“Cash is king” is an expression which illustrates the superiority of cash as an asset for both individuals and businesses. While there are numerous reasons for both entities to hold cash, the most important reason is cash flow. Without the proper amount of cash on hand, one could land in trouble and be eventually forced into bankruptcy.
Over the years, businesses which have been profitable would have paid out some dividends while retaining some profits for working capital purposes. That said, not all companies are fully funded by internal resources and debt levels vary depending on the company’s management. However, in a rising interest rate environment, it is indeed preferable to fund operations with a larger proportion of internal resources so as to reduce exposure to interest rate risk.
In fact, the commonly used financial ratio, price-to-earnings (P/E) can be modified further into Ex-Cash P/E for net cash companies. While P/E is simply the current share price divided by the earnings per share, Ex-Cash P/E excludes the net cash per share from the current share price.
With net cash companies are gaining favour among investors, here are three net cash companies to keep a lookout for.
Listed on the Singapore Exchange in 2014, mm2 Asia is a producer of films and TV/online content. As a producer, mm2 Asia provides services that cover the entire filmmaking process, including securing financing, producing and distributing as well as securing advertising and sponsorship.
The group has recently diversified into the cinema management and operations business, having already completed the acquisition of cinema-related businesses in Malaysia and Hong Kong. Previously, mm2 Asia’s bid for 50 percent of Singapore’s Golden Village cinema business was blocked by Hong Kong’s Orange Sky Golden Harvest Entertainment (Holdings), but the group recently entered into an option agreement to acquire Cathay Cineplexes (Cathay) for $230 million.
The price tag takes into account Cathay’s adjusted earnings before interest depreciation and amortisation of $16.7 million for FY16, and estimated future revenue of $21 million from the new seven-screen Parkway Parade complex, which began operations in September 2017. The proposed acquisition, which will be funded entirely through funds raised through the group’s internal cash resources and borrowings, is targeted for completion on 24 November 2017.
Currently, mm2 Asia’s cash pile of $127.4 million and total debt of $74.1 million puts it in a net cash position of $50.6 million or $0.044 per share. While the net cash per share is not exactly significant against the group’s share price of $0.555, for a high growth company such as mm2 Asia, maintaining such a strong balance sheet position while delivering strong results is indeed impressive.
mm2 Asia recently reported stellar 2Q18 results with net profit more than doubling to $4.6 million on the back of a 45.4 percent growth in revenue. Although mm2 Asia’s shares are currently trading close to its all-time high at a trailing 12 months (TTM) P/E of 28.3 times, the TTM Ex-Cash P/E is lower at 26.1 times.
With a history of 35 years, PEC is an established plant and terminal engineering specialist providing project works, maintenance services and other related services to the oil and gas, petrochemical, oil and chemical terminals, and pharmaceutical industries in Asia and the Middle East.
PEC’s shares, which are relatively thinly traded, stealthily creeped up 23.6 percent since the beginning of the year – almost double that of the local benchmark Straits Times Index.
Despite the share price movement, the group’s news room has been rather quiet this year and there is little to support the gains other than having secured a seven-year maintenance contract for the Vietnam’s largest refinery and petrochemical plant early this year. Although the contract value was not disclosed, PEC will be providing long term daily maintenance services for the entire US$9 billion project which has a refining capacity of 10 million tons per year.
With cash and equivalents of $107 million and total debt of just $9.5 million, PEC also sits in a net cash position of $97.5 million or $0.383 per share.
If having net cash per share at more than half of its current share price of $0.68 is not attractive enough, PEC is also trading at a 20 percent discount to book value and offering a dividend yield of 2.9 percent. PEC’s shares are currently valued at a TTM P/E of 11 times, while TTM Ex-Cash P/E is only 4.8 times.
Chuan Hup Holdings
Initially founded in 1970 a tug and barge service provider to the PSA Corporation in Singapore, Chuan Hup Holdings (Chuan Hup) has repositioned itself into an investment company with a diversified portfolio of investments which include property development and electronics manufacturing services under PCI.
Another thinly traded company for most part of the year, Chuan Hup’s shares only saw an increase in trading volume after the release of its FY17 results, which reported over 70 percent increase in net profit. The investment holdings company’s shares have since recorded a year-to-date gain of 31.9 percent to $0.31, not including $0.03 in dividends – equivalent to a generous dividend payout ratio of 113 percent.
As at FY17, Chuan Hup held $114.6 million in cash and short term investments, while total debt was only $7.7 million, giving the group a net cash position of $106.9 million or $0.115 per share ($0.085 after accounting for dividends).
Chuan Hup’s shares are currently valued at an Ex-Cash P/E of 8.6 times as compared to its P/E of 11.8 times, and at a 30 percent discount to book value.
While net cash companies could be a good starting point in the hunt for value stocks, investors should also be aware that additional analysis on the business itself is required to ascertain that it is not a value trap.