- Relevant to P3 (ACCA) but not P4 (ACCA)
TABLE 1: TSM GLOBAL BERHAD
SHARE PRICE AS AT 4 AUGUST 2008 : RM 1.27
NET TANGIBLE ASSETS : RM 2.05
MARKET DISCOUNT TO NET ASSETS : 60%
NET CASH POSITION PER SHARE : RM 1.35
PRICE/EARNINGS RATIO : 3.5 times
WORLD'S RICHEST MAN
Would you purchase a used car for RM20,000? You may ask: what is the mileage, condition and car make. Granted, these are factors that determines the market value of a car. But will your perception change, if you found inside the car boot a stack of cash amounting to RM21,200! Of course, as an honest person as I know you are, you will inquire of the seller, if the car comes with “everything” that is in it! The answer is affirmative yes. In fact, the seller said it includes the cash in the boot. So he knows!
In other words, you pay for RM20,000 and in return you get cash back RM21,200, a 6% above the purchase price. What about the car? Sure it will worth much more. So you estimate the car and cash is worth the total of RM32,000 which is a 60% price above the selling price. This is too good to be true. But in life, we do get sweet spots and good deals!
In table 1 above, you pay RM1.27/share for a company which is RM1.35/share backed by net cash! In fact the whole company’s Net Tangible Asset is worth RM2.05! What a bargain, you may say.
There must be a catch! There always a catch in life you may insist! From the report excerpt below judge for yourself by applying external business analytical models. Tell me if TSM Global is in strong or weak financial position?
EXCERPTS from theedgedaily:
“Motor vehicle parts maker TSM Global Bhd is cautiously optimistic on its outlook, leveraging on the expected continuing strong demand for Perodua’s Myvi and Viva. The group was confident about its sales in its financial year ending Jan 31, 2009 as demand for small cars remained resilient despite the partial lifting of petrol subsidies recently. (In fact the oil price increase is good news to the company as people demand cheap mode of transportation.) Compact cars like the Myvi and Viva are very much in demand due to the increase in fuel prices, with Myvi having the lead in sales.
TSM supplies wire harness, automotive accessories, high tension ignition cable sets and PVC wires and cables. Perodua contributes 30%-33% to the group’s revenue. It also supplies its products to Korean makes, including Inokom, and Daihatsu. TSM had been facing rising production cost due to the increase in raw materials but it had been able to pass through the rising cost to its customer.”Applying the external analysis, I am sure you will agree that TSM has bright business growth prospects. Go ahead! Use the external analysis models like LE PEST and Porter’s Five Forces Model.
Why then the Stock Exchange priced at a discount, a deep 60% discount of NTA for that matter, a sound company with strong recurring business orders ? This is definitely an undervalued stock and bright future in profit growth prospects. Yale University Professor Robert J. Shiller calls this “irrational exuberance” meaning people behave with ‘herd’s instinct’. when there is a stampede of panic, majority investors simply bail out of stock market.
Now what I am going to tell you next may affect you severely and even cause emotional disturbance. So don’t read on, if you are not ready to face the truth!
You will be taught in P4 (ACCA) Financial Strategy a concept called Efficient Market Hypothesis (EMH) where it stipulates that the Stock Market has already priced in all information that will affect share prices. You do not need to seek information ahead of the market because investors already know. If so, why would any ordinary sane human sell his shares at a discount to company’s cash and net asset position? Not only that, TSM will benefit tremendously from globally threatening recessionary conditions.
The PE Ratio means in 3.5 years you will get your cost of capital back based on current constant earnings (see Table 1). But we can project the company’s earning will grow with increasing demand for this fuel efficient car. So the current PE Ratio will improve to smaller single digit number! Now, would you pay for say Maybank Berhad with a PE Ratio that state you have to wait 14 years to recoup your cost of investment or this humble TSM Global company? You may say, Maybank Berhad business is safe. But isn’t TSM Global safer! People still need to own a car to commute, in view that substitute transport threat is low. Wary of poor economic outlook, people look for lowest priced cars. TSM is adopting a cost-leadership strategy (Porter), contributing to most affordable car in Malaysia.
The world’s richest man, Warren Buffet, is just so happy that so many top minds in top universities are forced fed this grave error of EMH investment hypothesis concept which states that you cannot beat the stock market no matter what you do. To these so-called professionals, there is no such thing as under-valued stocks since information are being released to general investing public efficiently. Hence it will be reflected in the price before you can act. While the crowd of ‘professionals’ refuse to buy undervalued stocks, Warren prudently accumulates them over period of 30 years making him the world’s wealthiest!
So what are the lessons for you? I have applied simple accounting/financial indicators with interpretation and business models concepts based on P3 Business Analysis (ACCA). Knowledge is power! Why not consider invest but ‘caveat de emptor’ as a disclaimer of liability. You don’t need to succeed like Warren Buffet but earning fraction of say 1% of his total wealth estimated US$55 billion is more than enough, I believe.
Another disturbing fact, you could have been taught lies? EMH is a possible one. Does this imply you shouldn’t take P4 as you an optional paper is a decision that only you can make. No one, not even your parents, let alone the school you are in, can decide that for you. Still, if you decide to do P4, then totally ignore my article and market reality are neccessary, for you have to blindly believe ACCA examiner is right in order to pass his paper.
Whatever your decision, the reality is TSM will continue enjoy strong business growth which fortunately or unfortunately (depending on how you want to use the information) not reflected in its share price.
Are you really an accountant? A good one will see business investment opportunity (applying P3 ACCA concepts) and evaluating risk investment and risk appetitie approach (appying P1 ACCA concepts).
SOURCES OF REFERENCE:
Edinformatics, 2008, Efficient Market Hypothesis -- Fundamental Analysis, http://www.edinformatics.com/investor_education/efficient_market_hypothesis.htm, Visited on 6th August
John Reeves, 2008, Warren Buffett's Priceless Investment Advice, http://www.msnbc.msn.com/id/25970328/, 31st July
Robert J. Shiller , 2008, Irrational Exuberance, Second Edition, http://www.irrationalexuberance.com/, Visited on 6th August
Theedgedaily, 2008, TSM cautiously optimistic about FY09 http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_6801c30f-cb73c03a-17050f50-ca147bf1, 28th July.
TSM Global, 2008, Quarterly Profit Announcements, http://www.bursamalaysia.com/website/bm/listed_companies/company_announcements/announcements/historical.jsp, Visited on 6th August
22 comments:
Please put in your comments on this highly unusual priced stock - TSM Global Berhad
mr marcus , i do not understand the part about warren buffet being happy about top students being fed the error on investment hypothesis.And which undervalued stocks did he purchase? tq.
oh its ok...i got it
yes yes, in F9(financial management), the theory suggests that window dressing would not affect share price of a company as u CANNOT fool the market. But come to think about it, recent ( well, maybe not so recent ) cases of Enron and worldcom show that there is a possiblity that market can be fooled! What they did was "earnings management" where they perceive what profits the public wants it to be, and use different techniques to achieve it such as applying short-termism, or manipulating accounts. In the end, what the theory says that "market cannot be fooled" is just proved wrong, as the share price DID go up,showing that the company is doing well (in fact its not as good) until of course, the manipulations are found out. Therefore, i agree with u that EMH is just a theory, but in practical, there are many flaws in it.
1. NTA might very well be overvalued? After all, it is an accounting measure.
2. Market is underviewing the share.
LOW PE ratio and high discount suggests perhaps we don't know something that the market does.
It's not always the case we know everything the market knows. It might be the case of us knowing less than the market, thus suggesting a pure TECHNICAL analysis such as this may in fact be misleading, because the market has in fact factored some other things that we don't.
I do not think that newspaper, f/stms and other publicized documents are sufficient information.
Also, NTA is a yearly measure, measured once every financial year when accounts are issued.
Does it not occur to u that during that time the company's asset position may have changed? Thus the validity of making an investment decision on information taht is old may not be relevant.
3. TSM = Perodua supplier = High inventory = linked to car productions/sales.
This suggest that given perodua's reputation as more fuel-efficient, perhaps it is undervalued.
BTW, EMH doesn't quite apply to Malaysia, our market is not matured enough, nor is it professional enough.
--
However, realize one thing, even if it is REALLY undervalued, what matters is whether the market will EVENTUALLY realize it's undervalued.
Realize that even if u know it's undervalued and it really is undervalued, if the market never realizes the undervaluation (thus the share price remains unchanged), you'll never get to make money.
Furthermore, the longer you hold it, the more likely you'll find yourself victim to the irrational exuberance you previously said.
lol nice article.
But hey Mr. Marcus, the stealth plane is not F-28 leh. It's F-117 Nighthawk.
http://en.wikipedia.org/wiki/F-117_Nighthawk
I know how you come up with F-28 lar. Since 1+1=2, and then 1+7=8. So it's F-28, lol.
A more recent and more yeng punya fighter jet that replaces F-117.
http://en.wikipedia.org/wiki/F-35_Lightning_II
Wow interesting comments here. Ray, I think EMH says you can't fool a STRONG-form efficient market. But as in reality, there are no strong-form efficient markets.
Most well known markets like LSE and NYSE are semi-strong and ours here are just weak.
So window dressing surely can fool anyone. The theory is true just not being practical.
And sir, erm... you can't put a chatbox for each article. You only can put a permanent one on your blog. Or maybe I just don't know how....
Hi, thanatos is thanatos swiftfire from lowyat forums? hows pwc? ^^
Not bad woh... ray noes about thanatos in PWC...
->Mr Marcus: Nice article... seems like Wikipedia no update Warren Buffet photo, it's still the same as I check about him last year, lol~
Hmm, im not too sure if the "theory" of "can't fool the mkt" applies to only strong form efficient market. But i guess theory is just theory. Many theories are subsequently proven wrong right? :)
sometimes theory is just a theory. Although some mature SE like LSE and NYSE claim that they are semi strong market, it is just true to a certain extent..
It is not practical for a market to reflect all past and current information of a company on the stock price. Other factors like market expectation might affect the price too. Especially market irrationality, there are many investors that go crazy speculating and trading stocks based on advice from the stock brokers and research house. Their irrationality send the demand-supply fluctuate at all time which then affect the market.
If EMH was true, how can a great man like Warren Buffet make his fortune of USD62billion mainly from stock market by buying undervalued stocks? How could he beat S&P 500 Index 20 out of 24 years?
I believe that is why EMH is called a "hypothesis" rather than Eff Mkt "Theory".
Thanatos, would you mind to elaborate your point 3?
"3. TSM = Perodua supplier = High inventory = linked to car productions/sales.
This suggest that given perodua's reputation as more fuel-efficient, perhaps it is undervalued."
appreciate that..^^
Ignore point 3. Realized halfway it was a pointless argument as it strays towards fundamental analysis covered by Mr Marcus in his post.
Will the market eventually price the company at fair value? over 100 years of stock market listed companies, you consistently see great companies grown from good the great, vice versa. 20 years ago, you hear Wang Laboratories which is a great company until it lost touch with market demand in Hardware equipment.
Warren, Senge, Templeton just to name a few consistently invest in undervalued stock. Now note that Warren made his fortune from an 'MATURE' USA market.
If EMH is dodgy, why build a whole finance calculation based on it? Its foundation is sandy weak.
Its like designing a dress for a flower when you are assuming its a little puppy.
thanks. its F-117_Nighthawk so you said. I need to edit that next time. Great you are paying attention.
LOL of course lar where can not pay attention inside your class. Haha!
Ops, it's Sir's class. Paiseh for being slightly rude.
P4 is interesting subject.pls do not drop it.
yeah like u said, juz agree with d examiner.everything he says is always RIGHT.not in reality.
ray..u r rite!i dun need 2 write a comment bout this case study since u already analysed it on my behalf.hehe
mr marcus,seeing u hav analysed the co,do u capitalise on ur knowledge to invest in the stock market??robert.t .kiyosaki in his book said the broker or analyser who comment on the market do not invest in the share tht they recommend,dont u think this is ridiculous~
I believe in Peters & Waterman principle - "walk the talk"
I have the satisfaction of proving Buffet right with personal experience. It is rewarding, to say the least.
1. Realize that finance theories are often made by non-accountants, and they tend to take a scientific approach to financial theory
EMH is one such hypothesis where things can go wrong, just like M&M's dividend irrelevance and capital structure irrelevance theory. It's so bad, that it helps us identify what makes a financial theory bad.
It's like saying, we know it's bad BECAUSE of XXXX, and thus since we know what causes it to be bad, we know how to avoid it.
And seriously, what do you mean by, we built a whole financial calculation on it?
The whole positive NPV method for investment appraisal relies on the fact that EMH DOESN't WORK, that's why we can have positive NPV in the first place.
A theory doesn't have to be right to be useful. Knowing how wrong it is can be just as insightful.
2. On the issue of historical proof that undervalued stock has normally been proven to eventually realize it's value. I can see 2 problems with ur historical proof.
2a. History is written by the victors. Nobody goes on telling everyone how his undervalued company failed because it was consistently undervalued. Things,a re usually obvious after the fact. Your cheery-picking companies to support your theory. I'm more inclined to believe if it is supported with market statistics.
2b. Your sample size is too small. Don't be surprised if you find some company fails due to constant undervaluation -> lack of financial ability to raise funds -> eventual failure.
Can you buy a company that is 60% discount to NTA?
Is the company's five forces in its favour?
accounting ratios and Five forces analysis say Yes.
So is this company's profits sustainable? Yes.
There you go. You earn your marks.
the article's purpose is application, application,application, along with more to come. This is my Blog's purpose.
I have to draw a line here. If candidates can forward their arguments objectively and professionally, these are welcome. However, if its sullied with emotions with tinge of anger and open challenge, let not this be the place. I will have to edit my blog for better readability. I am sure you will understand. if you insist your opinion, by all means you may post it on your blog. let us have human decency and civic-speeches. your cooperation is appreciated.
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