Is White Horse a Value Trap? (Part 2 of 2)
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.
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Contents
- 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?
There are 10 directors on the Board of White Horse.
4 senior executives were featured in the 2019 Annual Report.
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.
Chart 2: Peer Revenue Index Note: Seacara had a change in the financial year in 2019 so the 2018 values are extrapolated |
Chart 3: Peer ROE Note: Seacara had a change in the financial year in 2019 so the 2018 values are extrapolated |
White Horse Vietnam
- 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.
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.
Summary
- 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
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?
- 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.
- 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.
White Horse 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
Chart 4: Valuation |
Table 1: Valuation metrics |
Comparing Asset Value with 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
- 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?
- 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
- 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
- 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.
Chart 5: Q Rating |
How to Secure Your Investment by Minimizing Risk
- Privatization risk
- Turnaround risk
Privatization
Turnaround risk
- Recover its Malaysian business
- Expand its exports
- The Group track record of positive cash flow from operations,
- It's low gearing
- The efforts it has taken to control cost
How to Benefit from the Case Study
- 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.
Reading guideIf 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 & DisclosureI 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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