It is all about icapital.biz Berhad (ICAP, 5108) (Part 3)

In normal listed companies, one would look at forecasted earnings or growth and use P/E, ROCE, dividend yield or discounted cash flow to derive fair value. Below enclose with my own fundamental research upon ICAP base on its annual reports.

However, I do not think the abovementioned methods are appropriate methods to evaluate the fair valuation of ICAP. The earnings that we normally read from the annual report do not reveal the up to date information about the valuation of ICAP’s portfolio. To value ICAP, an investor should look at its net asset value (“NAV”) which is mark-to-market. If ICAP did a good job with excellent stock picks, eventually its NAV will be higher than its accounting value or the so-called net asset value. ICAP updates its NAV every Thursday at the announcement section of Bursa Malaysia.

Hence, the market price of ICAP should keep track to the NAV. If NAV was RM2, the market price should be traded at RM2 as well. As we know the market sentiment can vary from fundamental, the market price of ICAP will probably diverge from its NAV. It could be traded either above (in premium) or below (in discount) its NAV. By taking the advantage of this unique feature to trade in premium or discount to its NAV, we can outperform ICAP’s return. Effectively we can claim that our return is better than the return that TTB has achieved. How?

Assume that ICAP is able to double its fund size in 5 years since its listing. So its NAV raised from RM1 to RM2 of which indicates a return CAGR of 15% (= [RM2/RM1]^[1/5] – 1). As we know ICAP was listed at a mild bear market, so its share price could be traded in discount at RM0.90, which is 10% discount to its NAV during its 1st day of listing. After 5 years, the share market is in a bull run and instead of trading at RM2 on par to its NAV after 5 years, ICAP is traded 20% in premium at RM2.40. As an investor of ICAP, we can take the advantage to acquire ICAP shares in discount and dispose ICAP shares in premium and reward ourselves a handsome CAGR return at 22% (= [RM2.4/0.9]^[1/5] – 1), which is better than the return of 15% that achieved by TTB! This is the reason I mentioned in the previous thread that I will acquire additional ICAP shares whenever its share price is traded in discount to its NAV.

Furthermore, not to forget that ICAP is a CEF that adopts value investing. In other words, the shares that it holds are already at a discount to their long-term values. So when the market price of ICAP is traded in discount to its NAV, this means investors are getting a second level of discount.

For ICAP, there are few more added safety attractions as ICAP is not allowed to engage into derivatives and short-selling. In addition, ICAP is a conservative fund that no borrowing is allowed unless the fund is permitted by the shareholders. Just look at the number of hedge funds which are over leveraged and have recently gone bust, we should just sleep soundly by investing into ICAP.

Finally, at a NAV at RM1.86, ICAP is able to achieve a CAGR of 18% (= [RM1.86/RM1]^[1/3.75] - 1) which is greatly outperformed as compare to the benchmark KLCI index (KLCI index is performed poorly since last 3.75 years which only gained a CAGR of 6%). Below shows the rise in the NAV of ICAP versus KLCI index.

In a conclusion, we should prove to ourselves that serious long term value investing on KLCI does work and it is now a good time to invest into ICAP as it is market price is traded in discount of at RM1.79 (its NAV is RM1.86 according to last week announcement, so you are getting a discount of 3.8% if you buy ICAP now). Switch your unit trust funds to buy ICAP, attend its AGM and grow your wealth together with ICAP, this is all what I can advise to my friends and relatives.