Earthly valuation

Valuation is an art, indeed.

If you read the article on Bumi Armada, share price and valuation, you would be forgiven to scratch your head a bit.  The article appeared here, but the following are my comments:

Shares of Bumi Armada fell to a low of RM3.69 on Monday, the lowest since February 2013 as investors reacted to its weaker earnings and proposed rights issue to raise RM2.2bil.
Comment: Rule number 1, always remember that price is not the same as value.

Last Friday, Bumi Armada proposed a massive cash-call that could raise RM2.2bil and double its share base, as the offshore services firm prepares to spend RM6bil in capital expenditure over the next 12 to 18 months.

Comment: Raising cash does not automatically destroys the intrinsic value of a company, it is just another mode of financing. Yes, raising equity would increase the WACC of the company, but  it should be off-set by the incremental cash flows from the new projects which are going to use the rights issue proceeds.

The group also posted a 41% drop in first-quarter net profit to RM64.78mil from RM109.67mil a year earlier. It attributed it mainly due to change in earning recognition from operating leasing to finance leasing for its Kraken and C7 vessels coupled with lower activities in its T&I segment.

Comment:  This is why I am averse to PE or Earning Multiple based valuation. The drop in earnings above has nothing to to to how the business is operating. Changes in accounting treatments should not affect the cash flow of the company. But not if you were to use the PE multiple method, the intrinsic value of the company suddenly suffered a massive reduction.

"Hence, we maintain our Buy call with target price reduced from RM4.87 to RM4.70 based on sum-of-parts valuation method (versus price-to-earnings method previously) following the earnings revision," it said.

Comment: Hence a solution for some....

The above is not an advice to buy or sell the shares, merely educational points to ponder.