This Stock Could Be A Hidden Gem

At its current stock price of S$0.54, HupSteel Limited (SGX: BMH) is a really tiny stock with a market capitalisation of just S$67 million. But, it may be a hidden gem in the market.

Based on its latest financials, HupSteel has current assets of S$104.7 million and total liabilities of S$4.6 million, which give rise to a net current asset value (current assets minus total liabilities) of S$100 million.

Now, compare the company’s net current asset value with its market cap and you’d realise the latter is a lot lower.

HupSteel is thus, in investing parlance, a net-net stock, one with a market cap that is less than its net current asset value.

In theory, a net-net stock can be considered to be a tasty bargain because investors are getting a discount on the company’s current assets (things like cash and inventory) net of all liabilities. To top off the cake with cherry, the company’s fixed assets (properties, factories, equipment etc.) are thrown into the mix for free.

But, net-net stocks come with risks too. They could be deeply-troubled businesses, which would explain their fire sale prices. Professor Bruce Greenwald also once shared his impressions about net-net investing in Asia in an interview he did with my colleague Stanley Lim and I. Professor Greenwald, who lectures at the Columbia Business School and is a notable authority on the subject of investing, thought that net-net investing hasn’t worked out so well in Asia.

Investors who are enticed by HupSteel’s low valuation might want to dig deeper into the company to ensure it’s not a value trap.

One particular line item in the current assets section of HupSteel’s balance sheet may be worth some extra attention: Inventories. As steel prices have fallen hard in recent years, the value of HupSteel’s inventory on its balance sheet may not be an accurate reflection of reality given that the company’s a steel products supplier.

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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 writer Chong Ser Jing doesn't own shares in any companies mentioned.