Plenitude financial performance for FY ended 30 June 2014 kcchongnz

Plenitude financial performance for FY ended 30 June 2014
"If you look carefully, almost all Old Money secrets can be traced to a single source: a longer-term outlook." -- Bill Bonner

I wrote an article about Graham net current asset value (NCAV) for some property companies in i3investor a couple of weeks ago, with special emphasis on Plenitude when it was trading at RM3.27 then. Below is the link to the article:
http://klse.i3investor.com/blogs/kcchongnz/57943.jsp
Plenitude’s share price shot up to RM3.50 a couple of days later. Last two days, “Investors” went helter skelter and dumped the stocks after the release of its result showing a “plunge” of its 4^th quarter 2014 profit from 50.8m to 12m. Its price closed at RM3.15 on 29^th August 2014.
Here came a question on the thread of my previous article.
[hariharikais Dearest KC... I can't seem to understand why is there a massive drop in plenitude last Friday when quarterly result is ok...any comments?
30/08/2014 12:48 ]
I really didn’t know the “massive drop” you are talking about. I won’t know why the drop too as I am always very poor in predicting share price movement.
I didn’t write the article to entice anyone to buy so that I can dump my stock. To put the record straight here; I have never sold any share immediately after I wrote about it as I only wrote about stock which I think its share price is way below its intrinsic value and still has plenty of room for upside movement. I am still keeping my Plenitude since I bought it long ago. You can see that I own this stock in my portfolio since long ago. Its share price was RM1.85 nineteen months ago as shown in the link below here:
http://klse.i3investor.com/blogs/kcchongnz/44160.jsp
Was the financial results of Plenitude ended 30 June 2014 that bad? A big drop in profit, really? Does anyone see its annual result has improved from an earnings per share (EPS) from 28.8 sen to 32.5 sen this year? Does anyone see that its quality asset backing per share has also increased from RM3.37 to RM3.63, or 13%?
I still do not have any intention to sell it yet. Why? Value investors are not the ones who watch every quarter result and its hourly share price when they invest in a business. Yes, investing in the business of the company and not punting on a paper of ownership of a stock. Investing is a long-term endeavour and not a quarter-to-quarter affair.
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operation not meeting these requirements are speculative” Benjamin Graham
In anyway, the investment thesis on Plenitude is in its asset based Graham net current asset value (NCAV), which has improved with the recent release of its quarterly result, if one chooses to look at.
Graham net current asset value
“Know what you own, and know why you own it.”- Peter Lynch
NCAV is the lowest form of valuation you could possibly do because it ignores everything about the business and just focuses on tangible assets.

Net Net Working Capital =
Cash and short-term investments
+ (0.75 x accounts receivable)
+ (0.5 x inventory)
- total liabilities
This is a very conservative form of valuation. For more explanation, please refer to the link below:
http://klse.i3investor.com/blogs/kcchongnz/45296.jsp

Performance of Graham NCAV stocks
Walter Schloss, a low profile role model for all aspiring value investors has used similar asset-based value investing. He is one of the most influential investors based on his 5 decade long performance from 1955, returning 20% per year, almost three times the 7% return of the S&P during the same period.  For more information of Walter Schloss, please refer to the appended link below:

http://klse.i3investor.com/blogs/kcchongnz/52280.jsp

NCAV stocks have killed the market again in recent years. From 2000 to 2012, a portfolio of NCAV stocks earned an annualized return of 18.28% vs 1.57% of S&P500 and 5.31% for the Russell2000.

One has to bear in mind that the above two examples were quantitative investing with diversified portfolios of hundreds of NCAV stocks, regardless of their business performance. Many of those business sucks and often lost money, and yet the portfolio returned fantastic alphas.

Plenitude and Graham NCAV
Based on the latest financial results ended 30^th June 2014, the net tangible asset per share of Plenitude has increased to RM3.63 as shown in Table 1 in the Appendix. The NCAV of Plenitude has also increased to RM3.20 per share. This NCAV is still above the share price of Plenitude of RM3.15.

However, we have to remember that NCAV It's the lowest form of valuation just focuses on tangible assets with a discount to inventories and receivables and total omission of their fixed assets. Moreover, Plenitude has huge amount of “Land held for property development” which was mostly bought many years ago and have not been re-valued for years. The market values of these land could worth many folds their book values. Even the “Property development projects” which are taken as the book value could worth a market value much higher than the book value as evidenced from its high gross margins of 50%. Hence the NCAV of Plenitude could worth much more than what were taken from the book values.
What else Plenitude has as extras which most of those above companies of sole NCAV do not have?

Financial performance of Plenitude
Besides qualified as  Graham NCAV stock, Plenitude’s financial performance has been reasonably good every year as shown in Table 2 in the Appendix.

Margins are great with gross margin, operating margin and net profit margin at 50%, 34% and 28% respectively. Return on equity is below 10% but that is because it has a lot of cash in the balance sheet. ROE would be much higher if those excess cash is returned to shareholders, or the company uses it to engage in profitable projects.

A more appropriate metric of return on invested capital shows that the company has earned a return of 13%, higher than its cost of capitals. The company also has good cash flow and free cash flow every year without exception. Hence not only Plenitude is not a cash burner, it is a cash generator every year, consistently adding to its NCAV.

Market valuation
Table 3 in the Appendix shows the market valuation of Plenitude. At a price of RM3.15, the 2014 PE ratio is undemanding at 11, even for a normal, non-NCAV company. Its price is less than its book value of RM3.63.

Conclusion
We recollect that Plenitude’s investment thesis is based on its Graham NCAV which it fits in very well. Besides that, it has stable earnings and cash flow every year. Its land could worth a lot more than its book value. Its operation is also more efficient than many of its peers. It is hence a good long-term investment, in my opinion. Why not?

K C Chong on our National Day
(31 August 2014)

Appendix
Table 1: Graham NCAV for Plenitude

xxxxxxxxxxxxx		BS	Wt	Amount	Proportion	Per share
Excess cash		396356	100%	396356	35%	1.47
Property development projects		299866	100%	299866	27%	1.11
Land held for development		193916	100%	193916	17%	0.72
Investment Properties		46629	100%	46629	4%	0.17
Receivables		81168	75%	60876	6%	0.23
Inventories		42174	50%	21087	4%	0.08
Other assets		74452	0%	0	7%	0.00
Total tangible asses		1134561	xxx	1018730	100%	xxx
Total liabilities		-154021	100%	-154021	xxx	-0.57
Sum		970659	xxx	857298	xxx
NTA		3.63	xxx	3.20	xxx	3.20
Price		3.15	xxx	3.15	xxxx
MOS		12%	xxx	1%	xxxx

Table 2: Efficiencies

Year	2014	2013	2012	2011	2010	2009	2008	2007	2006
Gross margin	50%	55%	51%	43%	36%	43%	35%	39%	38%
Operating margin	34%	43%	42%	35%	30%	37%	30%	34%	33%
Net margin	28%	37%	35%	28%	24%	28%	23%	24%	24%
ROE	8.6%	8.6%	11.4%	11.6%	8.4%	11.2%	8.7%	8.5%	9.7%
ROIC	13.1%	12.9%	17.5%	19.4%	18.9%	17.1%	12.5%	13.5%	16.3%

Table 3

Market valuation	30/08/2014
Price	$3.150
EPS	$0.325
PE ratio	9.7
Book value	3.6
Price-to-book	0.9