V.S Industry, “BUY” by UOB KayHian kcchongnz

Author: kcchongnz   |   Publish date: Sat, 8 Aug 2015, 09:24 PM

“History is a better guide than good intention” Jeane Kirkpatrick



I like to read, write, and share my opinion about investing. I appreciate i3investor which gives me a platform to publish and share my thought. It has been three years already since I first did this. I enjoyed doing it a lot and in the process, I have learned a lot through the forum.

One thing I do know something about how to analyse and value a business from what I learned from academic study, and more from some established super investors from their sharing through their books, blogs and articles. Hence I have an independent mind of my own, and I don’t simply echo what others say about how good the stocks they are promoting are. Instead, I often share my different point of view, if I see it, with my detail analysis with facts and figures. I thought my opposite second opinions may be useful for those investing in the stocks. However, maybe I am too naïve thinking that others are like me too, i.e. welcoming contrarian views to curb my over-confidence in investing. For example, I wrote about my views on this company, V.S Industry here:

http://klse.i3investor.com/blogs/kcchongnz/76875.jsp

http://klse.i3investor.com/blogs/kcchongnz/77138.jsp

http://klse.i3investor.com/blogs/kcchongnz/77274.jsp

http://klse.i3investor.com/blogs/kcchongnz/77720.jsp

http://klse.i3investor.com/blogs/kcchongnz/77884.jsp

http://klse.i3investor.com/blogs/kcchongnz/77938.jsp

These posts of different opinions surprisingly made many investors in VS angry. They attracted many cynical and sarcastic remarks such as one as appeared below. I have some arguments and even lost a couple of friends because of those articles which are different from what they believe about the stock.



Posted by moneyface88 > Jun 24, 2015 12:05 AM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

“Hello Mr Sifu KC Chong .... from New Zealand ?
Your article very Keng , very analytical. I have learnt a lot reading this article of yours.
Then got worried and sold my V.S Share then share price moved up strongly.
Today Q2 result announced, not what you have expected, you must be disappointed
How much you charge ah to learn something from you?
Please tell me so that I can subscribe to your tips”



I have responded to his sarcasms as in the link below but I have yet to hear from him:

http://klse.i3investor.com/blogs/kcchongnz/78867.jsp

And here he came another sarcastic remark as below when there was a great announcement that one share of V.S becomes 5 and the share price of V.S continues to go up with this fantastic news.

Posted by moneyface88 > Jul 14, 2015 01:14 PM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

“Sifu KC, you were right. V.S was cheap cheap. Now 5.44 already, too expensive to buy liao”



How many times I have emphasized that I am just sharing what I think the performance of the business and what was my opinion is its value, and that I have no crystal ball in front of me to tell me what its future share price would be?

And here is another one cynical remark when I was sharing about the risk of risk arbitrage on Asdion as below:

http://klse.i3investor.com/blogs/kcchongnz/80930.jsp



Posted by Frankiechow > Aug 8, 2015 03:05 PM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

“It looks like KCChongnz is taking a cheap shot on Asdion or Paperplane. Why didn't he say anything few weeks back before Asdion took a dip along with the rest of counters in klse? Is he trying to divert from VS which he was completely wrong?”



So you see when someone gives hot tips, everyone applauses, but it is not a pleasant thing to do to share about knowledge and experience. Luckily not everyone in the internet forums is like that as you can see from a comment just posted today here:



Posted by duitKWSPkita > Aug 7, 2015 04:34 PM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

“thanks for sharing KC CHONG...
appreciate ur kind time for analysis always.............
KC CHONG, I love FA so I never miss all your FA write up.
KC CHONG, may I request if possible to re-analyze VS's financial performance on next QR report. I like to learn should they have certain improvement in facts and figures after the expansion. No doubt CIMB presents an attractive TP of RM7.10 (almost similar with KYY's) but no harm to do an analysis before & after business growth.
Again, thanks Senior Kc Chong. “



The above comment appear in my last post here:

http://klse.i3investor.com/blogs/kcchongnz/80930.jsp

There are still people out there happy to hear an opposite view. I believe the person here owns some V.S shares. With this, I like to talk about, you get it, V.S again, dedicating to our friend Duit. Well, if you check through this i3investor forum, I have been obliging many people answering their request. So this is no exception. But as I have already written a number of threads about V.S that writing another one will be construed as pressing down the stock again by many diehard V.Sers. For God sake, when have I ever “put down” its share price in any of the articles? And every time I write about it, its share price goes up and shareholders of VS are all laughing to the banks. Isn’t that wonderful? This time I just refer to an article done by UOB KayHian about V.S as shown in the appendix below. Again I like to talk about contrarian view, something to ponder about. Hopefully the share price of VS will gallop again.



Buy V.S, target price RM7.10 UOB KayHian

The report by UOB KayHian in the Appendix shows there was truly a fantastic growth of VS last year with the trailing twelve month (ttm) revenue and profit growing by 15% and 114% to RM2b and RM109m respectively. UOB expects its revenue and net profit to grow another 13% and 21% a year respectively for the next two years. UOB is very optimistic about the future of VS with its earnings projection 20% above the consensus. Net profit margin has more than doubled to 5.4%. The same goes to return on equity (ROE), doubling to about 15%. All these numbers are much better than before and they are in all-time highs now. However, this ROE is just reasonably good, nothing very fantastic considering the ROE is mostly achieved with high leverage of 2 times. The return on invested capital is also not bad at 12%, nothing great though. This shows VS has emerged to be a reasonably good company. Wait, I haven'’ talked about growth in the future yet. And I also haven’t talked about its price yet. Remember price is not the same as value, investing 101.



Market Valuation

Based on the projected EPS of 47.5 sen for the financial year ending 31st July 2015, UOB KayHian accorded a P/E ratio of 14.9 for VS with a target price of RM7.10. Is this PE ratio a reasonable one?

The person below definitely knows more than I regarding market valuation of contract manufacturer.

Posted by soojinhou > May 20, 2015 11:06 AM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

No matter how good VS is, they are ultimately just a contract manufacturer. The biggest of them all, hon hai, is valued at pe slightly more than 10. Using that as a benchmark, VS is more or less fully valued at the current price (about RM4.00).

Jin Hou, how wrong you are! But don’t get upset, I am much worse than you in this as you will see. This is what Howard Marks said:

"In the world of investing, being correct about something isn't at all synonymous with being proved correct right away."

A check with the Stock Performance Guide, Malaysia by Dynaquest shows that in the last 5 years, the range of PE ratio of VS is shown below:

Table 1: PE range







Year

Low

High

Average

2010

5.8

11.1

8.5

2011

4.8

8.8

6.8

2012

7.5

8.9

8.2

2013

4.6

5.6

5.1

2014

4.8

9.1

7.0



The P/E ratio is useful as a crude screening tools but it has serious limitations as shown here:

http://klse.i3investor.com/blogs/kcchongnz/63417.jsp

One such limitation is that the P/E ratio does not take into account the balance sheet and, as a result, it can materially misrepresent the earnings yield of a business.

UOB KayHian also uses EV/EBITDA to value a firm. This somewhat addresses the shortcoming of PE ratio. At a target price of RM7.10, UOB expects VS to be traded at enterprise value 9.5 times EBITDA of 2015.

Earnings before interest, taxes, depreciation, and amortization, or the acronym EBITDA is a popular standard by which to measure business performance. It is a display of pre-tax, pre-interest, and not considering any capital expenses which VS has to incur heavily in the amount of around RM50 m a year, or average about 80% of its net operating profit after tax.

“I think that, every time you see the word EBITDA, you should substitute the word ‘bullshit’ earnings.”

Charles Munger

As capital expenses is a real costs, I like to use EBIT, or operating profit for a firm. Buffett has said that he will generally pay 7x EV/EBIT for a good business that is growing 8-10% per year. Hence the reasonable price of VS using this is RM3.05.

Please don’t shoot me. I didn’t say VS is worth only RM3.05 apiece. I say according to Warren Buffett, he is only willing to pay RM3.05 for VS. Not I please.

If EBITDA is used, an EV/Ebit of 7 would probably translate to a fair EV/EBITDA of about 5.3, and certainly not 9.5 as projected by UOB KayHian, according to Warren Buffett’s criterion, not mine.



Show me the cash!

Personally my biggest concern about me (Read, it is me, not you) investing in VS is still the cash flow. I have written the importance of it in the link below:

http://klse.i3investor.com/blogs/kcchongnz/76875.jsp

Table 2 in the Appendix shows that VS has negative free cash flow for the last three years because of its high capital expenses. For the last four quarters, its cash flow has improved tremendously with a total free cash flow of RM15.4m. That FCF isn’t great at all as it is less than 1% of its revenue, and just 1.5% of the total capital invested in the business. Cash yield wise, it is only 1.4%, far below the interest rate one can get from the bank.



Investing is about the future

“I know of no way of judging of the future but by the past” Patrick Henry

Yes, I know, I don’t know about the future of VS like many do. And yes, my limited knowledge of VS is from the financial statements, a history. The past has no relevance. VS is going to get many big contracts from Keurig, the evolutionary cold drink makers, and new customers etc. This time is different. You already can see from its share price performance.

This is the information I get from the last few quarters result in progressive quarters:

Table 3: Latest four quarters results

 








Quarter

4th 14

1st 15

2nd 15

3rd 15

Total

Revenue, m

534.5

544.6

465.4

420.1

1964.5

EBIT, m

25.6

47.6

29.8

38.3

141.3

Net Income, m

34.3

34.0

17.2

23.9

109.4



 


Operating Margin

4.8%

8.7%

6.4%

9.1%



Net profit margin

6.4%

6.2%

3.7%

5.7%



Free cash flow, m

1.6

16.3

22.9

-25.4

15.4



Whether the revenue and profit of VS is likely to continue to grow at the fantastic rate of last year, or will the FCF improved tremendously in the future, you be your own judge.

“The further backward you can look, the farther forward you are likely to see” Winston Churchill



K C Chong (8th August 2015)



Appendix



Table 2: Cash flow of VS

Year

2015

2014

2013

2012

2011

2010

2009

Average

Revenue

1964495

1715082

1163911

1201992

1026818

800170

724836

1228186

CFFO

70813

46368

19666

34111

94277

49046

13021

46757

Net Capital expenses

-55428

-52371

-39639

-40360

-43268

-20578

-34325

-40853

Free cash flow

15385

-6003

-19973

-6249

51009

28468

-21304

5905

FCF/Revenue

0.8%

-0.4%

-1.7%

-0.5%

5.0%

3.6%

-2.9%

0.5%

Invested capital

1053045

966447

917188

423590

372702

422828

406657

651780

CROIC=FCF/IC

1.5%

-0.6%

-2.2%

-1.5%

13.7%

6.7%

-5.2%

0.9%






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