assets. </div><div><br /></div><div>Could there be risks that my conclusions are wrong?</div><div><ul><li>A new CEO took over in 2019 and there are signs of the Group divesting the lower returns business and acquiring those with better margins. </li></ul><ul><li>Management continues to report progress in improving the operations even though the impact has not been significant. There could be a turning point when there is a spike in operating efficiencies</li></ul><div><br /></div></div><div>My view is that the weight of history is against this. As such Zeus is not one of the better Nasdaq stocks to invest in. You can understand why I do not rate this as a good US stock. For details refer to:</div><div><ul><li><a href="https://seekingalpha.com/article/4459429-olympic-steel-stock-not-creating-shareholders-value" target="_blank">Olympic Steel - Not Creating Shareholder Value</a> – Seeking Alpha, Oct 2021.</li></ul></div><div><br /></div></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEj1-VyDTH1-REp8juqlqCMh9AyZx1Oa6KN3a38la97f1qbn_m7WLECvJy1VEPJWch8tq-bSuBbKjAcVEAsy_qQbwH9_eKOpr-Zsg1H-DcvD3GK5eJAjjuVVia1S75rdFjdzLgB4b92cvHtOu2Q_uM_tmVHVZJm--dygUpMBejQkZZ5hF0WbfGD4WGHR=s2000" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Olympic Steel one of the better Nasdaq stocks?" border="0" data-original-height="2000" data-original-width="800" src="https://blogger.googleusercontent.com/img/a/AVvXsEj1-VyDTH1-REp8juqlqCMh9AyZx1Oa6KN3a38la97f1qbn_m7WLECvJy1VEPJWch8tq-bSuBbKjAcVEAsy_qQbwH9_eKOpr-Zsg1H-DcvD3GK5eJAjjuVVia1S75rdFjdzLgB4b92cvHtOu2Q_uM_tmVHVZJm--dygUpMBejQkZZ5hF0WbfGD4WGHR=s16000" title="Is Olympic Steel one of the better Nasdaq stocks?" /></a></div><span><!--more--></span><div><br /></div></div></div></div><div><div></div></div></div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><br /></div><div class="separator" style="clear: both; text-align: center;"><br /></div></div></div></div><div style="text-align: justify;"><div><h2 style="text-align: center;">END</h2></div><span></span><div><h2><div style="text-align: center;"><div style="font-size: medium; font-weight: 400; text-align: left;"><div><div><div><br /></div></div></div><div><br /></div><div><br /></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div></div></div></h2></div><div><h2><div style="text-align: center;"><div style="font-size: medium; font-weight: 400; text-align: justify;">How to be an Authoritative Source, Share This Post</div><div style="font-size: medium; font-weight: 400; text-align: justify;"><br /></div><div style="font-size: medium; font-weight: 400; text-align: justify;"><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div></div></div></h2><h2 style="text-align: left;"><div style="text-align: center;"><div style="font-size: medium; font-weight: 400; text-align: left;"><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic; text-align: justify;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="font-style: italic; text-align: justify;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="font-style: italic; text-align: justify;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="text-align: justify;"><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div></div></h2><h2><div style="text-align: center;"><div style="font-size: medium; font-weight: 400; text-align: justify;"><div><div></div></div><div class="separator" style="clear: both; text-align: center;"><br /></div></div></div></h2></div><div><br /></div></div><div style="text-align: justify;"><br /></div>
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<div class="separator" style="clear: both; text-align: center;"><br /></div><br />i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-62853212908860200642023-12-31T09:41:00.001+08:002023-12-31T09:47:28.836+08:00Wing Tai is still not a value trap<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Value Investing Case Study 10-4. I initially covered Wing Tai in Mac 2021 based on the Annual Reports till FYE June 2020. This post is an update taking into account the Annual Report till FYE June 2023.</span></div>
<div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuRpcKdFDrWPAsk4ZSZgqhqdfzxkVjLwfz7zloF03C4liVrLBBzLqJiUD6nlziLhyphenhyphen1z-Lt3jmmByJ1z6z4ToKqdX9tJrLSn6rZi1eGT7eaKTRYFo6ZFtaAiy4V3eQ8dIbe4RKxOo42-W-yb2yfE_KsJ61YQXmqsXA4uUt8mUbzwz6j9E8WjdPqYxcFoc0/s147/Pic%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Wing Tai is still not a value trap" border="0" data-original-height="147" data-original-width="147" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuRpcKdFDrWPAsk4ZSZgqhqdfzxkVjLwfz7zloF03C4liVrLBBzLqJiUD6nlziLhyphenhyphen1z-Lt3jmmByJ1z6z4ToKqdX9tJrLSn6rZi1eGT7eaKTRYFo6ZFtaAiy4V3eQ8dIbe4RKxOo42-W-yb2yfE_KsJ61YQXmqsXA4uUt8mUbzwz6j9E8WjdPqYxcFoc0/s16000/Pic%201-min.png" title="Wing Tai is still not a value trap" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">I first covered Wing Tai Holdings Ltd (Wing Tai or the Group), Singapore's leading property and lifestyle group in 2021. At that juncture, it was trading at SGD 1.91 per share (as of 26 Feb 2021) compared to its Book Value of SGD 4.15 per share (as of the end of Dec 2020).</div><div style="text-align: justify;"><div><br /></div><div>As a property group, a significant part of the value is tied up in the assets. With a price that is about half of the Book Value, the first thing that came to mind was whether this was a value trap.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/KliTL0WcgHk" width="320" youtube-src-id="KliTL0WcgHk"></iframe></div><br /><div>To dismiss a company as a value trap, you have to show that its assets are not going to be impaired and that it will continue to generate positive free cash flows. Next, you have to show that there is an ample margin of safety between the current price and its intrinsic value. </div><div><br /></div><div>On such a basis I concluded then that Wing Tai was not a value trap. The market price of Wing Tai is currently SGD 1.32 per share (12 Dec 2023) while its Book Value has remained about the same at SGD 4.13 per share (as of the end of FYE June 2023).</div><div><br /></div><div>Did I make a mistake or has the market been irrational for the past 2 years? Join me as I re-look at my fundamental analysis. Where appropriate, I have incorporated the analyses from my earlier articles. If you had inadvertently tried to access them, you would be redirected here.</div><div><br /></div><div>The conclusion is that Wing Tai is still not a value trap.</div><div><br /></div><div>Should you go and buy it? Read my Disclaimer!</div><div><br /></div><h2>Contents</h2><div><ul><li><b>Investment Thesis</b></li></ul><ul><li><b>Business background</b></li></ul><ul><li><b>Operating trends</b></li></ul><ul><li><b>Growth and prospects</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Risk</b></li></ul><ul><li><b>Conclusion</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: left;" /></div></div><div><h2>Investment Thesis</h2><div>Wing Tai is a property group with about 55 % of its total assets in 2023 tied up in investment properties. The bulk of the balance is tied up in property development. </div><div><br /></div><div>About 59 % of the non-current assets are invested in Hong Kong with another 28 % in Singapore. The diversity has provided the Group with some protection against any slowdown in the property market.</div><div><br /></div><div>While its performance had declined from the 2013/14 peak, the Group seemed to have arrested this decline. I do not expect losses going forward. Wing Tai is currently trading at a significant discount to its Book Value and EPV. There is a sufficient margin of safety to invest in Wing Tai. </div></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div><div>In undertaking a fundamental analysis, I rely a lot on the company’s financial statements. According to <a href="https://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/accstate.htm" target="_blank">Damodaran </a></div><div><div><br /></div><div>“...there is a difference between what accountants try to measure in financial statements, and what financial analysts would like them to measure. Some of this difference can be traced to the differences in objective functions - accountants try to measure the current standing and immediate past performance of a firm, whereas financial analysis is much more forward-looking.”</div><div><br /></div><div>This case study is a good example of the difference between accounting treatment and investment analysis. There are 2 items here:</div><div><ul><li>Perpetual securities.</li></ul><ul><li>Investment in associates and joint ventures.</li></ul></div><div><br /></div><div>In the Wing Tai Balance Sheet, perpetual securities are treated as part of equity. </div><div><br /></div><div>But there is a commitment to make regular payments. And there are no shareholders’ voting rights associated with the perpetual securities. This is more debt-like rather than equity-like. As such I have re-classified perpetual securities as part of long-term debt in my analysis.</div><div><br /></div><div>Secondly, the Wing Tai Income Statement treated the associates' and joint ventures' contributions as non-operating income. Since these are large, I have also provided a Look-Thru analysis. </div><div><br /></div><div>This Look Thus basis is inspired by Warren Buffet.</div><div><br /></div><div>Warren Buffett created a metric for the average investor known as look-through earnings. This is to account for both the money paid out to investors and the money retained by the business.</div><div><br /></div><div>The theory behind his look-through earnings concept is that all corporate profits benefit shareholders. This is irrespective of whether they are paid out as cash dividends or ploughed back into the company. </div><div><br /></div><div>Look-through earnings can be calculated by taking an investor's pro-rated share of a company's profits. Then deduct the taxes that would be due if all profits were received as cash dividends.</div><div><br /></div><div>Accordingly, my Look Thru basis is to include the pro-rated share of the associate/joint venture company’s revenue, profits, and assets as part of the Group’s items.</div><div><br /></div><div>With several different ways to analyze and value companies, how do you determine which to use? This is where experience comes in. </div><div><br /></div><div>So, if you are just starting to analyze and value companies, it may be helpful to supplement it with third-party analyses. Several financial advisers provide such analyses. Those who do this well include people <span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.</div></div><div><br /></div></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>Business background</h2><div>Wing Tai was founded in 1955 in Hong Kong as a small garment manufacturer. It eventually extended its operations into Singapore and Malaysia in the 1960s. (Source: <a href="https://www.nlb.gov.sg/main/article-detail?cmsuuid=0125fcd5-1887-4d4a-88d3-5e21f739782a#:~:text=Corporate%20Background,and%20Malaysia%20in%20the%201960s." target="_blank">Singapore Infopedia</a>).</div><div><br /></div><div>In 1984 it ventured into the retailing of ready-made garments in Singapore and extended this to Malaysia in 1989. Currently, it is one of the largest fashion retail companies in Singapore and Malaysia. </div><div><br /></div><div>Wing Tai ventured into the property sector in 1978 with its first residential project in Singapore. Today its property activities in Singapore and Malaysia are far larger than the retailing operations.</div><div><br /></div><div>It added investment properties to its portfolio in 1991 with the completion of Winsland House, a grade-A office block in Singapore. </div><div><br /></div><div>Since then, the Group has expanded both regionally and sector-wise so that today it has 3 main business segments:</div><div><ul><li>Property Development with both residential and commercial properties. Current projects are in Singapore, Malaysia, and China.</li></ul><ul><li>Property Investments with serviced residences, office buildings, data centers, and hotels. These were developed across several geographical locations.</li></ul><ul><li>Lifestyle Retail. The Group has many branded stores in Singapore and Malaysia with many lifestyle brands such as Uniqlo and Mango.</li></ul></div><div><br /></div><div>This is a property group with Property Development as the main revenue contributor. Refer to Chart 1. Although it has operations across several countries, the bulk of the revenue comes from Singapore. </div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiL3lVi1Vss9HWaxt2LTs_I1y8UPZRofwNFeVB90k5KEYDbHzTkloKj7WCE94PMSROcbuUON3P49oY25hiZkpRq7DC8tsD3FBTd5pLxwC7uuTTRwAZMTka7ZwA-2sNKRjP26evIh-7Qch83SF9k2gCr5_qo5AwVkjfez641h869Ze76cVWIPSVPKQw9ip8/s903/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Chart 1: Segment profile" border="0" data-original-height="271" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiL3lVi1Vss9HWaxt2LTs_I1y8UPZRofwNFeVB90k5KEYDbHzTkloKj7WCE94PMSROcbuUON3P49oY25hiZkpRq7DC8tsD3FBTd5pLxwC7uuTTRwAZMTka7ZwA-2sNKRjP26evIh-7Qch83SF9k2gCr5_qo5AwVkjfez641h869Ze76cVWIPSVPKQw9ip8/s16000/Chart%201-min.png" title="Wing Tai Chart 1: Segment profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Segment profile</td></tr></tbody></table><br /><div>From a corporate structure perspective, there are 2 listed entities within the Group:</div><div><div><ul><li>Wing Tai Ltd (Wing Tai) which is listed on SGX.</li></ul><ul><li>Wing Tai Properties Ltd (WTPL) which is listed on HKEX. Wing Tai owns 33 % of WTPL. </li></ul></div><div><br /></div><div>Before 2017, the Group comprised 3 listed entities - Wing Tai Holdings Ltd, WTPL, and Wing Tai Malaysia Bhd. In 2017, Wing Tai Malaysia was successfully privatized and delisted and its results are now consolidated as part of the Group results. </div><div><br /></div><div>Wing Tai has a long history of forming strategic alliances to expand its business. For example:</div><div><ul><li>In 1984, it formed a joint venture to retail clothes designed under the G2000 brand.</li></ul><ul><li>In 1993 it entered into 2 Singapore government-back consortia to develop properties in China.</li></ul><ul><li>In 2000 it established a real estate fund with AIG to develop 2 prime properties for sale in Singapore.</li></ul></div><div><br /></div><div>One such result is that Wing Tai's investments in associates and joint ventures accounted for 39 % of its Total Assets in 2023. It was only 19 % in 2008.</div><div><br /></div><div>Given the large investments in associates and joint ventures, looking at accounting revenue would not give you a true picture of the Group activities. We are fortunate in that in its Annual Report Wing Tai provided a breakdown of the assets including those of the associates. </div><div><br /></div><div>This “Look-Thru” profile will provide a more realistic picture of the focus of the business. Refer to Chart 2. </div><div><br /></div><div>Based on these, you can see that the majority of the assets have been allocated to the Property Investment segment. Secondly, the bulk of the non-current assets have been deployed in Hong Kong.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOGJipfe4qI4i-xt2ivhM-OIsh5ivCt4VBD2dl95Fy2yUcLJAt9RfUPqkhVPangnPY87BVUa5Md0dfnajWIBCpRl7eUxerSJ-mW1jjtbCVwKb1nxxJYd2WyRd-ARWjzLFo9wSjIpC1VIOu_Vemn6uRPwl0CTIX3KOX2FUtF-co91gcDbXKKvZT2e98Ghg/s903/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Chart 2: Look Thru Asset Profile" border="0" data-original-height="273" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOGJipfe4qI4i-xt2ivhM-OIsh5ivCt4VBD2dl95Fy2yUcLJAt9RfUPqkhVPangnPY87BVUa5Md0dfnajWIBCpRl7eUxerSJ-mW1jjtbCVwKb1nxxJYd2WyRd-ARWjzLFo9wSjIpC1VIOu_Vemn6uRPwl0CTIX3KOX2FUtF-co91gcDbXKKvZT2e98Ghg/s16000/Chart%202-min.png" title="Wing Tai Chart 2: Look Thru Asset Profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Look Thru Asset Profile</td></tr></tbody></table><br /><div>You will get another picture looking at the floor area under development or leased based on a Look Thru basis. In this analysis, I took the proportionate ownership of the respective projects/buildings. On such a basis, </div><div><div><ul><li>The bigger development area came from Malaysia. </li></ul><ul><li>Hong Kong contributed the largest rental area. But you can see an increase in floor area from other regions (UK) from 2018.</li></ul><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxGp31-K8LsE6OIo2py5ty-bam1zwz7Ix6HhsJ0y-Zc24eRiNc7gNwHJjbRQskam02utwbZZAzw5p0L-NbeREhrG4UlRQGHkIxPG-Kw4ZEPlEBiCoZK1h99pdK1GPCSjFA5pCyPV1tSHjwpUzSonWdFppbVYpIKc24W5H0iTzjZedpnQT3BmSUijRFB8I/s903/Chart%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Chart 3: Look Thru Floor area." border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxGp31-K8LsE6OIo2py5ty-bam1zwz7Ix6HhsJ0y-Zc24eRiNc7gNwHJjbRQskam02utwbZZAzw5p0L-NbeREhrG4UlRQGHkIxPG-Kw4ZEPlEBiCoZK1h99pdK1GPCSjFA5pCyPV1tSHjwpUzSonWdFppbVYpIKc24W5H0iTzjZedpnQT3BmSUijRFB8I/s16000/Chart%203-min.png" title="Wing Tai Chart 3: Look Thru Floor area." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Look Thru Floor area</td></tr></tbody></table><br /><div>I have not provided a breakdown by property type (residential, commercial, or office). However, the group covered several categories</div></div></div><div><div><br /></div><div>The key takeaway is that this is a diversified property group in terms of business segments, regions, and product categories (eg residential vs commercial).</div><div><br /></div><div>I found that not all the segments were pulling the same weight. Refer to Chart 4 which shows the average performance over the past 12 years.</div><div><ul><li>While Retail was the smallest in terms of capital deployed, it generated the best returns. </li></ul><ul><li>The Property Investment segment generated the lowest return.</li></ul></div><div><br /></div><div>The Group performance seemed to be pulled down by the low returns of the Property Investment and Others segments. The bulk of the Others segment is also in Property Investment. As such, I would attribute the bulk of the low returns to the investment properties. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5aSW2iQ5aLLQDH-pkiT7tK7Djy24xVRGulja0DztmHA22FT6fyYogdq5YDeAyYaXQBtUxkgeiyaSBSMXjYxgDosDEKZLLPhQQaMgYklBcLUUU4WjyxEid8ecfHU4QyP4F8Wv3fmmS1EZ12l0Zh4MM5SJUsTfvyzf9_hLW4uwmgdfC8OMlkZD5_5GHNMo/s903/Chart%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Chart 4: Segment performance" border="0" data-original-height="352" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5aSW2iQ5aLLQDH-pkiT7tK7Djy24xVRGulja0DztmHA22FT6fyYogdq5YDeAyYaXQBtUxkgeiyaSBSMXjYxgDosDEKZLLPhQQaMgYklBcLUUU4WjyxEid8ecfHU4QyP4F8Wv3fmmS1EZ12l0Zh4MM5SJUsTfvyzf9_hLW4uwmgdfC8OMlkZD5_5GHNMo/s16000/Chart%204-min.png" title="Wing Tai Chart 4: Segment performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Segment performance<br /><div style="text-align: left;"><div><i>Notes</i></div><div><i>Capital = Equity + Debt as of 2023.</i></div><div><i>Average Revenue and EBIT based on past 12 years' average.</i></div><div><i>Return = Average EBIT / Capital.</i></div><div><i>Margins = Average EBIT / Average Revenue.</i></div><div><i>Investment, Others cover the associates, JV, and other operations.</i></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: justify;" /></div></div></div></td></tr></tbody></table><div><h2>Operating trends</h2><div>I looked at 3 metrics to get an overview of the overall performance – revenue, PAT, and gross profitability (gross profits / total assets). Refer to the Performance Index of Chart 5. </div><div><br /></div><div>You can see that all 3 metrics peaked in 2013 and declined thereafter. The values in 2023 were lower than those in 2012.</div><div><ul><li>Looking at Chart 1, you can see that the declining revenue post-2014 was due to the declining property development revenue from Singapore and Malaysia. The turnaround in 2018/19 coincided with the improvement in the property development activities in these 2 countries.</li></ul><ul><li>The decline in PAT was partly due to the declining revenue as well as declining gross profit margins. In 20112/13, the average gross profit margin was 45%. This had declined to an average of 31 % in 2022/23. The jump in profits in 2018 was due to a one-off gain from the disposal of a project in China.</li></ul><ul><li>Without any significant changes in the total assets, you should not be surprised that gross profitability mirrored the revenue and PAT trends. </li></ul><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiu3TrKsJ4pgpcBW081nMmMpVw-q2ceoDSWzJV2lnZStr_zjKLLAh7A4zlyXdDBSsdlwSzmqi31h2DIv1VrKN5LyG0j0fMlvixzXJ8OkmOr3ZCqjOI8oq5d-vBRxPfdKH06O-VUBAZ9jMunM4XlQmh7AIc0FRnADvHHsfBzKeartTKhFz4EruEyIh2u6bs/s903/Chart%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Chart 5: Performance Index and EBIT" border="0" data-original-height="275" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiu3TrKsJ4pgpcBW081nMmMpVw-q2ceoDSWzJV2lnZStr_zjKLLAh7A4zlyXdDBSsdlwSzmqi31h2DIv1VrKN5LyG0j0fMlvixzXJ8OkmOr3ZCqjOI8oq5d-vBRxPfdKH06O-VUBAZ9jMunM4XlQmh7AIc0FRnADvHHsfBzKeartTKhFz4EruEyIh2u6bs/s16000/Chart%205-min.png" title="Wing Tai Chart 5: Performance Index and EBIT" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Performance Index and EBIT</td></tr></tbody></table><br /><div>You can see from the EBIT part of Chart 5 that:</div></div></div><div><div><ul><li>The majority of the profits came from property development activities. </li></ul><ul><li>The Property Investment profits have not been consistent with losses in 2023 from fair value losses. </li></ul><ul><li>The Retail segment profits became more significant over the past 2 years.</li></ul></div><div><br /></div><div>Given the declining PAT, you should not be surprised to see a decline in ROE. I also tracked the Operating return defined as after-tax Operating profit / Total Capital Employed where:</div><div><br /></div><div>Total Capital Employed = Equity + Debt – Cash</div><div><br /></div><div>As shown in Chart 6, both the ROE and Operating Return showed a declining trend. There was an operating loss in 2017 due to the low revenue. Over the past 12 years, it achieved an average 5.3 % ROE and 1.9 % Operating Return.</div><div><br /></div><div>A DuPont Analysis of the Operating Return showed that Operating margin accounted for the bulk of the changes in returns. The positive sign was the improving Leverage (declining trend).</div><div><br /></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnWoHFreI5kfNhnBQH8Ma6tyPQCbVOuwf3iottfT3nY-rcqpRPFG0KoSVHeCxV8Oiu9QMtaAnZw0zuVndWHgZf4P_rWpIJvmJrT9-spk-Ny_VQ7eey64a7_NJ0gbc-eTx3htUU3reSNY7rYgSoEfsbq7_37lF8UNeW5-25IXk6SluFyf0Qhv1BkyOOqUg/s903/Chart%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Chart 6: Return and DuPont" border="0" data-original-height="272" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnWoHFreI5kfNhnBQH8Ma6tyPQCbVOuwf3iottfT3nY-rcqpRPFG0KoSVHeCxV8Oiu9QMtaAnZw0zuVndWHgZf4P_rWpIJvmJrT9-spk-Ny_VQ7eey64a7_NJ0gbc-eTx3htUU3reSNY7rYgSoEfsbq7_37lF8UNeW5-25IXk6SluFyf0Qhv1BkyOOqUg/s16000/Chart%206-min.png" title="Wing Tai Chart 6: Return and DuPont" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Return and DuPont<br /><div style="text-align: left;"><i>Note: In the years where the tax rate was negative, I took the past 12 years' average tax rate in determining the after-tax operating profit. </i></div></td></tr></tbody></table><div><div><br /></div><h3>Peer comparisons</h3><div>To assess management performance, I usually compare the company's performance with those of its listed peers.</div><div><br /></div><div>The challenge here is that there is no other SGX-listed company with property and retail operations. Secondly, it would be difficult to find SGX property companies with similar geographical spread. </div><div><br /></div><div>As such, I selected the top SGX-listed property companies with large overseas investment properties as peers. These are:</div><div><ul><li>Guoco Land (F17).</li></ul><ul><li>CapitaLand (C31).</li></ul><ul><li>HongKong Land (H78).</li></ul><ul><li>City Development (C09).</li></ul></div><div><br /></div><div>I looked at 2 metrics – revenue growth and ROA. Refer to Chart 7 and Table 1. </div><div><ul><li>Wing Tai had the worst revenue growth results. The revenue of both City Development and Wing Tai shrank over the past 12 years. </li></ul><ul><li>Wing Tai had the worst average ROA. It also had the largest drop from 2012 to 2022.</li></ul><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgtHVJ8z9cCUC7e9NBXGbycz-CgQ7-z51Ydo_MWCHqrRp34jXkEP4nXGSRjFGSj8cQ5VLB15z-TmzDxIkVlxSDre99xsTTvtLvG-gW8iS6JZ3_YCkS5tFLeunlTlsXnNpKwloGkzHgytOLvL0nLJLcpiFq2JRPBRwYTC4wfJVDhcnLJ5svTii2FfaUasS8/s903/Chart%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Chart 7: Peer Comparisons" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgtHVJ8z9cCUC7e9NBXGbycz-CgQ7-z51Ydo_MWCHqrRp34jXkEP4nXGSRjFGSj8cQ5VLB15z-TmzDxIkVlxSDre99xsTTvtLvG-gW8iS6JZ3_YCkS5tFLeunlTlsXnNpKwloGkzHgytOLvL0nLJLcpiFq2JRPBRwYTC4wfJVDhcnLJ5svTii2FfaUasS8/s16000/Chart%207-min.png" title="Wing Tai Chart 7: Peer Comparisons" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Peer Comparisons</td></tr></tbody></table><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZcfE3CPPBafSNwXw7QsMX9WvwKFTfoQ85i23tdIYpwIeJMLMO1F3NPA3cSIpbn5Rngdz9LmfvnlNjIVo41Q0k8nUYf5SDI4YaytR-BW8DiQi8fGp_m0YAA_LcvlIY0NBaq-aTwdLWf8j64_rM-XvAPj0eyZ6MaunWvA5Dk4aQlV3yeaI2hvt73jvwzOA/s550/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Table 1: Peer Performance" border="0" data-original-height="178" data-original-width="550" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZcfE3CPPBafSNwXw7QsMX9WvwKFTfoQ85i23tdIYpwIeJMLMO1F3NPA3cSIpbn5Rngdz9LmfvnlNjIVo41Q0k8nUYf5SDI4YaytR-BW8DiQi8fGp_m0YAA_LcvlIY0NBaq-aTwdLWf8j64_rM-XvAPj0eyZ6MaunWvA5Dk4aQlV3yeaI2hvt73jvwzOA/s16000/Table%201-min.png" title="Wing Tai Table 1: Peer Performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Peer Performance</td></tr></tbody></table><br /><div>Do remember that Wing Tai property business operates in different regions compared to the peers. As such, you should not be surprised to see different performances. The role of management is to make strategic choices about where to invest. Given this, you should not dismiss Wing Tai comparative poor performance outright. </div></div><div><br /></div><div><h2>Growth and prospects</h2><div>Over the past 12 years, revenue declined. This is reflected in Chart 3 which showed a reduction in the gross floor area developed. At the same time, there was not much growth in the lettable floor area.</div><div><br /></div><div>This is more a function of the property market condition. </div><div><br /></div><div>Based on the profile in the earlier charts, I would break up the Group’s property market into 2: </div><div><ul><li>Residential market - property development. These are especially important for Singapore, Malaysia, and Hong Kong.</li></ul><ul><li>Office rental market - These are relevant for the Property Investment portfolio in Hong Kong and UK.</li></ul></div><div><br /></div><div>I thus focus on these markets when looking at the prospects. Chart 8 shows that over the past 12 years, the housing starts in Singapore and Malaysia have been declining. </div><div><br /></div><div>Chart 9 shows the rental position for Hong Kong and the UK. </div><div><ul><li>The rental rates for Hong Kong increased from 2011 to peak in 2019 before declining. </li></ul><ul><li>Wing Tai started its operation in the UK in the early part of the last decade. But it became significant in 2018. </li></ul></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFcE7CkW8X3i8JpC0VlamE0FDZTm9A-XKfxpvnKwMhtO4CrhvXrL7y0Yms6cUlE1vREtPFzsuulYT5V5f_SiwJt8MzktOC6Ud_wgcckhUa8_cPtp9l8RAAznyol845nfMkdB4rvkwJQy_QoMPwIYS4cn8Z9upF8qjSPwpww9kQOYdX8kHeGaN9dreKw-4/s903/Chart%208-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Chart 8: Malaysia and Singapore Housing Starts" border="0" data-original-height="265" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFcE7CkW8X3i8JpC0VlamE0FDZTm9A-XKfxpvnKwMhtO4CrhvXrL7y0Yms6cUlE1vREtPFzsuulYT5V5f_SiwJt8MzktOC6Ud_wgcckhUa8_cPtp9l8RAAznyol845nfMkdB4rvkwJQy_QoMPwIYS4cn8Z9upF8qjSPwpww9kQOYdX8kHeGaN9dreKw-4/s16000/Chart%208-min.png" title="Wing Tai Chart 8: Malaysia and Singapore Housing Starts" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: Malaysia and Singapore Housing Starts</td></tr></tbody></table><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyy7kZ_21kL1XBc1KSY6LD5sbo3jKuCj0nvBL4Ef3F6w3XepA9OZVWF4ywsaMvyfwpO6A8P0ISWEfsya54cdF8euPVl-ZYsP0C9_DrhDbTM5zSPuqggEBMr5EP6NfddUygMa-p5qfFTneRcPd_mU__D4TDodOUqRZVualAbh_2aWOqGr6COTFhFeBuGSc/s903/Chart%209-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Chart 9: Hong Kong and UK Rentals" border="0" data-original-height="269" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyy7kZ_21kL1XBc1KSY6LD5sbo3jKuCj0nvBL4Ef3F6w3XepA9OZVWF4ywsaMvyfwpO6A8P0ISWEfsya54cdF8euPVl-ZYsP0C9_DrhDbTM5zSPuqggEBMr5EP6NfddUygMa-p5qfFTneRcPd_mU__D4TDodOUqRZVualAbh_2aWOqGr6COTFhFeBuGSc/s16000/Chart%209-min.png" title="Wing Tai Chart 9: Hong Kong and UK Rentals" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 9: Hong Kong and UK Rentals</td></tr></tbody></table><div><br /></div></div><div>Comparing Charts 1, 5, and 8, I would conclude that when the property development market was good (such as in 2013/14), the Group was able to deliver a good performance from the Property Development segment. </div></div><div><br /></div><div><h3>Reinvestments</h3><div>I defined Reinvestments as:</div><div><br /></div><div>Reinvestment with acquisitions = CAPEX & Acquisitions – Depreciation & Amortization + Net Changes in Working Capital.</div><div><br /></div><div>Over the past 12 years, the total Reinvestment was negative SGD 268 million. This meant that instead of investing in the business, cash was thrown out from divestiture. Furthermore, this meant that the amount incurred for Net CAPEX was less than the Depreciation and amortization.</div><div><br /></div><div>I would not expect to have this situation if the business is growing. </div><div><br /></div><div>The key takeaway is that it may be more appropriate to value Wing Tai based on the Earnings Power Value (EPV). This will assume that there is no growth and that the Reinvestment = zero.</div><div><br /></div><h2>Financial position</h2><div>I assessed Wing Tai's financial position based on the following metrics. Overall, I would rate it as average as there were both positive and negative performances.</div><div><br /></div><div>It has a 0.2 Debt Equity ratio as of the end of Jun 2023. The ratio had declined from the 12-year peak of 0.52 in 2012.</div><div><br /></div><div>As of the end of June 2023, it had SGD 404 million in cash and short-term investments. This was about 10 % of its total assets.</div><div><br /></div><div>Over the past 12 years, there were only 2 years with negative cash flow from operation. It generated about SGD 923 million in cash flow from operations compared to the total PAT of USD 1.85 billion. This is not exactly a good cash conversion ratio.</div><div><br /></div><div>Over the past 12 years, it generated SGD 923 million cash flow from operations. But it spent SGD 849 million on dividends and share buyback. This meant that there was not enough for CAPEX. Refer to Table 2. I would not consider this a good capital allocation plan.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimMS97QXgWdlPCIMm_3gC1XNIQhNa7PLCZ6Uy9xLqy5lrlaFzUnXv6kBm6MWTkjK62cZjdPne8OWjH-IY0ufWOuIYptsUMKAtlgXpJ5Hq1WRw1UJODDlQxzefOC0cwCyTqKLCB83fWUE6GKmwcbcvlgvTyyFZCy54qlvjpaHb8s8x3k06kIDJSsc08YIM/s506/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Table 2: Sources and Uses of Funds" border="0" data-original-height="252" data-original-width="506" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimMS97QXgWdlPCIMm_3gC1XNIQhNa7PLCZ6Uy9xLqy5lrlaFzUnXv6kBm6MWTkjK62cZjdPne8OWjH-IY0ufWOuIYptsUMKAtlgXpJ5Hq1WRw1UJODDlQxzefOC0cwCyTqKLCB83fWUE6GKmwcbcvlgvTyyFZCy54qlvjpaHb8s8x3k06kIDJSsc08YIM/s16000/Table%202-min.png" title="Wing Tai Table 2: Sources and Uses of Funds" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Sources and Uses of Funds</td></tr></tbody></table><div><br /></div><div>Over the past 12 years, it achieved an average after-tax operating return of 1.9 %. This was lower than the WACC of 6.2 % as per Table 3. This meant that it had not been able to create shareholders’ value.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgO8G1IJwaH_LCNoznVyjV44LyiGRInzE-6NC_quPjqdCla5YcUkDClSwTQrooKuCmrtWaS1085rfLMoYro324hsYK29upZ6N5uBmuUPVvQ1-BDHfnko1INd2zxYRRsXGLUfCVf8f24dPmWCz7_izowtu_LUH-tAFJfxdzlUGR5WvUNXdfuf1MTg5jJAhI/s367/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Table 3: WACC" border="0" data-original-height="126" data-original-width="367" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgO8G1IJwaH_LCNoznVyjV44LyiGRInzE-6NC_quPjqdCla5YcUkDClSwTQrooKuCmrtWaS1085rfLMoYro324hsYK29upZ6N5uBmuUPVvQ1-BDHfnko1INd2zxYRRsXGLUfCVf8f24dPmWCz7_izowtu_LUH-tAFJfxdzlUGR5WvUNXdfuf1MTg5jJAhI/s16000/Table%203-min.png" title="Wing Tai Table 3: WACC" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: WACC<br /><div style="text-align: left;"><i>Note: Based on a Google search for the term “Wing Tai Holdings WACC”.</i></div></td></tr></tbody></table><div><br /></div><div><h3>Wing Tai Malaysia Bhd (WTMB)</h3><div>At the beginning of 2017, WTMB was a 66.2 % subsidiary of Wing Tai. It had property development, property investment, and fashion retail operations in Malaysia.</div><div><br /></div><div>In May 2017, a voluntary unconditional cash offer was made for all the remaining shares in WTMB not already owned by the Group at a cash offer price of RM 1.80 per share.</div><div><br /></div><div>On 8 August the compulsory acquisition threshold was crossed and WTMB became a subsidiary of Wing Tai. WTMB was delisted from Bursa Malaysia on 30 August 2017.</div><div><br /></div><div>The offer price of RM 1.80 per share was about 48 % to 71 % premium to the various volume-weighted average market prices of WTMB. (The periods ranged from 5 days to 6 months of full trading days before the service of the Notice of Unconditional Take Over Offer.)</div><div><br /></div><div>In reality, the offer price was actually below the intrinsic value of WTMB.</div><div><ul><li>The Net Asset was RM 2.73 per share at that juncture.</li></ul><ul><li>The Independent Adviser estimated that the fair value of WTMB ranged from RM 3.55 to RM 3.59 per share (Source: WTMB Independent Advice Circular).</li></ul><ul><li>Another minority shareholder (Pangolin) estimated that the Revised Net Asset Value of WTMB to be RM 3.63 per share.</li></ul></div><div><br /></div><div>You can see that the acquisition was at a price that was lower than the intrinsic value of WTMB. As such it added value to the shareholders of Wing Tai. </div><div><br /></div><div>You would commend Wing Tai from a capital allocation perspective. They took advantage of the market conditions to privatize WTMB at such a price.</div></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div><div>On a personal note, I was a shareholder of WTMB at that juncture having invested a year or two ago at an average price of RM 1.78 per share. At that time when I purchased the shares, there was a 30-odd % margin of safety. This was based on the NTA as the intrinsic value.</div><div><br /></div><div>In hindsight, the discount to the NTA did not provide enough margin of safety. </div><div><br /></div><div>The margin of safety is a concept introduced by Benjamin Graham in his book “The Intelligent Investor”. </div><div><br /></div><div>It refers to purchasing stocks at prices that are at significant discounts to the computed intrinsic values. As the computed intrinsic values are based on assumptions, you want to ensure that there is some safety factor for any purchase you make.</div><div><br /></div><div>As all my case studies have shown, valuation is not an exact science. You will get different intrinsic values depending on the valuation approach as well as the assumptions used.</div><div><br /></div><div>Since the idea of value investing is to buy cheap stocks, you want to ensure that the purchased price is cheap. You achieve this by ensuring that the purchase price has some 20 % to 30 % discount on the computed intrinsic value.</div><div><br /></div><div>The margin of safety is more than a numerical discount. You can also introduce a “qualitative” aspect to the margin of safety with:</div><div><ul><li>Having conservative assumptions in the valuation.</li></ul><ul><li>Ignoring growth in the valuation.</li></ul><ul><li>Using different valuation approaches.</li></ul></div></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>Valuation</h2><div>The property sector is cyclical as can be seen from the earlier charts.</div><div><br /></div><div>Damodaran opined that cyclical companies’ performance depends on where they are in the cycle. Extrapolating the performance based on the current earnings and cash flows can lead to misleading valuations. </div><div><br /></div><div>To overcome the cyclical issue, we have to normalize the performance over the cycle. To reflect the current size of the business, Damodaran suggested that we should take the current revenue and determine the earnings by multiplying it with the normalized margins.</div><div><br /></div><div>I will develop my financial model of Wing Tai based on this approach. Unfortunately, when you look at Charts 8 and 9, you can see that 2012 to 2023 does not cover a full cycle ie peak-to-peak, or the equivalent.</div><div><br /></div><div>I used 2 key approaches to triangulate the intrinsic value of Wing Tai:</div><div><ul><li>Asset Value. I used the Book Value here.</li></ul><ul><li>Earnings Value. I consider the EPV case with 2 Scenarios. For Scenario 1 (EPV 1), I assumed the 2012 to 2023 average earnings. For Scenario 2 (EPV 2), I assumed that 2018 to 2023 average earnings.</li></ul></div><div><br /></div><div>Chart 5 summarizes the picture. With the current market price of SGA 1.32 per share (as of 12 Dec 2023) you can see that there is a sufficient margin of safety under both the Asset Value and EPV. </div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg58ADRyU5UELLUR0iHbTtsZmuna5oVL1eooUjn_te-zbIWtTbsDkJUlaUwCv8OCkUPRV8NIq-mmKGSEPdFI7_KJHQXInOAnaz3vn6KXdteMuCgCz6jQYdDqSKj2SQQulixVUI_sbCYUkXc7_NNvHRPJt1y12rD8Li38K1cRYttbEJ7DrBJ21TeXU5LV4Q/s657/Chart%2010-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Chart 10: Valuation" border="0" data-original-height="400" data-original-width="657" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg58ADRyU5UELLUR0iHbTtsZmuna5oVL1eooUjn_te-zbIWtTbsDkJUlaUwCv8OCkUPRV8NIq-mmKGSEPdFI7_KJHQXInOAnaz3vn6KXdteMuCgCz6jQYdDqSKj2SQQulixVUI_sbCYUkXc7_NNvHRPJt1y12rD8Li38K1cRYttbEJ7DrBJ21TeXU5LV4Q/s16000/Chart%2010-min.png" title="Wing Tai Chart 10: Valuation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 10: Valuation<br /><div style="text-align: left;"><div><i>Note: The orange column under EPV 1 and EPV 2 represents the net non-operating assets. They are the investment in associates/JV.</i></div><div><br /></div></div></td></tr></tbody></table><div><div>I estimate the Asset Value to be SGD 4.13 per share. This is looking at the assets of the company as a store of value. The Asset Value does not take into account the possible further fair value losses from the investment properties. </div><div><br /></div><div>There had not been very significant fair value losses at Wing Tai level compared to WTPL. There had been substantial fair value losses at the WTPL level over the past few years. However, because of the 33% ownership, the impact has been limited as shown in Table 4.</div><div><br /></div><div>Note that the reduction in the carrying value from 2022 to 2023 is about SGD 0.17 per share or about 4 % of the 2023 Book Value. As such the Asset Value provides a large margin of safety from the impairment perspective.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGmn2ZzSvwmMe61Mh-wwCwpSBKxcSXUVUaURG8Y7Bs52I66i86qwoIr9PP-wCsn03h21vTstRNwOoa46opAjDtmO4Btdjj-VbKkHSexBNwzal9AREGc8_uQIxwD1bHJm6oZXaZ2geka5PMkUCww12sWxXgFGlfrOpb1YzbhHzKVbjPiPX4mfjFmVRtBTA/s345/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Wing Tai Table 4: WTPL carrying amount in Wing Tai books" border="0" data-original-height="201" data-original-width="345" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGmn2ZzSvwmMe61Mh-wwCwpSBKxcSXUVUaURG8Y7Bs52I66i86qwoIr9PP-wCsn03h21vTstRNwOoa46opAjDtmO4Btdjj-VbKkHSexBNwzal9AREGc8_uQIxwD1bHJm6oZXaZ2geka5PMkUCww12sWxXgFGlfrOpb1YzbhHzKVbjPiPX4mfjFmVRtBTA/s16000/Table%204-min.png" title="Wing Tai Table 4: WTPL carrying amount in Wing Tai books" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: WTPL carrying amount in Wing Tai books<br /><div style="text-align: left;"><i>Note that the changes in the carrying amount are also due to dividends and forex apart from profit or loss.</i></div></td></tr></tbody></table><div><br /></div><div>I prefer to focus on the Earnings Value of SGD 3.09 per share under EVP 1 and SGD 2.29 per share under EPV 2. </div><div><ul><li>EPV 2 is a very conservative one as it assumes that the future earnings will be at the 2018 to 2023 performance level. </li></ul><ul><li>I am more inclined to see the future earnings to be the average of the past 12 years' performance as per EPV 1.</li></ul></div><div><br /></div><div><div>Note that a very large part of the EPV comprises the non-operating assets. These comprise mainly the investment in associates and JV. As such, the potential fair value losses mentioned earlier are also applicable here. However, the margin of safety under EVP 1 is large enough to cater to this. </div><div><br /></div><h3>EPV Valuation models</h3><div>I estimated the EPV based on Damodaran Free Cash Flow to the Firm (FCFF) model where:</div><div><br /></div><div>FCFF = EBIT(1-t) under the Earnings Power Value case. </div><div><br /></div><div>Value = FCFF / WACC</div><div><br /></div><div>The above model valued the operating assets. To estimate the Value of the firm, I added the Value of non-operating assets. In the case of Wing Tai, the non-operating assets were very large as they amount to SGD 1.73 billion. They comprise the investment in associates/JV and cash. </div><div><br /></div><div>The Value of Equity was then determined based to the following equation:</div><div><br /></div><div>Value of Equity = Value of the firm – Debt – Minority Interest.</div><div><br /></div><div>In interpreting the EPV you should note that I have assumed that the future performance is equal to that of the past. If you believe that the future would be better, then my valuation is low. </div><div><br /></div><h2>Risks</h2><div>I normally look at two types of risks - privatization and business risks. </div><div><br /></div><div>In the SGX context, the privatization rules are different than those for Bursa Malaysia. SGX rules require any privatization to be fair and reasonable. This means that the offer price should reflect the value of the securities and not just the market price.</div><div><br /></div><div>This is unlike Bursa Malaysia where an offer can be unfair but reasonable. It does not reflect the value of the securities but is in line with the market price.</div><div><br /></div><div>For example, the privatization of WTMB was deemed as “unfair” but “reasonable” by the Independent Adviser. This was because the offer price was less than fair value but at premiums to market prices.</div><div><br /></div><div>As such if you invested at a discount to intrinsic value, there is less concern about suffering a loss through the privatization of Wing Tai.</div><div><br /></div><div>The main risk for investing in Wing Tai is the business risk. The key questions in this context are </div><div><ul><li>Is property development and/or property investment a sunset industry?</li></ul><ul><li>Is fashion retailing going to be disrupted by digital technology?</li></ul></div><div><br /></div><div>I believe that there will still be a demand for residential properties in Singapore and Malaysia. As such this is not a sunset industry. </div><div><br /></div><div>However, there are risk issues with property investments and retailing.</div><div><br /></div><h3>Property investment</h3><div>One of the most significant impacts of the Covid-19 pandemic has been on the work-from-home trend. According to a recent article by <a href="https://www.mckinsey.com/mgi/our-research/empty-spaces-and-hybrid-places" target="_blank">McKinsey</a>:</div><div><br /></div><div>“Hybrid work is here to stay. As a result, office attendance has stabilized at 30 percent below pre-pandemic norms… The ripple effects of hybrid work are substantial.”</div><div><br /></div><div>While the above refers to the US market, I expect this work-from-home to be eventually a global trend. There are two possible scenarios for Wing Tai:</div><div><ul><li>Move into a co-working space.</li></ul><ul><li>More investments in non-office spaces eg data centers.</li></ul></div><div><br /></div><div>This will affect the occupancy of the investment properties. In 2023, Wing Tai recognized a fair value loss of SGD 4.9 million. But this was for Wing Tai's investment properties.</div><div><br /></div><div>WTPL had its share of fair value losses as follows:</div><div><ul><li>HKD 527 million (about SGD 90 million) for FYE 2021.</li></ul><ul><li>HKD 1,199 million (about SGD 204 million) for FYE 2022.</li></ul><ul><li>HKD 290 million (about SGD 49 million) for the first half of FYE 2023</li></ul></div><div><br /></div><div>I would not be surprised to see further fair value losses until the demand or rental rates stabilize, especially in Hong Kong. </div><div><br /></div><div>What is the potential loss? In the mid-90s to mid-2000s property cycle, property values in Hong Kong dropped by about half. </div><div><br /></div><div>Properties accounted for about 80 % of WTPL Total Assets. If history repeats itself, we could have 50 % impairment of this 80 %. But Wing Tai exposure is limited to its 33 % share. I estimated that this would result in a fair value loss of SGD 680 million Wing Tai ie about SGD 0.90 per share. </div><div><br /></div><div>If this worst case happens, the Asset Value would be reduced by about ¼. And there would still be a margin of safety under EPV 1. </div><div><br /></div><div>But then you are assuming that the property market would not recover. Historically there have be reversal of fair value losses. If you are a long-term investor, this fair value loss is not the end of the story. </div><div><br /></div><h3>Digital disruption and fashion retailing</h3><div>It is generally accepted that fashion is one of the key industries that is currently being redefined by digital disruption. According to the consulting group BCG in "<a href="https://www.bcg.com/publications/2020/why-fashion-must-go-digital-end-to-end" target="_blank">Why Fashion Must Go Digital - End to End",</a></div><div><br /></div><div>“Fashion, an industry of craft and creativity, needs to go digital both to survive attack and to thrive in the next decade….” </div><div><br /></div><div>Another consulting group, McKinsey opined that some apparel, fashion, and luxury companies won’t survive the current crisis; others will emerge better positioned for the future. Much will depend on their digital and analytics capabilities.</div><div><br /></div><div>As one of the leading fashion retailers in Singapore and Malaysia, Wing Tai is not immune from this threat.</div><div><br /></div><div>At this juncture, there is no sign of how the Group is going to meet the challenge of digital technology. It will have to address this if it is to remain a leading player in this sector.</div><div><br /></div><div>About 3 decades ago, the Group reinvented itself from garment manufacturing to fashion retailing. It will have to reinvent itself if it wants to continue to be in the fashion retailing sector.</div><div><br /></div><div>In mitigation, the fashion retailing segment is a small part of the Group.</div><div><br /></div><h2>Conclusion</h2><div>Wing Tai's revenue over the past 12 years declined. This was partly due to the soft property market in those regions where it operated. But part of the decline can also be attributed to its business model as some of its peers managed to grow their revenues.</div><div><br /></div><div>The bulk of the profit came from property development. As such the Group’s profit declined in tandem with the slowdown of the property development sector in Singapore and Malaysia.</div><div><br /></div><div>However, the property development sector is cyclical. The Group has the assets and track record to rebuild the Property Development segment revenue when this happens. </div><div><br /></div><div>The advantage is that the Group has a Retail segment that did very well over the past 2 years following the COVID-19 disruption. At the same time, the Group's low debt and strong cash position meant that it had the financial resources to scale up the property development business.</div><div><br /></div><div>The positive side is that there are margins of safety from both the Asset Value and Earning Power Value perspectives. </div><div><br /></div><div>Wing Tai does not look like a company that is going under. Property development is not a sunset sector and while there is a threat of digital disruption to its retailing business, this is a small contributor. </div><div><br /></div><div>The main challenge is the Property Investment portfolio. If the rental market in Hong Kong and the UK takes a longer time to recover, we may see further fair value losses. But this can be covered by the large margin of safety.</div><div><br /></div><div>Given the above, Wing Tai is not a value trap. I had a similar conclusion in 2021. The unknown is how long an investor has to wait for the market to re-rate Wing Tai. But the wait is not a value trap issue. It is a holding power and the size of the investment return issue.</div><div><br /></div><div>I am a long-term value investor holding onto stocks for 6 to 8 years. My analysis and valuation are from this perspective. And you can understand why I consider this an investment opportunity. </div><div><br /></div><div><br /></div></div><div><br /></div><div><br /></div><div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div></div><p></p><p><br /></p></div><div><br /></div><div><br /></div><div><br /></div><div></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-5091298944413273352023-12-24T09:48:00.001+08:002023-12-24T09:53:43.931+08:00Is KFIMA one of the better Bursa stocks? <script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Value Investing Case Study 14-4. An updated fundamental analysis of Kumpulan Fima based on the Annual Reports till FYE March 2023. </span></div>
<div style="text-align: left;"> </div><div style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjR2WTZMUwESK69DQ7RcmUjI8bMLcCkeChKswSt1VsosTkLjx2UjZOR6b1iyD7ZyGGhj5xrxOSFq0qyxXcJ9Wle9QstCRXD36B7fiprkFFn1_R37UjJzijXxJDYEEGDnK2qFeboU7dq6QUa3P4Zi3M0NjPgsS0Xjfyi6D-X2Atwbp_pQ0ZwiJXXYo8bXyM/s330/Picture1-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is KFIMA one of the better Bursa stocks?" border="0" data-original-height="330" data-original-width="257" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjR2WTZMUwESK69DQ7RcmUjI8bMLcCkeChKswSt1VsosTkLjx2UjZOR6b1iyD7ZyGGhj5xrxOSFq0qyxXcJ9Wle9QstCRXD36B7fiprkFFn1_R37UjJzijXxJDYEEGDnK2qFeboU7dq6QUa3P4Zi3M0NjPgsS0Xjfyi6D-X2Atwbp_pQ0ZwiJXXYo8bXyM/s16000/Picture1-min.png" title="Is KFIMA one of the better Bursa stocks?" /></a></div><span><a name='more'></a></span><div>I first covered Kumpulan Fima (KFIMA or the Group) in May 2021. It was then trading at RM 1.92 per share (as of 28 April 2021) compared to its Book Value of RM 2.90 per share (as of the end of Dec 2020).</div><div><br /></div><div>The market price has since dropped to RM 1.82 per share (as of 4 Dec 2023) while the Book Value had grown to RM 3.33 per share (as of the end of March 2033). </div><div><br /></div><div>The current market price is a significant discount on the Book Value considering that this is a brick-and-mortar group. The Group has been profitable over the past 12 years. </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/m31TkvDgthc" width="320" youtube-src-id="m31TkvDgthc"></iframe></div><br /><div>Is the market suggesting that its assets are overvalued and/or that the Group is going to face some insurmountable problems? Is KFIMA a value trap?</div><div><br /></div><div>For a company to be a value trap, the cheap price must be because there is a real reason for it. The trap springs after you have bought it. </div><div><br /></div><div>I will provide an updated fundamental analysis and valuation of KFIMA to show why it is not a value trap. Where relevant I have also incorporated some of the analysis from my earlier articles. If you had tried to access my previous articles, you would have been redirected here.</div><div><br /></div><div>To be transparent I own KFIMA shares at an average price of RM 2.23 per share. I have been holding them for about 9 years. </div><div><br /></div><div>Should you go and buy it? Well, read my Disclaimer.</div><div><br /></div><h2>Contents</h2><div><ul><li><b>Investment thesis</b></li></ul><ul><li><b>Business background</b></li></ul><ul><li><b>Operating trend</b></li></ul><ul><li><b>Financial position</b></li></ul><ul><li><b>Risks</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>KFIMA is one of the better Bursa companies</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: left;" /></div></div><div><h2>Investment Thesis</h2><div>KFIMA did not achieve any revenue growth over the past 12 years. But this was due to the loss of a major supply contract. The Group had managed to offset this by growing the business in the 3 other segments – Plantation, Food, and Bulking.</div><div><br /></div><div>The returns with the current business profile have yet to reach the levels of that prior to the loss of the supply contract. But the Group is making progress. </div><div><br /></div><div>The Group is fundamentally sound. It has managed to deliver returns that were greater than the cost of capital. It is financially sound with a good capital allocation plan.</div><div><br /></div><div>At the same time, there is a sufficient margin of safety based on both the Asset Value and Earnings Power Value. </div><div><br /></div></div><div><h2>Business background</h2><div>KFIMA was incorporated by the Malaysian Government in 1972 with the canning of pineapples as its first business. </div><div><br /></div><div>In 1981, KFIMA became the controlling shareholder of Fima Metal Box Bhd, now known as Fima Corporation Bhd (Fima Corp).</div><div><br /></div><div>A decade later, KFIMA underwent a Management Buy-Out in line with the privatization policy of the Malaysian Government. In 1996 KFima was listed on the Main Board of Bursa Malaysia.</div><div><br /></div><div>Today, KFIMA is a diversified group with 4 core business divisions - Manufacturing, Plantation, Bulking, and Food. They have also expanded beyond Malaysia to Indonesia and Papua New Guinea.</div><div><ul><li>Manufacturing. The Group is the largest domestic security printer in Malaysia. It has a wide range of products and services eg travel documents and licenses. The Group also operates Malaysia's only banknote printing plant.</li></ul><ul><li>Plantation. KFIMA is involved in the development, cultivation, and management of oil palm and pineapple estates. The Group currently owns and operates 16 estates in Malaysia and Indonesia with a land bank totalling 18,596 hectares.</li></ul><ul><li>Bulking. The Group's Bulking division operates five liquid bulk terminals. Three of them are located in Port Klang while the other two are in Butterworth. This division handles and stores various types of liquids. It also provides transportation and forwarding services.</li></ul><ul><li>Food. This division manufactures and distributes canned fish in Papua New Guinea. It also provides third-party food packaging services.</li></ul></div><div> </div><div>The Group comprises two listed entities with oil palm plantations as the common business.</div><div><ul><li>Kumpulan Fima Bhd. The core businesses are plantation, food processing, and bulking.</li></ul><ul><li>Fima Corporation Bhd (Fima Corp) - this is a 62% owned subsidiary of Kumpulan Fima Bhd. The core businesses are manufacturing and plantations. </li></ul></div><div><br /></div><div>The chart below illustrates the linkage between these two listed entities.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrxme1MEKjWAH06Mb4l4_hJnX6CiOELNhLUKJ7iSsoAv3B-Wvb3Oygfobf358p0vPZF8Vv7H9j7BSkScWhgkyr3lH0286TTi7unHVYUXtFbBAK7rw-jIsM_xu4ZiDw1xnoHspkcbEHsjP_oltpWyTlOa5rD0J61F-DLyOmJP6OMVaaIXCKgcNY1imbzFs/s903/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Chart 1: Business Structure" border="0" data-original-height="359" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrxme1MEKjWAH06Mb4l4_hJnX6CiOELNhLUKJ7iSsoAv3B-Wvb3Oygfobf358p0vPZF8Vv7H9j7BSkScWhgkyr3lH0286TTi7unHVYUXtFbBAK7rw-jIsM_xu4ZiDw1xnoHspkcbEHsjP_oltpWyTlOa5rD0J61F-DLyOmJP6OMVaaIXCKgcNY1imbzFs/s16000/Chart%201-min.png" title="KFIMA Chart 1: Business Structure" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Business Structure</td></tr></tbody></table><div><br /></div><div><h3>Segment performance</h3><div>To give you a sense of the size and returns achieved by each of the business segments, I look at the past 12 years' time-weighted average revenue and EBIT. I then estimate the 2023 total capital employed (TCE) defined as equity + debt – cash.</div><div><br /></div><div>Chart 2 shows the Manufacturing segment delivered the best return as measured by the EBIT/TCE. The Plantation business achieved the worst return even though it employed the largest capital. </div><div><br /></div><div>At the same time, the returns from cash and securities were not significant to offset the inter-co eliminations.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjneQmBVltkIyrLBX7ZTuQh5bEjoXm34BBujCuqhBs_lUaSRomy1YqJoEsNx3jI4Ex8OKn4U8BAH6A84GXQtxEiQHr8PcOOveIrGx7LW7xRcCh2eNOmJNKosfXcVpD5qJwqtme9XOzrvn4fqE-YBFhVGGsE4Jv76gbCLuAW3LQbrkbI-WbbaCWRhrMT_h0/s903/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Chart 2: Segment returns" border="0" data-original-height="254" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjneQmBVltkIyrLBX7ZTuQh5bEjoXm34BBujCuqhBs_lUaSRomy1YqJoEsNx3jI4Ex8OKn4U8BAH6A84GXQtxEiQHr8PcOOveIrGx7LW7xRcCh2eNOmJNKosfXcVpD5qJwqtme9XOzrvn4fqE-YBFhVGGsE4Jv76gbCLuAW3LQbrkbI-WbbaCWRhrMT_h0/s16000/Chart%202-min.png" title="KFIMA Chart 2: Segment returns" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Segment returns</td></tr></tbody></table><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>Operating trends</h2><div>I looked at 3 metrics to get an overview of the overall performance – revenue, PAT, and gross profitability (gross profits / total assets). Refer to Chart 3.</div><div><ul><li>The bulk of the revenue growth came over the past 2 years.</li></ul><ul><li>PAT and gross profitability showed a declining trend.</li></ul><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhR_9GyOpOB2aWjxL24kVg5DZyAUMu0c6wEe_Yc0eRGMuWey6KD5obQ9uEZtYJ-bhxUBNyV2J-uBwpMcc7H9xRRkVPhei0ltsCacaZrAQbs5z5ZfkiRplYIvtO4QWNNPnVoybMXbRiHDGSue45hWc0pHQ7XNeg2cURA608W0J3dbmsuREAYNjndEPiHbmM/s614/Chart%203-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Chart 3: Performance Index" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhR_9GyOpOB2aWjxL24kVg5DZyAUMu0c6wEe_Yc0eRGMuWey6KD5obQ9uEZtYJ-bhxUBNyV2J-uBwpMcc7H9xRRkVPhei0ltsCacaZrAQbs5z5ZfkiRplYIvtO4QWNNPnVoybMXbRiHDGSue45hWc0pHQ7XNeg2cURA608W0J3dbmsuREAYNjndEPiHbmM/s16000/Chart%203-min.PNG" title="KFIMA Chart 3: Performance Index" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Performance Index</td></tr></tbody></table><div><br /></div></div><div><h3>How did the Group get here?</h3><div>Although the Group started in the canning of pineapples, over the years it had ventured into non-food sectors. These include such diverse businesses as security printing, stock-broking, and trading. </div><div><br /></div><div>Not all the new ventures were success stories and by 2009, the Group had exited the non-profitable ones to focus on the current 4 divisions. In fact, in 2009, the Group even decided to exit from the pineapple canning business. </div><div><br /></div><div>From an operations perspective, the Group looks like a conglomerate. It has 4 diverse businesses - security printing, plantations, food, and bulking.</div><div><br /></div><div>The Group’s revenue has grown over the past 12 years with each division contributing different growth as can be seen from the chart below.</div><div><ul><li>By 2020, the Manufacturing division revenue had shrunk to 18 % of the Group’s revenue compared to 43 % in 2012. This division's revenue had been growing until 2017/18 when it lost a major supply contract. </li></ul><ul><li>The revenue for the other 3 divisions has grown so that by 2023 they seemed to have about similar contribution to the Group’s revenue.</li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJvPBhUurIG2US_U9bId98AMPc6_MGDNxVo-hxSnJAUz_PC0E5untb5Se16BeO8fxHGG4x6ocp-6ikTiYNnSVyURi96BOBtjVZlBsxbCv4NrAHaSwI9kBbUDAcIfawQLziHraX9K6Keqm-Q548NBBokogzNBDTmqEowIMklBEqcw9qYCbBvhyphenhyphenVfuABcb4/s614/Chart%204-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Chart 4: Segment Revenue" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJvPBhUurIG2US_U9bId98AMPc6_MGDNxVo-hxSnJAUz_PC0E5untb5Se16BeO8fxHGG4x6ocp-6ikTiYNnSVyURi96BOBtjVZlBsxbCv4NrAHaSwI9kBbUDAcIfawQLziHraX9K6Keqm-Q548NBBokogzNBDTmqEowIMklBEqcw9qYCbBvhyphenhyphenVfuABcb4/s16000/Chart%204-min.PNG" title="KFIMA Chart 4: Segment Revenue" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Segment Revenue</td></tr></tbody></table><div><br /></div></div><div> In terms of regional contribution:</div><div><ul><li>The Indonesian operation is mainly from the oil palm plantation while Papua New Guinea’s main operation is fish canning. The Malaysian operations cover 4 business segments. </li></ul><ul><li>The Malaysian operations had not shown any revenue growth from 2012 to 2023. The growth of the bulking and plantation operations made up for the loss of the manufacturing business.</li></ul><ul><li>For the same period, revenue from Papua New Guinea grew at 6.5 % CAGR while that for Indonesia was 3.0 % CAGR. </li></ul></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiqXPNNCF-4fyZ8US-wFiyomM8qC6uWN6afe9GhjHioOhlJKWfCoI3C5Z1RnMdhwQzQHvlvyP5-XniiEkO0gHXcefJovpOcgff7KtgVXCbOoeQeurvv2foNdSDggHvVgEdsRwbaMfNIuZxU0CV-JNxc_kSJVcBlMbl0CPZQCGjAXOcwRgvl4kPvC7M1ws/s614/Chart%205-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Chart 5: Revenue by Regions" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiqXPNNCF-4fyZ8US-wFiyomM8qC6uWN6afe9GhjHioOhlJKWfCoI3C5Z1RnMdhwQzQHvlvyP5-XniiEkO0gHXcefJovpOcgff7KtgVXCbOoeQeurvv2foNdSDggHvVgEdsRwbaMfNIuZxU0CV-JNxc_kSJVcBlMbl0CPZQCGjAXOcwRgvl4kPvC7M1ws/s16000/Chart%205-min.PNG" title="KFIMA Chart 5: Revenue by Regions" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Revenue by Regions</td></tr></tbody></table><div><br /></div><div><div>Each division’s profits were driven by different factors as they operated in different sectors of the economy.</div><div><ul><li>The Manufacturing division's profit is today smaller than that a decade ago due to the loss of a major supply contract. </li></ul><ul><li>The Plantation revenue is dependent on the planted acreage as well as the palm oil prices. The Group had about 7.3 hectares of planted oil palm in 2012. This grew to 15.0 hectares by 2023. KFIMA's plantation business is relatively small. Its planted area is less than 1 % of the total planted areas of the top 3 plantation groups in Malaysia (Sime, KLK, and IOI).</li></ul><ul><li>The Food division has been the smaller EBIT contributor over the past few years.</li></ul><ul><li>The revenue growth in the Bulking business came from added storage capacity. But as can be seen from the chart below, the EBIT contributions have grown over the past 2 years.</li></ul><div><br /></div></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi__xMgwlF8BpavN6pcDB6o16y5xLI51D8TA3AadI86FA8AXmAEnlkLl3aGxnr5iSuIjb4ky5DV8RLTr6YkAT3OcEF8EFoATXMb6fXtUsXBCu8XCZrhErI9SGlSbOM2Y7f2m5pOYc3zxOtGMEA685HPKiTjcievYTidTyJr2NYLocjWN9KjT_Yg_vaLwyY/s614/Chart%206-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Chart 6: Segment EBIT" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi__xMgwlF8BpavN6pcDB6o16y5xLI51D8TA3AadI86FA8AXmAEnlkLl3aGxnr5iSuIjb4ky5DV8RLTr6YkAT3OcEF8EFoATXMb6fXtUsXBCu8XCZrhErI9SGlSbOM2Y7f2m5pOYc3zxOtGMEA685HPKiTjcievYTidTyJr2NYLocjWN9KjT_Yg_vaLwyY/s16000/Chart%206-min.PNG" title="KFIMA Chart 6: Segment EBIT" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Segment EBIT</td></tr></tbody></table><div><br /></div><div><div>Over the past 12 years, while the Group’s revenue has grown, the profits have declined. Excluding the 2 extraordinary events (Indonesia land title issue and the loss of a supply contract), the declining profits were due to:</div><div><ul><li>A decline in the gross profit margins.</li></ul><ul><li>An increase in the Selling, General, and Admin expenses both in terms of dollar terms as well as % of the revenue</li></ul><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifH4ndFoT-Fzg6DB5llK13m5p5BqOEcko3Ap-bVCZi74QLX7ovdEQi-2sDizC8SjjMj20Wh6tRb7szt8my6ott9wefnV3D8po7-L_nhOerIT4LJDdQoHnHP8Bfbe3kgtGg0bdZbKWSSd24OxrRedqVm7SsHkKrH8cTmiaTB_U1CRUIvuMElf_W9hdmhvc/s505/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Table 1: Comparative performance" border="0" data-original-height="276" data-original-width="505" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifH4ndFoT-Fzg6DB5llK13m5p5BqOEcko3Ap-bVCZi74QLX7ovdEQi-2sDizC8SjjMj20Wh6tRb7szt8my6ott9wefnV3D8po7-L_nhOerIT4LJDdQoHnHP8Bfbe3kgtGg0bdZbKWSSd24OxrRedqVm7SsHkKrH8cTmiaTB_U1CRUIvuMElf_W9hdmhvc/s16000/Table%201-min.png" title="KFIMA Table 1: Comparative performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Comparative performance </td></tr></tbody></table><div><br /></div></div><div><h3>1H 2023 (First half FYE 2024)</h3><div>The revenue and PAT for the first six months ended Sep 2023 was about 20 % and 26 % respectively lower than that for the same period last year. </div><div><br /></div><div>According to the Group, the lower revenue was attributed to the decrease in revenue generated by the manufacturing, plantation, and food divisions. This in turn resulted in lower PAT. </div><div><br /></div><div>I am a long-term value investor and I consider quarterly performance as “noisy”. As such I focus on long-term trends. </div><div><br /></div><h3>Competitive profile</h3><div>KFIMA with its 4 business segments is unique as there are no other Bursa Malaysian companies with similar business profiles. </div><div><br /></div><div>Secondly, in terms of TCE, the Plantation division is the largest segment accounting for almost 1/3 of the Group TCE in 2023.</div><div><br /></div><div>However, I do not think that we should use the Plantation companies as the benchmark. I have mentioned that KFIMA planted areas are less the 1 % of the respective planted areas of the top 3 plantation companies in Malaysia.</div><div><br /></div><div>As such, I have selected as peers those companies with:</div><div><ul><li>About similar hectares of planted oil palms as KFIMA.</li></ul><ul><li>Sizeable non-plantation businesses. </li></ul></div><div><br /></div><div>The table below shows the profile of KFIMA and the peers comprising</div><div><ul><li>CB Industrial Product Holding Bhd (CBIP).</li></ul><ul><li>MKH Bhd (MKH).</li></ul><ul><li>Subur Tiasa Holdings Bhd (Subur Tiasa).</li></ul><div><br /></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgC2th8iFwQHcqYwRm7KWFGEE-mz0pc7iYnm7XY4kDUpXARH13HA22YLrqSXigLEv4Lp7Pn3NR6NrStY5wXW8NCNM0AN5Q2U2n7Mth3jG5Y3AM44TfvSLwBNzEq64XTNLyiLxIbKBCnLnOEeMeP0fc6G1NgUgVfupw5SQnnxfr_wSUy4EhFZBSAzqMmt_s/s819/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Table 2: Peer profile" border="0" data-original-height="176" data-original-width="819" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgC2th8iFwQHcqYwRm7KWFGEE-mz0pc7iYnm7XY4kDUpXARH13HA22YLrqSXigLEv4Lp7Pn3NR6NrStY5wXW8NCNM0AN5Q2U2n7Mth3jG5Y3AM44TfvSLwBNzEq64XTNLyiLxIbKBCnLnOEeMeP0fc6G1NgUgVfupw5SQnnxfr_wSUy4EhFZBSAzqMmt_s/s16000/Table%202-min.png" title="KFIMA Table 2: Peer profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Peer profile<br /><div style="text-align: left;"><div><i>Notes<span style="white-space: pre;"> </span></i></div><div style="text-align: justify;"><i>a) Based on 2022 Annual Reports.<span style="white-space: pre;"> </span></i></div><div style="text-align: justify;"><i>b) CBIP oil palm areas exclude the 7,352 hectares of its associates.<span style="white-space: pre;"> </span></i></div><div style="text-align: justify;"><i>c) I have included Subur Tiasa as one of the peers as it was a peer in my 2021 articles. At that juncture, the timber business accounted for 61 % of the group revenue.</i></div><div><br /></div></div></td></tr></tbody></table></div></div><div>Chart 7 shows the revenue and ROE trends of the peers compared to KFIMA. Table 3 summarizes the comparative growth rates and average ROE over the past 11 years.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVVWPbqRwFiXw7ipNoYqTH7JStJ4P8SkC-o6nHNdoyVeJ-xqQfLNjypc_ZHhWWI9lC4w1jPxThBjjWudULiQhDYreg0t_Denv5Xz5_AalnduWds3Fhn9gXWa1pWdsM_UKL7q4AuahizKkm6r5mhkTvlzZ9HkT1hyphenhyphenw89waXAvoDp0uD6qQx8k7SCMfxC1I/s680/Chart%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Chart 7: Peer Comparison" border="0" data-original-height="523" data-original-width="680" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVVWPbqRwFiXw7ipNoYqTH7JStJ4P8SkC-o6nHNdoyVeJ-xqQfLNjypc_ZHhWWI9lC4w1jPxThBjjWudULiQhDYreg0t_Denv5Xz5_AalnduWds3Fhn9gXWa1pWdsM_UKL7q4AuahizKkm6r5mhkTvlzZ9HkT1hyphenhyphenw89waXAvoDp0uD6qQx8k7SCMfxC1I/s16000/Chart%207-min.png" title="KFIMA Chart 7: Peer Comparison" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Peer Comparison</td></tr></tbody></table><div><br /></div><div><div>I would rate KFIMA performance as average based on these 2 metrics. </div><div><ul><li>In terms of revenue growth, KFIMA ranked 3rd among the 4 companies. It lost to CBIP and MKH. But note that these 2 companies had bigger revenue from different sectors. In other words, the respective revenue growth could be because of different sector growth rates. Hence, I would not draw too many conclusions about KFIMA's revenue performance. </li></ul><ul><li>In terms of ROE, all companies except MKH experienced declining ROE in the first half of the past 12 years. But on an overall average basis, KFIMA did well as can be seen from Table 3.</li></ul></div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMByjH8xak9BwRVHXFBEvKFwG8_4of83bMaZKtYxpg-NCbGik42NsDrzgk66RNG2pJWqV2ifIfvjm9VJzxuRjKMiq3MTlcd3jhRluMUZ-AKEj6VGs9waBlEd_6coN4VU6lQyROYUzYBdBlf4RI6zIpdpVgf8ZPfKUknNVP_zNqDz1uIYzDzRbFAKjojAA/s432/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Table 3: Peer performance" border="0" data-original-height="176" data-original-width="432" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMByjH8xak9BwRVHXFBEvKFwG8_4of83bMaZKtYxpg-NCbGik42NsDrzgk66RNG2pJWqV2ifIfvjm9VJzxuRjKMiq3MTlcd3jhRluMUZ-AKEj6VGs9waBlEd_6coN4VU6lQyROYUzYBdBlf4RI6zIpdpVgf8ZPfKUknNVP_zNqDz1uIYzDzRbFAKjojAA/s16000/Table%203-min.png" title="KFIMA Table 3: Peer performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Peer performance</td></tr></tbody></table><div><br /></div><div><h2>Financial position</h2><div>I would rate KFIMA as financially sound based on the following reasons: </div><div><ul><li>As of Sep 2023, the Group has RM 301 million in cash and securities. This is about 18 % of the total assets.</li></ul><ul><li>As of Sept 2023, the Group had a debt-equity ratio of 0.26. While low, it is the past 12 years high. Its lowest debt-equity ratio was in 2014 at 0.01. The increase was due to the lease liabilities for the leasehold land. </li></ul><ul><li>Over the past 12 years, the Group has generated positive cash flow from operations every year. Cumulatively it generated about RM 1.2 billion of cash compared to the RM 1.0 billion PAT. It is a reasonable cash conversion ratio.</li></ul><ul><li>The Group had a good capital allocation plan as shown in Table 4. Over the past 12 years, the cash flow from operations was invested to grow the business (CAPEX and acquisitions) as well as pay dividends. </li></ul><ul><li>The Group has an average 26% reinvestment rate. Reinvestment = CAPEX + Acquisitions – Depreciation + Changes in Net Working Capital. This meant that only 26% of the after-tax operating profit needed to be reinvested to grow the business. The balance of 74 % of free cash flow can be returned to shareholders.</li></ul></div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMLmJF5XGuF8kYBBuEdx7WB35SXufoLJi23RWs_flVx9wqhyW5XnGNIwEwcSCA5c6s97GCbPY7k9JpCanUL95x9mXKSHSonfLx_2VS9lKdpkjSoWQy2AxOQoDiot89Wv_AIsmnbpv9Pb5zFwQUxtYVFQ28cwfvnL3o4gm76P22P6HxTRU6THRvlyfufKo/s561/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Table 4: Sources and Uses of Funds 2012 to 2023" border="0" data-original-height="326" data-original-width="561" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMLmJF5XGuF8kYBBuEdx7WB35SXufoLJi23RWs_flVx9wqhyW5XnGNIwEwcSCA5c6s97GCbPY7k9JpCanUL95x9mXKSHSonfLx_2VS9lKdpkjSoWQy2AxOQoDiot89Wv_AIsmnbpv9Pb5zFwQUxtYVFQ28cwfvnL3o4gm76P22P6HxTRU6THRvlyfufKo/s16000/Table%204-min.png" title="KFIMA Table 4: Sources and Uses of Funds 2012 to 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: Sources and Uses of Funds 2012 to 2023</td></tr></tbody></table><div><br /></div><div><h3>Shareholders’ value creation</h3><div>I looked at the following metrics when assessing shareholders’ value creation:</div><div><ul><li>Comparing returns with the cost of funds.</li></ul><ul><li>Comparing the gains by an investor who bought a share at the end of 2012 with the cost of equity.</li></ul><ul><li>Looking at the Q Rating which is based on several valuation metrics. A high score relative to the panel meant that the company had the potential to create shareholders’ value.</li></ul></div><div><br /></div><div>I would assess KFIMA as good in terms of creating shareholders' value from a business perspective as it did better than the cost of funds for the first 2 metrics in Table 5. It failed on the last metric. But this is because of the poor market sentiments.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzlMNTtlHjYnjNWt_fG7D4SkdDSQh5gobUmVAVCflKY0Ea5laZ7v-5POTWWpbs6_qUbL2eCwchb_OC0LxWulr7iJYC_FycKX5MpJZUsSMziJ0T5dIw8k6uZmrsrM8wazfQDpYhoo3ccHlEmgTvYqtDY5DUpSKXBgBnJ_L31TEwvslszYhvHfZi2WCO29I/s646/Table%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Table 5: Shareholders value creation" border="0" data-original-height="101" data-original-width="646" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzlMNTtlHjYnjNWt_fG7D4SkdDSQh5gobUmVAVCflKY0Ea5laZ7v-5POTWWpbs6_qUbL2eCwchb_OC0LxWulr7iJYC_FycKX5MpJZUsSMziJ0T5dIw8k6uZmrsrM8wazfQDpYhoo3ccHlEmgTvYqtDY5DUpSKXBgBnJ_L31TEwvslszYhvHfZi2WCO29I/s16000/Table%205-min.png" title="KFIMA Table 5: Shareholders value creation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 5: Shareholders value creation<br /><div style="text-align: left;"><div><i>Notes<span style="white-space: pre;"> </span></i></div><div style="text-align: justify;"><i>(a) Based on time-weighted average EBIT/TCE from 2012 to 2023 assuming a 24 % tax rate compared with WACC.<span style="white-space: pre;"> </span></i></div><div style="text-align: justify;"><i>(b) This looked at how the SHF at the end of 2007 would have grown by the end of 2023 assuming that no dividend was paid. I compared it with the cost of equity.<span style="white-space: pre;"> </span></i></div><div style="text-align: justify;"><i>(c) Computed assuming that an investor bought 1 share at the end of 2012 and held onto it till the end of 2022. His loss is shown in the Table 6 below.</i></div></div></td></tr></tbody></table><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYTfZ6YLybAVXC2h_hDuoPIfyBBpWwQcs2hL3GRQna5IGHYgmm7QRb34Qe7DLa-WBoKXl30U-KD1ywr0CbaDzHupsdqhdg5IUVyLYof0aiMyFXmPebm1E4jkG4vPPYTMln5KiiPJysLs2luqYG_ee4go_50Ss3454WArK6Ns8MU0MCBO1jW74via4IOGU/s388/Table%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Table 6. Computing the shareholders’ gain" border="0" data-original-height="176" data-original-width="388" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYTfZ6YLybAVXC2h_hDuoPIfyBBpWwQcs2hL3GRQna5IGHYgmm7QRb34Qe7DLa-WBoKXl30U-KD1ywr0CbaDzHupsdqhdg5IUVyLYof0aiMyFXmPebm1E4jkG4vPPYTMln5KiiPJysLs2luqYG_ee4go_50Ss3454WArK6Ns8MU0MCBO1jW74via4IOGU/s16000/Table%206-min.png" title="KFIMA Table 6. Computing the shareholders’ gain" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 6. Computing the shareholders’ gain</td></tr></tbody></table><div><br /></div><div style="text-align: justify;">At the same time, KFIMA had an overall Q Rating of 0.44. This places it at the average position among the panel companies. On the negative side, the Q Rating had decreased from 0.47 in 2022 due to a lower score for low risk.</div><div style="text-align: justify;"><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixSQjiaSk4oNzIVwSFzbIAPJgxSPREiccSenxQOFPUV0XE0jgMr_k2Gi6oxqu_WrTWvcBM7VuKKCuPizPb3UukyzLJv72E5tseqmmOoUimTk9t4W2OSkC4J1ZzQ5Jrsj7qRdlpvGrm5GyAyvQomqUsL8o65TGTKd6deqU2RtsTmLguUnxQkLmZJHqQJBI/s614/Chart%208-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Chart 8: Q Rating" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixSQjiaSk4oNzIVwSFzbIAPJgxSPREiccSenxQOFPUV0XE0jgMr_k2Gi6oxqu_WrTWvcBM7VuKKCuPizPb3UukyzLJv72E5tseqmmOoUimTk9t4W2OSkC4J1ZzQ5Jrsj7qRdlpvGrm5GyAyvQomqUsL8o65TGTKd6deqU2RtsTmLguUnxQkLmZJHqQJBI/s16000/Chart%208-min.PNG" title="KFIMA Chart 8: Q Rating" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: Q Rating </td></tr></tbody></table><div><br /></div><div><div style="text-align: left;"><div style="text-align: justify;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div>Risk tolerance refers to your ability to psychologically endure the potential of losing money on an investment. It is the amount of loss you are prepared to handle. </div><div><div><br /></div><div>Your risk tolerance is not set in stone and can change throughout your life.</div><div><br /></div><div>Investing without considering risk tolerance can prove to be fatal. You must know how to react when the value of investments falls. </div><div><br /></div><div>But more importantly, how can you put risk tolerance into practice when value investing? In other words, how do you set your risk tolerance level?</div><div><br /></div><div>I think the best way to view risk tolerance is from the margin of safety perspective. You should have a higher margin of safety if you are less risk-tolerant. If you are very risk-tolerant, you can lower the margin of safety. </div><div><br /></div><div>I am a conservative investor and I looked for a 30 % margin of safety. For me, a very good buy is if all the 3 metrics - margin of safety, Acquirer’s Multiple, and Magic Formula - pointed in the same direction.</div><div><br /></div><div>My threshold is for the following 3 conditions:</div><div><ul><li>30 % margin of safety.</li></ul><ul><li>Acquirer’ Multiple < 6.</li></ul><ul><li>Magic Formula > 20 %</li></ul></div><div><br /></div><div>If you follow the above, you will realize that we are inverting the conventional idea of higher returns for higher risk. This is because a higher margin of safety will mean a lower risk. However, a higher margin of safety means a larger discount from the intrinsic value. Indirectly this means a higher gain.</div><div><br /></div><div>Lower risk, more gain.</div><div><br /></div><div>As you can see, fundamental analysis is more than just using some formula. There are choices to be made in terms of which approach to use and what to assume. </div><div><br /></div><div>So, if you are just starting to analyze and value companies, it may be helpful to supplement it with third-party analyses and valuation. </div><div><br /></div><div>Several financial advisers provide such analyses. </div></div><div><span style="text-align: start;"><br /></span></div><div><span style="text-align: start;">Those who do this well include people </span><span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.</div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div><h2 style="text-align: left;">Risks</h2><div style="text-align: justify;">I normally look at 2 categories of risks - investment risks and business risks. In most of my Bursa Malaysia case studies, the main investment risk is privatization risk.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">However, for KFIMA, I do not expect this to be a major risk. Firstly, if there was any plan to privatize the Group, it would have been better to do so in mid-2020 when the price was around RM 1.20 per share.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">At the current market price, it does not make economic sense to privatize it. I do not see this as an investment risk.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">However, in the context of a value trap, there are 2 business risks to consider:</div><div style="text-align: justify;"><ul><li>The Manufacturing division transport document business.</li></ul><ul><li>The Indonesian plantation land title issue.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I have also invested in KFIMA so you should treat my analysis as a potential bias risk.</div><div style="text-align: justify;"><br /></div><h3 style="text-align: justify;">Manufacturing </h3><div style="text-align: justify;">The Group's main manufacturing arm was originally the Malaysian government printing operations. It printed many of the government’s security and confidential documents such as passports. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">It was privatized and became part of KFIMA which then continued with the government printing business.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In 2016/17, the supply contract for travel documents expired and the Group lost the tender to a more tech-oriented proposal. The result was a large drop in revenue. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">KFIMA lost the travel document contract after being the supplier for more than 20 years. It lost the 5 years contract to a party that pitched a “digital tech” solution. In other words, digital tech has provided competitors with an entry point. KFIMA's long supply history may not be enough to provide a barrier to entry for the travel document supply. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">KFIMA has stated that it has now upgraded its digital technology capabilities. However, the Group has not been able to make any significant headway in selling these "digital" products to the neighboring countries. It does illustrate that it is not easy to supply to any government largely.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The Group only provided a breakdown of the various product categories from 2017 to 2022. It would seem that the biggest contributor today is from the transport product category.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The Group has not stated the number of contracts that are associated with this business. There may be one or two major contracts. If so, then this is a business risk. As the loss of the travel document supply contract has shown, there would be much lobbying for the transport document supply. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The Group said that it would adapt the business to be a multi-platform one as well as expand to the nearby geographies. But, the Group has not been able to find a replacement business on the same scale. So the Manufacturing division revenue has plateaued over the past 5 years. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The Manufacturing division's historical performance was due to its government printing legacy. I am not sure whether it can win back the travel document business. The real challenge is whether it would also lose the transport business. As such I would not project a bright future for this division. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">On a positive note, if the division can maintain its current position, it will still contribute to the Group's bottom line.</div><div style="text-align: justify;"><br /></div><h3 style="text-align: justify;">Plantation</h3><div style="text-align: justify;">From 2012 to 2023, the division's revenue doubled. The Plantation division is now focused on palm oil. In 2023, the pineapple plantation accounted for less than 2 % of the segment revenue.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">KFIMA Plantation division is a small operation in the context of the Malaysian oil palm plantation industry. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Palm oil is a global commodity with cyclical demand. Malaysia is the second-largest palm oil producer and exporter globally. Malaysia has <a href="https://www.foodnavigator-asia.com/Article/2020/02/05/Palm-oil-dilemma-Why-Malaysia-s-second-largest-commodity-export-continues-to-face-uncertain-future" target="_blank">32.6 %</a> of the international palm oil industry market share. However, the export volume has been dropping over the past few years due to the European Union's concerns over sustainability. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But the industry does not look like it is a sunset one. Firstly, the industry is moving towards a sustainable model although it looks like a long road ahead. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Secondly, palm oil is relatively cheap because it is something of a wonder crop. It grows relatively quickly, is easy to harvest, and is productive. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">“A hectare of oil palm can reliably produce four tonnes of vegetable oil every year, compared to 0.67 tonnes for rapeseed, 0.48 tonnes for sunflowers, and just 0.38 tonnes for soybeans. Under ideal conditions, high-yield oil palm cultivars can produce more than 25 times as much oil as soy can for the same area of farmland”. <a href="https://www.bbc.com/future/article/20200109-what-are-the-alternatives-to-palm-oil" target="_blank">BBC</a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Based on the above, there are still growth opportunities for the Plantation division. But I think this will have to come from new plantation land as the existing plantation land has been well utilized. </div><div style="text-align: justify;"><ul><li>The Group currently has 185 hectares planted with pineapple that could be repurposed for palm oil. This is a small acreage. </li></ul><ul><li>The is probably only a small increase in % of the land area planted. As of 2023, about 81% of the available land has been planted.</li></ul><ul><li>There is unlikely to be growth from more mature palms. In 2023, the mature areas accounted for 91 % of the total planted areas. </li></ul><ul><li>It is possible to get some growth from improved productivity - higher FFB (free fruit branches) yield and higher oil extraction rates.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">A profile of how the division has grown over the past 12 years can be seen in the table below.</div><div style="text-align: justify;"><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWAKR4hJNmepolfoYKmGCXnO0wk5ek76kr0wr8k4Y6vdHqCQ0CfYLSq4DgmfjtyPgLl6vSURcVMa4zVQBcQSWjNqGG1vJlOWNXBPApGbmLi-u481-pre1fpdt2_OygfH-onq2e3WgG79b-AQmokv5Yxp3F249s3fQ1SHjpeFbTnBBkhgMFXrKcERX2VQs/s883/Table%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Table 7: Plantation statistics" border="0" data-original-height="151" data-original-width="883" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWAKR4hJNmepolfoYKmGCXnO0wk5ek76kr0wr8k4Y6vdHqCQ0CfYLSq4DgmfjtyPgLl6vSURcVMa4zVQBcQSWjNqGG1vJlOWNXBPApGbmLi-u481-pre1fpdt2_OygfH-onq2e3WgG79b-AQmokv5Yxp3F249s3fQ1SHjpeFbTnBBkhgMFXrKcERX2VQs/s16000/Table%207-min.png" title="KFIMA Table 7: Plantation statistics" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 7: Plantation statistics</td></tr></tbody></table><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><h4>Indonesian Plantation legal case</h4><div>The Group has an 80% subsidiary PT Nunukan Jaya Lestari (PTNJL) that owned about 19,900 hectares of land in Kalimantan, Indonesia in 2023. Note that this acreage was based on the information provided under the list of properties in the 2023 Annual Report.</div><div><ul><li>This is the Group's only plantation operation in Indonesia.</li></ul><ul><li>In 2023, this Indonesian operation accounted for about 2/3 of the total fresh fruit branches of the Group.</li></ul></div><div><br /></div><div>There is currently a dispute with the Indonesian authority over the actual acreage owned by the Group. The dispute is over 2 parcels:</div><div><ul><li>17,765 hectares that overlapped with some forest areas.</li></ul><ul><li>3,500 hectares that overlapped with another 3rd party right to use the land.</li></ul></div><div><br /></div><div>There is an outstanding legal suit that was started in 2016 and has gone through several judicial levels. </div><div><br /></div><div>There have been several swing judgments. There was a point when it looked as if KFIMA had lost all the disputed land. There was then a subsequent judgment that KFIMA had the rights to all the areas except for the 3,500 hectares that overlapped with the 3rd party. At one point it seemed that KFIMA only had the right to 2,809 hectares of land. </div><div><br /></div><div>In its 2021 Annual Report, KFIMA stated that it had “…ceased operations in the disputed/overlapping area measuring approximately 800 hectares.”</div><div><br /></div><div>In its 2023 Annual Report, KFIMA reported:</div><div><br /></div><div>“PTNJL continues to operate its plantation activities premised on its current operating license pending issuance of the fresh one. Meanwhile, the HGU land title application in respect of the non-disputed areas is ongoing to date.”</div><div><br /></div><div>Pending the resolution of the dispute, the local authorities have allowed KFIMA to continue with its plantation operations.</div><div><br /></div><div>Looking at Table 7, I would surmise the following</div><div><ul><li>The Group plantation land bank in 2023 had taken into account the various legal decisions. This reduced the available land for the Group from 30,412 hectares in 2020 to 18,596 hectares. You will note that the 18,887 hectares are less than the 19,900 hectares owned by PTNJL as stated in the list of properties.</li></ul><ul><li>36% of the Group planted areas or 5,382 hectares are in Indonesia. This appears to be partly in the disputed areas.</li></ul></div><div><br /></div><div>I would point out that since KFIMA has made the appropriate provisions, there is unlikely to be an impairment to the PPE. In other words, the Asset value is realistic. </div><div><br /></div><div>Secondly, I would not expect an expansion of planted acreage from PTNJL. </div><div><br /></div><h3>Food</h3><div>The Food division has two segments:</div><div><ul><li>Manufacturing and distribution of canned and frozen fish in Papua New Guinea (PNG). This accounted for 97 % of the Food division revenue in 2023.</li></ul><ul><li>Trading of food products and contract packing services of powdered beverages and condiments. These were mainly carried out in Malaysia.</li></ul></div><div><br /></div><div>I estimated that the Food division revenue growth appears to be driven by the PNG operations. Revenue from PNG doubled from RM 90.1 million in 2012 to RM 186.1 million in 2023. </div><div><br /></div><div>According to the <a href="https://www.fisheries.gov.pg/industry-overview" target="_blank">National Fisheries Authority of PNG</a>, the fisheries potential of PNG is yet to be realized.</div><div><ul><li>Tuna is the largest PNG fishery. The catch from PNG waters accounts for 20 % to 30% of the regional catch and is about 10% of the global catch.</li></ul><ul><li>Export value in 2021 was doubled in 1999.</li></ul></div><div><br /></div><div>But as shown earlier, this is a low-margin business. While there are prospects for export growth from PNG, I would not expect double-digit growth in revenue or profits from the Food division.</div><div><br /></div><div><h3>Bulking</h3><div>From 2012 to 2023, the Bulking division has managed to double its revenue by growing at a CAGR of 10.2 %. The bulk of the growth came over the past 2 years. </div><div><br /></div><div>This reflects significant progress toward KFIMA's strategic objectives to be a fully integrated logistics provider for liquid products.</div><div><br /></div><div>But the average EBIT margins in 2012/13 of 56% had declined to 38 % in 2022/23. This was probably the result of changes in product mix and rental rates.</div><div><br /></div><div>This is mainly a storage business where revenue growth is constrained by storage capacity. The Group currently has 259 tanks with 412,865 cm of storage capacity.</div><div><br /></div><div>Long-term growth would depend on capacity expansion. In the past KFIMA had expanded through acquisitions as well as the construction of new storage tanks. For example:</div><div><ul><li>In 2009, the Group bought out the minority interest in one of its joint ventures.</li></ul><ul><li>New storage tanks with 13,000 MT capacity were added in 2013.</li></ul><ul><li>In 2023, new tanks with a storage capacity of 30,460 cm were completed. </li></ul><ul><li>The Group anticipates completion of an additional capacity of 33,860 cbm in Q2 of FYE 2024 and 52,590 cbm in Q4 of FY2024.</li></ul></div><div><br /></div><h3>My investment</h3><div>To be transparent, I have invested in KFIMA so you should treat this as one possible risk from my biased perspective.</div><div><br /></div><div>I bought the shares in KFima in 2014/15 at an average price of RM 2.23 per share as I found that it was a fundamentally strong Group. It had an overall Q Rating of 0.80 then. </div><div><br /></div><div>At that juncture, the Group’s NTA was RM 2.29 per share and it had an EPV of RM 3.19 per share. I could not see any reason why the market was underpricing the Group. As such, I had classified it as a Quality Value investment.</div><div><br /></div><div>I had expected the market to re-rate it within a few years. Unfortunately, the price began to decline after I had bought it. It did not help that the Group encountered the land title dispute and the loss of a major supply contract.</div><div><br /></div><div>I have not sold any of KFima shares since my purchase. Over the past 8.34 years (till the end Dec 2022), I have received on average about RM 0.87 of dividends per share. The result is that my total return is about 2.9 % per annum on a compounded basis. Refer to Table 8 for the computation.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiW5mfIwcLl03Km7CCCxBXpjUdcUH3Oz9kEkhPmBZyZTNHg0iJ_iSPUbHJPQpgKnzYvMXgGeTZKAkp5jLgH-WiqafcpblYwKAeV4b7Wn77Svw4_A6OTuaRB-H-eQPWYlMMBmZjOzsj5RYq1xQ_grXMCu_0q6_sT77z2l2rtCQgksMdKRWP9uBBJfszoNks/s690/Table%208-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Table 8: My Investment Return" border="0" data-original-height="176" data-original-width="690" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiW5mfIwcLl03Km7CCCxBXpjUdcUH3Oz9kEkhPmBZyZTNHg0iJ_iSPUbHJPQpgKnzYvMXgGeTZKAkp5jLgH-WiqafcpblYwKAeV4b7Wn77Svw4_A6OTuaRB-H-eQPWYlMMBmZjOzsj5RYq1xQ_grXMCu_0q6_sT77z2l2rtCQgksMdKRWP9uBBJfszoNks/s16000/Table%208-min.png" title="KFIMA Table 8: My Investment Return" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 8: My Investment Return</td></tr></tbody></table><div><br /></div></div></div><div style="text-align: justify;"><h2>Valuation</h2><div>There was hardly any revenue growth over the past 12 years as the Group lost a lucrative travel contract. The Group had to rebuild the revenue by growing the revenue from the other business segments. It had managed to achieve this. </div><div><br /></div><div>My investment thesis is that KFIMA has a turnaround and its Earnings-based value would depend on how you see the turnaround play out. </div><div><br /></div><div>In this context, I took a conservative approach and valued it based on its Earnings Power Value. In other words, I ignored growth. </div><div><br /></div><div>At the same time, KFIMA has understated investment properties amounting to RM 18 million. I have also ignored this in my Asset Value. </div><div><br /></div><div>Chart 14 illustrates the valuation of KFIMA. At the market price of RM 1.82 per share (as of 4 Dec 2023) there is more than a 30 % margin of safety for both Asset Value and EPV.</div><div><ul><li>The Asset Value is RM 3.33 per share.</li></ul><ul><li>The EPV is RM 3.51 per share.</li></ul></div><div><br /></div><div>The cash and securities of the Group came to RM 1.41 per share. This means that the market is only ascribing about RM 0.41 for all the operations of KFIMA. This looks like a lot of undervaluation. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfZ_SSNWxkdkKPKAOJZywag8gJ7CMMBlvxojEoVvnnnISQuAVoo8KKeRaz4qPrzha28moWlDH1mm-5QqNIirWoXp4VER5rfUBZeR8ZaXHqIAa6Ig9Af1WFyvPFrnsnIV_Vo8oc1gAg64bXhDCaPcfSkJvgAHGfRAQhtyExPAWGpcITHJIIWKf0zZvltfI/s614/Chart%209-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Chart 9: Valuation" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfZ_SSNWxkdkKPKAOJZywag8gJ7CMMBlvxojEoVvnnnISQuAVoo8KKeRaz4qPrzha28moWlDH1mm-5QqNIirWoXp4VER5rfUBZeR8ZaXHqIAa6Ig9Af1WFyvPFrnsnIV_Vo8oc1gAg64bXhDCaPcfSkJvgAHGfRAQhtyExPAWGpcITHJIIWKf0zZvltfI/s16000/Chart%209-min.PNG" title="KFIMA Chart 9: Valuation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 9: Valuation </td></tr></tbody></table><div><br /></div><div><h3>Valuation model</h3><div>My Earnings Power Value of the company was derived based on the average derived from 2 valuation methods:</div><div><ul><li>A single-stage Free Cash Flow to the Firm (FCFF) model as per Damodaran.</li></ul><ul><li>The Residual income model as per Penman.</li></ul></div><div><br /></div><div>The cost of capital used in the model was based on the Capital Asset Pricing Model. I followed Damodaran’s approach to determine the Beta and the risk premiums. </div><div><br /></div><h2>KFIMA is one of the better Bursa stocks</h2><div>My analysis of KFIMA showed that there was no growth in revenue over the past 12 years. But this was due to a loss of a major contract that was offset by growth in other businesses.</div><div><br /></div><div>While it also had some land title disputes over the Indonesian plantation land, the Group had provided for this impairment. The Group has also built up a strong bulking business.</div><div><br /></div><div>I would rate the Group as fundamentally sound.</div><div><ul><li>Its business returns were greater than the cost of funds.</li></ul><ul><li>It has a low reinvestment rate.</li></ul><ul><li>It is financially sound.</li></ul><ul><li>Excluding the security manufacturing business, the other 3 segments are not sunset sectors. They have growth potential.</li></ul></div><div><br /></div><div>On top of these, there is more than a 30% margin of safety based on the Asset Value and Earnings Power Value.</div><div><br /></div><div>Given these, I would conclude that KFIMA is not a value trap but one of the better Bursa companies to invest in. </div><div><br /></div><div>During the past 12 years, on top of COVID-19, the Group experienced 2 extraordinary events:</div><div><ul><li>A land title dispute for its Indonesian plantation. There was a marked reduction in profit in 2017 due to the impairment of RM 29 million to cater for this.</li></ul><ul><li>The 2018 results were affected by the loss of a major supply contract by the Manufacturing division. </li></ul></div><div><br /></div><div>I suspect that these caused the share price to decline. With these resolved, the market price recovered to reach a 12-year high in mid-2022. However, the market price has since declined to about the 2016/17 levels. Refer to Chart 10.</div><div><br /></div><div>If you look at the fundamental analysis, the market price does not seem to reflect a better business position. </div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQOfObZUWGdcTqBR9NQbwRQJdsMHg2NmQX5R8qwTgkh2_wYvDIvQkCD0yAIpDw6G5j1SLSt2-GnoiEm7Kw2DETOVdECd8TS7eqHu-3ueaenWNK48DE0emGm0qvyyeekXg3aEDkEmf_25-b8ufWrFeev99v0k6JTD_ykDs5MebRRlKAchYiI3CMfsen7ik/s907/Chart%2010-min.png" style="margin-left: auto; margin-right: auto;"><img alt="KFIMA Chart 10: Market price" border="0" data-original-height="373" data-original-width="907" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQOfObZUWGdcTqBR9NQbwRQJdsMHg2NmQX5R8qwTgkh2_wYvDIvQkCD0yAIpDw6G5j1SLSt2-GnoiEm7Kw2DETOVdECd8TS7eqHu-3ueaenWNK48DE0emGm0qvyyeekXg3aEDkEmf_25-b8ufWrFeev99v0k6JTD_ykDs5MebRRlKAchYiI3CMfsen7ik/s16000/Chart%2010-min.png" title="KFIMA Chart 10: Market price" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 10: Market price</td></tr></tbody></table><br /><div><br /></div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div></div><p></p><p><br /></p></div><div style="text-align: justify;"><br /></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-89893445647187762682023-12-17T11:08:00.003+08:002023-12-17T13:32:43.027+08:00Can you make money trading with fundamentals?<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Case Notes 25. Traders generally rely on price action to identify stocks to trade. The article makes the case that fundamental analysis can be a useful tool in the traders’ toolkits. Revision date: 17 Dec 2023</span></div>
<div style="text-align: justify;"> </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdG4LwJvr6qFfIag1T9uy4p728r8BAfsE0-YUUvPoalE8HQZ-DILXcvf2Ypuy2jao67cC2Mwtw0IovQLih3XPvoGHcqX6EHI9vqQTFwFjlxiDWfzr1im3ytF0JvRYd_5AzAKCP7FkxQTj9nZbdmhd7s8dvEKQEM7qc5f1qxkkSc_QHiH1l8-itmdJO/s295/Pic%201.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Can you make money trading with fundamentals?" border="0" data-original-height="92" data-original-width="295" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdG4LwJvr6qFfIag1T9uy4p728r8BAfsE0-YUUvPoalE8HQZ-DILXcvf2Ypuy2jao67cC2Mwtw0IovQLih3XPvoGHcqX6EHI9vqQTFwFjlxiDWfzr1im3ytF0JvRYd_5AzAKCP7FkxQTj9nZbdmhd7s8dvEKQEM7qc5f1qxkkSc_QHiH1l8-itmdJO/s16000/Pic%201.png" title="Can you make money trading with fundamentals?" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><span><a name='more'></a></span>I am a bottom-up long-term value investor with an average holding period of about 8 years. Before I consider a stock for investment, I would carry out a fundamental analysis of the company. This involves first looking at the business prospects, financials, and management. With this information, I next estimate the intrinsic value of the company.</div><div><br /></div><div>My decision on whether to invest is then based on the results of such an analysis. When I buy, I do not expect to sell until several years. As such I tend to relate fundamental analysis to long-term investing.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/mXWCEJbzhJk" width="320" youtube-src-id="mXWCEJbzhJk"></iframe></div><div><br /></div><div>However, I have written an article for Seeking Alpha where I used fundamental analysis to determine a pair of stocks to trade. When you trade you have a much shorter investment time horizon. The trading mentality is also different from that of a long-term investor.</div><div><br /></div><div>This then begets the question. Can you make money trading with fundamentals?</div><div><br /></div><div>Join me as I explore this concept. The answer is yes. Should you then use my fundamental approach to trade? Well, read my Disclaimer.</div><div><br /></div><div><div>Note that the article focuses on traders using fundamental analysis. It is not about fundamental investors using technical.</div><div><br /></div><div>Some fundamental investors use technical analysis to time their entry and exit points, even if their primary focus is on the underlying fundamentals of a company. I happen to belong to this category. But this is a different story for another day.</div></div><div><br /></div><h2>Contents</h2><div><ul><li><b>Trading vs Investing</b></li></ul><ul><li><b>Trading with fundamentals</b></li></ul><ul><li><b>One example of a fundamental trade</b></li></ul><ul><li><b>Can you make money?</b></li></ul><ul><li><b>Conclusion</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: left;" /></div></div><h2>Trading vs Investing</h2><div>While often used interchangeably, there are differences between trading and investing. Firstly, they have different goals.</div><div><ul><li>Traders focus on generating short-term profits by taking advantage of price fluctuations. They may use technical analysis, charts, and various indicators to help them decide.</li></ul><ul><li>Investors aim to build wealth over the long term by investing in fundamentally sound assets. They often rely on economic indicators and company performance to make decisions.</li></ul></div><div><br /></div><div>I would even contend that they both have different emotional involvement:</div><div><ul><li>Trading can be emotionally intense, especially for day traders who need to make quick decisions. Emotional discipline is crucial in trading to avoid impulsive actions.</li></ul><ul><li>Investing generally involves a comparatively relaxed approach, as investors focus on long-term trends and are less concerned with short-term market fluctuations.</li></ul></div><div><br /></div><div>There are several dimensions to consider when differentiating between them:</div><div><ul><li>Time horizon.</li></ul><ul><li>Approach.</li></ul><ul><li>Risk management.</li></ul><ul><li>Mindset.</li></ul><div><br /></div></div><h3>Time horizon</h3><div><div>Trading typically involves shorter time frames, ranging from seconds to weeks. Traders aim to capitalize on short-term price movements and may make numerous transactions within a single day or hold positions for a few weeks.</div><div><br /></div><div>On the other hand, investing generally involves a longer time horizon, often measured in years. Investors buy and hold assets with the expectation that their value will increase over time.</div></div><div><br /></div><div>“Investing and trading are two very different methods of attempting to profit in the financial markets…investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter time frame, taking smaller, more frequent profits.” <a href="https://www.investopedia.com/ask/answers/12/difference-investing-trading.asp#:~:text=Investing%20takes%20a%20long%2Dterm,daily%2C%20monthly%2C%20or%20quarterly." target="_blank">Investopedia</a></div><div><br /></div><div>“The goal of investing is generally to build wealth over the medium to long term. By contrast, the goal of trading is to generate profits in the short-term.” <a href="https://www.etoro.com/investing/investing-vs-trading/" target="_blank">eToro</a></div><div><br /></div><div>“With trading, you're hoping to earn quick returns based on short-term fluctuations in the market. Long-term investors, in contrast, tend to build diversified portfolios of assets and stay in them through the ups and downs of the market.” <a href="https://www.businessinsider.com/personal-finance/trading-vs-investing" target="_blank">Business Insider</a></div><div><br /></div><div>The general view is that investing involves a longer holding period than trading. However, within trading itself, there are several ways to trade depending on the time frame. According to Investopedia:</div><div><ul><li>Day trading entails opening and closing positions within the same trading day.</li></ul><ul><li>Scalping entails identifying and exploiting bid-ask spreads that are a little wider or narrower than normal due to temporary imbalances in supply and demand. Since the level of profit per trade is small, scalpers look for relatively liquid markets to increase the frequency of their trades.</li></ul><ul><li>Swing trading. At the end of a trend, there is usually some price volatility as the new trend tries to establish itself. Swing traders buy or sell as the price volatility sets in. Swing trades are usually held for more than a day but for a shorter time than trend trades. </li></ul><ul><li>Position trading requires investors to hold securities slightly longer, requiring patience as the trade develops. Some consider position trading to be a buy-and-hold strategy and not active trading.</li></ul></div><div><br /></div><div>Conceptually I see the various forms of trading and investing as lying on a continuous-time frame as illustrated in Chart 1.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTrl-v12pEAbgbZczyiYw2O_zRxyNt1QyCOGa1bmV4Pxq98zY92hjbIDeik6mO8wsNWFgGbFNK4UoQVXNF58S8_tXhlpUH8KOuU7EwOd0dm-PJVgcxppZIxQ2K_zy_ZwI81bXfZXLWkaO-gVzwSlS45qtlaCD6sjXXft2wxy21zzTrv73vCM2HZdFJ/s552/Chart%201.png" style="margin-left: auto; margin-right: auto;"><img alt="Trading vs investing continuum" border="0" data-original-height="282" data-original-width="552" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTrl-v12pEAbgbZczyiYw2O_zRxyNt1QyCOGa1bmV4Pxq98zY92hjbIDeik6mO8wsNWFgGbFNK4UoQVXNF58S8_tXhlpUH8KOuU7EwOd0dm-PJVgcxppZIxQ2K_zy_ZwI81bXfZXLWkaO-gVzwSlS45qtlaCD6sjXXft2wxy21zzTrv73vCM2HZdFJ/s16000/Chart%201.png" title="Trading vs investing continuum" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Trading vs Investing Continuum</td></tr></tbody></table><div><br /></div><div>There is some overlap between position trading and investing in terms of the holding period. But each approaches the stock market differently. Position trading is more likely to be based on trend following whereas investing is more likely to be based on fundamentals.</div><div><div><br /></div><h3>Approach</h3><div>The goal of investing is to gradually build wealth over an extended period through the buying and holding of a portfolio of stocks. While the market may be volatile, you would ride out the volatility. You expect that prices will rebound and any losses eventually will be recovered. </div><div><br /></div><div>However, the trading approach is different. According to Investopedia:</div><div><ul><li>Trading involves more frequent transactions. The goal is to generate returns that outperform buy-and-hold investing. While investors may be content with annual returns of 10% to 15%, traders might seek a 10% return each month. </li></ul><ul><li>Trading profits are generated by buying at a lower price and selling at a higher price within a relatively short period. The reverse also is true. Trading profits can be made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in a falling market.</li></ul></div><div><br /></div><h3>Risk management</h3><div>There are 2 schools of thought when it comes to risk:</div><div><ul><li>Those that view it as volatility.</li></ul><ul><li>Those that view it as a permanent loss of capital.</li></ul></div><div><br /></div><div>If you have been following my blog, you will know that as a long-term value investor, I follow the latter school of thought. I have covered the various ways to mitigate risk in my blog. Refer to:</div><div><ul><li><a href="https://www.i4value.asia/2020/05/how-to-mitigate-against-risks-when.html" target="_blank">How to mitigate risk when value investing</a>.</li></ul><ul><li><a href="https://www.i4value.asia/2023/10/how-to-mitigate-permanent-loss-of.html#more" target="_blank">How to mitigate permanent loss of capital in an awesome way</a>.<br /><br /></li></ul></div><div>Because of the short holding period, traders generally look at volatility as a risk. Then to mitigate risk, they use a different set of approaches. These include considering trade size, stop losses, profit-taking, and optimal risk-reward ratios.</div><div><ul><li>Trade size. The first step is to place a sensible-sized trade relative to the funds that you have available. The general rule is to risk 1 % to 2 % of your account on any one trade. </li></ul><ul><li>Stop loss. This is an order that automatically closes out your trade when the market price moves beyond a predetermined price level. </li></ul><ul><li>Take profit orders will close the trade at a pre-determined profit level. Planning this level prevents emotions from creeping into the trade and will make you set an optimal risk-reward ratio.</li></ul><ul><li>Risk-reward ratio. Once you know your stop loss and take profit points, you can estimate the risk-reward ratio for the position. As a general rule, successful traders will not consider trades that have a risk-reward ratio of less than 1:2. Some will only go for trades with a risk-reward ratio of 1:3.</li></ul></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhs74OJY2k-tJNAqRwkXydl0soJI-4-U9TRO68Q5d_3Cx6rNeG2Za6Zuwv9A7LGUbjHVQdRVee9MwogvZQt5F_Qh9p2kmBy2VR5LzCf18GHvIQXbRFLcicOssN-vRBAZj2r9A7fk6FHrYGp2x2pd0aH1MQskxemo91C_Qa98jgJRl7QW9sgcbCZVADn/s286/Mindset.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Mindset" border="0" data-original-height="189" data-original-width="286" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhs74OJY2k-tJNAqRwkXydl0soJI-4-U9TRO68Q5d_3Cx6rNeG2Za6Zuwv9A7LGUbjHVQdRVee9MwogvZQt5F_Qh9p2kmBy2VR5LzCf18GHvIQXbRFLcicOssN-vRBAZj2r9A7fk6FHrYGp2x2pd0aH1MQskxemo91C_Qa98jgJRl7QW9sgcbCZVADn/s16000/Mindset.png" title="Mindset" /></a></div><div><br /></div><div><h3>Mindset</h3><div>I tend to associate trading with buying and selling pieces of paper. It is mainly a market-sentiments-driven approach. For the short duration associated with trading, business fundamentals are not likely to change much. This is especially for scalping, day trading, and even swing trading. Looking at fundamentals does not make sense.</div><div><br /></div><div>However, when you invest for the long term, you would likely base it on fundamentals. Some will emphasize macro factors while others will focus on the micro or company-specific factors. </div><div><br /></div><div>The traders and investors look at different things because they have different mindsets. </div><div><br /></div><div>According to the <a href="https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/winning-mindset-of-a-trader/" target="_blank">Corporate Finance Institute</a>, successful trading is not about having better strategies. It is also about developing a winning mindset. Psychologically, the very best traders share the following characteristics:</div><div><ul><li>They are all comfortable with taking risks.</li></ul><ul><li>They are capable of quickly adjusting to changing market conditions.</li></ul><ul><li>They are disciplined in their trading and can view the market objectively.</li></ul><ul><li>They don’t give in to being excessively excited about winning trades or excessively despairing about losing trades.</li></ul><ul><li>They make the necessary effort to be self-disciplined with strict money and risk management rules.</li></ul></div><div><br /></div><div>I would like to illustrate the difference from the above by referring to the mindset of a value investor. In my book “<a href="https://www.i4value.asia/p/do-you-really-want-to-master-value.html" target="_blank">Do you really want to master value investing?</a>” I have summarized the value investing mindset as follows.</div><div><ul><li>Be patient. You are relying on the success of the underlying business to make money. Company performance changes slowly and you may have to wait years for the market to re-rate the company. </li></ul><ul><li>Be a contrarian. You are buying bargains. The nature of investing is such that a stock is only selling at a bargain if there is low demand. This will happen only if the crowd is not interested in the stock.</li></ul><ul><li>Be the tortoise rather than the hare. You should not seek excitement from your investments. Fundamental analysis takes time and it takes more time for the market to come around. </li></ul><ul><li>Have confidence in yourself. If you are going to be a contrarian, you need to be confident that your analysis is correct and that the market is wrong. You are a contrarian based on analysis.</li></ul><ul><li>Be resilient. In looking for the value stocks to invest in, the process eliminates far more stocks than it uncovers. It can be a frustrating way to invest during a bull market. Many stocks that you dismiss during your search will keep rising in value in bull markets. </li></ul></div><div><br /></div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div><h2>Trading with fundamentals</h2><div>A stock's fundamentals are the factors that are thought to contribute to the underlying company's value or worth as a business. Fundamentals can include quantitative data such as financial ratios and qualitative factors like the business model and competitive advantages.</div><div><br /></div><div>When you trade with fundamentals, you incorporate such information into your trading analysis. </div><div><br /></div><div>“Trading on the fundamentals – also referred to as trading the news – is the study of news events and economic statistics to determine trading opportunities. Referred to as fundamentalists, these traders pay close attention to changes in economic indicators such as interest rates, employment rates, and inflation.” <a href="https://www1.oanda.com/forex-trading/learn/trading-tools-strategies/fundamental-analysis" target="_blank">OANDA</a></div><div><br /></div><div>According to Investopedia fundamental trading focuses on company-specific events to determine which stock to buy and when to buy it. These events include earnings announcements, analyst upgrades and downgrades, and corporate exercises – share splits, M&A, and re-organizations.</div><div><br /></div><div>Looking at Chart 1, you may think that trading with fundamentals only applies to the longer time frame-type of trading. You would be surprised. There are many articles about how traders with a short time frame can adapt fundamental analysis to their trading plan. </div><div><ul><li><a href="https://www.schwab.com/learn/story/how-to-pick-stocks-using-fundamental-and-technical-analysis" target="_blank">How to Pick Stocks Using Fundamental and Technical Analysis </a>– Charles Swab. The advice is to first use fundamentals to screen for stocks to trade. Technical analysis is next used to identify stocks to hold from a few days to a few weeks.</li></ul><ul><li><a href="https://tokenist.com/investing/fundamental-analysis-stocks/" target="_blank">Stock Trading: How to Use Fundamental Analysis</a> – The Tokenist. The gist is to use fundamental analysis to identify overvalued or undervalued stocks to short or go long.</li></ul><ul><li><a href="https://www.daytradetheworld.com/trading-blog/how-to-master-the-art-and-science-of-fundamental-analysis/" target="_blank">How to adapt fundamental analysis to your day trading plan</a> – Day Trade, The World. The article opined that fundamental analysis is a useful process used by all types of traders. However, it is usually more useful for swing and long-term traders. </li></ul><ul><li>The Daily Routine of a Swing Trader – Investopedia. The article describes combining fundamental and technical analysis to catch momentous price movements while avoiding idle times.</li></ul></div><div><br /></div><div>When you trade, you are trying to identify the stocks whose prices will change within your trading time frame. You focus on market sentiments or crowd behaviour rather than fundamentals. </div><div><br /></div><div>Traders generally rely on price action via charts, trendlines, or other technical indicators to help gauge market sentiments. Fundamental analysis provides another perspective. It does not replace the analysis of market sentiments or crowd behaviour. </div><div><br /></div><div><h3>What to do</h3><div>If you want to use fundamentals to help inform your stock trading decisions, I have some guidelines for you.</div><div><br /></div><div><b>Understand the Basics of Fundamental Analysis. </b></div><div>Learn the fundamental factors that drive stock prices, such as earnings, financial strengths, and growth prospects. </div><div><br /></div><div><b>Focus on Quality Companies</b></div><div>Look for companies with strong fundamentals, including a history of consistent earnings growth, solid balance sheets, and competitive advantages. </div><div><br /></div><div><b>Study Financial Statements</b></div><div>Analyze financial statements, including income statements, balance sheets, and cash flow statements. </div><div><br /></div><div><b>Stay Informed About Industry Trends</b></div><div>Understand the broader industry or sector in which a company operates. Stay informed about regulatory changes, technological advancements, and other factors affecting the industry. Many consulting firms such as McKinsey publish industry analyses that are available online.</div><div><br /></div><div><b>Diversify Your Research Sources</b></div><div>In addition to financial statements, explore industry publications. Diversifying your information sources can provide a more comprehensive view of a company's prospects. I often do a Google search for global market research reports for this.</div></div><div><br /></div><h3>The cons of using fundamentals</h3><div>“The whole idea that the stock market reflects fundamentals is, I think, wrong. It reflects psychology. The aggregate stock market reflects psychology more than fundamentals.” Bob Shiller, Nobel Prize laureate.</div><div><br /></div><div>While I am a fundamental investor, I also recognize that there are shortcomings with this approach that makes it difficult to use when trading. </div><div><ul><li>You cannot determine position quickly.</li></ul><ul><li>It takes a lot of time.</li></ul><ul><li>It can be subjective, especially in the qualitative analysis part.</li></ul><ul><li>You have to dig for the information for fundamental analysis, especially the qualitative ones. It is not readily available as price and trading volume information.</li></ul><ul><li>There may be data accuracy and reliability issues. Financial statements can sometimes be subject to manipulation, and not all companies provide transparent and accurate information.</li></ul><ul><li>Fundamental analysis may not capture certain aspects of a stock's performance, such as sentiment-driven price movements, or other market dynamics that are not reflected in financial statements.</li></ul><ul><li>Fundamental analysis relies on historical data and assumptions about the future. Unforeseen events, changes in management, regulatory developments, or shifts in industry dynamics can have a significant impact on a company's prospects.</li></ul></div><div><br /></div><div>As such many think that it is not useful as exemplified by the following quote:</div><div><br /></div><div>“… So, who uses fundamental information when trading? It only can benefit investors, who hold positions for months at a time… fundamentals do not help traders make money, but traders often mention them because of tradition on Wall Street. They are afraid that their peers might respect them less for being purely technical traders.” <a href="https://www.brookstradingcourse.com/how-to-trade-manual/trading-fundamentals/" target="_blank">Brooks Trading Course</a></div><div><br /></div></div><div><h3>Combining strategies</h3><div>By combining fundamental and technical analysis, traders can make more informed decisions. This is achieved by considering both the underlying financial health of a company and the price trends reflected in the market. </div><div><br /></div><div>Some examples of how you can integrate both methodologies are as follows:</div><div><br /></div><h4>Entry and Exit Points</h4><div><ul><li>Fundamental Analysis. Identify a fundamentally strong stock based on factors such as earnings growth and a competitive edge in the industry.</li></ul><ul><li>Technical Analysis. Use technical indicators, like moving averages or support and resistance levels, to time entry and exit points. </li></ul></div><div><br /></div><h4>Trend Confirmation</h4><div><ul><li>Fundamental Analysis. Determine the overall trend of the market or specific sectors based on economic indicators and company performance.</li></ul><ul><li>Technical Analysis. Use trend analysis tools, such as trendlines or trend indicators, to confirm the direction of the trend.</li></ul></div><div><br /></div><h4>Confirmation of Breakouts.</h4><div><ul><li>Fundamental Analysis. Identify potential breakout stocks by analyzing company news, earnings reports, or other fundamental catalysts.</li></ul><ul><li>Technical Analysis. Confirm breakouts by observing price movements and volume. </li></ul></div><div><br /></div><h4>Earnings Season Strategies</h4><div><ul><li>Fundamental Analysis. Evaluate a company's earnings reports to identify strong or weak performers.</li></ul><ul><li>Technical Analysis. Use price patterns and technical indicators to identify potential trading opportunities around earnings announcements. </li></ul></div><div><br /></div><h4>Moving Average Crossovers</h4><div><ul><li>Fundamental Analysis. Choose stocks with strong fundamentals for long-term investment.</li></ul><ul><li>Technical Analysis. Use moving average crossovers as potential entry or exit signals to align with the overall trend identified through fundamental analysis.</li></ul></div><div><br /></div><h4>Volume Analysis</h4><div><ul><li>Fundamental Analysis. Consider company news and events that might lead to increased investor interest and trading activity.</li></ul><ul><li>Technical Analysis. Confirm the strength of a price movement by analyzing volume. </li></ul></div><div><br /></div><h4>Divergence Analysis</h4><div><ul><li>Fundamental Analysis. Identify potential divergences between a company's stock price and its underlying fundamentals.</li></ul><ul><li>Technical Analysis. Look for divergences between price and technical indicators. Divergence can signal a potential reversal or change in trend.</li></ul></div></div><div><br /></div><div><h2>One example of a fundamental trade</h2><div>In my Seeking Alpha article, “<a href="https://seekingalpha.com/article/4520580-home-builders-there-are-fundamental-trading-opportunities" target="_blank">Meritage Homes And KB Home: Fundamental Trading Opportunities</a>” I identified a pair of trades - one long and one short - based on fundamental analysis. </div><div><br /></div><div>I looked at 2 factors – business fundamentals and margin of safety. I hunted for a pair trade from the homebuilding sector so that all the companies face the same economic situation. As the homebuilding sector is cyclical, the analysis and valuation were over the cycle.</div><div><br /></div><div>The long position is the home builder with the best combination of good fundamentals and the best margin of safety. The short position is the home builder with the worst fundamentals and no margin of safety. Refer to Chart 2.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTEzYbqzxPTKWGeBBz1vRMLa3qlKBm-ilm87WrQ6Ji0hkdSrh9C_WahwXcGfPf5WZIE0a_oc6swANe7d0q_m1XEGhFD2dcrM5K2xBypsgth9TCGPCLpoYWkVjHDloNSGGyrHRCEbTcjQ3FlS7n0LxjdWQOkskjDFsCjSXVyTqYi2LAMCxiGD_r_gDc/s575/Chart%202.png" style="margin-left: auto; margin-right: auto;"><img alt="Scattergram of Margins of Safety vs Fundamentals" border="0" data-original-height="350" data-original-width="575" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTEzYbqzxPTKWGeBBz1vRMLa3qlKBm-ilm87WrQ6Ji0hkdSrh9C_WahwXcGfPf5WZIE0a_oc6swANe7d0q_m1XEGhFD2dcrM5K2xBypsgth9TCGPCLpoYWkVjHDloNSGGyrHRCEbTcjQ3FlS7n0LxjdWQOkskjDFsCjSXVyTqYi2LAMCxiGD_r_gDc/s16000/Chart%202.png" title="Scattergram of Margins of Safety vs Fundamentals" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Margin of Safety vs Fundamentals of top US Home Builders</td></tr></tbody></table><div><br /></div><div><div>The result of such an analysis shows that you should buy Meritage Homes Corporation (NYSE: MTH) and short KB Home (NYSE: KBH). The rationale is that the price of MTH would go up as value investors pile in. Given the current economic situation and the news about the possible recession, investors in KBH would seek to get out.</div><div><br /></div><div><h3>Other examples</h3><div>There are of course other ways traders can use fundamental analysis as summarized below.</div><div><br /></div><h4><b>Earnings Reports.</b></h4><div><ul><li>Strategy: Monitor and analyze quarterly and annual earnings reports of companies.</li></ul><ul><li>Execution: Buy or sell based on whether a company's earnings surpass or fall short of market expectations.</li></ul><div><br /></div></div><h4>Economic Indicators</h4><div><ul><li>Strategy: Pay attention to economic indicators like GDP growth, unemployment rates, and consumer confidence.</li></ul><ul><li>Execution: Adjust your portfolio allocation based on the overall economic outlook.</li></ul></div><div><br /></div><h4>Dividend Analysis</h4><div><ul><li>Strategy: Evaluate a company's dividend history and payout ratio.</li></ul><ul><li>Execution: Invest in companies with a consistent history of paying dividends and a sustainable payout ratio.</li></ul></div><div><br /></div><h4>Industry Analysis</h4><div><ul><li>Strategy: Analyze the performance and prospects of specific industries or sectors.</li></ul><ul><li>Execution: Allocate resources to industries with strong growth potential. For example, if there is a trend towards clean energy, consider investing in companies within the renewable energy sector.</li></ul></div><div><br /></div><h4>Financial standing</h4><div><ul><li>Strategy: Examine a company's debt levels and its ability to service that debt. Companies with low debt-to-equity ratios may be more resilient during economic downturns.</li></ul><ul><li>Execution: Avoid companies with high debt loads and focus on those with manageable debt.</li></ul></div></div><div><br /></div><h2>Can you make money?</h2><div>The main purpose of investing or trading is to make money. As such the most important aspect of using fundamentals for trading is whether it can improve the prospects of making money.</div><div><br /></div><div>But this is a very challenging question to answer. I have to find evidence that traders who used fundamentals performed better than those that did not. I could not find any study of such a comparison. </div><div><br /></div><div>The other way to answer the question is to search for successful or famous traders that used fundamental analysis. Yes, I equate success and fame with making money. </div><div><br /></div><div>Unfortunately, I could not find any information when I did a Google search for successful or famous fundamental traders. This is unlike a search for successful or famous investors where names like Warren Buffett, John Templeton, and Peter Lynch, to name a few, pop up immediately. </div><div><br /></div><div>I then resorted to looking for famous traders and then dug deeper to see whether there was any mention of them using fundamentals. Investopedia listed the following as the 10 of the world's most famous traders of all time:</div><div><ul><li>Jesse Livermore.</li><li>William Delbert Gann.</li><li>George Soros.</li><li>Jim Rogers.</li><li>Richard Dennis.</li><li>Paul Tudor Jones.</li><li>John Paulson.</li><li>Steven Cohen.</li><li>David Tepper.</li><li>Nick Leeson.</li></ul></div><div><br /></div><div>I found that a number of them have been associated with fundamental analysis.</div><div><br /></div><div>“People sometimes make the mistake of believing that <b>Jesse Livermore</b> was a purely technical trader… At other times though – as explained in Reminiscences of a Stock Operator – he would act on his understanding of the fundamental economics of a situation.” <a href="https://jesse-livermore.com/jesse-livermore-fundamental-analysis.html" target="_blank">Jesse Livermore, Stock Trader Extraordinaire</a></div><div><br /></div><div>“<b>George Soros</b> is a short-term speculator. He makes massive, highly-leveraged bets in the direction of the financial markets. His famous hedge fund is known for its global macro strategy, a philosophy centred around making massive, one-way bets on the movements of currency rates, commodity prices, stocks, bonds, derivatives, and other assets based on macroeconomic analysis.” Investopedia</div><div><br /></div><div>“<b>Paul Tudor Jones</b> is an inspiring trader and fund manager with tonnes of experience under his belt and a strong investment approach following global macro fundamental trading.” <a href="https://www.logikfx.com/post/paul-tudor-jones-top-10-trading-rules" target="_blank">Logikfx </a></div><div><br /></div><div>“<b>David Tepper</b> uses a value investing strategy that is very much like that of Warren Buffett. Tepper focuses his efforts on fundamental analysis to identify quality stocks then he concentrates on a handful of good ideas and invests the lion’s share of his portfolio there.” <a href="https://financhill.com/blog/investing/david-tepper-hedge-fund-strategy#:~:text=David%20Tepper%20uses%20a%20value,share%20of%20his%20portfolio%20there." target="_blank">Financhill</a></div><div><br /></div><div><div><b>Stanley Druckenmiller</b> is a highly successful hedge fund manager known for his macroeconomic trading strategies. He worked alongside George Soros during the famous Quantum Fund days. Druckenmiller combines macroeconomic analysis with fundamental research to identify trading opportunities, focusing on factors such as interest rates, inflation, and global economic trends.</div><div><br /></div><div>While <b>William O'Neil</b> is often associated with technical analysis, his CAN SLIM approach incorporates fundamental criteria for stock selection. O'Neil founded Investor's Business Daily and emphasizes factors such as earnings growth, new product developments, and market leadership in his trading strategy.</div></div><div><br /></div><div>What is the moral of the story? There is some evidence that fundamental analysis can be a useful tool for traders to make money.</div><div><br /></div><div>On a personal basis, I would like to think that my pair of trades using fundamentals can be another piece of evidence. But this is a long-term trade and would time. I must admit that there was one Seeking Alpha reader who disputed my shorting of KBH. </div><div><br /></div><div>He opined that KBH’s price would rise given its good business fundamentals. However I had subsequently carried out a detailed analysis of KBH and maintained my conclusion. Refer to the Seeking Alpha article "<a href="https://seekingalpha.com/article/4523308-kbh-cyclical-stock-all-signs-point-to-short-opportunity" target="_blank">KB Home: This Is A Cyclical Stock. All Signs Point To A Short Opportunity.</a>"</div><div><br /></div><div><h3>Trading for capital accumulation</h3><div>Combining short-term trading with long-term investing is a strategy that some investors use to potentially grow wealth. This approach is often referred to as "trading for capital accumulation." The idea is to actively trade in the short term to generate gains and then allocate those gains to long-term investments with strong fundamentals.</div><div><br /></div><div>One example of this strategy is to combine swing trading with long-term value investing.</div><div><ul><li>Timeframe. You focus on short-term price movements, ranging from a few days to several weeks.</li></ul><ul><li>Strategy. You use technical analysis to identify short-term trends and potential entry/exit points.</li></ul><ul><li>Risk Management. You implement strict risk management strategies to minimize losses.</li></ul><ul><li>Gaining Profits. When a trade is successful, profits are realized. You then look for long-term investments.</li></ul></div><div><br /></div><div>There are of course challenges with the above approach.</div><div><ul><li>Market Timing. Timing the market accurately in both short-term trades and long-term investments is challenging.</li></ul><ul><li>Risk of Loss. Short-term trading involves higher volatility and risk, and there's a chance of losing capital.</li></ul><ul><li>Psychological Factors. Balancing the mindset needed for short-term trading and the patience required for long-term investing can be challenging.</li></ul><ul><li>Tax Implications. Short-term gains are typically taxed at a higher rate than long-term gains, impacting overall returns.</li></ul></div><div><br /></div><div>Short-term trading involves technical analysis which requires a different skill set and mentality than those for fundamental analysis. While theoretically, such an approach can enable you to grow wealth, executing it is not simple.</div></div><div><br /></div><h2>Conclusion</h2><div>There are several differences between investing and trading. Apart from the holding period, they differ in the way they approach the stock market and how they manage risk.</div><div><br /></div><div>Traders tend to rely a lot on price action via charts, trendlines, and other technical indicators to guide their trade. On the other hand, investors rely more on fundamental analysis.</div><div><br /></div><div>However, I have shown that some traders do use fundamentals as well. But these are mostly to complement their technical analysis. I have not come across a trader that focuses only on fundamental analysis.</div><div><br /></div><div>As such I would conclude as follows:</div><div><ul><li>Fundamental analysis can be another tool in the trader’s toolkit.</li></ul><ul><li>Successful traders who have made money using fundamentals did so under specific situations. In other words, there are times when trading on fundamentals delivered enormous returns.</li></ul></div><div><br /></div><div>So, can you make money trading with fundamentals? Yes. But you have to develop the appropriate strategies.</div><div><br /></div><div>Note that the article focuses on traders using fundamental analysis. It is not about fundamental investors using technical. </div><div><br /></div><div>Some fundamental investors use technical analysis to time their entry and exit points, even if their primary focus is on the underlying fundamentals of a company. I happen to belong to this category. </div></div><div><br /></div><div><br /></div><div><br /></div></div><div><br /></div><div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div><div style="text-align: center;"><br /></div></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div></div><p></p><p><br /></p></div><div><br /></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com1tag:blogger.com,1999:blog-7763022747235103156.post-71128429317502729822023-12-10T09:33:00.006+08:002023-12-17T11:08:12.002+08:00Can we learn anything from investment case studies?<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); color: #171717; font-size: 15px; font-weight: bold; letter-spacing: 0.04em; padding-bottom: 10px; padding-top: 10px; text-align: justify; text-decoration: none;">Case Notes 01: This post has been updated to cover what you need to learn in the context of value investing and the role of case studies. Note that there is a PowerPoint presentation of this article under "<a href="https://www.slideshare.net/HongChewEu/learn-how-to-invest-using-investment-case-studies">Learn how to invest using investment case studies</a>". Revision date: 10 Dec 2023</div>
<div><br /></div><div style="text-align: justify;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4magJo3KHnoy3TybkQJs8t05c8kug9KW0b6bRMvPBNvP-zYv4-xRpaZGRF7QVbfkRzPzorajZMZoKGMSwR2Ga80Jy3AMjVvWH_oA-54B3k3jzRJI-LlTBxcN-NgsyJobUwQeOBupJrAg/s225/Study+reduced-min.png" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img alt="Case study" border="0" data-original-height="138" data-original-width="225" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4magJo3KHnoy3TybkQJs8t05c8kug9KW0b6bRMvPBNvP-zYv4-xRpaZGRF7QVbfkRzPzorajZMZoKGMSwR2Ga80Jy3AMjVvWH_oA-54B3k3jzRJI-LlTBxcN-NgsyJobUwQeOBupJrAg/s16000/Study+reduced-min.png" title="Case study" /></a></div><div style="text-align: justify;"><span><a name='more'></a></span><div><br /></div><div>In the world of finance, investment case studies serve as valuable narratives. They offer a retrospective lens into the successes and pitfalls of various investment decisions. </div><div><br /></div><div>By looking at real-world scenarios, we can get insights on the various factors that affect investment decisions. </div><div><br /></div><div>These case studies provide a nuanced education for those learning investing. They shed light on the intricacies of the ever-evolving financial landscape. </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/0FMpj9iVo9E" width="320" youtube-src-id="0FMpj9iVo9E"></iframe></div><br /><div>This article delves into the question of whether we can learn anything from investment case studies. Join me as I explore:</div><div><ul><li>The advantages and challenges of learning from case studies. </li></ul><ul><li>The steps involved. </li></ul><ul><li>What to look out for when learning from case studies</li></ul></div></div><div><div style="text-align: justify;"><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: left;" /></div></div></div><div><h2>Contents</h2><div><ul><li><b>What investment students need to know</b></li><ul><li><b>Valuing a business</b></li><li><b>Thinking about prices</b></li><li><b>Value traps</b></li></ul></ul><ul><li><b>What can you pick up from my Case Studies?</b></li><ul><li><b>Business Analysis</b></li><li><b>Valuation</b></li><li><b>Risk</b></li><li><b>Benefits</b></li><li><b>Disadvantages and limitations</b></li></ul></ul><ul><li><b>How to learn from Case Studies</b></li><ul><li><b>Learning steps</b></li><li><b>What to look out for</b></li><li><b>Where to find investment case studies</b></li><li><b>My experience</b></li></ul></ul><ul><li><b>Takeaways</b></li></ul></div></div></div></div><div class="separator" style="clear: both; text-align: center;"><br /></div><h2 style="text-align: left;">What investment students need to know</h2><div style="text-align: justify;">Warren Buffett in his 1996 letter to his shareholders said:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing, or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices.”</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The Warren Buffett quote above sums up what I will focus on in my blog</div><div><ul style="line-height: 1.5; text-align: left;"><li style="line-height: 1.5;">How to value a business.</li></ul><ul style="line-height: 1.5; text-align: left;"><li style="line-height: 1.5;">How to think about market prices.</li></ul><div><br /></div></div><div><h3 style="text-align: justify;">Valuing a business</h3><div style="text-align: justify;">While valuation is a numerical-based exercise, you have to ensure that it does not turn out to be number crunching. Use assumptions and projections grounded in reality.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">One way to ensure this is to first have a good understanding of the business you are valuing - the company analysis.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">However, there are several perspectives when analyzing companies:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Management would be looking at ways to improve its operations and/or business direction</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Creditors would be assessing the risk of extending loans and/or credit to the company</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Investors would be determining whether to invest</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As a minority investor, you have to remember that you are not management. Unless you are an activist investor, you are not likely to decide on how the company operates. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Your company analysis is thus from the perspective of trying to determine where the business is heading. Consider the challenges and risks so that you can make some realistic assumptions in your valuation.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What you focus on in the analysis will be different from that of management and other parties. </div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><img alt="Thinking about prices" border="0" data-original-height="170" data-original-width="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhE48KZNytQgazCUWQsWS6HW6CN7uruP5_ZIUtXg_uZ7yXjTRvA7aPCFpZCNBelIG4iwFiA2ThG0vlKjWyHd6edq_gXAhUKD-lXLjxQQbHXljZ9bU6h9ighjLZrn_-Oeuz6hrg7VJhmjN0/s16000/Stock+tips+reduced-min.png" title="Thinking about prices" /></div><div style="text-align: justify;"><br /></div><h3 style="text-align: justify;">Thinking about prices</h3><div style="text-align: justify;">“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” Warren Buffett</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If you are a stock trader, price and volume data are critical information because the focus is on trading pieces of paper. The fundamentals and/or intrinsic values of the companies are not important</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But, if you are a value investor, market prices are also important. You are buying and selling based on how the market price compares to the intrinsic values</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Both price and value are the two sides of the same coin. Understanding the difference between price and value is the core principle of value investing.</div><div><ul style="text-align: left;"><li style="text-align: justify;">While you can get the price of a stock (for listed companies), there are no quoted intrinsic values. In practice, you have to estimate the intrinsic values yourself. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">Different investors will have different estimates of the intrinsic value of a company. Contrast this with the stock price. While the stock price may fluctuate, at any one point, there is one price representing the thinking of the crowd at that time. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">Relative value is not intrinsic value. Relative value is assessing the worth of a company by comparing it with its peers. Intrinsic value is based on the company’s fundamentals and is related to the discounted cash flow generated by the business over its life. So, the market price represents the perceived value by the crowd and is not the intrinsic value.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Market price changes often whereas intrinsic value does not change on a day-to-day basis.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Technically market prices are set by supply and demand. According to economic theory</div><div><ul style="text-align: left;"><li style="text-align: justify;">If there are more buyers than sellers then the price will adjust upwards until we have the situation where the number of buyers = number of sellers</li></ul><ul style="text-align: left;"><li style="text-align: justify;">If there are more sellers than buyers, the price will adjust downwards until we have an equal number of sellers and buyers</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Of course, this is an economic model that works in a freely competitive environment and may not reflect what is happening in the stock market.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I prefer to look at the reasons why people buy or sell. For every transaction, there are people from opposite sides:</div><div><ul style="text-align: left;"><li style="text-align: justify;">The buyers are those that expect the price to give up so that they can make money</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The sellers are those who that think they will lose money or that they have made enough as they don’t expect the price to go up in the future. </li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So the real question is what drives the expectation.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I believe that it is a combination of sentiments and business fundamentals. In the short run, sentiments rule while in the long run, business fundamentals have more influence. The challenge is that sentiments are also influenced by fundamentals</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">These 2 views of what drives stock prices have given rise to 2 investing methods</div><div><ul style="text-align: left;"><li style="text-align: justify;">The technical school uses price and volume information as a proxy for market sentiments. These people trade pieces of paper.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The fundamental schools have value investors as one good example. These consider investing as being a part-shareholder of a company and as such view the business fundamentals as the main driver of value. </li></ul></div></div><div class="separator" style="clear: both; text-align: center;"><img alt="Value traps" border="0" data-original-height="160" data-original-width="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkc-JWEaSod2z4w3kIlaXG0eMt8_4WQLpLsJ6WVWcQFGAE9p_3KHtE-yzv-5UjOig5sTPTKzM1jFPZN24dfHkUWz3LcLxai1Epx56QHLkJ6cJMNouKaTjvq2ugrXABVZIIYD05HDoZsJc/s16000/Value+trap+1+reduced-min.png" title="Value traps" /></div><div><h3 style="text-align: left;">Value traps</h3><div style="text-align: justify;">By its nature, value investing is about </div><div><ul style="text-align: left;"><li style="text-align: justify;">Identifying undervalued companies, </li></ul><ul style="text-align: left;"><li style="text-align: justify;">Investing in them and </li></ul><ul style="text-align: left;"><li style="text-align: justify;">Selling them when they are overvalued.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The critical components are then </div><div><ul style="text-align: left;"><li style="text-align: justify;">Determining the intrinsic value and </li></ul><ul style="text-align: left;"><li style="text-align: justify;">Comparing the prevailing market price with intrinsic value.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">That is where value traps come in.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Value traps are companies that while appearing to be cheap, are not cheap as there are some fundamental issues with the company. So, if you invest in such a company you will be caught in a value trap as the price will continue to be low.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">When you compare price with intrinsic value, there are several possible scenarios</div><div><ul style="text-align: left;"><li style="text-align: justify;">The intrinsic value is correctly assessed and with the price below the intrinsic value, the stock is a bargain</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The intrinsic value is wrongly assessed. Although the price is below the assessed intrinsic value, the true situation will eventually come to light. When this happens, the price will continue to languish. You have a value trap</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You can see that value traps and bargains are the opposite sides of the value investing coin. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Value traps are part and parcel of value investment. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The only way you can avoid a value trap is to assess the intrinsic value correctly.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The various case studies are attempts to drive home this point. </div></div><div class="separator" style="clear: both; text-align: center;"><br /></div><div class="separator" style="clear: both; text-align: center;"><div style="text-align: justify;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div style="text-align: justify;"></div></div><h2 style="text-align: left;">What can you pick up from my Case Studies?</h2><div style="text-align: justify;">Warren Buffett has referred to his “two courses” several times since the letter. I don’t know whether it is an urban legend but he supposedly mentioned that he would do one case study after another when asked about the “How to value a business” course.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The case study method of learning is the hallmark of the Harvard Business School. The idea is that by using real-life situations, you can gain insights that may be difficult to teach via lectures. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You learn better from examples. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div>Each of my company case studies focuses on 3 issues</div><div><ul><li>What is the business of the company and where is it heading?</li></ul><ul><li>What is the intrinsic value of the business?</li></ul><ul><li>What are the key risks?</li></ul></div><div><span style="white-space: pre;"> </span></div><div>While valuation and risk mitigation are separate subjects covered elsewhere in the blog, they are an integral part of any valuing investment process.</div><div><br /></div><h3>Business analysis</h3><div>The starting point for any business analysis is to run through the historical Annual Reports. </div><div><br /></div><div>I then supplement this with industry insights</div><div><ul><li>Competitors Annual Reports are also good sources of such information</li></ul><ul><li>I also look at industry research</li></ul></div><div><br /></div><div>You will notice from my case studies that I don’t provide details of the Financial Statements. But I do rely quite a lot on them to gain information about the current and future financial health of the company. </div><div><br /></div><div>The financials are important building blocks but are not the end in themselves. Think of them as the bricks and cement in a building. You are interested in the building and not the bricks and cement.</div><div><br /></div><div>It is not the numbers that are important. It is what is behind the numbers that are more important. </div><div><br /></div><div>To do this, I read </div><div><ul><li>The Financial Statements and the accompanying notes, </li></ul><ul><li>The Chairman’s Statements and the Management Discussions and Analysis. </li></ul></div><div><br /></div><div>What about Corporate Governance, Risk Management, and Sustainability Statement? I skimped through them if they were motherhood statements. I only pay close attention if they can inform me of the long-term prospects of the company eg impact on the business direction, and key risks. </div><div><br /></div><div>The quantitative analysis is a straightforward part.</div><div><br /></div><div>It is always the qualitative analysis that is the most challenging. You are trying to get a picture of </div><div><ul><li>Where the industry is heading, </li></ul><ul><li>The prospects of the company, and </li></ul><ul><li>Whether management would be able to meet the challenges over the next 10 to 20 years.</li></ul></div><div><br /></div><div>I don’t think you can get this with quantitative analysis alone. </div><div><br /></div><div>I hope that the various case studies in my blog have shown that company analysis and valuation are not about being an EXCEL-king. </div><div><br /></div><div>I did not start with a spreadsheet and you will notice that the focus is on understanding the business ie</div><div><ul><li>How does the company make money?</li></ul><ul><li>Where is it now?</li></ul><ul><li>How did it get here?</li></ul><ul><li>Where is it heading?</li></ul><ul><li>Where does it want to go?</li></ul></div><div><br /></div><div>We all have our approach in trying to get the answers to these questions. I prefer what I have done in my case studies and will be using this framework in all my case studies. </div><div><br /></div><div>I also did not use the conventional SWOT (Strengths, Weaknesses, Opportunities, and Threats) technique in my analysis. I think this is overused and I have seen many SWOT analyses that are not linked to what to do next.</div><div><br /></div><div>But the main reason I tend to avoid SWOT is that you are analyzing the company to see where it is heading. You are forecasting the future from an investor’s perspective. You are not management. </div><div><br /></div><div>Unless you are an activist investor, you don’t have much hope of changing the way the business is run or heading. Yours is the minority shareholders’ perspective. </div><div><br /></div><div>I believe that I have provided a framework to enable you to identify the issues in such a way as to help in the valuation process. </div><div><br /></div><div>The point is that there are many techniques available from Porter’s 5 Forces, Factors analysis to the BCG matrix. Each will have its uses and weaknesses. </div><div><br /></div><div>It is not the technique that is important. It is the answers that you want and I will be using a variety of analytical techniques in all my case studies.</div><div><br /></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><img alt="Valuation" border="0" data-original-height="159" data-original-width="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZ4KJW0h9dGsC9JGRVpL72O2kpxQuBAwlXC-kup3CDsc2e0q4MyNMIDzOfMW3afsnI0XryJgKOmOemCE1HxzwI5aGAOG0QsHMFnJv6gu_9I1afKu4pmKOrAQkj8GZXVtJNx-AKw2dhdZs/s16000/Value+trap+2+reduced-min.png" title="Valuation" /></div></div><div style="text-align: justify;"><h3>Valuation</h3><div>I use 2 main valuation methods to derive the intrinsic value</div><div><ul><li>Asset-based where I consider the assets as a store of value. I rely on the Balance Sheet for this.</li></ul><ul><li>Earnings-based where the assets are seen as a generator of value. The intrinsic value is the discounted free cash flow generated over the life of the business. I rely on the Profit and Loss and Cash Flow statements for the information required for this.</li></ul></div><div><br /></div><div>I also have a host of other valuation techniques to help me triangulate the intrinsic values. These include the Acquirer’s multiple and the Greenblatt “Magic Formula”.</div><div><br /></div><div>I extracted all the information for these above valuations from the company’s financial statements. </div><div><br /></div><div>While I do not show the financial information specifically in my case studies, I have </div><div><ul><li>A spreadsheet with at least the past 12 years' financials for each company.</li></ul><ul><li>A financial model that extracts the relevant statistics for my financial analysis and valuation. </li></ul></div><div><br /></div><div>The chart below provides a snapshot of such an analysis. </div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><img alt="Financial analysis worksheet example" border="0" data-original-height="553" data-original-width="1275" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiK6G89bHlq-UuoU6eshvsMQqqDPuqPJwlQDdfOEGHnmT5pj3tCJVZXqldOPIDD3Dp0t4nIrUI0mMKjqLpH_BZgcAMiJdrc-Wr1OZ2d_h1ed89s_cVRCGTaKDE6_aVyi27JLHTIMcozwJU/s16000/Worksheet+example.png" title="Financial analysis worksheet example" /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><h3>Risk</h3><div>I view risk as a permanent loss of capital and my risk management approach is to</div><div><ul><li>Identify all the possible causes for any permanent loss of capital</li></ul><ul><li>Assess the threats in terms of the impact and the likelihood of them occurring</li></ul><ul><li>Adopt a host of risk mitigation measures </li></ul></div><div><br /></div><div>You can see that you need to have a strong understanding of the business to assess the risks.</div><div><br /></div><div>In other words, the company analysis serves two purposes</div><div><ul><li>Ensure that your assumptions about the prospects of the company used in the financial model are realistic</li></ul><ul><li>Enable you to identify the threats and hence take the appropriate risk mitigation measures</li></ul></div><div><br /></div><div>Of course, some of the threats are related to the investment process and my behavior while others are related to the business itself. </div><div><br /></div><div>To handle the latter, I cover the key risks in my company analysis as shown in my case studies. </div><div><br /></div><div><h3>Benefits</h3><div>There are several benefits when you learn from investment case studies. They can be summarized as follows.</div><div><br /></div><div><b>Real-world application.</b> Investment case studies offer practical, real-world examples. They bridge the gap between theoretical knowledge and its application. This approach enhances understanding and facilitates better decision-making.</div><div><br /></div><div><b>Risk management insights.</b> Case studies often highlight the importance of effective risk management. They show how risks were identified, assessed, and addressed in specific scenarios. These can help you can develop a more robust risk management framework.</div><div><br /></div><div><b>Strategic decision-making</b>. You can gain insights into the factors that drive successful investment decisions. These will help refine your analytical and decision-making processes.</div><div><br /></div><div><b>Market dynamics</b>. Case studies help you understand how various factors such as economic conditions and geopolitical events impact investments. This is crucial for making informed decisions. </div><div><br /></div><div><b>Enhanced analytical skills</b>. Case studies require you to assess various factors such as financial statements and industry trends. This will sharpen your analytical skills </div><div><br /></div><div><b>Confidence building.</b> With the lessons from case studies, you are better equipped to face challenges in the actual market.</div><div><br /></div><div>In summary, learning from investment case studies provides a multifaceted educational experience. They can contribute to the development of a more informed and adaptive approach to investing.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj50VAVgo19UCUSo7OpWuNZ5QLhdoCqGXAfpxb_CJ-gADzMM0OSxlgqAx1XJbs7dAy90gMKCls1B5r3-qxesiaRgrRK6pAG4XVZKUAIu0GdQ2R26wkgCUWTxeRQ1zJMh7sejeOmduDwCBXjB6lG5Q3VsNDPEjEYuurmzMUW-KzJzGZ0PLNyf64vLbIvac8/s510/Picture1-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Disadvantages and limitations of investment case studies" border="0" data-original-height="510" data-original-width="255" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj50VAVgo19UCUSo7OpWuNZ5QLhdoCqGXAfpxb_CJ-gADzMM0OSxlgqAx1XJbs7dAy90gMKCls1B5r3-qxesiaRgrRK6pAG4XVZKUAIu0GdQ2R26wkgCUWTxeRQ1zJMh7sejeOmduDwCBXjB6lG5Q3VsNDPEjEYuurmzMUW-KzJzGZ0PLNyf64vLbIvac8/s16000/Picture1-min.png" title="Disadvantages and limitations of investment case studies" /></a></div><div><br /></div><div><h3>Disadvantages and limitations</h3><div>There are also potential disadvantages and limitations to consider when learning from case studies.</div><div><br /></div><div><b>Hindsight bias.</b> Case studies are often analyzed with the benefit of hindsight. These can create a distorted perspective. In real-time decision-making, you do not have the luxury of knowing future outcomes. Relying too heavily on hindsight can lead to overconfidence.</div><div><br /></div><div><b>Unique context. </b>Each investment case is unique. The specific context may not be easily transferable to other situations. </div><div><br /></div><div><b>Incomplete information.</b> Case studies may not provide a complete picture of the information available at the time of the investment decision. In reality, you must make decisions with imperfect and incomplete information, which adds an extra layer of complexity.</div><div><br /></div><div><b>Market dynamics.</b> Financial markets are dynamic, and conditions can change rapidly. Case studies may become outdated or irrelevant as market dynamics evolve. This may make it challenging to apply historical lessons to current situations.</div><div><br /></div><div><b>Biases in selection.</b> The choice of which case studies to study may introduce biases. Selecting only successful cases may create an overly optimistic view of investment strategies. Exclusively examining failures may instill unnecessary fear and caution.</div><div><br /></div><div><b>Neglect of macro factors</b>. Case studies often concentrate on micro-level factors specific to individual investments. Neglecting broader macroeconomic factors could impact investment outcomes.</div><div><br /></div><div><b>Lack of emotional context</b>. Case studies may not capture the emotional and psychological aspects of decision-making. </div><div><br /></div><div><b>Oversimplification.</b> To make case studies more digestible, the author may simplify some complexities. This can lead to a false sense of understanding of the challenges.</div><div><br /></div><div>To mitigate these disadvantages, you should approach case studies with a critical mindset. Consider the limitations of each study, and use them as part of a broader educational framework. Case studies should complement, not replace, a well-rounded understanding of financial markets</div><div><br /></div><div>However, I believe that these disadvantages would be mitigated if you cover a lot of different case studies.</div><div><br /></div></div></div><div style="text-align: justify;"><h2>How to learn from Case Studies</h2><div>My investment case study is a description of a company’s business, its prospects, risks, and my estimate of the intrinsic value.</div><div><br /></div><div>It recounts events or problems in a way that so that you can learn from their complexities and ambiguities. </div><div><br /></div><div>There are two ways for you to learn from the case study</div><div><ul><li>Passively by merely looking at how I have analyzed and valued the company. You can use this as a template for your analysis and valuation</li></ul><ul><li>Actively by trying to analyze and value the company yourself before reading the case study. Then compare your analysis and valuation with mine. </li></ul></div><div><br /></div><div>If there was a formal classroom setting, there would be an opportunity to discuss the analysis and valuation with the class. You would have the chance to reflect on how your analysis and valuation might change as a result of the class discussion.</div><div><br /></div><div>Unfortunately, without a classroom setting, the next best alternative is to do the comparison yourself. </div><div><br /></div><div>It is obvious that for the case study to be useful, you must have the necessary knowledge first. The case study will then help you to understand what you have learned. More importantly, it will help to develop your skills in </div><div><ul><li>Qualitative and quantitative analysis</li></ul><ul><li>Dealing with ambiguities</li></ul></div><div><br /></div><div>It should be remembered that to develop the necessary investment skills you need both knowledge and practice. Case studies provide one way to see what you have learned being applied in a real-world setting. </div><div><br /></div><div>The alternative to case studies is a simulation or paper transactions. But these are stories for another post.</div><div><br /></div><div><h3>Learning steps</h3><div>Here are key steps to derive meaningful lessons from investment case studies:</div><div><br /></div><div><b>Identify key factors.</b> Pinpoint the critical factors that influenced the investment outcome. This includes market conditions, economic indicators, and company-specific information.</div><div><br /></div><div><b>Understand risk management.</b> Analyze how risk was assessed and managed in the case study. </div><div><br /></div><div><b>Evaluate decision-making.</b> Examine the rationale behind the investment choices. This include analysing financial statements, market trends, and competitive landscapes.</div><div><br /></div><div><b>Learn from mistakes.</b> Where appropriate understand the mistakes made in the case study. Assess the consequences of errors and explore alternative strategies.</div><div><br /></div><div><b>Consider diversification.</b> Examine the role of diversification in the case study. Understand how a diversified portfolio or lack thereof influences the overall risk and return profile.</div><div><br /></div><div><b>Stay informed.</b> Apply lessons from case studies to current situations. You should adapt strategies based on changing economic landscapes.</div><div><br /></div><div><b>Simulate scenarios.</b> Apply the lessons learned by simulating similar scenarios in a controlled environment. Utilize investment simulations or paper trading to practice implementing strategies.</div><div><br /></div><div>Dissecting and reflecting on investment case studies through the above lenses. If you do so, you can extract valuable lessons and develop a more nuanced and informed approach.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgG8Zyus4WIP6Xxwiqqjd-k8ThecBz45CMwC8h5xwiLOqIrMysnr8nIWSIdTfDDmkoJoCEr3-kgzKWr7wYi2FXIbUOfmtnq8GLOSdVjveFm7x1J2YrRdc8s9MXEH5NLRZNWugk3FQyhLdPVU1fSKmSw7_Hrr0xhgaIrYQlVZgrOxJDaHPTkUSoqJLyd57Q/s351/Picture2-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="What to look out for when learning from investment case studies" border="0" data-original-height="264" data-original-width="351" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgG8Zyus4WIP6Xxwiqqjd-k8ThecBz45CMwC8h5xwiLOqIrMysnr8nIWSIdTfDDmkoJoCEr3-kgzKWr7wYi2FXIbUOfmtnq8GLOSdVjveFm7x1J2YrRdc8s9MXEH5NLRZNWugk3FQyhLdPVU1fSKmSw7_Hrr0xhgaIrYQlVZgrOxJDaHPTkUSoqJLyd57Q/s16000/Picture2-min.png" title="What to look out for when learning from investment case studies" /></a></div><div><br /></div><div><h3>What to look out for</h3><div>There are many types of case studies and different author cover different things. I would suggest that when you come across an author for the first time, use the following checklist.</div><div><br /></div><div><b>Contextual relevance.</b> Ensure that the case study is relevant to your situation. Context matters. Applying lessons from a contextually inappropriate case may lead to misguided decisions.</div><div><br /></div><div><b>Quality of information.</b> Evaluate the quality and reliability of the data and information presented. Rely on well-researched and documented cases. This will ensure that the insights derived are based on accurate and credible information.</div><div><br /></div><div><b>Consider different perspectives.</b> Investment decisions are often subjective, and case studies may present a particular perspective. Be open to considering different viewpoints and interpretations of the same case.</div><div><br /></div><div><b>Identify biases.</b> Recognize potential biases in the case study. They could stem from the author’s perspective, the source of the information, or the outcome. </div><div><br /></div><div><b>Complexity and simplicity</b>. Assess the complexity of the case study. Some cases may be overly intricate, making it challenging to extract clear lessons. Others may oversimplify complex market dynamics. Seek a balance that aligns with your level of expertise and understanding.</div><div><br /></div><div><b>Distinguish between correlation and causation.</b> Understand the difference between correlation and causation. Just because two events occurred together does not imply a cause-and-effect relationship. </div><div><br /></div><div><b>Consider market conditions.</b> Take into account the prevailing market conditions during the period covered by the case study. Economic, industry and geopolitical factors play a significant role in investment outcomes. As such understanding their influence is crucial.</div><div><br /></div><div><b>Relevance to your strategy</b>. Identify actionable insights that align with your investment strategy. Not all lessons from a case study may be directly applicable to your approach.</div><div><br /></div><div><b>Update information</b>. Changes in the economic landscape since the case study’s occurrence might impact the relevance of the lessons learned.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQidF7wkaH5rQcNfS_Et9XOsSbHYPvp-EXDkBcPSRrcZoVwY0y-h5TciXSlpW2F3r6pbDofrcoTVjCTDs1IPOMUbc3uA-vcRIOEqbjDBGGcWLVvK2szSpqJna-6pNlU0V1YiFgP94WaMgmTiCm2N9CRRjsWukapYJO00HD0GHVbGi8JzqNqcPd0nucMAU/s348/Picture3-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Where to find investment case studies" border="0" data-original-height="334" data-original-width="348" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQidF7wkaH5rQcNfS_Et9XOsSbHYPvp-EXDkBcPSRrcZoVwY0y-h5TciXSlpW2F3r6pbDofrcoTVjCTDs1IPOMUbc3uA-vcRIOEqbjDBGGcWLVvK2szSpqJna-6pNlU0V1YiFgP94WaMgmTiCm2N9CRRjsWukapYJO00HD0GHVbGi8JzqNqcPd0nucMAU/s16000/Picture3-min.png" title="Where to find investment case studies" /></a></div><div><br /></div><div><h3>Where to find investment case studies</h3><div>There are other sources of investment case studies than just my blog. The table below provides some guidelines. Some sources may offer free access, while others may require a subscription or purchase.</div><div><br /></div><div>Remember to critically evaluate the quality and relevance of the case studies you choose. Consider such factors as:</div><div><ul><li>The source’s credibility.</li></ul><ul><li> The context of the case.</li></ul><ul><li>The applicability to your learning objectives. </li></ul></div></div></div><div><br /></div><div>
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<p class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l2 level1 lfo1; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a></p>
<p class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l2 level1 lfo1; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><!--[endif]--><a href="https://www.fool.com/" target="_blank"><span style="font-family: Roboto; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-MY; mso-font-kerning: 0pt; mso-ligatures: none;">The
Motley Fool</span></a><span style="font-family: Roboto; font-size: 11.5pt;"><o:p></o:p></span></p>
<p class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l2 level1 lfo1; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> <a href="https://www.investing.com/" target="_blank"> </a></span></span><!--[endif]--><span style="font-family: Roboto; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-MY; mso-font-kerning: 0pt; mso-ligatures: none;"><a href="https://www.investing.com/" target="_blank">Investing.com</a></span><span style="font-family: Roboto; font-size: 11.5pt;"><o:p></o:p></span></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0cm; text-align: left;"><span style="font-family: Roboto; font-size: 11.5pt;">Investment
blogs<o:p></o:p></span></p>
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<p class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> <a href="https://einvestingforbeginners.com/" target="_blank"> </a></span></span><!--[endif]--><a href="https://einvestingforbeginners.com/" target="_blank"><span style="color: black; font-family: Roboto; font-size: 11.5pt; text-decoration-line: none;">e</span><span style="font-family: Roboto; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-MY; mso-font-kerning: 0pt; mso-ligatures: none;">investing for Beginners</span></a><span style="font-family: Roboto; font-size: 11.5pt;"><o:p></o:p></span></p>
<p class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> <a href="https://www.valueinvestingjourney.com/" target="_blank"> </a></span></span><!--[endif]--><a href="https://www.valueinvestingjourney.com/" target="_blank">Value Investing Journey</a><span style="font-family: Roboto; font-size: 11.5pt;"><o:p></o:p></span></p>
<p class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l0 level1 lfo2; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><!--[endif]--><a href="https://www.valuewalk.com/" target="_blank"><span style="font-family: Roboto; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-MY; mso-font-kerning: 0pt; mso-ligatures: none;">ValueWalk</span></a><span style="font-family: Roboto; font-size: 11.5pt;"><o:p></o:p></span></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0cm; text-align: justify;"><span style="font-family: Roboto; font-size: 11.5pt;">Financial
news outlets<o:p></o:p></span></p>
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<p class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l1 level1 lfo3; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><!--[endif]--><span style="font-family: Roboto; font-size: 11.5pt;">The Wall Street Journal<o:p></o:p></span></p>
<p class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l1 level1 lfo3; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><!--[endif]--><span style="font-family: Roboto; font-size: 11.5pt;">Financial Times<o:p></o:p></span></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0cm; text-align: justify;"><span style="font-family: Roboto; font-size: 11.5pt;">Books<o:p></o:p></span></p>
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<p class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l1 level1 lfo3; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><!--[endif]--><a href="https://www.amazon.com/Value-Investing-Case-Studies-2011-2017/dp/1549719580" target="_blank"><span style="font-family: Roboto; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-MY; mso-font-kerning: 0pt; mso-ligatures: none;">26 Value Investing Case Studies (2011-2017)</span></a><span style="font-family: Roboto; font-size: 11.5pt;"><o:p></o:p></span></p>
<p class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l1 level1 lfo3; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><!--[endif]--><a href="https://www.amazon.com/Security-Analysis-Foreword-Buffett-Editions/dp/0071592539" target="_blank"><span style="font-family: Roboto; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-MY; mso-font-kerning: 0pt; mso-ligatures: none;">Security Analysis</span></a><span style="font-family: Roboto; font-size: 11.5pt;"><o:p></o:p></span></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0cm; text-align: justify;"><span style="font-family: Roboto; font-size: 11.5pt;">Academic
Journals<o:p></o:p></span></p>
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<p class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l1 level1 lfo3; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><!--[endif]--><span style="font-family: Roboto; font-size: 11.5pt;">Harvard Business Review<o:p></o:p></span></p>
<p class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l1 level1 lfo3; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><!--[endif]--><span style="font-family: Roboto; font-size: 11.5pt;">Journal of Finance<o:p></o:p></span></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0cm; text-align: justify;"><span style="font-family: Roboto; font-size: 11.5pt;">Professional
institutes<o:p></o:p></span></p>
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<p class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l1 level1 lfo3; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><!--[endif]--><a href="https://www.cfainstitute.org/" target="_blank"><span style="font-family: Roboto; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-MY; mso-font-kerning: 0pt; mso-ligatures: none;">CFA Institute</span></a><span style="font-family: Roboto; font-size: 11.5pt;"><o:p></o:p></span></p>
<p class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: 0cm; margin-left: 22.9pt; margin-right: 0cm; margin-top: 0cm; margin: 0cm 0cm 0cm 22.9pt; mso-add-space: auto; mso-list: l1 level1 lfo3; text-align: left; text-indent: -18pt;"><!--[if !supportLists]--><span style="font-family: Symbol; font-size: 11.5pt;">·<span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variant-position: normal; font-variation-settings: normal; line-height: normal;"> </span></span><!--[endif]--><a href="https://www.cisi.org/cisiweb2" target="_blank"><span style="font-family: Roboto; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-MY; mso-font-kerning: 0pt; mso-ligatures: none;">CISI</span></a><span style="font-family: Roboto; font-size: 11.5pt;"><o:p></o:p></span></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0cm;"><span style="font-family: Roboto; font-size: 11.5pt;"> </span></p></div><div><h3>My experience</h3><div>I do not consider myself a newbie. Yet I spend considerable time looking at case studies written by others. I group why I do so under the following.</div><div><br /></div><h4><b>Sanity check</b></h4><div>All analyses are based on assumptions about the future. I look at how others have analysed the companies to see whether I have missed things. I like to compare investment thesis as a check against bias. You would be surprised how often I have come across investment thesis that is completely different from mine. Such thesis would recommend a buy when I think it is a hold or sell.</div><div><br /></div><h4>Valuation</h4><div>Even though different analysts share similar views on the business prospects, they may differ in the way the companies are valued. They could use different valuation approaches. Some rely on relative valuation while I prefer DCF. Even with DCF, there are different models and discount rates. Looking at different valuations gives me a sense of the range of possible values. Think of it as some form of margin of safety.</div><div><br /></div><h4>Building blocks</h4><div>There are many occasions where I build on the analyses provided by others. Rather than repeat what has been covered elsewhere, I cover a different timeframe or do a complementary analysis. </div><div><br /></div><h4>Investment decision</h4><div>Sometimes, I just adopt the analyses provided in lieu of my own. I often do this when I am looking at markets that I am not familiar with. It is much faster to gain insights this way than carrying out a detailed fundamental analysis yourself</div></div><div><br /></div><div><br /></div></div><h2 style="text-align: left;">Takeaways</h2><div><div><ul style="text-align: left;"><li style="text-align: justify;">I hope my case studies have provided you with a framework to analyze and value companies. They are meant to cover the 2 areas suggested by Warren Buffett – how to value companies and how to think about market prices.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">My case studies are meant for both newbies and experts. For the experts, I hope they provide alternative perspectives. For the newbies, I hope that you use them in an active manner.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">For the newbies, treat the case studies as complementary sources of learning. You would still need to gain the theoretical knowledge through the traditional sources.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">For the newbies, I have provided learning steps and what to look for when learning from case studies. </li></ul></div></div><div><ul style="text-align: left;"><li style="text-align: justify;">If you are new to investing, I suggest that you read the 3 Fundamentals posts and then follow me on all the Case Studies and Case Notes. I think it would be a good idea once you have gone through 3 or 4 case studies to re-read the Fundamentals. I am sure you will pick up more points in the second round of reading.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The key insight is that value traps and bargains are the opposite sides of the value investing coin. One of the goals of the case studies is to learn how to distinguish which side of the coin a particular company is on. </li></ul></div><div><br /></div><div><span style="text-align: justify;">My case studies assumed that you have a business background and quantitative skills to analyze and value companies. If you do not have the skills to do so, and you still want to be a value investor, one way is to rely on other experts like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" style="text-align: justify;" target="_blank">Seeking Alpha.</a><span style="text-align: justify;">* </span>to <span style="text-align: justify;">assess and value companies for you. </span><span style="text-align: justify;">Click the link for some free stock advice.</span><span style="text-align: justify;"> I suggest that you give them a try. </span></div><div><div style="font-style: italic; text-align: justify;"><br /></div></div><div><br /></div><h2 style="text-align: center;">END</h2><div><br /></div><div><div style="text-align: justify;"><div style="text-align: left;"><div style="text-align: justify;"><div style="text-align: center;"><br /></div></div></div><div style="text-align: left;"><br /></div><div style="text-align: left;"> - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div></div></div><div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div><div><br /></div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic; text-align: justify;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic; text-align: justify;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="font-style: italic; text-align: justify;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="font-style: italic; text-align: justify;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="text-align: justify;"><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div><div><br /></div></div><div><br /></div><div><br /></div>
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DEHChttp://www.blogger.com/profile/05500421211530744850noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-676774512914269922023-12-03T14:22:00.002+08:002023-12-03T14:31:15.177+08:00Will Parkson Holdings turn out to be a dud?<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); color: #171717; font-size: 15px; font-weight: bold; letter-spacing: 0.04em; padding-bottom: 10px; padding-top: 10px; text-align: justify; text-decoration: none;">Value Investing Case Study 12-5. An updated fundamental analysis of Parkson Holdings based on the Annual Reports till 2022. I wanted to see whether it could turn around and deliver shareholders’ value. </div>
<div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiND2ljZ3mwM9rwKc5hqBsynHKAugZIObP8fGUTYTroNbQZhhVD9_i5u4-NcrNuDoe7PB3PkIyp1aFOROxLyBoZmD4z7fxZ1uymXBrCSKibmra2M4KPMmPrYJJNiUi1xjGMk4xDvgp9F2cNvR8BaWUCpVi031BBNnHqyh1EIT7CaPFv9Ewd_JuUL9uZ5ME/s293/Picture1-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Will Parkson Holdings turn out to be a dud?" border="0" data-original-height="217" data-original-width="293" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiND2ljZ3mwM9rwKc5hqBsynHKAugZIObP8fGUTYTroNbQZhhVD9_i5u4-NcrNuDoe7PB3PkIyp1aFOROxLyBoZmD4z7fxZ1uymXBrCSKibmra2M4KPMmPrYJJNiUi1xjGMk4xDvgp9F2cNvR8BaWUCpVi031BBNnHqyh1EIT7CaPFv9Ewd_JuUL9uZ5ME/s16000/Picture1-min.png" title="Will Parkson Holdings turn out to be a dud?" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">I first wrote about Parkson Holdings Bhd (PHB or PHB Group) in March 2021. It was then trading at RM 0.22 per share compared to its Book Value of RM 1.53 per share (as of the end of Dec 2020).</div><div style="text-align: justify;"><div><br /></div><div>The market price has since increased to RM 0.31 per share (as of 13 Nov 2023) while the Book Value has declined to RM 1.28 per share (as of the end of Jun 2013). The decline in the Book Value showed that PHB had incurred losses since then.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/_FaPwoBC9Mk" width="320" youtube-src-id="_FaPwoBC9Mk"></iframe></div><br /><div>To be transparent I own PHB shares at an average price of RM 0.80 per share. I have been holding them for about 7 years. </div><div><br /></div><div>In the article “<a href="https://www.i4value.asia/2022/06/parkson-holdings-how-to-handle-price.html#more" target="_blank">Parkson Holdings - how to handle a price decline</a>” published in Jun 2022, I provided my rationale on why I continue to hold the shares. In that article, I provided a framework on how to analyze an investment when you face a price drop. </div><div><br /></div><div>In this article, I will provide an updated fundamental analysis and valuation of PHB. Where relevant I have also incorporated some of the analysis from my earlier articles. If you had tried to access my previous articles, you would have been redirected here.</div><div><br /></div><div>Join me to see why I do not think that PHB will turn out to be a dud.</div><div><br /></div><div>Should you go and buy it? Well, read my Disclaimer.</div><div><br /></div><h2>Contents</h2><div><ul><li><b>Investment thesis</b></li></ul><ul><li><b>Rationale</b></li></ul><ul><li><b>Business background</b></li></ul><ul><li><b>Operating trend</b></li></ul><ul><li><b>Financial position</b></li></ul><ul><li><b>Risks</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>PHB is not a dud</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: left;" /></div></div><div><h2>Investment Thesis</h2><div>Over the past 8 years, PHB incurred losses. This was initially due to the digital disruption the PHB Group experienced in China. PHB had to re-invent itself with its “omni-channel” strategy. But before it could benefit from this, came Covid-19.</div><div><br /></div><div>With Covid-19 now behind us, there is an opportunity for PHB to return to profitability. PHB still has a strong store presence in China and Malaysia. </div><div><br /></div><div>The key challenge is the high-interest expense. However, this is a business that had a negative cash conversion cycle. At the same time, despite its losses, PHB had a good track record of generating cash flow from operations. This should mitigate the high-interest expenses.</div><div><br /></div><div>There is also a very good margin of safety from the Asset Value. My conservative estimate of its Earnings Power Value also provided a sufficient margin of safety. </div><div><br /></div></div><div><h2>Rationale</h2><div><ul><li>The department store industry in China and Malaysia is not yet a sunset one. There are revenue growth trends among the key players in these countries.</li></ul><ul><li>In China, PHB addressed the digital challenge by going into mall ownership and adopting an Omni-channel strategy. China accounted for about ¾ of the PHB Group revenue so any turnaround here will have a significant impact.</li></ul><ul><li>The Malaysia operations seem to have returned to profitability.</li></ul><ul><li>PHB has a good cash-generating track record. The key challenge is the high-interest expense. But higher earnings would mitigate this.</li></ul><ul><li>The Group has a good capital allocation track record. But I would rate its track record for creating shareholders' value as poor.</li></ul><ul><li>There are good margins of safety based on the Asset Value and EPV.</li></ul></div><div><br /></div><div>The supporting details are presented in the following sections.</div></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>Business background</h2><div>PHB is part of the Lion Group of Malaysia which was established in the 1930s. The Lion Group is today involved in the retail, property development, mining, steel, agriculture, and computer sectors in many ASEAN countries, China, and the USA.</div><div><br /></div><div>PHB was formerly in the steel fabrication business. It assumed its present name in 2007 when it divested its steel fabrication business. It then acquired a strategic stake in some retail assets in China, Malaysia, and Vietnam from another member of the Lion Group. </div><div><br /></div><div>PHB's business model comprises a blend of concessionaire sales, anchor tenants, customized product mix, and state-of-the-art management tools.</div><div><br /></div><div>There are currently 3 listed entities within the PHB Group as shown in the chart below.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMdhNWo5RXnar9sMaHtVW-u8Au8ovhQq7cF4CFymkRGzXJHhUR3q9BEh3aOvORg1ULdPX9pTIPAmlELG8Z4Om6vXX-G0osIMFh2KAyTfEGbqs-gwbksEUxJx4s-qJtoq5QegvMPyjOGZeMsNiJbzP5gWYbMA3MUIh3RSBtoaKuTV4pW3l_qsKT1rqi-mQ/s622/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 1: Corporate structure" border="0" data-original-height="232" data-original-width="622" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMdhNWo5RXnar9sMaHtVW-u8Au8ovhQq7cF4CFymkRGzXJHhUR3q9BEh3aOvORg1ULdPX9pTIPAmlELG8Z4Om6vXX-G0osIMFh2KAyTfEGbqs-gwbksEUxJx4s-qJtoq5QegvMPyjOGZeMsNiJbzP5gWYbMA3MUIh3RSBtoaKuTV4pW3l_qsKT1rqi-mQ/s16000/Chart%201-min.png" title="Parkson Chart 1: Corporate structure" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><br />Chart 1: Corporate structure</td></tr></tbody></table><div><div><ul><li>Parkson Retail Asia Ltd (PRA) was listed on SGX in 2011. It is the leading Southeast Asian department store retailer with 39 department stores in Malaysia and 1 in Vietnam as of Dec 2022.</li></ul><ul><li>Parkson Retail Group Ltd (PRGL) which made its debut listing on HKEX in 2005, is one of the premier retail operators in China. The PRGL Group has 42 stores in China. </li></ul><ul><li>PHB Group is the holding company for PRA, PRGL, and other subsidiaries which are not under PRA or PRGL. </li></ul></div><div><br /></div><div>In 2022, PRGL accounted for about 72 % of the PHB Group revenue while PRA accounted for 26 %.</div></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div>"Chain listing" is a situation where a subsidiary of a listed company is seeking its listing. To qualify for this listing, the subsidiary should have a distinct and viable business of its own. And it must not be in conflict or competition with the parent company.</div><div><div><div><br /></div><div>The idea is that the listing of the subsidiary should not affect the interests of the shareholders of the already listed company. </div><div><br /></div><div>PHB Group is a good example of a group that undertook a chain listing. It listed its retailing business (then in Malaysia, Vietnam, and Indonesia) under SGX. This was both to raise funds for the expansion but also to unlock the value of its subsidiaries. </div><div><br /></div><div>From an analysis perspective, chain listing can provide much more information about the group’s operations. The listed subsidiaries have their respective Annual Reports for you to extract information.</div><div><br /></div><div>Apart from the chain listing history, when you analyze the PHB Group, you need to ask what business it is in. Is it owning and managing department stores? Or is it retailing? </div><div><br /></div><div>This is the same question that the buggy whip companies had to answer a century ago. Were they in the buggy whip business or were they in the transportation business? If they saw themselves as in the transportation business, they might still be around today.</div><div><br /></div><div>If PHB sees itself in the business of distributing goods, then the department store is one of the many vehicles to enable the distribution. If PHB views itself as in the department store business, then it may go the way of the other department stores in the US. </div><div><br /></div><div>PHB Group may have been lucky to be operating in China. Many of the department store groups there have re-invented themselves to meet the online challenge. PHB seemed to have followed suit.</div><div><br /></div><div>As you can see, fundamental analysis is more than just applying some formula. If you don’t have the business background for this and yet want to invest based on fundamentals, you may have to rely on financial advisers to do them for you. </div></div></div><div><br /></div><div>Several financial advisers provide such analyses. <span style="text-align: start;">Those who do this well include people </span><span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.</div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div>The Lion Group retailing business had its roots in 1987 when it acquired the net assets of selected stores of Emporium Holdings Bhd. It then began to establish many department stores under the Parkson brand.</div><div><div><br /></div><div>Parkson Malaysia spearheaded the Lion Group retailing business. It established itself as a diversified retail chain with different retail formats catering to different market segments. By the time of its acquisition by PHB in 2007, Parkson Malaysia had a total of 30 department stores in Malaysia and 3 department stores in Vietnam. </div><div><br /></div><div>The Parkson brand was introduced to China with the opening of the Parkson department store in Beijing in 1994. PRGL which was set up to operate the Parkson department store in China, had 40 stores in 27 cities in China under its wing by the time it was acquired by PHB.</div><div><br /></div><div>Over the past 14 years, China and Malaysia retail stores accounted for the majority of the PHB Group sales. This is despite operating in few other countries as can be seen from Chart 2.</div><div><ul><li>The PHB Group closed its Myanmar retail store in 2018 after being in the country since 2013.</li></ul><ul><li>The PHB Group was in Sri Lanka in 2013 and 2014 via a listed associate. It is no longer there.</li></ul><ul><li>The PHB Group ceased to have control over the subsidiary in Indonesia in 2021.</li></ul><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghKr00lDMzE648D2qi8sIOPsBnC0mzvbqPdEiE9bdQvjnbktjTjzjiJpZ4fdf_ZvilJvrg9pMqN5DLqi_Je0ndw_04MICOhe0N0tFGpwUBZats18IbRaoSm7wMDN1Zb11eUoqEh0M4eqcgSFiTnzq2RtakTzLdWKiybNCOQbkDMTOFnkbhF8NzuDRvTBk/s614/Chart%202-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 2: Revenue by Country" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghKr00lDMzE648D2qi8sIOPsBnC0mzvbqPdEiE9bdQvjnbktjTjzjiJpZ4fdf_ZvilJvrg9pMqN5DLqi_Je0ndw_04MICOhe0N0tFGpwUBZats18IbRaoSm7wMDN1Zb11eUoqEh0M4eqcgSFiTnzq2RtakTzLdWKiybNCOQbkDMTOFnkbhF8NzuDRvTBk/s16000/Chart%202-min.PNG" title="Parkson Chart 2: Revenue by Country" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Revenue by Country</td></tr></tbody></table><br /><div>While the PHB Group revenue has shown a growth trend since 2009, it hid the fact that same-store sales have been declining as per the chart below. This reflected the challenging environment. </div></div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2uIA-nMY4ilMABbesizNa158v0tkSCkXxRqOWKpNcB9rQKR0xC81hSDiMbsCNtT7Y-G3TtCpUEpiXqd52GFWdj6V4weejPxDP1zwDuDh6jtdicrWWrrnK6JVBRv9ZI0XC8cBB4pzHa-Fn5_nlUtOxMEr8lNFe53N2RK69Sxcmyd9sekin2f2mkFe77gA/s614/Chart%203-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 3: Same Store Sales" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2uIA-nMY4ilMABbesizNa158v0tkSCkXxRqOWKpNcB9rQKR0xC81hSDiMbsCNtT7Y-G3TtCpUEpiXqd52GFWdj6V4weejPxDP1zwDuDh6jtdicrWWrrnK6JVBRv9ZI0XC8cBB4pzHa-Fn5_nlUtOxMEr8lNFe53N2RK69Sxcmyd9sekin2f2mkFe77gA/s16000/Chart%203-min.PNG" title="Parkson Chart 3: Same Store Sales" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Same Store Sales<br /><div style="text-align: left;"><i>Note: The Group did not report the same-store sales for 2021 and 2022 for Malaysia and Vietnam</i>. </div></td></tr></tbody></table><div><br /></div><div><div>Throughout the past 14 years, the PHB Group has expanded beyond its department store business. It went into mall ownership, provision of credit lines, and F&B. But, the contributions from these are still not substantial.</div><div><ul><li>In its 2014 Annual Report, RPGL stated that it will focus on an Omni-channel strategy. This is a combination of online and offline business. It also operated several different retail formats. These included shopping malls, department stores with lifestyle elements, specialty stores as well as fashion outlets.</li></ul><ul><li>In 2016, PRA ventured into the lifestyle retail concept. The department store operations had elements of entertainment and food and beverages. It has also introduced private label brands as well as agency lines of numerous international brands. </li></ul><div><br /></div></div><div>Yet, the sales of goods and concessionaire commissions still accounted for 89 % of the PHB Group revenue in 2022 down from 95 % in 2009. Direct sales of goods have become larger than concessionaire commissions. Refer to Chart 4. </div><div><br /></div><div>The only other area that seemed to have a significant contribution is rental with the 2022 rental income being more than doubled that of 2009.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuV71OtcFHRyRTWuUuty_so3b-1hpR6vJGYaKu4S8xBBguvlSUj5lJFWjQVRvrE78UjGUM1IJ817BN2vxEtYvaejx1bsTdN-M7A-t2N8JarSo0UZxqxTsU50OMASaEoUNvYkRXmcv_WpnZw2dIPjwil3nlw8BynV74y2J8spfnzMkQa3OKY0zWvNZhZGM/s614/Chart%204-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 4: Revenue Profile" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuV71OtcFHRyRTWuUuty_so3b-1hpR6vJGYaKu4S8xBBguvlSUj5lJFWjQVRvrE78UjGUM1IJ817BN2vxEtYvaejx1bsTdN-M7A-t2N8JarSo0UZxqxTsU50OMASaEoUNvYkRXmcv_WpnZw2dIPjwil3nlw8BynV74y2J8spfnzMkQa3OKY0zWvNZhZGM/s16000/Chart%204-min.PNG" title="Parkson Chart 4: Revenue Profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Revenue Profile</td></tr></tbody></table><br /><div>Apart from managing a diversified collection of retail formats, the PHB Group has also become a significant property owner. From 2009 to 2022, the value of the Investment Properties of the PHB Group grew from RM 32 million to RM 452 million. </div><div><div><br /></div><div>However, the fair value of the Investment Properties as of Dec 2022 was RM 2.1 billion rather than the RM 452 million recognized in the Balance Sheet. There is a substantial “hidden” value. </div><div><br /></div><h2>Operating trends</h2><div>I looked at 3 metrics to get an overview of the overall performance – revenue, PAT, and gross profitability (gross profits / total assets). Refer to Chart 5.</div><div><ul><li>Revenue peaked in 2019 and declined thereafter. I suspect this was due to the Covid-19 pandemic. Over the past 14 years, revenue grew at only 1.0 % CAGR.</li></ul><ul><li>PAT showed a declining trend with losses from 2015 onwards. </li></ul><ul><li>Gross profitability seemed to hold steady until 2020 when it dropped by about 40%. </li></ul></div><div><br /></div><div>If nothing else, the chart showed that PHB faced a challenging past 14 years. One of the key challenges was the heavy interest burden as exemplified by the following.</div><div><br /></div><div>From 2009 to 2022, PHB achieved an average annual operating profit of RM 276 million. Over the same period, it incurred an average annual interest expense of RM 187 million. </div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikSePntxhCBE_AOCQPAe1Q71cSQYX-qjzPtwSJDhIMbeFTcTmEF0bHRRrbd7YPlyqGFJmYkHQVERtlHN3Aepys7v82tpu6hyphenhyphenNoP9b4KxC66n1s0oRKlOuPDIbxyQEPaF_xLJH2IIvcksg73XzOhqNf17SJm4Gi0gZpM8M5Cgw1GhGKR6G8KVI_dyulJI0/s614/Chart%205-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 5: Performance Index" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikSePntxhCBE_AOCQPAe1Q71cSQYX-qjzPtwSJDhIMbeFTcTmEF0bHRRrbd7YPlyqGFJmYkHQVERtlHN3Aepys7v82tpu6hyphenhyphenNoP9b4KxC66n1s0oRKlOuPDIbxyQEPaF_xLJH2IIvcksg73XzOhqNf17SJm4Gi0gZpM8M5Cgw1GhGKR6G8KVI_dyulJI0/s16000/Chart%205-min.PNG" title="Parkson Chart 5: Performance Index" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Performance Index</td></tr></tbody></table><div><br /></div><div>Apart from the lower gross profits, the profits were affected by some high one-off expenses. To give you a sense of this, I have listed some of the key expenses of the 2 listed subsidiaries in the following section.</div></div><div><div><br /></div><h3>PRGL expenses</h3><div>You can infer a loss in Chart 6 when the gross profit is at the same level or lower than the total expenses. </div><div><ul><li> In 2015 there was a one-off litigation loss of RMB 140.9 million.</li></ul><ul><li>The profit in 2016 was due to a one-off gain of RMB 1,282.9 million. This more than offset the one-off impairment of RMB 402.0 million.</li></ul><ul><li>The loss in 2017 was due to a one-off litigation loss of RMB 136.0 million and an impairment in associates and goodwill of RMB 18.4 million. </li></ul><ul><li>In 2018, although RPGL had a positive PBT of RMB 125.8 million there was a loss after tax. The tax was higher than the statutory rate because there were tax losses not recognized as well as expenses not deductible for taxes.</li></ul><ul><li>In 2019, although RPGL reported an EBIT of RMB 538.9 million there was a loss after interest due to the adoption of IFRS 16. This resulted in an interest charge of RMB 425 million on the lease liability. Note that under IFRS, the rental was reduced and replaced with additional depreciation expenses. </li></ul><ul><li>The drop in revenue from 2020 to 2022 that led to losses was due to the measures taken in China to control Covid-19. </li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMb4F2TNbPHZwN2zDjM9SyCBwIfYfYj3OZYmUgNH4VvLiCuVwDClgIKQl7UqmpyhcAtfqXjhLBTXevDZ5KCjC0fHF7xcP0J31ypYKS7HW2RVGvG5i7nzexFpav_zeiiPNIuROdN3zP0F_GKFlYGnokPR2zyhcAUaAKdAE09K90JzJ7IL8Y6LcxfwEpfxE/s614/Chart%206-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 6: PRGL Expenses" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMb4F2TNbPHZwN2zDjM9SyCBwIfYfYj3OZYmUgNH4VvLiCuVwDClgIKQl7UqmpyhcAtfqXjhLBTXevDZ5KCjC0fHF7xcP0J31ypYKS7HW2RVGvG5i7nzexFpav_zeiiPNIuROdN3zP0F_GKFlYGnokPR2zyhcAUaAKdAE09K90JzJ7IL8Y6LcxfwEpfxE/s16000/Chart%206-min.PNG" title="Parkson Chart 6: PRGL Expenses" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: PRGL Expenses</td></tr></tbody></table><div><br /></div><div><h3>PRA expenses</h3><div>Chart 7 shows the gross profit in 2021 and 2022 being higher than the total expenses. These are indications of PRA returning to profitability. </div></div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEholRDsAKPB_4c-IVxZv2R5jKTfqFNLATsccw6QDt9YC77E-JwnsOPa_G-0DVTZ0CwRf0Z6OOCHaBuu6ULHtH_992z3pEhAFg7XHUx91Kjm-LQpGs2hwZlT8RACT3fF-ImOCiMH74ROa5spNRdrpkR_pZh961JOGafar6WqVqXdrgKkNrM6v7RlHIv0ASo/s614/Chart%207-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 7: PRA Expenses" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEholRDsAKPB_4c-IVxZv2R5jKTfqFNLATsccw6QDt9YC77E-JwnsOPa_G-0DVTZ0CwRf0Z6OOCHaBuu6ULHtH_992z3pEhAFg7XHUx91Kjm-LQpGs2hwZlT8RACT3fF-ImOCiMH74ROa5spNRdrpkR_pZh961JOGafar6WqVqXdrgKkNrM6v7RlHIv0ASo/s16000/Chart%207-min.PNG" title="Parkson Chart 7: PRA Expenses" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: PRA Expenses</td></tr></tbody></table><div><br /></div><div><div>From 2015 onwards, the lower revenue due to the challenging market condition led to lower gross profits. Together with the higher expenses, it meant that PRA incurred losses for many years. </div><div><ul><li>In 2015, there was a one-off provision of SGD 64.7 million for the early termination of a store lease in Hanoi.</li></ul><ul><li>In 2016, there was a one-off gain of SGD 46.8 million due to the disposal of a subsidiary that led to profits for the year.</li></ul><ul><li>In 2017 there was an impairment charge of SGD 26.1 million.</li></ul><ul><li>In 2018, there was an impairment of SGD 12.3 million although this was partly offset by an impairment reversal of SGD 9.7 million. </li></ul><ul><li>In 2019, there was an impairment and contract provision of SGD 17.1 million although this was partly offset by an impairment reversal of SGD 3.1 million.</li></ul><ul><li>In 2020, apart from the lower revenue due to the Covid-19 pandemic, the adoption of IFRS 16 resulted in an additional expense of SGD 38.2 million.</li></ul><ul><li>The profit in 2021 was after accounting for the deconsolidation of a subsidiary in Indonesia, and income from the Vietnam sub-leasing.</li></ul></div><div><br /></div><h3>DuPont Analysis</h3><div>Because of the high-interest expenses, it is more meaningful to look at the returns on an after-tax operating profit basis.</div><div><br /></div><div>I defined the operating return as [Op Profit(1-t)] / TCE where:</div><div><br /></div><div>TCE = Total capital employed = Equity + Debt – Cash</div><div><br /></div><div>The equivalent DuPont analysis is then</div><div><br /></div><div>Return = Op margin X Asset turnover X Leverage</div><div><br /></div><div>Op margin = Op profit(1-t) / Revenue</div><div><br /></div><div>Asset turnover = Revenue / Total assets</div><div><br /></div><div>Leverage = Total assets / TCE</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJVlZEZzTDTfYRM1ZgBKPbhfBegjhg4lyfFoRNkHT2mcT2YXRToaFIzSSl154zRAS0rYV_T_NAnXKEBxaMZTScxunl2_XDwfT0tNhFTjgZt7wHpe7eHLYfLZOSmpfANPE2T9qr1LYcI-dnxGbXlqn6Yi6fIw-b4RIBvwfJ2_s71b5hrqOT65khwjHWCcA/s614/Chart%208-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 8: DuPont Analysis" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJVlZEZzTDTfYRM1ZgBKPbhfBegjhg4lyfFoRNkHT2mcT2YXRToaFIzSSl154zRAS0rYV_T_NAnXKEBxaMZTScxunl2_XDwfT0tNhFTjgZt7wHpe7eHLYfLZOSmpfANPE2T9qr1LYcI-dnxGbXlqn6Yi6fIw-b4RIBvwfJ2_s71b5hrqOT65khwjHWCcA/s16000/Chart%208-min.PNG" title="Parkson Chart 8: DuPont Analysis" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: DuPont Analysis</td></tr></tbody></table><div><br /></div><div>You can see from Chart 8 that the Op return declined over the past 14 years in line with the declining PAT. A DuPont analysis showed that the bulk of the declining ROE can be linked to the declining Op margin. Leverage also showed a declining trend from 2012. </div><div><div><br /></div><h3>IH 2023</h3><div>The revenue for the first six months of 2023 was about 8 % higher than that for the same period last year. </div><div><br /></div><div>But in the first six months of 2023, PHB generated RM 80 million PAT compared to a loss of RM 74 million for the same period last year. The improved profit was due to the better performance from China.</div><div><br /></div><div>I am a long-term value investor and I consider quarterly performance as “noisy”. As such I focus on long-term trends. Nevertheless, the half-year results do point to some turnaround. </div><div><br /></div><h3>Competitive profile</h3><div>Since the PHB Group is unique in its presence in both China and Malaysia, I have separated the peer comparisons by country. </div><div><br /></div><h4>China Peers.</h4><div>PRGL's (ref 3368) peers are some of the major department store companies listed on HKEX or China as per the <a href="https://disfold.com/china/industry/department-stores/companies/" target="_blank">Disfold</a> list.</div><div><ul><li>Beijing Hualian Dept Store (ref 000882)</li></ul><ul><li>Dashang Company (ref 600694)</li></ul><ul><li>Shanghai Bailian Group (ref 600827)</li></ul><ul><li>Shanghai Yuyuan Tourist Mart (ref 600655)</li></ul><ul><li>Yonghui Superstore Company (ref 601933)</li></ul><ul><li>Wangfuijing Group (ref 600859)</li></ul></div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2Ir9Z0WyP3MgXeD2b0wI0bm9ERa72BabCLMD91xD85xX9Ej1nYkwdTLfpp6MOSX9BqkSSwi3ZmY-4qCrVhCPvR8koGO4QlpFIelxN305lbCMNVY3TNSeUgZzEaKoFkBe1HFayz1bfIY5c8JnFous9L9i92k7dZyKXmU0CnHiwTT75CRrRPCGxHsbcyhY/s633/Chart%209-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 9: PRGL Peer comparisons" border="0" data-original-height="534" data-original-width="633" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2Ir9Z0WyP3MgXeD2b0wI0bm9ERa72BabCLMD91xD85xX9Ej1nYkwdTLfpp6MOSX9BqkSSwi3ZmY-4qCrVhCPvR8koGO4QlpFIelxN305lbCMNVY3TNSeUgZzEaKoFkBe1HFayz1bfIY5c8JnFous9L9i92k7dZyKXmU0CnHiwTT75CRrRPCGxHsbcyhY/s16000/Chart%209-min.png" title="Parkson Chart 9: PRGL Peer comparisons" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 9: PRGL Peer comparisons</td></tr></tbody></table><div><br /></div><div><div>From the China perspective, PGRL was not among the top performers in terms of revenue and ROE as can be seen from Chart 9. </div><div><br /></div><div>Looking at the peer revenue from 2009 to 2019, it suggests that the Chinese department store companies seemed to have countered the digital disruption.</div><div><br /></div><h4>Malaysian Peers</h4><div>As Malaysia accounted for the bulk of PRA’s (ref O9E) revenue, it makes sense to compare its performance with those of the Bursa retailers. </div><div><ul><li>Aeon</li></ul><ul><li>Kamdar</li></ul><ul><li>Malaysian United Industries (a proxy for Metro Jaya)</li></ul></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivvIdylFur6RoMMe4QWxuH6tqsMrN8hMKVDn9Cr2L43FhvNklhnZiL1j5XGlfgsr0JVJdtYoOp6LOmDHmR4gXpj4lctLLdtCl3v5WbgLRw_0kD1djYklEuECptus9gN3JPS96xhPL78-UXDpOUylY44gv0kY8y_543mXakgKSIxoAvd7_ttt62xWUsmvU/s631/Chart%2010-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 10: PRA Peer Comparisons" border="0" data-original-height="489" data-original-width="631" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivvIdylFur6RoMMe4QWxuH6tqsMrN8hMKVDn9Cr2L43FhvNklhnZiL1j5XGlfgsr0JVJdtYoOp6LOmDHmR4gXpj4lctLLdtCl3v5WbgLRw_0kD1djYklEuECptus9gN3JPS96xhPL78-UXDpOUylY44gv0kY8y_543mXakgKSIxoAvd7_ttt62xWUsmvU/s16000/Chart%2010-min.png" title="Parkson Chart 10: PRA Peer Comparisons" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 10: PRA Peer Comparisons<br /><div style="text-align: left;"><i>Note: The high ROE for PRA in 2020 was because there was a loss as well as a loss of negative equity resulting in an arithmetically high ROE. </i></div></td></tr></tbody></table><br /><div>As for Malaysia, PRA lost out to Aeon in terms of revenue size but it did better than its other peers. But when it came to ROE, PRA only performed better than its peers before 2014. Thereafter, except for 2020, its ROE was worse than those of its peers. </div><div><div><br /></div><div>The key takeaway is that looking at the revenue trends for both China and Malaysia, I would conclude that this is not a sunset industry. </div><div><br /></div><h2>Financial position</h2><div>The key concern here is the high-interest rate. </div><div><ul><li>In 2022, there was only a 2.0 EBITDA / interest expense ratio. </li></ul><ul><li>PHB had a debt-equity ratio of 185 % as of Jun 2023. This is about the highest level over the past 14 years probably due to the low equity.</li></ul></div><div><br /></div><div>But there are other positives for PHB.</div><div><ul><li>It has a negative cash conversion cycle. The creditors are effectively funding its operations.</li></ul><ul><li>As of the end of Jun 2023, it had RM 1.5 billion cash and short-term securities. This was equivalent to 17 % of its total assets.</li></ul><ul><li>Over the past 14 years, there was only one year where it did not manage to generate positive cash flow from operations. </li></ul><ul><li>Over the past 14 years, it generated RM 6.5 billion cash from the cash flow from operations compared to RM 1.7 billion of PAT. This is a very good cash conversion ratio.</li></ul></div><div><br /></div><div>The PHB Group also had a reasonable capital allocation track record as shown in Table 1. You can see that its cash flow from operations was well deployed for CAPEX and dividends. Debt was also reduced from the sale of assets and securities.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8t6Oce8r3bdV-gDjMj-gu95TXJhRlb3nyUHYnTm58ipnJ6_4_Z27dcbckTel71A2vZj1khRp9N6eV5Ijx5NoYMo-wJK1QQXSYlarSIW4JhIzH1JwB3Z0ghQU2l9fQxSJdgQrxtpz52LMeEWyrgE5DhT_2bSyt8ID7Ccav3JKQek67kmCdKkhYZ79vJtM/s505/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Table 1: 2012 to 2022 Sources and Uses of Funds" border="0" data-original-height="276" data-original-width="505" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8t6Oce8r3bdV-gDjMj-gu95TXJhRlb3nyUHYnTm58ipnJ6_4_Z27dcbckTel71A2vZj1khRp9N6eV5Ijx5NoYMo-wJK1QQXSYlarSIW4JhIzH1JwB3Z0ghQU2l9fQxSJdgQrxtpz52LMeEWyrgE5DhT_2bSyt8ID7Ccav3JKQek67kmCdKkhYZ79vJtM/s16000/Table%201-min.png" title="Parkson Table 1: 2012 to 2022 Sources and Uses of Funds" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: 2012 to 2022 Sources and Uses of Funds</td></tr></tbody></table><div><br /></div><div><h3>Shareholders’ value creation</h3><div>I looked at the following metrics when assessing shareholders’ value creation:</div><div><ul><li>Comparing returns with the cost of funds.</li></ul><ul><li>Comparing the gains by an investor who bought a share at the end of 2011 with the cost of equity.</li></ul><ul><li>Looking at the Q Rating which is based on several valuation metrics. A high score relative to the panel meant that the company had the potential to create shareholders’ value.</li></ul></div><div><br /></div><div>I would assess PHB as poor in terms of creating shareholders' value as it failed on all metrics as can be seen from Table 2. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEil6ksMEP4OEEiIS5A6bK8lRLxSEE5GTXMQWDqMH_WqlxHwHToGvC9i2m0Vkng4rLI8EhnJq8xT7rvZdhhe_qQCyVoSTdEWyC5gslwM9O9GnHfFluDI58WQu3Tu6VlcIs6sZ3dkC9jwMsjxDPLjr9l-JKo_7akcxbzE6vGOseYVJt-xcZcFLCXla3jmWDI/s631/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Table 2: Shareholders’ value creation" border="0" data-original-height="101" data-original-width="631" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEil6ksMEP4OEEiIS5A6bK8lRLxSEE5GTXMQWDqMH_WqlxHwHToGvC9i2m0Vkng4rLI8EhnJq8xT7rvZdhhe_qQCyVoSTdEWyC5gslwM9O9GnHfFluDI58WQu3Tu6VlcIs6sZ3dkC9jwMsjxDPLjr9l-JKo_7akcxbzE6vGOseYVJt-xcZcFLCXla3jmWDI/s16000/Table%202-min.png" title="Parkson Table 2: Shareholders’ value creation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Shareholders’ value creation<br /><div style="text-align: left;"><div><i>Notes</i></div><div><i>(a) Based on time-weighted average EBIT/TCE from 2011 to 2022 assuming a 24 % tax rate compared with WACC.</i></div><div><i>(b) This looked at how the SHF at the end of 2011 would have grown by the end of 2022 assuming that no dividend was paid. I compared it with the cost of equity.</i></div><div><i>(c) Computed assuming that an investor bought 1 share at the end of 2011 and held onto it till the end of 2022. His gain is shown in the Table 3 below.</i></div><div><br /></div></div></td></tr></tbody></table><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvMxgxaSvxubEf_Z8CnN0SFMLMht1nUua9SSrwLFxmfiZ-jASN48mYNaEY0KyG4oeBVhS75kqg15segMTm9BZcGl2lIKi_LSaqS3xEvQCTJewt7XXNewi25qeDhRLXYabzRcqtjkgg5g09ONt-8Ln-ylV-mZftsd9Tk_F7LnILwgyG0_gfuTqz7m_Ig-g/s379/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Table 3. Estimating the shareholders’ gain" border="0" data-original-height="150" data-original-width="379" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvMxgxaSvxubEf_Z8CnN0SFMLMht1nUua9SSrwLFxmfiZ-jASN48mYNaEY0KyG4oeBVhS75kqg15segMTm9BZcGl2lIKi_LSaqS3xEvQCTJewt7XXNewi25qeDhRLXYabzRcqtjkgg5g09ONt-8Ln-ylV-mZftsd9Tk_F7LnILwgyG0_gfuTqz7m_Ig-g/s16000/Table%203-min.png" title="Parkson Table 3. Estimating the shareholders’ gain" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3. Estimating the shareholders’ gain</td></tr></tbody></table><div><br /></div><div>At the same time, PHB had an overall Q Rating of 0.45. This places it at the average position among the panel companies. On the positive side, the Q Rating had improved from 0.39 in 2021.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEFhUn3tABkPFXAmlgXdzEXJ0W364fLSSUMSm0CabPsbUcbthfG769z9WcuMuCkEOw2fjRIL896vpf3TniY5CE0NIMIXGKU-fEEroyEGRnWo9jvTKm2AqlrBGvRBJY9bZdgj1yL8Cr-iUYI9PpzudnHF5WpAv8qfslkM7F7uUxG9sLWdw6R-e1ZJCnzlE/s614/Chart%2011-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 11: Q Rating" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEFhUn3tABkPFXAmlgXdzEXJ0W364fLSSUMSm0CabPsbUcbthfG769z9WcuMuCkEOw2fjRIL896vpf3TniY5CE0NIMIXGKU-fEEroyEGRnWo9jvTKm2AqlrBGvRBJY9bZdgj1yL8Cr-iUYI9PpzudnHF5WpAv8qfslkM7F7uUxG9sLWdw6R-e1ZJCnzlE/s16000/Chart%2011-min.PNG" title="Parkson Chart 11: Q Rating" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 11: Q Rating</td></tr></tbody></table><div><br /></div><div><h2>Risks</h2><div>I look at risks through the following lenses:</div><div><ul><li>Privatization.</li></ul><ul><li>Digital disruption.</li></ul></div><div><br /></div><h3>Privatization</h3><div>The Chairman controls 55 % of PHB and it would cost him about RM 160 million to take it private at the current market price. </div><div><br /></div><div>PHB does not have much cash at its company level to undertake privatization via a capital reduction plan as the bulk of the cash is at the PRGL level. The Chairman and/or the Lion Group has to seek funding for such an exercise.</div><div><br /></div><div>I do not see the privatization of PHB as a key risk for the following reasons:</div><div><ul><li>The other businesses of the Lion Group - steel, and property - are also facing challenging times. I don’t see the controlling shareholder or the Lion Group using up the cash to privatize PHB.</li></ul><ul><li>If there was any interest in taking it private for relisting later, it would have been done when the share price was very much lower.</li></ul><ul><li>Given the revaluation surplus, I do not see any minority shareholders voting for privatization at the current market price.</li></ul></div><div><br /></div><div>At the same time, I do not see the possibility of taking PRA private. Under SGX guidelines, any privatization of PRA has to be at a fair price. I read this as an offer price being close to the Book Value or NTA. There is no financial reason to take PRA private based on such a price.</div><div><br /></div><div>But PRGL is a slightly different story.</div><div><br /></div><div>Given the current market price and 55 % ownership, it would cost PHB about RMB 154 million to take PRGL private. Compare this with the RMB 1.7 billion cash and securities held by PRGL. </div><div><br /></div><div>HKEX does not have “fair value” guidelines. PRGL can be privatized by a scheme of arrangements - this could be capital reduction based on PRGL's funds.</div><div><br /></div><div>Would PHB pursue this? I can think of some roadblocks to the privatization of PRGL.</div><div><ul><li>In the past PRGL has issued bonds which were then listed. PRGL would probably not want to lose this funding option given the expansion potential of China. </li></ul><ul><li>While PRGL has RMB 1.7 billion in cash and securities, it also has RMB 2.6 billion in debt (excluding leases). I am not sure that it is prudent to use up the cash for a privatization exercise given that PRGL still has expansion plans.</li></ul><ul><li>Given the revaluation surplus, I do not see any minority shareholders voting for privatization at the current market price.</li></ul></div><div><br /></div><h3>Digital disruption</h3><div>We know that digital technology is disrupting the retail sector. How did PHB Group respond to this?</div><div><ul><li>In its 2014 Annual Report, Parkson Retail Group Ltd (PRGL) said that it will now focus on an Omni-channel strategy. PGRL said that there would be a combination of online and offline businesses, shopping malls, dept stores with lifestyle elements, specialty stores as well as fashion outlets.</li></ul><ul><li>In its 2017 Annual Report, PGRL said that while “new retail” has brought a lot of challenges to the entire retail industry in China, PRGL sees ample opportunities and positive signs ahead with its new retail format.</li></ul><ul><li>As for the other countries, in its 2016 Annual Report, Parkson Retail Asia Ltd (PRA) stated that the department store model is shifting towards a multi-dimensional model that seeks to create a more family-oriented experience.</li></ul></div><div><br /></div><div>While the progress of PHB was disrupted by Covid-19, there are other challenges in meeting the digital challenge. This is aptly summarized by McKinsey & Company.</div><div><br /></div><div>In its paper “<a href="https://www.mckinsey.com/~/media/mckinsey/locations/asia/greater%20china/our%20insights/2022%20china%20retail%20digitalization%20whitepaper/2022-china-retail-digitalization-whitepaper.pdf" target="_blank">2022 China Retail Digitalization Whitepaper</a>” they opined the following”</div><div><br /></div><div>“Over the past decade, China’s retail industry has weathered seismic disruptions …Mobile commerce has surged, spurring the rise of the ‘new retail’ concept that blends offline and digital commerce… China’s Internet firms have stepped into retail and now vie for market share against offline incumbents.</div><div><br /></div><div>…But a narrow emphasis on omni-channel expansion has succeeded only in depressing retail profits without achieving significant earnings growth... </div><div><br /></div><div>…despite significant investment in omnichannel expansion, retailers are struggling to turn a strategic focus on digital into improved financial performance…”</div><div><br /></div><div>The paper suggests that there is still a lot of work before the traditional department stores can overcome the digital challenge. </div><div><br /></div><div>The good news is that the department store industry in China is not a sunset industry like what happened in the US. In Malaysia, the performance of Aeon suggests that this is also not a sunset sector.</div><div><br /></div><div>According to <a href="https://www.ibisworld.com/china/market-research-reports/department-stores-shopping-malls-industry/" target="_blank">Ibis World</a>, revenue for department stores and shopping malls in China is expected to grow at an annualized 1.9% over the five years through 2023, including an expected 3.3% rise in 2023 when profitability is set to reach 5.0%.</div><div><br /></div><div>Chart 12 shows that there has been growth in the number of department stores over the past few years. There is no sign yet of a collapse of the department store sector.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWUlwMEnJ9Fuy0Qp6ukQhMPjsRGPnO9qT3IaKuqJuJxcNWoRi7eX8kcxUxVoT1MwHD04JYTx8vxGgW0aJHvnaE77j1cV9nMvxR3x_QIRk6jNpd1mAb6ezWCiXQpMmnU1YRGEAaMDAsz_b5BMFWd-zvMDcjOM6opGErLeKJzFXEMTedZV4X7JbRCvp3JiA/s621/Chart%2012-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 12: Number of Department stores in China" border="0" data-original-height="395" data-original-width="621" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWUlwMEnJ9Fuy0Qp6ukQhMPjsRGPnO9qT3IaKuqJuJxcNWoRi7eX8kcxUxVoT1MwHD04JYTx8vxGgW0aJHvnaE77j1cV9nMvxR3x_QIRk6jNpd1mAb6ezWCiXQpMmnU1YRGEAaMDAsz_b5BMFWd-zvMDcjOM6opGErLeKJzFXEMTedZV4X7JbRCvp3JiA/s16000/Chart%2012-min.png" title="Parkson Chart 12: Number of Department stores in China" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 12: Number of Department stores in China. Source: <a href="https://www.statista.com/statistics/1229292/china-number-of-department-stores/" target="_blank">Statista</a></td></tr></tbody></table><div><br /></div><div><h2>Valuation</h2><div>PHB's performance over the past 14 years, especially its China operations, was affected initially by digital disruption and subsequently by Covid-19.</div><div><br /></div><div>PHB had to re-invent itself to meet the digital challenge. The first half of 2023 performance in China suggests that there is light at the end of the tunnel. It is now a question of rebuilding its business. </div><div><br /></div><div>At the same time, the Malaysian business seems to have also recovered from the measures taken to control Covid-19. </div><div><br /></div><div>Chart 13 supports my contention.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-op2TtleOVuYrJYunfHCvkhm9iIzAAU66lwTq6sWxdc0J5uELooe5EA1B3ZSEa-BiYiojXxbswlPiUgqoMM_pUZEpnknwEVkztBjDNcsHfArhAAwp2mkIFw8IKxL4GavOeLd1eLlgVyGGtEWIu0spndHq4luIIBLOqUxmyCPgCGajL5bv1G0V4ZSGS28/s614/Chart%2013-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 13: Sales per outlet" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-op2TtleOVuYrJYunfHCvkhm9iIzAAU66lwTq6sWxdc0J5uELooe5EA1B3ZSEa-BiYiojXxbswlPiUgqoMM_pUZEpnknwEVkztBjDNcsHfArhAAwp2mkIFw8IKxL4GavOeLd1eLlgVyGGtEWIu0spndHq4luIIBLOqUxmyCPgCGajL5bv1G0V4ZSGS28/s16000/Chart%2013-min.PNG" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 13: Sales per outlet</td></tr></tbody></table><br /><div>My investment thesis is that PHB is undergoing a turnaround and its Earnings-based value would depend on how you see the turnaround play out. </div><div><div><br /></div><div>In this context, I assumed that it would take about 5 years for PHB to regain the average 2011 to 2013 level of profits. On such a basis, I estimate the EPV to be RM 0.96 per share.</div><div><br /></div><div>At the same time, PHB has understated investment properties. In estimating the Asset Value, I assumed that since the properties are held by its 55% PRGL, we should only account for 55% of the revaluation surplus. Along this line, I estimated the PHB Asset Value to be RM 2.08 per share.</div><div><br /></div><div>Chart 14 illustrates the valuation of PHB. You can see that at the market price of RM 0.31 per share, there is more than a 30% margin of safety under both the Asset Value and Earnings Value.</div></div></div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixC3rv9C23g_qquvYBag_Y7YgvmpdwXXyauGRxherDwaBAHWrEYGmddf7Unjbobn4HM_HQT4BkNx_u2W49mCicMiCCoTCIc_bkofArRdjimhtd0qRYGWgNF_rwas1a3tjOJ5rI9hhbvAizT3jasAtr1dTuy38X6OSBAjn1WtDkLpzOsCHKCarM2nMyKE4/s614/Chart%2014-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Chart 14: Valuation of PHB" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixC3rv9C23g_qquvYBag_Y7YgvmpdwXXyauGRxherDwaBAHWrEYGmddf7Unjbobn4HM_HQT4BkNx_u2W49mCicMiCCoTCIc_bkofArRdjimhtd0qRYGWgNF_rwas1a3tjOJ5rI9hhbvAizT3jasAtr1dTuy38X6OSBAjn1WtDkLpzOsCHKCarM2nMyKE4/s16000/Chart%2014-min.PNG" title="Parkson Chart 14: Valuation of PHB" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 14: Valuation of PHB</td></tr></tbody></table><div><br /></div><div><h3>Valuation model</h3><div>My Earnings Power Value of the company was derived based on a single-stage Free Cash Flow to the Firm (FCFF) model as per Damodaran.</div><div><br /></div><div>Value of Firm = FCFF / WACC</div><div><br /></div><div>WACC = weighted average cost of capital. The cost of capital used in the model was based on the Capital Asset Pricing Model. I followed Damodaran’s approach to determine the Beta and the risk premiums. </div><div><br /></div><div>Value of Equity = Value of Firm + Cash – Total Debt – Minority interests</div><div><br /></div><div>FCFF = EBIT(1-t)</div><div><br /></div><div>t = tax rate. I assume a 24 % nominal tax rate.</div><div><br /></div><div>The other assumptions used in my valuation are shown in Tables 4 and 5.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMlVmZv8qqk0Krv-amts_faknC1KHA9fi43VLrN4PWOPLkrxoLQsqhOk-mMYBxWXLy_phZQFsNwfSjcQNkNtiboEMEpOQuf7DJzSCbjNQiyIiv4WLZAzhuMJcV7n_LLxm8S0W2GmU2OyOi4TestNvac7Jz5_ztvBQMsKKdplH63CQvfuZTebb-eIbkHdU/s432/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Table 4: Valuation assumptions" border="0" data-original-height="376" data-original-width="432" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMlVmZv8qqk0Krv-amts_faknC1KHA9fi43VLrN4PWOPLkrxoLQsqhOk-mMYBxWXLy_phZQFsNwfSjcQNkNtiboEMEpOQuf7DJzSCbjNQiyIiv4WLZAzhuMJcV7n_LLxm8S0W2GmU2OyOi4TestNvac7Jz5_ztvBQMsKKdplH63CQvfuZTebb-eIbkHdU/s16000/Table%204-min.png" title="Parkson Table 4: Valuation assumptions" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: Valuation assumptions</td></tr></tbody></table><div><br /></div></div><div><div>I assumed that it would take PHB 5 years to go from its current operating profit to the steady stage profit. Refer to Table 5. </div><div><ul><li>The value of the operating profit in Year 1 of RM 119.6 million is the actual 2022 operating profit. </li></ul><ul><li>The value for Yr 5 is the average 2011 to 2013 operating profit.</li></ul><div><br /></div></div></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtO6hpPlwerPxyqQqXu2w1Cgp2cMXF0hQqzmdLlx-d3cyqmeAYdi56ZX7wpMWXUxnyUiTmxo_lF1QwPis-pLNMB0JK2A3-VvGNUJvexm82il5XT3PHi7oICotFtFhsbe6DSOZ1aZrR4JmBT90sXyFpUQGri0kcstY7Z5wZ5FUTYV2GWSkLHUGgv7DRAHY/s561/Table%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Parkson Table 5: Deriving the NPV" border="0" data-original-height="201" data-original-width="561" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtO6hpPlwerPxyqQqXu2w1Cgp2cMXF0hQqzmdLlx-d3cyqmeAYdi56ZX7wpMWXUxnyUiTmxo_lF1QwPis-pLNMB0JK2A3-VvGNUJvexm82il5XT3PHi7oICotFtFhsbe6DSOZ1aZrR4JmBT90sXyFpUQGri0kcstY7Z5wZ5FUTYV2GWSkLHUGgv7DRAHY/s16000/Table%205-min.png" title="Parkson Table 5: Deriving the NPV" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 5: Deriving the NPV </td></tr></tbody></table><div><br /></div><div><h3>Valuation risks and limitations</h3><div>You should consider the following when looking at my valuation.</div><div><ul><li>Turnaround.</li></ul><ul><li>Revaluation surplus.</li></ul></div><div><br /></div><div>The EPV is dependent on PHB turning around the business. If you do not agree that PHB can achieve this, you should not invest in PHB. </div><div><br /></div><div>We can of course disagree on the level of profit that can be achieved. In my model, I have taken the 2011 to 2013 average where 2011 was the peak profits over the past 14 years. Note that the average value is 10% lower than the peak profit. </div><div><br /></div><div>In my Asset Value, I have assumed that all the revaluation surplus of RM 0.80 per share can be achieved. In other words, I ignore the tax impact of this. I am not familiar with China’s property tax law but I think this is a bit optimistic. </div><div><br /></div><div>In mitigation, I would state that I have not considered the value of the “Parkson” brand in my Asset Value. </div><div><br /></div><div><a href="https://brandirectory.com/rankings/malaysia/table" target="_blank">Brand Finance</a> ranked Parkson in the 54th position among the top 100 brands in Malaysia. I do not have access to the latest brand value. But in 2018, Brand Finance valued the “Parkson” brand at USD 308 million. </div><div><br /></div><div>The other point about the Asset Value is that over the past 14 years, PHB had impaired assets. I would like to think that the current asset value is realistic and is not overvalued.</div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div>PHB is a good case study on why it is important to also read the notes to the financial statements.</div><div><div><br /></div><div>In the PHB case, it has Investment Properties. If the PHB Group was in the property sector it would be likely for the Investment Properties to be revalued annually. And the revaluation surplus would have been recognized in the P&L.</div><div><br /></div><div>But, PHB is not a property company and so there was no need for the Investment Properties to be revalued every year. Furthermore, even if there was a revaluation surplus, there would not be any need to recognize it in the P&L.</div><div><br /></div><div>This was exactly what happened to the PHB Group in 2022. It had a revaluation surplus for the Investment Properties amounting to about RM 1.68 billion. Yet this was merely stated as a note in the financial statement.</div><div><br /></div><div>The Book Value of PHB based on the financial statement thus did not present the fair value of its assets.</div><div><br /></div><div>Secondly, as we had the financial statements of PRGL and PRA, we could see that the intangibles and revaluation surplus were at the PRGL level. </div><div><br /></div><div>As such when it came to assessing their impact on PHB, it was more realistic to account for them based on the % shareholdings of PRGL held by PHB.</div><div><br /></div><div>The impact would be different from the “accounting approach”. That would have assumed that all the impact accrued to the shareholders of PHB.</div><div><br /></div><div>As you can see, fundamental analysis is more than just applying some formula. If you don’t have the business background to undertake such an analysis and yet want to invest based on fundamentals, you may have to rely on financial advisers to do them for you. </div></div><div><br /></div><div>Several financial advisers provide such analyses. <span style="text-align: start;">Those who do this well include people </span><span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.</div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>PHB is not a dud</h2><div>My analysis of PHB showed that while it incurred losses over the past 8 years, this was due to initially the digital disruption in China followed by the COVID-19 measures.</div><div><br /></div><div>PHB has re-invented itself in China and with Covid-19 behind us, it is in a good position to return to profitability. China accounted for about ¾ of the Group revenue so any turnaround here would have a significant impact on the Group's performance.</div><div><br /></div><div>The department store sector is not yet a sunset industry in China and Malaysia as exemplified by the peers’ revenue growth. </div><div><br /></div><div>Its key challenge is the high-interest expenses, but as it builds back its earnings, it should be able to reduce its debt. </div><div><br /></div><div>Based on the above, I do not think that Parkson Holding is a dud. </div><div><br /></div></div></div><div><br /></div><div><br /></div><div><div><br /></div><div><div><br /></div><div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div></div><div><br /></div></div></div><div><br style="text-align: left;" /></div></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-71962490368049134642023-11-26T11:00:00.006+08:002023-12-01T08:21:05.320+08:00Is Dayang one of the better Bursa stocks?<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); color: #171717; font-size: 15px; font-weight: bold; letter-spacing: 0.04em; padding-bottom: 10px; padding-top: 10px; text-align: justify; text-decoration: none;">Value Investing Case Study 07-4. I first covered Dayang in Dec 2020. That analysis was based on the Annual Reports till 2019. This is an updated fundamental analysis and valuation incorporating the FYE 2022 results. </div>
<div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisumsgILJNlSQUX123TiUSxX0MSAulZ_6HpeRtEXT0wKFBkZqxwHVObErENVJl18HbcqshJmt6HuxBJt-Qgv0jzrHOHPuqosLf2dNyX6HN1JrLYa6qfnuuFpXdRq1ZxzKg12WQ7W0qGarfNxN0MH7lipB7jdhtP8KluoiP_SvxpdzbfbOoQEToF2XR6CU/s380/Picture1-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Dayang one of the better Bursa stocks?" border="0" data-original-height="380" data-original-width="268" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisumsgILJNlSQUX123TiUSxX0MSAulZ_6HpeRtEXT0wKFBkZqxwHVObErENVJl18HbcqshJmt6HuxBJt-Qgv0jzrHOHPuqosLf2dNyX6HN1JrLYa6qfnuuFpXdRq1ZxzKg12WQ7W0qGarfNxN0MH7lipB7jdhtP8KluoiP_SvxpdzbfbOoQEToF2XR6CU/s16000/Picture1-min.png" title="Is Dayang one of the better Bursa stocks?" /></a></div><div style="text-align: justify;"><span><a name='more'></a></span>When I first wrote about Dayang Enterprise Holdings Berhad (Dayang or the Group) in Dec 2020, it was trading at RM 1.24 per share. The market price has since increased to RM 1.92 per share (as of 3 Nov 2023). </div><div style="text-align: justify;"><div><ul><li>For FYE Dec 2020, Dayang made about RM 0.05 per share. This is equal to a PE ratio of 25. Based on the LTM performance, the Group would make RM 0.10 per share for FYE 2023. This is about a PE ratio of 19.</li></ul><ul><li>In Dec 2020, Brent crude oil was trading around USD 48 per barrel compared to the early Nov 2023 price of USD 85 per barrel. </li></ul></div><div><br /></div><div>Why has the PE ratio dropped from 25 to 19? Is the market projecting that the high crude oil prices will not hold and expect Dayang's performance to deteriorate accordingly? </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/quk378SFfCg" width="320" youtube-src-id="quk378SFfCg"></iframe></div><div class="separator" style="clear: both; text-align: center;"><br /></div><div>Join me to explore whether Dayang is one of the better Bursa stocks to invest in. </div><div><br /></div><div>Crude oil prices are cyclical with the last 2 peak-to-peak cycles from 2011 to 2022. As such I will analyse and value the Group from 2011 to 2022. </div><div><br /></div><div>Where relevant I have also incorporated some of the analysis from my earlier articles. If you had tried to access my previous articles, you would have been redirected here.</div><div><br /></div><div>Should you go and sell it? Well, read my Disclaimer.</div><div><br /></div><h2>Contents</h2><div><ul><li><b>Investment thesis</b></li></ul><ul><li><b>Rationale</b></li></ul><ul><li><b>Business background</b></li></ul><ul><li><b>Operating trend</b></li></ul><ul><li><b>Financial position</b></li></ul><ul><li><b>Risks</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Dayang is not one of the better Bursa stocks</b></li></ul><ul><li><b>Appendix 1. Malaysia's Oil and gas sector</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: left;" /></div></div><div><h2>Investment Thesis</h2><div>The Group has 2 business segments – topside maintenance and marine charter. The former used about 1/3 of the total capital employed and was profitable every year over the past 12 years. The latter which used up most of the balance incurred losses on a cumulative basis over the past 12 years. </div><div><br /></div><div>As such the Group achieved an average ROE of 7 % over the past 12 years. While financially sound, I have concerns about its business fundamentals. Better returns will depend on how it turns around the marine charter business.</div><div><br /></div><div>A valuation of the Group based on its performance over 2 oil price cycles showed only a 22 % margin of safety. This was based on its Earnings Value taking into account 4 % perpetual growth. I do not consider this one of the better Bursa stocks to invest in.</div><div><br /></div><h2>Rationale</h2><div><ul><li>Dayang is financially sound with a 22 % debt-equity ratio with 20% of its assets as cash and marketing securities.</li></ul><ul><li>Over the past 12 years, its ROE ranged from <span style="color: red;">– 29 %</span> to + 22 % with an average of 7 %. Its performance had been dragged down by the performance of the marine charter segment.</li></ul><ul><li>The marine charter business is a relatively capital-intensive one with low vessel utilization for the past 12 years. The challenge is to turn this around through higher utilization.</li></ul><ul><li>The Group has a good capital allocation track record. But I would rate its track record for creating shareholders' value as average.</li></ul><ul><li>There is only a 22 % margin of safety based on the Earnings Value with growth. </li></ul></div><div><br /></div><div>The supporting details are presented in the following sections.</div></div><div><br /></div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div>As there are two listed entities under Dayang, I will use the following definitions in the post:</div><div><div><div><ul><li>DEHB refers to Dayang Enterprise Holdings Bhd as the listed company.</li></ul><ul><li>PPB refers to Perdana Petroleum Bhd as the listed company.</li></ul><ul><li>The Group refers to all the companies within DEHB including those under the PPB Group.</li></ul><ul><li>PPB Group refers to all the companies within PPB only.</li></ul></div><div><br /></div><div>There are significant inter-company operations between DEHB and PPB. This is not critical if you are analyzing and valuing the Group.</div><div><br /></div><div>But if you are trying to see which of the following is a better investment, then being able to identify which is contributing to what is important:</div><div><ul><li>Invest in DEHB alone.</li></ul><ul><li>Invest in PPB alone.</li></ul><ul><li>Invest partly in DEHB and partly in PPB.</li></ul></div><div><br /></div><div>For this post, I will look from the perspective of investing in DEHB alone. </div></div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div><div><h2>Business background</h2><div>The Group is an oilfield services company - a major provider of offshore platform services in Malaysia. </div><div><br /></div><div>The chart below shows the current corporate structure of the Group.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizt7AEL0qz-IeStpXn1La-A-6snqaBY0Bvx1ut7cOjQGvn__sqbl7YdNfv5GeiZ2kAu0k67OjCOWNWhAwsBkMt2_l-9_UeMpnN7YCMnjmXG4c02SXN5SHW2nrIcbVkicN4rHoBBjeET7Lb5yZ88kKKUWmn5fvoFru42-h6-e_zW8PFmPOcRcP0aR5h8hI/s507/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 1: Corporate structure" border="0" data-original-height="386" data-original-width="507" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizt7AEL0qz-IeStpXn1La-A-6snqaBY0Bvx1ut7cOjQGvn__sqbl7YdNfv5GeiZ2kAu0k67OjCOWNWhAwsBkMt2_l-9_UeMpnN7YCMnjmXG4c02SXN5SHW2nrIcbVkicN4rHoBBjeET7Lb5yZ88kKKUWmn5fvoFru42-h6-e_zW8PFmPOcRcP0aR5h8hI/s16000/Chart%201-min.png" title="Dayang Chart 1: Corporate structure" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Corporate structure</td></tr></tbody></table><div><br /></div><div><div>The Group's initial business in the 80s was the trading of hardware materials and supply of manpower for the offshore oil & gas industry. Today the Group has two main business segments:</div><div><ul><li>Topside maintenance services where it is one of the big boys in the offshore hook-up and commissioning business.</li></ul><ul><li>Marine offshore support services with the charter of marine vessels to the oil & gas industry. This is via its marine vessels as well as through its 64% ownership of Bursa-listed Perdana Petroleum Berhad (PPB). </li></ul></div><div><br /></div><div>The Group customers included Petronas Carigali, Sarawak Shell Berhad, and ExxonMobil.</div><div><br /></div><div>Over the past 12 years, the Group’s order book and revenue have been cyclical as can be seen from Chart 2. As an oilfield services company, you may think that there is some link between these metrics and crude oil prices.</div><div><br /></div><div>However, there is a negative 0.38 correlation between Dayang’s revenue and Brent crude oil prices. It is a negative 0.11 correlation for the order book.</div><div><br /></div><div>The correlations were low so I would not consider them significant. One way to interpret this is that Dayang services are not directly dependent on crude oil prices.</div><div><br /></div><div>The other feature is the discrepancy between the order book and revenue. The cumulative order book over the past 12 years far exceeded the cumulative revenue. </div><div><br /></div><div>This meant that the actual work orders issued by the customers were less than the order book secured. In other words, the order book for the year may not translate 100% into revenue for the coming years. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRb8oazuORGZUi3SsYsJqNmZTCHV2Mav4uDvM8hyr7Wgj0uCgTVUm6VexcPUh-IDtDz2g3GQEEWVN2bMuZtl3sV_CZIbcxLbf27x6NptFrfFjYBV8r1doja7EWRVI9OPq2yXy1gCkueAiucitL17sAsz5t8dau8q5es7ZDDCafKwYonNqnWh0I3QeHbys/s614/Chart%202-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 2: Revenue vs Order Book and Crude Oil Prices" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRb8oazuORGZUi3SsYsJqNmZTCHV2Mav4uDvM8hyr7Wgj0uCgTVUm6VexcPUh-IDtDz2g3GQEEWVN2bMuZtl3sV_CZIbcxLbf27x6NptFrfFjYBV8r1doja7EWRVI9OPq2yXy1gCkueAiucitL17sAsz5t8dau8q5es7ZDDCafKwYonNqnWh0I3QeHbys/s16000/Chart%202-min.PNG" title="Dayang Chart 2: Revenue vs Order Book and Crude Oil Prices" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Revenue vs Order Book and Crude Oil Prices</td></tr></tbody></table><div><br /></div><div><h3>Growth history</h3><div>In looking at the history of the Group, you have to separate it into 2 parts - pre and post-PPB.</div><div><br /></div><div>PPB first came into the picture in 2013 as an associate. It then became a subsidiary (ie its accounts were consolidated) in 2015. </div><div><br /></div><div>During the first few years after listing, the Group's main business was topside maintenance. </div><div><br /></div><div>Although it had 4 vessels by 2009, the Group only reported its first external marine charter revenue in 2010. Thus in 2008 and 2009, the vessels supported the topside maintenance activities.</div><div><br /></div><div>The growth of the Group was driven by the massive contracts it secured in 2013. Refer to Chart 2. Thus, its order book for that year was more than 3 times the average order book for 2009 to 2011. </div><div><br /></div><div>To fulfill these orders, the Group:</div><div><ul><li>Aggressively hired increasing its headcount from 1,867 employees at the beginning of 2013 to 3,996 as of 31 March 2014.</li></ul><ul><li>Doubled the size of its fabrication yards.</li></ul><ul><li>Added new vessels.</li></ul><ul><li>Had a more strategic tie-up with PPB that eventually resulted in PPB becoming a subsidiary of DEHB. </li></ul></div><div><br /></div><h3>Marine charter and PPB</h3><div>From the onset, it would appear that DEHB wanted to expand into the marine charter business as a way to expand the Group’s business.</div><div><ul><li>It expanded its in-house fleet from 3 vessels in 2008 to 8 vessels by 2022.</li></ul><ul><li>In 2009, DEHB acquired 40% of Borcos. It owns 33 offshore support vessels, including fast crew boats and anchor-handling tugs.</li></ul><ul><li>It was not clear why Borcos was disposed of in 2011. It could be because of the low market vessel utilization in 2010. By 2011 DEHB had 7 vessels in its in-house fleet.</li></ul><ul><li>Also, in Nov 2011, DEHB had subscribed to a 10% private placement of shares by PPB and had built this up to 11.53 % through open market purchases by the end of 2011.</li></ul><ul><li>Over the next couple of years, DEHB acquired more shares of PPB so that by May 2015, it had amassed more than a 33% stake. This triggered a Mandatory General Offer for DEHB to purchase the rest of PPB’s shares from the open market. </li></ul><ul><li>To comply with the public shareholding spread after the General Offer, DEHB re-distributed some of PPB shares to the shareholders of DEHB so that today DEHB owns 64.0 % of PPB. </li></ul></div><div><br /></div><div>The marine charter business is more capital-intensive than topside maintenance. Refer to Table 1. It shows the segment revenue to total capital employed (TCE) ratio for both segments based on the 2022 segment performance.</div><div><br /></div><div>You can see that that the marine charter segment deployed about 10 times more capital to generate the same level of revenue. At the same time, the return as measured by EBIT/TCE for the marine segment was very low compared to that for the topside maintenance segment.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAHlt2YFYYOn0XuP752lHJAMA_CeVcKSj3xi1KdPmTfz0oWKdSUgNgBUf8HYvdhfDIQQpRdkXC3LV5aMtGuLLVSACzmJT-tEkObxJ3MCST2yd7pkih4XiG61aB0nmuHPWENxx4rEeuD3QkE4Y1wGHAAFMoBqGUeb7qaUSgsbqUZEAFVeJiZLPZyqsbKHs/s903/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Table 1: Segment performance" border="0" data-original-height="126" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAHlt2YFYYOn0XuP752lHJAMA_CeVcKSj3xi1KdPmTfz0oWKdSUgNgBUf8HYvdhfDIQQpRdkXC3LV5aMtGuLLVSACzmJT-tEkObxJ3MCST2yd7pkih4XiG61aB0nmuHPWENxx4rEeuD3QkE4Y1wGHAAFMoBqGUeb7qaUSgsbqUZEAFVeJiZLPZyqsbKHs/s16000/Table%201-min.png" title="Dayang Table 1: Segment performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Segment performance<br /><div style="text-align: left;"><div><i>Notes to Table 1</i></div><div><i>a) TCE = Total capital employed = Equity + Debt – Cash. I apportioned that Debt and Cash for the segment based on the segments’ interest expenses and interest income.</i></div><div><i>b) The segment assets and liabilities were from the 4Q 2022 announcement. </i></div><div><br /></div></div></td></tr></tbody></table><div><div>The other key features of the marine charter business are:</div><div><ul><li>There are two market segments - greenfield and brownfield segments.</li></ul><ul><li>The revenue is dependent on both utilization and charter rates.</li></ul><ul><li>There is a cut-off age for vessels participating in Petronas tender.</li></ul></div><div><br /></div><div>Although both the topside maintenance and marine charter segments serve the offshore oil & gas fields, they are driven by different business economics. </div><div><br /></div><div>The marine charter segment suffers from low utilization rates. The Group reported 49 % utilization for the first half of 2023. It was 60 % and 44 % for 2022 and 2021 respectively. </div><div><br /></div><div>Petronas had a 15 years cut-off age for vessels. However, there is news that this has been extended to 20 years. Source: <a href="https://theedgemalaysia.com/article/newsbreak-new-cap-20-years-likely-osv-players" target="_blank">The Edge Dec 2022</a></div><div><br /></div><h2>Operating trends</h2><div>I looked at 3 metrics to get an overview of the overall performance – revenue, PAT, and gross profitability (gross profits / total assets). Refer to Chart 3.</div><div><br /></div><div>Revenue over the past 12 years showed a cyclical pattern. Revenue grew at 9.0 % CAGR. </div><div><br /></div><div>PAT was relatively volatile with the Group incurring losses in 2017, and 2021. </div><div><ul><li>The 2017 losses were due to the prolonged and depressed prices of crude oil. This led to a significant reduction in work orders and contracts across the value chain.</li></ul><ul><li>The 2021 loss was mainly attributed to impairments and one-off additional depreciation charges. The depreciation charges were due to the change in accounting treatment of 8 vessels' useful lives from 25 years to 15 years.</li></ul></div><div><br /></div><div>The concern was the declining gross profitability. The 2022 gross profitability was lower than that in 2011.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhNs_Ys3hNVGJOkKOH0rUpoeWiUas2MEioGm_UHRtvcdOVsrDFm_ZLXQtDazjm9DPQQ-L_nMs8tAOd16Mim8djW2XrL7mCLY-mhJxi_OHzkES7ktHOFAdQrOtLx2O_g2NoDUxtTXgCkBk0X35eK96nHmR4pUxPdkUqPhOMz8kat6MeLwUL84mzisCw-4E/s614/Chart%203-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 3: Performance Index" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhNs_Ys3hNVGJOkKOH0rUpoeWiUas2MEioGm_UHRtvcdOVsrDFm_ZLXQtDazjm9DPQQ-L_nMs8tAOd16Mim8djW2XrL7mCLY-mhJxi_OHzkES7ktHOFAdQrOtLx2O_g2NoDUxtTXgCkBk0X35eK96nHmR4pUxPdkUqPhOMz8kat6MeLwUL84mzisCw-4E/s16000/Chart%203-min.PNG" title="Dayang Chart 3: Performance Index" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Performance Index</td></tr></tbody></table><div><br /></div></div><div><h3>Revenue</h3><div>The chart below shows the Group’s external sales profile over the past 12 years. </div><div><ul><li>The majority of the DEHB Group’s revenue was from the topside maintenance segment. In 2022, this segment accounted for 85 % of the Group’s revenue.</li></ul><ul><li>The marine charter business became significant in 2015 after DEHB became the major shareholder of PPB. DEHB then consolidated PPB financials into DEHB Group financials.</li></ul><div><br /></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNuk3v0XpcS9GBmt-YENDyT1cnv1IUYc_fHNBFk14GFDfnzjfVzM9-sEybShaFDO6AmX-Ylju8SQu8qcrxm9J-mgnN_x0N7Zhpyl1St6Q4aZg_JiUIYuMIm4BaFRUadBQPkiRtbDNMcIx04DUKAtAIK5mEaPDhYTYqdAnMJF3sOAXPt5lQQTGVyjgc4cI/s614/Chart%204-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 4: Revenue profile" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNuk3v0XpcS9GBmt-YENDyT1cnv1IUYc_fHNBFk14GFDfnzjfVzM9-sEybShaFDO6AmX-Ylju8SQu8qcrxm9J-mgnN_x0N7Zhpyl1St6Q4aZg_JiUIYuMIm4BaFRUadBQPkiRtbDNMcIx04DUKAtAIK5mEaPDhYTYqdAnMJF3sOAXPt5lQQTGVyjgc4cI/s16000/Chart%204-min.PNG" title="Dayang Chart 4: Revenue profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Revenue profile</td></tr></tbody></table><div><br /></div><div><h3>EBIT</h3><div>The topside maintenance business has been profitable throughout the past 12 years. Refer to Chart 5. In 2022, this segment accounted for about 84% of the Group’s EBIT.</div><div><br /></div><div>The marine charter business suffered losses in 2015, 2017, and 2021. On a cumulative basis, over the past 12 years, it was not profitable.</div><div><ul><li>Before 2013, all the marine charter segment EBIT excluded those from PPB Group.</li></ul><ul><li>For 2013 and 2014, PPB Group’s charter business was accounted for as associate profits and formed part of the “Others” in the chart below. </li></ul><ul><li>The “Others” for 2010 included the profits from its 40% share of Syarikat Borcos Shipping Sdn Bhd (Borcos). This is an associate company that owns a fleet of 33 offshore support vessels. Borcos was disposed of in April 2011.</li></ul><ul><li>The losses in 2021 were due to the low vessel utilization rate. </li></ul><ul><li>This was mainly due to stop-work orders issued by clients due to Covid-19 infections at work vessels.</li></ul><div><br /></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxj6HZxpE6Z8YETSCJRVGB6i6bxWjsDOLyg-oPHj_lcA6zkvch1PJsnP1mR6x96ochFCT3qexkXE21vOgAdFYaM-4BmMdDmfX5_m85veG0Lyvejpjshtk-KimO43SSgC0Gcjs7tW5tqWfZr1aJkG8FiKFy1omkGw5m8FijZjH9CUuDNsfP5lJo4U7lz6g/s614/Chart%205-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 5: EBIT Profile" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxj6HZxpE6Z8YETSCJRVGB6i6bxWjsDOLyg-oPHj_lcA6zkvch1PJsnP1mR6x96ochFCT3qexkXE21vOgAdFYaM-4BmMdDmfX5_m85veG0Lyvejpjshtk-KimO43SSgC0Gcjs7tW5tqWfZr1aJkG8FiKFy1omkGw5m8FijZjH9CUuDNsfP5lJo4U7lz6g/s16000/Chart%205-min.PNG" title="Dayang Chart 5: EBIT Profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: EBIT Profile</td></tr></tbody></table><div><br /></div><div><h3>DuPont Analysis</h3><div>The volatile PAT resulted in a volatile ROE. Over the past 12 years, the ROE ranged from <span style="color: red;">– 29 %</span> to + 22 % with an average of 7 %.</div><div><br /></div><div>A DuPont analysis as per Chart 6 showed that the bulk of the ROE volatility can be linked to the volatile Op Margin. </div><div><br /></div><div>Asset turnover also showed a declining trend from 2014. Together with the declining gross profitability, they showed that there were no improvements in the operating efficiencies.</div><div><br /></div><div>But leverage had improved from 2015 as shown by the declining trend line. It jumped in 2015 following the acquisition of PPB.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWL2-9WYVMDnGx13a6RdqoWcueQAsMwSb2b4esKj-EKuiW92Mk8FDPOlRxoISpvStbTn3c9KdpxNzQgJBoaftiE8g-BUgvIrHkR4krdMamsWPzKClib4JgKEqcv5KKuIj1MRqj7fa5RuZ5_bepYos7JCjJjGc1Gid9TagHKIWk0DpqSiNlQeEvhEGot0U/s614/Chart%206-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 6: DuPont Analysis" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWL2-9WYVMDnGx13a6RdqoWcueQAsMwSb2b4esKj-EKuiW92Mk8FDPOlRxoISpvStbTn3c9KdpxNzQgJBoaftiE8g-BUgvIrHkR4krdMamsWPzKClib4JgKEqcv5KKuIj1MRqj7fa5RuZ5_bepYos7JCjJjGc1Gid9TagHKIWk0DpqSiNlQeEvhEGot0U/s16000/Chart%206-min.PNG" title="Dayang Chart 6: DuPont Analysis" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: DuPont Analysis</td></tr></tbody></table><div><br /></div><div><div>I had earlier shown in Table 1 that the Group return was low due to the low return by the marine charter segment. Any improvement in the Group return would depend on turning around the marine charter business.</div><div><br /></div><h3>IH 2023</h3><div>The revenue and PAT for the first six months of 2023 were about the same as those for the same period last year. </div><div><br /></div><div>The Group explained the performance as follows:</div><div><br /></div><div>“The slightly lower revenue… is mainly attributable to the unfavorable oil price in early year of 2023, as compared to the oil price in early year of 2022. Despite the impact of oil prices, it is still manageable with robust and consistent revenue growth. The improved daily charter rates and higher vessel utilization rates of 49% as compared to 46% in the corresponding period boost up the revenue in the current period to be in line with the revenue in the corresponding period.</div><div><br /></div><div>The profit before tax…in the current period is arrived at, after taking into account a reversal of impairment loss on financial assets… however, been negated by the unfavorable impact from net realized/unrealized foreign exchange loss...”</div><div><br /></div><div>I am a long-term value investor and I consider quarterly performance as “noisy”. As such I focus on long-term trends. </div><div><br /></div><h3>Competitive profile</h3><div>There are about 2 dozen Bursa listed companies under the Energy Infrastructure, Equipment & Services sector. </div><div><br /></div><div>To have an apple-to-apple comparison, I excluded the following:</div><div><ul><li>Those in the drilling business.</li></ul><ul><li>Those in the floating production and operations (FPO) sector.</li></ul></div><div><br /></div><div>Rather I focussed on those with significant topside maintenance business. The ideal peers would be those with topside maintenance and marine charter.</div><div><br /></div><div>I have selected the following as the peer companies to benchmark against. </div><div><ul><li>Carimin Petroleum.</li></ul><ul><li>Deleum.</li></ul><ul><li>Petra Energy.</li></ul><ul><li>T7 Global</li></ul><div><br /></div></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaZep2vP7yZ8NBV5Y8g_UqliIP-RXdRusN30_R1VaBaoigMRbNahz68GGmxGcVsT8rnJMOtqzKoA44blvqauiluo6QBC_9kF4EBdUikfB_h8CbtTXN2j0xsxcxt9LKpYNURAdQ0D5rraVE-Le754ppZmdPElABIgUEsJhTadgxwV5v0X9iILK0BcJ4kiU/s903/Chart%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 7: Peer Performance" border="0" data-original-height="267" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaZep2vP7yZ8NBV5Y8g_UqliIP-RXdRusN30_R1VaBaoigMRbNahz68GGmxGcVsT8rnJMOtqzKoA44blvqauiluo6QBC_9kF4EBdUikfB_h8CbtTXN2j0xsxcxt9LKpYNURAdQ0D5rraVE-Le754ppZmdPElABIgUEsJhTadgxwV5v0X9iILK0BcJ4kiU/s16000/Chart%207-min.png" title="Dayang Chart 7: Peer Performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Peer Performance</td></tr></tbody></table><div><br /></div><div><div>The results of the comparisons are shown in Chart 7.</div><div><br /></div><div>Revenue-wise, the Group is way ahead of its peers in terms of size and growth rate. Dayang achieved 9.0 CAGR from 2011 to 2022 whereas the peers’ growth rate ranged from<span style="color: red;"> – 5.0 %</span> to + 5.3 %.</div><div><br /></div><div>ROE-wise, the Group achieved an average of 6.9 % from 2011 to 2022 and is ranked in the middle. The average ROE for the peers ranged from <span style="color: red;">– 2.7 %</span> to 13.7 %. </div><div><ul><li>The best performance was by Deleum but I suspect that this was because it did not have any marine charter business. </li></ul><ul><li>All the peer companies had turned around their respective ROEs in 2022.</li></ul></div><div><br /></div><h2>Financial position</h2><div>I would rate Dayang as financially sound based on the following:</div><div><ul><li>As of the end of Jun 2023, it had RM 471 million cash and short-term securities. This was equivalent to 20 % of its total assets.</li></ul><ul><li>It had a debt-equity ratio of 22 % as of Jun 2023. This is much lower than its peak debt-equity ratio of 60 % in 2015.</li></ul><ul><li>Over the past 12 years, it generated positive cash flow from operations every year. </li></ul><ul><li>Over the past 12 years, it generated RM 2.6 billion cash from the cash flow from operations compared to RM 0.6 billion of PAT. This is a very good cash conversion ratio.</li></ul></div><div><br /></div><div>The Group also had a good capital allocation track record as shown in Table 2. You can see that its cash flow from operations was well deployed for CAPEX and dividends.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDJnkZRyKpbXaN0-Y29ycxAxQquQkN3dKu76Led3gLeKcj0f49fSouNri-n_QydR2ZHmpH9eqxlmao4GcazAxgLk3py9utZ4DFNLsgIEYm4rhqmB5BD9l5PWMVwg9U1zeMSaqPJ-RGBOk4ZFP8PHgUeRBC3rhIi5QfZPZqoxymAfMVt03TYseTt6IB3LY/s505/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Table 2: 2012 to 2022 Sources and Uses of Funds" border="0" data-original-height="301" data-original-width="505" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDJnkZRyKpbXaN0-Y29ycxAxQquQkN3dKu76Led3gLeKcj0f49fSouNri-n_QydR2ZHmpH9eqxlmao4GcazAxgLk3py9utZ4DFNLsgIEYm4rhqmB5BD9l5PWMVwg9U1zeMSaqPJ-RGBOk4ZFP8PHgUeRBC3rhIi5QfZPZqoxymAfMVt03TYseTt6IB3LY/s16000/Table%202-min.png" title="Dayang Table 2: 2012 to 2022 Sources and Uses of Funds" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Sources and Uses of Funds - 2012 to 2022 </td></tr></tbody></table><div><br /></div><div><h3>Expansion into the marine charter segment</h3><div>The Group had looked at expanding into the marine charter sector as part of its growth plans</div><div><ul><li>In 2009, it spent RM 135 million to acquire a stake in Syarikat Borcos Shipping Sdn Bhd (Borcos) although the Board did not state why it decided to dispose of Borcos after a year.</li></ul><ul><li>In 2011, it subscribed to a private placement of PPB. DEHB then went on to acquire more shares in the open market so that it held 11.53% of PPB by the end of 2011. </li></ul><ul><li>By 2015, DEHB had spent RM 1,056 million for 98% of PPB which had shareholders’ funds of RM 744 million as of the end of 2015. </li></ul><ul><li>The shareholders’ funds of PPB had reduced to RM 585 million by the end of 2022. DEHB only had 64% of PPB by then. This was due to the distribution of PPB shares to the shareholders of DEHB to meet the shareholding spread. </li></ul></div><div><br /></div><div>With hindsight, given the current marine charter excess capacity, the RM 1 billion could have been better spent elsewhere.</div><div><br /></div><div>DEHB attributed its recent contract wins to having in-house vessels. However given the excess offshore supply vessel's capacity, there would be lots of willing strategic allies in its tender bids. </div><div><br /></div><div>At this juncture, the payback period for its RM 1 billion marine charter investment is likely to stretch beyond 10 years.</div><div><br /></div><div>The positive thing is the Group was able to generate sufficient cash flow over the past 12 years to cover the cost of entry into the marine charter business. The challenge is how to turn this into a profitable venture.</div><div><br /></div><h3>Reinvestment </h3><div>Growth needs to be funded and one metric for this is the Reinvestment rate. This is defined as:</div><div><br /></div><div>Reinvestment with acquisitions = CAPEX & Acquisitions – Depreciation & Amortization + Net Changes in Working Capital.</div><div><br /></div><div>I then determined the Reinvestment rate = Reinvestment / after-tax EBIT.</div><div><br /></div><div>Acquisitions are an integral growth driver for the company. As such I have included the annual acquisition expenditure as part of the CAPEX.</div><div><br /></div><div>Over the past 11 years, the total Reinvestment amounted to RM 492 million. The after-tax EBIT for the same period came to RM 1,502 million. This resulted in a Reinvestment rate of 12 %. This is a good rate.</div><div><br /></div><div>Note that the low Reinvestment rate was because of the low Reinvestments. This in turn was because there were several years when the Depreciation & Amortization far exceeded what was spent on CAPEX and Net Changes in Working Capital.</div><div><br /></div><h3>Shareholders’ value creation</h3><div>I looked at the following metrics when assessing shareholders’ value creation:</div><div><ul><li>Comparing returns with the cost of funds.</li></ul><ul><li>Comparing the gains by an investor who bought a share at the end of 2011 with the cost of equity.</li></ul><ul><li>Looking at the Q Rating which is based on several valuation metrics. A high score relative to the panel meant that the company had the potential to create shareholders’ value.</li></ul></div><div><br /></div><div>Overall, I would assess Dayang as average in terms of creating shareholders' value as not all metrics achieved positive results.</div><div><br /></div><div>As can be seen from Table 3, Dayang returns were lower than the respective cost of funds for 2 metrics. It only did well when it came to looking at the growth in SHF. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhP6B0WZV_5xO9o7EUzrCSSyZjAC8Mxub0GkwgGjYK3AfqRUBvuF3MAiXnp7D8CV6n-RKaQd4oFNysZws_YbiXujEIXUjxqVYUulSUflYx9tb7-hNAdYGIydSOdspLFEKjYMdpbOy3VU_fy0CRfqCISD0zXnrXCowtpIF-xxSDmTX1xpAiUQMDWN1Norhw/s631/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Table 3: Shareholders’ value creation" border="0" data-original-height="101" data-original-width="631" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhP6B0WZV_5xO9o7EUzrCSSyZjAC8Mxub0GkwgGjYK3AfqRUBvuF3MAiXnp7D8CV6n-RKaQd4oFNysZws_YbiXujEIXUjxqVYUulSUflYx9tb7-hNAdYGIydSOdspLFEKjYMdpbOy3VU_fy0CRfqCISD0zXnrXCowtpIF-xxSDmTX1xpAiUQMDWN1Norhw/s16000/Table%203-min.png" title="Dayang Table 3: Shareholders’ value creation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Shareholders’ value creation<br /><div style="text-align: left;"><div><i>Notes</i></div><div><i>(a) Based on time-weighted average EBIT/TCE from 2011 to 2022 assuming a 24 % tax rate compared with WACC.</i></div><div><i>(b) This looked at how the SHF at the end of 2011 would have grown by the end of 2022 assuming that no dividend was paid. I compared it with the cost of equity.</i></div><div><i>(c) Computed assuming that an investor bought 1 share at the end of 2011 and held onto it till the end of 2022. His gain is shown in the Table below.</i></div></div></td></tr></tbody></table><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifo3b7CsFCvj8H9_j19p0amxBSEGrpqNzD67lTIfv-LNABI8DSw-HKusymLtceaKfY9UJc8bawsfKRXfEe8uAFN0LNtv8_MIWdrPc-2taYgPS4CnMx1FVxqPkop5wZlvAsdE9ZcgYd-O1tmA1vS1BYuo5giWRXqN7u0CMHDvkkLk1vBVKCj9Haj64Kki0/s379/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Table 4. Estimating the shareholders’ gain" border="0" data-original-height="176" data-original-width="379" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifo3b7CsFCvj8H9_j19p0amxBSEGrpqNzD67lTIfv-LNABI8DSw-HKusymLtceaKfY9UJc8bawsfKRXfEe8uAFN0LNtv8_MIWdrPc-2taYgPS4CnMx1FVxqPkop5wZlvAsdE9ZcgYd-O1tmA1vS1BYuo5giWRXqN7u0CMHDvkkLk1vBVKCj9Haj64Kki0/s16000/Table%204-min.png" title="Dayang Table 4. Estimating the shareholders’ gain" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4. Estimating the shareholders’ gain</td></tr></tbody></table><div><br /></div><div>At the same time, Dayang had an overall Q Rating of 0.44. This places it at the average position among the panel companies. You can see that it did well in the financial ratings. On the negative side, the Q Rating had declined from 0.47 in 2020.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh57Du9kTgQN7TPjgfCdgdn5yrhYKV3fbUQw42_73l8sIFe_OfwY7FVMstg6qO-Hs535II74gBL58nbGatFMESYN498wARaXBL7_-5ZUxJzXyJ92WsnGGQLgLtcnu9XTexA71GO1KG51YP_aXkNbwSnBmCGqmTdG1BAWTeOMTgP4u3rNz1IfOccPYM30YQ/s614/Chart%208-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 8: Q Rating" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh57Du9kTgQN7TPjgfCdgdn5yrhYKV3fbUQw42_73l8sIFe_OfwY7FVMstg6qO-Hs535II74gBL58nbGatFMESYN498wARaXBL7_-5ZUxJzXyJ92WsnGGQLgLtcnu9XTexA71GO1KG51YP_aXkNbwSnBmCGqmTdG1BAWTeOMTgP4u3rNz1IfOccPYM30YQ/s16000/Chart%208-min.PNG" title="Dayang Chart 8: Q Rating" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: Q Rating</td></tr></tbody></table><div><br /></div><div><h2>Risks</h2><div>I look at risks through the following lenses:</div><div><ul><li>Crude oil prices.</li></ul><ul><li>Privatization.<br /><br /></li><li>Depletion of Malaysian oil reserves.</li></ul></div><div><br /></div><h3>Link to crude oil prices</h3><div>Oil prices have been cyclical as can be seen from Chart 9. While prices in 2023 have been high, it was not the historical high which occurred in 2012/14.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4N26Gyc0ur7rKjMVa_ga6hyphenhyphen5d8VorswDInlqZ4qTvKfwO0vfGJPeupsH903TEqUjSlPbXd07v3rdOziKuYpVSR-42E-WvifF5BlMhmd10BTIJSruSW6dJmIvogYP59kPB78cnv4EBe8vFXm0xxA9ynNZnSD3AGkG8VPO3BR8rUKIKKL9zb86ghGJNThA/s803/Chart%209-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 9: Brent Crude Oil Price. Source: Statista" border="0" data-original-height="493" data-original-width="803" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4N26Gyc0ur7rKjMVa_ga6hyphenhyphen5d8VorswDInlqZ4qTvKfwO0vfGJPeupsH903TEqUjSlPbXd07v3rdOziKuYpVSR-42E-WvifF5BlMhmd10BTIJSruSW6dJmIvogYP59kPB78cnv4EBe8vFXm0xxA9ynNZnSD3AGkG8VPO3BR8rUKIKKL9zb86ghGJNThA/s16000/Chart%209-min.png" title="Dayang Chart 9: Brent Crude Oil Price. Source: Statista" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 9: Brent Crude Oil Price. Source: <a href="https://www.statista.com/statistics/262860/uk-brent-crude-oil-price-changes-since-1976/" target="_blank">Statista</a></td></tr></tbody></table><div><br /></div><div><div>Crude oil prices and CAPEX by oil and gas companies are interrelated. When oil prices are high, companies are more likely to increase their CAPEX to take advantage of the favorable pricing environment and expand their operations. </div><div><br /></div><div>Conversely, in periods of low oil prices, CAPEX tends to be reduced to manage costs and conserve capital. These dynamics can contribute to the cyclical nature of the oil and gas industry and have a significant impact on the performance of the oilfield services companies.</div><div><br /></div><div>The Malaysia oilfield services and marine charter companies suffered from 2015 to 2020 when oil prices were low. We are now experiencing high oil prices. Will this last? </div><div><br /></div><div>The US <a href="https://capex.com/en/overview/oil-price-prediction" target="_blank">Administration</a> expects the average Brent crude prices to be:</div><div><ul><li>USD 61 per barrel in 2025.</li></ul><ul><li>USD 88 per barrel in 2035.</li></ul><ul><li>USD 91 per barrel in 2045.</li></ul></div><div><br /></div><div>Looking at the above forecast for the price of crude oil, it does not look much different from the past 12 years. The Group should not do any worse than what it achieved over the past 12 years.</div><div><br /></div><div>Secondly, we should look at the performance over the cycle when determining the margin of safety. </div><div><br /></div><div>In mitigation, I have earlier shown that the correlations between Dayang’s order book and revenue with crude oil prices were low. This probably meant that not all of Dayang’s business is tied to the oil and gas companies' CAPEX. Dayang probably had some maintenance and upkeep work. </div><div><br /></div><h3>Privatization</h3><div>In the case of DEHB, I would rate the privatization risk as low for the following reasons:</div><div><ul><li>It undertook a private placement and a rights issue of shares in 2019. The rights issue was offered at RM 0.92 per share which is lower than the current market price.</li></ul><ul><li>Apart from the Executive Directors, the other major shareholder is Naim Holdings Bhd (Naim) which holds about 24 % of DEHB. Naim is in the property and construction sector that has been facing a soft market for the past few years. I doubt Naim would want to spend its money on a privatization exercise.</li></ul><ul><li>Given DEHB's February 2020 price of RM 3.00, there would not be many minority shareholders who would be happy for DEHB to be privatized at the current market price</li></ul></div><div><br /></div><h3>Depletion of Malaysian oil reserves</h3><div>The main concern here is the depletion of Malaysian oil & gas reserves and the excess marine chart capacity. Refer to Appendix 1 for more in-depth discussions.</div><div><br /></div><div>The latter may cause charter rates to be low for some time. As for the former, historically the Group revenue came from Malaysia. The question then is whether the Group can expand to other countries. Alternatively, will it be able to seek a new business direction before the oil wells dry out?</div><div><br /></div><div>The positive side is that the Malaysian oil reserves can probably provide the Group with another decade-plus of work. This should give it time to seek alternative ventures.</div><div><br /></div></div><div><h2>Valuation</h2><div>In valuing the Group, I assumed that the size of the business is represented by the 2022 revenue. However because it is a cyclical company, I used the average 2011 to 2022 margins to represent its performance over the cycle.</div><div><br /></div><div>My value of Dayang is summarized in Chart 10.</div><div><ul><li>I estimated its Asset Value as RM 1.31 per share broken down into Graham Net Net, NTA, and Book Value.</li></ul><ul><li>I estimated its Earnings Value as RM 2.34 per share. This was broken down into non-operating assets, EPV, and Earnings value with growth.</li></ul></div><div><br /></div><div>At RM 1.92 per share, Dayang is trading above its Book Value and EPV of RM 1.23 per share.</div><div><br /></div><div>There is a 22 % margin of safety based on the Earnings value with growth. Whether this can be considered a reasonable margin of safety would depend on whether you agree with my assumptions. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2QoTEisnKlptCFSkB4QZMJOE5LZBfQA5ARhOo4_C4mlLf-wISJnnmqB_2qMeKA0h5eEY_8H6Eb2C9PfIsiRKhYXZuBP0n0tcT-tx1Iq2TKV0H7i-dTm28OLW5qm9yThLTZIppxCUxRVGzafbJl47jjfpbpxnyitRRrHKXlpDh5YZj5cW1faiIquHOvvc/s614/Chart%2010-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 10: Valuation" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2QoTEisnKlptCFSkB4QZMJOE5LZBfQA5ARhOo4_C4mlLf-wISJnnmqB_2qMeKA0h5eEY_8H6Eb2C9PfIsiRKhYXZuBP0n0tcT-tx1Iq2TKV0H7i-dTm28OLW5qm9yThLTZIppxCUxRVGzafbJl47jjfpbpxnyitRRrHKXlpDh5YZj5cW1faiIquHOvvc/s16000/Chart%2010-min.PNG" title="Dayang Chart 10: Valuation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 10: Valuation</td></tr></tbody></table><div><br /></div><div><h3>Valuation model</h3><div>My Earnings Value of the company was derived based on a single-stage Free Cash Flow to the Firm (FCFF) model as per Damodaran.</div><div><br /></div><div>Value of Firm = FCFF X (1 + g) / (WACC – g).</div><div><br /></div><div>g = growth rate = Return X Reinvestment rate. I assumed that this growth rate was 4 % based on the long-term GDP growth rate. </div><div><br /></div><div>WACC = weighted average cost of capital. The cost of capital used in the model was based on the Capital Asset Pricing Model. I followed Damodaran’s approach to determine the Beta and the risk premiums. These resulted in an 8.8 % cost of equity and an 8.0 % WACC.</div><div><br /></div><div>Value of Equity = Value of Firm + Cash – Total Debt – Minority interests.</div><div><br /></div><div>FCFF = EBIT(1-t) X (1 – Reinvestment Rate).</div><div><br /></div><div>t = tax rate. I assume a 24 % nominal tax rate.</div><div><br /></div><div>The Reinvestment rate was derived from the fundamental growth equation. This came to 12 % which was about the historical rate. </div><div><br /></div><div>I assumed that the 2022 revenue represented the current size of the business</div><div>.</div><div>To determine the EBIT, I used the average gross profit margins and SGA margins from 2011 to 2022. These covered at least 2 price cycles. I also factored in the average write-offs incurred over the past 12 years.</div><div><br /></div><div>The other assumptions used in my valuation are shown in Tables 5 and 6. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibhicKQyQQBaSPpS0Vm7JnRz6fjXhuzn1_S68cLTHIfLmPzDCw2ei3b9cKwjo9wIP0Hfc0koXBTden-QgWaQXSduBD4Vss6891KBU9u8sao2AGMLxTKd3jcCE6sBui0E_YT6CD5o_UOYkRJtHBrLd1UFtSyJ0EdGkhkCpNV5P2CMeqPQOIrCuCGanJ0rQ/s903/Table%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Table 5: Valuation assumptions" border="0" data-original-height="294" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibhicKQyQQBaSPpS0Vm7JnRz6fjXhuzn1_S68cLTHIfLmPzDCw2ei3b9cKwjo9wIP0Hfc0koXBTden-QgWaQXSduBD4Vss6891KBU9u8sao2AGMLxTKd3jcCE6sBui0E_YT6CD5o_UOYkRJtHBrLd1UFtSyJ0EdGkhkCpNV5P2CMeqPQOIrCuCGanJ0rQ/s16000/Table%205-min.png" title="Dayang Table 5: Valuation assumptions" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 5: Valuation assumptions</td></tr></tbody></table><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCIt00V9lyMgaKFFM5A1ht_GBL8ZzhPl85HPUMWYiA67ahZswQ4uYYEX1ll3U51srjDycIS455j4H8otvB19CazXNVXunlxUVi1zNiRRwR1T6iizkksLbwfXpb-o3Ld5o6wXszCdWw5OsABtoO6T8kcYIw_ngPjnfUiJ0c4TUTJhlpxps1OpUgMsgc7Vs/s903/Table%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Table 6: Deriving the EBIT" border="0" data-original-height="196" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCIt00V9lyMgaKFFM5A1ht_GBL8ZzhPl85HPUMWYiA67ahZswQ4uYYEX1ll3U51srjDycIS455j4H8otvB19CazXNVXunlxUVi1zNiRRwR1T6iizkksLbwfXpb-o3Ld5o6wXszCdWw5OsABtoO6T8kcYIw_ngPjnfUiJ0c4TUTJhlpxps1OpUgMsgc7Vs/s16000/Table%206-min.png" title="Dayang Table 6: Deriving the EBIT" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 6: Deriving the EBIT</td></tr></tbody></table><div style="text-align: justify;"><br /></div><div><div style="text-align: justify;">The first step was to derive the EBIT as shown in Table 6. I then used this EBIT to determine the FCFF and then the intrinsic value as shown in Table 7. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPudn6JWG91E59gticJL399qkNac3PcrA0JMYHBNbMcSxzTTDCS1I_dtx6BoCbHPXWGnoKj1cmWOmRZiWye-BmVzWnNFxSjJO1Tiid3AAi116l4X2GdD5H5ima1guOT8JLCt2-uYt0Cw5f8ZwXqKAS-AYjEkOaYLNxndikDQOMzlstftgjDhywtvvLZe8/s643/Table%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Table 7: Estimating the EPV and EV with growth" border="0" data-original-height="376" data-original-width="643" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPudn6JWG91E59gticJL399qkNac3PcrA0JMYHBNbMcSxzTTDCS1I_dtx6BoCbHPXWGnoKj1cmWOmRZiWye-BmVzWnNFxSjJO1Tiid3AAi116l4X2GdD5H5ima1guOT8JLCt2-uYt0Cw5f8ZwXqKAS-AYjEkOaYLNxndikDQOMzlstftgjDhywtvvLZe8/s16000/Table%207-min.png" title="Dayang Table 7: Estimating the EPV and EV with growth" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 7: Estimating the EPV and EV with growth</td></tr></tbody></table><div><br /></div><div><h3 style="text-align: left;">Valuation risks and limitations</h3><div style="text-align: justify;">You should consider the following when looking at my valuation.</div><div><ul style="text-align: left;"><li style="text-align: justify;">Cost of capital.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Cyclical sector.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The cost of capital was derived based on the risk-free rate and equity risk premium as of 2022. We currently have the Ukraine invasion and the Israel-Gaza conflict. The parameters do not reflect the higher-risk situation. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As such you should see the Earnings Value as an optimistic one. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Secondly, I assumed that Dayang is a cyclical stock. According to Damodaran</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">“Cyclical and commodity companies share a common feature, insofar as their value is often more dependent on the movement of a macro variable (the commodity price or the growth in the underlying economy) than it is on firm-specific characteristics…the biggest problem we face in valuing companies tied to either is that the earnings and cash flows reported in the most recent year are a function of where we are in the cycle, and extrapolating those numbers into the future can result in serious misvaluation.”</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To overcome the cyclical issue, we have to normalize the performance over the cycle. I have assumed that the 2011 to 2022 period is a good representation of the business performance over the cycle.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The key issue here is that during this period, PPB became a subsidiary of DEHB. I would argue that this was at great cost to DEHB. If you assumed that there would not be another such acquisition in the future, the earnings would be higher. In other words, the current valuation is conservative.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div>According to Laurentian Research on Seeking Alpha, </div><div><div><br /></div><div>“…we are experiencing a commodity supercycle, driven by new demand from the energy transition, supply chain rebuilding, and populist uprising…The commodity supercycle may last a decade or longer, as the revenge of the old economy goes on. Intelligent investors surely do not want to miss this generational opportunity.”</div><div><br /></div><div>Laurentian Research focuses on the natural resource space. Its investment ideas have to pass an AMMoS smell test, which stands for the Assets, the Management, and the Margin of Safety.</div><div><br /></div><div>For a commodity producer, the underlying assets are required to have:</div><div><ul><li>Low finding and development costs, and operating costs, relative to the realized product price - because the low cost means low risk and resilience in the commodity business.</li></ul><ul><li>A readily expandable production capacity to capture the maximum benefit in commodity upcycles.</li></ul></div><div><br /></div><div>As for management, Laurentian Research “…like to see a verifiable track record of successfully shepherding projects to fruition on schedule and under budget…have substantial skin in the game…”</div><div><br /></div><div>When it comes to margin of safety, Laurentian Research has this to say:</div><div><br /></div><div>“…I practice Greenwald's three-tiered valuation system, i.e., the asset value, earnings power value, and growth value. Asset value can be estimated with better accuracy and precision than earnings power value and growth value.”</div><div><br /></div><div>If you believe in the coming supercycle, Dayang would stand to benefit. You should then use the AMMoS smell test to see whether it is an investment opportunity for you.</div></div><div><br /></div><div>If you are a newbie and is not sure about how to undertake such analyses, you could rely on third parties for them.</div><div><br /></div><div>Several financial advisers provide such analyses. <span style="text-align: start;">Those who do this well include people </span><span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.</div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div style="text-align: justify;"><h2>Dayang is not one of the better Bursa stocks</h2><div>My analysis of Dayang showed that it is not one of the better Bursa stocks to invest in. There are some fundamental concerns and there is not enough margin of safety. </div><div><br /></div><div>My rationale can be summarized as follows.</div><div><br /></div><div>Although it started the past 12 years ago as mainly a top-side maintenance company, it today has a significant marine charter segment. But this marine charter business is not only relatively asset intensive but incurred losses on a cumulative basis over the past 12 years. </div><div><br /></div><div>The Group was not always profitable. The average ROE over the past 12 years was 7%. This low ROE is the result of the poor performance of the marine charter segment which used a larger proportion of the capital. </div><div><br /></div><div>The Group needs to turn around the marine segment which in turn depends on achieving higher vessel utilization at good charter rates. This could be challenging in the immediate future given the excess vessel capacity in the market.</div><div><br /></div><div>I would also rate Dayang as average from a shareholders’ value creation perspective. But the Group is financially sound.</div><div><br /></div><div>It is a cyclical business and I value it as such. My valuation showed that there is only a 22 % margin of safety based on the Earnings Value with growth. </div><div><br /></div></div></div><div><h2 style="text-align: left;">Appendix 1. Malaysia's Oil and gas sector</h2><div style="text-align: justify;">The oil & gas industry can be broken down into three segments:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Upstream, or exploration and production (E&P) companies. These find reservoirs and drill oil and gas wells.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Midstream companies that are responsible for transportation from the wells to refineries.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Downstream companies. These are responsible for refining and the sale of the finished products.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The oilfield services companies support the E&P companies and depend on the capital and operating expenditure of the E&P companies. This is in turn governed by the current and future price of oil and natural gas.</div><div style="text-align: justify;"><br /></div><h3 style="text-align: justify;">Malaysia's oilfield services sector</h3><div style="text-align: justify;">In Malaysia, all the upstream activities are offshore. Hence Malaysian oilfield services are geared towards offshore exploration and production.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The marine charter or offshore supply vessel (OSV) industry grew to support offshore oilfield services. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Furthermore, Petronas played a strong role in developing the Malaysian oilfield services industry.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Under the Petroleum Development Act, Petronas has exclusive rights to all the oil & gas rights in the country. Petronas has used its licensing and other regulatory powers to develop the local industry.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The Group has benefited from this. It is not surprising that its business has been focused on Malaysia. I would expect that in the immediate to mid-term, this focus will continue. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To a very large extent, the immediate to mid-term future of DEHB depends on Petronas' upstream program.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">According to Petronas Activity Outlook 2020 to 2022:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">“Malaysia has more than 12 billion barrels of oil equivalent (bboe) of undeveloped resources awaiting to be monetized. This presents great opportunities for new entrants and existing players to invest in marginal fields or Discovered Resource Opportunities (DRO) and extend the value of Late Life Assets (LLA) until abandonment”</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">According to Petronas, Malaysia produced an average daily production of over 1.7 million barrels of oil equivalent in 2018. At this production rate, the 12 bboe of undeveloped resources will last for about 19 years. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This simplistic analysis shows that even with a focus on Malaysia, there will still be business opportunities for the next decade or so. This should provide Dayang with enough time to plan its business direction for when the oil dries up.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In its 2023 to 2025 Activity Outlook:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Petronas talked about the transition to clean energy. This would add further pressure on the Group to look at new business directions.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Petronas projected a steady outlook for Malaysian offshore activities, including an increase in drilling and development project activities. This augurs well for domestic OSV operator.</li></ul><div style="text-align: justify;"><br /></div></div><div style="text-align: justify;">But the Group is one of the big boys in the hook-up and commissioning segment. So DEHB topside maintenance segment will do well both in the immediate term to mid-term.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The are several challenges for the marine charter business. There is currently overcapacity and ageing vessels among Malaysian players in this segment. </div><div><ul style="text-align: left;"><li style="text-align: justify;">The Malaysian OSV Owners’ Association (MOSVA) reported that the industry had a capacity of 300 vessels in 2019. From 2016 to 2019, only 170 vessels have been occupied from 300 previously. </li></ul><ul style="text-align: left;"><li style="text-align: justify;">In the first half of 2020, MOSVA prepared a proposal for Petronas to set up a special-purpose vehicle to take over the assets of ailing oil and gas (O&G) companies. But there is no further news on this.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">There is news report that in 2023, while about 230 vessels were operating, most are ageing, with the majority more than 10 years old. Source: <a href="https://www.rivieramm.com/videos/videos/reasons-for-newbuildings-in-the-growing-malaysian-market-78035" target="_blank">Riveria</a></li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">There is another view of the dire condition. In 2020 several Bursa-listed OSV companies have undertaken corporate restructuring or even delisting. </div><div><ul style="text-align: left;"><li style="text-align: justify;">Alam Maritim</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Bumi Armada</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Icon Offshore</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Marine and General</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Perisai Petroleum</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Scomi Group</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Of these, as of today, Perisai Petroleum has been delisted. Next, when you look at the revenue and ROE for the others, you can see that there were no significant changes compared to those in 2016.</div></div><div style="text-align: justify;"><br /></div><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyePGwse9Z_kOw3vnX5GxWr4i8H8Q1K9T_xrPOGgTyW4_O7LuyDmkHy5DGfrTHzJk59-bEPjUG63gQMD7a7y5RUwnevz0m38WmnmP9wklxJkDVOVsSg00xDSiKSdLuKwlCoIMCCwiCv0DxaAD_zwyidHzTNt30xYJB6ZDxNgUC4-6n1fNmrE7y-qIoWRc/s520/Chart%2011-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Dayang Chart 11: Bursa OSV Companies performance" border="0" data-original-height="413" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyePGwse9Z_kOw3vnX5GxWr4i8H8Q1K9T_xrPOGgTyW4_O7LuyDmkHy5DGfrTHzJk59-bEPjUG63gQMD7a7y5RUwnevz0m38WmnmP9wklxJkDVOVsSg00xDSiKSdLuKwlCoIMCCwiCv0DxaAD_zwyidHzTNt30xYJB6ZDxNgUC4-6n1fNmrE7y-qIoWRc/s16000/Chart%2011-min.png" title="Dayang Chart 11: Bursa OSV Companies performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 11: Bursa OSV Companies performance</td></tr></tbody></table><div style="text-align: justify;"><br /></div></div><div><h3 style="text-align: justify;">Going beyond Malaysia</h3><div style="text-align: justify;">Several Bursa-listed oil & gas companies in the Energy Infrastructure, Equipment, and Services sector have ventured out of Malaysia.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In some cases, the entry has been based on some Petronas international program.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The Group claimed to have started on this international journey. In November 2018, the Group together with Gujurly Inzener, its Turkmenistan partner, won a USD 100 million contract. This was for providing facilities maintenance support for Petronas Carigali (Turkmenistan) Sdn Bhd. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">However, in its 2019 to 2022 Annual Reports, Dayang reported that all of its revenue for these periods was from Malaysia. I have not dug deeper to find out what happened. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The conclusion is that Malaysia remains the Group's source of revenue. </div></div><div style="text-align: justify;"><br /></div><div><br /></div><div><br /></div><div><div><br /></div><div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div></div><div><br style="text-align: justify;" /></div></div></div><div><br /></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-20807707342603109662023-11-19T09:01:00.003+08:002023-11-26T11:43:35.785+08:00Petron Malaysia is still not a value trap<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); color: #171717; font-size: 15px; font-weight: bold; letter-spacing: 0.04em; padding-bottom: 10px; padding-top: 10px; text-align: justify; text-decoration: none;">Value Investing Case Study 05-4: I first covered Petron Malaysia in Oct 2020. This is an updated fundamental analysis taking into account the financials till FYE 2022. Where relevant, I have incorporated the analyses from the previous articles here.</div>
<div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiypFAgX84tf5kud3jBwnYov900Kq8S97Ov9PEkzAc0HewZcX0CP15cnp19phgArceTGuLTuIVbnX0Y1sldBRaPZMNTedC5EM5W5tdkon3TvzN90sc3nAaDCoz8GEGTZ4SQ0ftVVdHu4SBYbNW8vVyomSB77hUrG_Vk7-m0DkBHkttYv0IOpx98wiC-BY/s463/Picture1-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Petron Malaysia is still not a value trap" border="0" data-original-height="463" data-original-width="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiypFAgX84tf5kud3jBwnYov900Kq8S97Ov9PEkzAc0HewZcX0CP15cnp19phgArceTGuLTuIVbnX0Y1sldBRaPZMNTedC5EM5W5tdkon3TvzN90sc3nAaDCoz8GEGTZ4SQ0ftVVdHu4SBYbNW8vVyomSB77hUrG_Vk7-m0DkBHkttYv0IOpx98wiC-BY/s16000/Picture1-min.png" title="Petron Malaysia is still not a value trap" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">On 1st Oct 2020, Petron Malaysia Refining and Marketing Berhad (Petron Malaysia or the Group) was trading at RM 3.26. At that juncture, I estimated its NTA to be RM 5.93 (as of 30 June 2020). I had presented my rationale for why Petron Malaysia was not a value trap then.</div><div style="text-align: justify;"><div><br /></div><div>Petron Malaysia is today trading at RM 4.52 per share (30 Oct 2023) compared to its NTA of RM 8.51 per share (as of 30 Jun 2023). The market price had gone up by 9 % while its NTA had gone up by 44 %.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/YrMdgjFHHaU" width="320" youtube-src-id="YrMdgjFHHaU"></iframe></div><br /><div>The Group incurred losses in 2020 due to the measures taken to control Covid-19. With that behind us, the Group managed to turn around in 2021 with improved profitability in 2022.</div><div><br /></div><div>You should not be surprised that I do not consider Petron Malaysia a value trap. It is still one of the better Bursa Malaysia stocks to invest in. </div><div><br /></div><div>At the current price, there is still an investment opportunity. Should you go and buy it? Well, read my Disclaimer.</div><div><br /></div><h2>Contents</h2><div><ul><li><b>Investment thesis</b></li></ul><ul><li><b>Rationale</b></li></ul><ul><li><b>Business background</b></li></ul><ul><li><b>Operating trend</b></li></ul><ul><li><b>Financial position</b></li></ul><ul><li><b>Risks</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Petron Malaysia is not a value trap</b></li></ul><ul><li><b>Appendix 1. Expansion efforts</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: left;" /></div></div><div><h2>Investment Thesis</h2><div>As of 30 Oct 2023, Petron Malaysia was trading at about half of its Asset Value and EPV. With the Asset Value about the same as the EPV, I have great confidence in the margin of safety.</div><div><br /></div><div>The Group suffered due to the measures taken to control Covid-19. With this behind us, it should deliver better profitability. However, this was impacted by high crude oil prices. </div><div><br /></div><div>Historically Petron Malaysia did better when crude oil prices were around USD 60 per barrel. Oil prices are cyclical and I have accounted for the cyclical prices by using the past 12 years' performance in my valuation.</div><div><br /></div><div>The Group is financially sound and while there is the threat of the disruption of the petrol station business model, it is not imminent. </div></div><div><br /></div><div><h2>Rationale</h2><div><ul><li>Petron Malaysia is financially sound with a 30 % debt-equity ratio and 10% of its total assets as cash and marketing securities.</li></ul><ul><li>Over the past 11 years, it has managed to achieve an average ROE of 10%. But this was volatile ranging from – 7% to + 27%.</li></ul><ul><li>The Group has a good capital allocation track record. It also has a good track record for creating shareholders' value from a business perspective.</li></ul><ul><li>There is enough margin of safety based on the Asset Value and EPV. </li></ul><ul><li>Historically the Group did not do well when oil prices were high. It performed better when oil prices were around USD 60 per barrel. In my valuation of Petron Malaysia, I have taken the average performance over the past 12 years. These covered a period when crude oil prices ranged from under USD 60 per barrel to over USD 100 per barrel. </li></ul></div><div><br /></div><div>The supporting details are presented in the following sections.</div><div><br /></div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div><h2>Business background</h2><div>Petron Malaysia is part of Petron Corporation (Petron Corp) of the Philippines. Petron Corp is the largest integrated oil refining and marketing company in the Philippines. </div><div><br /></div><div>In March 2012 Petron Corp acquired ExxonMobil’s downstream businesses in Malaysia. Petron Corp’s subsidiaries in Malaysia today comprise:</div><div><ul><li>Petron Malaysia which is listed on Bursa Malaysia.</li></ul><ul><li>Petron Fuel International Sdn. Bhd. offers retail and commercial fuels and serves customers worldwide. This is a sister company of Petron Malaysia.</li></ul><ul><li>Petron Oil (M) Sdn. Bhd. The Company's business includes the wholesale distribution of petroleum and petroleum products. This is another sister company of Petron Malaysia.</li></ul><ul><li>Petron Oil & Gas International Sdn. Bhd. This is the immediate holding company of Petron Malaysia.</li></ul></div><div><br /></div><div>Petron Malaysia traces its rich heritage to 1893 when it was first established as the Standard Vacuum Oil Company. </div><div><ul><li>It opened its first service station in Malaysia in 1921.</li></ul><ul><li>Construction of the Port Dickson refinery was started in 1961 and commenced operations in 1963.</li></ul></div><div><br /></div><div>Along the way, Petron Malaysia experienced many significant changes. These included mergers and acquisitions, shaping it into part of ExxonMobil and finally part of Petron Corp.</div><div><br /></div><div>Today Petron Malaysia and its sisters’ facilities include:</div><div><ul><li>The Petron Port Dickson Refinery which has a rated capacity of 88,000 barrels per day. It produces a wide range of petroleum products eg gasoline, diesel, liquefied petroleum gas (LPG), and aviation fuel. </li></ul><ul><li>12 strategically located depots and affiliated terminals.</li></ul><ul><li>750 service stations throughout Malaysia. Note that the majority of these are directly owned by Petron Malaysia.</li></ul><ul><li>Petron Malaysia also owns the Lumut crude oil refining plant. This is a 90,000 tons per year Palm Oil Methyl Ester (POME) plant.</li></ul></div><div><br /></div><div>About 90% of its 2022 revenue was generated from domestic sales with the balance exported. Refer to Chart 1. You can see that over the past 11 years, the revenue was the lowest in 2020. But the 2022 revenue was an 11-year record.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXVxjQGxcm_jBniQc0-zx3EI9IZC_kV2Sqpl2GVPIVRzhlA9AcKpZnpKPghvzroeYQHj2G0wnP9o7yTU7Vfio6DYt8GUdgRj6_j3Jm3R3etB-1QO3D78tYM2RRo6XCb8ftwBzJtkbr19Akhm-8zDEnKToEbNIxpt5msUoP_sOLjYRUvtH3qP9B9dchXps/s614/Chart%201-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Chart 1: Revenue trends" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXVxjQGxcm_jBniQc0-zx3EI9IZC_kV2Sqpl2GVPIVRzhlA9AcKpZnpKPghvzroeYQHj2G0wnP9o7yTU7Vfio6DYt8GUdgRj6_j3Jm3R3etB-1QO3D78tYM2RRo6XCb8ftwBzJtkbr19Akhm-8zDEnKToEbNIxpt5msUoP_sOLjYRUvtH3qP9B9dchXps/s16000/Chart%201-min.PNG" title="Petron Malaysia Chart 1: Revenue trends" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Revenue trends</td></tr></tbody></table><div><br /></div><div><div>In Malaysia, its main market segments are:</div><div><ul><li>Transportation - served by the service stations network.</li></ul><ul><li>Households with its LPG.</li></ul><ul><li>Commercial with its industrial fuel products.</li></ul></div></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div>Before 2012, Petron Malaysia (then known as Esso Malaysian Berhad) was part of the ExxonMobil Group.</div><div><div><br /></div><div>In 2012, the San Miguel Corporation of the Philippines acquired all of ExxonMobil Group’s interests in Esso Malaysia Berhad.</div><div><ul><li>San Miguel nominated its subsidiary Petron Corp to be the registered owner of the shares in Esso Malaysia Berhad. </li></ul><ul><li>Esso Malaysia Berhad was renamed Petron Malaysia Refining and Marketing Berhad. </li></ul></div><div><br /></div><div>Because of the changes, I have analyzed the historical performance of Petron Malaysia from 2012 onwards.</div><div><br /></div><div>Some of Petron Malaysia’s products are marketed through its sister companies in Malaysia. The Management Discussion and Analysis in the Annual Reports do not always make the distinction between what is sold by the listed entity and what those by the sister companies. </div><div><br /></div><div>However, the financial statements of Petron Malaysia reflect the financials of the listed entity.</div><div><br /></div><div>Where appropriate, in the descriptive part of my case study, I have pointed out those contributed by the sister companies. </div><div><br /></div><div>This case study illustrates the importance of being clear about which entity you are analyzing and valuing. Do not lose sight of this when you undertake your research. </div><div><br /></div><div>This is especially critical when you analyze a company that is part of a bigger group. Sometimes in such cases, companies do not provide a clear distinction between whether the item discussed covered the whole group or only the particular part of the company.</div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>Operating trends</h2><div>I looked at 3 metrics to get an overview of the overall performance – revenue, PAT, and gross profitability (gross profits / total assets). Refer to Chart 2.</div><div><ul><li>Revenue over the past 11 years showed a cyclical pattern. Revenue grew at 4.8 % CAGR. As will be shown later a large part of this was price driven. To deliver revenue growth, the Group undertook considerable marketing and expansion efforts. Refer to Appendix 1 for some examples.</li></ul><ul><li>PAT was relatively volatile with the Group incurring losses in 2013, 2014, and 2020. </li></ul><ul><li>PAT peaked in 2017 but declined in 2018. According to the Group, this was “…mainly due to the significant inventory losses caused by the sudden drop in oil prices in the fourth quarter.” </li></ul><div><br /></div></div><div>The concern was that while gross profitability improved from 2015 to 2017, it had been declining since then. The 2022 gross profitability was lower than that in 2012.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6fZV7dx1JcDDau6cyE2XrarzcR9ed_7aB7ikSrDRA_84egdLYtpVVlQZklGZdfnND4iknBrb2wvZltubo2cWJOah8kksyaCCR4lJnyPJmmbUfel5fYMMn6FqNxm8CdNceM4HDWzxtXCH_mne4MujVEQcbKPGOp7vygmvs_WZeb7Lx9b3hL_Tv_8zwfjo/s614/Chart%202-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Chart 2: Performance Index" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6fZV7dx1JcDDau6cyE2XrarzcR9ed_7aB7ikSrDRA_84egdLYtpVVlQZklGZdfnND4iknBrb2wvZltubo2cWJOah8kksyaCCR4lJnyPJmmbUfel5fYMMn6FqNxm8CdNceM4HDWzxtXCH_mne4MujVEQcbKPGOp7vygmvs_WZeb7Lx9b3hL_Tv_8zwfjo/s16000/Chart%202-min.PNG" title="Petron Malaysia Chart 2: Performance Index" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Performance Index</td></tr></tbody></table><div><br /></div><div><div>The volatile PAT resulted in a volatile ROE. Over the past 11 years, the ROE ranged from – 7 % to + 27 % with an average of 10 %.</div><div><br /></div><div>Table 1 gives you a sense of the volatility over the past 11 years. Both the ROE and Op Margin had very high volatility, as measured by the standard deviation compared to the mean. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhm8ydpTwq4h22-R6UGLORBSQ4b_lL86FIJH32ZGTyVVVF0NRTCHu5BvvrO8940u7261a6wGkQR8X0tLzyDphRvylHFd27NG_AiMWrk3YexelpOtrMLok4ZOkN5KkJ40W9ExIun_CdWxegorTAeCPqASspbTAfyH1hmAfcMxGLJt8jdkfTzkrRf0ESfBNI/s266/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Table 1: Standard Deviation/Mean" border="0" data-original-height="126" data-original-width="266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhm8ydpTwq4h22-R6UGLORBSQ4b_lL86FIJH32ZGTyVVVF0NRTCHu5BvvrO8940u7261a6wGkQR8X0tLzyDphRvylHFd27NG_AiMWrk3YexelpOtrMLok4ZOkN5KkJ40W9ExIun_CdWxegorTAeCPqASspbTAfyH1hmAfcMxGLJt8jdkfTzkrRf0ESfBNI/s16000/Table%201-min.png" title="Petron Malaysia Table 1: Standard Deviation/Mean" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Standard Deviation/Mean</td></tr></tbody></table><div><br /></div><div><div>A DuPont analysis as per Chart 3 showed that the bulk of the ROE volatility can be linked to the volatile Op Margin. There was a 96 % correlation between the ROE and the Op Margin. </div><div><br /></div><div>Asset turnover also showed a declining trend. Together with the declining gross profitability, they showed that there were no improvements in the operating efficiencies.</div><div><br /></div><div>But leverage had improved as shown by the declining trend line.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_fJKjgN-lV-HRrFXGDLq4VUFH_P2sNYdEPsSF2y_rfkYpDnZIRyhDuvydbh_CqoPxd0zK_reT7VLgVfP86vrUA-67tHeOUIfaOiecWPXaBH0eLDN2RdEmwALgS7vKrbzV7-Bf5A6_W26A5t8q8t8CGu_U9NGsSRGatYs3Smpt83AL0wm0_27-hQZReYY/s614/Chart%203-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Chart 3: DuPont Analysis" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_fJKjgN-lV-HRrFXGDLq4VUFH_P2sNYdEPsSF2y_rfkYpDnZIRyhDuvydbh_CqoPxd0zK_reT7VLgVfP86vrUA-67tHeOUIfaOiecWPXaBH0eLDN2RdEmwALgS7vKrbzV7-Bf5A6_W26A5t8q8t8CGu_U9NGsSRGatYs3Smpt83AL0wm0_27-hQZReYY/s16000/Chart%203-min.PNG" title="Petron Malaysia Chart 3: DuPont Analysis" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: DuPont Analysis</td></tr></tbody></table><div><br /></div><div><div>We have been experiencing volatile oil prices over the past few years. To wash out the effect of the oil prices, I compared the Group sales (RM revenue and number of barrels sold) with the crude oil prices. Refer to Chart 4. </div><div><br /></div><div>While RM revenue grew at 4.8 % CAGR from 2012 to 2022, the number of barrels sold only grew at 1.5 % CAGR. You can attribute the RM revenue growth to changes in oil prices.</div><div><br /></div><div>You can see the impact of the oil prices. </div><div><ul><li>From 2012 to 2015, oil prices declined. While there was an increase in the number of barrels sold, it was not sufficient to offset the impact of lower oil prices.</li></ul><ul><li>From 2020 to 2022, both crude oil prices and the number of barrels sold grew boosting revenue.</li></ul></div><div><br /></div><div>Looking at the number of barrels, I would not consider Petron Malaysia as a high-growth company. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjlMDOxa3Mr21XvYT5N_2Q39ZAfNSvW-Zz0wKl-02vC594u5aTwHYS_8T7NeDKzIsIrLEhNfQpxG6LsWH207RMGIh8e_86OsX5RrIyxx5jplHyyBdjL3f07_LUGiJOvAZb7xSL0F8aWvCfPRREV0WE_wniwHsOLAAAJT8gLCxh0NmqxUCLYfFmWw-ilVI/s614/Chart%204-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Chart 4: Revenue (RM sale and barrels sold) vs Oil Price" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjlMDOxa3Mr21XvYT5N_2Q39ZAfNSvW-Zz0wKl-02vC594u5aTwHYS_8T7NeDKzIsIrLEhNfQpxG6LsWH207RMGIh8e_86OsX5RrIyxx5jplHyyBdjL3f07_LUGiJOvAZb7xSL0F8aWvCfPRREV0WE_wniwHsOLAAAJT8gLCxh0NmqxUCLYfFmWw-ilVI/s16000/Chart%204-min.PNG" title="Petron Malaysia Chart 4: Revenue (RM sale and barrels sold) vs Oil Prices" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Revenue (RM sale and barrels sold) vs Oil Price<br /><div style="text-align: left;"><i>Note: The crude oil prices for each year were based on the Brent crude prices from Macrotrends at the start, middle, and end of each year. </i></div></td></tr></tbody></table><div><br /></div><div><h3>IH 2023</h3><div>The revenue and PAT for the first six months of 2023 were 16% and 49 % lower respectively than those for the same period last year. </div><div><br /></div><div>You can trace the lower profits to the lower gross profit margin. The gross profit margin for the first 6 months of 2023 was 3.7 % compared to 7.0 % last year. This was attributed to lower oil prices and regional refining cracks.</div><div><br /></div><div>But sales volume in terms of the number of barrels sold in the first half of 2023 grew by 9% compared to the first half of 2022.</div><div><br /></div><div>I am a long-term value investor and I consider quarterly performance as “noisy”. As such I focus on long-term trends. </div><div><br /></div><h3>Competitive profile</h3><div>Currently, there are two other Bursa listed company involved in the marketing, sales, and distribution of petroleum products:</div><div><ul><li>Petronas Dagangan Berhad which operates in the same market segments as Petron Malaysia.</li></ul><ul><li>Boustead Holdings Berhad which operates the BHP petroleum retail network. However, Boustead is reported to be seeking buyers for its BHP petroleum retail business.</li></ul></div><div><br /></div><div>Boustead Holdings does not provide a separate report for its BHP operations. Rather it is reported as part of the trading segment operations which included building materials.</div><div><br /></div><div>As such I only compared Petron Malaysia's performance with that of Petronas Dagangan. Refer to Chart 5.</div><div><br /></div><div>Petronas Dagangan is a much bigger company than Petron Malaysia. In 2022 Petronas Dagangan's revenue was double that of Petron Malaysia. But Petron Malaysia's revenue grew at 4.8 % CAGR over the past 11 years compared to the 2.2 % CAGR for Petronas Dagangan. Both showed similar cyclical patterns.</div><div><br /></div><div>Over the past 11 years, Petron Malaysia's ROE averaged 10% compared to the 14 % ROE for Petronas Malaysia. But Petron Malaysia's ROE was more volatile. And there were 3 years when it outperformed Petronas Dagangan.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihV1K7rv__-s6uroA-XS2ORuIvnZR25icTOjIjbd0D19FwreFANrDoBdBAbTCbWVKV5BPy4PCe8irRtsW5lyfsqvOhNe80b9qP3bBwyWzV9KFMnFbpF01mtBWqzNyoEFGQumjBtYquL9lw6yATZ3X9pOM99zIlF0QN_gIOPVQyETctz_BgYdf4OCElLiE/s903/Chart%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Chart 5: Peer comparison" border="0" data-original-height="266" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihV1K7rv__-s6uroA-XS2ORuIvnZR25icTOjIjbd0D19FwreFANrDoBdBAbTCbWVKV5BPy4PCe8irRtsW5lyfsqvOhNe80b9qP3bBwyWzV9KFMnFbpF01mtBWqzNyoEFGQumjBtYquL9lw6yATZ3X9pOM99zIlF0QN_gIOPVQyETctz_BgYdf4OCElLiE/s16000/Chart%205-min.png" title="Petron Malaysia Chart 5: Peer comparison" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Peer comparison</td></tr></tbody></table><div><br /></div><div><div>Over the past 11 years, Petron Malaysia has grown its sales of physical products by 1.5 % CAGR. At this pace of growth, it is unlikely that it took some market share from its competitors because:</div><div><ul><li>The consumption of oil in Malaysia grew from about 758,000 barrels per day in 2012 to 894,000 barrels per day in 2022, equivalent to a CAGR of 1.7%. </li></ul><ul><li>Petron Malaysia's market share in terms of barrels per day decreased from 10.6 % in 2012 to 10.4 % in 2022. </li></ul></div><div><br /></div><div>I would say that Petron Malaysia has been able to compete with Petronas Dagangan.</div><div><br /></div><h2>Financial position</h2><div>I would rate Petron Malaysia as financially sound based on the following:</div><div><ul><li>As of the end of Jun 2023, it had RM 427 million cash and short-term securities. This was equivalent to 9 % of its total assets.</li></ul><ul><li>It had a debt-equity ratio of 30 % as of Jun 2023. This is much lower than its peak debt-equity ratio of 130 % in 2014.</li></ul><ul><li>Over the past 11 years, there were 3 years where it had negative cash flow from operations. </li></ul><ul><li>Over the past 11 years, it generated RM 2.2 billion cash from the cash flow from operations compared to RM 1.8 billion of PAT. This is a very good cash conversion ratio.</li></ul></div><div><br /></div><div>The Group also had a good capital allocation plan as shown in Table 2. You can see that its cash flow from operations was well deployed for CAPEX and dividends.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIFijHpRqZZ89k673n1dUk8SUV1YfrPcL6BQLvhmEQ0H_kbtEfIhu4udj-ueDsgEqqQuo6u7S1pnefO6GKE0n3BwZGiXIniLMY_lUB1IlwPgwxJSputkE44KBX5Urofnjcz_hh0LAlBClNLnms7357L4y4a3qNtyKwCndH8MacDLTL2DfYNqSllcSIBrA/s505/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Table 2: 2012 to 2022 Sources and Uses of Funds" border="0" data-original-height="251" data-original-width="505" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIFijHpRqZZ89k673n1dUk8SUV1YfrPcL6BQLvhmEQ0H_kbtEfIhu4udj-ueDsgEqqQuo6u7S1pnefO6GKE0n3BwZGiXIniLMY_lUB1IlwPgwxJSputkE44KBX5Urofnjcz_hh0LAlBClNLnms7357L4y4a3qNtyKwCndH8MacDLTL2DfYNqSllcSIBrA/s16000/Table%202-min.png" title="Petron Malaysia Table 2: 2012 to 2022 Sources and Uses of Funds" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Sources and Uses of Funds - 2012 to 2022 </td></tr></tbody></table><div><br /></div></div><div><h3>Shareholders’ value creation</h3><div>I looked at the following metrics when assessing shareholders’ value creation:</div><div><ul><li>Comparing returns with the cost of funds.</li></ul><ul><li>Comparing the gains by an investor who bought a share at the end of 2011 with the cost of equity.</li></ul><ul><li>Looking at the Q Rating which is based on several valuation metrics. A high score relative to the panel meant that the company had the potential to create shareholders’ value.</li></ul></div><div><br /></div><div>As can be seen from Table 3, Petron Malaysia returns were higher than the respective cost of funds for the first 2 metrics. It only did badly when it came to market prices. From a business perspective, the Group was able to create any shareholders’ value. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3L48jq5KRgAJ-nt7pHnWZkJAm5QpBT9ZVTkmxD9aKSPb0lRvewcg23PEMH9ypqjvxySO42-IMagrwJ7d497ce8quCUVnIg6O9ullUegzYG-Z1RmARgVtWzuGJOYPTPmfGeGWsKQ_N34fVa0XW9AnQyh0wIZA94fv85hFYh8Sfd6nCkn4S_3tzoSqEvD4/s631/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Table 3 Shareholders’ value creations" border="0" data-original-height="101" data-original-width="631" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3L48jq5KRgAJ-nt7pHnWZkJAm5QpBT9ZVTkmxD9aKSPb0lRvewcg23PEMH9ypqjvxySO42-IMagrwJ7d497ce8quCUVnIg6O9ullUegzYG-Z1RmARgVtWzuGJOYPTPmfGeGWsKQ_N34fVa0XW9AnQyh0wIZA94fv85hFYh8Sfd6nCkn4S_3tzoSqEvD4/s16000/Table%203-min.png" title="Petron Malaysia Table 3 Shareholders’ value creations" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3 Shareholders’ value creations<br /><div style="text-align: left;"><div><i>Notes</i></div><div><i>(a) Based on time-weighted average EBIT/TCE from 2012 to 2022 assuming a 24 % tax rate compared with WACC.</i></div><div><i>(b) This looked at how the SHF at the end of 2012 would have grown by the end of 2022 assuming that no dividend was paid. I compared it with the cost of equity.</i></div><div><i>(c) Computed assuming that an investor bought 1 share at the end of 2011 and held onto it till the end of 2022. His gain is shown in the Table 4.</i></div></div></td></tr></tbody></table><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1JRIjp0AFxkDqCvaksuOUc0rB6Nw8FuMCHIPVkpXVLcrS6USHxcUuwODj2P9-6G4xqx9EddR3X4P3iLA339CYaU9q7dfq1stN2Te7fG4eumZYQx1V6agmUi1OjJ8iFowLWXDEXZT-u5Q6qdP6bjFNDdbt4oxPYi4NFpbKUQuVkqWEb9YF93Ox51iDF1Q/s379/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Table 4. Estimating the shareholders’ gain" border="0" data-original-height="176" data-original-width="379" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1JRIjp0AFxkDqCvaksuOUc0rB6Nw8FuMCHIPVkpXVLcrS6USHxcUuwODj2P9-6G4xqx9EddR3X4P3iLA339CYaU9q7dfq1stN2Te7fG4eumZYQx1V6agmUi1OjJ8iFowLWXDEXZT-u5Q6qdP6bjFNDdbt4oxPYi4NFpbKUQuVkqWEb9YF93Ox51iDF1Q/s16000/Table%204-min.png" title="Petron Malaysia Table 4. Estimating the shareholders’ gain" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4. Estimating the shareholders’ gain</td></tr></tbody></table><div><br /></div><div><div>At the same time, Petron Malaysia had an overall Q Rating of 0.41. This places it just below the average position among the panel companies. You can see that it did well in the growth and financial ratings. </div><div><br /></div><div>On the negative side, the Q Rating had declined from 0.50 in 2020.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcfQ2HfOFLYkK6e-eXHxJ6iWIrOF5C6llM7gkERw3cWSCGCAiGhPZyf_S-9Lw9MocbDvUk-PcceWvSM1xxlmk4csMamKTeQKnLryckePZKBbS9x14TDqwrIpTk_EITxSQkQmmMhPZnTPb3Uorle1Xx-mElnLb2ssjYpf3brq1aL3TJPafF7slh-oZYITk/s614/Chart%206-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Chart 6: Q Rating" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcfQ2HfOFLYkK6e-eXHxJ6iWIrOF5C6llM7gkERw3cWSCGCAiGhPZyf_S-9Lw9MocbDvUk-PcceWvSM1xxlmk4csMamKTeQKnLryckePZKBbS9x14TDqwrIpTk_EITxSQkQmmMhPZnTPb3Uorle1Xx-mElnLb2ssjYpf3brq1aL3TJPafF7slh-oZYITk/s16000/Chart%206-min.PNG" title="Petron Malaysia Chart 6: Q Rating" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Q Rating</td></tr></tbody></table><div><br /></div><div><h2>Risks</h2><div>I look at risks through the following lenses:</div><div><ul><li>Crude oil prices.</li></ul><ul><li>Privatization.</li></ul><ul><li>Disruption of the fuel retail industry.</li></ul><ul><li>Automatic Price Mechanism.</li></ul></div><div><br /></div><h3>Link to crude oil prices</h3><div>Oil prices have been cyclical as can be seen from Chart 7. While prices in 2023 have been high, it was not the historical high which occurred in 2012/14.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMtoyQUO2L56ZWAkXsxmEiNR-8kcLEqIAEVMtwG8ta3f8JruRwEDqnBZCkHxgFxkdKVMTMZlgsM_AT_aOXrRqbwc73QB8xPF3NX8aB0jX791VvUCLzUbvUkPY6STCqCHhKzGxPjJ8C7l6G1dICOhqzL5pDYzQiP_kqf4e8Gm5l7TuvbAKh3JweHOb8wow/s803/Chart%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Chart 7: Brent Crude Oil Price." border="0" data-original-height="493" data-original-width="803" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMtoyQUO2L56ZWAkXsxmEiNR-8kcLEqIAEVMtwG8ta3f8JruRwEDqnBZCkHxgFxkdKVMTMZlgsM_AT_aOXrRqbwc73QB8xPF3NX8aB0jX791VvUCLzUbvUkPY6STCqCHhKzGxPjJ8C7l6G1dICOhqzL5pDYzQiP_kqf4e8Gm5l7TuvbAKh3JweHOb8wow/s16000/Chart%207-min.png" title="Petron Malaysia Chart 7: Brent Crude Oil Price." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Brent Crude Oil Price. Source: <a href="https://www.statista.com/statistics/262860/uk-brent-crude-oil-price-changes-since-1976/" target="_blank">Statista</a></td></tr></tbody></table><div><br /></div><div><div>As an oil & gas company, you may think that the performance of the Group would be linked to the global oil prices. However, the link is not so clear partly because Petron Malaysia is also a refinery where the margins are generally squeezed as crude oil prices increase. </div><div><br /></div><div>The other reason why the linkage between profits and crude oil prices is not so clear is that petrol prices in Malaysia are regulated.</div><div><br /></div><div>The chart below illustrates how Petron Malaysia experienced low gross profit margins when crude oil prices were in the USD 100 per barrel price range. Its gross profit margins improved when crude oil prices were in the USD 60 range.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuvcRRGYuj4Wp_jCJCc2SnLGyNQmajyJU-w0WBG4bOwEvoeZoVzGTcearXT3fssPQshykEzOM8J4bNW0x2fyzCd3lMLyjbc-VJYqn9RrYavHLCysD_DHJG8B8A8fI4weOECE4A2Xd7KK4-sKtF72HfAEUvw_8O_sz-8jfJ7dpNiPzErtxejrm8XB5vSdQ/s614/Chart%208-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Chart 8: Petron Malaysia Gross Profit Margin vs Brent Crude Oil Pric" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuvcRRGYuj4Wp_jCJCc2SnLGyNQmajyJU-w0WBG4bOwEvoeZoVzGTcearXT3fssPQshykEzOM8J4bNW0x2fyzCd3lMLyjbc-VJYqn9RrYavHLCysD_DHJG8B8A8fI4weOECE4A2Xd7KK4-sKtF72HfAEUvw_8O_sz-8jfJ7dpNiPzErtxejrm8XB5vSdQ/s16000/Chart%208-min.PNG" title="Petron Malaysia Chart 8: Petron Malaysia Gross Profit Margin vs Brent Crude Oil Price" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: Petron Malaysia Gross Profit Margin vs Brent Crude Oil Pric</td></tr></tbody></table><div><br /></div><div><div>Of course, the profits of the Group would also be affected by the physical volume of sales. Excluding the pandemic year, the sales volume had been growing. </div><div><br /></div><div>I had earlier shown in Chart 4 that Petron Malaysia Ringgit sales had some link to oil prices. But the sales volume in terms of barrels of oil did not show any linkage. </div><div><br /></div><div>What does this all mean for Petron Malaysia going forward?</div><div><br /></div><div>I would expect a continuation of the growth that was experienced from 2012 to 2019. This would be supported by the growth in the number of service stations.</div><div><br /></div><div>Secondly, the Group's performance was better when the crude oil prices were around USD 60 per barrel. Its prospects depend on how you view oil prices. </div><div><br /></div><div>The <a href="https://capex.com/en/overview/oil-price-prediction" target="_blank">US Energy Information Administration</a>'s expects the average Brent crude prices to be:</div><div><ul><li>USD 61 per barrel in 2025.</li></ul><ul><li>USD 88 per barrel in 2035.</li></ul><ul><li>USD 91 per barrel in 2045.</li></ul></div><div><br /></div><div>As such I would not expect a fantastic performance. But looking at the above forecast for the price of crude oil, it does not look much different from the past 11 years. The Group should not do any worse than what it achieved over the past 11 years.</div><div><br /></div><h3>Privatization</h3><div>I have mentioned in my other articles that at the current market prices, it is very attractive to take companies private.</div><div><br /></div><div>Can you rule out privatization here?</div><div><ul><li>In its General Offer in 2012 following the purchase of Petron Malaysia from ExxonMobile, San Miguel stated that it did not intend to maintain the listing status if there was a shortfall in the public spread. Note that the offer price then was RM 3.59. </li></ul><ul><li>It would cost San Miguel/Petron Corp about RM 330 million to acquire the remaining 27% of the shares it does not own at RM 4.52 per share. </li></ul><ul><li>This is a small sum for the parent company. Recall the amount that has been reinvested into the business. Also, over the last 11 years, the parent company has received about RM 374 million for its share of dividends declared.</li></ul></div><div><br /></div><div>In mitigation, I would point out that there was no privatization exercise when the stock was trading at its 5-year low of RM 3.37 per share. Today it would cost about 34 % more to privatize it. I do not think it makes sense to privatize it at a higher price. </div><div><br /></div><h3>Disruption of the fuel retail industry</h3><div>In its Jun 2021 article titled “What are the trends disrupting the fuel-retail industry?” <a href="https://www.mckinsey.com/industries/oil-and-gas/our-insights/oil-and-gas-blog/trends-in-fuel-retail-industry-video" target="_blank">McKinsey & Company</a> opined the following:</div><div><br /></div><div>“…the fuel value pool will decline, driven by fuel efficiency and the substitution of traditional internal-combustion-engine cars by electric vehicles…Nonfuel retail will continue to grow…driven by general grocery growth…</div><div><br /></div><div>However, the speed at which this transition will happen will differ dramatically around the world. In China and developed countries, the fuel value pool will decline at 2 to 3 percent CAGR…transition will happen at a slower pace in developing countries, in which the fuel demand will stay relatively flat…”</div><div><br /></div><div>Another consulting group, Arthur D Little also painted a disruptive future for the industry.</div><div><br /></div><div>“The traditional forecourt model is at its inevitable end. Electric vehicles (EVs), autonomous cars, data analytics, and the Internet of Things (IoT) are only a few of the emerging technologies threatening the classic fuel-station customer experience.”</div><div><br /></div><div>While both reports are in the context of the global fuel retail industry, Malaysia is not immune to them. </div><div><br /></div><div>The best analogy is how the Malaysian media and taxi sectors succumbed to the same disruption suffered by these industries in developed countries.</div><div><br /></div><div>Even Petronas Dagangan has recognized this changing environment. Its 2019 Annual Report stated that higher usage of public transportation and the push toward EVs is leading to waning fuel demand. </div><div><br /></div><div>If you want evidence of this waning demand look at the chart below. It shows that the vehicular traffic volume in Malaysia has not shown any significant growth since 2015. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWDWxNK-JgQPp-R0HlcH_EjS14lix_v5OiKYE4T-9ItXD4L8KsuOBbuXNu0bra0lcvuF9G5eorLh765S_0Gsoyi5Zu0XkwPYdGU9go2MjGj_-fxrYMGDCxf4q1BJhc0CixJ6_IX1-RMm4tM-8hj82Yc6X2HBBVrJouk9dDYLR6tyyo-KuzbHhVi_Y2UVs/s907/Chart%209-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Chart 9: Malaysia vehicle registration" border="0" data-original-height="321" data-original-width="907" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWDWxNK-JgQPp-R0HlcH_EjS14lix_v5OiKYE4T-9ItXD4L8KsuOBbuXNu0bra0lcvuF9G5eorLh765S_0Gsoyi5Zu0XkwPYdGU9go2MjGj_-fxrYMGDCxf4q1BJhc0CixJ6_IX1-RMm4tM-8hj82Yc6X2HBBVrJouk9dDYLR6tyyo-KuzbHhVi_Y2UVs/s16000/Chart%209-min.png" title="Petron Malaysia Chart 9: Malaysia vehicle registration" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 9: Malaysia vehicle registration Source: <a href="https://data.gov.my/dashboard/car-popularity" target="_blank">data.gov.my</a></td></tr></tbody></table><div><br /></div><div><div>For the fuel retail industry in Malaysia, it is not whether the disruption will occur. It is when. </div><div><br /></div><div>Taking a leaf from what has happened to the media and taxi industries, there are two possible scenarios:</div><div><ul><li>The first is the “traditional” industry being in a secular decline. This is what is happening to the media and taxi sectors in Malaysia.</li></ul><ul><li>The second is for the existing players to re-invent themselves. A good example of this is the Malaysian food retailers that have adopted online ordering with delivery via Grab.</li></ul></div><div><br /></div><div>Whether Petron Malaysia will reinvent itself remains to be seen. However, there are 3 positive things for them.</div><div><ul><li>It will have to reinvest. Given its reinvestment track record, this should not be an issue.</li></ul><ul><li>It sees itself as a sales and marketing company. This mindset may give it a first-mover advantage to re-invent the fuel retail network.</li></ul><ul><li>Petronas is the dominant player in Malaysia and like the taxi industry, there will be political-economic forces to delay the effects of the disruption. This may buy Petron Malaysia time to re-invent itself.</li></ul></div><div><br /></div><h3>Automatic Pricing Mechanism (APM)</h3><div>In Malaysia, petrol and diesel are “controlled goods” where their prices are regulated by the government. </div><div><br /></div><div>In place since the 80s, the APM is the Malaysian government’s formula to regulate petrol and diesel prices.</div><div><br /></div><div>The initial APM formula had a sales tax or fuel subsidy component that was sort of set at the discretion of the government.</div><div><br /></div><div>APM Formula = MOPS + Operation Costs + Profit Margin Oil Companies + Profit Margin Petrol Dealers + Alpha + Sales tax or fuel subsidy.</div><div><ul><li>MOPS = Mean of Singapore’s Platt oil prices. The formula meant that the refinery costs were already included and indexed in the MOPS.</li></ul><ul><li>The operations cost, profit margin, and Alpha is intended to cover the sales, marketing, and distribution portion. </li></ul></div><div><br /></div><div>In 2010, the subsidy for the premium grade of petrol was removed. </div><div><br /></div><div>In 2014, a managed float system was introduced following the removal of the sales tax/fuel subsidy in light of the reduction in crude oil prices. Initially, this was reviewed monthly but was later changed to weekly. </div><div><br /></div><div>With the removal of the sales tax/fuel subsidy, the government “lost” one way to regulate the retail prices via the APM. However other measures were adopted</div><div><ul><li>In the weeks leading up to the 2018 Malaysian election, the retail prices were frozen. </li></ul><ul><li>In 2019, the new government decided to bring back the APM while at the same time revising the dealers’ margins. According to the then Finance Ministry, there will also be a cap. </li></ul><ul><li>In Feb 2020, the cap on the retail fuel prices for RON95 and diesel was revised downwards based on the APM.</li></ul></div><div> </div><div>The APM appears to provide “base profits” for the oil and gas companies. If they could reduce their actual sales, marketing, and distribution costs to be below those in the formula there is a possibility of generating better profits. </div><div><br /></div><div>Note that the refinery costs have been covered in the MOPS. If the actual refinery cost could be lower than that “imputed” in MOPS, there could be extra margins. </div><div><br /></div><div>For Petron Malaysia, Malaysia will likely continue to have a regulated petrol and diesel price environment. There are benefits to being more cost-effective than its competitors. </div></div><div><br /></div></div><div><h2>Valuation</h2><div>My value of Petron Malaysia is summarized in Chart 10.</div><div><ul><li>I estimated its Asset Value as RM 8.51 per share broken down into Graham Net Net, NTA, and Book Value.</li></ul><ul><li>I estimated its Earnings Value as RM 8.50 per share. This was estimated based on its Earnings Power Value. </li></ul></div><div><br /></div><div>At RM 4.52 per share, Petron Malaysia is trading significantly below its NTA of RM 8.51 per share and EPV of RM 8.50 per share.</div><div><br /></div><div>I would conclude that there is a sufficient margin of safety. It is not a value trap as the existing operations are generating returns. </div><div><br /></div><div>I would also like to point out that over the past 11 years, it paid an average of RM 0.17 per share as dividends. Based on the current market price, this is about 3.8 % dividend yield. Not fantastic but as good as the bank interest rate. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0lQ6ZRcHIygSDLQ54RBsp4Q81f0Cp0L6Cxme3S3e4t5q0tLkUvKBECr8WRI18QBqmwfxAOOiKODxjvckRNEFrcx2IA33LcUQzZrVYIjfPjNVoXO3HOO6BN8wvMNC1jlS6YtjI-axHyngl5QPZDHeKkY1uuv_l3PZexI0ZVr9pEdeQLoAhemXMsdTPeFs/s614/Chart%2010-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Petron Malaysia Chart 10: Valuation" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0lQ6ZRcHIygSDLQ54RBsp4Q81f0Cp0L6Cxme3S3e4t5q0tLkUvKBECr8WRI18QBqmwfxAOOiKODxjvckRNEFrcx2IA33LcUQzZrVYIjfPjNVoXO3HOO6BN8wvMNC1jlS6YtjI-axHyngl5QPZDHeKkY1uuv_l3PZexI0ZVr9pEdeQLoAhemXMsdTPeFs/s16000/Chart%2010-min.PNG" title="Petron Malaysia Chart 10: Valuation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 10: Valuation</td></tr></tbody></table><div><br /></div><div><h3>Valuation model</h3><div>My Earnings Value of the company was derived based on the average values from 2 valuation approaches:</div><div><ul><li>Free Cash Flow to the Firm model as per Damodaran.</li></ul><ul><li>Residual Income model as per Penman.</li></ul></div><div><br /></div><div>For both models, I used the past 12 years’ time-weighted average value to represent the normalized value. </div><div><br /></div><div>I have taken a conservative view and ignored growth. At the same time, I have used the past 12 years’ time-weighted average EBIT as the earnings. </div><div><br /></div><div>The cost of capital used in the model was based on the Capital Asset Pricing Model. I followed Damodaran’s approach to determine the Beta and the risk premiums. </div><div><br /></div><div>These resulted in both 9.8 % cost of equity and 6.8 % WACC. </div><div><br /></div><h3>Why EPV</h3><div>Petron Malaysia is in a sector characterized by the following:</div><div><ul><li>Commodity in a mature market.</li></ul><ul><li>Cyclical.</li></ul><ul><li>Regulated market (for petroleum and diesel prices).</li></ul></div><div><br /></div><div>The national demand for petroleum products is likely to experience low single-digit growth. At the same time, there are limits to operational improvements. I thus expect that earnings growth will eventually be pegged to the country’s economic growth. </div><div><br /></div><div>Secondly although prices of its raw material - crude oil - are cyclical, the Automatic Pricing Mechanism (APM) provides some “stability” to its margins. </div><div><br /></div><div>The above scenario suggests that Petron Malaysia is not a growth stock. Its Earning Power value is probably a more realistic representation of its intrinsic value. </div><div><br /></div><h3>Valuation risks and limitations</h3><div>You should consider the following when looking at my valuation.</div><div><ul><li>Cost of capital.</li></ul><ul><li>Continuation of historical performance.</li></ul><ul><li>Greenwald analysis.</li></ul></div><div><br /></div><div>The cost of capital was derived based on the risk-free rate and equity risk premium as of 2022. We currently have the Ukraine invasion and the Israel-Gaza conflict. The parameters do not reflect the higher-risk situation. </div><div><br /></div><div>As such you should see the EPV as an optimistic one. The only mitigating point is that the margin of safety is sufficiently large. </div><div><br /></div><div>My valuation model assumes that the past 12 years' performance is a good reflection of the future. </div><div><ul><li>The period included the Covid-19 year. I do not expect such another global disruption. </li></ul><ul><li>At the same time, the past 12 years covered a period when the annual crude oil prices ranged from USD 52 per barrel to USD 110 per barrel.</li></ul></div><div><br /></div><div>If you think that the future will be better than the past, then my EPV is conservative. Of course, if you think that the future will be worse, my EPV is optimistic.</div></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div>As you see, the estimated intrinsic value will depend on the valuation models as well as the assumptions you make about the future. Projecting the future performance is very challenging.</div><div><div><br /></div><div>To get around it, my base approach is to determine the value based on the historical performance. This is probably the most "accurate" value as there was certainty about the inputs.</div><div><br /></div><div>I then gauge whether the future is going to be better or worse than the past. A good company analysis would help you answer this question. Once you can determine the future prospects relative to the past, you can then use the "historical valuation" in a relative manner.</div><div><ul><li>If the future looks better, then the intrinsic value based on the future outlook would be better than the historical valuation. </li></ul><ul><li>If the future is worst, then the historical value would have overvalued the company.</li></ul></div><div><br /></div><div>The crux of the matter is whether you have the business experience to judge whether the future is going to be better. If you do not have a business background, you may find this a bit challenging. If you face such a situation, one way is to rely on third-party analysis and valuation. </div></div><div><br /></div><div><div>Several financial advisers provide such analyses. <span style="text-align: start;">Those who do this well include people </span><span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.</div></div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h3>Greenwald analysis</h3><div>According to Professor Bruce Greenwald, you can gain strategic insights by comparing the Asset Value with the EPV.</div><div><br /></div><div>In the case of Petron Malaysia, we have a case where the Asset Value is about the same as the EPV. This indicates that the Group is generating a return that reflects good use of the assets.</div><div><br /></div><div>Furthermore, with the market price being lower than both the Asset Value and EPV, I have greater confidence in the margin of safety.</div><div><br /></div><h2>Petron Malaysia is not a value trap</h2><div>A value trap is an investment that while appearing cheap is facing insurmountable problems. It is cheap for a reason. Petron Malaysia does not fall into this category for the following reasons: </div><div><ul><li>The Group is financially sound and it has a viable business model. I have shown that to some extent, Petron Malaysia’s performance is affected by high crude oil prices. But I have already accounted for this by taking the past 12 years' performance in my valuation. </li></ul><ul><li>Its business in terms of sales of barrels of oil has been growing.</li></ul><ul><li>While there is the threat of a disruption of the petrol station business model, this is not imminent. As such I do not see the assets being in danger of write-offs. The assets are intact and are not going to be impaired due to under-utilization.</li></ul><ul><li>It has been able to generate returns that are more than its cost of capital.</li></ul><ul><li>I have also estimated that there is a sufficient margin of safety from both the Asset Value and EPV.</li></ul><div><br /></div></div></div><div><h2>Appendix 1. Expansion efforts</h2></div><div><div>Some examples of the activities undertaken by Petron Malaysia to grow its revenue:</div><div><ul><li>The number of Petron service stations has grown from about 550 (former Esso and Mobil stations) in 2012 to 750 in 2022. Not all of these are fully owned by Petron Malaysia. Some were owned by Petron Fuel International and some by Petron Oil (M). The main point is that today there are about 36 % more service stations retailing the Petron brand of gasoline compared to 2012. </li></ul><ul><li>In 2013, Petron Malaysia acquired the LPG business from its sister company Petrol Fuel International Sdn Bhd. The goal was to consolidate and grow the business in Peninsular Malaysia. By 2014 it had 1.6 million Gasul branded cylinders in the market. Today Petron Malaysia supplies LPG to households and restaurants. It was the first to introduce the selling of gas cylinders in service stations. </li></ul><ul><li>The Treats stores at major Petron service stations were introduced in 2012 and there were 200 stores by the end of 2013. By 2018, there were 470 Treats convenience stores and P Kedai marts. Of these, 240 were owned by Petron Malaysia. </li></ul><ul><li>The number of loyalty cardholders (formerly ExxonMobil Smile cardholders) increased from 1.3 million in 2013 to 2 million by 2014. By 2018, there were 3 million members.</li></ul><ul><li>The Petron Fleet card was introduced in 2013 and served 4000 corporate customers in 2014. In 2016, 3000 new cards were added to the base.</li></ul><ul><li>Introduced its Petron Mobile App in 2022 to provide better services and rewards.</li></ul></div><div><br /></div></div><div><br /></div><div><div><br /></div><div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. 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The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div></div><div><br /></div></div></div></div><div style="text-align: justify;"><br /></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-86643450220430439782023-11-12T08:44:00.004+08:002023-11-26T11:43:49.032+08:00White Horse is still not a value trap<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); color: #171717; font-size: 15px; font-weight: bold; letter-spacing: 0.04em; padding-bottom: 10px; padding-top: 10px; text-align: justify; text-decoration: none;">Value Investing Case Study 06-4: I first covered White Horse in Nov 2020. This is an updated fundamental analysis taking into account the financials till FYE 2022. Where relevant, I have incorporated the analyses from the previous articles here.</div>
<div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-MB1pKlpcVGWuyTSjDvM9Yztt4MUOke8HYDoTZS1bU-fhUSqGGIl_tNyu06bMP1m4S6iECFEq5Emo6O5ghJbDP5JPg5SS2FY9t2YRUyJ8-x09QOkhsvoNMd1ctcjUDm86RG614yyXJYyIQFd2X0CwqudSMVk1-8EmoxKZsIgyS3x2JSH3j-pwkpzu20U/s309/Picture1-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="White Horse is still not a value trap" border="0" data-original-height="309" data-original-width="219" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-MB1pKlpcVGWuyTSjDvM9Yztt4MUOke8HYDoTZS1bU-fhUSqGGIl_tNyu06bMP1m4S6iECFEq5Emo6O5ghJbDP5JPg5SS2FY9t2YRUyJ8-x09QOkhsvoNMd1ctcjUDm86RG614yyXJYyIQFd2X0CwqudSMVk1-8EmoxKZsIgyS3x2JSH3j-pwkpzu20U/s16000/Picture1-min.png" title="White Horse is still not a value trap" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">On 2 Nov 2020, White Horse Bhd (White Horse or the Group) was trading at RM 0.60 per share. At that juncture, the price was lower than its Graham Net-Net of RM 0.76 per share (as of 30 Jun 2020). I presented my rationale then for why White Horse was not a value trap.</div><div style="text-align: justify;"><div><br /></div><div>There has not been much change to the price since then. As of 25 Oct 2023, it was RM 0.58 per share. At the same time, the Graham Net-Net also increased to RM 1.28 per share (as of 30 Jun 2023). </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/nJnX8Nerv4E" width="320" youtube-src-id="nJnX8Nerv4E"></iframe></div><div><br /></div><div>From 2018 to 2020, the Group incurred losses. While it managed to turn around in 2021, the profit in 2022 was lower than that in 2021.</div><div><br /></div><div>You could be forgiven for thinking that it is going to be tough for the Group to deliver a good performance. But if you are an investor with a long-term investment horizon, you should look beyond the immediate performance. </div><div><br /></div><div>Join me as I argue why White Horse is still not a value trap and can be one of the better Bursa Malaysia stocks to invest in. </div><div><br /></div><div>At the current price, there is an investment opportunity. Should you go and buy it? Well, read my Disclaimer.</div><div><br /></div><h2>Contents</h2><div><ul><li><b>Investment thesis</b></li></ul><ul><li><b>Rationale</b></li></ul><ul><li><b>Business background</b></li></ul><ul><li><b>Operating trend</b></li></ul><ul><li><b>Financial position</b></li></ul><ul><li><b>Risks</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>White Horse is still not a value trap</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: left;" /></div></div><div><h2>Investment Thesis</h2><div>As of 23 Oct 2023, White Horse was trading below its Graham Net-Net. The Graham Net-Net is often used as a shorthand for the liquidation value. I do not expect White Horse to be liquidated. </div><div><br /></div><div>The Group’s problem is due to the soft property market that showed signs that it has reached the bottom as there were increased transactions in 2022.</div><div><br /></div><div>The market situation had resulted in the Group operating below or around its breakeven levels for the past 5 years. However, it has taken steps to address this with cost-down programs and disposal of excess capacity.</div><div><br /></div><div>The ceramic tile is not a sunset industry. White Horse has the brand name and distribution setup. Together with its cost reduction program, it would be able to benefit from the property market recovery. At the same time, the Group is financially sound and has the financial resources to withstand the soft market.</div><div><br /></div><h2>Rationale</h2><div><ul><li>White Horse is financially sound with an 11.7 % debt-equity ratio. Despite the losses since 2018, the Group has been able to generate positive cash flow from operations for 11 out of the past 12 years.</li></ul><ul><li>The losses were due to operating below its breakeven level. The Group has taken steps over the past few years to address this through its cost reduction plans. </li></ul><ul><li>The disposal of its Vietnam assets in 2021 would improve the capacity utilization of the Malaysian plants. </li></ul><ul><li>There is a 0.63 correlation between Malaysian sales and the number of property transactions. The number of property transactions has been on an uptrend since 2021.</li></ul><ul><li>Once the property market recovers, we will see White Horse returning to profitability. Ceramic tile is not a sunset industry and the Group has the brand name and distribution network to ride the recovery.</li></ul><ul><li>The Group has good operations and capital allocation track record. The only weak area is the poor track record for creating shareholders' value.</li></ul><ul><li>There is enough margin of safety based on the Graham Net-Net. </li></ul></div><div><br /></div><div>The supporting details are presented in the following sections.</div><div><br /></div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div><h2>Business background</h2><div>White Horse started in Johore in 1992 as a joint venture between Taiwanese, Malaysian, and Singaporean parties. </div><div><br /></div><div>From an initial set-up of only 2 kilns, the Group has since grown so that today it has 15 kilns. It is also recognized as one of the leading ceramic tile manufacturers in the Asia-Pacific region. </div><div><br /></div><div>The Group currently has 2 manufacturing facilities in Malaysia. </div><div><ul><li>The Group initially manufactured and distributed red bricks and roofing tiles. Today the Group produces ceramic floor and wall tiles, interchangeable floor and wall tiles, and also porcelain tiles.</li></ul><ul><li>Its products are sold in Malaysia, and Vietnam, and exported to more than 30 countries around the world. </li></ul></div><div><br /></div><div>The major accolades of the Group included:</div><div><ul><li>The Malaysian Brand Laureate Awards 2010 – 2021.</li></ul><ul><li>Ceramic World, the Group’s showroom is recognized by The Malaysia Book of Records as the largest tile showroom in Malaysia.</li></ul><ul><li>The Readers Digest Platinum Trusted Brand Award 2010 - 2020 in the Wall & Floor Tiles Category.</li></ul><ul><li>The first tile manufacturer in Malaysia to be invited by the Italian Association of Ceramic as one of the exhibitors of CERSAIE since 2012. White Horse is ranked 18th on CERSAIE’s leading companies in terms of world production and consumption.</li></ul></div><div><br /></div><div>The Group business was carried out in Malaysia until 2012 when it first reported exports amounting to 13 % of its revenue. </div><div><br /></div><div>Before this, there were also some exports. For example, from 2008 to 2011, the Group sold about RM 20 million of products and raw materials to a related party in Vietnam. These averaged about 4 % of the annual sales.</div><div><br /></div><div>As can be seen from Chart 1, international sales peaked in 2018 at 34 % but had since declined to 13% by 2022. Note that the % of international sales was skewed by the declining Malaysian sales. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhK9jbXPTwsu2xq2uAorELVvdMiIgESN_j-VpgFdxrEEQZfMDA3lqcIVJzStdfKB6tUoXPB2vddihERw4R64fCXD23iLwXw6V2yEQXWlBCNc9RFin85TfdWOI7ndy7A2mgxqsL_N-GZjmn595qJr66JF_mP76J0ItvZCMrvh4P3aa887c4hzIqVBUV-Tk4/s614/Chart%201-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Chart 1: Revenue trends" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhK9jbXPTwsu2xq2uAorELVvdMiIgESN_j-VpgFdxrEEQZfMDA3lqcIVJzStdfKB6tUoXPB2vddihERw4R64fCXD23iLwXw6V2yEQXWlBCNc9RFin85TfdWOI7ndy7A2mgxqsL_N-GZjmn595qJr66JF_mP76J0ItvZCMrvh4P3aa887c4hzIqVBUV-Tk4/s16000/Chart%201-min.PNG" title="White Horse Chart 1: Revenue trends" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Revenue trends</td></tr></tbody></table><div><br /></div><div><div>You can see from Chart 1 that the Group sales peaked in 2014 and declined to reach the bottom in 2020. This was partly due to the declining contribution from Malaysia due to the slowdown in the property sector.</div><div><br /></div><div>The sales decline has impacted several operating fronts.</div><div><ul><li>The cash conversion cycle which averaged 230 days from 2008 to 2010 has deteriorated to an average of 276 days from 2020 to 2022.</li></ul><ul><li>The administrative, selling, and distribution expenses averaged 17 % of sales from 2008 to 2010. They rose to an average of 24 % of sales from 2020 to 2022. </li></ul><ul><li>The lower production volume has meant that the gross profits have declined from an average of 33 % from 2008 to 2010 to 14 % from 2020 to 2022. </li></ul></div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNMG1XKLz-ysvZPaM6-FM2_I7F_2O6AGpoZ0qmecVCNJKe7jglmBuWmuo19fdHI3Z9F4uSmilAXC07ECuAilnh4KTe4jBsmHDmSm6XN6-Dquj2M7UU-8ikqCJhK4-8pS5nJsWTJwQFU4JMG5OfzgV30rzxLxOj1ev2HLithbihXA8-UtPs6NqR4yLX6P0/s614/Chart%202-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Chart 2: Profit and expense profile" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNMG1XKLz-ysvZPaM6-FM2_I7F_2O6AGpoZ0qmecVCNJKe7jglmBuWmuo19fdHI3Z9F4uSmilAXC07ECuAilnh4KTe4jBsmHDmSm6XN6-Dquj2M7UU-8ikqCJhK4-8pS5nJsWTJwQFU4JMG5OfzgV30rzxLxOj1ev2HLithbihXA8-UtPs6NqR4yLX6P0/s16000/Chart%202-min.PNG" title="White Horse Chart 2: Profit and expense profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Profit and expense profile</td></tr></tbody></table><div><br /></div><div><div>Since hitting its peak revenue in 2014, the Group has implemented several measures to improve the bottom line.</div><div><ul><li>Introduced new products as well as rationalizing its inventory control system.</li></ul><ul><li>Lowered production costs eg heat recycling projects, downsizing of manpower.</li></ul><ul><li>Stopped major capital expenditure since 2016. </li></ul><ul><li>Sold off the manufacturing assets in Vietnam in 2021.</li></ul></div><div><br /></div><h2>Operating trends</h2><div>I looked at 3 metrics to get an overview of the overall performance – revenue, PAT, and gross profitability (gross profits / total assets). Refer to Chart 3.</div><div><ul><li>Revenue grew from 2008 to peak in 2014 and has been declining since then. But it seemed to have leveled off from 2020.</li></ul><ul><li>The Group incurred losses from 2018 to 2020.</li></ul><ul><li>The positive sign is that while gross profitability had been declining since 2010, it seemed to have turned around in 2021.</li></ul><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbxAW0nCXHlVOTTqLgy0nw8cOScPnAZlDBAdqzBJr-lFS1Yj6Xswr9fo6cWhmc-ffZa-FEiTJ4_KkorSRJc9_XhPMWq_sJbeP6iADJKhyphenhyphenpla-Xk4yXLZMwvuh2jJqWuXFkf3tkv6_CXy3-Un3azhNsGrYFWPefklZ53jl7j_1nTmc5_ANND4rWvLQWgfU/s614/Chart%203-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Chart 3: Performance Index" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbxAW0nCXHlVOTTqLgy0nw8cOScPnAZlDBAdqzBJr-lFS1Yj6Xswr9fo6cWhmc-ffZa-FEiTJ4_KkorSRJc9_XhPMWq_sJbeP6iADJKhyphenhyphenpla-Xk4yXLZMwvuh2jJqWuXFkf3tkv6_CXy3-Un3azhNsGrYFWPefklZ53jl7j_1nTmc5_ANND4rWvLQWgfU/s16000/Chart%203-min.PNG" title="White Horse Chart 3: Performance Index" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Performance Index</td></tr></tbody></table><div><br /></div></div><div><div>It should be pointed out that during the period from 2014 to 2019, the Group generated a total EBIT of RM 102.4 million after deducting RM 82.3 million for the following:</div><div><ul><li>RM 15.5 million (net) from written-off and/or written-down inventories. </li></ul><ul><li>RM 31.2 million from impairment of Property, Plant, and Equipment.</li></ul><ul><li>RM 35.6 million of unrealized forex losses.</li></ul></div><div><br /></div><div>The long-term outlook of the Group would be different if these were considered as a one-off expenditure. </div><div><br /></div><h3>IH 2023</h3><div>The revenue for the first six months of 2023 was 13% lower than that for the same period last year. </div><div><br /></div><div>The Group incurred a loss of RM 30.2 million in the first half of 2023 compared to a loss of RM 6.6 million for the same period last year. Last year's result included a non-operating profit of RM 15 million.</div><div><br /></div><div>The gross profit margin for the first 6 months of 2023 was 2.2 % compared to 22.7 % last year. The Group attributed this to</div><div><br /></div><div>“…higher production cost, in particularly the fuel cost for natural gas and electricity, which were increased by 34% and 40% respectively…”</div><div><br /></div><div>I am a long-term value investor and I consider quarterly performance as “noisy”. As such I focus on long-term trends. </div><div><br /></div><h3>Competitive profile</h3><div>There are 3 other Bursa tile companies. A comparison between White Horse and its peers as per Chart 4 from 2014 to 2022 showed the following:</div><div><ul><li>White Horse's revenue declined more than those of its peers.</li></ul><ul><li>All experience declining ROE with the bottom in 2018/19. I would rate White Horse's performance as among the better ones.</li></ul></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLmkFGhU6g4VyapcijMTTsqheWlumNG-FbHu75sYYHVT3E2-G2kbN8lqGBI0q3Rea6oeW93QhRK_XZQPOqjsNHvOrhl_P00UAs_UPGnN7Mio7jyIsmIJn_myY6yKEPQ90UxPSYbFPFnomWAqNg445UdX6V11QMjnl1zJQRWsjTXCdUMkNC96BhSCGBqTQ/s901/Chart%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Chart 4: Peer performance" border="0" data-original-height="901" data-original-width="775" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLmkFGhU6g4VyapcijMTTsqheWlumNG-FbHu75sYYHVT3E2-G2kbN8lqGBI0q3Rea6oeW93QhRK_XZQPOqjsNHvOrhl_P00UAs_UPGnN7Mio7jyIsmIJn_myY6yKEPQ90UxPSYbFPFnomWAqNg445UdX6V11QMjnl1zJQRWsjTXCdUMkNC96BhSCGBqTQ/s16000/Chart%204-min.png" title="White Horse Chart 4: Peer performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Peer performance</td></tr></tbody></table><div><br /></div></div></div><div><h3>Breakeven analysis</h3><div>The losses and low profits for the past 5 years were because the Group was operating below the breakeven level. To turn around, the Group needs to operate above its breakeven level. The breakeven level is dependent on the volume, variable cost, and fixed costs.</div><div><br /></div><div>There is not enough information in the Annual Report to determine the breakeven picture accurately. But to illustrate the breakeven position, I assumed the following in my breakeven chart:</div><div><ul><li>Sales and costs from the various years were used as proxies for changes in volume.</li></ul><ul><li>Variable cost = Cost of sales less depreciation.</li></ul><ul><li>Fixed cost = Selling, General and Admin expenses + depreciation.</li></ul></div><div><br /></div><div>As can be seen from Chart 3, the differences between sales and the total costs (variable costs + fixed costs) had been declining since the mid-2000s. By 2018, the Group incurred losses. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8q4uNEuEj8VRnQ1wXenytXs1qwVzIHsnOF2PvNH6TtgMaXgmhqYMR1n3gQY3Dd0xhaI7FYphMnNCSCLt-LhPBmVfdsrkPK_IthjZkc0EKrPTedC2uz02ZfdzNLBJRlfd2A0VoIAyjRx-6GfaCr-_lYQrNzypVl9VrZHLw8Wfu4CrTSub-csFnl8-_Eug/s614/Chart%205-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Chart 5. Breakeven Analysis" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8q4uNEuEj8VRnQ1wXenytXs1qwVzIHsnOF2PvNH6TtgMaXgmhqYMR1n3gQY3Dd0xhaI7FYphMnNCSCLt-LhPBmVfdsrkPK_IthjZkc0EKrPTedC2uz02ZfdzNLBJRlfd2A0VoIAyjRx-6GfaCr-_lYQrNzypVl9VrZHLw8Wfu4CrTSub-csFnl8-_Eug/s16000/Chart%205-min.PNG" title="White Horse Chart 5. Breakeven Analysis" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5. Breakeven Analysis<br /><div style="text-align: left;"><i>Note: The breakeven analysis showed a loss in 2021 whereas the Group reported a profit in 2021. This was because there was a gain of RM 74 million due to the disposal of PPE. </i></div></td></tr></tbody></table><div><br /></div><div><div>To return to profitability, the Group has either to increase its sale quantities, sell at higher unit prices, or lower its costs. The Group had taken steps to address all of them.</div><div><ul><li>By disposing of the Vietnam operations, it would reduce its annual production capacity. This would reduce part of the fixed costs associated with the manufacturing facility. At the same time, it would result in higher capacity utilization for the Malaysian plant thereby reducing the variable cost. </li></ul><ul><li>The Group had taken steps to address its variable and fixed costs even before the Vietnam plant disposal.</li></ul><ul><li>The sales would depend on both the quantity sold and the unit selling price. These would depend on the market but if White Horse could bring down the production costs, it could be profitable with lower sales volume. </li></ul></div><div><br /></div><div>This is of course a back-of-envelope analysis as I do not have the production quantity or sales quantity. But it illustrates the direction to return to profitability.</div><div><br /></div><h3>Capacity utilization</h3><div>According to its website, the Group has an annual production capacity of 35 million m2 of tiles. This is from both Vietnam and Malaysian operations. </div></div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><i><span style="font-size: x-small;"><br /></span></i></div><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div>The company website in Oct 2023 stated that its capacity including its Vietnam operations is 35 million square meters. This is misleading for the following reasons:</div></div><div><div><ul><li>The Vietnam manufacturing facilities were disposed of in 2021. In its segment section of the 2022 Annual Report, the Vietnam operations were described as “…distribution of ceramic and homogeneous tiles…”</li></ul><ul><li>I had concerns about how the 35 million square meters were originally reported.</li></ul></div><div><br /></div><div>In 2013 the Group acquired the entire equity interest in White Horse Ceramic Industries (Vietnam) Co Ltd for USD 21 million or RM 64.74 million. This related company has been dealing with the Group since 2001. </div><div><br /></div><div>However, there were discrepancies in the reported capacities.</div><div><ul><li>According to the Circular issued for the acquisition, the Group's annual production capacity would be increased from 28.0 million m2 to 40.7 million m2.</li></ul><ul><li>I thus find it strange that on the White Horse website under the factory section, the Group's current capacity is stated as 35 million m2.</li></ul></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div><div><div>By disposing of the Vietnam operations, the annual production capacity would be reduced to 22 million m2. I derived this by deducting the Vietnam capacity of 13 million m2 of tiles.</div><div><br /></div><div>In my previous articles, I had stated the following:</div><div><ul><li><i>In terms of capacity, the Group produced about 16 million m2 of tiles in 2019 compared to its annual production capacity of 35 million m2. Production in 2019 has declined compared to the 2018 production of 22 million m2. </i></li></ul><ul><li><i>I estimated that at its peak in 2014, the Group produced about 34 million m2 to 35 million m2 of tiles. </i></li></ul><ul><li><i>To break even, (based on 2017 performance) the Group probably needs to produce and sell about 29 million m2 of tiles.</i></li></ul><ul><li><i>Furthermore, in 2018 and 2019, the Group’s annual production was only 22 million m2 and 16 million m2 respectively.</i></li></ul></div><div><br /></div><div>With the disposal of the Vietnam facilities, the Group would have a better capacity utilization. In other words, the Group would not have to produce and sell 29 million m2 of tiles (based on the 2017 performance as per above) to break even.</div><div><br /></div><div>The Group did not provide any information on the quantity of tiles produced in 2022. But it looks like breakeven.</div><div><br /></div><h3>Link to the property sector</h3><div>The past decade has been very challenging for the Malaysian property industry. The industry started the 2010 decade on a very positive note. However, the government soon instituted several cooling measures to reduce speculation. For example:</div><div><ul><li>The Developer Interest Bearing Scheme (DIBS) was banned.</li></ul><ul><li>Real Property Gains Tax (RPGT) was increased.</li></ul><ul><li>The minimum property purchase price for foreigners was raised from RM 500,000 to RM 1 million.</li></ul><ul><li>The was a cap on the loan-to-value ratio for the third house.</li></ul></div><div><br /></div><div>Many of these measures were implemented in the first half of the decade but their effects persisted long after this. As can be seen from Chart 6, the number of property transactions had been declining since 2011 but seemed to have picked up in 2022.</div><div><br /></div><div>There is a 0.63 correlation between White Horse revenue and the number of property transactions. What does this all mean for White Horse going forward?</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSewuIZQlVXGZo_gqBs1lZJjyqB0VMNdwlIRtUXbyl6w68lySxowQkOlZY4JXoOg7MQJ8Av9-jpDBuXqm7L18-Fgaq7mlWDPEoMrE3MQGYQhhmMEZPtZgg5aUiJsuGhqKHfy7D2PS6QS5qG5uZ02zkbXJf-r8C32kybxjjPL1sTZkslO8w3KTP0__6baQ/s614/Chart%206-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Chart 6: White Horse Malaysian revenue vs Malaysian Property transactions (residential and commercial)" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSewuIZQlVXGZo_gqBs1lZJjyqB0VMNdwlIRtUXbyl6w68lySxowQkOlZY4JXoOg7MQJ8Av9-jpDBuXqm7L18-Fgaq7mlWDPEoMrE3MQGYQhhmMEZPtZgg5aUiJsuGhqKHfy7D2PS6QS5qG5uZ02zkbXJf-r8C32kybxjjPL1sTZkslO8w3KTP0__6baQ/s16000/Chart%206-min.PNG" title="White Horse Chart 6: White Horse Malaysian revenue vs Malaysian Property transactions (residential and commercial)" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: White Horse Malaysian revenue vs Malaysian Property transactions (residential and commercial)</td></tr></tbody></table><br /><div>As the property sector improves, I expect White Horse Malaysian revenue to follow.</div><div><div><br /></div><div>In my article “<a href="https://www.i4value.asia/2021/06/will-malaysian-property-industry-turn.html#more" target="_blank">Will the Malaysian Property industry turn around by 2024?</a>” I had concluded that the financial performance of the property sector would only turn around in a couple of years because of the “big ship” effect.</div><div><br /></div><h2>Financial position</h2><div>I would rate White Horse as financially sound based on the following:</div><div><ul><li>As of the end of Jun 2023, it had RM 125 million cash. This was equivalent to 18 % of its total assets.</li></ul><ul><li>It had a debt-equity ratio of 11.7 % as of Jun 2023. This is much lower than its peak debt-equity ratio of 32.8 % in 2015.</li></ul><ul><li>Over the past 12 years, there was only one year (2022) where it had negative cash flow from operations. </li></ul><ul><li>Over the past 12 years, it generated RM 527 million cash from the cash flow from operations compared to RM 145 million of PAT. This is a very good cash conversion ratio.</li></ul></div><div><br /></div><div>The Group also had a good capital allocation plan as shown in Table 1. You can see that its cash flow from operations was well deployed for CAPEX and dividends.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEho4VJpIf0IQfIPSP3SH0eLqBrTWtnIuAg5DszTbhMq1dFuN7qpXqSMfT1k2m9nDf-_6N_5uMnCIvdNrnD8sFs4VtszwThdEPxey5q3hRCLkCHv1MuHRKRnh9lWWqRANlOS7od4SZUUgTSwuLTJHotmV9LGIKQsiZUfpRUsSta_Bj8wqAZBBIuppR8LBag/s505/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Table 1: 2011 to 2022 Sources and Uses of Funds" border="0" data-original-height="251" data-original-width="505" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEho4VJpIf0IQfIPSP3SH0eLqBrTWtnIuAg5DszTbhMq1dFuN7qpXqSMfT1k2m9nDf-_6N_5uMnCIvdNrnD8sFs4VtszwThdEPxey5q3hRCLkCHv1MuHRKRnh9lWWqRANlOS7od4SZUUgTSwuLTJHotmV9LGIKQsiZUfpRUsSta_Bj8wqAZBBIuppR8LBag/s16000/Table%201-min.png" title="White Horse Table 1: 2011 to 2022 Sources and Uses of Funds" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: 2011 to 2022 Sources and Uses of Funds</td></tr></tbody></table><br /><div>In the context of capital allocation, it is useful to look at the Group acquisition and “disposal” of the Vietnam operations. It points to:</div><div><div><ul><li>Prudent financial management.<br /><br /></li><li>Protection of shareholders' interest in the related party acquisition.</li></ul></div><div><br /></div><h3>White Horse Vietnam</h3><div>The Group acquired White Horse Vietnam in 2013 for RM 64.74 million (USD 21 million) from White Horse Investment (S) Pte Ltd. </div><div><ul><li>There was a Total Guaranteed Profit of USD 12 million by the vendor to be achieved over 4 years. </li></ul><ul><li>Any shortfall in the Total Guaranteed Profit was to be settled by offsetting the loan made by the vendor to White Horse Vietnam. In 2013, White Horse Vietnam owed the vendor USD 23.7 million. </li></ul><ul><li>The White Horse Vietnam 2016 financial statements were to be used to determine the shortfall.</li></ul></div><div><br /></div><div>Over the period from 2013 to 2019, the Vietnam operations ran at a loss. The total accumulated losses for the period amounted to RM 56.3 million.</div><div><br /></div><div>In the Circular to the acquisition of White Horse Vietnam, it was stated that </div><div><br /></div><div>“… with the expected increase in White Horse Vietnam export sales and optimization of capacity utilization of at least 80% of its capacity over the next 3 years after Completion, White Horse Vietnam would be able to reduce its overall unit production costs and accordingly improve its gross profit margin.” </div><div><br /></div><div>This was not achieved. </div><div><br /></div><div>The Group started to provide for this shortfall as a “contingent indemnification asset” in 2013. This was classified as “Other Assets” of RM 19.023 million in the 2013 Balance Sheet.</div><div><br /></div><div>In its 2016 Annual Report, it was stated that White Horse Vietnam could not meet the profit guarantee. As such the USD 12 million was re-classified to set off the balance owned by White Horse Vietnam to the vendor.</div><div><br /></div><div>With the completion of the profit guarantee, the Group acquired White Horse Vietnam for RM 64.74 million compared to its 2019 net asset of RM 69.1 million</div><div><br /></div><div>In 2021, the Group disposed of its assets in Vietnam for RM 113.5 million comprising</div><div><ul><li>RM 55.2 million for the value of the construction works.</li></ul><ul><li>RM 58.3 million for the machinery and equipment.</li></ul></div><div><br /></div><div>The selling price was based on about 90 % of a valuation by an independent registered valuer. </div><div><br /></div><div>The Group reported a gain of RM 73.8 million for the disposal.</div><div><br /></div><h3>Shareholders’ value creation</h3><div>I looked at the following metrics from 2011 to 2022 when assessing shareholders’ value creation:</div><div><ul><li>Comparing returns with the cost of funds.</li></ul><ul><li>Comparing the gains by an investor who bought a share at the end of 2011 with the cost of equity.</li></ul><ul><li>Looking at the Q Rating which is based on several valuation metrics. A high score relative to the panel meant that the company had the potential to create shareholders’ value.</li></ul></div><div><br /></div><div>As can be seen from Table 2, White Horse returns were lower than the respective cost of funds. In order words, the Group did not create any shareholders’ value. You should not be surprised given its losses over the past few years.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcsKvLBYT-gowZG06nSkaQFU0QzJ2U1vBomX7jwgslHuSqfmT4hxw9TLZStWW5qpEPVl4EOYRGijjBJKtLfZjcq-hwawXhQVOBUwjJKweNlYADSlmJY7XfRKarWAqTcn-b6Z2Jzzoun6wvziaxyvE9k-0EgkvWcJqsB9yS5ar2fXC9jwNi_XoSFaDEOe8/s631/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Table 2: Shareholders value creation" border="0" data-original-height="101" data-original-width="631" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcsKvLBYT-gowZG06nSkaQFU0QzJ2U1vBomX7jwgslHuSqfmT4hxw9TLZStWW5qpEPVl4EOYRGijjBJKtLfZjcq-hwawXhQVOBUwjJKweNlYADSlmJY7XfRKarWAqTcn-b6Z2Jzzoun6wvziaxyvE9k-0EgkvWcJqsB9yS5ar2fXC9jwNi_XoSFaDEOe8/s16000/Table%202-min.png" title="White Horse Table 2: Shareholders value creation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Shareholders value creation<br /><div style="text-align: left;"><div><i>Notes <span style="white-space: pre;"> </span></i></div><div><i>(a) Based on time-weighted average EBIT/TCE from 2011 to 2022 assuming a 24 % tax rate compared with WACC.</i></div><div><i>(b) This looked at how the SHF at the end of 2007 would have grown by the end of 2022 assuming that no dividend was paid. I compared it with the cost of equity.<span style="white-space: pre;"> </span></i></div><div><i>(c) Computed assuming that an investor bought 1 share at the end of 2011 and held onto it till the end of 2022. His loss is shown in the Table 3 below.<span style="white-space: pre;"> </span></i></div></div></td></tr></tbody></table><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLiPu_ozim4FxNrQLlejbCgDiIDupuLD7HC-qnFSuauh17hTU7V04qxNxy0nMrnTWTFU8EStT7AnzJLxv5MUUnKf76SYRCqi_pYxxdUm5Hzb8UmkEUcR_2PaiIx2644a4ygNDDhkO2C1jqauz_T53pvOh2O3onI7R1O03ELFGqnzbc0DFfJQPIKm_KcOE/s379/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Table 3. Estimating the shareholders’ gain" border="0" data-original-height="151" data-original-width="379" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLiPu_ozim4FxNrQLlejbCgDiIDupuLD7HC-qnFSuauh17hTU7V04qxNxy0nMrnTWTFU8EStT7AnzJLxv5MUUnKf76SYRCqi_pYxxdUm5Hzb8UmkEUcR_2PaiIx2644a4ygNDDhkO2C1jqauz_T53pvOh2O3onI7R1O03ELFGqnzbc0DFfJQPIKm_KcOE/s16000/Table%203-min.png" title="White Horse Table 3. Estimating the shareholders’ gain" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3. Estimating the shareholders’ gain<span style="white-space: pre;"> </span></td></tr></tbody></table><div><br /></div><div>At the same time, White Horse had an overall Q Rating of 0.41. This places it just below the average position among the panel companies. Again, it illustrated that it had been challenging for the Group to create shareholders’ value.</div><div><div><br /></div><div>On the positive side, the Q Rating had improved from 0.35 in 2020.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRHaYx2lFhvkQ-y7Y5YpmOm2XNXD-rUabxYgMs6B7I22sI61VvHdAa3ZfZz5xXoD9V20TATmISYQUqxZxnfCSk9ivd681kTQvWbVZZgCgS3YsBDt24KjY2UoxUne6C88Zfjutv5rCBH_1waukhAruB3A1zT30noxlrI7e8mhFeBFveC3GBkYfzPNKA1CM/s614/Chart%207-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Chart 7: Q Rating" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRHaYx2lFhvkQ-y7Y5YpmOm2XNXD-rUabxYgMs6B7I22sI61VvHdAa3ZfZz5xXoD9V20TATmISYQUqxZxnfCSk9ivd681kTQvWbVZZgCgS3YsBDt24KjY2UoxUne6C88Zfjutv5rCBH_1waukhAruB3A1zT30noxlrI7e8mhFeBFveC3GBkYfzPNKA1CM/s16000/Chart%207-min.PNG" title="White Horse Chart 7: Q Rating" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Q Rating</td></tr></tbody></table><div><br /></div><div><h2>Risks</h2><div>When you look at the risks of investing in White Horse, I would see the main ones as: </div><div><ul><li>Privatization risk.</li></ul><ul><li>Turnaround risk.</li></ul></div><div><br /></div><h3>Privatization</h3><div>I have mentioned in the past postings that at the current market prices, it is very attractive to take companies private.</div><div><br /></div><div>White Horse is no different. </div><div><br /></div><div>In the White Horse case, the Board members collectively control about 40 % of the company. Any plan to acquire the remaining 60 % at the current market price of RM 0.58 per share would need about RM 77 million. </div><div><br /></div><div>The company has cash and securities of about RM 125 million (as of June 2023). </div><div><br /></div><div>So, it would be possible to privatize it via a mix of capital reduction and external funding by the Board members. </div><div><br /></div><div>Would the controlling shareholders privatize the company then?</div><div><br /></div><div>You will have to judge for yourself. </div><div><br /></div><h3>Turnaround risk</h3><div>To turn around the business, the Group has to:</div><div><ul><li>Recover its Malaysian business.</li></ul><ul><li>Expand its exports.</li></ul></div><div><br /></div><div>The decline in Malaysian business is due to the soft Malaysian property and construction sectors. I think we are at the bottom of the property sector.</div><div><br /></div><div>Accordingly, I would expect the industry to recover. The risk is whether the Group has the resources to withstand a few more years of a soft property and construction market.</div><div><br /></div><div>I think that the Group would be able to do so given:</div><div><ul><li>The Group's track record of positive cash flow from operations.</li></ul><ul><li>It's low gearing.</li></ul><ul><li>The efforts it has taken to control cost.</li></ul></div><div><br /></div><div>The Group has also to re-grow its exports. The opportunities are there as summarized in the next section.</div><div><br /></div><div>The positive sign is that there is no sign of any substitute material to threaten the use of ceramic tiles. I would conclude that White Horse is not in a sunset industry that can hinder any turnaround. </div><div><br /></div><div>If the current performance is tied to technology or green issues, I would have assessed the turnaround risk as high. </div><div><br /></div><h3>Global demand</h3><div>The ceramic tile market is global.</div><div><br /></div><div>According to <a href="https://www.researchandmarkets.com/reports/5766599/ceramic-tiles-global-market-report?gad_source=1&gclid=CjwKCAjwnOipBhBQEiwACyGLup_sd7v7R0N11TI-J1rm7o5ftjZCTTVd5vs77kK3K1PDocPoGdacYxoCh5wQAvD_BwE" target="_blank">Research and Market</a>, the global ceramic tiles market is expanding as consumer spending on home remodeling grows, highlighting an increased demand for ceramic tiles used primarily in kitchens and bathrooms.</div><div><br /></div><div>It projected the global ceramics tile market industry to grow at 10.4 % CAGR from 2023 to 2030.</div><div><br /></div><div>Other market research groups also paint positive reports;</div><div><ul><li><a href="https://www.marketsandmarkets.com/Market-Reports/ceramic-tiles-market-228236779.html?gad_source=1&gclid=CjwKCAjwnOipBhBQEiwACyGLuv895flnly7Q1FJfBamn-NHqSPDfIcF9T1qXTG-7Gb_rCtYTyFoP3BoCKA8QAvD_BwE" target="_blank">Market and Market</a> estimated that the market for ceramic tiles will grow at a CAGR of 7.1 % from 2022 to 2027.</li></ul><ul><li><a href="https://www.grandviewresearch.com/industry-analysis/ceramic-tiles-market" target="_blank">Grand View Research</a> estimated the global ceramic tiles market will grow at a CAGR of 7.1 % from 2022 to 2030.</li></ul></div><div><br /></div><div>The general view is that the global demand for ceramic tiles is growing at a higher rate than global GDP growth. </div><div><br /></div><div>In terms of the advantages and environmental issues regarding ceramic tiles, the following were reported:</div><div><ul><li>Research and Market - Ceramic tile manufacturing is an environment-friendly process. Recent technological advancements have also enabled manufacturers to further reduce the emissions of carbon and other harmful gases during production. </li></ul><ul><li>Grand View Research - Ceramic tiles are durable, rigid, and environment-friendly materials. They comply with green building standards.</li></ul><div><div><br /></div><h2>Valuation</h2><div>My value of White Horse is summarized in Chart 8.</div><div><ul><li>I estimated its Asset Value as RM 3.57 per share broken down into Graham Net Net, NTA, and Book Value.</li></ul><ul><li>I estimated its Earnings Value as RM 0.69 per share. This was estimated based on its Earnings Power Value. You can see that the non-operating assets accounted for the bulk of this value. </li></ul></div><div><br /></div><div>At RM 0.58 per share, White Horse is trading significantly below the Graham Net-Net of RM 1.28 per share and the non-operating assets of RM 0.63 per share.</div><div><br /></div><div>The Graham Net-Net is commonly used as a shorthand for the liquidation value. Given that there are signs of a return to profitability, I do not expect White Horse to be liquidated. </div><div><br /></div><div>Looking at the above, I would conclude that there is a sufficient margin of safety. It is not a value trap as the existing operations are still viable and generating good returns. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_kLGPuLw6r2e0zcrau1g_FgdXvrbtKOa5cLrpqiJHYDriYFYA-QCHWlu9FI8sWqHonrnZYRqnanuwogwADtzYYw3XFa2sqLuncmYxROGaSb5w6KnXNN3BuLzp_OA_j-T6nzHYecPSWNLSTWjvuOfDMUInOmDjuHCdhRTFIQBOv-xH8MmtlYmHa3PpBhQ/s614/Slide7-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="White Horse Chart 8: Valuation" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_kLGPuLw6r2e0zcrau1g_FgdXvrbtKOa5cLrpqiJHYDriYFYA-QCHWlu9FI8sWqHonrnZYRqnanuwogwADtzYYw3XFa2sqLuncmYxROGaSb5w6KnXNN3BuLzp_OA_j-T6nzHYecPSWNLSTWjvuOfDMUInOmDjuHCdhRTFIQBOv-xH8MmtlYmHa3PpBhQ/s16000/Slide7-min.PNG" title="White Horse Chart 8: Valuation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: Valuation</td></tr></tbody></table><br /><h3>Valuation model</h3><div><div>My Earnings Value of the company was derived based on the average values from 2 valuation approaches:</div><div><ul><li>Free Cash Flow to the Firm model as per Damodaran.</li></ul><ul><li>Residual Income model as per Penman.</li></ul></div><div><br /></div><div>For both models, I used the past 12 years’ time-weighted average value to represent the normalized value. </div><div><br /></div><div>I have taken a conservative view and ignored the growth in my valuation. At the same time, I have used the past 12 years’ time-weighted average EBIT as the earnings. In other words, I have ignored the potential turnaround.</div><div><br /></div><div>The cost of capital used in the model was based on the Capital Asset Pricing Model. I followed Damodaran’s approach to determine the Beta and the risk premiums. </div><div><br /></div><div>These resulted in both 12.2 % cost of equity and 9.7 % WACC. </div><div><br /></div><h3>Valuation risks and limitations</h3><div>There are 2 critical assumptions in my valuation</div><div><ul><li>Cost of capital.</li></ul><ul><li>Continuation of historical performance.</li></ul></div><div><br /></div><div>The cost of capital was derived based on the risk-free rate and equity risk premium as of 2022. We currently have the Ukraine invasion and the Israel-Gaza conflict. The parameters do not reflect the higher-risk situation. </div><div><br /></div><div>As such you should see the Earnings Value as an optimistic one. The only mitigating point is that the margin of safety is based on the Graham Net-Net. </div><div><br /></div><div>My valuation model assumes that the past 12 years' performance is a good reflection of the future. In a company undergoing a turnaround or venturing into new areas, this is a very conservative picture. </div><div><br /></div><div>If you think that the future would be better than the past, then my Earnings Values are conservative. Of course, if you think that the future would be worse, my Earnings Values are optimistic.</div><div><br /></div><div>I had earlier stated that the Group wrote off about RM 82 million from 2014 to 2022. Without these, the EPV would be about 80% higher.</div><div><br /></div><div>Normally for a company undergoing a turnaround, I would use a 2-stage growth model to value it. I would first project the change in earnings from a loss to a profit. Next, I would assume some steady earnings. I did not do this for White Horse as there is already a margin of safety under the Graham Net-Net.</div><div><br /></div></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div>As you see, the estimated intrinsic value will depend on the valuation models as well as the assumptions you make about the future.</div><div><div><br /></div><div>This requires you to have a comprehensive company analysis. At the same time, you need business experience to identify the opportunities for improvements. </div><div><br /></div><div>If you do not have a business background, you may find this a bit challenging. If you face such a situation, one way is to rely on third-party analysis and valuation. </div><div><br /></div><div>Several financial advisers provide such analyses. </div><div><br /></div></div></div><div><span style="text-align: start;">Those who do this well include people </span><span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.</div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>White Horse is still not a value trap</h2><div>A value trap is an investment that while appearing cheap is facing insurmountable problems. It is cheap for a reason. White Horse does not fall into this category.</div><div><br /></div><div>My analysis showed that the Group is financially sound. It has the resources to see it through a turnaround. I have shown that:</div><div><ul><li>The business suffered losses because it was operating below the breakeven level. But the Group had taken measures to reduce the breakeven level.</li></ul><ul><li>There is a strong link between the Group’s revenue and the performance of the Malaysian property sector.</li></ul><ul><li>The Malaysian property sector is probably at the bottom of the cycle. There has been an increase in the number of property transactions in 2022 compared to 2021.</li></ul></div><div><br /></div><div>The Group is undergoing a turnaround. The return to profitability is dependent on the property market turning around. I do not expect the Malaysian property market to remain soft forever. The property sector is cyclical. Furthermore, the ceramic tile industry is not a sunset one.</div><div><br /></div><div>The steps taken by the Group to reduce cost and capacity will help it to be profitable at a lower production volume. At the same time, the Group has the brand name and distribution set up to benefit from any turnaround.</div><div><br /></div><div>I have also estimated that there is a sufficient margin of safety from a Graham Net-Net perspective. White Horse is more than a cigar butt investment strategy as there is still potential for the business to grow. </div><div><br /></div></div></div></div><div><br /></div></div><div><br /></div></div><div><div><br /></div><div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div></div><div><br /></div></div></div><div><br /></div></div><div><br /></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-28241427519223908382023-11-05T08:08:00.004+08:002024-03-09T07:24:15.111+08:00Is Asia File still a value trap as of Nov 2023?<script type="application/ld+json">
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"headline": "Is Asia File still a value trap as of Nov 2023?",
"description": "An updated fundamental analysis and valuation of Asia File as of Nov 2023 showed that it is still not a value trap",
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); color: #171717; font-size: 15px; font-weight: bold; letter-spacing: 0.04em; padding-bottom: 10px; padding-top: 10px; text-align: justify; text-decoration: none;">Value Investing Case Study 02-4. This is an updated fundamental analysis and valuation of Asia File based on the financial results till FYE Mac 2023.</div>
<div class="separator" style="clear: both; text-align: center;"><div class="separator" style="clear: both; text-align: center;"><br /></div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkHNMSRxgFsg28nlPlv72tVVCYDD-wl0NQC_RCEaqI3CwERBrKhyJD0b4dDM4xyfrlEFxG3f05I6p7w95tKASqItZ_LEwRluLq2bbGWBCLHkPSXkClSP4Aopym8Su1Wafc7jokQreWJEIKN7DJYrUTh_Lmi2JklWqsFHhkebdydD2zjj0pseR_W_IVnD8/s335/Picture1-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Is Asia File still a value trap as of Nov 2023?" border="0" data-original-height="335" data-original-width="233" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkHNMSRxgFsg28nlPlv72tVVCYDD-wl0NQC_RCEaqI3CwERBrKhyJD0b4dDM4xyfrlEFxG3f05I6p7w95tKASqItZ_LEwRluLq2bbGWBCLHkPSXkClSP4Aopym8Su1Wafc7jokQreWJEIKN7DJYrUTh_Lmi2JklWqsFHhkebdydD2zjj0pseR_W_IVnD8/s16000/Picture1-min.png" title="Is Asia File still a value trap as of Nov 2023?" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">I first covered Asia File Corporation Bhd (Asia File or the Group) in Jul 2020. At that juncture, it was trading at RM 1.85 per share compared to its NTA of RM 3.06 per share. I had concluded that it was not a value trap.</div><div style="text-align: justify;"><div><br /></div><div>This is my latest update of Asia File based on the financials till FYE March 2023. In this article, I pulled together all the analyses from my previous articles. If you had try to access them, you would be redirected here. </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/HMlJH6DBmzg" width="320" youtube-src-id="HMlJH6DBmzg"></iframe></div><div><br /></div><div>The market price currently is RM 1.95 per share (16 Oct 2023). My updated analysis showed that it is still not a value trap.</div><div><br /></div><div>To be transparent I invested in Asia File years ago and I am still holding onto the stock. My average purchase price was RM 3.00 per share. But over the years I have recovered about half of that from dividends. My net exposure today is still below the current market price.</div><div><br /></div><div>Should you go and buy Asia File? See my Disclaimer.</div><div><br /></div><div><h2>Contents</h2><div><ul><li><b>Executive Summary</b></li></ul><ul><li><b>Investment thesis</b></li></ul><ul><li><b>Business background</b></li></ul><ul><li><b>Operating performance</b></li></ul><ul><li><b>Financial position</b></li></ul><ul><li><b>Risks</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Conclusion</b></li></ul><ul><li><b>Appendix 1. Expansion into Europe</b></li></ul><ul><li><b>Appendix 2. Digital disruption</b></li></ul></div></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br style="text-align: left;" /></div></div><div><h2>Executive Summary</h2><div><ul><li>As a stationery company, Asia File faces the threat of digital disruption. The Group has recognized this by not expanding into this sector. Instead it diversified into food wares and consumer wares that in 2023 accounted for 16% of the Group revenue.</li></ul><ul><li>Both the stationery and food/consumer wares businesses are profitable and generating good returns. But the overall ROE is low as about 2/3 of its total assets are non-operating assets.</li></ul><ul><li>The Group is financial sound. This should give it breathing space to seek other new ventures as well grow the food wares and consumer wares business.</li></ul><ul><li>The current market price is well below its Asset Value and Earnings Value. I do not consider Asia File a value trap.</li></ul></div><div><div><br /></div><h2>Investment thesis</h2><div>The Group had not pursued any expansion into the stationery sector over the past decade. Nevertheless its filing segment is a good cash cow.</div><div><br /></div><div>To address the digital disruption, the Group diversified into food wares and consumer wares in 2017. The Group has plans to grow this business as well a seek other new ventures. </div><div><br /></div><div>The challenge is that about 2/3 of its capital is tied up in non-operating assets that generated low returns. This has resulted in overall low returns for the Group. It would have to depend on new ventures to rectify this. The Group is financially strong and this will give it time to deliver these. </div><div><br /></div><div>My valuation showed that it is not a value trap. There is sufficient margins of safety to invest at the current market price. But you need to have a long-term view.</div><div><br /></div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div><h2>Business background</h2><div>Asia File is a global stationery company. Headquartered in Penang, Malaysia, the Group’s facilities consist of:</div><div><ul><li>7 production and warehousing sites in Malaysia.</li></ul><ul><li>2 manufacturing plants and one paper mill in the United Kingdom.</li></ul><ul><li>2 manufacturing facilities in Germany.</li></ul></div><div><br /></div><div>In FYE 2023, Malaysia accounted for about ¼ of the Group revenue. As can be seen from Chart 1, the bulk of its revenue comes from Europe. Refer to Appendix 1 for a history of the Group’s expansion into Europe.</div></div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgy-rDGEhyWlW9hE5JOK-aIGgp0R16qQETaAq7QRtTEqjKr8MHVXQmbR_2zssHDGC5c-FRF61vsY1hwx3bWZIa9bLS__7-AnppIEvXJaJVLoHqVAiMZdhUWSwoQaL3fQcbLxGvG0nlDFkZz6uZFrG6krIVgdbTDyXJDnR0EVwJX2ZCmsZTbCpEcdmxnPtQ/s614/Chart%201-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Chart 1: Revenue trend" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgy-rDGEhyWlW9hE5JOK-aIGgp0R16qQETaAq7QRtTEqjKr8MHVXQmbR_2zssHDGC5c-FRF61vsY1hwx3bWZIa9bLS__7-AnppIEvXJaJVLoHqVAiMZdhUWSwoQaL3fQcbLxGvG0nlDFkZz6uZFrG6krIVgdbTDyXJDnR0EVwJX2ZCmsZTbCpEcdmxnPtQ/s16000/Chart%201-min.PNG" title="Chart 1: Revenue trend" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Revenue trend</td></tr></tbody></table><div><br /></div><div><div>The Group’s core product category covers a wide range of filing products and filing accessories made from quality paperboard, plastics, and metals. </div><div><br /></div><div>Asia File remains the No. 1 file manufacturer in Malaysia with its ABBA brand. The Group has dominant standing in the United Kingdom and part of Europe. Its filing products have also been exported across various continents.</div><div><br /></div><div>As part of the Group’s diversification plan initiated five years ago, it has ventured into recyclable food wares and consumer wares. In FYE 2023, this accounted for about 16% of the Group’s revenue. </div><div><br /></div><div>This food wares and consumer wares is still a Malaysia-centric business as in its 2022 Annual Report, the company stated that:</div><div><br /></div><div>“In the near future, the Group plans to expand this business segment internationally in particularly Europe…”</div><div><br /></div><h2>Operating performance</h2><div>I looked at 3 metrics to get an overview of the overall performance – revenue, PAT, and gross profitability (gross profits / total assets). Refer to Chart 2.</div><div><br /></div><div>Revenue and PAT peaked in 2016 with declining trends since then. The main reason was the declining stationery business.</div><div><br /></div><div>In 2012/13, the stationery business generated an average of about RM 300 million in revenue per year. This had reduced to an average of RM 270 million per year in 2022/23. </div><div><br /></div><div>The Group revenue trend would be worse if not for the food wares and consumer wares operations. These averaged RM 50 million in revenue per year in 2022/23. It was not in existence in 2012/13.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWpbnYj7aLEUuM_PgZcRyoJtgXwK-tQQexHnP3VUezW2Wa5QVfBSgJUFmlKLv3PjKn__o01i0twMf83XGtBwjQNNW6SvCiGC8nMY2kKWn9kjcL-2pDq5Iu9VxaAeHXkh3O_SkbqFibrZqaiHZ5m4bfJE9aiveUpsQPbeaaIZe0kYVKjgoz0R8PBmkY7ZQ/s614/Chart%202-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Chart 2: Asia File Performance Index" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWpbnYj7aLEUuM_PgZcRyoJtgXwK-tQQexHnP3VUezW2Wa5QVfBSgJUFmlKLv3PjKn__o01i0twMf83XGtBwjQNNW6SvCiGC8nMY2kKWn9kjcL-2pDq5Iu9VxaAeHXkh3O_SkbqFibrZqaiHZ5m4bfJE9aiveUpsQPbeaaIZe0kYVKjgoz0R8PBmkY7ZQ/s16000/Chart%202-min.PNG" title="Chart 2: Asia File Performance Index" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Performance Index<br /><div style="text-align: left;"><i>Note to Chart 2: To plot the various metrics on one chart, I have converted the various metrics into indices. The respective index was created by dividing the various annual values by the respective 2012 values</i></div></td></tr></tbody></table><br /><div>While the revenue seemed to have turned around to stabilize in 2022/23, PAT and gross profitability continued to decline. There were several reasons for the declining PAT:</div><div><div><ul><li>Firstly, the ringgit profit declined in tandem with the decline in revenue.</li></ul><ul><li>There was also a decline in the net margin as can be seen from Chart 3. I defined the net margin = gross profit margin – SGA or Selling, General and Administration margin. While the gross profit margin was trending down, the SGA margin was increasing (except for the past 2 years). </li></ul><ul><li>The portion of non-operating assets (eg cash, investments in associates) increased over the years. In 2012 it was RM 177 million. By 2023, it was RM 496 million. The profits from the non-operating assets were low compared to those from the operating assets.</li></ul></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXms7AQiUEinfBVKKy2KHtrKllpHVaf2w8iBVhoKfQcSN1QvRHTF5XdoMvjVRwOCIuprktDtautLaCPtte0gFENGOVYvma-OOMkmQRJxbhJ5k5d_qihdcoLEoI00CgsiyXb4Ew-HEFF2dS_h6DcFJ5Vo9usIP3NEX_3Iy646aMLCUQY6pYVfJhvKHcCEc/s614/Chart%203-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Asia File Chart 3: Gross profit margin and SGA margin trends" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXms7AQiUEinfBVKKy2KHtrKllpHVaf2w8iBVhoKfQcSN1QvRHTF5XdoMvjVRwOCIuprktDtautLaCPtte0gFENGOVYvma-OOMkmQRJxbhJ5k5d_qihdcoLEoI00CgsiyXb4Ew-HEFF2dS_h6DcFJ5Vo9usIP3NEX_3Iy646aMLCUQY6pYVfJhvKHcCEc/s16000/Chart%203-min.PNG" title="Asia File Chart 3: Gross profit margin and SGA margin trends" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Gross profit margin and SGA margin trends<br /><div style="text-align: left;"><div><i>Notes to Chart 3: </i></div><div><i>a) SGA = Selling, General and Administration expenses.</i></div><div><i>b) SGA margin = SGA/Revenue.</i></div><div><br /></div></div></td></tr></tbody></table></div><div><h3>Margins</h3><div>You may think that the declining gross profit margin is a reflection of the challenges in the stationery sector. But when you compare Asia File gross profit margin trends with those of its peers, the picture is not so clear cut.</div><div><ul><li>There are 3 other Bursa stationery companies – CWG, Pelikan and UPA. You can see from Chart 4 that the gross profit margins for Pelikan and UPA seems to be holding whereas Asia File and UPA margins had declined since 2016.</li></ul><ul><li>The Japanense and Chinese listed stationery companies show a similar situation. Some companies managed to maintain their gross profit margins while others declined. Refer to Chart 6.</li></ul></div><div><br /></div><div>I suspect that the differences are due to the different stationery products of these companies. </div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZiEqOAmfUoQJymPyqNTyMfwVpvXQxslmdtiP4p1mxlFabdcpyn1A0EVgCmzvf9gDdjraVzdFH2FxgB-ufixm3qVuq8g8feJMOOW68q_v5DVvqda9qyQiht55Mt-cdDDwDijyYvT2McgxyLUP5TCZ3yJWEPn_b77MVvZ-WgF853el7mcy8R3OxBZbvUjE/s907/Chart%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Asia File Chart 4: Peer gross margin trends" border="0" data-original-height="372" data-original-width="907" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZiEqOAmfUoQJymPyqNTyMfwVpvXQxslmdtiP4p1mxlFabdcpyn1A0EVgCmzvf9gDdjraVzdFH2FxgB-ufixm3qVuq8g8feJMOOW68q_v5DVvqda9qyQiht55Mt-cdDDwDijyYvT2McgxyLUP5TCZ3yJWEPn_b77MVvZ-WgF853el7mcy8R3OxBZbvUjE/s16000/Chart%204-min.png" title="Asia File Chart 4: Peer gross margin trends" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Peer gross margin trends</td></tr></tbody></table><div><br /></div><div>As for Asia File’s SGA margin, while it increased, this was more due to a reduction in the revenue. The ringgit amount of SGA expenses was reasonably stable over the past 12 years. Refer to Chart 5.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQjz9eqxjktE32sUCJsAnyReJgireWhrmz_zz-OJQy1qr2MR9M8kr6AaO8f0vTjkiwjW2sznF_XrudTpSOXFv_FL6DZDyIIgS0yY5UgC_khxmZoYjwyWiUI6mRYDy8aAU95RczXW38823RFmbntbRV1jgPZ_Yz7kXvoda8nHkI8cgNGo-YY6lvrP5723Q/s614/Chart%205-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Asia File Chart 5: P&L components" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQjz9eqxjktE32sUCJsAnyReJgireWhrmz_zz-OJQy1qr2MR9M8kr6AaO8f0vTjkiwjW2sznF_XrudTpSOXFv_FL6DZDyIIgS0yY5UgC_khxmZoYjwyWiUI6mRYDy8aAU95RczXW38823RFmbntbRV1jgPZ_Yz7kXvoda8nHkI8cgNGo-YY6lvrP5723Q/s16000/Chart%205-min.PNG" title="Asia File Chart 5: P&L components" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: P&L components</td></tr></tbody></table><div><br /></div><div><h3>Large non-operating assets</h3><div>I wanted to get a sense of how well the total capital of the Group has been deployed. As such I divided the Group into 3 components – filing, food and consumer wares, and non-operating assets.</div><div><br /></div><div>The non-operating assets include investment properties, investments in associates and securities, and cash.</div><div><br /></div><div>Table 1 shows the 2023 revenue and profits in this context. I assessed the return as segment profits / TCE or total capital employed)</div><div><br /></div><div>You can see that the non-operating assets, which accounted for 66 % of the total capital, had negative returns.</div><div><br /></div><div>The positive sign is that the return from the new and growing food and consumer wares business is similar to that for the filing business. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO8D1HQQdDY8ZQW53n4ir9_ak4SWj2ic7n3vRFr3saqhrqE6VxNC9Y9Xc3efQFLBoODjx18-aa4jDCJEJOHPOB8G0jwQzhXHRO8ndDyU0DKklr4yvMQY5hf1bjZaKaR9OM1yaIXlb4wrV7J6m9BfD-OaxRJFhzsfkfvsIf-u1ydyQJ115kHftqUvfNous/s687/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Asia File Table 1: Segment Performance" border="0" data-original-height="126" data-original-width="687" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO8D1HQQdDY8ZQW53n4ir9_ak4SWj2ic7n3vRFr3saqhrqE6VxNC9Y9Xc3efQFLBoODjx18-aa4jDCJEJOHPOB8G0jwQzhXHRO8ndDyU0DKklr4yvMQY5hf1bjZaKaR9OM1yaIXlb4wrV7J6m9BfD-OaxRJFhzsfkfvsIf-u1ydyQJ115kHftqUvfNous/s16000/Table%201-min.png" title="Asia File Table 1: Segment Performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Segment Performance<br /><div style="text-align: left;"><div><i>Notes to Table 1</i></div><div><i>a) F/C wares = food wares and consumer wares.</i></div><div><i>b) Revenue and profits for Filing and F/C wares were based on 2023 segment profits. The Non-Op segment profit was derived by deducting the segment profits from the Group PBT.</i></div><div><i>c) TCE = Total capital employed = total assets – total liabilities excluding leases.</i></div><div><i>d) TCE for the Filing segment was derived by allocating the total assets. The PPE was allocated based on the 2023 segment depreciation. The other net assets were allocated based on the 2023 segment revenue. </i></div><div><i>e) TCE for the Non-Op was assumed to be equal to the investment properties, associates, securities, and cash.</i></div><div><i>f) The TCE for the F/W wares was the balance TCE.</i></div></div></td></tr></tbody></table><div><br /></div><div>Given the increasing non-operating assets, declining gross profitability declined.</div></div><div><div><br /></div><h3>Digital disruption</h3><div>The stationery business is being disrupted by digital technology. The Group recognizes this as in its 2023 Annual Report, it stated:</div><div><br /></div><div>“The advent of digital technologies…has transformed the way information is stored…will reduce the reliance on physical files…the demand for traditional physical files may decline over time.”</div><div><br /></div><div>For a more detailed discussion on this, refer to Appendix 2.</div><div><br /></div><div>While there is the threat of digital disruption, there is no immediate danger. This is because the revenues and gross profit margins of the listed stationery products companies in Japan and China are still holding. Refer to Chart 6.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBfIsFCMeWEotM3Q_JXJ8k3yVOF6J3d9iMQAd146tULbFM2SzSz9cXA2jU9P4wZcQ9eeFwfI7LWxx9q4FpcHGiU6ITWJy5OnikccVUp5C2Q4LnnY_garJlWOhXaL4bOvsdML8ueSZ8MY-zD48MvMU1TnoyiKYvKf2jE92aoUR0_dbvIkbvXnnSZHhH9hs/s827/Chart%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Asia File Chart 6: Revenue and gross profit margin trends of Japanese and Chinese stationery companies" border="0" data-original-height="649" data-original-width="827" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBfIsFCMeWEotM3Q_JXJ8k3yVOF6J3d9iMQAd146tULbFM2SzSz9cXA2jU9P4wZcQ9eeFwfI7LWxx9q4FpcHGiU6ITWJy5OnikccVUp5C2Q4LnnY_garJlWOhXaL4bOvsdML8ueSZ8MY-zD48MvMU1TnoyiKYvKf2jE92aoUR0_dbvIkbvXnnSZHhH9hs/s16000/Chart%206-min.png" title="Asia File Chart 6: Revenue and gross profit margin trends of Japanese and Chinese stationery companies" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Revenue and gross profit margin trends of Japanese and Chinese stationery companies <br /><div style="text-align: left;"><div><i>Reference code in the Chart 6:</i></div><div><ul><li><i>Kokuyo Co Japan (7846)</i></li><li><i> Mitsubishis Pencil Co (7976)</i></li><li><i>Pilot Corp (7846)</i></li><li><i>Shanghai M&G Stationery (603899)</i></li><li><i>Shenzen Comix Group (002301)</i></li></ul></div><div><br /></div></div></td></tr></tbody></table>The key is that Asia File recognized this digital disruption threat years ago. As such it did not expand this business further but sought to invest in new ventures such as the food wares business in 2017.<div><div><br /></div><h3>Competitors</h3><div>To get a sense of how well Asia File was doing relative to its peers, I compared its ROE trends with those of 3 other Bursa companies in the stationery sector. These are CWG, Pelikan and UPA.</div><div><br /></div><div>Refer to Chart 7 where Asia File is denoted by the light blue line. You can see that most of the time, Asia File was the best performer.</div></div><div><br /></div><div><div>What are the key takeaways from the above?</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOtOkw5ndqoVqc67OoNWBiF6Uu5x2escnqfDOmQ-bULIjIezfSt48SRFIA8sDkhLLAwYW9IQaYPgtAVqsu6ylY0ToNNKD8rh_95hGi0g_3wGqOiiZ4yjYLsFBpZToXdL_Kbnl52bZV7ucKN0NHBvJ2x_39-OBVE6Gt0hqGsaisJi1DDEHTc0joTycb8ac/s833/Chart%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Asia File Chart 7: Peer ROE trends" border="0" data-original-height="332" data-original-width="833" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOtOkw5ndqoVqc67OoNWBiF6Uu5x2escnqfDOmQ-bULIjIezfSt48SRFIA8sDkhLLAwYW9IQaYPgtAVqsu6ylY0ToNNKD8rh_95hGi0g_3wGqOiiZ4yjYLsFBpZToXdL_Kbnl52bZV7ucKN0NHBvJ2x_39-OBVE6Gt0hqGsaisJi1DDEHTc0joTycb8ac/s16000/Chart%207-min.png" title="Asia File Chart 7: Peer ROE trends" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Peer ROE trends</td></tr></tbody></table><div><br /></div><div>The global stationery market is still projected to grow at about 4% over the next decade (refer to Appendix 2). From a conservative perspective, it is better to assume that filing segment would not see significant revenue growth.</div><div><br /></div><div>Looking at Chart 1 and Table 1, the food and consumer wares segment can offset the filing business revenue. And they both have similar returns. What is not clear yet is whether the food and consumer total addressable market is as large as Asia File's stationery market niche.</div><div><br /></div><h2>Financial position</h2><div>I would rate Asia File as financially strong based on the following:</div><div><ul><li>As of the end of June 2023, it had cash and securities of RM 303 million. This is about 37 % of its total assets.</li></ul><ul><li>As of the end of June 2023, it had zero bank loans. The only debt component came from its leases which amounted to less than RM 3 million.</li></ul><ul><li>It had been able to generate positive cash flow from operations every year over the past 12 years.</li></ul><ul><li>Over the past 12 years, it generated an average of RM 47 million per year in cash flow from operations compared to an average PAT of RM 50 million per year. This is a good cash conversion record.</li></ul><ul><li>It has a good capital allocation track record as shown in Table 2. About 45% of the cash flow from operations was returned to shareholders in the form of dividends and buybacks. A large part of the balance was reinvested into the operations. </li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIvOqBnYDgG4hx_HcCOTbEoYti5X7LbLqlJoFQDmq5SsOq-NXItMlxGZlY1b8eALI74Qb00-9oo2UCKCcdVkMSa5ONRxia5XGp9bYrF0nq2sejdkU1ts0oKbhjrFANRSsa1LUeJlYMy1IdrxnlA6ANQtyXMvjGniJbsnGI9IXONxVZF55CLIuzdCYSod0/s539/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Asia File Table 2: Sources and Uses of Funds 2012 to 2023" border="0" data-original-height="251" data-original-width="539" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIvOqBnYDgG4hx_HcCOTbEoYti5X7LbLqlJoFQDmq5SsOq-NXItMlxGZlY1b8eALI74Qb00-9oo2UCKCcdVkMSa5ONRxia5XGp9bYrF0nq2sejdkU1ts0oKbhjrFANRSsa1LUeJlYMy1IdrxnlA6ANQtyXMvjGniJbsnGI9IXONxVZF55CLIuzdCYSod0/s16000/Table%202-min.png" title="Asia File Table 2: Sources and Uses of Funds 2012 to 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Sources and Uses of Funds 2012 to 2023</td></tr></tbody></table><br /><div>Table 2 shows clearly that the filing business is a cash cow for the company. This is reinforced by the low Reinvestment rate.</div></div><div><div><br /></div><div>I defined Reinvestment rate = Reinvestment / EBIT (I-T).</div><div><br /></div><div>Reinvestment = CAPEX + Acquisitions – Depreciation & Amortization + Net Increase in Working Capital.</div><div><br /></div><div>I estimate that over the past 12 years, Asia File incurred an average Reinvestment of RM 4.9 million per year. Its average EBIT(1-t) over the same period came to RM 48.1 million per year. The Reinvestment rate = 4.9 / 48.1 = 10%.</div><div><br /></div><h3>Shareholders’ value</h3><div>I used 2 metrics to look at shareholders' value creation:</div><div><ul><li>Comparing returns with the cost of funds.</li></ul><ul><li>Q Rating.</li></ul></div><div><br /></div><div>Over the past 12 years, it achieved an average ROE of 9.6 % compared to its cost of equity of 7.9 %. This meant that it managed to create shareholders’ value. </div><div><br /></div><div>In 2023 Asia File has an overall Q Rating score of 0.53 placing it above the 75% ranking of the panel companies. Refer to Chart 8.</div><div><br /></div><div>The rating reflects the strong profitability, financial position, and risk. However, the rating highlights its poor growth. I will interpret the rating to mean that the Group would be able to sustain its earnings but do not expect to see significant earnings growth. </div><div><br /></div><div>You can see that the 2023 Q Rating is very much in line with that for 2020. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTmjUeQyTkspeEb2N-UU3UzWwKNehtDpn8i_DP_Gap3aO1nOiatJa2ikpE2Dwm3deGnaCTWcwJiGINhW-xOgIp25mk6jfR2PjQbKisBDlym_jFQIzdHgL9d0zC2OcM0Z2wAQhv5PMUP_UP1uSSp-SPzKNL6IICTGmJcJfe5OLjiEx466HQ6VkwgmMbfmE/s614/Chart%208-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Asia File Chart 8: Comparative Q Rating" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTmjUeQyTkspeEb2N-UU3UzWwKNehtDpn8i_DP_Gap3aO1nOiatJa2ikpE2Dwm3deGnaCTWcwJiGINhW-xOgIp25mk6jfR2PjQbKisBDlym_jFQIzdHgL9d0zC2OcM0Z2wAQhv5PMUP_UP1uSSp-SPzKNL6IICTGmJcJfe5OLjiEx466HQ6VkwgmMbfmE/s16000/Chart%208-min.PNG" title="Asia File Chart 8: Comparative Q Rating" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: Comparative Q Rating</td></tr></tbody></table><div><br /></div><div><div>The key takeaway for this section is that this is a financially sound Group. Its main challenge is growth. Unfortunately, this has to come from new ventures.</div><div><br /></div><h2>Risks</h2><div>When you look at risk, you have to consider not only business risk but also your own risk as an investor.</div><div><br /></div><div>Your risk covers the risk of the Group being privatized while the major business risk relates to the Group’s business direction.</div><div><br /></div><h3>Privatization</h3><div>In Asia File's case, the major shareholder collectively controls about 46 % of the company. Any privatization plan to acquire the remaining 54 % at the current market price of RM 1.95 per share would require about RM 205 million. </div><div><br /></div><div>The company has cash and securities of about RM 303 million (as of June 2023). So, it is possible to take it private via a capital reduction route. </div><div><br /></div><div>While I cannot read the minds of the shareholders, note that Amanah Raya is an institutional investor of Asia File with about 19 % as of the end of June 2023. </div><div><br /></div><div>I would think that any privatization offer by the controlling shareholders would need to be at an attractive price for Amanah Raya to vote for it. I doubt the current market price is attractive. </div><div><br /></div><div>This would minimize privatization risk. Besides if there was any privatization plan, it would be been undertaken a few years ago when the price was much lower at about RM 1.42 per share.</div><div><br /></div><h3>Strategic Direction </h3><div>Over the past 12 years, Asia File had to meet the digital disruption challenge.</div><div><br /></div><div>The performance of Asia File and a number of its Bursa-listed peers over the past 12 years reflects the challenging industry. </div><div><br /></div><div>This is not a high-growth business. </div><div><br /></div><div>When Asia File's share price was at its peak in 2016 the Group had a ROE of 15%. In 2023 this had come down to 4 % which is below its cost of funds. </div><div><br /></div><div>One of the key requirements for shareholders’ value creation is for the ROE to be greater than its cost of funds. </div><div><br /></div><div>To be above its cost of funds, given its RM 751 million total equity and debt, and a WACC of 7.9%, the threshold is RM 59 million PAT annually. </div><div><br /></div><div>With substantial non-operating assets, the Group would not be able to achieve this with the current filing business. It has to deploy its cash into higher return ventures. This is where the biggest risk will come from. </div><div><br /></div><div>About 2 decades ago, the Group set on a path to be an international integrated filing company. I believe that the Group is now at a similar crossroads that will shape its future.</div><div><br /></div><div>I think that in the 2023 Annual Report, the Group has given a glimpse of its strategic direction:</div><div><ul><li>Enhance existing operations.</li></ul><ul><li>Expand its food ware and consumer ware business.</li></ul><ul><li>Seek other new ventures.</li></ul></div><div><br /></div><div>In its first diversification, Asia File built on its manufacturing expertise to venture into food wares. It took the Group about 5 years to grow this to be an RM 50 million business. </div><div><br /></div><div>This is about 1/5 the size of the filing business. At this stage, it is not clear whether the food and consumer wares business could be as big as the filing business</div><div><br /></div><div>I have covered several US packaging companies (including those in the F&B) sector for Seeking Alpha. The global packaging business is not a high-growth sector with a projected CAGR of about 4%. </div><div><br /></div><div>Given this, the Group needs to think of another investment that within a decade could be as large as the current filing business. </div><div><br /></div><div>I am not sure whether the Group has thought in such quantum leap terms. If not, there will be limited growth.</div><div> </div><div>But a quantum leap will have to be from new ventures where Asia File is unlikely to have the expertise. It has no track record of such ventures.</div><div><br /></div><div>It is between the devil and the deep blue sea!</div><div><br /></div></div></div><div><h2>Valuation</h2><div>My value of Asia File is summarized in Chart 9.</div><div><ul><li>I estimated its Asset Value as RM 3.84 per share broken down into Graham Net Net, NTA, and Book value.</li></ul><ul><li>I estimated its Earnings Value as RM 4.97 per share. You can see that the non-operating assets accounted for about half of this value. A significant part of the balance came from its Earnings Power Value.</li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFx68K-qkdjtm-Y2KJLoLlWtlNk1c4jSHrri2eN-ZzjJmTyZQpy35lK_micFbjhivorG5v4q43ZbzBV_nyLfMfH0hwUmPuxY60iAfKwWJ8mQouj_4RQJVYl_wpQ66RKEg8nIlRlz2BnkIqbNXi1nACW0mjTAlBWSKR_Jou-w_mbyzV3Mc4vn6ZOwCd7RA/s614/Chart%209-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Asia File Chart 9: Valuation" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFx68K-qkdjtm-Y2KJLoLlWtlNk1c4jSHrri2eN-ZzjJmTyZQpy35lK_micFbjhivorG5v4q43ZbzBV_nyLfMfH0hwUmPuxY60iAfKwWJ8mQouj_4RQJVYl_wpQ66RKEg8nIlRlz2BnkIqbNXi1nACW0mjTAlBWSKR_Jou-w_mbyzV3Mc4vn6ZOwCd7RA/s16000/Chart%209-min.PNG" title="Asia File Chart 9: Valuation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 9: Valuation </td></tr></tbody></table><div><br /></div><div>At RM 1.95 per share, Asia File is trading significantly below the Asset Value and Earnings Value. It is even trading below its non-operating assets of RM 2.39 per share. </div><div><br /></div><div>Over the past 5 years and even currently, the market price of Asia File share has been below the Earning Power Value. </div><div><br /></div><div>Looking at the above, I would conclude that there is a sufficient margin of safety. It is not a value trap as:</div><div><ul><li>The existing operations are still viable and generating good returns. </li></ul><ul><li>The investment in associates is equal to RM 1.12 per share. </li></ul></div><div><br /></div><div>Even if you write off all its investments in associates, there is still more than a 30% margin of safety from the resulting Asset Value and Earnings Value.</div></div><div><br /></div><div><h3>Valuation model</h3><div>My Earnings Value of the company was derived based on the average values from 2 valuation approaches:</div><div><ul><li>Free Cash Flow to the Firm model as per Damodaran.</li></ul><ul><li>Residual Income model as per Penman.</li></ul></div><div><br /></div><div>For both models, I used the past 12 years’ time-weighted average value to represent the normalized value. </div><div><br /></div><div>The cost of capital used in the model was based on the Capital Asset Pricing Model. I followed Damodaran’s approach to determine the Beta and the risk premiums. </div><div><br /></div><div>These resulted in a both 7.9 % cost of equity and WACC. Note that the values for both are about the same due to the low debt situation.</div><div><br /></div><h3>Valuation risks and limitations</h3><div>There are 3 critical assumptions in my valuation</div><div><ul><li>Cost of capital.</li></ul><ul><li>Continuation of historical performance.</li></ul><ul><li>Value of the associate, Muda Holdings.</li></ul></div><div><br /></div><div>The cost of capital was derived based on the risk-free rate and equity risk premium as of 2022. We currently have the Ukraine invasion and the Israel-Gaza conflict. The parameters do not reflect the higher-risk situation. </div><div><br /></div><div>As such you should see the Earnings Value as an optimistic one. The only mitigating point is that the margin of safety is sufficiently large. </div><div><br /></div><div>My valuation model assumes that the past 12 years' performance is a good reflection of the future. In a company undergoing a turnaround or venturing into new areas, this is a very conservative picture. </div><div><br /></div><div>If you think that the future would be better than the past, then my Earnings Values are conservative. Of course, if you think that the future would be worse, my Earnings Values are optimistic.</div><div><br /></div><div>Finally, in my valuation, I considered the book value of the associates. This is about RM 218 million. However, an EPV of Muda Holdings (refer to the Case Notes) showed that the investment is only worth RM 101 million. This is thus an over-valuation of RM 117 million equivalent to RM 0.60 per share.</div></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><i><span style="font-size: x-small;"><br /></span></i></div><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><div><br /></div><div><div>About RM 218 million of the Group’s assets are for its 24 % shareholding in Muda Holdings Bhd (associates). </div><div><br /></div><div>As of the end of Dec 2022, the 24 % value of Muda Holdings based on several valuation metrics were:</div><div><ul><li>RM 303 million based on the NTA of Muda Holdings.</li></ul><ul><li>RM 104 million based on the market price of Muda Holdings as of 16 Oct 2023.</li></ul><ul><li>RM 101 million based on the Earning Power Value of Muda Holdings. This was based on the 2012 to 2022 average EBIT(1-t) of RM 62.8 million (Source: <a href="https://app.tikr.com/register?ref=0omlzm">TIRK.com</a>) and a WACC of 6% (Source: GuruFocus). I have also added RM 142.2 million cash to the EPV and deducted RM 717.4 million debt and RM 43.3 million minority interests.</li></ul></div><div><br /></div><div>We should use the Earning Power Value of Muda Holdings rather than the accounting value when determining the value of Asia File. </div><div><br /></div><div>As you can see, fundamental analysis is more than just using some formula. There are choices to be made in terms of which approach to use and what to assume. </div><div><br /></div><div>So, if you are just starting to analyze and value companies, it may be helpful to supplement it with third-party analyses and valuation. Several financial advisers provide such analyses. </div><div><br /></div></div><div><div><span style="text-align: start;">Those who do this well include people </span><span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.</div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>Conclusion</h2><div>Asia File is a company facing digital disruption for its filing business. However, the potential disruption by digital technology is still unclear. This gives the existing business some runway to continue to be profitable.</div><div><br /></div><div>The Group has addressed this threat by not expanding the stationery business. Instead, it ventured into food and consumer wares that in 2023 accounted for 16% of the Group revenue.</div><div><br /></div><div>I would rate Asia File as sound due to the following:</div><div><ul><li>Over the past 12 years, it has been able to create shareholders’ value.</li></ul><ul><li>In 2023 it generated reasonable returns from the filing, food wares and consumer wares businesses.</li></ul><ul><li>The Group is financially sound. The filing business is a good cash cow. </li></ul></div><div><br /></div><div>The market price did not reflect its Asset value let alone the Earnings value. </div><div><br /></div><div>A value trap is a stock that while appearing to be a bargain turns out to be a dud. This is because the company has insurmountable problems that affect its profitability.</div><div><br /></div><div>Asia File value from just cash and investment in associates comes to RM 2.39 per share. From a liquidation perspective, all shareholders will be able to get more than the current share price.</div><div><br /></div><div>Management has shown that they are prudent in spending money and I am confident that they are cost-conscious. There is ample margin of safety provided you have the holding power.</div><div><br /></div><div>There is thus downside protection. Asia File is not a value trap.</div><div><br /></div><div>But with 2/3 of its total assets as non-operating, is there a danger that Asia File is a cash holding value trap? Refer to my case study of <a href="https://www.i4value.asia/2023/10/eksons-is-now-value-trap-oct-2023.html#more" target="_blank">Eksons</a>. I do not consider Asia File in this value trap category as:</div><div><ul><li>It still has a strong operating business.</li></ul><ul><li>About half of the non-operating assets are actually investments in Muda Holdings that has business dealings with Asia File.</li></ul></div><div><br /></div><div>Management has mentioned not paying out so much dividends to have a reserve for diversification. However, there is a possibility that the operations may throw up more cash than needed for this. Should this happen, there could be more dividends in the future than what was paid in the last few years.</div><div><br /></div><div>If you were to invest in Asia File, it must be because you had a long-term horizon. You were betting that either:</div><div><ul><li>The market will eventually re-rate it based on its existing earning power.</li></ul><ul><li>Better still the Group finds an opportunity to redeploy its cash and the market re-rate on this basis.</li></ul></div><div><br /></div><div>For any re-rating, it has to improve its ROE. This will not come from the existing business. I would go so far as to say that if it wants to be re-rated to match the 5-year high price, the ROE should go back to the 15 % level.</div></div><div><br /></div><div><h2>Appendix 1. Expansion into Europe</h2><div>The Group ventured into Europe in the late 90s and by 2004, Europe was the top revenue contributor. But the big growth came from a series of acquisitions.</div><div><ul><li>2008 – The group acquired 2 German dividers manufacturers which resulted in increased sales in 2009 from Germany, Norway, and Switzerland.</li></ul><ul><li>2012 – The Group acquired a paper mill and a filing company in the UK giving the Group strategic control from supply to distribution.</li></ul></div><div><br /></div><div>While the Group spent about RM 100 million for these acquisitions (including RM 30 million in goodwill), it more than recovered the investments—a value-added M&A exercise. </div><div><br /></div><div>Although the Malaysian business did not grow, its 20 % stake in Muda Holdings has added value as its initial investment of RM 45 million in 2008 is recognized as RM 218 million in 2023 due to the post-acquisition reserves. </div><div><br /></div><h2>Appendix 2. Digital disruption</h2><div>The common understanding is that the stationery industry is ripe for disruption by digital technology. But when you look at secular changes in the industry, you have to differentiate between product disruption and supply chain disruption.</div><div><br /></div><div>An example of the former is email disrupting the traditional paper-based mail. An example of the latter is how Amazon has disrupted the brick-and-mortar bookstore. </div><div><br /></div><div>The future of the Group comes down to how it has responded to such secular changes. When I looked at the strategic direction of the Group through its Annual Reports, several things stood out.</div><div><br /></div><div>1. About 2 decades ago, Asia File started to establish itself as an integrated international filing Group. This led the Group to expand its facilities in Malaysia as well as to acquire several companies in the UK and Germany that gave it access to new markets. </div><div><br /></div><div>2. The Group direction took a new tone when in 2013, it started to mention the consolidation taking place in the industry, both from the competitor as well as the customer perspectives. This message about consolidation was repeated in several subsequent Annual Reports. </div><div><br /></div><div>3. Then in 2017, the impact of digital technology on the industry was first mentioned. The Group also announced its venture into the food ware business.</div><div><br /></div><div>4. In 2023, it mentioned that the usage and consumption of files have been impacted by digital transformation which makes E-filing an alternative to traditional physical filing of documents. However, E-filing would not completely replace physical filing and hence the existing players in the industry would be well-buffered from any potential new competitors given the nature of the industry.</div><div><br /></div><div>We should differentiate between the impact of consolidation (mainly a supply chain impact) and the impact of digital technology (a product impact).</div><div><br /></div><div>The former will intensify competition and as stated in the 2019 Annual Report will “exert pricing pressure and impact margins.” </div><div><ul><li>It is about existing industry players acquiring/merging with other industry players. The impact is bigger and stronger groups vying for the same market.</li></ul><ul><li>It is also about customers merging and giving them stronger bargaining power. </li></ul></div><div><br /></div><div>However, the impact of digitalization is generally about the entry of non-traditional players into the stationery market. A good example of this is email replacing the historical pen and paper mail. </div><div><br /></div><div>It is companies like Google and Microsoft entering the “office communication” market. In contrast with the consolidation phenomenon, the impact of digital technology is the disappearance of the market for traditional products. </div><div><br /></div><div>It is also highly possible that the impact of digital technology may have been the catalyst for the consolidation taking place in the industry.</div><div><br /></div><div>Asia File faces both phenomena. How has Asia File met the challenges of consolidation? </div><div><br /></div><div>It is with new products, both production and product innovation and cost control measures. They have also talked about reshaping the business models, new markets, and deepening customer engagements. </div><div><br /></div><div>What about digital technology? </div><div><br /></div><div>Stationery products cover a wide range of materials such as paper, writing instruments, drawing devices, filing and storage products, and greeting cards.</div><div><br /></div><div>Asia File, with its focus on filing products, operates in a niche segment. </div><div><br /></div><div>With such a wide range of products, it is not clear nor pre-ordained that the whole industry’s products would be disrupted by digital technology. The stationery industry is not like the taxi industry and with so little product segmentation, the taxi industry as a whole is being disrupted by the likes of Uber and/or Grab.</div><div><br /></div><div>Based on several excerpts of global market reports as per below, the stationery industry has still not gone the way of the newspaper industry. Most researchers still forecast growth. </div><div><ul><li><a href="https://www.researchandmarkets.com/report/stationery" target="_blank">Research and Market</a> projected at a CAGR of 4.6% over the analysis period 2022-2030.</li></ul><ul><li><a href="https://www.factmr.com/report/339/stationery-market" target="_blank">Fact.MR</a> sees worldwide demand for stationery products to increase by 4.2 % CAGR from 2023 to 2033.</li></ul><ul><li><a href="https://www.grandviewresearch.com/industry-analysis/stationery-products-market" target="_blank">Grand View Research</a> valued the global stationery market at USD 128.5 billion by 2025 and is expected to grow at a compound annual growth rate (CAGR) of 5.1% during the forecast period (2019 to 2025).</li></ul></div><div><br /></div><div>To come back to what Asia File has done to address the impact of digital technology.</div><div><ul><li>It ventured into the food ware business in 2017. By 2023, this accounted for 16 % of the Group revenue and segment profits.</li></ul><ul><li>It has re-strategized marketing by embracing digital technology and tapping into the vast potential of e-commerce. </li></ul></div><div><br /></div><div><b>Conclusion 1</b> – do not expect any quantum leap in growth from the current stationery business. I suspect that given the consolidation and digital threat, Asia File is not likely to undertake any other M&A exercise to either expand beyond filing products or to buy into new markets. Any growth for this traditional stationery segment will be organic.</div><div><br /></div><div><b>Conclusion 2</b> – it looks like there may be further diversification based on tapping into its existing food ware and consumer ware businesses. The Group has also stated in its 2023 Annual Report that:</div><div><br /></div><div>“To ensure sustainable growth, the Group will be on continuous lookout for new ventures whether within or outside its core business.”</div></div><div><br /></div><div><br /></div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><br /></div><div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div></div><div><br /></div></div></div><div style="text-align: justify;"><br /></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-21644958661208989552023-10-29T11:05:00.018+08:002023-11-26T11:44:21.786+08:00Baby steps in constructing a stock portfolio<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); color: #171717; font-size: 15px; font-weight: bold; letter-spacing: 0.04em; padding-bottom: 10px; padding-top: 10px; text-align: justify; text-decoration: none;">Fundamentals 06-1: There are two aspects in managing any stock portfolio - construction and maintenance. This post focuses on the construction of a stock portfolio while maintenance issues are covered in "<a href="https://www.i4value.asia/2021/01/baby-steps-in-maintaining-stock.html#more">Baby steps in maintaining a stock portfolio</a>". Revision date: 29 Oct 2023</div>
<div><br /></div><div><div style="text-align: justify;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhVkwSQeBgYcD-BTjdr7pNihNMm2SCOE31xDcEZDAVR0B-On12yhuaUpgdd9-R3WUFlgYVRLpzCo9sz7jGpTmJeBifiUzACxj0W616XrtI4kr4jEJaWQSiVar8mVrC-6-7GZB49RJDyDyQ/s560/Why+stock+portolio-min.png" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img alt="How to construct a stock portfolio" border="0" data-original-height="420" data-original-width="560" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhVkwSQeBgYcD-BTjdr7pNihNMm2SCOE31xDcEZDAVR0B-On12yhuaUpgdd9-R3WUFlgYVRLpzCo9sz7jGpTmJeBifiUzACxj0W616XrtI4kr4jEJaWQSiVar8mVrC-6-7GZB49RJDyDyQ/w400-h300/Why+stock+portolio-min.png" title="How to construct a stock portfolio" width="400" /></a></div><div style="text-align: justify;"><span><a name='more'></a></span></div><div style="text-align: justify;"><div>Constructing a stock portfolio can be both exhilarating and daunting, especially so for the bottom-up stock picker. Each stock in your portfolio is like a puzzle piece, carefully selected to contribute to the bigger picture of your financial future. </div><div><br /></div><div>In this guide, we will take you through the fundamental steps of creating a stock portfolio. We begin by understanding the core purpose of a stock portfolio. We next delve into the critical question of how to allocate your hard-earned savings effectively.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/7T7of46Q1Ww" width="320" youtube-src-id="7T7of46Q1Ww"></iframe></div><div><div><br /></div><div>Moving on, we explore the art of stock selection, shedding light on the quest for undervalued stocks. Once armed with the knowledge of stock selection, we shift our focus to the practical aspects of building your portfolio. </div></div><div><br /></div><div>Join us on this educational journey, where we break down the complexities of constructing a stock portfolio into manageable baby steps. </div><div><br /></div><div>This article focuses on how a stock portfolio is formed. As such issues relating to managing the portfolio eg portfolio performance and rebalancing will not be covered here.</div><div><br /></div><div>Secondly, I have a running case study on how to construct and maintain a stock picking portfolio. Refer to “<a href="https://www.i4value.asia/2022/01/how-to-construct-winning-stock.html#more" target="_blank">Case study on how to manage a stock picking portfolio</a>”. It is case study where I share how I construct the portfolio and how I review them every quarter. Consider it as an illustration on how to use the concepts presented here. </div></div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><h2><b>Contents</b></h2><div><div style="text-align: left;"><b>1. Understanding the Purpose of a Stock Portfolio</b></div><div style="text-align: left;"><b><br /></b></div></div></div>1.1 Why have a stock portfolio?<div><br />1.2 How to Allocate Your Savings<div style="text-align: justify;"><div><div style="text-align: left;"><b><br /></b></div><div style="text-align: left;"><b>2. Stock Selection Strategies</b></div><div style="text-align: left;"><br /></div></div></div>2.1 Finding Undervalued Stocks<br />2.1.1 Why Look for Undervalued Stocks?<br />2.1.2 How Stocks Become Undervalued<br />2.1.3 Steps to find undervalued stocks<br /><br />2.2 Determining Whether a Stock is Under or Overvalued<br />2.2.1 Using Relative Valuation<br />2.2.2 Using the Greenwald approach<br />2.2.3 Utilizing the Magic Formula<div style="text-align: justify;"><div><div style="text-align: left;"><b><br /></b></div><div style="text-align: left;"><b>3. Building Your Portfolio</b></div><div style="text-align: left;"><br /></div></div></div>3.1 Selecting the Stocks for Your Portfolio<br /><br />3.2 How Many Stocks Should You Have in the Portfolio?<br /><br />3.3 How Much to Invest in Each Stock<br />3.3.1 Do you allocate the same amount to each stock?<br />3.3.2 Investing as a Stock Trader<br /><br />3.4 Establishing the Position<div style="text-align: justify;"><div><div style="text-align: left;"><b><br /></b></div><div style="text-align: left;"><b>4. Risk</b></div><div style="text-align: left;"><b><br /></b></div><div style="text-align: left;"><b>5. Pulling It All Together</b></div><div style="font-weight: bold;"><br /></div></div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div><div><h2 style="text-align: left;">1. Understanding the Purpose of a Stock Portfolio</h2><div>In the world of finance and investment, understanding the purpose of a stock portfolio is paramount. Whether you're a seasoned investor or a newcomer to the world of stocks, this section aims to provide clarity on the fundamental question: Why do we build and maintain stock portfolios? </div><div><br /></div><div>Beyond the allure of potential profits, a well-constructed portfolio serves various purposes, from wealth accumulation and capital preservation to achieving specific financial goals and mitigating risks. </div></div><div><br /></div><h3 style="text-align: left;">1.1 Why have a stock portfolio?</h3></div><div style="text-align: justify;"><div>If you know that a particular stock is going to give the best return in the future, you would be an idiot not to put all your money into this one stock.</div><div><br /></div><div>The reality is that we cannot foresee the future and we don’t know which stock will perform. So, we spread our money to several stocks. We diversify thereby establishing a stock portfolio. </div><div><br /></div><div>The idea behind diversification is that if one stock does badly, we hope that the others will do well enough to offset the one that did badly.</div><div><br /></div><div>Having a diversified stock portfolio then is about risk management. When it comes to risk, there are 2 schools of thought:</div><div><ul><li>Those that view risk as volatility.</li></ul><ul><li>Those that view it as a permanent loss of capital.</li></ul></div><div><br /></div><div>However, risk management via a diversified stock portfolio is independent of how you view risk. </div><div><br /></div><div>More importantly, the extent of the diversification is dependent on having uncorrelated stocks. </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJw11WkmM88pXa1_KF-1hchzEpI3qenrZv2mVC7kjEUXei21dow6g_NJUaIo5U9-ZDrSX1VrS69ZH3Z2N3tgH9Ghs0vEp5s3HR8LibL-uxvuTTgVdjFIcIo0-RUXqr_O1_mJDruGTx4wiGYSv92tzdIwJNmLVU9HFNbOQfaD1kAzd7jnU1FA0NEW7yuK0/s614/Pic%202%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="How to allocated your savings" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJw11WkmM88pXa1_KF-1hchzEpI3qenrZv2mVC7kjEUXei21dow6g_NJUaIo5U9-ZDrSX1VrS69ZH3Z2N3tgH9Ghs0vEp5s3HR8LibL-uxvuTTgVdjFIcIo0-RUXqr_O1_mJDruGTx4wiGYSv92tzdIwJNmLVU9HFNbOQfaD1kAzd7jnU1FA0NEW7yuK0/s16000/Pic%202%20min.PNG" title="How to allocated your savings" /></a></div><div><br /></div><div><h3 style="text-align: left;">1.2 How to allocate your savings </h3><div>I suggest that you group your savings into 3 categories or Buckets - Liquid assets, Safe assets, and Risky assets</div><div><br /></div><div><b>Liquid assets</b></div><div>Examples of these are cash or bank savings. These serve as emergency funds so that you do not have to sell the other assets at the wrong time just to fund some unforeseen needs. </div><div><br /></div><div>When you invest in stocks, you want to be in control of when to sell. You do not want to sell when the market is down. These liquid assets will give you some breathing space so that you don’t have to sell just to meet some cash requirements.</div><div><br /></div><div>I have 2 years of my annual expenditure in this form. Look at your own lifestyle and allocate accordingly.</div><div><br /></div><div><b>Safe assets</b></div><div>These are investments where the principal is protected. Examples are government bonds. For Malaysians, the Amanah Saham investments fall into this category. </div><div><br /></div><div>There are 2 objectives with these investments. These serve as “floor net worth” in the event your investments in the risky assets tank. At the same time, they also perform better at times when the risky assets don’t perform well. </div><div><br /></div><div>I have 8 years of my annual expenditure here. Consider your risk tolerance and allocate accordingly.</div><div><br /></div><div><b>Risky assets</b></div><div>These are the ones that would be able to generate the best return among the 3 categories. But there is no protection for the principal. Prices here could also be volatile in the short term so you want to be able to live through such volatility. You achieve this by having the Liquid and Safe assets.</div><div><br /></div><div>I would put stocks and properties in this category. I have the balance of my savings here. While I use the term ‘risky” there are ways to mitigate risk when you invest in such assets.</div><div><br /></div><div style="text-align: left;"><b>How much to allocate to stocks?</b></div><div>You can see that if you follow the 3 Buckets strategy, only a certain % of your savings would be allocated to stocks. This is turn would depend on your own profile - income, savings, lifestyle. </div><div><br /></div><div>The key point is that the % is not set up front. You should not start by saying that you would have a certain % for stocks. Rather the % is the result of working through the various asset allocation parameters.</div><div><br /></div><div>Furthermore, look at the allocation from the savings or net worth angle rather than from the income level. In other words, don’t think of asset allocation in terms of % of income. This is because your income has to fund the various expenditures with the balance as your savings. </div><div><br /></div><div>You will notice that I have moved away from specifically tying the asset allocation plan to income, age, and risk tolerance. I am not saying that these are not important. Rather I am saying that these should not be the main drivers of your choices. Rather they indirectly affect the amount you set aside for each bucket.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4SqaX_zBQET262NVhKCXvZV_MdRUTjbhP7YAiUggv_7OPmYGn8o0GAqsEQhRATPi00_A1nFqhwJUDJ7GUWq-nF8byRZZ_888gBzdRdme2Xuu43GmW0-CRA5BsJ5m_AXIjJddQlpYz6kmCSKlkEGwp6qsxQDI69ZCAVVZYEfLsDcmsQO-LmBiKloqT1QA/s614/Pic%203%20min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Other investing rules" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4SqaX_zBQET262NVhKCXvZV_MdRUTjbhP7YAiUggv_7OPmYGn8o0GAqsEQhRATPi00_A1nFqhwJUDJ7GUWq-nF8byRZZ_888gBzdRdme2Xuu43GmW0-CRA5BsJ5m_AXIjJddQlpYz6kmCSKlkEGwp6qsxQDI69ZCAVVZYEfLsDcmsQO-LmBiKloqT1QA/s16000/Pic%203%20min.png" title="Other investing rules" /></a></div><div><br /></div><div><div><b>Other Investing rules</b></div><div>The above is of course not the only way to allocated your net worth.</div><div><br /></div><div>There are other guidelines on how you can allocate your savings. Examples are the age rule, the 60:40 rule, and the all-weather portfolio. If you want a more detailed discussion on asset allocation, refer to “<a href="https://www.i4value.asia/2020/11/baby-steps-in-asset-allocation-for.html" target="_blank">Baby steps in Asset Allocation for a Value Investor.</a>”</div><div><br /></div><div>Most of them are rules of thumb to help asset allocation. Furthermore, studies have been carried out to validate these rules. My objection against many of these rules is that they focus only on 2 assets - stocks and bonds. </div><div><br /></div><div>When you consider that there are many types of investments, I find that these rules do not provide a comprehensive guide.</div><div><br /></div><div><b>The 5 % rule</b></div><div>This is an investment philosophy that suggests an investor allocate no more than 5 percent of his portfolio to one investment.</div><div><br /></div><div>This is not really an asset allocation rule of thumb. This is because if you follow this rule, you would have 20 different assets. Most people will have problems finding 20 different assets to invest in. </div><div><br /></div><div>Rather this rule is meant for determining the amount to be allocated to a particular instrument within an asset class.</div><div><br /></div><div>Using the rule for stocks suggests that no more than 5% of your total investing dollars should be invested in any single stock. </div><div><br /></div><div>If you follow this 5 % rule equally, it means that you would have 20 stocks in your portfolio. </div><div><br /></div><div>Note that the 5% rule suggests that you are not supposed to invest more than 5% of your investment portfolio in any one stock. It does not specify the exact amount you should invest. The 5% rule works as a limit, not a mandate.</div><div><br /></div></div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div><div><h2 style="text-align: left;">2. Stock Selection Strategies</h2><div>In the world of stock market investing, the art and science of selecting the right stocks can make all the difference between success and disappointment. </div><div><br /></div><div>This section serves as a compass in this intricate landscape. It explores the diverse methodologies, tools, and insights that investors employ to identify promising stocks for their portfolios. </div><div><br /></div><div>As mentioned earlier, the focus of this article is construction a stock portfolio based on a bottom-up stock picking fundamental approach. You should not be surprised that there is considerable discussions about finding undervalued stocks. </div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSqfcL6Ti586LTEqkr1rAICNfyyJQyCFlodXBjtSi7PamLKsdHrhR7-jAGjdcDtWzx0K_I5VojZCG7lwsUpGFUCmvPT9B0hfjJC55yxGNm0hMYQbdLHfK8-QnjQo0P9CWLMUfxQww5sxKd9GxzBGaeMJojpWCFfJKWt4qca11TRnDXQftt1XNHEg4rycA/s614/Pic%204%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="Finding undervalued stocks" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSqfcL6Ti586LTEqkr1rAICNfyyJQyCFlodXBjtSi7PamLKsdHrhR7-jAGjdcDtWzx0K_I5VojZCG7lwsUpGFUCmvPT9B0hfjJC55yxGNm0hMYQbdLHfK8-QnjQo0P9CWLMUfxQww5sxKd9GxzBGaeMJojpWCFfJKWt4qca11TRnDXQftt1XNHEg4rycA/s16000/Pic%204%20min.PNG" title="Finding undervalued stocks" /></a></div><div><br /></div><div><h3 style="text-align: left;">2.1 Finding undervalued stocks</h3><div>Discovering undervalued stocks is a skill that can lead to substantial profits in the world of investing. In this section, we delve into the art and science of identifying these hidden gems within the stock market. </div><div><br /></div><div>Uncovering undervalued stocks involves a combination of fundamental analysis, where you assess a company's financial health, growth potential, and market position, and a keen eye for market anomalies. </div><div><br /></div><div>I propose a 4-steps process to find undervalued stocks:</div><div><ul><li>Screening.</li></ul><ul><li>Company analysis.</li></ul><ul><li>Valuation.</li></ul><ul><li>Value trap check.</li></ul></div><div><br /></div><div>The aim of screening is to avoid wasting time analyzing and valuing the wrong stocks. I used relative valuation for my screen. Once you have identified the potential stocks, I would undertake the company analysis. </div><div><br /></div><div>I would go through the company’s Annual Reports, Industry Reports, and competitors Annual Reports. This is to assess the business prospects and risks. These helped me to ensure that the assumptions I used in my valuation are grounded in reality.</div><div><br /></div><div>To value stocks, I use both the Asset-based and Earnings-based methods. I then assess whether the stock is undervalued using a number of methods. These are the Discounted Free Cash Flow, Residual Income, Acquirer’s Multiple, and Magic Formula.</div><div><br /></div><div>Finally, I checked to see that the stock is not a value trap. A large margin of safety between the price and the intrinsic value derived assuming zero growth is one good indicator that it is not a value trap.</div><div> </div><div>You will realize that to look for undervalued stocks, you have to analyze and value companies.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpb-0-i0cj7YE40wUoQopjha4CrvXh_hc8QDaLlkcsuh7SwFHsfFF0PmSnmhPJ5E1iu-m9538jtCVMNJAPnrLzGeq9g2sfvuAw-QBZ0BZhj3LEJUrpYGL18cO7KbW7frzFq5PuDeZAkWbLrbsBbNpXMHEjEhqhHpKcahWat3rz-bEneTP9ErUfC1SqlvM/s614/Pic%205%20min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Why look for undervalued stocks?" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpb-0-i0cj7YE40wUoQopjha4CrvXh_hc8QDaLlkcsuh7SwFHsfFF0PmSnmhPJ5E1iu-m9538jtCVMNJAPnrLzGeq9g2sfvuAw-QBZ0BZhj3LEJUrpYGL18cO7KbW7frzFq5PuDeZAkWbLrbsBbNpXMHEjEhqhHpKcahWat3rz-bEneTP9ErUfC1SqlvM/s16000/Pic%205%20min.PNG" title="Why look for undervalued stocks?" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><br /></td></tr></tbody></table><div><h4 style="text-align: left;">2.1.1 Why look for undervalued stocks ?</h4><div>There are 4 main ways to invest in the stock market:</div><div><ul><li>Based on technical. This is a market sentiment-driven approach where you buy popular stocks. You believe that this will drive prices up. Many use charts, trendlines, and other technical indicators to gauge market sentiments.</li></ul><ul><li>Fundamental investing. You look for opportunities where the price is less than the value of the underlying business. These are stocks that are undervalued relative to the fundamentals. You believe that the market will eventually re-rate such stocks enabling you to make money.</li></ul><ul><li>Factor investing. You invest in stocks based on certain characteristics eg growth or momentum that has been proven to explain stock returns.</li></ul><ul><li>Indexing. You believe that the price reflects all known information about the stock. So, you cannot get any advantage. You buy the market.</li></ul></div><div><br /></div><div>It is obvious that you are only concerned with looking for undervalued stocks if you are a fundamental investor. If you are following the other investing styles, finding undervalued stocks is not important.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi87iCTagG6eW-mDNbE1mKppGXDQ6X4XvIO-cAUdaILOXNg9FAXpodkmQYo5lcej-QCaFaO2kgPHjeJbvEXHC_xCqziRgXv0zatu1NGAuu2pMa1wSWJIg4OzXaUfOhdL1YqNEwyhw_lPDkg0qjAa3BGeVSGf9E2IB2zNu8QLeou8vSwXFw_ISMmRIelL5c/s614/Pic%206%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="How stocks become undervalued" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi87iCTagG6eW-mDNbE1mKppGXDQ6X4XvIO-cAUdaILOXNg9FAXpodkmQYo5lcej-QCaFaO2kgPHjeJbvEXHC_xCqziRgXv0zatu1NGAuu2pMa1wSWJIg4OzXaUfOhdL1YqNEwyhw_lPDkg0qjAa3BGeVSGf9E2IB2zNu8QLeou8vSwXFw_ISMmRIelL5c/s16000/Pic%206%20min.PNG" title="How stocks become undervalued" /></a></div><div><br /></div><div><h4>2.1.2 How stocks become undervalued?</h4><div>There are 2 main factors that affect a stock price.</div><div><ul><li>The business prospects ie fundamentals. In the long run, stock prices should reflect the business prospects. </li></ul><ul><li>Market sentiments. In the short run, this has a bigger influence on stock prices than the business fundamentals. The challenge is that the business outlook also affects market sentiments. </li></ul></div><div><br /></div><div>Given the above interplay, there are times when stocks can become over or undervalued. </div><div><br /></div><div>Thus the reasons why stocks are over or undervalued cover both market sentiments and business issues. Examples of why stocks are undervalued are:</div><div><ul><li>Market crashes or corrections could cause stock prices to drop.</li></ul><ul><li>Stocks can become undervalued due to negative press, or economic, political, and social changes.</li></ul><ul><li>Some industries are cyclical and the business may perform poorly over certain quarters.</li></ul><ul><li>Misjudged results: when stocks don’t perform as predicted, the price can take a fall.</li></ul><ul><li>The company’s fundamentals improve rapidly while the market price remains constant.</li></ul></div><div><br /></div><div>From an academic perspective, stocks are undervalued or overvalued because the market is not efficient. </div><div><br /></div><div>The efficient market hypothesis states that share prices reflect all information. As such stocks always trade at their fair value on exchanges. This makes it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. </div><div><br /></div><div>Therefore, those who looked for undervalued stocks believe that the market is not efficient.</div></div><div><br /></div><div><h4 style="text-align: left;">2.1.3 Steps to find undervalued stocks </h4><div>Let me elaborate on my 4 steps process to find undervalued stocks covering:</div><div><ul><li>Screening.</li></ul><ul><li>Company analysis.</li></ul><ul><li>Valuation.</li></ul><ul><li>Value trap check</li></ul><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEyohrC3mwdT9uJ0L-p6hdkucmbTl4hO4UsVdP9v65u_9VzOSFy38cBr2TaRaWZW30Az6WgVDrB9M3etSJC39hsBCGdNQ1f9Gk837BAW6nLHMe7GG8DRk47sKKO-1r5Qh2M2EzvW2vJy00z_MM3RzpTkc-OmkVLh8PJzKKw50lvLAb1dU6wzu7jza-dwo/s614/Pic%207%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="How to screen for undervalued stocks" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEyohrC3mwdT9uJ0L-p6hdkucmbTl4hO4UsVdP9v65u_9VzOSFy38cBr2TaRaWZW30Az6WgVDrB9M3etSJC39hsBCGdNQ1f9Gk837BAW6nLHMe7GG8DRk47sKKO-1r5Qh2M2EzvW2vJy00z_MM3RzpTkc-OmkVLh8PJzKKw50lvLAb1dU6wzu7jza-dwo/s16000/Pic%207%20min.PNG" title="How to screen for undervalued stocks" /></a></div><div><br /></div></div></div><div><div style="text-align: left;"><b>a) How to screen for undervalued stocks?</b></div><div>Company analysis and valuation are time-consuming. You have to go through companies’ financial reports and industry reports for the information you need. You need to develop the financial model to value companies. </div><div><br /></div><div>You don’t want to go through this process only to find that either the business prospects are not that good or that the company is highly overvalued. One way to avoid this is to screen the companies to weed out those with poor business fundamentals and/or likely to be overvalued.</div><div><br /></div><div>I normally use financial ratios and multiples to screen for companies. I use the following metrics to weed out the weak companies. Those that do not meet these criteria are screened out.</div><div><ul><li>ROE > 10 %. </li></ul><ul><li>Positive growth rate.</li></ul><ul><li>Debt Equity ratio < 1.0.</li></ul><ul><li>Current ratio > 2.0.</li></ul></div><div><br /></div><div>To improve the chances of finding value stocks, I hunt for them under the following circumstances:</div><div><ul><li>When the market is down.</li></ul><ul><li>When a company has announced a loss. </li></ul><ul><li>When a company cuts its dividends.</li></ul><ul><li>When a company is emerging from bankruptcy.</li></ul><ul><li>When no analyst is following the company.</li></ul></div><div><br /></div><div>Several of my undervalued companies are those that have a complex business structure or are in cyclical industries. </div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtcXTs41YPJf4e4rTow_R98MvkMBCA8Gr6n1L6a4AcJbcjHOAcedfsBgVy0Oiz33jhupCdqLaRv3meDFPjqQdUs-oE9OY_bn5GsWHL3lonW2vvUzUb-zI99flfZpN2ctGLLC7w6TciRUKryt8cuJEmWTAdW1_E2y53sZtrvh_tjyh5_VfKWSKmdwi5CcA/s614/Pic%208%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="How to analyze for undervalued stocks" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtcXTs41YPJf4e4rTow_R98MvkMBCA8Gr6n1L6a4AcJbcjHOAcedfsBgVy0Oiz33jhupCdqLaRv3meDFPjqQdUs-oE9OY_bn5GsWHL3lonW2vvUzUb-zI99flfZpN2ctGLLC7w6TciRUKryt8cuJEmWTAdW1_E2y53sZtrvh_tjyh5_VfKWSKmdwi5CcA/s16000/Pic%208%20min.PNG" title="How to analyze for undervalued stocks" /></a></div><div><br /></div><div><div style="text-align: left;"><b>b) How to analyse for undervalued stocks?</b></div><div>There are many ways to analyse a company. </div><div><br /></div><div>As a retail investor, you should not analyse it as if you are running the business. You are in no position to change the business direction or management. You cannot decide on its production or marketing strategy.</div><div><br /></div><div>You can only assess the business as it is and project where it is heading based on its current strategy. Along this line, I analyse companies in the context of my investment thesis.</div><div><ul><li>For a compounder, I looked to see whether the competitive edge can be sustained.</li></ul><ul><li>For a turnaround, I assessed whether it had the track record and management to turn it around.</li></ul><ul><li>For a Grahan Net Net, I looked to see it has cost control plans.</li></ul><ul><li>For a Quality Value company, I wanted to see that it can continue to improve its operations.</li></ul></div><div><br /></div><div>I valued companies using the Discounted Cash Flow and Residual Income methods. This required assumptions about the cash flow, growth prospects, and risks. A significant part of the company analysis is to ensure that the assumptions made are realistic.</div><div><br /></div><div><br /></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgN2EmGUzpLG7ZahX_0Jml9qyHwT1u3ETFzpPggesaTWcXDiKv_kmm7Dol6MOyVg56u_ykVTtK8ecrsQhMLugRi5z6sf3BUYGUFhyphenhyphen-d5bPiEw8JrICtVBNlTxFRJsE8ghWzS0KST_QETt19FahrlHLT3a1Y9F5VhMw8R7iuJxTbAEuR79yHlwBzHGd8cIg/s614/Pic%2023%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="Carrying out a company analysis" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgN2EmGUzpLG7ZahX_0Jml9qyHwT1u3ETFzpPggesaTWcXDiKv_kmm7Dol6MOyVg56u_ykVTtK8ecrsQhMLugRi5z6sf3BUYGUFhyphenhyphen-d5bPiEw8JrICtVBNlTxFRJsE8ghWzS0KST_QETt19FahrlHLT3a1Y9F5VhMw8R7iuJxTbAEuR79yHlwBzHGd8cIg/s16000/Pic%2023%20min.PNG" title="Carrying out a company analysis" /></a></div><div><span style="text-align: left;"><br /></span></div><div><span style="text-align: left;"><b>Carrying out a company analysis </b></span></div><div><div>The main goal of company analysis in the context of investing is to assess the prospects of the company. You want to ensure that when you value it, the assumptions you use are grounded in reality.</div><div><br /></div><div>An in-depth analysis will require a review of key documents. These are usually the company Annual Reports, Financial Statements, and Industry Reports. Some people also do fieldwork by talking to competitors, suppliers, and key customers to get insights into the business. The objective is of course to get a good understanding of the business.</div><div><br /></div><div>You look at the following:</div><div><ul><li>How the company got to where it is today from a qualitative and quantitative perspective.</li></ul><ul><li>Whether management has done a good job.</li></ul><ul><li>The business direction of the company.</li></ul></div><div><br /></div><div>While the focus is not valuation, I also looked at related valuation issues such as:</div><div><ul><li>Will there be Spectacular Growth in Shareholders’ Value?</li></ul><ul><li>How to Secure Your Investment by Minimizing Risk.</li></ul></div><div><br /></div><div>I would not go into the specifics of what to look for as the case studies in my blog provide actual examples of these.</div><div><br /></div><div>The above is a sort of qualitative analysis. When it comes to quantitative analysis, there are 2 areas to look for - performance and risk.</div><div><br /></div><div>My top 3 performance metrics are: </div><div><ul><li>Returns as measured by Return on equity (ROE) and EBIT/TCE.</li></ul><ul><li>Gross profitability.</li></ul><ul><li>Growth. I look for positive revenue and profit growth trends over the past 12 years.</li></ul></div><div><br /></div><div>I looked at some metrics to gauge risks.</div><div><ul><li>Financial risks. I looked for total debt to be less than book value and for the Current ratio to be greater than two. </li></ul><ul><li>Quality of earnings. I looked at accruals and the intensity of core earnings (ICE). </li></ul><ul><li>Financial Scores developed by academics. I use Altzman Z Score, Piotroski F Score, and Beneish M Score. </li></ul></div><div><br /></div><div>For details on the various indicators, refer to the <a href="https://www.i4value.asia/2020/05/definitions.html" target="_blank">Definitions</a> post.</div></div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO-t18hyphenhyphenjY2QTEXaQyVObr8ess_vcXXxDVcfNVSlAlWxKc2WanVKTA2tDFBC8SB8_p9bmK0yKywClZVS0mo7bGr5-pjFpbQQGcVcFPzixjfQzv4m_BwYedL8e6niYgZHn7afIZCGlA4BCv2hncpCnI0QZB1qaq9zbTX8i9wZtrfALo8buhf4yj3m28fU8/s614/Pic%209%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="How to value companies" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO-t18hyphenhyphenjY2QTEXaQyVObr8ess_vcXXxDVcfNVSlAlWxKc2WanVKTA2tDFBC8SB8_p9bmK0yKywClZVS0mo7bGr5-pjFpbQQGcVcFPzixjfQzv4m_BwYedL8e6niYgZHn7afIZCGlA4BCv2hncpCnI0QZB1qaq9zbTX8i9wZtrfALo8buhf4yj3m28fU8/s16000/Pic%209%20min.PNG" title="How to value companies" /></a></div><div><br /></div></div><div><div><b>c) How to value companies?</b></div><div>The key objective of valuation is to determine the intrinsic value so that I can use it to compare with the market price.</div><div><br /></div><div>Unfortunately, all valuations are not only based on assumptions but are likely to reflect the many behavioural biases. You should address these two issues. </div><div><br /></div><div>In order to mitigate against the behavioural biases, I do the following:</div><div><ul><li>Have a standard valuation model. </li></ul><ul><li>Document the valuation process.</li></ul></div><div><br /></div><div>To address the assumption challenge, I triangulate the value using the following approaches:</div><div><ul><li>Intrinsic value. This is the average value derived from the Free Cash Flow to the Firm Model (as per Damodaran) and the Residual Income Method (as per Penman).</li></ul><ul><li>Acquirer’s Multiple.</li></ul><ul><li>Magic Formula.</li></ul></div><div><br /></div><div>I would assess that a stock is undervalued if all the 3 approaches point to undervaluation.</div><div><br /></div><div>For those mathematically inclined, I look for a situation where all the above 3 metrics have about the same %. </div><div><ul><li>For the intrinsic value, I computed the % margin of safety.</li></ul><ul><li>I inverted the Acquirer’s Multiple to get a %. For example, a multiple of 5 is equal to 20 %.</li></ul><ul><li>I added both the ratios expressed in % in the Magic Formula to get the overall %.</li></ul><div><br /></div></div></div><div>Refer to section 2.2 for more discussions on valuation.</div><div><div><br /></div><div style="text-align: left;"><b>d) How to check for value traps?</b></div><div>If the stock price is less than the intrinsic value derived from a DCF method, I would generally conclude that it is not a value trap.</div><div><br /></div><div>This is because the intrinsic value has been derived based on conservative assumptions. And these would be after undertaking a comprehensive company analysis.</div><div><br /></div><div>Furthermore, it would not be a value trap if it can deliver the required performance. This is the performance in the context of the investment thesis eg compounders or turnaround, etc.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2julFRZ-VlTI3zFLL9MZ3wySB6tr6TJu-R_IHqVHhdHbE2PmEh1bMAV1dof8ZOqII8QNAo4pQufvy-tbXhu3P5pFzmULWXF4V-OOittP2tsekfLqUIyV4wwOIL3fMqE5_mQCfTJknU-K_nqTOWwaFFSjVa7CTEoZd4z2oaqCQ2gjhQBxEmc02-sMjDsA/s960/Pic%2010%20min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Determining whether a stock is under or overvalue" border="0" data-original-height="720" data-original-width="960" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2julFRZ-VlTI3zFLL9MZ3wySB6tr6TJu-R_IHqVHhdHbE2PmEh1bMAV1dof8ZOqII8QNAo4pQufvy-tbXhu3P5pFzmULWXF4V-OOittP2tsekfLqUIyV4wwOIL3fMqE5_mQCfTJknU-K_nqTOWwaFFSjVa7CTEoZd4z2oaqCQ2gjhQBxEmc02-sMjDsA/s16000/Pic%2010%20min.png" title="Determining whether a stock is under or overvalue" /></a></div><div><br /></div><div><h3 style="text-align: left;">2.2 Determining whether a stock is under or overvalued ?</h3><div>“Undervalued is a financial term referring to a security or other type of investment that is selling in the market for a price presumed to be below the investment's true intrinsic value. An undervalued stock can be evaluated by looking at the underlying company's financial statements and analyzing its fundamentals…to estimate the stock's intrinsic value…In contrast, a stock deemed overvalued is said to be priced in the market higher than its perceived value.” <a href="https://www.investopedia.com/terms/u/undervalued.asp" target="_blank">Investopedia</a></div><div><br /></div><div>In the context of investing, under or over-valuation is the result of comparing the market price with some value of the stock.</div><div><br /></div><div>There are 3 main ways to determine the value of a stock. The chart below illustrates this in comparison with valuing a house.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIUiy20Cq4X_kniyPNjPxi5h21mWPAdik7GT_UXns75fkN83A20pR-sZ-9gAJhSDo57l0Ex559quy1pn4tzsLIWRVhqyVF02wJzazvZnmqH_perTKA1773MmKT4P5lMxwGlD0JTgPncKDsO0-kj19mix-GdMg01RuX6QvBvFgL-l-Y_o5r_sZ2eUiEfiw/s960/Pic%2011%20min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="3 ways to value with house valuation analogy" border="0" data-original-height="720" data-original-width="960" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIUiy20Cq4X_kniyPNjPxi5h21mWPAdik7GT_UXns75fkN83A20pR-sZ-9gAJhSDo57l0Ex559quy1pn4tzsLIWRVhqyVF02wJzazvZnmqH_perTKA1773MmKT4P5lMxwGlD0JTgPncKDsO0-kj19mix-GdMg01RuX6QvBvFgL-l-Y_o5r_sZ2eUiEfiw/s16000/Pic%2011%20min.png" title="3 ways to value with house valuation analogy" /></a></div><div><br /></div><div><div><div><b>Relative valuation</b></div><div>In Relative valuation, you compare a company's value to that of its benchmark to assess the firm's financial worth. </div><div><br /></div><div><div>Relative valuation uses multiples or ratios to determine a firm's value. To undertake a relative valuation, you must first identify the benchmark. This could be industry peers or businesses with similar prospects and risks.</div><div><br /></div><div>You must control for the differences among the companies. One way is to scale the performance by earnings or size. That is why relative valuation usually involves some multiples. The more common multiples used are Price to Earnings, Price to Book, and Price to Sales.</div><div><br /></div><div>There are two other ways that I have used relative valuation:</div><div><ul><li>Compared current performance with its historical performance. A relatively lower multiple compared to a historical one could point to undervaluation.</li></ul><ul><li>Compared with some benchmark numbers. For example, I would consider a stock cheap if the PE is less than 10. A stock with a PBV of less than 1 would be considered cheap. </li></ul></div><div><br /></div><div><b>Intrinsic value</b></div><div>The Asset-based and Earnings-based valuation methods are known as absolute methods. This is because they make no external reference to a benchmark or average. For example, a company's Book Value which is expressed as a plain dollar amount tells you little about its relative value. </div><div><br /></div><div>Absolute valuation models are alternatives to Relative valuation models.</div><div><br /></div><div>The Asset-based and Earnings-based values are also referred to as intrinsic values. Purists will say that intrinsic value is the future free cash flows discounted to their present value. In other words, an Earnings-based valuation.</div><div><br /></div><div>I don’t think there is any benefit in getting into this debate. Valuation techniques can be complex. There are many who can point to links between Asset-based values with Earnings-based ones.</div><div><br /></div><div>All valuation involves assumptions and so different approaches will provide different answers. I use both the Asset-based and Earnings-based methods to triangulate the intrinsic value.</div></div><div><br /></div><div><b>Asset-based valuation</b></div><div>Asset-based valuation focuses on the value of the company’s assets. There are several components of the Asset-value.</div><div><ul><li>Liquidation Value - this is the value if the company is no longer an “ongoing concern”. The Graham Net Net is considered by many as a shorthand for finding the liquidation value of a company.</li></ul><ul><li>Net Tangible Asset - this is the Book Value less all the intangibles.</li></ul><ul><li>Book Value - this is the value of the company according to its books of accounts. It is what the shareholders would get if all the company assets are sold off and all the debts and obligations are paid off. </li></ul><ul><li>RNAV - Revised Net Asset Value. In some cases, the assets in the books are carried at historical values. If these assets are revalued to the current market value, we then have the RNAV.</li></ul><ul><li>Reproduction Value. This is the value to re-produced the company with its customer relationships, production know-how, and other intangibles.</li></ul><div><br /></div></div><div>The chart below shows how the various components of the Asset-Value can be built up.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5iLmTc0mC0be_Lr1YkqkvIuQAiHgGlmZizRvOeMLVUx2sEd0_vO-1YVF2eDZcj8M2wl7yZAyjkkwE6SF6RTh4oHfi7mY_avFrZlEcUnFAeFZJEg0ar8BrZZ91l7VMflgei0_qx5pRkSBNfyfBKBy_vCSdAIUitf4NsXw-mUYg1btfKpruUaoIUlaXcVQ/s542/Pic%2012.jpg" style="margin-left: 1em; margin-right: 1em;"><img alt="Components of Earnings-based valuation" border="0" data-original-height="188" data-original-width="542" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5iLmTc0mC0be_Lr1YkqkvIuQAiHgGlmZizRvOeMLVUx2sEd0_vO-1YVF2eDZcj8M2wl7yZAyjkkwE6SF6RTh4oHfi7mY_avFrZlEcUnFAeFZJEg0ar8BrZZ91l7VMflgei0_qx5pRkSBNfyfBKBy_vCSdAIUitf4NsXw-mUYg1btfKpruUaoIUlaXcVQ/s16000/Pic%2012.jpg" title="Components of Earnings-based valuation" /></a></div><div><br /></div><div><div><b>Earnings-based valuation</b></div><div>Many would consider the “correct” intrinsic value as the cash flow generated by the company over its life discounted to the present value. This is a DCF or discounted cash flow method.</div><div><br /></div><div>There are 2 main ways to determine the intrinsic value of a company:</div><div><ul><li>The discounted cash flow method as per Damodaran.</li></ul><ul><li>The residual income method as per Penman.</li></ul></div><div><br /></div><div>Both methods would give you the same answer if the assumptions used are consistent. In practice, I have found that because of the lack of information, it is very difficult to have consistent assumptions.</div><div><br /></div><div>What I generally do is then take the average of both methods as the intrinsic value.</div><div><br /></div><div>According to Damodaran, there are 4 parameters to consider to determine the intrinsic value of a company using the DCF method.</div><div><ul><li>The free cash flow.</li></ul><ul><li>The duration of the high growth period.</li></ul><ul><li>The discount.</li></ul><ul><li>What happens at the end of the high growth period ie the terminal value.</li></ul></div><div><br /></div><div>I would not try to teach you how to use the discounted cash flow method to value a company as it is not something that you can cover in one post. MBA students spend a semester learning valuation.</div><div><br /></div><div>I used the values from the Damodaran and Penman methods to build up a picture of the Earnings-value as shown below.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhk4bPuZDeHhlPGHWrp3IPhMniNDShdxKYn3Luea_Ww1wH4z2uek4M953P0rqXj-SKnZtGW73QdjkTi045_dKsJWLDD9DqbuxFYkgIDGrVnxjlPmEc1Vi0XtqlUENYrYoUI_ls7BYONrbaZSqJYmFYMdyDgNBo95ZnxXLdoEl4wGRKG2l3GUgdIRnlIk2g/s487/Pic%2013.jpg" style="margin-left: 1em; margin-right: 1em;"><img alt="Components of earnings-based valuation" border="0" data-original-height="217" data-original-width="487" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhk4bPuZDeHhlPGHWrp3IPhMniNDShdxKYn3Luea_Ww1wH4z2uek4M953P0rqXj-SKnZtGW73QdjkTi045_dKsJWLDD9DqbuxFYkgIDGrVnxjlPmEc1Vi0XtqlUENYrYoUI_ls7BYONrbaZSqJYmFYMdyDgNBo95ZnxXLdoEl4wGRKG2l3GUgdIRnlIk2g/s16000/Pic%2013.jpg" title="Components of earnings-based valuation" /></a></div><div><br /></div></div><div><div><b>Can you use technical analysis to find undervalued stocks?</b></div><div>To determine undervaluation, you compare price with value. As such you should not be using technical analysis to find undervalued stocks.</div><div><br /></div><div>Technical analysis relies on price action and volume. It compares the price at one reference point with another point. Prices are not values.</div><div><br /></div><div>Sure, use technical analysis to find momentum stocks or those favoured by the market. But do not confuse market sentiments with values.</div></div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCi9HlxQoa8hcaJI6-FLZOGrfmfZx_f5UOtVbopWXrq5ApC4FnesIEYx7aex6pmD0lWmfmGSI9WiyR9HzLgzxg-ytNPxQiHp16NQNMkGokjrsGjvWWpRJwKX2dsqKK6fJIsQf5uHAngiYoRcx9a_qRR9zIunhguAl0rXeUlW_vt2irH5KjI5G2lt87DVQ/s614/Pic%2014%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="Using relative valuation" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCi9HlxQoa8hcaJI6-FLZOGrfmfZx_f5UOtVbopWXrq5ApC4FnesIEYx7aex6pmD0lWmfmGSI9WiyR9HzLgzxg-ytNPxQiHp16NQNMkGokjrsGjvWWpRJwKX2dsqKK6fJIsQf5uHAngiYoRcx9a_qRR9zIunhguAl0rXeUlW_vt2irH5KjI5G2lt87DVQ/s16000/Pic%2014%20min.PNG" title="Using relative valuation" /></a></div><br /><div><br /></div><div><h4 style="text-align: left;">2.2.1 Using relative valuation</h4><div>When you use relative valuation, you compare the metrics of a given company with those of its peers. You determined if the metrics suggest that the value is in line with the peers, over or undervalued. </div><div><br /></div><div>No single metric can ensure that a potential investment is undervalued. You are looking for a pattern of several metrics all pointing in the same direction. </div><div><br /></div><div>There are a few metrics that are used in relative valuation.</div><div><ul><li>Price to earnings ratio (PE). The higher the PE, the higher the price of the stock relative to the earnings. While a low PE ratio may indicate a buying opportunity, it is important to dig further.</li></ul><ul><li>Price earnings to growth ratio. (PEG). This is computed by dividing the PE by the “earnings growth rate.” If the ratio is less than 1, it may point to undervaluation.</li></ul><ul><li>Price to book value. A low price to book may indicate undervaluation.</li></ul><ul><li>Dividend yield. If a company's dividend payment rate exceeds that of its competitors, this may indicate that the share price is cheap. </li></ul><ul><li>Price to Sales. This is one metric to use if you come across situations where the earnings are negative. </li></ul></div><div><br /></div><div>Relative valuation or multiples are rules of thumb and I would consider them as starting points. The other thing about using multiples is that the numerator and denominator must be consistent. For example, all the metrics mentioned above are based on the equity perspective. </div><div><br /></div><div>I use relative valuation for screening by comparing a company metric with some absolute value. The absolute value is derived either from fundamentals or the market profile.</div><div><br /></div><div>The charts below show the Bursa Malaysia profile that I used to derive the benchmark value.</div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhisbr3SLcQRGPVDMJiJ0k-jiT8T6Ik1SdYu5Ne4taY4U_RzbVihFddNsIaMaYCsvX7SDXezUmTSYhtoyTepIhbqk7ZJofAp1J5OxwgPPL7x-nTdhNnli3s7Dh0tjrg6fnJko1p0wnmNPCn6q1j4ZGB5XIJpEi4gRxZ4qmA0uuXVP31v3spltogvzA-I8g/s480/Pic%2015%20min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Histogram of Bursa PE" border="0" data-original-height="288" data-original-width="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhisbr3SLcQRGPVDMJiJ0k-jiT8T6Ik1SdYu5Ne4taY4U_RzbVihFddNsIaMaYCsvX7SDXezUmTSYhtoyTepIhbqk7ZJofAp1J5OxwgPPL7x-nTdhNnli3s7Dh0tjrg6fnJko1p0wnmNPCn6q1j4ZGB5XIJpEi4gRxZ4qmA0uuXVP31v3spltogvzA-I8g/s16000/Pic%2015%20min.png" title="Histogram of Bursa PE" /></a></div><div><br /></div><div><div>Median PE = 9.8 for 2016 and 10.3 for 2021</div><div><br /></div><div>Median PBV = 0.8 for 2016 and 2021</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhprv4bqgkhWhfjGPSEoH3owzhU1aL5zQ6dFkZC5qC3_n2kDf3dwozzBE43Gy7erNBTki30cuToBYZ2E-wflLiQS643qN_kZ4iV5GzeK-tqTsKD_D9Rl43KGqYkB6ke_mZzd1jAoCTHI-74_fb4kW0_RN91-hlFR01FXNUR6ihCLIKI47wzq6sBREp9TqY/s480/Pic%2016%20min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Histogram of Bursa PBV" border="0" data-original-height="288" data-original-width="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhprv4bqgkhWhfjGPSEoH3owzhU1aL5zQ6dFkZC5qC3_n2kDf3dwozzBE43Gy7erNBTki30cuToBYZ2E-wflLiQS643qN_kZ4iV5GzeK-tqTsKD_D9Rl43KGqYkB6ke_mZzd1jAoCTHI-74_fb4kW0_RN91-hlFR01FXNUR6ihCLIKI47wzq6sBREp9TqY/s16000/Pic%2016%20min.png" title="Histogram of Bursa PBV" /></a></div><div><br /></div><div><div>The example below shows how I use fundamentals to derive the benchmark value. Based on the Discounted Free Cash Flow to the Firm, we have</div><div><br /></div><div>EPV = FCFF / discount rate</div><div><br /></div><div>Given a no-growth scenario, FCFF = EPS</div><div><br /></div><div>Assumed a discount rate of 10%.</div><div><br /></div><div>EPV = EPS / 0.1</div><div><br /></div><div>Equity + Debt = EPV </div><div><br /></div><div>For a company without any debt, we have</div><div><br /></div><div>Equity = EPS / 0.1</div><div><br /></div><div>Thus PE = 10 for a debt-free company.</div><div><br /></div><div>There are times when looking at equity-based multiples may not tell the whole picture. This is especially if a company is highly geared or if the equity has been reduced by share buybacks.</div><div><br /></div><div>In such instances, it would be better to use firm-based multiples. So instead of PE, I use Enterprise Value to EBIT. </div><div><br /></div><div><b>Acquirer’s Multiple</b></div><div>In his book, Deep Value, Tobias E. Carlisle defined the enterprise multiple or the Acquirer’s Multiple as</div><div><br /></div><div>Acquirer’s Multiple = EV / EBITDA where</div><div><br /></div><div>EV = Enterprise Value = Market Capitalization + Debt – Cash</div><div><br /></div><div>EBITDA = Earnings Before Interest, Taxes and Depreciation & Amortization</div><div><br /></div><div>Carlisle compared the returns using various valuation multiples. He found that the Acquirer’s Multiple had the most success identifying undervalued stocks. Wall Street’s favourite metric— price-to-forward earnings estimate—was by far the worst-performing ratio. </div><div><br /></div><div>Because of this, I use the Acquirer’s Multiple as part of my valuation methodologies. </div></div><div><br /></div><div><h4 style="text-align: left;">2.2.2 Using the Greenwald method</h4><div>I adapted Professor Bruce Greenwald's approach of comparing Asset value (AV) and Earnings value (EV) to assess whether there are margins of safety.</div><div><br /></div><div>I also look at the margin of safety in the context of the AV and EV analysis with the following 4 scenarios:</div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgg6GxHiEtdu9HlzMmfKWPMQH_HaMtj8YQEtogvOnnhhizpOoo32tVPEHqLAFzVyqyrT8Drv91XG4uvEkl_h6TlM_Nba1Tg3mt5MaLbAs9QnXkcYrwpP5tfYs3V0tFegKoqh5IIERtnFocB2UmJ-a5J8lV8DPhwZkMmQGbWW5RSYJ1iiHVP_-5n_fwR3qo/s355/Pic%2017.jpg" style="margin-left: 1em; margin-right: 1em;"><img alt="Greenwald scenario 1" border="0" data-original-height="187" data-original-width="355" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgg6GxHiEtdu9HlzMmfKWPMQH_HaMtj8YQEtogvOnnhhizpOoo32tVPEHqLAFzVyqyrT8Drv91XG4uvEkl_h6TlM_Nba1Tg3mt5MaLbAs9QnXkcYrwpP5tfYs3V0tFegKoqh5IIERtnFocB2UmJ-a5J8lV8DPhwZkMmQGbWW5RSYJ1iiHVP_-5n_fwR3qo/s16000/Pic%2017.jpg" title="Greenwald scenario 1" /></a></div><div><br /></div><div><b>Scenario 1</b>: Excellent margin of safety. In this case, the market price is significantly below both the AV and EV. From a strategic perspective, the stock is earning a return reflective of the cost of capital as the AV = EV. </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNa55pE-a1iW-cic1uHtNgpw99_jPFuQ19fDI1TuckYs7P-6xg5hP4Nqxb9fkf7XpcldY137DCt-7QxJEfyG_Ng_7ihMK4jIRnT2F3OZaJ_qGSPv1Np-PhEqtTGy7pVmKdkhAfiSRPY3yVzRXv8804luivuba3Fdk5cfi0IaSY-mu8ImxxvwMrEPboxIs/s351/Pic%2018.jpg" style="margin-left: 1em; margin-right: 1em;"><img alt="Greenwald scenario 2" border="0" data-original-height="159" data-original-width="351" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNa55pE-a1iW-cic1uHtNgpw99_jPFuQ19fDI1TuckYs7P-6xg5hP4Nqxb9fkf7XpcldY137DCt-7QxJEfyG_Ng_7ihMK4jIRnT2F3OZaJ_qGSPv1Np-PhEqtTGy7pVmKdkhAfiSRPY3yVzRXv8804luivuba3Fdk5cfi0IaSY-mu8ImxxvwMrEPboxIs/s16000/Pic%2018.jpg" title="Greenwald scenario 2" /></a></div><div><br /></div><div><div><b>Scenario 2</b>: Acceptable margin of safety. In this case, the market price is higher than the EV but lower than the AV. For the EV to be less the AV, it suggests that the company is not fully utilizing its assets. If you invest in a company under this scenario, it must be because you believe that the company would be able to turn around. And that in the worst-case scenario, the value of the assets would offer some protection if the business fails.</div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEholx4EcQHGtePcp04RHdeVF3nT1soDSheMhW8H_Jy8u13S8nO2Zv373Pczc6Zn3W20uSBOEWeatKSwHVk0YILxEitkKPPRRVSvdxuPphrwIykOkRZAhXCYijI6wLS-P-hG9fQ7RbAkyduNmt-c7FHi2PkUg8trzgHBIdkvQmytTVgFIz1-UziK5SIC0Vc/s354/Pic%2019.jpg" style="margin-left: 1em; margin-right: 1em;"><img alt="Greenwald scenario 3" border="0" data-original-height="205" data-original-width="354" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEholx4EcQHGtePcp04RHdeVF3nT1soDSheMhW8H_Jy8u13S8nO2Zv373Pczc6Zn3W20uSBOEWeatKSwHVk0YILxEitkKPPRRVSvdxuPphrwIykOkRZAhXCYijI6wLS-P-hG9fQ7RbAkyduNmt-c7FHi2PkUg8trzgHBIdkvQmytTVgFIz1-UziK5SIC0Vc/s16000/Pic%2019.jpg" title="Greenwald scenario 3" /></a></div><div><br /></div><div><div><b>Scenario 3</b>: Better than an acceptable margin of safety. The EV > AV suggests that the company has some competitive advantage. In this case, the market price is higher than the AV but lower than the EV. In this scenario, you believe that the company’s competitive edge would provide you with some margin of safety.</div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWFtIEiGJKGV5bKmjHrOO3i4tmq-EMz2yUuBtk_aXJkVB_NOBCJrQ6jOCAe4aOqMgiEnklxoM095NsGd3oaFrIjEcQbKB4eceVLSfsTEEO29DTsd8dqyphexBU7_D7fmtgG9uLi_INw02XHhDx866u1-mPkmwTW1praaTPWTBuv0vxg-5F6vM8-UzZlgw/s368/Pic%2020.jpg" style="margin-left: 1em; margin-right: 1em;"><img alt="Greenwald scenario 4" border="0" data-original-height="268" data-original-width="368" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWFtIEiGJKGV5bKmjHrOO3i4tmq-EMz2yUuBtk_aXJkVB_NOBCJrQ6jOCAe4aOqMgiEnklxoM095NsGd3oaFrIjEcQbKB4eceVLSfsTEEO29DTsd8dqyphexBU7_D7fmtgG9uLi_INw02XHhDx866u1-mPkmwTW1praaTPWTBuv0vxg-5F6vM8-UzZlgw/s16000/Pic%2020.jpg" title="Greenwald scenario 4" /></a></div><div><br /></div><div><b>Scenario 4</b>: Poor margin of safety: In this case, the market price exceeds both the AV and EV. The only rationale for investing in such a company is that you believe that the EV will increase over time. You believe that this is some growth company whose future value has yet to be captured in the current EV.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgS9a6FP_jWNNGpRR5sASUplJ-ydH0k5g-Clt4D4Als3dfQxSy8RMWaL8T7GvPgf8ya9BzfZtKp0llrjAWpR-SPgVnGv7co3RpXzFRburW3WdHpJWTw-Ltcibu51KiQSHbZzeylfSx76imyAIauk7J7NFqYu5b8-90XVhP7AAvkI0g0sf324MZ8PP2TUTg/s614/Pic%2021%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="Using the Magic Formula" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgS9a6FP_jWNNGpRR5sASUplJ-ydH0k5g-Clt4D4Als3dfQxSy8RMWaL8T7GvPgf8ya9BzfZtKp0llrjAWpR-SPgVnGv7co3RpXzFRburW3WdHpJWTw-Ltcibu51KiQSHbZzeylfSx76imyAIauk7J7NFqYu5b8-90XVhP7AAvkI0g0sf324MZ8PP2TUTg/s16000/Pic%2021%20min.PNG" title="Using the Magic Formula" /></a></div><div><br /></div><div><h4 style="text-align: left;">2.2.3 Using the Magic Formula</h4><div>In “The Little Book That Beats the Market” Joel Greenblatt presented his “Magic Formula” for buying good companies at good prices. He focused on two key ratios:</div><div><br /></div><div>Earnings Yield = EBIT / Enterprise Value </div><div><br /></div><div>Return on Invested Capital = EBIT / Invested Capital </div><div><br /></div><div>Where: </div><div><br /></div><div>Enterprise Value is Market Value + Debt – Cash</div><div><br /></div><div>Invested Capital is Net Working Capital + Net Fixed Assets</div><div><br /></div><div>Earnings yield measures how cheap a company is compared to its ability to generate cash. All else being equal, you would want companies with higher earnings yields.</div><div><br /></div><div>Return on Invested Capital measures how efficiently a company deploys capital. The higher, the better.</div><div><br /></div><div>Greenblatt uses these metrics to ranks stocks and then select the top 20 to 30 stocks to invest. The Magic Formula was designed to help investors with “buying good companies, on average, at cheap prices, on average.” </div><div><br /></div><div>I have adapted the Magic Formula concept to help triangulate the value of a stock.</div></div><div><br /></div><div><h2 style="text-align: left;">3. Building Your Portfolio</h2><div>There is considerable literature on constructing portfolios based on Modern Portfolio Theory (MPT)</div><div><br /></div><div>MPT is an investment framework developed by Harry Markowitz. It suggests that by diversifying investments across a mix of assets with varying risk and return profiles, investors can optimize their portfolios to maximize returns for a given level of risk or minimize risk for a given level of return. </div><div><br /></div><div>MPT relies on mathematical models to quantify risk and correlation among assets, enabling investors to construct portfolios that aim to strike a balance between risk and reward. The key idea is that a well-diversified portfolio can potentially provide better risk-adjusted returns than investing in individual assets.</div><div><br /></div><div>However, if you are a stock picker, MPT will not be an appropriate way to construct a stock portfolio.</div><div><br /></div><div>Rather the key is how to select the stocks and ensure that as you build up your stock portfolio, you achieve the appropriate balance between risk and return. </div></div><div><br /></div><h3 style="text-align: left;">3.1 How do you select the stocks in the stock portfolio?</h3><div>There are 2 ways to form a stock portfolio.</div><div><ul><li>Top-down - this involves looking at big picture economic factors.</li></ul><ul><li>Bottom-up - this involves looking at company-specific factors.</li></ul></div><div><br /></div><div><b>Top-down</b></div><div>A top-down approach is a macro approach. In many ways, it is a continuation of the asset allocation process. </div><div><br /></div><div>It examines various economic factors to see how they affect individual stocks. You take into account the following to define the stock portfolio.</div><div><ul><li>Investment goals.</li></ul><ul><li>Risk tolerance.</li></ul><ul><li>Investment time-frame.</li></ul></div><div><br /></div><div>You define the stock portfolio in broad categories or sectors such as the following.</div><div><ul><li>Growth vs Income.</li></ul><ul><li>Conservative vs Aggressive.</li></ul><ul><li>International vs Domestic.</li></ul></div><div><br /></div><div>You then zoom in to identify those companies within the selected category. From here, you can then either select individual stocks or ETFs that represent the category or sector. </div><div><br /></div><div>The following are often seen as the advantages and disadvantages of the top-down approach.</div><div><ul><li>More efficient use of an investor’s time and attention to relevant data.</li></ul><ul><li>Allows you to diversify your investments across different sectors.</li></ul><ul><li>May produce a more long-term or strategic portfolio and favour passive indexed strategies.</li></ul><ul><li>But it may also miss out on a large number of potentially profitable opportunities.</li></ul><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgArLaCBTnA04YzecOgCuaMUD-TDMIewuptg9U6Xf-oIn2MyaEQJr7O1Z3v8REAaqLd4vy0XeEnLRkBJZb2FkXJB8qopCkfjPnMDriMDYR7h08tsWmlttHGuWGmO0VvQGY4DCW0OqW99tY/s557/Construct+portfolio+1-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Bottom-up approach to construct a stock portfolio" border="0" data-original-height="372" data-original-width="557" height="267" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgArLaCBTnA04YzecOgCuaMUD-TDMIewuptg9U6Xf-oIn2MyaEQJr7O1Z3v8REAaqLd4vy0XeEnLRkBJZb2FkXJB8qopCkfjPnMDriMDYR7h08tsWmlttHGuWGmO0VvQGY4DCW0OqW99tY/w400-h267/Construct+portfolio+1-min.png" title="Bottom-up approach to construct a stock portfolio" width="400" /></a></div><div><br /></div></div><div><b>Bottom-up</b><div>In the bottom-up approach, you try to identify specific companies based on your investment criteria. You build up the stock portfolio one by one based on the appropriate selection criteria. </div><div><ul><li>If you are a value investor, then you select the stocks whose prices < intrinsic values.</li></ul><ul><li>If you are a growth investor, the stock selection would be based on growth prospects.</li></ul><ul><li>If you follow the Graham school, then you would be looking for Net Nets</li></ul></div><div><br /></div><div>The stock portfolio’s main focus will be individual securities performance. The pros and cons of a bottom-up approach are: </div><div><ul><li>It may be limited to the investor’s knowledge of individual securities.</li></ul><ul><li>Better choice as there are more stocks to pick from.</li></ul><ul><li>The portfolio may have better returns as individual companies could perform well. This is despite the performance of their industry or the current economic climate.</li></ul><ul><li>More suitable for investors with a long-term investment horizon.</li></ul><ul><li>Time-consuming.</li></ul><ul><li>Possibility of overexposure to one sector.</li></ul></div><div><br /></div><div>As a retail investor, my goal is to identify the stocks for the portfolio. In practice, I use a combination of top-down and bottom-up approaches.</div><div><br /></div><div>Since the majority of my effort is on individual company analysis, I call myself a bottom-up stock-picker.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSy0kOIm9ZWt0W7YO1mnZUSWIKD5ayZcVI811VVbGjBp2cnrEe1fWuB6nbJJ6o_ITIYkt7xIvltHlDcpZ5_PvAe8osWc4NRlRkDmY1DUo8iJG2heNledrGIuEwSZMpyvIDrbXLS1tRosoFVIpDMYeDbsDmKM_zYm4cRfheR4Latiu0dqkfL75xWqV0LMA/s510/Pic%2024%20min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="How many stocks should you have in the portfolio?" border="0" data-original-height="283" data-original-width="510" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSy0kOIm9ZWt0W7YO1mnZUSWIKD5ayZcVI811VVbGjBp2cnrEe1fWuB6nbJJ6o_ITIYkt7xIvltHlDcpZ5_PvAe8osWc4NRlRkDmY1DUo8iJG2heNledrGIuEwSZMpyvIDrbXLS1tRosoFVIpDMYeDbsDmKM_zYm4cRfheR4Latiu0dqkfL75xWqV0LMA/s16000/Pic%2024%20min.png" title="How many stocks should you have in the portfolio?" /></a></div><div><br /></div><div><h3 style="text-align: left;">3.2 How many stocks should you have in the portfolio?</h3><div>By adding stocks to a portfolio that are not correlated with stocks already held, you can reduce the portfolio risk.</div><div><br /></div><div>Studies have shown that the benefits of adding stocks to a portfolio decrease with the size of the stock portfolio.</div><div><br /></div><div>The chart below extracted from<i> “A Random Walk Down Wall Street” </i>by<i> Burton G Malkiel</i> illustrates the diminishing return feature.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpLRqqki7Cike1DgdwILDSY54LRD6g_you-4qUQzQrZ6p0-IDS9QliARfbFos3kgLra_mbPnP9pLTd6dUyahPuxK7A1o_4hIKUh8mLtxB5MM1SSQMIwuXoskJGiNuVVCg5VnYve06tdZI/s553/Margin+benefit+of+diversification.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Diminishing benefit of diversification" border="0" data-original-height="438" data-original-width="553" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpLRqqki7Cike1DgdwILDSY54LRD6g_you-4qUQzQrZ6p0-IDS9QliARfbFos3kgLra_mbPnP9pLTd6dUyahPuxK7A1o_4hIKUh8mLtxB5MM1SSQMIwuXoskJGiNuVVCg5VnYve06tdZI/s16000/Margin+benefit+of+diversification.png" title="Diminishing benefit of diversification" /></a></div><div><br /></div><div><div>The question then is how many stocks should you have to achieve an optimum risk profile?</div><div><br /></div><div>Unfortunately, the question of “optimum” is not so straight forward as the following extracts show:</div><div><br /></div><div>1) On page 214 of their book <i>“Investment Analysis and Portfolio Management”, Frank Reilly and Keith Brown</i> reported that:</div><div><br /></div><div>“The results indicated that the major benefits of diversification were achieved rather quickly, with about 90 percent of the maximum benefit of diversification derived from portfolios of 12 to 18 stocks.”</div><div><br /></div><div>2) “We show that a well-diversified portfolio of randomly chosen stocks must include at least 30 stocks for a borrowing investor and 40 stocks for a lending investor. This contradicts the widely accepted notion that the benefits of diversification are virtually exhausted when a portfolio contains approximately 10 stocks.” <i>How many stocks make a diversified portfolio, Meir Statman Jstor</i></div><div><br /></div><div>3) “Increasing the number of imperfectly correlated securities in a portfolio reduces the range of its returns around the market return. Although the marginal reduction in range diminishes as the number of securities increases, holding 30 or more is clearly worthwhile.” <i>Portfolio Diversification Strategies, Roger B. Upson, Paul F. Jessup, and Keishiro Matsumoto, Jstor</i></div><div><br /></div><div><br /></div><div>The main challenges when interpreting such studies are:</div><div><ul><li>In real life, the correlations between stocks are not static.</li></ul><ul><li>Many studies are based on a random selection of stocks. In practice, stock selection is not random.</li></ul><ul><li>Many of the studies are based on the view of risk as volatility. </li></ul></div><div><br /></div><div>But more importantly, the goal of the stock portfolio is not only to reduce risk. You invest to generate returns and here lies the dilemma. </div><div><ul><li>A more concentrated portfolio will achieve a larger dollar return compared to a more diversified portfolio.</li></ul><ul><li>A more diversified portfolio will lead to lower risk than a more concentrated portfolio.</li></ul></div><div><br /></div><div>You then have to find a balance between these two. This is where your view of risk comes into play. Is it volatility or permanent loss of capital?</div><div><br /></div><div>If you believe that risk is volatility, you have a risk-reward trade-off. You see risks as broken into systematic and non-systematic risks. </div><div><br /></div><div>Non-systematic risks can be diversified away while you have to bear the systematic risks.</div><div><ul><li>The theory states that for a given level of risk, there is the best return portfolio. For a given return, there is a portfolio that has the least risk.</li></ul><ul><li>There is no such thing as the best of both factors and you have to choose which you want to focus on. </li></ul><ul><li>The ultimate is the market portfolio and you are left with indexing. </li></ul></div><div><br /></div><div>On the other hand, the permanent loss of capital followers believe that systematic and unsystematic risks do not capture all the investment risks. </div><div><ul><li>There are also behaviorial risks and investment process risks.</li></ul><ul><li>There are other risk mitigation measures than diversification. Examples are having a margin of safety, having a conservative investment process, and adopting measures to minimize behavioral biases.</li></ul></div><div><br /></div><div>Investors like Warren Buffett and Monish Prabai who follow the permanent loss of capital school believe in having a concentrated portfolio. They believe that their knowledge of the businesses minimizes the investment risks. And they have a host of other mitigation strategies to minimize the risks. </div><div><br /></div><div>What are your options as a layman given that there are proponents for both ends of the concentrated vs diversified spectrum?</div><div><ul><li>The nature of market sentiments is such that sectors tend to be correlated and it would be a challenge to find 10 to 20 uncorrelated stocks. </li></ul><ul><li>Given this, then you may need to identify 30 to 40 stocks and then adopt a different set of measures to minimize the correlation.</li></ul><div><br /></div></div></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJRyl0t2BTz0oFtRXWiHdv3ITDlgO29eu5K-WpTi9gDRNvZhoWuEtZxJXiRgxbvi6qXvHyt3T3nsF4ume9x9ut3GUDW_sIDKH-oGZd6XarWjhCZ_Y6NF51MUR1bekvalr_BA2V05QFjHc/s562/Construct+portfolio+2-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Ensuring diversification" border="0" data-original-height="316" data-original-width="562" height="225" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJRyl0t2BTz0oFtRXWiHdv3ITDlgO29eu5K-WpTi9gDRNvZhoWuEtZxJXiRgxbvi6qXvHyt3T3nsF4ume9x9ut3GUDW_sIDKH-oGZd6XarWjhCZ_Y6NF51MUR1bekvalr_BA2V05QFjHc/w400-h225/Construct+portfolio+2-min.png" title="Ensuring diversification" width="400" /></a></div><div><br /></div><div style="text-align: left;"><b>Ensuring diversification and low correlation</b></div><div>To ensure diversification, you should also assess the degree of concentration under various criteria. Some of the criteria that I have used to form groups include:</div><div><ul><li>Sectors or industry</li></ul><ul><li>Market cap or size</li></ul><ul><li>Business performance or Investment type - turnaround, compounders, cyclical, dividends</li></ul></div><div><br /></div><div>The idea is to select stocks based on different economic, political, technological, and even market sentiment factors. My rules of thumb for diversification are:</div><div><ul><li>Single stock concentration - the market value of a stock should not be more than 10% of the market value of the total portfolio.</li></ul><ul><li>Group concentration - the market value of the stocks within a group should not be more than 30% of the market value of the total portfolio.</li></ul></div><div><br /></div><div>I currently have a portfolio of 27 stocks and the profiles of the stocks are as shown below.</div></div><div><br /></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhs7OgXZJlw3c4LVik1PgSmdRKxwrdfsfFFJ3LFlUL1qZ7LCpzEHIVkZPtL83ZTEF-vdi8mJ7g99XodSQOruv3N4HkXL4m9mEpt-1H1O53zHoVR4oVV37xWjicHhYhey8oFj52c7r_dbY8/s481/Sector+profile.png" style="margin-left: 1em; margin-right: 1em;"><img alt="My portfolio sector profile" border="0" data-original-height="289" data-original-width="481" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhs7OgXZJlw3c4LVik1PgSmdRKxwrdfsfFFJ3LFlUL1qZ7LCpzEHIVkZPtL83ZTEF-vdi8mJ7g99XodSQOruv3N4HkXL4m9mEpt-1H1O53zHoVR4oVV37xWjicHhYhey8oFj52c7r_dbY8/s16000/Sector+profile.png" title="My portfolio sector profile" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjw72kCXeFiNPEpoREiehqfD3PwBtn-yYvCLuoC-e4wEaMMETP7of36tT3kTwRIFpVXhBXHpgQH65e6FYMYg7PGGOkAJ8QVI3sVBJx3vCsJl3gYUbOg8rGfVlL73koKRUlCv8sAClQ_0wY/s2048/Market+cap+profile.png" style="margin-left: 1em; margin-right: 1em;"><img alt="My portfolio market cap profile" border="0" data-original-height="1231" data-original-width="2048" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjw72kCXeFiNPEpoREiehqfD3PwBtn-yYvCLuoC-e4wEaMMETP7of36tT3kTwRIFpVXhBXHpgQH65e6FYMYg7PGGOkAJ8QVI3sVBJx3vCsJl3gYUbOg8rGfVlL73koKRUlCv8sAClQ_0wY/s16000/Market+cap+profile.png" title="My portfolio market cap profile" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3ztUS773T4_tuNv8yRq7MNM5tjjD-F6ulGt9ZeAZr1SktvA69GyEF-5sFmTw06NZkDkq8aaw11bluvcpcsauV_1S6vb9269SwDIFWA7v_UYZq4qtxInM7hj5csMc1iuFWEgpHcAjCz_E/s481/Business+perform+profile.png" style="margin-left: 1em; margin-right: 1em;"><img alt="My portfolio investment type profile" border="0" data-original-height="289" data-original-width="481" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3ztUS773T4_tuNv8yRq7MNM5tjjD-F6ulGt9ZeAZr1SktvA69GyEF-5sFmTw06NZkDkq8aaw11bluvcpcsauV_1S6vb9269SwDIFWA7v_UYZq4qtxInM7hj5csMc1iuFWEgpHcAjCz_E/s16000/Business+perform+profile.png" title="My portfolio investment type profile" /></a></div><div><br /></div><div><br /></div><div>As can be seen, I am currently slightly over-concentrated in one size in the market cap group. This is because of the current Covid-19 situation. This would be reviewed during the re-balancing stage.</div><div><br /></div><div><h3 style="text-align: left;">3.3 How much to invest in each stock?</h3><div>In the previous section, I have a rule that the maximum amount invested for a particular stock should not be more than 10% of the total market value of the stock portfolio.</div><div><br /></div><div>If you follow this to the logical conclusion and allocate 10% to each stock in the portfolio, you would end up with 10 stocks. </div><div><br /></div><div>You can see that there is a relationship between the 3 key parameters of a portfolio.</div><div><ul><li>The total amount to be invested for the portfolio.</li></ul><ul><li>The number of stocks in the portfolio.</li></ul><ul><li>The amount to be allocated to each stock ie the position size.</li></ul></div><div><br /></div><div>If you assume that the portfolio will have about 30 to 40 stocks, then the average amount to be invested in each stock will range from 2.5 % to 3.3 % of the total portfolio value. Of course, if the amount for each stock is not the same, then the range would be wider. </div><div><br /></div><div>I have mentioned earlier that there was an upper limit of 10% based on the risk mitigation criteria. How was the 10% determined?</div><div><br /></div><div>On one hand, the 10% represents the total amount I was prepared to lose in one stock. The amount would vary with the risk tolerance of an individual.</div><div><ul><li>A more risk-averse person may set a lower limit.</li></ul><ul><li>I doubt there is anyone who is prepared to risk 100% as it could be ruinous if the one investment tanks.</li></ul></div><div><br /></div><div>On the other hand, the 10% limits the gain from that stock.</div><div><ul><li>If the total amount allocated to a portfolio is $ 100,000, a 10% investment in one stock is equivalent to $ 10,000. If this stock gains 25 %, this is equivalent to $ 2,500.</li></ul><ul><li>If the amount invested in the stock was 20% i.e. $ 20,000, the same 25 % stock gain would result in $ 5,000.</li></ul></div><div><br /></div><div>You have to balance between risk and return. What are the parameters to be considered then when determining this balance?</div><div><br /></div><div>I found that the Expectancy Formula and Kelly Formula are helpful in determining the position size. </div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjW41jbbNrECW4zotG_jD-Hy9MbKcxjKB57ZFF_YJzghTkJLi9ViwNdQYcR8D8D54RsC2WRDOYIYL6s3Z1cJ5I1PqjD0Jnnf21la_tDt8bPt78y-O8UNkjqCs15_CiWwQ_JfqOPmvb-B3U/s571/Construct+portfolio+3-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Expectancy" border="0" data-original-height="378" data-original-width="571" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjW41jbbNrECW4zotG_jD-Hy9MbKcxjKB57ZFF_YJzghTkJLi9ViwNdQYcR8D8D54RsC2WRDOYIYL6s3Z1cJ5I1PqjD0Jnnf21la_tDt8bPt78y-O8UNkjqCs15_CiWwQ_JfqOPmvb-B3U/s16000/Construct+portfolio+3-min.png" title="Expectancy" /></a></div><div><br /></div><div><div><b>Expectancy </b></div><div>Although I am a long-term investor, I find that the trading concepts regarding expectancy can give some insights into the stock construction issues.</div><div><br /></div><div>Trading expectancy is a calculation that shows what the typical profit is for each trade placed. If it’s negative, the strategy is a loser. If it’s positive, the strategy is a winner. </div><div><br /></div><div>Expectancy can be represented by the following formula.</div><div><br /></div><div>Expectancy = (Win % x Win Size) – (Loss % x Loss Size)</div><div><br /></div><div>A winning strategy is one where the trading expectancy is positive. You can improve the trade expectancy by either improving:</div><div><ul><li>The win % or probability of winning. Note that because the win and loss probability must add up to 1, a higher win probability will automatically reduce the loss probability.</li></ul><ul><li>The win-size to loss-size ratio. </li></ul></div><div><br /></div><div>While a trader may not be able to control the win size, he is able to control the loss size by having a stop loss and a lower exposure to a single stock or trade.</div><div><br /></div><div>Unlike a trader, as a long-term investor, the number of transactions each year is small. So, every stock should have a high expectancy. This can be achieved by:</div><div><ul><li>Having a large margin of safety - This affects both the win probability and the win-size to loss-size ratio.</li></ul><ul><li>Investing in dividend-paying stocks helps the win-size to loss-size ratio.</li></ul><ul><li>Developing your investment skills helps to improve your probability of winning. </li></ul></div><div><br /></div><div>In general, the higher the expectancy the greater the amount to be invested. The optimal amount is one that would maximize the overall expected return on a portfolio. </div><div><br /></div><div>The Kelly Formula provides one way to determine the optimal amount.</div><div><br /></div></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkKXwKEM-P_qjw_IDSU_fBoPBv0Nf0aGALXlHecim8_bsj8rOuShaXfu5LHdOcdihCpFG200DVlUKuGgBseUZXcCwaUaFFUlR1_GTznaTZJJDzlIWiS-noGORk5zWpqX9gxzUTxiAysWc/s562/Construct+portfolio+4-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Kelly Formula" border="0" data-original-height="370" data-original-width="562" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkKXwKEM-P_qjw_IDSU_fBoPBv0Nf0aGALXlHecim8_bsj8rOuShaXfu5LHdOcdihCpFG200DVlUKuGgBseUZXcCwaUaFFUlR1_GTznaTZJJDzlIWiS-noGORk5zWpqX9gxzUTxiAysWc/s16000/Construct+portfolio+4-min.png" title="Kelly Formula" /></a></div><div><br /></div><b>Kelly Formula</b><div>The Kelly Formula was created by John Kelly, a researcher at Bell Labs, who originally developed the formula to analyze long-distance telephone signal noise.</div><div><br /></div><div>It is a bet sizing formula that leads almost surely to higher wealth compared to any other strategy in the long run.</div><div><ul><li>It assumes that your objective is long term capital growth. </li></ul><ul><li>It reinvests profits, and thus puts them at risk. </li></ul></div><div><br /></div><div>There are two basic components to the Kelly Formula. </div><div><ul><li>The first is the win probability.</li></ul><ul><li>The second is the win-size to loss-size ratio.</li></ul></div><div><br /></div><div>The Kelly's Formula is:</div><div><br /></div><div>K% = W − [ (1−W) / R ]</div><div><span style="white-space: pre;"> </span> </div><div>K% = The % capital to put in a single investment</div><div><br /></div><div>W = Win probability </div><div><br /></div><div>R = Win-size / loss-size ratio</div><div><span style="white-space: pre;"> </span></div><div><br /></div><div>The percentage that the equation produces represents the investment size. For example, </div><div><ul><li>If historically your win 60% of the time, then you can assume that W = 0.6.</li></ul><ul><li>If historically your average gain is 25 % compared to an average loss of 20 % of the investment, then R = 1.25.</li></ul><ul><li>K % = 0.6 - [ (1 - 0.6) / 1.25 ] = 0.28 ie you should invest 28 % of your capital.</li></ul></div><div><br /></div><div>This system is based on pure mathematics and works for binary bets that do not apply to the stock market. Besides in the stock market, none of the components can be precisely quantified. </div><div><br /></div><div>Even if you can guesstimate the components, I find that the Kelly formula results in an investment size that is much greater than the risk cap that I have set. So, while not practical in terms of using the numbers, I find the principles applicable:</div><div><ul><li>You invest the most in the stock with the greatest probability of winning and the best win-size to loss-size ratio. </li></ul><ul><li>This can be translated into investing more into those where you have the best conviction and/or highest margin of safety.</li></ul></div></div><div><br /></div><div><div style="text-align: left;"><b>Establishing the criteria</b></div><div>The guidelines to determining how much to invest in each stock then boil down to investing as much as possible to the ones with the highest conviction subject to the risk cap.</div><div><br /></div><div>But in order to have a diversified portfolio, you should have 20 to 30 stocks and this determines the average amount to be invested in each stock.</div><div><br /></div><div>In practice, I classify the 20 to 30 stocks into 3 groups based on conviction. For example:</div><div><ul><li>Group A would be those with the better conviction - allocate 6 % to 8 % of the portfolio value to each stock here.</li></ul><ul><li>Group B would be those with the average conviction - the amount to be allocated to each stock would be about the portfolio average allocation. </li></ul><ul><li>Group C would be those with the lesser conviction - each stock here will be allocated 1 % to 3 % of the portfolio value.</li></ul><ul><li>The total amount allocated to all the stocks would of course be equal to the portfolio value.</li></ul><ul><li>I generally have about ¼ of the total number of stocks each in Group A and Group C so that half of the stocks are in Group B.</li></ul></div><div><br /></div><div>The profile of my portfolio of 27 stocks is as follows:</div><div><ul><li>I have 6 stocks in Group A where the amount invested in each stock averaged about 7 % of the total portfolio value.</li></ul><ul><li>I have 5 stocks in Group C where the amount invested in each stock averaged about 2 % of the total portfolio value.</li></ul><ul><li>I have 16 stocks in Group B where the amount invested in each stock averaged about 3 % of the total portfolio value.</li></ul></div><div><br /></div><div>I do not use an exact formula to determine the amount to be invested for each stock because:</div><div><ul><li>As a bottom-up stock picker, the number of stocks in the portfolio is also dependent on whether I could find the stocks that meet my investment criteria. There have been occasions where I was hard-pressed to find 20 stocks.</li></ul><ul><li>The position size is also affected by whether the stock is in the process of being build-up or sold off as I do not enter or exit a position in one go. Rather I do it over some time. Refer to the next section.</li></ul></div><div><br /></div><div>However, for those mathematically inclined, there is no reason why you cannot have a formula for the position size based on all the parameters that have been discussed.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiChmXaJn9bzQfuFMfE3Q72djIFGyQR8bB-70_C78Mg_SmYqsaBPYHcdyT4Q4OvsZXnftct9VlRjwJ9nnNNeehYA_PFMgly8ffQno8_o7wAeD0MQ5jYQEj02drwuDfsVwPeJZzrDxZlpbvzm9xCtK22N61xOs6fA1uWYyjuIvfGqElEGF3rRIjOIGOOXyM/s614/Pic%2032%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="Do you allocate an equal amount to each stock" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiChmXaJn9bzQfuFMfE3Q72djIFGyQR8bB-70_C78Mg_SmYqsaBPYHcdyT4Q4OvsZXnftct9VlRjwJ9nnNNeehYA_PFMgly8ffQno8_o7wAeD0MQ5jYQEj02drwuDfsVwPeJZzrDxZlpbvzm9xCtK22N61xOs6fA1uWYyjuIvfGqElEGF3rRIjOIGOOXyM/s16000/Pic%2032%20min.PNG" title="Do you allocate an equal amount to each stock" /></a></div><div><br /></div><div><h4 style="text-align: left;">3.3.1 Do you allocate an equal amount to each stock?</h4><div>I have illustrated the relationship between the 3 key parameters of a stock portfolio.</div><div><ul><li>The total amount to be invested for the portfolio. </li></ul><ul><li>The number of stocks in the portfolio. </li></ul><ul><li>The amount to be allocated to each stock ie the position size.</li></ul></div><div><br /></div><div>The first is determined by your asset allocation plan. The marginal returns from diversification enable you to determine the number of stocks in the portfolio. </div><div><br /></div><div>When it comes to position sizing, there are a number of factors to consider.</div><div><ul><li>From a risk management perspective, you should have some cap rules. This should be for individual stock and for groups of stocks making up particular characteristics eg industry, size, region. You could follow the 5 % rule. </li></ul><ul><li>From a return perspective, the more you allocate to one stock, the more impactful its contribution to the portfolio return.</li></ul></div><div><br /></div><div>I generally do not advise allocating the same amount to each stock in your portfolio. You would only do this if you believe that all the stocks have similar risks and/or similar returns.</div><div><br /></div><div>In practice, there are some stocks that you have more conviction. The guideline to determine how much to invest in each stock then boils down to investing as much as possible to the ones with the highest conviction, subject to the risk cap.</div><div><br /></div><div>But in order to have a diversified portfolio, you should have 20 to 30 stocks and this determines the average amount to be invested in each stock.</div><div><br /></div><div>In practice, I classify the 20 to 30 stocks into 3 groups based on conviction. For example:</div><div><ul><li>Group A would be those with the better conviction - allocate 6 % to 8 % of the portfolio value to each stock here.</li></ul><ul><li>Group B would be those with the average conviction - the amount to be allocated to each stock would be about the portfolio average allocation. </li></ul><ul><li>Group C would be those with the lesser conviction - each stock here will be allocated 1 % to 3 % of the portfolio value.</li></ul></div><div><br /></div><div>The total amount allocated to all the stocks would of course be equal to the portfolio value. I generally have about ¼ of the total number of stocks each in Group A and Group C. This means that half of the stocks are in Group B.</div><div><br /></div><div>I do not use an exact formula to determine the amount to be invested for each stock because:</div><div><ul><li>As a bottom-up stock picker, the number of stocks in the portfolio is also dependent on whether I could find the stocks that meet my investment criteria. There have been occasions where I was hard-pressed to find 20 stocks.</li></ul><ul><li>The position size is also affected by whether the stock is in the process of being build-up or sold off as I do not enter or exit a position in one go. Rather I do it over some time. </li></ul></div><div><br /></div><div>However, for those mathematically inclined, there is no reason why you cannot have a formula for the position size based on all the parameters that have been discussed.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjbHMuWKKr8I4GTXpQyqlu-6H-MV8PKWj5JeOGHAN-cr7oJ0Zivm4xHv99Z7X38YxKHDS9yKSOKdqdZl_PHd4PUELwS6B2kbRyiFt7OPAOpaN5-GfoysmTvMIaESJaDLnMTf_qPgDUmSCdhlxoWuvgSAVxTpWkKbdETfM0h1DJPh1XLFhK7ryAQANrLN8/s614/Pic%2033%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="How to determine the high conviction stocks?" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjbHMuWKKr8I4GTXpQyqlu-6H-MV8PKWj5JeOGHAN-cr7oJ0Zivm4xHv99Z7X38YxKHDS9yKSOKdqdZl_PHd4PUELwS6B2kbRyiFt7OPAOpaN5-GfoysmTvMIaESJaDLnMTf_qPgDUmSCdhlxoWuvgSAVxTpWkKbdETfM0h1DJPh1XLFhK7ryAQANrLN8/s16000/Pic%2033%20min.PNG" title="How to determine the high conviction stocks?" /></a></div><div><br /></div><div><div style="text-align: left;"><b>How to determine the high conviction stocks?</b></div><div>If you are going to allocate different amounts to different stocks, you should have a consistent basis for such an allocation.</div><div><br /></div><div>I have mentioned using conviction as the criterion. How do you define a high conviction stock? I look at the following parameters:</div><div><ul><li>The margin of safety. The greater the margin of safety the greater the conviction.</li></ul><ul><li>Prospects. I classify stocks in terms of how challenging their business prospects are. I have compounders (those with strong moats) on one end and turnarounds on the other end. In between, I have the quality value companies and the Graham Net Net. I would have a higher conviction for the compounders compared with those facing turnarounds. </li></ul><ul><li>Shareholders’ value creation. I use my Q Rating as one measure of the ability to create shareholders' value. The higher the Q Rating the higher the conviction.</li></ul></div><div><br /></div><div>At the end of the day, conviction is about your confidence in your fundamental analysis. It denotes your confidence that a particular stock would be a winner.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPxd53jVQrJrzLPJD9zR3Ox7_-Sx3E9dDOfdaCNMiG5JhFiLq8wyg9-D1oo4-qqldg07EHnXzVgNoFpSEw3nibGyluJlEv0ckM0zM-lKrSmtvipT1uOtPzzMv162omFxxnutyBf75mVFUJu1EBzxqm52mJFsZiLXMykcE3c0KrPFpPdEbMdXf_KgOben0/s614/Pic%2034%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="What is the min amount to start investing in stocks" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPxd53jVQrJrzLPJD9zR3Ox7_-Sx3E9dDOfdaCNMiG5JhFiLq8wyg9-D1oo4-qqldg07EHnXzVgNoFpSEw3nibGyluJlEv0ckM0zM-lKrSmtvipT1uOtPzzMv162omFxxnutyBf75mVFUJu1EBzxqm52mJFsZiLXMykcE3c0KrPFpPdEbMdXf_KgOben0/s16000/Pic%2034%20min.PNG" title="What is the min amount to start investing in stocks" /></a></div><div><br /></div><div><div style="text-align: left;"><b>What is the min amount to start investing in stocks for a fundamental investor?</b></div><div>Since you cannot know for sure how a particular stock will perform, you invest in a portfolio of stocks. If you take the view that you need 30 stocks to have a diversified portfolio, it must mean that you should have enough funds to establish the 30 stocks portfolio.</div><div><br /></div><div>In the Bursa Malaysia context, the minimum transaction lot size is 100 shares. Accordingly, the minimum amount to start investing is the amount required to buy 100 lots of shares in the 30 identified stocks. Based on an average price of RM 2.00 per share, this means that you will require at least RM 6,000 to start investing.</div><div><br /></div><div>In some countries like the US, there are platforms that now enable you to buy even fractional shares. The issue of a minimum requirement is no longer tied to some “lot size” requirements. </div><div><br /></div><div>Nevertheless, while you can buy one share or fractional share, from a risk mitigation perspective you should not invest in only one share. You should aim to have a portfolio from the start. This then determined the minimum amount you need to start investing in stocks.</div><div><br /></div><div>When I buy shares, I determined my cost per share by dividing the total amount I paid by the number of shares. The total amount I paid included both the commissions and other government duties. Brokerage fees and duties are not exactly linear, ie there are minimum charges. This means that for purchases of a small number of shares, the brokerage and duties will account for a bigger % of the cost per share. </div><div><br /></div><div>So, while in theory, you could buy one share or even a fractional share, you would have to aim for a higher price in order to make the same % gain as someone who bought a larger number of shares.</div><div><br /></div><div style="text-align: left;"><b>Is there any benefit of buying one share?</b></div><div>So far, we have looked at share ownership from a purely financial perspective.</div><div><br /></div><div>However, if you consider investing as becoming part-owner of a company, then owning one share makes you a shareholder of a company.</div><div><br /></div><div>This makes you eligible to attend the shareholders’ meetings and to vote at those meetings. If you are lucky, some companies have door gifts and discounts for those attending shareholder’s meetings. If this happens it is more than whatever financial gain you get from owning the one share.</div><div><br /></div><div>There are some who think that for a newbie, owning one share helps to break the psychological barrier of investing in stocks. I am not sure whether this applies in the days of fractional apps.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvzUvX2sWCyCO2g-Qyy_K7Uk5bbb2OzWz9V1Y5XWR_SSK327armjLpX6vQt_cir0oyphr-KOxZnHWapVCaxd2Bnp34lQQxZwzNpVwbeU65yoYZvBXvXeeLEhGcFNitOkwTC3HLPw6lMghojxx1mXyiYphdjdmI_AwOu5GKxHTLCJjQ7DswHbFmU71RVEk/s614/Pic%2035%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="Investing as a stock trader?" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvzUvX2sWCyCO2g-Qyy_K7Uk5bbb2OzWz9V1Y5XWR_SSK327armjLpX6vQt_cir0oyphr-KOxZnHWapVCaxd2Bnp34lQQxZwzNpVwbeU65yoYZvBXvXeeLEhGcFNitOkwTC3HLPw6lMghojxx1mXyiYphdjdmI_AwOu5GKxHTLCJjQ7DswHbFmU71RVEk/s16000/Pic%2035%20min.PNG" title="Investing as a stock trader?" /></a></div><div><br /></div><h4 style="text-align: left;">3.3.2 Investing as a stock trader?</h4><div>You will realize that the discussion in sections above are targeted at the long-term stock investor.</div><div><br /></div><div>If you are trading in stocks, the amount you invest in each trade would follow a different set of rules. Yes, how much you invest is affected by your investment styles.</div><div><br /></div><div>When it comes to trading, the differences are:</div><div><ul><li>Firstly, many brokerages have some rules about the amount you should have in your account (capital) to start trading. </li></ul><ul><li>Secondly, trading expenses like commissions have a bigger impact on your returns. The smaller the amount you invest per trade, the bigger the commission impact.</li></ul><ul><li>When it comes to trading, you don’t know whether a particular trade is going to be a winner or a loser. A loss can easily get out of hand if not controlled. To avoid this, you cap the risk on each trade. </li></ul></div><div><br /></div><div>The common rule is to risk not more than 1 % to 2 % of the capital on each trade. </div><div><br /></div><div>Do not confuse this with the amount of share you can buy for a particular stock. Risking 1% does not mean that you can only utilize 1% of the capital in a trade.</div><div><br /></div><div>For example, if you have $ 50,000 capital, you can lose up to $500 per trade if you risk 1%. However, you can still utilize all of your capital. If you buy 1,000 shares of a $50 stock, you have used all of your buying power. As long as you don't lose more than $500, your risk is less than 1%.</div><div><br /></div><div>The easiest way to make sure you don't lose more than $500 is to use a stop-loss order. A stop-loss order gets you out of a trade when the price moves against you and reaches a pre-set price.</div><div><br /></div><div>The rationale of setting the 1% risk amount is so that you can live to fight another day. You want to avoid a situation where a period of continuous losses wiped out your capital.</div><div><br /></div><div style="text-align: left;"><b>How do you determine the position size for stock trading?</b></div><div>Position size is how many shares you take on a stock trade. Position size is determined by a simple mathematical formula that helps control risk and maximize returns on the risk taken.</div><div><br /></div><div>Position size = Amount of capital to risk / Amount to risk for each trade</div><div><br /></div><div>For example, if you have $ 50,000 capital and you want to risk 1 %, then the amount of capital at risk is $ 500.</div><div><br /></div><div>Assumed that that share price is $ 100 per share and you set your stop-loss at $ 98 per share. This means that you risk $ 2 per share for the trade.</div><div><br /></div><div>The number of shares you buy or position size = 500 / 2 = 250 shares.</div><div><br /></div><div>How do you determine the stop loss position? </div><div><br /></div><div>One common way is to link it to the volatility of the stock using the Average True Range (ATR). ATR is a market volatility indicator that is typically derived from the 14-day simple moving average of a series of true range indicators.</div><div><br /></div><div>ATR can be used in position sizing by calculating a multiple of the ATR to come up with a volatility-adjusted stop loss level. In order to size your trade, you then need to adjust your position size so that your maximal loss never will exceed your set limit. A good ATR multiple is often somewhere around 2-3 but varies with market and strategy.</div><div><br /></div><div>For example, if the ATR for a stock is $ 1 and you decided to use a multiple of 2. Then the maximum amount of money you are prepared to lose on the trade = $ 1 X 2 = $2.</div><div><br /></div><div>This then becomes your stop loss amount and if the amount of capital you risk is $ 500, the number of shares you buy = $ 500 / $ 2 = 250 shares.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvHlDsR0DxV1ZUpkW0QUPSCowf5Xyv-Yzp_skGjIPHpdmA4LUY4dRXLy6wtdkbNZancjaOQ9-bY6vs5iTh9dsORWPuJWkBaB85OlxamXriL7t91nMNQu_9W5s9VaUtqMOchREQXT7GQbMhWbQlMoD62VSa54LPEiEUWdfqiKEvMzoDvtRT9la4Npm4mio/s614/Pic%2036-min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="How do you construct a stock trading portfolio?" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvHlDsR0DxV1ZUpkW0QUPSCowf5Xyv-Yzp_skGjIPHpdmA4LUY4dRXLy6wtdkbNZancjaOQ9-bY6vs5iTh9dsORWPuJWkBaB85OlxamXriL7t91nMNQu_9W5s9VaUtqMOchREQXT7GQbMhWbQlMoD62VSa54LPEiEUWdfqiKEvMzoDvtRT9la4Npm4mio/s16000/Pic%2036-min.PNG" title="How do you construct a stock trading portfolio?" /></a></div><div><br /></div><div><br /></div><div><div style="text-align: left;"><b>How do you construct a stock trading portfolio?</b></div><div>If you are a stock trader, you do not approach a stock portfolio like a fundamental investor.</div><div><br /></div><div>This is because your main risk control is the maximum amount of capital you risk at any given point in time. I would think the 5% rule is your starting point. In other words, 5 % is the total amount of your capital at risk at any time.</div><div><br /></div><div>You can then determine the number of active trades to undertake at any point in time.</div><div><br /></div><div>For example, if you risk 1 % per trade, it meant that you should have only 5 active trades. If you risk 2 % per trade, you should not have more than 2 to 3 active trades.</div><div><br /></div><div>Essentially you do not follow the fundamental investor’s diversification concepts.</div><div><br /></div><div>Secondly, given the relatively small number of stocks in the trading portfolio, you would select those stocks with the highest conviction. These would be those with the following combination:</div><div><ul><li>The best win-loss ratio.</li></ul><ul><li>The best signal strengths. </li></ul></div><div><br /></div><div>As a trader, you probably rely on charts, trendlines, or other technical indicators to signal the price movement. The best signals could be those:</div><div><ul><li>Chart patterns that signal an uptrend if you are trading long.</li></ul><ul><li>Trendlines with the strongest trend strengths.</li></ul><ul><li>With the best confluence of technical indicators.</li></ul></div><div><br /></div><div>My point is that you need a consistent basis to guide your decision-making process.</div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJV9OxRfajSbe2WIdspk1DM3pisCNNQun70ksIy9IoOJD6HNY0XoxbzybIYjIpvdnw1HF9TKeEVzQ6DiwLlaJIZCGF3ogj1zpcUBZdmNo4mmLCgfwYMA6Y1mbLyLnAUVcFhtyiMMw9s40BJj5hWHK0WkF4B1M8IdhMh9AksRbA6RNE0qgSO36ntUhbfYQ/s614/Pic%2037%20min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="How to establish the position" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJV9OxRfajSbe2WIdspk1DM3pisCNNQun70ksIy9IoOJD6HNY0XoxbzybIYjIpvdnw1HF9TKeEVzQ6DiwLlaJIZCGF3ogj1zpcUBZdmNo4mmLCgfwYMA6Y1mbLyLnAUVcFhtyiMMw9s40BJj5hWHK0WkF4B1M8IdhMh9AksRbA6RNE0qgSO36ntUhbfYQ/s16000/Pic%2037%20min.PNG" title="How to establish the position" /></a></div></div><div><div><br /></div><h3 style="text-align: left;">3.4 How to establish the position</h3><div>Once you have identified the stock and have a target amount to invest, do you slowly build-up to the target amount, or do you buy in one lump sum? You can imagine a similar question when you sell.</div><div><br /></div><div>In practice, I have never bought or sold in one lump sum. From a buying perspective, this is because:</div><div><ul><li>If you split the purchases into several tranches, there is a chance that your average purchased price could be lower.</li></ul><ul><li>I have found that after owning a stock, I picked up issues that I missed before. This is probably a behavioural issue. But I find it advantageous to scale into a position rather than buy in one go.</li></ul><ul><li>Investing a large lump sum at once can be emotionally stressful, especially during periods of market uncertainty. Scaling in reduces this stress by breaking down the investment into smaller, more manageable portions.</li></ul><ul><li>For those with limited funds, scaling in can help you build up your stock position</li></ul></div><div><br /></div><div>When it comes to selling, I scale out because I have never been able to forecast the peak price. So, scaling out of a position improves my overall selling price.</div><div><br /></div><div>However, there have been times when the price dropped dramatically after my first sale. These are situations when there was some irrational reason for the price spike. Unfortunately, I can only see this with hindsight.</div><div><br /></div><div>I still scale-out over 5 or 6 tranches rather than a lump sum sale because there are not many cases of irrational price spikes.</div><div><br /></div><div>You could improve on your average purchased or selling price if you have a way to identify the market top or bottom. I have come across advice to use technical indicators to do this. </div><div><br /></div><div>Unfortunately, my transaction period is usually 3 to 4 weeks. For such short durations, I have not been very successful in identifying the market top or bottom using technical analysis. This is after trying with trend, candlesticks, and chart pattern analyses.</div><div><br /></div><div>In practice, I identify the target price, and then I tried to improve it through scaling in or scaling out as the case applies. </div><div><br /></div><div style="text-align: left;"><b>What is the min amount to start investing?</b></div><div>If you take the view that you need 30 stocks to have a diversified portfolio it must mean that you should have enough funds to establish the 30 stocks portfolio.</div><div><br /></div><div>In the Bursa Malaysia context, the minimum transaction lot size is 100 shares. Accordingly, the minimum amount to start investing is the amount required to buy 100 lots of shares in the 30 identified stocks. Based on an average price of RM 2.00 per share, this means that you will require at least RM 6,000 to start investing.</div><div><br /></div><div><h2>4. Risk</h2><div>As a bottom-up stock-picker, it is obvious that your investment risks come from the bottom-up as well as stock picking process. I have several articles that cover these risks. Refer to</div><div><ul><li><a href="https://www.i4value.asia/2020/05/how-to-mitigate-against-risks-when.html" target="_blank">How To Mitigate Against Risks When Value Investing</a>.</li></ul><ul><li><a href="https://www.i4value.asia/2023/10/how-to-mitigate-permanent-loss-of.html#more" target="_blank">How to mitigate permanent loss of capital in an awesome way.</a></li></ul></div><div><br /></div><div>The objective of having a stock portfolio is to mitigate the individual stock risks. </div><div><br /></div><div>However, there are stock portfolio risks that we also have to contend with. These are risks that affect the portfolio as a whole. There are risks than cannot be diversified away. Modern Portfolio Theory refers to these systemic risks. Some examples are:</div><div><br /></div><div>Market risk. The overall market's performance can impact the portfolio. Factors such as economic conditions, interest rates, and geopolitical events can affect the entire market, potentially influencing your portfolio's performance. Note that MPT solution is to seek higher returns for taking on such risk.</div><div><br /></div><div>Sector and industry risk. Different sectors and industries may perform better or worse under certain economic conditions. Overconcentration in a single sector can expose your portfolio to heightened risks if that sector experiences difficulties. This is one of the reasons why I have my diversity criteria.</div><div><br /></div><div>Catastrophic events. Natural disasters like earthquakes, hurricanes, or pandemics can disrupt supply chains, damage infrastructure, and impact multiple sectors of the economy, causing systemic risk.</div><div><br /></div><div>Currency/sovereign debt risk: If you invest in international stocks, fluctuations in exchange rates can impact returns when converting gains or losses back into your home currency. When a country is unable to service its debt obligations, it can undermine the stability of the global financial system, as creditors and financial institutions holding that debt can face significant losses.</div><div><br /></div><div>To mitigate these risks regularly review and adjust your portfolio.</div><div><br /></div><div>It is obvious that you should not allocate all your savings to one asset class such as stocks. That is why an asset allocation plan is part of the stock portfolio risk mitigation measures.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3x0MwTEsbnsfHDXr04tEbroC-gjF7W9u9Qf57JzSueGTQWvz74bVeilBtn0EgtIHR10c820pt97Nv8aGNsfUcoJKJjn6Eeawq7YwgC1Up9PxtbgAUtaroKQefWcoOp7RJZVCzFdhANuD5XPuPQ89qJB1LqL9B0H7trYODY6BPqmptG6IlZpgQg2E4wng/s614/Pic%2038-min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="Pulling it all together" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3x0MwTEsbnsfHDXr04tEbroC-gjF7W9u9Qf57JzSueGTQWvz74bVeilBtn0EgtIHR10c820pt97Nv8aGNsfUcoJKJjn6Eeawq7YwgC1Up9PxtbgAUtaroKQefWcoOp7RJZVCzFdhANuD5XPuPQ89qJB1LqL9B0H7trYODY6BPqmptG6IlZpgQg2E4wng/s16000/Pic%2038-min.PNG" title="Pulling it all together" /></a></div><div><br /></div><h2 style="text-align: left;">5. Pulling it all together</h2><div><div><div>Building a stock portfolio is a common strategy for individuals looking to grow their wealth over time. However, this investment approach comes with its own set of benefits and issues. The benefits of having a stock portfolio can be summarized as:</div><div><ul><li>Potential for Wealth Accumulation. By carefully selecting a diversified set of stocks, investors can harness the power of compounding to grow their wealth steadily.</li></ul><ul><li>Income Generation. Stock portfolios can also be a source of income through dividend payments. </li></ul><ul><li>Portfolio Diversification. This is a key strategy in portfolio construction. By spreading investments across various stocks from different industries and sectors, investors can reduce their exposure to individual stock risk. </li></ul></div><div><br /></div><div>Some of the issues involved in constructing a stock portfolio includes:</div><div><ul><li>Risk Management. Your view of risk will affect your approach. For example, if you follow the volatility view of risk, you would look at the Modern Portfolio Theory as the guide in constructing your stock portfolio. But if you follow the permanent loss of capital school, the discussions here would be more appropriate.</li></ul><ul><li>Research and Analysis. Effective stock portfolio construction requires ongoing research and analysis. </li></ul><ul><li>Emotional Decision-Making. Emotions can cloud judgment and lead to impulsive investment decisions. Overcoming emotional biases is a challenge that all investors face. This will impact your portfolio construction. </li></ul><ul><li>Costs and Fees. Investing in stocks often involves transaction costs, such as brokerage fees and taxes on gains. These costs can eat into returns and should be considered when planning a portfolio strategy. </li></ul></div><div><br /></div><div>When it comes to constructing your stock portfolio and/or determining the amount to invest in a particular stock, the rules for a fundamental investor are different from those for a trader.</div><div><br /></div><div>This is because the risk focus is different.</div><div><br /></div><div>A fundamental investor would aim for a 30-stock portfolio. Then the amount allocated to each stock would be guided by whether he goes for an equal amount for each stock or based on some conviction rules. </div><div><br /></div><div>On the other hand, a stock trader would focus on the maximum amount of the capital to risk, and the amount to risk per trade. The number of stocks in the portfolio follows from these.</div><div><br /></div><div>I would summarize some of the portfolio construction key points into:</div><div><ul><li>Having a portfolio of stocks is part of the risk mitigation plan.</li></ul><ul><li>You can identify the stocks in the portfolio by either a top-down or bottom-up approach. The important thing is to focus on individual stocks rather than the economy or industry. </li></ul><ul><li>Target to have at least 30 stocks uncorrelated stocks in the portfolio. This is a good balance between maximizing returns from concentration and minimizing risks with diversification.</li></ul><ul><li>Allocate more to those stocks with the most conviction. From a Kelly Formula perspective, this is better than allocating the same amount to all the stocks.</li></ul><ul><li>Scale in and scale out of a position rather than buy or sell in one lump sum. </li></ul></div></div><div><br /></div><div>You can see that as a bottom-up stock picker, the starting point is a good fundamental analysis of the company. This requires skill and experience. If you are a newbie, I would suggest that you complement what you do with insights from experts. There are many sites that provide such analysis such as<span style="text-align: start;"> </span><a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. They have a long track of business analysis, valuation, and risk assessment and as a member, you can tap into their library. </div><div><br /></div><div><br /></div><div><br /></div><h2 style="text-align: center;">END</h2></div><div><br /></div><div><br /></div><div><div><div><div style="text-align: center;"><br /></div></div></div><div><br /></div><div> - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div></div><div><div class="separator" style="clear: both; text-align: center;"><div style="text-align: left;"><h2 style="text-align: justify;"><div style="text-align: center;"><div style="font-size: medium; font-weight: 400; text-align: justify;">How to be an Authoritative Source, Share This Post</div><div style="font-size: medium; font-weight: 400; text-align: justify;"><br /></div><div style="font-size: medium; font-weight: 400; text-align: justify;"><br /></div><div style="font-size: medium; font-weight: 400; text-align: justify;"><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div></div></h2><h2><div style="text-align: center;"><div style="font-size: medium; font-weight: 400; text-align: left;"><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic; text-align: justify;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="font-style: italic; text-align: justify;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="font-style: italic; text-align: justify;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="text-align: justify;"><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div></div></div></div></h2><h2 style="text-align: justify;"><div style="text-align: center;"><div style="font-size: medium; font-weight: 400; text-align: justify;"><div><div></div></div><div class="separator" style="clear: both; text-align: center;"><br /></div></div></div></h2></div></div></div></div></div>
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</div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-17998739310517435402023-10-22T09:18:00.004+08:002023-12-21T06:41:18.480+08:00Stock picking portfolio vs MPT<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: bold; letter-spacing: 0.6px; text-decoration-line: none;">Fundamentals 20-8: This is the Sep 2023 review of the stock-picking portfolio that was first established at the start of 2022. I also look at the differences between a stock-picking portfolio and that based on Modern Portfolio Theory (MPT).</span></div>
<div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYa0pfhyphenhyphen6Xn88-It5sFLwkPWZs4bJ5eY21fuzGlthXqEM7ehJ0WJdJD51efShhpyN-oXDrnv14uhasYmUXD2VwMJuRqkMNXfC0p6iTy4NJZkNnuYSEUSU0bHPAQ5pkrP61DA7WbzBvr_or39pJH_0BJTr2opKS4RjTrxnNSmx0wzfTW61lZof2g8_Ou6c/s1280/Pic%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Stock picking portfolio vs MPT" border="0" data-original-height="720" data-original-width="1280" height="225" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYa0pfhyphenhyphen6Xn88-It5sFLwkPWZs4bJ5eY21fuzGlthXqEM7ehJ0WJdJD51efShhpyN-oXDrnv14uhasYmUXD2VwMJuRqkMNXfC0p6iTy4NJZkNnuYSEUSU0bHPAQ5pkrP61DA7WbzBvr_or39pJH_0BJTr2opKS4RjTrxnNSmx0wzfTW61lZof2g8_Ou6c/w400-h225/Pic%201-min.png" title="Stock picking portfolio vs MPT" width="400" /></a></div><div style="text-align: justify;"><div><span><a name='more'></a></span>In Jan 2022, I constructed a stock portfolio based on the companies that I had analyzed and valued over the past year. The goal was to track the portfolio performance to provide insights into establishing and managing a stock portfolio.</div><div><br /></div><div>This is my seventh quarterly review. The goals of each portfolio review were:</div><div><ul><li>To determine the portfolio return.</li></ul><ul><li>To ensure that the portfolio still meets the diversity criteria.</li></ul></div><div><br /></div><div>In this article, I will also cover the differences between a stock-picking portfolio and that based on the Modern Portfolio Theory (MPT). </div><div><br /></div><div>This post builds on the data from the various tables presented in my earlier articles in this series. To benefit from this article, you should first read the following:</div><div><ul><li><a href="https://www.i4value.asia/2022/01/how-to-construct-winning-stock.html#more" target="_blank">How to manage a stock picking portfolio for 2022</a>.</li></ul><ul><li><a href="https://www.i4value.asia/2022/04/mac-2022-review-of-winning-stock.html#more" target="_blank">Mac 2022 review of the stock picking portfolio.</a> </li></ul><ul><li><a href="https://www.i4value.asia/2022/07/the-winning-stock-portfolio-has-lost.html#more" target="_blank">The stock-picking portfolio has lost money – do not panic.</a></li></ul><ul><li><a href="https://www.i4value.asia/2022/11/the-winning-stock-portfolio-dipped-but.html#more" target="_blank">The stock picking portfolio dipped but buy more.</a></li></ul><ul><li><a href="https://www.i4value.asia/2023/01/the-first-annual-review-of-winning.html#more" target="_blank">The first annual review of the stock picking portfolio.</a></li></ul><ul><li><a href="https://www.i4value.asia/2023/04/how-often-do-you-review-winning-stock.html#more" target="_blank">How often do you review the stock-picking portfolio?</a></li></ul><ul><li><a href="https://www.i4value.asia/2023/07/how-to-grow-stock-picking-portfolio.html#more" target="_blank">How to grow the stock-picking portfolio value?</a></li></ul></div><div><br /></div><h2>Contents</h2><div><ul><li><b>Tracking performance</b></li></ul><ul><li><b>End Sep 2023 Returns</b></li></ul><ul><li><b>End Sep 2023 Diversity</b></li></ul><ul><li><b>Stock picking portfolio vs MPT</b></li></ul><ul><li><b>Conclusion</b></li></ul></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html">Learn more</a>.</i></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div><div style="text-align: justify;"><h2>Tracking performance</h2><div>To recap, I started with a USD 100,000 investment fund. I then added another USD 10,000 at the end of 2022. </div><div><br /></div><div>I did not use all the money when I established the portfolio. There is some balance cash. When looking at performance, I will look at it from the fund perspective rather than just the stock portfolio perspective. For the avoidance of doubt:</div><div><ul><li>The portfolio refers to the stocks that I invest in.</li></ul><ul><li>The fund refers to both the value of the stock portfolio and the unutilized cash.</li></ul></div><div><br /></div><div>The total fund value as of the last review date (end of June 2023) was USD 112,878 as per Table 1. Refer to "<a href="https://www.i4value.asia/2023/07/how-to-grow-stock-picking-portfolio.html#more" target="_blank">How to grow the stock picking portfolio value?</a>” for details.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqH8iiPUUOSrw6u0QwsxkFZ7WITDH4P1QvPb6QrmTQlgLgLb4bsGWR719aZ6ih3_qxRGswYrtrmImChyrhp0aUU8jwwZrTdeooSnwJaf4RxuCFmZs7NpEU_YjVzZUcrFt38iccxTOwLRJPz4Bl6mAFF1vFEfuAYfCmPHx9fv5dfqgfvxDnNJgEMAEQIdI/s324/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 1: Total Fund Value as of the end of June 2023" border="0" data-original-height="146" data-original-width="324" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqH8iiPUUOSrw6u0QwsxkFZ7WITDH4P1QvPb6QrmTQlgLgLb4bsGWR719aZ6ih3_qxRGswYrtrmImChyrhp0aUU8jwwZrTdeooSnwJaf4RxuCFmZs7NpEU_YjVzZUcrFt38iccxTOwLRJPz4Bl6mAFF1vFEfuAYfCmPHx9fv5dfqgfvxDnNJgEMAEQIdI/s16000/Table%201-min.png" title="Table 1: Total Fund Value as of the end of June 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Total Fund Value as of the end of June 2023</td></tr></tbody></table><div><br /></div><div>Over the last 3 months, I sold and bought some stocks. </div></div><div style="text-align: justify;"><div><ul><li>I sold all my Boustead Plantation at an average price of RM 1.40 per share as its price was up-trending. I later found out that KLK was buying it from LTAT at RM 1.55 per share. The deal was eventually called off but LTAT decided to continue with the general offer at RM 1.55 per share.</li></ul><ul><li>I sold NVR as I viewed that the US Housing Start was peaking.</li></ul><ul><li>I sold United States Steel following the announcement that Cleveland Cliff was considering a takeover exercise.</li></ul><ul><li>I bought MDC as my analysis showed that this home builder was still an investment opportunity. Refer to “<a href="https://seekingalpha.com/article/4615923-mdc-not-best-financially-has-margin-of-safety" target="_blank">M.D.C. Holdings: Not The Best Financially But Has A Margin Of Safety</a>”</li></ul><ul><li>I bought Ryerson based on my analysis of this US steel center company. Refer to ”<a href="https://seekingalpha.com/article/4635756-ryerson-made-hay-while-the-sun-shone-but-is-the-sun-still-shining" target="_blank">Ryerson Made Hay While The Sun Shone. But Is The Sun Still Shining?</a>” </li></ul></div><div><br /></div><div>This affected the value of the portfolio as of the end of Sep 2023 as shown in Table 2. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVnQGMy9NFUbAIHXuOeR6AjoN7X8gtwW38Y2YtwMhEDHl6QSBWmqOxwstmrPgra3x2cpDGjfirdAgZDKCWdIz0Zfb4bNH6OKVHTndRJFeQC9pZU2_wx4mbHRwv2cnRZxA2Vrgn8Lp9CPD9-uj1N7z2LcqjNwiaHZWW1fXMPaoOtL0LKj0uL-Yns7XURCI/s1064/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 2: Portfolio as of the end of Sep 2023." border="0" data-original-height="1064" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVnQGMy9NFUbAIHXuOeR6AjoN7X8gtwW38Y2YtwMhEDHl6QSBWmqOxwstmrPgra3x2cpDGjfirdAgZDKCWdIz0Zfb4bNH6OKVHTndRJFeQC9pZU2_wx4mbHRwv2cnRZxA2Vrgn8Lp9CPD9-uj1N7z2LcqjNwiaHZWW1fXMPaoOtL0LKj0uL-Yns7XURCI/s16000/Table%202-min.png" title="Table 2: Portfolio as of the end of Sep 2023." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Portfolio as of the end of Sep 2023.</td></tr></tbody></table><br /><div>At the same time, there were changes to the cash positions as shown in Table 3. You can see that the cash had increased to USD 16,329 at the end of Sep 2023 compared to USD 1,541 at the end of June 2023. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcm7XvCeG5_yVW0GkPd38V_-QsM-Syizay8Io8tuZ5aZ8plCZ-Efe3Y8rXpZv3Mzcgw7zAao67xmm0krM3aXNMtvKBJzjBRdE3Fe4PCBqy8zAZ2Jmr8Z1FpFHb4r02IaJMVpF6rHydwuvUyGitwkiMS89yDa3U6xFTSORmyZieKzydJG9y5u9WwOm90_0/s895/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 3: Cash Position as of the end of Sep 2023" border="0" data-original-height="407" data-original-width="895" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcm7XvCeG5_yVW0GkPd38V_-QsM-Syizay8Io8tuZ5aZ8plCZ-Efe3Y8rXpZv3Mzcgw7zAao67xmm0krM3aXNMtvKBJzjBRdE3Fe4PCBqy8zAZ2Jmr8Z1FpFHb4r02IaJMVpF6rHydwuvUyGitwkiMS89yDa3U6xFTSORmyZieKzydJG9y5u9WwOm90_0/s16000/Table%203-min.png" title="Table 3: Cash Position as of the end of Sep 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Cash Position as of the end of Sep 2023</td></tr></tbody></table><br /><div>As I did not use all the cash to buy new stocks, the total portfolio value decreased to USD 105,045 (refer to Table 2) compared to USD 111,337 as of the end of June 2023 (refer to Table 1). </div><div><div><br /></div><div>The total fund value at the end of Sep 2023 then became USD 112,878 as per Table 4.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigQa2WKRT4b5sLjOEuLvsuckg0hYp5_tPC7JWpdnXiFjQk7yPCCvtdcR6S-QPwQquBm2b6FadBJCMMgOb4tTIBKmKukIfaLthyosLU6Mn74UItMGN0AQKuN0eSRN_3XpD8wCXTRVvlONkNaOoHypz5T3-WvIOO4Mb5b7AgI0P4rY3dd6ydXYurL4SVqys/s661/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 4: Total Fund Value as of the end of Sep 2023" border="0" data-original-height="146" data-original-width="661" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigQa2WKRT4b5sLjOEuLvsuckg0hYp5_tPC7JWpdnXiFjQk7yPCCvtdcR6S-QPwQquBm2b6FadBJCMMgOb4tTIBKmKukIfaLthyosLU6Mn74UItMGN0AQKuN0eSRN_3XpD8wCXTRVvlONkNaOoHypz5T3-WvIOO4Mb5b7AgI0P4rY3dd6ydXYurL4SVqys/s16000/Table%204-min.png" title="Table 4: Total Fund Value as of the end of Sep 2023" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: Total Fund Value as of the end of Sep 2023</td></tr></tbody></table><br /><div>Note that to derive the portfolio value in USD, I used the updated forex rates as per Table 5.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbBDNrWQLiQOvvrn0Z4uZcQA5rrSVW0C7b9fJ-oIsNH5uD21ctzKi0BW5T8kgfPpGl9u1mECRAI0_MHAx4fo0bdxPX-MWII9VjW79icc00pxrXYQ6DLqrNNpA38yYdstsr1skOTlH2rIAyO1k3_Tii1KKUZaqeuWYtF4Vdn71Gn_-yuzLPqUZyWTcdZKI/s346/Table%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 5: Forex Rates at the end of Sep 2023: 1 USD to the respective currencies." border="0" data-original-height="146" data-original-width="346" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbBDNrWQLiQOvvrn0Z4uZcQA5rrSVW0C7b9fJ-oIsNH5uD21ctzKi0BW5T8kgfPpGl9u1mECRAI0_MHAx4fo0bdxPX-MWII9VjW79icc00pxrXYQ6DLqrNNpA38yYdstsr1skOTlH2rIAyO1k3_Tii1KKUZaqeuWYtF4Vdn71Gn_-yuzLPqUZyWTcdZKI/s16000/Table%205-min.png" title="Table 5: Forex Rates at the end of Sep 2023: 1 USD to the respective currencies." /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 5: Forex Rates at the end of Sep 2023: 1 USD to the respective currencies.</td></tr></tbody></table><div><br /></div><div><h3>Recap</h3><div>When it comes to assessing performance, I consider the following 3:</div><div><ul><li>Look at absolute returns.</li></ul><ul><li>Compare the returns with those of the benchmarks.</li></ul><ul><li>Compare the returns on a risk-adjusted basis.</li></ul></div><div><br /></div><div>When it comes to the fund or stock portfolio, the return is complicated by the following situations:</div><div><ul><li>During the period, some of the stocks could have lost money. You could have a negative total gain if a capital loss is larger than the dividends.</li></ul><ul><li>You could have sold off some stocks and be holding cash. Alternatively, you could be holding onto some dividends in cash form rather than have them reinvested during the review time.</li></ul><ul><li>You could have allocated additional cash to the funds. In other words, the amount set aside for investment is bigger not because of any gain, but because of additional funds.</li></ul></div><div><br /></div><div>To cater to such situations, I define the total gain and return in the following manner. </div><div><ul><li>Total Gain = current value - previous value + dividends.</li></ul><ul><li>The Total Returns for the period = Total Gain divided by the previous value.</li></ul><ul><li>The fund value includes any un-invested cash.</li></ul></div><div><br /></div><div>I used the market value of the stocks in the portfolio to calculate the portfolio value. It is the sum of the market value of the respective stocks. The current and previous values refer to the value of the portfolio assuming it is liquidated. </div><div><br /></div><div>The market value of a particular stock = number of shares held × market price. The number of shares held currently may be different from the number of shares held before. This could be due to bonus issues and or other corporate activities.</div><div><br /></div><div>To ensure that I am comparing apples to apples, I also include any dividends or money that I have received that has not been reinvested. </div><div><ul><li>The dividends refer to all the dividends received during the annual review period. Since there is a likelihood that you may reinvest the dividends, I look at the after-tax value of the dividends received.</li></ul><ul><li>The cash on hand could be money pending reinvestment or money taken out.</li></ul></div><div><br /></div><div>I hope that I have shown you how to handle various situations through the past few articles. I have provided work examples so that you can see the “mechanics” of the computation.</div><div><br /></div><div>To ensure a meaningful comparison, I recommend considering quarterly performance excluding dividends. Then on an annual basis, I would consider a total return basis ie including dividends.</div><div><br /></div><div>Along the same lines, I would assess the Information Ratio and Jensen Alpha only on an annual basis. </div><div><br /></div></div><div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div></div><div><h3>End Sep 2023 Returns</h3><div>The fund returns for the quarter ended Sep 2023 = (121,375 – 112,878) / 112,878 = 7.5 %. </div><div><br /></div><div>A summary of the quarterly and annual returns over the past few quarters is shown in Table 6. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhszb0EyXPF0Xxyo4lArJLm87y8DCVwBxwkF8sQSGsNh5Uu4SBwi4RMM-LNcmameiBDXYO9jyZvTVtwVGSZbfe99dGD71-o-KYW5nuBx_hgM3rQ6sTAFe2kNRBIVil8VgxSxZfVOnbVh4xJQBSqHtu2YEkTSGIJeojOlZcfAWzNxUAqVIVfGY3SBykFYcg/s551/Table%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 6: Fund Performance" border="0" data-original-height="349" data-original-width="551" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhszb0EyXPF0Xxyo4lArJLm87y8DCVwBxwkF8sQSGsNh5Uu4SBwi4RMM-LNcmameiBDXYO9jyZvTVtwVGSZbfe99dGD71-o-KYW5nuBx_hgM3rQ6sTAFe2kNRBIVil8VgxSxZfVOnbVh4xJQBSqHtu2YEkTSGIJeojOlZcfAWzNxUAqVIVfGY3SBykFYcg/s16000/Table%206-min.png" title="Table 6: Fund Performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 6: Fund Performance<br /><div style="text-align: left;"><div><i>Notes<span style="white-space: pre;"> </span></i></div><div><i>a) Quarterly Return = (End of quarter / End of the previous quarter) -1.</i></div><div><i>b) Annual Return = (End of year / End of previous year) -1.</i></div><div><i>c) The end of the previous quarter or year values are after accounting for any additional funds and/or changes in investments.</i></div><div><br /></div></div></td></tr></tbody></table><div><h3>Benchmarking returns</h3><div>You can see that the portfolio gained when looking at the latest quarter. Now whether this is a good performance can only be gauged by comparing it with some reference performance or benchmark. </div><div><br /></div><div>In my previous article, I created a benchmark based on the following:</div><div><ul><li>KLCI for Bursa Malaysia.</li></ul><ul><li>STI for SGX. </li></ul><ul><li>S&P 500 for the US.</li></ul><ul><li>FTSE100 for the London Stock Exchange.</li></ul></div><div><br /></div><div>The weights for each benchmark are the value of funds allocated to the respective stock exchange at the beginning of the period. Refer to Table 7 which estimated the benchmark return.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3JReHjLJy7DrEbOyE1y7n735VeI60Ww_3RHprYv6uLSPTM6tHQwM7dJe4VUH9e2J4c9VVtlzkE8KYEhM65de5O194gzFOcJoQ0f7fsGaOstwOa51Jtl6VpSWG-ILWKxLmlpAoRR2GyFMsRp1W3fT6Wj4AJtkK-L9WwvcYFp-POd8m3rXtSodySiNwxHw/s903/Table%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 7: Computing the Quarterly Gains for the Benchmark" border="0" data-original-height="222" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3JReHjLJy7DrEbOyE1y7n735VeI60Ww_3RHprYv6uLSPTM6tHQwM7dJe4VUH9e2J4c9VVtlzkE8KYEhM65de5O194gzFOcJoQ0f7fsGaOstwOa51Jtl6VpSWG-ILWKxLmlpAoRR2GyFMsRp1W3fT6Wj4AJtkK-L9WwvcYFp-POd8m3rXtSodySiNwxHw/s16000/Table%207-min.png" title="Table 7: Computing the Quarterly Gains for the Benchmark" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 7: Computing the Quarterly Gains for the Benchmark<br /><div style="text-align: left;"><div><i>Notes<span style="white-space: pre;"> </span></i></div><div><i>(a) Index as at end of Jun 2023.<span style="white-space: pre;"> </span></i></div><div><i>(b) Index as end Sep 2023 as per Yahoo Finance.<span style="white-space: pre;"> </span></i></div><div><i>(c) Gain computed as per the formula shown.<span style="white-space: pre;"> </span></i></div><div><i>(d) This is the % investment of the respective items at the start of the period ie end of Jun 2023.</i><span style="white-space: pre;"> </span></div></div></td></tr></tbody></table><br /><div>You can see that the benchmark gained 0.4 % for the quarter compared to the fund gain of 7.5 %. I would consider this a good performance. </div><div><div><br /></div><div>I have not attempted to compute the benchmark return from the start of the fund for this quarter. </div><div><ul><li>The quarterly total gains for the benchmarks are difficult to find.</li></ul><ul><li>The weights used in the benchmark quarterly review differ from quarter to quarter. Refer to the previous post “<a href="https://www.i4value.asia/2023/04/how-often-do-you-review-winning-stock.html#more" target="_blank">How often do you review the stock picking portfolio?</a>” for an illustration.</li></ul></div><div><br /></div><div>For these reasons, when it comes to estimating the benchmark returns, I differentiate between the following:</div><div><ul><li>The quarterly returns where I have ignored dividends.</li></ul><ul><li>The annual returns which are based on a total return basis ie with dividends.</li></ul></div></div><div><br /></div><div><h3>Summary of performances</h3><div>Table 8 summarizes the performance of the fund based on my recommended approach. </div><div><br /></div><div>For 2022, the fund with a <span style="color: red;">-2.0 %</span> return on an annual basis (including dividends) did worse than the benchmark with a <span style="color: red;">-1.3 %</span> return. </div><div><br /></div><div>But since then, the 2023 returns for all the quarters (excluding dividends) for the fund outperformed the benchmark.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyUZDacx9ylcHVNMhyDZE-7T_lJYrpCwKwG5b-c2KVV3pc_Qy3NyhTyQHWftiTTRcCdT2ERzLWV_whl63Gi8jhb8JV-6L0JsLmZB-HyChPFLouQWX4VLKDacPk4alx3TiwqqBs_YEclUo6FDboPskHqFyTGsQKfaR1-uEJbC0yw8Q1zv8-HE25EekL694/s903/Table%208-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 8: Summary of Performance" border="0" data-original-height="278" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyUZDacx9ylcHVNMhyDZE-7T_lJYrpCwKwG5b-c2KVV3pc_Qy3NyhTyQHWftiTTRcCdT2ERzLWV_whl63Gi8jhb8JV-6L0JsLmZB-HyChPFLouQWX4VLKDacPk4alx3TiwqqBs_YEclUo6FDboPskHqFyTGsQKfaR1-uEJbC0yw8Q1zv8-HE25EekL694/s16000/Table%208-min.png" title="Table 8: Summary of Performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 8: Summary of Performance<br /><div style="text-align: left;"><i>Note: Refer to the previous article of this series for the computation of the Information ratio and Jensen Alpha.</i></div></td></tr></tbody></table><div><br /></div><div><h2>End Sep 2023 Diversity </h2><div>The goal of a portfolio is to have about 20 to 30 uncorrelated stocks. You will have difficulty computing the covariances required to determine the correlations. As such, I used a rule of thumb to ensure diversity. </div><div><ul><li>Single stock concentration - the market value of a stock should not be more than 10% of the market value of the total portfolio.</li></ul><ul><li>Group concentration - the market value of the stocks within a group should not be more than 30% of the market value of the total portfolio.</li></ul></div><div><br /></div><div>Refer to my earlier post on this series for the details. The diversity profile at the end of Sep 2023 is presented in Table 9. </div><div><br /></div><div>You can see that cash increased in this quarter compared to the previous quarter. But the concentration within each group reduced in this quarter.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWuWER-7b6Sjat2Z5o-aCRdf1jMsnEDvJ-gw4B_Qy58HBvZeHaiXz1uFNTTrlviWc5hatUdFmXOVsZzm4vA75PK9GdgT9LN-lxITLcc2_I48U6RQNc-j-k-mSXl_w-KRxG_bJSgzpzzXUl2Qpu7pQtHR-1reFOhAW8Ii20bv9Amz-xBoxEdhGs51vhxGI/s903/Table%209-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 9: Diversity Profile" border="0" data-original-height="894" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWuWER-7b6Sjat2Z5o-aCRdf1jMsnEDvJ-gw4B_Qy58HBvZeHaiXz1uFNTTrlviWc5hatUdFmXOVsZzm4vA75PK9GdgT9LN-lxITLcc2_I48U6RQNc-j-k-mSXl_w-KRxG_bJSgzpzzXUl2Qpu7pQtHR-1reFOhAW8Ii20bv9Amz-xBoxEdhGs51vhxGI/s16000/Table%209-min.png" title="Table 9: Diversity Profile" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 9: Diversity Profile</td></tr></tbody></table><div><br /></div><div><h2>Stock picking portfolio vs MPT</h2><div>A stock-picking portfolio and one based on MPT are two different approaches to constructing a stock portfolio. </div><div><br /></div><div>Stock-picking portfolios are based on the belief that an investor can identify and select individual securities that will outperform the market. Stock picking can be more subjective and relies heavily on individual judgment, while MPT is based on quantitative analysis and objective measures of risk and return.</div><div><br /></div><div>As such, many think that stock-picking portfolios are associated with higher individual stock risk, while MPT portfolios aim to reduce overall portfolio risk through diversification.</div><div><br /></div><div>I have of course a risk mitigation framework that addresses many of the risk issues associated with a stock-picking portfolio. For details refer to my article “<a href="https://www.i4value.asia/2023/10/how-to-mitigate-permanent-loss-of.html#more" target="_blank">How to mitigate permanent loss of capital in an awesome way”</a></div><div><br /></div><div>The key differences between them can be summarized as follows:</div><div><br /></div><h3>Stock-Picking Portfolio</h3><div><ul><li>Individual Stock Selection: The goal is to identify specific stocks that will outperform the market or their peers.</li></ul><ul><li>Active Management: The portfolio is actively rebalanced to capitalize on perceived opportunities and avoid underperforming stocks.</li></ul><ul><li>Diversification: I target 30 stocks based on my diversity rules. </li></ul></div><div><br /></div><h3>MPT</h3><div><ul><li>Diversified Portfolio: MPT emphasizes the creation of a portfolio that combines assets with different risk-return profiles to achieve an optimal level of risk and return.</li></ul><ul><li>Quantitative Analysis: MPT relies on quantitative analysis to determine the ideal asset allocation for a given level of risk tolerance. It seeks the "efficient frontier" of portfolios that provide the maximum expected return for a given level of risk or the minimum risk for a given level of expected return.</li></ul><ul><li>Passive or Index Investing.</li></ul></div><div><br /></div><div>Those following the debate between a stock-picking portfolio and MPT should keep in mind that I have a stock-picking portfolio because I am a stock-picker. I am a stock-picker because I believe that this will enable me to beat the market. </div><div><br /></div><div>The stock-picking portfolio results from my stock-picking investment approach. I cannot be a stock-picker yet follow MPT when it comes to portfolio construction. </div><div><br /></div><h2>Conclusion</h2><div>There are 2 key questions when reviewing and interpreting the results of the portfolio review:</div><div><ul><li>How did we perform?</li></ul><ul><li>Are we still well diversified?</li></ul></div><div><br /></div><div>What I said in my previous article is still valid:</div><div><ul><li>Compare quarterly returns excluding dividends to assess how well the fund has performed during the year.</li></ul><ul><li>Compare annual returns on a total return basis to assess how well the fund has performed year-to-year.</li></ul><ul><li>Use the Information Ratio and Jensen Alpha on an annual basis.</li></ul></div><div><br /></div><div>Based on this, the portfolio in 2022 did not perform as well as the benchmark. But in the following 3 quarters, the portfolio outperformed the benchmark. </div><div><br /></div><div>In the context of risk management, I am satisfied that the portfolio at the end of Sep 2023 is still diversified. </div><div><br /></div><div>Note that I have yet to use the portfolio review to check for investment mistakes. I will illustrate this in due course when I have held the stocks for several years. </div><div><br /></div></div><div><div><div><div><div><br /></div><div><br /></div><div><br /></div></div><div><div style="text-align: left;"><h2 style="line-height: normal; margin-bottom: 6pt; text-align: center;"><span face="" style="mso-no-proof: yes;">END</span></h2><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div style="text-align: justify;"> - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">How to be an Authoritative Source, Share This Post</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div style="text-align: justify;"><br /></div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic; text-align: justify;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic; text-align: justify;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="font-style: italic; text-align: justify;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="font-style: italic; text-align: justify;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic; text-align: justify;"><font size="2"><br /></font></div><div style="text-align: justify;"><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span style="text-align: left;"></span><div style="text-align: left;"><br /></div><div style="text-align: left;"><br /></div><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b" style="text-align: left;">Your link text</a></div><div><br /></div></div><div><br /></div></div><div><br /></div><div><br /></div></div><div><br /></div><div><br /></div><div><br /></div></div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-64345921769397398722023-10-08T09:06:00.004+08:002023-12-21T06:42:25.971+08:00How to mitigate permanent loss of capital in an awesome way.<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Fundamentals 27. This is an update of my approach to mitigating risk from a permanent loss of capital perspective. It pulls together the threads from my various risk articles. If you have gone to them, you would be re-directed here. </span></div><div class="separator" style="clear: both; text-align: center;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgF06t5N_bmhp1Y2mV00v1SMvPpzbrsQa7ksBJR5QA7i1doXzMZnfsuKWy2W0CfCUF8eaGMV7mIw8y3T6VzOtvkP_ehLgPxvJ4N6T0UPTNh_5sUoCxsXV9W185z4ueFt23DOMw81eZ6L2ZteqULuJ_TAwLvy6mrY0iXwJzq62kywrVLfwzEqcxv0PIbwko/s960/Slide4-min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="How to mitigate permanent loss of capital" border="0" data-original-height="720" data-original-width="960" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgF06t5N_bmhp1Y2mV00v1SMvPpzbrsQa7ksBJR5QA7i1doXzMZnfsuKWy2W0CfCUF8eaGMV7mIw8y3T6VzOtvkP_ehLgPxvJ4N6T0UPTNh_5sUoCxsXV9W185z4ueFt23DOMw81eZ6L2ZteqULuJ_TAwLvy6mrY0iXwJzq62kywrVLfwzEqcxv0PIbwko/s16000/Slide4-min.PNG" title="How to mitigate permanent loss of capital" /></a></div><span><a name='more'></a></span><div><br /></div><div style="text-align: justify;">There are 2 schools of thought about investing risk:</div><div><div><ul style="text-align: left;"><li style="text-align: justify;">The volatility school that views variance as risk.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">The permanent loss of capital schools that view risk as a permanent reduction of the amount invested.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The volatility school has strong academic credentials. This branch of finance theory has developed to a stage where you can numerically bring risk into the valuation process. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">However, all the discussions on permanent loss of capital as risks are qualitative. How can you manage risk if you are following the permanent loss of capital school? Specifically:</div><div><ul style="text-align: left;"><li style="text-align: justify;">How to methodically bring the permanent loss of capital into the investment process?</li></ul><ul style="text-align: left;"><li style="text-align: justify;">How to compare risks between two companies?</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I have a 3-minute video that provides an overview of all the above. </div></div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: justify;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/RRZGJ5MGdBE" width="320" youtube-src-id="RRZGJ5MGdBE"></iframe></div><div class="separator" style="clear: both; text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: justify;"><div>This article shows how to translate the permanent loss of capital concept into a practical way to mitigate investment risk. </div><div><br /></div><div>But I hasten to say that the 2 views of risk are not mutually exclusive. Even as a value investor, there are benefits from bringing volatility into your overall risk mitigation process.</div></div><div style="text-align: justify;"><br /></div><div><h2 style="text-align: justify;">Contents</h2><div><ul style="text-align: left;"><li style="text-align: left;"><b>Risk management</b></li></ul><ul style="text-align: left;"><ul><li style="text-align: left;"><b>Tapping into my experience</b></li><li style="text-align: left;"><b>What is risk?</b></li></ul></ul><ul style="text-align: left;"><li style="text-align: left;"><b>Permanent loss of capital</b></li></ul><ul style="text-align: left;"><ul><li style="text-align: left;"><b>Possible causes for permanent loss of capital</b></li><li style="text-align: left;"><b>Assessing the threats</b></li><li style="text-align: left;"><b>Risk mitigation</b></li><li style="text-align: left;"><b>Case study</b></li></ul></ul><ul style="text-align: left;"><li style="text-align: left;"><b>Volatility</b></li></ul><ul style="text-align: left;"><ul><li style="text-align: left;"><b>Modern Portfolio Theory</b></li><li style="text-align: left;"><b>Capital Asset Pricing Model</b></li></ul></ul><ul style="text-align: left;"><li style="text-align: left;"><b>An integrated risk management framework</b></li></ul><ul style="text-align: left;"><ul><li style="text-align: left;"><b>Identifying the root causes</b></li><li style="text-align: left;"><b>Threat matrix and risk mitigation measures</b></li><li style="text-align: left;"><b>Behavioral dimension</b></li></ul></ul><ul><li style="text-align: left;"><b>Pulling it all together</b></li></ul><ul style="text-align: left;"></ul></div></div><div><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html" target="_blank">Learn more</a>.</i></div></td></tr></tbody></table></div></td></tr></tbody></table><div><br style="text-align: justify;" /></div></div><div><div style="text-align: justify;">Risk is not some number. It is about some events that can lead to a permanent loss of capital. If you take this view, then risk mitigation should involve every stage of your investment process. </div><div><ul style="text-align: left;"><li style="text-align: justify;">Start with an overview of risk and an asset allocation plan.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Dovetail this into your stock portfolio.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Adopt the corporate risk management process to assess risk and bring it into your investment process.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For details of the first component, refer to the following articles:</div><div><ul style="text-align: left;"><li style="text-align: justify;"><a href="https://www.i4value.asia/2020/05/how-to-mitigate-against-risks-when.html" target="_blank">How To Mitigate Risks When Value Investing.</a></li></ul><ul style="text-align: left;"><li style="text-align: justify;"><a href="https://www.i4value.asia/2020/07/is-there-way-to-learn-online-free-to_26.html" target="_blank">Baby steps into the investment universe - Risks; Part 3 of 3.</a></li></ul><ul style="text-align: left;"><li style="text-align: justify;"><a href="https://www.i4value.asia/2020/11/baby-steps-in-asset-allocation-for.html" target="_blank">Baby steps in Asset Allocation for a Value Investor.</a></li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For details of the second component, refer to the following articles:</div><div><ul style="text-align: left;"><li style="text-align: justify;"><a href="https://www.i4value.asia/2021/01/baby-steps-in-constructing-stock.html" target="_blank">Baby steps in constructing a stock portfolio.</a></li></ul><ul style="text-align: left;"><li style="text-align: justify;"><a href="https://www.i4value.asia/2021/01/baby-steps-in-maintaining-stock.html" target="_blank">Baby steps in maintaining a stock portfolio.</a></li></ul><ul style="text-align: left;"><li style="text-align: justify;"><a href="https://www.i4value.asia/2022/01/how-to-construct-winning-stock.html#more" target="_blank">How to manage a stock-picking portfolio.</a></li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This article focuses on the last component. I covered 2 aspects:</div><div><ul style="text-align: left;"><li style="text-align: justify;">A framework for assessing permanent loss of capital.</li></ul><ul style="text-align: left;"><li style="text-align: justify;">Bringing volatility into my risk mitigation framework.</li></ul><div style="text-align: justify;"><br /></div></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhK87dj0USKTwaR3OuOwGcbKkdsK_6c0ApfCkfrFwbTLw4z_kI4p2UUmeQKOIituD8QfabS1QBYzV85Q9IJQ_BTrlTcWephunPDQBaRJpSUHIrnqeoZysdeqiUcc9yvoT6z8Cqw0-RN5DaHFrnOMXz3UmtMVQMfMGgpJA2XNB0JdB3LHRj2lCJEOMYerBA/s960/Slide7-min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="Risk management" border="0" data-original-height="720" data-original-width="960" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhK87dj0USKTwaR3OuOwGcbKkdsK_6c0ApfCkfrFwbTLw4z_kI4p2UUmeQKOIituD8QfabS1QBYzV85Q9IJQ_BTrlTcWephunPDQBaRJpSUHIrnqeoZysdeqiUcc9yvoT6z8Cqw0-RN5DaHFrnOMXz3UmtMVQMfMGgpJA2XNB0JdB3LHRj2lCJEOMYerBA/s16000/Slide7-min.PNG" title="Risk management" /></a></div><div style="text-align: justify;"><br /></div><div><h2 style="text-align: justify;">Risk management</h2><div style="text-align: justify;">“Risk management is the identification, evaluation, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.” <a href="https://en.wikipedia.org/wiki/Risk_management" target="_blank">Wikipedia </a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">There is a long association between risk management and insurance. But in the 1950s other forms of alternatives to insurance started to appear. This was when the cost of insurance was considered high relative to the benefits.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The discipline evolved and it became a more widespread concept with the growth of corporate governance. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Today there is even an ISO 31000 standard for risk management. This provided the principles and guidelines for effective risk management.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The risk management process involves the following:</div><div style="text-align: justify;"><ul><li>Identify the causes that can lead to the risk.</li></ul><ul><li>Assess the risk in the context of the impact and the likelihood of the occurrence.</li></ul><ul><li>Formulate the mitigation measure to manage the risk.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The strategies to manage them cover:</div><div style="text-align: justify;"><ul><li>Avoidance - what can be done to prevent it from happening.</li></ul><ul><li>Reduction - how to minimize the impact of any risks.</li></ul><ul><li>Transfer - is there a way to transfer the risk and/or the consequences to another party.</li></ul><ul><li>Accept - in some instances where the cost of mitigation outweighs the benefit of the mitigation strategies, it may be better to live with the risk.</li></ul></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If you consider the permanent loss of capital as a risk, there is no reason why we cannot use the risk management framework to manage risk. </div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div></div><div style="text-align: justify;"><h3>Tapping into my experience</h3><div>There is a lack of literature on how to assess permanent loss of capital. I thus had to develop my risk management process.</div><div><br /></div><div>I was fortunate as I had served as a member of the Audit Committee in several listed companies since the 90s. Over this period, the focus of the Audit Committee had shifted from internal audit to corporate governance. And corporate governance began to focus on risk management.</div><div><br /></div><div>I tapped into my corporate risk management experience to develop my risk management framework.</div><div><br /></div><div>The other fortunate thing was my engineering background. In my early work life, I worked in factories looking after quality management among other things.</div><div><br /></div><div>That gave me the opportunity to be familiar with quality control tools. The one that I remembered best was using the Ishikawa or fishbone diagram to trace defects.</div><div><br /></div><div>Whenever there is a defect, you first list down all the possible causes. At this stage, this is merely guesswork. There could be several causes for a defect. Some are direct, and some are indirect. Some are second-level effects. </div><div><br /></div><div>I used the Ishikawa diagram to help frame the cause and effect so that you can identify the root causes. You then formulate measures to eliminate the root causes. </div><div><br /></div><div>Two things can happen. If you are lucky, you don’t see the defects any more.</div><div><br /></div><div>Most of the time, the defects still occur. When this happens, the conclusion must be that the activity that you tackled was not the cause. You then move on to another suspected cause.</div><div><br /></div><div>You then update the Ishikawa diagram. </div><div><br /></div><div>To cut a long story short, I used the tools from the factory and Audit Committee experience to develop my risk management framework.</div><div><br /></div><div>Actually, it was not only a trial-and-error process but also a rambling and iterative one. What you see today is a framework that has gone through several rounds of improvement.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixgp7XLa7fW6ecozbZcAVudqAPh2FW7RfCLzjkfysiww8PDf-PT_VYoO5-3q-zLb2dniryc90mnJ4rOu6OHjKW_Tvs1ID2_XVxGAqHw4YSpZSxhG-VuhXVF_VEFJaoloql9dabN_9_dRzYjJ9uqMD0N73hrwcq3nR-MB9DVXY6qpKJKBqdGilOfeAQNm4/s960/Slide3-min.PNG" style="margin-left: 1em; margin-right: 1em;"><img alt="What is risk?" border="0" data-original-height="720" data-original-width="960" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixgp7XLa7fW6ecozbZcAVudqAPh2FW7RfCLzjkfysiww8PDf-PT_VYoO5-3q-zLb2dniryc90mnJ4rOu6OHjKW_Tvs1ID2_XVxGAqHw4YSpZSxhG-VuhXVF_VEFJaoloql9dabN_9_dRzYjJ9uqMD0N73hrwcq3nR-MB9DVXY6qpKJKBqdGilOfeAQNm4/s16000/Slide3-min.PNG" title="What is risk?" /></a></div><div><br /></div><div><h3>What is risk?</h3><div>In investing there are 2 schools of thought when it comes to risk.</div><div><ul><li>Those that view it as volatility.</li></ul><ul><li>Those that view it as a permanent loss of capital. </li></ul></div><div><br /></div><div>The former has lots of academic credentials. The theory has developed to a stage where risk can be modeled mathematically. Furthermore, risks are separated into systemic and non-systemic risks. You can diversify the non-systemic risks. You live with the systemic risks by demanding higher returns for the higher risks you take.</div><div><br /></div><div>Unfortunately for us value investors, there is very little academic research into the permanent loss of capital. </div><div><br /></div><div>Some would consider risk as the likelihood of not earning what you expect. I don’t think making less is not the same as losing some of the capital. </div><div><br /></div><div>Over the years, I have suffered such permanent loss of capital from 3 situations:</div><div><ul><li>Selling during a temporary price drop thereby converting the temporary loss into a permanent loss. I no longer have this risk having learned to invest for the long term. At the same time, I do not invest using borrowings so that there is no pressure to sell an investment at the wrong time.</li></ul><ul><li>A deterioration in the intrinsic value to permanently below the purchase price. Over the past 15 years, I have had 3 cases of such losses. Two were due to outright fraud by the companies while the other was due to business risks.</li></ul><ul><li>Privatization by the controlling shareholders. There have been occasions where I have benefited from a privatization exercise. However, there were a few privatization exercises where the offered price was below my purchase price. OK, you can argue that I should have bought the shares with more margin of safety.</li></ul></div><div><br /></div><div>The moral of the story? You have to differentiate between the effect (losing some of your capital) and the reasons (cause of the loss) if you are going to manage risks.</div><div><br /></div><div>There is another difference between volatility and permanent loss of capital. With the latter any loss is permanent. It cannot be reversed. The best you can do is cut loss or look at other ways to make back the loss. That is why learning how to invest and taking preventive measures are critical.</div><div><br /></div><h2>Permanent loss of capital</h2><div>There is no question that all the proponents of the permanent loss of capital agree that it represents the risk in investing.</div><div><br /></div><div>· “... permanent loss of capital is the risk that you might lose some or all of your original investment if the price falls and you sell for less than you paid to buy.” <a href="https://weitzinvestments.com/resources/investor-education/a-70/the-primary-risk-of-investing-permanent-loss-of-capital.fs" target="_blank">Weitz Investments Management</a></div><div><br /></div><div>· “True investment risk is a permanent impairment of capital. In other words, an asset depreciates and never recovers.” <a href="https://www.forbes.com/sites/michaelcannivet/2018/01/19/investors-should-avoid-risk-and-embrace-uncertainty/?sh=43b131af635d" target="_blank">Forbes</a></div><div><br /></div><div>· “A better way to think of risk is as the possibility or probability of an asset experiencing a permanent loss of value or below-expectation performance.”<a href="https://www.investopedia.com/financial-edge/0512/low-vs.-high-risk-investments-for-beginners.aspx" target="_blank"> Investopedia</a></div><div><br /></div><div>Yet, I have not come across studies that attempt to quantify the potential “permanent loss of capital” in an investment. </div><div><br /></div><div>Rather most proponents generally focus on why volatility is not risk. They then proceed to describe how permanent loss of capital can occur.</div><div><br /></div><div>This is unlike the volatility school which separate risks into systematic and non-systematic ones.</div><div><ul><li>You manage non-systematic risk through diversification.</li></ul><ul><li>You aim for higher returns for taking on greater systematic risk.</li></ul><ul><li>You can also bring risk to your valuation by incorporating Beta into the cost of capital formula.</li></ul></div><div><br /></div><div>However, the permanent loss of capital school approaches risks qualitatively. It then focuses on mitigating this permanent loss of capital. </div><div><br /></div><div>Nothing illustrates this way of thinking better than the risk portion in the book “The Art of Value Investing”. </div><div><br /></div><div>This is a book by John Heins and Whitney Tilson. It collects the thoughts of experts on various valuing investing topics, including risk. </div><div><br /></div><div>Not surprisingly, there is no attempt to quantify or assess this permanent loss of capital. Instead, the experts offer insights on the measures taken to mitigate a permanent loss of capital. </div><div><br /></div><div>The following quote from the book exemplifies the position.</div><div><br /></div><div>“Guarding against risk is built into every aspect of the best value investors' strategies, from the ideas they pursue, their buy and sell disciplines, how they build positions, how they structure their portfolios, how they manage cash, and how they hedge.”</div><div><br /></div><div>Unfortunately, if you are learning to invest, this will not help you assess and mitigate risks. This article is an attempt to fill this void.</div><div><br /></div></div><div><h3>Possible causes for permanent loss of capital</h3><div>Identifying all the causes of investment risks is critical. So, when I first started to think about risk, I spent a lot of time researching investment risk literature. I wanted to produce a universal list of investment risks.</div><div><br /></div><div>It is very sad to say that there is a lot of muddled thinking out there.</div><div><br /></div><div>For example, I have come across an article that described 4 ways to mitigate risks. It then went on to cover diversifying into different sectors, countries, market capitalization, and styles. To me, it was only one measure i.e. diversification. </div><div><br /></div><div>Many people also confuse between cause and effect. Some of the recommended risk strategies don’t address the root causes.</div><div><br /></div><div>This is where the Ishikawa or fishbone diagram came in.</div><div><br /></div><h4>Ishikawa diagram</h4><div>An Ishikawa diagram shows the causes of an outcome and is often used in manufacturing to show where quality control issues might arise. </div><div><br /></div><div>It is sometimes referred to as a fishbone diagram. It resembles a fish skeleton, with the "ribs" representing the causes and the final outcome appearing at the head of the skeleton. In such a diagram:</div><div><ul><li>The head of the fish is created by listing the problem and drawing a box around it.</li></ul><ul><li>A horizontal arrow is then drawn across the page with an arrow pointing to the head. This acts as the backbone of the fish.</li></ul><ul><li>The key causes are identified that might contribute to the problem. These causes are then drawn to branch off from the backbone with arrows, making the first bones of the fish.</li></ul><ul><li>For each key cause, the root causes of the problem are identified. These contributing factors are written down to branch off their corresponding key cause.</li></ul><ul><li>The chart below shows the structure of an Ishikawa diagram.</li></ul></div><div> <table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEita0HPWVIvqMYc4sP0fbFJn_-lcuWgC5MmInVxS9hcjpb7obp-YlP4qLleuNKg78fuAePc9zI_JePCO_7DNm_5EpRzs9gDSfuH53v2Yj4aoDmbHLeqNKMSdOuOAgyl5l67vHAMquRGCQNRh4a4px27Z6Pz8mkYEG1sdN3xZaANLloP3VzuAwIuZnUlIY4/s456/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 1: Ishikawa diagram" border="0" data-original-height="257" data-original-width="456" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEita0HPWVIvqMYc4sP0fbFJn_-lcuWgC5MmInVxS9hcjpb7obp-YlP4qLleuNKg78fuAePc9zI_JePCO_7DNm_5EpRzs9gDSfuH53v2Yj4aoDmbHLeqNKMSdOuOAgyl5l67vHAMquRGCQNRh4a4px27Z6Pz8mkYEG1sdN3xZaANLloP3VzuAwIuZnUlIY4/s16000/Chart%201-min.png" title="Chart 1: Ishikawa diagram" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Ishikawa diagram</td></tr></tbody></table></div></div><div><br /></div><div><h3>Ways to suffer a permanent loss of capital</h3><div>To suffer a permanent loss of capital, the investment has to be sold at a price that is lower than the buying price. </div><div><br /></div><div>For simplicity, I will ignore the situation where the investment has been sold due to short-term volatility. From a value investment perspective, this is unlikely to happen. </div><div><br /></div><div>Rather I assumed that any sale is because the price is “permanently” below the purchased price due to the following direct reasons:</div><div><ul><li>Deterioration in the intrinsic value due to changes in the fundamentals - both macro and micro.</li></ul><ul><li>Issues with portfolio construction.</li></ul><ul><li>Wrong assessment of intrinsic value in the first place.</li></ul><ul><li>Stock market changes due to regulatory changes.</li></ul></div><div><br /></div><div>These are the main direct causes and there are other root causes for each of them. </div><div><br /></div><div>To help identify the root causes, I have used the Ishikawa fishbone diagram to help identify the various causes and effects. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjB_Ejx9uxkI0fX_rOOvwy0JHaQzHtud9EvnMJaKjjjW7u19aLjDttp2JqYzgpsm7GCPTq6jiv-T4Ot6xlYTwtASAXcLjKcOZVIV7ETcnKDuZUc8NlG7SKUJGwmuVhW-7DL2pjgh1c2ZWUat1D6kQucLY67xj1P8hYKt5dbKXUdnH571WJUJNJkmLBhaZk/s572/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 2: Ways to suffer a permanent loss of capital" border="0" data-original-height="402" data-original-width="572" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjB_Ejx9uxkI0fX_rOOvwy0JHaQzHtud9EvnMJaKjjjW7u19aLjDttp2JqYzgpsm7GCPTq6jiv-T4Ot6xlYTwtASAXcLjKcOZVIV7ETcnKDuZUc8NlG7SKUJGwmuVhW-7DL2pjgh1c2ZWUat1D6kQucLY67xj1P8hYKt5dbKXUdnH571WJUJNJkmLBhaZk/s16000/Chart%202-min.png" title="Chart 2: Ways to suffer a permanent loss of capital" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Ways to suffer a permanent loss of capital</td></tr></tbody></table><br /><div>The details of each of the root causes for the boxed items in the Ishikawa diagram are presented below.</div><div><div><br /></div><div><b>Stock Market Changes</b></div><div><ul><li>Privatization - you are sometimes forced to sell at below your purchased price due to a privatization exercise.</li></ul><ul><li>Regulatory - these relate to rules that affect the availability of the stock e.g. trading restrictions. There is a “feedback loop” here. If the business deteriorates there is a higher likelihood of some listing guidelines that may affect its liquidity.</li></ul></div><div><br /></div><div><b>Wrong initial intrinsic value</b></div><div>The assessment of intrinsic value is the heart of value investing. If this was wrongly assessed at the start, the purchase would be a mistake that would be realized much later.</div><div><ul><li>Governance. The intrinsic value is generally assessed based on the financial statements. If there are issues due to the poor quality of earnings or even creative accounting, the computed intrinsic value would be wrong.</li></ul><ul><li>You could have made some analytical errors in assessing the intrinsic value. You are more likely to make errors if the company has a more complex business model.</li></ul><ul><li>Your behavioral biases can skew your estimates of intrinsic value. Again, there is a high likelihood of more behavioral biases in analyzing and valuing a company with a complex business model. </li></ul></div><div><br /></div><div><b>Portfolio construction</b></div><div><ul><li>Position size. This relates to the number of stocks in the portfolio and the amount to be allocated to each stock. </li></ul><ul><li>Cash management. From an individual investor perspective, the amount of cash you have affects your holding power. You should have enough to handle emergencies without being forced to sell your shares at the wrong time. The amount of cash also affects the ability to take advantage of the market but I don’t see this as critical in the context of a permanent loss of capital.</li></ul><ul><li>Hedging refers to other strategies of guarding against risk eg taking a short position.</li></ul></div><div><br /></div><div><b>Deterioration of intrinsic value</b></div><div>The intrinsic value of a company could decline over time. Over the long term, the market price will decline to reflect this.</div><div><ul><li>Management could be the cause of the decline. This could be due to adopting the wrong strategy or plain incompetence.</li></ul><ul><li>Financials - if the company has debt, there could be changes to the loan situation e.g. higher interest rates that affect its profitability or cash flow.</li></ul><ul><li>External - this covers all the social, political, and economic changes that negatively impact the company. I would include technological changes here as well. </li></ul></div><div><br /></div><div>The above Ishikawa diagram shows the first level of cause-and-effect. You can have a second or even third level cause-and-effect diagram for the more complex cases. </div><div><br /></div><div>For example, in the case of the External factors, you could further break it down into:</div><div><ul><li>Different economic factors e.g. interest rate, GDP growth, and inflation.</li></ul><ul><li>Different social factors e.g. demographic trends, and migration patterns.</li></ul></div><div><br /></div></div><div><h3>Assessing the threats</h3><div>The goal of threat assessment is to evaluate the likelihood of occurrence of each of the threats and the impact. </div><div><br /></div><div>I classify each cause in the Ishikawa diagram into one of the following 4 colored cells based on the assessment of its impact and the likelihood of it occurring as per the Chart below.</div></div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEguPSFkhKCIn2mkju5HTjhd34t2MFjU58f1N92bU0A6AYfZSsm7fY2Ltev8AHIXSFokQ3h_uixShByaZ5gAMO6GLaGEiJdv4ukq3j_C5SVkr12jP-x48t1_oZLoVId7XZ0bkr6TO9RrcG2mGlutCqV5cXWk3gSxIf5n9HZ3A8dOYdvEKg6760rw1W6tXs0/s352/Chart%203%20Threat%20matrix-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 3: Threat Matrix" border="0" data-original-height="241" data-original-width="352" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEguPSFkhKCIn2mkju5HTjhd34t2MFjU58f1N92bU0A6AYfZSsm7fY2Ltev8AHIXSFokQ3h_uixShByaZ5gAMO6GLaGEiJdv4ukq3j_C5SVkr12jP-x48t1_oZLoVId7XZ0bkr6TO9RrcG2mGlutCqV5cXWk3gSxIf5n9HZ3A8dOYdvEKg6760rw1W6tXs0/s16000/Chart%203%20Threat%20matrix-min.png" title="Chart 3: Threat Matrix" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Threat Matrix</td></tr></tbody></table><div><br /></div></div><div style="text-align: justify;"><div>This is of course a qualitative assessment. But I find that it ties in neatly with the value investing approach. </div><div><br /></div><div>For you to be able to assess and value companies, you need an in-depth understanding of the business, the competitors, and the industry. That is why staying within your area of competence is important. You tap into the same pool of knowledge to carry out the risk assessment. </div><div><br /></div><div>It is important to be able to slot the various causes into the appropriate cells of the Threat Matrix as it helps to determine your mitigation measures.</div><div><br /></div><div>Determining the likelihood of the cause is a judgment call based on your own investing experience. </div><div><br /></div><div>Over my past 15 years of value investing, there have been several occasions where I have suffered a permanent loss of capital.</div><div><ul><li>Once or twice, my whole investment was wiped out because the companies went into liquidation following some fraudulent practices. </li></ul><ul><li>I have sold stocks incurring some losses after waiting 10 years for the market to re-rate. I lost patience. </li></ul></div><div><br /></div><div>I have then used this experience to classify the various causes into “high” or “low” probability ones. If you don’t have sufficient experience with bad investments, I would suggest that you play safe and classify a cause as “high probability” if you are not sure.</div><div><br /></div><div>When it comes to assessing the impact, I think along the following lines:</div><div><ul><li>If it impacts the whole portfolio, I classify it as “high impact”.</li></ul><ul><li>If it affects a single stock, then I look at the consequences. If it can wipe out the whole investment, I classify it as ‘high impact”. If it only reduces a small % of the investment, I classify it as “low impact”.</li></ul></div><div><br /></div><div>For example, I would consider a deterioration in the intrinsic value due to poor management as a “high impact” one.</div><div><br /></div><div>For my investment process, the following fall into the red cells:</div><div><ul><li>Deterioration in the intrinsic value - poor management.</li></ul><ul><li>Wrong initial intrinsic value – behavioural.</li></ul><ul><li>Stock market changes – privatization.</li></ul></div><div><br /></div><div>The idea of slotting the various risks into the 4 cells is because it will help you identify the risk mitigation measures. </div><div><br /></div><div>Remember the 4 mitigation measures - Avoid, Reduce, Accept, and Transfer? </div><div><br /></div><div>There are costs associated with each of these mitigation measures so it is important to have an idea of which cell a particular risk falls into. Generally:</div><div><ul><li>I would “Accept” the risks that fall into the green cell.</li></ul><ul><li>I would “Avoid” or “Transfer” the risks that fall into the red cell.</li></ul><ul><li>I would “Reduce” or “Transfer” the risks that fall into the orange cell.</li></ul><ul><li>I am ambivalent about what to do when it comes to the yellow cell.</li></ul></div><div><br /></div><div>The above is a visual and qualitative approach. In theory, it is possible to assign a score to each cell so that we can have a quantitative assessment.</div><div><br /></div><div>However, there are two challenges to such a quantitative assessment:</div><div><ul><li>How do you validate the score assigned to each of the cells?</li></ul><ul><li>How do you weigh the individual threat items to derive an overall score? </li></ul></div><div><br /></div><div>The question is whether such a scoring method would provide any useful information compared to a visual assessment.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEik4SccAswGcZJcMD9C4L_yy3spNQ5EIeXkGTpezJzAcss60QEoHp26V-CF_f7nWbgDtXJssfNYz5SYFph3qXEh1eKrqafJ1qdFQQ6O_ULdQEgu5J8S7OAJpkvVAJ-QX2QJtiyaQMXCycfRkzs8astb7WpSU7xvibpiZ5ewtp4oY37rSTHYpqwR-K0374I/s243/Picture%206.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Risk mitigation" border="0" data-original-height="187" data-original-width="243" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEik4SccAswGcZJcMD9C4L_yy3spNQ5EIeXkGTpezJzAcss60QEoHp26V-CF_f7nWbgDtXJssfNYz5SYFph3qXEh1eKrqafJ1qdFQQ6O_ULdQEgu5J8S7OAJpkvVAJ-QX2QJtiyaQMXCycfRkzs8astb7WpSU7xvibpiZ5ewtp4oY37rSTHYpqwR-K0374I/s16000/Picture%206.png" title="Risk mitigation" /></a></div><div><br /></div></div><div style="text-align: justify;"><h3>Risk mitigation </h3><div>There are 2 components of risk - the chance or probability of an outcome and the impact of the outcome. </div><div><br /></div><div>It is obvious that if there is no impact there is nothing to lose. Furthermore, if we were certain that a loss would occur, we would not have invested. </div><div><br /></div><div>So, when there is investment risk, it is because there is uncertainty as well as a loss if the uncertain outcome occurs. This is an important risk concept for risk mitigation. In other words, to reduce risk, we can address the probability, the impact, or a combination of both.</div><div><br /></div><div>Given the various items that can lead to a permanent loss of capital, the risk management approach is to identify various measures to handle them.</div><div><br /></div><div>The Chart below summarizes the various measures that I have adopted categorized into:</div><div><ul><li>Avoiding the threats.</li></ul><ul><li>Reducing the likelihood or impact of the threats.</li></ul><ul><li>Accepting the threat.</li></ul></div><div><br /></div><div>You will notice that some measures cut across several risk mitigation categories.</div><div><br /></div><div>At the same time, to transfer some of the risks, I have some of my net worth invested in unit trusts and properties. These have a different risk profile than those of stocks. </div><div><br /></div><div>Furthermore, if you view the threat as a function of both the likelihood of the event and the impact of the event, then depending on the nature of the threat, </div><div><ul><li>Some of the measures focus on the likelihood.</li></ul><ul><li>Some focus on the impact.</li></ul><ul><li>Some cover both likelihood and impact.</li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitQqTv96uxkGP7fQ-FGzqPCPq6F2XbvnU-KB28cw2x_0RbDyxpRYS9LruAwVsM4TmsO4UNE0dma5Pro1EeC9JRYlRVHTCQf7HWHvlRny21GfVVle4N9YHxy7LQxPTBFjiDIbGyYBhyTbGHnU6umPErTJ2ESZrvB3gvJr0r-p-aEM9vj4p6fofhL7CJvpQ/s1181/Chart%204%20Risk%20mitigation%20strategies-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 4: Risk Mitigation Strategies" border="0" data-original-height="975" data-original-width="1181" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitQqTv96uxkGP7fQ-FGzqPCPq6F2XbvnU-KB28cw2x_0RbDyxpRYS9LruAwVsM4TmsO4UNE0dma5Pro1EeC9JRYlRVHTCQf7HWHvlRny21GfVVle4N9YHxy7LQxPTBFjiDIbGyYBhyTbGHnU6umPErTJ2ESZrvB3gvJr0r-p-aEM9vj4p6fofhL7CJvpQ/s16000/Chart%204%20Risk%20mitigation%20strategies-min.png" title="Chart 4: Risk Mitigation Strategies" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Risk Mitigation Strategies</td></tr></tbody></table><div><br /></div><div><div>Most of the measures adopted a self-explanatory. But for some others, I provide a brief description (in alphabetical order) as follows:</div><div><ul><li>Analyze shareholders - privatization will also depend on whether the controlling shareholder sees any advantages in maintaining the listing status. </li></ul><ul><li>Avoid deep value - deep value stocks are those that are generally trading at a deep discount to the Asset values. These are potential privatizations.</li></ul><ul><li>Cap investment - this is to ensure that there is no concentration in a particular stock.</li></ul><ul><li>Cost-benefit - only hedge if the benefits outweigh the cost.</li></ul><ul><li>Cut loss - be prepared to sell and cut loss if you have made an error in your analysis and/or valuation.</li></ul><ul><li>Don’t rush - this refers to slowly building up or exiting a position. You may likely look at a stock differently when you are invested.</li></ul><ul><li>More for high conviction - this relates to investing a bigger amount for those stocks with higher conviction. </li></ul><ul><li>Quality of earnings - this relates to the proportion of income attributable to the core operating activities of a business. You ignore any anomalies, accounting tricks, or one-time events.</li></ul><ul><li>Several sectors - diversification is not only about investing in several companies. It is also to ensure that the stocks in the portfolio are from different sectors. The goal is to ensure that there is no concentration in any particular sector.</li></ul><ul><li>SOP - have standard operating procedures.</li></ul><ul><li>Understand management - evaluate management from several perspectives i.e. as an operator and as a capital allocator. </li></ul><ul><li>Use various metrics - there are many metrics and techniques when it comes to valuation. Adopt a number of them to triangulate the intrinsic value.</li></ul><ul><li>3 Bucket - this refers to an asset allocation strategy where the net worth is spread into 3 asset classes i.e. liquid, safe, and risky assets. </li></ul></div></div><div><br /></div><div><h3>Case study - Comparative visual assessment</h3><div>To be able to assess the threats there is a need to first analyze the companies. Such analyses have been carried out for 2 companies - <a href="https://www.i4value.asia/2023/10/eksons-is-now-value-trap-oct-2023.html#more" target="_blank">Eksons</a> and <a href="https://www.i4value.asia/2021/06/is-asia-file-still-value-trap-june-2021.html#more" target="_blank">Asia File</a> - whose details can be viewed on other posts in this blog. </div><div><br /></div><div>For each company, I categorized each of the causes of permanent loss of capital (as per the Ishikawa diagram) into the relevant threat category (as per the Threat matrix). </div><div><br /></div><div>The comparative results and rationale are tabulated below.</div><div><br /></div><div>Based on a visual comparison, you would conclude that an investment in Asia File would have less risk compared to a similar investment in Eksons.</div><div><br /></div><div>The above is mainly a first-level cause-and-effect assessment (although I did go down to the second level in the case of the External factors)</div><div><br /></div><div>You can go down into a second or even third-level cause-and-effect assessment if needed. </div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgk8yjykRrfeh1SVM6u_e1iW-rex1svwQYg0nM9KXJAbjmWM6oOLfgW9Nk5K777jBOxhp6dBHYJiI74jJSwlguJnebqgnzX9qE0h8r1EukaZm_wAaTUK7CaYV_0jtbTIIcnE-8ebcTSGbgYWLIN0Jxb9fFrvshEgtos9b3GqBPKsKKLhK5aFYaRInjc58M/s661/Chart%205%20Risk%20comparison-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 5: Comparing the risk between Eksons and Asia File through a permanent loss of capital lens" border="0" data-original-height="661" data-original-width="558" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgk8yjykRrfeh1SVM6u_e1iW-rex1svwQYg0nM9KXJAbjmWM6oOLfgW9Nk5K777jBOxhp6dBHYJiI74jJSwlguJnebqgnzX9qE0h8r1EukaZm_wAaTUK7CaYV_0jtbTIIcnE-8ebcTSGbgYWLIN0Jxb9fFrvshEgtos9b3GqBPKsKKLhK5aFYaRInjc58M/s16000/Chart%205%20Risk%20comparison-min.png" title="Chart 5: Comparing the risk between Eksons and Asia File through a permanent loss of capital lens" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Comparing the risk between Eksons and Asia File through a permanent loss of capital lens</td></tr></tbody></table><div><br /></div></div><div style="text-align: justify;"><div><b>Notes</b></div><div>a) Any regulatory issues affect both companies equally.</div><div><br /></div><div>b) Because of the shareholders' profile and cash available in the company, I consider a greater likelihood of Eksons being privatized. Of course, whether you suffer a permanent loss of capital would depend on your purchased price.</div><div><br /></div><div>c) Since both stocks are in the same portfolio, they share the same risk profile and hence I have not attempted a finer breakdown.</div><div><br /></div><div>d) I use the same analytical process for both so they share the same assessment. My margin of safety minimizes the impact of any error here.</div><div><br /></div><div>e) I relied on the Q Rating to assess Eksons to be riskier. My margin of safety minimizes the impact of any error.</div><div><br /></div><div>f) Eksons has a simpler business model and hence fewer analytical and valuation issues.</div><div><br /></div><div>g) Both companies are financially strong.</div><div><br /></div><div>h) Asia File is more likely to face digital disruption.</div><div><br /></div><div>i) Eksons is facing log supply issues resulting from the government logging policies. Note: this comparison was done before Eksons ceased the plywood operations that used logs as its raw materials.</div><div><br /></div><div>j) Asia File management has a stronger track record.</div><div><br /></div><h4>What to do with the results</h4><div>Although this is a simple visual assessment, I have used the results in the following manner:</div><div><ul><li>Position sizing. The concept behind the Kelly Formula is to invest more in those with the greatest payoff and the best probability of success. I translate this to mean that I invest more in Asia File compared to Eksons. I believe that this is in line with the idea that you invest more in those with a higher conviction.</li></ul><ul><li>The margin of safety. This margin is to protect you against bad luck and other errors made in the investment process. I would require a smaller margin of safety for Asia File compared to Eksons.</li></ul></div><div><br /></div><h4>Pros and Cons of the Methodology</h4><div>The goal of the assessment is to have a standard way of comparing the risk between several companies. </div><div><br /></div><div>A visual assessment serves this purpose. Unfortunately, it is not very meaningful if you want to assess the risk of just one company. </div><div><br /></div><div>I see the following as the Pros and Cons of this approach.</div><div><br /></div><div><b>Pros</b></div><div><ul><li>Simple visual assessment.</li><li>A consistent basis to compare.</li><li>Relates to the reasons for permanent loss of capital ie risk.</li></ul></div><div><b><br /></b></div><div><b>Cons</b></div><div><ul><li>Requires detailed analysis of each company.</li><li>May not be practical to compare many companies together.</li><li>Different parties may come to a different assessment.</li><li>Dependent on identifying the correct cause-and-effect.</li></ul></div><div><br /></div></div><div style="text-align: justify;"><h2>Volatility </h2><div>In this section, let us look at why volatility can be considered a risk even for a value investor. I will then use my risk mitigation framework to bring it into the risk mitigation process.</div><div><br /></div><div>Imagine that you invest in a stock that costs x. The outcome is uncertain so the exit price could be less or even more than x. If it is less than x, there is a loss. </div><div><br /></div><div>Suppose that we have historical data showing the distribution of prices around some expected mean. Refer to Chart 6.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2baXCOt-e7LlMvQtGznJgViEAB1l1xV90XglXy2Mvl3MQl4Ax8qkgrxFPRZmBakaCm6ZBVoAWTHflFFf0HWnIg8kzgkjnA8VITI5mnt4XgtVBmCZfS3fksEqawvawLhWmnQNyubIrwK8EorPopv3ZocdMTPsaLGwrQDR31hbp2SmJWz5vBkSds9hpGVc/s732/Chart%206-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 6: Distribution of Prices about the Mean" border="0" data-original-height="450" data-original-width="732" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2baXCOt-e7LlMvQtGznJgViEAB1l1xV90XglXy2Mvl3MQl4Ax8qkgrxFPRZmBakaCm6ZBVoAWTHflFFf0HWnIg8kzgkjnA8VITI5mnt4XgtVBmCZfS3fksEqawvawLhWmnQNyubIrwK8EorPopv3ZocdMTPsaLGwrQDR31hbp2SmJWz5vBkSds9hpGVc/s16000/Chart%206-min.png" title="Chart 6: Distribution of Prices about the Mean" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Distribution of Prices about the Mean</td></tr></tbody></table><div><br /></div><div><div>Statistically, the distribution has a mean. We can measure the distribution of the data around the mean with the standard deviation or variance (square of the standard deviation). </div><div><br /></div><div>Let us look at this in the context of x. Based on this distribution we could calculate the frequency of the price being less than x. We can then compare this with all the frequencies and determine the probability of the price being less than x. This can be interpreted as the risk of the stock. You can see that if the standard deviation is bigger, the risk of the price being less than x could be bigger and vice versa.</div><div><br /></div><div>You can see why the standard deviation or variance can be used to measure risk. A stock with a bigger standard deviation would be considered riskier than one with a smaller standard deviation. Conventionally many use the term “volatility” to describe the variance.</div><div><br /></div><div>The argument from the permanent loss of capital school is that volatility is only crystalized into a permanent loss of capital if you sell when the price is less than x. If you view volatility as temporary and do not sell the stock, you have not suffered any loss. That is why the permanent loss of capital school does not believe that volatility is a good measure of risk. </div><div><br /></div><div>I would argue that there are times when you crystallize the loss even though you know that the price volatility is temporary. For example:</div><div><ul><li>You sell due to some portfolio rebalancing rule. </li></ul><ul><li>You have made a mistake in estimating the intrinsic value. </li></ul><ul><li>You found a better investment opportunity.</li></ul></div><div><br /></div><div>Because of these, it is better to not rule out volatility as a risk even though I follow the permanent loss of capital school.</div><div><br /></div><h3>Modern Portfolio Theory (MPT)</h3><div>MPT is based on the view that variance represents risk. </div><div><br /></div><div>When you create a stock portfolio there are two parameters at your disposal. </div><div><ul><li>You can select the stocks to be included. </li></ul><ul><li>You can also determine the proportion of a stock relative to all the stocks in the portfolio. This is commonly referred to as the weight of the stock in the portfolio. This can be computed based on the cost of the investment or the value of the stocks.</li></ul></div><div><br /></div><div>Let us consider the case where you have selected the stocks and are now looking at various portfolio options based on changing the weights. You are looking at the impact on the portfolio return and variance. </div><div><ul><li>The return of the portfolio is the weighted average return of the individual stocks in the portfolio. </li></ul><ul><li>The variance of the portfolio is not the weighted average variance of the stocks in the portfolio. The portfolio variance is dependent on the variances of the various stocks in the portfolio amended by the covariances. If you have uncorrelated or even lowly correlated stocks, you can have a portfolio variance that is less than the lowest stock variance. </li></ul></div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><i><span style="font-size: x-small;"><br /></span></i></div><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes</b></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><div>According to Investopedia, the standard deviation or variance refers to the spread of a data set around its mean value. The larger the variance, the larger the distance between the numbers in the set and the mean. Conversely, a smaller variance means the numbers in the set are closer to the mean.</div><div><br /></div><div>The covariance refers to the measure of how two random variables will change when they are compared to each other. A positive covariance means both investments' returns tend to move upward or downward in value at the same time. An inverse or negative covariance, on the other hand, means the returns will move away from each other. So, when one rises, the other one falls.</div><div><br /></div><div>Variance covers one variable whereas you need 2 variables to compute the covariance.</div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div><div>You can see the benefits of diversification. The portfolio variance can be reduced with uncorrelated stocks. If you consider variance as a risk then the risk is reduced with the portfolio.</div><div><div><br /></div><div>MPT provides a numerical basis for the adage that you should not put all your eggs in one basket. </div><div><br /></div><div>I have a stock portfolio as part of my risk mitigation plan. While I do not use MPT to construct my stock portfolio, I follow the principle that it should have uncorrelated stocks. </div><div><br /></div><div>Furthermore, I target about 30 stocks. This is because studies have shown that the benefits of diversification become marginal after this number. These studies generally use volatility as the measure of risk with Chart 7 as a typical one.</div><div><br /></div><div>You can understand why there would be inconsistencies if I did not consider volatility as a risk. </div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimuuolCIkF3ay7BsdtSZFWyATQo6ArpwBguCJoZwLyf3LxOZdCmZ3XPPjOXQb05H43Uj2JoyEIQIrPa0GyDpJSQ11RUHOnKKUg49EU_t5nvhYVTKGDGb8aPycRtzm1KvBGVKLJtLCthNQjPZbBQamnfYIuR67olHWP8mZlafIWD1mpyUNOWy5fgQDKpek/s699/Chart%207-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 7: Risk vs. Number of Stocks in a Portfolio" border="0" data-original-height="578" data-original-width="699" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimuuolCIkF3ay7BsdtSZFWyATQo6ArpwBguCJoZwLyf3LxOZdCmZ3XPPjOXQb05H43Uj2JoyEIQIrPa0GyDpJSQ11RUHOnKKUg49EU_t5nvhYVTKGDGb8aPycRtzm1KvBGVKLJtLCthNQjPZbBQamnfYIuR67olHWP8mZlafIWD1mpyUNOWy5fgQDKpek/s16000/Chart%207-min.png" title="Chart 7: Risk vs. Number of Stocks in a Portfolio" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 7: Risk vs. Number of Stocks in a Portfolio</td></tr></tbody></table><div><br /></div><div><div>The permanent loss of capital school does not have a quantifiable basis for constructing a stock portfolio. If you do not consider volatility as a risk, can you adopt the MPT approach when constructing a portfolio? You can see the dilemma. </div><div><br /></div><div>The mental gymnastics I used to get out of this dilemma was as follows:</div><div><ul><li>While the variance can be considered a measure of risk, covariance is not exactly volatility. But because it can be used to reduce portfolio volatility, people sometimes confuse it with the measure of volatility. </li></ul><ul><li>In other words, although I do not consider volatility a risk, this is okay as MPT focuses on covariance rather than variance. </li></ul></div><div><br /></div><div>I now think that it is better to consider volatility as another component of risk rather than disregard it completely. Then you do not need some mental gymnastics to rationalize using MPT.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpXlOCOa_akihhlqbIEQ9j4375b4fz2gJxHXYdjlUk5R5ry_UrXVFaOJG_P-6bIrRQd56XBUuYxk3Mdkgs99qu_TL2Ximx6GEJMca1IO6zPMyAdbM9ftHzPqV7zrFszJfiNWAfYwpGlx4-r2OwHGrYV68w8seAhmyupo2h2Gzmt8oCjy6pgqA_5IzZ-Jc/s301/Picture%202-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Capital Asset Pricing Model" border="0" data-original-height="244" data-original-width="301" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpXlOCOa_akihhlqbIEQ9j4375b4fz2gJxHXYdjlUk5R5ry_UrXVFaOJG_P-6bIrRQd56XBUuYxk3Mdkgs99qu_TL2Ximx6GEJMca1IO6zPMyAdbM9ftHzPqV7zrFszJfiNWAfYwpGlx4-r2OwHGrYV68w8seAhmyupo2h2Gzmt8oCjy6pgqA_5IzZ-Jc/s16000/Picture%202-min.png" title="Capital Asset Pricing Model" /></a></div><br /><div><br /></div><div><h3>Capital Asset Pricing Model (CAPM)</h3><div>I used CAPM to determine the cost of equity. This is then used to determine the WACC which is the discount rate (the expected return) used when estimating the intrinsic value of the firm.</div><div><br /></div><div>According to Investopedia, CAPM is a finance model that establishes a linear relationship between the required return on investment and risk. And of course, the risk under CAPM refers to volatility.</div><div><br /></div><div>You can see the anomaly. As a person following the permanent loss of capital school, I am relying on a volatility-based theory to determine the cost of equity. I used to justify this by arguing that there was no better theory.</div><div><br /></div><div>I now believe that it is wrong to treat volatility and permanent loss of capital as mutually exclusive. My view now is that they both represent different dimensions of risk.</div><div><br /></div><div>According to CAPM, the expected return of a stock depends on the stock Beta, the risk-free rate, and the equity risk premium. This is represented by the following equation.</div><div><br /></div><div>Er = Rf + Beta X (Rm – Rf) </div><div><br /></div><div>Where:</div><div><br /></div><div>Er = expected return </div><div><br /></div><div>Rf = risk-free rate</div><div><br /></div><div>Rm = market return</div><div><br /></div><div>Rm – Rf = equity risk premium</div><div><br /></div><div>The Beta of a stock is a measure of how much risk the stock will add to a market portfolio. If a stock is riskier than the market, it will have a Beta greater than one. If a stock has a Beta of less than one, the formula assumes it will reduce the risk of a portfolio.</div><div><br /></div><div>The key concept here is that risks are separated into systemic and non-systemic risks.</div><div><ul><li>Systemic risks refer to the risks inherent to the entire market or market segment. It is also known as “undiversifiable risks,” or “market risks,” as they affect the overall market and not just a particular stock.</li></ul><ul><li>Non-systemic risks refer to risks that are not shared with a wider market or industry. These are risks often specific to an individual company due to its management or business model. Unlike systemic risks, non-systemic risks can be reduced by diversifying one's investments.</li></ul></div><div><br /></div><div>Systemic risk is impossible to avoid. It cannot be mitigated by diversification. To account for the systemic risk, you require the stock to deliver a return that is equal to or higher than those determined by the CAPM. </div><div><br /></div><div>There are 2 takeaways from CAPM when formulating your risk mitigation plan.</div><div><ul><li>If you hold a concentrated portfolio, you face more of the non-systemic risks. </li></ul><ul><li>An investor can identify the systemic risk of a particular stock by looking at its Beta. You aim for a higher return when investing in a particular stock relative to that calculated with CAPM. </li></ul></div><div><br /></div><div>It is obvious that in addition to seeking a higher expected return, you should also adopt measures that address systemic risks. For example, you could invest in other asset classes.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrRXfu3uD17aldTUFH6Ixekiej_qzZlxdVbeBxXb32l0gIgeWNKKNyzbjYmOoLXFILFj5nRVCRJjehgeKEInEIFrjX6rbWBFq9Ucm04RghS-dLwBTGafpojb2eMMkkZQqvnSMGd-9wvs1nnK41WTs9HYeDS8GYAisUDHHmnVUkf-PzXaJyulkBGeHZrwU/s165/Picture%204.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Beta" border="0" data-original-height="165" data-original-width="160" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrRXfu3uD17aldTUFH6Ixekiej_qzZlxdVbeBxXb32l0gIgeWNKKNyzbjYmOoLXFILFj5nRVCRJjehgeKEInEIFrjX6rbWBFq9Ucm04RghS-dLwBTGafpojb2eMMkkZQqvnSMGd-9wvs1nnK41WTs9HYeDS8GYAisUDHHmnVUkf-PzXaJyulkBGeHZrwU/s16000/Picture%204.png" title="Beta" /></a></div><br /><div><br /></div><h4>Beta</h4><div>Beta is calculated by dividing the product of the covariance of the stock's returns and the market's returns by the variance of the market's returns over a specified period. It can be represented by the following equation:</div><div><br /></div><div>Beta = Covariance (Re, Rm) / Variance Rm</div><div><br /></div><div>Where: </div><div><br /></div><div>Re = the return on an individual stock.</div><div><br /></div><div>Rm = the return on the market.</div><div><br /></div><div>In statistical terms, Beta represents the slope of the line through a regression of data points. In finance, each of these data points represents an individual stock's returns against those of the market.</div><div><br /></div><div>You can see from the above equation that Beta relates to volatility. Beta is a measure of the volatility of a stock compared to the market. Ultimately, you are using Beta to try to gauge how much risk a stock is adding to a portfolio relative to the market risk.</div><div><ul><li>If a stock has a Beta of 1.0, it indicates that its price activity is strongly correlated with the market. A stock with a Beta of 1.0 has systemic risk. In the Bursa Malaysia context, companies like Hap Seng Consolidated and TH Plantations have levered Beta of around 1.0 </li></ul><ul><li>A Beta value that is less than 1.0 means that the stock is theoretically less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock. Examples of Bursa Malaysia companies with a levered Beta significantly less than 1.0 are Suria Capital and Ajinomoto.</li></ul><ul><li>A Beta that is greater than 1.0 indicates that the security's price is theoretically more volatile than the market. Examples of Bursa Malaysia companies with a levered Beta of greater than 1.2 are Notion and Heitech Padu.</li></ul></div></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><i><span style="font-size: x-small;"><br /></span></i></div><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes </b><span style="text-align: left;"><b> </b></span></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><div>When looking at Beta, there are 2 points to note:</div><div><div><ul><li>It is usual to differentiate between levered and unlevered Betas.</li></ul><ul><li>I use the bottom-up Beta approach as per Damodaran.</li></ul></div><div><br /></div><div>Unlevered Beta (or Asset Beta) measures the market risk of the company without the impact of Debt. Un-levering a Beta removes the financial effects of leverage thus isolating the risk due solely to company assets. In other words, how much did the company's equity contribute to its risk profile?</div><div><br /></div><div>On the other hand, levered Beta (commonly referred to as just Beta or Equity Beta) factors in Debt and Equity. </div><div><br /></div><div>The relationship between the Unlevered Beta and the Levered Beta is given by the following equation: (Source: Investopedia)</div><div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhw5rSb0_0KCnEaGJxWC1npZVKGechV4U81iwrrkfMrljxtYxNktxSCGS7bV0TybkaNF8pRakDn6iH_-FjvVrkfNYASLSYTh7ucsVQ2BeCyZl65m-19J7SvKef8SHuK1Y40ARv1O1zTPFf88gzarkQ5CqVtKdroO1cS2T74gB3g_vdRCcCbN9ejp_hrRqs/s472/Beta%20formula-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Beta formula" border="0" data-original-height="49" data-original-width="472" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhw5rSb0_0KCnEaGJxWC1npZVKGechV4U81iwrrkfMrljxtYxNktxSCGS7bV0TybkaNF8pRakDn6iH_-FjvVrkfNYASLSYTh7ucsVQ2BeCyZl65m-19J7SvKef8SHuK1Y40ARv1O1zTPFf88gzarkQ5CqVtKdroO1cS2T74gB3g_vdRCcCbN9ejp_hrRqs/s16000/Beta%20formula-min.png" title="Beta formula" /></a></div></div><div><br /></div><div>According to Professor Damodaran, a bottom-up Beta is estimated by starting with the businesses that a firm is in, estimating the Beta of each of these businesses, and taking a weighted average of these Betas.</div><div><br /></div><div>Bottom-up Betas are better than regression Beta for three reasons:</div><div><ul><li>They are more precise. The standard error in a bottom-up Beta estimate is more precise because you are averaging across regression Betas. </li></ul><ul><li>If a firm has changed its business mix, you can reflect that more easily in a bottom-up Beta because you set the weights on the different businesses.</li></ul><ul><li>If a firm has changed its Debt-to-Equity ratio the bottom-up Beta can be easily adjusted to reflect those changes.</li></ul></div><div><br /></div><div>There are four steps to derive the bottom-up Beta:</div><div><br /></div><div>Step 1: Break your company down into the businesses that it operates in. </div><div><br /></div><div>Step 2: Estimate the Beta of each business. This Beta is called an Asset Beta or an unlevered Beta.</div><div><br /></div><div>Step 3: Take a weighted average of the unlevered Betas of the businesses you are in, weighted by how much value you get from each business.</div><div><br /></div><div>Step 4: Adjust the Beta for your company's financial leverage.</div><div><br /></div><div>If you are a newbie, it could be challenging to consider the various nuances when estimating Beta and computing the WACC. I would recommend that instead of computing the WACC, refer to the many estimates available online. Sites like <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha</a>* present a fundamental analysis of companies some of which state the WACC used in the assessment. Tap into them.</div></div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><h2>An integrated risk management framework</h2><div>I had earlier presented a risk management framework comprising several elements.</div><div><ul><li>The Ishikawa of Fishbone diagram to identify the root causes of a permanent loss of capital. </li></ul><ul><li>A Threat Matrix to assess the likelihood and impact of each of the risks.</li></ul><ul><li>A Risk Mitigation Matrix to ensure that we have measures to mitigate each root cause.</li></ul></div><div><br /></div><div>In those articles, I used the framework to analyze risk only as a permanent loss of capital. I will now use the same framework but consider both volatility and permanent loss of capital.</div><div><br /></div><h3>Identifying the root causes</h3><div>In the earlier part of the article, I identified 4 main causes that can lead to a permanent loss of capital:</div><div><ul><li>Deterioration of intrinsic value.</li></ul><ul><li>Portfolio construction.</li></ul><ul><li>Wrong initial intrinsic value.</li></ul><ul><li>Stock market changes.</li></ul></div><div><br /></div><div>Refer to Chart 2 reproduced below.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOHtQnXDPQcAJ5J_L64sFHyIqM7oH7liOQegpBr_i1bEPaRJvme7HLydo-C1zRmUjx9L-dp4clkVB5znCF6loM9VZAMDSi1gln-zEyezd-N0QHJpCST-80Bm-2-6KjtXPTrUwkLhZrbnK_lU9jM__TYqfRUHj1RroUZYnAjDpB2I9i-hVBv9SRjxGFnz4/s572/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 2: Causes of Permanent Loss of Capital (Reproduced)" border="0" data-original-height="402" data-original-width="572" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOHtQnXDPQcAJ5J_L64sFHyIqM7oH7liOQegpBr_i1bEPaRJvme7HLydo-C1zRmUjx9L-dp4clkVB5znCF6loM9VZAMDSi1gln-zEyezd-N0QHJpCST-80Bm-2-6KjtXPTrUwkLhZrbnK_lU9jM__TYqfRUHj1RroUZYnAjDpB2I9i-hVBv9SRjxGFnz4/s16000/Chart%202-min.png" title="Chart 2: Causes of Permanent Loss of Capital (Reproduced)" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Causes of Permanent Loss of Capital (Reproduced)</td></tr></tbody></table><div><br /></div><div><div>If I now include volatility as another component of risk, I would retain the latter 3 items. However, I would replace the “deterioration in intrinsic value” with 2 other main causes as shown in Chart 8:</div><div><ul><li>Reduction in intrinsic value due to either systemic or non-systemic risks. You can see that I have sub-causes for the systemic and non-systemic components. </li></ul><ul><li>Temporary volatility that was crystalized to invest in a better opportunity. It can also be for portfolio rebalancing reasons or because of analytical errors.</li></ul></div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgV7keky4CL0Yq4QBYgRq9S23__Uqu6tulDgNRsbsL2FKWwlQv96TGtGp4iSjhBsJZMywFlpVXNlb0HD4oKXx2XYHDeLN3N0ndelTsBWK4D2u9twku6l5IihogCpUKDfT3WFs0qDQ14ErlznyOAso_zct-AHW1aaVNKQHiZWPXpoFYr8boZjcPEeevcpq0/s1650/Chart%208-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 8: Update Fishbone Diagram incorporating Volatility" border="0" data-original-height="734" data-original-width="1650" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgV7keky4CL0Yq4QBYgRq9S23__Uqu6tulDgNRsbsL2FKWwlQv96TGtGp4iSjhBsJZMywFlpVXNlb0HD4oKXx2XYHDeLN3N0ndelTsBWK4D2u9twku6l5IihogCpUKDfT3WFs0qDQ14ErlznyOAso_zct-AHW1aaVNKQHiZWPXpoFYr8boZjcPEeevcpq0/s16000/Chart%208-min.png" title="Chart 8: Update Fishbone Diagram incorporating Volatility" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 8: Update Fishbone Diagram incorporating Volatility</td></tr></tbody></table><div><br /></div><div><div>I have also identified 4 sub-causes each for the systemic and non-systemic components. In other words, to address the systemic and or the non-systemic risks, you address the respective sub-causes.</div><div><br /></div><div>As for the sub-causes for the Stock market changes, Wrong initial intrinsic value, and Portfolio construction, refer to the earlier section.</div><div><br /></div><div>You can see that by considering volatility as a risk, there is a more comprehensive picture. The segregation of risks into systemic and non-systemic ones shows that you need to address both if you are not well-diversified. At the same time, you cannot rule out losses due to temporary volatility.</div></div></div><div><br /></div><div><h3>Threat matrix and risk mitigation measures</h3><div>Once you have identified the various causes of risks, you can then assess the impact using the Threat matrix. Thereafter you establish the respective risk mitigation measures for each of the causes. </div><div><br /></div><div>In this section, I will jump straight to the risk mitigation measures for the systemic, non-systemic, and temporary volatility components. If you want detail on the other components, refer to Chart 4.</div><div><br /></div><div>Chart 9 summarizes the risk mitigation measures for the systemic, non-systemic, and temporary volatility components. Note the following:</div><div><ul><li>There is nothing much you can do about the systemic risks. You cannot avoid or reduce them. I have identified 2 measures to live with such risks. The first is to invest in other asset classes such as properties and bonds. The second is to follow the volatility school of aiming for a higher return for taking on the risk. This is achieved by using CAPM to determine the cost of equity.</li></ul><ul><li>Many of the measures listed in Chart 9 are also the ones that I have established under the previous framework. </li></ul><ul><li>There are some cells in Chart 9 where I could not identify a suitable risk mitigation measure. This is not so bad as there are other measures for that particular cause.</li></ul><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSXv9hhXRnkZ6D-Qq67kOVEKUSEiilcLgnXbxW_RO2yABRgEI0X47tBmixE475Ck9KxFkLur060g6X_1tzqvaOOpsuv0jYWabSxChw8L3uXW9i7X98nc9FZ1XJyoG5qd1Y-_CJSOehwDLYy6v-yBFvR3v4DNIsqSaagmUsw6aTYUUlKVDE8L71SJr_sBI/s945/Chart%209-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 9: My Risk Mitigation Measures" border="0" data-original-height="703" data-original-width="945" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSXv9hhXRnkZ6D-Qq67kOVEKUSEiilcLgnXbxW_RO2yABRgEI0X47tBmixE475Ck9KxFkLur060g6X_1tzqvaOOpsuv0jYWabSxChw8L3uXW9i7X98nc9FZ1XJyoG5qd1Y-_CJSOehwDLYy6v-yBFvR3v4DNIsqSaagmUsw6aTYUUlKVDE8L71SJr_sBI/s16000/Chart%209-min.png" title="Chart 9: My Risk Mitigation Measures" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 9: My Risk Mitigation Measures<br /><div style="text-align: left;"><i>Note: For the other measures, refer to Chart 4</i></div></td></tr></tbody></table><div><br /></div></div><div><h3>Behavioral dimension</h3><div>When you look at the measures in Chart 9, you can see that there are many behavioral aspects. You should not be surprised as there are 3 decisions to consider when investing:</div><div><ul><li>What to buy?</li></ul><ul><li>How much to buy?</li></ul><ul><li>When to buy?</li></ul></div><div><br /></div><div>From a value investment perspective, the buy and sell decisions are based on the market price relative to the intrinsic value.</div><div><br /></div><div>But to derive the intrinsic value, you have to understand the business and make assumptions about its prospects, etc. These affect your valuation. Any biases you have then affect your valuation and hence your buy and sell decision.</div><div><br /></div><div>When it comes to how much to buy, this is generally dependent on the amount you allocate to the total portfolio and the number of stocks you want to hold. At the same time, unless you allocate an equal amount to all the stocks, the likelihood is that you will allocate a bigger sum to the stocks with the highest conviction.</div><div><br /></div><div>Again, you can see how behavioral biases affect this decision.</div><div><br /></div><div>Can you mitigate these? There are several things that I do:</div><div><ul><li>Have a standard procedure.</li></ul><ul><li>Don't listen to the news.</li></ul><ul><li>Don't rush into things.</li></ul><ul><li>Take a long-term view.</li></ul></div><div><br /></div><div>The reality is that behavioral biases are one of the risk elements in investing. Investing success is dependent on behavior rather than intelligence.</div><div><br /></div><h4>Investment risk tolerance</h4><div>From a behavioral angle, your risk tolerance plays a role in your risk mitigation measures. </div><div><br /></div><div>I like to think of risk tolerance as the % of your savings you can afford to lose without fretting about it.</div><div><ul><li>A 100% risk-tolerant person thinks nothing of losing 100% - these are the addicted gamblers.</li></ul><ul><li>Then there is the 0% risk-tolerant person who gets upset even losing 1%.</li></ul></div><div><br /></div><div>When it comes to investing, there are 100% risk-tolerant persons - just imagine those who blindly trade/invest.</div><div><br /></div><div>However, I don’t think there is any 0% tolerant person. To invest you need some risk tolerance.</div><div><br /></div><div>Having said that, being some 10% to 20% risk-tolerant doesn’t mean that you simply trade/invest. In other words, being risk-tolerant does not mean that you sit back and accept the risk of losing money.</div><div><br /></div><div>There are a host of measures to adopt so that while being risk-tolerant, you end up with a minimal permanent loss of capital.</div><div><br /></div><div>I have seen several “questionnaires” over the years that try to establish your risk profile for investment purposes.</div><div><br /></div><div>At the end of the day, if you are knowledgeable about investments, you don't need a questionnaire to tell you your risk tolerance.</div><div><br /></div><div>Warren Buffett has the saying that risks come from not knowing what you are doing. I think this aptly describes my point.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEir7YGLRSTCT4_IFoExN1g0n4lDrj59WtTrxBpEX7e1sS-GcbJIjv_1AUgjcc55hypxwxzs0_f1jUK2qoCXrAkEwIJGNRaXEjEjd1v2aW5Ke9W0kyuHBjTNWniqeYGOmIfFIhKhdJysmCTmRTSFgCBIYp7szwYpaJ8q9yKoJFbvVnBRA-A7v5vwhuEwd24/s103/Picture%207.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Pulling it together" border="0" data-original-height="73" data-original-width="103" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEir7YGLRSTCT4_IFoExN1g0n4lDrj59WtTrxBpEX7e1sS-GcbJIjv_1AUgjcc55hypxwxzs0_f1jUK2qoCXrAkEwIJGNRaXEjEjd1v2aW5Ke9W0kyuHBjTNWniqeYGOmIfFIhKhdJysmCTmRTSFgCBIYp7szwYpaJ8q9yKoJFbvVnBRA-A7v5vwhuEwd24/s16000/Picture%207.png" title="Pulling it together" /></a></div><div><br /></div><div><h2>Pulling it all together</h2><div>Risk management involves identifying the threats, assessing, and then mitigating them. You consider both the likelihood of the event happening and its impact.</div><div><br /></div><div>I have presented a risk management framework comprising several elements.</div><div><ul><li>The Ishikawa diagram to identify the root causes of a permanent loss of capital. </li></ul><ul><li>A Threat Matrix to assess the likelihood and impact of each of the risks.</li></ul><ul><li>A Risk Mitigation Matrix to ensure that we have measures to mitigate each root cause.</li></ul></div><div><br /></div><div>The framework shows how to mitigate risk from a permanent loss of capital perspective. I have also shown how this framework can be used to bring volatility into the risk mitigation process.</div><div><br /></div><div>As a value investor, I do not follow the volatility school when it comes to risk. However, I do use some of the volatility concepts in my valuation. As such it does not make sense to ignore volatility.</div><div><br /></div><div>But there is no need for this if you view volatility as another risk component. By considering volatility and permanent loss of capital as different components of risks, you can have a more comprehensive picture. At the same time, MPT and CAPM concepts can then be part of your fundamental analysis.</div><div><br /></div><div>The permanent loss of capital school does not have a quantitative measure of risk while the volatility school has managed to do this via the variance. However, variance is not a precise measure of risk. But in certain circumstances, an imprecise measure is better than no measure. </div><div><br /></div><div>I hope that I have made a case that even if you follow the permanent loss of capital school, there is a basis for considering volatility. </div><div><br /></div><h3>My risk mitigation measures</h3><div>What you adopt will depend on your situation. My measures include the following:</div><div><br /></div><div>1) Adopt a conservative approach in the valuation. Use conservative estimates for the various valuation parameters. For example, if there are growing trends for the profits and/or cash flows, any valuation that assumes zero growth will be conservative.</div><div><br /></div><div>2) Have different levels of the margin of safety depending on the nature of the investment. For example, have a larger safety margin for companies going through a turnaround compared to one with a "consistent" track record. I also choose companies with some dividend track record as I consider dividend payment as some form of margin of safety. </div><div><br /></div><div>3) Focus on quality stocks and those with a long operating history to guard against fraud and the business environment. I have incorporated several academic quality and risk indicators in my analysis. Examples are the Beneish M Score, the Piostroski F Score, and the Altzman Z Score. </div><div><br /></div><div>4) Diversify. I adopt a 2-tiered diversification plan. Firstly, I invest in several asset classes with equity as only one of them. Secondly, I hold a portfolio of about 30 to 40 companies. These are from different sectors and market capitalization categories of investments. </div><div><br /></div><div>5) Understand the company. Get a good picture of how it got to its present position. Understanding its business model and strategies helps me get a handle on its fundamental and macroeconomic risks. </div><div><br /></div><div>6) Invest in the long-term. This helps to mitigate any short-term economic upheavals.</div><div><br /></div><div>7) Be prepared to cut loss if the investment thesis is no longer valid. I have done this several times. While there are some initial losses, I can more than makeup for the losses by investing the money in other companies with better prospects.</div><div><br /></div><div>8) Invest more in those where you have more confidence. This is related to the position sizing strategy. </div><div><br /></div><div>9) Incorporate Beta into the valuation. When I first started, I used one discount rate in my valuation. To account for the risks, I now use the Capital Asset Pricing model to determine the discount rate. </div><div><br /></div><div>10) At the end of the day, the best risk mitigation strategy is to look at the investment from the downside protection perspective. Let the upside take care of itself. Don’t think of the returns that can be made. Rather think of how to prevent losses.</div><div><br /></div></div><div><br /></div></div><div><br /></div><div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div></div><div><br /></div></div><div><br /></div></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-1025220854732229362023-10-01T08:26:00.009+08:002024-03-01T14:27:03.096+08:00Eksons is now a value trap (Oct 2023)<script type="application/ld+json">
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Value Investing Case Study 01-4: An updated fundamental analysis of Eksons based on the financial results till FYE Mac 2023. It also pulls together the relevant sections of my earlier articles on Eksons. You would also be re-directed here if you have tried to access the earlier posts.</span></div>
<div style="text-align: justify;"><br /></div><div style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhergstFV6xixijdj-SeWA0M-PdghF4NzzEphUmJzcG474l1JQlalO725Qr0dDqxfEvLrOiObDzDyfc0rAjuHxzYHva0g0LaesaNr9jSSEKLbA6KiZoV1FGScuZhVpw9qT8CtNE-PxlTlQDC5NZ3DtS0KuvJHS1BuZ-Fq9WNLAW4jvH8X31X5u06uUZaWY/s386/Pic%201-min.png"><img alt="Eksons is now a value trap (Oct 2023)" border="0" data-original-height="386" data-original-width="281" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhergstFV6xixijdj-SeWA0M-PdghF4NzzEphUmJzcG474l1JQlalO725Qr0dDqxfEvLrOiObDzDyfc0rAjuHxzYHva0g0LaesaNr9jSSEKLbA6KiZoV1FGScuZhVpw9qT8CtNE-PxlTlQDC5NZ3DtS0KuvJHS1BuZ-Fq9WNLAW4jvH8X31X5u06uUZaWY/s16000/Pic%201-min.png" title="Eksons is now a value trap (Oct 2023)" /></a></div><span><a name='more'></a></span><div style="text-align: justify;">I first covered Eksons Corporation Bhd (Eksons or the Group) in June 2020. At that juncture, the Group had two operating segments – timber (plywood) and property development. I found that Eksons was a Graham Net Net and concluded that it was not a value trap. </div><div style="text-align: left;"><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But Eksons today is no longer an operating company. It had ceased the timber operations and completed its property development projects. There is no other property development project in the pipeline. But it is holding onto RM 259 million cash.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Eksons is currently a cash holding company that is still a Graham Net Net. But due to the lack of significant operations, I have revised my view and concluded that it is now a value trap.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I have a 3-mins video that provides an overview of this thesis. </div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/g1byo-eO4CM" width="320" youtube-src-id="g1byo-eO4CM"></iframe></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Should you sell Eksons? See my Disclaimer.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><h2>Contents</h2><div><ul><li><b>Investment thesis</b></li></ul><ul><li><b>Thrust of my analysis</b></li></ul><ul><li><b>Financial position</b></li></ul><ul><li><b>No significant operations</b></li></ul><ul><li><b>Capital allocation</b></li></ul><ul><li><b>Inflation and market dynamics</b></li></ul><ul><li><b>Management</b></li></ul><ul><li><b>Valuation</b></li></ul><ul><li><b>Conclusion</b></li></ul><ul><li><b>Appendix 1 – Timber prospects</b></li></ul><ul><li><b>Appendix 2 – Was shareholders’ value created?</b></li></ul><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html" target="_blank">Learn more</a>.</i></div></td></tr></tbody></table></div></td></tr></tbody></table><div><br /></div></div><div>When I first covered Eskons in June 2020, it was trading at RM 0.57 per share compared to its cash and marketable securities of RM 1.27 per share. I concluded that Eksons was a Graham Net Net. It was also not a value trap. </div><div><div><br /></div><div>In May 2021, I carried out an updated analysis. The market price had gone up to RM 0.835 per share (as of April 2021). But it was still below the latest cash and marketable securities of RM 1.32 per share (as of the end of Dec 2020). I maintained that Eksons was still a Graham Net Net and not a value trap.</div><div><br /></div><div>In its 2023 Annual Report, Eksons stated that it had ceased its plywood (timber) operations in Jan 2023. The assets of the timber segment would be deployed as investment properties. The Group would continue with its property development business as well as identify key business opportunities.</div><div><br /></div><div>This is my latest update of Ekson taking into account the change in the business direction. Where appropriate I have also pulled together the analyses of the earlier articles. </div><div><br /></div></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkce_iXF0W0QNbicqk9sHNkqnF_baTyaev2y-9_2g1gROzdhGE6w1V7F7dUytnePATQ_SHVrrDazoE6TqFNErWmGvE13VGw3dFqAMIM_-ZuB9jOM1eTxV-U4TJH4zTDvQZAu_HkeKg81_Y3F8yAJAXfKU-zQH9Dx4IxuMaQ-aJ2mnnjfohHA7Anuo-RAA/s535/Eksons%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Eksons investment thesis 2023" border="0" data-original-height="355" data-original-width="535" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkce_iXF0W0QNbicqk9sHNkqnF_baTyaev2y-9_2g1gROzdhGE6w1V7F7dUytnePATQ_SHVrrDazoE6TqFNErWmGvE13VGw3dFqAMIM_-ZuB9jOM1eTxV-U4TJH4zTDvQZAu_HkeKg81_Y3F8yAJAXfKU-zQH9Dx4IxuMaQ-aJ2mnnjfohHA7Anuo-RAA/s16000/Eksons%201-min.png" title="Eksons investment thesis 2023" /></a></div><br /><div><br /></div><div><h2>Investment Thesis</h2><div>In Jan 2023, the Group ceased its plywood operations and rented out the facilities. This rental operation was reported as part of the property and investment holdings segment. But there is nothing to suggest that the Group would acquire other investment properties as part of this segment.</div><div><br /></div><div>The Group is thus left with property development as the ongoing operation. But there are no development projects and the Group is just selling off its inventory of completed units. </div><div><br /></div><div>However, the Group is cash rich with RM 259 million in cash or cash equivalent (investment securities) as of June Jun 2023. It does not look as if this will be returned to shareholders and is probably earmarked for new business opportunities.</div><div><br /></div><div>Eksons is currently trading at RM 0.54 per share (12 Sep 2023) compared to its Graham Net Net of RM 2.02 per share (as of end Mac 2023). There is a sufficient margin of safety. </div><div><br /></div><div>However, without any significant operations, the Group is essentially a cash-holding company. I consider this a value trap unless and until the Group builds up its operations. </div><div><br /></div><div><h2>Thrust of my analysis</h2><div>A value trap occurs if you buy a company because it is cheap only to find out that the assets are not what you think they are and/or there is no future. In other words, it is cheap for fundamental reasons.</div><div><br /></div><div>To avoid value traps in such a situation, you determine the intrinsic value based on its business fundamentals. If the price is less than the intrinsic value, I would conclude that the stock is not a value trap.</div><div><br /></div><div>This was what I did in my earlier analyses and valuations of Eksons. At those junctures, the Group still had substantial business operations. </div><div><br /></div><div>Ekons currently does not have any substantial business operations. It is essentially clearing stocks and holding onto cash while looking for new opportunities.</div><div><br /></div><div>There is an alternative perspective of a value trap that applies to a cash-holding company such as Eksons.</div><div><br /></div><div>The cash can make it seem like a good investment opportunity. However, several factors can turn it into a value trap:</div><div><ul><li>Capital Allocation. If management is unable to allocate the cash to generate returns for shareholders, the cash can become a liability rather than an asset. This can happen if the company fails to identify profitable investment opportunities.</li></ul><ul><li>Transparency. Some companies may have undisclosed or unclear plans for their cash holdings. This makes it difficult for investors to assess the company's prospects. </li></ul><ul><li>Erosion of purchasing power. Inflation can erode the value of cash holdings over time. If the cash is not invested to keep up with inflation, the purchasing power of that cash can decline, and shareholders may not benefit.</li></ul><ul><li>Dividend and share buyback. You may invest in a cash-rich company expecting it to distribute the excess cash. If the company does not have a clear policy or willingness to return cash to shareholders, your expectations will not be met.</li></ul><ul><li>Market dynamics. External factors, such as changes in interest rates or shifts in market sentiment, can also impact the valuation. If interest rates rise, for example, the opportunity cost of holding cash increases, which can negatively affect the company's stock price.</li></ul></div><div><br /></div><div>I will show that Eksons falls into the cash-holding company category. To assess whether it is a value trap, I will assess its capital allocation strategy, and its plans for the cash. Apart from evaluating its transparency, I will also look at its track record in managing its cash reserves and generating returns.</div><div><br /></div></div><div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div></div><div><h2>Financial position</h2><div>As of the end of Mac 2023, the Group had a Total Capital Employed (TCE = total Equity + total Debt) of RM 382 million. About 37% of the TCE was deployed for the operations with the balance as financial/non-operating assets. Refer to Chart 1.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZPu4AvweRXITrqoU0GWNpD99XofpmZZsN4NqHumDkdk_wdicRwJ9RKdIRIIB4jiTeZpiMQikJfAcnWVEjPLj_vpTYXSxupm758mi4Q3nOTENKKshhQnQwP2Bi3pMwjgmGVq6euPlUQxyaKgyRL_Hfona80oqHWWhY1HK8nQ0a-RhHl8K3pVztw5xG7EQ/s614/Chart%201-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Chart 1: Eksons Sources and Uses of Funds" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZPu4AvweRXITrqoU0GWNpD99XofpmZZsN4NqHumDkdk_wdicRwJ9RKdIRIIB4jiTeZpiMQikJfAcnWVEjPLj_vpTYXSxupm758mi4Q3nOTENKKshhQnQwP2Bi3pMwjgmGVq6euPlUQxyaKgyRL_Hfona80oqHWWhY1HK8nQ0a-RhHl8K3pVztw5xG7EQ/s16000/Chart%201-min.PNG" title="Chart 1: Eksons Sources and Uses of Funds" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Sources and Uses of Funds</td></tr></tbody></table><div><br /></div><div>To understand how the net operating assets were deployed, I re-allocated the Balance Sheet items as shown in Chart 2. I have also shown the past 12 years' average revenue and PBT to give you a sense of the returns.</div><div><div><br /></div><div>You can see that:</div><div><ul><li>The property development segment used about half of the net operating assets. It generated about 7 % return as measured by the PBT/Total Equity. It is not exactly a fantastic return.</li></ul><ul><li>There are net operating assets in the timber (plywood) segment as there is still about RM 37 million of inventory. The Group stated that it may take more than a year to clear them. I have also allocated all the Property, Plant & Equipment (PPE) amounting to RM 23 million to this segment. This segment was not profitable for the past 6 years of the 12 years resulting in a weighted average loss. </li></ul><ul><li>I do not expect any significant profit contribution from the rental of the plywood facilities as the monthly rental has to cover depreciation and insurance. In the past, the rental of unsold properties was also classified as part of this segment. </li></ul><ul><li>The Misc segment is the balancing segment and comprises mainly the cash and investment in securities. </li></ul></div><div><br /></div><div>I would expect that there would be more cash converted from the timber net operating assets when the operation is fully run down. As such I expect the amount of cash and investment securities to increase in the coming year or so.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9ons8F3XUHDSZBtGc-GOqilj0HP18tP-TetzyOhMz7qSDEfjHszighfFG4qNMsXx2joNtBphpov_52f3e6JFLK-trAq6wSqoITYr9sOJZCN1hMjxLP0fO6GD0v0HCoxHyz5Lty6CZX4A_xnQei8SnCK1XIQHQpq3rmTF5YuT5R1DRXdK-V_1EG8FUVeY/s903/Chart%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 2: Eksons Segment performance" border="0" data-original-height="305" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9ons8F3XUHDSZBtGc-GOqilj0HP18tP-TetzyOhMz7qSDEfjHszighfFG4qNMsXx2joNtBphpov_52f3e6JFLK-trAq6wSqoITYr9sOJZCN1hMjxLP0fO6GD0v0HCoxHyz5Lty6CZX4A_xnQei8SnCK1XIQHQpq3rmTF5YuT5R1DRXdK-V_1EG8FUVeY/s16000/Chart%202-min.png" title="Chart 2: Eksons Segment performance" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Segment performance<br /><div style="text-align: left;"><div><i>Notes</i></div><div><i>a) The PPE was allocated to the timber (plywood) segment.</i></div><div><i>b) All cash, loans, and taxes were allocated to the Misc segment.</i></div><div><i>c) Receivable and payables were apportioned based on the 2022 segment revenue.</i></div><div><i>d) The average revenue and average PBT were based on the past 12 years’ time-weighted average value</i>s.</div><div><br /></div></div></td></tr></tbody></table><div>I will show that the property investment and property development operations are not substantial operations. This means that effectively Eksons today is a cash holding company. Chart 3 illustrates this.</div><div><br /></div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-32HsiMldUgR5888l0W_OE4sqqvzqCypAi7EXZpimvPATgxlaqiCt5JCMqOyhkX0quewA-D5Zls8AnDLKEnO3dLXVov1LgXbQ6sGZRa1JEz5JNV8FYoqI4J2PI2fqggHLthHRWdy6OajCsyBweIjbMu6zn0qu2AiGD7rHA5U0-SDkdt1egIIRue9EI0E/s614/Chart%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 3: Eksons Capital allocation" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-32HsiMldUgR5888l0W_OE4sqqvzqCypAi7EXZpimvPATgxlaqiCt5JCMqOyhkX0quewA-D5Zls8AnDLKEnO3dLXVov1LgXbQ6sGZRa1JEz5JNV8FYoqI4J2PI2fqggHLthHRWdy6OajCsyBweIjbMu6zn0qu2AiGD7rHA5U0-SDkdt1egIIRue9EI0E/s16000/Chart%203-min.png" title="Chart 3: Eksons Capital allocation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Capital allocation</td></tr></tbody></table><br /></div></div></div></div><div><h3>Current Performance</h3><div>For the first financial quarter ended Jun 2023, the Group reported revenue of RM 5 million and PAT of RM 10 million. The bulk of the revenue came from the sale of the Affinity Residence project. </div><div><br /></div><div>As for the profits, the Group benefited from a forex gain of RM 11 million. Without the forex gain, the Group would probably break even.</div><div><br /></div><div>I would expect the Group to continue to break even at best for FYE 2024 and onwards until it can build up a substantial operation. Refer to my analysis of the investment property and property development operations.</div><div><br /></div><h2>No significant operations</h2><div>As per Chart 2, you can see that the Group currently has 3 operating segments. However, I do not consider these to be significant operations.</div><div><ul><li>The timber (plywood) segment ceased operations in Jan 2023 and is now clearing stocks. After the stocks have been cleared, there will not be any operations.</li></ul><ul><li>The property investment segment is a rental recovery operation and I would not consider this a substantial operation. Refer to the next section for details. </li></ul><ul><li>As shown in the subsequent section, the property development segment is not exactly an operating segment. </li></ul></div><div><br /></div><h3>Property investment</h3><div>The Group does not own major investment properties. In the past, the investment properties and rental income were from the unsold units in The Atmosphere. Eksons has now extended this to include the rental of the plywood factory.</div><div><br /></div><div>It is good that management is extracting some revenue from inventory and unused facilities. But you can see that this segment is a by-product of operating challenges rather than a business that is pursued separately.</div><div><br /></div><div>This looks like a break-even type of business and I do not expect more funds to be deployed here. Rather some of the assets here could be converted to cash.</div></div><div><br /></div><div><h3>Property development</h3><div>The Group currently does not have any projects under development. </div><div><ul><li>Its 2 projects - The Atmosphere and Affinity Residences – have been completed. The Group has unsold units amounting to RM 60 million as of the end of Mac 2023. </li></ul><ul><li>The Group has a 66-acre plot in Seremban for development that was acquired in 2012. But there is no news about developing this. This land is reported in its books at RM 17.3 million. It is possible that the land value could be higher today. </li></ul></div><div><br /></div><div>With RM 75 million net assets currently deployed for the property development segment, it is a small operation. Eksons could of course allocate more of its net assets to this segment. </div><div><br /></div><div>But as can be seen from Chart 2, its returns have not been fantastic. To give you a better sense of this, it is instructive to look at its property development history.</div><div><br /></div><h4>The Atmosphere</h4><div>Eksons’ property development started in 2006/07 with The Atmosphere. This was undertaken via separate joint ventures with the project manager and the landowner to overcome the issue of expertise and to minimize start-up costs. </div><div><br /></div><div>Then in 2008 to 2010 the Group acquired the Atmosphere land to cap the land cost. </div><div><br /></div><div>The Atmosphere approved master layout plan comprised: </div><div><ul><li>9 acres hypermarket zone.</li></ul><ul><li>12.5 acres stratified community with shops and a medium-sized entertainment center.</li></ul><ul><li>14.5 acres commercial component with a retail complex, hotel, serviced apartments, and office towers. </li></ul></div><div><br /></div><div>In 2009, the Group successfully launched the shop offices and boulevard shops component of The Atmosphere with 90% of the units sold. </div><div><br /></div><div>Unfortunately, the Malaysian property market started to turn soft in 2014 affecting its property development plans. This affected not only the sales of units in The Atmosphere but also led to the re-timing of the Affinity Residences that were originally planned for the 2016 launch. </div><div><br /></div><div>The jump in the revenue for the Property Development segment in 2015 was due to a one-off sale of 14.64 acres of land which was part of The Atmosphere project. </div><div><br /></div><div>While technically correct to count the land sale as revenue for the property business, you want revenue from development. After all, Eksons is not a land trader. </div><div><br /></div><div>In terms of Eskons's property development activities, the Group only developed the 12.5 acre acres as:</div><div><ul><li>The 9 acres of land hypermarket zone was sold in 2009 (on which a Giant Hypermarket was set up) contributing to the maiden segment revenue of RM 23.5 million. </li></ul><ul><li>The 14.5 acres of land were sold in 2015 for RM 140.3 million. </li></ul></div><div><br /></div><div>With 55 acres of land, the Group only developed less than a 1/4. It sold most of it. Well, selling off land is a good opportunistic move. But this is not a long-term plan for a property developer. </div><div><br /></div><div>With most of the 12.5-acre plot of The Atmosphere developed, any future contribution from this development will be from the unsold properties currently held as inventory. </div><div><br /></div><div>The positive part is that with the opening of the MRT station at Putra Permai in March 2023, there would be increased interest in The Atmosphere. </div><div><br /></div><h4>Affinity Residences</h4><div>This is a RM 155 million gross development value (GDV) project comprising 23 Grand Villas and 70 Duplex Villas that was officially launched in June 2018. As of the end of FY 2019, about RM 43 million out of the RM 155 million GDV had been sold. </div><div><br /></div><div>To be fair, this was launched when the property market was soft.</div><div><br /></div><div>In its 2023 Annual Report, Eksons stated that it delivered vacant possession in Jan 2023. The Group recorded a loss for the property development segment in 2023 due to “the recognition of all anticipated contract costs at the point of completion.”</div><div><br /></div><h4>Key takeaways</h4><div>Without any property development pipeline, the Group is relying on sales of stocks to generate profits from this segment. The Group has about RM 60 million of unsold properties where half is at net realizable value. As such I am not confident that this segment will be a significant profit contributor over the next few years. </div><div><br /></div><div>In reality, the property development segment was a small revenue contributor compared to the timber segment. If you ignore the sale of land, the property sales over the past 12 years were only around RM 30 million a year. This is only about 1/10 the size of that from the timber segment in its good years. </div><div><br /></div><div>More importantly, property development is a long-term activity. So even if the Group develops the 66 acres of Seremban land, it will be another 2 or 3 years before we see income being recognized. Besides the Group has yet to assess the gross development value of the Seremban land.</div><div><br /></div><div>You can see why I don’t see the property development segment as a significant profit contributor in the next few years. </div><div><br /></div><div><h2>Capital allocation</h2><div>I look at the following to assess whether Eksons has a good capital allocation plan.</div><div><ul><li>Financial health. A financially sound company points to good capital allocation.</li></ul><ul><li>Business strategy. A good capital allocation plan should align with the company's strategic goals and growth prospects.</li></ul><ul><li>Historical performance. Did its past investments, acquisitions, and divestitures create value for shareholders?</li></ul><ul><li>Return. A high return indicates efficient capital allocation.</li></ul><ul><li>Dividend and share buyback. Many consider returns of capital to shareholders through dividends or buybacks as prudent if the company has excess cash.</li></ul><ul><li>Risk management. A well-balanced capital allocation plan should not overly expose the company to unnecessary risks.</li></ul><ul><li>Transparency and communication. Was the company transparent in its asset allocation plans?</li></ul><ul><li>Peer comparison. Did the company perform better than its peers? This can provide insights into whether the company is making relatively better or worse decisions.</li></ul><ul><li>Shareholder value creation. Ultimately, the goal of a good capital allocation plan is to create value for shareholders. </li></ul></div><div><br /></div><div>My assessment of Eksons is summarized in Table 1 where I have rated each of the criteria as Good, Average, and Poor. You can see that there were many more Poor-ratings compared to the Good-ratings.</div><div><br /></div><div>I have rated the business strategy and historical performance as poor as the company took too long to cease the timber (plywood) business. My earlier articles pointed out the precarious situation of Eksons. I reproduced this in Appendix 1.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbWttMDnDD5xg0xzt6NaBfNwnDNofwPGdJuDhnevuLsqQTpQHyWwEy5yxGeQBeoGuGFUMN7oG2RJx8ntuswsjGv5KrMUBgk-G3QTNkbdHD5FA7Iggc-6Wiq4VldVmPdxX5n3r4sflinVZKr6RKm13xY-MlxTcNXbs1nIBn2uc14b2F0rdbYhI328casq0/s891/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 1: Assessment of Esksons as a cash holding value trap" border="0" data-original-height="290" data-original-width="891" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbWttMDnDD5xg0xzt6NaBfNwnDNofwPGdJuDhnevuLsqQTpQHyWwEy5yxGeQBeoGuGFUMN7oG2RJx8ntuswsjGv5KrMUBgk-G3QTNkbdHD5FA7Iggc-6Wiq4VldVmPdxX5n3r4sflinVZKr6RKm13xY-MlxTcNXbs1nIBn2uc14b2F0rdbYhI328casq0/s16000/Table%201-min.png" title="Table 1: Assessment of Esksons as a cash holding value trap" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Assessment of Esksons as a cash holding value trap</td></tr></tbody></table><div><br /></div><div><div><i>Notes to Table 1.</i></div><div><i>a) The Group has about 59% of the total assets held in cash and cash equivalents. Over the past 12 years, it generated RM 228 million cash flow from operations. It is a good cash conversion ratio compared to the RM 77 million profits for the same period.</i></div><div><i><br /></i></div><div><i>b) The Group has not articulated its path moving forward. </i></div><div><i><br /></i></div><div><i>c) While it ventured into property development, the return was not exciting. Furthermore, it took too long for the company to cease the timber (plywood) operations. In my earlier analysis, I indicated that it would have difficulty turning the business around unless the Group could forge some strategic alliance with the timber companies. Refer to Appendix 1. </i></div><div><i><br /></i></div><div><i>d) The Group had a negative average ROE over the past 12 years. </i></div><div><i><br /></i></div><div><i>e) Over the past 12 years, Eksons used about half of its PAT for dividends and share buyback.</i></div><div><i><br /></i></div><div><i>f) The excess cash before the closure of the timber (plywood) operations was because the operations were scaled down. The cash was kept pending deployment when the business picked up. The Group also took a cautious approach when venturing into property development</i></div><div><i><br /></i></div><div><i>g) The Annual Reports do not provide a clear picture of its property operations. It is not clearly stated that the Group don’t have any more property projects by 2023. If you don’t dig deep, you could be misled into thinking that the Group have a strong investment property portfolio. In reality, the investment property operation is due to its inability to sell its property development units and unused facilities. </i></div><div><i><br /></i></div><div><i>h) Chart 4 compared Ekson's ROE for the past 12 years with 19 other Bursa companies in the plywood, wood mouldings, and timber products sector. You can see that Eksons return (shown in bold blue) was lower than most of the peers. </i></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfFam4RsV-5Lk-BWVf5aT70Tya4VP-R4Tn3gfIoVtEffH3vzUx1OFKzjnAELUq0ZHF0WPHpyTkX3W_uOPS5tmM4r-oI20bx1YlQTXqdZM5BkrOHVY9QTtqPulLP2C3x4EYQIclUCSPTrzPeiN8hXad2jc-nPkjkpy8OrZ2CuK-J8hWCaHmT5K57NaAdAo/s907/Chart%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 4: Eksons Peer ROE" border="0" data-original-height="339" data-original-width="907" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfFam4RsV-5Lk-BWVf5aT70Tya4VP-R4Tn3gfIoVtEffH3vzUx1OFKzjnAELUq0ZHF0WPHpyTkX3W_uOPS5tmM4r-oI20bx1YlQTXqdZM5BkrOHVY9QTtqPulLP2C3x4EYQIclUCSPTrzPeiN8hXad2jc-nPkjkpy8OrZ2CuK-J8hWCaHmT5K57NaAdAo/s16000/Chart%204-min.png" title="Chart 4: Eksons Peer ROE" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Peer ROE</td></tr></tbody></table><div><br /></div><div><i>i) I looked at 2 metrics. Was the average past 12-year return greater than the cost of capital? Was the compounded annual growth in intrinsic value over the past 15 years greater than the cost of capital? The answers were “no” for both. I have not tabulated the details of the analyses as these are very similar to my May 2021 analyses where I had arrived at the same conclusion. Refer to Appendix 2 for the May 2021 analyses. </i></div><div><br /></div></div><div><h2>Inflation and market dynamics </h2><div>Over the past 2 decades, Malaysia's annual inflation rate seems to be between 2 % to 4 % as can be seen in Chart 5. </div><div><br /></div><div>Over the past 12 years, the returns from the interests and dividends from the cash and investment securities averaged about 2.2 %. Also, the Group reported a total fair value losses of about RM 17 million during the same period.</div><div><br /></div><div>Looking at the numbers, I would conclude that the Group had not been able to protect its cash from being eroded by inflation. </div><div><br /></div><div>I am not an economist so I would not forecast the direction of interest rates, forex, or other economic factors that affect cash purchasing power. </div><div><br /></div><div>To be fair to the Group, I suspect that the objective of investing the excess cash into investment securities is to protect it against inflation. The company did not approach it from the Warren Buffett perspective of deploying the cash to generate better returns.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_fDtm7_y21G1kgMFcrvOCPpA3L9zzyi0qb0xLBy5zJQ_BnMqgHsujOuXaUR5bnR1-AfR7_fNHKjyXbi3JZJVCCBBSbfZbn0_4dwJOfItrljoB4bT2Sv6Di-mcm3tpkDnYMU1dGQVADx1A6RQwroodiRYR1vOom_nmiPH2WtXsdlihCyfl-wh4dv8uFug/s907/Chart%205-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 5: Malaysian Inflation" border="0" data-original-height="423" data-original-width="907" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_fDtm7_y21G1kgMFcrvOCPpA3L9zzyi0qb0xLBy5zJQ_BnMqgHsujOuXaUR5bnR1-AfR7_fNHKjyXbi3JZJVCCBBSbfZbn0_4dwJOfItrljoB4bT2Sv6Di-mcm3tpkDnYMU1dGQVADx1A6RQwroodiRYR1vOom_nmiPH2WtXsdlihCyfl-wh4dv8uFug/s16000/Chart%205-min.png" title="Chart 5: Malaysian Inflation" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 5: Malaysian Inflation</td></tr></tbody></table><div><br /></div><div><h2>Management</h2><div>Comparing the 2023 Annual Report with that of 2020, I noticed the following changes to the Board of Directors.</div><div><ul><li>Mr Tang Seng Fatt who was Executive Director since 2006 resigned from the Board in May 2022. Eksons did not provide any reason for this but he would have been 55 in 2022.</li></ul><ul><li>Ms Hew Mei Ying was appointed as the Independent Non-Executive Director in Nov 2021 to replace Mr. Koay Kah Ee</li></ul></div><div><br /></div><div>The key players – Chairman, Deputy Executive Chairman, and MD – remained the same.</div><div><br /></div><div>The Chairman and The Deputy Executive Chairman still controlled about the same number of shares in 2020 as in 2019. They controlled about 57 % of Eksons (direct and indirect)</div><div><br /></div><div>Given the above, I do not think that there is any significant change in the way the Group is being managed. </div><div><ul><li>I do not expect changes in the way the cash is managed. It is unlikely that the cash would be returned to shareholders.</li></ul><ul><li>The Group would still be cautious about new ventures.</li></ul><ul><li>In terms of reporting, I do not expect more transparency or clarity in the Annual Reports. </li></ul></div><div><br /></div><div>These are important takeaways when assessing Eksons as a cash-holding value trap.</div></div><div><br /></div><div><h2>Valuation</h2><div>Since the Group does not have any significant operations, it does not make sense to value it based on its earnings power. In other words, the conventional intrinsic value calculation based on the Free Cash Flow is not applicable here.</div><div><br /></div><div>It is more realistic to value it based on its asset value.</div><div><br /></div><div>As of the of end March 2023, Group had an NTA of RM 2.23 per share. This can be broken down into the following as shown in Table 2. </div><div><br /></div><div>The question is whether the PPE will be further impaired when the plywood operations fully cease. On the other hand, the land and building under the PPE as well as the development land and investment properties are at historical costs.</div><div><br /></div><div>As such I would take the asset value as not less than RM 2.00 per share. This is close to its Graham Net Net of RM 2.02 per share.</div><div><br /></div><div>The market price of Eksons as of 12 Sept 2023 was RM 0.54 per share. The Graham Net Net thus provides more than a 30 % margin of safety. </div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBRPJS21XtpuErz9ps2EBKf4Sofwg40XMbInDx3XEDN4gG9UF-hUwns2lE5nuFg-J4r-nxcFWXRfLUSO5A2mrLFoHaBqTR-3_BIAxIPCwphLQKFQLiz5KkELBJYL_SLRxOmq2XypGoeTSGDvwC0B9e0cRK21tjkING3VKPs-PV8RsZAnHQSrUz112FG40/s517/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 2: Analysis of Eksons NTA" border="0" data-original-height="151" data-original-width="517" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBRPJS21XtpuErz9ps2EBKf4Sofwg40XMbInDx3XEDN4gG9UF-hUwns2lE5nuFg-J4r-nxcFWXRfLUSO5A2mrLFoHaBqTR-3_BIAxIPCwphLQKFQLiz5KkELBJYL_SLRxOmq2XypGoeTSGDvwC0B9e0cRK21tjkING3VKPs-PV8RsZAnHQSrUz112FG40/s16000/Table%202-min.png" title="Table 2: Analysis of Eksons NTA" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Analysis of NTA</td></tr></tbody></table><br /><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><i><span style="font-size: x-small;"><br /></span></i></div><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><b>Case Notes </b><span style="text-align: left;"><b> (as originally published in May 2021)</b></span></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div><div><div>Slightly more than half of the Group’s Current Assets are in the form of cash and cash equivalents (marketable securities).</div><div><br /></div><div>Unfortunately, you should not consider these as potentially distributable to shareholders. This is because a significant portion of these is the result of the slowdown in the Timber segment. Much of it would be redeployed as working capital when the Timber segment operations pick up.</div><div><br /></div><div>I have an article on the implication of this in Focus Malaysia magazine titled “<a href="https://focusmalaysia.my/eksons-dont-be-mesmerised-by-the-cash-hoard/" target="_blank">Eksons: Don’t be mesmerized by the cash hoard”.</a></div><div><br /></div><div>However, even when the cash is redeployed, it should not affect the Graham Net Net value. This is because the cash would be translated to stocks and receivables. These are still components of working capital</div><div><br /></div><div>In other words, the current computed Graham Net Net value would still be unchanged.</div><div><br /></div><div>The margin of safety comes from the Graham Net Net rather than the Earning-based value. This is the main reason why I do not provide details on the assumptions used to derive the Earning-based value.</div></div></div><div><br /></div><div><div>As you can see, fundamental analysis is more than just using some formula. There are choices to be made in terms of which approach to use and what to assume. </div><div><br /></div><div>So, if you are just starting out to analyze and value companies, it may be helpful to supplement it with third-party analyses and valuation. </div><div><br /></div><div>There are several financial advisers who provide such analyses. </div><div><br /></div><div><span style="text-align: start;">Those who do this well include people </span><span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.</div></div><div><br /></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div><div><h3>Is Eksons a value trap?</h3><div>If Eksons was an operating company, a margin of safety based on the Graham Net Net would mean that this is not a value trap.</div><div><br /></div><div>I have shown that the Group is an inventory-clearing and cash-holding company. As such you have to assess the value trap differently.</div><div><br /></div><div>The table below summarizes my assessment of whether Eksons is a value trap from a cash-holding perspective. Based on this I would conclude that Eksons is a value trap.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPPd5UbMcSeKOIrbsekkLUdnt2Uksf4tA-f5Vb-HfYcMC4Zgr0Rsg_rQm7iA_sD73BqFNxwA54fRGSXxHHUTpqtlSiiJQzl_iY0yFn06773FRGXljNjpJijcMKqB-KvuhSR1Ljkqv0J4s0nQkGX4oJjehvyJ8tjg_X30Fu0XpewcXrhphisu3jQN1EL4w/s598/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Table 3: Value trap assessment of Eksons" border="0" data-original-height="179" data-original-width="598" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPPd5UbMcSeKOIrbsekkLUdnt2Uksf4tA-f5Vb-HfYcMC4Zgr0Rsg_rQm7iA_sD73BqFNxwA54fRGSXxHHUTpqtlSiiJQzl_iY0yFn06773FRGXljNjpJijcMKqB-KvuhSR1Ljkqv0J4s0nQkGX4oJjehvyJ8tjg_X30Fu0XpewcXrhphisu3jQN1EL4w/s16000/Table%203-min.png" title="Table 3: Value trap assessment of Eksons" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Value trap assessment of Eksons</td></tr></tbody></table><div><br /></div><div><div>This value trap assessment is on the basis that the purchasing power of cash would be eroded by inflation while waiting for management to look for new ventures. </div><div><ul><li>It assumes that the cash would not be returned to shareholders. Note that this cash came from the cessation of the business rather than cash generated by the operations.</li></ul><ul><li>Management has been cautious in looking for new ventures and as such I do not expect the funds to be deployed quickly. </li></ul><ul><li>Management has a good custodian track record in that the funds are not likely to be squandered away. But they are not good investors that can generate high returns from investments. </li></ul></div><div><br /></div><div>There are no clear plans to use the cash to generate better returns. </div><div><br /></div><h2>Conclusion</h2><div>In the mid-2000s, the timber segment was the core business. At its peak in 2007 and 2008, this segment had an average annual revenue of RM 345 million with about 15 % return on the SHF + MI utilized by the segment.</div><div><br /></div><div>The Group then diversified into property development in 2006/07. However, this was a relatively small segment compared to the timber segment</div><div><br /></div><div>However, the timber segment started to decline from 2007/08 due to log supply, labor shortages, and escalating production costs. By Jan 2023, the Group had ceased the timber (plywood) operations. The unused facilities have been rented out to generate income under the investment property segment.</div><div><br /></div><div>However, this investment property segment is an unsold asset utilization program. The company has not indicated that it would build up a significant investment property portfolio. </div><div><br /></div><div>At the same time, the property segment had completed all its development. The Group at this stage is merely clearing the unsold units from its two projects – The Atmosphere and Affinity Residences.</div><div><br /></div><div>While the Group has 60-odd acres of land in Seremban, it has not announced any development plans.</div><div><br /></div><div>The Group is essentially a cash-holding group trading at a significant discount to its Graham Net Net. As of mid-Sept 2023, its market price was RM 0.54 per share compared to its Graham Net Net of RM 2.02 per share.</div><div><br /></div><div>But is this a value trap? With no significant operations, it has to be assessed differently from a value trap perspective.</div><div><br /></div><div>Based on my cash holding assessment, I concluded that Eksons is now a value trap. There are no clear plans to deploy the cash into operations that can generate better returns. To exit the value trap, Eksons will have to build up a significant operation. There is currently no indication of this. Looking at its history, this can be a long wait</div><div><br /></div><div>If you are a conservative value investor, there are currently better opportunities than Eksons. If you are a speculator, Eksons looks like a good bet. The challenge for the speculator is how long you have to wait before Eksons builds up its operations. </div><div><br /></div><div>It would appear that assessing whether a stock is a value trap is not so straightforward after all. If you are new to fundamental analysis, all this may prove very challenging. </div><div><br /></div><div>One way to overcome this is to complement your analysis with those of other experienced advisers. Those who do this well include people <span style="text-align: start;">like</span> <a href=" https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:52417482" rel="nofollow" target="_blank">Seeking Alpha.</a>* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.</div></div><div><br /></div><div><h2>Appendix 1 – Timber prospects</h2><div>The Timber segment has to address 3 issues to return to profitability – log supply, production costs, and new markets.</div><div><br /></div><div>Conceptually you can think of the wood-based industry as comprising:</div><div><ul><li>The upstream logging.</li></ul><ul><li>The mid-stream primary processed wood products such as sawmilling, veneering, plywood, and panel production.</li></ul><ul><li>The downstream secondary processed wood products such as moulding, builders’ carpentry, and joinery production as well as the furniture and its component manufacturing.</li></ul></div><div><br /></div><div>Eksons is a stand-alone mid-stream player, unlike some other Malaysian groups with integrated upstream and midstream operations. It thus has to purchase logs. </div><div><br /></div><div>Log supply has been a major challenge to Eksons over the past few years partly due to bad weather for some years and partly due to the reduction in logging activities. </div><div><br /></div><div>You can argue that Eksons had faced similar log supply problems before as in 2005/06. But this time may be different. </div><div><br /></div><div>This time the supply problem is also due to the national policy of reducing the natural forest logging areas. While this is supposed to be offset by the increase in forest plantation areas, the planted forest areas have not met this goal. </div><div><br /></div><div>Implication? There will be a continuing reduction in the supply of logs from within the country so log supply will be a mid to long-term issue for Eksons. </div><div><br /></div><div>Sadly, there are other bad implications. The log supply problem has increased its raw material costs. </div><div><br /></div><div>At the same time, Eksons experienced other cost increases. All these could mean that a standalone mid-stream timber processing sector may no longer be viable. </div><div><br /></div><div>Finally, to make a comeback, Eksons has to win back the confidence of all the customers it lost over the past few years. </div><div><br /></div><h3>Turnaround</h3><div>The Board and key senior managers have a long history in the plywood sector and would be in a strong position to address the key issues of log supply, cost control, and regaining sales. </div><div><br /></div><div>If I tell you that at its peak the Timber segment generated about a 15 % return on capital, you would agree that there is a good economic reason to try to turn it around.</div><div><br /></div><div>Are there reasons not to undertake a turnaround?</div><div><br /></div><div>Probably. Unless there is a paradigm shift in the Malaysian mid-stream wood processing industry, the Group could be wasting its time. Think of an analogy with the palm oil industry. In Malaysia, palm oil mills that process the palm fruit bunches are integrated with the plantation activities. </div><div><br /></div><div>Eksons’ plywood operations are not integrated with any logging activities. </div><div><br /></div><div>It will have to join the other independent plywood factories to fight for the reduced supply of logs. I think the integrated plywood factories would have an advantage. </div><div><br /></div><div>The government policy is not very encouraging. </div><div><br /></div><div>“.. the production of logs from these forested areas would decline… the policy on the ban of exports of logs by several timber-producing countries would further affect the supply… Hence, the industry would have to adjust their operations to the limited supply of both domestic and imported timber resources.” National Timber Industry Policy, 2009-2020</div><div><br /></div><div>If you look at Chart 6, you can get a sense of what the timber mid-stream sector is facing from the revenue index of several listed timber companies with mid-stream manufacturing. It is not an encouraging picture as the revenue for all of them has not grown since 2008.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigxqJUyw7xrL4aC_kHkI-c6oToVhLrkrG2RaUDH3C95aclVUcp3f5DBKVzhC8cZeCuAfW6sEzQWHWzRdlfnEfqH5ZxctvxT9mk8l-_o1_C8cWuX0gmYL8hqFErzlCiE5BTK_vBUN1Kz9IWEqbvdOtua9M2TEwsyDXM3r9TUmTqTBM4z3bPlS7MyLxDgyo/s614/Chart%206-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Chart 6: Eksons Peer Companies Revenue Index" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigxqJUyw7xrL4aC_kHkI-c6oToVhLrkrG2RaUDH3C95aclVUcp3f5DBKVzhC8cZeCuAfW6sEzQWHWzRdlfnEfqH5ZxctvxT9mk8l-_o1_C8cWuX0gmYL8hqFErzlCiE5BTK_vBUN1Kz9IWEqbvdOtua9M2TEwsyDXM3r9TUmTqTBM4z3bPlS7MyLxDgyo/s16000/Chart%206-min.PNG" title="Chart 6: Eksons Peer Companies Revenue Index" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 6: Peer Companies Revenue Index</td></tr></tbody></table><div><br /></div><div>Unless the Group forms some strategic alliance with a logging group for long-term log supply, I think that Eksons’ efforts would be better spent on scaling down and/or divesting from this sector.</div><div><br /></div><div>OK, this is a very strong view, but not unrealistic. </div></div><div><br /></div><div><h2>Appendix 2 - Was shareholders’ value created?</h2><div>I used the following 3 metrics in my May 2021 analysis:</div><div><ul><li>Comparing the after-tax return on Total Capital Employed (TCE) with the WACC.</li></ul><ul><li>Comparing the return assuming no dividend or share buyback i.e. CAGR in SHF with the cost of equity.</li></ul><ul><li>Looking at total shareholders' gain from investing in the shares of Eksons.</li></ul></div><div><br /></div><div>As can be seen from the analyses below, the returns were less than the respective cost of funds. In other words, there was no shareholder value created during this period. We should not be surprised by the results as the Group was not profitable for 5 years out of the 12 years analysis period.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJF3PUIL-97dXir1mYH9jgIypX_cey1PPmUI0RlDTZ64AyB8SO9EvGROPCYn2-yMPofWqduqn1I7P7vkhJr5w9s9MMwiLsnErAEb4b5wn0pu2X2WZbZdlpnCtEULDKeMv0M-jdehpqbSvpE1Kea2mKabdQaz9z86hF4oIHyaGg7UnfjAptbd3XbezK-Jw/s903/Table%204-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Table 4: Eksons Shareholders' value creation metrics" border="0" data-original-height="156" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJF3PUIL-97dXir1mYH9jgIypX_cey1PPmUI0RlDTZ64AyB8SO9EvGROPCYn2-yMPofWqduqn1I7P7vkhJr5w9s9MMwiLsnErAEb4b5wn0pu2X2WZbZdlpnCtEULDKeMv0M-jdehpqbSvpE1Kea2mKabdQaz9z86hF4oIHyaGg7UnfjAptbd3XbezK-Jw/s16000/Table%204-min.PNG" title="Table 4: Eksons Shareholders' value creation metrics" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: Shareholders' value creation metrics<br /><div style="text-align: left;"><div><i>Notes</i></div><div><i>a) Based on average EBIT/TCE from FYE 2009 to FYE 2020 and assuming a 24 % tax rate.</i></div><div><i>b) From FYE 2009 to FYE 2020. This looked at how the SHF would have grown over this period assuming that no dividends were paid. I also ignored treasury and capital injection/reduction transactions.</i></div><div><i>c) Refer to Table 5 for the detailed computation.</i></div><div><br /></div></div></td></tr></tbody></table><div><h3>Total gain for shareholder</h3><div>This is the return that a shareholder would have obtained if he had bought RM 1,000 of Eksons shares at the start of 2009 as shown below.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGsrJPlJ3dg0TvZq5vz3gfahFCynC9DlcWjBg7Dov6YYSOGqMP4JOSJxP0Nsb6ZApWLnIL8qR7NgL9Ub4TXVCgmQ5sR1EyQdjJpACVRLWggTpFa_5-6y6A1fzJEQMCrzqP8BuPs6ufcTCe9moH5iP7lhWAq-mfT7_ndAyWC1f1gjfaO8Rfh17M_ROY0zk/s903/Table%205-min.PNG" style="margin-left: auto; margin-right: auto;"><img alt="Table 5: Computing the total gain by a shareholder" border="0" data-original-height="206" data-original-width="903" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGsrJPlJ3dg0TvZq5vz3gfahFCynC9DlcWjBg7Dov6YYSOGqMP4JOSJxP0Nsb6ZApWLnIL8qR7NgL9Ub4TXVCgmQ5sR1EyQdjJpACVRLWggTpFa_5-6y6A1fzJEQMCrzqP8BuPs6ufcTCe9moH5iP7lhWAq-mfT7_ndAyWC1f1gjfaO8Rfh17M_ROY0zk/s16000/Table%205-min.PNG" title="Table 5: Computing the total gain by a shareholder" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 5: Computing the total gain by a shareholder</td></tr></tbody></table><br /><div><br /></div><div><br /></div></div><div><br /></div><div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. </font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div style="font-style: italic;"><font size="2">I may have equity interests in some of the companies featured.</font></div><div style="font-style: italic;"><font size="2"><br /></font></div><div><font size="2"><i>This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.</i></font></div></div></div><div><br /></div></div><div><br /></div></div></div></div></div><div><div><br /></div><script async="" data-uid="836dc6015b" src="https://investing-for-value.ck.page/836dc6015b/index.js"></script><span></span><a data-formkit-toggle="836dc6015b" href="https://investing-for-value.ck.page/836dc6015b">Your link text</a></div><div><br /></div></div><div><br /></div><div><br /></div></div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div></div>i 4 Value Asiahttp://www.blogger.com/profile/00169948272842470433noreply@blogger.com0tag:blogger.com,1999:blog-7763022747235103156.post-67661372966790408982023-09-24T09:11:00.005+08:002023-12-21T06:43:08.004+08:00Are there Bursa proxies for gold?<script type="application/ld+json">
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"headline": "Are there Bursa proxies for gold?",
"description": "The article looked at 2 questions. Can Bursa gold miners or jewellers be proxies for gold? Are you better off investing in gold or gold proxies? The answers are YES for both",
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<div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px; text-align: justify;"><span style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px;">Case Notes 26. This article explores whether there are Bursa Malaysia gold proxies. It also considers whether an investor would be better off investing in a Bursa Malaysia gold proxy rather than gold. Revision date: 24 Sep 2023.</span></div>
<div style="text-align: justify;"> </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg59a_1C7Q_y89lPl3NR5NiJmuzGjwrK4R5nKEVykvwD-i0EH_G3XDz5al_sZXoI4Ailk_C9KoqagyrlYqb1nRpfowmatbO88mzS3s8NMYGpOs0Fkvnl2SaolavTJHRar-VonUF7P3E45oXlcvyS8LIEY03hk2lVEcXX3syX-EsBWiJp5CruQVGC-OJ/s249/Pic%201-min.png" style="margin-left: 1em; margin-right: 1em;"><img alt="Are there Bursa proxies for gold?" border="0" data-original-height="187" data-original-width="249" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg59a_1C7Q_y89lPl3NR5NiJmuzGjwrK4R5nKEVykvwD-i0EH_G3XDz5al_sZXoI4Ailk_C9KoqagyrlYqb1nRpfowmatbO88mzS3s8NMYGpOs0Fkvnl2SaolavTJHRar-VonUF7P3E45oXlcvyS8LIEY03hk2lVEcXX3syX-EsBWiJp5CruQVGC-OJ/s16000/Pic%201-min.png" title="Are there Bursa proxies for gold?" /></a></div><br /><div style="text-align: justify;"><span><a name='more'></a></span>The world is currently experiencing high inflation. While Malaysia has yet to see an inflation rate over 8 %, many believe that this is due to price controls and/or subsidies. In times of high inflation, gold is seen as an inflation hedge. </div><div style="text-align: justify;"><div><br /></div><div>For thousands of years, gold has been used as money and considered a store of wealth. Gold is an excellent choice of investment for many reasons. It can be used as a hedge against inflation and will always be of value due to scarcity. It is also a great portfolio diversifier.</div><div><br /></div><div>If you are looking to invest in gold, you can invest in physical gold or gold funds. This is because the values of gold funds move closely with the price of gold. Alternatively, you can consider at investing in gold miners as proxies for investing in gold. This is because many think that gold mining and gold are similar.</div><div><br /></div><div>I have a 3-minutes video that gives you an overview of the issues to consider when investing in gold proxies. It also touches on whether there are Bursa proxies for gold.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="180" src="https://www.youtube.com/embed/CvdIyx3eAWA" width="320" youtube-src-id="CvdIyx3eAWA"></iframe></div><br /><div>There is only one active Bursa Malaysia gold mining company. But there are Bursa Malaysia-listed gold jewellers. In this article, I will explore 4 such companies to see whether they can be proxies for investing in gold. They are:</div><div><ul><li>Poh Kong Holdings Bhd (Poh Kong) – jeweller.</li></ul><ul><li>Tomei Consolidated Bhd (Tomei) – jeweller.</li></ul><ul><li>Bahvest Resources Bhd (Bahvest) – gold miner</li></ul><ul><li>Niche Capital Emas Holdings Bhd (NICE) - jeweller.</li></ul></div><div><br /></div><div>Should you go and invest in them? Well, read my Disclaimer.</div><div><br /></div><h2>Contents</h2><div><ul><li><b>Company profiles</b></li></ul><ul><li><b>Gold vs gold proxies</b></li></ul><ul><li><b>Are there Bursa Malaysia gold proxies?</b></li></ul><ul><li><b>Are you better off investing in gold?</b></li></ul><ul><li><b>Method</b></li></ul><ul><li><b>Conclusion</b></li></ul></div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><i style="color: #171717; font-size: 15px; font-weight: 700; letter-spacing: 0.6px; text-align: left;">This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. <a href="https://www.i4value.asia/p/important-disclaimer.html" target="_blank">Learn more</a>.</i></div></td></tr></tbody></table></div></td></tr></tbody></table><div><br /></div></div><div><br /></div><h2>Company profiles</h2><div><div>As of 3 Sep 2023, iSaham listed 9 gold/silver stocks under Bursa Malaysia. </div><div><ul><li>Bahvest</li></ul><ul><li>Bornoil</li></ul><ul><li>Nice</li></ul><ul><li>MuiProp</li></ul></div><div><ul><li>PohKong</li></ul><ul><li>Tomei</li></ul><ul><li>YongTai</li></ul><ul><li>YXPM</li></ul></div><div><ul><li>Zhulian</li></ul></div><div><br /></div><div>In my original article in Sep 2022, I covered only 4 of them. They were those with financials from 2007 to 2021 period. The other companies did not meet my analysis criteria. In this update, these 4 companies continue to meet my criteria. Refer to the Method section for the rationale I omitted the 5 other companies. </div></div><div><br /></div><div>The 4 companies covered in my analyses are of different sizes as shown in Table 1.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRvNar1LXZqgPrnecbDN2pjQnlyYhh-On4xaUL9IvSuYbwM27bUdWMAgkZgP8gf56liYuEUuO3-rWW5hXWhVyyGg6m2hL0i358KnOFoCIf9_eZonncN7WM9o_UCBDBFapybfsjzo5UVxQhKbnzR9c2ne7F7hFZJtZcKA67aAm5m8pC8Y1ocfCbUsNa/s438/Table%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Company size" border="0" data-original-height="110" data-original-width="438" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRvNar1LXZqgPrnecbDN2pjQnlyYhh-On4xaUL9IvSuYbwM27bUdWMAgkZgP8gf56liYuEUuO3-rWW5hXWhVyyGg6m2hL0i358KnOFoCIf9_eZonncN7WM9o_UCBDBFapybfsjzo5UVxQhKbnzR9c2ne7F7hFZJtZcKA67aAm5m8pC8Y1ocfCbUsNa/s16000/Table%201-min.png" title="Company size" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 1: Size</td></tr></tbody></table><div><br /></div><div><div>To wash out the size effect, I constructed indices and compared the performance of these indices with that of gold.</div><div><br /></div><div>I had covered Poh Kong in my blog some time back. For details of this company refer to “<a href="https://www.i4value.asia/2022/07/is-poh-kong-proxy-for-gold.html#more" target="_blank">Is Poh Kong a proxy for gold?</a>”</div><div><br /></div><div>Brief profiles of the other 3 companies are:</div><div><ul><li>Tomei was founded in 1968 as a jeweller designer and manufacturer. It was listed on Bursa Malaysia in 2006. Today it has more than 50 retail outlets in Malaysia under 4 different brands. Tomei also exports its products to Singapore, Vietnam, Thailand, Indonesia, and Europe.</li></ul><ul><li>Bahvest was listed on the KLSE’s ACE market in 2005. The group engages in the gold and silver mining business in Malaysia. Its gold mine deposit covers a total mining area of 318 hectares located in Tawau, Sabah. The group also has an aquaculture operation, but this accounted for less than 10% of the group's revenue in 2021.</li></ul><ul><li>NICE is principally involved in investment holding, trading, distribution and retail of jadeite stones, gold jewellery and ornaments, construction and project management. The non-gold segments accounted for about 43 % of the group's revenue.</li></ul><div><br /></div></div><h2>Gold vs gold proxies</h2><div>A gold proxy stock is a publicly traded company whose financial performance and stock price are closely correlated with the price of gold. Investing in gold proxy stocks allows investors to gain exposure to the price movements of gold without actually owning physical gold. These stocks are often associated with companies involved in the exploration, mining, production, or distribution of gold.</div><div><br /></div><div><a href="https://resourceworld.com/gold-vs-gold-miners/" target="_blank">Resource World Magazine</a> has the following view on the difference between gold and gold miners.</div><div><br /></div><div>“A popular misconception about gold and gold miners being similar has to do with the symbiotic relationship between the two. Mining companies have claims to, or outright ownership of, gold that is in the earth. The gold resources need to be extracted, processed and then sold to cover the costs of operations for the company to make a profit. </div><div><br /></div><div>Gold in the ground is very different than a gold coin that can easily be transferred from a seller to a buyer. Mining companies are dependent on the price of bullion in relation to fiat currencies. Specifically, if gold is too low in price, a mining company is unable to extract the gold from the ground, because it is uneconomical…The higher the price of gold, the more economical it becomes to dig for lower-grade sources of gold. Mining shares can move up significantly as gold moves higher, but that is not always the case.”</div><div><br /></div><div>Gold proxies such as gold miners or jewellers use gold as their raw materials. Investing in gold proxies is thus investing in companies where gold is one of the factors of production. Whether gold is a big component of the factor of production will depend on the nature of the business. </div><div><br /></div><div>The following quote from<a href="https://www.etf.com/etf-education-center/etf-basics/commodity-etfs-gold-miners-vs-gold" target="_blank"> ETF.com</a> illustrates the point.</div><div><br /></div><div>“…In the end, a miner is a company that seeks to maximize profits for shareholders. Profitability is going to vary for each of the miners depending on their output, cost structure and other considerations…Miners can hedge their output providing steady profits for the firm…Management can have a tremendous impact on profitability.”</div><div><br /></div><div>For those investing in gold proxies, they hope that there is a “multiplier” effect of gold on the profits. This in turn will lead to a larger share price movement compared to the gold price movement. At the same time, there are the potential dividends. </div><div><br /></div><div>This is different from investing in gold where the only way to make money is from the gold price movements.</div><div><br /></div><div><h3>Why gold proxies?</h3><div>Investing in gold proxy stocks can be an attractive option for investors for several reasons:</div><div><br /></div><div><ul><li>Diversification. Gold has historically had a low correlation with traditional asset classes like stocks and bonds. Adding gold proxies to your portfolio can help diversify your investments and reduce overall portfolio risk. </li></ul><ul><li>Inflation hedge. When the purchasing power of fiat currencies erodes due to rising inflation, the value of gold tends to rise. Investing in gold proxies can help protect your wealth during inflationary periods.</li></ul><ul><li>Risk Mitigation. Gold proxies can provide a way to benefit from this safe-haven demand without the need for physical storage or security concerns.</li></ul><ul><li>Liquidity. Many gold proxies such as gold mining stocks, are highly liquid. They can be bought and sold easily, providing flexibility for investors.</li></ul><ul><li>Speculation. Some investors are attracted to the potential for significant capital appreciation in gold proxies. For example, gold mining stocks can offer leveraged exposure to the price of gold, which means their prices can rise more sharply than the actual metal when gold prices increase.</li></ul><ul><li>Portfolio Balancing. Gold proxies can be used strategically to rebalance a portfolio. </li></ul><ul><li>Dividend Income. Some gold proxies may pay dividends to shareholders. </li></ul><ul><li>Accessibility. Investing in gold proxies is often more accessible and cost-effective than purchasing physical gold. </li></ul><ul><li>No Storage Costs: Unlike physical gold, gold proxies do not require storage costs or security measures, making them more cost-effective for some investors</li></ul></div></div><div><br /></div><div>But when you consider the investment benefits of gold vs gold proxies, you have to also look at the impact on the portfolio. This is because physical gold and mining stocks react differently within a properly diversified portfolio.</div><div><br /></div><div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><span style="font-size: 15px; letter-spacing: 0.6px; text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s145/moomoo%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="145" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90-eOgd53t7t1GkL6FRcNWP_rZplNl6UrsNbduXeiBQkudzzmVAAe6RZaUA-qtuXyscaSNjB11NKGUDB37s_xww4BDQRzJ2xcmJXiJA_XqRGnaNxgx4pXLnaWOOKcNwu-KXNo_DFadb8OvIYcVNeDdLu-KUNz6ErNzZCcSw3zBMc8J7tdDBgyWRq4zWTc/s1600/moomoo%202.png" width="145" /></a></div></span><span style="color: #171717; font-size: 15px; letter-spacing: 0.6px; text-align: left;">Moomoo is a trading platform that caters to both beginners and experienced traders alike. It is engineered to empower beginners to trade like a pro with an intuitive interface and powerful tools, while at the same time, offering a suite of advanced tools that meet the demands of seasoned traders. The tools are completely free on moomoo. Are you ready to take your trading journey to new heights? </span><a href="https://j.moomoo.com//00zSMJ" style="font-size: 15px; letter-spacing: 0.6px; text-align: left;" target="_blank">GET MOOMOO</a>*</div><div style="text-align: justify;"><br /></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div><div></div></div></div><h3>Impact on portfolio</h3><div>According to Resource World Magazine,</div><div><br /></div><div>“Gold is the most negatively correlated asset class to traditional financial assets such as stocks and bonds…Multiple studies show that a portion of physical gold held within an investment portfolio improves returns and reduces risk, whereas shares of gold mining companies increase the amount of risk within a portfolio, and can negatively affect returns over the long run.”</div><div><br /></div><div>The chart below illustrates this. You can see that a portfolio with gold will provide better risk-adjusted returns compared to a portfolio with gold mining stocks.</div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNi2Q21GSE7jn1-IS1vUmkNsU56gLoUGuCUXfdcMvGn3fjqVgKeZfWZR6h6RQ_iu0CdRG-KKnAo9bRQdjyRbl7f803xyPOZj1X1_9HfKsLNIx1H-0_fukmbUbFEYpsrR_Sczb5SeBi78aUEb6wmpkaAH9DRN4oX3Ey9DNzntmplY8kYDXFtq38lA2H/s383/Chart%201-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Portfolio comparison" border="0" data-original-height="284" data-original-width="383" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNi2Q21GSE7jn1-IS1vUmkNsU56gLoUGuCUXfdcMvGn3fjqVgKeZfWZR6h6RQ_iu0CdRG-KKnAo9bRQdjyRbl7f803xyPOZj1X1_9HfKsLNIx1H-0_fukmbUbFEYpsrR_Sczb5SeBi78aUEb6wmpkaAH9DRN4oX3Ey9DNzntmplY8kYDXFtq38lA2H/s16000/Chart%201-min.png" title="Portfolio comparison" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 1: Portfolio Comparison Source: Resource World Magazine</td></tr></tbody></table><div><br /></div><div><h3>Downside and risks of gold proxies</h3><div>While investing in gold proxies can offer various benefits, it's crucial to be aware of the potential downsides and risks associated with them. Here are some of the key downsides and risks:</div><div><ul><li>Volatility. Gold proxies can be highly volatile. </li></ul><ul><li>Market risk. The performance of gold proxies is closely tied to the price of gold, which can be influenced by a variety of factors - economic conditions, interest rates, geopolitical events, and currency movements. </li></ul><ul><li>Company-specific risks. If you invest in stocks, you are exposed to the specific risks associated with the companies themselves. </li></ul><ul><li>Investment costs. Investment vehicles have associated costs, including management fees and trading commissions. These costs can erode your returns over time.</li></ul><ul><li>Tax. Depending on your jurisdiction, there may be tax implications associated with gains made from gold proxies. </li></ul><ul><li>Currency risk: If you invest in gold proxies denominated in a foreign currency, exchange rate fluctuations can impact your returns when you convert back to your home currency.</li></ul><ul><li>Regulatory. Regulatory changes related to gold or the financial markets in general can affect the performance and availability of gold proxies.</li></ul></div></div><div><br /></div><div><h2>Are there Bursa Malaysia gold proxies?</h2><div>To answer this question, I compared the performance of the 4 Bursa companies with the price of gold. I looked at two scenarios.</div><div><br /></div><div>In the first scenario, I compare the gold price movements with the fundamental performance of these companies. I covered 15 years from 2007 to 2021 looking that the year-end prices with the results for the year. I used 2 metrics to represent the fundamental performance – revenue and PAT.</div><div><br /></div><div>In the second scenario, I compared the gold price movements with the share price movements. I looked at two situations. </div><div><ul><li>The first covered the year-end prices over 15 years from 2007 to 2021. </li></ul><ul><li>The second situation was for a shorter time frame from Jan 2019 to Aug 2022. I knew that gold prices had a significant jump around mid-2020 and I wanted to see the impact of this. For this analysis, I look at the prices every 10 days.</li></ul></div><div><br /></div><div>Refer to the Method section for other details of the approach.</div><div><br /></div><h3>Fundamentals</h3><div>The rationale for this analysis was that gold represented the raw materials for these companies. Any changes in the price of gold would affect the revenue and profit margins. </div><div><br /></div><div>If these companies are proxies for gold, there should be significant correlation between the price of gold and their performance. I would consider a 70% of higher correlation as significant.</div><div><br /></div><div>Table 2 summarizes the correlation between the year-end price of gold and the revenue and profits for the year. You can see that only Bahvest had any significant correlation, but this was based on its revenue. There was a negative correlation when it came to profits. In other words, it lost money as the price of gold increased. </div><div><br /></div><div>I would consider the correlation between gold prices and profits to be borderline for both Poh Kong and Tomei.</div><div><br /></div><div>The analysis suggests that there are other factors rather than the price of gold that drove the profits of these 4 companies. Since dividends are generally tied to profits, investors should not hope for higher dividends when the price of gold increases. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiSyG8zmGGIfvn-tgyYPIyx2E3s2S6OglxvS2_kFbJKJrDWSIva3qPauULYSNNS30VfLLiiV8D8HADhPs-lfWZwMo60lBgVXKAe_tOSjiQ96_ug4IKGTzTftF5ktnx2_1o7PdWNzxlkUuoC_RZbd0wQUX6DzQrfqzk-ZIcCjgJB67r1Vo8UtLOKArkL/s332/Table%202-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Correlation between gold prices and fundamentals" border="0" data-original-height="122" data-original-width="332" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiSyG8zmGGIfvn-tgyYPIyx2E3s2S6OglxvS2_kFbJKJrDWSIva3qPauULYSNNS30VfLLiiV8D8HADhPs-lfWZwMo60lBgVXKAe_tOSjiQ96_ug4IKGTzTftF5ktnx2_1o7PdWNzxlkUuoC_RZbd0wQUX6DzQrfqzk-ZIcCjgJB67r1Vo8UtLOKArkL/s16000/Table%202-min.png" title="Correlation between gold prices and fundamentals" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 2: Correlation between Gold Prices and Fundamentals</td></tr></tbody></table><div><br /></div><div><h3>Share prices</h3><div>The share price of a company is a function of the business fundamentals and market sentiments. Rather than try to explain which has a greater impact, this part of the analysis merely takes the share price as one variable. The other variable is the gold price.</div><div><br /></div><div>I look at 2 situations:</div><div><ul><li>In the first situation, I took the perspective of a long-term investor by looking at year-end prices over 15 years. </li></ul><ul><li>In the second situation, I took the perspective of a shorter-term investor looking at more frequent price changes.</li></ul></div><div><br /></div><div>Table 3 summarizes the results of the correlation between gold prices and stock market prices of these 4 companies.</div><div><br /></div><div>You can see that there is no significant correlation based on the year-end prices. But when you look at price changes every 10 days, we can see significant correlations for Poh Kong, Tomei and NICE. The links between the gold price and the share price can be seen in Chart 2.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgTsJlT5d7xbqNu8n-it17d0b23dMHwXeuT69alaoXT3Pi5bsIu44Ec3sOP3xhlEi84zPVnQrwTzo0qDXCvepxjMHZUbMOewvE55NYiLN7NlpRNvI2MjXbsL-SoZewqErQv0x3bz11zKkaxEMuyikzY54VLJr0oviiaqgn-6N4PulJsOndO1IDzz3NQ/s332/Table%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Correlation between gold price and share prices" border="0" data-original-height="122" data-original-width="332" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgTsJlT5d7xbqNu8n-it17d0b23dMHwXeuT69alaoXT3Pi5bsIu44Ec3sOP3xhlEi84zPVnQrwTzo0qDXCvepxjMHZUbMOewvE55NYiLN7NlpRNvI2MjXbsL-SoZewqErQv0x3bz11zKkaxEMuyikzY54VLJr0oviiaqgn-6N4PulJsOndO1IDzz3NQ/s16000/Table%203-min.png" title="Correlation between gold price and share prices" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 3: Correlation between Gold Price and Share Prices</td></tr></tbody></table><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_wJXxEGo-HAJQUxTCaaRsKZtbL2E_w3C9RBxDeHYi_6V77XhHJLJGUFahOsu9dkGHlOknaQeZvZzJ0ZE-NXfg__eYqHZ34e3OGK2DQc3JJnzqyy5QM9BtdNYYVmEbgMwlLbRCF-4GqsI_uFIaprCSSetxUYjIOVoPTswPXKO-z4KGKT4ZeCmF5DfV/s614/Gold%20proxy-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Gold price and share price trends" border="0" data-original-height="346" data-original-width="614" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_wJXxEGo-HAJQUxTCaaRsKZtbL2E_w3C9RBxDeHYi_6V77XhHJLJGUFahOsu9dkGHlOknaQeZvZzJ0ZE-NXfg__eYqHZ34e3OGK2DQc3JJnzqyy5QM9BtdNYYVmEbgMwlLbRCF-4GqsI_uFIaprCSSetxUYjIOVoPTswPXKO-z4KGKT4ZeCmF5DfV/s16000/Gold%20proxy-min.png" title="Gold price and share price trends" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 2: Gold Price and Share Price Trends<br /><div style="text-align: left;"><div><i>Notes to Chart 2</i></div><div><i>a) The indices were computed by dividing the price at various points in time with the respective price as of 4 Jan 2019.</i></div><div><i>b) Because of the higher price movements for Bahvest, refer to the axis on the right for the index readings. For the others, refer to the left axis.</i></div><div><br /></div></div></td></tr></tbody></table><div><div>According to Merriam-Webster, a proxy is an agency that acts as a substitute for another. In the investing context, a gold proxy is then an instrument that behaves like gold when it comes to gold price movements.</div><div><br /></div><div>The analyses show that when looking for gold proxies, we should not consider the fundamental metrics such as revenue or profit. Rather we should look at prices. Even then we should look at price movements within short durations.</div><div><br /></div><div>On a short interval basis, only Bursa Malaysia gold retailers can be considered as proxies for gold. Forget about the one Bursa Malaysia gold mining company.</div><div><br /></div><h2>Are you better off investing in gold?</h2><div>To answer this question, I compared the gain from the various investments based on the short-term situation ie 2019 to 2022. </div><div><br /></div><div>From 4 Jan 2019 to 26 Aug 2022, gold appreciated by 8.5 % CAGR. If you have invested in the Bursa gold jewellers, your compounded annual gains are shown in Table 4. The gains comprises both capital gains as well as dividends.</div><div><br /></div><div>You can see that Bahvest did not achieved a better compounded annual total return than that for gold. I would consider those from Poh Kong and Tome to be more representative. On such a basis there is no advantage to investing in gold.</div><div><br /></div></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgK1DEe-IhyG454w_mzAggDZ4Dg1bT-w5WG_RAQHqas4Cqffato_3CFIsv8ItIYEeVsZQrlKCZov2cKTKBKpHjUcYTZv6p8jLh38asDyoVaOtuVZTAc4GVaOfwzv4ufR7z9rDSFGlRmsv060ovzvakMS-Tt_pwlvjjKX6DrjFdL9br0A5x1watu2qx2/s536/Table%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Shareholders' gain" border="0" data-original-height="162" data-original-width="536" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgK1DEe-IhyG454w_mzAggDZ4Dg1bT-w5WG_RAQHqas4Cqffato_3CFIsv8ItIYEeVsZQrlKCZov2cKTKBKpHjUcYTZv6p8jLh38asDyoVaOtuVZTAc4GVaOfwzv4ufR7z9rDSFGlRmsv060ovzvakMS-Tt_pwlvjjKX6DrjFdL9br0A5x1watu2qx2/s16000/Table%204-min.png" title="Shareholders' gain" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Table 4: Shareholders' Gain</td></tr></tbody></table><div><br /></div><div><h3>Other studies</h3><div>The conclusion that it is better to invest in gold rather than Bursa Malaysia proxies seems to be limited to Malaysia. There are different conclusions for other parts of the world.</div><div><br /></div><div>Chart 3 is extracted from “<a href="https://caia.org/sites/default/files/AIAR_Q3_2016_03_GoldMining.pdf" target="_blank">New Evidence on Whether Gold Mining Stocks Are More Like Gold or Like Stocks</a>”. This is a graph showing the price per share of the Market Vectors Gold Miners ETF (GDX), SPDR Gold Shares ETF (GLD), and the SPDR S&P 500 ETF Trust (SPY). You can see that you are better off investing in gold compared to gold miners.</div><div><br /></div><div>You could of course argue that they were comparing gold miners which could be different from jewellers. Note that Bahvest is a gold miner. </div><div><br /></div></div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbOk88XNGkUveOAJEnCBB0JmflXW28fyEXB2iKMPjXmY6OLLC0ltZCqufVMMAg3Ss0SdcN28fY6MWdCuSW2KhbtY9GdWBnQsRdxNxW_rztl6u1nmHRHdY1VAyOt9YmE7r4765IYg2iIFqG9YOsI-B2BfDI2ItmRBBXdXQuD7PbsTWJcUrJ4e1iRLcD/s392/Chart%203-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Gold Miners vs Gold" border="0" data-original-height="275" data-original-width="392" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbOk88XNGkUveOAJEnCBB0JmflXW28fyEXB2iKMPjXmY6OLLC0ltZCqufVMMAg3Ss0SdcN28fY6MWdCuSW2KhbtY9GdWBnQsRdxNxW_rztl6u1nmHRHdY1VAyOt9YmE7r4765IYg2iIFqG9YOsI-B2BfDI2ItmRBBXdXQuD7PbsTWJcUrJ4e1iRLcD/s16000/Chart%203-min.png" title="Gold Miners vs Gold" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 3: Gold Mines vs Gold Source: cais.org</td></tr></tbody></table><div><br /></div><div><a href="https://www.suissegold.eu/en/posts/physical-gold-vs-mining-companies" target="_blank">Swiss Gold</a> opined as follows:</div><div><br /></div><div>“…physical metal outperforms gold miners over the long run, and it should always be the preferred precious metals investment…Mining stocks are attractive because they are leveraged; this means that when gold prices go up, these stocks tend to move up MORE due to debt and financial leverage. </div><div><br /></div><div>In the short term, mining stocks seem to outperform gold. However, gold mining equities carry many risks that physical metal does not have. Gold mining stocks can fail even if precious metals are in a bull market.”</div><div><br /></div><div>Chart 4 reinforces this view. It shows the relative performance of gold and gold miners since 2000. Gold is in gold colour and the miners are in dark blue. Over the period from 2000 to 2018, gold has gone from below $300 an ounce to $1350. The HUI has gone from just below $75 to $182. The HUI is up around 150%, while gold is up around 350%.</div><div><br /></div><div>Note: The NYSE Arca Gold BUGS Index, better known as the HUI Gold Index, is an index of publicly-traded gold-mining companies. </div></div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJafE3V21pctGbfN0IAXuZdEowNPQoV54P55HHobr7Wza2CailKvEl3uZdba5o9p4WU9NBuj9rxk5QNn5tgJHVOKFZhuHVcTNueEdfD4uQQPoKL8C-Ycx0qW9VuT8CFXclsH7-vn9lNKdg9QZ8AxdzbUK1SGIeULN_aSJSwiAnRjeDuyatL_dturWH/s382/Chart%204-min.png" style="margin-left: auto; margin-right: auto;"><img alt="Chart 4: Gold Miners vs Gold" border="0" data-original-height="253" data-original-width="382" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJafE3V21pctGbfN0IAXuZdEowNPQoV54P55HHobr7Wza2CailKvEl3uZdba5o9p4WU9NBuj9rxk5QNn5tgJHVOKFZhuHVcTNueEdfD4uQQPoKL8C-Ycx0qW9VuT8CFXclsH7-vn9lNKdg9QZ8AxdzbUK1SGIeULN_aSJSwiAnRjeDuyatL_dturWH/s16000/Chart%204-min.png" title="Chart 4: Gold Miners vs Gold" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Chart 4: Gold Mines vs Gold Source: Bullion Vault</td></tr></tbody></table><div><br /></div><div><h2>Method</h2><div><div>The reasons why I have not covered the following companies in my analysis were as follows:</div><div><ul><li>Bornoe Oil Bhd (Bornoil). The group has various business segments that are broadly categorised under, Food & Franchise Operations, Property Investment & Management and Resources & Sustainable Energy. The company had <a href="https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3257211" target="_blank">announced</a> its gold reserves in May 2022. But there was no reporting of this being in operations in its 2022 Annual Report.</li></ul><ul><li>MUI Properties Bhd (MuiProp). According to the <a href="https://theedgemalaysia.com/article/mui-group-sells-shares-mui-properties-price-surges" target="_blank">Oct 2020 Edge article</a>, the group had exposure to gold by way of its 40.7% stake in Australian-listed gold exploration company Nex Metals Explorations Ltd. But it exited from gold mining interest when the Australian counterpart rejected MuiProp's option for loan stock conversion into shares and returned all investment plus interests <a href="https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3086998" target="_blank">in 2020.</a></li></ul><ul><li>Yong Tai Bhd (Yong Tai). This is a property development group. In 2021 one of its subsidiaries obtained the exclusive right to undertake exploration works on a 100ha site in Bukit Kenderak in Pahang. But in its 2022 Annual Report, the company stated that “… will not proceed with the venture due to the unsatisfactory results expected from the gold exploration works.</li></ul><ul><li>YX Precious Metals Bhd (YXPM). The group is involved in wholesaling, design and manufacturing of gold jewellery and was listed on the ACE Market of Bursa Malaysia Securities in 2022. Note that part of this group was part of the listing group of Tomei in 2006.</li></ul></div></div><div><ul><li>Zhulian Corporation Bhd (Zhulian). This is a multi-level marketing company initially distributing gold-plated jewellery through its channel. However, in 2021, jewellery accounted for about 10% of the total revenue. As such I have not included it in my analysis.</li></ul></div><div><br /></div><div>The sources for my analysis were as follows:</div><div><ul><li>The financial data for the 4 companies were extracted from <a href="https://app.tikr.com/register?ref=0omlzm" target="_blank">TIKR.com.</a></li></ul><ul><li>The share price data for the 4 companies were extracted from Yahoo! Finance.</li></ul><ul><li>The gold prices from 2017 to 2022 were downloaded from <a href="https://www.bullionvault.com/gold-price-chart.do" target="_blank">Bullion Vault.</a></li></ul><ul><li>The annual gold prices from 2007 to 2021 were extracted from <a href="https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart" target="_blank">Macrotrends</a>.</li></ul><div><br /></div></div><div>To compute the correlations, I first converted the respective values for each metric into indices. This was obtained by dividing the values at various points in time by the respective initial value. For example;</div><div><ul><li>The 2007 to 2021 revenue indices for Poh Kong was obtained by diving the annual revenues by Poh Kong’s 2007 revenue.</li></ul><ul><li>The 2019 to 2022 share price indices for gold was obtained by dividing the gold prices on the various dates by the gold price as of 4 Jan 2019.</li></ul></div><div><br /></div><div>Note that the gold prices from Bullion Vault were based on prices every 10 days starting from 4 Jan 2019. When matching the share prices for a particular day, there were days when there were no share prices. </div><div><br /></div><div>I then took the share price of the nearest day to represent the share price for that day. Sometimes this was one day before the reference date. Sometimes it was one day after. Most of the time, the share prices for the day before and after the reference day were the same.</div><div><br /></div><h2>Conclusion</h2><div>The article looked at 2 questions:</div><div><ul><li>Can gold miners or jewellers be proxies for gold?</li></ul><ul><li>Are you better off investing in gold or gold proxies?</li></ul></div><div><br /></div><div>To determine whether an instrument is a proxy, I looked at the correlation between the gold price and the appropriate metric. The analysis shows that there is no correlation between revenue or PAT and gold prices. There is only a significant correlation when we look at the stock prices on a short interval basis.</div><div><br /></div><div>In the Bursa Malaysia context, investing in gold jewellers can be proxies for investing in gold. But I would not draw the same conclusion for the sole gold miner.</div><div><br /></div><div>You should not be surprised by this result. </div><div><ul><li>In the short term, share prices are influenced more by market sentiments than business fundamentals. Over intervals of 10 days (as covered in the analysis), business fundamentals do not change significantly. Besides companies only announce their business performance quarterly.</li></ul><ul><li>An investor can only guess how the business fundamentals would change as a result of daily or weekly changes in gold prices. But this is enough to influence market sentiments and hence changes in market prices.</li></ul></div><div><br /></div><div>As for the second question, the approach is to compare the gain from investing in gold with the gain from investing in proxy companies. In the Bursa Malaysia context, it is better to invest in gold proxies. This conclusion is different for other parts of the world that focus on gold miners rather than jewellers.</div><div><br /></div><div><br /></div><div><br /></div><div><div><div><div><div><div><h2><div style="text-align: center;">End</div><div style="text-align: center;"><br /></div></h2></div><div><div class="separator" style="clear: both;"><div><div><div style="text-align: center;"><br /></div></div><div>- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - </div><div><br /></div><div>How to be an Authoritative Source, Share This Post</div></div><div><br /></div><div><br /></div><div><div><div><div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;"><table border="1" bordercolor="#888" cellspacing="0" style="border-collapse: collapse; border-color: rgb(136, 136, 136); border-width: 1px;"><tbody><tr><td style="min-width: 60px;"><div style="text-align: justify;"><div><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/s384/cover%20reduced-min.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Do you really want to master value investing?" border="0" data-original-height="384" data-original-width="240" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnIdf8MF87xr1D4LIwcX9QIlQoLyvJu7VugjgR9EpyHpc_yQZwRMSn6Q-bwvbABGPGWUOBwWrHvHlbuqBR21OlWVqajNt4TfxTblPw8_sHQyJZAKtkM8kYWDE4Ho5uRI5rPis_-U3uv34KZgYtaW16PnIfurGrEocVzSB7TSj0th9nQ344jP5q3rdu/w125-h200/cover%20reduced-min.png" title="Do you really want to master value investing?" width="125" /></a></div><br /><div><span style="font-size: medium;"><span>If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from <a href="https://www.amazon.com/Really-Want-Master-Value-Investing-ebook/dp/B0B4FQWY7P/ref=sr_1_1?crid=NQWC3Z3J2XK9&keywords=master+value+investing&qid=1655944725&sprefix=master+value+investing%2Caps%2C322&sr=8-1" target="_blank">Amazon</a>, <a href="https://www.kobo.com/en/ebook/do-you-really-want-to-master-value-investing" target="_blank">Kobo</a> and </span><a href="https://play.google.com/store/books/details?id=SqmTEAAAQBAJ" target="_blank">Google Play</a><span>.</span></span></div><div><div><p><span style="color: red;"><span style="font-size: medium;"><br /></span></span></p><p><span style="color: red;"><span style="font-size: medium;">PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. </span></span></p></div><div><br /></div></div></div></td></tr></tbody></table></div></td><td class="tr-caption"><br /></td><td class="tr-caption"><br /></td></tr></tbody></table></div><div><br /></div></div></div></div><div><br /></div><div><div><div><div style="border-bottom: 1px solid rgb(23, 23, 23); border-top: 1px solid rgb(23, 23, 23); padding-bottom: 10px; padding-top: 10px;"><div style="font-style: italic;"><b>Disclaimer & Disclosure</b></div><div style="font-style: italic;"><font size="2">I am not an investment adviser, security analyst, or stockbroker. 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