INSAS (3379) - Insas - Intrinsic value P3A-5A


Part 3A - Cash generation

From here, we shall use some past data to get an average 5 years of free cash flow(FCF) generation. By getting a hold of the average free cash flow, we shall extrapolate the data to the future. However, we will extrapolate it with a flat rate of growth. Once again, we are making the speculative component as minimal as possible.

RM ‘000

2017 – (23,852)

2016 – (93081)

2015- (31158)

2014- (109,235)

2013-  98,234

Therefore, calculating the 5 year average, we get RM 31,818,400 of leaking cash annually. Here we stumbled upon a problem. At 2013, the cash and deposits are RM 375,395,000 while in the first quarter of 2018 it is RM 606,621,000. Where did RM 231,226,000 worth of cash come from? This question leads us to figure out that FCF is not the correct way to see the how is cash generated by Insas. This is actually pretty obvious once we take a look cash flow from investing activities, we have to understand that the major business nature of Insas is investments. From part 3, we concluded that FCF is not an appropriate way to gauge cash generation of Insas. Usage of FCF is only effective if the nature of business earnings is majorly based on operating activities. Therefore, I shall leave this part up to you as it is highly dependent on opinion(speculation). I shall just point you in the right direction, which is to check the cash flow from investing activities and extrapolate your own figures for the future.

Cash flow from investing activities (RM’000):

2017- 92,963

2016- 146,437

2015- 16,872

2014- 7,234

2013- 43,702

5-year average = 61,441

(By inspection, majority of the amount of cash was generated by disposing of associates and dividend)

Part 4A – A little speculation

*** A continuation of part 3, if you have your own estimate of cash flow generation annually. You can totally ignore this part as this is just my own speculation.

However, I will still be as conservative as possible and make it as simple as possible. Note that the figures here are way more complex in nature and that is why I have stated that it is better for you to have your own estimate that you will be comfortable with.

Simplicity- Inflow of investing activities averages RM 61,441,000 while there is a leakage of RM 31,818,400. The net inflow is RM 29,622,600 annually. However, is this too simplistic? The answer is Yes. With that being said, I am very comfortable simplifying it this way because of the current ownership of their associate companies. (Look at the annual report of 2017 and see the current market capitalization of those listed, from there you can gauge that in the future, inflow of investing activities will continue to flood in).

I will reiterate that having your own estimate is the best way for your personal investment and from this is where the intrinsic value would differ from person to person.

Part 5A - A comfortable intrinsic value

A quick glance by to previous parts:

Conservative book value: RM 1,305,802,000

Annual Cash Generation: RM 30,000,000 ( Multiply by a period of 10 years) Chose 10 years as I believe it highly probable 30 MILLION can be generated in average for the next 10 years and I do not bother looking past that yet as the longer period you estimate, the error becomes bigger. Once again, this is up to your personal estimation that you are comfortable making.

*** Part A is where Inari is slowly disposed and Insas will remain holding Inari as an associate. (Same actions as the past)

Total comfortable intrinsic value = RM 1,605,802,000

Note the word comfortable, if I ended my calculations here, I will bet that there will be an angry crowd of Insas shareholders. Therefore, we shall proceed to Part 3B.  In the end, I will have two intrinsic value. One based on part 3A to 5A, another based on Part 3B to 5B