Hexza announced a dividend of 10% on 24th October 2013. At the close of 77.5 sen this morning, the dividend yield amounts to 6.5%. This is twice the interest rate one can get from putting the money in fixed deposit in bank. Isn’t that good? 

Hexza Corporation Berhad operates in three business segments: investment holding, which is engaged in investment holding activities; manufacturing, which is engaged in the manufacture and sales of formaldehyde based adhesives and resins for timber related industries, ethyl alcohol, natural vinegar, cooler, liquefied carbon dioxide and kaoliang wine. 

Hexza has been in the business for a long time. Although there is not a single year of losses, there has been no growth in earnings for the last 12 years. However, the management has been generous to its shareholders with increasing dividend payment from 0.6 sen to the most recent 5 sen per share. Is this high dividend yield of 6.5% sustainable? 

Referring to Hexza’s latest financial statements as at 30 June 2013, there is plenty of hard cash available. Free Cash Flow amounts to 20m, or 9.5 sen per share. It has an excess cash of 130m, or 65 sen per share in its balance sheet. Hence there is no problem at all for Hexza to continue paying good dividend in the future. 

The liquidation value of Hexza is computed using the Graham net net is shown in Table 1 below: 

Table 1: Graham net-net valuation of Hexza 
Cash and cash equivalents 73,404 100% 73,404 0.37 
Other investments 55,886 100% 55,886 0.28 
Trade & other receivables 23,885 75% 17,914 0.09 
Inventories 17,367 50% 8,684 0.04 
Property, plant and equipment 66,959 50% 33,480 0.17 
Other assets 3,295 0% xxxx xxxx 
Total assets 240,796 xxxx 189,367 0.95 
Non-Controlling Interests (6,876) 100% (6,876) (0.03) 
TOTAL EQUITY AND LIABILITIES (20,421) 100% (20,421) (0.10) 
Net assets 213,499 xxxx 162,070 xxxx 
Number of shares 200,380 xxxx 200,380 xxxx 
NAB 1.07 xxxx 0.809 0.809 

The table above shows that the net asset backing (NAB) of Hexza is RM1.07. At this morning’s closing price of 77.5 sen, it is traded at a huge discount of 27% to its NAB. The net-net valuation of Hexza is shown to be 81 sen, which is still higher than its price. 

Isn’t Hexza an undervalued stock as shown above? Wait until we perform some basic checks. 

3 Basic Checks to Perform for a Net Net 
For a net net to be investable, it should have 
• a solid balance sheet, preferably more cash than inventories and receivables. 
• is not bleeding cash. At least breaking even or positive in net profit. 
• positive EBITDA 

The first check shows that Hexza has most of its net-net assets in high quality assets in cash and cash equivalent amount to 65 sen per share. Hence we can safely confirm that the quality of the assets is excellent. Next to check is “Is it bleeding cash” and if it has positive Ebitda? 

The latest annual financial results ended 30 June 2013 shows Hexza’s made a net profit of 8m and 4m, or EPS of 4.2sen and 3 sen respectively in 2013 and 2012. Cash flow from operations amounts to 20m with free cash flow of 18.7m last financial year. This FCF is a high of 15% (>10%) of revenue. Hence Hexza passes these checks with flying colours. 

Conclusions 
Hexza qualifies as Graham net net investment strategy with a wide margin of safety. It can also stand on its own as a value investment stock as a going concern with the high dividend yield investing strategy.

Posted by kcchongnz at Nov 8, 2013 02:42 PM