Invest like Benjamin Graham in Malaysia stocks

Benjamin Graham is the father of  investing and his way of value investing was to search for net-net stocks where he will construct a basket of stocks as his portfolio. His method of value investing is still being widely practiced by value investors such as Seth Klarman, Third Avenue Management etc. Following my blog post a month ago on Singapore stocks via a report by CLSA, I would like to feature a similar report by CLSA on Malaysia stocks. 


Ben Graham stated 10 rules for stock selection, the first five measuring “reward” (price relative to earnings) and the second five measuring “risk”  financial soundness and earnings stability). Ben Graham's 10 criteria are:

• Is PE ratio less than half the reciprocal of the 10yr government bond yield?
• Is the PE ratio less than 40% of the 5yr average?
• Is the dividend yield at least 2/3rd of the 10yr government bond yield?
• Is the share price below 2/3rd of tangible book value per share (BVPS)?
• Is the share price less than 2/3rd of net current assets per share?
• Is the net gearing ratio (net debt/equity) less than 100%?
• Is the current ratio (current assets / current liabilities) greater than 2x?
• Is total gross debt less than 2x net current assets?
• Has EPS growth over the last 5 years averaged more than 7%?
• Has EPS growth been negative no more than 1 year out of past 5 years?

Mirroring these 10 “value” requirements, CLSA Asia screened our ex-financials coverage universe: 13 of 31 stocks score 5/10 and above – big-caps are Genting, PGas, Tenaga, Gamuda, Genting(M) and KLK. Small-caps top the list, with Padini scoring 7 (highest) and rubber glove stocks Top Glove, Hartalega scoring 6. At the bottom of the list, we are underweight Astro, BumiArmada and Maxis. Stocks showing value and dovetailing with “base case” election outcome top picks are Tenaga, Gamuda, PGas, Genting(M), UEM Land, Top Glove and Padini.

For those interested to read more about the report by CLSA, please click here

Invest like Benjamin Graham in Singapore stocks

Benjamin Graham is the father of  investing and his way of value investing was to search for net-net stocks where he will construct a basket of stocks as his portfolio. His method of value investing is still being widely practiced by value investors such as Seth Klarman, Third Avenue Management etc. In this blog post, I would like to refer to an article by CLSA to explore the idea of investing in Graham-like stocks in the Singapore stock market.

This is a reprint of an article from brokerage research house, CLSA. In this article, they construct a stock screen that incorporates the attributes that Ben Graham looks for in a undervalued stock and run the stock screen through all the SGX stocks to find stocks that fulfill it. The end result of this stock screen is the Ben Graham Number.

What is the Ben Graham Number?
Graham Number is a concept based on Ben Graham's conservative valuation of companies. Graham Number is calculated as follows:

Graham Number = SquareRoot of (22.5 * Tangible Book Value per Share * Earnings per Share)
= SquareRoot of (22.5 * Net Income * Total Equity) / Total Shares Outstanding

Which Singapore stocks passes the Ben Graham Screener?
The following list of stocks passes:
F&N
City Dev
Keppel Land
Ezion
Parkinson Retail Asia
Keppel
Genting
Capitaland
Singapore Airlines
ST Eng
Semb Marine
Golden Agri
YangZiJiang
SATS
Singapore Post

CLSA article below:

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