Please read the disclaimer here: http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!
I picked up some shares in Kumpulan Fima Berhad a few weeks ago for Ringgit Malaysia (RM) 2.00 per share (approximately USD 0.63). Kumpulan Fima Berhad is a Malaysian company that generates most of its profits from its plantation, manufacturing of security and confidential documents and bulking divisions. The company may not be the next Apple or Berkshire Hathaway, but it does offer good value. Kumpulan Fima is trading at a low valuation, has a large cash balance and has a diverse range of businesses that collectively generate decent returns on capital. In other words, Kumpulan Fima is not the part-time model that has a few dozen guys clamouring to like her status updates and write bullshit comments; Kumpulan Fima is that sweet, understanding girl who you secretly want to get fresh with even though you keep telling her that she’s your “friend”. Sure you get more bragging rights if you snag the model, but you still end up happy with your “friend” because she will care and stuff.
Part 1 of this series will discuss what went through my mind when valuing Kumpulan Fima while part 2 will discuss the business performance of the company (there were just too many damn words to cram into one article). The following is the revenue and profit before tax breakdown of the company’s business divisions:
For the quarter ended
Revenue (in millions) Profit before tax (in millions)
Plantation (mainly oil palm) RM 24.259 RM 8.623
Manufacturing of security RM 52.475 RM 13.222
and confidential documents
Bulking RM 16.715 RM 9.706
Food RM 18.033 RM 0.102
Others RM 6.333 -RM 0.689
Total RM 117.815 RM 30.964
The present value of a perpetuity model will be employed to help us get a better idea of Kumpulan Fima’s intrinsic value. A company can be considered as a perpetuity because an investor should, after analysing the risks, be reasonably confident that the company she invests in is a going concern and wipe out risk is minimal. To use the present value of a perpetuity model we will first need to find the company’s true earnings. I use the term true earnings to refer to the maximum amount of cash that the company can pay out to shareholders without affecting its ability to maintain current business volume.
The following are the assumptions, additions and subtractions I made to the company’s operating profits for the quarter ended June 30, 2013 to arrive at what I believe is a reasonable estimate of the company’s true earnings:
Figures in millions
Operating profit RM 30.14
Add foreign exchange loss RM 0.741
Add share of loss in associates RM 0.689
Add depreciation property, plant & equipment (PP&E) RM 5.662
Less purchase of PP&E RM 4.624
Less taxation (25% statutory tax rate) RM 8.152
Less profit attributable to
non-controlling interests (assume 35%) RM 8.56
True earnings RM 15.90
True earnings annualized RM 63.60
Foreign exchange loss is added back to profits as sometimes you get foreign exchange gains, other times you get losses. As long as you’re comfortable with the geographical exposures and foreign exchange risk level of the company, you shouldn’t really care about foreign exchange gains and losses that arise from doing business in multiple currencies. Just like how you shouldn’t really care when some college kid or unemployed bum with well-off parents tells you that you can make big money “playing FOREX” (this shit is hot in Malaysia right now). Share of loss in associates is added back as Kumpulan Fima’s associates had been profitable for at least the past 6 years and I don’t believe that the company’s associates will continue making losses over the long-term. To be conservative, I assume that 35% of profits are attributable to non-controlling interests even though it never exceeded 31% over the past 4 quarters (the last quarter in the sample ended June 30, 2013).
Now that we’ve estimated annualized true earnings at RM 63.60 million, we will then discount a perpetual stream of RM 63.60 million back to the present using an 8% discount rate. This will give us a value of RM 795 million for the company (you can access a present value of a perpetuity calculator here). I believe that an 8% discount rate is appropriate in this case as that’s the rate that investors can reasonably expect from Malaysian equities over the long-term considering that Malaysia’s GDP has consistently expanded at a healthy pace of over 5%.
The RM 795 million we got for discounting Kumpulan Fima’s true earnings back to the present is not the company’s intrinsic value. The company has large cash holdings of RM 320 million as at June 30, 2013 and that has to count for something. Assuming that the company sets aside RM 65 million to cover its capital commitments and another RM 100 million for working capital needs (the company only has RM 124.22 million in current liabilities), there’s still about RM 100 million in excess cash that can be paid out to shareholders (after taking in to account the 35% cut of non-controlling interests). We finally arrive at RM 895 million for Kumpulan Fima’s intrinsic value by adding the RM 100 million in excess cash to the RM 795 million we got from discounting true earnings back to the present. By dividing RM 895 million by the weighted average number of common shares of 270,519,000 (including stock options), we get intrinsic value per share of RM 3.30.
It is prudent to buy stocks at a discount to intrinsic value so as to have a margin of safety in case shit hits the fan. The same way it’s prudent to have a margin of safety during sexual intercourse by getting the dude to cum outside instead of inside even if a condom is used. I personally required a 30% discount to intrinsic value for Kumpulan Firma which meant that I could only purchase Kumpulan Fima’s stock at RM 2.31 or below. I bought the stock at RM 2.00, today the stock closed at RM 1.97.
Thank you for reading this rather long article. Hope to see you during Part 2 of the series although I can’t promise when I will finish it. I got a lot of shit to take care of and I probably have ADD as it’s difficult for me to focus on one thing at a time (it’s more likely that I’m just too fucking lazy though). Expect to see a few more articles before I finish part 2 of the Kumpulan Fima series. Take care and have a happy Halloween!