Why is it mispriced?


 Why is it mispriced?

 The biggest question we should ask ourselves before we invest in a company is why is it mispriced? Why would the investing community provide you with the opportunity for a possible large gain? Firstly, if you believe in an efficient market, you can stop reading here as everything I say here will not make any sense to you at all. I personally believe that the Malaysia equity market is highly inefficient as there is a lack of exploitation of public information.

To quote Mr. Howard Marks: “To be a superior investor, you have to think differently than others. If all you do is embody the consensus, you’ll act the same. If you act the same, you’ll perform the same”

Therefore, Mr. Howard Marks has introduced us to the idea of second-level thinking. Second-level thinking is having the perspective on why is the company mispriced in the first place, having an understanding of what the first-level thinking is. What’s the first-level thinking of INSAS that has caused it to be mispriced?

First-level thinking:

Here I assume everyone that buys/sells/hold INSAS has a clear understanding of its intrinsic value. If you are not very clear about the intrinsic value, please read my article on it to ensure that you are at least partially informed. Thus, the first-level thinking already incorporates an assumption that you understand certain parts of INSAS intrinsic value.

a) Dividend Payout

INSAS is a company that pays out 1% of dividend annually. Many investors in Malaysia places a huge emphasis on dividend as a crucial factor for a worthwhile investment. This is evident as we screen through most of the listed companies in Malaysia. The reason why the dividend is so important is that this shows that the wealth of the company is distributed to its shareholders and if the dividend is consistent, it shows an ability to generate enough cash to sustain its business while rewarding its shareholders. Besides that, investors will feel safer that there is an actual inflow of money to them that they can utilize. A low/nil dividend payout is thought of as a greedy policy made by the management. Since wealth is not distributed to the common shareholders, we should shun away from companies like INSAS as the management is too greedy.

b) I might else well buy Inari

I believe the majority of investor and non-investor of Insas understand Insas currently owns 20% of Inari. Therefore, it comes to mind that if you are buying INSAS because of the value of Inari, you might else well just buy Inari. Looking at the movement of share price, if I have brought Inari, it would have given me a large capital gain. Therefore, it is pointless to buy Insas.

c) Troubled company – Share price

High book value companies are usually troubled company. If Insas has such a high book value, why don’t the share price reflect it? There must be 'catch' to it.

d) Unstable earnings

Past data has shown that earnings are unstable.

Second-level thinking

a) Do not pay dividend

The main point of giving dividend is when the company has nothing better to reinvest the capital in. Since Insas is an investment holding company, it is their job to find investment opportunities that would give better returns. Capital appreciation in a long run can be higher if capital invested provides more value. Besides, Insas has the best position to give out lucrative dividend as they have net cash on hand whereas another financial companies do not even have net cash but are giving out 4-5% of dividend. However, I personally prefer Insas to not pay out any dividends because of the business nature of Insas. My point of view is that INSAS can reinvest their capital better than ME.  For example, if INSAS decided to give 5% of dividend, it will be up to us to reinvest the 5% of dividend to generate more future returns for ourselves. I as a part owner will prefer INSAS to reinvest that ‘5%’ and in the future, generate a higher capital appreciation.

(Inspired reply to those seeking dividend by reading nearly all of Berkshire letters):

The nature of Insas business is investing. Therefore, we believe that we can reinvest our earnings at a higher rate of growth which leads to a higher future capital appreciation. Dividend is given if the business believes that the earnings are in such an excess that there are not any better opportunities for reinvestment. As an investment company, we strive to be in a position where we can reinvest our capital at a higher rate to grow the company rather than giving dividend. Insas has a great amount of excess liquid assets now which positioned us to act first whenever there is a good opportunity. Shareholders shouldn’t be too overly concerned regarding whether is dividend given, they should instead focus on the growing value of the company. The share price of the market on the short term is just like a voting machine. However, in a long run it is a weighing machine. Sooner or later the price of the company will gravitate to its value.

b) In depth study of the balance sheet for companies with P/B lower than 1

- Most companies found below P/B has a high book value only because of PPE and inventories. PPE, inventories and receivables are treated as not valuable assets for gauging book value. However, Insas has a high book value due to Investments, Associate Companies, Cash and Fixed Deposits.

-Most companies below P/B of 1 are unable to payback their short term plus long term borrowing by liquid assets. Insas has more than enough liquid assets to cover all borrowings

-Conservative book value of Insas is higher than market capitalization.

c) Equity method of accounting

-Understanding of equity method of accounting.

- Owns 20% of Inari. Inari has a market cap of 5 BILLION now.  1 BILLION worth of shares deducted by 300 MILLION recorded in the balance sheet under Associates Companies equals to 700 MILLION of unrecorded. (Edit: written months ago, lazy to update the figures)

-Other associates.

-The key here is not we do not need to worry too much about paying too high of a premium for Inari. We are safeguarded against a high P/E ratio while enjoying the gains of the growing profits in Inari.

d) Earnings

Take an average of at least 5 years to make an accurate judgement. Insas earnings are highly dependent on market conditions. Therefore, those who invest should for themselves know how the market fluctuates.  That’s why I found it great when the earnings dipped and the share plunge by like 30%+.

Quoting Warren Buffett: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it”

*** In my opinion, what matters most when investing in INSAS is your personal behavior and holding period.

Quoting Charlie Munger: “The big money is not in the buying and the selling…but in the waiting”.

That's all from me for now, I do not plan to write any more about Insas. I wish you well in your investing journey and do share with me your opinion in the comments too.