How My Deep Value Stocks Fared From 25 March 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 While some information is outdated most information can still be useful.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 cheap.

Need recent ideas? For more information on my quantitative deep value newsletter see here.

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 and did not warn against, 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 Friday 22 March 2019, which is the date of publication of my research. I use Monday 25 March 2019 as the start date for computing returns.

The stocks I did not discuss in detail were Talisman Mining, HomeMaid AB and Aalborg Boldspilklub. Their average annualized return was about 11.5%.

Talisman Mining (March 2019, ASX:TLM): My screener displays this stock as a net-net but it isn’t because the company paid out 0.15625 AUD per share in a subsequent event, after reporting the last balance sheet. See here. Now net current assets are less than 5 million AUD while the market cap is over 15 million AUD at a stock price of 0.085 AUD.

Update 10 March 2021: The stock price increased from 0.076 AUD to 0.095 AUD. In USD the return was 35.7% and the annualized return was 16.8%. The stock is still in my nanocaps list but not with a favorable ranking.

HomeMaid AB (March 2019, STO:HOME B) offers housekeeping, care and office services. I am skipping this nanocap because I think most of you cannot trade this stock. If you are still interested in a more detailed analysis please let me know.

This is an earnings play with EV/EBIT of 10.9 at 7.5 SEK per share. The P/B is over 5 with negative net tangible assets. The intangible assets are mainly goodwill. The company is a good dividend payer with a yield of 5.3%.

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 is a reliable dividend payer. In 2015 the company raised about 5% of book value but most likely at P/B above 2. Apart from another, tiny dilution in 2012 the company did not dilute or buy back shares during the last 10 years.

Though net tangible assets are negative the balance sheet is still strong with plenty of cash, much smaller current and non-current debts and a current ratio of 0.9.

Update 10 March 2021: This stock had a great rank in my nanocaps list. It worked. The stock price increased from about 7.3 SEK to 9.38 SEK. In USD the return was 39.6% and the annualized return was 18.6%. Often it pays to invest in stocks few other people can buy.

Aalborg Boldspilklub A/S (CPH:AAL) is displayed in my screener as a net-net. In reality it almost certainly trades above liquidation value. The market cap is 38.3 million DKK at a share price of 115 DKK. This is more than 31.2 million DKK, equal to the current assets minus all liabilities. See also the annual report over 2018. The annual report is in Danish. Since this pdf is a scanned image it cannot be machine translated.

Update 10 March 2021: I got better because now I can have most scanned images machine translated. If the financial reports and company announcements imply a net-net much more expensive than displayed in most screeners it can still be a good stock. But the odds for getting large gains are still worse. This one did not work out well: The stock price decreased from approximately 75 DKK to 41.6 DKK. In USD the return was -41.4% and the annualized return was -23.9%.

I now continue with 10 stocks I discussed in more detail 2 years ago. This was the second newsletter of March 2019. After publishing this newsletter I added 2 of these 10 stocks to the Selected Stocks list I had started at the end of January 2019. 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 4 stocks to the Selected Stocks list: Nadex Co, Buffalo Co, SBI Offshore and Jadason Enterprises. I moved the last stock to the Played Out list on 30 March 2020. Unfortunately SBI Offshore was not actionable because trading was halted after doing the research but just before publishing the article. See here. When trading was resumed it became a liquidation play, with a much higher stock price. So it was not possible to buy this stock for a price close to the price I mentioned in my research.

I compute an average return of 0.99% for the 3 stocks. The average annualized return was -6.95%. The average return of the 10 stocks I investigated in detail and I did not explicitly warn against was 0.55% and the average annualized return was -4.34%. So it was not a good month to find new quantitative deep value stocks.

Moreover I missed a nice return because trading in SBI Offshore got suspended just before publishing my notes. Furthermore I missed a big outlier as we shall see below. This was a stock with substantial intellectual property. Last year I came to the conclusion that small stocks with intellectual property have much better chances on good returns than other stocks. So I won't make the same mistake again. I think the results of this change are already visible. Since the beginning of 2019 the return on all 89 stocks moved to the Played Out list is slightly more than 20% on average with an average holding period of about a year. The average return on the 243 stocks that I selected but have not yet moved to the Played Out list is slightly above 30%.

Since we have been spoiled during the last 12 months we may have forgotten this: In the stock market loss making stocks and bad luck are quite common. Not always everything goes up. If something always worked everybody would do it. And then it would not work anymore because everybody would be bidding up the same stocks.

Something similar we see now with largecaps. Too many people have invested in these stocks through index funds. As a result largecaps have been bid up so much that future returns will be low. In particular many big technology stocks are vulnerable when the market corrects.

Before I continue with more detailed stock research I give the list of stocks that are still cheap:

1. Buffalo Co (TYO:3352): reasonably good stock in my low EV/EBIT list and in my low EV/EBIT + quality list. A good stock but not very good.
2. PGO (WAR:PGO): cheap based on debt reduction, EV/Revnue, P/FCFand P/Retained Earnings with low trading volume. This is not an actionable idea: trading volume is just too low for my lists.

1. Jadason Enterprises: net-net, nanocap

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
SGX:J03 7	0.021 SGD 0.06 SGD (1x)	15.2 SGD 7.1 SGD	- 0.13	0.31 -	2.1 1.8
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	-0.55 SGD	2.1 SGD	1.8 SGD	3.6	-

March 2019: Jadason Enterprises manufactures equipment and supplies for the printed circuit board (“PCB”) industry in Asia. The company sells its products in China, Hong Kong, Malaysia, Japan, Singapore, Thailand and Taiwan. Headquarters are in Singapore.

The 5-year low was around February 2018 at 0.008 SGD.

The company also provides PCB drilling services in Dongguan and Suzhou, PRC and also mass lamination services in Suzhou. Almost all revenue comes from the PRC where also almost all non-current assets are (see here). In addition almost all its receivables and a large part of its cash are denominated in CNY.

In 2018 both equipment & supplies and manufacturing services contributed to losses. In both segments revenue decreased in 2018.

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

The company is on the so-called “watch list” of the Singapore exchange since June 5, 2017. If the company cannot show a profit over the last 4 quarters by June 5, 2020 the stock may be delisted.

According to the cash flow statements in my screener the company suspended the annual dividend 5 years ago. During the last 10 year the company did not dilute and did not spend significants amounts of money on stock purchases.

See the annual results over 2018 and the annual report over 2017. In the last 3 quarters the company booked losses. In the first 2 of these 3 quarters the company booked small losses and but last quarter the company booked a bigger loss.

There are no retained earnings, just accumulated losses instead.

The balance sheet is strong with low leverage, lots of cash combined with minor current bank debt and a current ratio of about 3.

The book value of the current assets is 47.1 million SGD including 7.2 million SGD of not so valuable assets like inventory. The book value of the liabilities is 16.0 million SGD. Therefore my estimate of liquidation value = 47.1 -0.5*7.2 -16.0 = 27.5 million SGD. Therefore Liquidation Value/Market cap = 27.5/15.2 = 1.81.

There are 722.395 million shares excluding treasury shares. My screener computes the correct market cap.

Substantial shareholders: the non-executive chairman Ms. Queeny Ho 32.67%, outsider investor Liaw Hin Hao 8.46% (buying), Fung Chi Wai 4.53%, Yeo Seng Buck 1.66%.

Related-party transactions: in 2018 there were no significant related-party transactions other than compensation of key managers of 1.1 million SGD, including 772k SGD for the directors.

Update 10 March 2021: This nanocap and net-net looked promising based on ranking, shareholder structure and governance. Outsider investor Liaw Hin Hao bought more shares in January 2021.

In USD I compute a return of -40.63% and an annualized return of -40.24% from 25 March 2019 until 10 March 2021. The stock price decreased from 0.024 to 0.015 SGD on 30 March 2020, when I move the stock to the Played Out list. I did that because the stock was not a net-net anymore and was not so cheap anymore as a nanocap either, based on rankings. If I had held on to the stock the return would have been good since the stock price is now 0.031 SGD.

The stock is still one of the best 32% in my nanocaps list. For me that is not cheap enough.

2. SBI Offshore: net-net, 5-year low, 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
SGX:5PL 5	0.045 SGD 0.043 SGD	8.3 USD -8.4 USD	- -1200	0.51 -	2.0 2.0
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	-14.3 USD	-1.2 USD	-1.2 USD	-	-

March 2019: SBI Offshore was an offshore oil and gas services company. Since the beginning of 2018 the company has been exploring "strategic acquisition and investment opportunities in other industries with a view to enhancing shareholder value".

After a couple of years of losses the company managed to liquidate its non-current assets and is now acquiring a group of "Berlitz" offshore companies. This group of companies provides marine offshore services, owns vessels and provides "operating and ship management services in the oil and gas sector".

SBI Offshore went public in November 2009.

A search on the company name and keyword "fraud" revealed several relevant links. Outsiders tried to change management in an attempt to turn around the business in February 2018. In April 2018 the company appointed an independent auditor to reconcile discrepancies in reporting between the company and a subsidiary. The amount involved was 373k USD. The independent review is still in progress.

The Singapore exchange apparently suspects Chinese real estate was disposed way below market value. See also here and here.

Also in September 2016 there was a proxy fight. See this great summary from a professor in corporate governance and ethics. The same shareholder group was involved as in 2018. The board accused two of the shareholders of serious irregularities implying illegal self-dealing. This would have happened in 2015 en before that they, Mr. Hui Choon Ho and and Mr. Tan Woo Thian, were CEO  and an executive director respectively. These allegations seem credible. Moreover the company tried hard to find a compromise.

Both in 2016 and in 2018 the proxy fights did not succeed. In these years director turnover was still high.

According to the cash flow statements in my screener the company paid a small dividend but suspended it 4 years ago. The company diluted much in 2013 and 2014. I guess self-dealing management was ousted in 2015. During the last 10 years the company did not buy back shares.

See the results announcement for 2018 and the annual report over 2017.

The company switched from profitable to loss making in 2015. The loss over 2018 was much lower than in 2015, 2016 and 2017.

There are no retained earnings, only accumulated losses.

The balance sheet is very strong with hardly any leverage, no debts and almost all current assets are cash.

Such a balance sheet with hardly any revenue in 2018 and hardly any non-current assets is typical for a company in liquidation.

My estimate of the liquidation value is 15.2 million USD.

The current share count is 249.68 million. If the acquisition completes almost 500 million new shares will be issued. The nominal value of the new shares is 36 million USD and they are issued at 0.1 SGD. The company says this is be below book value of the acquired business.

So after completion of the acquisition the market cap will be 24.5 million SGD equivalent to about 20.2 million USD. Almost certainly this is way below book value but we do not know this yet because the company has not filed much information on the acquired business. Also the company will issue extra shares as earn-out payments, which is still being negotiated.

Substantial shareholders (before acquisition): Mr. Hui Choon Ho 7.84% (selling), the executive chairman Mr. Mirzan Bin Mahathir 18.72% (not the CEO), Mr. Tan Woo Thian 16.57%.

Malayan Mr. Mirzan Bin Mahathir is also a fund manager. He is president of Crescent Capital Sdn Bhd (maybe affiliated to Saudi fund Arcapita but I do not think so).

Update 10 March 2021: This company was highly dependent on the oil and gas sector. Because of corona energy prices decreased. Therefore this company did not do well. But it became a liquidation play. After doing the research but before publishing my notes trading was halted. When trading resumed the stock price was about 50% higher because then the market recognized it was a liquidation play. So this idea was not actionable. It was not possible to buy the stock for a price close to the 0.045 SGD I mentioned 2 years ago. Therefore I have not used this stock in my return calculations.

3. Mirriad Advertising: net-net, nanocap

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:MIRI 5	0.095 GBP -	10.0 GBP -12.1 GBP	- -18.9	0.46 -	2.1 1.2
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-06-30	-13.0 GBP	-8.9 GBP	-9.6 GBP	-	-

March 2019: Mirriad Advertising is a "video technology company delivering in-video advertising". The company focuses on "large scale distribution partners". Among others it does business with NBCU in the US, El Cartel Media for RTL II in Germany, Youku/Alibaba, Star India and Tencent.

Though the company has some revenue it still focuses on technology development and "building long term Marketplace partnerships". The company builds "towards delivering an entirely new form of advertising to the market". Yet it says its technology platform ("MarketPlace") is a proven success based on results of many pilot projects.

See the prospectus for the IPO. It contains lots of information on the history of the company and its shareholders. The company went public on December 19, 2017 for 0.62 GBP per share. During the IPO 41.0 million new shares and 1.3 million existing shares were sold. Selling shareholders were high level executives including the CEO, CTO, CFO and the head of product development.

After the IPO a new dilution followed in April 2018: a private placement raising 2 million GBP at 0.62 GBP per share, way above the market price of between 0.4 and 0.48 GBP per share. Going forward I expect the company to continue diluting.

A search on the company name and keyword "fraud" did not reveal any relevant links. I also searched on the IPO broker name "Numis Securities" and keyword "fraud". That search returned several links with worrisome information on this broker.

The share price decreased so much since the IPO because revenue decreased much. Apparently that was not expected. Decreasing revenue is not good for share prices of growth companies anyway. And of course pre-IPO revenue might also have been overstated, as happens often with IPOs.

The company attributes the revenue decline to focusing on building software for long-term, sustainable business. As happens often software needs to be built twice. The first time is to try out the concept and the second time for larger scale commercial use. My feeling is the company has completed building its software for the second time by now.

That does not mean revenue will pick up fast since the company warns sales cycles are long. In addition it seems the company sells its products/services below cost price. It needs scale to earn the other costs related to its software enabled services.

In October 2018 the company got a very high profile CEO: Stephan Beringer.

See the results over the first half of 2018.

There are no retained earnings, just accumulated losses instead.

The balance sheet is strong, with hardly any leverage, no debts and a big cash pile. Cash burn is really fast however: 6.2 million GBP is the first half of 2018.

Assuming the company burned to another 9 million GBP by now my estimate for the liquidation value is about 12 million GBP. Therefore Market cap/Liquidation Value = 1.2.

Substantial shareholders (December 2017): investment fund manager IP Group Plc 27% (confirmed June 2018), Parwalk Advisors 18%, Soros Fund Management 4.7% and 4 other institutional investors with smaller stakes.

Related-party transactions: companies affiliated with IP2IPO Portfolio GP charged 6.4 million GBP of "secretarial Fees and expenses" from the IPO in December 2017 to June 30, 2018. The company also paid small amounts for "data room charges related to fundraising activity" and as compensation for 2 non-executive directors affiliated with IP2IPO Portfolio GP.

Update 10 March 2021: Too bad I missed this one! Only in 2020 I found out returns of cheap companies with substantial intellectual property can be great. In this case the stock price increased from 0.096 GBP to 0.505 GBP now. In USD I compute a return of 463.51% and an annualized return of 141.43% from 25 March 2019 until 10 March 2021.

The stock is not in any of my quantitative lists anymore, because it is too expensive. In my screener I see a "strong buy" analyst rating but with a target price of 0.26 GBP, so much lower than the current share price.

4. Buffalo Co: nanocap, low EV/EBIT, 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
TYO:3352 9	888 JPY 750 JPY	1980 JPY 843 JPY	1.8 0.1	0.40 0.53	0.9 0.8
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-09-30	465 JPY	535 JPY	276 JPY	-	3.4

March 2019: Buffalo Co runs 15 Autobacs Chain stores as a franchiser of Autobacs Seven Co (stock code 9832 in Tokyo) in Japan. The company sells and installs car parts and supplies such as tires, wheels, car electronics, and oil and batteries. Tires/wheels and inspections are good for over 50% of the revenue. Accessories and maintenance is good for about 20% of the revenue. Car electronics, oil and batteries are another 20%. The company also trades used cars (5% of revenue) and acts as an insurance agent (2% of revenue).

A search on the company name and keyword “fraud” generate many links but for other companies. Because of the generic company name this search is not effective.

According to the cash flow statements in my screener the company is a reliable dividend payer. Last year the company raised about 1% of book value at approximately P/B=0.5. Otherwise there were no dilutions or significant buy backs during the last 10 years.

Multi-year metrics measuring earnings quality and effectiveness of asset allocation are probably below average but not way below average. A headwind is unfavorable demographics.

I have looked into the recent quarterly report (December 31, 2018) and the annual report for the year ending on March 31, 2018.

Retained earnings are 3.77 billion JPY. Therefore Market cap/Retained Earnings = 1.98/3.77 = 0.525.

The balance sheet is very strong with a current ratio of almost 3, lots of cash and much smaller loans. A rough estimate of liquidation value is 1.6 billion JPY. So Liquidation Value/Market cap is 0.8.

There are 2.196 million shares including 100 treasury shares.

Substantial shareholders: Autobacs Seven Co 23.05%, Masataka Masuda 12.01%,the CEO Sakamoto Yuuji 9.42%, Emiko Ushida 8.28%, Fidelity Low Priced Stock Fund 4.33%, Buffalo Employee Shareholding 3.43%.

Because of block ownership I do not think the company is an easy target for an acquirer.

Related-party transactions: among others the company pays almost 100 million JPY of royalties to Autobacs Seven Co (percentage of revenue). In addition the company subleases some stores from Autobacs Seven Co, including a 2-year deposit of the rent of 364 million JPY. The company also purchased for 3.7 billion JPY from Autobacs last fiscal year.

Unfortunately it is not clear from the annual report how much key executives earn.

My take: extremely cheap company of decent quality. I will add this one to the Selected Stocks list.

Update 10 March 2021: The stock price increased from 836.4 to 1256 JPY now. In USD I compute a return of 52.36% and an annualized return of 23.96% from 25 March 2019 until 10 March 2021. I think this is still a reasonably cheap stock. It is among the 36% best stocks in my low EV/EBIT list and among the 45% best stocks in the low EV/EBIT + quality list.

5. Wee Hur Holdings: low EV/EBIT, low EV/EBIT +quality, 5-year low

Ticker, Fin Strength	Share Price Anal target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
SGX:E3B 8	0.2 SGD 0.196 SGD	187 SGD 211 SGD	3.8 0.72	0.51 0.78	- 1.18
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	44.6 SGD	77.1 SGD	72.3 SGD	2.9	4.0

March 2019: Wee Hur Holdings is a construction business from Singapore that started developing and investing in real estate in 2009. The company has projects and property in the PRC, Singapore and Australia (student accommodation). See also this historic overview.

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 was pretty dilutive until 5 years ago. The company also paid big dividends but reduced payouts 2 years ago. Over 2018 the board proposes a final tax-exempt dividend of 0.004 SGD for shareholders on May 7, 2019.

This stock ranks high in both the low EV/EBIT list and the low EV/EBIT + quality list. In particular the company is a good cash flow generator, and with a high 8-year geometric mean of return on capital. Also gross margin growth and the 8-year geometric mean of return on assets are better than average. I do not believe in a moat for any property developer. Instead the favorable multi-year metrics suggest the company is a very good asset allocator.

See the results announcement for 2018 and the annual report over 2017. Key audit matters were revenue recognition for the construction business and the book value of development properties.

Most of the profit in 2018 comes from property development in Singapore. With property development earnings are often unstable since much depends on the timing of completion of projects.

Net assets for the business segments are as follows: construction -8.5 million SGD, dormitory investments (in Singapore) -3 million SGD, Singapore property development 95 million SGD, Australian property development and property investment 153 million SGD, other overseas property development (I think in the PRC) 95 million SGD. Most liabilities are related to the Australian business. The Chinese business hardly has any liabilities.

Retained earnings are 240 million SGD. Therefore Market cap/Retained Earnings = 187/240 = 0.78.

The balance sheet is strong with moderate leverage (Tangible Assets/Tangible Equity about 2) lots of cash but roughly equal current debt. The current ratio is 1.3. The combination of cash with current debt is a red flag. Considering the company’s track record I suppose the company keeps a lot of cash for jumping on opportunities. According to the annual report over 2017 a large part of the debt is short-term secured loans for properties under construction, see here.

The book value of the current assets is 371 million SGD including for 131 million SGD of properties under development. Among the non-current assets there is for 317 million SGD of investment properties. The book value of the liabilities is 402 million SGD including 12 million of non-controlling interest. Therefore my estimate of the liquidation value is 371 -0.5*131 +317 -402 = 220.5 million SGD. Therefore Liquidation Value/Market cap = 220.5/187 = 1.18.

Substantial shareholders: (December 31, 2017): executive chairman Goh Yeow Lian 45.51%, Goh Yeu Toh 3.63%, Sua Nam Heng 3.31%, Cheng Kiang Huat 2.28%, executive director Goh Yew Tee 1.81%, Kuik Ah Han 1.09%, Goh Yew Lay 1.04%.

Related-party transactions (December 31, 2017): the company pays 10.4 million SGD of “Dormitory management fee expenses” and gets 87k SGD of rental income from a Singapore company most likely controlled by the main shareholder.

This is a family business. There are 4 Goh’s in the board including the executive chairman and main shareholder. Among the senior managers there are 2 Goh’s including the CEO.

The company also sells property to the Goh’s. See here for a transaction of 2.5 million SGD. The company and another company affiliated with the Goh’s also guarantees loans of a joint venture in the PRC, see here.

Two Goh executive directors earn more than 1 million SGD including a bonus of 80% of their total package. Also another director and 4 key executives earn bonuses of 47% or more of their total package. Such high bonuses are a red flag because they encourage excessive risk taking.

Update 10 March 2021: The stock price increased from 0.19 SGD to 0.205 SGD. In USD I compute a return of 8.27% and an annualized return of 4.14% from 25 March 2019 until 10 March 2021. I did not add the stock to the Selected Stocks list probably because of high insider compensation, the bonuses and related party transactions. The stock is not cheap anymore.

6. Kudo Corporation: low EV/EBIT, nanocap

Ticker, Fin Strength	Share Price Anal target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
TYO:1764 9	2517 JPY -	3351 JPY 3967 JPY	3.7 0.21	0.86 1.24	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	1178 JPY	1361 JPY	1291 JPY	2.9	4.0

March 2019: Kudo Corporation does civil engineering and construction work, runs a building management business and a nursing care business for the elderly, all in Japan.

In terms of employees the nursing care business is the largest business segment with over 60% of the employees. The construction business is good for over 20% of the employees. The rest of the employees are mostly dedicated to the building management business and overhead.

In terms of sales the construction business is good for 57%, the building management business 22% and the care business 21%.

The Google translation of the Japanese name is (apparently) Kudo Construction Co.

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

A tailwind is extra demand for construction work because of the Olympic Games in Tokyo in Summer 2020. This tailwind can turn easily into a headwind since this kind of massive government spending often results in excess capacity.

According to the cash flow statements in my screener the company has been a reliable dividend payer during the last 10 years. Dividend increased 2 years ago. The company did not dilute and did not spend significant amounts on buy backs.

According to the list of the cheapest companies ranked on quality the company has average quality. Below average multi-year metrics are offset by an excellent score on financial strength.

There are 1,331,220 shares including 34,400 treasury shares or 2.58%. My screener (spreadsheet and table above) overestimates the market cap because of the treasury shares.

Retained earnings are 2.63 billion JPY. Therefore Market cap/Retained Earnings = (2.517*(1.33122 -0.0344))/2.63 = 1.24.

The balance sheet is pretty leveraged with Tangible Assets/Tangible Equity above 3. For a large part leverage is operational instead of financial. There is a combination of cash and short-term loans (red flag). Cash roughly covers the current and non-current loans and the current ratio is slightly above 1. Therefore I do not think this company is financially distressed.

The company trades much above liquidation value.

Substantial shareholders: Top Inc 54.91%, CEO Hidetoshi Kotoh 3.07%, MOMO Corporation 3.06%, executive chairman Kojiro Kotoh 2.74%, Tomomasa Yaezawa 2.35%. A couple of other companies own stakes of slightly more than 1% each. The percentages are relative to the total number of shares minus the treasury shares.

I think another transcription of the Japanese for “Kudo” is “Kotoh”. Elsewhere is the annual report the name of the chairman is transcribed as “Jiro Kudo” instead of “Kojiro Kotoh”. I think the shares of the company of Top Inc are ultimately owned by Iwao Kudo, who is the uncle and father of the 2 people running the company.

Related-party transactions: the company does construction work for probably the main shareholder and other family members of the main executives. In the year ending on June 30, 2018 the total amount was 50.3 million JPY.

I could not find a clear description of compensation for the main executives. I think the total for 7 executives is 156 million JPY. While that is not much I do not know whether this amount is director compensation only, and whether the executives also get compensation as an employee.

Update 10 March 2021: The stock price increased from 2222 JPY to 2249 JPY. In USD I compute a return of 2.67% and an annualized return of 1.35% from 25 March 2019 until 10 March 2021. The stock is still among the best 32% in my low EV/EBIT list. That is still cheap but not very cheap.

7. Nadex Co: low EV/EBIT, update

Ticker, Fin Strength	Share Price Anal target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
TYO:7435 6	890 JPY -	8549 JPY 4464 JPY	3.2 0.14	0.62 0.60	1.01 0.9-1.0
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-10-31	1362 JPY	1879 JPY	1616 JPY	-	1.1

March 2019: Nadex Co manufactures electronics and components and sells factory automated systems and welding solutions, all in Japan, China, the US and Thailand. In Thailand the company conducts business via a wholly owned subsidiary and via a 49% owned joint-venture.

About 2/3 of the employees are based in Japan. A large part of its sales are for the car industry. About 75% of sales and 80% of property, plant and equipment are in Japan.

Since I reported on the company in July 2017 the stock went up from 869 to 890 JPY.

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 is a reliable dividend payer having increased the dividend last reporting year. My screener displays a yield of only 1.1% but I think the real yield is over 5% or 12 JPY/share per quarter. Last reporting year the company also bought shares back: it spent 100 million JPY or about 1% of the market cap. Otherwise it has not diluted or spent significant amounts on buy backs during the last 10 years.

Multi-year metrics suggest good earnings quality. In particular gross margin growth and the 8-year geometric return on capital are good. Because of the mediocre value for Financial Strength there are still 31% stocks with better quality in my list of the cheapest "low EV/EBIT + quality".

The company was granted 4 US patents that have not expired yet, but these patents will all expire in just a couple of years. During the last 5 reporting years the company spent almost 400 million JPY per year on research and development. So there might be 1-2 billion JPY of value that is not reflected in the balance sheet. The research is mainly directed to the welding solutions business (resistance welding and aluminum welding). The company also does research on using more aluminum for cars to save weight.

During the last 2 quarters revenue, gross margin and operating income went down year on year.

There are 9,605,800 shares including 367,400 treasury shares or 3.82%. Because of the treasury shares my screener (spreadsheet and table above) overestimates the market cap.

Retained earnings are 13.7 billion JPY. So Market cap/Retained Earnings = (9.6058 -0.3674)*0.89/13.7 = 0.600

The balance sheet is very strong with low to moderate leverage, lots of cash and hardly any debts.

The book value of the current assets is 18.4 billion JPY including for 7.9 billion JPY of not so valuable assets like inventory. Among the non-current assets there is most likely for 0.9 billion JPY of land and at least 2.5 billion JPY of non-current investment securities. The book value of the liabilities is 9.8 billion JPY. Therefore my estimate of liquidation value = 18.4 -0.5*7.9 +0.9 +2.5 -9.8 = 8.05 billion JPY. So the stock trades just above liquidation value.

Substantial shareholders (April 30, 2018): Art Gallery Fujimi Co 15.17%, Fidelity Low Price Fund 8.64%, Furukawa Michiko 3.09%, Akira Furukawa 2.4%, IR director Masaru Furukawa 2.3%. These percentages are based on the total number of shares minus the number of treasury shares.

I do not think there are big impediments to deter an unfriendly acquirer. However there might be hidden block ownership. The company holds many small stakes in other companies. Such companies most likely also hold small stakes in Nadex Co and will follow voting recommendations of management.

Total executive director compensation is 145 million JPY. None of the directors earns more than 100 million JPY in total so including his/her salary as an employee.

Related-party transactions: there were no material related-party transactions in the year ending on April 30, 2018.

Update 10 March 2021: The stock price decreased from 848.5 JPY to 763 JPY. In USD I compute a return of -8.77% and an annualized return of -4.57% from 25 March 2019 until 10 March 2021. The stock is still among the best 47% in my low EV/EBIT list. That is still cheap but not very cheap.

8. Accel SAB de CV: microcap + momentum + high retained earnings + low EV/EBIT

Ticker, Fin Strength	Share Price Anal target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
MXK:ACCELSAB 7	19.9 MXN -	3761 MXN 6268 MXN	7.9 0.78	1.43 1.81	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-30	794 MXN	567 MXN	379 MXN	9.9	-

March 2019: Accel SAB de CV operates along 2 business segments: wholly owned logistics division Accel Logística and a 60.36% owned manufacturer of sweets and nuts with 3 factories in Mexico, a factory in the US and a distribution center in Texas, US. The logistics division does not only transportation but also conditioning of merchandise (freezing and refridgeration), inventory management, business verification and foreign trade.

The company sells its nuts to restaurants and self-service chains in the US. The candy production is sold to other candy producers, marketers and re-packagers including supermarkets, candy stores and pharmacy chains.

Almost 90% of the revenue comes from the manufacturing division. Both business segments are roughly equally profitable in terms of gross margin. In terms of Segment Profit/Segment Assets the manufacturing division is clearly more profitable than the logistics business.

The ticker symbol on the Mexican exchange is ACCELSA, so different from the ticker symbol in my screener (spreadsheet and table above).

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 did not pay a dividend in the last 10 years. The company did not dilute or buy back shares except for a substantial dilution in 2009 (bad timing) at slightly more than 1 MXN per share. Buy and hold investors got more than 30% geometric return since this dilution in 2009!

Multi-year metrics do not suggest any moat or good capital allocation. In particular 8-year geometric returns on assets and capital are not great and not much free cash flow was generated during the last 8 years.

Strong and reasonably smooth momentum combined with low valuation based on market cap/retained earnings and EV/EBIT predicts high statistical returns. See the stock chart in USD:

Trading might be illiquid though Average 3-months volume/Public Float still satisfies my criterion for minimum liquidity. My feeling is that not every day there is a trade but volume is relatively high in the days with trades. For the minimum liquidity criterion the huge volume spike in December 2018 was not taken into account because that was more than 3 months ago.

See the annual report over 2017 and the recent quarterly report (December 31, 2018).

There are 189.00 million shares including 3.76 million treasury shares. My screener (table above and spreadsheet) overestimates the market cap because of the treasury shares.

The cash flow from operations is much lower than the EBIT because of increases in accounts receivables and inventory.

Retained earnings are 2.03 billion MXN. Therefore Market cap/Retained Earnings = (189 -3.79)*19.9/2034 = 1.81.

The balance sheet has low leverage with Tangible Assets/Tangible Equity below 2. The current ratio is almost 2 but the company is low on cash and has a lot of current and non-current debt. Assuming no capex it still takes 3 years to repay the debt from cash flow from operations. The company lends mostly from foreign banks at mostly fixed interest rates of 4-5% (on average 4.52% in 2017). Most of the loans are in USD. That should be no problem since most of its revenue is in USD.

Substantial shareholders: the chairman Elloy S. Vallina 54.91%. Other directors do not have stakes of more than 1%. His son is the CEO. There are 12 directors in the board, including 2 other family members of the chairman. A large board predicts lower statistical returns.

Related-party transactions: the company leases a factory building from its chairman and controlling shareholder for 25.7 million MXN in 2017. The manufacturing operations are insured via a company controlled by the chairman. In 2017 the premium was 7 million MXN. Also the company bought administrative services from an affiliate for 33.2 milliion MXN and air transportation services for 12.9 million MXN. In total these transactions were about 85 million MXN which is equivalent to about 4.4 milion USD.

Key managers earned 41.7 million MXN in total in 2017.

Update 10 March 2021: For momentum stocks I think 1-year holding periods are better than 2-year holding periods. Probably shorter holding periods are even better. The stock price decreased from 20.4 MXN to 18.25 MXN. In USD I compute a return of about -26.8% and an annualized return of -27.4% from 25 March 2019 until 24 March 2020.

Despite the disappointing return this was a good momentum stock. At the time I did not have stock prices in USD (I have added the chart just for this blog) and therefore I could not compute a measure for chart smoothness. But now I can do these computations. It turns out I picked a stock with extremely strong and extremely smooth momentum.

For individual stocks good statistical properties are no guarantee for good returns. But if you own many stocks like this one for many years you will do extremely well, also on a risk adjusted basis.

Right now the stock is not in any of my lists anymore, so it is not cheap anymore.

9. PGO: falling knife, 5-year low, low EV/EBIT

Ticker, Fin Strength	Share Price Anal target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
WAR:PGO 10	1.64 PLN -	158 PLN 219 PLN	6.7 0.53	0.64 1.32	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-09-30	32.8 PLN	47.8 PLN	21.2 PLN	7.5	-

March 2019: PGO SA produces cast iron, steel castings, die forgings and wrought iron. The head office is in Katowice, Poland. The company characterizes itself as a high-flexibility producer in terms of weights of castings and forgings it produces. Almost half of the sales is foreign and mostly goes to other countries in the European Union.

A search on the company name and keyword “fraud” did not reveal any relevant links. Recently a member of the supervisory board resigned without giving a reason.

The company might have suffered from the high exchange rate of the Polish zloty a while ago. Last year the PLN was clearly too strong. Now the PLN is much weaker. The company expects lower revenue going forward due to a slow down in the euro area. In particular the company mentions a drop in orders from Germany.

According to the cash flow statements in my screener the company paid a dividend in 3 of the last 10 years: a small dividend in 2008, a large dividend in 2011, and a smaller but still large dividend in 2017 of 0.37 PLN. The dividend in 2011 was accompanied by a dilution of equal size. Other than that the company did not dilute during the last 10 years.

Part of the share price decline may be explained from the missing dividend in 2018. Moreover in the beginning of 2018 the share price might have been elevated because of the very high dividend paid in 2017.

Multi-year metrics do not suggest high of even above average earnings quality.

Interim EBIT numbers in my screener are too high. My screener still comes up with a reasonable EV/EBIT multiple. In the table above I have corrected the EBIT from my screener with the correct EBIT computed from the financial reports and the annual EBIT in my screener.

Disclosure is in Polish. I was able to machine translate selected documents. See the last quarterly report (September 30, 2018) and the annual report over 2017.

It seems the company recently simplified its legal structure, which may save significant costs.

Retained earnings are 119.9 million PLN. Therefore Market cap/Retained Earnings = 158/119.9 = 1.32.

The balance sheet displays low leverage with Tangible Assets/Tangible Book = 1.6. However the company is low on cash (18 million PLN) while there is for about 80 million PLN of current and non-current debt. There is even twice as much current debt (about 36 million PLN) as cash. Assuming no capex it still takes 4 years to fully pay back all debts from earnings. I still think the company has at least a year of runway though.

So there might be some financial distress at PGO but there is also time to solve these problems. The recent debt agreement might be enough for 2 year of runway instead of just one year. On September 28 the company signed this credit agreement with a bank for up to 58 million PLN. The end date of that agreement is September 30, 2020 and for the secured part of the debt the end date is even September 30, 2021.

My conservative estimate of liquidation value based on current assets, real estate and liabilities is close to zero. However I think page 46 of the annual report over 2017 also mentions there is for 89 million PLN of real estate that was mortgaged. Taking this into account Liquidation Value/Market cap could be above 0.5.

Substantial shareholders: TDJ Equity II 67% (controlled by the chairman of the Supervisory Board Mr. Tomasz Domogała), Nationale-Nerderlanden Universal Pension Society SA (formerly ING PTE) 7.58% (increasing), Aviva Universal Pension Society Aviva Santander SA 6.8% (increasing). Apart the the indirect 67% stake I think the chairman also owns 1.7% directly, at least he owned these shares on December 31, 2017.

At the end of 2018 Altus TFI SA sold most of its shares.

Related-party transactions: in 2017 the company sold for 59.7 million PLN and bought for 14.3 million PLN from related parties. The total of outstanding amounts was low. The company Famur SA is both a seller and a buyer.

I do not think the non-executive chairman has family members in the board or as executives. At least, I have not found anyone else with surname Domogała. After looking at page 67 of the annual report of 2017 my conclusion is managers are not overpaid.

Update 10 March 2021: The stock price decreased from 1.57 PLN to 1.45 PLN. In USD I compute a return of -6.0% and an annualized return of -3.2% from 25 March 2019 until 10 March 2021.

Based on debt reduction, EV/Revnue, P/FCFand P/Retained Earnings this stock is still very cheap. It is not in my quantitative lists anymore because trading volume is below the minimum for it to be actionable.

10. Grupo Aeroportuario del Centro Nort: US listed low EV/EBIT + quality, screener underestimates market cap

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:OMAB 10	43.5 USD 50 USD (8x)	34797 MXN 36396 MXN	8.8 4.6	- 6.1	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	4113 MXN	3653 MXN	2400 MXN	14.5	3.9

March 2019: Grupo Aeroportuario del Centro Norte Sab de CV (OMAB) operates 13 airports in Mexico. Apart from operating parking lots, VIP lounges and providing passenger and freight services this includes providing floor space to restaurants, banks, car rental providers, shops and renting out 6 warehouses. The company also operates 2 hotels at its airports with help of a Spanish human capital management company.

Almost all flights from these airports are domestic (88.4%). Much depends on how much Mexicans fly, so on the general Mexican economy. In particular 45% of the domestic passengers flew via Mexico City International airport, which the company does not own. From there most foreign travelers fly to the company’s airports.

The stock trades in Mexico and in the US as American Depository Shares or ADS. One ADS is equivalent to 8 common shares. Because the stock trades on 2 exchanges my screener underestimates total 3-months trading volume. However the stock still trades very illiquid so I do not think this would have resulted in a much different value-ranking.

What does matter is of course the market cap. Unfortunately my screener (spreadsheet and table above) displays a market cap that is over 15% too low. At a share price of 43.5 USD or 104 MXN the real market cap is about 41 billion MXN. The stock would have been just too expensive for inclusion in the low EV/EBIT + quality list after correcting this screener error. Nevertheless this is still an interesting quality stock.

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

In November 2018 the company appointed a new CEO after the former CEO stepped down “after twenty years of service”.

Since 2005 there is a dispute about land for Ciudad Juárez airport. If the company loses this airport would have to be closed resulting in loss of 4.5% of the revenue. In that case the Mexican government most likely has to compensate the company for this loss.

Airports gets revenue from regulated passenger fees (aeronautical revenue) and commissions based on revenue from all third parties offering products and services at the airports. About 74% of the revenue is aeronautical revenue.

Rates to be paid by passengers are negotiated rates approved by the Mexican government in multi-year arrangements. There is fear the new left-wing Mexican government will curb these rates. See this pay-walled article from December 2018. The target price of that author was about 45 USD per share. The target price was not so much based on regulation risk but more on risk of economic downturn in Mexico.

As someone who lives not so far from one of the biggest airports in the world I can assure you airports are a totally unsustainable business. Air traffic is simply too polluting and too noisy. Short-term it is good for the economy but longer term it damages the economy. Opponents of air traffic are beginning to speak louder in The Netherlands. It will take many years before existing policies will be changed but at the same time growth will be curbed.

According to the cash flow statements in my screener the company paid a dividend in 7 of the last 10 years. Three years ago the company did a small dilution raising an amount equivalent to 3% of its equity, probably at a P/B of 2-3. In the period 2012-2016 the company did large buybacks.

According to 8-year metrics measuring business quality the company scores better than average on gross margin growth, and very well on 8-year free cash flow generation and 8-year geometric means of returns on capital and even more so on assets.

Disclosure is in English. See the annual report over 2017 and the latest earnings announcement from December 31, 2018.

Retained earnings are 6.74 billion MXN. Therefore Market cap/Retained Earnings = 41/6.74 = 6.1. Such a high multiple can be expected because the company seems to have subtracted spending on buy backs from retained earnings. Many other companies decrease “contributed capital” with spendings on buy backs, which is better in my opinion.

Whether the balance sheet is strong or not depends on how you value the intangible assets. The intangible assets are the airport concessions valid until November 1, 2048. I think such assets are very valuable, because they have proven earnings potential. An airport is basically the concession plus buildings, parking lots and lanes. In practice the concession is an exclusive right, so for someone else it is impossible to start another airport nearby, including all necessary road and rail connections. Therefore airport concessions are much different from other intangible assets like patents, brand names, non-current deferred tax assets and goodwill.

When valuing the airport concessions at book value the balance sheet has moderate leverage with Total Assets/Equity of less than 2. The company has large debts but this is non-current debt. If needed I think the company could pay off all debts in 2-3 year. Furthermore the current ratio is above 3. So no financial distress here.

Substantial shareholders: Empresas ICA 14.5%, Standard Life Aberdeen 5.1%, Aberdeen Asset Management 7.1% (increasing), the Quintana family 4.0%.

There are 11 directors, all non-executive. On average large boards predict lower returns. The CEO is not a board member.

The Quintana family has 2 seats in the board including the chairman and his younger brother. Empresas ICA is an infrastructure company doing civil and industrial construction. The stock code is ICA on the Mexican exchange. The company also invests in concessions: in airport concessions via OMAB but also in private highways and ports. The company is founded by a Quintana and the chairman is another Quintana Isaac. My conclusion is that the Quintana family controls at least 18.5% of the shares.

Among the shares controlled by Empresas ICA is a stake of 12.6% of Series BB shares. These shares have many special rights. Among others holders of Series BB shares propose candidates from which all shareholders as a group elect the CEO. Furthermore they have the right to appoint at least half of the executive officers and to appoint 3 directors. Furthermore directors appointed by Series BB shareholders can block any company decision requiring approval of the board according to the bylaws. Two of the 3 directors appointed by Series BB shareholders are Quintanas.

One of the affiliates of Empresas ICA pledged shares in return for a loan several times. Each time shares were sold to force repayment of the loan, also in 2017. Currently no shares have been pledged.

Related-party transactions: the controlling shareholder provided technical assistance for 6.8 million USD in 2017. The controlling shareholder has to match public bids for this contract.

Empresas ICA also have a master construction agreement with the company for a total of 1.68 million MXN. In 2017 the company paid 267 million for services delivered under this contract.

I could not find anything about management and director compensation in the annual report.

Update 10 March 2021: The stock price decreased from 42.10 to 51.9 USD. I compute a return of 23.2% and an annualized return of 11.3% from 25 March 2019 until 10 March 2021.

This looks extremely silly because this airport business was heavily impacted by corona. Moreover it is still very uncertain the business will return to normal anytime soon. I guess it will take several years before older tourists return to flying. Fortunately the company is still profitable. I doubt this stock is a good reopening trade but I have been wrong before.

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