While on the lookout for undervalued stocks, Hanwell Holdings (Hanwell) is one such company that caught our eyes. The group is primarily involved in two main business segments – Consumer Essentials and Strategic Investments. Hanwell’s Consumer Essentials segment specializes in the manufacturing and distribution of a wide range of fast moving consumer products with popular proprietary brands including Royal Umbrella rice, Beautex tissue products as well as Fortune Food soya bean-based products. Meanwhile, the group’s strategic investment segment’s key investment is in Tat Seng Packaging Group, one of the leading manufacturers of corrugated paper packaging products with operations in Singapore and China.
For the period FY18, Hanwell’s Consumer Essentials and Strategic Investments segments constituted 33.5 percent and 66.4 percent of the group’s top-line respectively. The majority of Hanwell’s revenue was derived from the China market at 57.5 percent while the remaining shares were contributed by Singapore and Malaysia markets at 28.9 percent and 13.6 percent.
Source: Company’s Annual Reports
Stocks could be trading cheaper than their assets value for a reason. More often than not, a stock may be ignored by investors because the company has been making losses or has poor operating cash flows. While we are looking for undervalued stocks in term of assets value, we simply cannot disregard earnings. We think profitability is important, as losses made over time will eat into a company’s assets and in the worst-case scenario, it may even fail to continue as a going concern. While we do not expect fantastic results, companies must at least be able to generate positive earnings in the last few years in order for us to take it into consideration.
Over the last five years, Hanwell delivered a stable growth in its revenue attributed to stronger demand in packaging business with both the Singapore and China sectors experiencing expansion. In addition, the consumer business in Malaysia also achieved better performance as a result of new agency products, more aggressive promotions and closer working relationship with various distribution channels to drive sales. Consequently, the group’s revenue grew at compounded annual growth rate of 4.6 percent to $501.6 million in FY18. In line with the higher revenue, net profit surged 53 percent to $13.4 million in FY18 over the same period.
Source: Company’s Annual Reports
Deeply Discounted Assets
The price-to-book (P/B) ratio is a common metric which investors use to gauge values, and having a P/B ratio of less than one means that a stock is trading at less than its net assets value. Trading at $0.23 a share as at 25 February 2019, Hanwell’s share price currently offers a 55.7 percent discount with respect to its net asset value at $0.5194 a share. The group’s P/B ratio currently stood at around 0.4 times.
Looking closer at Hanwell’s balance sheet, it is notable that the group does not have high debts. As at 31 December 2018, the group holds $152.4 million of cash in its coffer and has $87.2 million of debts obligations, putting it in a net cash position of $65.2 million.
Moreover, Hanwell qualifies as a net-net stock. Net-net investing, a value-investing technique popularized by Benjamin Graham, defines net-net stocks as companies trading at less than their net-net value (current assets less total liabilities). In these instances, the companies’ long-term assets including properties, plants and equipment (PPE) as well as their profitable business are as good as given free. With $409.2 million of current assets and total liabilities of $222.7 million, Hanwell’s net-net value stood at around $186.5 million. This translated into a net-net value of $0.3370 per share which is already around 46.5 percent higher than the group’s last market price of $0.23. Do note that this has not even taken Hanwell’s $162.9 million of non-current assets into account.
Taking a step further, not all assets are of equal values. For instance, cash assets being liquid, are of a higher quality than inventories which may be difficult to liquidate in times of emergencies. In addition, inventories in fast-moving industries may also become obsolete quickly and worth less than its recorded values. As such, one feasible proposition will be to compare market prices against a “conservative net asset value” (CNAV) – which only take into account cash and investment properties at their full value, as well as receivables, inventories and PPE at 50 percent of their recorded book values. We believe that this could provide us with a greater margin of safety when assessing assets value.
Along these lines, if we want to be more conservative by taking just Hanwell’s quality assets into consideration (including cash and investment properties at face value as well as inventories, receivables and PPE at half their recorded values) to net off its total liabilities, CNAV stood at $119 million which is equivalent to around $0.2150 per share. This conservative figure is quite close to Hanwell’s current market price reassuring us that we are not over-paying for Hanwell’s assets at this level.
Pop Up In Share Price
Hanwell’s share price jumped 22.2 percent to close at $0.22 on 11 January 2019 upon the group’s announcement to undertake a capital reduction exercise by way of a cash distribution of $0.03614 a share. Together with the group’s final dividend of $0.01 a share, investors may look forward to a one-time yield of around 20.1 percent based on current market price.
We think this might lead to more investors taking notice of Hanwell’s asset-rich fundamentals. Technically, should Hanwell break above its recent consolidation high of $0.23, more potential upside can be expected.