Nagacorp (literal fortress with a moat)

I never ask if the market is going to go up or down, because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: “Where is the one that is lowest priced in relation to what I believe it’s worth?” John Templeton, November 1978

NagaCorp Ltd (3918.HK) operates the largest casino hotel in Cambodia, NagaWorld, and its shares have been among the top performers on the Hong Kong stock market since listing in 2006. (read here and here)

NagaCorp operates NagaWorld, the only licensed casino in Phnom Penh, Cambodia. The company holds a 70 year license running through 2065 that includes a 41 year monopoly within a 200 kilometer (120 mile) radius of capital city Phnom Penh. NagaCorp’s monopoly on Phnom Penh casinos not due to expire until 2035.
NagaCorp added a $9m aircraft to its arsenal in 2012 to better enable VIPs from Malaysia, Indonesia, Thailand, China and Vietnam to patronize NagaWorld.
It pays no taxes on income or gaming revenue, just a fixed fee that last year amounted to 1.5% of total revenue.
Labor and construction costs are low compared with other Asian gaming destinations. “We built a facility for $200 million that would have cost $1.5 billion in Macau.
Its 700 rooms include 500 five-star accommodations at less than half of Macau prices.
The company’s management said the extension of NagaWorld should be operational during the first half of 2017. Naga2 will include more than 1,000 new hotel rooms and luxury suites, up to 300 gaming tables and 500 electronic gaming machines. The casino operator also announced that it has already started preliminary planning work on Naga3, “which would be located in-between the current NagaWorld and Naga 2 facilities” (read here)

“In business, competition is never as healthy as total domination.” Peter Lynch

A pristine balance sheet:

Profit Margin: 33.66%
Operating Margin: 34.13%
Return on Equity: 22.21%
Total Cash: 194.46M
Total Debt: 0
Current Ratio: 6.68
Trailing Annual Dividend Yield: 5.34% (at least 4%)*
EPS growth(5 years): 37.20
Cash flow from Operating Activities increasing through the years.

*Peter Lynch, John Neff, and James O’Shaughnessy, have incorporated dividend yield into their strategies in various ways. Ideally dividend yield is to be at least 4%. Nagacorp’s dividend yield is definitely more than 4%.

It is noted that ROE (Return on Equity) is an important factor to consider. Buffett, for example, has targeted companies that have averaged an ROE of at least 15% over the past decade. Well I don’t really have that 10 year data on hand now (let’s make do with approx. 5 years).

NagaCorp Historical Return on Equity (TTM) Data (see here)

Dec. 31, 2010: 14.46%
Dec. 31, 2011: 26.64%
Dec. 31, 2012: 29.22%
Dec. 31, 2013: 24.05%
June 30, 2014: 23.915

Average 5 years ROE: 23.657% Definitely more than the required 15%.

However is the price too high?

“I’ve never bought a stock unless, in my view, it was on sale.” John Neff

Market Cap: HK$13,733 m
Enterprise Value: HK$12,151 m
Price/Book: 2.80
Enterprise Value/Trailing EBITDA: 8.8 (read here and here)
P/E (Trailing 12m) : 12.9
Trailing PEG: 10.35/ 37.20 = 0.28
Est. PEG Ratio: 1.3093 (Source: Bloomberg Business)

At first glance, the market cap is unfortunately higher than the enterprise value.
Price to book is also high (prefer less than 1).
EV/EBITDA is less than 10 which is good.
Relatively low P/E compared to peers.
High PEG (more than 1)

Overall more cons (3 nos) than pros (2 nos).

Intrinsic Value:

Let’s do a quick calculation on their intrinsic value. First let’s look at their 5 years earning growth.

We are going to use a timeframe of 5 years from now for this purpose. Given EPS and a PE ratio, stock price can easily be calculated for any company. Using the below formula. (actually I just got the results after keying in the figures in this website :P)

F = P(1+R)^N

where:

F = the future EPS
P = the starting (present) EPS
R = compound growth rate
N = number of years in the future (5)

EPS growth (5 yrs) for Nagacorp is 37.20. Starting EPS: 0.0660.

Estimated Future EPS is 0.32.

Estimated Historical PE (source from here): 11.8

Estimated Intrinsic Value vs Current Stock Price:

Looking at the above, the current stock price is unfortunately higher than the calculated intrinsic value ($3.75).

In addition, as mentioned earlier, the market cap is higher than enterprise value, the price to book is slightly high and high PEG.

So in gist, price wise it is not ideal yet.

However, all these are not an exact science (esp. with my estimation of future P/E). Future events may change the fundamentals of the company – cash flow change, management changes etc. Well but at the very least, for the moment it satisfies my curiosity.