KLCI VALUE DRIVERS FOR 2012

TA SECURITIES - CPE 28 APRIL 2012

About me
KEY AREAS OF CONSULTATION: LEADERSHIP STRATEGY FINANCE CPE Training for Stock Market Professionals Corporate Finance - Securities Commission of Malaysia Curriculum on Investment Banking BNM FSTEP Malaysia Investment Advisory Report preparation of templates and schedules for several corporations including national bodies and agencies

By attending this training session, participants will be able to:

Identify the key value drivers that could impact the value of listed securities Distinguish between the impact footprint of global factors and local factors Apply valuation models to compute intrinsic value of specific counters Demonstrate an ability to recognize market cycles and determine whether price change is due to intrinsic or cyclical factors

ASSETS

EARNINGS

CASH FLOWS

FAIR MARKET VALUE OF ASSETS Useful for property based counters Also companies that have hived off REITS NTA not very useful anymore

Earnings Based Value - The PER Trend

Mkt Price Company 20th May 2011 PE Mkt Price 23rd April 2012 PE Company PE change

Maybank CIMB Pchem Sime PB Bank Axiata Genting Maxis Tenaga IOI Corp MISC KLK Petgas PLUS

8.87 8.28 6.99 9.14 13.08 4.95 11.18 5.40 6.27 5.31 7.03 22.00 11.42 4.48

16.4 16.9 75.6 15.0 23.6 18.8 17.6 10.7 16.1 16.8 23.1 15.7 17.2

8.85 9.89 7.55 6.56 13.74 6.10 5.37 10.80 6.52 5.34 16.84 3.92 24.12 12.44

25.7 16.2 13.9 19.9 13.8 18.1 19.2 13.9 71.2 15.4 30.8 24.3 16.3 16.5

Maybank Sime CIMB Pchem PB Bank Maxis Axiata Genting Tenaga IOI Corp Petgas DiGi KLK HL Bank

56.7 (78.6) (17.8) xxx (8.0) 2.8 (18.6) (26.1) 565.4 (4.3) 96.2 28.6 (29.4) (6.8)

% % % % % % % % % % % % % %

Mixed bag of Changes

Company Mkt Price 20th May 2011 PE Mkt Price 23rd April 2012 PE Company PE change

% 15.0 GenM (5.1) %

GenM

3.55

15.8

3.78

PPB RHB Cap

AMMB HL Bank YTL Power Pet Dag YTL TM BAT

17.28 9.25
6.51 12.04 2.22 15.48 1.58 4.17 46.00

10.9 14.0
14.6 17.7 11.9 20.4 16.3 12.3 18.0

16.70 5.42
6.30 18.88 1.72 7.43 56.48 55.98 1.79

20.2 16.3
14.1 28.6 14.6 10.8 22.4 28.8 9.8

PPB TM
AMMB Pet Dag YTL RHB Cap BAT Nestle YTL Power

85.3 % 32.5 %
(3.4) % 40.2 % (10.4) % (22.9) % 24.4 % % (17.6) %

ACTIVITY

Compile information on selected counters Consider the PER info on previous slides Suggest a six month forward target PER Compute Target Price

Capitalized Economic Income

Based on required returns PROCESS :

IDENTIFY

SECTOR BETA VALUE APPLY TO SECTOR COMPONENTS MODIFY BETA FOR NON-AVERAGE COUNTERS COMPUTE REQUIRED RETURN PROJECT REQUIRED PRICE TO ACHIEVE REQUIRED RETURN

ACTIVITY

Select Prices for selected counters in a sector Match against KLCI Compute Beta Value Compute Required Returns Compute Target Price to achieve Required Returns

The Beta Family

Beta provides the Required Return = Rf + (Beta x Market Risk Premium) Intrinsic Value of a Share

Sharpe Measure

S =

Actual Returns from Share

Rf

Std Deviation of Returns from this share

Jensen Measure = Surplus Returns

Jensens =

Actual Returns from Share - Required Returns

http://globalvoicesonline.org/2012/04/24/malaysiaprepares-for-bersih-3-0-sit-down-protest/

IN THE NEWS

Banking: No intention to review lending guidelines. BNM has no intention to review its new guidelines on responsible lending for the time being, said the governor Tan Sri Dr Zeti Akhtar Aziz. BNM's recent lending guidelines effective Jan 1, stipulate that loans would only be approved based on net and not gross income as practice previously. The new guidelines are aimed at managing household debt in Malaysia at reasonable levels. (Source: The Edge Financial Daily)

MIER

Consumer Index

OUTSIDE MALAYSIA

U.S: Sales of new homes exceeded estimates in March. Houses sold at a 328,000 annual rate, down from an upwardly revised 353,000 pace in February that was the highest in two years, according to Commerce Department data. (Source: Bloomberg) U.S: Home prices in 20 cities fell at slower pace in February, pointing to stabilization in the real-estate market. The S&P/Case-Shiller index of property values fell 3.5% YoY, the smallest 12-month drop since February 2011. The index climbed from the prior month on a seasonally adjusted basis for the first time since April of last year. (Source: Bloomberg) U.S: Consumer confidence in April little changed as outlook cools. The Conference Board's confidence index was at 69.2 compared to a revised 69.5 in the prior month, figures from the New York-based private research group showed. (Source: Bloomberg)

More from Bloomberg

U.K: Budget deficit unexpectedly widened in March, intensifying pressure on Chancellor of the Exchequer George Osborne to keep squeezing spending as austerity strains governments across Europe. Net borrowing excluding support for banks was GBP 18.2b (USD 29.4b), up from GBP 18b a year earlier and the most since November 2010, the Office for National Statistics said. Spending rose 4.2% YoY and tax revenue climbed 1.4% YoY. (Source: Bloomberg)

CHINA

China: Net overseas financial assets declined in the final quarter of 2011. China's holdings of overseas assets totalled USD 4.72t at the end of last year, USD 1.77t more than foreigners' ownership of Chinese assets, according to a statement on the State Administration of Foreign Exchange website. The gap was USD 1.89t as of Sept. 30. (Source: Bloomberg) China: Leading index rose at a slower pace in March, adding to evidence growth in the world's second-biggest economy is moderating. The gauge gained 0.8% MoM from the previous month to 230.6, the New York-based Conference Board said in a statement, citing a preliminary reading. That compares with a 1% MoM rise in February that was revised up from a previously reported 0.8% MoM increase. (Source: Bloomberg)

Others

Vietnam: Trade balance swung to a deficit in April. Vietnam recorded a deficit of USD 400m in April, compared with a revised USD 424m surplus in March, according to preliminary figures released by the General Statistics Office in Hanoi. (Source: Bloomberg) Australia: Core consumer prices rose last quarter at the slowest pace since 1998. The so-called trimmed mean gauge of core prices advanced 0.3% QoQ from the previous quarter, the Bureau of Statistics said, the lowest rate since the third quarter of 1998. The consumer price index rose 0.1% QoQ from the previous three months, compared with 0.6% forecast in a Bloomberg News survey, (Source: Bloomberg)

Palm Oil vs Crude

Crude

Steady as Steel

Golden Dragon

PPI up to 0212

5 Key Areas of Analysis

RATE OF PROFITS
ABILITY TO SETTLE CURRENT LIABILITIES ON TIME = LIQUIDITY

SUPPORT MATERIALS FOR FUNDAMENTAL VALUATION

MANAGEMENT OF WORKING

CAPITAL

MANAGEMENT OF BORROWING

LEVELS MANAGEMENT OF INVESTOR

RETURNS

This has 3 components : REVENUE GENERATION MARGINS RETURNS

REVENUE GENERATION

Total Assets Utilization = R / TA Non Current Asset Utilization= R / NCA Current Asset Utilization = R / CA
Inventory Management AR Management Specific Asset = R / INV = R / AR

Rate of Profits: MARGINS =

COSTS OF SALES MARGIN

OPERATING COST MARGIN

OPERATING PROFIT MARGIN NET PROFIT AFTER TAX MARGIN

INVENTORIES MARGIN
ACCOUNTS RECEIVABLE MARGIN CASH RESERVES MARGIN

Rate of Profits :

RETURNS

OPERATING ROI = OP / TOA

NET ROI = NPAT / TA

SELLING EFFICIENCY = R / TA

LIQUIDITY & WORKING CAPITAL

CASH RATIO = CCE / CL

AR RATIO = AR / CL
ADJUSTED ACID TEST = CCE + AR / CL

FINANCING MATCH = CA / CL (Working Capital Ratio or Current Ratio)

BORROWING MIX
FINANCING MIX (Gearing) = BORR / EQ

ASSET FINANCING (Gearing) = BORR / TA

INTEREST COVER = OP / FIN CHG

DU PONT ANALYSIS

DuPont analysis also allows analysts to view trends in the components of ROE
For

example, whether or not profit margins are improving or if financial leverage has changed

We know ROE = NI / Equity Du Pont System shows that this is also equal to ROA multiplied by the Equity Multiplier ROE = ROI X EQUITY MULTIPLIER ROE = ROI X (ASSETS / EQUITY )

VALUATION RATIOS

P/E P / CF

= =

Price per share / EPS Price per share / Cash Flow per share Price per share / Sales per share Price per share / Book Value per share

P/S

P/B

WORKSHOP

This session will see the use of current market values of selected companies compared with their values using the techniques discussed in Session One. The workshop activity, which may spill over to the next session, will be to explain any differences in the values and the possible forward thrust of market price for each of the selected companies.

FINAL WORDS

Price and market value sustainability Discussion / debate :

Specific companies listed on Bursa will be selected Valuations under various models will be applied Comparison with current market price will be made Forward looking information will be analysed. This will be done to debate how much of the forward value thrust will be based on cyclical factors (systemic) and how much will depend on intrinsic factors.