We just finished reading "The Intelligent Investor" by Benjamin Graham and we will distill the important points for our dear readers. Actually, we didn't really agree on some of Benjamin's methodology because some of it was purely rule of thumb. BUT....given that he has "reproduced" some pretty fine students, see below table and compare their performance with our Dear Aberdeen Fund Managers and Dear Fidelity Fund Managers from Fundsupermart Singapore, we have becomed believers. Shameful.....still taking management fees somemore!
Benjamin Graham came up with a simple rule of thumb formula to find the intrinsic value of a stock. (Seriously, don't ask us how its derived...its baffling! )

Intrinsic Value per share= Current ( Normal) Earnings per share X (8.5 + twice the expected annual growth rate of earnings per share)

Take note that (Normal ) means one-off , extraordinary items that inflate or deflate the earning for that year are excluded. These extraordinary items refers to, for example, currency gains, sale of property ( non-property company), or anything that is earned/loss from activities not in the normal course of a company's business. The expected annual growth rate of earnings is the growth expected over the next 7 to 10 years.

Let's use it on Singapore Airport Terminal Services shall we!


We pulled the data out from Reuters ( let's assume reuters is correct) You can get the reuters data from http://www.reuters.com/. ( thats if you believe in their data!) Look at Diluted EPS Excluding ExtraOrd Items. Note that we use Diluted EPS instead of Basic EPS as the former is a more accurate reflection on the ownership of a company. Read here for a better explanation.
This data has already excluded extra-ordinary items therefore it is "normal".

Expected Annual Growth rate of SATS earnings per share = 0! ( based on the above. It might be negative too.. but let's be good shall we! This is up to your assumptions. Garbage in Garbage out!)

Current (Normal) Earnings per share = 0.179

Intrinsic Value per share = 0.179 X ( 8.5 + 0) = $1.512

Current value now as of 24 Nov 2008 = $1.37

Wow...let's go chiong and buy! Wait. Benjamin Graham also mentioned about the Margin of Safety! So is $1.512 - $1.37 = $0.142 a good discount and sufficient as a Margin of Safety?? Use your own judgement!.

As Graham once wrote: " You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."