Issue #19 - Value of a stock relative to MGS
It was observed that a company that consistently earns positive and increasing income gives investors confidence in projecting its future earning per share. Referring to previous issue, the projected EPS of SP Setia (annual growth rate of 4.57%) and IOI Property (annual growth rate of 10.63%) for the next 10 years are listed below. With such earning capability, how much are we willing to pay for a stock of SP Setia or IOI Property?
Stock of SP Setia or IOI Property here are viewed as investment vehicle for investors. If purchased at their market price indicated above, both companies are projected to earn a total of RM4.177 and RM13.085 per share respectively. On the other hand, the same amount money to purchase a stock of SP Setia or IOI Property earns RM2.395 or RM5.10 respectively if invested in a riskless fixed deposit with 5.03% interest (labeled as FD-A and FD-B). It is obvious that owning stocks gives better rate of return.
In order to receive the same amount of earnings by owning stocks, the riskless fixed deposit has to have an interest rate of 7.73% (FD-A) or 10.13% (FD-B). The above earnings comparison did not take into account of transaction fee incurred upon purchasing any stock.
The riskless fixed deposit used as comparison here refers to a government securities or more specifically Malaysian Government Securities (MGS).
"Government securities are defined as the obligation of the state in respect of borrowed money. They are generally transferable securities with a defined rate of interest and maturity date. MGS are medium-to long-term obligations, which were first issued by the Treasury in 1959, to finance public sector development programs. MGS are issued and managed by Bank Negara Malaysia on behalf of the Government of Malaysia. They are considered gilt-edged securities because they are borrowings of the government and issued for financing long-term government development projects. MGS are issued by auction and by subscription and are securities with interest payable semi-annually. The tenure of MGS is above one year and the coupon rate is determined by the weighted average of the successful yield." - extracted from http://www.mdex.com.my/education/edufmg5.htm.
Additional information on MGS can be found here:
Daily trading information - http://www.bnm.gov.my/index.php?ch=12&pg=589
MGS Rates - https://fast.bnm.gov.my
Projected earning per share (RM)
Years SP Setia IOI Prop FD-A** FD-B**
2015 0.507 1.977 0.296 0.630
2014 0.484 1.787 0.282 0.600
2013 0.463 1.616 0.268 0.571
2012 0.443 1.460 0.255 0.544
2011 0.424 1.320 0.243 0.518
2010 0.405 1.193 0.231 0.493
2009 0.387 1.079 0.220 0.469
2008 0.370 0.975 0.210 0.447
2007 0.354 0.881 0.200 0.425
2006 0.339 0.797 0.190 0.405
Total 4.177 13.085 2.395 5.100
2005 0.324 0.720 0.000 0.000
Price* 3.78 8.05 3.78 8.05
*as of 06/30/06
**Riskless fixed deposit with 5.03% interest
Stock of SP Setia or IOI Property here are viewed as investment vehicle for investors. If purchased at their market price indicated above, both companies are projected to earn a total of RM4.177 and RM13.085 per share respectively. On the other hand, the same amount money to purchase a stock of SP Setia or IOI Property earns RM2.395 or RM5.10 respectively if invested in a riskless fixed deposit with 5.03% interest (labeled as FD-A and FD-B). It is obvious that owning stocks gives better rate of return.
In order to receive the same amount of earnings by owning stocks, the riskless fixed deposit has to have an interest rate of 7.73% (FD-A) or 10.13% (FD-B). The above earnings comparison did not take into account of transaction fee incurred upon purchasing any stock.
The riskless fixed deposit used as comparison here refers to a government securities or more specifically Malaysian Government Securities (MGS).
"Government securities are defined as the obligation of the state in respect of borrowed money. They are generally transferable securities with a defined rate of interest and maturity date. MGS are medium-to long-term obligations, which were first issued by the Treasury in 1959, to finance public sector development programs. MGS are issued and managed by Bank Negara Malaysia on behalf of the Government of Malaysia. They are considered gilt-edged securities because they are borrowings of the government and issued for financing long-term government development projects. MGS are issued by auction and by subscription and are securities with interest payable semi-annually. The tenure of MGS is above one year and the coupon rate is determined by the weighted average of the successful yield." - extracted from http://www.mdex.com.my/education/edufmg5.htm.
Additional information on MGS can be found here:
Daily trading information - http://www.bnm.gov.my/index.php?ch=12&pg=589
MGS Rates - https://fast.bnm.gov.my
posted by yitping at 9:53 PM
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