My Reply to My Friend's Questions on KSH - Part 2

Here is my reply to my friend's second question:
"If 55 cents is not a fair value, how do we determine the fair value? Based on PER?”

As mentioned in my previous post, different investors have different ways of valuing businesses.  Eli Lee of OCBC Research thought the fair value for KSH to be 71.0 cents but I do not know how he arrived at the estimate.

For KSH, this is how one could estimate its fair value but it is by no mean the only way.

Fair value = NAV + estimated total EPS for the next 5 years
                 = NAV + EPS x 50% x 5 years                                 (1)

where NAV stands for Net Asset Value and EPS stands for Earning Per Share.

As mentioned before, it is difficult for an investor to foresee a business's future beyond 2 to 3 years.  An investor could use the conservative estimate that the average EPS per year for the next 5 years to be 50% of the EPS today and ignore earning beyond the 5th year.  Assume that KSH does not pay out the dividend to its shareholders and does not issue any new shares for the next 5 years, its NAV in 5 years' time would be that shown in Equation 1.  An investor could use that to estimate the fair value of KSH -- the fair value does not change if dividends are paid out as whatever dividends that are paid will go to the investor/shareholder.

The NAV of KSH is 54.64 cents and its 1Q15 EPS is 2.32 cents (so FY15 EPS could be estimated to be 2,32 x 4 = 9.28 cents; hence, its fair value could be estimated to be 77.8 cents using this method.

For Keong Hong, an investor could use a similar method to estimate its fair value and distress value.  However, since Keong Hong's EPS today has yet to factor in its profit from property development, an investor could factor in its share of profit in Twin Waterparks, which is estimated to be 6.88 cents per share, in the fair value and distress value estimation as follows:

Fair value
= NAV + EPS from construction business x 50% x 5 years + share of profit from Twin Waterparks  
= 30.23 cents + 7.49 cents x 50% x 5 years + 6.88 cents
= 55.8 cents   

As a comparison, Voyager Research's estimate of Keong Hong's fair value to be 54.0 cents -- it estimated its fair value to be 81.0 cents before the 1 for 2 bonus issue.

In general, an investor should monitor the stock he/she has invested in and adjust his/her view on whether he/she should buy more, reduce the holding or divest completely for every new piece of information received.

By and large, fair value estimation is very subjective,  If the efficient market hypothesis is correct, then the present market price of any stock reflects its fair price.  However, I do not believe that it is true; hence, it presents opportunity for those who are skills in detecting the temporary mispricing of common stocks to make good profit.