Tat Yans Stock Analysis on Two Companies: WBL and Straits Trading

My writing intention is to raise market participants awareness on Straits Trading and WBL. This article is meant to get the reader to have better idea of how much both stocks should be worth. I am regretful if there is some degree of deviations from actual results due to unforeseen future circumstances. You, the reader, have your own responsibility to perform due diligent before you make a decision to buy stock. If you have any opinion or clarification on this piece of article, you are welcome to email me at tonydelpiero10@hotmail.com

WBL Corporation Limited is one of the oldest local companies in Singapore, founded in 1906. After restructuring and streamlining itself, it has four divisions: Automotive, Property, Technology and Engineering & Distribution. From year 2010 to few weeks ago, its share price has fallen steadily. Careful check on its annual reports and financial statements reveal no reason to why it has fallen too much. We can only see steady rise in revenue since 2008 and positive net profit from 2008 onwards. Automotive division can expect consistent demand as more people, due to the growing size of Asia population, have desire to own cars for various reasons such as jobs (marketing, sales), toys and etc. Annual report 2011 reveals that its expectation for this sales growth in automotive is quite positive one. In property division, it was among the first Singapore developers to invest in China. In China, the property market is in cautious mode due to the intervention of the central bank/government not to fuel the growth of possible bubble. Its technology division has two public-listed companies MFS Technology listed in SGX and Multi-Fineline listed in NASDAQ. They provide flexible printed circuit (FPC) and value-added component assembly solutions. At the time of writing, MFSs last price is SGD$0.92 and Multi-Finelines last price is US$27.36. WBL has 77.3% and 62% interest respectively based on their annual report 2011. Circuits are needed for the manufacturer of electronics products. This kind of product should be in somewhat considerable demand as long as they are capable of capturing sizeable market share in their respective places. That demand came from smartphones and tablets. It is certainty that people will keep on buying/changing smartphones and tablets at different time in next 2-3 years. Its engineering and distribution division should see flat or modest growth for the business to enhance customers business via hardware, software, security and etc. Third Avenue Management LLC, well-known US-based value investing firm, has around 17-18% interest in WBL. It is well known for buying stocks on the basis of asset value, which is shown to be undervalued compared to the market value. It ups its ante by voting out long-serving director together with the Straits and sold small number of WBL stocks to improve trading volume WBLs balance sheet shows that net asset is growing for few years. Therefore, its asset value should be growing in line with the growth in the value of net asset. Its assets have ability to generate earnings, with sufficient certainty, in automotive and technology division in next 3 years. With regards to property division and engineering and distribution division, it will be safer to consider that it can generate flat earnings in next 3 years as it greatly depends on the mood of the economy. That will be the most conservative assessment we should adopt. Thus, its asset deserves more attention than its earning power. Its intrinsic value based on the asset valuation with going concern assumption (rather than liquidation) should be between SGD$3.50 and SGD$5.50. The upsides are as follows: 1. Third Avenue Management LLC has put up its man in the board of director. It is doing as much as it can in order to narrow the gap between market value and asset value. On Third Avenues annual report 2011, it says that WBLs stock trades at a large discount to the value of its high quality assets, a discrepancy which it believe will be recognized over time. Straits Trading is doing the same as Third Avenue Management. But it appears to make attempt to enhance its value of its holdings of WBL. Directors have substantial numbers of shares in WBL. In this case, they have strong interest to see WBLs share price to rise.

2. 3.

The downside is the condition of the economy in the next 3 years. Disclosure: I have long position in WBL since first week of January 2012.

Straits Trading is probably the oldest living company (incorporated in 1887) in Singapore. It also has four divisions: property, hospitality, resources, and investments. Investment division has 18.9% interest in WBL. Its resource division through Malaysia Smelting Corporation is quite impressive, earning exceptional revenues, which is higher than revenues from other three divisions. Hospitality division suffered the most due to poor underlying economies in various countries. Its property division, targeting various locations in different countries is having almost flat growth on its revenue. Local media cover its chairman, Ms Chew Gek Khim. She said that it re-invests itself as diversified investment holding company in the ilk of Berkshire Hathaway. This implies that it have intention to buy and hold companies in different and unrelated industries as subsidiaries. There is slight hint that she understands the following quote made by Warren Buffett: When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. In 2008, it experience corporate bidding war. After that, it underwent restructuring operation. She is modest to say that the target of streamlining depends on the market. Its remuneration system seems to be reasonable by linking to individual and corporate performances. There is no bonus/option based payment and benefits in kind. The board of directors is neither underpaid nor overpaid. It is worth to note that there are more non-executive directors than executive directors. The chairman has vested interest to ensure that it is to grow over time, achieving long-term targets because her family owns substantial interest 88.94%. At the same time, there is no analyst coverage. That probably explains why there is low trading volume. She tackles that problem by having investor presentation on September 2011, highlighting key points about itself. On the first year after Carins won the corporate bidding war, it paid out $2.50 dividend per share out of the cash and the sale of stock portfolio. Right now, it is paying $0.02 dividend per share during the last two years. She said that their average cost was way below the final offer price, they are still in the money. She also added that she knew what they are buying and what they can do with it. Based on going-concern asset value, it is slightly undervalued. As it underwent restructuring operation until 2015, asset valuation can be fast changing, highly dependent on what direction the management intends to go. Looking at its earnings power, it has tremendous potential to generate a lot of earnings for its given quality assets especially properties (except the ones in China), tin mines, and WBLs business. The valuation based on its earnings power is around between SGD$5 to SGD$9. If we look at Q3 2011 result with Q3 2010, the profit has increase substantially and its cash and cash equivalent also increase too. By logic, it should be rising slowly. The reason for the deviation between what share price should be like now and current market price is probably that the stock is misunderstood with no analyst coverage. The upside is as follows: 1. 2. 3. 4. 5. Given its dividend track record, it can be said that the board of directors are shareholders-friendly type. If this is true, a rise in earnings over few years should lead to a rise in dividend per share. If the company is on the right track after restructuring, its share price can rise based on that catalyst. Its earnings can increase if the economy woes abate and less natural disasters occur, resulting in a modest improvement of hospitalitys earnings. It is getting more active managing (rather than passive one) as the chairman shook the cage in WBL recently. Thus its share price should rise in line with that of WBL. There is separate of duties and responsibilities among non-executive and executive directors. Low chance of overpaying directors due to conflict of interests.

The downside is as follows: 1. 2. It is not known whether the chairman and/or CEO is financial-savvy like Warren Buffett in terms of acquiring companies if it intends to follow Berkshire Hathaway blueprint. Will it overpay for acquiring companies that may turn out to be dud in the future, assuming it has plan to acquire in future?

Disclosure: I have long position in Straits Trading Co since middle of January 2012.