13/09/2021
Today we look at one of my realized investment that gave me a 93% return in 2.5 years. As this is a realized investment, I don't mind sharing the name, which is MYEG(0138).
This is one of my very first stock i bought after dipping my feet in the stock market, which is right at the general election that saw the ruling coalition Barisan Nasional toppled in 2018. During this time, alot of PLC that was perceived to be politically linked are battered, and MYEG is one of the most badly hit, dropping from RM 2.90 to the RM 0.60 range.
The momentous drop in price caught my attention. As Buffett said, business values don't change instantaneously. So I dived deep into the annual report of MYEG to see what kind of company it is. Some people may think catching a falling knife is dangerous and not for the faint of heart, but you have to know what kind of knife are you catching to not get hurt. Steep price drop does not guarantee you will profit from the rebound, but it provides a good place to look for profit opportunities.
So how do i assess an opportunity? It always starts from the 3 financial statements. It is a starting point, not an end, which is the converse of what majority thinks. To me, financial statement gives me the background, only then can I start to aseess the qualititative aspect of a company.
So for MYEG, I first calculate what Buffett defined as the owner earnings. For MYEG 2018, that is(all figures in thousands) 102,778.4, adding in the depreciation and amortization charges 25,421.60, adding interest expense 6,329.60, to arrive at 134,528. Deducting the average CAPEX of 88,888 and you get 45,728. But there is a hiccup in 2018 for MYEG, due to the cancallation of the GST roll out, MYEG had to write off the investment it has made to carry out the GST implementation. This amount to about 170 million at that time. This requires abit of a subjective judgement, which in my view the writeoff amount can be recovered gradually as I hypothesize the government will reinstate GST in the future, so I disregarded the writeoff and put in the 170 million into the earnings and come up to about 215 million.
So how do you relate earnings to the value of a company? I have a very simple idea that I got from Buffett, which is to use the long term MGS rate at that time, which is about 5.5%. So when you capitalize 215 million with 5.5%, you get about 4.3 billion of enterprise value, which essentially is the market value of the company as MYEG doesn't have much debt.
I compared the calculated value and the market value at that time, and I found a big discrepancies. 4.3 billion enterprise value vs around 2.8 billion market value, I smelled opportunity. Remember, when I capitalize the earnings at 5.5%, implicitly I ignored the growth portion of the enterprise value. This is a conservative assumption as MYEG has been growing at about 15-20% CAGR over the past 10 years. Now here comes the juicy part. A company that is constantly growing 15-20% CAGR is selling at a value less than a no growth assumption? I decided to pounce on this opportunity.
My first purchase started at about RM 0.77/share before split, and I kept buying untill my average price is about RM1.07/share. When I am buying, I am a frequent visitor of i3investor, which alot of so called 'sifus' cautioned that don't catch this dropping knife, or the CEO is linked to Najib's wife and there will be no more contract for MYEG in the future, etc. The baloney never stops. But as I have done my homework, these "cautions" never caught on to me, but it does requires alot of courage to be contrarian at that time.
Fast forward 2.5 years later, MYEG came up to the RM 2 range, which is right around what I calculated it's fair price should be, and I sold all at RM 2.08, netting a 93% return from a 2.5 years wait. This is still excluding the dividend that I received these 2.5 years, which could add about 1-2%.
Right now, MYEG is hovering around RM 1.80 to RM 2.00, which I think is a fair price, but not at an investment price. It is ironic that only now do the investment houses starts to praise how good MYEG is, but not during 2018 when it is at the lowest and the most attrative price. I guess Buffett is right when he said, the rear view mirror is always clear.
In conclusion, what I learnt from this investment is that you first had to know your reference price, the reason you are buying the stock, and these must be logically formed. Once you had done the buying, all you had to do is have the patience and courage to wait, but of course you had to monitor the progression of the company to see if it is indeed performing at your expectation.
Alot of people let the stock price tell them how good a company is, but they never invert and look at another way, which is the company performance determines the stock price in the long term
I like to end this long winded murmuring with one of the poems I like best from Rudyard Kipling:
If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise:
If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build ’em up with worn-out tools:
If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: ‘Hold on!’
If you can talk with crowds and keep your virtue,
Or walk with Kings—nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son!
