A HOLISTIC ANALYSIS OF “LUXCHEM (5143): LUXCHEM CORP BHD” – MOST UNDERVALUED STOCK WITH A FAIR VALUE OF RM1.34: [PART 5/6] INTRINSIC VALUE WITH HIGH MOS ((by THINKING-MAN))
PART 5 – MUCH UNDERVALUED, CHEAP TO ITS INTRINSIC VALUE – WITH HIGH MOS
(THIS IS PART 5 OF 6)
(9) WHAT IS THE “FAIR PRICE (VALUE)” OF LUXCHEM? AGAIN, HOW CHEAP IS ITS SHARE PRICE IN COMPARISON WITH OTHER HEALTHCARE, GLOVE RELATED STOCKS? WHAT IS THE INTRINSIC VALUE (IV) AND MARGIN OF SAFETY (MOS) OF LUXCHEM?
((INTRINSIC VALUE/FAIR PRICE – “CHEAPNESS” OF CURRENT PRICE & MARGIN OF SAFETY))
FAIR PRICE (VALUE) is the share price of a stock that is supposed to reflect the true and balanced value of a company. This is also known as the company’s “INTRINSIC VALUE (IV).” Intrinsic value is the true worth of a company, which is sometimes NOT IN LINE WITH ACTUAL SHARE PRICE IN THE MARKET due to asymmetrical, imperfect information (in the market). People might not know or realize the true value of the company, making the market share price different (skewed, biased or poorly reflected) from what the true value of the company is. If the fair, intrinsic value is more than the market share price, then the share would be a good buy since it is “UNDERVALUED” by the market, vice versa.
To have the “INTRINSIC VALUE (IV)” of LUXCHEM, we need to use a number of methods to get its fair price (value) as shown below. There are various methods and we take these methods as “guideline and reference.” We will see the relevant calculations shortly.
METHOD 1: ENTERPRISE VALUE (EV) AND EBIT MULTIPLE TO GET A “FAIR PRICE”
To further understand a company at its firm level, we need to have a look at the ENTERPRISE VALUE (EV). EV is a thorough valuation of a company, looking at the value of the entire firm. It takes into account of capitals provided both by equity shareholders and debt holders, and it also removes assets not needed for the operation of its business. EV is an essential tool to value an investment for better results. EV is different from market capitalization (which is at the surface value) since it is a more precise, accurate and concise representation of a company’s value. We can use EV to calculate its EBIT MULTIPLE for valuation.
EBIT MULTIPLE = EV/EBIT
EV = ENTERPRISE VALUE
EBIT = EARNINGS BEFORE INTEREST AND TAX
EV = Market capitalization + Debt + Minority interest – Cash – Other non-operating assets (investments)
= 716,800,000 + 52,632,406 – 1,595,118 – 131,834,651 – (2,750,468 + 4,763,151 + 46,198)
= 628,442,820
This EBIT MULTIPLE is only up until September 2020. If we want to estimate the EBIT MULTIPLE for the whole year, we need to take into account EBIT for December 2020 QR. At this moment, we can only have a general estimate. For December 2020, EV is definitely changing. Market capitalization would be increased (with increasing number of outstanding shares, assuming price remains or increases). Cash amount would also increase if everything goes well as expected. As for debt, minority interest and other non-operating assets (investments), they are hard to estimate. However, given that market capitalization and cash amount are more likely to increase, these 2 effects can offset each other. Therefore, for simplicity, we just assume that EV would not change much (for simple calculation). Assuming that for December 2020 quarter, EBIT is almost the same with September 2020 quarter. With this, we add on this EBIT (around 19,000,000 to 20,000,000), and we can get the cumulative EBIT value for year 2020:
EBIT (2020) = 44,355,414 + 20,000,000
= 64,355,414
EBIT MULTIPLE (2020) = EV/EBIT
= 628,442,820/64,355,414
= 9.77 (less than 15 – EXCELLENT, which is considered as still CHEAP and INEXPENSIVE – A GOOD BARGAIN!)
A reminder - this EBIT MULTIPLE is ONLY a rough estimate, NOT an exact prediction or calculation. It is a general estimate, serving as guideline. As a rule of thumb, a firm with EBIT MULTIPLE of less than 12 can be considered as cheap, undervalued and “fairly valued.” The lower it is, the better and cheaper its share price. For a growth company, EBIT MULTIPLE up to 15 is regarded as acceptable. Anything beyond that is considered to be overvalued.
For LUXCHEM which is growing, the EBIT MULTIPLE is 9.77 – still much less than 15. This SIGNIFIES that at the market price of 0.80, LUXCHEM is still CHEAP and INEXPENSIVE. LUXCHEM is a GOOD BARGAIN AT THE MOMENT!
One might have asked, “If this EBIT MULTIPLE is still low and it is undervalued, WHAT SHOULD BE THE INTRINSIC VALUE (FAIR PRICE) OF LUXCHEM?” Well, to get a fair price, we should set its EBIT MULTIPLE at maximum 15 (since it is overvalued for value beyond 15). Again, “for simplicity,” we assume “ceteris paribus” for the figures in the calculation. We can get a fair price as shown below:
EV = Market capitalization (based on “fair price”) + Debt + Minority interest – Cash – Other non-operating assets (investments)
EV = (FAIR PRICE x 896,000,000) – 88,357,180
EBIT MULTIPLE = EV/EBIT
15 = [(FAIR PRICE x 896,000,000) – 88,357,180] / 64,355,414
965,331,210 = (FAIR PRICE x 896,000,000) – 88,357,180
FAIR PRICE x 896,000,000 = 1,053,688,390
LUXCHEM’S FAIR PRICE = RM1.17 (EXCELLENT - MUCH HIGHER than the current price at 80 cents – “EXTRA 37 CENTS” to go)
Based on this calculation, LUXCHEM’s intrinsic value (fair price) should be RM1.17. This fair price is much higher than the current share price at 80 cents. Therefore, it is indeed a cheap stock – with another 37 cents to increase. The price at 80 cents is very much undervalued.
METHOD 2: PREDICTED EPS AND P/E RATIO TO ESTIMATE A “FAIR PRICE” (THE COMING YEAR)
The EBIT MULTIPLE method to calculate LUXCHEM’s fair price is based on this whole year 2020. It tells us the historical (first 2 quarters), present (latest quarter) and the coming (an estimate of December 2020 quarter) situation of LUXCHEM. For the first 3 quarters in the calculation, only the latest September quarter has significant increasing profit (due to ASP increase of glove chemicals), with the first 2 quarters having less profits.
As we are well aware, the present and coming quarters of LUXCHEM would show better profits compared to the first 2 quarters of 2020. This EBIT MULTIPLE only shows partial condition of improved profits (for September and December 2020). Since the coming year 2021 would show steady or improved profits due to fully booked glove chemical orders (as a result of higher gloves demand), we need to calculate its “fair price” based on this future scenario. The increase or decrease of share price depends on its future growth and profits.
In short, the “fair price” at RM1.17 is based on this year alone. WE NEED TO CALCULATE ITS FAIR PRICE IN 2021. If we were to use the same EBIT MULTIPLE of 15 and calculate its value for year 2021 with assumption of “just maintaining” its current QR huge profits (EBIT = 80,000,000 [20,000,000 x 4 quarters]), we will get a higher “fair value” at RM1.44. Profits are expected (likelihood) to increase even more in year 2021 (if that is the case, the “fair price” would be even HIGHER than RM1.44), however we just remain conservative. Now, this is one method presented here. In order to further show that LUXCHEM would be valuable at this price level, we will use another (common) approach.
We will estimate its future intrinsic value by taking into account of this profitable condition (in the coming year 2021). To calculate its potential fair value, Earnings per share (EPS) and Price-to-earnings (P/E) ratio are needed. To do this, we need to predict its EPS and P/E ratio. These 2 metrics are the future, forward, forecasted values. They are the most commonly and popularly used to calculate the intrinsic value of a company.
FORECASTED EARNINGS PER SHARE (EPS) [estimation] – To predict EPS for the coming year, first we need to take the EPS for the current quarter – 1.59 cent. Since we believe that this EPS would be maintained or improved in the following quarters, we can calculate EPS for the coming year. With this, we have:
EPS ANNUAL (for the coming year, 2021) = 1.59 cent x 4 quarters
= 6.36 cents
FORWARD, PROJECTED PRICE-TO-EARNINGS (P/E) RATIO [estimation] – For its forward P/E ratio, we use EPS annual for year 2021. At the share price of 80 cents, the forward P/E ratio is much lower at 12.58 (0.80/0.0636) – indicating it is potentially CHEAP. To calculate LUXCHEM to be fairly priced according to its intrinsic value, the P/E ratio should not be too low or too high. We can make estimation here. We assume it to be fairly priced when P/E ratio is around 20-25. With this, we can proceed to calculate the intrinsic value of LUXCHEM. This is as follows:
INTRINSIC VALUE (FAIR PRICE) OF LUXCHEM = EPS ANNUAL x P/E RATIO
Assuming P/E ratio = 20,
LUXCHEM’S INTRINSIC VALUE = 0.0636 x 20
= RM1.27 (market price is only RM0.80 – STILL UNDERVALUED BY “47 CENTS”)
Assuming P/E ratio = 25,
LUXCHEM’S INTRINSIC VALUE = 0.0636 x 25
= RM1.59 (market price is only RM0.80 – STILL VERY MUCH UNDERVALUED BY “79 CENTS”)
The potential intrinsic value of LUXCHEM is around RM1.27-1.59, using different P/E ratios. This is the possible, future scenario for LUXCHEM.
Well, the above methods estimate the intrinsic value (“fair price”) of LUXCHEM based on EBIT MULTIPLE and (EPS x P/E ratio) formulas. Different people would value LUXCHEM differently. Some might be more optimistic while others might be less optimistic. We try to take a balanced intrinsic value of LUXCHEM. To achieve this, we just make it simple by taking the average “fair price” of these 3 different pricings.
LUXCHEM’S INTRINSIC, FAIR VALUE (balanced) = (RM1.17 + RM1.27 + RM1.59) / 3
= RM1.34 (IN COMPARISON WITH CURRENT MARKET PRICE AT 80 CENTS, IT IS VERY CHEAP AND UNDERVALUED)
The average intrinsic value of LUXCHEM is RM1.34. This reflects a much higher valuation compared to its current market price at 80 cents – indicating its cheapness and undervalued condition.
With this, we can calculate the POTENTIAL UPSIDE OF LUXCHEM – we can get the MARGIN OF SAFETY (MOS) and its percentage. MARGIN OF SAFETY (MOS) is the price difference between the Intrinsic Value (IV) of a company and its relevant, current (market) share price – the range itself is the safety gap of buying a share. The bigger the MOS gap, the safer and more secured the share is. As with most metrics, all formulas and calculations (as presented) serve as good guide, and they can give objective or subjective (non-absolute) values since there are various methods to value a company. Each method has its own way of evaluating and analyzing a company. Uncertainties in the market do exist from time to time (due to stock speculating, punting and frying in short or long run). All these should be taken note and understood by all readers. Nevertheless, all these formulas and calculations do provide us with a good as well as concrete foundation and valuation of a company (firm). They are helpful tools and instruments in guiding investors in their investments and trading activities.
MARGIN OF SAFETY (MOS) = Intrinsic value (fair price) – Current market price
= RM1.34 – RM0.80
= RM0.54 (EXCELLENT – A GOOD PRICE WITH “54 CENTS” POTENTIAL UPSIDE)
MOS RATE = MOS/Intrinsic value x 100
= RM0.54/RM1.34 x 100
= 40.30% (MORE THAN 30% OF MOS RATE – A VERY GOOD BARGAIN WITH HIGH MOS!)
There is a MARGIN OF SAFETY (potential upside) of ADDITIONAL 54 CENTS which is yet to be realized and priced in. The MOS RATE should be more than 30%. For LUXCHEM, the MOS rate is 40.30% - much higher than 30%. Therefore, LUXCHEM is a good, bargain stock – providing a HIGH MARGIN OF SAFETY for investors. LUXCHEM is still very, very cheap! FURTHERMORE, THE AVERAGE INTRINSIC VALUE (“FAIR PRICE”) CALCULATION OF RM1.34 (BASED ON ‘EBIT MULTIPLE’ AND ‘EPS x P/E RATIO’) ARE ALREADY TAKEN AS CONSERVATIVE SINCE IT ASSUMES THAT LUXCHEM JUST MAINTAINS ITS LATEST QR PROFIT IN THE COMING QUARTERS. HOWEVER, IF WORLDWIDE GLOVES DEMAND CONTINUES TO INCREASE DUE TO HIGH COVID-19 CASES, THEN LUXCHEM’S PROFIT WOULD BE EVEN HIGHER THAN THE ASSUMED AMOUNT. THEREFORE, THE INTRINSIC VALUE (“FAIR PRICE”) COULD BE EVEN HIGHER THAN RM1.34.
If you look at most healthcare, PPE and/or glove related stocks, the share prices have all been increased, reflected and priced-in when the companies announced huge supernormal profits (please refer to the table below for the list of stocks which have increased during this period due to high surge in healthcare, PPE and gloves demand). The ONLY STOCK that has not been rising consistently in line with its profit is LUXCHEM. LUXCHEM is still a laggard despite having huge profit.
Table 1: Comparison of LUXCHEM with other healthcare, PPE and glove related stocks (approximate figures)
|
NO.
|
SHARE NAME
|
Share price range upon release of fantastic results (low/high) |
Percentage increase
|
Current share price range
|
|
1 |
TOPGLOVE |
1.50-9.77 ((4.50-29.30)) |
551% |
6.65-6.99 |
|
2 |
HARTALEGA |
5.30-21.10 |
298% |
14.36-14.50 |
|
3 |
SUPERMAX |
0.90-12.20 ((1.80-24.40)) |
1,256% |
7.77-8.29 |
|
4 |
KOSSAN |
2.10-9.75 ((4.20-19.50)) |
364% |
5.82-6.10 |
|
5 |
COMFORT |
0.80-7.20 |
800% |
3.61-3.73 |
|
6 |
RUBEREX |
0.27-2.73 ((0.70-8.20)) |
1,071% |
1.71-1.73 |
|
7 |
CAREPLUS |
1.10-5.80 |
470% |
2.60-2.63 |
|
8 |
HLT |
0.65-3.30 |
408% |
1.09-1.22 |
|
9 |
LKL |
0.60-2.00 |
233% |
0.95-0.96 |
|
10 |
PROLEXUS |
0.60-1.90 |
217% |
1.50-1.56 |
|
11
|
LUXCHEM – the one that is still undervalued |
0.78-0.96
|
23%
|
0.80-0.81 STILL CHEAP AND PROFIT IS NOT PRICED-IN DUE TO IMPERFECT INFORMATION AND THE SITUATION IN THE MARKET |
In short, THE AVERAGE FAIR, INTRINSIC VALUE FOR LUXCHEM IS RM1.34. The current share price is ONLY around RM0.80. Just months before its QR release with extraordinary profit, the price did increase to RM1.47 and then down, only up again to RM1.01 before retracting again. When the QR was released, the price did increase from 0.87 to 0.96. Due to global uncertainties, the price decreased again to the current 0.80 cents. With this, LUXCHEM is still cheap, inexpensive, much undervalued as it is selling at a “low, bargain price” whereas the true, intrinsic value is RM1.34 in the coming year – or maybe much higher.
As mentioned, most healthcare, PPE and glove related stocks have peaked and surged to their highest after they reported increased profits in history (though they have retracted a bit some time ago, there is a likelihood they might rebound due to continuous high demand in healthcare equipment and gloves). LUXCHEM, at the moment, has not increased much since its good QR release in October. This is understood since in October, there were uncertainties in the market which drove the market sentiment down. As for now, LUXCHEM is still very cheap and people do not seem appreciate or realize its potentiality. With that, this is a good opportunity to buy LUXCHEM at much, much lower and cheap price!!!
(10) HOW DO YOU COMPARE AND EVALUATE LUXCHEM IN SIMPLE TERM AND UNDERSTANDING?
((A STORY OF BAGS FOR SIMPLE UNDERSTANDING OF LUXCHEM))
Well, to further illustrate the case study of LUXCHEM, please do take note of this. REMEMBER THIS - BUYING A GOOD STOCK (SHARE) SHOULD BE SUPPORTED, FOLLOWED BY “PROVEN RECORDS OF EARNINGS/PROFITS – FUNDAMENTAL ANALYSIS COUNTS AND MATTERS!” Many times you might have heard news about certain companies wanting to do healthcare businesses - and the share prices suddenly SPIKED, INCREASED, PEAKED TO THER HIGH. These companies HAVEN’T EARNED PROFITS SINCE THEY HAVEN’T STARTED THEIR PRODUCTION. THEY ONLY ANNOUNCED THEY WILL DO CERTAIN BUSINESSES IN THE FUTURE, IN WHICH THE PREPARATION WILL TAKE TIME. HOWEVER, THEIR SHARE PRICES STILL INCREASE. BUT FOR LUXCHEM, WHICH HAS ALREADY EARNED BIG PROFITS WITH HUGE CASH FLOW AT HAND – IS SOMETHING CONCRETE, STRONG, PROVEN AND REALIZED! AND NOW THE PRICE IS STILL CHEAP AND MUCH UNDERVALUED! It is a stock that many people truly miss out!
To further make this point, let us explain LUXCHEM in a much simpler term so that one can understand its value and situation. An evaluation of LUXCHEM is made by using a story.
THE “UNDERVALUED LUXCHEM” STORY – THE STORY OF A CHEAP, QUALITY BAG
To further illustrate this LUXCHEM undervalued and cheap stock, imagine this. Assume now you go to a shop to consider buying bags. There are many types (brands) of bags. The brands are presented as below:
Table 2: The cheap, undervalued LUXCHEM – a comparison
NO.
CHARACTERISTIC OF BAG
CONSIDERATION
SITUATION
Brand 1
High quality and high price
Might consider, the high price paid reflects high quality bag. ONE GETS THE SAME VALUE FOR WHAT HE PAYS.
A FAIR, JUST-WORTH OR OVERVALUED-PRICED BUY
(expensive but worth the money paid)
Brand 2
Low quality but high price
Might not consider, since one pays a high price for a low quality bag. ONE GETS MUCH LESS VALUE FOR WHAT HE PAYS.
A TOO EXPENSIVE, NO VALUE, NOT-WORTH, LOSS-MAKING BUY
(expensive but not worth the money paid)
Brand 3 (just like LUXCHEM)
High quality but low price
Might surely consider, in fact, it is very cheap since one pays a low price for a high quality bag. ONE GETS MORE VALUE FOR WHAT HE PAYS.
A CHEAP, UNDERVALUED, TRULY-WORTH, PROFIT-MAKING BUY
(cheap but truly [more] worth the money paid – a great DISCOUNT!)
To explain this story, high quality bag represents high profits (PAT) earned by a company. High (low) price of bag means high (low) share price of a company. Brand 1 is the “high quality and high price” bag. The product is indeed good - that is why people realize and are aware of its quality. The price is at the higher side due to its high demand. Customers either get a fair value or overvalued bag for the price they paid.
Brand 2 is the “low quality but high price” bag. The bag’s quality is much lower, however people think it is of high quality and chase after the product due to rumours. Due to this, the price soars to its high. However, it is only a matter of time when people realize it is of low quality. In another scenario, the price could be high due to someone putting a high price to create attraction. With this, customers pay expensive, overvalued price for the bag.
Brand 3 is the “high quality and low price” bag. The bag is of high quality and it is durable, also stable. However, not many people are well aware of its high quality, and there are less demand for the bag. The bag is also less promoted though it is a hidden gem. People just do not realize of the presence of this cheaply-priced good bag. Therefore, the price is still low despite of its high quality due to its less demand. However, if a person buys this bag at this low price, he truly earns because he gets much, much higher value (quality) than the cheap price he paid. Who knows, if he buys now, people will realize of its high quality later and rush in to buy – it is only a matter of time. By then, he might be able to resell it at a good price (than he paid for) when the bag becomes a hot, top choice of the people. So, he is buying the bag at an indeed cheap, undervalued price. This bag resembles LUXCHEM at the moment!
DISCLAIMER: Please read and understand this disclaimer. This article is written upon observations and it is intended to be a SHARING – for informational and educational purpose only. The intention is to share knowledge with you all. None of what is written here is to influence your decision to buy or sell shares. REMEMBER, IT IS NOT A BUY CALL, IT IS ALSO NOT A SELL CALL. This article is from one’s point of view – consisting of various opinions. You are welcome to read this article, however you need to do your own research first before buying or selling any shares. You should be aware that you buy or sell shares at your own responsibility and risk. This article doesn’t recommend any buy or sell call decision in shares. Share market investment comes with risk, and no one can guarantee everything. It is only a sharing. AS ALWAYS, you need to do your own diligent and prudent research before investing. To buy or sell any shares ENTIRELY DEPENDS on your own decision, judgment and choice. You make your own call either to buy or sell.
https://klse.i3investor.com/blogs/thinkingmanblog/2020-12-11-story-h1537478563-A_HOLISTIC_ANALYSIS_OF_LUXCHEM_MOST_UNDERVALUED_STOCK_WITH_A_FAIR_VALUE.jsp
