Prospecting from the "Dustbin"

One popular way of searching for value is to sleeve through the "dustbin"... namely the 52-weeks low stocks.

I have such a readily made screener in www.stocks.cafe. Parameters used are illustrated below:

I would explain some of the terms above for users unfamiliar to the stocks.cafe platform. "Close% from 52-weeks Low" is expressed as a percentage. Any stock's last closing price that is within 3% from the lowest in the last 52 weeks will appears in the results.

"Price/ Tangible Book" refers to the closing price divided by the book value, minus any "soft" items like goodwill, land rights, etc. It isn't that they do not have value... it is just hard to determine. The prudent value investors tend to ascribe a value of 0 to it. Now I will say this screener might not work too well on this, so you need to double check the annual reports for the prospect. I don't have any hard and fast rules about book value, but anything within 3 or so is still reasonable. I intend to write  another post regarding the book value investing approach later.

Debt/Equity is expressed as a number. If the figure is 0.3, it means that for every 1 dollar of assets, there is 30 cents worth of debt. Ideally this should be interest-bearing debt-- trade payables are usually not interest-bearing and should not be accounted as debt.

"Last Close > 0.1" is a personal choice-- I do not want to look at any penny stocks in SGX. These stocks are prompt to consolidation in the future. For the uninitiated, SGX has this weird rule that stock prices must meet the Minimum Trading Price of > 0.20 in X amount of years; stocks are traded in 100 units minimum in Singapore.

Since my capital is small, I will gladly forfeit some quality penny stocks.

EV/ EBIT_operating_income > 0 is a funny one. It basically means Enterprise Value (EV), which is Market Cap (all stocks multiply by market price) + Debt - Cash.

There are a couple of ways this can be negative. First, the company might have more cash than debt and market cap combined. These are the ultimate value stocks. Since I forced the screener for give me a positive value, this means I would miss such stocks. There is nothing to stop me from creating another screener to look for these value stocks The other reason why it will be a negative number, is that EBIT is negative (company is making a loss).

EBIT_operating_income is not a choice I preferred, but the only one that is available. For the uninitiated, this refers to profit that is available after all costs, except tax and finance cost (which is interest charges from borrowing), is levied. The whole idea is to evaluate companies from an equal footing.

Current Yield > 0 is the current dividend yield in percentage. A dividend must be present. You will need to wait for dustbin stocks to recover and I want to be paid for it.

***

 Running this screener for just SGX this week, I have the following:

The data is copied and pasted into Microsoft Excel for easier viewing. I added a column call Price/FCF. A company which has unsteady cash flows will have a very high or low number... this is just for my viewing pleasure.

The next step is to cut away all stocks that:
Do not offer a dividend consistently for years. Capitaland has been offering increasing dividends over the years, which is delightful.

Large debts; a very high D/E (debt/equity) number-- unless this is a relatively big company. As silly as this sounds, banks do give institutions a bigger leeway. For the smaller companies, they are removed. This is not to say that they aren't good stocks-- I just want to sleep better at night.

The next step is to look at each and individual companies from stocks.cafe. There is an advantage here presented by Stock.Cafe, an extract of the Profile tab of YZJ Shipbuilding as follows:

First of all, the book value must improve over the years. Book value has increased 0.698 to 1.389. Whether this book value is reliable... let's just say we will check that later.

More of an interest to me is the earnings, and free cash flow per share diluted. I want to see positive numbers in free cash flows. Most companies are capital intensive, which means for every dollar earned, a large amount of it is re-invested into the company for both maintenance and growth.

I want to say something about growth-- a growth in earnings per share is not necessary a sign of growth. It is merely a hint of growth, and the company's ROIC should be investigated. An EPS growth of 10% that results from a substantial increase in invested capital is not growth. 

I have digressed-- let's get back to screening stocks.

Companies that have less than desired reputation are also removed.The net result is 7 companies for further investigation, out of a starting of 26. This is just the first step. I would not be surprised if none of them make the cut at the end of the day.

If you do dustbin-picking very frequently, you will recognize names that appear time and again. Reputed value investors (like John Neff) advocate paying more attention to new stocks that appear in the list. My personal opinion is that the market is usually efficient-- so long term, they can't be that wrong.

Perfect Shape: Unaudited Full Year Earnings Released

Perfect Shape (1830, HKEX) full year results were signed off and released hours ago. Do refer to my  earlier post on buying Perfect Shape,

Actual revenue turns out to be 900+m, an increase of about 150m. The cost of goods sold did not increase much as accordingly. This trickled down to an increase of net profit to 194.187m over 91.356m last year. Perhaps this business is really as efficient as it looks.

Net margin, without considering non-business-operations gain, is now 21.4%. This leapfrogs last year's 12%. However, trade receivables remain worrying. One can only take the words of the management, which I quote:

"There  is  no  concentration  of  credit  risk  with  respect  to  trade  receivables  as  there  are  a  dispersed number  of  financial  institutions  with  high  individual  credit  ratings  through  which  the  credit  card and  installment (sic)  sales  arrangements  are  entered  into."

The company decided to distribute 15.1 cents of dividend, in view of the company's 15th anniversary. I did not foresee this. The yield would be about 10% given today's closing price.

Diluted EPS is 17.9 cents. Given a PE of 10, the company is worth about 1.79 HKD. This is roughly inline with my estimate.

***

Cash and equivalents is 395.761m
Market Cap is now 1.63B, or specifically, 1635.607200m
Enterprise Value is 1239.8462m
Net Profit is 194,187.
Adjusted Earnings Per Share is  6.4 times and the (conservative) acquirer multiple is 6.384 times. If we were to use EBIT instead, it will be 4.86 times. This company is really, really cheap.

*I have liquidated my current positions at 1.79 HKD, in view of the mounting trade receivables. I was unable to get a response from Investor Relations despite sending emails*

A Statistical Look at Our Big Three Telcos

Using very simple statistics, I have a few opinions about the current predicament of telcos. Stats are compared with closing market prices on 22-June.

Without considering into the qualitative aspects of our three listed entities:
(a) M1 has a cash yield of about the 7.12%. This means as a business owner, can look forward to a cash return of 7% after buying over the company as whole. This is simply cash flow from last reported year over market cap.

On an average of 10 years, this cash yield is 8.77%. Unlike Starhub, M1 management did not indicate a dividend payout in absolute or percentage terms (correct me if I am wrong, I am not a keen follower). So M1 has a distinct advantage.

Gross Margin has fallen in the last 10 years, from 23.94% to 15.97% (CAGR: -3.96%)
Net Margin has fallen from 18.75% to 12.78% (CAGR: -3.76%)

(b) Starhub has a cash yield of 7.79% based on last year's return.Given its precipitous fall over the last few weeks (and surprising 2% uptick on Friday), perhaps market is tagging it as a bargain.

The cash yield over 10 years average data is 11.79%.
However, Starhub has pledged to give 16 cents a share last year... I don't have any idea if the management will comes to their senses soon.

Gross Margin has fallen in the last 10 years from 19.24% to 15.12%. (CAGR: -2.38%).
Net Margin has fallen from 14.63% to 9.87% (CAGR: -3.86%)

(c) Big brother Singtel has a cash yield of 7.08% (from 2018 AR figures). While this sounds attractive given the dividend strength (in terms of cash flow), Singtel would probably struggle to pay if free cash flow falls below 2.857B. The average over the last 11 years is 2899B or so.

On an average of 11 years, Singtel's cash yield is 6.72%.

Gross Margin has fallen (less drastically so) from 29.99% to 27.55%.
Net Margin from 26.68% to 16.19% (CAGR:  -4.44%). This net margin drop looks drastic because I excluded the divestment from Netlink Trust, which is non-recurring. With it, the net margin is 27.25% (CAGR: 0.19%).

My opinions
(i) If Starhub have a more sensible dividend payout, it is a better buy given the cash yield of 7.79%. Unfortunately, a downward adjustment of dividends is likely to be succeeded by a downward adjustment in prices... this makes market timing close to impossible.

While it is the cheapest, it isn't that much cheaper. Take note: Starhub have the worst gross margin drop, as well as the worst net margin.

(ii) Singtel's gross margin over the years suggest they have the most capable management among the three. The lack of special dividends from divestment is understandable, and not because it was stingy. Stop wishing for the special dividends.

(iii) There is little difference between Singtel and M1's cash yield, meaning they are almost as cheap as each other! But it is only for the past year.

*****

Trade carefully, and do note that there are...... more than just these 3 companies in SGX, and there are more than just SGX in the world.

Portfolio Updates, 2nd Quarter 2018

The Singapore market nose-dived since 11-June, from 3.2% to -1.15%. The HSI returned -1.51% year-to-date. It was pretty merciless.

Investors who said hello to Valuetronics, AEM and other popular tech sectors recently would see their eggs royally smashed.

The proposed tariffs brought about by Trump on China and the latter's counter-measures sunk the HKEX market pretty bad yesterday. HSI closed at -2.7%.

Two of my stocks, Perfect Shape (PS) and Xing Hua Port Holdings (XHP), were down by almost 5% and 7% intra-day respectively. It was a pretty sad sight but I am not affected because it wasn't because my stock picking has failed me.

There were no issues with the companies behind the stock.

Current returns stayed at 9.19%, which means I am about 10% better than both markets, which is highly satisfactory given my limited ability.

PS remains the biggest position in my little portfolio. Earnings will be released next week. I expect the market to price this company in pretty volatile fashion.

RHT Health Trust's fate is intertwined with Fortis, which is still in the midst of getting its financial statements and buy-out (of RHT) sorted. Eventually the deal should be realized. In view of the risk, this arbitrage is my second biggest position. Usually I would put in quite a bit of money in merger deals, but there is a slight risk here. As long as there is value in RHT, there shouldn't be cause to worry. Sure, the price will plunge should the deal falls through, but the value will still be there.

XHP is pure bad news but I do not believe the odds are poor for the next 3 years. Meanwhile the wait is compensated by a decent 4% dividend.I am currently looking at a -8% loss and will average down when it hits 15-20%.

XHP is a bit of a shame since I was staring at a 60% return, just like Innotek (currently at 16% or so). I guess that is the price to pay when you do not want to listen to the market.

There are a handful other stocks which has not hit its potential yet. The portfolio is currently diversified across 10 companies. No radical approach will be adopted-- I shall stick to picking stocks on value.