04-01-2011, 09:37 PM
(04-01-2011, 06:51 PM)d.o.g. Wrote: [ -> ]cif5000 Wrote:IMHO, the current price is conservative that
- it does not factor in the "earning power"
- it is a discount to the liquidation value
- it ascribes no value to the management and "sales network"
Earning power is best tracked over a full market cycle to even out the boom/bust earnings. Look at the change in book value per share, as not everything is captured in P&L. AEH compounded book value per share faster than most of the other stockists - why? Is this outperformance likely to persist?
Liquidation value of the inventory is likely to be 30%-50% discount to the adjusted carrying value. No competitor will buy the inventory except at a big discount since they can replicate it themselves. Money is not free - buying inventory locks up working capital. So any extra inventory has to be cheaper to compensate.
The sales network is nothing special, especially in Singapore where it is a fairly friendly neighbourhood. Everybody knows who the customers are. Everybody knows who the suppliers are. Everybody knows what everybody's costs are. They even buy from each other. And you can't (officially) bribe the customers' employees. It is a question of what products you choose to carry, and how low you are willing to go on price.
As usual, YMMV.
Since IPO, from 2005 to 2009, book value grew 8.1% annually from $0.26 per share to $0.365 per share. Nothing spectacular even after factoring in the consistent 40% dividend payout. I don’t know if that is outperformance but the business did earn money. Reportedly, it has been profitable in every of the past 37 years. I am not saying the business has an earning power and I should rephrase my statement to:
The current price is conservative that it assumes the business to earn nothing going forward.
Given the strong balance sheet with net cash of all liabilities, it is highly improbable for the company to go into a forced liquidation. In voluntary liquidation, there is no need to offer 50% discount on inventory. For discussion sake, let’s assume 50%. Equipment is mostly depreciated and I give the PPE (mostly leasehold properties) a 30% cut from carrying amount.
Inventory: 56,951 x 50% = 28,476 ($0.020 per share)
PPE: 7,704 x 70% = 5,393 ($0.104)
Receivables: 18,578 x 95% = 17,649 ($0.065)
Cash: 33,320 x 100% = 33,320 ($0.112)
Total: 84,837 ($0.310)
Total Liabilities: 6,845 ($0.025)
Forced Liquidation Value = $0.285 per share
It’s actually a close call but it will command a good puff if it is going for a voluntary liquidation.
Guess you have described the “sales network†quite clearly. It’s free at this price anyway. Anyone who wants to join the “network†will have a difficult time.
On gaining mileage, the 2 common approaches are:
1. Pay a good price for a fair business
2. Pay a fair price for a good business (better because you can sit on it for a long time)
The third and uncommon approach is to pay a good price for a good business.
I am not arguing that steel stockists are a good business but the current price, IMHO, is still good enough.