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07-04-2012, 10:18 PM
Business Times - 07 Apr 2012
SHOW ME THE MONEY
'If a business does well, the stock eventually follows'
So says Warren Buffett. And his insight rings true in some recent examples on the Singapore stock market
By TEH HOOI LING
SENIOR CORRESPONDENT
SOME three months ago, Venture Corp - a global electronics services provider which has been around for 28 years as it grew from a start-up to a multibillion-dollar business - was trading at an expected dividend yield of over 8 per cent. It has little debt, if any. Its forecast price-to-earnings multiple was 11 times, and the market was valuing it at its book value. That is, it was valued as much as the recorded price of its net assets, with no premium given to it as a company which can add value in its production process.
The average return on its assets in the last three years was 6.2 per cent, and its return on equity averaged 8.7 per cent.
Meanwhile, a smaller manufacturing company - Adampak, whose market cap was under $100 million - was trading at a yield of 11 per cent, assuming it maintained its previous year's dividend payout. The company - a manufacturer of high-quality labels, radio frequency identification (RFID) tags, seals and other die-cut components that serve the electronics, pharmaceutical, petroleum and other industries - has also been a rather consistent performer.
At the time, it was trading at 5.8 times its historical earnings, and 1.2 times its book value. It has little debt. Its return on assets amounted to 13.3 per cent on average in the past three years, while its return on equity was an impressive 16.5 per cent. Since its initial public offering in 2004 at 20 cents a share, Adampak has distributed 19.1 cents of dividends to its shareholders.
Meanwhile, Hong Fok - a property developer and investment holding company which owns the International Building, The Concourse and Henderson Industrial Park, and in Hong Kong, the Memo Building - was trading at just 30 per cent of its net asset value. Its return on assets and equity averaged 5.1 per cent and 8.8 per cent respectively.
Fast-forward to today. Venture Corp's share price has risen 31 per cent, from $6.52 on Jan 16 to $8.55 on Thursday. At the current price, the stock still comes with a dividend of 55 cents a share, which will be paid some time in May.
As for Adampak, private equity firm Navis Capital Partners last week announced an offer to privatise the company at 42 cents per share. On Thursday, the stock closed at 41.5 cents a share, up 50.9 per cent from its price of 27.5 cents on Jan 16.
Meanwhile, Hong Fok in February announced a 41 per cent jump in its net earnings to $140 million as it recognised sales revenue from the residential units of Concourse Skyline based on the percentage-of-completion method and sales revenue from its completed development properties. Last month also, it proposed a one-for-five bonus issue. Between Jan 16 and Thursday, Hong Fok's price has risen 47.6 per cent.
During the same period, the Straits Times Index rewarded investors with a return of 8.6 per cent.
The point of the above examples is that, eventually, the market will recognise the fundamentals of a business that is undervalued. Yes, in the beginning of the year, sentiment was bad. Everyone was fretting over how the crisis in the eurozone would be resolved; a bad turn of events would plunge the global financial markets into turmoil.
But the thing is, beyond the financial markets, there is a real economy that is still chugging along. People still need to buy IT gadgets for their communications, work and entertainment needs. Factories will still churn out products which need tags. Businesses still need to pay for their offices.
Yes, demand may be weak for a while. But as long as there is no structural change in the industry that the companies serve, as long as they are not too burdened by debt that their survivability is threatened, as long as the companies have shown resilience in previous economic downturns, more likely than not, these companies will still be around after the rough patch is over. At a low enough price, such companies are bargains.
Profit from folly
In this regard, it is useful to be reminded of the wisdom of one of the greatest investors of all time, Warren Buffett.
'If a business does well, the stock eventually follows,' he said.
'I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.'
'Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.'
'A public-opinion poll is no substitute for thought.'
So always do your own homework, and assess the attractiveness of a stock on your own - not what the market price is telling you about the stock.
Recently, a friend emailed me in response to the list of stocks I churn out every week. These are stocks with the highest dividend yields, lowest price-earnings ratios, lowest price-to-book ratios and stocks with the highest dividend yield but lowest price-to-book ratios.
He said a friend of his had alerted him to an undervalued stock with some potential share price catalyst this year.
The stock is United Engineers (UE). Since Jan 16, UE has risen 27 per cent. The company recently raised its dividends declared by 50 per cent for the full year 2011 to 15 cents. The stock will go ex-dividend on May 3. Based on its current share price of $2.50, the yield works out to 6 per cent. In addition, more dividends may be announced later this year.
In July, UE is celebrating its 100th anniversary. Going by the OCBC stable of companies (OCBC owns close to 30 per cent of UE) like WBL and Great Eastern, all paid special dividends when they celebrated their 100th anniversaries. So investors can possibly look forward to something additional this year.
On the valuation front, the stock is trading at 60 per cent of its net asset value. Among its property holdings are UE Square, a residential/commercial development on Clemenceau Avenue; UE Tech Park, a warehouse complex in Pandan Crescent; and UE Ville, a condominium on Kim Yam Road. Within UE Square, the group also runs the Park Avenue Suites serviced apartments.
By some estimates, the recurring revenue from rental and services is expected to increase from $140 million last year to about $200 million this year with contributions coming from Rochester retail mall, serviced apartments, and the award of the Temporary Occupation Permit of UE Bizhub in Changi Business Park in the next 1-2 months.
Other development projects UE is working on include the Bendemeer Road/Whampoa East Condominium, Austville Residences at Sengkang East Avenue/Buangkok Drive, and orchard- gateway at 277 Orchard Road (the former Specialists' Centre/Hotel Phoenix). However, these projects are not expected to contribute significantly to the group's development profit in 2012. In fact, its exposure to residential projects is a concern given the expected weakening of the market next year onwards.
E&C business
UE said it expects its turnover and operating profit for 2012 will mainly be derived from the engineering and construction (E&C) and the property rental and services segments.
UE spun off its E&C business as a separate listed entity last year. Since Jan 16, UE E&C - still a 70 per cent-owned subsidiary of UE - has seen its share price surge 78 per cent. Its market cap is now $187 million. This compares with UE's market cap of $720 million.
Based on a dividend of 15 cents a share, the cash needed to be distributed totalled about $43 million. According to the group's latest results, its property rental and services division generated results of $78 million. So if the dividend payments can be sustained, UE would qualify as yet another of those stocks that pay investors while they wait for some share price catalyst.
The writer is a CFA charterholder
SHOW ME THE MONEY
'If a business does well, the stock eventually follows'
So says Warren Buffett. And his insight rings true in some recent examples on the Singapore stock market
By TEH HOOI LING
SENIOR CORRESPONDENT
SOME three months ago, Venture Corp - a global electronics services provider which has been around for 28 years as it grew from a start-up to a multibillion-dollar business - was trading at an expected dividend yield of over 8 per cent. It has little debt, if any. Its forecast price-to-earnings multiple was 11 times, and the market was valuing it at its book value. That is, it was valued as much as the recorded price of its net assets, with no premium given to it as a company which can add value in its production process.
The average return on its assets in the last three years was 6.2 per cent, and its return on equity averaged 8.7 per cent.
Meanwhile, a smaller manufacturing company - Adampak, whose market cap was under $100 million - was trading at a yield of 11 per cent, assuming it maintained its previous year's dividend payout. The company - a manufacturer of high-quality labels, radio frequency identification (RFID) tags, seals and other die-cut components that serve the electronics, pharmaceutical, petroleum and other industries - has also been a rather consistent performer.
At the time, it was trading at 5.8 times its historical earnings, and 1.2 times its book value. It has little debt. Its return on assets amounted to 13.3 per cent on average in the past three years, while its return on equity was an impressive 16.5 per cent. Since its initial public offering in 2004 at 20 cents a share, Adampak has distributed 19.1 cents of dividends to its shareholders.
Meanwhile, Hong Fok - a property developer and investment holding company which owns the International Building, The Concourse and Henderson Industrial Park, and in Hong Kong, the Memo Building - was trading at just 30 per cent of its net asset value. Its return on assets and equity averaged 5.1 per cent and 8.8 per cent respectively.
Fast-forward to today. Venture Corp's share price has risen 31 per cent, from $6.52 on Jan 16 to $8.55 on Thursday. At the current price, the stock still comes with a dividend of 55 cents a share, which will be paid some time in May.
As for Adampak, private equity firm Navis Capital Partners last week announced an offer to privatise the company at 42 cents per share. On Thursday, the stock closed at 41.5 cents a share, up 50.9 per cent from its price of 27.5 cents on Jan 16.
Meanwhile, Hong Fok in February announced a 41 per cent jump in its net earnings to $140 million as it recognised sales revenue from the residential units of Concourse Skyline based on the percentage-of-completion method and sales revenue from its completed development properties. Last month also, it proposed a one-for-five bonus issue. Between Jan 16 and Thursday, Hong Fok's price has risen 47.6 per cent.
During the same period, the Straits Times Index rewarded investors with a return of 8.6 per cent.
The point of the above examples is that, eventually, the market will recognise the fundamentals of a business that is undervalued. Yes, in the beginning of the year, sentiment was bad. Everyone was fretting over how the crisis in the eurozone would be resolved; a bad turn of events would plunge the global financial markets into turmoil.
But the thing is, beyond the financial markets, there is a real economy that is still chugging along. People still need to buy IT gadgets for their communications, work and entertainment needs. Factories will still churn out products which need tags. Businesses still need to pay for their offices.
Yes, demand may be weak for a while. But as long as there is no structural change in the industry that the companies serve, as long as they are not too burdened by debt that their survivability is threatened, as long as the companies have shown resilience in previous economic downturns, more likely than not, these companies will still be around after the rough patch is over. At a low enough price, such companies are bargains.
Profit from folly
In this regard, it is useful to be reminded of the wisdom of one of the greatest investors of all time, Warren Buffett.
'If a business does well, the stock eventually follows,' he said.
'I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.'
'Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.'
'A public-opinion poll is no substitute for thought.'
So always do your own homework, and assess the attractiveness of a stock on your own - not what the market price is telling you about the stock.
Recently, a friend emailed me in response to the list of stocks I churn out every week. These are stocks with the highest dividend yields, lowest price-earnings ratios, lowest price-to-book ratios and stocks with the highest dividend yield but lowest price-to-book ratios.
He said a friend of his had alerted him to an undervalued stock with some potential share price catalyst this year.
The stock is United Engineers (UE). Since Jan 16, UE has risen 27 per cent. The company recently raised its dividends declared by 50 per cent for the full year 2011 to 15 cents. The stock will go ex-dividend on May 3. Based on its current share price of $2.50, the yield works out to 6 per cent. In addition, more dividends may be announced later this year.
In July, UE is celebrating its 100th anniversary. Going by the OCBC stable of companies (OCBC owns close to 30 per cent of UE) like WBL and Great Eastern, all paid special dividends when they celebrated their 100th anniversaries. So investors can possibly look forward to something additional this year.
On the valuation front, the stock is trading at 60 per cent of its net asset value. Among its property holdings are UE Square, a residential/commercial development on Clemenceau Avenue; UE Tech Park, a warehouse complex in Pandan Crescent; and UE Ville, a condominium on Kim Yam Road. Within UE Square, the group also runs the Park Avenue Suites serviced apartments.
By some estimates, the recurring revenue from rental and services is expected to increase from $140 million last year to about $200 million this year with contributions coming from Rochester retail mall, serviced apartments, and the award of the Temporary Occupation Permit of UE Bizhub in Changi Business Park in the next 1-2 months.
Other development projects UE is working on include the Bendemeer Road/Whampoa East Condominium, Austville Residences at Sengkang East Avenue/Buangkok Drive, and orchard- gateway at 277 Orchard Road (the former Specialists' Centre/Hotel Phoenix). However, these projects are not expected to contribute significantly to the group's development profit in 2012. In fact, its exposure to residential projects is a concern given the expected weakening of the market next year onwards.
E&C business
UE said it expects its turnover and operating profit for 2012 will mainly be derived from the engineering and construction (E&C) and the property rental and services segments.
UE spun off its E&C business as a separate listed entity last year. Since Jan 16, UE E&C - still a 70 per cent-owned subsidiary of UE - has seen its share price surge 78 per cent. Its market cap is now $187 million. This compares with UE's market cap of $720 million.
Based on a dividend of 15 cents a share, the cash needed to be distributed totalled about $43 million. According to the group's latest results, its property rental and services division generated results of $78 million. So if the dividend payments can be sustained, UE would qualify as yet another of those stocks that pay investors while they wait for some share price catalyst.
The writer is a CFA charterholder
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
