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QuestionsCategory: Valuation QuadrantValuation IV calculation question
lee jun asked 3 months ago

Hi! I have a few question while doing the exercise on calculating intrinsic value using the P/E method on company Tencent

  1. I find that using the EPS from previous FY to have very choppy. However if I using the trailing twelve months (TTM) seem to be smoother on the graph. I have attached the Graph and would like to hear your input on which type is most suitable for calculating IV?

 
a)Previous FY EPS?
b)TTM EPS?
c) Quarter EPS instead?
 
2) I  noticed that Tencent have been posting non-IFRS EPS since 2015 and the numbers are quite different from the normal EPS. Which will be better to follow?
 
3) Tencent Has quite significant “Other gains”  in the operating profit every quarter , I have been using the reported EPS but am wonder if I should consider them as exceptional items every quarter to calculate the EPS?
 
Looking forward to your reply, thanks!

Attachments
Jieren Zheng replied 3 months ago

I think which ever EPS number you use, you need to be consistent with it.

I would adjust for the exceptional items to get the underlying operations EPS.

Hope it helps.

2 Answers
Rusmin Ang answered 3 months ago

Hi Lee Jun,
 
You may want to use underlying EPS (yearly) which Tencent has removed out the exception items, i.e. fair value gain/loss to derive your valuation. 

Rusmin Ang replied 3 months ago

You could also use TTM but that would require a lot more work if you don’t mind. I think yearly work just fine and it is a lot easier to create the chart. Either way, you should see that Tencent is trading at -ve 2sd as we can see that from your chart.

lee jun replied 3 months ago

Do you mean that the ‘non-IFRS EPS’ are the values that Tencent have removed the exception items?

Rusmin Ang replied 3 months ago

Yep. Non-IFRS figure which remove non paper gain/loss. They explained how they derive the figure. For example, we can see the explanation given on their latest 1H2021 result (page 14)

https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0818/2021081800391.pdf

lee jun replied 3 months ago

Ahh i see, it’s much clearer now, thanks!!

lee jun replied 3 months ago

Ahh i see, it’s much clearer now, thanks!!

Rusmin Ang replied 3 months ago

You’re most welcome! :)

lee jun answered 3 months ago

For example 2021Q2, I’m comtemplating to take 42,587 – 20,763 = 21,824 , which is lower than the non-IFRS. As the exception gain is half of the quarter profit(quite substantial).
 
Or is the non-IFRS amount meaningful enough for valuation?
 
Yes, it’s quite alot of work to breakdown quarter report however the graph is much more sensitive to trend. Thanks for pointing out that it is -ve 2sd, which I think it’s meaningful to valuate :)

Attachments
Rusmin Ang replied 3 months ago

I am using Non-IFRS profit to keep things simple. Like what Jieren say, as long as you are consistent with your base. Your chart would point you to the right direction.