Using owner earnings to value shares: Cash yield or Interest rate method

This approach is very simple.

Take the owner earnings or the cash profit per share and divide it by the current share price to get a cash interest rate (or yield)

Cash interest rate = cash profit per share / share price

Rational

The whole point of owning shares is to get a higher return on your money so that you can grow the value of your savings. 

If you are going to get only a small cash interest rate on your shares at the current share price, it could be a sign that the shares are overvalued.

What a low interest rate is telling you is that cash profits are going to have to grow a lot in the future to allow you to get a decent return from owning the shares.

Investing is all about interest rates.  

To make money you should aim to try and get the highest rate of interest on your investments as you can without taking lots of unnecessary risks.

Only you can decide what rate of interest is high enough.

EXAMPLE of using cash yield or interest rate method to value share

Let's say that you want to get a 10% cash flow return on buying shares in Company X where the cash profit per share is 11.6 sen.  At its present share price of $3.20, you are currently getting a cash yield or interest rate of 3.6%.   You need to work out what annual rate of growth over what length of time would be needed to get to 10%.  (Best way is to set up a spreadsheet and play around with some growth scenarios.)

Assuming a 10% annual cash profit growth:  

In year 3, the cash profit per share is 15.4 sen, giving a cash yield of 4.8%.

In year 10, the cash profit per share is 30.1 sen, giving a cash yield of 9.4%.

Scenarios analysis

This kind of exercise can teach a great deal about what a $3.20 share price for Company X says for the company's future cash profits.  A lot of future growth is already baked into the share price.  It takes a reasonably long time with a reasonably high growth rate to get a reasonable cash yield on buying the shares at $3.20.

Profits are going to have to grow faster than 10% per year to get to an acceptable cash yield in a shorter time.  Even if you wanted a 7% return, you would have to wait seven years at a 10% growth rate.  That is a long time to wait.

What if growth is a lot lower than 10% or even if profits fall?   The chances are that Company X's share price would fall, which means you could end up losing money.

What does a low cash yield means?

It means that you are paying for growth in advance of it happening.  

It will take years of high growth in cash profits to get a reasonable return on your $3.20 buying price.  

This is one of the most risky things that you can face as an investor.  

You can protect yourself by insisting on a higher starting interest rate when buying shares in the first place.  

Look for an interest rate of at least 5% and even then, you have to be very confident that growth would be high for many years in the future.

How to set your buying price for a 5% or 8% initial cash yield?  

Take the cash profit per share and divide it by 5% or 0.05.  For Company X with a cash yield of 11.6 sen, this gives:

11.6 sen/ 0.05 = $2.32

Even more cautious, and wanted a starting yield of 8%, then your buying price would be

11.6 sen/ 0.08 = $1.45

These results of $2.32 and $1.45 make Company X share looks well overpriced at $3.20

Warren Buffett has looked at owner earnings (cash profits) of businesses for many years.

 In his 1986 letter to shareholders, Warren Buffett described how he worked out what he called the "owner earnings" (referred here as cash profits) of a business.  He did this because he believed the reported profits of a business were not a conservative estimate of the amount of money that really belonged to the shareholders of a business.

Owner earnings 

= net income + depreciation & amortisation + other non cash items - maintenance capital expenditure.

Buffett's view was that the amount of money a company needed to spend to maintain its competitive position (known as maintenance, or stay in business capex) often exceeded the depreciation and amortisation expense and therefore, profits were overstated.

Also, if a business needed extra working capital (more stocks, or more generous credit terms to customers), this should be added to the maintenance capex figure.  Generally speaking, though, this calculation ignores changes in working capital that are included in free cash flow.

The hardest part of this calculation is trying to estimate what maintenance or stay in business capex is.  As a company outsider without intimate knowledge of its assets and their condition it is virtually impossible for you to be exactly right on this. 

So how do you get an estimate of stay in business capex?

There are three reasonable methods:

1.  The company tells you.  This figure may be in the annual report.

2.  Use a multiple of the current depreciation or amortization expense.  For example, use a figure that is bigger than this, such as 120%.  This can be a reasonable estimate sometimes, but for some companies it can be way off if the cost of replacing assets is falling.

3.  Use a 5 or 10 year average of capital expenditure or capex.  This is likely to include money spent to grow a business but these assets will need to be replaced in the future and so this could provide a good proxy for cash needed to stay in business.  This is a good approach to use if the company does not state the figure outright.  As a rough rule, if the 5 year capex figure is higher than the 10 yr average you should use the higher figure.

Annual depreciation expense <<<  average 5 or 10 year capex.

This is the case in asset intensive companies.  These companies usually have very poor free cash flow track records and modest ROCE and CROCI performances.   These are two good reasons against investing in them.  Avoid them unless they have been able to produce a good ROCE whilst investing heavily.

Capex <<< depreciation and amortization.

Normally this kind of behaviour would make you suspicious, thinking that a company has been      under-investing, which would hurt its ability to make money in the future.

On the other hand, there maybe nothing bad going on.  You need to study the company's history on this issue to make sure that it is not under-investing.

Using average capex figures to estimate of cash profits (owner earnings)

If the 5 year capex figure is higher than the 10 year average, use the higher figure.

Comment:   Note the key outlier is Tesco.  Its cash profit is negative.  If you come across a company that looks as if it is losing money when estimating its cash profits you need to either do some more research to see if you have missed something - such as the company investing in lots of new assets rather than replacing them - or look for another share to buy.

Here is the process to derive owner earnings or cash profits again:

• Use the most recent annual underlying or normalised net income/profit
• Add back depreciation and amortization
• Minus an estimate of maintenance or stay in business capex.
• From these, you derive cash profit (owner earnings)
• Divide by weighted average number of shares in issue for the latest financial year to get an estimate of cash profit per share.

Knowing the company's cash profits, you can use these to value shares.  HOW?

Manipulation of free cash flow. NOT all FCF should be valued the same.

Because investors have become suspicious of company profits, free cash flow is a popular way to assess a share.  

Rightly, profits are too easy to manipulate.  Yet, free cash flow can be manipulated as well and you need to know how to spot this.

Companies can boost their free cash flow in many ways.  

Here are a few ways they can do this:

1.  Delay paying their bills until after the end of the financial year. 

This increases their trade creditors and boosts operating cash flow and free cash flow for the year.

2.  Sell debtors to a credit company (also known as debt factoring).   

This allows a company which sells products on credit to turn those sales into cash faster than ight have been the case.

3.  Cut back on investment.  

Slashing investment in new assets can boost free cash flow, but might harm the long-term prospects of the business.

4.  Buy businesses rather than invest in new assets.   

A standard calculation of free cash flow might ignore this.

Review FCF and its trend over at least 5 years

This is why you should review a company's free cash flow over a number of years (at least 5 years) and look at the trend.  

You need to look at what is causing the free cash flow to change, as not all free cash flow should be valued the same.

NOT all FCF should be valued the same.

1.  Highest quality of free cash flow

Ideally, a company should be generating more free cash flow because its profits are growing.  This is the highest quality of free cash flow.   

2.  Lesser quality of free cash flow

Companies that are boosting cash flows through changes in working capital (paying their bills later, collecting their debtors faster and holding less stocks of finished goods) or cutting capex might be doing the right thing, but these kind of improvements are not achievable year after year.

CAPEX: Look for companies where the capex ratio is consistently below 30%

Quality companies produce high ROCE (at least 15%) and lots of free cash flow because they don't need to spend much money on new assets in order to grow.

Capex Ratio

                              Capex ratio = capex / operating cash flow

This ratio compares the amount of cash a company ploughs back into tits business through capex to the amount of cash coming into the business - its operating cash flow.

It is very easy to calculate a capex ratio for a company, using its cash flow statement.

Low capex ratio (< 30%).

The lower this ratio, the less capital intensive a company is and the better chance it has of producing lots of free cash flow and a high ROCE. 

Look for a capex ratio of lower than 30%.

Non-financial companies with low capex ratios, generally also have very high ROCE figures as well.

High capex ratio (>30%).

Companies with high capex ratios tend to have a very low ROCE.  Generally, companies with capex ratios of 30% or more tend not to produce very high ROCE.

A high capex ratio is sometimes necessary in order to give a company the scope to grow.  This is not usually a problem, as capex will tend to fall back afterwards.  However, when the capex ratio is consistently high year after year, this is a warning sign for investors.

Shell (High capex ratio) versus Domino's (Low capex ratio) for 2006 to 2015

Company Shell consistently ploughed more than half its operating cash flow back into its business with capex for 2006 to 2015.  This consistently high capex ratio - along with volatile oil prices - meant that its free cash flow moved around all over the place in this period.

Domino's capex ratio from 2006 - 2015 were mainly below 30%, except in 2008 and 2009 when it was 45% and 60% respectively.  Domino's capex ratio has declined significantly since 2008 and 2009 (when the company was investing in new distribution centers to help grow the business).  Company Domino's capex ratio is now less than 10% and in 2015 was 8.45%.  

In the ten years to June 2016, Domino's trounced Shell as an investment.  Domino's returned nearly 660%, compared with just 63% for Shell.   The divergent share price performance of the two companies was not  a surprise given what we now know about the importance of free cash flow in quality companies.

RETURN ON CAPITAL EMPLOYED

RETURN ON CAPITAL EMPLOYED

Capital employed is just in simple term, the money invested.  

Return on capital employed is the company's return on the money it has invested.

ROCE = normalised EBIT / CAPITAL EMPLOYED X 100%

How to calculate the money invested in the company

1.  Calculated from the Asset side of the Balance Sheet

Capital employed = Total assets - Current Liabilities + Short term borrowings

2.  Calculated from the Liability side of the Balance Sheet

CE = TE + NCL + Short-Term Debt

CE = TE + Other NCL + Total Borrowings

Using average capital employed

ROCE is usually calculated using a company's average capital employed over a period of two years.

Ideally, you would like to know the amount of money a company has invested throughout the year, rather than at a frozen point in time when the financial statements were compiled.

Interpreting the operating cash conversion ratio

Turning operating profits into operating cash flow is a desirable characteristic of companies.

Does it mean that an operating cash conversion ratio of more than 100% is a sign that you have found a great business?   Answer:  It is not as simple as this.  It doesn't mean that a company will go on to produce lots of free cash flow.

1.  Companies that have lots of fixed assets

Examples:  manufacturers, hotels, oil explorers, miners or utility networks

These will tend to have very big depreciation expenses, which boost their operating cash flow when these expenses are added back to operating profit.   This will tend to give these sorts of companies a high operating cash conversion ratio (>100%),

You can spot such companies by looking at the ratio between depreciation and operating cash flow, this is usually high at > 30%.

                   Depreciation / operating cash flow > 30%

When you come across a company with high levels of operating cash conversion ratio always calculate the depreciation and amortization expenses as a percentage of operating cash flow as well.  As a rule of thumb, avoid companies with a depreciation to operating cash flow ratio of more than 30%, because this tends to mean that at least 30% of operating cash flow will have to be spent maintaining assets.

Good companies are ones that don't need to spend a lot of money to grow.   When it comes to operating cash conversion, you are better off looking for high conversion rates (>100%)  and low depreciation to operating cash flow ratios (<30%).  

2.  Changes in working capital

Look at the amount of cash flowing out of a business due to changes in working capital - inventory, debtors and creditors.  High levels can be a sign of financial distress or aggressive accounting.

Inventory

With inventory, a rising level sees cash flowing out of the company.  This is usually fine if the company is building them up in anticipation of extra sales, but if it becomes a trend or is not due to higher anticipated future sales, it could be a sign of trouble.  If a company has too many inventory, it might have to reduce its selling prices to get rid of them, which will reduce future profits.

Stock or inventory ratio = inventory / revenue x 100%

A rising inventory ratio can be a sign of company weakness.  

Inventory levels are particularly relevant for manufacturing and retailing companies and need to be watched closely.

Debtors

If you are looking for signs of aggressive accounting, then the debtors number in the cash flow statement is something you should be keeping an eye on.

A company can grow its turnover quickly b giving customers generous credit terms.  This means that a sale can be booked in the income statement but the company will have to wait longer to be paid.  Sometimes, the cash is never received.

A cash outflow from debtors is not necessarily a problem and is expected from a company that is growing.  But if this is accompanied by a rise in the debtor ratio, then it can be a sign that something is amiss. 

Debtor ratio = Trade debtors / Revenues x 100%.

A big outflow of cash from debtors (looking at its operating cash flow) and a big increase in the debtor ratio are warning signs to be heeded.

Creditors

When it comes to cash outflows from changes in creditors, you need to be wary of very big changes.   This is telling you that a company's suppliers are demanding faster payment.  Why?  This could be a sign of a loss of buying power, a weakness in the financial position of the company or even imminent bankruptcy.

Summary

High quality companies convert their operating profits into operating cash flow.  

They do it without having large depreciation expenses or big cash outflows from working capital.

These are the initial steps to a company producing lots of free cash flow.

The next most important step is a company having low capex requirements.

Quality of company's profits. Operating cash conversion ratio.

Operating cash conversion ratio

Operating cash conversion = (operating cash flow / normalised EBIT) x 100%

(EBIT = operating profit)

This ratio gives the investor an insight into the quality or otherwise of a company's profits.  Ideally, we want to see a company consistently turning all its operating profits into operating cash flow.  This will be reflected by an operating cash conversion ratio of 100% or above.

Not only does this make a company's profits more believable but also it means that it will have a stronger financial position - and less need to borrow money - than a company that has to wait for some of its profits to turn into cash.

EBIT

+ Depreciation & Amortization

+/-  Profit on disposals

+/-  Change in working capital

- Tax paid

= Net cash from operations

The 2 components needed to calculate the operating cash conversion ratio are:

1. the operating profit (EBIT), and
2. the operating cash flow (Net cash from operation)

Calculating Net Operating Cash Flow number

Calculating Net Operating Cash Flow number 

CASH FLOW STATEMENT

Operating Activities

Net Income before Extraordinaries

+ Depreciation, Depletion & Amortization

+ Other Funds

__________________________________

Funds from Operations

+/-  Changes in Working Capital

Receivables

Inventories

Accounts Payable

+/- Other Assets/Liabilities

__________________________________

Net Operating Cash Flow

Main adjustments when calculating the Net Operating Cash Flow number are:

1.  Depreciation and Amortization

This reduced the operating profits in the income statement, but, as it is not a cash flow, it is added back to operating cash flow.

2.  Profit/losses on disposals.  

A profit or loss on the sale (disposal) of an asset compared to the asset's value on the balance sheet (or book value).  The cash received from the sale is included in the investing section of the cash flow statement.   The profit or loss on the sale is included in the operating profit.  The profit or loss (the difference between the cash received and the asset value on the balance sheet) is used to adjust the company's operating cash flow.  A loss is added back to operating profit and a profit is taken away.

3.  Increases/decreases in debtors (sales made on credit).

If a company is growing its sales then often its outstanding debtors will grow as well.   If debtors grow faster than sales, then the company is giving more credit to its customers - not ideal.  If debtors goes down compared to sales then the company is tightening its credit - perhaps by chasing debtors harder.  This affects operating cash flow but does not affect operating profit.

4.  Increases/ decreases in creditors (purchases made on credit_

Companies can make purchases on credit.   This increases their trade creditors balance.  The balance will decrease as payments are made.   An increase in this balance means that the company gets a temporary cash benefit to operating cash flow.  If the balance reduces - if suppliers want paying faster - cash flows out of the company which reduces operating cash flow.

5.  Increases/decreases in stock levels (inventory)

Building up inventory requires cash to be spent.  If more stock is added than is sold, a company's inventory balances will increase and this will show as a cash flow out of the company and reduced operating cash flow.  It will not affect operating profit.  If a company is selling its inventory faster than it is buying raw material, this balance will decrease and the change will be shown as a cash flow added back to operating profit.  Operating with inventory levels that are too low can generate expensive problems, example, when there is a sudden dramatic increase in demand.   In general, expect inventory levels to go up and down with sales levels.

6.  Amount paid into a final salary pension fund is more/less than pension cost expensed in the income statement.  

In recent years, final salary pension schemes have become problematic for some companies as the money in the pension fund has not been enough to pay the promised pensions in the future.  This has meant that cash top up payments in excess of the regular expense have been required.  This is shown by a reduction in a company's operating cash flow and is a deduction from the starting operating profit figure.   

Changes in working capital (Receivables, Inventories and Accounts Payable)

Working capital refers to the amount of cash a company needs to undertake its day-to-day activities.  

If working capital is increasing, then this shows the amount of cash a company might need to borrow - from a bank overdraft facility - to finance its day-to-day activities as it waits for cash to flow in.   The smaller a company's working capital requirement, the better its cash flow and financial position tends to be.

How quality companies generate free cash flow?

Cash flow is the lifeblood of any business.

There have been numerous companies that seemed to be very profitable, but were teetering on the edge of bankruptcy because they couldn't turn their profits into cash fast enough.

Profits and cash flow are not the same thing, and it is not sufficient for a company to be profitable to make it a good investment.

After finding out that a company is profitable, is to see how good that company is at turning its profits into cash flow.

A company's future free cash flow is the ultimate determinant of how good an investment the company will be.  Cash flow is the key determinant of its share price and the size of the dividend it will pay out to shareholders - which are the two elements that comprise the total returns from owning a share.

Free cash flow to the firm (FCFF)

Cash flows from operating activities + dividends received from joint ventures - tax paid  = net cash flow from operations

Net cash flow from operations - capex = FCFF

Free cash flow for shareholders (FCF) or Free cash flow for equity (FCFE)

FCFF - net interest (interest received - interest paid) - preference share dividends - dividends to minority shareholders = FCF

How can you use free cash flow numbers to identify good companies to invest in and bad ones to stay away from? 

A company with very little debt and a tiny interest payment, virtually all of the FCFF become FCF or FCFE.  In other words, there is not much difference between FCFF and FCF or FCFE.   This is a positive sign for investors and you should look for this sort of situation in companies you are analysing.

In contrast, a company with lots of borrowings and therefore interest bills to pay, the FCFF and FCF or FCFE will be different.   The interest payment has eaten up a big chunk of the company's FCFF, leaving less FCF or FCFE for shareholders.  In general, it is a good idea to avoid companies with lots of debt.  Too much of their FCFF can end up being paid in interest to lenders instead of to shareholders.

The one possible exception to this rule is when companies are using their FCFF to repay debt and lower their future interest bills.  This can see FCF to shareholders increasing significantly in the future, which can sometimes make the shares of companies repaying debt good ones to own.

Look for a company with vey good long-term track record of producing free cash flow for its shareholders.

Companies that produce lots of free cash flow can make excellent investments.

MYEG at another glance

 

VELESTO at a glance

VALUATION

KLCI MARKET PE (2008 TO 2024)

 

The total market cap of the whole Bursa is approaching RM 2 Trillion today.

The top 30 counters in Bursa account for >50% of the total market cap of Bursa.

KLCI historical chart

Market PE of KLSE component stocks

 

Market KLSE

PE 16.65

DY 3.74%

P/B 1.47

ROE 6.01%

DPO 0.62

Sorted on earnings

How to perform CPR

How to perform CPR 

Check the scene for safety and put on personal protective equipment

If the person seems unresponsive, check for life-threatening conditions, using shout-tap-shout

If the person still isn't breathing, call 9-1-1

Kneel down and place the person on their back, on a firm, flat distance

Give 30 chest compressions

Give two breaths

Continue giving sets of 30 chest compressions and two breaths, and use a AED [defibrillator], as soon as one is available

'If the person does not respond, and is not breathing, or only gasping, CALL 9-1-1 and get equipment, or tell someone to do so.

'Kneel beside the person. Place the person on their back on a firm, flat surface.

'Give 30 chest compressions. Hand position: Two hands centered on the chest. Body position: Shoulders directly over hands [and keep] elbows locked. Depth: At least two inches.'

The instructions continued, 'Rate: 100 to 120 per minute. Allow chest to return to normal position after each compression. Give two breaths. 

'Open the airway to a past-neutral position using the head-tilt/chin-lift technique.

'Pinch the nose shut, take a normal breath, and make complete seal over the person's mouth with your mouth.

'Ensure each breath lasts about one second and makes the chest rise. Allow air to exit before giving the next breath.'

The next steps include: 'If the first breath does not cause the chest to rise, re-tilt the head, and ensure a proper seal before giving the second breath. 

'If the second breath does not make the chest rise, an object may be blocking the airway.

'Continue giving sets of 30 chest compressions and two breaths. Use an AED [defibrillator] as soon as one is available! 

'Minimize interruptions to chest compressions to less than 10 seconds.'

 

© Provided by Daily Mail

REDTONE at a glance

 Company Profile

Sector: TELECOMMUNICATIONS & MEDIA

Subsector: TELECOMMUNICATIONS SERVICE PROVIDERS

Description:

REDtone International Bhd is a digital infrastructure and services provider that offers services under three categories that are Telecommunications Services which offers data and voice services to government, enterprises, and small and medium enterprises (SMEs), Managed Telecommunications Network Services (MTNS) which includes building, maintaining and operating large scale WiFi hotspots, radio access network (RAN) infrastructure and fibre optic infrastructure, and Industry Digital Services (IDS) which includes data centre services, internet of things (IoT) services, cloud services and applications, and healthcare solutions to enterprises, government and the healthcare industry. The company's Telecom services generate maximum revenue for the company.

OCK at a glance

Company Profile

Sector: TELECOMMUNICATIONS & MEDIA

Subsector: TELECOMMUNICATIONS SERVICE PROVIDERS

Description:

OCK Group Bhd provides telecommunications network services. The company is engaged in the provision of telecommunication services equipped with the ability to provide full turnkey services. It provides comprehensive services to all six segments of the telecommunication network services market: network planning, design and optimization, network deployment, network operations and maintenance, energy management, infrastructure management, and other professional services. The company also trades in telecommunication hardware and installation of materials such as antennas, feeder cables, and connectors.

Cocoa plunged by the most ever, slumping as much as 27% in just two days

https://theedgemalaysia.com/node/709963

Cocoa plunges most ever with trader exodus sparking huge moves

By Mumbi Gitau / Bloomberg

30 Apr 2024

Despite the recent pullback, the price of cocoa has roughly doubled since the start of the year.

(April 30): Cocoa plunged by the most ever, slumping as much as 27% in just two days, with price swings becoming more extreme as fewer investors and companies can afford to maintain trading positions.

Futures slid as much as 13% in New York on Tuesday (April 30) before paring some of the loss after tumbling the previous day by the most in data going back to 1960. The retreat marks a stark turnaround from earlier this month, when prices soared to a record above US$11,000 (RM52,497.09) a tonne due to a historic supply crunch, raising the cost of making chocolate.

Even with the recent pullback to the lowest in a month, cocoa has still roughly doubled since the start of the year. The rally made it more expensive to keep positions and prompted investors to close out trades, which has drained liquidity and made the market more vulnerable to large price swings.

Cocoa’s rally had made it more expensive than copper, and the big question was how far prices could reach. Pierre Andurand, a hedge-fund manager best known for his oil wagers, bet on higher cocoa prices ahead of the massive recent surge. He forecast futures to break US$20,000 this year.

The magnitude of the recent drop was a surprise, though the declines could prove brief because the fundamental picture hasn’t changed, said Fuad Mohammed Abubakar, head of Ghana Cocoa Marketing Company UK Ltd, a subsidiary of the country’s regulator.

“The market action in the last three days goes to show the fall is always easier and faster than the climb,” he said.

Harvests in West Africa have been battered by crop disease and poor weather this season, putting the world on track for a third straight supply deficit and forcing both Ivory Coast and Ghana to roll forward supply contracts. The amount paid to farmers there is also well below the global market prices, making growers less able to invest in plantations and boost production.

Lower prices would offer some relief to chocolate makers, who have seen costs soar and have been scouring the world for cocoa beans. Shares of Barry Callebaut AG, which supplies some of the biggest consumer chocolate brands, climbed as much as 6.6% on Tuesday.

Maintaining Positions

Cocoa’s advance this year has meant traders — including those who’ve hedged against physical holdings — have had to come up with more money to pay margin calls, which work as an insurance policy to cover potential losses. When they can’t do that, they’re forced to close out positions. That has helped push down open interest, or the number of outstanding contracts, curbing liquidity.

Looking forward, the end of the El Nino weather phenomenon could help harvests recover next year, Marijn Moesbergen, sourcing lead at Cargill Inc, said at the recent World Cocoa Conference in Brussels. Prices may have overshot and the market needs to find a new equilibrium between supply and demand, he said.

Prices:

- The most-active cocoa contract was last down 5.9% at $8,405 in New York. London cocoa futures slid 8.4%.

- In other soft commodities, arabica coffee declined 1.5% and raw sugar fell 0.9%.

LPI Capital’s 1Q net profit surges 37%

LPI Capital’s 1Q net profit surges 37%, shares snap losing streak after results

By Hee En Qi / theedgemalaysia.com

29 Apr 2024, 01:34 pm

KUALA LUMPUR (April 29): Shares in LPI Capital Bhd snapped a three-day losing streak on Monday, after the general insurer reported a 37% net profit surge in the first quarter, thanks largely to sharply lower net expenses from reinsurance contracts held and higher investment income.

LPI had turned positive following the results announcement, and rose nearly 3% to as high as RM12.12. The stock closed at RM11.92 at 5pm, valuing the company founded by the late Tan Sri Dr Teh Hong Piow of Public Bank Bhd at RM4.75 billion. Trading volume stood at 251,900 shares at the closing bell. 

Net profit for the three months ended March 31, 2024 (1QFY2024) was RM101.29 million compared to RM73.83 million over the same period last year, LPI said in an exchange filing. Revenue for the quarter edged up 1.4% year-on-year to RM469.8 million from RM463.3 million as gross written premiums rose.

“The Malaysian insurance industry will continue to face greater competition and underwriting margins compression owing to the phased liberalisation process,” LPI said. The company said it will focus on “strategic sectors that can provide steady and sustainable profits”.

For 1QFY2024, the company’s general insurance segment — which mainly provides motor and fire insurance — reported a 30% year-on-year increase in its profit before tax to RM107.45 million from RM82.4 million, on a lower net claims incurred ratio of 40.1% in 1QFY2024, from 51.8% a year earlier.

Meanwhile, the pre-tax profit of the investment holding segment more than doubled to RM19.9 million from RM9 million, contributed by higher tax-exempt dividend income received from its equity investment.

The company “will continue to strengthen its distribution channels by forming partnerships and enhancing its collaboration with agents and bancassurance partners, to grow the desired portfolios”, LPI added.

Shares of LPI closed at RM11.92 on Monday, up 12 sen from last Friday’s close. The stock have dipped two sen or 0.17% this year, amid caution among analysts.

There are three “hold” calls out of five research houses covering the stock and two “buy” ratings. The consensus 12-month target price is RM13.13.

https://theedgemalaysia.com/node/709704

SUPERMAX at a glance

 

KOSSAN at a glance

 

Positive outlook for Kossan on strong greenback

KUALA LUMPUR: RHB Research remains positive on Kossan Rubber Industries Bhd even as the company faces margin compression risks due to higher operating costs.

The company is facing a gas-tariff review, and cost escalations in natural rubber and acrylonitrile prices. These factors, however, are offset by the strengthening of the US dollar against the ringgit since the company’s export sales are denominated in the greenback.

RHB Research said recent operating dynamics overall have turned in favour of glove manufacturers, as the research house understands that customers are more receptive to average selling price (ASP) increases in the coming months.

“We believe more meaningful price hikes are likely to take place in April and May. Conversely, Chinese glove makers are expected to raise ASPs to US$16-US$17 per 1,000 pieces from US$15-US$16 previously for the coming months based on our channel checks,” the research house said.

“On the demand side, the value of Malaysia’s first quarter glove exports surged 5% year-on-year, surpassing export volume growth. This indicates the cost pass-through mechanism’s momentum is picking up,” the research house added.

It maintained its “buy” call on the counter with a higher target price of RM2.40 based on the discounted cash flow calculation, from RM2.20.

The rating is premised on a meaningful improvement in market dynamics anticipated by the second half of the year and Kossan’s consistent dividend payout practices, the research house said.

The target price incorporates a new 5% environmental, social and governance (ESG) discount based on its 2.8 ESG score compared to the country median of three.

The score was raised from 2.6 before after the company demonstrated a reduction in carbon dioxide emissions, primarily due to higher renewable energy consumption through solar power during the year, RHB Research said.

“Following a housekeeping exercise, our 2024 and 2025 forecast earnings are raised by 4% in both years after incorporating figures from Kossan’s latest annual report,” the research house said.

RHB Research expects Kossan to deliver core profit of between RM30mil and RM35mil in its first quarter on the back of improving operating dynamics

https://www.thestar.com.my/business/business-news/2024/05/01/positive-outlook-for-kossan-on-strong-greenback