Is White Horse a Value Trap? (Part 2 of 2)

Value Investing Case Study 06-2:  This 2-parter is on the fundamental analysis and valuation of White Horse Berhad.  Part 2 here focuses on valuation and risks.

Is White Horse a value trap?

White Horse Bhd (White Horse or the Group) is cheap with a market price of RM 0.60 per share (as of 2 Nov 2020) compared to its Book Value of RM 2.63 per share (as of 30 Jun 2020)

But how can you tell that it is not a value trap?

Many will say that the Group has made losses for the past 2 years and the current year is likely to be another loss-making one.

There are also those who will say that the share price has declined from its 5-years peak of RM 2.18 and is likely to remain low due to the projected losses.

I would contend that comparing the current price with historical prices is not the correct way to assess a value trap.  Any comparison should be made with intrinsic value.

Join me in Part 2 of this series as I present my valuation of White Horse and argue why it is not a value trap. 

An update was published on 7 Nov 2021.

Now as to whether you should go and buy White Horse - see my Disclaimer.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.


  • Did Top Management Seize Opportunities?
  • Is there an Awesome Buying Opportunity?
  • Will there be Spectacular Growth in Shareholders’ Value?
  • How to Secure Your Investment by Minimizing Risk
  • How to Benefit from the Case Study

Did Top Management Seize Opportunities?

Top Management

There are 10 directors on the Board of White Horse.  

4 senior executives were featured in the 2019 Annual Report.

White Horse Board Profile
Chart 1: Profile of the Board of Directors and Senior Executives

Directly and indirectly, the Executive Directors and Non-independent Board members have significant shareholdings in White Horse Berhad.   

The other major shareholder, Urusharta Jamaaah Sdn Bhd is owned by the Malaysian Ministry of Finance.  The Ministry does not get involved in management.  

I would thus conclude that White Horse is an “owner-managed” group.

Given the long tenure and experience, how did top management perform?

The chart below compared the performance between White Horse and other listed tile manufacturers in the country.

  • Revenue-wise, White Horse led the peers for most of the periods except for the last 4 years where it lost the top position to Kim Hin.  This was because of Kim Hin's exports.
  • ROE-wise, White Horse led the peers for 7 out of the 12 years (from 2008 to 2014).  

Top management performance is very good during periods of good economic growth.  But during the tough part of the economic and/or property cycle, they don't stand out.

White Horse Peer Revenue Indices
Chart 2: Peer Revenue Index
Note:  Seacara had a change in the financial year in 2019 so the 2018 values are extrapolated

White Horse Peer ROE
Chart 3: Peer ROE
Note: Seacara had a change in the financial year in 2019 so the 2018 values are extrapolated

White Horse Vietnam

The Group acquired White Horse Vietnam in 2013 for RM 64.74 million (USD 21 million) from White Horse Investment (S) Pte Ltd. 
  • There was a Total Guaranteed Profit of USD 12 million by the vendor to be achieved over a 4 years period. 
  • Any shortfall in the Total Guaranteed Profit was to be settled by offsetting the loan made by the vendor to White Horse Vietnam.  In 2013, White Horse Vietnam owed the vendor USD 23.7 million. 
  • The White Horse Vietnam 2016 financial statements were to be used to determine the shortfall.

Over the period from 2013 to 2019, the Vietnam operations ran at a loss.  The total accumulated losses for the period amounted to RM 56.3 million.

In the Circular to the acquisition of White Horse Vietnam, it was stated that 

“… with the expected increase in White Horse Vietnam export sales and optimization of capacity utilization of at least 80% of its capacity over the next 3 years after Completion, White Horse Vietnam would be able to reduce its overall unit production costs and accordingly improve its gross profit margin.” 

This was not achieved. 

The Group started to provide for this shortfall as a “contingent indemnification asset” in 2013. This was classified as “Other Assets” of RM 19.023 million in the 2013 Balance Sheet.

In its 2016 Annual Report, it was stated that White Horse Vietnam could not meet the profit guarantee.  As such the USD 12 million was re-classified to set-off the balance owned by White Horse Vietnam to the vendor.

With the completion of the profit guarantee, the Group acquired White Horse Vietnam for RM 64.74 million compared to its 2019 net asset of RM 69.1 million

Capital allocators

Over the period from 2008 to 2019, the Group generated a total profit after tax of RM 360.7 million.  Of this, 

  • RM 228.6 million was paid out as dividends. This is equivalent to a 63% payout ratio.
  • RM 5.5 million was spent on share buybacks. The prices paid for the shares were on average 57% of the NTA. 
  • The cash balance increased by RM 33.9 million
  • RM 64.7 million was spent on the acquisition of White Horse Vietnam
  • RM 212.6 million was spent on additional plant and machinery

Note that the Group used up more funds than those generated from the profits as during the same period, the Group also

  • Borrowed an additional RM 52.4 million.  
  • Generated significantly more cash from operations.

The point is that about 77% of the profits were reinvested back into the operations (including the White Horse Vietnam acquisition).  I would consider this well spent provided the Group would be been able to turnaround the business. 


I would conclude the following about top management
  • Has industry-leading operating track record during the good times.  But when the economy got tough, the performance has not been industry-leading
  • Has allocated its funds effectively. Cash that was not required for reinvestment was distributed to the shareholders.  Shares were bought back at a significant discount to the NTA.
  • Has protected shareholders' interest in the White Horse Vietnam-related party acquisition.

Case Notes

I have avoided using multiples in my valuation because I do not think that it captures the cash-earning capabilities of the business.  

If you accept that the intrinsic value of a business is the cash flow generated by the business over its life suitably discounted, you would also avoid relative valuation.

But this is not to say that I do not use relative valuation. In fact, I use both the Price Earning and Price Book multiples when screening for stocks.

From a value investment perspective, an investment is only made after a comprehensive company analysis and valuation.  In practice, it takes me about 10 to 15 days of full time to analyze and value a new company.  Imagine running through the past 12 years of annual reports not only for the company but also for the key competitors. 

So when I start on such an analysis, I want to have a more than fighting chance that in the end, there will be a good investment prospect. To ensure this, I screen for the companies I want to analyze.

My screens will throw out those with
  • ROE < 10 %
  • PE > 12
  • Price Book > 1.2

This will ensure that my detailed analysis covers those with good returns as well as good valuation prospects.

I appreciate that to be able to value companies well, you need to be a bit numerate. If you are not numerate and worry about valuation, you can still invest based on fundamentals by relying on third-party assessments. There are many advisers who do this well. These include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can have the business analysis, valuation, and risk assessment.

Is there an Awesome Buying Opportunity?

From a value investing perspective, I invest when price < intrinsic value. 

I generally use two approaches in assessing the intrinsic value
  • Asset-based where the assets are viewed as a store of value. This is generally a straightforward exercise. I would assume that the Balance Sheet reflects the fair value of the Group’s assets and liabilities. 
  • Earnings-based where the assets are viewed as a generator of value. This is generally assessed based on the Free Cash Flow generated by the business over its lifetime. 

My base case Earning based valuation is one assuming that the past 12 years performance is a good sign of the future. 

For companies like White Horse facing a turnaround situation, the base case Earning Value would not be realistic.  In a turnaround, you would assume that the future should be better than the historical performance. 

There are two ways to guesstimate the Earning Power value in a turnaround case
  • Consider that historical extra-ordinary expenses as a once-off expense. 
  • Given that the Group capacity is under-utilized, we could consider the impact with better utilization.

In the case of the former, from 2014 to 2019, the Group incurred RM 82.6 million from forex losses and impairment of assets (refer to Part 1).  Accounting for this, the Earning Power Value would be RM 0.88 per share. 

In the case of the latter, we took the 2006 to 2017 average performance as what could be achieved. Incorporating this I derived an Earning Power Value of RM 1.73. 

If you take the average of both the “no extra-ordinary expenses” and the “maximum capacity” we have RM 1.30 as the optimistic Earning Power Value.

White Horse Valuation

The chart and table sum up White Horse’s valuation. 
  • The Earning Power Value is significantly below the Asset value.  This is not surprising as the Group has been operating at a loss for the past 2 years. 
  • Over the past 5 years and even currently, the market price of White Horse share has been below the Asset value.  In fact, the company is trading below its Net-Net (a proxy for liquidation value) of RM 0.76 per share.
  • Given the Earning Power Value ranging from RM 0.45 per share to RM 1.30 per share, any margin of safety would be from the Asset Value
White Horse Valuation
Chart 4: Valuation

White Horse Valuation Metrics
Table 1: Valuation metrics

Comparing Asset Value with Earning Power Value

Another concern that I have is the large difference between the Asset Value and Earning Power Value.
  • In a competitive environment, you would expect the Earning Power Value to be the same as the Asset Value.  This meant that the Group is generating the expected returns
  • If the Earning Power Value is below the Asset Value, it could be the result of poor management.  Or the Asset Value is over-valued

At RM 2.63 per share, the Asset Value is 52 % higher than the highest Earning Power Value of RM 1.73 per share.

As White Horse out-performed the industry during good economic periods, I would rate management as OK.  I am more inclined to think that some of the assets as reported in the Balance Sheet could be over-valued. 

One possible cause could be the depreciation rates adopted by the Group. If a higher depreciation had been adopted the value of the fixed assets would be lower. 

This is not unrealistic as the depreciation rates for the Malaysian operations are higher than those for Vietnam.  (Refer to Independent Adviser’s comments in the acquisition Circular)

Note that the higher depreciation rate does not affect the Earning Power Value.  This is because the calculation is based on Free Cash Flow where the depreciation is added back to the profits after tax. 

Is there an awesome buying opportunity?
  • I would conclude that at the current market price, the margin of safety comes from the Graham Net Net.  A higher intrinsic value is a bonus. 
  • I would assess the Asset Value of RM 2.63 per share as not reflective of its intrinsic value.  RM 2.63 per share is probably too high. 
  • The Earning Power Value is a better estimate of the intrinsic value of White Horse than the Asset Value. This will of course depend on how you view the prospects of the Group. I would see the most optimistic value to be RM 1.73 per share. 
  • Given that White Horse is currently trading below its Graham Net Net, the intrinsic value provides a “bonus margin of safety”

Will there be Spectacular Growth in Shareholders Value? 

In investing, I consider quality from the perspective of creating shareholders’ value.  
  • A high-quality company will have a good likelihood of increasing shareholders’ value.
  • A low- quality company is one that is likely to destroy shareholders’ value. 
  • The Q Rating assess this dimension 

White Horse has an overall Q Rating of 0.31 placing it in the bottom 1/3 rank of the panel companies. (Refer to Note 1).  This is not surprising given the poor historical performance.  
  • But it has a good Financial score meaning that it has low financial risk
  • It has zero Profitability score implying poor return prospects
  • Not surprising, the Growth score is low

Despite its profitability and growth challenges, the Group is financially strong with a debt to equity ratio of 0.3.  
  • Over the past 12 years, it has generated an average of RM 62 million in cash from operation annually.  As shown earlier, this has been sufficient to fund dividends and Capex. 
  • Even with the past 2 years' losses, the Group's past 2 years of cumulative cash flow from operations is still positive. 
White Horse Q Rating
Chart 5: Q Rating

In line with the Q Rating, the actual track record in creating shareholders’ value has not been very impressive. 

From 2007 to 2019, assuming no dividend was paid, the Group only generated about 5% compounded annual growth in shareholders’ funds.  

How to Secure Your Investment by Minimizing Risk


When you look at the risks in investing in White Horse, I would see the main one as 
  • Privatization risk
  • Turnaround risk


I have mentioned in the past postings that at the current market prices, it is very attractive to take companies private.

White Horse is no different. 

In the White Horse case, the Board members collectively control about 40 % of the company.  Any plan to acquire the remaining 60 % at the current market price of RM 0.60 per share would need about RM 82 million. 

The company has cash and securities of about RM 84.9 million (as of June 2020). 

So, it would be possible to privatize it via a mix of capital reduction and external funding by the Board members.   

Would the controlling shareholders privatize the company then?

You will have to judge for yourself.

Your protection from privatization risk actually comes from the other substantial shareholder - Urusharta Jamaaah Sdn Bhd. 

This is owned by the Malaysian Ministry of Finance as part of the Tabung Haji rescue plan that was executed at the end of Dec 2018.  At the juncture, the White Horse share price was around RM 1.53 per share. 

I am very confident that the Malaysian Ministry of Finance would not vote for privatization based on the current market price. 

I am not even sure that the Ministry would favour any privatization exercise based on RM 1.53 per share as this is substantially below the book value (even if considering the high depreciation rates). 

Turnaround risk

To turnaround the business, the Group has to 
  • Recover its Malaysian business
  • Expand its exports

The decline in the Malaysian business is due to the soft Malaysian property and construction sectors. If not for Covid-19, 2019, and 2020 would probably be the bottom of the current cycle.

Accordingly, I would expect the industry to recover.  The risk is whether the Group has the resources to withstand a few more years of a soft property and construction market.

I think that the Group would be able to do so given
  • The Group track record of positive cash flow from operations, 
  • It's low gearing
  • The efforts it has taken to control cost

The Group has been able to grow its exports as shown in Part 1. Again, the challenge here is the low global economic growth due to the pandemic. 

The positive sign is that there is no sign of any substitute material to threaten the use of ceramic tiles. I would conclude that White Horse is not in a sunset industry that can hinder any turnaround. 

If the current performance is tied to technology or green issues, I would have assessed the turnaround risk as high. 

Rather the turnaround risk is tied to the risk of a prolonged economic recovery. Being the market leader in Malaysia and having a strong Balance Sheet helps to mitigate such risk.

How to Benefit from the Case Study

What is our investment thesis? 
  • The Group is financially strong and not burning cash giving it time to outlast the economic downturn. 
  • A turnaround is tied to the recovery of the Malaysian property market (for domestic sales) and well as global GDP growth (for the exports). My estimate is that this will take another 2 to 3 years before we see any results. 
  • The Group has a good track record when the property market is doing well and hence should be able to recover. Its under-utilized capacity would also boost its bottom line when production volume goes up. 
  • This is a classic Graham Net Net long-term investment – you have downside protection and you bet on the upside. 

I started the case study with the question of whether White Horse is a value trap.

If you compare that current price with the intrinsic value, you can see that there is more than a 30% margin of safety.  This is assuming a conservative intrinsic value of RM 1.30 per share.

The market has under-valued White Horse and it is not a value trap. You need to be patient.

This is all well and good if you buy it currently. 

What if you had bought it in 2018 at RM 1.53 per share? 

I would hang onto the shares.   There are very good chances that the Group would return to profitability and that the market will re-rate it.  Don’t expect too much of an upside, but it is definitely better than selling now and crystallizing the loss.

End of Part 2 of 2

An Update was published on 7 Nov 2021

1) About 80 companies across a number of non-financial sectors are covered annually.  For further details, refer to the posting  "Q Rating"

Reading guide
If you are a first-time visitor to this blog, you may not be familiar with some of the concepts that I have used in my analysis and valuation.  I suggest that you check up the Foundations series - Fundamentals 01,  Fundamentals 02, and Fundamentals 03.   I also have a Definitions page in case you are not familiar with the terms I have used. 

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Disclaimer & Disclosure
I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.

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