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.
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
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.
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.
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.
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.
Valuations By Top Leading Brokers
- FREE Special Report: Cemex Holdings Philippines, Inc. (CHP) IPO Analysis #1
- Special Report: Cemex Holdings Philippines, Inc. (CHP) IPO Analysis #1 (by Unicapital Securities)
- Special Report: Cemex Holdings Philippines, Inc. (CHP) IPO Analysis #2 (by AB Capital Securities)
- Special Report: Cemex Holdings Philippines, Inc. (CHP) IPO Analysis #3 (by Regina Capital Dev’t Corp.)
- Special Report: Cemex Holdings Philippines, Inc. (CHP) IPO Analysis #4 (by RCBC Securities)