Post Reply
10241-10243 of 10243
Below is a post by volvo125 in the deleted 2022 Superstar thread. Had saved it as I found it very useful. Hope volvo will not mind that I reproduce it here in case others want to read it again.
YFH Valuation 1
volvo125 17-May-2022 23:29
Contact Follow Quote!
This ERM is actually new to me when I first saw it in Simplywall.st just days ago but I am familar with DCF, WACC and TV as I was involved in M& A activities. But their concepts are similar. DCF is for conventional coy while ERM is for asset mgt coy. By the way, I am also learning so we learn together.
The 1.8% risk free rate taken from the 5yr Govt bond is a given, meaning anyone can just buy the bond and sure get this 1.8% pa coupon return no risk. There are certainly 10yr, 20yr, 30yr Govt Bond but no investment appraisal decision will use the higher risk free rate for the longer period bond for reference. This 1.8% risk free rate for 5yr Govt bond is suffice to be use as a perpeture growth rate reference ( note : assumption of growth rate to perpecturity, not just 5 years. )
Ignore the the 1.44 valuation by Simplywall.st because Simplywall.st was using a kE [or required rate of return on equity, or discount rate] computed with the prevailing S& P equity risk premium adjusted for the " supposedly" relevant Capital mkt beta (or risk), giving a kE 6.19%. But Ren is not paying us an equity return of 6.19%. Ren is paying us much less. And Simplywall.st certainly not aware Ren has intention to pay out only 40% of NPAT as dividend ( you may take the receipt of this dividend as the return that you get on the equity, meaning this is the kE for you and me)
I shall lay this numbers out to you ( and all our friends here in this thread ) again using 40% payout policy, 8% ROE and 1st year NAV 1.08.
1. eps = 0.08*1.08 = 0.0864
2. 40% payout = 0.4*0.0864 = 0.03456 or 0.03456/1.08 = 3.2% [ this is the kE that you and I get, not 6.19% but 3.2% ]
3. ER (excess returns) = 0.0864 - 0.03456 = 0.05184 [ this excess value will go back into the asset pool [supposedly ... ideally] to capture new investments, meaning your NAV will go up by this amount.]
4. TV (terminal value) = 0.05184 / ( 3.2% -1.8% ) = 3.7 [ ok .... this is a another technical formula similar to the Gordon growth model, using dividend and cost of equity to determine the price. In this case, this sub model or formula within the ERM is trying to give a valuation to this Excess returns yoy (year on year) to perpetuity. The valuation (or terminal value) of this future stream of excess returns based 8% ROE, 3.2% kE will worth $3.7 per share today. Why use 3.2% minus 1.8% because 1.8% is a given, so the model wants to take the true return less risk free ]
5. YFH value = 1.08 + 3.7 = $4.78 per share
To help you understand even better, now I shall lay out the Yr 2 numbers for you on the same 8% ROE, 40% payout :-
1. NAV yr 2 = 1.08 + 0.05184 = 1.13184 [ see ... the NAV has just increased due to the plough back of excess returns. The asset backing per share has strengthened. For an asset mgt coy, it also means that you have more cash to deploy for new investments. ]
2. eps = 0.08 * 1.13184 = 0.09055 ( still 8% ROE but your eps in absolute dollar term is higher )
3. 40% payout = 0.03622 or 0.03622/1.13184 = 3.2% ( see ... still 3.2%, but your dividend on yr 2 is higher in absolute dollar term )
4. ER = 0.09055 - 0.03622 = 0.05433 ( the excess returns value is also higher due to the higher eps in absolute dollar term )
5. TV = 0.05433 / ( 3.2% - 1.8% ) = 3.88 ( the higher ER in yr 2 will give a higher TV )
6. YFH value = 1.13184 + 3.88 = $5.01 per share
Observations and Implications
1. YOY, the NAV will go up to the amount equivalent to the ER being ploughed back into the asset pool for reinvestment.
2. eps in absolute dollar term will go up yoy at the same 8% ROE, die die only 40% payout from NPAT.
3. ER will also go up yoy.
4. TV must go up yoy if ER is going up yoy on a constant 3.2% kE.
5. YFH equity value can only go up going forward
Now, someone here may ask what exactly the Yr 1 value $4.78 and Yr 2 $5.01 mean or imply ? Now, if YFH so decide to sell away the business and find a buyer in Yr 1 now, the $4.78 will be used as a reference for negotiation. If this happens in Yr 2, then $5.01 will apply because the coy asset base has grown.
Conclusions :-
1. So, NAV yoy higher + TV yoy higher will give a 2 prones value increase on YFH equity value yoy.
2. You will get more dividend in cash term yoy even though the payout is capped at a constant 40% NPAT or a translated 3.2% kE.
3. YFH will become an infinitely growing cash machine ....
The valuations worked out above are drawn from ERM (not me ...), the financial model used by the professional valuers to appraise Asset Mgt Coy in the Capital mkt. In the short run when little is known or not clear on how the YFH internal mechanics works, the stock market will accord a discount to the coy ..... some times very steep as in what we see today at 0.415 close. In the long run, the full effect on how all the above numbers will play out based on Mgt (Ren and Toe) committed 8% ROE ( i vaguely remember he mentioned target 8~10% ROE) and 40% payout policy.
This post very long ... so likely a lot of typo .... pardon.
Kindly ignore this post if you do think I am talking nonsense .....
YFH Valuation 1
volvo125 17-May-2022 23:29
Contact Follow Quote!
This ERM is actually new to me when I first saw it in Simplywall.st just days ago but I am familar with DCF, WACC and TV as I was involved in M& A activities. But their concepts are similar. DCF is for conventional coy while ERM is for asset mgt coy. By the way, I am also learning so we learn together.
The 1.8% risk free rate taken from the 5yr Govt bond is a given, meaning anyone can just buy the bond and sure get this 1.8% pa coupon return no risk. There are certainly 10yr, 20yr, 30yr Govt Bond but no investment appraisal decision will use the higher risk free rate for the longer period bond for reference. This 1.8% risk free rate for 5yr Govt bond is suffice to be use as a perpeture growth rate reference ( note : assumption of growth rate to perpecturity, not just 5 years. )
Ignore the the 1.44 valuation by Simplywall.st because Simplywall.st was using a kE [or required rate of return on equity, or discount rate] computed with the prevailing S& P equity risk premium adjusted for the " supposedly" relevant Capital mkt beta (or risk), giving a kE 6.19%. But Ren is not paying us an equity return of 6.19%. Ren is paying us much less. And Simplywall.st certainly not aware Ren has intention to pay out only 40% of NPAT as dividend ( you may take the receipt of this dividend as the return that you get on the equity, meaning this is the kE for you and me)
I shall lay this numbers out to you ( and all our friends here in this thread ) again using 40% payout policy, 8% ROE and 1st year NAV 1.08.
1. eps = 0.08*1.08 = 0.0864
2. 40% payout = 0.4*0.0864 = 0.03456 or 0.03456/1.08 = 3.2% [ this is the kE that you and I get, not 6.19% but 3.2% ]
3. ER (excess returns) = 0.0864 - 0.03456 = 0.05184 [ this excess value will go back into the asset pool [supposedly ... ideally] to capture new investments, meaning your NAV will go up by this amount.]
4. TV (terminal value) = 0.05184 / ( 3.2% -1.8% ) = 3.7 [ ok .... this is a another technical formula similar to the Gordon growth model, using dividend and cost of equity to determine the price. In this case, this sub model or formula within the ERM is trying to give a valuation to this Excess returns yoy (year on year) to perpetuity. The valuation (or terminal value) of this future stream of excess returns based 8% ROE, 3.2% kE will worth $3.7 per share today. Why use 3.2% minus 1.8% because 1.8% is a given, so the model wants to take the true return less risk free ]
5. YFH value = 1.08 + 3.7 = $4.78 per share
To help you understand even better, now I shall lay out the Yr 2 numbers for you on the same 8% ROE, 40% payout :-
1. NAV yr 2 = 1.08 + 0.05184 = 1.13184 [ see ... the NAV has just increased due to the plough back of excess returns. The asset backing per share has strengthened. For an asset mgt coy, it also means that you have more cash to deploy for new investments. ]
2. eps = 0.08 * 1.13184 = 0.09055 ( still 8% ROE but your eps in absolute dollar term is higher )
3. 40% payout = 0.03622 or 0.03622/1.13184 = 3.2% ( see ... still 3.2%, but your dividend on yr 2 is higher in absolute dollar term )
4. ER = 0.09055 - 0.03622 = 0.05433 ( the excess returns value is also higher due to the higher eps in absolute dollar term )
5. TV = 0.05433 / ( 3.2% - 1.8% ) = 3.88 ( the higher ER in yr 2 will give a higher TV )
6. YFH value = 1.13184 + 3.88 = $5.01 per share
Observations and Implications
1. YOY, the NAV will go up to the amount equivalent to the ER being ploughed back into the asset pool for reinvestment.
2. eps in absolute dollar term will go up yoy at the same 8% ROE, die die only 40% payout from NPAT.
3. ER will also go up yoy.
4. TV must go up yoy if ER is going up yoy on a constant 3.2% kE.
5. YFH equity value can only go up going forward
Now, someone here may ask what exactly the Yr 1 value $4.78 and Yr 2 $5.01 mean or imply ? Now, if YFH so decide to sell away the business and find a buyer in Yr 1 now, the $4.78 will be used as a reference for negotiation. If this happens in Yr 2, then $5.01 will apply because the coy asset base has grown.
Conclusions :-
1. So, NAV yoy higher + TV yoy higher will give a 2 prones value increase on YFH equity value yoy.
2. You will get more dividend in cash term yoy even though the payout is capped at a constant 40% NPAT or a translated 3.2% kE.
3. YFH will become an infinitely growing cash machine ....
The valuations worked out above are drawn from ERM (not me ...), the financial model used by the professional valuers to appraise Asset Mgt Coy in the Capital mkt. In the short run when little is known or not clear on how the YFH internal mechanics works, the stock market will accord a discount to the coy ..... some times very steep as in what we see today at 0.415 close. In the long run, the full effect on how all the above numbers will play out based on Mgt (Ren and Toe) committed 8% ROE ( i vaguely remember he mentioned target 8~10% ROE) and 40% payout policy.
This post very long ... so likely a lot of typo .... pardon.
Kindly ignore this post if you do think I am talking nonsense .....
Is there a need to compare the image and reputation of YFH with YSB? 🤔 After all, they are different businesses. Perhaps YFH might ride on the image and reputation of YSB at first. But YFH might have already built up its own image & reputation in the loans market over the years. Perhaps we might want to consider instead how much of the relevant core values that make YSB successful can be carried over to YFH.
ss2017. ( Date: 12-Jul-2022 22:30) Posted:
|
YFH can be attractive in various ways. Its zero debt and low PB attract value investors. Its dividend policy and potential dividend growth attract dividend investors. Its high market liquidity and volatility attract traders and short term investors.
Hope that posts in this new thread will share useful news and insights about YFH from these various angles, without running down others who view YFH from a different angle.
Hope that posts in this new thread will share useful news and insights about YFH from these various angles, without running down others who view YFH from a different angle.