Friday, July 13, 2007

EUROSP - Business P/E

From "starter" ...

"Seng, how you can get a PE of 3.5 for EUROSP? Correct me if I'm wrong but I think the PE should be around 8 base on the current price."

Dear starter,

Here are some simple facts about EUROSP:

1. Last night, EUROSP closed at $1.16. At this price, the stock is capitalized at $46.4M.

2. The TTM (Trailing Twelve Month) net earnings (PAT) is $7.2M, or 18.1 sen per share.

3. At the last Balance Sheet date (28 Feb 2007), the stock has a Net Cash of $22.2M, or 56 sen per share and nil borrowings.

4. This implies that EUROSP's underlying business is available for sale for only $46.4M - $22.2M = $24.2M

5. So, the Business P/E is 24.2M / 7.2M = 3.4, which I've simply rounded up to 3.5. Compared to its listed competitors, I believe EUROSP is trading at a very undemanding multiple.

6. Superficially, if one doesn't put any value on its $22.2M cash hoard, then, you could say the P/E is 46.4 / 7.2 = 6.4 times.

7. Superficially, if you prefer to use outdated 2006 Financial Year earnings, then, the P/E is 46.4 / 5.8 = 8 times. But to me, this is not the right way to value a business - and is potentially dangerous when applied to other stocks - since it gives no credit to recent earnings growth (EUROSP Financial Year ends 31 May), as well as not giving credit to EUROSP's strong cashflow and its large cash hoard.

8. If you think such a business, in the current environment, deserves a P/E multiple of 7, then, the Target Price could be 18.1 sen x 7 + 56 sen = $1.83, say between $1.50 to $2. Whether EUROSP actually reaches this price or not will depend to a large extent on the market.

For more details, you may refer to my previous writing on EUROSP here - http://fusioninvestor.blogspot.com/2007/04/eurosp-business-proposition.html

Cheers,
Seng.

Disclaimer: As usual, use your own judgement and invest (buy, hold, sell) at your own risks.
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5 comments:

  1. BoonJuly 14, 2007 at 6:27 AM

    Hello Seng!

    This is Boon. I am an active and passionate trader of the US futures (Dow and Russell 2000) -- I trade with a combination/system of concepts that I learned and developed through years of relentless research. I also participate in Bursa Malaysia and have trading accounts in the UK as well as China. I am a big fan of James Simons and Warren Buffett, but not Jesse Livermore. I am a strong believer of Modern Technical Analysis.

    Found out about this blog of yours recently. Any chance of a link exchange?

    Best wishes
    Boon
    http://tradebursamalaysia.blogspot.com/

    ReplyDelete
  2. UnknownJuly 14, 2007 at 10:56 AM

    Dear Mr Seng,

    I enjoy reading your blog very much an I like your analysis. It makes sense to me since cash is"cash" it should be fully value.

    I was wondering could you teach me how to calculate the mkt value of the company. Do we have to take into account warrants and stuff like that.

    ReplyDelete
  3. SengJuly 16, 2007 at 3:01 PM

    Hello Boon!

    Thanks for visiting my blog. Until your comment, I must say I haven't heard of James Simons, but after reading about him on the web, I must say I'm quite impressed with what he's achieved in applying mathematics to investment field, to becoming billionaire. Not many academics I know are like this.

    To be honest, I'm not very active in maintaining this blog ... one of the main reasons are life priorities - to me, investing is just one (of many) priorities, and I'm afraid blogging doesn't rank too highly in that list ... My basic philosophy on blogging is if I have spare time, I'll blog, if not, then, I'll leave it at that until time comes along ... Not very ambitious I know, but it's important to set priorities in life. I'm flattered though you've considered my blog for a link exchange.

    I can see from your blog that you are very passionate trader and willing to share your knowledge. Do keep up the good work.

    Best wishes to you too.

    Cheers,
    Seng.

    ReplyDelete
  4. SengJuly 16, 2007 at 3:18 PM

    Dear sp,

    Thanks for your kind comments.

    Regarding calculating market value of companies with warrants, to keep it simple, it's easier to make a distinction between cash-settled warrants and warrants with physical share deliveries.

    Benjamin Graham suggested that if exercising the warrant results in an increase in the number of mother shares outstanding (and potentially diluting original shareholder's share of future company profits), then, the market cap of such warrants should be included in calculating the market value of the company.

    Conversely, for cash-settled warrants which does not increase the number of mother share outstanding, then, my interpretation is that such cash-settled warrants should be excluded when calculating the market value of the company, as these contracts are merely separate derivative contracts which does not affect mother shareholder's entitlements or share of future company profits.

    In EUROSP's case where there are no warrants, the calculation of market value is fairly straightforward.

    Hopefully this is clear. If not, perhaps you may have a specific company in mind. If so, it may be easier to mention it either here, or at investssmart chatbox (if you are registered there).

    Cheers,
    Seng.

    ReplyDelete
  5. BoonJuly 22, 2007 at 1:54 AM

    Hi Seng,

    First of all, sorry about my late reply. I did check for your response for the first couple of days after leaving my last comment. Many thanks for your response. Your posts are great, and I am very grateful to you for adding me. All the best!

    Best wishes
    Boon

    ReplyDelete