Eksons - neither here nor there

[i4value]

I invested in Eksons years ago when it was a plywood play. Since then the plywood business had done badly. The company had diversified into property development hoping to counter-act the poor plywood business.

Unfortunately, the property market got soft. So both sectors did badly for the past few years.

There are signs of the Malaysian property market turning around. But the plywood remains challenging as Eksons do not own any timber concession. So it has to source for timber for its plywood production.

Think of this as a palm oil mill business where the mill does not own any plantation but has to buy the palm fruits from the plantation companies. I think there is no independent palm oil mill business in Malaysia.

But Eksons plywood business is like the palm oil mill company. Is there a future for this business model?

Eksons is an interesting company and as such I covered it as a case study in my value investing book. 




FYI I have compile the key ideas in the book into infographic format that is readily available from Do you really want to master value investing?

[i4value]

Is Eksons a value trap?

Eksons is a Bursa ex-plywood manufacturer cum property developer trading below its Graham Net Net.

The Graham Net Net (current assets minus total liabilities) is often used as a short-hand for liquidation value. The general view is that if you have a company trading very much below its Graham Net Net, you have found an investment opportunity.
Eksons is currently trading at RM 0.52 per share compared to its Graham Net Net of RM 2.02. You may think that this is a bargain.

But Eksons currently does not have any significant operations and is a cash holding company. This makes it a cash-holding value trap.

A value trap is a company that appears cheap but instead of being a bargain turns out to be a dud. Normally if you have a Graham Net Net, it is not a value trap. But this applies only if there are operations.

For a company with lots of cash but without significant operations, you have to assess it differently. This is the case with Eksons

For details on how I assessed this company, go to Eksons is now a value trap (Oct 2023) https://www.i4value.asia/2023/10/eksons-....html#more

[i4value]

You have a stock portfolio to provide a balanced and risk-adjusted exposure to the stock market. But for this to be meaningful, the stocks in a portfolio should not be correlated.

This then begs the question. Should the correlation be based on price or some business fundamentals?

The ideal case is to have uncorrelated stocks based on both market price and business performance correlation. This will achieve diversification that addresses short-term volatility and aligns with long-term investment objectives.

In practice I seldom look at price correlation in my stock portfolio as I am a long-term investor. I look at correlation from a business perspective.

Take the example of Eksons and Annum. The former was in the plywood and is now attempting to be a bigger property developer. Annum is still in the plywood business although it has ventured into construction and property development. The top chart shows the ROE trends of the 2 companies while the bottom chart shows the share price trend.



Should they be in the same portfolio?

[i4value]

You may think that a company with lots of cash can be a good thing. Afterall many would not challenge the mantra that “cash is king”

But in the case of Eksons, you may have to think differently. As of the end of 2023, Eksons had about 2/3 of its total assets held in cash and short term securities. The huge cash position is because the company had scaled down its plywood business and its property development business had yet to scale up.

So it ended with tons of cash where a significant amount is now invested in securities. Unless they have a Warren Buffett in the company, you should worry about whether this is an effective deployment of cash.

My point is that the large cash holding is because of the lack of operations. This large cash holding has been there for many years. I used to think it was a good thing. But if a company is holding onto cash for years, it may not be a good thing. In this case, cash is actually a value trap. https://www.i4value.asia/2023/10/eksons-....html#more

[i4value]

Bursa Malaysia Eksons used to have 2 business segments – timber (mfg of veneer and plywood) and property development. But in early 2023, it closed down the timber business. At the same time, there is no new property development projects. The company is merely selling off its stocks of plywood and unsold properties.

But the company is cash rich due to the closing down of the timber business. It has RM274 million in cash or cash equivalent (investment securities) as of Dec 2023. But cash can also be a value trap as explained in page 21 of INVEST where I have an updated valuation.