Author: kcchongnz | Publish date: Tue, 19 May 2015, 08:47 PM
“Mr Chong, V.S Industry share price has been rising, very hot stock. Is it a NBI?”
A new participant of my course asked me this. Didn’t know much of this company except that the share price has performed very well recently. Ok, let me spend some time on this.
First I look at its past share price performance as shown in Figure 1 below.
$*%&#@, I missed it. Its share price has gone up by three times a year ago from about RM1.50 to RM4.11 at the close today, up by 22 sen today! I missed a No-Brained Investment, or NBI, didn’t I? I must jumped in now, or otherwise I will miss the train, the last train, again!
But wait, just cool down and be rational. Think first, is V.S really a NBI at this price as described here?
http://klse.i3investor.com/blogs/kcchongnz/76694.jsp
For a NBI, we look at cash. No cash comes in from the business, no talk. That is what most successful businessmen think, don’t they? Let us look at its cash flow in Table 1 below.
Table 1: Cash flow of V.S
What happened to the last three years? There aren’t any cash left after spending money in capital expenses. Cash yield calculated from FCF/Price is negative, or “Not Applicable”. So how?
As businessmen, they want to extract cash out from the business, or use the cash from the business to grow the business to make more cash. They aren’t happy that you tell them they will make a lot of “earnings” but have to continuously put in more money from their own pockets as the cash earned is not enough for capital expenses. I don’t know about others, but my business friends think this way.
But the investment banker said we should buy V.S. This is what RHB Investment Bank wrote.
“We recently met with management and came away feeling positive on its robust earnings outlook, driven by higher volume growth from its key customers, particularly Keurig. Reiterate BUY with a revised TP of MYR4.50 (from MYR2.95), 45.2% upside. The company will produce the third model of coffee machine in 4QFY15. It expects double-digit sales volume growth for the new model vs the outgoing model.
Maintain BUY with a revised MYR4.50 TP. In view of higher sales volume growth from its key customers, as well as the recent strengthening of the USD against the MYR, we raise our recurring earnings forecasts for FY15-17 by 55.6%-61.9%. Accordingly, our TP is lifted to MYR4.50 (from MYR2.95), based on an unchanged recurring FY16 P/E of 10x. With a minimum payout policy of 40%, it also offers a respectable dividend yield of 5.2-6.5% for FY15-17F.” RHB
Yes, they did. Buy faster, it will go up to RM4.50. It is already RM4.11 now. They aren’t wrong. Not yet.
Let us look at Table 2 below and see how true what is mentioned by RHB.
Table 2: Growth in revenue and income
“Higher sales volume growth”. This is definitely true by any standard as the sales grow by more than 100% in four years, or a compounded annual growth of 21% from 800m in 2010 to 1715 m in 2014.
But why no mention about profit growth? Is there profit growth?
In 2014, the Net Income was boasted by a tax credit of RM4.6m. Without that, it is just the same as 2013. In 2013, a profit of RM28.4m was booked from an obscure item “Effect of acquisition of a subsidiary”. What was that? Mind you this is booked as part of the operating income, not as a one-off extra-ordinary item after the Net Income. Without that, net profit in 2013 would have dropped by more than 60%. Actually he more representative profit is the less tinted operating profit. Do you see any trend of operating profit growth over the years?
Umm, maybe I am not an accountant, I can’t comprehend it. Or maybe non-accountant can easily be deceived.
So high revenue growth, but where is the profit growth? So is revenue growth the Holy Grail, and profit growth is immaterial?
Actually I don’t give a damn to growth, if the quality of growth is poor. A quality growth is one which the return on capital is higher than the cost of capital. What do you think is the cost of capital? To put in simply, if you want to put your money in a business, which has high inherent risk, what is your required return? For me, I would want a return of at least 10%. For V.S, my minimum is 12%.
Let us look at the return on capitals for V.S last few years in Table 3 below.
Table 3: Return on Capitals
Are you happy with the return on capitals of V.S in its business at 5% to 7%? I don’t. Far from it. Notice that the trend of return on capitals is actually deteriorating quite badly.
What is the effect on the company with this no-growth profit, low return on capital, no cash business? Let us look at its balance sheet.
Table 4: Balance sheet
Look at how net borrowing increasing unabated throughout the years from 63m in 2011 to 286m in 2014. Look at how the inventories increased even faster than the growth in revenue. Have they really sold so many coffee makers, or just kept in some subsidiary companies or shops, as they have spent so much money in capital expenses in the tune of RM50m last year as shown in Table 1 above.
Not only we don’t see cash from the high growth in sales, we see company kept on borrowing like no tomorrow. What is happening?
Unfortunately few people pay attentions to good comments from a young man below:
“Posted by lmenwe > Feb 24, 2015 09:52 PM | Report Abuse
Einhorn had cut his position in Keurig but it is still way too early to judge whether Keurig is a fraud. Do you know how many years Einhorn took to prove he is right in the past? Try to read books and articles related to Einhorn. I know Keurig had been performing for years but please remember price doesn't equivalent to value. Remember John Paulson? Before subprime he also lost his pant but once subprime happen he made tonnes of money. “
“Posted by sense maker > Apr 5, 2015 12:09 PM | Report Abuse
No sooner had I written about my concern over VS's rather big net debt position than it announced a cash call.”
Yeah, I missed making big money from V.S a year ago. I also missed buying KNM at 40 sen two years ago and its price ran up to more than RM1. But I didn’t miss buying it 8-10 years ago when its adjusted price was above RM10. I missed buying Hibiscus also at RM1+ 2 years ago and then it ran up to RM3.00 before Christmas 2013, but boy, I didn’t miss buying it at RM3.00 and it is now 77 sen. Likewise, London Biscuits which went up from 60 sen to close to 90 sen now. I didn’t miss it when it was RM3.00 a few years ago. Guan Chong, Ivory, Smartag, Amedia etc. all exhibit the same patterns, companies seemingly with good profit but very poor cash flows and all prices manipulated by insiders and syndicates.
http://klse.i3investor.com/blogs/kcchongnz/63777.jsp
So serious I have nothing to regret about. I always tell myself, “When everyone is making money in the stock market, and I don’t, it is alright.” My motto is, I presume all businessmen also think alike:
“No cash no talk.”
Look at Enron’s four years financial performance and cash flow from 1997 to 2000 below with its net income galloped by 832% from $105m to $979m before it went belly up. This was one of the most talked about corporate scandals in the US in 2000s. Focussed on PE ratio, Wall Street sent Enron’s stock price soaring from about $30 to $100 from 1997 to 2000. However, from 1997 to 1999, the company burned all its revenues and required an additional $3b of capital expenses just to open its doors.
Table 5: Enron cash flow
Few businesses can survive long without the ability to generate cash.
But putting cash aside, does V.S that compelling an investment as suggested by the investment bank?
“our TP is lifted to MYR4.50 (from MYR2.95), based on an unchanged recurring FY16 P/E of 10x”
Why based on 10X PE, why not 5, 15, 20, or 30? Is PE a good metric when V.S has so much debts?
At RM4.22, the present PE ratio is 14 and enterprise value is 21 times operating income. Is that cheap?
Conclusion
I try to train myself to look at business at the businessmen’s point of view, i.e. Cash is King, and No Cash No talk. So V.S obviously doesn’t fit into my category by miles. Yeah I know, I have missed it. But again I always try to console myself, “When everybody makes money and I don’t, it is ok”.
I have put up this thing on my wall
"A friend of mine decided to get into the stock market and called his broker. “Buy me 10000 shares of XYZ.” And sure enough he bought and the price went up. He says, “This is great. I’m making money.” He picks up the phone three days later. “Buy me another 10000 shares.” The price goes up again. And this goes on for weeks and the price is mounting and he’s building a huge block of stock in his portfolio. My friend says, “You know, I have gotten to the point where I don’t want to be too greedy. I want to sell.” He picks up the phone, once again to call his broker. He says, “Jim, I’ve had enough. I want you take all my stock and sell it.” The broker responds, “To whom?”
For personal discussions, please contact me at ckc14invest@gmail.com
KC Chong (20th May 2015
A new participant of my course asked me this. Didn’t know much of this company except that the share price has performed very well recently. Ok, let me spend some time on this.
First I look at its past share price performance as shown in Figure 1 below.
$*%&#@, I missed it. Its share price has gone up by three times a year ago from about RM1.50 to RM4.11 at the close today, up by 22 sen today! I missed a No-Brained Investment, or NBI, didn’t I? I must jumped in now, or otherwise I will miss the train, the last train, again!
But wait, just cool down and be rational. Think first, is V.S really a NBI at this price as described here?
http://klse.i3investor.com/blogs/kcchongnz/76694.jsp
For a NBI, we look at cash. No cash comes in from the business, no talk. That is what most successful businessmen think, don’t they? Let us look at its cash flow in Table 1 below.
Table 1: Cash flow of V.S
| Year |
2014
|
2013
|
2012
|
2011
|
2010
|
| CFFO |
46368
|
19666
|
34111
|
94277
|
49046
|
| Net Capital expenses |
-52371
|
-39639
|
-40360
|
-43268
|
-20578
|
| Free cash flow |
-6003
|
-19973
|
-6249
|
51009
|
28468
|
What happened to the last three years? There aren’t any cash left after spending money in capital expenses. Cash yield calculated from FCF/Price is negative, or “Not Applicable”. So how?
As businessmen, they want to extract cash out from the business, or use the cash from the business to grow the business to make more cash. They aren’t happy that you tell them they will make a lot of “earnings” but have to continuously put in more money from their own pockets as the cash earned is not enough for capital expenses. I don’t know about others, but my business friends think this way.
But the investment banker said we should buy V.S. This is what RHB Investment Bank wrote.
“We recently met with management and came away feeling positive on its robust earnings outlook, driven by higher volume growth from its key customers, particularly Keurig. Reiterate BUY with a revised TP of MYR4.50 (from MYR2.95), 45.2% upside. The company will produce the third model of coffee machine in 4QFY15. It expects double-digit sales volume growth for the new model vs the outgoing model.
Maintain BUY with a revised MYR4.50 TP. In view of higher sales volume growth from its key customers, as well as the recent strengthening of the USD against the MYR, we raise our recurring earnings forecasts for FY15-17 by 55.6%-61.9%. Accordingly, our TP is lifted to MYR4.50 (from MYR2.95), based on an unchanged recurring FY16 P/E of 10x. With a minimum payout policy of 40%, it also offers a respectable dividend yield of 5.2-6.5% for FY15-17F.” RHB
Yes, they did. Buy faster, it will go up to RM4.50. It is already RM4.11 now. They aren’t wrong. Not yet.
Let us look at Table 2 below and see how true what is mentioned by RHB.
Table 2: Growth in revenue and income
| Year |
2014
|
2013
|
2012
|
2011
|
2010
|
| Revenue |
1715082
|
1163911
|
1201992
|
1026818
|
800170
|
| Operating income |
57963
|
59346
|
66788
|
67337
|
47842
|
| Net Income |
46622
|
39967
|
32313
|
35488
|
25350
|
| EPS, sen |
28.8
|
24.1
|
18.7
|
22.9
|
14.5
|
“Higher sales volume growth”. This is definitely true by any standard as the sales grow by more than 100% in four years, or a compounded annual growth of 21% from 800m in 2010 to 1715 m in 2014.
But why no mention about profit growth? Is there profit growth?
In 2014, the Net Income was boasted by a tax credit of RM4.6m. Without that, it is just the same as 2013. In 2013, a profit of RM28.4m was booked from an obscure item “Effect of acquisition of a subsidiary”. What was that? Mind you this is booked as part of the operating income, not as a one-off extra-ordinary item after the Net Income. Without that, net profit in 2013 would have dropped by more than 60%. Actually he more representative profit is the less tinted operating profit. Do you see any trend of operating profit growth over the years?
Umm, maybe I am not an accountant, I can’t comprehend it. Or maybe non-accountant can easily be deceived.
So high revenue growth, but where is the profit growth? So is revenue growth the Holy Grail, and profit growth is immaterial?
Actually I don’t give a damn to growth, if the quality of growth is poor. A quality growth is one which the return on capital is higher than the cost of capital. What do you think is the cost of capital? To put in simply, if you want to put your money in a business, which has high inherent risk, what is your required return? For me, I would want a return of at least 10%. For V.S, my minimum is 12%.
Let us look at the return on capitals for V.S last few years in Table 3 below.
Table 3: Return on Capitals
| Year |
2014
|
2013
|
2012
|
2011
|
2010
|
| ROE |
7.3%
|
6.7%
|
7.9%
|
8.7%
|
6.4%
|
| ROIC |
6.7%
|
5.2%
|
10.4%
|
11.2%
|
7.4%
|
Are you happy with the return on capitals of V.S in its business at 5% to 7%? I don’t. Far from it. Notice that the trend of return on capitals is actually deteriorating quite badly.
What is the effect on the company with this no-growth profit, low return on capital, no cash business? Let us look at its balance sheet.
Table 4: Balance sheet
| Year |
2014
|
2013
|
2012
|
2011
|
2010
|
| Total Assets, TA |
1551689
|
1404443
|
850986
|
772166
|
754179
|
| Total common equity, E |
526160
|
479646
|
410491
|
393609
|
374587
|
| Cash and cash equivalent |
123464
|
97288
|
58680
|
71853
|
67364
|
| Total borrowing |
409791
|
361757
|
138008
|
134829
|
170044
|
| Net borrowing |
286327
|
264469
|
79328
|
62976
|
102680
|
| Trade Account Receivables |
447550
|
410526
|
317572
|
203250
|
195821
|
| Inventory |
269794
|
177760
|
104577
|
87227
|
77380
|
Look at how net borrowing increasing unabated throughout the years from 63m in 2011 to 286m in 2014. Look at how the inventories increased even faster than the growth in revenue. Have they really sold so many coffee makers, or just kept in some subsidiary companies or shops, as they have spent so much money in capital expenses in the tune of RM50m last year as shown in Table 1 above.
Not only we don’t see cash from the high growth in sales, we see company kept on borrowing like no tomorrow. What is happening?
Unfortunately few people pay attentions to good comments from a young man below:
“Posted by lmenwe > Feb 24, 2015 09:52 PM | Report Abuse
Einhorn had cut his position in Keurig but it is still way too early to judge whether Keurig is a fraud. Do you know how many years Einhorn took to prove he is right in the past? Try to read books and articles related to Einhorn. I know Keurig had been performing for years but please remember price doesn't equivalent to value. Remember John Paulson? Before subprime he also lost his pant but once subprime happen he made tonnes of money. “
“Posted by sense maker > Apr 5, 2015 12:09 PM | Report Abuse
No sooner had I written about my concern over VS's rather big net debt position than it announced a cash call.”
Yeah, I missed making big money from V.S a year ago. I also missed buying KNM at 40 sen two years ago and its price ran up to more than RM1. But I didn’t miss buying it 8-10 years ago when its adjusted price was above RM10. I missed buying Hibiscus also at RM1+ 2 years ago and then it ran up to RM3.00 before Christmas 2013, but boy, I didn’t miss buying it at RM3.00 and it is now 77 sen. Likewise, London Biscuits which went up from 60 sen to close to 90 sen now. I didn’t miss it when it was RM3.00 a few years ago. Guan Chong, Ivory, Smartag, Amedia etc. all exhibit the same patterns, companies seemingly with good profit but very poor cash flows and all prices manipulated by insiders and syndicates.
http://klse.i3investor.com/blogs/kcchongnz/63777.jsp
So serious I have nothing to regret about. I always tell myself, “When everyone is making money in the stock market, and I don’t, it is alright.” My motto is, I presume all businessmen also think alike:
“No cash no talk.”
Look at Enron’s four years financial performance and cash flow from 1997 to 2000 below with its net income galloped by 832% from $105m to $979m before it went belly up. This was one of the most talked about corporate scandals in the US in 2000s. Focussed on PE ratio, Wall Street sent Enron’s stock price soaring from about $30 to $100 from 1997 to 2000. However, from 1997 to 1999, the company burned all its revenues and required an additional $3b of capital expenses just to open its doors.
Table 5: Enron cash flow
| Year |
1997
|
1998
|
1999
|
2000
|
| Net Income |
105
|
703
|
893
|
979
|
| D&A |
600
|
827
|
870
|
855
|
| Non-cash charges |
-65
|
-233
|
-1000
|
1769
|
| Capital expenses |
-2000
|
-2000
|
-2000
|
-2000
|
| FCF |
-1360
|
-703
|
-1237
|
1603
|
But putting cash aside, does V.S that compelling an investment as suggested by the investment bank?
“our TP is lifted to MYR4.50 (from MYR2.95), based on an unchanged recurring FY16 P/E of 10x”
Why based on 10X PE, why not 5, 15, 20, or 30? Is PE a good metric when V.S has so much debts?
At RM4.22, the present PE ratio is 14 and enterprise value is 21 times operating income. Is that cheap?
Conclusion
I try to train myself to look at business at the businessmen’s point of view, i.e. Cash is King, and No Cash No talk. So V.S obviously doesn’t fit into my category by miles. Yeah I know, I have missed it. But again I always try to console myself, “When everybody makes money and I don’t, it is ok”.
I have put up this thing on my wall
"A friend of mine decided to get into the stock market and called his broker. “Buy me 10000 shares of XYZ.” And sure enough he bought and the price went up. He says, “This is great. I’m making money.” He picks up the phone three days later. “Buy me another 10000 shares.” The price goes up again. And this goes on for weeks and the price is mounting and he’s building a huge block of stock in his portfolio. My friend says, “You know, I have gotten to the point where I don’t want to be too greedy. I want to sell.” He picks up the phone, once again to call his broker. He says, “Jim, I’ve had enough. I want you take all my stock and sell it.” The broker responds, “To whom?”
For personal discussions, please contact me at ckc14invest@gmail.com
KC Chong (20th May 2015
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