38% (1)

[Case Study] Undervalued Company Delivers 35% Gains After Delisting

Alvin Chow
Alvin Chow

As at the time of writing, the delisting offer is still undergoing. The purpose of this writing is not meant as inducement for anyone to invest. It is an educational piece. All investing comes with risks.

San Teh requested for a trading halt on 3rd Sep 2019.

Two days later they announced that the Kao family who controls San Teh, intends to make an offer of $0.28 to the rest of the shareholders and privatise the Company.

How do you know if this is a fair price?

The easiest way is to determine the book value of the company (not all companies can be valued this way though). At almost $0.50 book value per share, a $0.28 Offer sounds like a steal for the Kao family.

You may complain it is unfair. But if you deliberate on this matter, you will realise it is precisely because the shares have to be trading at a low price in order for the majority shareholder to consider a buyback.

Who wants to buy shares when they are expensive?

As such, most delistings are done at cheaper valuations. SGX in recent years have also experienced greater numbers of delistings – and since we know that delistings happen when shares are cheap, it should signal to you that there are still cheap companies within Singapore for retail investors to focus on.

I bought this stock at $0.21 on 14 Jul 2017 using my CPF, and I would accept the Offer of $0.28 for a 35% gain (including dividends).

Let’s walk through why we bought it.

San Teh Was an Undervalued Stock.

I had some investible CPF funds to buy stocks back in 2017. I wanted to make my money work harder for me and I believe I could do better returns with my own stocks than the 2.5% interest in the CPF.

I could only buy CPF-approved stocks listed in SGX. You can refer to this list, or your brokerage platform would indicate them for you.

I was looking through the list of undervalued stocks using the CNAV strategy and San Teh was trading at $0.21 compared to a CNAV2 value of $0.43.

The book value per share was $0.57. That would be a potential gain of 171% if I can buy at $0.21 and sell at $0.57. This is how I estimate if the reward is worth the risk and I usually want a minimal potential gain of 100%. San Teh fit the bill.

I don’t know what would cause the share price to jump or if would ever hit the book value. It is a bet that any catalyst can trigger this and I was willing to wait three years for this event to happen. If nothing happens, I would sell it after three years. I know this makes many investors feel uncomfortable.

We yearn for certainty and without it, makes us feel stupid to do it. But just as there is no uncertainty in life, there is no certainty in the world of investing.

Even if you buy a ‘good business’, bad things can happen and cause you to lose money.

As investors, we need to have the humility that we don’t know and cannot control the future. Only accepting this would make us less emotionally affected by our investments.

The Value is In The Property!

It isn’t as fluffy as you think if you look at the assets that San Teh had in the 2016 balance sheet (the data I used to invest).

The top two assets were Investment Properties (real estate rented out for income) and Cash.

These are considered good assets as they retain value well. Their total liabilities were only $17m. The amount of cash can easily pay them off which means San Teh is a ‘financially free’ company!

I also noted that they quoted their investment properties at cost. The value of $69m was based on cost after depreciation. Looking at Note 12, you will see below that the value of these investment properties was actually worth $117m in 2016, almost twice the quoted value in the balance sheet!

The most prized asset is the commercial property in Shanghai which alone was worth $84m:

This means the book value per share should even be higher at around $0.70 if we take the market value of these properties.

I believe this was a good bet since my investment dollars would be backed by real tangible assets in the economy. San Teh made a loss in 2016 but its cash flow was positive.

The company value shouldn’t be eroding much even if the business continues to deteriorate.

In fact, it might not be a bad thing because the management may be forced to sell the properties and realise the true value of the assets, causing the market to get interested in San Teh shares.

Why I’m going to sell

Let us be clear. I don’t think this is a fair price for shareholders. The buildings were listed at cost which means that the fair price of each share should have been $0.70.

But life isn’t fair.

We make room for 100% gains so that in the event it fails, we still get some amount of gains which makes up for our time spent investing in the stock.

In this case, the total returns would be 38% over two years, or about 19% a year since we all know now that the management decided to take it private at a very good price of $0.28.

As I mentioned earlier, I would tender my shares and accept the Offer.

  1. The first reason is that as an investor, I am a price taker and not a price setter. A lot of investors lose sight of this. There’s not much I can do to influence the outcome.
  2. Second, I have held the stock for two years and I only have got one year more for another catalyst to happen. It would be unlikely and this is possibly the best I can get.
  3. Third, 35% gain over two years in such a lousy market is decent enough for me, even if it is not as sweet as 100%.

So goodbye San Teh. I will use the proceeds to buy the next stock.

We have written extensively on how we find, buy and target undervalued stocks for 100% take profit targets. If you would like to go through it first hand with me, live, you can register for a seat here in our introductory class.

If you prefer to read it, you can find more of our case studies here, here, here, and here. Our more recent write-ups can be found here.

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
Read These Next

Leave a Comment