Meng Teck is an author, investor and entrepreneur.
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Income is the ultimate outcome that we want out of our investments.
Imagine if the income from your dividend alone can cover for all your expenses and more.
That would be financial freedom isn't it?
If you're looking for a stable investment with pretty high dividend payout. I think this is the company for you.
At current price of 1.48 per share. This company is giving out 10 cents dividend per share.
That amounts to 6.75% dividend yield. Which is an income of RM67,500 per year if you invest RM1,000,000. Enough for most people to stop working and start enjoying life.
Many people are worried that Padini is losing its charm. They say that recently, there is a new competitor that is very hot and is stealing Padini's customers. When I ask what is it? They say it's brands outlet. Many are surprised to learn that Brands Outlet is actually owned by Padini Bhd too.
The image above shows some of the brands carried under Padini.
Strength - Brand Name + Experienced Management
Weakness - Lack of Innovation
Opportunity - Brands Outlet promises ability to grow
Threat - Foreign Competitors like Uniqlo & H&M eating market shares + GST "knee jerk"reaction.
As you can see, even though the revenue is rising year on year, the net profit isn't rising at the same pace. This is because the net profit margin is corroded. (Which I think is a symptom of tough competitions.) However, I want you to look at the highlight here which is the revenue contribution from Brands Outlet. It is growing at a steady pace and I think this is good. Why? Brands outlet has become a new favorite among middle to lower class Malaysian. If this is the case, then the earnings will be pretty solid and will tend to increase as more outlets are opened.
I think the management is smart and experienced. They know that Brands Outlet shows good potential and is now aggressively expanding it.
Just in case you don't know yet. The management is heavily invested in this company.
The Managing Director, Mr. Yong Pang Chuan, owns 44% of the share in this company indirectly. He will probably try his very best to keep this business growing.
Current ratio is around 3. Not a lot of debt, mostly payables. Isn't it pretty stable? Let's look at the income statement.
Profit margin is slightly more than 10%. Not amazing but slightly above average, right?
The amazing thing is this, this business is able to generate a ROE of more than 20% consistently.
Look at the right column below.
My humble idea.
If someone who knows the management is reading this, I actually have an idea. Instead of using western model, try using K-Pop stars. Let's admit it, the Generation Y (me included) are crazy over K-Pop..anything Korean sells, from cosmetics to live concerts to Korean ramen & bbq. We buy those Korean stuffs to emulate our idols. We want to be just like them, cool, clean & adorable. If you can position your brand as something that can make them just as cool, then I think you have a pretty strong edge there.(plus, it's Asian, we can relate more.). That will differentiate your brand against Uniqlo (Japan) & H&M (Western).
Is it a good deal now?
I must admit, I wasn't too careful with this one. I bought a sum of it when it was 1.89 ( Sobs..) last September, right before the mini crash.
The thought was that it still yields almost 6% dividend yield and it is a growing business.
I made the mistake of not being able to sit quietly when there is no good deal to be made.
However, I am not saying this is a terrible investment. I am still getting a yield of almost 6% which is pretty okay and there is still a chance of capital appreciation (it's gonna take some time for this company to get back on track). It just isn't a very good investment when I bought it at that price.
Further growth will be uncertain. With GST coming in, it's going to be pretty challenging this year and the next.
So, the question is, is at current valuation.
PE of 11.81 & DY of 6.75% attractive enough for you?
(I'm sorry for I am unable to provide a clear valuation on this as I can't project the growth rate with any accuracy.. Used to value this using the PEG but it's obsolete now that the growth is distorted.)
When a share you own drop in price, you only need to ask yourself this question to decide if you should sell it.
"At this price, if I didn't own this share and if I have excess cash, will I buy it?"
If you answer, yes, then you shouldn't sell it.
For me, I am still holding this share.
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Before we proceed, I would like to invite you to read our disclaimer and also warn that this article may be biased as I am pretty bullish on L&G.
This is actually a write up to update on the performance of L&G since it was last featured few months ago.
How did it perform this quarter?
60 Million profit for this quarter! Nearly 300% the earnings on the preceeding year quarterly result.
The purpose of this update is actually not to simply discuss about the increase in profit of this company even though I am more than delighted that this company continues to surprise and exceed my expectation quarter after quarter. The main purpose,however, is to do a better valuation towards this company as I think I have been pretty loose on it previously. Now, the question is, is this company still worth investing?
Valuation was difficult due to the existance of ICULS but since most of the ICULS were converted in the last quarter, I think it is easier for us to do a proper valuation. Before we proceed to calculating the diluted earnings per share of the company, let us find out what's the number of shares as of 26/11/2014.
No of Shares Outstanding = 1,053,117,816
No of ICULS yet to be converted = 143,206,744
Total Shares Assuming All ICULS Converted = 1,196,324,560.
The total amount of shares assuming all ICULS are converted (Fully Diluted) is about 1.2 Billion Shares. The current quarter result is about 60 Million in profit which translates to an earning per share of 5 cents for this quarter alone.
Assuming that this quarterly result is consistent throughout the year, this company will earn an earning per share of 20 cents. At the current valuation of 0.55, the projected PE for this company will be less than 2.75! (That's cheap!)
But of course, I don't think this earning can be sustained.
Projected EPS = 0.15/ Year.
Need more justification why I think this is a good buy?
Book Value = RM 690 Million / 1200 Million Shares = RM 0.575. (Refer the image above).
At current price, you're buying this business below it's book value.
If you look at the quality of the asset, it is actually very good. Out of the 1 Billion Ringgit Asset, 443 Million of it is Cash & Cash Equivalents. Not to be forgotten, it's agricultural land (Oil Palm & Rubber Tree) in Mukim Kerling, Ulu Selangor of is only written as 48 Million in the book where the real value should be close to 235 Million.( Refer the image below).
1 hectare = 2.4 acres
1 Acres is worth around RM98,000.
1000 Hacteres equal 2400 acres equal to a value of (2400*98,000) = 235 Mil.
At current price, you're getting the business at a discount to the book value (that is,in my opinion quite conservatively written) but not only that, you get the competent manager, Mr.Low Gay Teck ( Regarded by many as the White Knight Of L&G for the ability to turn L&G around in a few year. Note: He is also the MD of Mayland previously.) and also some part of the 600 Million Unbilled Sales mentioned by them previously (I'm not sure how much is left) for free.
If you want to put a conservative valuation to this company, assume this, you're going to buy this business as a whole. It seem to have plenty of good projects on the pipeline, a quite competent management is already in place and the financial position is quite healthy.
The question is how much are you willing to pay?
Is it safe to presume that paying for the book value + a premium of 5 years earning will be conservative? If so, then the valuation will be like the following:
Book Value (0.575) + 5*Projected Yearly Earnings (0.15) = RM 1.325
Yes, I am saying that I believe this share is worth RM1.325.( I may sell before it reaches this price) and that's a potential 200% gain. I do realize that my valuations can be more conservative in terms of projected earnings but I think at the current price, this is a real bargain. Remember, this is not a recommendation to buy or sell, this article is strictly educational. Any action resulting from the use of this article is on your own risk.
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I like something that I can understand. Predictable & Certain, that's my thing.
Before I proceed with anything, please read this article after reading our disclaimer. I've been holding this share for my client for almost 3 months now. (Don't bother asking me about this, my fund is extremely private, you wouldn't want me to invest for you, and I wouldn't want to invest for you). The average purchase price is 3.16. Current price is 2.72. ( A 14% paper loss). Did I screw up? I don't think so. I'm writing this article today as a proof to the amateur investors who will read this in the future date that you don't always make money immediately after you purchase a share. You need to be able to hold it eventhough there is volatility and paper loss. What we are concerned is the business fundamentals and this one is doing very fine. I would say it is one of the most undervalued if not the most I have seen. And it is certain. Why? Let's proceed.
For your information, at the time of writing, I am still an undergraduate in Universiti Teknologi Malaysia. I first saw this share around April. At quick glance, it seems cheap with low PER. However, previous earnings has been bad. I quickly skipped this share because of 2 reasons:
1) Unstable Earnings in the past. (I like it predictable and stable)
2) I don't want to add another company in property industry to my portfolio.
However, last August, one of my graduate highlighted this to me (Thanks Kenn!)
as he was considering to buy this share. Being an overly concerned tutor, I checked this company out. (More in depth analysis).
As I was reading through their description, I immediately fell in love with this company when I found out they built the Taman Universiti that I go for meal every day, every meal (Almost). They are also situated in Johor, I can visit them easily. And so I did.
Being a curious investor, I drove to their showroom, about 20 minutes from my university. I disguised as a prospect looking to buy properties and went in to ask the salesgirl some questions. What I found out was great! Most of their shoplots and houses are sold out. I couldn't remember what phase and or the name of those projects. But the impression that I get is most of their projects are sold out and now they are concentrating on 2 things.
1) Their One Sentral Project and,
2) To build some affordable houses around that area (Government Requirement)
One Sentral Project. A Condominium.
A Quick Ratio will give you a current ratio of more than 2. Which is good enough to avoid liquidity issue. We can also observe that the borrowing is not too much. Overall, the balance sheet seems healthy albeit the high receivables.
I went away from their sites with 3 impressions.
1) Their sales is doing very well and income streams for another 1 and a half to 2 years wouldn't be a problem.
2) Their houses built are getting smaller and smaller.
3) They are building on a very strategic location. Only 5 Minutes drive to Kota Iskandar, Puteri Harbour, and Legoland.
Now, having this insight is good, but proper investing process needed to be followed. So next to do is to analyse the financial health of the company.
We can observe that the recent years has been very well for the shareholders of CView with a good uptrend in earnings. ( I reckon these earnings are contributed by the finished projects) The trailing 4 quarters result @ 16.11.2014 turns out to be even better than the performance in 2013 with a profit of 82 Million which is a EPS of 82.52. The total dividend paid out throughout last 4 quarters has been 28 Cents.
Method 1 : Cigarette Butt Method.
Assuming the company's income stream will be constant for the next 1.5 Year.
2.81 (Current Book Value) + 1.5 (0.8252) = 4.04
Assuming that the price to book ratio is at 1. Which what is has been valued at throughout the years. At current price of 2.72. A Potential Gain of 47.2% within a 1.5 Year.
Method 2 : Comparing PE across Industry
Based on the approxiamte industry average PE of 8 (For Propery Development Industry)
The fair value of this company should be 0.8252 * 8 = 6.60
A potential 142% gain.
I think method 1 is more appropriate with this company. Just like finding a cigarette butt on the floor,you saw there is still some puff to it, you pick it up and have that last puff. It's not sexy, it's not a great business. But it's a cheap last puff. Even if you do not agree with my valuation method, at current price, you're getting 10.30% dividend yield. All you need, is to be certain that they will pay out this dividend at a constant rate for more than a year.( A projection I am quite certain about). My target price for this company is 4.00.
(Note: This is not a recommendation to buy, hold or sell, the author disclaims any risk or liabilities as a result of the use of this article.)
Update (Nov 2015) - This turns out to be my first major mistake in investing.
2 Things you can learn from this:
1. Don't buy just because they are cheap. Focus on quality first.
2. Don't buy companies that you are not certain they will grow in earnings.
Sold my share at 2.80 when I notice the eps started declining steadily due to no project launch. Cut my losses of 15%. Lesson learnt. Lost few thousands on this. :(
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Please read our disclaimer before you proceed.
Did you buy any companies that were operating in the furniture industry last year? If you did and have kept them till 19 September, congratulations, because your return would have been in the range of 19% to 183% as reported by the financial magazine, Focus Malaysia on 19 September. However,will these companies continue to rally and be supported by strong financial performance? Or the rally is just temporary and these stocks will pull back to their previous performance? In conjunction with that, I would like to bring your attention to this company called Homeritz Corporation Berhad.
What sets this business apart from many other furniture companies in Malaysia is that it is also an Original Design Manufacturer (ODM) company,not only Original Equipment Manufacturer (OEM). This means that they manufactures and sells their own design instead of just manufacturing other people's design. This means that their furniture should be able to create recurring customers due to the taste or style of design of this company. This also mean that, they can enjoy higher profit margin compared to other companies and they can't be easily replaced by new competitors who might come in and offer to manufacture furniture at a cheaper price. It should also be noted that they exports most of their products internationally and thus is not that heavily tied to the sales of housings or economy of a particular country.
Revenue and profit have been inconsistent between year 2009 to year 2013. However, their year to date earning has been 22,005,000 which is a 45% growth since 2013. If we take the earnings from 2011 to 2014, it would be an uptrend, however, we will not consider this company as an uptrend as there is no identifiable factor that can ensure this uptrend as I know of.
Rags to Riches
The management is a couple duo force. This is a classic rags to riches story where neither of them had high education background. Chua was only educated to SRP level while Tee to SPM. Their success is a combination of prudent business deals,investment,hard work and savings.
Strong Financial Position with little debt, strong cash position. Receivables at normal level.
Healthy Cash Flow, Operation Cash Flow doesn't differ much compared to earnings. Very little cash needed to be invested into the business again. Refer below. (Strong Free Cash Flow)
How's the ROE? What is the valuation? (Source: I3Investor)
Using 10 Years DCF. Assuming FCF at 20 Million and Growth rate of 10% and Discount Rate of 4%. We value this company at 212 +87 (Net Asset) = 299 Million. As of 23.10.2014,12.02pm, it is selling at 156 Million. Price is what you pay, value is what you get, we come to a margin of safety of close to 50%.
We value it should be worth 1.50 per share if the value is fully recognized.
Valuation Checklist: At Price of 0.78 Per Share
PE - 7.09 (Okay) (Industry Average PE at 7 if compared with other furniture stocks)
DY- 4.79% (Fair)
PTB - 1.77 (Mediocre)
1)Business Model is good compared to others
2)Management is deemed competent and has aligned interest (Trying to focus more on ODM)
3)Strong Financial Position to weather any difficulties
This is not a recommendation to buy or sell. The author is not responsible for any loss,liability or risk incurred as a result of the use of this content.
At the time of writing, the author does not own any of the company's share. The case study is purely for educational purposes.
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Before you continue reading,please read & understand the disclaimer carefully,
I am obliged to tell you,as of the time of writing,I am holding shares of this company.
L&G is an investment holding that is comprised of 3 businesses, the property development business,education business and oil palm business. The revenue of the group is mostly contributed by the property development business(~90%) whereas the education business and oil palm business each contribute about 5% to the revenue. Therefore,it is appropriate to say that L&G is a property development business.
In my opinion,the success of property development businesses depend largely on the location of the land that the company has and the management’s ability to evaluate, acquire and to develop these lands into premium housings or office buildings. Therefore, the criteria I’ll be looking for in a property development company to invest in will be, competent management and strong financial position. Other than having a huge size and branding. it is rather difficult to differentiate oneself from its peers in this industry.In this aspect, I do not feel that L&G has a lot of advantages over its peers.
What interests me in this company is its management. The current managing director is Mr.Low Gay Teck. Mr.Low was appointed the Managing director of L&G since 2008 under the influence of Mayland,which is the major shareholder of L&G with 16.94% shares,but prior to that,Mr.Low was the managing director for Mayland. Upon reading through the annual reports and I found that Mr.Low has had 25 years of experience in property development and project management. Interestingly, if you look at the earnings per share of the company, you will realize that the group’s earning has been on a steady growth rate since year 2008 (where Mr.Low took over) and the Return on Equity has also been increasing steadily. A Return on Equity of more than 15% signifies a competent management(The company is having ROE of 17% as of 2013). If we compare the ROE against its peers, this company is doing better. According to an interview with Mr.Low that was published in Nanyang Newspaper, the company’s tremendous improvement over the past five years was mainly contributed by these factors;
1) Emphasizing focus on their core business,Property development.
2) Rallying the enthusiasm of employees
3) Fully utilizing the resources of the company,especially the lands on premium areas.
4) Constant effort to reduce debt
5) Setting a clear long-term vision
6) Restructure of management
If we compare the earnings per share of the company over the past five years, the eps has increased 187% from 2.56 in year 2009 to 7.35 in year 2013 or an annualized growth rate of 23.5% every year! However,if you compare the eps of year 2008 and before it,the company has been making very little money and sometimes even losing money. Don’t you think that an experienced management that is able to turn a company from loss making to profit making with double digit growth rate in just 5 years , knows what they are doing?
Now that we have covered on the management, let us check their financial position, as of 31 December 2013. The company has a cash ratio of 1.60. This means that the company is cash rich. Not only will this company be able to pay off all its liabilities, it is also in a ready position to take on good opportunities that arise thus ,further increasing the shareholder’s wealth. The total liability of the company compared to the asset is in the ratio of 1 : 3.66. This signifies that the company is in a strong financial position. What this means is that we wouldn't have to worry too much about the company when there is crisis or similar problems because the company is likely to thrive in those conditions.
The revenue has been growing at a double digit pace across the years. The revenue grew from only 37 million in 2009 to 216 million in year 2013 which is an increase of 5.8 times or an annualized growth of 42.3%. This kind of growth rate is amazingly high. However,the managing director has said that the growth rate were principally due to the land resources that was purchased at a low price long time ago. In the annual report,it is also said that the current increase in profits and revenue were principally derived from our property division, led by the successful completion of the 8trium,and the two on-going development projects namely The Elements@Ampang and Damansara Foresta. Besides these projects, the company is also involved in a Joint Venture in Melbourne,Australia named Hidden Valley and also a resort building project. The managing director also said that income in the near future will be good due to an amount of unbilled sales (The amount stated by different media contradicts). However, moving forward, the growth rate may not be as high anymore as they have run out of good lands to develop but then again,the management has been actively planning to increase its recurring income through renting activities. The possibility of the company moving towards the direction of becoming something similar to Real Estate Investment Trust (REITs) is not denied by the management. What we can conclude here is that the management is now planning ahead and thinking about creating value for the future which is good sign.
Now that we have covered on the management,financial position and growth prospect of the company, it’s time to see if it is the right price to buy. In an interview with Mr.Low conducted by Nanyang in April, Mr.Low expressed that he thinks the stock is undervalued (when it was trading around 45 cents) and is worth collecting in small amount. How many times have you seen a managing director telling everyone, ‘Buy my company,its UNDERVALUED!”
Through my calculation,the forecast-ed current diluted (due to ICULS) EPS is 10.12. I simply took the 9 months cumulative eps of 7.59(diluted) and multiply it by (4/3). If we take this EPS and compare with the price,we can get a PE(Price/Earning) of 5.63.
This means that there is still room for the stock price to move up even if the eps is constant and not growing. However, as we have covered earlier that the future prospect of the company is positive. Then we have to answer this question of why the PE of the company is so low when the company is doing so well? I believe that the market has not been able to follow the growth rate of the EPS and therefore, the growth in price lags the growth in EPS. More importantly, I think the market is worried about the prospect of property development companies, especially when property prices has reached a peak and sales of properties has started to slow due to cooling measure. In fact, many famous investors including Mr. Koon Yew Yin, founder of IJM, are not optimistic on this industry. (Which is very reasonable) . However, At the price of 57 cents,I believe that the share is still a very good buy. In my opinion the share is worth at least, PE*EPS (8*10.13) = 81.04 cents at a PE of 8.
But given the growth rate,strong financial position and competent management, I believe there should be a premium of at least 20% to buy this share from me in the short term (within 2 years).
Therefore,my short term target price for this share is 97 cents which is a 70% difference from the current share price. In fact, if we were to use the PE/Growth ratio, taking the growth rate at only 16%,the PE should be 16 which means that this share is worth 1.62. But I will just stay conservative and go with the 97 cents.