ValueGrowthInvesting
SHH Resources Holdings Berhad - A 'must have' for your 2016 Portfolio
ValueGrowthInvestor
Publish date: Tue, 05 Jan 2016, 09:53 AM
ValueGrowthInvestor
0 28
Looking for that rare combination, where companies exhibit signs of above-average growth whilst trading at undervalued prices due to market mispricings. Hence, value growth investing.
As we bid so long to 2015 and welcome 2016, I am sure that many questions linger on the minds of investors: Are there any hidden gems left to be discovered on Bursa? Should we all just follow some senior investors' picks as they did very well in 2015? What are the themes in play for 2016? Any fresh stock ideas?
Well, let me start off by sharing with you a stock which I have discovered after much filtering, and studied thoroughly. The reason I have chosen to present this stock is because it meets my investment criteria of having both value and growth characteristics with high margin of safety. Yes, as my blog name suggests, I will be presenting you with value + growth stock picks from now onwards as and when I discover them and perhaps the stock performances can speak for themselves.
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VALUE:
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SHH’s current price implies a forward PE ratio of only 5.5x. Calculated by annualizing 1QFY16 Core EPS (removing unrealized FX derivative losses). It is the cheapest among its rubber wood furniture exporting peers Latitud, Liihen and Pohuat.
- Forward EV/EBITDA of only 3.1x indicating that at its current price, if a company were to acquire SHH, it would only need 3 years for it to recover its investment. This explains why there was interest by Heveaboard earlier in 2015 which could very well be revisited in the near future or a new bid initiated by its larger competitors, i.e. Latitud, Liihen or Pohuat. At its current price, the acquisition would be value accretive as SHH trades at a lower PE ratio compared to its peers.
- Net cash position of 54 sen or 26% of market cap. This allows SHH to do 3 things: 1) Become an acquirer of smaller furniture companies thus allowing for inorganic growth; 2) Embark on an expansion drive should capacity be unable to meet demand; 3) Pay out special dividends such as the 10 sen special dividend announced recently in October.
- GROWTH:
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Revenue grew 47%yoy while core net profit surged 1096%yoy in 1QFY16. The increase in both top and bottom line were due to increased orders from customers and weakening Ringgit which I expect to continue going forward. We already have a look into the future that the next quarter should perform well as evident in Malaysia’s latest external trade performance in October 2015, where timber and timber-based products, which accounted for 2.8% of total exports, expanded RM468.3 million or 28.5%yoy to RM2.1 billion.
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SHH’s business exposure is centered on the US economy. Thus, any slowdown in the local economy will not affect the performance of the company. Meanwhile, the US economy is currently buoyant, with US Housing Starts (new houses need furniture), US disposable personal income (ability to purchase furniture) and US consumer spending (willingness to spend) all on a very healthy uptrend.
- Furniture theme remains in play with sales expected to be healthy in 2016. Furniture is considered a consumer discretionary item, meaning goods that are nonessential. In light of recent economic resurgence as shown in my previous point, strong demand for consumer discretionary goods have pushed companies and along with it, the entire sector to become the best S&P500 performer in 2015. This, along with the FED’s willingness to hike interest rates is a strong indication that the demand for furniture will continue to be strong in 2016. In addition, SHH is a good stock to hedge against a drop in oil prices as lower pump prices in the US will leave more disposable income to consumers to spend on discretionary goods.
- TARGET PRICE:
- SHH’s should be worth RM3.61 (76% upside) by end-May 2016 after 2 quarterly results which should grab investors' attention. My target price is based on an inexpensive average peer PE ratio of 9.6x. This also implies EV/EBITDA of 6.1x which is still very reasonable considering that shareholders would normally only consider selling out at the range of between 8-10x EV/EBITDA.
- Expect next quarter results to show 8-10 fold increase in earnings yoy. Based on the trend of revenue and profits, coupled with Malaysia's external trade data and US economic data, I believe there is a strong possibility that SHH’s past 2 quarter earnings trend will continue to show in the following quarterly results.
- Good time to accumulate as share price consolidating at RM2.00-2.10 level. In addition, it is off its highs of RM2.30 after announcing a special dividend of 10 sen. It is safe to say that a lot of hot money, speculators and weak holders have most likely exited their positions leaving only the serious investors in the stock.
Disclaimer: The purpose of this blog is to share some of my findings with fellow blog readers and should not be construed as an invitation or offer to buy/sell any stock. All information presented should be verified independently by the reader and any decision to buy or sell should be based on the reader's own judgement.
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Discussions
7 people like this. Showing 26 of 26 comments
Thanks for pointing out seasonality. In fact the first quarters have been the weakest quarter for SHH in which it made losses in 2008, 2009, 2011 and 2012 while making the weakest quarterly profits in years 2014 and 2015. Thus if you are arguing on seasonality, the following quarters should be even stronger compared to first quarter and my assumption is rather conservative.
2016-01-05 10:41
This company benefited from the depreciation in USD. As the cost of production is in ringgit, the appreciation of USD will increase the competitor advantages with country such as vietnam as the cost of production (labour cost, logistic cost, rental and etc) calculated in malaysia ringgit.
Think about this, if they sell furniture to foreign company, they can offer a much lower price as the cost is much lower in term of USD in global market. Hence the sales volume will increase if they lower down the price (in term of USD) as they able to offer much lower price to compare other furniture maker that setting up their factory outside Malaysia.
Other than that, the company incurred loss on derivatives of RM1.9mil of derivatives cost with the currency rate of RM4.40. If you look on the currency on RM4.29429, hence profit on derivatives will incurred.
If loss on derivatives did not incurred, the company will have extra 3.8sen profit for their account. Hence 6.96+3.8=10.76 sen for next quarter at least
2016-01-05 10:44
ValueGrowthInvestor, if you look at Poh Huat and Latitude Tree, 2H of calendar year is typically stronger half for them.
2016-01-05 10:57
You seem biased, because the seasonality is obviously not first quarter Sept 30 as you stated, but SHH itself stated that "turnover is generally lower in the beginning of the calendar year"
ie its third quarter March 31, which is seasonal low for most OEM exporters.
Therefore, as hpcp correctly pointed out, it's not right to annualise from Sept quarter, typically the strongest quarter for OEM exporters.
2016-01-05 11:24
You pointed out that the 1Q of SHH fiscal year was typically weakest. Did you manage to find out why? But for other furniture manufacturer exporting to US, the are strong in 2H due to higher sales before Christmas and New Year. Hope to hear from you your understanding why 1Q of SHH was typically weakest.
2016-01-05 11:30
Ronnietan: I disagree with some of your points
Yup, some furniture will have a weak season during 1st quarter but it only affect for the company which have a long holiday during chinese new year. A good example to see is Prlexus and Pohuat which most of their revenue generated from Vietnam.
I also disagree with you that 30 Sept is the strongest quarter for exporters.
In fact 31 Dec is the strongest quarter for furniture exporters as the company will export more furniture during christmas season.
2016-01-05 11:37
hpcp, SHH explained under "seasonal factors" in its results statements that first quarter calendar year has lower turnover due to "lower overseas demand and longer festive holidays."
Calendar Q1 is typically weakest quarter for exporters because it's a long way off from the peak Christmas season.
Strongest quarters tend to be calendar year Q3 or Q4.
For Latitude eg, Q4 is its strongest, while for Poh Huat, its strongest is its Q ending Oct 31.
2016-01-05 11:47
After checking some retail data for furniture sales, 2nd half of calendar years have typically witnessed peak sales. Thus, as the quarter ending Sept had already exhibited strong numbers, I expect the quarter ending December to show improved numbers.
There is a possibility that some normalization could occur for the quarters ending March and June. However, based on the past 2 years track record, the quarters ending March and June have been good quarters suggesting that SHH's customers could have restocking needs in these 2 quarters.
2016-01-05 12:05
I take back and apologise for my remark of bias. That was unnecessarily personal. This is a forum after all.
2016-01-05 12:11
In any case, to address your comment on being biased, I valued Latitud, Pohuat and Liihen's PE ratio all based on annualized latest quarter earnings (in your opinion, the strongest quarter) as well, thus making comparisons apple-to-apple.
2016-01-05 12:25
Valuegrowthinvestor: for your information, for 31/3/2014, the profit is so good due to disposal of one of the building. Hence u cannot say that 31 Mar quarter, the result must be good
2016-01-05 13:29
Hi ValueGrowthInvestor, if you used Pohuat latest quarter without taking out the one off loss from the fire incident, then it may not be a good comparison
2016-01-05 13:40
pingdan: Disregarding gain on disposal of RM2m, the quarter's profit of RM1.762m is still the highest that year.
hpcp: For Pohuat, loss on write off of property and inventory net off gain from insurance is RM5.18m. However, do note also in the cash flow of "other non-cash item gain" of RM5.9m and note in the balance sheet a new item "investment property" amounting RM7m. There could be some reclassification of asset into "investment asset" with revaluation done and intention to dispose in the future.
2016-01-05 14:33
haha nvmla. I also holding quite alot shares in SHH. I dun care about others detail . As long as it will generate good profit, I will continue hold this.
2016-01-05 14:42
good write up~buy buy buy!!! Target RM3, undervalued and undercoverage exporting stocks!
2016-01-05 18:06
Potential share split because 50 million shares. Look at Prlexus in 2012 their share base only 36 million, after share split and bonus issue to 100+ million, any investor who hold on from 2012 to middle of 2015 have their investment grow more than 10 time. Same like Pohuat at least 4 times yourinvestment. You just can expect today you buy the shares and the next day you make some coffee money. Hold tight !!!! you will be rewarded.
2016-01-05 21:45
Hi ValueGrowthInvestor, the forward foreign currency contract has a fair value lost of RM1.9 mil. It increase quite a fair bit compare to previous quarters when USD/MYR are weaker than before between July - Sept 2015 period. Too bad it hits the bottom line. What's your view on this for the next quarter?
2016-01-05 23:27
Hi Rob, yes there are changes in the fair value of derivative contracts that is reflected in P&L. However, these are non-cash items until which time the contracts are due and settlement is made. Thus, it is removed in my calculations.
To gauge the impact of this on P&L in the quarter ending Dec, all we need to do is look at the closing USD/MYR rate for that quarter in which the fair value of contract is determined and compare it with the previous quarter. On 30/9/15, the USD/MYR was 4.40 while on 31/12/15 it was 4.30, a difference of -2.3%.
Hence, it is safe to say that we might see some profits from the change in fair value of derivative contracts for the quarter ended Dec 15.
2016-01-06 08:03
Hi valuegrowthinvestor, can u explain more in details about the exchange contract i.e. how is the mechanism, the locking period? The time frame? This is a very important element as i also see them appeared in many companies. Thank u
2016-01-06 08:10
(iii) Derivative financial instruments
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. Changes in fair value of financial instruments are recognised in the profit or loss.
2016-01-06 08:27
Poh huat is very similar in valuations and also sells to the US. Also very much higher revenue and profit base. Would you consider them then?
2016-04-05 12:47
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hpcp
Not right to annualise its first quarter earnings. Earnings of furniture makers are seasonal
2016-01-05 10:17