Aviation Related Stock, Revisit (Part II)

In Part I of this series (Read more here), pre-Covid19 Monte Carlo model was compared with actual price range of SAM Engineering (SAM).  The predicted price range correlate well with the actual data.  The author argued that the market might not have incorporated Covid-19 impact thus a post-Covid19 Monte Carlo model is needed to forecast the price.

Several key factors need to be considered in order to build a robust post-Covid19 Monte Carlo model.  They are,

       I.          Earnings impact;

      II.          Volatility (mood and momentum); and

    III.          Economy recovery pattern and duration (V-Shaped, U-Shaped, or L-Shaped).

First, the earnings impact will be assessed using the concept outlined by valuation guru, Prof. Aswath Damodaran (Read more here).  He mentioned three key crisis-specific inputs:

1.      Revenue Change & Operating Margin in 2020;

2.      Expected Revenue Growth in 2021-2025 and Target Operating Margin; and

3.      Failure probability and consequences.

He also posted a very comprehensive spreadsheet for users to do their own valuation (spreadsheet), and a video guide to use the spreadsheet (guide).

Second, the volatility of the price movement will be assessed using the latest five years Price to Earning (PE) ratio with assigned probability.

Third, the shape and duration of the recovery.  Basically, three types of recovery pattern are considered, V-Shaped, U-Shaped, and L-Shaped.  Each type of recovery pattern will be assigned with probability.

Earnings Impact & Recovery Pattern

Now let us examine the earnings impact by first looking at point number 3 in Prof. Damodaran’s key crisis-specific inputs – Failure probability and consequences.  Prof. Damodaran pointed out that smaller, younger and more indebted company are likely to fail in this crisis.  Based on market cap definition, SAM is classified as small cap company in Bursa Malaysia.  It has been in the industry for more than 10 years thus it is not really a young company.  Thus, the key parameters to consider here is indebtedness.

Table 1 shows the liquidity and solvency ratios of SAM Engineering.  The financial position of SAM Engineering is healthy based on the most recent quarter (MRQ) or trailing twelve month (TTM) information as at 31 Dec 2019.  The liquidity and solvency ratios are healthy and their cash in hand is believed to be enough to pay wages and interest in the near term.

Table 1:  Liquidity and Solvency Info

	MRQ/ TTM
D/E	0.27
Quick Ratio	1.43
Current Ratio	1.92
Operating Cash Flow to Debt Ratio	0.88
Interest Coverage	13.3
Interest Expense	RM2.60 mil
Cash	RM20.61 mil

Let us move to point number two – Expected Revenue Growth in 2021-2025 and Target Operating Margin.  This portion can be analysed together with point (III), recovery pattern.  The revenue growth shall follow V-Shaped, U-Shaped or L-Shaped pattern?

The good thing about Monte Carlo model is one can incorporate all recovery patterns into the model, then assigning the probability of occurrence for each pattern.  However, the probability assignment now becomes the main issue.  A poll by Ernst & Young (EY) showed that 38% of the global executives said the recovery will be V-Shaped, 54% said U-Shaped, while 8% said L-Shaped (Read more here).  This Monte Carlo model will use these numbers as input but with different recovery level.  Table 2 shows the recovery assumptions.

Table 2:  Recovery Pattern (Revenue)

Recovery Shape	Back to pre-Covid19 level by	Recovery Path	Probability
V-Shaped	2023	Straight Line	38%
U-Shaped	2025	S-Curve	54%
L-Shaped	2030	Flat-S	8%

Finally, let us look the most difficult parameter - Revenue Change & Operating Margin in 2020.  This is the most important parameter as it serves as the reference point for the model.  Based on rough estimation, if the revenue dropped by 30%, at least 10% work force reduction is needed in order to maintain positive EPS.  Thus, SAM’s 2020 EPS may go negative if the revenue dropped more than 30%.  As such, in accordance with L-Shaped recovery pattern, the minimum price for SAM shall be determined by using discounted tangible book value.  As at 31 Dec 2019, the tangible book value per share of SAM is RM4.11.  Assuming it may trade at 80% of its tangible book value, it will be around RM3.29.  This would serve as the floor value for 2020 till 2023.  (Floor price changed to RM2.0 on 3 May 2020, see Part III for details).

Table 3 shows the assumptions for revenue forecast and the happening rate for 2020.  The EPS is highly dependent on the cost cutting measure and other government support scheme.  For this model, only work force cut is assumed.  Tax rate and other measures are assumed similar to 2019.

Table 3: Revenue Forecast & Probability

Revenue Drop	10%	20%	30%	40%	50%
Work Force Cut	5%	10%	15%	20%	25%
EPS (RM)	0.28	0.18	0.08	-0.03	-0.15
Probability	15%	50%	30%	3%	2%

Figure 1 shows the EPS forecast for various recovery pattern.  (The U-Shaped recovery pattern looks more like a Nike swoosh).

Volatility (Mood & Momentum)

The volatility impact (mood & momentum) is studied using past five years PE range.  Figure 2 shows the daily PE range from Mar 2015 to Mar 2020.  The PE could go as high as 30 and hit the lowest at around 7 but their probability of occurrence is 0.08%.  They only happen once in five years.  About 50% of the occurrence happened between 10 to 23.  See Table 4 for details.

Table 4: PE Range and Occurrence (2015 – 2020)

PE	Occurrence	Percentage of Occurrence	Cumulative Occurrence
13.7	63	5.2%	5.2%
13.8	57	4.7%	9.9%
13.9	34	2.8%	12.7%
13.6	28	2.3%	15.0%
15.1	23	1.9%	16.9%
13.5	21	1.7%	18.6%
15.8	20	1.6%	20.3%
15.9	20	1.6%	21.9%
13.1	18	1.5%	23.4%
14.2	18	1.5%	24.9%
14.3	18	1.5%	26.4%
15.2	18	1.5%	27.9%
15.6	18	1.5%	29.3%
15.5	17	1.4%	30.8%
14.4	16	1.3%	32.1%
14.6	16	1.3%	33.4%
14.8	16	1.3%	34.7%
15.4	16	1.3%	36.0%
23	16	1.3%	37.3%
13.4	15	1.2%	38.6%
14.7	15	1.2%	39.8%
14.1	14	1.2%	41.0%
10.9	13	1.1%	42.0%
13.2	13	1.1%	43.1%
15.3	13	1.1%	44.2%
21.4	13	1.1%	45.3%
22.9	13	1.1%	46.3%
13	12	1.0%	47.3%
14.5	12	1.0%	48.3%
21.8	12	1.0%	49.3%
22.4	12	1.0%	50.3%

The PE range with their probability of occurrence will be fed into the Monte Carlo model, together with the earning estimates and their happening rate in accordance with different recovery pattern.

The simulation results will be reviewed in Part III of this series.

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.

Aviation Related Stock, Revisit (Part I)

In a previous article dated 8 June 2018 (Read more here), SAM Engineering stock prices for 2019 to 2021 were forecasted using Monte Carlo simulation.  The forecasted median price was around RM6 while the forecasted min and max price were around RM4 and RM8 respectively.   In fact, SAM Engineering hit RM8.64 in 2019 and plunged to RM4.20 during the Covid-19 pandemic sell-off in March 2020.  Figure 1 shows the forecasted and the actual price range for SAM Engineering.

The Monte Carlo model is known for predicting extreme outcome.  In the long run, the stock price is believed to revert to mean (or median).  As such, after the huge price drop, SAM Engineering is trading around RM5.82 as at 30 April 2020. 

Figure 1: Monte Carlo Forecast vs Actual

  

The next question to ask is – the forecasted price range still hold?  While it appears that the price is reverting to mean (or median), this could be just the market have yet to come up with new forecast model as many argued that in such a volatile market, there are just too many uncertainties.

However, as the valuation guru Prof Aswath Damodaran said (Read more here),

“I know that that you are trying to make a judgment call in a period of incredible volatility, where no one (managers, analysts, governments) know what is coming, but your reasoned guess is as good as anyone's estimate. So, be bold, make your best estimate and move on!”

Thus, a post-Covid19 Monte Carlo model will be designed to incorporate the impact of the pandemic such as volatility, earnings; the shape and the duration of economy recovery.  It will be covered in Part II of this series.

Stay@Home!

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.

Malaysia Covid-19 Forecast using Generalized Logistic Function (Updated 28-Apr-2020)

In a previous article dated 14-Apr-2020 (beginning of the Phase 3 MCO), the Generalized Logistic Function (GLF) model predicted the total case of Covid-19 in Malaysia would be plateauing around 6200 cases by mid-June (Read more here).  Also, the daily new positive cases would go below 50 by end of Phase 3 MCO (Read more here).

Today is the end of Phase 3 MCO, and the daily new cases reported was 31, whereas the past two days daily cases were at 40 and 38 respectively.  This shows that the Covid-19 trend in Malaysia is well predicted by the GLF model and fellow Malaysians are doing a good job to flatten the curve!

Besides GLF, other method such as Susceptible-Infected Recovered (SIR) is also a popular choice among scholars. The Data-Driven Innovation (DDI) Lab of Singapore University of Technology and Design predicted that the pandemic will be 97 per cent contained in Malaysia by May 7.  It further predicted the figure will then increase to 99 percent by May 20, with full containment on July 8 (Read more here).

The prediction by DDI Lab using SIR model is pretty much in line with GLF model prediction, which is still targeting the cumulative case to be plateauing around 6200 by mid-June.

Based on the GLF model updated best-case scenario, by the end of Phase 4 MCO (12-May-2020), the daily new cases would go below 10, entering the single digit phase.  This number is derived purely using quantitative approach.  It does not factor in traffic movement (flight routes reopen), new vaccine development and other qualitative measures such as reopening additional business sectors.

Hang in there, it is almost over.  Please continue to Stay@Home for now!

Stock Screening Using TradingView

While Bursa Market Place is still my number one choice of free stock screening tool for Malaysia Stock Market (link), lately I found that TradingView’s free screening tool provides more knobs for screening (link). 

TradingView serves as the quick tool to screen stocks that fit your selection criteria.  Once you get the list, move to Bursa Market Place to study the detail financial info.

Here’s a simple video to walk you thru the navigation process.  Once you are familiar with it, you can add more criteria according to your preference.

Enjoy the video, Stay@Home.

This article is only meant for education purposes and not act as a recommendation for any particular stock investment. As such the author accepts no liability real (or otherwise) for any investment made by an investor.