The Singapore Market Currently Undervalues This Luxury Watch Retailer

One way to determine if a stock is undervalued is to compare its market capitalisation with its net current asset value.

If the market capitalisation of a stock is lower than its net current asset value, then it could be undervalued. Such stocks are known as net-nets. The father of value investing, Benjamin Graham, liked to invest in net-net stocks.

The net current asset value of a stock can be calculated using the following formula:

Net current asset value = Total current assets – Total liabilities

In theory, a net-net stock is a bargain as investors can get a discount on the company’s current assets, such as cash, after stripping off all liabilities. Moreover, the company’s fixed assets, such as properties, are thrown into the mix for free.

Having said that, net-net stocks are usually businesses that are in serious trouble and have poor business fundamentals. This means that investors who invest in these companies are also at risk of losing their capital if things continue going south.

One net-net stock in the Singapore stock market currently is Cortina Holdings Limited (SGX: C41). The company is a luxury watch retailer that began operations in 1972. It now has a presence in Singapore, Malaysia, Thailand, Indonesia, Hong Kong, and Taiwan.

For the six months ended 30 September 2017, Cortina posted revenue of S$210.5 million, a 15% year-on-year rise. Its net profit surged 63% to S$8.9 million. The company did not cite reasons for the excellent showing, but we can get some clues from its financial results for the full year ended 31 March 2017.

During that period, sales went north by 6% year-on-year to S$390.8 million while earnings increased 41% to S$11.8 million. The firm said the increase in revenue was on the back of “expansion in the Group’s retail network, notably Singapore, Taiwan and Thailand”.

Despite the robust business performance in its latest half-year period, it warned that “market conditions will remain competitive in all the markets” that it operates in. It also added that the “social and economics condition will continue to affect” the firm’s performance.

As of 30 September 2017, Cortina had total current assets of S$248.6 million, and total liabilities of S$103.7 million. This gives the firm a net current asset value of S$144.9 million.

At its stock price of S$0.85 on 15 December 2017, the retailer had a market capitalisation of S$140.7 million. The ratio of its market-capitalisation-to-net-current-asset-value is thus 0.97. This also means the company is selling at a 3% discount to its net current asset value.

Even though Cortina is a net-net stock right now, it does not mean that you have to gobble up its shares immediately. Not all net-net stocks work out well for an investor, and some will end up losing you money. Therefore, diversifying widely is critical in protecting your portfolio.

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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 Sudhan P doesn’t own shares in any companies mentioned.