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QuestionsCategory: Investor PsychologyComfort Unlocking value for shareholders
Theodore Tan asked 7 months ago

Hi Victor,
I read about comfort’s news to divest away from their Australia business.I interpret the below news as selling away the business in Australia or divesting the Australia component of the business via IPO seperately. Can you share with me how we can re-calculate the stock price with PE/PB ratio with this news?
Many thanks on your guidance!
https://www.straitstimes.com/singapore/comfortdelgro-to-liquidate-some-assets-in-australia-its-largest-overseas-presence

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6 Answers
Victor Chng answered 7 months ago

Hi Theodore,

If you are using PE ratio to value the company. Firstly, you need to find out what is the percentage of profit the Australia business is contributing. Secondly, find out the possible PE trading range of the Australia business by comparing it with their competitor. Lastly, multiply the profit of Australia division with the PE trading range to get the value of the business.

You can repeat that to the other division to find the full value and sum them up.

Theodore Tan replied 7 months ago

Thank you! your advice is very advanced!

Theodore Tan answered 7 months ago

Hi Victor, I took your instructions. Taking a PE ratio of 18x in the transport industry. I came up with the excel file below.
Seems like comfort will rise to $5 per share. This seems too good to be true though.
Do you mind taking a look at it?
Thanks
 

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Victor Chng answered 6 months ago

Hi Theodore,
 
May I know what is the operating profit of the Australia segment that you have collected?
 
Based on your valuation of Australia business worth $6B may be incorrect. If you look at the 2020 annual report of Comfort (page 23), there is a table showing the operating profit by geography. 
 
Australia’s operating profit before tax in 2020 is $35.7m which was affected by Covid. Taking this figure multiply by PE 18x that you have stated will work out to be $642.6m. Since 2020 was temporary affect by covid then using the 2019 operating profit as valuation will work out to be $1404m. Hence Australia business should be roughly between $642.6m to $1404m. 

Theodore Tan answered 6 months ago

Hi Victor, I think there’s an additional typo on my side. I got operating profit to be about $35 million also for Australia. After subtracting away the business value of Australia, I am only left with (China, UK, Singapore). However, my calculation of the stock price is still around $5 per share.
This seems to good to be true. Wondering if there is any error at my side.

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Victor Chng answered 6 months ago

Hi Theodore,
 
You may want to share with me your calculation on how you arrived to $10,844.2m ?
 
If you will to add up the SG, China and Australia division based on your value, it should be $2,079.4m

Theodore Tan replied 6 months ago

oh okay my bad, based on o/s shares of 2167. Price per share will be $0.96.
May I know how then will the unlocking of value in Australia benefit shareholders?

Victor Chng replied 6 months ago

Hi Theodore,

They are just selling the asset either through partial sale or IPO. By doing that, they are able to recognise the full value of the Australia business instead of it hiding within the conglomerate. By selling the division, they may pay out a special dividend to shareholder.

Theodore Tan replied 6 months ago

Thanks. I am extremely concerned about the stock price after they sell off the Australia’s business. Do you think it is likely that they will crash to $0.96?

Victor Chng replied 6 months ago

Hi Theodore,

It is hard to predict how investor will react to the sale of Australia business. Hence, I am unable to give a definite answer to it.

Victor Chng replied 6 months ago

Also do note that your valuation is based on Covid affected earnings. You should do a valaution based on pre-covid earnings to get a range of the value of the company.

Theodore Tan replied 6 months ago

ok thank you! I will work on it!

Victor Chng replied 6 months ago

Welcome Theodore :)

Victor Chng answered 6 months ago

Hi Theodore,
 
2020 figure was affected due to Covid so it does not give you a complete picture. Hence, using 2019 figure make more sense and do note that at $2.03 is based on operating profit. The figure is before tax so you must have a rough gauge on the taxation and deduct from there. We can say the value should be below $2.03.

Theodore Tan replied 6 months ago

Thanks!

Victor Chng replied 6 months ago

Welcome Theodore :)