This is the first time I am trying to apply Fundamental Analysis on a stock. I am using Adam Khoo’s method, which has 8 criteria for screening for a Value stock. He covered the method in both his books, “Profit From the Panic” and “Secrets of Millionaire Investors“.
Criteria 1: History of Consistent Earnings and Cash Flow Growth
Here is the chart of the Net Income (Profits after Tax) of SMRT over the years. It shows a consistent growth in earnings.
Criteria 2: Durable Competitive Advantage
SMRT is a major transport service operator in Singapore. Operating the Mass Rapid Transit system except the Northeast Line. Her main competitor is Comfort DelGro. New competitors will have big resistance entering into the rail service as the railway tracks, tunnels and stations are expensive to replicate. This will give SMRT an undeterred edge and continue to prosper through her daily operations.
Criteria 3: Conservative Debt Financing
Based on the Financial Results released in Apr 09, SMRT has long term debt (or non-current liabilities) of $363.1M. With a Net Income of $162.7M, it has a long term debt to net income ratio of 2.2. It is considered to have conservative debt financing since the ratio is less than 3.
Criteria 4: High Return on Equity
The 09 report stated that the Returns On Equity (ROE) is 23.3%. The average ROE is 12. SMRT is outperforming in terms of ROE.
Criteria 5: High Free Cash Flow
SMRT was sitting on $12.5M of free cash flow in Apr 09. The Revenue was $905.6M and hence the ratio of free cash flow to revenue is 1.38%. A company is considered cash rich when the ratio is greater than 5%.
Criteria 6: Management is Holding/Buying Stock
Temasek Holdings is the major shareholder of SMRT and had increased her holdings from 54.99% to 55.06% on 29 Oct 09.
Criteria 7: Undervalued?
For the calculation of the intrinsic value of SMRT stock, I would need to find the projection of her cash flow from operations for the next 10 years. One way is to take average of projections from various analysis reports. As I do not subscribe to any reports, I will conveniently use the cash flow growth from 2008 to 2009 which happens to be 9.3%. I’ll use 8% for being on the conservative side. Using a discount factor of 5% for future cash flow, the intrinsic value of SMRT stock is calculated to be $1.26. Comparing the intrinsic value to the current share price of $1.80, SMRT appears to be overvalued.
Criteria 8: Stock Price is consolidating or on an uptrend
This is a one year view of SMRT stock price and the blue line is the 200-day Moving Average (MA). You can see the stock is on an uptrend and is already above the 200-day MA.
So is SMRT a good buy? It has fulfilled 6 out of 8 criteria. I feel that it has potential but it is not the right time to buy as the price assumed to be overvalued. Interested parties may have to monitor the earnings for the next few quarters and see if the projected cash flow is close enough.
Please note that this is not an investment advice or an invitation to invest in the company shares. Currently, I have no holding or any interest in this stock.
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perhaps you wanna take a closer look at the last quarter result and get a feel of the impact of partial opening of circle line has on its overall revenue. if im not wrong, it was meaningful. the full opening of circle line will bring a large swing into their coffers.
Hi Ryan, you may be right but I would doubt that the circle line will have shown it’s earnings in the latest quarter report. This is because the line is not in operation yet. In this post, I was just trying to demonstrate how to carry out a fundamental analysis on a stock.
Hi Alvin,
Correct, circle line is not opened yet. However, part of it is opened , which connects not only the circle line to northsouth line through Bishan station but also , the opened section connects the 2 lines to the northeast line. Thats why theres lots more human traffic in bishan station. This part of revenue was captured in the last qtr and it was meaningful number. These is good ‘investigative clue’ in fundamental analysis, every tiny detail counts particularly those that leads to a bigger picture. Because quite frankly, by the time the circle line is opened, and by the time everyone can see it for themselves, the analysts in town would probably have it in their spreadsheets and report out in the market, and buying then, would have been behind the curve. Fundamentalist work involves investigative work as well. Books dont teach this kinda lessons.
I agree with you Ryan that there must be some projection of earnings.
The difficulty is to make good enough guesswork that is close enough. This is the risk of uncertainty of the future that makes investment profitable.
Hope you are right that circle line will be very much profitable!
Hello,
Do take a look at the weekly chart for smrt. Using Elder’s system of divergence, did you see anything?
Is there divergence? I don see any. Please enlighten :)
No divergence man. This stock is in a multi week bull cycle. of course, slowly lah, if you know mrt trades. this is one of those fortified stocks. 2008 hardly made a dent on the stk. in fact it just broke out from 2007 high.
whether you realised it or not, smrt is an environmental theme. public transport get enhanced, more people use mrt (also shift from bus to mrt, tks to circle line), carbon footprint per capita drop. thus the urgency to complete the circle lines. its a stk you buy and keep in the vault.
True. It survived the 07 crash pretty well.
Hi alvin,
There is a potential class A bearish divergence happening on weekly. It might take some time to unravel since the time frame is weekly. Keyword is potential. It might fizzle out.
I’m waiting for it to go long again.