Value strategies can be applied anywhere and although Singaporeans like to shop in Malaysia, it isn’t a popular foreign stock market among the investors.
One of the reasons that come to mind is the forex risk – the devaluation of the Malaysian currency versus the Singaporean dollar. In the past, it used to be one Singapore dollar for every two Malaysian ringgit. Nowadays, it’s one Singaporean dollar for three Malaysian ringgit. There is some obvious risk if you buy stocks in Malaysia therefore if the currency continues to be worth less than what you traded it for.
But that doesn’t mean there are no opportunities as the gains can dwarf the forex losses at times. We just need to make sure the potential gain is huge enough before we invest.
As the name suggests, the company produces packaging for consumer products with a focus on vice – cigarettes and liquor. Phillip Morris is one of their major customers. They also have Jonnie Walker and Chivas Regal as customers.
The bad news was that the global tobacco sales volume was declining since 2014 even though the revenue increased through higher pricing. Lower number of packs sold means less packaging is needed, thereby pulling Bright Packaging’s share price lower.
To make matter worse, Asia has an illicit cigarette issue which would mean lower demand for the legal ones that Bright Packaging produces for. Philippines is the largest market for Bright Packaging with Indonesia coming in second. Malaysia is a small market and had one of the worst records of illicit cigarettes. Bright Packaging could have generated more revenue in Malaysia if the illegal trade was curtailed more.
Given the bad news, the share price more than halved to RM0.25. This was below our calculated Conservative Net Asset Value per share of RM0.398 and qualified as our definition of an undervalued stock. Debt was very low too at Debt-to-Equity of 9%.
23% of the total assets were cash and another 20% were in the form of land and buildings. The plant and equipment represented 44% of the assets and we usually halved this value due to its depreciative nature. Taken together, the stock market was heavily mispricing these assets which you can own at a fraction of the costs and get a profitable business for free.
We bought the stock at RM0.248 in Jun 2016. The sales improved by the end of 2016 only to post losses in 2017 and 2018.
We had a 3-year holding period rule to prevent holding a value trap stock and we sold it in Jun 2019 at RM0.185, realising a 28% loss.
In hindsight, holding on to it for another few months would have turn this loss into a respectable gain as the share price went up as high as RM0.485, a possible gain of 96%.
Tough luck. We don’t regret selling because we follow the rules and did the right thing. We will continue to experience such incidents in the future and we can only accept them as price takers in the markets.
The trigger for the rise was likely due to the earnings turnaround as the 2019 hit the highest revenue in the past 5 years and the company turned a profit.
On a brighter note, one of our graduates manage to sell at a good price. She invested at RM0.258 in Nov 2016 and sold at RM0.475 in Jan 2020. It was slightly beyond 3 years because the stock was already running in Nov and it makes sense to hold on a bit longer for a better price. That was a realised profit of 84%!
Even though we didn’t profit from this, we are happy that our graduate did.
We used a holding period of 3 years because statistically, it is very likely for an undervalued company to be able to regain its footing and proceed towards fair value again within that time frame, as proved by De Bondt and Thaler, who in turn, were verifying Benjamin Graham’s claim that ‘the interval required for a substantial undervaluation to correct itself averages 1.5 to 2.5 years’.
Thus, we use three years.
You will realise in this article there isn’t a lot of math and ratios. We had simple numbers. We used primary school mathematics. We had a target price. We had a way of knowing that the stock was undervalued.
Investing doesn’t have to be difficult. In fact, the more difficult it is to analyse a company, the more likely you will get things wrong. Unless you like the fun of digging into a company, keeping things simple means you reduce the risk of losing money and increase your chances of compounding your wealth at the same time.
If you’d like to find out how we do our undervalued calculations live, you can register for a seat here. Alvin will be providing a demo, several case studies, and giving a discussion on how to best approach the markets systematically using a step-by-step process. See you there.