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Expanding intrinsic value and rising dividends....
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jeremyow
Senior |
06-Jul-2009 11:09
Yells: "Passionate business investor" |
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You are welcomed! It's a good thing to share and discuss about investing stuff. I have also picked up investment ideas and knowledge from all the sharing in this forum and this is just my way to give back whatever I have also. We hope one another will grow to be knowledgeable investors and invest our hard-earned money cautiously for good rate of returns. It is also good for the excellent businesses that investors invest in to help the invested businesses grow with equity funding. As investors, we help excellent businesses grow with our invested capital. Any excellent businesses will reward back their investors with good business growth and returns on their investments. Of course, businesses with lousy economics are not worthy investments. They may cause investors to lose their invested capital. So, there is no point supporting a business that is doomed to fail. <It works both ways. Support an excellent business with equity funding by investors and the business will reward back their investors with good returns on their investments. Invest in a business with lousy economics and the business will punish it's investors with lousy business economics and risk of loss of investor's capital.> |
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wongmx6
Veteran |
06-Jul-2009 10:29
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Hi jeremy, Appreciate |
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jeremyow
Senior |
06-Jul-2009 01:04
Yells: "Passionate business investor" |
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Hi all, thanks for the interest on exploring concept of intrinsic value of shares of a company as a method of investing. Intrinsic value of a company is just an estimate as it takes into account past financial performance of a company to make a forecast on the future performance of the company. There is assumption that future financial performance will be at least consistent if not better than past financial performance of a company. I am following the discounted operating cashflow method to estimate the present intrinsic value of the shares of a company. I have not rigourously estimated the intrinsic value of many companies yet. So far, one good company that I find is Keppel Corp. My current estimated intrinsic value of it's shares is around $8 per share using the discounted cashflow method. I have also posted in one of my earlier posts regarding a research by DMG and Partners Securities where they use the sum-of-parts evaluation of the fair value of Keppel Corp's shares at $8.60 per share. So, I believe those investors who are now holding Keppel Corp's shares at below $8 per share are actually getting a bargain on it's shares. Those investors who have invested even earlier at $4 per share range during March's low and are still holding on to it's shares will see the company soon trading back to it's intrinsic value of $8 per share. By then, those investors who are patient will get around 100% returns on their invested capital (considering if their average holding price was $4 per share and Keppel Corp's shares estimated intrinsic value is around $8 per share). If Keppel Corp can maintain growing dividends consistently from this time onwards, the longer one hold onto it's shares (e.g. those who bought at $4 per share or even lower), the higher the future dividend yield will be many years down the road. Furthermore, if the intrinsic value of it's shares should consistently rise higher than $8 per share years down the road, an investor will be sitting at growing higher rate of return considering his original shares were at $4 or lower per share and future fair value of Keppel Corp's shares is worth many times over (say for example intrinsic value per share is $12 years down the road). The faster the growth of the intrinsic value per share and annual dividends, the higher the rate of yearly compounded returns on an investor's investments. Of course, intrinsic value is just an estimated value of how much a company's shares should be worth. Intrinsic value can also depreciate instead of expanding should a company deteroriate permanently in it's operations and operating cashflows. Here, the advantage to an investor is in investing in a company that is good at growing it's operating cashflows, earnings per share, rate of return on equity with very certain probability through the years. I look at Keppel Corp as an established conglomerate with more than 40 years of business exposure. It is also the world largest oil rig builder (market leader). So, there is a high probability of the intrinsic value of it's shares and dividends growing through the future years. <Long term buy-and-hold is a superior strategy provided an investor has gained a good safety margin by buying the shares of excellent companies at high discounts below their current intrinsic value per share. And, an investor is very certain with high probability that such market leaders will continue to deliver excellent business economics thereby expanding their intrinsic value and growing their dividends to the investor's advantage.> <Another good example of expanding intrinsic value at work is in Wilmar International's shares. This market leader in palm oil business has made remisier king Mr Peter Lim's original investement of around 10 million years back worth around 700 million in current times. Why is this so? Wilmar International's intrinsic value per share has grown significantly through the years. It is almost impossible to see it's shares trading back at it's earlier historic intrinsic value per share. The significant growth in it's intrinsic value per share comes from the growth of it's business operations into the world largest palm oil business having an economic moat (market leadership).> <There is nothing miracle about this concept. If an investor invested $500k in an excellent company that expands it's intrinsic value per share. When the intrinsic value per share has grown by 100%, an investor's shares on hand has also grown by 100% in value. That makes his $500k investment becomes $1 million worth. This will only happen with high certainty for excellent companies which are market leaders enjoying good economic moat outcompeting it's smaller competitors in a lucrative industry.> <One may argue that stock market trading forces can interfere with share prices and an investor may not realise the intrinsic value of his shares. However, no investors can ignore for long the intrinsic value of the shares of an excellent business that has already grown spectacularly through the years. The shear size and strong economics of the business of a market leader will eventually be reflected in it's shares trading at fair value.> <For example, will anyone with the right mind sell Wilmar's shares or Keppel Corp's shares currently at $1? I doubt so. If got such lobang, I will gladly buy their shares at a super huge discount to their current intrinsic value per share.> |
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dealer0168
Elite |
05-Jul-2009 10:23
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Ooo which are the one than.......jeremyow? Care to share it out. Me interested as well. | ||
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wongmx6
Veteran |
05-Jul-2009 07:57
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This post sound really good. I guess many readers like it. Please share at current moment what companies at STI are below intrinsic Value (at your point of view)?
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jeremyow
Senior |
04-Jul-2009 02:15
Yells: "Passionate business investor" |
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Many people have heard of the term 'intrinsic value' of a stock. One should always seek to buy and own shares below the intrinsic value to get a good bargain. However, this alone may not be enough to see the investor through with good returns. Buying below intrinsic value of a stock ensures the investor gains a good safety margin should the intrinsic value of a company decrease in future. The even better way to gain an advantageous rate of return for a long term period is the concept of expanding intrinsic value. If an investor has evaluated accurately the long term business economics of an invested company, he may likely see the intrinsic value per share of the company rise through a long term period. And if the investor is patient enough to hold onto his shares to realise this rise in intrinsic value of the company, then "wholla", his shares will be worth much more than what it was years back. There are already many good cases of blue chip companies that were trading years back at peanuts but now worth many folds over in their share value. If an investor has remain invested through this business growth period and see the expanding intrinsic value of the shares at work, his shares will be worth many times over what they were worth years back. And, coupled with the growing dividends received through the years, each of his shares will be sitting at very escalated value now then years before. So, his rate of returns will be very high holding on to shares of excellent companies that see their intrinsic value of shares and dividends grow through the years. An example is Keppel Corp. Many years back, it was trading at $1 plus to $2 plus range per share. If an investor has bought and held on to the shares over these years, each share will now be worth 2 to 3 times over in value. The intrinsic value per share of the company has now grown to a higher value and it is very difficult if not impossible to see the shares of Keppel Corp trading back to the old lower intrinsic value of $2 plus per share years back. And, if Keppel Corp maintains the same annual dividends rate of close to 10% of it's intrinsic value per share, an investor who has invested years back at lower intrinsic value may now enjoy much higher dividend yield (~30%) since the dividends provided have out-grown the older intrinsic value of it's business years back. Of course, there are risks of staying invested long term in a company such as risk of facing fundamental deteroriation in it's business. Other risks like cash raising exercises through equity (e.g. issue of rights/ warrants/ shares placement/ convertible bond) can also see dilution to the value and rate of return of an investor's shares in the company. <So, if there is an excellent gem among the many companies out there that keeps growing the shareholder's earnings per share and return on equity, and also expanding the intrinsic value of the company's shares with good dividend growth, the longer an investor stays invested in the company, the more valuable his shares become with the passage of time.> <The key is to be able to select out such rare gems which consistently expands the intrinsic value of it's business and provide stable dividend growth through the years>. |
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