In mid June 2020, a worrying development of a resurfacing wave of covid-19 shadowed on the global financial markets. From its peak of 27,580, DJIA fell to its low of 24,843 in the matter of six trading days—it was hovering near this low until the beginning of July 2020. The VN-Index trailed the global market, plunging from 905 to its low of 780 in late July.
It didn’t help either when Vietnam’s PMI figure slid from 51.1 in June to 47.6 in July. The reading further decline to 45.7 in August, before sharply recovered to 52.2 in September.
We watch companies' ROICs as the key indicator for their value creation. In principle, we favor companies with their ROICs larger than 10-12% as the signal for their increasing intrinsic values—ones with lower ROICs simply destroying their shareholders' value. We take a step forward by saying that a change in ROIC signals the slope of value creation/destruction. For example, a lower-than-10% but increasing ROIC means that the firm’s intrinsic value declines at slower pace. In this regards ROIC serves as a derivatives for the stock’s value.
While it is difficult to exactly quantify a company’s intrinsic value we know that in the long run stock price tends to converge to this vague value. In short term, however, stock price might vary, sometime significantly from its intrinsic value. This leads to different investment strategies, such as value investing and growth investing. In the former, a company delivers poor ROICs, therefore its intrinsic value declines. However, the stock might still look attractive if:
a. its stock price is much lower than its intrinsic value. We use several metrics, such as cash flow versus its market capitalization, dividend yield, etc. for a gauge on this criteria, and
b. it has a strong balance sheet, stable cash flows, and admirably some potential kickers.
In the latter, a company yields spectacular ROICs (ideally much higher than 10%-12%) as its intrinsic value grows. Its stock would be very attractive if management can allocate capital properly to grow the firm without sacrificing its ROIC, AND trades at reasonable valuations. There are several of such good stocks in Vietnam, namely MWG, PNJ, FPT, and maybe HPG.
Our investment philosophy is to:
1. buy undervalued stocks with their catalyst(s) for potential upside. We have several stocks acquired in our portfolio in this regards.
An example is PVTrans Pacific (PVP:UPCom), a shipping firm that serves Dung Quat refinery, and operates a FSO for Dai Hung Queen oil field. When we first paid our attention to the stock, its market value was at VND 600Bn, and we believe the market was unfairly pricing the company: its operating cashflow recorded at VND 323Bn in 2019, and VND 225Bn in 2018. It was trading at a valuation just approx. twice its annual operating cashflow. It focused on repaying its debt (its net debt/equity declining from a risky level of 150%-160% in 2014-2015 to a current safe one of 23%), hence it did not pay out dividend. At current capital structure, the company can afford to pay dividend: it paid out VND 93Bn of cash to its shareholders, a dividend yield of 15.50%. The dividend paying trend might extend into coming years. Admittedly, the company plans certain capex in coming years to buy “new” (second-hand) ships to add to its fleet, but the purchase couldn’t be as fast as expected. We roughly calculate that the shipping line can afford to pay dividend in a range from VND 47Bn to VND 94Bn in 2020, and perhaps a similar sum in 2021. We will have to re-assess the firm after its next capex.
We started to accumulate the stock in November 2019. Thanks to the covid-19 triggering a stock market collapse in March, we managed to buy at as low as VND 4.9k/share (translating to a market value of merely VND 420Bn). Eventually, our average price was at VND 5.57k/share, effectively valuing the company at VND 525Bn, or a PER of 4.4x, and a PBR of 0.38x. We have 8.5% of the company in our portfolio as of ending September 2020.
Its stock price has been gradually increasing then, perhaps thanks to both a strong market, and to investors’ notice of its attractive dividend potential. Thankfully, the management announced to pay a total dividend of VND 94Bn on October 7, 2020, just when we were writing this newsletter. We are sitting on a 50% capital gain before dividend and are very happy with the favorable outcome.
We don’t expect every investment to be immediate successes like the one in PVTrans Pacific. It might take longer time for a stock’s value to be unlocked, thus patience is the virtue.
2. buy growing stocks with their attractive expansion trajectories, which would translate into increasing net income (and EPS). We understand that a portion of value comes from growth.
We have MWG and PNJ in our portfolio as examples for the approach. Moreover, we also find attractive growth potential with characteristics of a value stock in Sabeco Western (WSB: UPCom).
Sabeco Western is a subsidiary of Sabeco (SAB:HSX), which has 51% interest in it. The company serves as a manufacturing firm for SAB, covering Western market—we know that, more than people in other regions, the Westerners like to drink. What makes WSB attractive is its dirt cheap valuation: Sabeco, having its Bia Saigon brands, is trading at its PER of 30x, and Sabeco Western is at merely 5x of its earnings. Nevertheless, profitability of WSB is not much different from that of SAB: In the context that margin of both companies have been largely stable over the past three years, SAB’s operating margin was at 14.5% in 2019, versus WSB’s of 17.1%. While we agree that owning brand name is the key in consumer sector, we notice that in the value chain, much benefits are retained for the manufacturers, who have to burden the cost of capex.
Current market value of WSB is approx. VND 600Bn, but it generated annual operating cash flows of VND 204Bn in 2019, and VND 134Bn in 2018. It spun out dividends of VND 57Bn and VND 86Bn, yielding 12.1% and 8.1% in 2019 and 2018 respectively.
There are headwinds for the company: first the government’s strict drunk driving prohibition (for which we 100% support), and second current covid-19 largely impacting Westerners, many of those have their exposures to manufacturing or exporting businesses. However, it’s cheap enough to cover for the downside. We also believe that the dirt cheap valuation serves as the safety margin for a possibility that the Thai management squeezes margin from its manufacturers. Moreover, we have downside protection from an expected dividend yield (as decided in its 2020 AGM resolution) of 7.65% in 2020 (to be paid in 2021). In a positive scenario, the company would advance a portion of the dividend in later 2020.
We, as shareholders of WSB, therefore enjoy any upside from potential value created from its operation optimization encouraged by the parentco. Additionally, the company plans to expand its capacity from current 120Mn liters per years to 190Mn (+58%). With an assumption of unchanged profitability, we are eyeing a 60% growth in net income over the next 5-7 years.
We started to accumulate the stock in August 2020, and managed to have an average price at PER of 4.8x, and PBR at 0.9x. We feel like the sellers were inviting us to build a new factory, enjoying its existing distributing network, and brand name AT A DISCOUNT. We allocated 21% of our portfolio for the stock.
In an ideal world, we love to have a portfolio that we can hold on to forever. However, we don’t live in one. Generally, we like to hold our portfolio 5-10 years for quality growth stocks (such as MWG, PNJ), and 1-3 years for undervalued ones (for example PVP), depending on the progress of their value realization.
Noted the investing time horizon mentioned above, we set several exemptions that we might tactically liquidate the portfolio sooner than expected. They are:
- wars
- pandemics and their waves
- financial/economic crises/recessions
At the same time, we are willing to use margin when the market is extremely oversold (or we like to call the condition as “maximum fear”). We are aware of the strategy’s riskiness, therefore we only use it a few times per year as the situation might allow. From our experience, such opportunities occur 1-3 times per year.
Given the second wave of the covid-19 both locally and globally, we traded tactically in the quarter, which fortunately preserved our capital in the market decline, and gave us a chance to buy the stocks back at their more attractive valuations.
We reduced our stock/cash to 43/57 ratio in June. At the VN-Index’s low of 780-800pts, we bought back and aggressively. We loaded up on MWG and PNJ at their attractive valuations:
- MWG at average price of VND75.39k/share, or a TTM PER of 8.8x, and
- PNJ at VND 56.49k/share, or a TTM PER of 13.2x.
We allocated 27% of portfolio to MWG, and 21.9% to PNJ as of ending September.
We used margin to take advantage of the cheap valuation. Our margin level was at 132% at ending July, and 151% at ending August. We cautiously cut the margin back to 126% as of September 30, 2020, and planned to further reduce it in coming months, as the market becomes less cheap.
As of September 30, 2020, our holding on MWG and PNJ posted returns of 38.3%, and 12.4% versus their acquired prices respectively. MWG (+38.3%) actually delivered the largest return in the portfolio, PVP ranked second at +38.2% return. Two poorest performers are SGN (0.0%), which we started to build our position, and NT2 (-0.3%, or a 6.2% total return from a dividend yield of 6.5%).
Eventually, we managed to post encouraging returns of 20.78% in Q3 2020. Monthly returns are as follows:
- July: -8.17%
- August: 23.05%
- September: 6.89%
Our portfolio has an ytd return of -8.56%.
In Q3 2020, we made a net profit of VND 215Mn. We deposited a total of VND 137Mn into the accounts. Our NAV as of September 30, 2020 was VND1,224Mn.
Imagine that there is a company with the following metrics:
That’s how our portfolio with its weighted metrics looks like as of September 30, 2020.
| Div. yield | YTD Operating Margin | Net Debt/ Equity | ROIC | PBR | TTM PER | Last year NPAT growth (%) | YTD NPAT growth (%) |
| 4.6% | 16.5% | 30.2% | 13.3% | 2.27x | 9.79x | 25.4% | -7.6% |
No comments:
Post a Comment