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Let’s Look For Value

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In a previous article we looked at how ex-mutual fund manager John Neff tries to search for value in the shares market. But with the Straits Times Index (SGX: ^STI) above 3,300 and closing in on its 52-week high of 3,322 points, investors might be wondering if there is still any value to be found in the market today.

Let us find out, by taking some cues from the father of value investing, Benjamin Graham.

The Value Maven

Graham, who was also the mentor of Warren Buffett, ran a hedge fund of his own for 20 years from 1936 to 1956. In the process, he grew his investors’ money by 3,800% and made the market’s 1,000% return look decidedly pedestrian.

With Graham’s track record, it would be wise for investors to see just how he looked for value in the shares market and to know if it can be applied to a local context.

It was known that Graham pioneered an approach known as Net-Net that he used with his hedge fund, and it can be boiled down to one simple formula:

Net-Net = Current Assets – Total Liabilities

Graham looked for shares that had a market capitalisation two-thirds lower than the Net-Net value, as it provided him with a greater safety-net should the investment not work out. He wanted a greater margin of safety because he recognised that companies that were being valued so lowly by the market might have something seriously wrong with them. By insisting on a very low purchase price, he could then increase his odds of success.

The Net-Net method might sound enticing, but I wish you the best of luck spotting such opportunities.

The much faster flow of information in modern times has made such companies rare to find. So instead, I looked for companies that are merely trading below their Net-Net value without the ‘two-thirds criteria’ that Graham insisted on.

So, is there Value?

I have found three such companies, though there are likely to be more. First up, we have AEM Holdings (SGX: A10). As you would expect for a Net-Net opportunity, the semiconductor equipment manufacturer has not been doing well – it registered losses in four out of its last six financial years.

AEM Holdings

S$m

Current Assets

68.7

Total Liabilities

19.1

Net-Net

49.6

Market Cap

40.4

Two other companies I have found are DMX Technologies (SGX: 5CH) and Pan Hong Property Group (SGX: P36). DMX, which is an information technology provider, has been burning through cash for the last four years. Meanwhile, property developer Pan Hong has seen year-on-year revenue declines over the last two quarters.

DMX Technologies

US$m

Current Assets

401.9

Total Liabilities

79.7

Net-Net

322.2

Market Cap*

278.3

*Note: DMX’s Market Cap is in SGD. After conversion to USD, that would   equate to roughly US$222.6m

 

Pan Hong Property Group

RMBm

Current Assets

2,855.6

Total Liabilities

1,335.7

Net-Net

1,519.9

Market Cap*

113.9

*Note: Pan Hong’s Market Cap is in SGD. After conversion to RMB, that   would equate to roughly RMB569.5m

The Foolish Bottom Line

Graham’s Net-net approach can uncover deep-value in the stock market. But, companies that can pass Graham’s screen might also be facing difficulties of one sort or another. As it is with all investment strategies or techniques, the Net-net method is not perfect. It therefore pays to tread carefully if you plan to use it.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.