Again, EPS (Earning per Share) improved after the lost in 2007 from 7sen (2008) to 28.21sen (2011). Overall, raw material to inventory ratio and finished product to inventory ratio are quite good. Moreover, it is worth to highlight that the clear inventory period was improved significantly from 2005 (121 days) to 2011 (38 days only). This indicator is very important for investors to figure out whether the products of the company is good and attractive in the market. The lower the clear inventory period, the better the sales and inventory control. Besides, we can also use this indicator to predict the future of the company. For example, the clear inventory period was extremely high during 2006 and 2005, that were, 166 days and 121 days, respectively. In order words, it need to take at least 4 months (4x30) to clear its inventory in 2005; and more than 5 months (5x30) to clear its inventory in 2006.
The high inventory turnover makes me feel the SAPIND products were good in the market. Overall, I am quite satisfied this performance of SAPIND.
To evaluate its intrinsic value, we should firstly make sure we understand the business of the campany briefly, and then make sure it has a good financial condition and profitability. After that, investigating whether its market price is undervalued, fair or over-valued with some assumption.
Here are my assumption to SAPIND in the fiscal year 2012:
1. Maintain its 2011 performance (Of course, it is better it will improve further)
2. At least 50% dividend payout. (Note: 2011 SAPIND got 100% dividend payout)
3. The financial condition and profitability do not change as 2011. (Of course, it would be better if both of them are improved further)
(Note: the assumptions will determine its fair value, when the performance is better than the assumptions, the fair value should be increase and vice versa.)
First method to calculate is fair value - Based on its dividend:
In 2011 fiscal year, EPS of SAPIND was 28.22 sen. If 50% will be used as dividend, it is equivalent to 14 sen per share.
In order words, with market price of RM1.70 to own a share of SAPIND, the DY (dividend yield) is equivalent to 8.2%. If our target is to have at least 6% return, then the fair value of SAPIND should be RM2.33, that is, 0.14/2.33 = 6%.
Second method to calculate is fair value - Based on its PE:
Maybe you will say that SAPIND business is not as high demand as other like TopGlove, let's give it PE of 8. With estimated EPS of 28sen, the fair value should be 8x28sen = RM2.24, which is quite similar with the first method.
When is the time to sell SAPIND?
Based on Cold Eyes' advice, there are three conditions for us to sell our shares:
1. When the company fundamental condition is not good anymore
2. When the market price is irrational expensive (Extremely over-valued).
3. When there is another better investment.
Lastly, for your information, I am one of the shareholders of SAPIND. I invest it because I believe my analysis with the reasonable assumptions. I am not able to predict the performance of SAPIND in 2012. As long as the assumption is applicable, I will hold it until it is over-valued. That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.
Written by: Xaivier Chia