In truth as a cigar butt investor I am finding it quite hard to come up with my two required ideas. APWC might be too far down the risk spectrum for some, but it is difficult to argue that it isn't cheap (quantitatively at least).

 

APWC manufactures cables for telecoms, energy and other applications. About half the business is a listed Thai subsidiary, Charoong Thai (APWC owns 51%). There are also material wholly owned operations in Singapore, Australia and the PRC. The business has trailing EBIT of c$7m for an EV/EBIT of 4.1x but the reason I have purchased it is for its balance sheet. The statutory accounts are a little complicated because they consolidate 100% of the Thai operation but removing the minority interest in that (line by line) highlights some extraordinary value, in my view.

 

Leaving all the tangible assets (current and long term) at book value the business is trading at a P/TBV of 0.29x. Ignoring fixed assets entirely and valuing only the current assets the business is trading at 0.39x the net net value (current assets minus all liabilities). Valuing the cash and cutting accounts receivable by 20%, inventories by 30% and writing off a couple of other possibly uncertain investments the stock is trading at 75c on the dollar.

 

 

The two perennial risks are corporate governance and operating losses.

 

Future operating losses don't look too terrifying. The business is currently profitable (albeit modestly) but made money in each of the last four years. Current modest profitability is partly driven by write downs on the copper inventory, absent these (possibly) one-off costs the business is solidly profitable, it made $11m of net earnings in 2012 which would be an EV/EBIT of maybe 1.7x. Cash generation has not been great with a flow of cash into inventory and receivables, some of which is probably justifiable by a 30% increase in sales over the last three financial years, but it still isn't great. Something definitely to watch out for. Furthermore, though the balance sheet isn't quite as strong as the consolidated accounts suggest it has a sizable net cash position.

 

Corporate governance is clearly a risk. The business is 65% owned by a Taiwanese cable manufacturer called Pacific Electric (PEWC). PEWC was embroiled in a massive accounting fraud in 2003 and has been effectively bankrupt and owned by Taiwanese banks since then. Is this a corporate governance risk or is it a catalyst for an eventual sale of PEWC's assets to the highest bidder? In addition, APWC's auditors (Ernst & Young) found a material weakness in the 2012 and 2011 financial reporting. Remedial action since then may well have sorted it out and, from the outside at least, it doesn't look much more than poor collation of subsidiary results. But it is clearly a red flag. So is this a fraud? I think that is unlikely. Firstly, most of the business is not in China and half of it is in an quoted Thai subsidiary. Secondly, decent auditor. Thirdly, business has been operating in a number of areas outside of PRC for many years. As always, though, you can't rule it out in this part of the world.

 

Other risks: currency risk is material. Thai Baht exposure to those assets and generally exposure to copper prices denominated in USD and selling wire and cable in Thai Baht, AUD, SGD and Renminbi. A big melt down in Emerging Markets would hurt it (I was around in 1998 in Thailand and it wasn't pretty though gosh there were some bargains)

 

No real catalyst. Though bankrupt majority shareholder putting its stake up for sale would probably help.