A Review of Some Graham Net Current Asset Value Property Stocks

On 6^th September, less than a year ago, a forumer in i3investor here published my article on the Graham Net Current Asset Value (NCAV) methodology and its use for three property companies as shown in the link below:

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/36493.jsp

Graham NCAV property stocks

These types of stocks are also called "net nets", companies that sell for less than its net current asset value (NCAV), or net net working capital. It's the lowest form of valuation you could possibly do because it ignores everything about the business and just focuses on tangible assets.

The three property companies listed in Bursa which were qualified as Graham net net stocks were highlighted as shown in Table 1 below; they are Daiman, KSL and Plenitude.

Table 1: Some net net property stocks

From the Table 1 above, it can be seen that all the three company stocks were trading way below their net tangible assets from 35% for KSL to 46% for Daiman during that time. These stock prices were in fact also substantially below their NCAV with KSL 18% and Daiman and Plenitude both 31% below their NCAV. In retrospectively, wasn’t that a no brainer to invest in these stocks then?

Return of the NCAV stocks

Slightly less than a year has passed, the stock prices of those stocks has risen substantially at the close on 15^th August 2014 as shown in Table 2 below.

Table 2: Return of some property companies

In less than a year, the share price of KSL, Plenitude and Daiman have increased by 83%, 59% and 49% respectively, or an average increase of a whopping 63%, compared to 6% of KLCI and 20% of the KLSE Property Index during the same period.

These returns are certainly not inferior to the return of 98.3% of this portfolio of mine below which was based on an entirely different strategy of the Greenblatt Magic Formula which has lasted for 18 months compared to the less than a year duration for those stocks above.

http://klse.i3investor.com/blogs/kcchongnz/56926.jsp

Moreover, the risk involve for a Graham NCAV strategy is lower than that of the Magic Formula as the stocks were invested at prices below their NCAV, rather than basing on future earnings in the Magic Formula which are more uncertain.

Are they overvalued now?

This is a more pertinent question; after such a run, are these stocks overvalued now? To answer the above question, we have to relook at the latest asset values of the stocks in Table 3 below.

Table 3

With the recent run up in the share prices,  none of the stocks is trading at discount anymore to their NCAV, although Daiman is still trading substantially below its NTA at 25%, and Plenitude 8%. In this respect Plenitude appears to present the best value at a market price (3.27) just about its NCAV, whereas KSL seems to be way overpriced now at 34% above its NCAV, not forgetting that KSL has substantial outstanding warrants which are deep in-the-money now and would have a claim over the assets of KSL.

However, we have to remember that NCAV It's the lowest form of valuation just focuses on tangible assets with a discount to inventories and receivables and total omission of their fixed assets. Moreover, all three companies have huge amount of “Land held for property development” which was mostly bought many years ago and have not been revaluated for years. The market values of these land could worth many folds their book values. Even the “Property development projects” which are taken as the book value could worth a market value much higher than the book value as evidenced from their high net margins of 33% (KSL) to 37% (Plenitude). Hence the NCAV of these property companies could worth much more than what were taken from the book values.

Furthermore, all these property companies also have good earnings. The PE ratio of Plenitude at 7.0 is particularly cheap considering it has 387m cash in hand or 1.43 per share and with zero debt.

Conclusions 
Although their share price have run up substantially for the last one year, all three property companies above may be still trading below their NCAV considering the huge amount of land they have in strategic locations which have not been re-valued for a long period of time. Besides they have stable and decent earnings. Of these Plenitude appears to be a better buy due to its low price in relation to both its NCAV and its earnings, besides its huge amount of excess cash. 

K C Chong (17^th August 2014)