Wake Me Up When September Ends

Inflation? Recession? War? Covid?  Are these the factors that causing the stock markets going south since the beginning of 2022?

Where is the bottom?

Let’s look at it from the technical analysis perspective.

Below are the weekly charts of S&P500, HSI, CSI 300, and KLCI.  All of them are exhibiting MACD divergence trending.  If the MACD does not make new low and manage to pull upwards in the coming weeks, this will confirm the divergence (please refer to previous articles for details, Read more here).  The market might stop plunging and possibly move upwards.

Time to wake up?  Good luck, have fun!

Chart 1 S&P500 Weekly Chart

Chart 2 HSI Weekly Chart

Chart 3 CSI 300 Weekly Chart

Chart 4 KLCI Weekly Chart

Disclaimer:  The above analysis does not imply any buy or sell recommendation.  The author disclaims all liabilities arising from any use of the information contained in this article.

Tiger Year 2022 – Impact to Industries? – from Metaphysics Perspective

Gong Xi Fa Cai!

From Feng Shui perspective, the Tiger Zodiac begins from Spring Solstice (4^th Feb 2022).  According to Chinese astrology, the destiny of a person can be predicted by plotting the Four Pillars Of Destiny, as known as Bazi (Read more here), using the birth date of that person.  The same principle can be applied to company, organization, country or even “year”, if the starting (birth) date of that entity is known.

Table 1 is the Bazi of 2022 Tiger Year.  The Bazi plot of 2022 Tiger year shows that 2022 is full of Water and Wood elements, lacks Metal and Fire.  From Feng Shui perspective, every industry has its own Feng Shui element.  Table 2 shows the industries that associated with different Feng Shui elements.  Based on the 2022 Tiger Year Bazi, the Water and Wood industries such as logistics, tourism, and pharmaceutical might perform better.

Table 1: 2022 Tiger Year Bazi Plot

 

Table 2: Industry associated with Feng Shui Element

There are quite a number of Feng Shui impact to stock market articles and interviews on the internet.  Here are some of the popular links:

1.      https://www.bfm.my/podcast/morning-run/morning-brief/is-the-year-of-tiger-a-roar-or-purr

2.      https://www.clsa.com/special/FSI/2022/?

3.      https://www.theedgemarkets.com/article/clsa-feng-shui-index-2022-eye-tiger

4.      https://www.theedgemarkets.com/article/what-will-year-water-tiger-bring

Good Luck and have fun!

Disclaimer:  The info in this article are for educations purpose. Data are not supported by proper financial research.  Please consult licensed financial advisors for your investment decision.

 

Discounted Cash Flow (DCF) Valuation Basic – Part IV

In previous articles, the basic concepts of DCF valuation such as time value money, FCFF, and WACC were discussed (Read more here), (Read more here), and (Read more here).

The next step is to forecast the future FCFF stream.  Normally analysts will forecast the numbers based on their understanding of the company business and development.  For beginner, you can refer to research reports that are available for free on Bursa Market Place.

As promised, we are going to analyse Top Glove.  The following tables are the summary of analysts forecast.  All analysts are expecting the revenue of Top Glove to be either doubled or tripled in 2021, but will decline starting 2022.  Which means the supernormal demand and high selling price of glove is not sustainable.

Most research reports will not provide forecast beyond three years, some even only provide two years forecast.  Thus, forecasting beyond 3 years horizon is challenging but in DCF model, based on Damodaran spreadsheet (Download here), at least 10 years horizon is required and estimating the terminal value is very important.  Terminal value means at a certain point of time, the company will grow at a nominal rate forever.  The usual assumption is the FD rate ten years later.  In order to cover the uncertainty of long term growth rate, it is recommended to have 3 different scenario, average, min, and max.  Same assumption is applicable to WACC, Revenue, and EBIT forecast.

Top Glove Revenue Forecast
Research House	2021F	2022F	2023F	Report Date	Source
MayBank	27,796.0	17,793.0	15,520.0	8-Oct-20	link
Public	17,827.9	12,345.9	10,672.9	18-Sep-20	link
JF APEX	12,513.0	8,057.3	n/a	30-Sep-20	link
AFFIN	16,882.9	10,922.5	10,759.0	17-Sep-20	link
Kenanga	17,290.0	13,514.0	n/a	18-Sep-20	link
Aminvest	21,810.7	11,589.7	9,229.3	18-Sep-20	link
MIDF	12,852.0	10,710.0	9,481.5	18-Sep-20	link
HLBANK	14,598.6	10,261.2	n/a	18-Sep-20	link
Average	17,696.4	11,899.2	11,132.5
Min	12,513.0	8,057.3	9,229.3
Max	27,796.0	17,793.0	15,520.0

Top Glove EBIT Forecast
Research House	2021F	2022F	2023F	Report Date	Source
MayBank	14,794.9	5,554.6	2,281.9	8-Oct-20	link
Public	10,622.4	4,929.0	2,893.3	18-Sep-20	link
JF APEX	5,630.9	1,611.5	n/a	30-Sep-20	link
AFFIN	n/a	n/a	n/a	17-Sep-20	link
Kenanga	n/a	n/a	n/a	18-Sep-20	link
Aminvest	7,963.8	2,867.3	1,513.8	18-Sep-20	link
MIDF	5,996.4	2,533.7	1,880.7	18-Sep-20	link
HLBANK	7,310.6	3,732.6	n/a	18-Sep-20	link
Average	8,719.8	3,538.1	2,142.4
Min	5,630.9	1,611.5	1,513.8
Max	14,794.9	5,554.6	2,893.3

	Min	Average	Max
WACC	7.43%	8.61%	9.80%
Terminal growth rate	2%	3%	4%

The spreadsheet framework that we are going to use here is the simplified version of Damodaran spreadsheet.  We will be estimating the value of Top Glove based on average condition.  There are a lot of cells that need to be filled in order to complete the sheet thus it will not be easy to explain in words and sentences.  Thus, an additional sheet that shows all the formula will be embedded as well.  Drop your questions on engineering2finance facebook page if you have any questions (link). 

Keep in mind that there are many assumptions made in formulating the model.  These assumptions did not go thru due diligence exercise, and most of the time they are made for easy understanding rather than accuracy.  However, the numbers in each cells are derived based on sensible financial principle rather than haphazardly. 

Finally, let’s come back to the most important question – what is the value of Top Glove based on this DCF model?

Here you go.

Try to build you own spreadsheet to find the Max value and post your answer on the engineering2finance facebook page (link).

REMINDER!  The example – Top Glove, used in this DCF model is meant for education purpose, to help readers to better understand the building block of DCF model.  It should not be interpreted, or relied upon, as financial or business advice.  Please consult licensed investment advisors for proper investment advice.

Good luck and have fun!

Disclaimer:  The above analysis does not imply any buy or sell recommendation.  The author disclaims all liabilities arising from any use of the information contained in this article.

Disclosure: The author may have interest in the stocks of the companies in this article. 

Discounted Cash Flow (DCF) Valuation Basic – Part III

In previous articles, the basic concepts of DCF valuation such as time value money and FCFF were discussed (Read more here), and (Read more here).  This article will focus on basic concept of WACC and cost of equity, which are essential to “discount” the future FCFF stream to present value.

Some websites provide WACC and cost of equity for free, but the numbers provided by each site are slightly different.  This article will guide you to compute the WACC and cost of equity yourself. 

WACC is the cost of capital to run a company, which include debt and equity.  The formula of WACC is

where,

Debt      = market value of debt (or book value of debt)

Equity    = market value of equity (market cap)

kd           = Cost of Debt

ke           = Cost of Equity

Again, math is simple but getting the correct number to be inserted into the formula is not straight forward.  The following table shows the source to obtain the numbers and the level of difficulty to get them.

(for simplicity, kd is estimated using this year interest expense divided by average of this year and last year total debt)

CAPM is the most popular way to estimate cost of equity.  The formula of CAPM is

where,

Rf                          = Risk Free Rate (or Fixed Deposit rate for retail investor)

β                            = Beta (volatility of stock relative to overall market)

Rm                        = Market return

(Rm – Rf)             = Market Risk Premium

It is not easy to compute Beta but there are a lot of tutorials available on web or Youtube.  Fortunately, many financial websites are now publishing beta of company, but the issue is their numbers are different from each other.  This because each source is using different time horizon to calculate beta.  Some use 1-year, some use 3-year, and most of them do not state the time horizon explicitly.  Generally, those who do not state the time horizon highly likely are 3-year beta.

Market return, or more popular measure – “market risk premium” is also difficult to estimate.  Professor Damodaran from NYU Stern maintains a page to provide market risk premium for various country but only update occasionally for country outside US.  However, Malaysia investors can roughly estimate the market risk premium by using the implied ERP of S&P500 plus the yield spread between US T-Bill and Malaysia T-Bill.  Both data could be found in the Damodaran’s page and Bank Negara Malaysia website.

It is time to go for a real world example.  Again, we are going to compute Top Glove WACC.  The following table shows the respective data required to calculate WACC as at 9pm 18 November 2020.

Variables	Value	Source
Debt (FY2020)	RM0.54 bil	Top Glove Website
Equity (Market Cap)	RM59.0 bil	Bursa Market Place
Tax	17.4%	Top Glove Website
kd	2.3%	Top Glove Website
ke	9.88%	Compute
Rf	2.0%	Google FD Rate
[Rm – Rf]	6.85%	NYU & BNM
Beta (1-Yr)	1.15	TradingView
WACC	9.80%	Compute

The computed WACC is 9.80%  (WACC = 7.4% if 3-Yr Beta is used), which is higher than the numbers reported by some websites.  The main reason is we are using 1-Yr Beta (3-Yr Beta is around 0.8), which is highly volatile due to recent spike in prices.

We have covered three basic concepts of performing a DCF valuation, which are time value money, FCFF, and WACC (and cost of equity).  We will dive into the spreadsheet construction in the next article to estimate the value of Top Glove.

Stay online!  Stay safe!

Disclaimer:  The above analysis does not imply any buy or sell recommendation.  The author disclaims all liabilities arising from any use of the information contained in this article.

Disclosure: The author may have interest in the stocks of the companies in this article.