Revalued Net Asset Valuation (RNAV) & Sum-of-Parts Valuation (SOP)

These are 2 common valuation that are rarely used by Retail investors. Reason being because lack of resource and it requires proficiency in understanding and estimating business earning by division/business segment.

Example below are the valuation for CMSB (Cahya Mata Sarawak Berhad). Remember this is NOT a BUY NOR SELL recommendation. I will not be held responsible for any action taken by you.

Revalued Net Asset Valuation

It is based on so called experts' judgement that the market value of certain assets of a company far exceeds that of their book value, and a revaluation is justified. The most well known example would be that of property companies where market benchmarks can be easily established and revaluation based on such benchmarks are credible.

Sum of Parts Valuation

Sum of the parts valuation, in most cases, is done roughly basis. First, a firm is broken down into asset classes or businesses, even though there may be overlap across businesses or centralized support services. Second, the earnings or other operating metric for each asset class/business is converted to an estimated value, using the average multiple at which publicly traded companies in that business trade for. Third, the estimated values of the businesses are added up and compared the actual market value.

What is the different between SOP and RNAV? if you noticed, RNAV is normally used to value land banking asset. SOP is particularly used to project earning (Profit before tax or EBITDA) plus (Net Cash- Net debt) plus holding in other subsidiaries. Of course we can combine both RNAV and SOP into one valuation.

To be on the safe side, we reduce the value using margin of safety (MOS) discount as a buffer against over valuation. MOS discount can be in the form of 30-50%. Considering Market Price versus MOS Price, if the gap is so high, You know what it means. It is massively undervalued.

Of course I bought CMSB when it was RM2.45++. At the time I bought, it is really massively undervalued. Now, Considered as Fairly valued.

Hope you have learned something.

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.