How My Deep Value Stocks Performed From 25 February 2019

Summary

• For subscribers of my Marketplace newsletter I discuss about 10 deep value stocks based on quantitative rankings twice a month.
• In this article I share information on stocks discussed in my newsletter from 2 years ago. While some information is outdated most information can still be useful.
• I will also do a quick follow up on each stock. In particular I compare them with recent quantitative stock rankings. Several stocks are still very cheap.

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Let's start with the stocks I looked into but I did not recommend based on what I found. Then I will give the average return of the 10 stocks I discussed in more detail, followed by a list of stocks that are still good picks and/or interesting. Finally you will find the detailed descriptions of 10 stocks. At the end of each of these descriptions you will find a short update.

The share prices mentioned in the short company descriptions are from the day I wrote these notes. That is before 24 February 2019, which is the date of publication of my research. I use 25 February 2019 as the start date for computing returns.

Avantium Holding (AMS:AVTX) (OTCPK:AVTXF) (25 February 2019): this Dutch net-net and 5-year low (5-year low at 1.83 EUR) is a chemical research company. The company tries to develop processes for producing sustainable plastics: 100% bio-based and 100% recyclable. The company owns 2 pilot plants.

For their research it had a joint-venture with BASF: Synvina. When BASF withdrew from the JV the stock cratered. Avantium had to buy BASF out for a total of 17.3 million EUR. This is now a done deal. There will not be any litigation and BASF took a loss of 39 million EUR. See also the transcript of the recent conference call.

The reason the 2 companies broke up were differences in opinions on commercialization of the new technologies. From what the company said I understand BASF wanted to go after the high-volume applications as soon as possible. To do this BASF wanted to build a big plant. Avantium however first wanted to look at lower-volume applications with higher value. So Avantium wanted to build a much smaller factory for higher value applications.

Going forward the company hopes to keep cash burning limited to 10 million of cash per year, instead of previous cash burning of 15 million per year together with BASF.

My estimate of the cash net of liabilities is about 55 million EUR. At a share price of 2.01 EUR the market cap is 51.8 million EUR. Therefore the discount to NCAV and liquidation value is not large enough to justify a more detailed discussion. It might still be a great stock market bet though, especially since it seems the company got a lot of research from BASF for only about 35% of the costs.

Update 8 Februari 2021:  Usually companies trading at a discount to liquidation value with lots of intellectual property do very well. My note reflects this as well but I could have made it clearer. Moreover I should have included this one in the Selected Stocks tab of the bi-weekly spreadsheet for my subscribers.

This one was no exception with the stock price increasing from 2.65 EUR to 6.06 EUR. That is equivalent to a return of 142.48% and an annualized return of 57.62%, both measured in USD.

Sigma Designs (US:SIGM) (OTC:SIGM): this OTC traded net-net is liquidating itself. See this announcement. It has stopped filing with the SEC. In August 2018 the company distributed 6 USD per share so in total about 240 million USD. The company expects to distribute at most another 15 million USD. That compares well with the market cap of 8 million USD. But it is not clear how much cash the company has and what the total of liabilities is. For insufficient information describing this stock is beyond the scope of this newsletter.

Update 8 Februari 2021: This liquidation play turned out to be quite profitable. On 25 February 2019 the share price was approximately 0.17 USD. The final distribution was 0.285 USD per share. See here. As the payment date I use 20 August 2020. Therefore the return is 67.65% over 543 days and the annualized return is 41.53%.

I am in doubt whether I should include stocks like this one in the Selected Stocks tab of my bi-weekly spreadsheet. On one hand such stocks usually generate good returns. On the other hand there was a lot of uncertainty and most liquidation plays do not work out as well as this one. Moreover I prefer to avoid stocks with delisting risk for my subscribers.

I now continue with 10 stocks I discussed in more detail 2 years ago. This was the second newsletter of February 2019. After publishing this newsletter I added 5 of these 10 stocks to the Selected Stocks list I had started at the end of January. Initially I was very careful and added only the stocks I had a strong preference for. At the moment it is the other way around: I add every stock to the Selected Stocks list unless there are very strong signs governance is terrible or if there is much financial distress.

Nearly 2 years ago I added the following 5 stocks to the Selected Stocks list: Solar Company, OneMarket, Joban Kaihatsu Co, Hour Glass and Vera Bradly.

Based on the dates I put in the Played Out tab of my bi-weekly spreadsheet I computed an average return of 19.12% for these 5 stocks. The average annualized return was 9.69%. The average return of all stocks I investigated in detail was -8.55% and the average annualized return was -11.02%. Since a purely statistical/quantitative investor would go for all 10 stocks I created a lot of alpha with my 5 picks. In particular I got this favorable outcome because I avoided a stock with high fraud risk and 2 stocks with leveraged balance sheets.

The following stocks are still cheap:

1. Tokatsu Holdings Co (ticker 2754 in Tokyo): cheap nanocap based on EV/EBIT, EV/Revenue, very illiquid
2. Joban Kaihatsu Co (ticker 1782 in Tokyo): cheap based on EV/EBIT and EV/Revenue, with good earnings quality/asset allocation.
3. Hour Glass (ticker AGS in Singapore): cheap based on EV/EBIT and other multiples with good earnings quality/asset allocation.

Detailed Stock research (Feb 2019) with updates

1. China Infrastructure Investment: net-net, nanocap

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
HKG:600 6	0.045 HKD 0.032 HKD	192 HKD -147 HKD	-4.4 -3.7	0.23 -	1.57 1.57
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-06-30	-17.0 HKD	440 HKD	440 HKD	0.44	-

February 2019: China Infrastructure Investment is a property developer with a project in Jiangning and 2 projects in Tianjin, PRC. One of the real estate projects has a guaranteed return of at least 12%, or 36 million HKD per year. The real revenue however comes from natural gas sales and related construction materials and construction projects. In practice I think most of this real revenue comes from sale of construction materials. This segment accounts for more than half of the operating assets. The company also earns some rental income.

This company was formerly known as, among others, Honesty Treasure International Holding.

A search on the company name and keyword “fraud” did not return any interesting links. However I might have overlooked links because of the generic nature of the name of this company. Furthermore the search did return links relevant for a now delisted US reverse merger with almost the same name: China Infrastructure Investment Corp with stock code CHNC. See here.

David Webb mentions several issues but these issues were long ago, involving different insiders that today’s insiders. Among others the issues were forms of self dealing (giving loans, 2002) and alleged real estate bribery (in 2007).

According to the cash flow statements in my screener the company did not dilute significantly during the past 9 reporting years. It did not buy back shares either and diluted much 10 years ago. The company did not pay any dividends during the past 10 years.

The probability cash is overstated is high but not extremely high since the company scores 3 out of 4 points using the method of GMT Research for detecting fake cash. The only point it misses is excessive profitability. BTW, I expect the company to score only 2 points when it releases its balance sheet for December 31, 2018 because on or before the end of 2018 it should have paid back its bank debt. In addition I should also mention almost the entire cash balance is denominated in CNY.

In November 2016 the company borrowed long term 250 million HKD at 10%. This was for an acquisition the company intended to do. But the negotiations for the acquisition failed. So instead the company tried to utilize the cash by lending it out at 4.35% to so-called independent third parties. Against the listing rules the company did not disclose this in 2016 but disclosed it a year later. The borrowers paid the loans back to the company at the end of 2017. The company should have repaid the bank loan of 250 million HKD by now.

It seems loans to these so-called independent third parties have been booked as receivables. As a result a large part of the positive cash flow came from repayments of these loans at the end of 2017. But since the loans were more investments than trade receivables they should have been booked as investments. Therefore the company enjoys positive cash flow from investing instead of from operations when borrowers repay these loans.

See the interim report over the first half of 2018 and the annual report over 2017. Key audit matters were the goodwill, interests in associates, property plant and equipment, investment properties and the acquisition of a subsidiary owning a real estate project in Tianjin. In the first half of 2018 the company made a loss.

There are no retained earnings, just accumulated losses.

There is hardly any leverage and, as I wrote, the suspicious combination of short term bank debt and a big cash pile. So, if the cash is real no financial distress at China Infrastructure Investment.

The book value of the current assets is 699 million HKD. This is almost entirely cash denominated in CNY. Among the non-current assets there are 65 million HKD of investment properties. These properties generated over 13.5 million HKD of rental income in 2017 but only 1.3 million HKD in the first half of 2018. Between the beginning of 2017 and June 30, 2018 the book value did not change much. So the first number suggests a much higher market value but the more recent number suggests a market value of about 50 million HKD.

Total liabilities are 324 million HKD and non-controlling interest is 73 million HKD. Therefore my estimate of liquidation value is 699 -324 -73 = 302 HKD. Therefore Liquidation Value/Market cap = 302/192 = 1.57. In practice the liquidation value might be much higher because of the stakes in the real estate with a combined book value of 343 million HKD, but that is speculative.

Substantial shareholders: executive director (but not the chairman/CEO) Mr. Ye De Chao controls 27.85% but his economic interest is less than 20%. Outsider Mr. Zhang Xiaojun owns 8.99%. He might be related to the chairman and CEO Mr. Xu Xiao Jun. The similarity might also be a transcription effect since the 2 names look very differently in Chinese.

Mr. Ye De Chao owns a stake in one of the real estate affiliates where the company owns 40%. Originally he owned 100% together with other entities but in 2012 the company subscribed for 40% new shares.

Related-party transactions: at the end of 2017 the company owed Mr. Ye De Chao 12.85 million HKD, but the company does not provide details.

Update 8 February 2021: The adjusted close of the stock price declined from 0.043 to 0.027 HKD. So in USD the return was -36.43% and the annualized return was -20.76%. Currently the stock is not a net-net with sufficient discount to NCAV anymore. The stock is still in my nancoap list but not with a good ranking. So I do not think the stock is still cheap.

2. Solar Company: net-net, nanocap

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
WAR:SOL 5	0.62 PLN 0.39 PLN	18.6 PLN 11.0 PLN	- 0.09	0.21 0.31	4.1 2.1
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-09-30	-45.6 PLN	4.9 PLN	2.7 PLN	6.9	-

February 2019: See also my note from February 2018: Solar Company produces women clothing, apparel and accessories. The company owns shops and has shops operated by franchisers. Despite that the company has shops in many countries almost all sales are in Poland. Google translated quote: “The basis of the success of the Solar brand is to combine world trends with expectations of Polish clients.”

This apparel company booked a big loss at the end of 2017, followed by a much smaller loss in the first quarter of 2018. In next 2 quarters the company was marginally profitable.

The company did not file results for the fourth quarter of 2018 yet but filed sales numbers every month. From these numbers we know revenue in the fourth quarter of 2018 is up with 13% to 37.5 million PLN year over year. Also sales in January 2019 was up to 9.8 million PLN from 9.2 million PLN in January 2018.

I think the big loss at the end of 2017 is related to a big write down on receivables from prepayments and returned unsold goods to its main/sole supplier: "Grutex" APH Jolanta Gruszka. Grutex is probably a related party. I think the company has a stake in Grutex but it does not control it. The big write-off on the receivable from a related party is by itself a red flag.

Now let’s look at the reasons for the write-off. From the automated translation of the recent quarterly report my understanding is the company ordered too much inventory and prepaid these orders. Then the Polish authorities banned opening of shops in Poland on Sundays, not good for revenues either. The company also realized the designs were not so good. Because of this Sunday shopping ban and changed consumer habits/preferences the company canceled already paid orders.

But in April 2018 the company mentioned increased credit risk as (another) reason for the write-down. This differential disclosure is a red flag. Often people specify multiple reasons to support a negative message just to obfuscate the real reason.

See the recent quarterly report (September 30, 2019). I was able to get around the file transfer limitations of Google Translate (although that took much effort).

Retained earnings are 60.0 million PLN. Therefore Market cap/Retained Earnings = 18.6/60 = 0.31. Just over the last 8 years Market cap/Retained earnings = 0.62.

The balance sheet is still strong with hardly any leverage, enough cash and no debts.

The book value of the current assets is 88 million PLN including 23 million PLN of inventory and about 52 million PLN of these prepayments or related-party receivables. Total liabilities are 12 million PLN. Therefore my estimate of liquidation value is 88 -0.5*(23 +52) -12 = 38.5. Therefore Liquidation Value/Market cap = 38.5/18.6 = 2.1.

Substantial shareholders: Wakom Investments (29.98%), Stanmax Co (14.99%), Veraques (14.99%). So Quercus probably sold out. On September 30, 2018 they still had their stake of 5.32%, according to the latest quarterly report.

Update 8 February 2021: I put this stock on the "Played Out" tab of the bi-weekly spreadsheet for my subscribers on 30 March 2020. The split adjusted stock price decreased from 5.7 to 2.96 PLN. In USD the return is -51.73% and the annualized return is -48.66%. I consider this an example of a net-net and nanocap that looks good in my rankings but that does not work out in practice. There will always be stocks like this one because if an investing strategy always worked the opportunities would soon cease to exist.

3. Sunbridge Group: net-net, nanocap

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
ASX:SBB 5	0.017 AUD 0.008 AUD	8.0 AUD -20.6 AUD	-7.5 -0.33	0.12 0.15	6.7 6.2
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-06-30	2.1 AUD	-4.5 AUD	-4.6 AUD	-	-

February 2019: See also my note from November 2017. Sunbridge Group is a Chinese company listed in Australia. The company designs and sells menswear in its own stores in China. Headquarters are in Jinjiang City, Quanzhou, PRC. In addition the company acts as a menswear wholesaler in the PRC. The company is trying to build brands.

A big positive for the stock was the Noel Edward Kagi family trust buying a stake in 2018. They now own 87.8 million shares or 18.6%. The latest transaction was in November 2018. A big negative was that the CEO/major shareholder sold shares in April 2018.

From November 2017 to October 2018 the company spent 5.85 million AUD on renovation and upgrading of stores of distributors. This might also have resulted in increased revenue and profit.

A new search on the company name and keyword “fraud” did not reveal any relevant links expect for this link. There the company is accused of revaluation fraud but without explanation. See also previous note on the stock.

When judging the probability the cash is fake I have used the scoring method of GMT Research. The more points, the higher the probability of fraud. On this 0 to 4-point scale I give Sunbridge 2 points: for no dividends and for a high build up of non-production assets.

See the annual report over 2017, the interim report over the first half of 2018 and subsequent quarterly cash flow statements here (September 30, 2018) and here (December 31, 2018).

I analyzed the first digit of every number in the interim report and the 2 cash flow statements using Benford’s law. Based on this test the probability the numbers are fake is low. The p-value the frequency of the first digits satisfy Benford’s distribution is 46%. There was not enough data to do the same test with the first 2 digits, but with the 2 first digits the p-value was 53%.

Clearly 2018 was much better than 2017. In the first half the company booked 2.8 million AUD of profit and probably the company booked about 4 million AUD of profit in the second half of 2018.

In the first half of 2018 20-25% of the revenue came from retail sales and the rest from whole sales. In 2018 the company spent about 2.3 million AUD on marketing.

Based on the interim report retained earnings are 53.9 million AUD including a foreign exchange translation reserve of 8.8 million AUD. Therefore Market cap/Retained Earnings = 8.0/53.9 = 0.15.

Based on the numbers from June 30, 2018 the book value of the current assets is 58.4 million AUD including 13.6 million AUD of inventory and prepayments. Total liabilities are 5.4 million AUD. Therefore my estimate of liquidation value is 58.4 -0.5*13.6 -5.4 = 46.2 million AUD. So Liquidation Value/Market cap = 46.2/8.0 = 5.8.

This estimate is conservative judging the 2 subsequent quarterly reports. It seems the company had about 4 million AUD of extra cash on December 31, 2018. Assuming half of the cash comes from reduced inventory and prepayments and the rest comes from profits (also conservative) we can add 3 million AUD to my estimate of liquidation value. So liquidation value becomes 49.2 million AUD and the ratio Liquidation Value/Market cap becomes 49.2/8 = 6.15.

There are 471.7 million shares.

Substantial shareholders (March 15, 2018): CEO Mr. Jia Yin Xu 36.6%, Noel Edward Kagi Family trust 18.6%, outsider Mrs Jiya Zhang 4.6%, outsider Mr. Narayan Chandrasekaran 2.54%, Hysenk Pty 2.38%.

In April 2018 the CEO sold another 45 million shares for 0.012 AUD per share or 540k AUD in total in 2 off-market transactions. This is a big red flag.

Investors are still concerned. See the shareholder letter from the CEO in May 2018.

Salaries for the executive directors are low. The managers and directors do not enjoy large bonuses either.

Related-party transactions: The CEO pays certain expenses in Australia and gets reimbursed later.

The board does not have a separate audit committee because there are not enough board members. There is no internal audit function either.

Update 8 February 2021: The stock was delisted and I think there is zero value left. So I note an annualized return of -100%. In hindsight seeing the CEO/major shareholder selling was a good reason to avoid the stock. I have seen this many times. Nanocaps that are undervalued on paper but with the main shareholder selling have never good returns.

4. OneMarket: net-net, spin-off

Ticker, Fin Strength	Share Price Analyst target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
ASX:OMN 6	0.695 AUD -	46.3 USD 124 USD	-4.4 -3.7	0.28 -	4.0 2.4
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2017-12-31	-133 USD	-67.9 USD	-70.1 USD	-	-

February 2019: OneMarket provides a network to retailers for overcoming data defiencies, technological inefficiencies and saving costs. It provides 2 electronic platforms: Hadley and Shopper Exchange. Hadley is a platform for messages between retailers and consumers such as order tracking, live receipts and messages related to returns. Shopper Exchange is a “digital advertising platform focused on retailer-brand co-marketing.” The company is based in San Francisco, US, and has an office in London, UK, as well.

The company listed on June 8, 2018 as a spin-off from Westfield Corporation. Westfield is a real estate developer and manager of shopping centers. Westfield was acquired by Unibail Rodamco in June 2018. That OneMarket is listed in Australia does not make sense to me.

A search on the company name and keyword “fraud” did not reveal any relevant links. There is hardly any financial history for this stock. The company has yet to publish its first audited annual report, although reports for the spin-off prospectus have been written by an “independent expert”. An auditor also made an “independent limited assurance report” among others for the profit and loss statement, balance sheet and cash flow statement over 2017.

In November 2018 the CEO stepped down for health reasons. See the company presentation from November 2018.

See the interim report (September 30, 2018) and the recent quarterly cash flow statement (December 31, 2018).

For the first 9 months of 2018 the company made a loss of 53 million USD. In September 2018 the company did a small reorganization. I expect it to reduce the loss to well below 50 million USD. The company expects to have at least to have enough cash until late 2020.

The company expects to burn 25 million of cash in the first quarter of 2019. The outcome of a “strategic review” by the new CEO is that the company should do another reorganization. With this second reorganization the company expects to have enough cash until late 2021.

There are no retained earnings, just accumulated losses.

The balance sheet is very strong with hardly any leverage, lots of cash and no debts.

On December 31, 2018 the company had 140 million USD of cash. I estimate book value of liabilities at 13 million USD and there is also non-controlling interest with book value 17 million USD. Therefore my estimate of liquidation value is 110 million USD and Liquidation Value/Market cap = 110/46.3 = 2.38.

There are 103.93 million shares.

Substantial shareholders: Samuel Terry Asset Management Pty 9.0%, Mitsubishi UFJ Financial Group 5.3%. The chairman Steven Mark Lowy controls 8.4% together with affiliates.

Steven Lowy is the former co-CEO of Westfield. The Lowy family controlled Westfield before they sold it to Unibail Rodamco. I think it is a good sign they try to create value with this spin-off. Also Unibail Rodamco owns 10% of the US subsidiary. The CFO of Unibail Rodamco is a director of the US subsidiary.

The previous CEO earned an excessive salary of 1.4 million USD. He can double this with his bonus of at most 1.4 million USD. For the Chief Technological Officer basic salary and bonus are 650k USD each. They also get 3.5% and 1.45% of the share capital in restricted stock. In total approximately 20% of share capital has been reserved for employee incentives.

Related-party transactions: there are all kinds of service agreements between Westfield and OneMarket.

Update 8 February 2021: The stock was delisted in an "orderly windup". As far as I know the last trading date was 29 November 2019. Until delisting the stock price increased from 0.655 to 0.97 AUD. Therefore in USD the return is 39.78% and the annualized return is 55.51%. It is very likely these numbers underestimate the return for investors still holding the stock after delisting.

5. Tokatsu Holdings Co: nanocap, low EV/EBIT, below liquidation value

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
TYO:2754 6	468 JPY	2265 JPY 1682 JPY	3.9 0.22	0.56 0.61	- 1.26
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	401 JPY	539 JPY	507 JPY	4.7	2.1

February 2019: Tokatsu Holdings Co is a Honda car dealer. Another transcription of the company name is (apparently) Dongshu Holdings Co. The company mainly sells new cars, maintains cars and trades second-hand cars. About 15-20% of the revenue comes from second-hand cars and the rest is from new cars. Included in the revenue from new car sales is also some revenue from servicing cars.

The company owns 10 stores for selling new cars and 3 for selling second-hand cars. Each store also includes a facility for maintaining cars. The company does not have plans for new stores or disposals.

The company can be found in Edinet with stock code E03401.

A search on the company name and keyword “fraud” did not reveal any relevant links.

According to the cash flow statements in my screener the company has paid dividends in each of the past 10 reporting years. The company did not dilute and did not spent significant amounts on buy backs.

Multi-year metrics measuring earnings quality do not suggest substantial durable competitive advantages. However these metrics are not all bad: 8-year gross margin stability and 8-year accumulated free cash flow are better than average.

Retained earnings are 3.71 billion JPY. Therefore Market cap/Retained Earnings = 2.27/3.71 = 0.61.

The balance sheet is strong with low leverage and more cash than debt. I would not call it a big cash pile but the combination of excess cash and short-term debt is a red flag.

There are 4.84 million shares. There are about 150,000 employee options with low exercise prices. It seems these options have to be exercised when the grantee leaves the company, but I am not sure. I estimate these options make the market cap about 3% higher than the market cap just based on the number of shares, so about 2.31 instead of 2.265 billion JPY.

The book value of the current assets is 3.2 billion JPY including 0.6 billion JPY of not so valuable assets like inventory. Among the non-current assets there is land with a book value of 2.1 billion JPY. The book value of the liabilities is 2.1 billion JPY. Therefore my estimate of the liquidation value is 3.2 -0.5*0.6 +2.1 -2.1 = 2.9 billion JPY. Therefore Liquidation Value/Market cap = 2.9/2.31 = 1.26.

Substantial shareholders: executive chairman Saito Kuniharu 30.14%, Fidelity (FMR LLC) 7.33%, Togaku Holdings employee stock holding meeting 3.6%, the CEO Ishizuka Tosh 2.29%, the deputy CEO Yoshitaka Matsushita 2.29%, two outsiders with surname Inada own 2.41% and 2.19%. Also 3 insurance companies own 4.65% each. I think these 3 insurance companies are affiliates.

The 10 largest shareholders hold together over 60% of the shares. Because of block ownership and ties between shareholders I do not think the company is an easy target for an acquirer.

Executive directors earn about 250k USD per year each including about 25% variable pay.

The company does not mention any related-party transactions in its annual report for the year ending of March 31, 2018.

Update 8 February 2021: The adjusted closing price (taking dividends into account) decreased from 444.2 to 429 JPY. In USD the return was 1.79% and the annualized return was 0.92%.

The stock is still a nanocap with a low EV/EBIT multiple. The stock is also cheap based on EV/Revenue. Moreover certain 8-year metrics suggest better than average earnings quality/assets allocation. The stock is not in my nanocap list anymore because trading is too illiquid for this idea to be actionable for my subscribers.

6. Joban Kaihatsu Co: low EV/EBIT, low EV/EBIT + quality, below liquidation value

Ticker, Fin Strength	Share Price Analyst target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
TYO:1782 8	5320 JPY -	4176 JPY 318 JPY	0.17 0.02	0.51 0.59	0.85 1.2-1.3
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-09-30	1781 JPY	465 JPY	271 JPY	-	4.5

February 2019: See also my note from December 2017: Joban Kaihatsu Co is a construction company constructing commercial, industrial and institutional buildings. The name apparently also translates as “Joban Development Co” or “Tokiwa Development Co”.

The company is also engaged in various civil engineering projects (greenery projects), environmental business (construction, measurements and analysis) and real estate business (selling real estate). Other business is providing securing facilities. About 60% of the revenue comes from building, and almost 25% from the civil engineering projects. The rest mainly comes from securing facilities and the environmental business.

A new search on the company name and keyword “fraud” did not reveal any relevant links.

There are no plans for big disposals or new facilities.

According to the cash flow statements in my screener the company paid a dividend in 9 of the 10 past reporting years. Dividend payout was mostly increasing. The company did not dilute and did not spend significant amounts on buy backs either.

The company is not only very cheap based on EV/EBIT, it is also one of the best quality stocks available with 96.6% stocks with lower quality in the low EV/EBIT + quality list. Multi-year metrics measuring earnings quality suggest strong durable competitive advantages. Metrics with above average scores are 8-year gross margin growth, 8-year geometric returns on assets and even more on capital and 8-year accumulated free cash flow.

Retained earnings are 7.09 billion JPY including 0.38 billion JPY of other comprehensive income: mainly unrealized gains on investment securities and offset by a paper loss on land revaluation. Therefore Market cap/Retained Earnings = 4.18/7.09 = 0.59. Based on just the retained earnings from the last 8 reporting years the multiple is 0.8.

The balance sheet is strong with moderate leverage and some current and non-current debts offset by much more cash (red flag).

Cash flows are much less than operating income. This is partly caused by a decrease in a provision for bonuses. Such a provision artificially lowers the profit and reversing later inflates profits. So the company seems to be smoothing out profit fluctuations (red flag).

The book value of the current assets is 12.2 billion JPY including 2.8 billion JPY of not so valuable assets such as uncompleted work expenditure. Among the non-current assets is land with book value 1.1 billion JPY and investment securities with book value 1.4 billion JPY. The book value of the liabilities is 8.2 billion JPY including a very small amount of non-controlling interest. Therefore my estimate of the liquidation value is 12.2 -0.5*2.8 +1.1 +1.4 -8.2 = 5.1 billion JPY. So Liquidation Value/Market cap = 5.1/4.18 = 1.2.

The company mentions it owns some buildings for rent with a book value of 749 million JPY. If we assume the land for these buildings is worth about 250 million JPY the liquidation value becomes 5.6 billion JPY and the ratio 1.34.

Substantial shareholders: Chubu Kosan Co 12.75%, Jobai Joint Gas Co 3.83%, outsider Kazutaka Sato 2.87%, outsider Toshihiro Yoshida 2.45%, Fidelity 9.31% (increased in May 2018 from 6.29%). The chairman Fujise Sakawa owns 4300 shares (about 200k USD) and 3 other directors own 2700, 2000 and 1500 shares. Many banks own small stakes as well.

The annual report (March 31, 2018) mentions an “outside director” is “full-time auditor of Hinozan Kosan Co., Ltd., a major shareholder”. I think he is CFO of Chubu Kosan Co (different transcription).

Directors get 122 million JPY, I think that they earn this together with 9 people. But executive directors get a salary on top of that.

I do not think there are big barriers for an unfriendly acquirer, although hidden block ownership from the combination of many small stakes might still be possible.

There is significant customer concentration. In the year ending of March 31, 2018 big customers were Iwaki City (30% of revenue), and also Fukushima Prefecture and Jobai joint firepower Co.

There are related-party transactions with Chubu Kosan Co: the company is doing for 1.4 billion JPY of construction work for this shareholder. The company also owns 6.7% of Chubu Kosan Co and purchased for 276 million JPY of building materials from Chubu Kosan Co. I do not like it when a customer is a supplier at the same time.

My take: well managed and shareholder friendly business that is extremely cheap. Business activities (construction) are not so exiting making chances on good returns even higher.

Update 8 February 2021: The adjusted closing price increased from 5161.1 to 9050 JPY. What triggered the decrease was an offer to acquire the company. I do not think the company is going to be acquired because the stock price is now higher than the initial offer. What is interesting is that I suggested the possibility of it being acquired 2 years ago.

The stock is still cheap based on a mix of EV/EBIT and other metrics. In addition certain 8-year metrics suggest better than averag earnings quality/asset allocation. However for my subscribers I consider it "Played out".

7. Hour Glass: low EV/EBIT, low EV/EBIT + quality, close to 5-year low

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
SGX:AGS 6	0.64 SGD 0.56 SGD	451 SGD 330 SGD	4.4 0.47	0.87 0.96	0.81 -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	75.1 SGD	71.2 SGD	54.2 SGD	5.7	3.1

February 2019: The Hour Glass is a specialty watch retailer. The company has operations in Singapore (15 shops), Australia (3 shops), Malaysia (8 shops), Hong Kong (2 shops), Japan (1 shop), Thailand (10 shops) and Vietnam (2 shops). See this list.

A search on the company name and keyword “fraud” did not reveal any relevant links. The company tries to limit the tenures of independent non-executive directors. Also the 3 committees only have independent non-executive directors as members.

According to the cash flow statements in my screener the company paid a dividend during the past 10 years and did not significantly dilute or buy back stocks.

Multi-year metrics suggest high earnings quality: a very stable gross margin, high 8-year geometric means of return on capital and assets and good free cash flow generation during the past 8 years. Because financial strength went down from 8 to 6 it might end up lower in my low EV/EBIT + quality list than it is now. However lower financial strength might also be a consequence of incomplete results for the most recent quarter in my screener. So most likely this is just a temporary data issue.

See the annual report (year ending March 31, 2018) and the results for the quarter ending December 31, 2019. For the annual report key audit matters were the inventory of 282 million SGD and the investment properties with a book value of 67 million SGD.

The year ending on March 31, 2019 will almost certainly be much better than the year before. In the previous shareholder letter (dated May 31, 2018) chairman expected the good times to continue for another 12-18 months.

Retained earnings are 471 million SGD including an currency translation loss of 8 million SGD. Therefore Market cap/Retained Earnings = 451/471 = 0.96.

The balance sheet is very strong with hardly any leverage and much more cash than debt. However the combination of cash with current debt is a red flag. Possibly the current debt is at a subsidiary with non-controlling interest though.

My estimate for the liquidation value is approximately 315 million SGD.

Salaries for the executive directors are very high, including large bonuses. Such high bonuses encourage excessive risk taking. Also independent non-executive directors are well paid.

There are 705.0 million shares.

Substantial shareholders: founder and executive chairman Mr. Henry Tay Yun Chwan 53.64%. He owns most of this stake together with his ex-wife, Jannie Chan. His (probably) former brother-in-law and executive director Kenny Chan Swee Kheng 0.3%. His son and executive director Michael Tay Wee Jin Kay 0.26%. UOB Kay Hian Private 1.53%, Ong yek Siang 0.83%, Chia Kum Ho 0.43%.

Amstay Pte owns 5.23% and is another company of the executive chairman together with his son.

This is a family business: the son of the executive chairman/controlling shareholder and (possibly former) brother-in-law of the divorced chairman are executive directors. The ex-wife of the chairman was also a founder but does not have a role in the company anymore.

Related-party transactions: there are for 1 million SGD of transactions with Amstay Pte. The company does not report related-party transactions of less than 100k SGD.

Update 8 February 2021: The adjusted closing price (taking dividends into account) increased from 0.596 SGD to 0.795 SGD. In USD I compute a return of 34.89% and an annualized return of 16.62%.

The stock is still cheap based on a mix of EV/EBIT and other multiples. Moreover certain 8-year metrics suggest better than average earnings quality/assets allocation. However for my subscribers I consider it "Played out".

8. NMCN Plc: momentum + low EV/EBIT

Ticker, Fin Strength	Share Price Analyst target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
LON:NMCN 8	7.55 GBP -	76.6 GBP 62.2 GBP	5.9 0.19	5.3 5.8	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-06-30	2.4 GBP	18.2 GBP	13.8 GBP	5.8	1.2

February 2019: NMCN Plc is also known as North Midland Construction Plc and NM Group. The company provides engineering, construction and management services in the UK. It designs and build houses and appartments, health care centers, highways, and engineering an construction services for utilities (natural gas, electricity and water) and telcos.

A search on the current and former company name did not reveal any relevant links.

According to the cash flow statements in my screener the company paid a dividend during 8 of the 10 past reporting years. The company did not dilute or buy back shares.

Multi-year metrics do not suggest significant durable competitive advantages.

Reasonable smooth and strong momentum predicts good returns. See the stock chart in GBX:

See the recent quarterly update (September 30, 2018), the interim report (June 30, 2018) and the annual report over 2017.

Retained earnings are 13.1 million GBP. Therefore Market cap/Retained Earnings = 76.6/13.1 = 5.8.

The company is very leveraged with Tangible Assets/Tangible Book = 102.5/14.6 = 7.0. Leverage is almost entirely operational with enough cash and hardly any debt. The current ratio is sightly below 1 and almost all liabilities are payables.

The executive chairman gets 447k GBP, no bonus. The CEO gets between 370k and 850k GBP. Up to 35-36% of his package and that of 3 other executive directors is paid as performance shares. They can get up to another 21% as a bonus. Bonuses are based on profit before tax. So variable payment can be about 50% of the total package. This increases the probability the executive directors take excessive risks. The executive chairman is also entitled to get a bonus but waived it.

In total the executive directors got 1.7 million GBP in 2017. Bonuses must have been “on target”, so the bonuses were not higher than usually. I find these packages excessive, even more so when comparing these costs to the book value of about 15 million GBP.

In 2017 the company does not report any related-party transactions. Instead it reports transactions with wholly owned subsidiaries, but these can be ignored.

There are 10.15 million shares.

Substantial shareholders: the company is controlled by the Moyle family with at least 51.6% but there is no single controlling shareholder. The largest shareholders in this family are Mr I.B. Speke, Mrs D. Hutchinson & Mr M.S. Garratt with 32%. The executive chairman is Robert Moyle. He owns 4.56% together with his wife and some more shares indirectly.

I did not know construction companies without strong competitive advantages or valuable intangible assets but with a leveraged balance sheet could trade at such high P/B multiples. Going forward less competition and temporarily more building activity may be possible after the Brexit.

Update 8 February 2021: Momentum stocks are good for holding at most 1 year. So I measure the return until 24 February 2020. The adjusted closing price (taking dividends into account) decreased from 0.704 to 0.501 GBP. In USD I compute a return of -29.74% and an annualized return of -29.82%.

The stock is still cheap based on EV/EBIT. But because the balance sheet is too leveraged it is not anymore in my lists. I think stocks with lots of leverage are riskier, and this one might be a good example. HIgh executive pay and the leveraged balance sheet were probably the reasons I avoided this stock.

Usually there are better alternatives than investing in companies with leverage balance sheets. In particular in the newsletter I published a couple of days ago I discussed another European construction company with a better balance sheet (although still pretty leveraged) but also with better earnings quality/asset allocation.

After I wrote on this stock I improved my tools for selecting stocks on momentum. So now I can say momentum measured in USD was quite good, although not as good as the momentum stocks I find now. So what I wrote for Solar Co is also true here: investment opportunities would not exist if it always worked out well.

9. MCH Group: falling knife, close to 5-year low

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
SWF:MCHN 6	20.7 CHF 18.5 CHF	124 CHF 124 CHF	- 0.23	0.49 –	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2017-12-31	-104 CHF	67.9 CHF	54.6 CHF	2.0	-

February 2019: MCH Group specializes in marketing with focus on exhibitions. In 2017 the company organized 24 exhibitions and is based in Basel. In 2017 about 60% of operating income came from exhibitions and 30% came from “live marketing solutions” (among others consultancy and exhibition stands). The company also gets revenue from third-party exhibitions (51 in 2017) and numerous venues. Almost all revenue come from Switzerland.

The stock might be overlooked because my screener (based on the Reuters/Thomson database) does not display any interim results.

Among others the company organizes an important watch and jewellery event: BaselWorld. This event got a big blow after Swatch Group decided not to be part of it anymore, from 2019. See this blog and here for background on how important this is.

A search on the company name and keyword “fraud” did not reveal any relevant links.

In each of the last 10 full reporting years (up to 2017) the company paid a dividend translating to about 2.5% yield. However the company skipped the dividend over 2017. So the dividend that would normally have been paid in 2018 was skipped.

Multi-year metrics do not suggest any durable competitive advantages.

Disclosure is in German and in English. See the interim report for the first half of 2018 and the annual report over 2017. Unfortunately the interim report does not include a complete balance sheet. Important key audit matters were the acquisition of the MC2 group for 102 million USD and the value of property, plant and equipment (the 3 exhibition halls).

In the first half of 2018 EBIT was 25.7 million CHF: about 15% less than a year ago. Furthermore free cash flow was -4.6 million CHF and cash flow from operations was 1 million CHF. For the full year 2018 the company expects a loss of at least 14 million CHF before a provision for restructuring costs of 30-40 million CHF and also before an impairment on the exhibition hall in Basel of at least 100 million CHF.

Retained earnings are 120.7 million CHF. Therefore Market cap/Retained Earnings = 124/120.7 = 1.03. But when the company books the expected losses over 2018 retained earnings will turn into an accumulated loss.

The balance sheet is pretty leveraged with Tangible Assets/Tangible Book almost 3. Much of this leverage comes from non-current debts from related parties. The company has lots of cash though and the current ratio is very high at 3. So MCH Group is not financially distressed.

The stock trades way above liquidation value. The company might have valuable real estate (exhibition halls). I do not think the total is significant since at least part of the land is leased instead of owned.

There are 6,006,575 shares.

Substantial shareholders: Canton Basel-Stadt 33.5%, Canton Basel-Landschaft 7.8%, LB (Swiss) Investment AG 9.6%, Canton of Zurich 4.0%, City of Zurich 3.7%. So MCH Group is majority owned by several local authorities without anyone having a controlling stake. Together 4 local authorities have 6 seats in the board of directors, including 3 seats for the Canton Basel-Stadt.

The board of directors has 11 seats. Such a large board predicts lower returns. The company pays the fees for the directors representing the different local authorities directly to these entities. The CEO gets a salary of 465 million CHF, no bonus. The executive board as a whole gets 1.9 million CHF including a bonus of 117k CHF. A new CEO took over in February 2019.

Related-party transactions: the company got loans from local authorities from the cities and districts where its exhibition halls are located. These are low interest loans sometimes on other favorable terms as well. For instance in 2012 the company got a non-repayable loan of 50 million CHF in return for the obligation it continues to operate its congress center in Basel.

Furthermore the American subsidiary (acquired in 2017) pays the equivalent of 1.7 million CHF to related parties (probably to management of the subsidiary).

Update 8 February 2021: The adjusted closing price decreased from 18.45 to 13.80 CHF. In USD the return was -16.75% and the annualized return was -8.99%.

Leverage is now much higher than it was because of large losses from corona. Because high leverage makes stocks riskier this stock is not in any of my lists.

10. Vera Bradley: US listed low EV/EBIT + quality

Ticker, Fin Strength	Share Price Analyst target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
US:VRA 8	9.25 USD 10.67 (4x)	321 USD 212 USD	4.6 0.49	1.11 1.13	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-11-03	31.1 USD	46.8 USD	37.3 USD	8.6	-

February 2019: Vera Bradley (VRA) designs “women’s handbags, luggage and travel items, fashion and home accessories, and unique gifts”. The company sells its products via several online channels, its own 160 stores and approximately 2400 other retail locations. See also this Wikipedia article. Its products are mostly produced by third-party manufacturers in Asia.

The company says it focuses on design and customer service. It introduces new collections approximately 10 times per year. About 40% of the revenue comes from bags.

Last reporting year (ending on February 3, 2018) the company launched an aggressive turnaround plan. With this plan the company will reduce clearance sales and offer less products.

The 5-year low was around 7.2 USD in September/October 2017.

A search on the company name and keyword “fraud” did not reveal any relevant links.

According to the cash flow statements in my screener the company has not paid a dividend during the last 7 years. During the last 4 years the company spent a lot of money on buy backs. The board of directors approved a new buy back program for spending up to 50 million USD from December 14, 2018 through December 2020.

Multi-year metrics measuring earnings quality are really excellent.

See the recent quarterly report (November 3, 2018) and the annual report (February 3, 2018).

The EV/EBIT multiple in my screener is too low. Instead it should be about 6. So the stock is cheaper in the screener than in reality. That does not change its position in the list with US quality stocks though. In the last 9 months revenue was down but profit increased mainly because in the year before the company had for about 10 million USD of one-time expenses/losses.

Retained earnings are 283.4 million USD. Therefore Market cap/Retained earnings = 321/283.4 = 1.13.

The balance sheet is very strong with hardly any leverage, plenty of cash and no debts. I estimate the liquidation value at about 160 million USD.

Substantial shareholders: co-founder and director Patricia R. Miller 15.8% (sold about 800,000 shares, to the company, see here) together with her husband, BlackRock 9.5%, director and co-founder Barbara Bradley Baekgaard with extended family about 12% (selling, see here for 2019 and compare with 2018 and see here), Dimensional Fund Advisors 8.6%, Renaissance Technologies 4.7% (might have sold out by now).

The chairman, Robert J. Hall, is the son-in-law of director and co-founder Barbara Bradley Baekgaard. She is also an employee and therefore does not get director compensation. The brother of the CEO is employed with the company as Photography Studio Director. The husband of Patricia Miller is also a director.

Packages of non-executive directors are typically 140k USD, including for 85k USD in restricted shares. Executive directors have much better packages: the CEO earns over 2 million USD with about 2/3 variable pay. Such high bonuses and restricted share grants encourage excessive risk taking.

This might be an easy target for an acquirer. However if an acquirer terminates the key managers then he/she has to pay them 9 million USD in total. More generally: severance pay of executive directors can be very high. Founders seem to be determined sellers though.

My take: great company for a really low price. Potential to be acquired. I think the low price is caused by a combination of a broad market slowdown and bad sentiment from the reorg over a year ago.

Update 8 February 2021: After a year I moved this stock from the Selected Stocks to the Played Out list in the bi-weekly spreadsheet for my subscribers. The adjusted closing price decreased from 9.63 USD to 8.46 USD. The annualized return was -12.13%.

This kind of business has suffered a lot from the corona. I could not have predicted this. So far this company navigated the storm quite well but I do not find the stock cheap anymore.