ValueGrowthInvesting
(VGI) No Brainer Investments Part 1 : SHH Resources Holdings Berhad
ValueGrowthInvestor
Publish date: Tue, 07 Jun 2016, 02:23 PM
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.
Many may not know this but Warren Buffett's Berkshire Hathway actually has sizable investments in furniture companies which generate lucrative cash flow to fuel many of its other investments. This is because the low profile furniture business which is highly tied to the US economy does not receive as much publicity as the railroads, energy, insurance and consumer businesses that have over the years been headline favorites for media outlets.
If its good enough for Warren Buffett, it should be good enough for yousu! But which one should we choose among the many listed on Bursa?
My pick is SHH Resources, a very under the radar company with close to no coverage and attention given by the media and investors. Throughout my post, I will be comparing SHH to Liihen who engages in similar business. Liihen's share price has increased by 22% ytd while SHH has decreased 16% which is nonsensical! Let me explain why:
1) Earnings growth. The company saw its earnings grow more than 300% in 9M2016 and more than double in the latest quater. The good growth in earnings is due to a stronger USD (which remains above 4), higher orders from its US customer Ashley Furniture which is opening 100 new stores in 2016 alone and better profit margins from automation and better product mix. Meanwhile, Liihen's earnings at most only doubled from the year before.
2) Price-to-earnings ratio (P/E ratio) The company is trading at a very attractive P/E ratio of only 5.48x, based on a discount to Liihen at 8x, the company should be worth RM2.57, a 46% upside from its current price. This is more than justified as SHH has better earnings growth compared to Liihen.
3) Potential dividend per share of RM0.22 based on 70% payout ratio, lower than 2015's 75% payout implying a dividend yield of 13% Even after paying ot the dividend, the company will still be in healthy cash per share position of RM0.38. There is no reason for the company to not pay out dividends as their capex requirements is less than RM2m per year anyway and their cash flow is strong with free cash flow per share of RM0.24. If we were to assume that 8% dividend yield is fair for the company, the company should appreciate to a price of RM2.81, an upside of 60%.
4) Realisable net asset value a 53% premium over book value Most are not aware that SHH owns a massive 16.6 hectare industrial land in Pagoh where it houses its operating facilities. What's interesting about these land are that they have not been revalued since 1994! Since then, major developments have taken place including Sime Darby's Bandar University Pagoh project with the building of 5 university campuses with GDV of RM8bil.
If I were to take the company private and break up the company and sell its parts, I would sell off all the land for RM81m which is roughly similar to the current market cap. Then, I would still pocket the company's net cash of RM29m (maybe RM20m net of all fees, of course I have not included the value of its machinery and buildings yet). A hefty profit for doing basically nothing!
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Discussions
9 people like this. Showing 32 of 32 comments
SHH is not stable in giving dividends. Do not expect SHH will give good dividend every year. Not like Liihen has good track records of giving good dividends.
2016-06-07 15:32
Revenue drop by 6 % compared to March Q 2015 ( even with lower ringgit rates) and by 18 % compared to Dec 2015 quarter.................perhaps eaten by Lihen.......hahahaha
like that also can buy?
2016-06-07 15:38
Erm...i prefer Liihen for DIVIDEND every QUARTER + SPECIAL DIVIDEND every YEAR. Its free cash flow believed stable than SHH.
2016-06-07 15:54
No need to get so defensive, I am not asking others to sell Liihen and buy SHH (well, it doesn't seem like such a bad idea). Only shows how insecure you are.
Liihen is trading at 2.4x its book value and the stock has already gone up 22% this year. High time for some very 'smart' people to cash out.
Yes, you 3 fellas continue holding on and promoting, when Liihen's share price drop do not forget to buy more. You will be very prosperous soon.
2016-06-07 15:56
VGI, i thought you say you already want to stop writing at i3? Just one week, already broken promise?
2016-06-07 16:45
Hi Faye, my passion for writing and discovering hidden gems overrode my desire to quit i3investor.
2016-06-07 18:07
ValueGrowthInvestor please keep posting. We value your contribution.
I am selling Liihen and I plan to buy SHH.
2016-06-07 18:19
re the land. The value of a stock is dependent on the cash flow it can generate over it's lifetime. So whatever that is sitting on top of that piece of land is generating those cash flow for SHH and shareholders already. Revaluating the land is not going to increase the cash flow or make the company more valuable, you will end up double counting.
If SHH is a property developer, that's a different story. The nature of property developer is to develop lands and sell it. The nature of SHH is manufacturing furniture. Unless you have insider information that SHH decide to do a 360 degree shift and become a developer, the odd is not in your favor.
2016-06-08 08:05
Liihen got "noble intention" KOONman coverage and endorsement ma, tats why SHH and Liihen performed differently in price although both also same industry
2016-06-08 10:28
When 2 companies are also good, one have to consider the size of the companies.
2016-06-08 10:32
Danny Tan is giving expert advice again, come back again using new ID after previous 2 accounts were banned due to abusing.
2016-06-08 10:36
Dear Ricky I am showing people the break-up value of the stock which serves as a floor price for a company.
In the event that the worst happens, shareholders still have the tangible assets to fall back on, which is why the true and fair value of the assets are important.
On the other hand, if a company is trading far below the value of its assets, it would likely become a target to sophisticated investors who aim to make a profit by breaking up the company and selling its assets.
If a bank were to loan me the money, I would consider buying over the company at its current price, selling the land and pocketing the net cash to make a quick buck.
Of course this would be a secondary option seeing that the company is making RM10m a year, which would cover my cost of investment within 6 years: Buy the company for RM90m - net cash of RM30m = RM60m. RM60m divided by RM10m profit per year. You don't need to be a genius to know this, that is why my title is 'No brainer investments'!
2016-06-08 10:52
Dear moneySIFU, the size of company measured by market capitalisation is only an indicative value given by market participants who are short sighted in nature and tend to act in herds.
What is more important is the intrinsic value of a company, something which most people are unable to do and the reason why most people underperform in the stock market.
2016-06-08 10:56
I won't buy Genting because it is too big to me, so I won't think I am short sighted.
Same to your comment, when one does not choose to invest one company due to the size of the company, I won't say that person is short sighted, that's not true and correct.
What I am trying to say is when 2 companies are also good & you can only invest one, what is your choice?
I like SHH for this company is starting to paying good dividend & doing very well but I have limited fund only, so I have to make a choice.
2016-06-08 11:14
All I have to say, this SHH is good long term investment, so it is too bad if anyone overlook on this company.
2016-06-08 11:17
Condition 1: Everything run as normal, no revaluation, no sophisticated investor (when was the last time you saw corporate activist in Malaysia?). The share price will dependent on the cash flow the business generated. Considered the past avg ROIC of below 10%. Fair value will be BV, give it $1.80
Condition 2: Corporate activist came in, tussle with board so they can takeover, break it up and distribute all money back to shareholders. Everyone happy because the share price will shoot up because of this exercise. Breakup success. BV turn into $2.65
Let's estimate the probability of condition 1, I will say 90%. Condition 2, 10% (very optimistic if you asked me)
Expected value = $1.89
$1.80 x 0.9 = $1.62
$2.65 x 0.1 = $0.265
2016-06-08 11:44
Funny how you value a company at book value when your ROIC is 10%. Please explain your logic.
2016-06-08 11:52
I am being generous to assign a fair value at book because it's ROIC is below 10%. If the cost of capital is 10%, and if SHH can't improve its ROIC beyond cost of capital in the future, they deserve book value.
2016-06-08 11:54
Here you have 2 options, you can either use a 9M16 unadjusted CROIC that is inflated by interest income and currency as a benchmark, or you can look at the past 5 years poor ROIC and ask what has changed, is there any magic that makes the business suddenly flowing more cash?
No right or wrong, but you have to choose.
2016-06-08 13:06
Ricky Yeo, you are to sticky to the book though it is not wrong by the way.
I've read The Intelligent Investor more than 5 times & read many times of those books wrote about warren buffett. Can we apply everything strictly on what they said in the books? I am not sure on others but I can't apply everything.
2016-06-08 13:16
What I do now is to learn from those good people in i3 through their stock selection and articles & study why they choose those stocks, it gave me very good direction to start with.
2016-06-08 13:18
in short, everything looks good and improving. This company has just turned over a green leaf since 2013 and has been delivering improving results. But, the determining factor is USD. Not sure how severe its profitability could be impacted if USD reverses.
2016-06-09 00:25
If shh is able to maintain its current earning and cash flow, it is worth more than 2.65. The question is how they could sustain what they have now if USD is not in their favor. :)
2016-06-09 00:42
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It's not entirely fair to compare SHH to liihen, shh is a smaller company comparing to liihen. You can't expect the market to give same valuation with bigger cap and much bigger business, right?
2016-06-07 15:10