The price is not particularly attractive. The company don't seem to possess any price fixing power in the industry value chain. Their management team are not acting in the best interest of the shareholders.
Before the analysis
1. What are the financial data that matter?
For a growing company which have occasionally issued new shares in the past, EPS growth rate might be illusive.
A simple ( and extreme example ).
- Suppose a company has original ROE of 20% , and initial equity of RM100 million, with 100 million shares outstanding. The EPS now is RM 0.20.
- Suppose, as the P/B value is high, the company decided to sell additional 20 million shares for RM 5 each. Raising equities to RM 200 million, with 120 million shares outstanding.
- Now , even if the ROE declined to 15%, the company will still recorded an EPS of RM 0.25 ( 15% * RM 200 million / 120 million shares). A 20% increase for EPS , doesn't show that the Management Team of the company actually performed better.
Hence, a trend of ROE over five years, will show if the management team utilize the capital well.
2. What about others financial data, like revenue growth rate?
The truth is that, a growing company can't grow forever, its growth will start to slow some point.
The problem is that, estimating the point where the company will start to slow, required extensive analysis and frequent updating information about : the nature of the business the company operated in, the competitive advantages the company have ( patent, brand, government policy ) , the quality of the management team, and the future of the industry.
These kind of tasks often required massive amount of time and energy spent. Given that there are hundreds of stocks available in the main board, using a simpler tool to screen for potential undervalued stocks will save you quite a lots of time.
3. What about the Present Value formula, or Gordon Growth Model?
A growth stock's present value evaluated using Gordon Growth Model is very sensitive to the rate of return ( or discount rate) demanded by the investors.
Added by the fact that you simply can't expect the initial growth rate be continued at the future, these are the reasons why Benjamin Graham will advised investors staying away from growth stock / or evaluating a stock like a growth stock.
The Key Parts.
| 1 year | 5 year average | All time | |
| Price | 1.13 | ||
| Dividend | 0.012 | 0.0116 | |
| Payout Ratio | 0.3 | 0.2786 | 0.2786 |
| NAV | 0.511 | ||
| Return on Equity(%) | 7.9 | 11.94 | 11.29 |
| Return on Asset(%) | 5.6 | 7.54 | 6.87 |
| EPS | 0.040 | 0.061 | 0.058 |
| PER | 28.25 | 18.52 | 19.59 |
At initial glance, with KLCI's average P/E ratio at 18, any company with share price higher than NAV per share will require a current P/E ratio lower than 18 for equivalent risk premium existed. 3A's current P/E ratio, with price RM 1.13 and recent EPS RM 0.04, was 28.25, which is way higher than the market average. Even if assuming they can return to their average ROE of 12%, the adjusted PER of 18.52 for 5 years average, and 19.6 for all time average, are still below general market performances.
The company performed poorly these two years despite increasing revenue income. This showed they are unable to pass on the increase of production cost ( raw material price ) to their customers ( A sign of little price fixing power in their market ).
It is understandable that for a growing company, its dividend payout ratio will be low, and the investors won't expect high rate of return at this period. However , the Board of Director's determination to safeguard minority interest in the company is questionable, when they took home a total of three million remuneration package, when the after tax profit is just fifteen million ringgit. Furthermore, the company announced a share buy back program recently, given the share price of the company are currently overvalued, this will overpay the departing shareholders at the expense of those who stay. Furthermore, a share buyback program, is an implicit admission that the current management team can't grow the returns further.
Conclusion
When a family business goes public, the Board of Directors formed by family members will tend to put family's interest above minority shareholder's. Hence, the investors need to demand higher rate of return than market's average. Unless the current P/E falls below 20 and long term P/E falls below 15 ( which indicated a price of RM 0.80-0.90), we should restrained ourself from any further analysis.
Other links
CWYEOH KLCI stock analysis
Bursa Saham Company Information
