Buying Shares of DBS, OCBC & UOB Banks in 2016

 

Warren Buffett stated the following:

 

Intrinsic value is the discounted value of the cash that can be taken out of a business during its remaining life.[p 224, The essays of Warren Buffett, 3rd edition]

 

Calculations of intrinsic value are necessarily imprecise and often seriously wrong. The more uncertain the future of a business, the more possibility there is that the calculation will be wildly off-base. [p 228 The essays of Warren Buffett, 3rd edition]

 

          Intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover---and this would apply even to Charlie and me----will almost inevitably come up with at least slightly different intrinsic value figures. [p 224 The essays of Warren Buffett, 3rd edition]

 

Buffett also gave shareholders an easy-to-understand tutorial on how a company’s intrinsic value could exceed its book value by the magic of economic goodwill. [“The Warren Buffett Way.” 3rd Edition ]

         That is: Intrinsic Value = Book Value + Economic Goodwill

                                         = [1 + x] Book Value

 

Phillip Securities has tabulated that the Average Market Price/Book Value1 from March 2002 to Dec 2015 of:

                  DBS   = 1.30

                  OCBC = 1.56

                  UOB   = 1.52

 

In the short-term the market is a voting machine and in the long-term, it is a weighting machine. This means that in the long-term, the Average Market Price could be in line with the Intrinsic Value.

 

So, we may conveniently assume that the:

         Intrinsic Value of DBS   = Average Market Price of DBS   = 1.30 Book Value of DBS

         Intrinsic Value of OCBC = Average Market Price of OCBC = 1.56 Book Value of OCBC

         Intrinsic Value of UOB   = Average Market Price of UOB  = 1.52 Book Value of UOB

        

Purchases of Berkshire that investors make at a price modestly above the level at which the company would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire’s directors will only authorize repurchases at a price they believe to be well below intrinsic value. [2014 annual report]

 

But in September 2011, Buffett announced that Berkshire would repurchase its shares at a price of up to 110% of Book Value. [p 185, The essays of Warren Buffett, 3rd edition]

 

And in May 1 2016 2:25 AM

Berkshire, says Buffett, would likely buy a lot of stock if the price falls below 1.2 times book value, but it won't "prop up" the price. Buffett: Anytime you can buy stock for less than its worth it benefits the shareholders, but it has to be by a large margin. [ http://www.cnbc.com/2016/04/30/warren-buffett-in-omaha-for-berkshires-annual-meeting.html]

 

However, to provide a cushion against mistakes, they will not actually buy an asset without at least a 25 percent discount in intrinsic value (this discount is their margin of safety). [p. 154  Charlie Munger---The Complete Investor”]

 

Whitney Tilson, a hedge fund manager, advised that to have better Margin of Safety the market price to pay for a company should be 50% discount in the Intrinsic Value. [https://www.youtube.com/watch?v=2-nf0_voeQ4]

 

Based on the above assumptions, the calculations for the market prices at which to purchase the DBS, OCBC and UOB shares for 2016 are tabulated below:

 

DBS Intrinsic Value (IV) = 1.30 Book Value (BV)

Repurchase at Price Well below IV

Investors Buy modestly above

           Investors to Purchase

Investors Buy modestly above

Investors to  Purchase

 

the well below IV 

 at Market Price

the well below IV

at Market Price

 

At 10% more

       with BV = $15.82

At 15% more

with BV = $15.82

 

 

[ST 23/2/16]

 

 

80%IV = 1.04BV

1.14BV

$18.03

1.20BV

$18.98

75% IV = 0.98BV

1.08BV

17.09

1.13

17.88

70% IV = 0.91BV

1.00BV

15.82

1.05

16.29

65% IV = 0.85BV

0.94BV

14.87

0.98

15.50

60% IV = 0.78BV

0.86BV

13.60

0.90

14.24

55% IV = 0.72BV

0.79BV

12.50

0.83

13.13

50% IV = 0.65BV

0.72BV

11.39

0.75

11.87

 

 

 

 

 

OCBC Intrinsic Value(IV) = 1.56 Book Value(BV)

Repurchase at Price Well below IV

Investors Buy modestly above

           Investors to Purchase

Investors Buy modestly above

    Investors to Purchase

 

the well below IV

 Buy    at      at Market Price 

the well below IV 

at Market Price

 

At 10% more

   with BV = $8.03

At 15% more

with BV = $8.03

 

 

[ST 18/2/16]

 

 

80% IV = 1.25BV

1.38BV

$11.08

1.44BV

$11.56

75% IV = 1.17BV

1.29BV

$10.36

1.35

10.84

70% IV = 1.09BV

1.20BV

$9.64

1.25

10.04

65% IV = 1.01BV

1.11BV

$8.91

1.16

9.31

60% IV = 0.94BV

1.03BV

$8.27

1.08

8.67

55% IV = 0.86BV

0.95BV

$7.63

0.99

7.95

50% IV = 0.78BV

0.86BV

$6.91

0.90

7.23

 

 

 

 

 

UOB Intrinsic Value(IV) = 1.52 Book Value(BV)

Repurchase at Price Well below IV

Investors Buy modestly above

           Investors to Purchase

Investors Buy modestly above

Investors to Purchase

 

the well below IV 

         at Market Price 

the well below IV 

 at Market Price

 

at 10% more

        with BV = $17.84

at 15% more

with BV = $17.84

 

 

[ST 17/2/16]

 

 

80% IV = 1.22BV

1.34BV

$23.91

1.40BV

$24.98

75% IV = 1.14BV

1.25BV

$22.30

1.31

23.37

70% IV = 1.06BV

1.17BV

$20.87

1.22

21.76

65% IV = 0.99BV

1.09BV

$19.45

1.14

20.34

60% IV = 0.91BV

1.00BV

$17.84

1.05

18.73

55% IV = 0.84BV

0.92BV

$16.41

0.97

17.30

50% IV = 0.76BV

0.84BV

$14.99

0.87

15.52

 

The more one can buy shares of great companies at prices materially below the Book Value, the greater will be the margin of safety one will enjoy.

 

For ease of remembrance, maybe one should aim for between current BV of 0.75 to 1.20. The lower the BV one pays, the more Margin of Safety one gets.

 

Note

1. Price to Book Value ratio valuation by Phillips Securities from 2002 to 2015.

 There are 3 bands: pink is p/b of 3x over the period, blue is p/b of 2x over the period and yellow is p/b of 1x over the period and white shows the actual price over the period. 


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