Singapore Stocks - Bargain Hunting

After a dramatic plunge below 3,000 points in February, the benchmark Straits Times Index has since recovered to close above. Yet a good many stocks remain undervalued or underowned. In this post, we will highlight 2 stocks – CWT and CSE Global.

CWT

CWT has 2 main business segments, logistics and Commodity SCM business. CWT is trading at 6.4x FY14F PER, representing a steep discount to its peers (average 16.7x). CWT has traded down from its 52 week high of $1.83 due to over-estimation of risks in Commodity SCM and lack of clarity on earnings growth ahead. The volatility in earnings due to its commodity related business has caused investors to reduced ownership of the stock. However the Commodity SCM business is less risky than perceived as CWT fully hedges prices in its Commodity SCM business, rendering the trades back-to-back and eliminating risk of losses through adverse price movements. Also, its main logistics business is expected to grow at 16% with the addition of redeveloped Jurong East Logistics Centre, Cold Hub 2 and Pandan Logistics Centre.

CSE Global

CSE Global is another stock that has underperformed the STI but have paid dividends over the last 12 months. CSE’s FY13 bottomline took a hit as it made provisions for project cost overruns amounting to S$8.1m. Following the successful divestment of CSE Global’s entire shareholding interest in Servelec Group in Dec last year, the company can now focus on driving its growth largely from the oil and gas sector. CSE has significant exposure to the Gulf of Mexico and the company is expected to benefit from the on-going recovery following the ill-fated Macondo oil spill incident and the imminent liberalisation of the Mexican oil and gas market.

Beside these 2 stocks, investors can also screen stocks that are undervalued by a few parameters such as positive free cash flow, a high dividend yield, low debt to equity ratio. The Edge Magazine in a February article did a screening of Singapore stocks that have underperformed the STI. pay a dividend, generate free cash flow and are in a net cash position. The screen produces stocks such as Chosen Holdings, Civmec, Keong Hong Holdings, F&N, Smartflex Holdings and TTJ Holdings

Undervalued SG stock: Goodpack update

I first wrote about Goodpack as an undervalued stock when I started the blog 3 years ago. Three years on, I still feel that Goodpack is a good stock and is one of the undervalued stocks listed on the SGX. The following blog post is a brokerage report on Goodpack issued by DBS Vickers on 19th March.

In the report, they had recommended investing in Goodpack. Below is the excerpt from the report on the investment thesis on Goodpack:

•        Russian market and new Lanxess plant in Singapore to drive stronger growth from 2Q13
•        Gaining traction in autoparts segment
•        Recent price weakness is a buying opportunity


Shifting to faster gear. Goodpack should see stronger growth from 4QFY13 (FYE June) with new contracts from the Russian market and Lanxess’ new plant in Singapore. Momentum should continue into FY14 with the pickup in rubber trade volume on the back of pent up demand in the replacement tyre market, which constitutes c.53% of total rubber demand, following 20 months of weakness. In addition, cost savings from the global tender exercise will help to improve net margins by an estimated 1ppt. We expect these to fuel FY14/15F net profit growth of 25%/16%.

Gaining traction in autoparts segment.  Goodpack has been knocking hard on the doors of GM’s OEMs and suppliers as well as a few other automakers. Hundreds of samples have been sent for testing and we understand that the company is making progress with a few suppliers in Europe. Future announcements of autopart contracts should be a share price catalyst. 

To read more on Goodpack, please click here 

Finding Undervalued US Stock: Coach Inc

Background

Coach is one of the most recognized brands in the luxury goods industry. It is a leading marketer of fine accessories for women and men, including handbags, women’s and man’s leatherwear, footwear, travel bags, watches, fragrances and related accessories. Coach was established in 1941 and sold to Sara Lee for $30 million in 1985. Sara Lee Corporation then sold 19.5% of the shares in an IPO in October 2000. Since listing of the company in New York Stock Exchange, Coach has grown to be the number one brand within the U.S premium handbag and accessories market.

Business Model
Coach’s merchandise is sold through Coach stores, factory outlets, select department and specialty stores, duty free locations in airports and online via their website, coach.com. It groups its business into 2 segments, namely Direct-to-Consumer and Indirect. Over 85% of the company’s sales are generated by Direct-to-Consumer segment, with the majority of the sales coming from selling handbags and accessories.  

Coach markets itself as selling “accessible luxury” and its pricing strategy for a handbag ranges from $298 - $1000 which means that its product reaches a larger consumer demographic than other high-priced competitors such as Louis Vuitton, Prada which focus on the very wealthy.  The strategy of targeting the higher and upper middle income shoppers differentiates Coach from its competitors and also helps to establish it as the poster child of tapping into this global trend of consumers wanting to trade up in the quality and style of what they buy.

As Warren Buffett says “In business, I am looking for economic castle protected by moats”, Coach has a narrow moat and competitive advantage. It has a strong brand presence in the luxury market and this is not easily eroded by other competitors. New competitors into the luxury brand industry will have to spend a large amount of money and resource to build up brand awareness and image. There is also consumer loyalty as Coach has been delivering high quality products that is simple, reliable and perceived value for the money.

To further grow the business, Coach has outlined its strategy of (i) raising its brand awareness and market share in under-penetrated Asian market with China being the top targeted market (ii) growing its woman’s business in North America and European market (iii) increasing its men’s business in North America and Asia (iv) maximizing e-commerce sales

Why is Coach a screaming buy?

Coach is a great company to invest in for a multitude of reasons. Coach has executed its strategy successfully over the past decade. Its revenue has grown progressively every year at a compounded growth rate of 21%. This is a mean feat considering that it is in a highly competitive sector. It has also showed that it is able to grow through strong or weak economies as evident by the increase in sales in 2009. The ability to keep increasing revenue shows the strength of its pricing strategy.

To find out why Coach is a undervalued stock that could turn out to be a multibagger, click here

Finding Undervalued Singapore Stock: Ocean Sky

This is a stock that I came across while reading a stock report recommendation from OSK-DMG. The stock is called Ocean Sky. Ocean Sky International Limited and its subsidiaries is a one-stop fully integrated apparel service provider with global end-to-end supply chain management capabilities from design to distribution. The Company’s divisions include Corporate Services, Apparel Agency and Apparel Production Services divisions. The Company's subsidiaries include Ocean Sky Marketing (HK) Ltd, Suntex Pte Ltd, Bright Sky Pte Ltd, Suntex Investment Co. Ltd, Bloom Time Embroidery Pte Ltd and Ocean Star Apparel (Guangzhou) Pte Ltd. 

Why is Ocean Sky undervalued?
The stock is currently trading below cash and offers a dividend yield of more than 11%. The company recently sold off its core apparel business together with two properties in Hong Kong which left the company flush with cash. OSK-DMG estimated the cash to be 30-
40% higher than the entire market cap of the company. With the huge amount of cash on hand, management will be expected to be dishing out some SGD0.016 of special dividend. Together with the final dividend of SGD0.008, this would mean that the yield on the company comes up to just over 11%. OSK-DMG estimates the intrinsic value of the stock to be about SGD0.29, which represents an upside of close to 40%. 

Valuation of Ocean Sky
Below is the valuation done by OSK-DMG. 

Risk of investing in Ocean Sky
In value investing, we are always focused on the risk of losing money; the downside. The risk of investing in Ocean Sky is that management might not be able to find a good business to reinvest the excess cash. 

An update was posted on Ocean Sky in October 2013. Check out the update here

Disclaimer: This is not a buy or sell stock tip. Please do your own research. 

How to find value in stocks

As the oldest rule in investing advocates investor to buy low, sell high. This essentially means that the goal of all investors is to buy an asset (stocks, bonds, gold etc.) for something less than you can sell it for. In order to do that, investor will have to be able to assess the value of the stock. In this article, we’ll go over the metrics on how to identify value in stocks. Consistent increasing sales, income and cash flow The first step to identify value is to determine if the stock has a history of consistently increasing earnings, sales and cash flow over a period of 5 – 10 years. We will use Cisco as an example in our illustration below. The earnings, sales and cash flow figures can be obtained from financial websites such as Google Finance, Morningstar. Below is a screenshot from Morningstar that shows that Cisco has increasing sales, net income and operating cash flow over the past 10 years.



High Gross Margins
The second metric to look at is the gross margin. Gross margin is defined as a company’s total sales revenue minus the cost of goods sold, divided by the total sales revenue. A high gross margin provides an indication of the economic moat of the business. Cisco below has shown a consistent high gross margin above 60% which indicates that it does has some economic moat as shown by its market leader status in server and routers.



To read the rest of the article, click here