I have received 3 questions on LPI Capital Bhd (LPI) from a subscriber of mine at DividendVault.com. The questions are sent to me in screenshots and Mandarin. So here, let me translate them into English for the benefit of all: 


Focus: LPI’s Shareholdings in PBB

Source: Public Bank Bhd (PBB)’s Annual Reports (2009-2021)


Question 1:
Did LPI invest in PBB or is it the other way around? 

The answer is the former. 

LPI invested in PBB and is the ninth largest shareholder of PBB in 2021. The way to find this information is to check PBB’s annual reports where it revealed its 30 largest shareholders on an annual basis under ‘Analysis of Shareholders’. 

Source: PBB’s Annual Report 2021


So in 2021, PBB has paid out 15.2 sen in dividends per share (DPS). Therefore, it means that LPI had earned RM 32.3 million in dividends from PBB. 


Question 2: 
Why was there a huge increase in LPI’s shareholdings in PBB? 

This is because PBB completed its issuance of 4 bonus shares to 1 share (4:1) as of 27 January 2021. Hence, PBB’s existing investors would own 5,000 shares, for every 1,000 shares invested. 

In theory, there should not be a change in investment value after its issuance of bonus share. Let me illustrate: 

Let’s say I owned 1,000 shares of PBB where each was at RM 20 per share, after the bonus issue, I would now have 5,000 shares of PBB where each share is at a price of RM 4. Thus, my investment value in PBB should remain the same which is at RM 20,000, after receiving my bonus shares. 


Total Investment Value: (Before Bonus Issue)
= Number of Shares x Market Price 
= 1,000 shares x RM 20 a share 
= RM 20,000


Total Investment Value: (After Bonus Issue)
= Number of Shares x Market Price 
= 5,000 shares x RM 4 a share 
= RM 20,000


In practice, a bonus issue such as this would make PBB more affordable, thus, it should enable more participation to buy and sell PBB among local investors. So, the benefit derived for PBB out of this is – ‘improved trading liquidity’. 

From LPI’s view, I’m sure investors would be happy as long as PBB’s finances are solid and has the capability to continue growing into the future. 

Hence, the increase in LPI’s shareholdings in PBB is due to PBB’s 4:1 bonus issue on 27 January 2021. 


Focus: Market Cap, Stock Price, Earnings, EPS and P/E Ratio

Source: LPI Capital Bhd (LPI)’s Annual Reports (2010-2021)


Question 3 is about understanding the relationship between: 


a. Stock Price 
b. Market Capitalisation (Market Cap) 
c. Shareholders’ Earnings 
d. Earnings per Share (EPS)


Part 1: 

For a start, we need to know that LPI completed two issuances of bonus shares; the first was a 2:1 bonus issue in 2015 and the second was a 1:5 in 2018. So, LPI had increased its number of shares issued twice as follows: 

a. From 221.3 million shares in 2014 to 332.0 million shares in 2015. 
b. From 332.0 million shares in 2017 to 398.4 million shares in 2018. 


From LPI, it provided: 

Source: LPI Capital Bhd (LPI)’s Annual Report 2021


We can see that LPI’s market cap had increased from RM 3.2 billion in 2012 to a total of RM 5.6 billion in 2021. But, its stock price remained relatively flat at RM 14-18 a share in that 10-year period. The question is, ‘Why?’. 

Obviously, the answer lies in its two issues of bonus shares in 2015 and 2018. 

But here, let me explain. 


Part 2: 

First, the relationship between stock price and market cap is as follows: 


Market Cap = Stock Price x Number of Ordinary Shares Issued. 

So in 2012, LPI’s closing stock price was RM 14.54 a share. LPI had 221.3 million ordinary shares issued at that time. Thus, its market cap was RM 3.22 billion, as reported in its annual report shown above: 


Market Cap (2012) 
= Stock Price x Number of Ordinary Shares Issued. 
= RM 14.54 a share x 221.324 million shares 
= RM 3.218051 billion (as reported above)


In 2021, LPI’s closing stock price was RM 14.06 a share. This time, LPI had 398.4 million ordinary shares issued. Thus, LPI’s market cap was RM 5.60 billion and it is calculated as follows: 


Market Cap (2021) 
= Stock Price x Number of Ordinary Shares Issued. 
= RM 14.06 a share x 398.383 million shares 
= RM 5.601265 billion (as reported above)


Well, what does it mean? 

It means LPI’s closing stock prices in its annual report 2021 was not adjusted for its bonus issue in 2015 and 2018. 

These closing stock prices would be different from LPI’s closing stock prices that were plotted at Google Finance. This is because at Google Finance, its price had been adjusted for LPI’s bonus issue in 2015 and 2018. 

LPI’s stock price performance over the long-term is as follows:

Source: Google Finance


So, how do we adjust these closing stock prices for its two bonus issues? 

Well, the answer is simple. 

We can take LPI’s market caps and divide them with its latest number of shares, which is 398.4 million shares. By doing so, we’ll have LPI’s adjusted stock prices, which is presented in the following page. 

These prices should match the ones presented at Google Finance and it is more reflective of LPI’s long-term financial results: 

Calculated based on data sourced from LPI’s Annual Report 2021


Part 3: 

Now, let’s move onto shareholders’ earnings and earnings per share (EPS). 

The relationship between them is as follows: 


EPS = Shareholders’ Earnings / Number of Ordinary Shares Issued 

or 

Shareholders’ Earnings = EPS x Number of Ordinary Shares Issued


Here, let’s connect some dots: 


Market Cap = Stock Price x Number of Ordinary Shares Issued. 
Stock Price = Market Cap / Number of Ordinary Shares Issued. 

Shareholders’ Earnings = EPS x Number of Ordinary Shares Issued. 
EPS = Shareholders’ Earnings / Number of Ordinary Shares Issued. 


So, there are two methods to calculate P/E Ratio: 

Method 1: P/E Ratio = Stock Price / EPS
Method 2: P/E Ratio = Market Cap / Shareholders’ Earnings

Relationships between Stock Price, Market Cap, Earnings, EPS and P/E Ratio


You may take some time to comprehend their relationships. Now, let’s just focus on LPI’s financial results in 2021: 


Market Cap = RM 5,601.255 million 
Closing Stock Price = RM 14.06
Shareholders’ Earnings = RM 344.679 million 
Earnings per Share (EPS) = 86.5 sen


So, let’s calculate its P/E Ratio using Method 1 and Method 2: 


Method 1
= Stock Price / EPS
= RM 14.06 / RM 0.865 
= 16.25


Method 2
= Market Cap / Shareholders’ Earnings
= RM 5,601.255 million / RM 344.679 million 
= 16.25


At the end, we would have similar P/E Ratio figures for both methods. 


Part 4: 

Before I calculate the past historical P/E Ratio for LPI in 2012-2021, I made a key adjustment to its past shareholders’ earnings figures, which is to eliminate each years’ realized gains / losses, from any sales of its assets. Personally, these gains are not important as they don’t contribute to LPI’s future earnings. 

By doing so, I would have the following adjusted earnings and EPS figures: 

Calculated based on data sourced from LPI’s Annual Report 2012-2021


Part 5: 

By now, we have both the adjusted stock price (refer Part 2) and adjusted EPS. Here, we could calculate the past historical adjusted P/E Ratio for LPI in the past 10 years. These figures could then be used to value LPI. Once again, the formula to calculating adjusted P/E Ratio is as follows: 

Adjusted P/E Ratio = Adjusted Closing Stock Price / Adjusted EPS

Calculated based on data sourced from LPI’s Annual Report 2012-2021


Conclusion: 

From the 3 questions, we learnt about PBB’s bonus issue and more importantly, the relationships between market cap, stock price, earnings, EPS, and P/E Ratio. As an investor, I would say this mastery of these 5 terms is important, especially in advanced stock valuation. This is because it enables investors to value a stock accurately based on its actual income-production capabilities in the long run.

Here, if you wish to learn more on the art of stock investing, here’s a free training you can attend:

Link: How to Build a Stock Portfolio that Pays Increasing Dividends?


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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