Valuing A Stock With Supernormal Dividend Growth Rates

by Peter Cherewyk 

The supernormal growth model is most commonly seen in finance classes or more advanced investing certificate exams. It is based on discounting cash flows, and the purpose of the supernormal growth model is to value a stock which is expected to have higher than normal growth in dividend payments for some period in the future. After this supernormal growth the dividend is expected to go back to a normal with a constant growth. (For a background reading, check out Digging Into The Dividend Discount Model.)

Tutorial: Discounted Cash Flow Analysis

To understand the supernormal growth model we will go through three steps.

1. Dividend discount model (no growth in dividend payments)

2. Dividend growth model with constant growth (Gordon Growth Model)

3. Dividend discount model with supernormal growth

Dividend Discount Model (No Growth in Dividend Payments)
Preferred equity will usually pay the stockholder a fixed dividend, unlike common shares. If you take this payment and find the present value of the perpetuity you will find the implied value of the stock.

For example, if ABC Company is set to pay a $1.45 dividend next period and the required rate of return is 9%, then the expected value of the stock using this method would be 1.45/0.09 = $16.11. Every dividend payment in the future was discounted back to the present and added together.

V = D1/(1+k) + D2/(1+k)2 + D3/(1+k)3 + ... + Dn/(1+k)n

Where:
V = the value
D₁ = the dividend next period
k = the required rate of return

For example:

V = $1.45/(1.09) + $1.45/(1.09)2 + $1.45/(1.09)3 + … + $1.45/(1.09)n V= $1.33 + 1.22 + 1.12 + . . . V= $16.11

Because every dividend is the same we can reduce this equation down to: V= D/k

V=$1.45/0.09

V=$16.11

With common shares you will not have the predictability in the dividend distribution. To find the value of a common share, take the dividends you expect to receive during your holding period and discount it back to the present period. But there is one additional calculation: when you sell the common shares you will have a lump sum in the future which will have to be discounted back as well. We will use "P" to represent the future price of the shares when you sell them. Take this expected price (P) of the stock at the end of the holding period and discount it back at the discount rate. You can already see that there are more assumptions you need to make which increases the odds of miscalculating. (Explore arguments for and against company dividend policy, and learn how companies determine how much to pay out, read How And Why Do Companies Pay Dividends?)

For example, if you were thinking about holding a stock for three years and expected the price to be $35 after the third year,  the expected dividend is $1.45 per year.

V= D1/(1+k) + D2/(1+k)2  + D3/(1+k)3 + P/(1+k)3 V = $1.45/1.09 + $1.45/1.092 + $1.45/1.093 +$35/1.093

Dividend Growth Model with Constant Growth (Gordon Growth Model)
Next let's assume there is a constant growth in the dividend. This would be best suited for evaluating larger stable dividend paying stocks. Look to the history of consistent dividend payments and predict the growth rate given the economy the industry and the company's policy on retained earnings.

Again we base the value on the present value of future cash flows:

V = D1/(1+k) + D2/(1+k)2+…..+Dn/(1+k)n

But we add a growth rate to each of the dividends (D₁, D₂, D₃, etc.) In this example we will assume a 3% growth rate.

So D₁ would be $1.45(1.03) = $1.49

D₂ = $1.45(1.03)² = $1.54

D₃ = $1.45(1.03)³ = $1.58

This changes our original equation to : 

V = D1(1.03)/(1+k) + D2(1.03)2/(1+k)2+…..+Dn(1.03)n/(1+k)n V = $1.45(1.03)/(1.09) + $1.45(1.03)2/(1.09)2 + $1.45(1.03)3/(1.09)3 + … + $1.45(1.03)n/(1.09)n V = $1.37 +$1.29 + $1.22 + …. V = 24.89

This reduces down to: V = D₁/k-g

Dividend Discount Model with Supernormal Growth
Now that we know how to calculate the value of a stock with a constantly growing dividend we can move on to a supernormal growth dividend.

One way to think about the dividend payments is in two parts (A and B). Part A has a higher growth dividend; Part B has a constant growth dividend. (For more, see How Dividends Work For Investors.)

A) Higher Growth
This part is pretty straight forward - calculate each dividend amount at the higher growth rate and discount it back to the present period. This takes care of the supernormal growth period; all that is left is the value of the dividend payments which will grow at a continuous rate.

B) Regular Growth
Still working with the last period of higher growth, calculate the value of the remaining dividends using the V = D₁/(k-g) equation from the previous section. But D₁ in this case would be next year's dividend, expected to be growing at the constant rate. Now discount back to the present value through four periods. A common mistake is discounting back five periods instead of four. But we use the fourth period because the valuation of the perpetuity of dividends is based on the end of year dividend in period four, which takes into account dividends in year five and on.

The values of all discounted dividend payments are added up to get the net present value. For example if you have a stock which pays a $1.45 dividend which is expected to grow at 15% for three years then at a constant 6% into the future. The discount rate is 12%.

Steps

1. Find the four high growth dividends.

2. Find the value of the constant growth dividends from the fifth dividend onward.

3. Discount each value.

4. Add up the total amount.

Period	Dividend	Calculation	Amount	Present Value
1	D1	$1.45 x 1.151	$1.67	$1.50
2	D2	$1.45 x 1.152	$1.92	$1.56
3	D3	$1.45 x 1.153	$2.21	$1.61
4	D4	$1.45 x 1.154	$2.54	$1.67
5	D5 …	$2.536 x 1.06	$2.69
		$2.688 / (0.11 - 0.06)	$53.76
		$53.76 / 1.114		$35.42
			NPV	$41.76

Implementation
When doing a discount calculation you are usually attempting to estimate the value of the future payments. Then you can compare this calculated intrinsic value to the market price to see if the stock is over or undervalued compared to your calculations. In theory this technique would be used on growth companies expecting higher than normal growth, but the assumptions and expectations are hard to predict. Companies could not maintain a high growth rate over long periods of time. In a competitive market new entrants and alternatives will compete for the same returns thus bringing return on equity (ROE) down.

The Bottom LineCalculations using the supernormal growth model are difficult because of the assumptions involved such as the required rate or return, growth or length of higher returns. If this is off, it could drastically change the value of the shares. In most cases, such as tests or homework, these numbers will be given, but in the real world we are left to calculate and estimate each of the metrics and evaluate the current asking price for shares. Supernormal growth is based on a simple idea but can even give veteran investors trouble. (For more, check out Taking Stock Of Discounted Cash Flow.)

by Peter Cherewyk (Contact Author | Biography)

Peter Cherewyk has worked in the financial field for over 10 years. He completed his Bachelor of Commerce from the University of Alberta, and is currently working towards a Chartered Financial Analyst designation. He enjoys hockey and hiking and the opportunity to teach others.

Filed Under: Dividend, Fundamental Analysis, Stock Analysis, Stocks

http://www.investopedia.com/articles/fundamental-analysis/11/supernormal-growth-analysis.asp

Dutch Lady anticipates rising raw material prices

Spreadsheet of Dutch Lady 27.3.2011
https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdHVrZkV4VVBudUhjakpiLXBrZDIwZlE&output=html


Capital Structure 31.12.2010

Outstanding shares (m) 64
Market price RM  25.3.2011 16.22
Market capitalisation (m) 1038.08

Per Share
EPS 1.00
DPS 0.73
NAV 3.09
FCF 1.40

Valuation
P/E 16.25
EY 6.15%
P/B 5.26
DY% 4.47%
P/DIV 22.37
D/E 0.00
P/FCF 11.62
FCF/P 8.60%

ROA 20.78%
ROTC1 (TC= Eq+LTL+ STL-Cash) 57.14%
ROTC2 (TC= Eq+LTL-Cash) 57.14%
ROE 32.35%

Turnovers
Inventory Turnover (days) 59
Receivable Turnover (days) 34
Payable Turnover (days) 31

Business Prospects

After a relatively stable year for mild solid prices in 2010, we anticipate that prices for imported dairy raw materials will rise sharply starting early in 2011.  This is mainly a result of increasingly strong demand in upcoming markets and climatic changes affecting milk powder exporting countries.  It will unfortunately increase our input costs and likely to impact the bottom-line results for the financial year ending 31 December 2011.

Market Watch

Recent Financial Results

Announcement Date		Financial Yr. End		Qtr	Period End		Revenue RM '000		Profit/Lost RM'000		EPS		Net Pr. Marg
25-Feb-11		31-Dec-10		4	31-Dec-10		161,833		10,835		16.93		6.7%
29-Nov-10		31-Dec-10		3	30-Sep-10		186,715		13,322		20.82		7.13%
18-Aug-10		31-Dec-10		2	30-Jun-10		188,929		18,918		29.56		10.1%
18-May-10		31-Dec-10		1	31-Mar-10		173,111		20,812		32.52		12.0%

Nestle Malaysia continues to grow

Nestle Malaysia

Spreadsheet on Nestle Malaysia 23.3.2011
https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdGNIczdibWJKdERSWFA4bjFJbHMwMGc&output=html

Capital Structure 31.12.2010

Outstanding shares (m) 234.5

Market price (25.3.2011)  RM 47.86
Market capitalisation (m) 11223.17

Per Share
EPS 1.67
DPS (Net) 1.50
NAV 2.62
FCF 1.56

Valuation
P/E 28.67
EY 3.49%
P/B 18.30
DY% 3.13%
P/DIV 31.91
P/FCF 30.75
FCF/P 0.03
D/E 0.67

Turnovers
Inventory Turnover (days)   52
Receivable Turnover (days) 32
Payable Turnover (days) 57

Current year prospect

After an encouraging 2010, the local economy is expected to further grow, leveraging on the  Economic Transformation Plan recently presented by the government. The sharp increase in the global commodity prices and the government's gradual reduction in food and fuel subsidies which put pressure on the Group's input costs, remains a concern.  The Group will continue to closely monitor the development of commodity prices, evaluate and adjust its pricing policy accordingly. Where possible the Group will leverage operational efficiencies and cost savings initiatives to avoid passing on price increases to consumers.


In 2011, the Group will take advantage of the improvement in both the local and international economies to further grow both top and bottom line. It will also increase its marketing investment in line with Nestle's objective of being the leader in Nutrition, Health & Wellness, as well as an industry benchmark for its financial performance and being trusted by all stakeholders.

Market Watch

Recent Financial Results

Announcement Date		Financial Yr. End		Qtr	Period End		Revenue RM '000		Profit/Lost RM'000		EPS		Net Pr Marg
24-Feb-11		31-Dec-10		4	31-Dec-10		963,893		39,259		16.74		4.07%
28-Oct-10		31-Dec-10		3	30-Sep-10		991,076		113,187		48.27		11.42%
26-Aug-10		31-Dec-10		2	30-Jun-10		1,050,863		100,153		42.71		9.53%
21-Apr-10		31-Dec-10		1	31-Mar-10		1,020,487		138,798		59.19		13.60%

Nestle (Malaysia) Bhd hits year-high

Nestle (Malaysia) Bhd hits year-high

Malaysia

• Company news
• NewsBites
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NEWS BITES ASIAN MARKETS Nestle (Malaysia) Bhd (4707.KL), Malaysia's 3rd largest Consumer Products company by market capitalisation, hit a 52-week high of MYR48.0 during the week. In the last six months the stock has hit a new 52-week high twice....

© 2011 NewsBites

Read more: http://news.reportlinker.com/n08516219/Nestle-Malaysia-Bhd-hits-year-high.html#ixzz1HmXcd01m

HOW and WHY to own a piece of a business?

An interesting post by Special Situation on how investing is actually owning a piece of a business. I concur, though I am in business myself. ;-)




Quote:


It's ok. I don't really care people buying follow my advice or not. I would rather think of owning a piece of business, which is managed by capable management + capital. It's very hard to start a biz, which is making enough $$$$ for you.

Just make it simple.

If Mr. Lim start a biz with RM200k, the return is RM5k/month. This biz is not something profitable after RM5k-his own salary = ??!!. Further more, how long it takes to breakeven?

I would like to see net return after minus all his salary. Investing in stock, just like buying a piece of business,which is managed by well-capable management. For some biz, it's very hard for us to start it nowadays due to high initial invested capital. But, with share, we can buy a piece of GREAT biz like Parkson.

If you're a biz, how much capital required to start a business like parkson? Will bank approve your loan?

There're many things to consider when you start a big biz like parkson. They have powerful bargain with bank. For us, it's very hard. So, just buy a piece of business better 




by Special Situation
http://www.investlah.com/forum/index.php/topic,18615.msg346266.html#msg346266

What is good business and what is good managers?

Good business is this: It generates more cash than it consumes.


Good managers is this: They keep finding ways of putting that cash to productive use.

In the long run, companies that meet this definition are virtually certain to grow in value, no matter what the stock market does.

http://hongwei85.blogspot.com/2011/03/what-is-good-business-and-what-is-good.html

Valuing an asset using DCF and PER

Value investing is theoretically simple: buy assets for less than they're worth and sell when they approach or move beyond fair value. 


What 2 methods do you use to value assets?


1)  DCF


So too are valuing assets:discount future cash flows back to today at an appropriate interest rate for the life of the asset. The discounted cash flow (DCF) model is a commonly-used tool, hammered into every finance and business student.

But DCF models quickly deteriorate when they meet a rapidly changing world. The fact that most analysts failed to consider the impact of falling US house prices on their models played a major role in triggering the global financial crisis. Worse still, the misleading precision imbues investors with unwarranted overconfidence. Too often, models are precisely wrong.





2)  Price Earnings Ratio

Other tools are available to help you avoid this error. The price-to-earnings ratio (PER) is a regularly used proxy for stock valuation but also one of the most overused and abused metrics. To make use of it you need to know when to use it and when not to.

Related:

Price-Earning Ratio 101
http://myinvestingnotes.blogspot.com/2011/03/price-earning-ratio101.html

Investor Dialogue: Soo-Hai Lim

Soo-Hai Lim, manager of Baring Asean Frontiers Fund, explains why he thinks Southeast Asia has the greatest potential in the region.

By Rupert Walker | 17 March 2011
Keywords: baring | asean frontiers fund | asean | southeast asia

Soo-Hai Lim joined Baring Asset Management in 2005 and manages its Asean Frontiers Fund, a $370 million Dublin-registered fund that is regulated by the Hong Kong Securities and Futures Commission. Lim also directs research in the Australasia and Asean markets, and is a key member of the portfolio construction team for all Asian regional mandates. Lim is Singaporean and was previously the country specialist for Australia and Malaysia for five years at Daiwa SB Investments. His frontiers fund started life with a wider Pacific mandate, but in 2008 the focus changed.


Why did you change the mandate of the original fund?

We decided that it was too restrictive and not consistent with our belief that the greatest potential within the region was among the Asean nations — despite the original fund’s strong performance. The Asean countries are on a secular growth trend, supported by young demographics — especially in Indonesia and the Philippines — and it is at least as convincing as India’s story. So we gained the approval of unitholders to change the mandate to an Asean focus, and hence changed the benchmark, and we also gained the flexibility to invest in companies on the frontier of the region, such as Sri Lanka, to give some extra spice to our investors. We can invest up to 30% of our net assets in non-Asean countries: so far that’s only been Sri Lanka, but Bangladesh is now on our radar. Overall, we are restricted to 15% more or less than a country’s representation in the benchmark, and 5% either way for a named company, and a 10% absolute limit. Currently, the fund is invested in around 70 stocks.

LIM'S TOP THEMES Focus on unrecognised growth stocks in Asean and frontier countries  1  Rising consumption by half a billion people offers vast opportunities  2  Asean learned hard lessons in 1997 and passed the global crisis test  3

What is your investment philosophy and style?

We are stock pickers and make our selections through intensive bottom-up analysis and use the well-established “growth at a reasonable price” criteria. But, we also have our own five-point check-list to help find attractive opportunities. These are growth, liquidity, valuation, management and currency. We have a stock template and score each proposition from one to five, with “one” denoting outperformance potential, “five” for underperformance and “three” as benchmark performance.
Basically, we look for stocks where growth potential isn’t fully priced in, and can expect to produce excess returns — that is alpha — over our benchmark, the MSCI Southeast Asia Total Net Return. In terms of our broader approach, geographical focus dominates sector considerations, although we have certain preferences, such as energy and materials. The key is that we gain outperformance through stock selection rather than asset allocation.


And your process?

We use both qualitative and quantitative methods to screen for ideas in our investment universe. Our qualitative methods include the use of top-down macro, thematic, sector views from our strategic policy group in London, as well as our own views of the catalysts for the individual Asean markets to direct our research focus to look for alpha-generating ideas. A key part of this process is intensive meetings with companies’ managements in our search for unrecognised growth stocks. We also use these meetings to assess potential stock ideas in any part of the value chain of that company’s industry. To supplement the qualitative screening, we have our in-house quant screens based off several growth and value factors like earnings per share revision, momentum return on equity to rank stocks in our investment universe into deciles.
Just as important, our process is continuous, involving constant discussion, analysis and review. We are also happy to receive input from brokers, as long as they add value. By that I mean that they have reliable market information, come up with original ideas early and can provide access to company management.


Who are your investors?

We enjoyed substantial inflows last year from European retail customers, and always have a healthy distribution in Hong Kong to retail investors and funds of funds.


What are the best opportunities now?

At the moment we are underweight Singapore (which makes up more than a quarter of our benchmark) and Malaysia, and overweight Indonesia, Thailand and the Philippines. Indonesia’s improving macroeconomic trajectory is well established, and there are key companies such as Astra that are tremendously placed. In fact, Astra has a great story: it has a 50% share of the domestic market for the assembly and distribution of motor vehicles, and historical precedents show there is a linear correlation between vehicle penetration and increases in per capita GDP. So, if Indonesia’ growth continues, Astra will be a major beneficiary. The Philippines is especially exciting — it has a young, educated and increasingly affluent population that could sustain a consumer boom and is almost underwritten by the traditional remittances from its diaspora. If the new president can deliver on his promises of reform, like reducing corruption and increasing tax collection, then its potential is enormous, in particular in the consumer and infrastructure sectors. We have already enjoyed strong performance here, taken profits, and are now looking to reinvest in some stocks that have fallen to attractive levels.
Thailand has some great companies and can justifiably boast about being an agriculture superpower; unfortunately it has suffered from unstable politics during the past couple of years. Malaysia is perhaps too reliant on commodities riches, to the detriment of the development of other industries and companies, but its closer relationship with Singapore should lead to opportunities. Meanwhile, Singapore constantly re-invents itself, and it always offers attractive, well- managed companies to invest in. Our underweight position simply reflects better investment opportunities elsewhere in the region.


What about the frontier markets?

Sri Lanka appealed to us because companies such as the conglomerate John Keells and a couple of bank stocks looked undervalued following the end of the civil war and evidence now of political stability. We also have exposure to greater China through a holding in the Baring China A-Shares Fund. Bangladesh has enormous potential, but valuations have already shot up, so we will be looking for opportunities on any weakness. Laos is a country we’re now examining closely as the latest frontier market this year.


What are the greatest risks?

Inflation is certainly a problem within the region. But, a large part of it is perhaps due to a temporary rise in food prices due to extreme weather events and farmers struggling against poor harvests. On the other hand, as these economies grow richer, dietary habits change, which could lead to a permanent, secular sift in food prices. Politics remains an issue in Thailand, execution of policy is an issue in the Philippines, Vietnam is suffering from the effects of an overheating economy and land acquisition difficulties are holding Indonesia back.
Despite these problems, the region offers among the best opportunities in the world today. And, crucially, local companies are rising to meet those challenges. That translates into great investment potential.

This interview was first published in the February issue of FinanceAsiamagazine.

http://www.financeasia.com/News/250672,investor-dialogue-soo-hai-lim.aspx

Esso Malaysia Berhad

On 25.3.2011, Esso said that it was unaware of any plans by ExxonMobil (its parent) to take Esso private following a newspaper article.  Interestingly, exactly a year ago, on 30.3.2010, Esso also said the same, denying any privatisation move by ExxonMobil, following an article that appeared in the Malaysian Reserve on that matter.

Business structure of Esso

The company is involved in:
1. refining and
2. marketing of petroleum products.

Esso is a subsidiary of Exxon Mobil Corporation which is the world's largest energy company.  Currently, Esso's refinery is the third largest in Malaysia after Shell and Petronas.

April 1995:  Esso's licensed refining capacity was upgraded to 75,000 barrels per day (bpd) from 66,000 bpd previously.
1996: A further increase in licensed capacity to 88,000 bpd
Nov 1999:  Exxon merged with Mobil to form Exxon Mobil.
May 2000:  Esso entered into a Shared Services Agreement with Mobil Oil Malaysia.  Esso and Mobil will continue to operate as two separate companies each retaining their Esso and Mobil brand names.

Esso is also the third largest petroleum products player in Malaysia.  It is perhaps important to note one major difference between Esso and its main local rival, Shell Refining.  Shell Refining sells its products through its sister company, Shell Marketing, at prices determined by the Singapore free market (the so-called Singapore Postings).  Unlike Shell, Esso sells directly to the consumers of government fixed prices according to automatic pricing mechanism (APM).


Revenues are mainly derived from the sale of petroleum products to domestic customers including its affiliates and competitors, and sales to ExxonMobil Asia Pacific Pte. Ltd. (EMAPPL), Singapore.




Comments by SPG Dynaquest

Based on its end August 2010 price of RM 2.71, Esso as at 3.6.2010  was selling at:

• prospective PER of 3.6 x, 
• nett DY of 3.3% and 
• 1.18 x its NTA of RM 2.30 

It is to be noted that Esso's gearing ratio of 1.3 (nett borrowings divided by shareholders' equity) as at 30.6.10 can be considered high by local standards.

Shares outstanding:  270m
Par RM 0.50
Major shareholders:  ExxonMobil International Holdings (18.3.2010):  65%
At a price of 3.80 per share, market cap is RM 1,026 m.

Past Performances
      
  
           DPS    EPS     
2000   0.0       8.1
2001   0.0     67.6
2002   7.2     -3.2
2003   7.2     21.1
2004   8.6     -9.0
2005   8.6       7.3
2006   8.6      2.6
2007   8.8     21.2
2008   8.9    -93.1
2009   9.0     53.9
2010  10.5   99.50
Total  77.4    176.0

(DPS is net after tax)

DPO ratio = 77.4 / 176 = 44%

Spreadsheet on ESSO Malaysia for latest VALUATION figures.
https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdHpkbEdmdmRIZkpGUjMtSzRwbEpOUFE&output=html


Commentary on Prospects 

The outlook for the Malaysian economy in 2011 remains positive, and demand for petroleum products is expected to be robust.  However, volatility in the crude price environment will continue to affect the industry. Recognising the potential for earnings volatility, the Company's focus shall remain on sustaining  flawless operations, cost control and product and services quality, as well as strengthening its business position through continued emphasis on strategic investment.



Esso pares gains after refuting privatisation news
Written by Joseph Chin of theedgemalaysia.com
Friday, 25 March 2011 15:12


KUALA LUMPUR: ESSO MALAYSIA BHD [] shares shed half of the early gains in late afternoon trade on Friday, March 25 after the company refuted a news report it could be taken private.

At 2.56pm, Esso was up 39 sen to RM3.88, off the high of RM4.40 at the midday break.

The FBM KLCI was up 1.67 points to 1,515.51. Turnover was 731.12 million shares valued at RM967.67 million. There were 420 gainers, 252 losers and 291 stocks unchanged.

Esso informed Bursa Malaysia during the midday break that it was not aware of any plans to take it private as had been reported.

“Esso wishes to also announce that there have been no undisclosed developments which would account for the apparent unusual market activity,” it said, referring to the high trading volume in its shares.

Esso surges amid talk on privatisation
Published: 2011/03/25

Shares of ESSO Malaysia Bhd (3042)rose to its highest in more than four years on unusually heavy volume yesterday, amid rumours the group may be taken private.

Some 1.32 million shares changed hands yesterday. This was significantly higher than its 30-day average volume of 143,000 shares.

The stock gained 8.7 per cent or 28 sen, to close at RM3.49 yesterday, its highest since August 2006.

Esso is 65 per cent held by ExxonMobil Corp, one of the world's largest oil companies.

Esso operates a refinery in Port Dickson, Negri Sembilan, as well as a growing network of petrol stations across the country.

For the financial year ended December 31 2010, it almost doubled its net profit to RM268.6 million. Revenue rose to RM8.42 billion from RM8.03 billion recorded in 2009.

http://www.btimes.com.my/Current_News/BTIMES/articles/esso24/Article/#ixzz1HmCWXDp0

Esso shares jump 31 sen
Published: 2011/03/26

ESSO Malaysia Bhd (3042) said it is unaware of any plan to take the company private, even as its share price jumped on heavy volume for the second straight day yesterday.

It put on 31 sen to close at RM3.80 yesterday, off an intra-day high of RM4.40. It has gained 18.3 per cent over the last two days.

Some 5.9 million shares changed hands, more than three times that of the previous day.

Esso, a unit of one of the world's largest oil companies Exxon Mobil Corp, told the stock exchange yesterday that it was unaware of any reasons for the share movements.


http://www.btimes.com.my/Current_News/BTIMES/articles/essoma/Article/index_html#ixzz1HmD7vdKj



ExxonMobil to add 12 petrol stations in 2011
Published: 2011/01/18

ExxonMobil is aiming to add another 10-12 petrol stations this year to the current 560.

"Last year, we opened 10 stations. For 2011, our target is about 10 to 12 stations," Esso Malaysia Bhd's head of the retail business sector, Faridah Ali, told reporters this at the launch of Exxonmobil's new Dual Fleet Card.

The new card is to complement the existing Fleet Card programme which is a convenient and value-added computerised payment method that helps companies manage their fleet and fuel expenses.

According to Faridah, with the new card, customers would get a vehicle card assigned to each vehicle and a driver card which carries a specific personal identification number.

With the card, customers can have better control for improved efficiency and cost management. -- Bernama


http://www.btimes.com.my/articles/20110118134941/Article/#ixzz1HmEGXdq1

Price-Earning Ratio 101

What actually is PER?

It's often said that the PER is an estimate of the number of years it'll take investors to recoup their money. Unless all profits are paid out as dividends, something that rarely persists in real life, this is incorrect.

So ignore what you might read in simplistic articles and note this down: a PER is a reflection not of what you earn from a stock, but “what investors as a group are prepared to pay for the earnings of a company”.

All things being equal, the lower the PER, the better. 


But the list of caveats is long and vital to understand if you're to make full use of this metric.

PER:  Historical versus Forward or Forecast PER

The PER compares the current price of a stock with the prior year's (historical) or the current year's (forecast) earnings per share (EPS). Usually the prior year's EPS is used, but be sure to check first.

For example:

Last financial year, XYZ Ltd made $8 million in net profit (or earnings). 

The company has 1 million shares outstanding.

So it achieved earnings per share (EPS) of $8.00 ($8 million profit divided by 1 million shares). 

In the current year, XYZ is expected to earn $10 million; a forecast EPS of $10.00.

• At the current share price of $100, the stock is therefore trading on a historic PER of 12.5 ($100/$8). 
• Using the forecast for current year's earnings, the forward or “forecast PER” is 10 ($100/$10).

Quality has a price to match

Quality usually comes with a price to match. 


It costs more, for example, to buy handcrafted leather goods from France than it does a cheap substitute from China. Stocks are no different: high quality businesses generally, and rightfully, trade on higher PERs than poorer quality businesses.





Low PER doesn't alone guarantee quality business

• Value investors love a bargain. Indeed, they're defined by this quality. 
• But whilst a low PER for a quality business can indicate value, it doesn't alone guarantee it. 
• Because PERs are only a shortcut for valuation, further research is mandatory.
• 
  

High PER with strong future earnings growth maybe a bargain

• Likewise, a high PER doesn't ensure that a stock is expensive. 
• A company with strong future earnings growth may justify a high PER, and may even be a bargain. 
• A stock with temporarily depressed profits, especially if caused by a one-off event, may justifiably trade at a high PER. 
• But for a poor quality business with little prospects for growth, a high PER is likely to be undeserved.

Avoid a Common trap: Use underlying or normalised earnings in PER


There's another trap: PERs are often calculated using reported profit, especially in newspapers or on financial websites. 


But one-off events often distort headline profit numbers and therefore the PER. 


Using underlying, or “normalised”, earnings in your PER calculation is likely to give a truer picture of a stock's value.





What is a normalised level of earnings?

That begs the question; what is a normal level of earnings? That's the $64 million dollar question.


 If you don't know how to calculate these figures for the stocks in your portfolio, now is the time to establish whether it's skill or luck that's driving your returns. And if you don't know that, history may well make a monkey of you.




An old encounter with low PE stock: Hai-O


It is nostalgic to re-read an old post on Hai-O by ze Moola. 

http://whereiszemoola.blogspot.com/2008/04/more-on-haio.html

Sunday, April 13, 2008
MORE ON HAIO

My dearest BullBear,

A low PE stock means only one thing and that is the stock is trading on a lower valuation compared to what it is currently earning.

Some simply consider that what is happening is the stock is being ignored in the market despite its impressive earnings.

Why?

The market could be wrong and that perhaps this is a stock that's an ignored gem. Yeah, the classical hidden gem and if this is the case, investors who invests in the stock could be rewarded for their stock selection.

However, on the other hand, sometimes the market could be right and that they do sense something is not right within the stock.

And because of this reasoning, I have always realised that a low PE stock does not make a stock a QUALITY stock.

It just means the stock is trading 'cheaply'.

It could be a bargain but it could also be a trap.

Don't be a stockpicking monkey, mistaking skill for luck. Learn DCF and PER 101.

Don't be a stockpicking monkey
Greg Hoffman
March 21, 2011 - 12:06PM

Monkeys are great stockpickers. Had your common-or-garden variety primate randomly selected five stocks in March 2009, chances are it would now be sitting on huge capital gains, contemplating reinvesting them in bananas - by the truckload.

It's easy enough for us to see that our monkey, who now sees himself as a future fund manager, is mistaking skill for luck. What's harder for us to see is how we might be making the same mistake ourselves.

If examining your portfolio's returns over the past few years engenders in you a feeling of self-satisfaction, you're running that risk. With the sharemarket falling recently now is the time to educate yourself. Consider what follows a lesson in fire safety.


Value investing is theoretically simple: buy assets for less than they're worth and sell when they approach or move beyond fair value. So too are valuing assets: discount future cash flows back to today at an appropriate interest rate for the life of the asset. The discounted cash flow (DCF) model is a commonly-used tool, hammered into every finance and business student.

But DCF models quickly deteriorate when they meet a rapidly changing world. The fact that most analysts failed to consider the impact of falling US house prices on their models played a major role in triggering the global financial crisis. Worse still, the misleading precision imbues investors with unwarranted overconfidence. Too often, models are precisely wrong.

Other tools are available to help you avoid this error. The price-to-earnings ratio (PER) is a regularly used proxy for stock valuation but also one of the most overused and abused metrics. To make use of it you need to know when to use it and when not to.

PER 101

The PER compares the current price of a stock with the prior year's (historical) or the current year's (forecast) earnings per share (EPS). Usually the prior year's EPS is used, but be sure to check first.

Last financial year, XYZ Ltd made $8 million in net profit (or earnings). The company has 1 million shares outstanding, so it achieved earnings per share (EPS) of $8.00 ($8 million profit divided by 1 million shares). In the current year, XYZ is expected to earn $10 million; a forecast EPS of $10.00.

At the current share price of $100, the stock is therefore trading on a historic PER of 12.5 ($100/$8). Using the forecast for current year's earnings, the forward or “forecast PER” is 10 ($100/$10).

It's often said that the PER is an estimate of the number of years it'll take investors to recoup their money. Unless all profits are paid out as dividends, something that rarely persists in real life, this is incorrect.

So ignore what you might read in simplistic articles and note this down: a PER is a reflection not of what you earn from a stock, but “what investors as a group are prepared to pay for the earnings of a company”.

All things being equal, the lower the PER, the better. But the list of caveats is long and vital to understand if you're to make full use of this metric.

Quality usually comes with a price to match. It costs more, for example, to buy handcrafted leather goods from France than it does a cheap substitute from China. Stocks are no different: high quality businesses generally, and rightfully, trade on higher PERs than poorer quality businesses.

Value investors love a bargain. Indeed, they're defined by this quality. But whilst a low PER for a quality business can indicate value, it doesn't alone guarantee it. Because PERs are only a shortcut for valuation, further research is mandatory.

Likewise, a high PER doesn't ensure that a stock is expensive. A company with strong future earnings growth may justify a high PER, and may even be a bargain. A stock with temporarily depressed profits, especially if caused by a one-off event, may justifiably trade at a high PER. But for a poor quality business with little prospects for growth, a high PER is likely to be undeserved.

Common trap

There's another trap: PERs are often calculated using reported profit, especially in newspapers or on financial websites. But one-off events often distort headline profit numbers and therefore the PER. Using underlying, or “normalised”, earnings in your PER calculation is likely to give a truer picture of a stock's value.

That begs the question; what is a normal level of earnings? That's the $64 million dollar question. If you don't know how to calculate these figures for the stocks in your portfolio, now is the time to establish whether it's skill or luck that's driving your returns. And if you don't know that, history may well make a monkey of you.



Greg Hoffman is research director of The Intelligent Investor.

http://www.brisbanetimes.com.au/business/dont-be-a-stockpicking-monkey-20110321-1c32p.html

Buffett at University of Kansas (2005): You can still earn extraordinary returns on smaller amounts of capital.

University of Kansas : Warren Buffett Q&A
Notes by Professor Hirschey, University of Kansas ( May 6, 2005 )

Question: According to a business week report published in 1999, you were quoted as saying “it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?

Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.

You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. 

A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.

Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.

The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn't have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.

I know more about business and investing today, but my returns have continued to decline since the 50's. Money gets to be an anchor on performance. At Berkshire's size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business.


http://www.valueplays.net/wp-content/uploads/vinvesting-com.pdf