Intrinsic Value – INSAS
Intrinsic value is the value of the company based purely on facts and figures, keeping the speculative component of the share value as minimal as possible. Therefore, I will try to only state facts and figures, letting the financial statements tell us the story. I will be as conservative as possible.
Part 1- Anchoring
I usually begin looking at the book value of a company. I use this to act as a fundamental anchor for the company. Book value excludes intangible assets which are perfect for the conservative investor as intangible assets are purely speculative and the stated value in the balance sheet could be written off. As a conservative investor, we must take a safety precaution against ‘water’ in the balance sheet, as it may just evaporate away at any time. Let’s dive right into the figures.
a) Improvement of book value from year to year.
2011- RM 915,653
2012- RM 941,607 (+2.8%)
2013- RM1,004,108 (+6.63%)
2014- RM 1,169,630 (+16.48%)
2015- RM 1,270,293 (+8.61%)
2016- RM 1,357,222 (+6.8%)
2017- RM 1,528,110 (+12.6%)
2018 Q1- RM 1,570,681
Part 2- Cleaning the anchor
The most recently recorded book value of Insas is RM1,570,681,000. However, book value can be deceiving. We must be wary of what kind of assets that are in abundant. For example, a company with a high book value may seem good in first sight but if most of the book value is derived from PPE, inventories and receivables then we can conclude it is not that great after all. This is because when a company liquidates or gets acquire, we run the risk of paying too much. PPE and inventories run the risk of being permanently loss (incapable of generating returns). Receivables run the risk of impairment. Another thing we must look out for is leverage. Is the company borrowings too much? A quick check can be done by comparing the liquid assets to the short-term borrowings of the company.
Breaking down balance sheet book value ( Keyword is balance sheet, we shall not talk about hidden assets for now). Being conservative, I will half the amount of PPE, inventories and trade receivables of Insas. By recalculating the book value this way, we get RM 1,305,802,000 the conservative book value which is an astounding figure. This figure is up for debate, but I will remind you that I have already mentioned that I will be very conservative with my figures. Secondly, let’s check whether is this company overleveraging.
Liquid Assets that can be easily used to pay off ALL borrowings.
Financial Assets at fair value(assuming the company really needs to pay off their borrowings, they can always sell off their financial assets and it is already recorded at fair value). Both deposits and cash are self-explanatory.
Financial Assets at fair value - RM325,197,000
Deposits – RM476,572,000
Cash – RM 130,049,000
Total = RM 931,818,000
Total borrowing = RM 289,495,000 (Short term + Long term)
*** Excess liquid assets after paying off all borrowings = RM 642,323,000
Therefore, it can be concluded that conservatively paying a book value of RM 1,305,802,000 for Insas has a great margin of safety if the market capitalization is below.