TOMEI (7230) TOMEI CONSOLIDATED BHD - Gold Stock Trading at Super Cheap Valuation: Mr OTB Calls for RM2.40
Question 1: So, what is the sudden rush in buying equities related to gold?
We will let you to discover the answer by showing you the gold price.
The gold price is stabilising between the region of $1,850 - $1,950 which is very high compared to price of gold early this year. Gold is a natural hedge against equities which means when equities are expected to do badly simply due to the pandemic, we can expect gold price to go up. Investors perceive gold as safe heaven. We believe gold price will remain high until the pandemic is over. Covid-19 cases are rising because winter season is usually also the flu season. The pandemic is further worsening the situation.
Question 2: Again, the golden question. Show us the earnings because we had enough of all these sweet talks by certain companies promising the moon but quarter report is lousy.
Question 3: What about the Earnings per share?
Investors need to know that higher equity financing is actually bad because earnings per share get diluted. For instance, if a company earns RM100 and has 10 shares outstanding. That means each share has an earning of RM10. Imagine another company earns the same RM100 but has 100 shares outstanding. Each share has an earning of RM1 only. So, always keep an eye on number of shares outstanding.
Tomei Berhad has low number of shares outstanding which is approximately 138.6 million. Comparatively, Poh Kong Berhad which is in the same business of Tomei has shares outstanding of RM410 million. Lower number of shares outstanding for Tomei Berhad is very attractive.
Question 4: Sorry, we forgot to ask this question earlier. What about the business model?
The business model of Tomei is very straightforward. We will show you the extract from the latest quarter report.
Question 5: Show us the performance review for the latest quarter and Year-to-Date (YTD).
Question 6: Let’s get to the favourite part. What should be the valuation for Tomei?
We would not do a relative valuation by comparing Tomei to Poh Kong because Poh Kong’s latest QR is only up to 31.07.2020. Tomei’s latest QR is up to 31.09.2020. Therefore, comparing the PE would be misleading in this case.
EPS in the latest quarter ended 31.09.2020 is about 9.82 cents. Let’s be very conservative in making this valuation. Gold price has come down to around $1,850 from the peak of $2,070; a decrease of 10%. We will discount the EPS by 30% for the upcoming quarters (as we mentioned earlier, let's be very conservative). That would give us an EPS of around 7 cents.
Annualising the EPS would be 28 cents. Now, applying a super cheap PE of 5x would give us RM1.40. A more bullish PE of 10x will give us RM2.80. We wouldn’t give anything more than 10x PE simply because we all know gold price wouldn’t stay that high for the next 10 years (hopefully this is the case or else equities are going to do very badly – remember, gold is a natural hedge against equities).
No matter how you discount the valuation, Tomei is trading at a SUPER CHEAP valuation of RM0.92/share given the latest earnings. With the low number of shares outstanding, we believe Tomei Berhad will re-test back the previous high of RM1.88.
Target price: RM1.40 – RM2.80
None of my posts was meant to influence your investment decision. I decided to share my analysis of stocks so that I could benefit from your constructive feedback. As I have mentioned earlier, I am here to share my knowledge and also to learn from many of you. In specific to this post, I am not a substantial shareholder of Tomei Consolidated Berhad.
Thank you, and please leave your constructive feedback.