Saturday, March 14, 2015

This Stock Is Trading At Less Than Its Cash Value

In a bullish market environment, it is often difficult to find companies that provide a long term value with a sufficient margin of safety to shareholders. Because of such difficulties, we often see investors pumping up their investment in commonly seek blue chip companies that pushes its price to earnings to record high these few years. 

However, this stock that I will be highlighting shortly is currently trading at a massive discount. In fact, they are trading at less than what the cash value is worth on their books. I will be explaining in further detail later.




The company mentioned is Fu Yu Corporation



To give a little bit of the background, the company was started in 1978 and listed in the SGX in 1995. The company is in the business of moulding, fabrication and assembly and they are a pioneer in the major plastics manufacturer. I will not be doing a thorough review on the company’s foundation at this moment as this is only a preliminary review at the start. Should you be interested to explore further, please conduct your own due diligence on the company.

The company reported its full year 2014 results recently on the last day of February. 


Balance Sheet Strength

On their balance sheet, the one thing that stands out is their huge cash and cash equivalent balance which amounted to $83 million, which is equivalent to 11 cents / share. The current share price is trading at 10.8 cents / share, which is already a discount to what they have for the cash on their book.     

The company has also positive net working capital excluding cash. This means that current assets (excluding cash) are able to cover the provision for current liabilities, mostly through their trade receivables. 

The other thing which stands out on their balance sheet is the zero (or very minimal) borrowings they have. With an impending interest rate increase, the non-leverage factor is definitely a plus to have on any company’s book right now. 

The NAV of the stock is currently at 23.23 cents / share. 


Sign of Value or Trap? 

With such a strong balance sheet, you wonder why the company is trading at such massive discounts to what their worth are. 

One main reason is due to its volatile business nature, which has seen its gross profit margin for its core business going up and down over the past few years. The business has also been suffering net losses from 2006 to 2009 as well as in 2011. The company had started to turn profits only recently from 2012 onwards. Obviously, this is a turnaround play to see if they can sustain the profits.

Despite the massive cash they are holding on their book, the company has also not paid dividends to shareholders since 2007. My guess is probably in view of the recent losses and volatility, the management wants to wait it out until profitability is sustained before they are willing to resume the dividends payout. Nevertheless, the key is to look out on the margin of their business. 

In terms of cashflow, the company seems to operate in a competitive industry where it needs to spend quite a bit of their cash to ramp up on capital expenditure. A quick look at their PPE and you can probably see how much equipment they are using to operate on their business. Return on assets doesn’t look extremely fantastic though they are relatively reasonable given the industry they are in.


This is still a stock in review on my watchlist. I'll be watching out on further news regarding their project orders and margins.

13 comments:

  1. I'd be wary of such companies. If it's a case where you can't buy over the entire company and liquidate it for the cash, then we must assume the Company destroys cash and shareholder value in a business which is earning a very low return versus its cost of capital, and which requires significant amounts of working capital. So the cash on the Balance Sheet is probably a historical number - literally and figuratively!

    ReplyDelete
    Replies
    1. Hi MW

      The liquidation value is attractive at this point in time. As far as the business or management is concerned, they can always choose to destroy the value at their discretion, so this is probably the other risks that investors need to take note of.

      Delete
  2. Hey B,

    When I bought into Hock Lian Seng last year in Aug, it's cash asset value was $0.245 and I paid $0.27. It took a bit of deliberating to take that trade because I was wondering too if it was a trap. However, HLS pays dividends so I felt a bit more comfortable holding onto this asset play while the market rediscovers it more accurate value. That turned out quite okay for me.

    The EV/EBITDA of Fu Yu by my calculations looks to be.... 2.1?! If Fu Yu paid dividends, I'll be all up in this, but like you pointed out, they haven't paid out a dividend since 2007. My only concern is how minority shareholders might ever unlock that value. Without dividends, the only route is the market pricing it higher. Seems like there is no good exit plan here because if it gets cheaper, it just makes it look even better based on the rationale of entering in the first place.

    It's a very interesting find though!

    ReplyDelete
    Replies
    1. Hi GMGH

      There's a lot of play on the existing net cash value and as investors that is the kind of risk that we are subject to. It's always a suspect for value trap when the stock is trading that low. Looking back, it's always easy to say damn I knew I was buying in with a lot of margin of safety but it's never the case.

      The EBITDA for their latest results came in pretty strong. The gross margins came in very very strong, which is one of the reason why I want to wait out at least until the Q1 2015 to see if it can be maintained. The company has not debt with plenty of cash, so it's possible we are seeing a very attractive EV/EBITDA staring at our eyes here.

      My main concern is not so much on the dividends, but rather if they are able to maintain the profits and margins they have in 2014. If they can, then the cash would increase further by the end of 2015 which would increase their attractiveness.

      Delete
  3. Hi B, for this counter, my friendly advice is to dig more for the qualitative factors then the numbers, especially into the mgmt. happy digging.

    ReplyDelete
    Replies
    1. Hi Mr. IPO

      For such pennies counter, the management is usually key to unlocking the value of the shareholders. I admit I have not gone into researching more to the management aspect but should I decide to be vested in this, I will definitely take some time to do so.

      Delete
  4. I think it's just a matter of acknowledging the risks in investing. There's nothing wrong with B's investment thesis.

    For B's case, the risk is getting stuck in a value trap while searching for cigar butts. For others buying into high quality businesses, the risk is buying in at too high a valuation.

    There are always risks in whatever stock we invest. If we can diversify accordingly to manage the risks, we should be fine!

    BTW, interesting stock!

    ReplyDelete
    Replies
    1. Hi BfGf

      Same thoughts with you :)

      I think when we are staring at such an attractive valuation, we always think whether that is real or merely a value trap these days. If they are real, then why are the others not realizing its value? Pretty tricky these days but this is where multi baggers could be found i guess ;)

      Delete
  5. If we take away net gain due to properties sale and forex, Fuyu will still making a loss of $6.3M in 2013.

    Agree that it is asset play. One will need extra patient to wait for Mr. market to recognize its value. It needs a catalyst, i.e. profit.

    ReplyDelete
    Replies
    1. Hi Ray

      Thanks for your input. I didn't realize about the one off gain from the properties sale. If that's the case, then we need to exclude that out since they will be non-recurring in nature.

      Delete
  6. Will 3D printing be a threat to them?

    ReplyDelete
    Replies
    1. 3D printing will not be a threat. It will in fact augment their business and perhaps unlock value in the prototyping and design process which could strengthen margins on providing upstream services with higher value-add.

      Delete
    2. This comment has been removed by the author.

      Delete

UA-57154194-1