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"E-book" by AK

Second "e-book".

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Tea with Mike: UOB KayHian Holdings.

Saturday, October 5, 2013

Getting a sense of a fair price to pay: UOB KayHian Holdings as a case study.

I was screening for companies with decent yield and growth for the past 5 to 10 years, using a Google screener, and I decided to do some in depth study of UOB KayHian.

UOB KayHian pays out about 50% of earnings as dividends for almost a decade. In the earlier years, the payout was more than 50%. So there is certainty of payment, and it has been profitable for the past 12 years, and last year was actually the weakest year in a decade.

I use the spreadsheet to churn out important numbers such as revenue, NP, margins etc for the various markets, such as Singapore, Hong Kong, Thailand. I wanted sustainability of dividend income. So, I want to know what income I can expect going forward and I gave myself a few scenarios:

Click to enlarge.

At its peak, net profits is almost 3 times of what it is in 2012, if you take the average of $100 million over 12 years, it is still higher than 2012.

1H2013 results has already recovered, its 1H EPS of about 8 cents, is already almost as high as full year EPS of about 9 cents in 2012. Assume full year EPS to be 16 cents, they will pay out about 8 cents, giving a yield of 4.8%. That is my best case scenario.

If you take the average of 12 years, EPS is about 13 cents, so payout will 6.5 cents, giving a yield of 3.9%. This is my conservative scenario.

Although Singapore contribution is in decline, it is generally in line with SGX trading income revenue, which reflect the prevailing market conditions and not loss of competiveness. The “other” and Thailand operations have been bucking the trend and is contributing more despite market weakness, this could be due to its expansion bearing fruits.


Click to enlarge.

I want to get a sense of market valuation of the counter throughout the years, so I use the highest price, lowest price and average price of each year to calculate the corresponding yield and PE.

If I take away the super exceptional year of 2007, the average lowest yield is 5% and average highest yield is 9%, and the average lowest and highest PE is 10 and 17 respectively.

If I take conservative EPS of 13 cents, and DPS of 6.5 cents. I would like a yield of 6% and a PE as close to 10 as possible, and what would that price be?

To give a yield of 6% based on EPS 13 cents, price will be about $1.09 and PE 8.4.

If I am content with PE 10, I need the price to be $1.3.

To give a yield of 6% based on EPS 16 cents, $1.33. And a PE of 10 at EPS 16 cents will be $1.6.

Now, I know I will not touch this company at price above $1.6, unless I believe the next few years will see EPS growing to its peak soon. But there were not many years in which the company had above average results. So, most probably I will only start buying at $1.6 and below.

Other considerations like market share, gearing level and positive average FCF are also looked at, they are not significant enough to offer a further discount or premium.

I do like its profit resilience and rather undemanding valuation as compared to SGX and GK Goh, but given the amount of competition and my estimated calculation of only 10% Singapore Market share, I would not allow myself to pay a premium above $1.6.


Gary said...

Good analysis! =)

Kevin Tang said...

Hi AK,

I am reading your posting with great interest. I am wondering where could I get the pass years' financials beyond 5 years back. Thanks.


Cory said...

PE is a little high. Current yield is quite low.

AK71 said...

Hi Kevin,

This is a guest blog by Mike. I am sure he will reply to you soon. :)

sillyinvestor said...

Kevin, I got it a the company website, under investor relation. Not every companies have more than 5 years AR posted.

Cory, actually PE is rather undemanding if u take forward PE. But I will buy Kay Hian for yield rather than growth, so PE is secondary compared to yield.

Such a exercise is good for preventing 1 falling in love blindly. When I see the 50% payout, the good years earnings, and the reasonable yield and PE. I almost wanted to buy straight away. When I go further, I think I will get some at 1.6 and accumulate more if it go further. So now, it's on to other companies to research ...

Musicwhiz said...

Perhaps the pertinent question for UOBKH would be - what are its growth prospects? If trading volumes and "churn" are its drivers of growth, and with business being predominantly in Singapore, what are its prospects for growing trading volumes and hence top line?

Valuation in isolation or even compared to GK Goh/SGX may not give a full picture of the prospects of a company. One must also look at the industry structure, geographic exposure and ask the usual 5-forces questions.

I am not readily concluding anything for UOBKH (I seldom conclude on a company without sufficient further deep research), am just highlighting that in the absence of obvious growth, would one be paying too much either on a PER or FCF yield basis?


sillyinvestor said...

Hi musicwhiz,

I was asking myself the same qn, when I was looking at sgx before Uobkayhian, their business seem more correlated to the market sentiments than its innate ability to capture market.

There is no way of knowing how well sgx can expand beyond the normal market forces except its derivatives products and in the case of kayhian, the others segment might be the catalyst.

As such, it would provide margin of safety only when it is perhaps trading at 1.2, as mentioned in my earlier post. At such price, it will be worth even if we take the worst year business results can wait for the upturn. But there seem no mispricement opportunity.

Although valuation of sgx is higher than kayhian, I would rather buy sgx at a right price as a cyclical play. Uobkayhian caught my interest as earnings recovered but price did not. Later, I realised that price increase was already there half a year earlier.

Every projection into future earnings is problematic for non consumer or non-manufacturing business, so my margin of safety does not come from calculating future growth but buying sound resilience companies and fire sale price.

matchbox said...

Simple yet a good piece of analysis!
Thanks for sharing AK!


AK71 said...

Hi matchbox,

Mike did all the hard work. I only did a bit of editing. ;)

Go to the left sidebar and look for ASSI's guest bloggers to read his other guest blogs.

You might also want to visit his blog listed under "RESOURCES". Click on "Sillyinvestor". :)

sillyinvestor said...

Btw... What is the 5 forces???heard of SWOT, is it the one that include political, economical, industry, sector and company? Can u share how u do your research?

sillyinvestor said...

Hey AK,

Thank you for selling koyo for my blog!! Hahaha.

Just like SMOL, thank you for inspiring me to blog. Although I not quite sure about my own blog yet.. :p

AK71 said...

Hi Mike,

Sell koyok? Now that you put it that way, I will need to send you an invoice for services rendered liao. ;p

I look forward to your next guest blog. :)

Musicwhiz said...

Just do a google search on "Porter's 5-Forces". There's more than enough information on it on the Net.

The one you are referring to is PEST analysis.

AK71 said...

For any reader who might be interested, I mentioned Michael Porter and his books briefly in one of my earlier blog posts:
When to BUY, HOLD or SELL (Part 1)

sillyinvestor said...

Thanks MW and AK,

I am intrigued by that analysis. It's rather useful in identifying gaps of understanding of companies and also the overall risk profile, and perhaps the the reward to demand to compensate the risk

Cory said...

The dividend yield i understand is only 2.8% at current price. Can you help clarify the 6% calculation ?

AK71 said...

Hi Mike,

Michael Porter's framework is very useful when I assess businesses qualitatively, especially when determining whether a company has an economic moat and its potential for growth. :)

sillyinvestor said...


2.8% yield is trailing dividend yield at existing price.

1H DPS is already at 8 cents, unless you think 2H is only going to add 0.5 cents, which is extremely remote, you can expect DPS this year to be higher than the 4.5 cents given out next year.

6% is what I would demand, it is not what it will be. If you think kayhian can do as well in the second half as the first half, there is no reasons why it should not, there is plenty of penny trading is SGX and volume is quite the same as 1H thus far, so if you annualised it, you should get 16 cents eps and with 50% payout, we COULD see 8 cents DPS, which will yield 4.8% at current price. If you think 13 cents, that it will earn only 5 cents in 2H, then yield will be even lower.

Why I wanted a 6% yield, because the market has been demanding from 5% to 9% on average, throughout the years, And I do not want to shortchange myself by just demanding an 4plus percent yield, and experince heartache when market starts to demand 6%.

Of course, if you can project the growth rate more accurately like what music Whiz is doing about, you should be have an more accurate projected yield going forward.

I see no catalyst (or beyond my capabilities to see catalyst)in future growth, as Kayhian is operating in a competitive environment and I am not sure whether market sentiments will be bullish and quiet for the next few years, so I just use the mean over the past 12 years as a guage.

Hope you understand what I am talking about

Cory said...

Here's the historical dividends from the web. There is a unique pattern in their distribution.If you break them by pair, you can do a trend.

DIVIDEND 12 May 2008 SGD 0.1189 ONE-TIER TAX


Sun said...

I also did a similar thing for my university project, valuation of stock prices, with sensitivity analysis. I was conservation with my stock valuation back then and my team did a sudden shock of 50% drop in profit earnings etc

some of the classmates didnt like it but i think the prof appreciate the different perspective and the different valuation we put up for different profile of investors.

But it is a lot of work crunching numbers and verifying numbers of different sources and using different models. but its good fun although very time consuming. maybe we could work together and use different models!

AK71 said...

Hi Sun,

Sounds like you will make a perfect guest blogger for ASSI. I would like to welcome your maiden guest blog soon. ;)

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