FA Valuation?

In FA, there are many ways to value a stock. P/B, P/E, cash return, DCF etc. Some investors also look at things like net debt/net cash, free cash flow, ROE, ROA, dividend payout ratio, EPS growth rate etc for the financial health of the company and the total return of money to investors. Some also look at economic moats of the companies business, managers, CEOs of the companies for the qualitative aspects. Personally, I kept one excel sheet to keep my calculation of these terms simpler. I am lazy to press calculator everytime. Haha!

Regardless of which method you use, its important to understand the meaning of these terms and acknowledge the fact that these are "tools" to help you and they are not the "holy grail" to investment success.  Personally,  I believe emotion is the hardest to manage.

Let me introduce some of these terms:

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 P/B ratio, I guess many have heard of this ratio before. Anyway, this is one way of valuation of stock to see if you are paying a premium to its book value.

 What is price to book ratio?

A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Book value is basically net tangible asset value which is total assets - intangible assets - total liabilities. This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.

Good read below:

http://business.asiaone.com/Business/My%2BMoney/Building%2BYour%2BNest%2BEgg/Investments%2BAnd%2BSavings/Story/A1Story20091005-171848.html

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 Enterprise value

A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash. 

Some use FCF/enterprise value to see if the companies are generating good FCF from its enterprise value. 

FCF = free cashflow = net cashflow from operations - capex 

(Credits to investopedia for the definition of these terms)

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FA - ARA

Based on latest FY2011 1H report

• AUM grows to 18.8B (current) from 9.4B (2007) (it might not be easy to double again.)

 Based on 2007 to 2010,

• HK 超人 as backup. around 13% from ARA's website.
• Good ROE, ROA. consistent earnings due to its interesting business model
• Little or no debt
• Consistent +ve FCF
• Current dividend around 3.6%
• Valuation - fair. PE around 15.4, enterprise value/EBITA around 12.8 for FY2010. Given the potential bear market, could wait longer for cheaper valuation around $1 to enter. $1 gives PE around 10.9 and enterprise value/EBITA around 8.9. Of course, ideal will be PE <10.

(Disclaimer: This is not buy call, just my personal opinion.)

Gearing Ratios

I did some research and realised that the generic term "gearing" that people use have different meanings.

For Reits: Gearing = Total Debt/Total Asset.
Using LMIR as example for FY2010, gearing = 125000 / 1212508 = 10.3% (ST debt of LMIR = 0)
(this is what you see in the presentation in LMIR.)
(For reits, this is usually the gearing which they talk about)

However, some people also use gearing as Total debt/Total Equity where Total debt = LT debt + ST debt
Using LMIR as example for FY2010, gearing = 125000 / 901909 = 13.7%

For Net gearing, which is more comprehensive in my opinion as it account the cash portion.
Net gearing = Net debt / Total equity where Net debt = LT debt + ST debt - cash & cash equivalents. This ratio include the liquid portion of the company, cash & cash equivalents.
Using LMIR as example for FY2010, net gearing = (125000 + 0 -109979) / 901909 =1.67%

Of course, there is also the famous debt to equity ratio. Debt to equity = LT debt/equity.

In summary, there are many gearing ratios available. Different gearing ratios should be use for different purposes. Always think of purpose first before using.

Next time, when other people talk about gearing, please remember to ask them which gearing they are talking about. 

Breadtalk Quantitative Summary

 

Growth:

Consistent growth revenue margin of >50% 

Net Income around 3-5% in the recent years

Selling, general and adminstrative is high, it will be good if the company can improve on this aspect and thus indirectly improve its net income

Profitability:

ROE is generally consistent although it become lower in recent years

ROA a bit low at around 5%

Retained earning is consistently improving over the years

The company produce postive net cash flow operation, postive FCF. The company is consistently putting money into CAPEX and little on dividend. Personally I think this is desirable.

Financial Health:

Gearing: around 4% consistently

debt to equity: quite low 0.12

current ratio: 0.9 although not greater than 1 but the company should be able to finance the debt in times of trouble. 

The company also has no problem in paying off its debt in less than 1 year if it uses all of its net income. 

Overall debt is low and manageable.

Valuation:

Trailing PE: 15.8

Earning Yield: 6.33%

Cash Return: 8.34%
If use discount rate of 10.5% with 35% marign of safety, it seems like the company is a bit expensive. However, this DCF method is very subjective and hence might not be reliable in my opinion. In term of valuation, I would prefer the 3 ratios above, DCF only serve as a reference.

Conclusion:
Good FCF, low debt, good gross revenue margin.
It would be good buy if it can increase its net income margin to at least 10% and reduce its SGA which is unlikely as breadtalk is still expanding its outlets. 
Based on valuation, it is not expensive and yet not cheap. Given the current market condition, I might buy on dip but not at the current price of 0.63. 

Healthway Quantitative Summary