Best World resumed trading yesterday. Prior to that, it had conducted two "equal access buyback offers," both at arguably very low prices of 1.36$. I wrote an opinion after the first exercise was announced. I do think that the price was opportunistic.
So on Monday, I surmise that the patient and opportunistic bunch would bid up the prices. They did. From the open price of 1.47 (an 8% over the buyback price), to a day high of 1.87 (up 37.5%). The market calmed down and ended at 1.82.
Today, on the second day of trading, saw sell down till 1.57, representing a decline of 13.7%. It was pretty volatile, and ended with a doji candlestick pattern of 1.64. Volume on both days does not differ significantly.
At 1.64$ a share, and 440.121093 million shares (based on the latest announcement of share buy back conducted today), this means Best World is priced as follows, based on the 3Q filings:
Market Capitalization: 721.79m
Cash and Eq: 356.918m
Inventory: 77.352m
Receivables: 20.027m
Total Liabilites: 209.6m
Should we discount the value of inventories and receivables by 50% each, without discounting any for cash and eq, the quick and dirty net asset is of 198.9m, or round off to about 200m.
This means that a shareholder is paying 521.8m dollars in effect for a company that had been earning 54m (in 2017) to 140-ish million (2018, 2020, and 2021). It earned 70m in 2019. Based on any year, none of them look too demanding. 3Q filings does register decline in cash flows on a y-o-y basis.
The biggest contributor to its coffers appear to be still from China. So the worsening numbers could reasonably be attributed to the country's COVID control policies.
If one would had know that trading would resume in a matter of months, no reasonable shareholder would have participated in the equal access offer. None of the executive directors sold-- that would be expected. Those who sold had their money stuck in there for way too long.
What caught my eye is that board members, particularly the non-exec directors, as well as senior management largely remained in the company.
Purchasing Best World shares at the moment is difficult on a couple of counts: first, one would be aware of the possibility that the company would run foul of regulations/laws. Since board membership remains largely the same, I think the probability of it is low.
The second reason is likely price anchoring given how the stock surged on day 1. Maybe it would be easier to look at it from a value point of view; if there is still a huge gap between value and price, a 30% surge on a day might mean little.
So my back of the envelope math tells me:
Since the "net" asset is about 200m, and cash flow is about 100-140m in recent times, a no-growth multiple of 7-8, based on an assumption that it would earn about 90m yearly, means this company is worth about 200m + (630m to 720m) which round off to~ 830m to 920m. These are very "safe" and conservative numbers, indicating a margin of safety of only 15-27%.
The growth investor would baulk at these numbers and rightly so. But this is the stock market, and the market is never kind to companies that don't grow, no matter how much free cash they threw off yearly.
The market and media, laughingly, would only claim that such a company is too cheap when they attempt to go private. Otherwise by and large they are believers of efficient markets.
If you would believe that the company could earn about 120m and ascribe a multiple of 10, that would mean the company is worth 1400m, an upside of about 100%! Valuation is very personal.
Given what happen to my portfolio in 2022, I think it is fine to be too conservative.
As of writing, I do not have any positions in Best World.
