HupSteel

[lavue]

Is Hupsteel a modern day Graham net-net?

Cash and cash equivalents + inventories (discounted) + receivables (discounted) + available-for-sale financial assets (discounted) + investment properties (June 2012 OMV) = $168m

Total liabilities = $8.4m

Liquidation value = $159.6m

Market capitalization = $138m (627,370,610 shares*$0.22)

Why is Hupsteel trading below liquidation value? Logically, why wouldn't a businessman with $138m to spare buy up the company, then liquidate it and be rewarded for $22m for essentially doing nothing? Is the 70 year-old steel business which has spanned 3 generations worth nothing? Will Mr Market re-rate this stock to a price that is fair and reasonable, or at least closer to its NAV of $0.3298?

[Underdogger]

Similarly, if New Toyo's management decides to liquidate New Toyo and sell off all its parts in open market now, they can get back 41 cents versus current share price of only 27.5 cents (NAV = 36.5 cents).

All New Toyo's investment properties are valued at historical net value. The above also excludes all the redevelopment potential of land holdings by Tien Wah at Petaling Jaya Section 13.

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a. 54% Stake in Tien Wah market price at 2.07 RM = 43mil SD (cash if sold off in open stock market)
b. 34% stake of SAH = 34% x 160mil = 54.4 mil SD (cash)
c. New Toyo’s own investment properties = $25.64 mil (market valuation as at Dec 2011)
d. New Toyo's own specialty paper business = $3.64mil net profit for FY12 (Say 4 cents valuation)
e. New Toyo’s 49% stake in MEIL – RM $13.2mil for FY12. Assuming P/E of 7.4, we will get valuation of 8.9 cents

(a) to (e) give 41 cents in all

Is Hupsteel a modern day Graham net-net?

Cash and cash equivalents + inventories (discounted) + receivables (discounted) + available-for-sale financial assets (discounted) + investment properties (June 2012 OMV) = $168m

Total liabilities = $8.4m

Liquidation value = $159.6m

Market capitalization = $138m (627,370,610 shares*$0.22)

Why is Hupsteel trading below liquidation value? Logically, why wouldn't a businessman with $138m to spare buy up the company, then liquidate it and be rewarded for $22m for essentially doing nothing? Is the 70 year-old steel business which has spanned 3 generations worth nothing? Will Mr Market re-rate this stock to a price that is fair and reasonable, or at least closer to its NAV of $0.3298)?

[pianist]

in term of liquidity, new toyo stands out better i think

[paullow]

agreed abt hup poor liquidity. theoretically a billionaire can pay 138m to buy up hup n still be left with cash after breaking it up. but in practice, v v unlikely. y? lim family controls ard 60-70% of hup thru henfa n thru direct stakes n they are unlikely to agree to a 138m deal as they know their company is worth much more. so even if there is a willing party willing to mop up as much shares as possible fr open market, he still would be unlikely to buy up 30% of hup n gain control n do as he deem fit with its assets. unless one or two of lim brothers decides to sell their stakes, then different story. but that to me is highly unlikely because that wld mean breakup of henfa holding n hence likely family breakup.

[cif5000]

agreed abt hup poor liquidity. theoretically a billionaire can pay 138m to buy up hup n still be left with cash after breaking it up. but in practice, v v unlikely. y? lim family controls ard 60-70% of hup thru henfa n thru direct stakes n they are unlikely to agree to a 138m deal as they know their company is worth much more. so even if there is a willing party willing to mop up as much shares as possible fr open market, he still would be unlikely to buy up 30% of hup n gain control n do as he deem fit with its assets. unless one or two of lim brothers decides to sell their stakes, then different story. but that to me is highly unlikely.

You have summarized one very important factor that contributes to a "value trap". How long it takes for the trap to be broken (aka value to be unlocked) is anybody's guess. Doubling the investment can be great but to do it over a period of 10 years the investment performance becomes just ordinary. Value can be quantified. Not time in these cases. How else can we be sure of a satisfactory return - and especially so if dividends are not guaranteed? I am questioning myself why I didn't dump every share of Hupsteel during the run-up recently. Sentimental reasons maybe, but more likely I am holding on to hope - the hope that one day the value will be unlocked, the hope that the one day is becoming sooner rather than further away.

[d.o.g.]

Value can be quantified. Not time in these cases. How else can we be sure of a satisfactory return - and especially so if dividends are not guaranteed?

Indeed. I just did the numbers and came up with a $250m liquidation value if the business was shut down and everything was sold today (discounting inventory and receivables by one-third, and selling all the real estate at fair value). But this requires the Lim family to give up and call it a day. This is rather unlikely as 3 members of the Lim family are employed as executive directors and another 3 are employed as non-executive directors, plus 1 more as an executive director of a subsidiary. Clearly, the company provides not only dividends but also jobs to the family. Presumably it is also a source of pride/ego.

The "best" scenario for the minority shareholder is for a full liquidation. This would realize about $250m, a 90% premium to the current market value. But this is the worst scenario for the Lim family as it means a loss of livelihood and their business heritage. Therefore it will probably not happen.

The more likely scenarios are:

1. The investment properties are redeveloped and/or sold. They are carried at $14m but have a market value of $47m. If they are redeveloped they will probably sell for more. If the sale proceeds are paid out, all shareholders will benefit from the bonus one-off dividend. If the redeveloped properties are retained they should generate more rental income.

2. The business recovers and dividends are increased. The share price goes up accordingly.

Nobody knows when either scenario will happen. Those willing to wait indefinitely may be well rewarded... eventually. Remember that the Lim family much prefers #2...

[paullow]

hi cif5000, same here. i think i am idiot for not sellingduring this recent run up. to hold 750k worth of hup n wait is indeed a trying event, for god knows when this will be unlocked. worse if they stop paying dividend due to poor steel biz n hold off redev of their ppties. this is a long haul...perhaps very long haul

[CityFarmer]

For asset play, it is important to do right on valuation. It is equally important to do right on entry/exit timing. Otherwise it is really a long haul which is a drag on the return IMO

It seems there are quite a bit of asset plays in the market, but no all are right on timing. HupSteel is one of them IMO

To share my view, with respect.

[kuku]

there is some accumulation over this period of time. Once accumulate enuff think it might go further up... can break 27 n go higher anot is another issue. think 27 is crucial level to watch recently at 275 got short down, and long time ago there was some support at 27.. so if it maintain abv n break then will see higher price.. otherwise.. might only see minor movement up or stagnant here

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vested and waiting for the golden egg to hatch.....

[paullow]

i hope so. but it needs healthy eps to support price. to high pe is deterant to price run ups. anyway, i took chance to buy some more. i am a wisker away from koh boon hwee hupsteel share holding now.