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Value Investing: A Cheap and Undervalued Gem in Singapore?

This week, I went hunting for undervalued stocks that may have flown under the radar in Singapore. To begin my search, I did a simple stock screen for companies with (1) net cash, (2) return on equity of at least 10%, and (3) a price-to-book ratio of less than 2.

A handful of companies met these requirements but only one company stood out for me.

The company in question is a small-cap company called Sinostar PEC Holdings Limited (SGX: C9Q). Sinostar is engaged in producing and supplying downstream petrochemical products in China, which are sold to manufacturers of petrochemicals, plastic products, and liquefied petroleum gas distributors.

Here’s why I think this company is worth a second look.

Revenue and income growth

The company whose core operations are entirely in China has seen strong and consistent revenue growth over the past five years. Its net profit has also grown substantially. The table below shows the group’s revenue, gross profit, and net profit.

Source: Sinostar investor relations website

Revenue has more than doubled in just five years, while the group’s net profit has increased from negligible in 2014 to RMB 82.7 million in 2018. Importantly, the group has recorded a healthy profit for the last four years.

In the first half of 2019, Sinostar’s revenue surged 84% from a year ago but net profit dipped 27% due to a decrease in the overall market selling price of petrochemical products.

A robust balance sheet with strong cash flow

Sinostar also has a robust balance sheet with RMB267.8 million in cash and just RMB93.75 million in bank borrowings, which the company took to finance a 70% stake in Dongming Qianhai propylene plant, which will be ready in two years.

The company expects the acquisition to be earnings-accretive when up and ready.

In addition, Sinostar has generated healthy cash flow from operations and maintained steady free cash flow over the last five years. The table below shows the group’s cash flow from 2014 to 2018.


Source: Author’s compilation of data from annual reports

What’s next?

Investors have turned cautious on Sinostar’s near-term prospects because of the challenging macro factors and pressure on selling prices. On top of that, the group is carrying out major maintenance in its plants that produce propylene and polypropylene, which will result in lower production volume during the next quarter.

However, the group’s longer-term outlook remains sound with demand for its products still robust. The acquisition of the Dongming Qianhai propylene plant will also increase its production capacity and the quality of its products.

Cheap?

At its current price of S$0.145 per share, Sinostar has a price-to-book ratio of just 0.61 and an annualised price-to-earnings ratio of just 7.7. When you take into account its net cash position of RMB 173 million (S$34 million), its share price looks even more enticing.

Sinostar has also paid a consistent dividend for the last few years. Its dividend of 0.5 Singapore cents in 2018 translates to a dividend yield of 3.5%.

Despite the near-term headwinds, the group’s cheap valuation, strong balance sheet, and consistent cash flow make Sinostar a company worth watching.

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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 Jeremy Chia doesn’t own shares in any companies mentioned.