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QuestionsCategory: Valuation QuadrantHi Rusmin, re your talk on last nite webinar pertaining to the intrinsic value of Raffles Medical, could you explain how you derived at the intrinsic value of $3.02. Also could you also explain how do you value Breadtalk, which valuation method do you use ?
CB Wong asked 7 years ago
9 Answers
Rusmin Ang answered 7 years ago

Hi CB,    
 
To be conservative, Victor used a P/E of 20 to value Raffles Medical Group. With a historical EPS of $0.151, our intrinsic value is estimated to be $3.02. Due to their predictable earnings and recession-proof business, many companies in the healthcare industry trade at high P/E multiples. For instance, in Singapore, Q&M trades at 46 times earnings. In Malaysia, IHH Healthcare trades at 63 times earnings. It’s an industry norm (most tech-related companies also trade at extremely high earnings multiples – but for different reasons altogether).    
 
As for BreadTalk’s valuation, I used P/OCF and PEG. Can you find a new “Case Studies” navigation tab at the top? The answer will be uploaded there this coming week. I will cover more in-depth analysis on BreadTalk. Stay tuned… :)

CB Wong replied 7 years ago

Hi Rusmin,Appreciated explanation, will lookout to the upload on the ‘Case Studies’.Thanks

Augustine Lim replied 7 years ago

Hi Rusmin. May I know how to calculate Free Cash Flow (FCF)? I understand that FCF is Operating Cash Flow(OCF) – Capital Expenditure.. Lets take the example of Breadtalk using their latest half year results. In this case is Breadtalk OCF $17.5 million? Then how to know Breadtalk Capital Expenditure in order to determine its FCF? Finally, my last question if using P/OCF for breadtalk valuation, then the formula will be $1.33(current price of breaktalk) /$17.5m? If it is , then how you get the 3.4 times P/OCF you said in the webinar?

Rusmin Ang replied 7 years ago

Hi CB,<br><br>We will do our best to support you. Do let us know if you have any other questions :)<br><br>Hi Augustine, <br><br>Yes, that is the formula that I usually use to get FCF. CAPEX is stated as Purchase of Property, Plant and Equipment in the Cash Flow Statement. <br><br>In the case of BreadTalk, since it is at a rapid expansion stage, it is going to have negative free cash flow ($17.48m – $27m – $4.27m). The valuation I stated in the webinar was two years ago when I was first analysing the stock. Today, the figure is definitely higher since the market has started to appreciate BreadTalk's business model and consistent cash flow generation.

Augustine Lim replied 7 years ago

Hi Rusmin. Another question. How to calculate Discounted Cash Flow? I am quite blur in this. Maybe we can take the example of breadtalk again. How to calculate the discounted cash flow for breadtalk. Also, may I know what is the purpose of knowing discounted cash flow?

Neo replied 7 years ago

If u r interested to know more about DCF, can check out the following. http://www.investopedia.com/walkthrough/corporate-finance/3/discounted-cash-flow/introduction.aspx<br>Based on my understanding of DCF, there are a lot of assumptions involved and u will need to project future cash flows. So, we have to be aware of the assumptions we made as just changing a small part of it can affect the intrinsic value by a lot. And DCF would be suitable for stocks that have stable cashflows. Admin do correct me if i am wrong. thanks.

The Fifth Person answered 7 years ago

Hi Augustine,
 
Discounted Cash Flow will be added to the Valuation module soon. It will answer your questions then. So look out for it!

Augustine Lim replied 7 years ago

Hi AdminThanks for your prompt reply. One last question. May I know the formula for price to cash flow? Can take the example of breadtalk again using their latest half year results?

The Fifth Person answered 7 years ago

Hi Augustine,  
 
The formula and lesson on the Price-to-Cash-Flow ratio can be found in the Valuation Quadrant module: https://investmentquadrant.com/the-valuation-quadrant/price-to-cash-flow-ratio/  
 
You can take the example of BreadTalk and calculate their Price-to-Cash-Flow ratio using the last four quarters to be more accurate.

Eric Voon answered 7 years ago

Hi,
 
I have question bout the cash flow statements as well..Why do they put all the “Gain” as “-ve” value and all the cost as “+” value?
Exp like below:
CASH FLOW FROM OPERATING ACTIVITES
Profit before taxation                                             = 48,013,673
Adjustment for: 
Bade debt                                                     = 9,136
Depreciation                                                 = 5,470,305
Dividend Income                                           = (1,069,032)
Gain on disposal of non current asset               = (26,400)
Gain on disposal of property, plant equipment = (212,604)
Interest Income                                            = (925,523)
Property, plant and equipment written off        = 22,551
Unrealised gain on foreign exchange               = (191,618)

 Operating profit/(loss) before working capital = 51,090,488
 changes
 
 
 

Rusmin Ang answered 7 years ago

Hi Eric,    
 
The cash flow statement tracks the actual ‘inflow’ and ‘outflow’ of cash of a company. For example, depreciation is a non-cash item (which is deducted from the income statement) that should be added back to the cash flow statement to determine the actual cash inflow in running the business operations. Another example, unrealised gains is recorded for the purpose of drafting out the income statement. However, in actual business operations, there wasn’t any actual transaction involved or currency being converted on the ground. So the amount is only a ‘paper gain’ and must be deducted from the cash flow statement.    
 
After some time, I just let accountants do the job on how to reclassify these things. After all, they are being paid by the company to do so. Lol

Eric Voon replied 7 years ago

oic~~ now i know

Augustine Lim replied 7 years ago

Hi RusminI saw the formula on price to cash flow. One question, regarding the operating cash flow per share, you take the operating cash flow before changes in working capital or you take the net cash generated from operation ie after the changes in working capital?

Augustine Lim answered 7 years ago

Hi RusminI saw the formula on price to cash flow. One question, regarding the operating cash flow per share, you take the operating cash flow before changes in working capital or you take the net cash generated from operation ie after the changes in working capital?

Rusmin Ang answered 7 years ago

Hi Augustine,  
 
It depends. Since I knew BreadTalk’s working capital is mainly financed by their suppliers, I decided to use a more conservative figure — operating cash flow before working capital minus tax for the financial year ended 2011. For other businesses which do not enjoy such a high negative CCC, I prefer to use cash flow after working capital. 

Neo replied 7 years ago

why not Free Cash Flow?

Rusmin Ang answered 7 years ago

Hi Neo,  
 
Unlike knowledge-based companies, i.e. Microsoft, retail businesses are highly capital intensive. Currently, BreadTalk is still in its aggressive expansion phase that requires a huge amount of capital expenditure. So using free cash flow would distort the true value of the company. 

Neo replied 7 years ago

Since it is highly capital intensive, and the CAPEX is necessary for the growth of the company, isn’t FCF a better reflection of the true value of the company after deducting CAPEX as after deducting CAPEX from OCF, the remaining will be the FCF that is available for shareholders.

Rusmin Ang answered 7 years ago

Yes, you could. But just be aware that method will be extremely conservative.    
 
BreadTalk spent $64 million (one-time CAPEX) to build the new iHQ building in Singapore. These expenditures were captured in the Purchase of Property, Plant and Equipment mainly in year 2012 and 2013. So if you take these expenditures into valuation, it will be tough to derive an entry point since the FCF for both financial years will be negative.   
And if you refer to the CAPEX lesson, there are two main types of expenditures: maintenance and development. Logically, maintenance CAPEX should be deducted from Operating Cashflow to determine a proper valuation. But again, the challenge is that not many companies provide the breakdown of these two expenditures. Should you pose this question to the company, from my experience, the management will usually direct you to depreciation figures as their maintenance expenses.