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?
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. :)
Below is my questions:
- 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?
- What is the rational behind the use of payout ratio 50% multiply by the ROE 30%? How does it relates to sustainable growth rate?
- Yes you should use net cash flow from operating activities.
- Use the current outstanding shares
- If you are calculating average cash flow than you have to take into account the negative cash flow
- You can learn the rational from this article that I wrote: http://fifthperson.com/how-to-use-roe-to-spot-potentially-high-growth-investments/
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