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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Please avoid BUKI, CARS - Extremely overvalued

Please avoid BUKI, CARS - Extremely overvalued

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Slstock


Director - Equity Analytics
Director - Equity Analytics
@The Alchemist wrote:Firstly Earnings,
1. Please note my comments on this forum on another thread recently which I have copied for your easy reference. Pls go through this again and let me know what exactly don’t you get or understand from this analysis ?
2. " it appears that some are under impression that Buki especially is overvalued on a P/E basis. IMHO that BUKI is trading at 8-10 times forward earnings when you take the following under consideration :
Last Annual Reported Earnings = Rs 32 per share (FY 2010/2011)
Add to that Rs 18 for their Consolidation Policy of not accounting for their GoodHope Asia - 35 % share of profit (refer page 4 of Buki Annual Report 2010/2011 Para in Red)
Add to that Accounting Change for Fair Value of Biological Assets = Rs 17 ( refer page 75 Note i of Buki Annual Report 2010/2011 for calculation)
Add to that currency impact of Rupee Devaluation + Ringitt Appreciation to the Dollar) totally add 20 % to EPS- FY 2012/2013
Add to that Palm Oil prices appreciating in 2012 so far by 10-15 %
Add to that Palm oil output increasing by at least 20 % in FY 2012/2013 as per maturity profile immature Land in Annual Report.
When you make these adjustments, you will note that Buki EPS is actually close to Rs 100 per share and it is trading at 8-9 times forward earnings. This is compared to a JKH trading at 20 times earnings."

3. Buki 9 months FY 2011/2012 reported EPS was Rs 20.71. when compared to current price of Rs 870, how on earth do you get an P/E of 135 ?
4. Cars 9 months FY 2011/2012 reported EPS was Rs 14.32. when compared to current price of Rs 460, how on earth did you get P/E of 81 times. Very seriously, time to brush up on the math !
5. Also please learn to read & analyse notes to the Accounts in Annual Report and Financial Statements re Consolidation Policy & Fair value Accounting and make these changes accordingly.

Secondly Assets

Cars – Net Book Value = Rs 125.54
Buki – Net Book Value = Rs 140.00

Now pause and think for a moment. For Carsons, Book value of usd 1 into 192 million shares outstanding so therefore can Carsons be worth only USD 192 million ? For starters, lets forget about their Brewery sector, Investment sector, Real estate sector, Leisure sector assets. Lets only focus on the Palm Oil sector Assets i.e. Good Hope Asia Holdings , GHAHL (unlisted company). Carsons owns directly & Indirectly 65 % of this company, This company has Net Assets worth over USD 1.5 Billion as per the following calculation :

Take the 60,000 Hectares Palm oil developed land at value conservertively @ usd 20,000 / per hectare. (google and search on internet developed palm oil land value in Kalimantan). Unfortunately they cannot revalue the land due to very high Revaluation Tax in Indonesia. They said so about 5 years back in their annual report so they cannot disclose real market value in the Financial Statements.
If you go by the income method (another way of valuing this land), PT Agro Indomas, 20,000 Hectares made USD 46.23 Million NPAT on Turnover of USD 120.30 Million (Pls refer Selinsing Annual Report 2010/2011 Page 2). This works out to approx USD 2500 NPAT per Hectare. At USD 20,000 Land Value per Hectare, ROI is 12.5 % Payback is 8 years, so market value of usd 20,000 / Hectare is Justifiable. .
Therefore Indonesian Palm Oil Plantation Assets worth Approx usd 1.2 Billion.

Then take the Malaysian Palm oil Assets, 1000 Hectares in Selangor (Kuala Lumpur is in Selongor ! ) and balance approx 500 Hectares Selinsing in Perak near Penang. These have serious commercial land value. Just imagine having 2500 ACRES land in District of Colombo. Add to that Downstream Operations including 3 companies acquired last year having the largest Palm oil refinery in the world. check out their website www.Premiumveg.com
I value the Malaysian palm oil Plantation Assets at USD 300-400 million. Hint Pls refer Good Hope plantations Annual Report FY 2010/2011 page 45 note 10 pt iii
The Debt is absorbed by Indonesian Mill Assets, Malaysian Refining Assets and Cash (they generate approx USD 75 Million Cash Profits per year. Check the Segmental info in Annual Report and Cash Flow Statement. Also Check Carsons Annual Report FY 2010/2011 Page 3 Financial Highlight section - Cash Earnings Per Share is Rs 66.80

So therefore Good Hope Asia Holdings Net Plantation Assets total USD 1.5 Billion.
Just imagine, Good Hope Asia have Net Assets of Rs 1.5 Billion. Does any company in Sri-Lanka have that type of asset base ? just for comparison JKH current Market Capitalization is USD 1.2 Billion
As Carsons owns 65 % of this USD 1.5 Billion company GHAHL, ( btw this company made over usd 60 million dollars last year and will make over 80 million FY 2011/2012. In fact Only the fully mature 20,000 hectare PT Agro Indomas made usd 46.23 million pls refer Selinsing FY 201/2012 Annual Report page 2.), this means that Carsons Palm Oil assets could be over USD 1 Billion. Now divide by 192 million shares. you will get usd 5.20 or Rupees 675 Per Share only Palm oil assets mind you! now add the rest i.e. Brewery, Investment, Real Estate and Leisure sector Assets. I haven’t done this due to time constraints but could be further Rs 175 per share.

Therefore Carsons Net Asset Value is Approx Rs 850 Per share (not Rs 100 as you mention) and share is trading at Rs 460 almost Half its Asset Value.
Oh and remember Buki owns 35 % of this GHAHL and also 45 % or 92 million Carsons shares. So it cannot be worth only USD 110 million according to the Net Book value (Rs 140 * 102 miillion shares). More like 35 % into USD 1.5 biilion + 92 Million shares into Rs 850 divided by Buki issued shares of 102 mill = Rs 1400 Per share.

Enough said about Book Values and Asset values.

Not only have you got your facts, figures and math wrong, but you are advising people to avoid these 2 fundamentally sound shares and arguably the cheapest P/E Blue Chips in the market which are trading at adjusted future single digit Earnings Multiples and at 50 % of Adjusted Asset / Book Values, in order to bring down the market P/E ?
That my friend is akin to cutting your nose to spite your face.


Very interesting analysis to give a different insight to PE and NAV valuation. It is interesting to note that BUKi has come down form Rs 1600 peak to rs 850. Cars from rs 700 peak to Rs 460.

I considered this still overvalued before. But by looking much deeper as per your analysis I acknowledge there are other ways of valuation and maybe this is atleast trading closer to fair value due to pyramid hidden asserts. No doubt about CARS reputation. Also am not sure how much more this share will drop due to its illiquid nature and strength.

So I give you credit for that.

But comparatively I still find better discounted shares in the market than CARS/BUKI. Thats my opinion only.

BTW their investment trusts are also getting attractive CINV and GUAR. LION is trading with future growth hope.

K.Haputantri


Co-Admin
This is a usefull discussion which highlights alternative methods of evaluating shares. Thanks to Alchemist and all who contributed in the discussion which educated me very much on the subject. As Alchemist described in brief, the adition of certain %s to PE seems logical, but determining the exact %s to be added seems arbitrary. I may be wrong, Alchemist please correct me if that is so. There may be a logical way of determining the %s to be added. Alchemist pl. elaborate on this as I am ignorant on your new method.

Slstock, thank you very much for your expert openion which helped me to get over the confusion on the two seemingly conradictory openions.

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@K.Haputantri wrote:This is a usefull discussion which highlights alternative methods of evaluating shares. Thanks to Alchemist and all who contributed in the discussion which educated me very much on the subject. As Alchemist described in brief, the adition of certain %s to PE seems logical, but determining the exact %s to be added seems arbitrary. I may be wrong, Alchemist please correct me if that is so. There may be a logical way of determining the %s to be added. Alchemist pl. elaborate on this as I am ignorant on your new method.

Slstock, thank you very much for your expert openion which helped me to get over the confusion on the two seemingly conradictory openions.


A. Last years reported earnings = Rs 32 per share

B. Add to that Rs 18 for their consolidation policy of not accounting for their GoodHope Asia - 35 % share of profit (refer page 4 of Buki Annual Report 2010/2011 Para in Red)

C. Add to that Accounting change for Fair Value of Biological Assets = Rs 17 ( refer page 75 Note i of Buki Annual Report 2010/2011 for calculation)

D. Add to that currency impact of Rupee devaluation + Ringitt appreciation to the Dollar) totally 20 % add to EPS

E. Add to that Palm Oil prices appreciating in 2012 by 10-15 % currently

F. Add to that Palm oil output increasing by at least 20 % as per maturity profile in Annual Report.

G. When you make these adjustments, you will note that Buki EPS is actually close to Rs 100 per share and it is trading at 8-9 times forward earnings. This is compared to a JKH trading at 20 times earnings.

EXPLANATIONS

A. Last years reported earnings = Rs 32 per share - source BUKI FY 2010/2011 ANNUAL REPORT. You can check this on www.cse.lk website

B. Add to that Rs 18 for their consolidation policy of not accounting for their GoodHope Asia - 35 % share of profit (refer page 4 of Buki Annual Report 2010/2011 Para in Red)


Earnings are low throughout all periods for BUKI due to their Consolidation Policy. Pls refer Buki Annual Report FY 2010/2011 bottom paragraph in red. It seems that they are NOT equity accounting for the full 35 % direct stake in GHAHL! Carsons is consolidated as a direct subsidiary of Buki whilst results of GHAHL gets consolidated as a subsidiary via Carsons. This is also re-iterated in Chairman’s statement page 5 paragraph 1. The cross holding between Buki & Carsons creates an Accounting blind spot. This is why Earnings appear low & Minority Interest is so high for Buki. I will illustrate the above with an example. Please refer Page 60 Buki Annual Report 2010/2011 segmental info Palm Oil business. The Palm oil business i.e. GHAHL made Rs 6,711,608,000 (6.7 Bill) NPAT for FY 2010/2011. GHAHL owns approx 90-95 % of this palm oil business (balance 5-10 % owned by minority shareholders of Malaysian palm oil companies and initial promoters of indonesian palm oil plantations) lets take 90 % for this illustration, and since Buki owns at least 65 % of GHAHL and should account for least approx 65 % of this profit, i.e. Rs 6,711,608,000 * 90 % * 65 % and that works out to Rs 3,926,290,680. However, the Attributable profit to Owners of the Company is only Rs 2,031,513 000 and Minority Interest is Rs 4,680,095,000 Billion. Therefore, it seems that they are not taking into account their full profit share in GHAHL. This could have understated Buki’s 2010/2011 profit by Rs 1,894,777,680 or approx Rs 18 EPS.


C. Add to that Accounting change for Fair Value of Biological Assets = Rs 17 ( refer page 75 Note i of Buki Annual Report 2010/2011 for calculation)

From 1st April 2012, the Accounting Standards change, and the recognition of fair value for Biological Assets, will take place. This is significant. Please refer Buki Annual Report 2010/2011 Page 75 note i to see the explanation & calculation. For year ending 31st March 2011, under the new accounting standard, they would have had to recognize Rs 1,762,122,000 additional in Income Statement. i.e. increase EPS for Buki by Rs 17.62 for FY 2010/2011 due to this alone.

D. Add to that currency impact of Rupee devaluation + Ringitt appreciation to the Dollar) totally 20 % add to EPS

As you are aware, The rupee has devalued from around Rs 110 to the usd from November 2011 to around Rs 130 to the usd todate. That is around 15 %. Further, the malaysian ringitt has strenghtned from RM 3.25 to the 1 USD in Jan 2012 is around RM 3.05 To 1 USD todate. This means that from their Malaysian operations Ringitt profits, they will get approx 6 % more USD. When you combine the two, it is around 20 %. What this means is that when they translate all their Ringitt & USD Revenues Profits, Assets & Liabilities into Sri Lankan rupees, in the future financial statements, there is 20 % more of each.

Just fyi, for he Income statement items, average exchange rates for quarter are taken. For Balance Sheet
Items, closing period rates are taken.

E. Add to that Palm Oil prices appreciating in 2012 by 10-15 % currently

Crude Palm Oil (CPO) prices were on average around RM 3000-3200 PER Tonne Mid-2011 to Early Jan 2012. Now, they are around RM 3500/ Tonne. According to Dorab Mistry, an world renowned vegetable Oil specialist attached to Godrej International in London, CPO prices could go up to RM 4000 by june/july 2012.
Please Google “Dorab Mistry Palm Oil News” and check what he has to say about direction of CPO prices this year. RM 4000 / tonne possible. In a business driven by economies of scale and high operating leverage, just imagine what a CPO Price increase and an increasing Plantation maturity profile will do profits.

H. Add to that Palm oil output increasing by at least 20 % as per maturity profile in Annual Report.

In year 2012/2013, approx 60,000 hectares in various stages of maturity (refer and analyse graph on page 31 of Carsons 2010/2011 Annual Report).
When more lands mature, it results in more crop and thus more CPO. Especially in times when there is more output, and attractive prices, a multiplier effect in profits is created as variable cost (i.e. overheads) don’t increase as much proportionately. Thus, your Gross Profit Margins increase. If for eg. when prices increase 10-15 % and crop output increases 20 %, a multipler effect on profits is created which is hard to quantify in a precise manner but result has to be only good no ? !


Backstage


Moderator
Moderator
Trying to understand the all the information given by Alchemist has got my brain chemistry all mixed up.
If Alchemist is right, this topic header is misleading and very disconcerting to see for a shareholder. Maybe adding ? at the end,might now be appropriate. Dinesh over to you friend....

K.Haputantri


Co-Admin
Alchemist, thank you very much for your elaboration on the grey areas. I agree with your expert explanations in detail but explanation to issue B bothers me. ?Is the consolidation policy of not-accounting for their Goodhope Asia performance an inadvertant mistake or a delibarate policy for some other reason? Is it in line with SLAS or IAS. ? Will you be able to shed some light on this.

By the way, now I realize that it is not an easy task to analyse fundamentals in companies. One need to go very deep in to the accounts. Very usefull discussion though little complicated to most of us.

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@K.Haputantri wrote:Alchemist, thank you very much for your elaboration on the grey areas. I agree with your expert explanations in detail but explanation to issue B bothers me. ?Is the consolidation policy of not-accounting for their Goodhope Asia performance an inadvertant mistake or a delibarate policy for some other reason? Is it in line with SLAS or IAS. ? Will you be able to shed some light on this.

By the way, now I realize that it is not an easy task to analyse fundamentals in companies. One need to go very deep in to the accounts. Very usefull discussion though little complicated to most of us.

A very astute observation and a very valid point. To be honest, I'm not sure. Perhaps it is due the cross holding relationship between Buki & Carsons i.e. Buki owns approx 45 % of Carsons and Carsons in turn owns approx 7 % directly in Buki and further 20 % through RIT (Which is co-owned by Approx 50 % : 50 % by CINV & GUAR). Just FYI, Carsons owns approx 53 % Directly in GoodHope Asia Holdings (GHAHL) and Buki Owns Approx 35 % directly in GHAHL. So therefore, Buki treats Carsons as a subsidiary although Buki is an Associate company of Carsons ! Perhaps due to Accounting convention and Generally Accepted Accounting Principles (GAAP), this Accounting treatment is acceptable. Perhaps it may change with April 2012 onwards to due implementation of the new International Accounting Standards. Nevertheless, the reality is that due to this consolidation process, Buki results are understated.
I am reminded of a quotation from one of Warren Buffets essays on Look Through earnings which is apt in this context " The value to Berkshire Hathaway of retained earnings (of our investees) is not determined by
whether we own 100%, 50%, 20%, or 1% of the businesses in which they reside. . . . Our perspective on such “forgotten-but-not-gone” earnings is simple: the way they are accounted for is of no
importance, but their ownership and subsequent utilization is all-important. We care not whether
the auditors hear a tree fall in the forest; we do care who owns the tree and what’s next done
with it".

K.Haputantri

K.Haputantri
Co-Admin
Thanks Al. All doubts cleared.

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@The Alchemist wrote:
@K.Haputantri wrote:Alchemist, thank you very much for your elaboration on the grey areas. I agree with your expert explanations in detail but explanation to issue  B bothers me. ?Is the consolidation policy of not-accounting for their Goodhope Asia performance an inadvertant mistake or a delibarate policy for some other reason? Is it in line with SLAS or IAS. ? Will you be able to shed some light on this.

By the way, now I realize that it is not an easy task to analyse fundamentals in companies. One need to go very deep in to the accounts. Very usefull discussion though little complicated to most of us.

A very astute observation and a very valid point. To be honest, I'm not sure. Perhaps it is due the cross holding relationship between Buki & Carsons i.e. Buki owns approx 45 % of Carsons and Carsons in turn owns approx 7 % directly in Buki and further 20 % through RIT (Which is co-owned by Approx 50 % : 50 % by CINV & GUAR). Just FYI, Carsons owns approx 53 % Directly in GoodHope Asia Holdings (GHAHL) and Buki Owns Approx 35 % directly in GHAHL.  So therefore, Buki treats Carsons as a subsidiary although Buki is an Associate company of Carsons ! Perhaps due to Accounting convention and Generally Accepted Accounting Principles (GAAP), this Accounting treatment is acceptable. Perhaps it may change with April 2012 onwards to due implementation of the new International Accounting Standards. Nevertheless, the reality is that due to this consolidation process, Buki results are understated.
I am reminded of a quotation from one of Warren Buffets essays on Look Through earnings which is apt in this context " The value to Berkshire Hathaway of retained earnings (of our investees) is not determined by whether we own 100%, 50%, 20%, or 1% of the businesses in which they reside. . . . Our perspective on such “forgotten-but-not-gone” earnings is simple: the way they are accounted for is of no importance, but their ownership and subsequent utilization is all-important. We care not whether the auditors hear a tree fall in the forest; we do care who owns the tree and what’s next done with it".    


date 24th May 2012.

Bukit Darah PLC
I n t e r i m  R e p o r t
Fourth Quarter Ended 31st March 2012

Page 6

Note B -Consolidation

The Profit/Equity attributable to the equity holders of the Company have been understated during the year end 31st March 2011, due to an error in the computation of effective percentage holding. Accordingly, the Profit/Equity attributable to the owners of the Company and Non controlling interest in the prior year financial statements have been re stated in line with Sri Lanka Accounting Standard 10 – Accounting Policies, Changes in Accounting Estimates and Errors. The said correction has been included in the statement of changes in equity above.

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