It’s the Great Singapore Sale, a lot of selling down of penny stocks in the market, but it also represents an opportunity to catch some stocks on fire sale. Sometimes things in a business change so fast that its share price doesn’t do it justice. For starters, Hanwell’s Cash per Share is $0.3069 and current share price stands at $0.2800. How could I not look into this company when it’s practically free?
- Stable Business
- Strategic Investment Paying Off
Basically, Hanwell is into two businesses, Consumer Essentials and Strategic Investments. Under Consumer Essentials, there are popular brands like Beautex tissue paper and Royal Umbrella Rice. These businesses will not go out of fashion, neither will they ever become a sexy business segment for Hanwell. Under Strategic Investments, Hanwell owns 63.9% of Tat Seng Packaging which is in the business of corrugated paper. Hanwell is in a very boring business that is hard to be excited about, but what makes it great is that it owns some brands that the leaders in their fields.
Strategic Investment Paying Off
A further look into the numbers reveal some interesting facts:
In terms of revenue contributions, the numbers have been switched around. In 2011 Consumer Business contributed to 57% of the revenue and Packaging contributed to 42%. But in 2016, Consumer Business contributes only 43% whereas Packaging contributed 57%. Things are changing in Hanwell. Their ‘Strategic Investment’ is indeed paying off, with a 6.5% CAGR in revenue contribution.
- Thin margins (Nature of business)
Due to the nature of its businesses, primarily the FMCG segment, margins are razor-thin. While things are beginning to improve, we see Hanwell’s net profit margins increasing from 1.14% in 2011 to 4.36% in 2016. This represents a 30.77% CAGR in net profit margins. While commendable, and possibly revealing the growing competence of the company, I chose to put it as a Weakness because of the very nature of the business, especially where half the business is in FCMG, net profit margins will not go very high.
- Cash-per-Share > Share Price
- Enterprise Resource Planning(ERP)
This excites me the most! When I first noticed Hanwell’s cash-per-share > share price, I was immediately reminded of Fu Yu which displayed similar characteristics as well when it was 15c. For Fu Yu, it was a case of almost getting a whole company for free(cash per share was around 13c) with a profitable business operation. But this time around, Hanwell is a case of getting the whole company free with a profitable business operation. Paying $0.28 for a profitable business with cash holdings of $0.3069 per share.
You would think it was from borrowing. So did I.
No, it wasn’t from borrowing.
With a cash holding of $176,822,000, loans only account for 20% of the cash holding. All these cash must have been coming from somewhere else.
It turns out, Hanwell has been churning out a lot of cash from its operating activities which is the main reason for the increase in cash holdings year after year. Through sustainable cash-generating operations, the cash-per-share of Hanwell will only keep growing!
Update [21 May 2017]:
Thank you all who have pointed out to me to use Net Cash Per Share instead. In this segment, I will discuss more about my perspective from a Net Cash Per Share point of view.
With a net cash per share of 0.2417 and a current share price of 0.2800, effectively, we are paying $0.0383 for a business that generated $0.0363 cash per share (20,085,937/553,415,746 shares)
from its 2016 operating activities alone.
To break it down, for 28 cents, we are getting 24 cents back in cash, and paying 4 cents for its whole operations (Consumer Essentials & Tat Seng Packaging), valued only at $21.2m. If Tat Seng Packaging alone is already valued at 88.8m, a 63.9% stake should indicate severe undervaluation of Tat Seng Packaging in Hanwell.
Net of cash, Tat Seng’s operations are worth $64.5m. The 63.9% stake in Tat Seng should be worth approximately $41.2m. Based on Tat Seng alone, we can already see that there is possibly 200-300% undervaluation of Tat Seng in Hanwell.
Enterprise Resource Planning (ERP)
In Hanwell’s 2015 Annual Report, CEO Dr Allan Yap said “Concurrently, we also embarked on planning and initiating a 2-phased Enterprise Resource Planning (ERP) project to improve efficiency of internal working processes. This initiative will complement the Company’s overall efforts to expand and upgrade the hardware and software of the Company’s growing operations and we expect to gradually implement this over the next few years.”
While not too many details about how much benefits ERP can bring to Hanwell, case studies of Hillerich & Bradsby (Louiseville Slugger) show us the positive benefits in terms of bottom-line savings, supply chain management and customer relationship management it can have on a company. This could indicate upwards revision of net profit margins.
- Foreign Currency Translation
Foreign currency translation hurt Hanwell pretty bad in 2016. While profits were $17m, Loss from foreign currency translation was $6m, effectively wiping out 30% of profits. While this was a one-off experience, it made me question why didn’t the management think about hedging against such exposure.
It seems that people are selling off Hanwell not realising how cheap Hanwell has gotten. The charts look bad, but the numbers look so good. Like my previous article of My S.W.O.T Analysis for Chasen Holdings (5NV), Hanwell is an asset play as well.
BONUS: There was a lot of company buybacks and purchases by substantial shareholders done in 2013 at an average price of $0.29-0.295. That was when cash-per-share was at $0.2148. Cash per share stands at $0.3069 as of 31 March 2017.
Disclaimer: I own shares in Hanwell.