Good ol' Tiger Balm. A household brand around the region.
I first initiated a position in Haw Par Corp late last year. The thesis to the investment was simple- Haw Par Corp was selling at deep discount to Book Value. Based on the FY2009 report, Haw Par had Available-for-Sale Financial Assets (AFS) worth $1.220B on its books but had a Market Cap. of $1.232B. Essentially, the market was pricing the value of Haw Par Corp at its stake in UOB, UOL and UIC. Furthermore, markets had come up strongly from their lows in March 2009 and the figures I used were based on its latest Balance Sheet figures as of 30 Sep 10. In December 2o10, that same book value should be higher and therefore closer to the Market Cap.
What is also meant was that Mr. Market was not even giving due consideration to Haw Par’s Operating, Leisure and Property segments. This segments consisted of the Tiger Balm manufacturing and distribution, interest in a HK-listed Bio-Pharmaceutical company, Underwater World attractions (in Singapore, Pattaya and Chengdu) and various properties in Singapore, Malaysia and Hong Kong. I valued this to be about $361 million (Property, Plant & Equipment + Cash and Short Term Investments + 10 years of FCF discounted to present).
[4 Jul 11 Update: The FY2010 AR, unlike FY2009, shows the amount of shares that Haw Par owns in UOB, UOL and UIC being 66,116,619; 41,428,805; 67,558,000 respectvely. I was alerted to this from donmihaihai's blog (h/tip to him) as well as his very instructive reverse-calculation of Haw Par's share of UOB. Interesting to note that Haw Par's share of UOB has actually increased from FY2009 (which means that someone's guess that Haw Par elected to participate in UOB's scrip dividend scheme holds true after all. All in all, I think this is good thing overall.)]
On top of this, Haw Par is essentially debt-free in that it is in a nett cash position and has been giving an approx. $0.20 dividend per share per year over the last 5 years. They have been giving out dividends as far back as my records go (1999).
Furthermore, I surmised that the economic cycle has just gotten out of the trough and therefore, the continued rise of the share price of UOB, UOL and UIC should lead the way and Haw Par would follow. My margin of safety, therefore, should be more than adequate.
I jumped at the bargain.
In sum, the strategy is:
- A deep value play.
- Upside is to ride on the market value of UOB, UOL and UIC going up in the economic cycle.
- Downside is limited by the dividend yield (~ 2.3% at cost of purchase) as well as the operating assets.
Thus far, how has this turned out?
4 Jul 11: It hasn’t turned out quite the way I envisioned it to. Admittedly, I was afraid of missing the boat on this one so momentum wasn’t in my favour. Turns out I could have bought it much cheaper if only I waited some 3 months. So far, a $0.14 dividend per share has been declared, lowering the cost of investment to $6.07 per share. This is why one must always take a long term view, it gives you more margin for error. At today’s closing price of $6.04, the loss is $0.03 per share or a 0.5% unrealised loss (hardly worth losing sleep over).
[...] another investor and blogger discovered last yr that Haw Par is undervalued and blogged abt it recently. Welcome to the club [...]
hi,
the correct valuation methodology is to treat the marketable securities as a closed-end fund (with the attendant closed-end fund discount) and then work accordingly from there—-at least that’s what the hedge fund guys do.
Hi Paul,
Thanks for sharing. Just curious, what’s the discount for a usual closed-end fund like?
Hmmm…. I had been monitoring this stock for the last 3 years, it is a confirmed an undervalued company
From MARGIN OF SAFETY Risk-Averse Value Investing Strategies for the Thoughtful Investor
“Once a security is purchased at a discount from underlying value, shareholders can benefit immediately if the stock price rises to better reflect underlying value or if an event occurs that causes that value to be realized by shareholders.
Such an event eliminates investors’ dependence on market forces for investment profits. By precipitating the realization of underlying value, moreover, such an event considerably enhances investors’ margin of safety.
I refer to such events as catalysts.”
Sad to say I can’t see any catalyst for Har Par for the long history of it been undervalued.
But if we were to take Har Par as a Zero-Growth Stock that pays a constant $0.2 dividend, which they had been doing for 5 years, what will the value of Har Par now?
Factors to consider:
1. Will Har Par be able to pay $0.2 or higher dividend till infinity?
2. Need to know what your Required Rate of Return is?
a. A good reference will be to use the US 10 Years Treasury Yield Curve Rates.
http://www.multpl.com/interest-rate/
Using the US 10 Years Treasury Yield Mean of 4.67%
Har Par as a Zero-Growth Stock (Constant Dividend) the stock value will be:
Annual Dividend / Required Rate of Return = $0.2 / 0.0467 = $4.28
b. Or from The Intelligent Investor, commentary on Chapter 5, the average dividend yield of stock investments is 1.9%
Har Par as a Zero-Growth Stock (Constant Dividend) the stock value will be:
Annual Dividend / Required Rate of Return = $0.2 / 0.019 = $10.53
Hmmm…. Which value should we use?
Hi donclang,
that’s a great question. Without going into too many details, my recent thoughts are that I feel that Haw Par is actually a proxy to getting UOB, UOL and UIC. Therefore, the catalyst will be a renewed growth in the economy and investor optimism.
I would probably go with your b. which is based on the Gordon Growth Model. Your a. seems too low as r (reqd rate of return) is usually calculated according to CAPM as ‘risk-free rate + some function of market premium’, therefore simply using the 10yr treasury yield is too low (i’m not even sure if that’s the yield to use. 10 yr SGS bond seems more appropriate)
I would also add that the market is giving Haw Par a lower than fair valuation due to the fact that the Wee family effectively has control. i.e. there’s probably no chance that HP will be close to fair value unless we reach very very overvalued levels like in 2H 2007.
Am I right in thinking along these lines?