CHP Stock Review: Opportunity Or Misfortune? | The Investing Engineer

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CHP Stock Review: Opportunity Or Misfortune?

CHP’s stock price has dropped significantly due to the performance it reported in the 4th quarter of 2016.

​Today, many investors are now worried and think that they made a bad investment decision when they bought the stock around P11 to P12 per share last year.

​If you’re an existing CHP holder, should you really be worried now that it’s trading at around P8.xx per share?

​On the other hand, does CHP constitute a buying opportunity for value investors at this price range?

​In this post, we’ll try to answer those questions. We’ll forecast CHP’s earnings to come up with a financial model so that we can make an intelligent decision if the company presents a buying opportunity or not.

​If you’re thinking of buying CHP to take advantage of the decline or planning to average down or cut your losses and move on, then this post is definitely for you.

So let’s begin.​

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​Profit & Loss Forecast

Fig. 1 Profit & Loss forecast (CHP)

Profit & Loss forecast assumptions

  • Revenue y-o-y % growth: 19%
  • Cost of goods sold as a % of Revenue: 48.5%
  • Operating expenses as a % of Revenue: 33%
  • Depreciation and amortization as a % of Revenue: 4.10%
  • Interest expenses: I’ll assume that CHP will not incur any debt for the next 5 years.
  • Extraordinary items: No assumptions will be made for this income/expense because of its complex nature.
  • Taxes: 24.5%

The Net Income for the final forecast period was estimated at P5.195 billion. We’ll later use this figure to get the intrinsic value.

​Balance Sheet Forecast

Fig. 2 Balance Sheet Forecast (CHP)

Balance Sheet forecast assumptions

  • Days receivables (DSO): 12.23
  • Days inventory (DIO): 73.21
  • Days payables (DPO): 72.63
  • Property, Plant & Equipment as a % of Revenue: 71.67%
  • Other assets as a % of Revenue: 22.66%Other liabilities as a % of Revenue: 47.29%
  • Intangibles and financial assets will remain flat all throughout the forecast period.
  • No additional debt will be incurred throughout the forecast.

Cash Flow Forecast

chp stock review

Fig. 3 Cash Flow Forecast (CHP)

Since the Unlevered Free Cash Flow (UFCF) forecast for FY2016 is negative, I instead used the Earnings Valuation model – almost the same as the P/E Model I’ve been using.

Earnings Valuation

Fig. 4 Earnings Valuation (CHP)

Intrinsic value calculation assumptions

  • Discount rate (WACC): 10%
  • Margin of safety: 25%

If you’ll buy CHP at P8.91 per share, upside would drop to 6.60% which in my opinion, is not an attractive return.

​Sensitivity Analysis

Fig. 5 Sensitivity Analysis (CHP)

This is an analysis made using different discount rates and margin of safety assumptions. For example, at 7% DR and 20% MOS, intrinsic value per share would fall at P8.76.

​Final Thoughts

​If you’re optimistic at CHP, changing some of the assumptions will most likely increase the intrinsic value. The assumptions I used are based on base case scenarios.

​In my opinion, the stock is already attractive at these prices if you have an optimistic view on CHP’s performance. We have yet to see the FY2016 income report. If the numbers are attractive, we might see investor confidence go back.

​This reminds me of Warren Buffett. He once said this;

What’s nice about investing is you don’t have to swing at pitches. You can watch pitches come in one inch above or one inch below your navel and you don’t have to swing. No umpire is going to call you out. You can wait for the pitch you want. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard. I’ve never swung at a ball while it’s still in the pitcher’s glove. - Warren Buffett

That’s it for this CHP stock review. If you have some ideas to share, I love to hear them in the comments section below.

Happy investing!​

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  • Jun says:

    Hi Mark,

    Thanks for this very informative CEMEX stock evaluation. It helps to define my investing decision.

    As always, congratulations for a job well done.

    Best Regards,

    Jun

  • cayenne river says:

    price of chp is down to 7.03… do i need to sell my stocks? i will have 14,000 php loss 🙁 🙁 🙁

    • Hi Cayenne river,

      Put it in this perspective, if you bought the stock because;
      a) You believe that the company has excellent management who can turn things around and care about the shareholders.
      b) You have studied the predictability of its earnings and you have a high degree of certainty that the company will increase its earnings for a period of 5 to 10 years.
      c) You believe that the price is cheap based on earnings power and its ability to retain earnings to increase shareholder value.
      … then you shouldn’t sell. You should buy more to increase your holdings.

      Now, if you bought the stock because you think that;
      a) The price will rise based on investor sentiments within a few months or a year.
      b) You saw an opportunity to make a quick buck based on technical indicators.
      c) Any other reasons that you think will make you a decent gain in the short-term.
      … then think about it and decide if cutting losses and switching to other stocks will benefit you more.

      CHP is an IPO with the main purpose of the proceeds is to pay-off restructuring costs taken out from loans and I think they mentioned it in their prospectus that no amount of the IPO proceeds will be used to acquire businesses or expand operations. This is why I stayed away from it for now. (http://investingengineer.com/cemex-stock-review/)

      Investing’s main goal is to compound your money. To do that, you should invest in companies that increase shareholder wealth. Investing in businesses that burn cash, take on more debt, issue more equity but fails to increase earnings and shareholder value will not compound your money in the long-term.

      You alone can decide on what to do with your investments.

      I hope this helps and good luck.

  • Rosh says:

    Hi Mark,
    Thank you for this article and your reply to comments.
    I buy shares for long term investment and bought Cemex thinking it has good earnings potential for the next 5-10 years. Being overseas, it is very difficult to find articles for CHP and the local cement market.
    However, seeing it drop to 4.84 now, I have to decide if I should add more to my portfolio. Do you have any updates or thoughts on the company or its Antipolo expansion you can share? Also, can you explain the margin of safety / discount rate table you have? I kind of use WACC for DR to analyse, but don’t know how to relate it to MOS.

    And again, thank you for this informative blog.

    • Hi Rosh,

      The problem with CHP is that the revenues and income are underperforming since the 4Q2016 filings. We already know that if there’s a decrease in income, there would be a decrease in retained earnings and the company would not be able to grow its assets or pay out its debts as we expect. An undervalued stock would reach fair value if it can grow its earnings, book value and free cash in a manner that’s ABOVE expectations.

      In my opinion, buying more shares to a company that’s having a difficult time generating earnings is pure speculation. Another reason to stay away is that even at its low price, the company’s P/E (TTM) is 24.95 – high compared to the industry median of 17.51.

      CHP is undervalued YES, but is it a good buy? In my opinion, NO. Why? Because the company is underperforming. It’s better to buy a stock priced at 1.2x its book value if its performing above industry standards and investor expectations rather than buy a stock that’s having problems generating income.

      WACC is also called the discount rate, or for us, the returns we want to get in our investments. WACC is used by banks to value companies. But to make it simpler, we can just ignore it and set our own value which of course totally depends on you. MOS is the safety net – the price you buy that’s less than the intrinsic value. I used sensitivity analysis to correlate the two so you get different buy prices. You can use the prices you get to determine your range of values of where to buy. I personally use 50% MOS and 12% discount rate to get my intrinsic values. It’s up to you to decide.

      Hope this helps. 🙂

  • Truly Success says:

    Follow your heart, no one knows, even the best technical and fundamentalist trader/investor. Learn from Great Investor (Warren), buy shares in the company at undervalued prices. Remember the customers (100K Million+++ Filipinos), projects… government infrastructures….this is your time to shine…Invest wisely, monthly, and be mature in your portfolio strategy. CHP will shock you when it goes Up…Remember the DD, starts from 3 PHP then boom to 80 PHP….who knows, so many peoples are the great mindset, cautious but limited in future perspective…..Look Ahead, my friend…Grab it! God bless CHP and your strategy!

    • Thanks for your wonderful feedback. 🙂

    • ken says:

      how long shall the investors wait? CHP will only be able to move once company completes debt payment and might be only attractive upon seeing an income after it. Kindly note that DD had a different goal which is into expansion and it is very visible. If investors dropped this stock and invested in strong blue chips which are the main drivers of the pse index, then they could have a feeling of relief by now. it is ok to loose if you are a multi-million peso investor but for people who are investing in small tranches, a thousand peso loss matters to them. as of now, remove your money while you still can and put it in an uptrend stock. Slow but sure gain, no daily stress. Stress can be fatal. you will feel happy and stress free even before CHP starts to gain.

      • Truly Success says:

        You have a point because you felt the sorrow of your decision before in CHP, right now… The people and market psychology are both the same…..debt here, debt there, pay here, pay there. But still okay because the people still breathing. The same with the market, now down, tomorrow up. Look ahead of the product and the Philippine nation vision. Don’t stick with limited vision. For the small investor….follow your heart again, I know you are doing the trading…and not a wise long-term investor. Be bold enough to your decision. I respect your opinion. Diversify…

  • ken says:

    daily torture, eh? I am half investor and half trader, I have real estate, mutual funds and insurance. There is what you call good or bad investment. If it is bad and fundamentals or purpose of stock offering is bad, then stay away. not all subscribers are big time and not all emotions are the same. Some may need money immediately and some are not, but they are forced to believe. For this, brother bo should provide solutions on how not to prolong the problem.

    • Truly Success says:

      Trading in stock market is much safer than trading in forex. Remember the power of cost averaging…for my opinion, don’t sell any shares in companies that have the capacity to expand in the near future. If you bought shares in CHP with an average price of 9/share, don’t quit and sell right away…Still, invest in 10 – 20 % monthly until you reach the desired average price on what the current market is. Enjoy the other 80% of your money to invest in the companies that you think you can gain and enjoy the profit right away. Be patient and wise…Stock market experienced the downtrend in the history about 50…70…80, negative. But then, it bounces back, because of the life continuous, demand and population increasing day by day.

  • Her0ne says:

    hello Mark,
    Any update for this year in CHP?

    • Hi Her0ne,

      Actually in my opinion, mas okay ang performance ni HLCM compared kay CHP and EAGLE. The profits CHP make and the returns it generate is not good. HLCM is good however it seems overvalued as of now. Still speculative pa rin si CHP and wala pa sila dividends unlike kay HLCM kahit maghold ka may returns ka makuha yearly (and medyo mataas siya at around 9%+). I would still stay away muna dito and probably the cement industry in particular hangga’t wala ako nakikitang improvement sa industry as a whole.

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