Zagro Asia released a formal proposal to seek the voluntary delisting of the Company which I think greatly undervalues the company.

I have sent an open letter to company reflecting my stance that the offer should be revised upwards to reflect the true intrinsic value of the company.

The original letter can be found here.

Open Letter to Zagro Asia about Proposed Voluntary Delisting

The proposed voluntary delisting at 30 cents came as a surprise to us. It deeply undervalues what is an intrinsically high quality business.

In our opinion, a conservative appraisal of Zagro Asia would yield a valuation of at least 35 – 40 cents.

First off, let me congratulate management for running a tight ship. For ten years, you have grown the earnings of the company consistently, even through tough times.

In the FY 2005, you earned $3.14 mil, and in the FY 2014, you earned a profit of $7.23 mil. In those ten preceding years, you have never recorded a loss, and have paid out a dividend in every one of those ten years.

More impressively, you have done so without the excessive use of leverage, and maintained an average Return on Equity (ROE) of over 11%.

These numbers are highly impressive, and few listed companies in Singapore can match your track record in the industry.

Summary of Zagro Asia Financial Results¹

The Offer Grossly Undervalues Zagro Asia



The current offer price of 30 cents pegs the companies P/B ratio at 0.87x.

In the preceding 5 years (Nov 2010 – present), your stock has traded at an average P/B of 0.95x.

In preceding 10 years (Nov 2005 – present), your stock has traded at an average P/B of 1.11x².

It is clear from the above charts that in the last decade, a P/B of 0.87x is close to the lowest end of the valuation range.

Given the sterling business record of Zagro Asia, there is no reason why it should not trade at least at least at book value.

This would imply an offer price of at least 34.58 cents.

A Look at the Underlying Assets
& Business of Zagro Asia

To add to the above point, I would like to highlight the high quality assets that Zagro Asia has.

The financial position of your company is in good shape, with significant amount of cash $27.9 million, representing 31% of your total equity. Furthermore, you also possess a freehold land valued at $5.4 million.

In addition, you have also pared down your borrowings by $4.6 million. There are no significant liabilities, either on or off the balance sheet.

It is safe to say that your balance sheet is at one if its strongest positions since its listing history.

Finally, in your latest half year results, the company recorded a significant improvement in net profits of 18%, from $3.3 million to $3.9 million.


The above points highlight improving business results, a strong unencumbered balance sheet and solid business record.

There is no reason why Zagro Asia should not trade at least at book value, or even a premium of book value indicating a fair value or 35 – 40 cents.

Shareholders who have received notice of your voluntary delisting have already expressed scepticism that the proposed offer of 30 cents reflects the true underlying intrinsic value of your business³.

We have in principle, no objection to a delisting offer, and strongly urge the directors of Zagro Asia to revise their offer as it grossly undervalues what is intrinsically a high quality business.

Tay Jun Hao
Director of Farrer Enterprise, Editor of The Asia Report

[1] Financial Results Summary from ShareInvestor.com
[2] Data from Thomas Reuters
[3] http://valuebuddies.com/thread-731-page-10.html

First off, thanks for everyone who came down on Saturday and said hi to me. I had a lot of fun both during the presentation and the Q & A.

The Fifth Person did a post-event write up which you can find here.deepvalue

A copy of the slides can also be downloaded here.

Popular Holdings Divestment

During my presentation, I also talked about an idea of mind that had worked out well – Popular Holdings. 

Its was taken private earlier this year.

I wrote up “post-mortem” of the investment which was picked up by Nextinsight.

Powermatic Data Systems Case Study

I also talked about a company which fell into my criteria of being a “deep value stock”.

I actually wrote about it a couple of months ago, and you can check out the investment thesis here:


*Disclosure: I own shares in Powermatic, and am long the stock.

Photos from Invest X Congress 2015

Calm Before The Storm
Talking about Deep Value
Adam, AK, Rusmin, Jun Hao, Victor

Post thumbnail
Yeo Seng Chong of Yeoman Capital
Yeo Seng Chong of Yeoman Capital

I sat down recently with Mr. Yeo Seng Chong in his office at Robertson Walk.  He is the founder and CIO of Yeoman Capital Management, which in turn manages the Yeoman 3-Rights Value Asia Fund.

Since inception, his fund has yielded an absolute cumulative return of +788.16% or a CAGR of +12.96% p.a. nett of all fees for the 17 years and 11 months to end 3Q 2015, in SGD terms with dividends re-invested.

Over the same period, this Index increased by +91.61% implying a CAGR of +3.70% p.a.

I think its safe to say that his results have been most satisfactory, and that investors in Yeoman are happy with his results thus far. 

Looking Beyond the Numbers

Mr Yeo attributes a big part of his success to his own multi-disciplinary experiences over the years, which then allow him to home in on what matters most: the business itself, and the value it represents.

Maturity and experiences over his long career have also taught him to keep an open mind, and to connect with people from all lines of work.

Although the numbers are without a doubt the foundation of what he does, but behind that is a highly qualitative judgment that requires experience.

Herding Behavior When Stretching For Yield

Mr Yeo’s comments are in sync with what other prominent investors such as Howard Marks and Seth Klarman have been warning in recent years – investors are increasingly stretching towards “riskier bets” in this increasingly yield starved world.

He comments that Singapore investors have been attracted to the “perceived safeness” of real estate and corporate bonds, which ironically makes them more dangerous as prices rise beyond the actual fundamentals of the asset.

I can’t help but think of the same “common wisdom” of the crowds back in 2006/2007 in the UK and the US when houses were perceived to be “safe”.

Still, the government stepped in in time to defuse the situation with repeated rounds of cooling measures, and my own data indicates that housing prices have actually gone below their historical trend for now.

Mr Yeo thinks that equities offer a much more compelling risk reward ratio as compared to other asset classes. Put simply, they are unloved and unwanted at this stage.

Once cannot help but recall the words of Sir John Templeton:quote-bull-markets-are-born-on-pessimism-grow-on-skepticism-mature-on-optimism-and-die-on-john-templeton-58-34-87

Thoughts on Malaysia and Productive Assets

The stock markets in Malaysia are cheap – especially if you take into account the dramatic depreciation of the Ringgit in the last six months.

Mr Yeo thinks that this represents an interesting risk/reward situation, with investors benefiting from a potential strengthening of the currency, and an appreciation in the stock price itself.

Still, as he stressed, the key is to invest in productive assets that generate cash flow and dividends, and not to simply hold cash.

Discipline & Professionalism

Mr. Yeo credits the success to his fund to a disciplined approach to investing, that his grounded on the quantitative aspects of a business.

He explains that it is important to be intellectually honest, and working in a professional setting means that it is crucial to always review investments when the fundamentals deteriorate.

Contrast this to the all to common behavior of retails investors in simply forgetting about investments when they sour, or turning short term ideas into “long term holdings” when the thesis doesn’t pan out.

Unlike most funds with high turnover rates, Mr. Yeo moves at a much more glacial pace, with stocks tending to remain in the portfolio for 5 to 6 years on average.

Thoughts from the Interview

I think 18 years is as long a time as any to judge the long-term success of a fund, and Yeoman Capital is testament to what applying sound investing principles can do.

Still, if you take a look at his original 3-Rights Value Fund, you will see that the results are volatile, with significant down years in 2000, 2008 and 2011.

Therein lies a valuable lesson.

Investors must always remember that investing in stocks involves living with volatility.

However, if one can overcome short-term price fluctuations and take a long term view, then satisfactory results are possible with hard work and diligence.

Asia report - top banner v1

Mr Yeo Seng Chong will be speaking at the upcoming Asia Value Investor Conference in Hong Kong on the 8th December 2015. You can find out more here.


6th Singapore Corporate Governance Week

I attended the 6th Global Corporate Governance Conference organized by SIAS at Raffles City today.

One topic which stuck with me was the debate on the role of shareholder activism in the financial markets, and more specifically the recent spate of short selling reports by anonymous individuals.

I think there’s a general unease with short selling among most people.

After all, no one likes to hear bad news. Especially not of companies they own.

And yet, short sellers play an important role in the market. They temper the exuberance that can get out of hand.

They are the naysayers that keep us sceptical when we should be.

After all, there is no shortage of optimism in the markets, with an overwhelming number of brokerage recommendations leaning on the positive. History is replete with instances of what Greenspan would call “irrational exuberance”.

They happen far more often then we think. Or remember.

So… Is Short Selling Wrong?

Curiously, one of the panellists felt that it was wrong to go short a stock, and then publish a report on it detailing why.

I must admit I struggle to see why that would be considered morally wrong when it is deemed acceptable to publish a bullish report after going long a stock.

Are we to say that only positive information should be released in the markets?

Where Do Anonymous Short Sellers Fit?

Another criticism is that short sellers often post these reports anonymously – leading to little accountability.

Well, it’s not hard to see why.

Here are just some of the headlines reflecting Noble’s response upon the release of the short report by Iceberg:

Noble Group Files Lawsuit to Stop Criticism

Noble Group Sues Former Credit Analyst After Iceberg Reports

And yet, the criticism levelled by the short-seller had merit as covered by a series of letters from Michael Dee which you can read here:

Michael Dee: Response To Noble’s Open Letter

Why Noble choose not to sue Michael Dee who himself highlighted similar points to the report from Iceberg, and instead responded (for a while) with an open letter back to him is anyone’s guess.

Without engaging in who was right or wrong, it’s hard for me to imagine the turnabout in investor disclosure that came about months later when the depression of Noble’s share price turned out to be slightly longer than “temporary”.

YTD Performance of Noble Group N21.SI

Where Do I Stand?

At the end, in this “David vs Goliath” battle, it seems to me that short sellers or activists are for the most part, out-gunned. They are the underdog here, and I do love rooting for the underdog.

True, they have a vested agenda, and stand to profit from their research and efforts.

But who in the financial markets isn’t here to profit from it?

Activist and short-sellers live and die by the validity of their arguments, and the truth in their statements. If they are wrong, they get punished heavily financially.

I do not envy the life of one that sells short.

My own experience is that they tend to do far more work than the average buy side research. Their reports tend to make illuminating reads. One cannot help but wonder whether the presence of more short sellers who had shared their research would have dampened the damage caused by the successive wave of frauds of Chinese listed firms all around the world.