Fervent value investors ascribing to Benjamin Graham’s investment philosophy may sometimes find opportunities in stocks stigmatised by the market. Such stocks of companies often trade down to bargain levels due to their involvement in accounting irregularities, financial distress or protracted litigation. An example of such stocks in our local context, Vibrant Group recently plunged almost 50 percent from $0.33 to $0.17 after discovering possible accounting fraud in its BlackGold International subsidiary just a year after acquiring the company.
While most investors would tend to avoid stocks of such companies, some are good investments for those that remain steadfast in face of bad news (think Warren Buffet and Wells Fargo). Notwithstanding those impacted by “bad news”, there are still some financially sound companies that are trading at depressed valuations. Such are those that are overlooked by the market, perhaps because of unexciting or boring business operations, a general decline in business or just simply negative market sentiments.
Yet, for the patient investor who believes that the stock market “is a voting machine in the short-term, but a weighing machine the long run”, such stocks would eventually realise their intrinsic value and potentially bring them enormous rewards. In this article, we screened for 3 stocks that are trading at overwhelming discounts to their book value.
Fuji Offset Plates Manufacturing
Fuji Offset Plates Manufacturing (FOPM) is one of the longest-listed company on Singapore Exchange. Established in 1982, the company listed on our local bourse in 1988. After ceasing its trading operation for printing plates, FOPM is currently only engaged in the manufacturing and sale of rotogravure printing cylinders.
Since peaking at $0.64 in 2014, the stock traded downwards to a multi-year low of $0.19 today. The decline in FOPM’s share price is not entirely unfounded. After all, the print media industry is gradually walking into the sunset and investors fear that the business would become obsolete.
To be fair, while increasingly competitive, rotogravure cylinder manufacturing is unlikely to go extinct in the foreseeable future, given that rotogravure printing is the fastest known flexographic printing process. In other words, the print media is not the only major customer for FOPM’s cylinders and the company could still rely on other customers such as from the packaging industry.
What really stood out for FOPM though is despite its gradually declining financial performance, the company has been faithfully paying dividends of $0.003 per share annually since 2009. A deeper look into its balance sheet and investors should see the value proposition.
Based on the latest 1H18 results, FOPM has a cash balance of $7.5 million, against total borrowings of $0.2 million. This translates to a net cash position of $7.3 million, representing about 77 percent of its market capitalisation of $9.5 million. With a public float of 17.6 percent, the company could be taken private at just about $2 million, assuming a 20-percent premium to the prevailing share price.
Bearing in mind, the company also own other assets apart from cash. Total assets stood at $32.6 million against total liabilities of just $1.7 million. Based on book value per share of about $0.56, FOPM is trading at 34 percent of its book value.
HL Global Enterprises
HL Global Enterprises (HL Global) is an investment holding company that operates hospitality asset Copthorne Hotel Cameron Highlands. The group also hold stakes in management services company to Equatorial Hotel Shanghai and some parcels of land.
Previously, HL Global was a pretty hard-sell as it appeared more of a value trap. For one, the company’s financial performance were lacklustre for the past five years until the group disposed of its 100-percent interest in LKN International which held deemed stakes in serviced apartments located in Shanghai’s central district and 60-percent interest in loss-making Copthorne Hotel Qingdao in 2017. The move injected a load of cash into the group and revitalise its balance sheet.
As of 1H18, cash balance of HL Global stood at $62.8 million, after HL Global repaid off most of its debts. Currently, the group’s total borrowings amounted to $1.1 million, translating to a net cash position of $61.7 million. With a market capitalisation of $37.4 million, the stock is valued below the cash assets!
Due to the disposal of the underperforming assets, the group finally reported reasonable earnings, generating $2 million of net profit on $6.8 million revenue in 1H18. Assuming the group maintains its earnings in 2H18, net profit of $4 million would translate into earnings per share of $0.043. At the current share price of $0.40, this would represent a forward-FY18 price-to-earnings of just 9.3 times. Regardless, the stock is trading at a discount of 51.8 percent discount to its book value per share.
Far East Group
Far East Group is engaged in the sourcing and distribution of commercial air-conditioning, light industrial refrigeration systems and heat exchanges in South East Asia. Since listing in end-2011, the company has been profitable for four out of six financial years and during which would have paid dividends.
However, given the maturity of the industry, business growth was tepid and revenue only grew from $33.8 million from FY11 to $37.1 million in FY17. Meanwhile, the business also gradually became less profitable and net profit plummeted from $2.5 million to $0.4 million over the same period.
Understandably, the stock also fell out of favour amongst investors, plunging from above $0.20 in 2013 to as low as $0.038 in 2017. To unlock value for its investors, and partly due to a less lucrative industry, the group in 1H18 sold two properties in Singapore and one property in Malaysia. This helped to prop up its balance sheet and inject cash to the company. Meanwhile, it declared a one-off interim dividend of $0.03 per share which represented a yield of 16.7 percent based on closing price of $0.18 per share on 13 August 2018.
After adjusting for the dividend distribution, the cash balance in Far East Group’s balance sheet would be around $23.1 million. On the other hand, total borrowings were also pared down from $36.2 million in FY17 to $25.9 million, translating to a small net debt position of $2.9 million.
Unlike the other HL Global and FOPM, the deep bargain of Far East Group was recognised by the market and the stock managed to rally back to $0.159 as of 3 September 2018. However, at the current valuation, the stock is still priced at a significant discount. Based on its net asset value per share of $0.464, Far East Group is trading at a price-to-book value of just 0.34 times.
Money Is Made In The Waiting
As Warren Buffet quipped, “Investing is simple, but not easy.” The fear of missing out on the next big thing often tempts investors to chase the market. For disciplined and patient investors though, the value strategy simply takes time to pay off. The great deviation between the price and underlying value of the 3 stocks above should eventually be recognised should rationality prevail. Patience is a virtue, especially in the stock market.