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Padini Holdings Berhad valuation

QuestionsCategory: Valuation QuadrantPadini Holdings Berhad valuation
Thomas asked 5 years ago

Hi,

Recently the fifthperson has an article on this company. So, I would like to ask for your opinion on how you will approach in valuing this company based on its latest quarter results. 

As this company is in my portfolio, I would like some advise from you on how to derived the intrinsic value of this company. Previously, before I decided to invest in this company, I have used the following valuation metrics:

1) PEG ratio based on CAGR of 20% (which is the average CAGR of Revenue, Net Profit & Operating Cashflows) on its 11 years results and divided against historical PE & current trailing PE. I got the PEG of 0.71 and 0.68 respectively.

2) I have also use the discounted earnings model based on CAGR of 15% and a discount rate of 6%, which brings me the intrinsic value of RM3.35.

3) Another metrics I use is Price-to-Operating Cashflow which I get the value of 10.36 but I do not have the industry average figures as I do not know where to get it (maybe you could advise me on where to get this info…if possible).

As per the above, I have invested the company on March 2016. The latest result of the company which is a drop of 10% in profit has made me wonder what is the intrinsic value of this company again and have I use the right metrics to calculate the intrinsic value of this company?

3 Answers
Victor Chng Staff answered 5 years ago

Hi Thomas,
 
I am so sorry, I think I have missed out your post. 
 
When it comes to valuation, I tend to be very conservative and always discount their past growth rate. Something you need to understand about business is that if the business have grown 20% for the past 10 years does not means that it will continue to grow at 20% for the next 10 years. Hence, you have to always discount the growth rate and find out what is the sustainable growth rate of the company. For instance, I usually find sustainable growth rate by using ROE, If the company ROE is 30% and they payout 50% as divided hence the sustainable growth rate is 15% (0.5*30%). You can also find out what is Padini average trading range for their PE and PCFO. The idea is to buy below the average. 
 
I hope I answer your questions. If you still have any questions do ask me. :)

Thomas answered 5 years ago

Hi,
 
Below is my questions:

  1. When finding a company’s cash flow from operation per share:
    • We should use the “Net cash from operating activities right?
    • Should we use the current no. of outstanding shares or the historical outstanding shares for calculating the “per share” value?
    • If a company over the 10 years have made negative cash flow from operation for 3 consecutive years, do we still take into account of the negative cash flow when calculating the average cash flow from operation?
  2. What is the rational behind the use of payout ratio 50% multiply by the ROE 30%? How does it relates to sustainable growth rate?

Regards,
Thomas

Victor Chng Staff answered 5 years ago

Hi Thomas,
 

  1. Yes you should use net cash flow from operating activities.
  2. Use the current outstanding shares
  3. If you are calculating average cash flow than you have to take into account the negative cash flow
  4. You can learn the rational from this article that I wrote: http://fifthperson.com/how-to-use-roe-to-spot-potentially-high-growth-investments/