Valuetronics Holdings

[DCF]

High cash balance not always good, it depends on the reasoning............for valuetronics, high cash balance is actually the rainy day fund for credit crunches and meant for such purposes instead of relying on banks

So why always depend on cash balance for valuation is beyond me.......should go by earnings

No, not on the reason for holding high cash. I asked the CFO this question and he replied that
1 Cash is a differentiation for them to win customers. Their customers want to outsource to people who has the financial strength to produce for them, as their customers are taking high risk of relying.
2 They are considering aquisition of similar business. They believe their strength is managing such business in a cost-effective way.

[dzwm87]

^^ Granted what the CFO said is true. Does it still make sense to look at P/E ex cash since cash is now a "working capital"

[(cy)]

not sure if this is relevant but when it comes to valuing companies, particularly manufacturing firms, isn't EV/EBITDA more appropriate?

separately, I think holding cash for inorganic growth such as M&A is good but the rationale of hoarding cash for the sake of differentiation does not quite make commercial sense...

[specuvestor]

^^^ EV/EBITDA was an approximate LBO metrics. Besides using it for stable cashflow companies to see how much technically it can be leveraged up or pay dvd, IMHO it is not very useful unless u intend to takeover or foresee a takeover

This happened 29 dec 2014 but was not mentioned in this forum yet: Executive Director and co-founder Mr. Chow Kok Kit sold 36 mln of his 64.7 mln shares to undisclosed parties (or the market?). His interest going from 17.28% to 7.67% of the total company shares.

Why would he do so at a point when the share price seems very cheap based on simple price ratios? No explanation whatsoever from Valuetronics.

Without a valid explanation this is a major red flag to me.

When I was a SH, the constant share sale by management was one of my concerns
I don't think they try to time their sales, ie not trying to sell when they think share price will drop in the near future
Rather, because they get cheap share options annually, they have to exercise n sell regularly. This forms part of their remuneration except that it's not paid directly by $$$ but indirectly by other SHs
If they didn't sell, after a few years their share holdings build up because of the options, then when they do sell it'll be a disaster

They can get their remunerations through dividends. If their cost is cheap they can calculate their cashflow return on investment pretty easily. That's the ORIGINAL logic of stock options: to align their interests with shareholders

[CityFarmer]

^^^ EV/EBITDA was an approximate LBO metrics. Besides using it for stable cashflow companies to see how much technically it can be leveraged up or pay dvd, IMHO it is not very useful unless u intend to takeover or foresee a takeover

I don't see major conflict between value investors and LBO buyers. Stable cash flow is important for both, thus the metrics used should be pretty similar.

[specuvestor]

Value guys look at NAV, book value, RNAV, intrinsic value ie mostly equity measures. LBO buyers look at leverage capacity and how to structure deleveraging post that... they are world of difference. Decade back I asked analysts why we need to look at market value plus debt ie EV when we are actually just concern about equity, and no one can give a good answer except it is customary like P/E, which when I decided to explore my own question myself.

What is common is both focus on cashflow, but the reason is different

[CityFarmer]

Value guys look at NAV, book value, RNAV, intrinsic value ie mostly equity measures. LBO buyers look at leverage capacity and how to structure deleveraging post that... they are world of difference. Decade back I asked analysts why we need to look at market value plus debt ie EV when we are actually just concern about equity, and no one can give a good answer except it is customary like P/E, which when I decided to explore my own question myself.

What is common is both focus on cashflow, but the reason is different

Our reference should always go to Mr. Buffett. Mr. Buffett looks at owner earning i.e. free cash flow, rather on equity.

Yes, both focus on cash flow, with different reason. It will not affect the nature of the free cash flow, thus the metric used should be similar, IMO

[specuvestor]

Since we reference Buffett Buffet says Depreciation is real cost... so why use EBITDA that is excluding Depreciation? To be exact Buffet and value investors look at free cashflow return ON UNLEVERED capital (you forgot the 2nd part)

http://www.forbes.com/global/2003/0317/024.html

Like I said the use of EV/EBITDA is generally not for us OPMI because we are not LBO, just like distressed debt investing is usually not the same game for OPMI even though both vultures and OPMI profess looking for value. Knowing who we are is important so that we use the right tool.

[newborn1000]

oh maybe I remember wrongly......I think my phasing was poor also

I was just trying to point out that unless the cash is returned to shareholders, doing a valuation base on cash balance dont make sense to me

just my opinion =)

[CityFarmer]

Since we reference Buffett Buffet says Depreciation is real cost... so why use EBITDA that is excluding Depreciation? To be exact Buffet and value investors look at free cashflow return ON UNLEVERED capital (you forgot the 2nd part)

http://www.forbes.com/global/2003/0317/024.html

Like I said the use of EV/EBITDA is generally not for us OPMI because we are not LBO, just like distressed debt investing is usually not the same game for OPMI even though both vultures and OPMI profess looking for value. Knowing who we are is important so that we use the right tool.

My view is, which may be different from yours.

If the EV/EBITDA is applicable to LBO, it is also application for value investing (or OPMI if you wish), because both focuses on "cash flow". Value investing derives the "value" from projected "cash flow".

EV/EBITDA is by no mean a perfect metric, it is just one of common metrics used.