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23-08-2023, 08:17 AM
(This post was last modified: 23-08-2023, 10:49 AM by i4value.
Edit Reason: typo error
)
Fundamental analysis is a time-consuming exercise. We all screen for companies so that we spend time on those that have a good chance to be an investment opportunity once we complete the fundamental analysis.
I use a simple back-of-envelop valuation approach for screening brick-and-mortar companies. I used Value = Book Value X (ROE/10)
Where:
For the intrinsic value to be above the Book Value we should have a ROE that is greater than 10%. That is why I focus on ROE as a good screening metric.
In the case of Thong Guan, its average ROE over the past 10 years was 10.93%. Its current Book Value is RM 2.13 per share
My quick and dirty value is that:
Value = 2.13 X (10.93 / 10) = 2.13 X 1.1 = RM 2.34
Its current market price is RM 2.06 per share giving a margin of safety = (2.34 -2.06 ) / 2.06 = 14%.
It is a quick and dirty valuation than can be done in a few minutes but it does indicate that this is a candidate worth digging deeper into.
I of course have detailed analysis of other packaging companies such as New Toyo (NO8) and Canone. So I also compare their ROE as shown below. You can see that TGUAN did better than New Toyo and over the past few years did even better than Canone.
![[Image: TGUAN-vs-New-Toyo.png]](https://i.postimg.cc/Y0vfMXMV/TGUAN-vs-New-Toyo.png)
Again, it gives me confidence that if I spend time doing a fundamental analysis of TGUAN, I would not be wasting my time. Most of the time, the actual cost of capital would be lower than 10%. Any the actual valuation is based on free cash flows rather than earnings.
I of course have the advantage of a panel of 100 over companies that I have covered consistently over the past 20 years and have a good reference source. I have shared some of them eg New Toyo. You will have of course to build your own data base.
But this quick and dirty valuation is a useful screen to ensure that you have a more than fighting chance of finding a company with a good margin of safety when you do the detailed analysis.
I use a simple back-of-envelop valuation approach for screening brick-and-mortar companies. I used Value = Book Value X (ROE/10)
Where:
- ROE is the past 10 years average ROE to smooth out the yearly fluctuations due to business cycle,
- The 10 % represent the average cost of capital. It is a rule of thumb base on my history of valuing Bursa companies.
For the intrinsic value to be above the Book Value we should have a ROE that is greater than 10%. That is why I focus on ROE as a good screening metric.
In the case of Thong Guan, its average ROE over the past 10 years was 10.93%. Its current Book Value is RM 2.13 per share
My quick and dirty value is that:
Value = 2.13 X (10.93 / 10) = 2.13 X 1.1 = RM 2.34
Its current market price is RM 2.06 per share giving a margin of safety = (2.34 -2.06 ) / 2.06 = 14%.
It is a quick and dirty valuation than can be done in a few minutes but it does indicate that this is a candidate worth digging deeper into.
I of course have detailed analysis of other packaging companies such as New Toyo (NO8) and Canone. So I also compare their ROE as shown below. You can see that TGUAN did better than New Toyo and over the past few years did even better than Canone.
Again, it gives me confidence that if I spend time doing a fundamental analysis of TGUAN, I would not be wasting my time. Most of the time, the actual cost of capital would be lower than 10%. Any the actual valuation is based on free cash flows rather than earnings.
I of course have the advantage of a panel of 100 over companies that I have covered consistently over the past 20 years and have a good reference source. I have shared some of them eg New Toyo. You will have of course to build your own data base.
But this quick and dirty valuation is a useful screen to ensure that you have a more than fighting chance of finding a company with a good margin of safety when you do the detailed analysis.