Chapter 6 Fundamental Analysis Fundamental analysis outline A

Chapter 6: Fundamental Analysis

Fundamental analysis: outline A. What is it about? B. Analysis C. Sources of information D. For further study

A. What is it about? Finding fair value of stocks. n Objective is to check if market price is cheap, fair, expensive for investment – Buy, Hold, or Sell or to explain the change of market price. n

B. Analysis: stock valuation process 1. Understand firm and stock’s nature 2. Forecast 3. Choose valuation method 4. Make decision

1. Understand firm and its stock’s nature n From company itself n n n Financial statements, IR From other sources n n n Research paper, Firm’s competitors Etc.

2. Forecast Make assumptions n Information, information n

Information’s issues What information is relevant? News concerning risk and return n When will it come out? n

Getting start (use consolidated) Restatements and work from restated statements. n Analyze relevant data and forecast: revenue break-down, cost break-down n

Analysis: Top down n Bottom up n Top down and bottom up n

Top down / Bottom up n Top down: n n n Bottom up n n Economy -> industry -> firm -> stock Globalization – impact. Firm -> industry -> economy Top down and bottom up: n Economy <-> industry <-> firm <-> stock

Economy Economic variables: GDP growth rate, unemployment rate, etc. n Economic life cycle: changing n Domestic & international: globalization impact n

Industry Porter’s 5 forces n Boston matrix: star, dog, cash cow, question mark n Change in external factors: social, regulations, consumer’s taste, etc. n Industry life cycle: sun-rise, sun-set n

Company Management quality n Accounting – clean, dirty n Business nature - income, cost, margin’s volatility, key success factors, position, strength, weakness etc. n Financing n Growth opportunity n

Company n Dream & do

Remarks If the success (failure) is consistent or temporary. n Past success doesn’t guarantee future success. n

Understand the stock’s nature Major investors n Sensitive to foreign fund flows n Defensive or cyclical n Etc. n

3. Choose valuation methods n Choosing criteria: n n n Characteristics of firm Data: availability, quality Valuation methods n n Discount cash flows Price multiples

Discount cash flows n Discount rate n n Cash flows n n CAPM, APT Dividends, Free cash flow for firm (FCFF), Free cash flow for equity (FCFE), Residual income (RI) Growth rate n = ROE x b

Price multiples n Price Multiples n n Link to competitors, industry, past Link to company’s fundamentals – discount cash flows

Price multiples: PE multiple n Trialing PE (Current PE) Po/E 1 = (D 1/E 1)/(r-g) = (1 -b)/(r-g) n Leading PE (Forward PE or Prospect PE) Po/Eo = {[Do(1+g)]/Eo)}/(r-g) = [(1 -b)(1+g)]/(r-g)

Price multiples: PBV multiple Book Value is unlikely to be negative. n Compared to earnings, book Value is less manipulated. n PBV = (ROE-g)/(r-g) n

Price multiples: P adj BV multiple n Adjusted BV = BV – (NPV – Acc. Provision)

Price multiples: PS multiple No negative sales n Sales is less likely to be manipulated. n Po/So =(Eo/So)(1 -b)(1+g)/(r-g) n But sales might not mean profit. (No information on cost structure)

Price multiples: PCF n Cash flow n n n EPS + non-cash charge CFO FCFE EBITDA Less manipulation

4. Make decision Buy (undervalued, buy, trading buy, strong buy) n Sell n Hold n

Some technical terms in fundamental analysis n n n ARPU GRM Baglog BDI NIM L/D ratio CAR CASA CAPEX OPEX P&L B. E. 1. 1

C. Sources of information Anything affecting company’s earnings (growth, volatility) n n Newspaper: local (Bangkok Post, The Nation, Bangkokbiznews, etc. ) and international (The New York Times, Financial times, etc. ) Internet: www. settrade. com, www. set. or. th, www. sec. or. th, www. bot. or. th, www. nesdb. go. th, www. worldbank. org, www. imf. org, http: //www. efinancethai. net, etc.

C. Sources of information n Reuter, Bloomberg, Setsmarts, E-financethai Analyst meeting, opportunity day Company presentation

For novice What data? To under stand a company’s nature, start with 56 -1 form, company’s presentation, investment analysis paper, opportunity day meeting and company’s annual report n Where to find? n When it will be release? n

Financial data (SEC, SET) n Why SEC, SET? To be fair to public, companies should not provide financial data to a particular investor (or group) before public.

SEC_ financial statements

SET_ latest news

Opportunity day_ meet company’s management team

Company’s presentation n From company’s website.

Investment research paper

Where to find research paper? n Brokers

Where to find research paper? n Free? • Free?

For further study n Books: n n n Security analysis, Benjamin Graham and David L. Dodd, Mc. Graw-Hill, The intelligent investor, Benjamin Graham, Harper. Collins Publishers, Analysis of equity investments: valuation, John D. Stowe, Thomas R. Robison, Dennis W. Mc. Leavey, Association for Investment and Research, etc. Research paper Websites: n n www. tsi-thailand. org, www. ft. com, etc.