CapitalandMall Trust

It has been more than 5 months since I presented the value of stocks. I had used an example on the stock CapitalandMall Trust (CMT) whose former name was CapitalMall Trust.

During that time, the stock was trading at about $2.22 per share. Using the software which I had written, the distribution per unit (DPU) growth rate was about 2.04%. By plugging the growth rate of 2.04%, I obtained an intrinsic value of $2.22 per share which was exactly the Friday closing price the day before. The software is not a forecasting tool used to predict the share price or to do magical wonders to tell us what price to buy or sell. It is a convenient tool to carry out calculations that might be complex in nature to help us in our stock valuation process. And if need be, we can simply change some parameters to help us assess the value of share price in more realistic circumstances.

Figure 1: Intrinsic value using DPU growth rate of 2.04%.

Figure 1: Intrinsic value using DPU growth rate of 2.04%.

However, I had warned that we had used a DPU growth rate of 2.04%, and we had obtained a price of $2.22. It is important to note that circumstances might change and the DPU growth rate might no longer be possible, for example, an increase in interest rates might result in less rental collection by CMT. Hence, assuming a DPU growth rate of 2.04% may be dangerously optimistic. Even at this growth rate the price was $2.22 and there seemed to be little upside as the on-going trading price was already at $2.22. Unless we are sure that CMT can continue to increase its DPU, my view was there was little upside. To be on the safe side, I would conservatively input my DPU growth rate as zero. (Of course, I could go into the other extreme of using a negative growth rate, but I think it would be not be realistic as rental tends to increase over time. Furthermore, how negative do we want the input to be as it could never end). Given that the general interest rate environment was perking up, I would input a zero DPU growth rate.

Figure 2: Intrinsic value using a zero growth rate.

Figure 2: Intrinsic value using a zero growth rate.

When I changed the DPU growth rate to zero, and I obtained a value of $1.75. I explained that if I want to buy CMT, I would at least wait for the price to sink to $1.75 to pick up the stock in order to buy the stock below intrinsic value. Otherwise, I would not be picking a stock below intrinsic value. At that time, it was trading at a premium. Pehaps, at that time in early April 2015, the time was still very good. There appeared to be a wide disbelief because the price difference was a whopping $0.47 difference. It meant that the stock has to sink about 21% from $2.22 to $1.75 going forward before we could pick it up at good value.

With the rout in the stock market in China as well as uncertainties around the world, the share price of CMT had sunk about $0.33 and closed at a price of $1.89 last Friday, a decrease of about 15%. While the stock price was still about 14 cents above the obtained intrinsic value, it showed that value is emerging as stock prices fall.

(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

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