Thursday, October 31, 2013

Invested in Kumpulan Fima Part 1: Valuation

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!

11 comments:

  1. Great post... not many is interested in Kfima as the stock price is slow. I don't see this as a disadvantage but an advantage for us to add position to the stock slowly. I have been holding since I bought some at RM 1.55 and progressively added to it.

    Your article of BBRI also hit the spot, but I am invested in BMRI which i think has slightly better prospects at same valuation.

    ReplyDelete
    Replies
    1. Haha, to be honest I would be happy if Kumulan Fima dropped back to 1.55 or even lower as I can add more. I don't mind holding on to this baby for the long-term and enjoy the dividends. The dividend yield is currently around 4% which is healthy.

      I always wanted to invest in Mandiri, but I didn't as I already had BBRI and Tifa and I almost reached the maximum exposure I set for myself for Indonesian equities. I can't exactly remember why but I preferred BBRI to Mandiri. But I won't mind holding mandiri as well, just need to grow my portfolio so I can have more exposure to Indonesia without exceeding the percentage constraints I set for the "Greedy Dragon" portfolio.

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  2. Cant wait for your part 2 for Kfima.

    For Indon banking and finance, the best in terms of NIM, ROA, ROE, Growth, NPL and LDR will be BTPN, but the stock is not so liquid.

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    Replies
    1. Right now I'm torn between finishing part 2 or finish a write up on another Malaysian stock. Quite embarrassing for me as a Malaysian invstor to have only 1 Malaysian company write up in my blog.

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    2. Thanks for giving me the heads up on BTPN, Do you own any shares in BTPN?

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    3. Yes I own BTPN.... Interesting to see more regional stocks from you, ie. MY, SG and ID.

      Keep up the good work.

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  3. Insrease my KFIMA @ 1.95 just before rebound. Follow this stock since 2006 up and down. Try to keep for long term now.

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    Replies
    1. Long-term's the best approach in my opinion as short-term anything can happen. As long as business fundamentals don't deteriorate I would be happy to sit and collect dividends from Kumpulan Fima.

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  4. Hi : I hope in part #2, you will comment in detail on the competency of its Board of Directors and the performance of its biz. Also as to why its price has stagnant for so long if it is as good as your analysis? I do not think the broad market especially the many specialists in equity markets are all numb to know its value for so long especially in the long hot market. If its price lags behind the broad market for so long, there must be a good reason behind, just like why apple hit the head of Newton. Thank you very much in advance.

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    Replies
    1. Thank you for reading this blog. Yup I think I might take your suggestion and see if the board's interest is aligned with shareholder interest. Apart from analyzing business performance and maybe management competency I'm limited in my ability to do anything else as I don't have powerful networks to really get into the inner workings of the company. But I will do my best anyway. I might write about another Malaysian company before part 2 k.fima though as I think as a Malaysian investor I really should discuss more than 1 Malaysian company on my blog. Hope I don't keep u guys waiting too long! Again thanks for reading

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  5. Hi Justin : Thank you for your prompt response. Yes, it would be very nice if you can write more stocks of M’sia. I browsed your blog up and down for many times searching for other stocks of M’sia, it is disappointing to find none besides KFima.

    FYI, my KFima were accumulated on 9 Dec 2010 and 22 Sep 11 at RM1.50 and RM1.52. They are still in my portfolio. I may consider selling if only CPO ups to RM3000 or higher.

    I will visit your blog daily looking for new articles related to biz in M’sia. Please do not let us wait for too long.

    Thank you very much and keep up the good job.

    ReplyDelete