Sunday, September 14, 2008
Wednesday, September 10, 2008
Unlocking Value Investing
When someone tells you that they are value investors, what first comes to mind? "Buy and Hold" strategy, invest for the long term, it is futile to time the market, buy on value at a margin of safety and invest in your circle of competence. Is that all? So easy? That is what I thought at first. OK, besides those difficult to understand FA analysis and valuation of companies, I shall touch on the general concepts of value investing that most value investors have not noticed.
"Buy and Hold"
Warren Buffett popularised this strategy and practices it more than often because he had an eye for scouting what I called "super companies" like Wal-Mart, Coca Cola, GEICO. They had superior earnings growth year after year for many years in the past(or now? I haven't looked at their income statement). They had ROE>20%, EPS growth per year and quarterly of >25%. Superb growth companies. Looks like C=current quarterly EPS and A=annual earnings increases, from the "CAN SLIM" method popularised by William O'Neil. They always look for companies with exceptional growth.
What most value investors did not notice is that Warren Buffett do not buy-and-hold forever for every company he bought. He sells off companies that he thinks is over-valued like PetroChina or mistakes like Dexter Shoe and US Air. Although there were no losses but very little gains as capital was not properly allocated. He did not allow his portfolio to tank 50% in value and more or even average down on them. Warren Buffett soon realises his mistake and did not chase good money after bad companies. In fact, he averaged up on Wal-Mart when prices kept soaring over the years with earnings.
If you had read his letters to partners, the Buffett Partnership performed better in a bear market than in a bull market using the Dow as yardstick. In fact, his portfolio has never recorded losses in a bear market. I believe he took some profits when signs of the bear is clear.
On investing long term
Benjamin Graham said "In the short run, the market is a voting machine but in the long run it is a weighing machine."
Value investors never realise that in the short run the market is always correct. Never try to beat the market because the market is bigger than you. It is like trying to out debate with millions of people and you will lose badly. If you think Citi was cheap when it is trading at $30 and 2 months before it was $50, you are so wrong. The market does not think this way and prices continue to tank until $20. At $30, I believe most investors know that prices will definitely go down further and why would someone buy at $30 knowing that it would fall further?
I used to think that it is futile to "time" the market. However by saying that, I am telling myself that I do not understand market psychology which is a very important characteristic in investing. By timing the market I do not mean by the exact buy and sell point of the stock. It is more of demand and supply. Take Koda for instance, I know it has very good management, stock selling at below NAV. However I would not buy it now because demand for their products are decreasing due to the slow down in global economies. Most value investors fail to revalue their companies realising that the bear is coming and sell them when they think it is overvalued.
By failing to do so the value investor did not realise that earnings would slow down or turn negative in a bear market, hurting overall performance of the company in the long term. If in the next 10 years the company can collect 100M of free cashflow, adding 3 years of bear market, they might have 60M at the end of 10 years. That is why prices go down from the high valuation in the previous bull market. Things would have been so different if we are in a bull market now right? It is not very difficult to tell from a bull and bear. Nevertheless nobody can predict the extact top of the bull or the bottom of the bear. We just have to be patient and analyse the market and companies carefully. Warren Buffett also did not rush to buy companies immediately few weeks after the sub-prime crisis. He knows the market very well.
Ps: Have been reading on "Can Slim" and TA stuffs. Some of the concepts makes sense to me and might have influenced my thoughts on value investing. I find that I understand value investing a lot better now. =D On 2nd thoughts, buying SBSTransit might be a mistake.
"Buy and Hold"
Warren Buffett popularised this strategy and practices it more than often because he had an eye for scouting what I called "super companies" like Wal-Mart, Coca Cola, GEICO. They had superior earnings growth year after year for many years in the past(or now? I haven't looked at their income statement). They had ROE>20%, EPS growth per year and quarterly of >25%. Superb growth companies. Looks like C=current quarterly EPS and A=annual earnings increases, from the "CAN SLIM" method popularised by William O'Neil. They always look for companies with exceptional growth.
What most value investors did not notice is that Warren Buffett do not buy-and-hold forever for every company he bought. He sells off companies that he thinks is over-valued like PetroChina or mistakes like Dexter Shoe and US Air. Although there were no losses but very little gains as capital was not properly allocated. He did not allow his portfolio to tank 50% in value and more or even average down on them. Warren Buffett soon realises his mistake and did not chase good money after bad companies. In fact, he averaged up on Wal-Mart when prices kept soaring over the years with earnings.
If you had read his letters to partners, the Buffett Partnership performed better in a bear market than in a bull market using the Dow as yardstick. In fact, his portfolio has never recorded losses in a bear market. I believe he took some profits when signs of the bear is clear.
On investing long term
Benjamin Graham said "In the short run, the market is a voting machine but in the long run it is a weighing machine."
Value investors never realise that in the short run the market is always correct. Never try to beat the market because the market is bigger than you. It is like trying to out debate with millions of people and you will lose badly. If you think Citi was cheap when it is trading at $30 and 2 months before it was $50, you are so wrong. The market does not think this way and prices continue to tank until $20. At $30, I believe most investors know that prices will definitely go down further and why would someone buy at $30 knowing that it would fall further?
I used to think that it is futile to "time" the market. However by saying that, I am telling myself that I do not understand market psychology which is a very important characteristic in investing. By timing the market I do not mean by the exact buy and sell point of the stock. It is more of demand and supply. Take Koda for instance, I know it has very good management, stock selling at below NAV. However I would not buy it now because demand for their products are decreasing due to the slow down in global economies. Most value investors fail to revalue their companies realising that the bear is coming and sell them when they think it is overvalued.
By failing to do so the value investor did not realise that earnings would slow down or turn negative in a bear market, hurting overall performance of the company in the long term. If in the next 10 years the company can collect 100M of free cashflow, adding 3 years of bear market, they might have 60M at the end of 10 years. That is why prices go down from the high valuation in the previous bull market. Things would have been so different if we are in a bull market now right? It is not very difficult to tell from a bull and bear. Nevertheless nobody can predict the extact top of the bull or the bottom of the bear. We just have to be patient and analyse the market and companies carefully. Warren Buffett also did not rush to buy companies immediately few weeks after the sub-prime crisis. He knows the market very well.
Ps: Have been reading on "Can Slim" and TA stuffs. Some of the concepts makes sense to me and might have influenced my thoughts on value investing. I find that I understand value investing a lot better now. =D On 2nd thoughts, buying SBSTransit might be a mistake.
Wednesday, September 3, 2008
Kingsmen spreadsheet
The figures in spreadsheet are more detailed, finally thought of a way to post it here. Did not analyse a lot on balance sheet cause Kingsmen have very low debts. ROA for this company is not very important as they depend on their designers to work on their contracts. In other words, their people are their assets which is why companies in this industry have very low margins. They pay a lot to keep their good designers.
Tuesday, September 2, 2008
Kingsmen Creatives
Introduction:
Kingsmen has 4 business segments: 1) Exhibitions and Museums, 2) Interiors, 3) Research & Design, 4) Integrated marketing communications. The main drivers of the company are 1 and 2. Over the years Kingsmen has found a niche in high-end retail shop designs, with Interior Designs outpacing Exhibitions. In my opinion they are the leaders of Interior Design in Asia and the Middle East.
Customer base:
Close to 80% are repeat customers with brand names such as Apple, Burberry, Chanel, DBS, Esprit, FJ Ben, Gap, Gucci, John Little, Marks & Spencer, Nokia, Nuance Watsons, Omega, Polo Ralph Lauren, Robinsons, Standard Chartered Bank, Tag Heuer, Tiffany, Tommy Hilfiger, Wing Tai, Aldo, BMW etc.
Competitors:
One of their main competitors are Pico Far East Holdings(listed in HK) which specialises in Exhibition and event marketing services. Although Pico's NAV is approximately 4 times larger than Kingsmen, in terms of revenue from 2H07 and 1H08, Kingsmen's revenue only lacks behind Pico's by approximately 20%. Pico has slightly higher margins by 1%. Kingsmen is securing more contracts and catching up with Pico. The other is Cityneon whom only has a small share in the market.
Note: Exchange rate S$1 : HK$5.45
Income statement: (values are in '000 unless stated otherwise)
............2003.....2004......2005.....2006.....2007......1H08.....F2008
Revenue..53,477..63,261...76,74...108,945...146,131....77,74..194,350
NP.........1,579.....1,580....2,364....4,684.....10,243....5,750...13,605
NP.margin..3%.......2.5%.....3.1%......4.3%.......7%........7.4%.......7%
EPS(cents)..1.78....1.41......2.17.....4.88.......7.87.......2.85........7
EPS.growth.........-20.8%....53.9%...124.9%....61.3%...............-11.1%
Increasing revenue tells us that this is a growing industry, at the same time their expansion strategies to regional areas are doing well. According to my predictions for F2008, EPS growth might drop due to more outstanding shares issued from acquisition of subsidiary and associates. Usually 2H of results would be better because it will contribute approximately 60% of total revenue for the year. That is how I come out with F2008 prediction as usually there will be more demand for designs from retail stores due to the coming holiday season.
DCF valuation:
.......................2003.....2004.....2005.....2006.....2007....F2008
Net.income........1,579....1,580....2,364.....4,684...10,243...13,605
+Depreciation.....440.......544.......795.......1,137....1,703....2,538
+Amortisation.................................................121.......167
-Capital.exp......610......490.......1,422.....1,172.......866.....1,500
FCF................1,409...1,634.....1,737.....4,649.....11,201...14,810
FCF.growth..................16%.......6.3%....167.6%....141%.....32.2%
Using Warren Buffett's owner's earnings or free cash flow(FCF). Capital expenditure does not include investment into subsidiaries, but only expenditure necessary to keep the company running. Since Kingsmen's core assets are it's people, the costs have been deducted from income statement.
.......................F2008....F2009....F2010...F2011.....F2012
FCF................14,810....19,253....24,066...28,879...33,211
FCF.growth.........32.3%.....30%.......25%........20%.......15%
PV.using.DF.4%.....14,240...17,800....21,395...24,686...27,297
I used a conservative estimate of 30% FCF growth in F2009 and decreasing FCF growth by 5% for the next 3 years to calculate DCF for 5 years. However bearing unforeseen circumstances, I can safetly say that FCF growth will increase in 2009 and 2010, by how much, I do not know.
Discounting factor(DF) of 4% to calculate present value(PV) is the risk-free interest rate for Singapore government securities(SGS) in the long run. (rounded off from 3.5% of 20yrs SGS)
There is increasing revenue growth in China and the rest of Asia. Revenues will increase significantly from the 2 IRs and new malls in Orchard Road. Some say that we cannot bang on the idea of IR, however look at the many retail stores that are going to be setup there, Kingsmen will definitely have a share of it from their customer base. The demand for interior design would be high.
Outstanding shares as of June'08: 194,183
Market Capitalisation at $0.43: 83,499
DCF for next 5 years= 14,240 + 17,800 + 21,395 + 24,686 + 27,297 = 105,418
Cash on hand and at bank= 25,417
Valuation: 105,418 + 25,417= 130,835
Discount: 36.2%
I used cash on hand and at bank instead of using NAV at 38,393 to be more conservative in DCF valuation. Like Warren Buffett said "it is better to be generally correct than precisely wrong". For others, 30% FCF growth may be too optimistic. Another thing I like about Kingsmen is they have very low debts, I got nothing much to comment on their balance sheet.
PER valuation:
Let us look into PER valuation. Average EPS growth for the 5 years is 40%. To be conservative, I will use my estimated EPS of 7cents. 20% growth in F2009 and F2010, 15% growth in F2011 and 10% growth in F2012.
EPS valuation: $0.07 x 1.2 x 1.2 x 1.15 x 1.1= $0.128
Average PER: 7 to 8
Price per share: $0.9 to $1.02
Margin of safety 40%: $0.54 to $0.61
Conclusion:
In general, business prospects look very good for the next 3 years. Kingsmen over the years have built up their brand, increased their moat, increased their market share and are known for their quality designs and efficiency in delivering their product. It is not an easy business as it requires capable management to run, however they are in an easy industry as there are very few competitors thus far. Barriers to entry is huge as multi-million contracts are usually offered to big design companies like Kingsmen, Pico or Cityneon.
Some points to note, that director's remuneration and fees are approximately 16% of gross margin and gross margin is around 25-30% of revenues. So if we know how much revenues they are going to earn, we can easily predict net profits.
So which method of valuation would you prefer? I would prefer DCF.
Please feel free to comment and critique. Thanks!
Ps: Took me quite some time to figure out how to load the excell spreadsheet into Blogger, in the end I gave up. If you would like more detailed figures on Kingsmen, feel free to ask from me.
Kingsmen has 4 business segments: 1) Exhibitions and Museums, 2) Interiors, 3) Research & Design, 4) Integrated marketing communications. The main drivers of the company are 1 and 2. Over the years Kingsmen has found a niche in high-end retail shop designs, with Interior Designs outpacing Exhibitions. In my opinion they are the leaders of Interior Design in Asia and the Middle East.
Customer base:
Close to 80% are repeat customers with brand names such as Apple, Burberry, Chanel, DBS, Esprit, FJ Ben, Gap, Gucci, John Little, Marks & Spencer, Nokia, Nuance Watsons, Omega, Polo Ralph Lauren, Robinsons, Standard Chartered Bank, Tag Heuer, Tiffany, Tommy Hilfiger, Wing Tai, Aldo, BMW etc.
Competitors:
One of their main competitors are Pico Far East Holdings(listed in HK) which specialises in Exhibition and event marketing services. Although Pico's NAV is approximately 4 times larger than Kingsmen, in terms of revenue from 2H07 and 1H08, Kingsmen's revenue only lacks behind Pico's by approximately 20%. Pico has slightly higher margins by 1%. Kingsmen is securing more contracts and catching up with Pico. The other is Cityneon whom only has a small share in the market.
Note: Exchange rate S$1 : HK$5.45
Income statement: (values are in '000 unless stated otherwise)
............2003.....2004......2005.....2006.....2007......1H08.....F2008
Revenue..53,477..63,261...76,74...108,945...146,131....77,74..194,350
NP.........1,579.....1,580....2,364....4,684.....10,243....5,750...13,605
NP.margin..3%.......2.5%.....3.1%......4.3%.......7%........7.4%.......7%
EPS(cents)..1.78....1.41......2.17.....4.88.......7.87.......2.85........7
EPS.growth.........-20.8%....53.9%...124.9%....61.3%...............-11.1%
Increasing revenue tells us that this is a growing industry, at the same time their expansion strategies to regional areas are doing well. According to my predictions for F2008, EPS growth might drop due to more outstanding shares issued from acquisition of subsidiary and associates. Usually 2H of results would be better because it will contribute approximately 60% of total revenue for the year. That is how I come out with F2008 prediction as usually there will be more demand for designs from retail stores due to the coming holiday season.
DCF valuation:
.......................2003.....2004.....2005.....2006.....2007....F2008
Net.income........1,579....1,580....2,364.....4,684...10,243...13,605
+Depreciation.....440.......544.......795.......1,137....1,703....2,538
+Amortisation.................................................121.......167
-Capital.exp......610......490.......1,422.....1,172.......866.....1,500
FCF................1,409...1,634.....1,737.....4,649.....11,201...14,810
FCF.growth..................16%.......6.3%....167.6%....141%.....32.2%
Using Warren Buffett's owner's earnings or free cash flow(FCF). Capital expenditure does not include investment into subsidiaries, but only expenditure necessary to keep the company running. Since Kingsmen's core assets are it's people, the costs have been deducted from income statement.
.......................F2008....F2009....F2010...F2011.....F2012
FCF................14,810....19,253....24,066...28,879...33,211
FCF.growth.........32.3%.....30%.......25%........20%.......15%
PV.using.DF.4%.....14,240...17,800....21,395...24,686...27,297
I used a conservative estimate of 30% FCF growth in F2009 and decreasing FCF growth by 5% for the next 3 years to calculate DCF for 5 years. However bearing unforeseen circumstances, I can safetly say that FCF growth will increase in 2009 and 2010, by how much, I do not know.
Discounting factor(DF) of 4% to calculate present value(PV) is the risk-free interest rate for Singapore government securities(SGS) in the long run. (rounded off from 3.5% of 20yrs SGS)
There is increasing revenue growth in China and the rest of Asia. Revenues will increase significantly from the 2 IRs and new malls in Orchard Road. Some say that we cannot bang on the idea of IR, however look at the many retail stores that are going to be setup there, Kingsmen will definitely have a share of it from their customer base. The demand for interior design would be high.
Outstanding shares as of June'08: 194,183
Market Capitalisation at $0.43: 83,499
DCF for next 5 years= 14,240 + 17,800 + 21,395 + 24,686 + 27,297 = 105,418
Cash on hand and at bank= 25,417
Valuation: 105,418 + 25,417= 130,835
Discount: 36.2%
I used cash on hand and at bank instead of using NAV at 38,393 to be more conservative in DCF valuation. Like Warren Buffett said "it is better to be generally correct than precisely wrong". For others, 30% FCF growth may be too optimistic. Another thing I like about Kingsmen is they have very low debts, I got nothing much to comment on their balance sheet.
PER valuation:
Let us look into PER valuation. Average EPS growth for the 5 years is 40%. To be conservative, I will use my estimated EPS of 7cents. 20% growth in F2009 and F2010, 15% growth in F2011 and 10% growth in F2012.
EPS valuation: $0.07 x 1.2 x 1.2 x 1.15 x 1.1= $0.128
Average PER: 7 to 8
Price per share: $0.9 to $1.02
Margin of safety 40%: $0.54 to $0.61
Conclusion:
In general, business prospects look very good for the next 3 years. Kingsmen over the years have built up their brand, increased their moat, increased their market share and are known for their quality designs and efficiency in delivering their product. It is not an easy business as it requires capable management to run, however they are in an easy industry as there are very few competitors thus far. Barriers to entry is huge as multi-million contracts are usually offered to big design companies like Kingsmen, Pico or Cityneon.
Some points to note, that director's remuneration and fees are approximately 16% of gross margin and gross margin is around 25-30% of revenues. So if we know how much revenues they are going to earn, we can easily predict net profits.
So which method of valuation would you prefer? I would prefer DCF.
Please feel free to comment and critique. Thanks!
Ps: Took me quite some time to figure out how to load the excell spreadsheet into Blogger, in the end I gave up. If you would like more detailed figures on Kingsmen, feel free to ask from me.
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