Published on February 28, 2014
FUNDAMENTAL ANALYSIS OF STOCK USING MARGIN OF SAFETY PRICE VALUATION OF THE 50 BIGGEST MARKET CAPITALIZATION COMPANIES LISTED ON THE INDONESIA STOCK EXCHANGE Supervisor : Mr. 崔维军 Candidate : Nohan Pradipta（曾汉琦）
Primary Objective Our Main Goal is : To find a wonderful company, and buy it at a cheap price.
To find wonderful business (financially) Financial Condition Financial Ratios
In this research, we use : • Average Return on Equity (ROE) • Equity Growth • Sales Growth • Earning Growth • Free Cash Flow Growth
Parameter : • Average Return on Equity (ROE) > 15% in 5 years • Equity Growth > 15% in 5 years • Sales Growth > 15% in 5 years • Earning Growth > 15% in 5 years • Free Cash Flow Growth > 15% in 5 years If it meets the requirements, go to the next step : price valuation. If it doesn’t, discard the company from the list.
Compound Annual Growth Rate (CAGR) From the formula above, we can derived the i as follows: So, we can get that the CAGR formula is :
Population 50 Biggest Market Capitalization Companies listed on the IDX (Indonesia Stock Exchange) according to IDX Quarterly Statistics Report, 3rd Quarter 2013. Total Market Cap in IDX 74.43% of Total IDX Others (> 400 Companies) Total of The 50 Companies Total Market Capitalization in IDX per 3rd Quarter 2013 : Rp 4.251.368.071.000.000,-
Estimating the value of Sticker Price (Intrinsic Value)
Estimating the value of Sticker Price (Intrinsic Value) Either Average Historical PE over the past years, or Twice of Minimum Equity Growth, or use average professional analyst estimation in financial research websites (if possible) which is lower (more conservative number).
Estimating the value of Sticker Price (Intrinsic Value) Historical Equity Growth Rate
Why Equity Growth is so important? The value of the business obviously increases with the increase in the value of the equity. A growing equity comes from growing surplus cash. Surplus cash is what makes a business valuable. The real value of a business is all of the money you can collect from it over the years.
Estimating the value of Sticker Price (Intrinsic Value) In this research, we use 15% as our required rate of return.
Margin of Safety Is it great to buy something that value $1 for only 50 cents? “No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what Graham called the “margin of safety”, never overpaying, no matter how exciting an investment seems to be, can minimize your odds of error.”
Margin of Safety If Current Market Price > MOS Price (Don’t Buy) If Current Market Price <= MOS Price (Buy)
Conclusion From the 50 companies that we analyzed, 11 companies can be categorized as wonderful companies, and 39 companies are discarded because they don’t pass our requirements. Sticker Price MOS Price (Rp) (Rp) Market Price (Dec 13/2013) Recommendation No Company Name 1 Bank Central Asia Tbk 10,512 5,256 9,500 Don’t buy 2 Bank Mandiri (Persero) Tbk 11,041 5,520 7,700 Don’t buy 27,006 13,503 4,625 Buy 29,407 14,703 18,900 Don’t buy 3 4 Perusahaan Gas Negara (Persero) Tbk Indocement Tunggal Prakasa Tbk
5 Indofood CBP Sukses Makmur Tbk 39,290 19,645 9,900 Buy 6 XL Axiata Tbk 7,764 3,882 4,950 Don’t buy 7 Indo Tambangraya Megah Tbk 52,254 26,127 27,900 Don’t buy 8 Bank CIMB Niaga Tbk 2,702 1,351 940 Buy 9 Mayora Indah Tbk 20,622 10,311 26,300 Don’t buy 10 Bank Tabungan Pensiunan Nasional Tbk 13,046 6,523 3,900 Buy 11 SMART Tbk 8,650 4,325 6,200 Don’t buy Companies that have great financial performance and are currently traded at cheap price are: 1.Perusahaan Gas Negara (Persero) Tbk 2.Indofood CBP Sukses Makmur Tbk 3.Bank CIMB Niaga Tbk 4.Bank Tabungan Pensiunan Nasional Tbk
Recommendation for further Research 1. It is better if possible to use at least 10 years historical financial performance. 2. Try to look at the other financial ratios, such as Debt-to-Equity ratio, Current ratio, etc, just to make sure the financial condition of the company. 3. Research further about the company’s management, for example the CEO’s profile of the company, etc. 4. Prospective investors should know about the company they want to buy, the business model, how the company makes money. 5. Check if there is any insider trading in the current years. 6. It is better to learn some technical analysis tools, such as Stochastic, Moving Average Convergence Divergence (MACD), Exponential Moving Average, etc.
Thank you Happy Investing!
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