Mr.

Ooi Kok Hwa

13 September 2014, Golden Screen Cinema, One Utama

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The Speaker
Mr. Ooi Kok Hwa is currently the Managing
Partner of MRR Consulting, dealing mainly with
Business Appraisal, Investment and Financial
Training. He is a CFA charter holder and also a
licensed Investment Advisor by Securities
Commission of Malaysia. He is specialized in
offering business valuation for private limited
companies.

Agenda - Stock-Picking Strategies

Value vs Growth
Investing
Market Oriented vs
Small Cap Investing
Fundamental Analysis

Value vs Growth Investing

Value Investing
is concerned with the current price and the price
component of the ratio.
cares much less about the future earnings growth of
the company.
Look at low PER. Reason:
perhaps due to an overly pessimistic assessment
of the companys future; and
The PER will revert to normal or market levels
when others realize that prospects are not as
bad as thought.

Value Investing
Look at lower price-to-book and low price-to-sales
ratios
Rely on movement in price, rather than earnings, to
be the reward.
Anticipates PER will rise with no increase in earnings
Risk:
The stocks cheapness is misread
The markets concerns about the company are
indeed correct

Value 3 Substyles

LOW PER

CONTRARIAN

YIELD

1
LOW PER

Low prices relative to current,

normalized or discounted
future earnings
Focus: defensive, cyclical or
out-of-favor industries

2
CONTRARIAN

Low valuations relative to their

tangible book value
Depressed cyclicals or firms
with no current earnings or
dividend yield
Hope that a cyclical rebound
or companys earnings
turnaround will result in
substantial price appreciation
Quality of companies is usually
below average because
earnings are depressed and
financial leverage is relative
high

3
YIELD

The most conservative value

managers
Focus: companies with
above-average yields that
are able to maintain or
increase their dividend
payments

Growth Investing
is concerned with the earnings component of the ratio.
Anticipate higher companys future growth rate will
contribute to higher earnings
higher stock price
(assuming the PER remains constant)
Attempt to identify companies with above-average
growth prospects
Focus: growth not reflected in the current price,
regardless of the current PER

Growth Investing
Focus:
higher-quality companies, an emphasis on
consumer, service, health care and technology
stocks; lighter weightings in deep cyclicals and
defensive stocks
The key risks: the future growth does not occur as expected
the PE multiple declines for some unanticipated
reason.

Biosensors Intl Group

(US'mil) 2007

Sales

34.35

2008

2009

2010

1H11

44.32 118.96 116.18 156.59

PBT

-35.05 -27.96

8.86

33.68

49.10

ROE
(%)

-52.41 -32.03

-1.08

22.16

11.43
14

15

Growth
Consistent growth

Earnings momentum

Emphasize high-quality,
consistently growing
companies
Business have very
predictable earnings and
extensive records of superior
profitability, valuation multiples
are frequently well above the
market
Choose consumer-oriented
industries and underweight
cyclicals

Prefer companies with more

volatile, above-average growth
Purchase companies in
anticipation of earnings
acceleration
Choose companies in any
economic sector as long as the
equities offer the best potential
earnings growth

Price and Earnings Pattern:

Value vs Growth
Value investor is the earlier buyer of a stock
This may or may not be accompanied by earnings
increases
As the price increases, the value investor becomes
uncomfortable with and sells. Now the growth
investor has noticed the improving fundamentals of
the company.
The growth investor will purchase the same
stock the value investor viewed too
expensive

Below shows the different buying and selling

signals for value and growth investing

18

Table 1 provides the key differences between

value and growth investing
Table 1

19

The historical earning per share (EPS) of

Company A and Company B

Company A
EPS

Average
Price

(Sen)

(RM)

2001

9.9

1.49

2002

13.6

2003

Company B
PER

EPS

Average
Price

PER

(Sen)

(RM)

15.0

26.2

3.67

14.0

2.18

16.0

24.6

3.44

14.0

15.2

2.58

17.0

15.3

2.20

14.4

2004

18.2

3.09

17.0

-3.5

1.00

NM

2005

20.2

3.64

18.0

12.5

1.88

15.0

Past 5-year
average

15.0

15.0

20

Market Oriented
vs. Small Cap Investing

Market-Oriented
Do not have a strong or
persistent preference for the
types of stocks emphasized in
either value or growth
portfolios
Portfolio characteristics are
closer to market averages
over a business cycle

Market-Oriented
4 substyles: Value bias or Growth bias
Have portfolios with a tilt
toward either value or
growth
But not sufficiently distinct
to put them in either the
value or growth styles

Market-Oriented
4 substyles (cont): Market-normal
Construct portfolios with growth and valuation
characteristics that are similar to the broad market
over time
Make bets in growth or value stocks but no
continued preference toward either
Growth at a price
Seek companies with above-average growth
prospects selling at moderate valuation multiples
Do not offer wide diversification in portfolio structure

Small-Capitalization
Focus on small companies
which are less followed by
institutional investors
Characteristics of the
portfolio:
Below market dividend yields
Above-market betas
High residual risk relative to
broad market indexes
Thin following by analysts

3 Subtypes within Small-Cap

VALUE

Seek under researched small

companies that sell at low
valuations relative to assets,
earnings or revenues

Focus on less seasoned companies

with above-average growth
prospects

1
GROWTH

3
MARKET-ORIENTED

Focus on small companies that over

time, exhibit growth and value
characteristics similar to the broad
small-cap marketplace

Stock-Picking Strategies Fundamental Analysis

8 Key Criterias
3 Main Yardsticks
1. Price Earnings Ratio (PER)
2. Dividend Yield (DY)
3. Price to Book Value

Potential Growth in Price

4. Growth in EPS
5. Past 5-Year Price Range
6. Past 12-Month Price Range

Health of the Company

7. Debt to Equity Ratio
8. Net Cash Per Share

Valuation Process
2 General Approaches
The top-down, threestep approach
Economic Analysis
Industry Analysis
Stock Analysis

The Bottom-up, stock

valuation, stock
picking approach
focus on individual stock
regardless of market
outlook

Fundamental Principles
Buy undervalued stocks
look for quality in earnings
Good management
Good profit margin
(use EBITDA margin)
look for growth and
stability

Focus on: Stability and Growth rate

Growth in
sales
earnings
Attention on EPS growth
Look for stability and
growth rate

31

Price Earnings Ratio (PER)

32

PPB Group

Normalised PER = (16.8+22)/2 = 19.4

Intrinsic Value = 19.4 x 85/100 = 16.5
= 19.4 x 90/100 = 17.5

Dividend Yield (DY)

34

Price-to-Book Value
1) Net Tangible Assets (NTA) per share
NTA per share

Net Tangible Assets

Number of ordinary shares

2) Price to Book Value

= Price / NTA per share

Selection:
a. reflect owner's cost
- No owner will sell to you at below NTA per share except
for certain reasons that you may not aware

35

Liquid asset/share
Liquid asset = cash, bank balances
and deposits
Liquid asset/share implies how much
cash or cash equivalent the
company has based on per share
basis
Selection: higher number implies the
company is cash rich and has the
ability to pay dividend

36

Debt/Equity (D/E) Ratio

D/E measures the ratio
between the amount of
interest bearing debt a
company has and the
amount of shareholders
equity
Selection criteria: D/E<0.5

37

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