Malaysian’s pension fund, EPF continues to offload its equity position in Bursa-listed packaging company, Kian Joo Can Factory Berhad (“KJ”). Summary of recent Bursa announcements relating to the on-going disposals is shown as follows:
Technically, KJ continues to remain “bearish” in the short term:
Price Earnings Ratio (“PER”) as Valuation Metric
Does the fundamental angle support a higher valuation for KJ? The historical trailing price-to-earnings ratios (“PER”) of KJ is between 6.34 times and 14.06 times, with an average of 10.31 times (since Jan 2011):
So, what is a fair PER? One may possibly consider the following formula:
Fair PER = (ROE – g) / ROE (r-g), whereby ROE = Return of Equity, g = earnings growth rate and r = required rate of return
Historically, KJ has a stable financial profile, recording year-on-year revenue growth rate with a 10 year simple average of 9.3% growth rate per annum. Except for the latest financial period ending 30 June 16, KJ records relatively stable year-on-year annual earnings growth rate, with respectable 10-year average return on equity (“ROE”) of 10.2%. The latest financial period of KJ was impacted by volatility in the exchange rate as well as competition in the packaging industry.
PER Simulations & Indicative Valuation Range
To derive a fair PER for KJ, we have run numerous simulations of PER based on the following key parameters:
- Discount rate 7.0% – 10.0% (as per CAPM rule shown below, we have derived cost of equity of 6.65% for KJ)
- Perpetual earnings growth rate: (3.0%) – 3.0% (not unreasonable in view of the actual long term average year-on-year earnings growth rate of KJ )
- ROE 5.50% – 12.0% (not unreasonable in view of actual long term average ROE for KJ)
Based on the above simulations, we limit our valuation analysis based on ROE of between 9.50% and 10.50% and perpetual annual earnings growth rate of between 1.5% and 2.0%. Scenario (based on discount rate of 7.0%, ROE:9.50%-10.50%, g=1.5%-2.0%) has been excluded as well, as the derived PER is relatively higher than of the actual trading PER range of KJ of not higher than 14.06 times.
Therefore, based on PER of of between 9.91 times to 13.49 times and forecast FY16 EPS of 23.12 sen, the indicative valuation range of KJ is between RM2.29 and RM3.12 per share.
Kindly note that the above analysis is a simple desktop analysis. Detailed analysis is required to ascertain the valuation range of KJ.
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