Tuesday, November 1, 2011

3Q 2011 - Nanyang Holdings (0212 HK)

I wrote up a detailed report on the firm and it is listed on my good friends and fellow value investors' website at  for which I am very thankful for. 

The report is listed at:

A very big thank you to Will Thrower and Ryan Gill!

They have been very supportive and truly global investors. Do visit their site for some good ideas as well. 
Once you read the report, you will have a better idea of the kind of undervaluation I am talking about. 

Note that there are many estimations of numbers and asset figures so hopefully my conservatism puts the valuation in range.  

3Q2011 Updates

This quarter was filled with much volatility, I did not expect that the chart I did up on Euro/ Global indebtedness would come in so relevant, more so than the bottom up pickings which were absolutely boring this quarter with the exception of Koon which announced a 15% JV into real estate development, not surprising which I mentioned since they bought GPS Alliance, the real estate agency and advisory firm in 1H2011. 

NY Times had one good article talking about the Euro problem (with a far more impressive and interactive chart) than my boring table.http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html. Well it appears by the reps of which countries are mentioned, Greece seems to be very crucial in the equation of solving the debt issues. However there's more than meets the eye. By absolute numbers, Spain and Italy send shivers down the spine, with related creditors such as Britain, Germany and France likely to be affected in a web of debt that makes Greece look really like David rather than the Goliath. 

I have also learnt many a thing during this quarter, one of which "Your selling price is only as good as how much you bought it for". Undoubtedly, Nanyang Holdings is an extremely undervalued counter and I mean "very", I ought to have bought it lower especially when I expected the Euro debt issue to be replayed. 

World precision had some good support on price level with its steady growth. News of China slowing down the infrastructure spending and words of worker with wages on credit also toned down the enthusiasm for the company which announced significant investment in railway and automotive machine production which currently contributes over 50% of revenue in 2011. Utilization figures also suggest the economy has not yet slowed down significantly however we do expect the numbers to slow down sometime in the next few quarters. World precision is currently China's 3rd largest precision stamping tool manufacturer with 2.9% market share and needs to triple sales to top the charts which should not be too difficult given its technological tie ups with PAMA Group and Aida from Italy and Japan. Management owning over 77% of total shares and its record of stable dividends have also been comforting. Price wise, the last attempted takeover was at S$0.70-75 per share or S$ 395-423 million in total which is in my opinion a low target for the firm. Management has also stated that replacement cost for the plants alone stand at over RMB 1.5 billion or about S$ 300 million. Order book is at RMB 1.2 billion with LTM net margins at 15.3%, lowest 12% in 2010. Market values the firm now at over S$200 million.

Lastly I have also exited a negligible position in Unidux with the takeover at S$ 0.143 per share for a good gain. Illiquidity of the counter did not allow for a good accumulation even though the case was clear.

I will also cover the shorts now to focus on the longs and their related experiments.

Feel free to email me any queries.

Thursday, October 6, 2011

Big Lots (BIG:NYSE)

This is a write up I did a few weeks back and I think it is still very relevant. If you are interested to discuss more in detail, feel free to drop me a note to my email or to my blog inbox.

The firm was at market cap of $2.4 billion at around $32 per share. While I do not think it is likely to be a mega blockbuster within a short time frame, it does have the qualities and price levels that a private business owner will be interested in. A better valuation will be more ideal. 
1) Company Background
  • Brief overview
    • Big Lots (BIG) is a US’s largest closeout and overstock retailer (i.e buys surplus inventory, odd lots
    • The firm has 5 distribution centers, 1405 stores in 48 states, 41.925 million sf. (April 2011)
    • Stores mainly in Texas, Florida, Ohio, Pennsylvania and California
    • Distribution centers in Ohio, California, Alabama, Oklahoma, Pennsylvania total 9.5 million sf (All owned except 0.45 million sf leased in Ohio)
  • Operations
    • Company basically contacts vendors who have surplus productions, shutting down operations or businesses and purchases goods in bulk at discounts and retails them at a slight markup
    • Some merchandise not available through closeout and imported (20-30% of sales)
    • Mainly in Seasonal and furniture and to lesser extent toys and home department
  • Segments
    • Company products on retail to both individuals, families and wholesale to corporate (% of sales 2010)
    • Consumables (food, health and beauty, plastics, paper, chemical, and pet stuff)  - 29.3%
    • Home (domestics, stationery, and home decorative) – 15.8%
    • Furniture (upholstery, mattresses, ready-to-assemble, and case goods) – 16.8%
    • Hardlines (electronics, appliances, tools) – 14.1%
    • Seasonal (lawn and garden, Christmas, summer) – 13%
    • Others (toy, jewelry, infant accessories, and apparel) – 11%
  • Other corporate information
    • Hit $50 in 1997, $30-40 range in 1999,2007,2008 and recent high >$40 in 2010 and 2011
    • At current price of $32.23 per share on 75.19 million shares gives a cap of $2.42 billion
    • Owners are CEO Steven Fishman 1.3%, Wellington Co 7.1%, Sasco Capital 6.6%, Vanguard Group 6.1% and LSV Asset Mgmt at 5.2%. Directors and executives (21 pax) owns total 3.3%.
2) Investment Thesis
  • Business
    • Resilient business – people like deals regardless of good or bad times
    • With bad economy and people less willing to spend, Big lots is clearly a beneficiary
    • Such a boring business that no large bulge bank covers it
    • Open to buy in excess of $3 billion for inventory liquidators – few can match that
    • Firm has never had a negative year of same store sales
    • http://www.biglots.com/corporate/investor-relations/comparable-store-sales
  • Moat/Competition
    • Largest in this field of closeout and overstock and no other close comparables
    • Moat lies in the network of negotiation and distributions of products, clearly being large and having a strong  network is the key advantage which few can replicate
    • No one is able to offer a lower price than Big Lots, not even the dollar stores or dollar tree stores
  • Operations, margins
    • Thin margins as gross margins is around 40% and selling and administrative expense is about 31-32% with depreciation only at 1.5-2% range. Margins remains higher than peers
    • Firm focus on cost led to decline of overall cost from 38.5% to 33.4% from 2005 to 2010
  • Management
    • 2010, executives are awarded about 80% in non equity incentive compensation based on corporate performance benchmarks, total $22.8 million among 5 executives ofwhich average is 1/5 in options, 1/5 in non equity incentive, 1/3 in stock and rest in cash
    • 8 directors compensation is around $1.5 million, about 50-50 in stock and cash
    • CEO Steven Fishman has experience in bankruptcies and turnarounds (Rhodes Inc 2004)
    • Has a knack for deals as shown by intelligent acquisitions of competitors, recent by liquidators world based in Canada and sale of old toys department to Bain capital
    • Open to sale of firm, recently rejected bids by 2 consortiums of ThomasH Lee+Advent , TPG+Bain advised by Goldman Sachs in 18 May. Analyst estimates bids at $3-3.5b while research houses value the firm at $4b. Management is also clear on the firm value. 
  • Situational
    • Firm rejected PE buyers' bid and below estimates earnings resulting in sharp drop in stock price of 27+%
    • Firm intends to expand beyond US evident from purchase of Canda’s Liquidation world

3) Financials (assumptions) - All figures in USD millions (unless otherwise stated)

    • Firm is net cash $178 million and employs 0 leverage
    • Shareholder equity decline in due of the massive share buyback which resulted in approximately $1 billion in treasury stock versus $1.5 billion in retained earnings and $0.52 billion of paid in capital (shows the financial power of this firm)
 4) Risks
    • No dividends - but the firm has massive stock buyback programs, latest being $400 million worth
    • Irregularity to consistency of range of products sold - led to recent gap of food products and same store sales
    • Inaccurate expectation of demand may lead to poorer sales and inventory clearing or markdown
    • Bigger, financially stronger retailers may enter their field - deep network expertise needed
    • Energy prices affect transport from vendor to Big lot’s distribution center to Big lot shops
    • Sourced 25% of goods overseas, notably 21% from China so theres fx risks - Yuan capped
    • All stores except 54 (Mainly in California) are leased - but distribution centre owned 
    • On average 250 leases will expire annually from 2011 to 2015.
    • Slowdown in top line (although management has been able to squeeze higher profits) - attractive valuations 
    • Alignment of interest could be better since insiders only own 3.3% of total shares out

5) Expectations - figures in USD millions (unless otherwise stated)
    •  KKR paid 11x EBITDA for Dollar Stores LBO back in 2007
    • Averaged firms trade at 10-11x EV / EBIT
    • If the discount rate is 10%, expected return is still positive at 3.9%
    • If the long term growth is 0% / -2%, returns are still 29.6% / 3.4%
    • A value of $3-3.6 billion is fair but I opine that upside could be much larger
    • Reason being theres a lot of room for improvement, PE firms interest, strong organic growth and financial strength
    • Valuation accounts by using the perpetuity formula as mentioned in John Burr's "Theory of investment value"
    • If one uses a stepped FCF valuation, be it 5 or 3 years, the valuation will be higher
    • Long term growth at 1% based on past growth and should not outgrow US economy growth
    • Discount rate is 30 year treasuries at 4.20%, bumped it to 7% for risk premium. Higher discount does not equate to negation of risks, it is purely a measurement tool  
Sources: Google, Wall street Journal, Big Lots webpage, SEC filings and Annual reports