|Shares Out. (in M):||14||P/E||0||0|
|Market Cap (in $M):||38||P/FCF||0||0|
|Net Debt (in $M):||-34||EBIT||0||0|
Hi, guys –
Warning, micro-cap with 20% float, this is for personal accounts only.
APWC is a NASDAQ-listed, filing, profitable company trading for ~25% of book. That alone makes it one of the cheapest things I've seen in 20 years of messing around with stocks. Underappreciated events over the last few months and potential short-term catalysts over the next few could drive the stock somewhere between “higher” and “much higher” over the next few months or years.
I wrote up APWC back in 2014:
I'm resubmitting rather than updating because I think the idea is worthy. APWC produces and installs wire and cable in Asia and the Pacific; for further background, check my previous write-up
Here's a little outline to keep us all on track:
A: Dividend Policy
B: Land Sales/Exits
A: Long Term -- Investability
1: Economic Rationality & Rule of Law
B: Short-Term -- Speculative Appeal
III Other Stuff
I: Changes Since 2014
Operations have been unprofitable.
In August 2015, PEWC, which controls APWC, bought out Michael Dell's 10% stake at $5.1/share.
Over the the last 12 months:
APWC announced they would dividend out at least 25% of earnings, subject to the usual constraints and their dependence, as a holidng company, on distributions from their subsidiaries. Note that's “announced”, not “initiated”; I'd expect an initation to accompany their year end earnings release, which should happen over the next couple of weeks.
They closed down a Chinese sub that was losing $1.6MM a year, selling the land and building for $8.8MM, leading to a $4.2MM gain on sale.
In Q2, Charoong Thai, their Thailand subsidary, had a gain on sale of $4.6MM from disposing of some unused land.
The price of copper, their main raw material, stopped going down, and is actually up nicely, starting even before Trump's election and associated reflation/infrastructure speculation.
A: Long Term
Look, the valuation here is nuts and has been nuts for years. But “Nuts” doesn't necessarily mean “wrong”. As an outside passive minority investor, you're relying not just on the performance of the business, but even more on management's economic rationality and respect for the rule of law. If management are nuts, then no valuation is sane; if they're crooks, then of course you can't invest at all.
There was never any evidence of insanity or peculation here, but now there's evidence to the contrary. I don't want to overstate things. This is not a good business. APWC is really a subsidiary of Pacific Electric Wire & Cable, it's being run for PEWC's benefit, not for the benefit of US penny stock speculators. Management are not – well, they're Taiwanese businessmen, not outsider CEOs laser-focused on shareholder value.
But at least there are some signs of rationality. They're willing to shut down a money-losing operation. They're willing to withdraw capital from the enterprise -- legally! – by dividending it out instead of finding some sneaky way of squirrelling it back up to the parent. There's no reason to think that this is just uninvestable. Untradable? Sure! But not uninvestable.
And now that they're (hopefully) going to start paying a dividend, and have shown thay they're not determined to reinvest every baht back into a crappy business, it's possible to have to conversations about valuation that go beyond, “25% of book is cheap, maybe it will go up some day.”
Let's try some kind of dividend discount model. Total return = dividend yield + dividend growth. Dividend yield = dividend / price. Dividend = earnings * payout ratio. Earnings = equity * return on equity. Dividend growth = equity * (1- payout ratio) * return on equity. Given shareholder equity, ROE and payout ratio, you can then solve for a price that gets you your desired return. Using $11 book, 7% ROE, 25% payout ratio, and a 10% total return, I get:
$4 is greater than $2.80. Where did the inputs come from? Book = “Around there”, ROE = generic crappy emerging market ROE (note that historical ROE is more like 2%; that'll happen when you have a decade with a financial crisis, biblical flooding, political instability and your profitibality is tied to the collapsing copper price), payout ratio assumes they follow through on their announcement. The point of the exercise is that, at 25% of book, as long as they don't piss all the money away, and there's some kind of capital return, you do OK.
The 25% payout ratio -- if they follow through at all -- is a floor. Charoong Thai, a publicly traded sub, has a similar policy, and has lately been at more like 50%, albeit off a very low base. The point here is not this is some sort of "dividend play", but rather that at this level, sucking as much capital out of the enterprise as quickly as possible is good for US penny stock speculators. Sticking 50% into the above calculations gets $6/share as fair value.
The recent dispositions highlight the asset value and the valuation discrepancy. They closed an unprofitable sub and sold some land that was on the books for nothing for something like a 1-year $12MM cash swing on a $40MM market cap. Valuing their other real estate at cost instead of after depreciation adds some $2/share to liquidation value. Not part of thesis, but check out the Nam Tai story to see how "we built some factories on some farm land 50 years ago" can work out.
B: Short Term
Thanks mostly to the land sales, I've got APWC at around $0.80 EPS for 2016. If they pay out 25% of that, we're looking at a company with increasing earnings, a 3.5 PE and 7% dividend yield trading at 25% of book. Thanks to the rise in copper, I'm got run-rate Q4 earnings ex-items is also around $0.80, not that my Q4 estimates are worth much. Q1 earnings, which should be released late next month, are also likely to be good -- I'm not going to venture an estimate --as they benefit from a full quarter of higher copper prices and increased Thai infrastructure spending. The next chance to hear any bad news from these guys will be in August, which is a long time in penny stock land. Given some luck in the rest of 2017, I could see this hitting $10 -- I'm not saying it's worth $10, but sure, it could trade there, and still look cheap.
III: Other Stuff
I just want to submit this and go to bed. I'll note that if I were younger and crazier I'd own a lot more this than I do. Oh, and that this is selling for a huge discount to a public listed sub despite having substantial other assets. Oh, and that the reason for the dividend announcement is that Lonsin Capital sent them a couple of letters asking for one: http://www.lonsincap.com/news-3/
Earnings, dividends, valuation.
|Entry||04/27/2017 12:18 PM|
where would their 2016/ run-rate earnings be if you excluded asset sales and changes in the price of copper (but including earnings boost from getting rid of the unprofitable subsidiary they sold)
|Entry||04/30/2017 08:09 PM|
Hi, MPK --
> where would their 2016/ run-rate earnings be if you excluded asset sales and changes in the price of copper (but including earnings boost from getting rid of the unprofitable subsidiary they sold)
Thanks for the question, and sorry for the slow response. I'm not going to try to explicitly back out the effect of rising copper prices. I've got Q2, when copper prices were stable, at around $0.05, around $0.07 adjusting for the sub getting shut down. For Q4, ex gain on sale but - drag from sub, I get >$.20. The degree of confidence and precision here is low; I'd say qualitatively, minimally profitable in Q2, solidly so in Q4.
One of the fun things about the situation is that, given the discount to any lidquidation that doesn't involve fraud or expropriation, I'm not sure that positive earnings are actually a good thing for shareholders. Management seems to have a return hurdle that's >0%; if it were clear the enterprise was permanently unprofitable, maybe they'd shut it down?
|Subject||A Note On Liquidity & Suitability, Part II|
|Entry||04/30/2017 11:38 PM|
Hi, guys --
Part I was not intended to address the investment merits of APWC -- which I'd rather be doing -- but rather to provide some background for our (hopefully briefer) discussions about liquidity & suitability.
We laid out a framework where we could assess stocks on the basis of liquidation, going-concern, and speculative value. APWC is clearly trading a huge discount to any reasonable estimate of liquidation proceeds. (Personally, I think it's really cheap even for that kind of thing, these are levels more like, "The company owned 3 bowling alleys when they went dark in 1999, but a recent lawsuit reveals that they now own two golf courses, one of which, etc"). Illiquidity is practically speaking a requirement for this amount of disconnection. You need management to not care about the stock price and no possibility of activism to get to these levels at all, in the same way you need some really bad news to get a, "despite excellent management and a clear path to 5-year 20% EPS CAGR, LMNO is trading at a low double digit PE" cheap-to-going-concern-valuation story. The "no possibility of activism" means illiquid. Closely held. Low market cap. No holders willing to sell at anything like the current level. So small that it's not worth anyone's time to even bluff.
The cure for illiquidity is ... patience. I wrote this up some 3 years ago as catalyst-less deep value. It promptly went down and stayed down, which didn't surprise me at all. I'm too lazy to look at the volume history over that period, but it was possible to pick up a decent amount of shares. The absolute $ value would have been low. The potential $ value would have been much higher. I'd describe this write-up as being deep-value with potential short term catalysts. I sure hope the IRR is higher! Despite the shorter time frame, I suspect that it still might be possible for some members to pick up an at least personally meaningful amount, because, even if things go as a I hope, the stock might not move at all, it could even go down if Des Moines dentist decides this a good exit point!
This is not suitable for all accounts. That happens. There are many ideas posted on VIC that I can't, for one reason or another, participate in. My next idea might not be suitable for all accounts, either -- these days I have a thing for fixed-income alpha, if I ran across some BBB bond at 94 with four years to maturity, I'd be likely to write it up, despite it being completely untouchable for many due to hurdle-rate/mandate issues.
I don't know. At my day job, I help push around some $170B of pension fund money. (I haven't and won't present APWC to the Investment Commitee, the notion is laughable.) I spend some of my time thinking about and discussing factor investing. The only factor I'm convinced is durable over the long haul is small/micro cap value, and that's only because there's really no money in it.
|Subject||But Back To APWC|
|Entry||05/01/2017 12:28 AM|
Hi, guys --
Just so my rant won't be a total waste of time --
Using the framework I just laid out, the original thesis was based on liquidation value & speculative value, the speculative value being, "Sooner or later they're going to have another good year and idiots will bid it up." Liquidation value is about the same and speculative value has increased because it looks headline EPS for 2016 will be decent. I'm now also willing to assign some going concern value to the company, how much, I'm not sure. Over the next couple of weeks I think they'll declare a $0.10, $0.20, maybe even $0.40 dividend, although I wouldn't be totally floored by $0.0 or $0.80. Anybody want to give me a quote on a dividend swap?
|Entry||05/01/2017 01:21 PM|
Hi guys --
20f out, don't have time to look at, 2016 @ $0.2 among other reasons die to impairment charge, apologies to the club.