After Falling By 41% In 3 Days, Would Nam Cheong Ltd Interest Warren Buffett’s Investing Mentor?

At the time of writing (4:50 pm), shares of offshore support vessels builder and owner, Nam Cheong Ltd (SGX: N4E), are trading at S$0.029 each. Just three trading days ago on last Friday, Nam Cheong’s shares closed at S$0.049 apiece. So, the current stock price of the company represents a 41% decline in three days.

This sharp fall with Nam Cheong, a result of bankruptcy fears, could attract the attention of bargain-hunters. But, it’s worth noting that not every stock that has experienced a fierce decline is a real investing opportunity. To gain some insight on whether a stock is truly a bargain, we can turn to Benjamin Graham.

In investing circles, the late Graham is a well-known and highly respected figure. He was the investing mentor of the famous billionaire investor Warren Buffett, and had penned two classic investment books, namely, Security Analysis and The Intelligent Investor.

During Graham’s investing career, he developed a 10-point investing checklist which can help us look at stocks through his eyes.

With that, let’s run Nam Cheong through the checklist:

1. An earnings-to-price yield that’s at least twice the triple-A bond rate

An earnings-to-price yield is the inverse of the P/E ratio. Unfortunately, this criterion cannot be applied in Nam Cheong’s case, since the company has negative earnings over the last 12 months.

Verdict: No

2. A P/E ratio that is 40% or less than the highest P/E ratio the stock has had over the past five years

As mentioned earlier, Nam Cheong has negative trailing earnings. So, the company naturally can’t pass this criterion either.

Verdict: No

3. A dividend yield of at least two-thirds the triple-A bond yield

Nam Cheong’s latest financials are for its fiscal year ended 31 December 2016. In that year, the company had failed to pay a dividend, thus giving it a dividend yield of zero. This also means that the company has failed this particular criterion.

Verdict: No

4. A stock price that’s below two-thirds of the stock’s tangible book value per share

As of 31 December 2016, Nam Cheong has a tangible book value per share of S$0.21, according to data from S&P Global Market Intelligence. The company’s current stock price of S$0.026 is merely 12% of its tangible book value, thus giving it a tick in the box here.

Verdict: Yes

5. A stock price below two-thirds of net current asset value (where net current asset value = total current assets minus total liabilities)

The offshore support vessels builder gets the nod again. At the end of 2016, Nam Cheong has a net current asset value per share of S$0.107, which is around four times the company’s current stock price.

Verdict: Yes

6. Total debt less than tangible book value

Nam Cheong recorded total debt of S$587.7 million and a tangible book value of S$441.1 million at the end of 2016. It’s obvious to see that the company fails to clear the bar here.

Verdict: No

7. Current ratio (total current assets divided by total current liabilities) greater than two

With total current assets and total current liabilities of S$1.11 billion and S$596.7 million, respectively, Nam Cheong’s current ratio is just 1.87.

Verdict: No

8. Total debt less than four-thirds of the net current asset value

It’s a ‘No’ response here. Four-thirds of Nam Cheong’s net current asset value would be S$310.7 million; the company’s total debt is higher.

Verdict: No

9. Compound annual earnings growth rate of 7% over past 10 years

Nam Cheong was listed only in 2011, so it does not have a 10-year earnings track record. But, with its earnings per share (EPS) of S$0.020 in 2011 and -S$0.006 in 2016, the company has not been able to compound its earnings at an annual rate of 7% or more.

Verdict: No

10. Stability of earnings: No more than two years of declining earnings of 5% or more over the past 10 years

In 2012, 2013, and 2014, Nam Cheong had impressive growth rates of 43%, 33%, and 44%, respectively, for its EPS. But, the company’s EPS declined by a massive 92% in 2015 and in 2016, as I’ve mentioned earlier, the EPS number was negative. So, it’s clear that Nam Cheong has not managed to deliver stable earnings in its relatively short life so far as a listed company.

Verdict: No

In a tally of the scores, Nam Cheong has passed just two out of the 10 criteria in Graham’s checklist. With such a result, I think it’s very fair to say that Graham would not be interested in the company at all right now.

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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 company mentioned.