Kevin Scully made the following presentation at the Value Investing Summit on 26 January 2013. The full presentation slides are available at www.nracapital.com
My definition of Value Investing for my Singapore investments:
♦ Investment must show immediate value (price to book <1)
♦ You must pay me to wait as there is an opportunity cost to holding the stock – should have running dividend yield
♦ Have sufficient liquidity – must have trading liquidity to reduce exit costs
♦ Have a definable catalyst event and exit price –investment horizon shorter than WB’s 20 years
♦ Should offer huge upside – one or two bagger.
How do you find these Value stocks? Look for major price declines and analyze whether it’s justified…..go against the herd and crowd instinct !!
Three Value stocks which I am recommending now
#1 JAYA HOLDINGS
First, a bad financing decision…
♦ June 2009, Jaya announces that some of its creditors would be reducing their lines – problem was that Company was financing its medium term ship building program with short term debt from global banks.
♦ Shares fell from $0.67 to S$0.31. This was 0.54 times price to book with a forward PE of 3-4 times.
♦ Gross gearing was about 0.84 times which net gearing was 0.61
♦ The main problem – wrong kind of financing with wrong bankers
♦ Loan restructured with no haircut.
Second, its major shareholder defaults
♦ February 2011 – its major shareholder Affinity fund defaults on its loan….shares fall from $0.79 to $0.51
♦ New financial shareholders emerge.
♦ Gross gearing was about 0.64 times while net gearing was down to 0.25
♦ 2012 loan restructured – Jaya can now pay dividends and is in a net cash position
♦ Its chartering business seeing a nice cyclical rebound as regional exploration activities pick-up.
Recent story: JAYA HOLDINGS: Full steam ahead to expand charter fleet
#2 MIDAS HOLDINGS
China Railway Minister found guilty of corruption…
♦ Midas problems started in early 2011 when the shares was around S$1.00 with the China Railway Minister being investigated for corruption
♦ September 2011, Shanghai railway accident, Chinese Government stops issuing new high speed rail contracts
♦ Midas shares fall to a low around $0.25 with profits down 80-90% as the absence of high speed rail contracts lowered its utilisation rate.
New Chinese Govt in late 2012 gives hope of renewal of highspeed rail contracts
♦ At $0.25, Midas shares were trading at 0.5 times price to book, with gross gearing of 0.51 and net gearing of 0.23.
♦ China has just announced in January 2013 an increased budget for railways in 2013 to RMB630bn from RMB400bn in 2012. This is to meet a railway rollout of 9300km now to 20400km in 2015.
♦ Midas has been surviving on municipal rail contracts since the Shanghai accident. It's one of two manufacturers of the train carriages so should be a major beneficiary when rail contracts resume.
♦ Net profits were in excess of RMB150mn before the rail accident and were down to RMB 10-20mn now. A major high speed contract should see the share rerate to their old highs.
Recent story: YZJ, MIDAS, CAPITAMALLS ASIA: What analysts now say...
# 3 AEM HOLDINGS
AEM shares fell in 2007 on corruption investigations
♦ AEM’s woes started in 2007 with its Chairman, another ED and its CFO were investigated by authorities for corruption and insider trading.
♦ The shares fell from S$0.25 to S$0.03 over the next four years with huges losses being incurred. The company was also placed on the watchlist and about to be delisted.
♦ In late 2011 and early 2012, a new shareholder emerged together with a new CEO replacing Transpac Capital.
♦ AEM managed to get off the watch list by making more than S$10mn pretax profits in 2010/2011.
Very compelling valuations
♦ AEM at $0.08 is now trading at 0.5 times price to book.
♦ Its gross/net cash is about S$43mn compared to its market capitalisation of S$35mn – so it's trading below cash.
♦ Its main business is in the semi-conductor sector and it only has two customers. An earnings recovery in the second half of 2013 should see the shares first rerate to its NAV $0.16. Its next target would be earnings driven.
Recent story: KEVIN SCULLY: Takeaways from meeting with CEO of AEM