Is Astino a value trap?

Value Investing Case Study 61-1: Astino Holdings: A solid investment or a risky cigar-butt play? Discover the 30% margin of safety!

I first invested in Astino in 2017 at an average price of RM 0.74 per share. I held it for about a month before selling it at RM 1.09 per share which resulted in a gain of 47%. Given the short holding period, this was equivalent to a multi-bagger from an annualized CAGR perspective.

The market price of Astino is today at about the same level as what I bought in 2017. Of course, this price was after considering the 4 for 5 bonus issue in 2021. 

I want to see whether there was another multi-bagger opportunity for Astino.

Join me as I carry out a fundamental analysis and valuation of Astino. Based on these, I found that while I do not consider Astino as a wonderful company in the Buffett sense, it is profitable and financially sound. There is also more than a 30% margin of safety from both an NTA and Earnings Power Value perspective. 

As such I would not consider it a value trap but an investment opportunity in the” cigar-butt” sense. A cigar butt investment is a term popularized by Warren Buffett and his mentor, Benjamin Graham. 

It describes an investment strategy where investors seek out stocks of companies that are undervalued or out of favor with the market but still have a small amount of value left in them. This is much like picking up a discarded cigar butt that still has a few puffs left. These stocks are typically bought at very low prices, with the expectation that they will yield some return before they lose their remaining value.

Should go and buy it? Well, read my Disclaimer. 

Contents 

• Investment Thesis

• Background

• Operating performance

• Financial position

• Valuation

• Conclusion

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Investment Thesis

Astino delivered single-digit revenue and earnings growth over the past 12 years. Its average returns just about matched the cost of funds suggesting that it barely maintained its shareholders’ value.

While its operating results are nothing to shout about, it is financially sound. Based on the past 12 years' performance, I estimated that there is more than 30% margin of safety from both the NTA and an Earnings Power Value perspective. It is not a value trap but a cigar-butt investing opportunity. 

Case Notes An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions.  It defines your reasoning. A clear thesis encourages disciplined decision-making. It helps assess risks. It provides a benchmark to evaluate whether the investment is performing as expected. An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Background

Listed on Bursa Malaysia in 2003, Astino is principally engaged in the manufacturing and trading of metal building materials and other steel products. Its main products included metal roofing, purlins, steel pipes, and agro facilities.

The Group has 10 manufacturing plants located at strategic locations in Peninsular Malaysia. The Group did not provide a breakdown of its revenue into the various products. 

However, looking through its project references, I would conclude that the Group's focus is its roofing products.  Similarly, looking at the details of subsidiaries in its 2023 Annual Report, there were more companies involved in roofing products.

While the Group delivered revenue growth over the past decade, sales volume has been declining. Refer to Chart 1. The increasing revenue with lower sales volume implies increasing unit selling prices. 

Secondly, this is a Group where domestic sales accounted for the bulk of the revenue.

Chart 1: Revenue profile.  Source: 2023 Annual Report

Operating performance

Over the past 12 years, revenue grew at 2.1 % CAGR while PAT grew at 1.8 % CAGR. This is not a high-growth Group. However as shown in the left part of Chart 2, PAT was more volatile.

• The adverse performance in 2015 was mainly due to a decrease in overseas demand for products and lower profit margins as a result of weakening market demand and intense competition.

• The drop in 2019 was due to lower gross profit margins and a higher effective tax rate.

• The spike in PAT in 2021 was due to higher selling prices. This led to a gross profit margin of 22 % compared to the 14% for the previous 2 years.

Chart 2: Performance Index and Returns

Note: The 2024 results were based on the Jan 2024 LTM performance.

The 2021 and 2022 profits were externally driven in that Astino benefited from the spike in global steel prices as illustrated in Chart 3. But as can be seen, steel prices declined thereafter. This resulted in declining profits in 2023 despite growing revenue.

Over the past 12 years, there was hardly any growth in the returns. ROIC averaged 8.5 % while ROE averaged 8.9 %. These average returns were around the current 8.4 % WACC and 8.7 % cost of equity. Comparing the returns and the cost of funds, I would say that it barely created shareholders’ value. I think this is much better than destroying shareholders’ value. 

The other characteristic of the return was the volatile CFROIC compared to the ROIC and ROE. This was due to the volatile cash flow from operations. 

Chart 3: Hot Roll and Cold Roll Prices   Source: Trading Economics

Given the poor returns, you should not be surprised that there was no sign of improvement in productivity or efficiency:

• Capital efficiency as measured by gross profitability declined by 1.9 % compounded annually over the past 12 years. Refer to the left part of Chart 2.

• Asset turnover declined over the past 12 years. Refer to the right part of Chart 4.

• There was hardly any change in leverage.

• I also could not identify any improving trend in the contribution margin. Refer to the left part of Chart 4.

Chart 4: Returns and DuPont Analysis

Note to Op Profit Profile. I broke down the operating profits into fixed costs and variable costs.

• Fixed cost = SGA, Depreciation & Amortization and Others.
• Variable cost = Cost of Sales – Depreciation & Amortization.
• Contribution = Revenue – Variable Cost.
• Contribution margin = Contribution/Revenue

Peer performance

There is only one other roofing manufacturer on Bursa Malaysia – Ajiya. Thus to get a better peer analysis, I included the following:

• CSC Steel – this is a cold rolling mill with steel pipe products.

• United U-Li – this is an electrical cable tray manufacturer.

Table 1 summarizes the comparative size in terms of revenue. This is not a high revenue growth sector as all of them achieved single-digit CAGR over the past decade. Ajiya even had a negative growth rate suggesting that Astino did ok.

Table 1: Peer revenue

Over the past decade, Astino did well relative to its peers based on 2 metrics – return on capital and EBIT margin. Refer to Chart 5.

Chart 5: Peer return of capital and EBIT margin

Market demand

Various roofing options are available for homeowners in Malaysia. Although they use different words, tiles, and shingles describe the same thing. They are commonly referred to as ''shingles'' in Europe and the United States, but ''tiles'' are more commonly used in Malaysia. 

In Malaysia, the choice of roofing materials is influenced by the tropical climate, which includes high temperatures, heavy rainfall, and humidity. Here are some common roofing types used in Malaysia:

• Clay tiles. These are popular for their durability and aesthetic appeal. They provide good insulation against heat.

• Concrete tiles are strong and durable. But these are heavier than other roofing materials, requiring a robust roof structure.

• Metal roofing includes materials like zinc, aluminum, and steel. These are lightweight and durable. They are also resistant to fire, mildew, and insects. Some claim that the reflective properties help in reducing heat absorption.

• Asphalt shingles are less common but are affordable and easy to install. They offer decent insulation.

• Thatch roofing is the traditional option using natural materials like palm leaves or grass. They provide natural insulation and ventilation but require regular maintenance and are less durable than modern materials.

• Polycarbonate roofing is often used for patios, carports, and outdoor extensions. They are lightweight and provide UV protection.

• Asbestos cement sheets were previously common due to affordability and ease of installation. But is now less favored due to health concerns associated with asbestos.

• Bitumen roofing is commonly used for flat or low-slope roofs. These offer good waterproofing properties and are commonly used in commercial buildings.

According to 6Wresearch and Research Markets, the metal roofing market in Malaysia is a significant segment within the broader roofing industry. As of the latest data, metal roofing accounts for about 25-30% of the total roofing market in Malaysia. This market share reflects a steady demand driven by the durability, low maintenance, and energy efficiency benefits associated with metal roofing materials.

According to ChatGPT, this is not a high-growth sector:

“The metal roofing market in Malaysia…is anticipated to grow at a compound annual growth rate (CAGR) of approximately 5.5% from 2024 to 2030. This growth is driven by increasing demand for durable and energy-efficient roofing solutions across residential, commercial, and industrial sectors.”

This is also not a high-growth sector from a global perspective as exemplified by the following:

“Metal Roofing Market to Exhibit Significant Growth at 4.95% CAGR, Reaching USD 30.13 Billion by 2030, Backed by Increasing Construction Activities” The Malaysia Reserve quoting Kings Research.

Financial position

Despite its lacklustre operating performance, there are many positive points from a financial perspective.

As of the end of Jan 2024, 

• It had RM 111 million in cash and short-term investments. This is about 19 % of the total assets.

• It had a debt-capital ratio of 3%. This had reduced from its 34% high in 2013.

Over the past 12 years, it generated RM 548 million cash flow from operations compared to the RM 399 million PAT. This is a good cash conversion ratio. 

It has a good capital allocation plan as shown in Table 2. You can see that CAPEX was about 39% of the cash flow from operations. This was in line with the high average Reinvestment rate.

Table 2: Sources and Uses of Funds 2013 to 2024

But I have 2 concerns:

• There were 2 years with negative cash flow from operations over the past 12 years.

• It had a high average Reinvestment rate of 61%.  This meant that there may not be much excess NOPAT that could be returned to shareholders.

I would conclude that the positive points more than outweigh my concerns. As such I would consider Astino financially sound. 

Valuation

The NTA of Astino was RM 1.10 per share (as of Jan 2024) compared to its market price of RM 0.63 per share (as of 28 Jun 2024). 

Given its low earnings growth track record, I think it is more appropriate to value Astino based on its Earnings Power Value (EPV). On such a basis, I found that it had an EPV of RM 1.12 per share.

You can see from Chart 6 that there is more than a 30% margin of safety under both valuation metrics.

According to Bruce Greenwald, in a strong competitive environment, you are likely to find a situation where the Asset Value = EPV. This is especially true if the company does not have a strong moat to protect its earning power. 

We can deduce that Astino not only operates in a competitive environment, but the analysis indicates that it does not have any strong moat. 

Chart 6: Valuation

Valuation model 

The EPV was determined based on the average of 2 valuation approaches:

• Free Cash Flow to the Firm model as per Damodaran.

• Residual Income model as per Penman.

I used the past 12 years’ time-weighted values to determine the relevant inputs. The cost of equity and WACC was based on Damodaran’s build-up approach. 

Note that in its 2023 Annual Report, the investment properties were captured in its books as RM 47 million compared to its fair value of RM 75 million.  I did not account for this surplus in the NTA or EPV since there was already more than a 30% margin of safety.

Case Notes According to Bruce Greenwald, you can get strategic insights by comparing the Asset Value (AV) with the Earnings Power Value (EPV). There are 3 possible scenarios when comparing them. Scenario 1: AV = EPV. Scenario 2: AV > EPV. Scenario 3: AV < EPV. Scenario 1 is the most common situation. In a competitive environment, a business with high returns would attract competition. Eventually, any excess returns would have competed away so that the company just earned its cost of capital. In Scenario 2, the assets are under-utilized possibly due to some issues with the business.  This could be due to poor management, or that the business in an industry is in secular decline. In Scenario 3 the returns generated by the business far exceed the cost of capital. I would expect the company to have some form of an economic moat for it to continue to enjoy a return that is higher than its cost of capital. For more insights refer to “The Basics Of Valuation - Picking out Value Traps” The valuation model you use depends on the Scenarios. In the case of Astino, I have deduced that it falls into Scenario 1.  The challenge is sometimes it is not clear which Scenario a company falls into. This is especially true if the company is undergoing a turnaround or some fundamental change in the business direction. I often look at what others have done to get a second opinion. As you can see, fundamental analysis requires expertise and time. Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format. Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies.

Case Notes

According to Bruce Greenwald, you can get strategic insights by comparing the Asset Value (AV) with the Earnings Power Value (EPV). There are 3 possible scenarios when comparing them.

• Scenario 1: AV = EPV.

• Scenario 2: AV > EPV.

• Scenario 3: AV < EPV.

Scenario 1 is the most common situation. In a competitive environment, a business with high returns would attract competition. Eventually, any excess returns would have competed away so that the company just earned its cost of capital.

In Scenario 2, the assets are under-utilized possibly due to some issues with the business.  This could be due to poor management, or that the business in an industry is in secular decline.

In Scenario 3 the returns generated by the business far exceed the cost of capital. I would expect the company to have some form of an economic moat for it to continue to enjoy a return that is higher than its cost of capital.

For more insights refer to “The Basics Of Valuation - Picking out Value Traps”

The valuation model you use depends on the Scenarios. In the case of Astino, I have deduced that it falls into Scenario 1. 

The challenge is sometimes it is not clear which Scenario a company falls into. This is especially true if the company is undergoing a turnaround or some fundamental change in the business direction. I often look at what others have done to get a second opinion.

As you can see, fundamental analysis requires expertise and time. Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies.

Conclusion

When Warren Buffett first started, he focussed on finding “cheap” companies without paying too much attention on the quality of the business. He referred to this as cigar-butt investing. He likens this to finding a cigar butt that still has one or two puffs left. You can still have a smoke but it is not going to last long.

He later migrated to investing in “compounders” at a fair price. These are companies with the ability to compound their returns because they have some moat to protect them. A compounder is likely to have a double-digit return, some competitive advantage to protect its returns, and a growth runway so that it can reinvest to compound its returns.

I would not consider Astino a compounder. 

• Its average returns over the past decade are in single digits. 

• It only delivered a single digit growth rate. The growth rates of its peers were also single-digits.

• Sales volume had declined over the past decade.

• There is no sign of improving operating efficiencies. 

• With AV = EPV, it does not appear to have any sustainable moat.

Nevertheless, it is a profitable business and is financially sound. While it is in a mature sector, it is not a sunset industry. I do not see any digital or other disruption on the horizon. 

My valuation showed that there is more than a 30% margin of safety under both the NTA and EPV.

As such I would not consider Astino a value trap. Its low market price is due more to market sentiments. If you cannot find compounders, Astino can be a cigar-butt investment opportunity. 

I would not look down on cigar-butts. Many of my investments are cigar-butts and I have made money off such investments. Many famous investors such as Seth Klarman refer to their investments as more “cigar butt” than compounders.

END

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If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from Amazon, Kobo and Google Play.

PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. 

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.

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