I just wrote an article on Dividend Discount Model using Pintaras Jaya as an example. It was never meant for peddling the stock of Pintaras Jaya, although I have invested in this stock for a very long time. The article as you can see, is to share my thoughts on how to value a stock based on dividends. In fact, I have written many articles to share here using Pintaras Jaya as an example.
I want to reiterate again here. I am just a small time retail investor. Yes, I did write a number of articles in i3investor this couple of years, 165 articles all together, in twenty months, or equivalent to one article on alternate day. In all these articles, I am just trying to share some fundamental knowledge about investing, which belong to the school of fundamental value investing.
Have I peddle any stock in my articles? No, I don’t because I have humility. I know no matter how much analysis I do, how much I know about a company, there is still a chance that I could be wrong, especially its future which is unknowable and unpredictable. And that is why I never try to be a hero and tell you which stock to buy, which stock to sell. I know there are better investors out there who can confidently tell you which stock to buy, which stock to sell. But sorry, I am not as good as them.
Hence for this comment below, I agree with it. I owe him nothing. I never say he owes me anything. If he is disappointed, I don’t think it is my problem.
Thanks KC for your sense of sarcasm and effort in replying to my simple request and suggestion. An ordinary investor wouldn't have bothered to write so many articles in I3 and even offer to educate interested people in value investing. I am disappointed. But let's move on, as neither of us have any real obligation to one another.]
Yes, let us move on. I would like to write something as requested by these people below here. Again, it is just sharing. We used to give different opinions about some companies and even criticize each other on the subject matter, not personally of course. We have different opinions, but I respect his sharing, and I think he values and respects my views too. Hopefully I am right.
Possible Econbhd like PTaRas in future?keke..
Ha ha I am just about to ask the same question
Got little bit of econpile also
Got little bit of econpile also
my analysis shows that econpile is not a dividend stock, but it can double very soon]
The question is, which foundation company is a better company? And which company is a better investment? These companies are Pintaras Jaya, which I have written many articles on purely to share investing knowledge, and Econ Piling, a newly listed company doing exactly the same business.
The foundation construction industry
Both Pintaras and Econpile are engaged in heavy foundation works, specializing in design and build piling, retaining structures, and basement construction. There is another niche player in Sunway Construction which has a strong geotechnical division, besides a couple of foreign established players and a number of smaller but also capable individual players in this market. Pintaras is the longest public listed foundation company, and probably the most well-known player in the market now. Econpile has been in the market for a long time too, but just got public listed about a year ago. The pioneer in this industry, Pilecon Engineering, has gone into oblivion.
Being construction companies, foundation contractors are living in a dog-eat-dog world. Coupled with the difficulties in foundation engineering in bored piling which works are done underground and can’t be seen, and with different and difficult soil conditions of granite residual soil with boulders, limestone cavities, soft marine clay, it is the toughest kind of construction works. Throughout the years, I have seen many companies, even good companies have gone bust, and many of them just after the boom years when they overly committed, overly aggressive and overly-geared in their operations. Pintaras is one of the very few which still left standing, and standing tall with increasing earnings and positive free cash flows every year, even during the crisis, as I have described in my last article.
I can’t say much about Econpiling as its history of listing is just too short but I guess they are as competent. Let’s make a comparison of the performance of these two companies as requested.
The growth in revenue and net profit
Since listing, Econpiles revenue has increased by a modest 2.5% to RM429m for the financial year ended 30th June 2015. Its net profit, however, has increased by a whopping 50.3% to RM46.6m, a very good news for the shareholders of Econpiles. Pintaras revenue increased by 20% to RM243m for the year ended 30th June 2015. This revenue, however is just 43% that of Econpiles. Pintaras net profit, however, dropped by 4% compared to last year to RM51.9m. this was due to a particular challenging job they have done last year in Merdeka Square, I think.
But do you notice that even though Pintaras’s revenue is only 43% that of Econpiles, and its net profit has dropped, the net profit of Pintaras is still 11.4% higher than that of Econpiles?
That is the reason of the return on capitals, the topic I have been emphasizing all this while.
Many investors look at profit and profit growth as their only criterion in investing. They swear that is the only investing strategy that works. That is perfectly okay if that it always work for them, after all, everyone has his own strategy which works. I have my own way of looking at how a good company looks like, that is basing on the return on capital.
In his book, “the Warren Buffett Way”, Robert Hagstrom wrote this:
“Customarily, most investors measure annual company performance by looking at earnings per share (EPS). Did they increase over last year? Are they high enough to brag about? For his part, Buffett considers EPS a smokescreen. Most companies retain a portion of their previous year's earnings as a way of increasing their equity base, so he sees no reason to get excited about record EPS. There is nothing spectacular about a company that increases EPS by 10%, if at the same time, it is growing its equity base by 10%. That's no different, he explains, from putting money in a savings account and letting the interest accumulate and compound. Worse still, there are many companies borrow huge amount of money to improve EPS, but the marginal return is way below its borrowing costs.
The test of economic performance, he believes, is whether a company achieves a high earnings rate on equity capital ("without undue leverage, accounting gimmickry, etc."), not whether it has consistent gains in EPS. To measure a company's annual performance, Buffett prefers return on equity or ROE. -- The ratio of operating earnings to shareholders' equity.”
The test of economic performance, he believes, is whether a company achieves a high earnings rate on equity capital ("without undue leverage, accounting gimmickry, etc."), not whether it has consistent gains in EPS. To measure a company's annual performance, Buffett prefers return on equity or ROE. -- The ratio of operating earnings to shareholders' equity.”
DuPont Analysis of Pintaras Vs Kimlun
Let us examine the dissection of ROE of the two companies using their latest financial statement of 2015 ended June 2015. For those who are interested in this topic, please refer to the link below:
Table 1 below shows how the return on assets, ROA, and return on equity,ROE of Pintaras was achieved versus that of Econpiles for the financial year ended June 2015.
Table 1: Dissection of ROE for Pintaras and Econpiles
It is clear from the above that Pintaras has a higher net profit margin twice that of Econpiles, whereas Econpiles has much more work, or higher asset turnover than Pintaras. Their equity multipliers are about the same. The emphasis of each company’s is different; Pintaras on margins, and Econpiles on turnover, and the end results are they both achieve about the same return on assets average of 13% (>10%), and return on equity average of about 15.5% (>12%). Both metrics are good for both companies. Bear in mind Pintaras has a lot of cash and Econpiles some debts in their balance sheet.
Construction is a tough industry. Foundation construction works is worse with numerous technical and resources problems. When there are a lot of works, you have the problems shortage of workers, supervisors, engineers. You often have the problems of shortage of materials, steel bars, concrete especially. You often meet foundation problems; hitting limestone cavities, boulders, collapsible bored holes, machines breakdown, temporary retaining structures give way and roads sink, nearby buildings settle and walls crack, slope collapse and all other kinds of headaches. Hence as a foundation contractor, I really prefer less work so that I can focus and manage well, but still earn good return because of the higher margins.
Many investors like profit and profit growth. They want their companies they invest in make a lot of earnings. They talk about it all the time, as I talk about return on capitals. They don’t care if this earnings may be smokescreen, such as growing receivable, or clients owe and dispute with them. They don’t mind the money the company makes has to be continuously put into the business by buying more plants and equipment. No cash never mind. Have to put in more money never mind, as long as the management tell them they make profit.
For me, like a broken record, and like usual, I want the company I invest in to earn cash, not just accounting profit. No money no talk. Isn’t this what most businessmen think? Am I the only exception? What is your preference, earn cash or accounting profit?
Cash flows
Table 2 below shows the cash flows of Pintaras Jaya Vs Econpiles
Table 2: Cash flows
Pintaras’s cash flows from operations is 35% above its net profit signifying the good quality of its earnings. It produces RM41m in free cash flow, FCF, in 2015, after spending RM29m in buying more plant and equipment. This FCF amounts to 17% of revenue and 24% of its invested capital. I have written many articles about the importance of cash flows. For those who are interested of what these number mean, please refer to the link below:
On the other hand, CFFO of Econpiles is way below its earnings at 59%. It has no FCF for 2015. Is this that bad for Econpiles? Not necessary in my opinion. A company just after its listing and on an expansion plan may need to buy machines for its projects on the pipeline, and that may be good. Piling and auxiliary machineries are expensive. Hopefully the capital expenses will yield further profit, and some FCF soon.
However, Pintaras has purchased much more machineries than Econpiles recently. It has spent RM63 million in capex the last two years, and yet it still has plenty of FCF. Like what has been described in the previous article, it has ample FCF every year, not only last year. For some investors, the past history has no relevance. But for me, history rhymes loud and clear, and it is the only thing which I can depend on confidently. With all the new machineries they have acquired, it is a matter of getting some jobs which is lacking now.
Conclusions
Both companies, Pintaras Jaya and Econpiles have done equally well in last year’s financial performance in terms of ROA and ROE. However the thing I like most is cash flow and a history of good performance. In this case, Pintaras way excel Econpiles. Hence my preference of which is a good company is quite clear.
However, a better company doesn’t mean is a better investment. It all depends on the price. That will be the next topic of discussion.
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