Part 3B -In plain sight (Ultra conservative version)
Before we begin this part, you must have at least the very basic knowledge of equity method of accounting or else this may end up as gibberish.
Firstly, I would like to clarify that PART 3A and PART 3B is individually distinct which in turn provides distinctive intrinsic value. In plain sight, the market capitalization of Inari is screaming at us whenever we are valuing Insas. It is in plain sight as we could easily figure out the market capitalization of Inari. As I was writing this, Inari has a market capitalization of 5 BILLION while now it currently stands at above 6 BILLION which shocked me when I was checking the share price of Inari.
I will not put a valuation on Inari as that would take another long study. Therefore, I shall distrust the market as I am being conservative with my calculations, let’s put the market capitalization of Inari to be back to 5 BILLION which is essentially devaluing Inari by 19%. I personally do not think that Inari has been so badly mispriced as mentioned (opinion and judgement). However, to reiterate, I am being as conservative as possible to give my valuation a great margin of safety.
From our understanding of equity method of accounting, we shall pull out the figures that matters.
Under non-current assets, Associate companies as at 09/17 are RM 318,598,000. As this is the ultra-conservative version, from the assumption that Inari is fully sold by Insas and I am ignoring the fact that there are other associate companies, the gain in disposal will be:
(0.2 x 5BILLION) – 318,598,000 = RM 681,402,000
Part 3B- Opinion version
Inari is fairly valued at 6 BILLION.
(0.2 x 6 B) – 318,598,000 = RM 881,402,000
Part 3B- Straight out of Annual Report
Refer to page 109, Market value of quoted shares in Malaysia = 885,148,000, associate = RM301,303,000. Total:
885148000-301303000 = 583,845,000
(My personal problem with this figure is that I do not understand how can the market value of quoted shares be lesser than 1 BILLION considering that Inari itself is already quoted in the market above 1 BILLION by Insas percentage of ownership).
Part 4B – This is where it differs
This is where our personal valuation will vary depending on how you put a figure onto other hidden value of INSAS’s associates.
Part 5B – Conclusion
Concluding from Route B, we can see that this route takes the assumption that Insas plans to dispose of Inari fully to unlock the potential gain. In this assumption, you can see that I have not mentioned about the cash generation annually. This is because if Inari was disposed of, the inflow from investing activities for the future will be very uncertain. Therefore, to guard ourselves against speculating beyond what we know, we shall state that the cash flow generation is NIL. Cash flow generation obviously will not be NIL as there are still many other subsidiaries, available for sales investments, other associates, etc. However, I shall put it as NIL so that there will not be even a component of speculation in it.
Intrinsic value by unlocking hidden value of Inari only:
Conservative book value- RM 1,305,802,000
3 different scenarios:
Hidden value 1: RM 681,402,000
Hidden value 2: RM 881,402,000
Hidden value 3: RM 583,845,000
I shall use hidden value 1 to conclude the intrinsic value as a personal preference.
Intrinsic value = 1,305,802,000 + 681,402,000 = 1,987,204,000 (Remember that we are assuming NIL cash generation after the sales of Inari)
Part 6- The most important part
By calculating in two separate ways, we end up with:
Intrinsic value 1: RM 1,605,802,000
Intrinsic value 2: RM 1,987,204,000
My personal preference will be to select intrinsic value no.2 because it assumes NIL generate of cash and the total sales of Inari. Now, the most important part, PRICE. Insas is currently worth 650 MILLION which is around 0.94 per share. According to the intrinsic value calculated, it is 2.87 per share. (+205%)
As time goes by, the intrinsic value may re-adjust and I shall write again if there is any major shifts, major findings or when I have the time to value other holdings of Insas.
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