Enterprise Value

Market Capitalization can be used to determine how much a company worth at a point of time, or "how big" a company is. However, there is a more accurate measure of a company's value, which is the Enterprise value.

The calculation of Market Cap is quite straight forward,

Market Cap = Share Price x Total Outstanding Shares

Enterprise Value (EV) is also not hard to calculate,

EV = Market Cap + Debt + Minority Interest + Preferred Shares - Cash & cash equivalent

All the figures except market cap can be obtained from the balance sheet.

EV is a theoretical takeover price. It is widely considered as a more accurate representation of a company's value.

When company A wishes to takeover or acquire company B, it needs to:

• pay company B's ordinary shares holders (market capitalization)
• pay company B's total debt
• pay company B's minority interest shareholders
• pay company B's preferred shares holders

However, company A does not need to pay for company B's cash. It will pocket the cash.

After obtaining the EV, we can calculate a company's Enterprise Value Multiple (EVM), which is one of the investment valuation ratio like the more commonly used PE ratio.

EVM = EV / EBITDA

EBITDA = Earning Before Interest, Tax, Depreciation & Amortization

EVM roughly tells how long it would take for an acquisition to earn enough to pay off its cost, assuming that there is no change in its annual EBITDA.

If EVM is 10, then it will take 10 years. Thus, the lower the number the better it is.

EVM might be a better valuation ratio compared to PE ratio as it includes a company's earning, debt and cash into the valuation, while PE ratio is only about a company's earning.

Like any other financial ratios, it is best to compare with peers and historical data.

Car Electronics Maker Builds Hospital

Multico is one of the stocks in my stock alert list. It caught my attention because of its low PE ratio and good dividend yield. It is in Cold Eye's 42 stocks list as well.

Multi-Code Electronics is a Johor-based manufacturer of vehicle electronics parts founded in 1990. It has now grown to become a leading Original Equipment Manufacturer (OEM) specializing in full spectrum of design, manufacture and supply of automotive electronics and mechatronics parts for the Malaysian and regional markets.

In Malaysia, it has Proton & Perodua as its clients with long-term contracts to supply various car electronics parts such as reverse sensors, functional switches, key sets, actuators, power window regulators, anti-theft system etc.

Though the national cars contribute to a vast majority of its business, Multico also supplies parts to Honda in Melaka and Ford in Thailand & Australia.

Multico's revenue has been flat for the past four years (FY10-FY13 end July) between RM100-110mil. From its recently announced financial result, full-year FY2013 revenue falls slight from RM111.1mil to RM109.2mil, but net profit rises from RM11.1mil to RM28.9mil.

Multico Financial Result FY09-FY13

RM mil	Revenue	PAT
FY09	84.7	0.2
FY10	103.7	9.4
FY11	101.6	8.7
FY12	111.1	11.1
FY13	109.2	28.9

In FY13, there is a one-off gain of RM19mil from the recovery of doubtful debt arising from the legal actions and proceedings against its certain former directors and subsidiaries.

Without this special gain, I think Multico's net profit for FY13 should be around RM11.5mil, which will still break its previous year's record of RM11.1mil by a thin margin.

At this estimated FY13 earning of RM11.5mil, Multico's EPS will be 25.9sen base on 44.4mil shares. This will give it a PE ratio of only 6.4x at current share price of RM1.67. A fair PE of 10x will give it a fair value of RM2.59.

Multico gave away 12sen of net dividend for its FY2013, representing a net yield of 7.2% at share price of RM1.67. However, 6sen of it is a special dividend due to the special gain. Thus its future expected dividend yield is about 3.6% (6sen).

       Functional Switches

In mid November, Multico made an announcement to purchase a 3.3acres commercial property within Setia Alam for RM28.6mil to build a healthcare facility. 

What? A car electronics manufacturer diversifies into provision of healthcare services?

The first question that comes to my mind is, is any of the directors or major shareholders a medical doctor?

Yes, true enough. After checking through the directors profile, Multico's executive director and single largest shareholder Goh Kar Chun holds a medical degree from Ireland. He worked as a medical doctor for 2 years  in Ireland before joining the company. 

Apparently he made a wise decision in joining Multico. He is only 37 years old now.

However, in my opinion, I don't think the decision to build hospital will benefit the shareholders in the near future. Establishing a hospital is neither cheap nor easy. It needs a lot of money and experience. It may require a joint venture with an experienced partner.

The construction of the hospital building will only commence in year 2015 and is expected to be completed in 2018. So during these years, I would expect Multico's earning to be under pressure due to the cost involved. 

Furthermore, when the new hospital starts to operate in 2019, usually it will register loss in its early years due to lack of customers and high staff cost.

       Goh KC & Lim MK

Without this healthcare diversification, Multico's core business seems to be quite stagnant for the past few years. The management has a plan to expand regionally especially into Indonesia & Thailand. I'm not sure how's the progress now.

Back in July, Multico has signed a joint venture agreement with an Indian party to manufacture and supply automotive parts in India. However, there is no further announcement made until now.

I believe the overall automotive industry will grow in the near future. However, national cars may face stiff competition from other car makers.

Even though it is traded at relatively low PE, it is very unlikely that I will invest my money into it in the near future. So, I'll remove it from my Stock Alert List.

Fundamentally, Multico is still a good company with some growth potential in its core business.

Furniture Stocks Draw Attention

I came to know about Latitude Tree just last week. In the early morning of that day, I still never heard of this stock, but later in that day just before the market closed, I decided to add it into my portfolio.

It is rather impulsive. I saw its share price spiked after a magnificent quarterly financial result.

Latitud is a Malaysia-based furniture manufacturing company founded & controlled by Taiwanese. It started off as a manufacturer of dining chairs in 1988. Now it has grown into a complete medium to high end dining & bedroom sets manufacturer. It also produces living room collection sets and some office furniture.

There are quite a number of furniture manufacturers listed in Bursa Malaysia. I pick 4 of them to do a very simple & superficial comparison. They are:

• Latitude Tree
• Homeritz
• Lii Hen
• Poh Huat

* The information, figures, calculation & opinion provided below might not be accurate or true. Please do own research if in doubt.

Products

Company	Products
Latitude	Wooden furniture
Homeritz	Upholstered furniture
Lii Hen	Wooden furniture
Poh Huat	Wooden furniture

Homeritz is different from all 3 others as it designs and manufactures upholstered home furniture such as leather and fabric-based sofas, dining chairs, bed frames etc. It also has its own brand Eritz since 2009.

The other 3 companies design and manufacture wood-based furniture. Both Latitude & Lii Hen concentrate on home furniture but Poh Huat manufactures both home & office furniture.

Market

All 4 companies export majority of their products to overseas which include the Americas, Europe, Middle East, Australasia & South Africa. 

Latitud exports 99% of its products, in which 92% are exported to the United States (FY2013). The rest are to Canada, Europe, Australia, South Affrica & Middle East. I think it still has a lot of room to expand its presence worldwide.

The other 3 companies claim that they export to more than 50 countries worldwide.

Homeritz's major export destination is Europe, which comprises 41% in FY2011. United States is Poh Huat's biggest export country (?%) while export to the Americas (North & South) makes up 77% of Lii Hen's revenue in 2013.

Facilitiy

Latitude has 3 factories in Malaysia, 2 in Vietnam & 1 in Thailand.

Homeritz & Lii Hen both have 5 factories each in Johor.

Poh Huat has 2 factories in Vietnam, while others in Malaysia, China & South Africa.

Latitude might be less affected by the effect of minimum wages and increased electricity tariff in Malaysia, as its mainly concentrates its production in Vietnam, while scaling down its Malaysia operation.

Market Capitalization

	Latitude	Homeritz	Lii Hen	Poh Huat
Share price	1.74	0.56	1.64	0.85
M/Cap (mil)	169.1	112.0	98.4	96.4

Latitude has biggest market cap followed by Homeritz.

Financial Performance

RM mil	Latitude	Homeritz	Lii Hen	Poh Huat
Revenue	493.7	112.9	346.5	392.0
PAT	24.4	15.1	21.3	15.2
Gross margin%	14.4	16.9@	15.4	13.4

*Latitude FY2013 (end June13)

*Homeritz FY2013 (end Aug 13)

*LiiHen FY2012 (end Dec12)

*Poh Huat FY2012 (end Oct12)

@ Operating margin

Latitude sells more and earns more compared to others. However, Homeritz has the best gross margin even though its revenue is the lowest.

For latest financial result,

Latitude and Homeritz break previous years' earning record. Lii Hen & Poh Huat's 9MFY13 revenue & PAT are lower YoY but there is a special one-off loss for Poh Huat.

Balance Sheet

RM mil	Latitude	Homeritz	Lii Hen	Poh Huat
Total Asset	478.6	103.8	190.4	243.3
Total Liab	179.3	16.5	46.8	94.5
Cash	112.5	34.7	40.4	30.2
Borrowings	91.2	2.7	17.6	33.4
ROE (%)	10.5	20.2	15.9	10.7
D/E ratio	Net cash	Net cash	Net cash	0.02

Almost all are in a net cash position.

Homeritz has the best ROE, while Latitude has the lowest ROE but still not too bad above 10%.

Dividend

	Latitude	Homeritz	Lii Hen	Poh Huat
Share price	1.74	0.56	1.64	0.85
Dividend (sen)	6.3	3.0	12.0	2.0
Div Yield %	3.6	5.4	7.3	2.4
Div Payout %	25.0	40.8	33.8	16.0

*Share price at 4th Dec 2013 close

*Base on previous full financial year total dividend

Homeritz & Lii Hen are more generous in their dividend payout. At current share price, Lii Hen has the best dividend yield, followed by Homeritz, Latitude and Poh Huat.

Value

	Latitude	Homeritz	Lii Hen	Poh Huat
Share price	1.74	0.56	1.64	0.85
EPS (sen)	25.07	7.56	35.5	14.04
PE	6.9	7.4	4.6	6.1
NTA	2.57	0.41	2.39	1.37
P/B	0.68	1.36	0.69	0.62

*EPS base on last full financial year earning

All 4 stocks have relatively low PE ratio. This shows that the furniture stocks are not popular and perhaps overlooked.

Due to recent spike in share price, Latitude's PE ratio has gone up from 5.3x to 6.9x. Lii Hen has a very low PE but it is anticipated that its upcoming FY2013 profit will be lower. All except Homeritz are trading below their book value.

       Homeritz's dining set

Out of all of these 4 companies, Homeritz stands out with best gross margin, best ROE, best dividend payout ratio, decent dividend yield and its recent financial results are good. That's why it's the "most expensive" one here.

As all 4 companies are export-orientated, I think they will have good time ahead as the US and Europe are slowly coming out from recession. US house sale seems to recover thus there will be more demand for furniture. The expected strengthening of US dollar will also improve exporters' earnings to a certain extent.

For me, I think Latitude is the best bet in furniture manufacturing, mainly because of its future earning prospect and low projected PE.

       Latitude's bedroom set

Latitude's latest FY14Q1 result records a 27% and 62% increase in revenue and net profit YoY, due to higher orders, production and sales, while the USD has strengthened only 3.6% between these two periods. Its FY14Q1 net profit already makes up 60% of FY2013 full year net profit.

RM mil	FY14Q1	FY13Q4	FY13Q1
Revenue	177.1	124.4	139.7
PBT	20.7	9.4	12.2
PBT%	11.7	7.6	8.7
PAT	14.6	5.9	9.0
MAS Rev	28.9	23.2	29.2
MAS PBT	1.2	-1.0	0.8
VIET Rev	142.2	96.1	106.3
VIET PBT	20.0	12.0	11.7
THAI Rev	6.0	5.2	4.2
THAI PBT	0.02	-0.5	-0.2

In FY2013, there is an increase in monthly production capacity of a factory in Vietnam by approximately USD1.0mil. I am keen to know what is the utilization rate of its overall production capacity and its future plan of capex.

In early 2013, Latitude has proposed to acquire all the subsidiaries of Latitude Tree International Group Ltd (LTIGL) for SGD48.75mil, which includes 99.99% of share capital of Latitude Tree Vietnam Joint Stock Company. Operation in Vietnam (under LTIGL) contributes 100% of Latitude's profit in FY2013 as operation in both Malaysia & Thailand suffer minor loss.

Currently Latitude Tree holds the shares of Vietnam operation indirectly through 77.6% owned LTIGL. Once the corporate exercise is completed, Latitude Tree will directly own 99.99% of its most profitable Vietnam operation. 

The net profit attributed to non-controlling interest for FY2013 amounted to RM7.68mil, compared to RM24.37 net profit for owners of the parent. If both are combined later, its net profit might be 32% more.

For recent FY14Q1, PBT from Vietnam operation increases as much as 70% both QoQ and YoY to RM20mil. To add icing on top, operation in Malaysia turns profitable in this quarter after scaling down of its operation.

Latitude will only need to pay SGD2.3mil cash for the acquisition, the balance of SGD46.4mil will be settled by way of set-off against the capital due to be returned to Latitude Tree. I actually don't understand what it really means, but it seems like Latitude does not need to borrow or deplete its cash substantially, or do share placement to complete the acquisition.

The proposed acquisition is expected to be completed before 31 Dec 2013.

       Latitude's dining set

As Latitud's business is moderately affected by seasonality, one would expect its Q3 & Q4 results (Jan-Jun) to be weaker. If LTIGL acquisition is completed in Q2, then Q3 & Q4 result might be good due to full contribution from Vietnam operation.

My personal estimation of Latitude's FY2014 PAT is RM40mil (64% increase from FY2013). This will give it an EPS of 41sen base on 97.2mil shares. Thus, my own target price for Latitude is RM3.30, if we give it a PE ratio of 8x. 

Anyway, I think Latitude's FY2014 net profit has a good chance to exceed RM40mil. Next quarter's result (FY14Q2) will be vital to determine whether to top up the shares.

At current price of RM1.7x, Latitude still looks quite cheap to me.

Both Latitude & Homeritz are perhaps worth to invest in, as both are good and manufacture different types of home furniture.

Last but not least, in Latitude's FY2013 annual report just released last week, Cold Eye Fong SiLing appears to be its no.12 largest shareholder at 1.4%. In FY2012, his name does not appear in the Top 30 largest shareholders list.

Surprise Dividend by Tropicana

Tropicana FY13Q3 Financial Result

TROP	FY13Q3	FY13Q2	FY13Q1	FY12Q4	FY12Q3	FY12Q2
Revenue	363.4	362.1	305.3	234.1	161.1	117.1
Gross Profit	130.2	117.7	130.7	98.1	78.4	53.4
Other Income	9.0	14.6	1.9	33.5	65.0	136.1
Finance Cost	27.7	15.6	16.5	13.9	8.5	4.7
PBT	49.3	62.3	66.8	60.8	80.1	58.7
PBT%	13.6	17.2	21.9	26.0	49.7	50.1
PAT	23.7	38.3	43.8	60.2	57.8	38.8
P/Dev Rev	269.2	312.4	270.1	210.6	133.9	106.7
P/Dev PBT	31.3	45.6	64.2	32.9	16.6	19.6
P/Inv Rev	36.8	33.9	35.1	21.7	26.5	10.4
P/Inv PBT	19.9	25.5	14.0	25.0	66.1	46.2
Inv Rev	57.5	15.8	0.0	1.8	0.7	0.0
Inv PBT	-1.8	-8.8	-11.4	2.9	-2.6	-7.1
Total Equity	2345.5	2336.7	2174.5	2061.1	1662.2	1074.3
Total Assets	5045.4	4990.5	4667.1	4518.4	3982.9	2659.5
T/Receivables	236.0	214.9	101.2	103.5	52.3	70.3
Prop dev cost	370.3	412.8	517.1	417.2	387.2	378.1
Inventories	68.8	73.4	30.4	20.3	20.4	18.1
Cash	333.6	372.0	282.9	213.7	155.8	130.0
Total Liab	2520.3	2477.8	2362.0	2329.6	2188.0	1455.3
T/Payables	226.8	205.3	178.1	201.5	165.5	150.5
Oth/Payables	152.4	161.1	132.5	129.4	351.8	86.8
ST Borrow	315.2	298.2	240.2	223.9	302.3	180.6
LT Borrow	1613.6	1562.6	1610.9	1642.1	1188.6	855.5
Net CF	145.4	139.2	59.0	86.4	36.3	10.8
Operation	-98.4	-120.6	-94.7	-16.6	334.8	6.7
LD gain	60.4	60.4	58.1	0.0	0.0	0.0
FV gain	12.1	12.1	0.0	112.1	98.7	132.3
Investment	32.3	106.0	105.6	-894.9	-615.8	-42.3
Proceeds LD	149.0	149.0	126.0	0.0	0.0	0.0
Financing	211.5	153.8	48.1	997.9	363.4	46.4
EPS	2.20	4.31	5.50	8.31	12.55	8.42
NAS	2.12	2.45	2.54	2.60	3.61	2.33
D/E Ratio	0.68	0.64	0.72	0.80	0.80	0.84

LD gain = gain on disposal of land held for property development
FV gain = gain for fair value adjustment of investment properties
Proceeds LD = proceeds from disposal of land held for property development


I find Tropicana's financial report very complicated, and need more time to digest. Of course I won't understand all of them.

Since the assets injection into the company, Tropicana's results have been "affected" heavily by land disposal gain & fair value adjustment gain on investment properties.

For current FY13Q3, Tropicana's revenue stands at all-time high of RM363.4mil, which is a substantial increase of 126% YoY but only a marginal 0.4% increase QoQ.

Its overall PBT & PAT are non-comparable as there are significant other incomes included such as land sales and fair value gain almost in every quarters.

In term of gross profit (purely from property development and investment), Tropicana registers an 109% increase from RM181.4mil (9M12) to RM378.6mil (9M13). This shows that its core business is growing.

For solely property development activity for the cumulative first 9 months period, revenue increases 145% from RM348.3mil to RM851.7mil, while PBT increases 185% from RM49.5mil to RM141.1mil compared to preceding corresponding year.

This set of result is amazing to me. The only little set back is that the property development contribution for FY13Q3 is significantly lower compared to previous 2 preceding quarters.

Current quarter's net profit of RM23.7mil is the lowest in the previous 6 quarters due to lack of land sales and fair value gain.

However, I think its next quarter result from property development should be better in view of strong property sales in 2HFY13. The ground-breaking of its Penang World City development has just taken place last week.

       Penang World City

Anyway, Tropicana's balance sheet remains tight, as it continues to borrow from banks.

For 9MFY13, Tropicana has paid a total finance cost of RM59.8mil, which can represent a whole year profit of some small developers.

What is surprising to most is, Tropicana still manage to give an interim dividend of 4.5sen (less tax) for its FY2013. This is the first interim dividend given at this time from Tropicana/Dijaya. However, it is not sure whether it will give a final dividend later.

Perhaps Tropicana's management is very confident with its de-gearing exercise. It has lots of assets. Although the deal with CMMT fell through, Tropicana might have secured other interested buyers for its investment properties. The encouraging sales of recent property launches might help it greatly.

Tropicana achieves record sales of RM1.85bil in 9MFY13 and its unbilled sales is at an all time high of RM2.2bil in end of September. It has a potential future GDV of RM79.5bil from its undeveloped 2,178 acres of landbank.

The proposed private placement of 10% should be completed by the first quarter of 2014, that means more equity but further earning dilution.

I hope Tropicana can achieve a net profit of RM150mil in its full FY2013, which is slightly lower compared to FY2012. If this is achieved, its projected EPS will be 13.6sen. As it has a market cap of RM1.5bil, I will give it a target PE ratio of 12x. Thus, my short term target price will be RM1.63. 

Tropicana's share price seems to find its bottom after hitting a low at RM1.24. Currently it is trading at RM1.36.

Base on several reasons, I think it is not the time for me to buy more shares to average down Tropicana.

Nevertheless, I still haven't lose all the confidence in Tropicana. So, it is neither a sell.