Value Investor, who works in the fund management industry and is vested in the shares of San Teh, contributed this article to NextInsight.
THE SPIRITUAL FATHER of value investing, Benjamin Graham, pioneered the "net net" technique in which a firm is valued solely on its net current assets.
As Investopedia explains, when a viable company is identified a net net, it is "about as close to a sure thing as you can get in the markets".
With the proliferation of information and computers since the days of Ben Graham, net net opportunities very rarely spring up. These days, they only show up usually in small capitalisation firms because professional fund managers neglect this area of the market.
We pointed out one such opportunity in late 2009 pertaining to Lion Asiapac. Investors who seized the opportunity then would have reaped a healthy return. After a long two years, our screens have finally thrown up a net-net gem for us to start 2012 on the right footing.
San Teh is a Singapore Exchange mainboard company with a cement business in China. Despite being listed since July 1991, it will not be a company familiar to friends when you swap investing ideas at New Year parties.
In August, San Teh announced plans to dispose the cement business to China Resources Cement Holdings. Following the sale, the firm is expected to receive a total cash inflow of S$319.1 million.
Part of the proceeds will be used to fully repay its group companies' existing bank borrowings of S$66 million and to support its remaining hotel and PVC pipes business.
On a per share basis, the disposal would increase San Teh's NAV to S$0.92 per share. More interestingly, its net cash spikes to S$0.70 per share.
The stock rallied on the back of the August announcement, which dangled this carrot: "The Company intends to pay a special dividend of S$0.30 per Share or a total dividend payout of S$103,174,000 to its shareholders upon the completion of the Proposed Transactions."
Currently, there could still be money left on the table.
Following the successful closure of the disposal, San Teh confirmed in an SGX filing on 29 December 2011 that it would pay the whopping special tax exempt dividend of S$0.30 per share.
This special dividend will be doled out on 31 January 2012.
With many investors sitting on the sidelines due to fear or out holidaying, San Teh closed trading on Friday at only S$0.60, at an unreasonable discount to its net cash assets. Trading back up to its net cash level of S$0.70 implies an upside move of 16.7%.
Previous NextInsight story: SAN TEH: Boost to come from Shanghai listing?
Additional content from Value Investor published at 11 pm, Jan 2.
San Teh was incorporated in Singapore in 1979. It was founded as joint venture between Taiwanese turned Singaporean entrepreneur Kao Shin Ping and Sun Arrow Industry Co Ltd of Japan back in 1979. In 1982, Mr Kao bought out his Japanese partner.
The company was listed on the secondary board in 1991 and was upgraded to the mainboard in 1993. Unlike S-chips, San Teh is headquartered in Singapore. Its business lines are in China as management considers the country to offer the most growth prospect.
Following the divestment of the cement business to China Resources (a large Chinese state owned enterprise), it will continue to have PVC pipe manufacturing operation (in Nantong) and hospitality/commercial business (in Nantong, Suzhou and Anting).
As proof of the presence of cash on its balance sheet and an indication of the stock being cheap, San Teh conducted share buy backs when the stock traded at around S$0.55. The last such trade was done in 6 October 2011.
San Teh will receive S$309.1 mil cash from the sale of the cement business. By our estimates, following repayment of bank borrowings (S$69.6 mil), it would have about S$239.5 mil. On a per share basis, this implies that San Teh's balance sheet is flushed with S$0.70 net cash position and an NTA of S$0.92 (over a 343 million shares). The S$0.70 net cash was conservatively derived after ignoring the entire S$115 mil cash in its 2Q FY2011 balance sheet.
Management has a track record of declaring dividends to reward shareholders. Hence, following the S$0.30 special dividend, San Teh could continue to undertake shareholder friendly action by doling out more special dividends. This occured in the case of Lion Asiapac where management followed up with another large special dividend several months after the declaring the first.
Taken together, we consider that an adequate margin of safety exists because the current share price of S$0.60 offers a 53% discount to NTA.
With the special dividend of S$0.30 per share which will be paid out in end January, San Teh could trade to its net cash position of S$0.70 relatively quickly; suggesting that a return of 16.7% could be crystallised in a reasonably short time frame.
Comments
At 60c a share, it is indeed a good bargain. With cash paid to retire debts and 30c dividend, there are at least 45c cash available and get the rest of assets almost free.
Wonder if the company has hedged the RMB or not as the RMB has risen against SGD since the acquistion was made.
I agree that San Teh at 60 cents is a wrong valuation. It is like getting a 10 cent of goods (in this case - cold hard cash) for every 60 cents for goods that one buys!
Think many forumers are raising the possibility of second dividend. so think it is a buy up to the 70 cents for the first price target tomorrow!!
THANKS and please share more ideas in 2012!!!
Freedom way of valuation of the company seems to be right. The current trading price reflects the similar discount given to NAV before the sale. Before the sale, NAV was 68c and market priced it at 39c which means a discount of 43%. After the sale, NAV is 92c and after dividend NAV is 62c, using the same discount of 43%, the market would value remaining assets at 35c and adding back 30c to get 65c approx current trading price.
Nonetheless, to me, Mr Market has valued San Teh crazily wrong this time. The pure net cash assets after dividend is 28cents. So essentially the market is valuing the other fixed assets (despite loss making) at 7 cents or less where the actual value should be 30 cents. That is too much of a discount. Let see how it goes.
San Teh isn't one of those s chips. Go look at it's place of incorporation, management and board!
This is a Singapore company. So happens to have invested in this Chinese business a while back and is divesting it. China resources is a huge listed Chinese conglomerate that it buying San Teh's cement business.
May fortune favours those who research this year!
Shin Ping would be evaluating how much working capital that the chinese hotel and the pvc pipes business needs. given his shareholder friendly actions, Shin Ping could engineer San teh to payout another special dividend of 15 - 20 cents at the next half financial year.
Good luck investing!