My S.W.O.T Analysis for Hanwell Holdings (DM0)

Introduction

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?

Strengths

  1. Stable Business
  2. Strategic Investment Paying Off

Stable Business

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.

Weaknesses

  1. 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.

Opportunities

  1. Cash-per-Share > Share Price
  2. 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.

Threats

  1. 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.

Conclusion

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.

Aloysius Lee

Aloysius has been investing in Singapore Equities from the age of 18 and is still madly enthusiastic about it. He strives to sharpen his edge while guiding others along the way to snowball their way to financial freedom!

10 thoughts on “My S.W.O.T Analysis for Hanwell Holdings (DM0)

  • May 19, 2017 at 12:16 AM
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    Thanks for sharing. What do you think is the management’s rationale behind holding on to so much cash and giving low/no dividends on the past few years despite having such a strong cashflow?

    Reply
    • May 21, 2017 at 12:26 PM
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      Hi JY,

      I’ve written to the company to understand more about the company and am awaiting their reply. I will put an update if I have any additional insight!

      Best regards,
      Aloysius Lee

      Reply
  • May 20, 2017 at 1:32 PM
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    Hi aloy! thanks for highlighting this net-net. will look into it further, together w the business.

    Reply
    • May 21, 2017 at 12:27 PM
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      My pleasure, do share with me if you have any insights that I might have missed out!

      Reply
  • May 21, 2017 at 11:51 AM
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    Hi, great post and very nicely found. This is almost a “free-kill” and definitely one of the more guaranteed profits, if you buy a stock for less than its cash assets. However, after taking away debt, I calculated the actual net cash per share to be 0.24. So you are not really buying a dollar for 0.93, but actually a dollar for 1.25. Which is still very worth it don’t get me wrong! But I just thought this would be important to point out. Is there any possible alternative explanation for the sell-off though anyway? I find it hard to believe a $10 note on the floor is lying around just like that and nobody is picking it up. What’s the catch? If not, then we better pick it up asap 🙂

    Secondly, I find something strange in their Cash Flow statement which I hope you have an insight to. It seems odd to me that their Changes to: Trade and other receivables would be a negative number.

    Their explanation in the notes states: The increase of S$7.38 million in trade and other receivables was mainly due to deposits paid for the new machinery for the
    expansion of production plant and ERP project in Consumer Business in Singapore. In addition, the increase is due to higher bills
    receivables and advance payment for materials purchased from suppliers by the Packaging Businesses in China. I don’t exactly understand what they mean, but neither does it sound right nor logical to me. What do you think of this?

    Reply
    • May 21, 2017 at 12:40 PM
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      Hi Winston,
      Yes, I concur with you, I’ll be editing this post to talk about the business from a net cash per share perspective! Thank you for pointing out! Indeed, still a very good deal as we are only paying 3.8 cents per share for such a profitable business with strong cashflow generation of 3.6 cents per share in 1 year of operations. I too find it hard to believe that nobody is picking up this. I attribute this largely due to the unavailability of analyst coverage and no PR team from the company.

      Trade and other receivables is a negative figure because they have made credit sales and have yet to collect the cash. Therefore a negative figure. In terms of receivables, this figure should not be too worrying because in page 109 of Annual Report 2016, you would see that 86.6% of the receivables are not yet due and 10.3% of it is past due 0-90 days. The risk of a write-off is not high in my opinion.

      Reply
  • May 22, 2017 at 12:36 PM
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    Hi Aloysius, thanks for your response. I still find the idea of them adding CAPEX to their receivables as a little odd, but I will overlook that.

    In any case, your sum-of-the-parts calculation has really hit the nail on the head. 1 + 1 = 5 right? Love it.

    I did a bit of simple math on my own to further illustrate their value based on your point of 63.9% stake in Tat Seng Pkg. I valued Tat Seng by assets instead of market cap, but I’m sure both roads lead to the same general conclusion.

    Assuming PPE of Tat Seng is worthless, to go extremely conservative,
    63.9% of (CURRENT assets of Tat Seng – ALL liabilities of Tat Seng) is worth 33 million
    Net Cash position of Hanwell, including “other financial assets” = 136.4 million
    Hanwell Mkt Cap at $0.30 per share: 166 million

    Indeed, we are truly getting 169.4 million (and probably more) for the 166 million that we pay.

    I’d like to postulate that in addition to the market sell-off, another reason for the undervalued share price is probably due to their earnings being around 15-16x as of latest AR. Forgive me if you think I am just spouting the obvious. But both Tat Seng Pkg and Hanwell are gradually improving their margins and net profit number at a nice rate, which I think given time, will bring that P/E ratio down and the earnings and assets of the company will become more in-line with each other.

    I also like to mention that what really got me was that this company is in the consumer and packaging goods business – boring, easy to understand, generally resilient to most business climates and can withstand the test of time 😉 the more boring, the better it is.

    Thanks so much once again for spotting this and sharing. I added 0.30. Might have a short term pullback after today’s spike but I’m okay with holding it for a while 🙂

    Reply
    • June 2, 2017 at 10:00 PM
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      You’re welcome! Happy to see today’s sudden burst of interest in Hanwell 🙂

      Reply
  • May 31, 2017 at 3:01 PM
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    Great post and thanks for the analysis. Just a quick qn regarding corporate governance. As seen from the AR, the executive chairman is also holding executive positions in 5 other companies and (maybe as a result of this) has only attended 3/8 board meetings in the past 2 yrs. Considering there’s only 2 executive directors in Hanwell, does this pose any concern to you?

    Reply
    • June 2, 2017 at 10:08 PM
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      Hi Jack,

      Thanks for pointing this out. Indeed, it’s worth noting, but in my opinion, not a major concern. The net cash per share is my margin of safety.

      Best regards,
      Aloysius Lee

      Reply

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