Investment

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What is Powermatic worth?

I primarily think that companies can be valued in two ways: based on cash flows in the future discounted to the present, or based on what a company has. An analogy is a household who has bought a property, car and paid off all its debts with some cash in the bank account. There are two parts to it, the future income stream, of which you can get a good feel based on their previous performance and work history, and what they currently own.

Their equity (total assets – total liabilities) act in the same way the “liquidation value” of a company is. A comment I hear often is that the “value” of these companies can only be realized if they liquidate… but in my experience this is not the case. Very few companies actually undergo liquidations, and there are a variety of ways for “value” to be realised outside of liquidation.

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The “Hidden Value” in Powermatic

Base Value of Powermatic

This is where Powermatic strikes me as being a compelling investment opportunity. Even on a conservative appraisal of their assets, the liquidation value of Powermatic comes close to $40 – $50 million, against a market capitalization at $30+ million. There is no reason in my view for a company of such a track record to trade at such a discount. You could literally buy out Powermatic out today at its current price for its investment property – and receive its business and other assets net liabilities for free.

I look at it as buying a $1 for 50 cents. The kicker in my view is that its like buying a REIT – since Powermatic pays a dividend yield of 5.35% at today’s price, and has done so for the last 9 years consistently. Management has a vested interest to keep this payout, with them owning 64% of outstanding shares.

The biggest differentiation with a REIT is that at this point Powermatic has not engaged in any borrowings. I pressed the point to management, and suggested they engage in significant share buybacks as one of the resolutions to be passed was a buyback mandate for up to 10% of their outstanding shares. After all, who knows the business best than management themselves… and they are well aware of the gross mismatch between price and value.

Some concluding thoughts:

Howard Marks once said that in investing, take care of the downside and the upside will take care of itself. Powermatic has something which I look for in my investments – an asymmetrical risk reward payout.

The worst case scenario provides an attractive return, and we get a free option on management turning around their business. The consistent 5% + dividend yield makes it all the more compelling.

Time is on my side too, as the value of the freehold property appreciates as the years go by. The current dividend is very much sustainable (costing the company $1.74 million per annum), and management has multiple ways to create value going forward.

Disclosure: The author is long Powermatic.

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I was at the AGM of Powermatic last week. Its not a well known company, but has a small following among the value investing community so I thought a write a post on it.

They operate in tough industry – and have done as well as anyone could have done faced with a similar situation. They’ve had 9 year of straight profits, and have paid dividends for the last 8 years which is impressive by my standards for a company listed on the SGX.

I had a chat with management after the AGM. They strike me as honest, down to earth people with an understanding of the current situation that the company faces. They have a vested interest in seeing the company succeed and turn its fortunes, with Dr Chen Mun & Ms Ang Bee Yan owning 64% of the shares.

So what makes Powermatic interesting?

What really strikes me is that Powermatic trades at 0.7x book value. There are many companies that trade at a huge discount to their book value, but plenty of them have assets which by measure are hard to value (intangibles, property, plant and equipment specific to their industry etc).

Powermatic on the other hand has a significant portion of its book value in current assets, and a freehold investment property that is stated at $18.6 million. 

Footnote details their investment property at  7,9 Harrison Lane. However, read deeper, and you will see that the property is in fact worth significantly more based on a independent valuation by Knight Frank, and is worth $35 million at the 31st of March 2014.

In order words, Powermatic really trades at 0.5x its book value.

More importantly, the property is freehold and not leasehold, making it all the more valuable. Rusmin Ang from the Fifth Person was kind enough to send me an interesting article on freehold industrial property, which you can check out here.

Here’s the relevant bit:

“The freehold property is a “rare commodity for an industrial site as most buildings released by JTC are on a 20-year lease”, said Ms Christina Sim, the director of investment (capital markets) at Cushman & Wakefield.”

Diving Deeper Into Their Balance Sheet

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Now I was quite curious about the make-up of the Thailand portfolio, but unfortunately wasn’t able to get more information on it.  Mr Yee Lat Shing, one of the directors who seems like a seasoned investor himself from his comments), has said that the equities are reasonably priced, and offer an attractive return going forward.

Still, I have my reservations given the considerable run-up in price of close to 60% in a year, and I wish the board had been more forthcoming about the portfolio.

A Closer Look at Remuneration Levels

ScreenClipA glance at their remuneration reveals that they are by comparison, very lowly paid compared to most boards in Singapore, with most of their remuneration coming in by way of dividends. This is an exceedingly fair arrangement if you compare it to most other listed companies in a similar position, with management taking ridiculous salaries despite the business going down hill (a story for another day).

Conclusion:

Part 1 concludes some of the “hidden value” that lies in Powermatic, and some points that I noted while running through its Annual Report. The next post will cover what I think Powermatic is worth, and why its a compelling investment opportunity.

I am heading to Macau to check the place out, and to take a look at couple of casinos listed on the Hong Kong Stock Exchange which I found compelling at first glance.

Everyone’s focusing on the headline news right now in China, and Macau hasn’t received that much attention with the crazy gyrations in the stock market. But for those keeping an eye on the situation on the ground, its not been easy days as the Government clamped down on corruption.

I think its all too easy to write off Macau now, but as the saying goes, within crisis lies opportunity. Howard Marks had a great saying:

“Rule No. 1: Most things will prove to be cyclical. – Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.”

Bloomberg has a great piece out yesterday which describes the situation that you can check out here.

Macau is at a critical juncture in its history now, transitioning to a more family friendly destination, and with a bigger focus on the mass market. Have we seen this before? Looking back in history, Las Vegas has faced similar circumstances, and has had to reinvent itself multiple times to stay relevant. Macau likewise has to do the same.

At the back of this however, are some positive points. China’s middle class is growing, and their taste of travel will be a big tailwind for the years to come. As an investor, I probably err on the side of being overcautious.

But that’s one thing I wouldn’t bet against – the desire of people no matter their circumstances to better their lives, to become richer, and to experience a great variety of things. Over the long run, betting against humanity has always been a bad idea.

Are there pre-existing problems within the Chinese economy (and the stock market if thats what you’re following). Yes! But people often forget that the US has been through 47 recessions (and one great depression) in the last 200 or so years. And they seem to have done just fine.

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What I am trying to get at is that its probably more worthwhile to take a more nuanced view of whats happening. I love what Howard Marks said about cycles, simply because there’s nothing more dependable in the financial markets than the pendulum swinging between greed and fear. The pendulum now has swung solidly towards fear in Macau.

The key as always is valuation and finding the right business to invest in. More on that in the next post!