Bursa Malaysia has been a chronic underperformer. As we noted last week (“The dichotomy of words and actions on the ringgit”, The Edge Singapore, Issue 1082, April 10), the FBM KLCI is the worst-performing benchmark index in the region, down by about 15% since end-2012 — yes, that’s negative 15% returns over the past decade. The local bourse suffered net foreign portfolio fund outflows in seven of the last 10 years. So far in 2023, foreign fund flows have also been negative.
We have discussed the possible reasons for this poor performance in previous articles, including the falling-stagnant profitability and earnings for Corporate Malaysia due, primarily, to underlying structural weakness in the economy. Perhaps it could also be argued that the FBM KLCI is not the best performance metric. After all, we believe, there is some inherent “flaw” in the way the index is constructed, focusing on the 30 largest stocks based on prevailing market capitalisations.
Regardless, the fact is that investors can do better — and we have proven this, emphatically, with the Malaysian Portfolio — through selective stock-picking based on fundamental research. And, sometimes, the market, driven by over-riding bearish sentiment, throws the baby out with the bathwater. In other words, opportunities for diligent investors. For instance, we recently wrote about the sudden collapse in Velesto Energy’s share price, triggered by a slew of negative analyst reports following dismal earnings results. The stock has since rebounded by some 30% from its lows in late February.
Sentiment for the broader market has been pretty downbeat for some time. Both the FBM KLCI and the broader FBM EMAS Index are in the red for the year-to-date. So, stock prices are, generally, depressed — a quick filter shows that 537 (almost 57%) of the 950 listed companies on the local bourse are currently trading below their book values. Our question is: Are there any deep-value stocks that are worth investing in?
We performed another simple (more extreme) filtering — for companies listed on Bursa and the Singapore Exchange (SGX) that are trading at negative enterprise values (EVs). (Owing to space constraints, we could only publish selected stocks here. FYI, you can easily repeat the same filtering or, indeed, pick out stocks based on your preferred parameters using a range of filters available on www.absolutelystocks.com.)
Negative EV means that the market is valuing these companies (market cap) at less than their net cash. The results are shown in Table 1. To be clear, this is not a “buy” recommendation list. There are many possible reasons behind a negative EV situation — it could be a red flag on the company or it could be an opportunity to buy the stock for less than its underlying value. Careful research would be needed to determine whether it is a value trap or an opportunity.
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When a stock is trading at less than net cash, it generally suggests that the market has a very negative perception of — and low confidence in — the company’s future prospects (rightly or wrongly) or governance and/or believe the cash is not real. It is also likely that some of these companies are simply too small and, therefore, not tradeable — this is more evident on the SGX list. And some are shell companies waiting for a corporate exercise, for example, SCGM on Bursa and Vertex Tech SPAC on SGX.
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We have said before that it is very hard to fake bank statements and, accordingly, net cash on the balance sheet, though not impossible, particularly if the monies are located offshore. Remember the cases involving several China-based companies, such as China Stationery and Xingquan International Sports Holdings previously listed on Bursa and China Sun Bio-Chem Technology Group Co on SGX? Investors were badly burnt, following revelations of massive accounting irregularities — including the reported cash going missing and discovery of previously unknown (unauthorised) loans. As the saying goes, when something appears too good to be true, it often is.
The market’s lack of confidence in a stock could also be due to perception of poor corporate governance: for instance, when investors expect that the cash — even though real — could be used in a way that is not in the interests of minority shareholders. It has happened time and time again. It is why the integrity of management and controlling shareholders is a key factor for investors when valuing stocks, and this is reflected in the stock price.
Furthermore, existing cash on the balance sheet could be whittled away by contingent liabilities, when the market anticipates imminent payments for retrenchment exercises, lawsuits and so on. For example, the Star Media Group (Star) spent some RM56 million on a mutual separation scheme/early retirement option in 2017.
When a company is persistently loss-making and, importantly, suffers negative cash flows from operations — whether due to idiosyncratic issues and/or broader economic downturn — that too will eat into its cash hoard. So, if the market has a downbeat outlook for the company’s prospects, it will, accordingly, place a big discount on the stock. In short, there are a myriad reasons that a stock might trade at negative EV, but not all of which are necessarily ominous.
Oftentimes, companies trade at discounts to their net cash and, more broadly, the value of their underlying assets, because of the “time to monetisation” factor. That is, investors are generally not patient enough to wait for asset value to crystallise. For example, many property companies are currently trading below their book values, not for any of the ominous reasons mentioned above, but simply because they are land-banking. The land is valuable but it takes many years to be developed and translated into earnings, cash flows and returns to shareholders.
In these cases, opportunity arises when the company unlocks the value of its assets, usually coinciding with the emergence of new substantial shareholders or activist investors, or when the company undertakes a major strategic change and restructuring or the privatisation of a listed entity.
A recent example that comes to mind is Pelikan International. The stock has historically traded well below its book value — averaging 0.4 times net book value last year. That is, until recent months, when speculation was rife that it was looking to dispose of its core assets. If true, it would crystallise the value of its stationery business. Pelikan’s share price has more than doubled this year and is now trading at almost 0.9 times book value.
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The restructuring at Singapore Press Holdings (SPH) is another good example of how investors can benefit greatly from asset monetisation. The company’s media business had been suffering from falling print advertising and subscription revenue, made worse by the Covid-19 pandemic, and it reported a loss for the first time in FY2020. In addition, the outlook for the print media industry remains downbeat from continuing tech disruption. SPH’s media business plays a critical function, however, in providing news and information in Singapore. On May 6, 2021, in response to shareholder pressure, it was decided that the media unit would be privatised into a non-profit company limited by guarantee. The rest of SPH’s assets (mainly real estate) were to be sold to Keppel Corp, for $2.099 per share, including cash and shares. A bidding war ensued, however, and the assets were ultimately sold to Cuscaden Peak (a consortium backed by tycoon Ong Beng Seng and portfolio companies of Temasek). SPH shares were trading at $1.13 at the start of 2021, rising to $1.79 just prior to the restructuring announcement in May 2021 and further to $2.35 before it was delisted in May 2022 (see Chart).
Of note, there was no negative EV company among components of the Standard & Poor’s 500 index and only a handful of very small companies in the Russell 3000 Index. Perhaps this could be attributed to the presence of powerful activist shareholders in a mature market. The absence of activist investors may well be the problem for both Bursa and SGX.
The Malaysian and Global Portfolios bought three stocks selected from Table 1. We tabulated the key assets held by each of the companies in Table 2. Let us be clear: We have no inside information on whether their shareholders-managements are looking to unlock value in the companies. As we said, one of the biggest risks for buying stocks priced far below their net asset values is time to monetisation. But we think they are deep-value stocks, trading at less than net cash in hand and likely to have limited downside risks. We also believe these three companies have controlling shareholders, boards of directors and managements who have reputations and integrity to protect. Patient investors may well be handsomely rewarded, over time.
The Global Portfolio gained 8% for the week ended April 18, boosted by the 31.8% surge in share price for Star. Other notable gainers include newly acquired Insas (+5.3%), Meituan (+3.3%) and BYD Co (+3.1%). In fact, all the stocks in our portfolio traded higher except for Alibaba Group Holding, whose share price fell 1.3%.
As mentioned, we added Insas to the Global Portfolio and also raised our stake in Star last week. Following these acquisitions, cash was reduced to 11.4% of total portfolio value. Total portfolio returns since inception were lifted to 34.2%, though still trailing the MSCI World Net Return Index’s 47.6% returns over the same period.
Similarly, the Malaysian Portfolio returns were lifted by strong gains from Star (32.5%) and Insas (9.6%). We bought additional shares in Star and Insas, and added KUB Malaysia to the portfolio. Our cash was, accordingly, reduced to 7.9% of the total portfolio. Total portfolio value was up 10.8% last week, even as the FBM KLCI fell 0.2%. Total portfolio returns now stand at 169.2% since inception. This portfolio is outperforming the benchmark index, which is down 21.7%, by a long, long way.
Last but not least, we wish all our Muslim readers Selamat Hari Raya Aidilfitri.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
