“Ben Graham taught us to look at stocks as businesses, use the market’s fluctuations to your advantage, and seek a margin of safety. A hundred years from now, these will still be the cornerstones of investing.” – Warren Buffett quoted in The Warren Buffett Way by Robert G Hagstrom, 2005
Buffett's investment framework
We adopt Buffett and Munger's Four Filters framework in governing our investing process and decisions.
Buffett and Charlie look for companies that have (1) a business we understand; (2) favorable long-term economics; (3) able and trustworthy management; and (4) a sensible price tag.
Buffett also has phrased the Four Filters framework as below:
With regard to Berkshire‘s portfolio of companies, he noted in his 1996 letter to shareholders that:
"We continue to make more money when snoring than when active. … [Y]ou simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.""Following Ben's teachings, Charlie and I let out marketable equities tell us by their operating results - not only by their daily, or even yearly, price quotations - whether our investments are successful."
PPHB as a case study
In our posting on 7 March 2017, we identified PPHB as a Buffett-like stock after passing all Four Filters.
It is best followed up for educational purpose here since we have written extensively on PPHB and the company has published its 6-month financial results of FY17 vis-a-vis made a corporate exercise.
PPHB is a total (one-stop) customized corrugated and paper packaging (product) solution (service) provider, spanning from artwork design and shape design, production, warehousing, and to packing and delivery services.
PPHB is favored as it is unlikely to experience major change. We are certain that its products possess enormous competitive strength ten or twenty years from now. Its products cost little to customers who need packaging to protect their goods and leave a good impression to their receivers.
In FY16, based on its Annual Report 2016, PPHB invested RM13.59m for organic growth in terms of (1) factory building expansion and (2) machinery (operational facilities upgrade).
In the Q1 of FY17, the management guided that "we will continue to strengthen our position and expand customer base amidst the continuous competition and challenges faced. Our effort in enhancing operational efficiency and effectiveness ... cost control measures will be continued."
It was further indicated in its recent circular to shareholders in relation to the proposed bonus issue and a share issuance scheme that:
- Revenue increased by 8.03%, significantly higher than its previous 1.9% CAGR. This suggests that customer base vis-a-vis scale of operation have expanded, resulting likely from increasing customer demands and orders.
- All profit margins have increased marginally. They indicate improved efficiency as an effect of cost control measures.
- Compounding both revenue growth and improved margins, net profit for the first half of FY17 has increased by 9.56%.
- Operating cash flow is not far from that of net profit, suggesting acceptable quality of earnings. The lower cash receipt is attributed to increased receivables and inventories (since cost of raw materials has been increasing) and decreased payables.
- Free cash flow is negative for the first time since FY11. Operating cash flow and additional cash were used to acquire property, plant and equipment.
Buffett's approved disposal
focusing on a business they operate: A parent company that owns a subsidiary with superb long-term economics is not likely to sell that entity regardless of price. “Why,” the CEO would ask, “should I part with my crown jewel?” Yet that same CEO, when it comes to running his personal investment portfolio, will offhandedly—and even impetuously—move from business to business when presented with no more than superficial arguments by his broker for doing so. The worst of these is perhaps, “You can’t go broke taking a profit.” Can you imagine a CEO using this line to urge his board to sell a star subsidiary? In our view, what makes sense in business also makes sense in stocks: An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business."
Being a co-owner
We practically "bring" our invested companies with us at all time and refer prospective customers to the management, sometimes, at our own cost.
For example, in our recent acquisition due diligence exercise on an Australian dairy farm, we introduced PPHB as to how it would create value to one of the Malaysia's largest fresh milk producers (traders soon). The COO was interested in exploring further and we immediately passed his personal contact to Mr. Koay (MD of PPHB) on the next working day.