ValueGrowthInvesting
SHH Resources - 6.81x PE ratio, 5.4% div yield, 60 cents net cash (RM30m) and 250% profit growth
ValueGrowthInvestor
Publish date: Fri, 18 Mar 2016, 08:38 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.
Having attended a presentation by the company, I managed to learn more about SHH's plans in 2016. Let us have look at SHH's current valuation metrics and industry data followed by their plans and outlook for 2016:
1) Last 12 months PE ratio is only 6.81x with net cash per share of RM0.60 (33% of market cap). Forward PE ratio obtained by annualising first half results of RM8m is 5.2x. ROE and net profit margin are above 15%. During the presentation, the company's boss informed participants that growth was seen in higher demand and not purely from stronger dollar.
2) Retail data from the US where SHH derives >90% is up 3.8%yoy and 0.5%mom (February is a much shorter month and non-peak in terms of seasonality). 
3) Malaysia Timber council expects the strong growth in 2015 to continue in 2016 from higher demand from US and India.
4) SHH is spending CAPEX of RM3mil in FY16 (50% of FY15 profits and triple the amount spend in FY15) into improvements of manufacturing plant and machinery. This will reduce labour cost, increase efficiency and improve margins over the long run improving gross margins by 5% starting October 2016.
5) SHH is moving from generic furniture which makes up 70% of sales into original design furniture currently only 30% into a more even 50:50 split. SHH currently has the design team and is working closely with its clients from the US to design exclusive range of premium furniture. Expect marging to improve further with current trend showing margins doubling from 6% to 12% already.
6) The company is breaking into the hotel furnishing business where it has secured a sizeable amount of contracts from renown hotel operators and the entertainment industry from tenders called in addition to a recently concluded furniture exhibition. These carry high margins and recurring income for maintenance/replacements. SHH has very good track record and quality finishing which makes it preferred over its competitors.
7) It's largest customer in the US which is the largest furniture retailer in North America, i.e. Ashley Furniture Stores is placing higher orders for SHH products compared to last year. Ashley is ranked 105th in largest private companies in the US with revenue of US$4B. Growth is expected to be boosted by the launching of its E-Commerce business which is expected to accelerate growth.
8) To be very conservative, SHH should be valued at 8x forward PE from EPS of 36 cents giving it a target price of RM2.85 (massive55% upside). This is a 20% discount over its larger peers such as Liihen, Pohuat and Latitud. In addition, SHH has a much higher cash balance risk and steady shareholders (its largest shareholder and company founder purchased more shares in 4th quarter 2015 from MUI) reducing downside risk. No large shareholders waiting to make a quick buck such as a prominent i3 blogger.
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Discussions
9 people like this. Showing 25 of 25 comments
Please refer to my previous post where I did a comparison. SHH is by far the cheapest and most under the radar. Importantly, no large shareholders waiting to cash out.
2016-03-18 09:10
CKWan11d, please be more objective in your comments. ValueGrowthInvestor is writing more on facts and figures than bull shitting. Final decision is on your own. Don't blame author.
2016-03-18 09:21
My aim is to share with the investing public undervalued companies with high growth prospects which is exactly what I am doing. The market is not always right that is why people can generate extraordinary returns when the gap between price and value exist.
I don't really care about the short term share price movements, as you mentioned, that post is only a few weeks ago. Is Warren Buffett judged by his monthly results, or over his 50 year investment career? If you studied Buffett, you would know that growth in the company's net assets is better than growth in share price. To that argument, SHH's book value increased by 16% over the past year. That is even after a special dividend of 10 cents.
2016-03-18 09:27
ValueGrowthInvestor, in actuality, I treasure your well written analysis, perhaps more than the others. Just now, I purposely poked your nerve and your reaction and remark is what exactly I wish to see. Oh yes. There is a boy in every man. Man in this context means mankind.
You are a sincere person.
Hats off to you, ValueGrowthInvestor.
2016-03-18 09:49
CKWan, do not worry about the share price in the short term. Look at earnings, cash flow and industry/company prospects. Data, facts and figures do not lie. Shareholders will be rewarded accordingly as management is willing to declare dividends.
2016-03-18 09:59
VGI, may I ask. Where and when were these presentations held? In Johor? Thanks!
2016-03-18 09:59
I know. Thank you very much ValueGrowthInvestor for reminding me.
< Price is what you pay, but Value is what you get> ...
2016-03-18 10:06
Personally I dont think it is what's going to happen going forward but what happened. When investor look at the record of SHH, SHH threw 30% of their operating cash flow into capex every year for the past 10 years but book value has not grown, while revenue has gone down by 50% and all of these are shown in their dismal ROE. That make sense why investors would give co like Latitude a higher valuation because of their stable history.
2016-03-18 10:33
Hi JT, it is true that book value was eroded slightly despite capex spent during over the last 10 year period. But bear in mind that we had a financial collapse from 2007-2011 where discretionary stocks were affected.
We are in an economic upcycle where the US is growing relative to the rest of the world. In addition, all economic data from consumer sentiment to retail sales to housing starts are pointing upward. Furthermore, low pump prices have yet to trickle into increased consumer spending meaning that cash is still being hoarded.
Nevertheless, book value was hardly eroded during bad times and has grown quickly since then. Also remember that SHH did not revalue any of its properties since 1994. If they were to revalue, assuming property prices rose at CAGR of 5% per annum, their book value would be triple what it is now.
2016-03-18 10:55
Look around the world, other than US, which country is growing? Almost every country is loosening policy to stimulate growth, and US is the only country that might raise rates this year (although at a more gradual pace than originally intended). Where else do you find growth in today's economy if not US? I am bullish on US consumer play, in particular Liihen, Latitud and SHH because:
1) US economy is resilient to external slowdown because 70% of GDP is derived from consumption. This means that when the economy gets going, it keeps going.
2) US jobs market has been improving steadily. Unemployment now stands at 4.9%, down from double digits after the GFC. Finally, even the anemic wages saw improvement with a 2.2% increase y-o-y.
3) US housing start has been improving steadily.
2016-03-18 11:03
VGI I can be wrong, just offering another perspective for you to think about it. You need a dragonfly eyes, taking in perspective from different angle, calibrate and make a decision.
I have no insight into how US economy as a whole will impact SHH, it is way too macro for me to predict. It is predicting the unpredictable. I can only offer an alternative view which is a growing economy will potentially invite more competitors into the economy & industry.
Property revaluation is a non-issue. Cash flow determines how much the business is worth, regardless of whether the properties are being revalued or not. One could have taken all properties i.e. branches own by Public Bank, revalue them, and nothing will happen.
2016-03-18 11:25
shh...dun tell other. Let them sell down so we can buy more. The financial figure is good. US Housing Data is strong, nothing to worry.
2016-03-21 09:42
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 12:48
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How about Latitude, Poh Huat and Lii Hen ? Can do an industry analysis on this ?
2016-03-18 09:08