We’ve all heard the expression “cash is king.” Cash is the lifeblood of a company and enables it to keep running smoothly.
As such, investing in companies with more cash than debt is usually a safe bet. Not only can cash-rich companies ride out recessions, they also have the financial capacity to expand in good times, issue share buybacks, and reward shareholders through special dividends.
With that in mind, I did a simple stock screen to find companies with:
- (1) a positive net cash position,
- (2) a small market cap relative to net cash,
- (3) consistent free-cash-flow generation, and
- (4) a low dividend payout ratio
These four characteristics should mean the company will be able to continue dishing out those sweet dividends and may even have the capacity to reward shareholders with a special dividend. On top of that, a low market cap relative to its net cash position could mean the market may not be fully appreciating the value of the stock.
Here are two companies that tick these four boxes.
Manufacturing a nice dividend
First on this list is Valuetronics Holdings Limited (SGX: BN2), a manufacturing company with all of its factories located in China. As you may have guessed, investors have been shunning the stock ever since Trump initiated a trade war with China.
Investors certainly have reason to be cautious. Around 45% of the manufacturing company’s revenue came from US customers, and around half of its US shipments were subjected to a 25% tariff. If the tariffs aren’t lifted, some of its US customers may be forced to look for other suppliers.
That said, Valuetronics has already taken steps to try to retain its US customers. The HK-headquartered company has set up a production facility in Vietnam, with the leased site already qualified by a customer and mass production began at the site in June.
Management also said Valuetronics is looking to purchase its own plot of land in an industrial park in Vietnam to build its own manufacturing campus there.
While this will likely require north of HK$100 million in capital expenditure, it is a prudent move to diversify its production facilities.
However, what makes Valuetronics an interesting investment opportunity is the company’s solid balance sheet and track record of growth and low valuation.
The group’s net cash position has ballooned from HK$689 million in FY2016 to HK$993 million as of 30 June 2019.
It also has a track record of growing its earnings and dividend per share over the last 10 years. From HK23.2 cents per share in 2008, the group’s earnings per share increased to HK46.2 cents per share in FY2019.
Its dividend has also more than tripled from 7.8 HK cents to 25 HK cents in FY2019. Furthermore, the group’s dividend payout ratio is still relatively conservative at just 54%. This gives it room to continue increasing its dividend in the future.
With the recent dip in its share price, Valuetronics’ market cap now stands at just around S$273.4 million (HK$1.5 billion). With its net cash position of HK$993 million making up close to two-thirds of its entire market cap, Valuetronics’ shares look to be in bargain territory at the moment.
A roaring cheap stock?
Perhaps one of the most overlooked stocks in the market is HAW PAR CORPORATION LTD (SGX: H02). The investment holdings company has two main arms: its healthcare division, which is driven primarily by the Tiger Balm brand, and its investment segment.
The Tiger Balm Brand, after some tough times in the 1980s, has seen a remarkable turnaround in its fortunes under the guidance of manager Han Ah Kuan. Tiger Balm products are now found in over 100 countries worldwide.
The Tiger Balm brand has driven Haw Par’s healthcare division from S$14.4 million in profit in 2007 to S$77.3 million in profit in 2018. That translates to a healthy 16.5% compounded annual growth rate. Amazingly, the healthcare division’s return on equity (ROE) has been close to or north of 100% for the last four years!
Yet, the healthcare division is just the tip of the iceberg.
The group also has S$407.5 million in cash and S$2.56 billion in “strategic investments” that are made up of substantial stakes in United Overseas Bank Limited and UOL Group Limited. Haw Par also has just S$23.8 million in debt, putting it in a net cash position of a staggering S$383.7 million.
Given that the group’s healthcare division is unlikely to require so much cash, the group’s unused capital could be returned to shareholders in the future. In 2018, Haw Par announced an S$0.85 per share special dividend to reward shareholders and celebrate its 50th anniversary.
Lastly, Haw Par stock has been trading at an unreasonably low valuation when you consider its sizable cash hoard and stock investments.
At the time of writing, the company’s market cap was S$3.05 billion, while its combined cash and strategic investments had a book value of S$2.97 billion. These two assets alone account for more than 97% of its entire market cap. As such, the market has priced its healthcare business at less than S$100 million. For a business that has shown remarkable growth and generated S$77.3 million in profit last year, that, to me, is a ridiculously cheap price to pay.
Furthermore, the company has a well-protected dividend with a conservative free cash flow (including dividends received from its stock investments) payout ratio of just 56%.
I believe market participants will eventually wake up to the fact that Haw Par is heavily undervalued at the moment. Patient investors who purchase shares now will be well rewarded when that time comes.
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. The Motley Fool Singapore has recommended shares of Haw Par Group Ltd and United Overseas Bank.