tag:blogger.com,1999:blog-6833372664905554734.post5867088211411655126..comments2024-03-23T03:41:27.086+08:00Comments on Corporate Governance in Malaysia: Joel Greenblat and Value InvestingM.A. Windhttp://www.blogger.com/profile/16833927103193297126noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-6833372664905554734.post-54671225107180973232013-09-23T15:51:49.478+08:002013-09-23T15:51:49.478+08:00What I was trying to share in the table is that ev...What I was trying to share in the table is that even two simialr companies with the same ROE and PE ratio, they are not performing the same (ROIC), and their price is not the same too (EV/ebit).<br /><br />If you take the return of capital (ROIC), not just ROE, company B did much better with ROIC of 15.3% vs 11.3% of A. Why is ROIC important as you are only interested your return as an equity investor? Because you borrow money to get the same return of other with leverage, definitely it is better as it is less risky. Leverage can cut both ways, it will also amplifies a company's losses if there is a down down.<br /><br />In term of value, market enterprise value of company A at 8.9 times ebit is also much expensive than 6.5 times of B. B can replicate the capital structure of A and still get the same ROE and PE ratio by borrowing 40m from bank and pocket it. Then B will have the same net debt of 40m as B.<br /><br />K Chttps://www.blogger.com/profile/02986490115485764028noreply@blogger.comtag:blogger.com,1999:blog-6833372664905554734.post-33397829483395945822013-09-23T13:36:32.884+08:002013-09-23T13:36:32.884+08:00Thanks, great feedback, will post separately about...Thanks, great feedback, will post separately about the issues mentioned.M.A. Windhttps://www.blogger.com/profile/16833927103193297126noreply@blogger.comtag:blogger.com,1999:blog-6833372664905554734.post-30260738766426761732013-09-23T13:09:41.386+08:002013-09-23T13:09:41.386+08:00I agree with KC, using P/E and ROE is fundamentall...I agree with KC, using P/E and ROE is fundamentally different from using EV/EBIT and ROIC. What about companies that require large amounts of working capital and fixed assets, which they have funded with debt? What about the differences in accounting assumptions that can change the level earnings below the operating line? <br /><br />I'm using a similar screen (EV/EBITDA - so as to take out any differences in accounting treatment across countries) over a majority of the ASEAN countries (Malaysia, Singapore, Vietnam, Philippines, Indonesia). However, I'm also trying to add a level of analysis to the screen because I've found that the screen picks up some dodgy companies (S-Chips, technically listed companies, and subsidiaries of parent companies that are heavily leveraged) and I also want to add a macro overlay, taking into consideration the shifts in FX, which will be material for ASEAN investors (n.b. Indonesia recently). I'm confident that the formula could be applied to SEA markets but I believe there would be more ups and downs caused through corporate frauds, since there isn't the same level of corporate governance / accountability in Asia as the States.<br /><br />You can check out the analysis and some of the results at www.argutori.comargutorihttp://www.argutori.comnoreply@blogger.comtag:blogger.com,1999:blog-6833372664905554734.post-37583273435202117822013-09-22T22:44:18.364+08:002013-09-22T22:44:18.364+08:00Thanks, I agree, also decent example, I normally d...Thanks, I agree, also decent example, I normally don't go for D/E above 50%, so first example is (just) inside my limit.<br /><br />Another way to look at it is to completely separate the operational part of a company(making the products or delivering the service, generating revenue, COGS, administration, etc.) from the financial part (equity, borrowing, paying interest/dividends, etc.).<br /><br />Many companies (many hundreds of Malaysian listed companies) are not good in the first part, they probably should not have been listed.<br /><br />Some companies are good in the first part, but not so good in the second (like Panasonic), which is a pity, it is not exactly rocket science.M.A. Windhttps://www.blogger.com/profile/16833927103193297126noreply@blogger.comtag:blogger.com,1999:blog-6833372664905554734.post-81469472783043972052013-09-22T19:05:33.404+08:002013-09-22T19:05:33.404+08:00Two companies in exactly the same industry but wit...Two companies in exactly the same industry but with total different capital structures can have the same ROE, and trading at the same PE. But in term of enterprise value, they are totally different, one can be trading at more than 50% higher in EV than the other. If you were to consider purchasing one of them, which would you prefer to buy?<br /><br />EV=market cap+total debt+MI-excess cash<br /><br />Example two companies below:<br /><br />Company A B<br />No. of shares, m 100 100<br />Share price 1.00 1.00<br />Market Cap, m 100 100<br />Total debt, m 50 10<br />Excess cash 10 20<br />Book value 100 100<br /><br />Company A B<br />EBIT 15.8 13.8<br />Interest -2.5 -0.5<br />EBT 13.3 13.3<br />Tax @ 25% -3.3 -3.3<br />Net income 10.0 10.0<br />ROE 10% 10%<br />ROTC 11.3% 15.3%<br /><br />Enterprise value, m 140 90<br />PE 10% 10%<br />EV/EBIT 8.9 6.5<br />K Chttps://www.blogger.com/profile/02986490115485764028noreply@blogger.comtag:blogger.com,1999:blog-6833372664905554734.post-54997195363056484992013-09-22T17:34:23.708+08:002013-09-22T17:34:23.708+08:00Thanks for sharing, appreciated, and agree with wh...Thanks for sharing, appreciated, and agree with what you write. <br /><br />Yes, Bursa is pretty inefficient, I invested myself very actively from 1994 to 2008, also outperforming the index by a large margin (about the same as you describe). <br /><br />Focused, good quality companies, not too much debt, high ROE, some dividend, no CG issues, they are often seen as too boring, but not by me (and I guess neither by you). <br /><br />Yes, I was aware of EBIT and EV, thanks for pointing out, I used ROE and PE myself, I think not that different, but should have pointed that out to the reader.M.A. Windhttps://www.blogger.com/profile/16833927103193297126noreply@blogger.comtag:blogger.com,1999:blog-6833372664905554734.post-7484027083332471352013-09-22T17:16:03.530+08:002013-09-22T17:16:03.530+08:00Buying great companies at cheap price. How not to ...Buying great companies at cheap price. How not to work with this type of strategy? <br /><br />I have been doing my personal investment this way. The 5 year compounded annual return of my portfolio has out-performed the broad Bursa market by more than twice. ie 27% Vs 12% of KLSE. I am quite sure if anybody back-test Bursa stocks for the last 5-10 years, the results would be quite similar. Bursa is more inefficient where extra-ordinary profits are more likely to be found by the Magic Formula.<br /><br />Greenblat actually used ROIC and enterprise value/Ebit for the firm instead of ROE and PE ratio for the equity holders only. He ranked his portfolio of stocks using the two metrics, and rebalance the portfolio every year.K Chttps://www.blogger.com/profile/02986490115485764028noreply@blogger.com