I had a breakfast with an experienced uncle with more than 30 years’ experience to ask about the latest opportunity in the market. I call him Sifu or master in English. Some of the things that he told me are as below:
Sifu told me SUPERMAX bottom is RM15.30
Sifu said SUPERMAX can fetch RM23.25 if this year earnings can go up 15x against last year
Sifu said near term price swing can be high but patience should pay off
Some important part of the discussion:
1. On why the bottom is RM15.30?
Sifu: (take out calculator), the bottom is around RM15.30
Me: Why?
Sifu: RM400m * 4 = RM1600m. Use this annualized net income times 13x PE… you get RM20800m. Divide this by 1360m shares.. You get RM15.30.
Why RM400m is the sustainable? Because Gloves Physical Price (GPP) still going up so next quarter will be stronger but let’s just use RM400m to be conservative. This will take care of earnings decline in Gloves Physical Price (GPP) in the future because it will average it out in the future.
Why 13x PE is the bottom? Because if you look at FBMKLCI PE is around 18x. Small cap PE around 15x. 13x is already super low because Supermax very likely will join FBMKLCI in November. And its market cap is more than Rm20b. So when you assume an illogical number of 13x PE to take care of crazy selldown that sometimes happen, then you get this kind of discount
2. On how sifu get his RM23.25 if this year earnings can go up 15x against last year
Sifu: Wow, earnings actually increased by 15x ! Last year share price was RM1.55. So, if the RM400m quarter can sustain… share price should be RM1.55 * 15 = RM23.25. Remember this is not a recommendation, I am just an old uncle… so do your own calculation. (smiling…)
3. On sifu asking me to stay patient
Sifu: Buy only if you have money and can stay at least 3 months. This is the time needed for a Company to show either better or worse profit. If you play daily contra or want to earn in a week, better don't buy.
Full conversation:
Me: Gloves share price is very volatile, it has declined quite a lot. It seems like the sector is already a GAME OVER…
Sifu: Be greedy when others are fearful. Instead of giving you a straight answer. Let me ask you… which stock you are more familiar or focus on recently… I give you 10 minutes as I don’t have much time.
Me: OK, let’s talk about Supermax. Its recent quarter net profit is RM400m. The earnings actually surge by a lot. More than 15 times if I am not mistaken. But the share price has dropped so much in a week, I am afraid to buy. I miss it last time but I also don’t want to catch a falling knife.
Sifu: Wow, earnings actually increased by 15x ! Last year share price was RM1.55. So, if the RM400m quarter can sustain… share price should be RM1.55 * 15 = RM23.25. Remember this is not a recommendation, I am just an old uncle… so do your own calculation. (smiling…)
Me: What? RM23.25? How come market keep declining ? What is the bottom that I can be more safe to buy? I am really REALLY scared…
Sifu: What is the reason that Supermax share price gone up so much ?
Me: Because gloves price increase loh.
Sifu: I see… Can Gloves Physical Price (GPP) still increase?
Me: As COVID cases still going up, I think gloves price still increase.
Sifu: Sounds logical. So do you agree next quarter earnings will still go up?
Me: Yes.
Sifu: For how long ?
Me: I don’t know. Some people say vaccine is coming out soon.
Sifu: Vaccine out do you think it straight away magic and appear to everyone in the world?
Me: No
Sifu: (Check phone again). OK, my intelligence told me it will take some time at least one year.
Me: Sifu, you haven’t answer me. What is the lowest it can go? I am scared leh dunno should go in or not…
Sifu: (take out calculator), the bottom is around RM15.30
Me: Why?
Sifu: RM400m * 4 = RM1600m. Use this annualized net income times 13x PE… you get RM20800m. Divide this by 1360m shares.. You get RM15.30.
Why RM400m is the sustainable? Because Gloves Physical Price (GPP) still going up so next quarter will be stronger but let’s just use RM400m to be conservative. This will take care of earnings decline in Gloves Physical Price (GPP) in the future because it will average it out in the future.
Why 13x PE is the bottom? Because if you look at FBMKLCI PE is around 18x. Small cap PE around 15x. 13x is already super low because Supermax very likely will join FBMKLCI in November. And its market cap is more than Rm20b. So when you assume an illogical number of 13x PE to take care of crazy selldown that sometimes happen, then you get this kind of discount.
Me; I am REALLY scared leh
Sifu: Buy only if you have money and can stay at least 3 months. This is the time needed for a Company to show either better or worse profit. If you play daily contra or want to earn in a week, better don't buy.
Me: How about vaccine? People told me we are going to have it soon!
Sifu: I have answered you previously about vaccine. We have to be humble and don’t simply assume that this vaccine or that vaccine will save us all in a short time. I don’t know about vaccine date but to take care of downside, the RM400m sustainable earnings already take care that one day Gloves Physical Price (GPP) will decline. But from now until that day, GPP will still go up. So it average each other you see.
Me: Thank you so much sifu.
Sifu: Time's up. Breakfast on you right?
Me; Of course lah!!! Hahaha.
https://klse.i3investor.com/blogs/feliciawong/2020-08-17-story-h1512389923-SUPERMX_How_Low_Can_Share_Price_Go.jsp
