How To Calculate A Stock Intrinsic Value

In the previous articles, we have covered on buying a stock that is below its market value. There are 1001 ways on how to define an intrinsic value of a stock. As you know, stock market price is fluctuated every now and then. You will never know at what price that market reflects a stock true value.

I will share on how to come out with intrinsic value. I may not be possible to cover all methods of the stock valuation in one article but will try to cover it as many as I can in the next series of articles.

Intrinsic Value Illustration

Just remember, calculating an intrinsic value is not an exact science. It is a projection or estimation on the future value of a stock price based on business historical performance. What determine a future value is subject to a lot of factors, variables and parameters:

• Business performance - can a company sustain its current performance in the next 10 years?
• Business trend - Will the trend change? (best classic example, Nokia used to be a leader in Cellular phone  but it has been knocked down once Apple Inc.  introduce Iphone. Now Apple Inc. faced the same cycle where Samsung has slowly become No.1 in Smart Phone Industry)
• Economic condition (country, regional and global)
• Company's financial condition (debt, cash flow, Earning, future expansion and capital expenditure etc)
• Talented CEO or Board of directors

For the above criteria, you need to be really conservative in your stock valuation. One of the stock investor legend (Benjamin Graham and Seth Klarman), they factor in the so-called Margin of Safety (MOS). On the other hand, coming out with Stock Intrinsic Value, it is an estimation. Famous saying by Warren Buffett, "It is better to be approximately right than precisely wrong." An intrinsic value of a stock will give a hint or gut feeling whether a stock value can be undervalued or overvalued.

Why do we bother to find an intrinsic value? Here's the reason why. Assuming a company's earning growth 15% on yearly basis. Current Earning is RM100 million. Next 10 years, if a company accumulated RM100 million every year, by year 2023 company has accumulated RM1 billion. Next step is, in the next 10 years [2023], will the value of RM1.00 in 2023 be equivalent to RM1.00 in 2013. You never know what is the inflation rate like, interest rate, BLR rate etc. What do you need to do? You need to factor in Discounted rate.

Let's use a real company information and come out with intrinsic value. I choose Tomypak Holding Berhad.

Tomypak Counter

In the previous article, I have shared where to find all the relevant information (http://zayedzulkifli.blogspot.com/2013/04/where-to-find-wtf-investment-tools.html). This will help you to estimate intrinsic value of a stock.

Tomypak Balance Sheet 2012

Tomypak Profit & Loss Statement

Tomypak Cash Flow Statement

Tomypak Cashflow Statement

Don't worry on how-to formula. I have developed excel sheet formula, you just need to plug-in:

1. Current year net profit (from Profit & Loss statement)
2. Total outstanding share in the market
3. Cash and Equivalent (from Balance sheet statement)
4. Total debt (From balance sheet statement)
5. EPS growth rate is standardized though some investment analysts give 26% CAGR-3 years-EPS growth rate. (remember: be conservative)

Tomypak Intrinsic Value

Tomypak current market price as of last week was RM1.41. Comparing its intrinsic value RM3.04, our entry price should be at RM1.52 or below (the lower the better it is). So, does that mean when we buy RM1.41 we will immediately get RM3.04? It will take time for the market to realize tomypak market value. if lucky enough, we may see the realization in 2-3 years. To be successful in investing, you need to have 3P Persistent, Perseverance and Patience.

3P: Persistence, Perseverance and Patience

Some additional information on Tomypak. On top of margin of safety price, a dividend will be a safety net for your investment while waiting for market to realize a stock value. At least, you have passive income plus capital appreciation.

Tomypak EPS Historical

Tomypak Dividend History

Another factor to decide:

• A company has been consistently and continuously paying dividends to stock holder
• A company has recorded uninterrupted net profit for many years
• A company's operating cash flow
• Proven record on ROE (Return on Equity) that company has efficiently used capital and provide reward to shareholders.
• Conservative debt management - net cash is preferred

Disclaimer: the above is just for education purpose. Not intended for buy or sell call.

Where To Find (WTF) Investment Tools

You must be wondering now: What stocks to buy? Do I just simply buy? What if I bought the right stocks? 

What stocks to buy?

To buy or sell stocks, it is a decision making. For you to make a decision, you must equip yourself with intelligent tools to back up your decision. Where to find (WTF) Investment tools that will assist your decision making in buying or selling stocks? You cannot rely on others on your decision. Your money is your responsible. You have to make due diligent analysis on your decision. Otherwise, you tend to blame others if you are making wrong decision.

Here, I will share intelligent data that may help you making intelligent decision

1. Information of companies listed in Bursa Malaysia: there are over 1000 companies listed in Bursa Malaysia. The first source to go is to go to Bursa Malaysia website itself:

http://www.bursamalaysia.com/market/listed-companies/

For Muslims, if there are interested whether a company operates according to syariah, Securities Commission Malaysia provides such list which is updated twice a year:

http://www.sc.com.my/paper.asp?pageid=877&year=2011

2. Financial Data on Annual Report (Balance Sheet, Profit and Loss Statement, Cash flow): This information is very crucial in stock market decision making. You don't call yourself as an investor if you didn't look at any part of financial information of a company.

Same case as the above, Bursa Malaysia also provides financial data particularly on the annual report as well as quarterly report. Example is Dutch Lady Milk Industries:

http://www.bursamalaysia.com/market/listed-companies/list-of-companies/plc-profile.html?stock_code=3026

Dutch Lady Milk Industries - Leader in Diary Product in Malaysia

Corporate Announcement on Dutch Lady Milk

Disadvantage of Bursa Malaysia Financial Data is that, it is just data. You have to interpret and do you financial ratio calculation (Like Return of Equity, Debt to Equity Ratio etc). It may be available in the annual reports still.

3. Financial Ratio Calculation:You can also find on other financial data and financial ratio on companies listed in Bursa Malaysia. You don't need to be mathematical genius or financial expert on how to do ratio calculation, what formula etc. This is given and free of charge:

- Reuters: http://www.reuters.com/finance/stocks/overview?symbol=DBMS.KL

- Bloomberg: http://www.bloomberg.com/quote/DLM:MK

 

- Financial Times: http://markets.ft.com/research/Markets/Tearsheets/Financials?s=DLADY:KLS

All of the above is free. There are a few companies that provide services giving financial data and ratio analysis:

http://klsenew.klsetracker.com.my/ (if you open trading account with Jupiter Securities or Apex Securities, they provide data from EquitiesTracker as well but limited to 5 years data)

https://www.insage.com.my (if you subscribe with Malacca Securities, they provide financial data from Insage with limited to 8 years of Financial Historical Data)

4. Financial Analysis on Companies: I really recommend you to buy (in fact, it is a must have for every investors in Malaysia. This book is available at MPH Bookstore, Popular Bookstore, Kinokuniya etc. It provides quite reasonable analysis. But you shouldn't follow blindly. The price of this is RM70.00. It is updated and published twice a year (March and September).

Stock Performance Guide Malaysia

Sample Analysis in Stock Performance Guide

Looking forward your investment journey 

Investing School of Thoughts

There's a saying, "Tactic wins the battle, strategy wins the war"

To win the investment war, you need to strategize your investment approach. Else, you will have high chance of losing the money. There are 3 popular school of thoughts in investing strategy. There are many more but I just want to highlight 3 strategy that commonly used and successfully generate return as well. The three strategies are

1. Fundamental Analysis Strategy

Fundamentalist will look at the business fundamental, looking at quantitative value at  a report (Ratios, Financial reports like Balance sheet, Cash flow statement, Profit and loss etc) as well as qualitative characteristics of a business - moat, durability, management, business prospects etc.). The fundamentalist will try to buy and hold a stock as long as they can. the buy call will be triggered when a value of a stock is extremely undervalued using margin of safety valuation. The sell call will be executed if the business fundamental is deteriorated like increase of debt, consecutive losses, bankrupt, no durability. Best example in trendy and hot product like Polaroid Camera (now that it is being obsolete in the market), Nokia Handphone use to become market leader in 2000's, now being cannibalized when Apple and Samsung introduced smart phone.

Fundamental vs Technical

2. Technical Analysis Strategy

This strategy will only look at price and volume action. believe that the historical performance of stocks and markets are indications of future performance. This can be tracked using chart and graph. The technical analyst tend timing to buy entry and sell exit based on pattern of price and volume. They sometimes don't call themselves as investors but known as traders or chartists. Sample chart below is MYEG (Company listed in Bursa Malaysia who provides E-Government Services), the arrows are the trigger of buy and sell call. It is not holy grail as they said. Profitability of you being correct is 60-70%.

MYEG stock from the perspective of Technical Analyst

3. Hybrid of Both Strategies

The hybrid of both will only select strong fundamental companies to be traded when there's a buy or sell signal using price and volume action based on historical performance of chart pattern. Some said the hybrid can’t mix as both are opposed to each other like oil and water. The hybrid uses most important reports and ratios like Profit & Loss (earning report), P/E (Price Earning Ratio). Mostly, the hybrid will not try to keep a stock for a long term. Most popular strategy that people talk a lot is CANSLIM Method invented by William O' Neil (Will discuss separately on this in different topics).

Which one should be your choice?

Which one fits your investment objective, time frame, your psychological mind, your full time job etc. Both can be right or wrong. If you think you can consistently make money with either strategies; stick to it, be discipline, have perseverance, patience and may the success be always be with you.

My take (personal bias): is the one who stay in the market the longest and become successful of all time like Warren Buffett, John Neff, Benjamin Graham, Philip Fisher, Peter Lynch, John Templeton (just t0 name a few). Of course, some successful trader like Dan Zanger,  Richard Dennis, William Eckhardt etc. The question is who can sustain longer in the market and becoming more richer. If you look at the Forbes top billionaire, who are they?

Hunting The Value Bargain in Stock Market

Price vs Value

Would you buy a property or land that's worth RM10 million at price of RM100k? May be you think the person who is selling to you is a nutcase. But who would want to sell that if they knew the true value. That's what happening in stock market. Most of the time, the value of a stock sometimes is mispriced. Investor feels that a stock's market price doesn't match the value of the underlying business.

If you remember this famous saying by Warren Buffett: "Price is what you buy. Value is what you get"

I will bring you a real business case example that happened in Bursa Malaysia Stock Exchange recently. Sometimes, we don't really understand why it is being ignored, why investors tend to wait and only take action last minutes. And there are so many question that will make you think, market is really irrational and doesn't make sense.

Example 1: KRISASSETS HOLDINGS BERHAD

Kris Assets (KASSETS) used to own Midvalley Megamall (one of the biggest and crowded mall in Malaysia). They have sold Midvalley to new entity called IGB REIT. From the sale proceed (billion of ringgit) has been returned to Shareholder in the form of Cash dividends and Free unit of IGB REIT shares. Also, KASSETS still has some  amount of cash in bank. To avoid KASSETS from becoming PN17 company (which will give a lot of hassles later to a company), the company must be winding up (de-listed from stock exchange) at a reasonable value.

Kris Assets Value

They have hired liquidator to value delisted price and announced delisted price at RM0.08 on March 26th 2013 (as above). The market price of KASSETS was RM0.05. Huge discount of value 60%. How the market react on this announcement? Nothing! The price only moved on April 2nd to RM0.06. Why investors hesitate to buy at 60% discount of value? The only answer that I know, market is irrational. They only act when market react on the price. The winding exercise will only take 2 months with 60% gain. This is great deal, isn't it? 

Example 2: HUA YANG BERHAD

HUAYANG is one of small capital property developer. If you looked at the below report analysis by CIMB, the land bank owned by HUAYANG against its liabilities, the Revalued Net Asset Value (RNAV) per share  is RM3.96 versus the current market price RM2.03, huge value discount against its market price. This exclude dividend payment around 5-6%. Imagine huge discount.

Huayang Asset Value

What can you understand in the above 2 cases? The above is one of the example on how to value a stock using accounting (balance sheet) valuation. Of course, there are more methods to  value a stock. Sometimes, when you do valuation, a stock can be undervalued or overvalued. The equation is very simple, Undervalue = buy, Overvalue = Sell, Fairly Value = Hold/Wait. Please note that this shouldn't be the only criteria to buy a stock (in certain cases, it can be the only criteria i.e. de-listing of a stock from stock exchange). We will discuss more about the criteria in the future chapters. 

Rule of investing is to buy a stock value that is above its market price. You do not want to overpay the price of a stock that you buy.

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” —Benjamin Graham (Warren Buffett Sifoo)

Disclaimer: This is only for discussion purpose, not a buy nor sell call.

Buy A Business, Not A Stock

If you read any investment advice from the world greatest investor (Warren Buffett, Peter Lynch, Philip Arthur Fisher, John Templeton, Benjamin Graham, David Dreman etc), you will find one common advice: “Buy A Business, Not A stock”

When you buy a stock, you have to understand what does it really mean to you. If you didn’t, you might be a stock market gambler.

Peter Lynch

Peter Lynch’s famous investment quotation (Excerpt from his famous books – One Up on Wall Street, Beating The Street, Learn To Earn):

“Stocks aren’t lottery tickets. There’s a company attached to every share.”

“Behind every stock is a company. Find out what it’s doing.” 

“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.”

Warren Buffett once said (1998): “I buy businesses, not stocks, businesses I would be willing to own forever.”

If you buy a stock with the mind of set of owning a business, you will change your mindset against what majority of stock investors in the market. Most of them think that stock market is a form of casino (though they may not realize it). They just buy and sell almost everyday without knowing the true meaning of buying a stock nor own a business. To them, it is just buy and sell a piece of paper.

If you wanted to own a business, what comes to your mind should be the following:

1. Business that you really understand well
2. Business that can be very profitable for a very long time

You do not want to buy a business that can only sustain 6 months and shut down for another year. Don’t buy a company that you are unable to understand its business model (what a company does, what a company produces, how a company makes money, what are the business risks etc).

Point to ponder: “All we want is to be in businesses that we understand, run by people whom we like, and priced attractively relative to their future prospects” -Warren Buffett 1994

How to Open An Investment Account in Bursa Malaysia

Steps to become stock investor is to open an account with Bursa Malaysia. Below are the steps:

Step 1: Open CDS account with Bursa Malaysia. CDS is an acronym for “Central Depository System”. The Central Depository System is a system that is fully owned and operated by Bursa Malaysia Depository Sdn Bhd (formerly known as Malaysian Central Depository Sdn Bhd), a wholly owned subsidiary of Bursa Malaysia Berhad. There are 3 forms that you need to fill in:

CDS Card Form

Open account with Bursa

E-Dividend Form: This is for crediting dividend direct into your bank account

Investors who wish to trade in securities listed on Bursa Malaysia must open CDS accounts with Authorised Depository Agents (ADAs), i.e. stockbroking companies. Securities bought will be credited into CDS accounts that the investors have opened. Likewise for securities sold, these securities will be debited from the CDS accounts.

You need to pay RM10.00 fee to open an account. But some brokers do waive this fee.

Step 2: For your trading account (trust account) with authorized brokers with Bursa. You can call them and ask them to meet you which is nearest to your home:

Bursa Registered Brokers

The buy and sell activities will be transacted with brokers. If you asked me, i am biased for CIMB Securities, Malacca Securities and Jupiter Securities

What you should be looking for when choosing brokers for investment?:

1. Cheaper brokerage fee. Normal standard fee is around 0.40%. The cheapest would be around 0.05%
2. Excellent, efficient service and definitely fast response or feedback from them
3. Extensive Report analysis for stock. CIMB Securities provides excellent analysis on this.
4. Easier to transfer money from and to your trust account. You can withdraw the money from trust account and transfer your saving account if you need the money (only once you sell off your shares)

Sample screen of Trust Account

Step 3: Start transferring your money into your trust account. Don’t worry, your trust account is safe and secure.

Step 4: Set your investment goals and strategies

Step 5: Start your investment transaction – buy and sell stocks

Contact me if you are interested to open with any of the above brokers. I can refer to my dealers to arrange your account opening.

See ya around!

The Stock Market Pillar: Buy and Sell

The foundation of economy is supply and demand. there will be someone who will supply good (seller) and services and the parties who demand (buyer) for it. The price of good and services are determine by the forces of demand and supply. The price of good and services will be determined at the point of agreement between willing buyer seller and willing buyer. This sample is free market definition. Of course, in some cases, price is being controlled. Example, petrol price in Malaysia is regulated by Malaysian Government.

Demand and Supply Equilibrium

Whatever happen in world economy will be reflected in Stock Market. What is being traded in stock market? The product that is being bought and sold is called Stock (Definition: What is Stock?) Just like economy, price of a stock is determined when there’s a willing buyer and seller at the agreed price. If there’s no agreement, no transaction will happen; no stock ownership is transfer between 2 parties. The mechanism of buy and sell has been computerized. The stock price is very volatile, it moves up and down on daily basis. In some stocks, price doesn’t move much.

 Let’s have a look how does this buy and sell is done in stock market particularly Bursa Malaysia. Bursa Malaysia is the exchange where a stock is being traded. Since I am one of the CIMB customer, what you will see is the screen shot on my trading account with CIMB. There are plenty of investment broker in Malaysia. You can choose to open with any of them. The brokerage fee is more or less the same. All brokers in Malaysia are now operated online and can be accessed in the internet.

I guess the screenshot is pretty self explanatory: Stock Name, Code, Quantity, Buy price, Sell Price. Stock is traded in lot: Odd and Normal. For normal lot, 1 lot = 100 units of shares. For odd lot, it represents the individual unit of share. Most of the time, investor or trader in Bursa Malaysia do not trade stock using odd lot. Screenshot below will tell more:

1. Stock name is PADINI (Padini Holding Berhad is one of retail brand store in Malaysia that manufacture and sell apparel for men, women and children)
2. # = the number of queue for buyer or seller
3. B/Qty. = Buy quantity offer – quantity lot for buying , S/Qty = Sell Quantity offer – quantity lot for selling
4. Buy = Buyer offer price
5. Sell = Seller offer price

Row No.1 Explanation:

There’s one buyer willing to buy PADINI stock at the price of RM1.92 at 30 lots (3000 units of shares), 4 willing sellers want to sell 730 lots of PADINI share at RM1.97.

This is how the stock transaction is done in Stock Exchange (Bursa Malaysia). Buy and sell is the easiest part. This buy and sell is no different from what you buy groceries at stores or hypermarkets. You will only buy rice/vegetables/cooking oil at the price you want and the seller only want to sell at the price they want. If both parties agreed, then the transaction is completed. Transfer of good move from seller to buyer.  Buying/Selling  a stock or share is buying the ownership of a company.  But the difficult part is when to buy a stock? at what price should we buy/sell it? In order to make money, you have to buy at a low price and sell at a high price. Till then, see you in the next topics.