The share price of 2nd Chance has been in severe declining phase since its last failed execution of spinning their properties into Reits. The last time I blogged about this was back in January this year when the share price declined fiercely to the news that it went down from $0.45 to as low as $0.38. If you are interested in the original article, you can view them here.
Since then, the company has reported declining earnings for quarter 1 & 2 that sent its share price plunged further down to as low as it has touched $0.30 today. I mentioned in the original article that price was still overvalued back then, but what about at current price? Do you consider giving a second chance to take a look at them?
Stripping out one off gain, last year trailing earnings are still at around $0.0244, which represents an earnings yield of around 8.13% based on current share price of $0.30. The earnings for this year will almost certainly be worse than last year judging from the first half results, so earnings yield could plunge further down to around 7% based on my estimate. Dividends could also be slashed downwards and share price could face further pressure.
Temporary or Permanent Loss of Moats
As an investor, it is crucial to consider whether the fall in earnings are temporary or permanent in nature. Some industries face certain cycles in their businesses for the different periods and a value investor would be able to use the opportunity to add to their position when the cycle is at its bottom.
Based on the core nature of 2nd Chance business, it seems like some of the revenue contributor business are cyclical in nature and the drop may be temporary in nature. Securities, Properties and Gold are certainly assets that we are more familiar of and we know how they can go up and down based on different economic environment. The apparel business is a little tricky because they've closed down a few shops recently that led to a loss in profitability in 2015. The management cited the loss due to labor intensive and restructuring organization. My guts feeling tells me that they might be considering to streamline the overhaul process for the apparel business while the other business maintain the earnings for now.
If you take a look at the breakdown below, you would see that properties and securities contributed a high gross profit and EBITDA margin to their bottomline, and it is key because they do not require much capex and labor to incur for. These items probably tied up a lot of their investment in their books, but they are giving decent return since they purchased it many years ago.
Outstanding New Warrants
I highlighted about the potential dilution from the outstanding new warrants they issue at an exercisable price of $0.40 during the period 25 July 2016 to 24 July 2017. Based on what we've seen lately, it seems that the warrants will be out of the money and highly unlikely that they will be exercised. So this concerns will go away for now.
Current share price is at $0.30. NAV is at around $0.37. Gearing is at around 34%. Earnings yield are at around 7%.
This looks to me much like what we've been paying for Reits out there with the same above criteria but with so much more love than this one. Again, remember that they are having a bad cycle for their apparels, gold and properties and when the cycle bounces back, they could be a reckon to consider.
There's certainly not much catalyst at the moment, so I'm waiting patiently to see if it can go down lower to my target price at around 27 - 28 cents. We'll see how it goes in the next few weeks. If market continues to weaken, I may just give this stock a second chance to own them again.