Monday, January 8, 2007

Value Investment on Singapore Stock Exchange - How do one derive the Intrinsic Value during stock evaluation?

Value Investment on Singapore Stock Exchange - How do one derive the Intrinsic Value during stock evaluation?

There was an interesting discussion about how the Intrinsic Value of business is calculated, in one of the earlier posting (click here to view the discussion).

For your benefit, you might be interested to review the approach and give me your opinions / comments!

Firstly, there are many ways to calculate the intrinsic value of stocks and from my limited experience, the company's earning power (revenue & profit) plays an important part. I am pretty sure the follow approach is not the most accurate / appropriate way... :) So, if you must, please use with care.

In essence, I look at 3 parts of the company's financials:
(a) Net Tangible Assets, it is the value of total assets minus intangible assets and total liabilities (NTA & EPS are commonly available in company financial statements)
(b) Earning Per Share, how much profit the company made for each share of the company (I multiple it by 5 for the next 5 years, this is assuming I will hold the stock for the next 5 years)
(c) My personal level of confidence of the company maintaining or increasing its NTA and EPS (expressed in ratio / percentage).

The formula of the maximum price that I would purchase at is (a) X (b) X (c).

Of course, I ignore some other factors like potential growth, etc. Instead, I consider it as part of the item (c). As this part appears to be the trickiest, you may wish to look at the examples below.

Asiatic Group's safety equipment division, a company reviewed earlier.
During my Army time, I had to check and ensure that all the 20-odd fire extinguishers are serviced regularly and replaced, if need to. Thus, it seems like a good type of recurring business for the above business., especially for the safety equipment division.

For another example, if you see another comment posted by Ken Chee (Click here for link), he mentioned about talking to the management, competitors, suppliers, ex-staff, customers, etc, directly. This is definitely a good approach as well, which paid off handsomely for him!

Also, my confidence level is expressed as a percentage or ratio, so, if I am extremely happy about the company and the market condition is like now (seems like most stocks are expensive now!), I may go up to 100% or 1.0. However, in most cases, I give at least 20% safety margin, i.e. 80% or 0.8. The safety margin (or discount) increases as my confidence and / or knowledge of the business decreases.

This means if I find (a) X (b) is $1, I will only pay maximum $0.80 for it (most of the time).

Please give me your comments and happy investing! :)

Warm regards,
Fu Chin
Value Investment Blog

P/S: As always, this is not a recommendation to buy or sell anything and investors should always do their own analyses when considering investing decisions

No comments: