Will OSK Holdings Meet the Criteria of Warren Buffet's Value Investing?

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One of Warren Buffet's most famous sayings is "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." Another one is "If the business does well, the stock eventually follows." The third is "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

So how can he tell us to never lose money? Buffett invests only in companies he thoroughly researches and understands. He doesn't go into an investment prepared to lose, and neither should you. There is never any complete protection from this happening. It happens to the best of us but the trick is to try to minimize your loses and protect yourself by giving yourself a margin of safety.

A margin of safety is principle of investing that in which you the investor will only purchase a stock if it is below its intrinsic value. Warren Buffett used to insist on a 50% margin of safety when he was purchasing stocks.

Next question. What is intrinsic value? How do we Calculate a Margin of Safety?

First, we will need to calculate the intrinsic value and then we can apply a margin of safety to the number to determine at what point we could buy.

In “The Intelligent Investor” Graham suggests a formula for finding value was multiplying the current earnings per share by the sum of 8.5 and twice the sum of the anticipated growth rate

V = EPS X (8.5 + 2G)

The formula was later revised in 1962 to include a required rate of return. It now looks like this.

Final Adjusted Benjamin Graham Formula


margin of safety investing equation
Where:

IV = intrinsic value
EPS = Earnings per share
G = Expected growth rate
Y = current yield of 10 year Treasury notes.

Also according to the theory, any stock price below the Graham number is considered undervalued and thus worth investing in. The formula is as follows:






So, what is the Graham Number and Formula for OSK Holdings Berhad?

EPS = 17.45 sen = RM 0.1745

 Book value = NTA = RM 2.30

 Graham number = RM 3.005

 Therefore even apply with 50% of safety of margin, it's still at RM 1.50 in which the current share price of RM 0.96 is considered undervalued. Therefore it's meet with Rule 1 & Rule 2 of Warren Buffet.

 How about the Graham Formula of the intrinsic value?

EPS = 17.45 sen
G = Expected growth rate = As according to OSK annual report 2018 of Compound annual growth rate (last 5 years) CAGR = 10%
Y = current yield of 10 year Treasury notes = 1.69%

 IV = 17.45 x (7 + 10) x 4.4 /1.69 = RM 7.72

 Let said we used the current yield of 10 year Treasury notes during at high about 3.2%

 IV = 17.45 x (7+10) x 4.4/3.2 = RM 4.079

 Therefore it's with very high intrinsic value and even with 50% of safety margin it's still with intrinsic value between RM 2.04 to RM 3.86.

 Therefore it's met Warren Buffet expectation of "If the business does well, the stock eventually follows."

 The PEG ratio is considered to be an indicator of a stock's true value, and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued.

 What is PEG for OSK Holdings Berhad?

 Price per share = RM 0.96
EPS = 17.45 sen
G = Expected growth rate = As according to OSK annual report 2018 of Compound annual growth rate (last 5 years) CAGR = 10%

 PEG ratio = PE/EPS Growth = 0.516 

 (So analysis used one year comparison on EPS growth of about 4-5% therefore the PEG around 1)

 The PEG ratio is used to determine a stock's value while also factoring in the company's expected earnings growth and is thought to provide a more complete picture than the P/E ratio. The PEG ratio is considered to be an indicator of a stock's true value, and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued. The PEG for a given company may differ significantly from one reported source to another, depending on which growth estimate is used in the calculation, such as one-year or three-year projected growth.

 Analysis of PEG ratio based on OSK annual report 2018 of Compound annual growth rate (last 5 years) CAGR = 10%


With the PEG well below 1, also indicated that "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."


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