KLCI – VALUE DRIVERS FOR 2012

TA SECURITIES - CPE 28 APRIL 2012

W E L C O M E

THIS TRAINING

IS SC-SIDC APPROVED AND CARRIES 10 CPE POINTS

About me

KEY AREAS OF CONSULTATION:LEADERSHIP – STRATEGY – FINANCE

CPE Training for Stock Market Professionals

Corporate Finance - Securities Commission of Malaysia

Curriculum on Investment Banking – BNM – FSTEP Malaysia

Investment Advisory Report – preparation of templates and schedules for several corporations including national bodies and agencies

LEARNING OUTCOMES

By attending this training session, participants will be able to: Identify the key value drivers that could

impact the value of listed securities Distinguish between the impact footprint of

global factors and local factors Apply valuation models to compute intrinsic

value of specific counters Demonstrate an ability to recognize market

cycles and determine whether price change is due to intrinsic or cyclical factors

OVERVIEW OF VALUE DRIVERS

ASSETS

EARNINGS

CASH FLOWS

SESSION ONE

The Assets – Profits – Cash Flow – Corporate Governance grid

Asset Accumulation Capitalized excess earnings Capitalized Economic Income Impact of Corporate Exercise (e.g. TOM activity)

Impact of global factors

ASSETSPROFITS

CASH FLOWSCORPORATE GOVERNANCE

FAIR MARKET VALUE OF ASSETS Useful for property based counters

Also companies that have hived off REITS NTA not very useful anymore

Earnings Based Value - The PER Trend

CompanyMkt Price

PEMkt Price

PE Company PE change20th May 2011

23rd April 2012

Maybank

8.87 16.4 8.85 25.7 Maybank 56.7 %

CIMB

8.28 16.9 9.89 16.2 Sime (78.6) %

Pchem

6.99 - 7.55 13.9 CIMB (17.8) %

Sime

9.14 75.6 6.56 19.9 Pchem xxx %

PB Bank 13.08 15.0

13.74 13.8 PB Bank (8.0) %

Axiata

4.95 23.6 6.10 18.1 Maxis 2.8 %

Genting 11.18 18.8

5.37 19.2 Axiata (18.6) %

Maxis

5.40 17.6 10.80 13.9 Genting (26.1) %

Tenaga

6.27 10.7 6.52 71.2 Tenaga 565.4 %

IOI Corp

5.31 16.1 5.34 15.4 IOI Corp (4.3) %

MISC

7.03 16.8 16.84 30.8 Petgas 96.2 %

KLK 22.00 23.1

3.92 24.3 DiGi 28.6 %

Petgas 11.42 15.7

24.12 16.3 KLK (29.4) %

PLUS

4.48 17.2 12.44 16.5 HL Bank (6.8) %

Mixed bag of Changes

Company Mkt Price PE Mkt Price PE Company PE change

20th May 2011 23rd April 2012 %

GenM

3.55 15.8 3.78 15.0 GenM (5.1) %

PPB 17.28 10.9

16.70 20.2 PPB 85.3 %

RHB Cap

9.25 14.0 5.42 16.3 TM 32.5 %

AMMB

6.51 14.6 6.30 14.1 AMMB (3.4) %

HL Bank 12.04 17.7

18.88 28.6 Pet Dag 40.2 %

YTL Power

2.22 11.9 1.72 14.6 YTL (10.4) %

Pet Dag 15.48 20.4

7.43 10.8 RHB Cap (22.9) %

YTL

1.58 16.3 56.48 22.4 BAT 24.4 %

TM

4.17 12.3 55.98 28.8 Nestle %

BAT 46.00 18.0

1.79 9.8 YTL Power (17.6) %

ACTIVITY

Compile information on selected counters

Consider the PER info on previous slides

Suggest a six month forward target PER

Compute Target Price

Capitalized Economic Income Based on required returns

PROCESS : IDENTIFY SECTOR BETA VALUE APPLY TO SECTOR COMPONENTS MODIFY BETA FOR NON-AVERAGE

COUNTERS COMPUTE REQUIRED RETURN PROJECT REQUIRED PRICE TO ACHIEVE

REQUIRED RETURN

ACTIVITY

Select Prices for selected counters in a sector

Match against KLCI Compute Beta Value Compute Required Returns Compute Target Price to achieve

Required Returns

The Beta Family

Beta provides the Required Return = Rf + (Beta x Market Risk

Premium)

Intrinsic Value of a Share = Dollar Value of Returns from

this share Required % Return from

this share

Sharpe Measure

S =

Actual Returns from Share - Rf

Std Deviation ϭ of Returns from this share

Jensen Measure = Surplus Returns

Jensen’s α =

Actual Returns from Share - Required

Returns

LOCAL & GLOBAL FACTORS

SESSION TWO

http://globalvoicesonline.org/2012/04/24/malaysia-prepares-for-bersih-3-0-sit-down-protest/

IN THE NEWS

Banking: No intention to review lending guidelines. BNM has no intention to review its new guidelines on responsible lending for the time being, said the governor Tan Sri Dr Zeti Akhtar Aziz. BNM's recent lending guidelines effective Jan 1, stipulate that loans would only be approved based on net and not gross income as practice previously. The new guidelines are aimed at managing household debt in Malaysia at reasonable levels. (Source: The Edge Financial Daily)                        

MIER

Consumer Index

OUTSIDE MALAYSIA

U.S: Sales of new homes exceeded estimates in March. Houses sold at a 328,000 annual rate, down from an upwardly revised 353,000 pace in February that was the highest in two years, according to Commerce Department data. (Source: Bloomberg) 

U.S: Home prices in 20 cities fell at slower pace in February, pointing to stabilization in the real-estate market. The S&P/Case-Shiller index of property values fell 3.5% YoY, the smallest 12-month drop since February 2011. The index climbed from the prior month on a seasonally adjusted basis for the first time since April of last year. (Source: Bloomberg) 

U.S: Consumer confidence in April little changed as outlook cools. The Conference Board's confidence index was at 69.2 compared to a revised 69.5 in the prior month, figures from the New York-based private research group showed.  (Source: Bloomberg) 

More from Bloomberg

U.K: Budget deficit unexpectedly widened in March, intensifying pressure on Chancellor of the Exchequer George Osborne to keep squeezing spending as austerity strains governments across Europe. Net borrowing excluding support for banks was GBP 18.2b (USD 29.4b), up from GBP 18b a year earlier and the most since November 2010, the Office for National Statistics said. Spending rose 4.2% YoY and tax revenue climbed 1.4% YoY. (Source: Bloomberg) 

CHINA China: Net overseas financial assets declined in the

final quarter of 2011. China's holdings of overseas assets totalled USD 4.72t at the end of last year, USD 1.77t more than foreigners' ownership of Chinese assets, according to a statement on the State Administration of Foreign Exchange website. The gap was USD 1.89t as of Sept. 30. (Source: Bloomberg) 

China: Leading index rose at a slower pace in March, adding to evidence growth in the world's second-biggest economy is moderating. The gauge gained 0.8% MoM from the previous month to 230.6, the New York-based Conference Board said in a statement, citing a preliminary reading. That compares with a 1% MoM rise in February that was revised up from a previously reported 0.8% MoM increase. (Source: Bloomberg)

Others

Vietnam: Trade balance swung to a deficit in April. Vietnam recorded a deficit of USD 400m in April, compared with a revised USD 424m surplus in March, according to preliminary figures released by the General Statistics Office in Hanoi. (Source: Bloomberg) 

Australia: Core consumer prices rose last quarter at the slowest pace since 1998. The so-called trimmed mean gauge of core prices advanced 0.3% QoQ from the previous quarter, the Bureau of Statistics said, the lowest rate since the third quarter of 1998. The consumer price index rose 0.1% QoQ from the previous three months, compared with 0.6% forecast in a Bloomberg News survey, (Source: Bloomberg)  

Palm Oil vs Crude

Crude

Steady as Steel

Golden Dragon

PPI – up to 0212

5 Key Areas of Analysis

SUPPORT

MATERIALS FOR

FUNDAMENTAL

VALUATION

RATE OF PROFITS ABILITY TO SETTLE CURRENT

LIABILITIES ON TIME = LIQUIDITY MANAGEMENT OF WORKING

CAPITAL MANAGEMENT OF BORROWING

LEVELS MANAGEMENT OF INVESTOR

RETURNS

RATE OF PROFIT GENERATION

This has 3 components :

REVENUE GENERATION MARGINS RETURNS

REVENUE GENERATION

First Level Evaluation : Total Assets Utilization = R / TA Non Current Asset Utilization= R / NCA Current Asset Utilization = R / CADetailed Evaluation : Inventory Management = R / INV AR Management = R / AR Specific Asset

Rate of Profits: MARGINS = x / R%

COSTS OF SALES MARGIN

OPERATING COST MARGIN

OPERATING PROFIT MARGIN

NET PROFIT AFTER TAX MARGIN

INVENTORIES MARGIN

ACCOUNTS RECEIVABLE MARGIN

CASH RESERVES MARGIN

Rate of Profits : RETURNS

OPERATING ROI = OP / TOA

NET ROI = NPAT / TA

SELLING EFFICIENCY = R / TA

LIQUIDITY & WORKING CAPITAL

CASH RATIO = CCE / CL

AR RATIO = AR / CL

ADJUSTED ACID TEST = CCE + AR / CL

FINANCING MATCH = CA / CL

(Working Capital Ratio or Current Ratio)

BORROWING MIX

FINANCING MIX (Gearing) = BORR / EQ

ASSET FINANCING (Gearing) = BORR / TA

INTEREST COVER = OP / FIN CHG

DU PONT ANALYSIS

DuPont analysis also allows analysts to view trends in the components of ROE For example, whether or not profit margins are

improving or if financial leverage has changed We know ROE = NI / Equity Du Pont System shows that this is also

equal to ROA multiplied by the Equity Multiplier

ROE = ROI X EQUITY MULTIPLIER ROE = ROI X (ASSETS / EQUITY )

VALUATION RATIOS

P / E = Price per share / EPS

P / CF = Price per share / Cash Flow per share

P / S = Price per share / Sales per share

P / B = Price per share / Book Value per share

WORKSHOP SESSION

SESSION THREE

WORKSHOP

This session will see the use of current market values of selected companies compared with their values using the techniques discussed in Session One.

The workshop activity, which may spill over to the next session, will be to explain any differences in the values and the possible forward thrust of market price for each of the selected companies.

Completing the Discussions

SESSION FOUR

FINAL WORDS

Price and market value sustainability Discussion / debate :

Specific companies listed on Bursa will be selected

Valuations under various models will be applied

Comparison with current market price will be made

Forward looking information will be analysed. This will be done to debate how much of the forward value thrust will be based on cyclical factors (systemic) and how much will depend on intrinsic factors.

THANK YOU for your kind attention