By Gabriel Gan
Many people talk about value investing but fail to realize what real value is. Real value can come from either a stock market crash or when investors fail to spot a company’s growth potential.
It is not as difficult to call for a screaming buy on a blue chip when it is trading at 50 percent of its net asset value, but we cannot say the same for a growth company that is, at the same time, one that trades below its true value.
Blue Chip Good, Penny Bad
Investors have grown accustomed to the idea that we should always invest in tried and tested blue chip while some risk-takers may want to pit their investment skills by betting on penny stocks.
After all, stocks like Venture Corporation went IPO at $0.50 many years ago.
We have to agree that penny stocks are risky; penny stocks are penny stocks simply because the lack the fundamentals. But what if there are fundamentally-sound and/or fundamentally-improving stocks that deserve deeper investigation into?
Accrelist first caught our eyes not due to its earnings performance but rather because of its 65.82 percent-owned crown jewel – Jubilee Industries Holdings.
The latter is an Electronics Manufacturing Services (EMS) player serving customers in the automotive, consumer electronics and medical industries. Apart from being engaged in component distribution, which is its cash cow, the group is also involved in plastic injection moulding as well as mould design and fabrication.
Jubilee made a turnaround in March-FY18 with a profit attributable to shareholders of $932,000 followed by a four-fold surge in profit to $3.9 million in FY19. This took place despite the trade war starting in 2018.
While we expect earnings to moderate, it is noteworthy that the FY19 profit translates into a price-to-earnings (P/E) ratio of 6.6 times based on its last traded price of $0.10 post share consolidation.
On a price-to-book (P/B) basis, its shares are also trading at 2.5 times its book.
Source: Shares Investment Subscription Page
The current market capitalization of Jubilee Industries stands at $25 million. Assuming the valuation (P/E) goes higher to 7.5 times, which is a little bit closer to its larger listed peers, the “fair value” should see Jubilee’s market capitalization rise to $29.25 million.
Of the $29.25 million, Accrelist’s share of its 65.82 percent-owned subsidiary’s market capitalization, then the value ascribed to Accrelist based on this stake alone should be worth about $19.25 million.
On a sum-of-parts basis, Accrelist’s stake in Jubilee is worth $19.25 milllion. As it stood on 13 September, Accrelist’s market capitalization was only $14.56 million – a far cry from what it should be worth taking only into account its stake in Jubilee Industries.
Here comes the more interesting part about Accrelist – its latest foray into medical aesthetics, which means that all treatment can only be administered by trained doctors as opposed to beauticians.
Late last year, Accrelist made its first foray into this segment with the acquisition of a chain of aesthetic clinics (four outlets). By March 2019, or FY19, the aesthetics segment added a fifth clinic in Clementi Mall and made a pre-tax profit of around $1 million.
As at September 2019, A.M Aesthetics, or Accrelist Medical Aesthetics, from what we understand, it now has six clinics in Singapore (including the latest acquisition announced on 17 September that will earn the group $1.4 million). It ventured into Malaysia with a clinic in Penang, a joint venture-clinic in Kuala Lumpur with a Korean partner who specialized in dermatology and plastic surgery as well as a franchise clinic in Ipoh. Loosely speaking, Accrelist now has nine clinics altogether.
Four clinics made $1 million in pre-tax profit. If we were to simply extrapolate the numbers to the nine clinics, then Accrelist may earn more than $2 million in profit for FY2021 assuming it does not acquire more clinics.
Based on this potential $2 million worth of profit, we apply a simple P/E valuation method to determine its worth. Based on a very conservative valuation of 10-12 times, the market capitalization of A.M Aesthetics could easily be worth $20-$24 million.
Disregarding all other assets, Accrelist can easily be $42 million to $44 million in terms of its market capitalization based on what Jubilee ($19.25 million) and A.M Aesthetics ($24 million) are worth.
$44 million? 280 million shares in issue? How much per share? 15.7 cents?
Its last traded price on 17 September was 8.1 cents.