BEST WORLD: "100% gain this year, what attracted me to it last year"

Ming, who retired in 2015 from an accounting-related career, contributed this article to NextInsight. His investment in Best World International's shares has done exceedingly well: The stock, $2.62 currently, has surged an astonishing 100% this year, lifting its market cap to S$1.4 billion.

Considering the historical performance of the business and assuring words from the management in the financial results announcements, I formed a view that the setback was temporary, and the business was on course to be a great growth business.

It’s one year since, and the market has moved up and down a lot during that time but my confidence in the business has grown. 

As a value investor, I will hold Best World for the long term, and have no intention to trade the share.

In my one year of being a shareholder, Best World has gone through milestones such as:

1. In Feb 2018, company reported that its profit for FY17 surged 61%.
   
   
2. 1Q 2018 results fell 40% due to a change in its business model in China and the accounting treatment. But the underlying business fundamentals continued to be strong. This could be seen in its “other income”.
   
   
3. Institutional investors sold down Best World after the 1Q results, as reported in Business Times which relied on Singapore Exchange data:
   
   

With a market cap of S$750M during the trading period, institutional investors were buying high at about $1.60 to $1.50 during the first few months of 2018 and selling at $1.40 to $1.28 after the release of Q1 results.

In total, institutional investors sold down about 5% of Best World after its Q1 results.

4. As a show of confidence, the management of Best World and as well as the company bought the shares. (May 16 to Jun 25)
   
   
5. During the Q2 results’ briefing, the management conveyed their conviction that the business performance in China was strong.
   
   
6. Just before the release of Q3 results, RHB Research initiated coverage of Best World with a buy rating, which triggered the start of a recovery of the stock price.
   
   
7. Speculators and traders playing the shares have missed the best profits if they sold too early.
   
   As we can see from the table below, institutional investors started buying back aggressively from Oct 22 till presently.
   
   
   

The average retail investor took profit as the share price increased, probably missing the big move to fair valuation.

In my view, the recent run-up in the share price is a move toward the fair value of a high growth business.

Peter Lynch’s book has highlighted the power of compounding growth. I have put together a table to show how Best World’s stock price can surge if the business grows at 20% a year:

Best World’s business is very scalable and with its franchise model in China growing to cover 10 provinces, the upside is expected to continue for many more years.

There was a write-up (click here) on a 100-bagger called MTY Food Group, which is listed in Toronto.

As the writer noted: “… the company only grew earnings by 12.4x, how did the stock grow 100x? The answer lies in the price to earnings multiple expansion. Investors in MTY went from paying roughly 3.5x earning when it was left for dead in 2003 to a more optimistic 26x earning in 2013.”

(By the way, MTY has gone on to become a 300-bagger currently!)

So, again, you need huge growth in earnings. The combination of rising earnings and a higher multiple on those earnings is what really drives explosive stock price returns over the long-term.

This is the twin engine of growth.

As Best World’s market cap grows bigger (currently about S$1.4 billion) and the stock has more liquidity, bigger institutional investors will be attracted to it as some of them have in-house rules that set the minimum size of stocks they can invest in.

We could be sitting on a golden goose called Best World.