Saturday, July 21, 2012

What are intangibles?

Perhaps one of the biggest factor for investment decisions but yet not many have valued the significance of it. A lot of times it is much easier to calculate a business based on its Net Asset Value or if the business has significant goodwill, Net Tangible Assets. Remember I was highlighting Maxis which is trading at negative NTA but yet the valuation it gets is way higher than that.

Intangibles is brand value

For example, BAT is having Net Asset per share of below RM2 whereas its share price is trading at RM58 per share. Besides the manufacturing plant, distribution channel, management, the bulk of it is in its brand value. A lot of money have been spent on advertising for the brand and these costs are usually expensed off. However these branding enhancement spending, most of the time will not go to waste.

While PE ratio is historical, the brand value is what carries the business valuation to the future. PE and its profit trend is what guides us towards the valuation of the company but really the brand intangibles is what we are buying for especially for companies that has very little tangible asset value.

Intangibles is your perceived value on the company

For a company which has yet to make any profit - example Groupon, the market was valuing it at beyond $12billion at its IPO (now has dropped to below $5 billion). Few years ago Google was offering the shareholders of Groupon for somewhere around $6 billion. Hence it is the perceived value which we think the business value should be. Amazon is currently trading at 187x PE. Why? Because investors have so much confidence on this largest online retailer especially on its intangibles. They think Amazon will conquer online retailing so much so that the value that they are giving to Amazon is perhaps illogical for value investors.

Intangibles is where Property asset owned by a non-property company is very different from a premium property player

The land that Tan Chong Motor holds is valued differently to the land that say SP Setia or Sunrise may own even though it may be the same piece. Believe me on this? If Tan Chong or F&N Malaysia (which it is) becomes a property player, its valuation as a developer will be different from SP Setia or Sunrise or even IGB the developer. Hence, if Tan Chong is to develop on its Segambut land, its net sellable value may be lower than if Sunrise is to develop it.

Often in an analysis that I have read, the analysts would have calculated the properties based on the market value of the land but I sometimes disagree. For example, a piece of land in Klang which was valued at less than RM10 per sq ft can be turned into more than RM100 / sq ft by SP Setia within less than 10 years. Land adjacent to Setia Alam or Setia Eco Park do not carry the same valuation as the one owned by SP Setia. So if you want to buy properties, buy a property company which has a strong perceived brand value. If you disagree, do buy Talam (or Trinity) as they are trading at below NTA. If you noticed, even after Talam has changed name the perceived intangibles of the company is still low.

Negative intangibles is when consumer has negative perception of the company or the brand

Think of Proton. Proton has lost so much value that before it was delisted it was trading at below it NA. Why? Was it undervalued? You may think so now, but why not buy the shares during then? So a brand can have negative value - which is also why whenever there were rumours of Volkswagen or GM taking over the operations of Proton, its share price jumped.

Intangibles is the value we put onto the management and owner

Sometimes management can make a change to the value of the company instantaneously. Remember Steve Jobs and Apple? Most of the times however, it may not create much impact.

In Malaysia, I feel that recently there is a tendency to provide higher valuation to professionally managed companies (especially well managed ones) rather than owner managed companies. I may not know the exact reasons for it but it may go to trust as there are fear of owners who are management themselves influencing the share price or perhaps taken some questionable actions as I have highlighted in Digistar.

Can you see the significance of that value creation as it takes a whole effort to build it? Hence investment is not just Price / NA or PE as there are much more in intangibles to the whole lot effort to valuation.

7 comments:

Sunny said...
This comment has been removed by the author.
Sunny said...

Do you think that Eksons is a turnaround investment opportunity?

Currently I think 5 sen per share dividend is sustainable.

I bought a very tiny piece of this business because I feel its property segment is difficult (for me) to value.

I value it from the tangible assets, and think that it is quite safe at RM 1.00.

My bet is on a dividend payout ratio to increase from 5 sen per share to 10 sen per share as the balance sheet grows more solid, and this will distort the price value of this stock to the level of RM 1.40 per share, assuming flat revenue and net profit.

What is your thought on this?

felicity said...

I have very little understanding of the timber business especially plywood. I remember the last time made some investments into Mieco many years ago - got burned :(.

Hence I tried not to do what I am not very sure about. Having said that I briefly looked at it - their balance sheet is ok and Price / NA is attractive

Sunny said...

I have not heard of Mieco. Can the mistake be avoided by studying the financial statement? How did you get burnt (was it due to business failure or fraud)?

I did my study in Megan's financial report and found the red flags. Did Mieco's show the same sign?

Sunny said...

How did you get burnt? (due to business failure, fraud, or simply the wrong industry)

I bought it for a few reasons:

1) stronger USD vs RM
2) high plywood demand in Japan and when the US's economy / housing is recovering (perhaps this is already the worst time, as the going gets tough, the tough get going)
3) insider share purchase
4) increasing dividend / share
5) increasing equity
6) valuation from the property segment (I view this as the struggle of the management to find another reliable source of income as the future of the plywood segment is not optimistic. I don't like property development because it is hard for me to do the valuation with limited info and knowledge, and its cyclical nature. I am not good at guessing the cycle either.)

The down sides are that I feel that this is NOT a WONDERFUL business and do not really know how good is the management. There are some businesses which are just anyhow profitable regardless of the weather and therefore easy to run by mediocre managers and directors, such as Nestle, Dutch Lady, BAT, etc, but definitely not Eksons which is in a really challenging business environment.

I listed down 6 +ve sides, and only 2 -ve sides, but yet I am frightened enough to purchase more than a mere 6000 shares of it. She looks just fine but I don't know her heart and that freaks me out.

felicity said...

Sunny, I think you probably got it right in terms of the timber industry - plywood inclusive. Ekson seem to be the one which does not need govt's assistance -the others are Sarawak or some state govt's link - see Jaya Tiasa, Lingui, WTK etc.
The industry looks cheap now.

Sunny said...

Haha... looking from the the other side, that means Eksons doesn't have that "intangible assets". This is an extra information for me that price is not inflated with the non-existing "intangible assets".