Revisiting of trailing PEG and Intrinsic Value of Sarine Technologies Limited

I have previously calculated the trailing PEG and Intrinsic Value using a 6 years EPS growth rate of approx. 76.28. (from 2009 to 2014)

I stumbled upon the EPS history of Sarine dating back to 2003.

EPS history: read here or see below:

However if we use the EPS growth rate of over 12 years (from 2003 to 2014), the approx. growth rate becomes a normalised 15.8%.

1) Trailing PEG

If we do a quick trailing PEG using the 6 years EPS compound growth rate, will be 24.37/(76.28+0.04) = 0.32. It is a super low 0.32!

However if the compound growth rate is changed to 15.8 (12 years), the trailing PEG will be 24.37/(15.8+0.04) = 1.53.

2) Intrinsic Value

If we calculate the intrinsic value using a growth rate of 15.8%.

• Annual compound growth rate of EPS from 2003 (ESP: US cents 1.56) to 2014 (US cents 7.83) = 15.8% (12 years).
• Annual compound growth rate of EPS from 2008 (ESP: US cents 0.5) to 2014 (US cents 7.83) = 76.28% (6 years).

F = P(1+R)^N

• F = the future EPS
• P = the starting (present) EPS (SGD 0.10)
• R = compound growth rate (15.8%)
• N = number of years in the future (5)

Estimated future EPS: 0.21

I will be estimating the future PE of Sarine to be 19.2 (from Kim Eng report).

Future Stock Price

P=EPSxPE

• P = future stock price
• EPS = future EPS
• PE = future PE

Hence future stock price of Sarine is 0.21x 19.2= SGD 4.032

Intrinsic Value

P=F/(1+R)N

• P = present (intrinsic) value
• F = future stock price (4.032)
• R = MARR (15% or 0.15)
• N = Number of years (5)

Hence intrinsic value of Sarine is SGD 2.

Given the current stock price of Sarine at SGD 2.04, the margin of safety (percentage at which current stock price is lower than intrinsic value) is only -2%.

 

However, if we factor in the Annual Compound Growth Rate of the EPS as  76.28%, the intrinsic value would be way of the chart eg. SGD 16.2. The margin of safety (percentage at which current stock price is lower than intrinsic value) is 87%!

Neverthess, it would be safer to stick to a longer time period for the EPS growth eg. 15.8%. (The EPS in 2008 [0.5] and 2009 [0.46] were exceptionally low; which could explain the extremely high 5 year annual compound growth rate for the EPS)

Without doubt the margin of safety becomes significantly smaller when we factor in 11 – 12 years compound growth rate. The EPS in 2008 and 2009 appear to be blips in the earnings history, which is probably due to the great financial crisis (GFC) back then. In addition, Sarine seems to belong to a cyclical industry. The only consolation is that as compared to the past, Sarine has alter their sales model to have an element of recurring revenue (from its installed base of Galaxy family systems), and this recurring revenue has been growing. So hopefully this can translate to a more sustainable EPS even during recessionary phases in the economy.

This is unlike companies like Raffles Medical, Vicom and Diary Farm – whereby their EPS kept increasing even during the GFC. Read here.

For now having bought the stocks of Sarine during the recent price dip on 13 April 2015 – I shall hold and monitor first. And would only buy when the price dip further as it would present a much more comfortable margin of safety.