Sunday, June 27, 2010

Broker's Recommendation (May 2010)

This is a compilation of all broker's recommendation in the month of May. These are 10 counters which were favoured by research houses in May. Brokerage house do not publish stock research reports on a stock frequently. Hence the coverage and opinions on these 10 stocks will be valid for this year until they initiate updated coverage. I hope that through this compilation, it serves to provide readers with some ideas on good tickers which are favoured by research houses

Monday, June 14, 2010

Value Mining - Unearth stocks below Book Value

This is the 1st post of 3 posts that will feature attractive Singapore Stocks that are trading below book value. This post is inspired by an article that appear April edition of Pulses.

Father of Value Investing, Benjamin Graham, advocated investing in companies that trade at a fraction of their estimated liquidation value or net-net. Net-net value is defined by Graham as the following criteria:
Cash and Short Term investments + (75% accounts receivable) + (50% inventory) - total liabilities

The first company that is classified as a net-net is Lion Asiapac. Lion Asiapac is a holding with diverse business lines. Its core business are electronics contract manufacturing, quicklime supply and scrap metal trading. The company is a Malaysian congolomerate charied by William Cheng popularly known as the "Steel King".

What I like about Lion AsiaPac from other companies is that it has a strong balance sheet with virtually no long term debt. It has few liabilities and a huge net cash position. Its balance sheet as at Dec 31, 2009 show that the firm had cash of $190.2 million. The company has net cash of $0.46 per share. Currently the share is trading at $0.235. Based on Graham's criteria, the recommended buying price is at $0.29 per share. Lion Asiapac is currently trading at 0.506 times book and 0.51 times its net cash value. Beside getting a stock that has cash more than its current market valuation, the company also has a good dividend yield of 4.3% which the investor can benefit.

However, as much as this company is an attractive net-net stock, growth investor looking for revenue and profit growth should be wary as the company reported a steady decline in sales as well as a 72% decline in net profit for year 2009.

In summary, Lion Asiapac fulfills Graham's criteria of a net-net stock.With the surplus cash on hand, i believe management will invest its surplus cash into new business or distribute the cash in the form of higher dividends. Investor who favour net-net strategy for hunting out deep value in the stock market could benefit when market re-valued the company

Wednesday, June 9, 2010

Noble Corp: A Value Play

The recent Deepwater Horizon disaster has not only affected the companies (BP, Transocean)directly associated with it but also has led to financial market reacting by punishing stock prices of company associated with oil and gas exploration in the Gulf of Mexico. Stocks such as Halliburton (HAL), Schlumberger (SLB), Noble Corp (NE)had fallen close to their 52 week low. In some cases, the massive sell-off could be due to deterioating fundamentals. However in this case, it seems that the market is over-reacting to the industrial accident and these oil related stocks maybe under pressure due to investors' confusion and uncertainty over the accidents and its repercussion on the industry.

The massive sell-off has provided value investor with an opportunity to evaluate and identify stocks where the market had over-reacted. A value play that could be identified is Noble Corporation (NE),one of the companies that provide equipment and services for oil and gas drillers in the Gulf.

Noble Corporation is a company that provides offshore contract drilling, engineering, and production management services to the oil and gas industry. Noble’s current fleet includes 62 mobile offshore drilling units comprised of 43 jackups, 13 semisubmersibles, 2 submersibles, and 4 drillships. The company currently has six semisubmersible rigs operating in deepwater locations of the Gulf of Mexico.

From the financials, revenue per share has been increasing from $3.30 in Year 2000 to 13.90 in Year 2009. Earnings per share has also been increasing from $0.61 to $6.42. The high operating margin and net margin illustrates Noble Corp's market position in the industry. Besides that it has also been able to generate high ROE. These solid financial condition had been achieved with decreasing debt-to-equity ratio. Noble is a capital intensive business but management has not relied excessively on debt to finance capital expenditures.

The company has also been generating significant free cash flow with increases in every year. This cash flow has been deployed mostly toward expansion of the fleet (newbuilds) or enhancements to the existing fleet. Beside strong investment in its fleet, Noble also places great emphasis on training its people in safety, operations, management and leadership program. Noble has delivered its best ever safety performance which is paramount in the aftermath of the Deepwater Horizon disaster.

Despites Noble's solid financial results, it does face certain impact to its revenue due to the recent six month moratorium on deepwater drilling. Noble derives its revenue from a diversified list of countries (United States, Benin, Brazil, Canada etc.) with Mexico accounting for 29% of its revenue in 2009. The bulk of the revenue is associated with deep water drilling activities. Noble currently has 6 rigs deployed in Gulf of Mexico and with the halt to drilling, these rigs might have to be left idle.

However, it is reasonable to believe that the halt in deep water driling will be a temporary measure. In the long run, the United States government will allow deepwater driling with tougher regulation. Noble Corporation appears to be well positioned with its diversified revenue stream and strong managment team to weather the temporary halt in drilling and grow its business. Moreover, it has also delivered solid financial result with minimal leverage in recent years. Using the cash flow and its financial, the intrinsic value of the company is at $113.79 which exist a huge margin of safety.

Wednesday, June 2, 2010

Finding undervalued Singapore Stock: Goodpack

Goodpack is engaged in renting its multi-modal, returnable metal box system, known as Intermediate Bulk Container (IBC). IBCs are used for the packaging, transporting and storage of cargoes. Through a network of subsidiaries, the Company provides a range of supply chain services and technical support to its clients globally.

Listed on the Singapore Exchange in 2000, Goodpack has emerged as No. 1 in the world in its business of supplying and leasing IBC. IBCs are able to provide customers with 20-40% savings over traditional packaging methods and Goodpack could lease its IBCs at half the rate that its competitors sell their containers for one-time use. Today it owns 1.7 million containers while its nearest competitor has 60000 containers of a different design.

Goodpack has a wide economic moat. As the world's largest provider of IBCs, it has clear advantages over its peers. Firstly, it allows the group to achieve economies of scale and greater trade-lane matching opportunities. Secondly, the sheer size of its IBC and market coverage also present a high barrier to entry for its competitors.

Besides its current business in natural rubber, fruit juices and synthetic rubber, the company is also looking into other new products such as automotive parts, chemicals, LCD panels & rice. The market value for each of the new products is huge. Beside targeting new product, the company is also looking into expanding its foothold into new countries such as South Africa, Taiwan, Russia and the Middle East

After going through Goodpack's business model, let's walk through the financial of the company to arrive at the estimated intrinsic value:

1. Sales revenue had been increasing every year from 26.6 mil in year 2001 to 102.4 mil in year 2009. Net income as well as cash flow from operations had been increasing consistently from year 2001 to 2009
2. Goodpack has future growth drivers in place. It is penetrating its services to new market such as autoparts, a market that is 10x times larger than current market. There are progress though slow in penetrating new markets
3. The company also has low debt-to-equity ratio. It also has high ROE of 15% and ROA of 8%
4. Goodpack require low CAPEX to maintain current operations

I like Goodpack for its good financials and great growth as well as the business model. Based on the DCF method, the stock's intrinsic value is at $2.02 which represent a margin of safety of 28% from its current trading price

Wednesday, May 12, 2010

Ezion Holdings - Valued entry into growth story

Ezion Holdings is a pure marine & offshore provider. It is involved in the provision of offshore marine logistics & support services and the development, ownership and chartering of strategic offshore assets such as Multi-Purpose Self-Propelled Jack-Up Rigs ("Liftboats"). It is the owner of the largest and most sophisticated class of Lifeboats in the world and one of the first to introduce the usage of Liftboats in Asia & Middle East.

Ezion Holdings's value is in their first mover advantage to own the world’s largest liftboats. This is due to its five-year exclusive building contract with US-based Levingston Inc. (expiring in 2013). Ezion’s liftboats are versatile offshore construction vessels that do equipment lifting for a wide variety of works at offshore oil fields and wind farms. Beside this, Ezion secured a contract to supply marine logistics vessels to US energy company Chevron for the first phase developmental work of Gorgon gas fields. The company is expected to bid for other sub-contract work related to the US$43bn Gorgon Project.

The financials also provide evidence of a growing company. For the year 2009 ended December 31, Ezion grew its revenue by 136.9% and its gross profit by 105.8%. At its current price of SGD $0.73, it is trading at a P/E ratio of 13.4. This is low as compared to P/E ratio of 53.66 and 23.19 in Year 2008 and 2009.

I favour Ezion based on the following:
1. business transformation via the high margin liftboats, at an estimated 4.2 years payback periods
2. ability to self-fund this liftboat business expansion using debt and internal cash flows
3. Experienced and strong management to establish Ezion to be global dominant liftboat company and capitalise in the opportunities that are present in the offshore oil and gas industry as well as the offshore wind farm development market

Ezion is expected to grow 50% in the next 5 years and based on the growth rate, the intrinsic value is $0.95 which represent a 32% margin of safety

Wednesday, May 5, 2010

Value Investing and Beyond

A great video to start the topic of value investing. Bloomberg brought together a panel of top value investors which included Bruce Greenwald (Director of Research at First Eagle Funds), Robert Olstein (Chairman of Olstein Capital Management LP), Thomas Russo, (Partner at Gardner Russo & Gardner), and David Winters (CEO of Wintergreen Advisers LLC)at Columbia Business School to discuss the future of value investing.

This video is a must watch for value investors and is filled with knowledge of value investing wisdom.
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