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QuestionsCategory: Valuation QuadrantValuation – Hartalega
Viv asked 5 months ago

I have worked on the valuation of Hartalega using PE and DY. Based on PE, the intrinsic value is above the market valuation by a MOS of 70% – i.e. can buy. (pls see attachment) However, based on DY, the stock is trading at low yield of < 1% based on div ps of FY31/3/2020 (FY 2021 – exceptional year due to Covid 19, so I took dps ps for previous year without COVID impact) – i.e. expensive valuation and shd not buy. – Why is this the case?
Is Hartalega a growth stock (CAGR for last 4 years of 38%)? Should it be valued based on PE? Is DY valuation used only for dividend stocks?
For the PE chart of Hartalega, I used the adjusted closing price (instead of closing price from Yahoo Finance cos I note that there were 3 occasions where the co issued bonus shares) for PE computation. Is it correct to use the adjusted closing price? Can you refer me to any references to help me plot the +- 1 SD on the PE chart (I dont know how to do this)?
Thank you.

5 Answers
Victor Chng answered 5 months ago

Hi Viv,
2020 is a bump year for all the gloves companies due to the sudden surge in gloves demand. When doing the valuation, you cannot use the latest EPS to value as it is too optimistic. There is a high probability that the company may not sustain the same EPS and possible oversupply of gloves happening in the next few years. Hence, that is the reason why you see the share price decrease for the past few months. You may want to value the company based on past 5 years average EPS. 
You can just use the close price as it have been adjusted for split already. As for valuation, you can use the PE and DY for Hartalega as it is sort of a in between stock where they have growth and dividend.  
For plotting standard deviation, you just have to create a column beside PE average. You can name the column 1SD and key the figure in the column. Highlight both the column including the date column and click plot chart. 

Viv answered 5 months ago

Tq Victor for your response. Noted to use ave EPS and not EPS for FY2021 because this was an exceptional year.
Regarding use of closing price, why use closing price and not adj closing price? In your vid, you said that if there is share split, to use adj closing price. In this case, no share split but got bonus issue in 3 years. On the same basis, shouldnt it be using adj closing price?
On plotting the 1 SD, I calculated the SD using the excel formulae, STDEV.S. To get the + 1SD, I added the SD to the ave, and for – 1SD, I deducted the SD from the ave. Is this correct?
When calculate the intrinsic value, Hartalega is trading above its intrinsic value (based on ave EPS for last 5 years), which means it expensive. But from the PE chart, Hartalega’s PE (16/7/2021) is below the ave PE. From here, is it correct to say that you cannot just rely on the PE chart to determine whether the valuation is right, but need to calculate the intrinsic value?

Victor Chng answered 5 months ago

Hi Viv,
1.I recently found out that the closing price included share split which I thought it did not in the past. 
2.Yes you are right on the adding the SD to the average. 
3.The intrinsic value is taking the average 5Y EPS and multiply by average PE. The latest PE may look cheap because the bump in earnings in the latest full year.

Viv answered 4 months ago

Hi Victor, I re-worked the PE ratio using closing price and intrinsic value using ave EPS for last 5 years(as attached). Why is it that using PE, I get the intrinsic value to be above mkt price, i.e. can go in. But when you look at the Div Yield, current mkt price is still at low yield, i.e. just over 1%.   
In your lesson on PE, you mentioned that to take account of growth, PE to growth ratio is used. How do you use this ratio and is it relevant to Hartalega above.

Victor Chng answered 4 months ago

Hi Viv,
There is a huge spike in the PE chart for Hartalega – hence you should use median PE instead of average PE.
As mentioned above that 2020 is an exceptional year for Hartalega and to sustain the same growth for 2020 is extremely hard for them. Alternatively, you can calculate their profit from from 2015-2019 and see how fast are they growing before Covid pandemic to get a rough gauge of a more sustainable growth rate.