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Disclaimer: This post was written in collaboration with Investor-One. But be rest assured that what we have expressed below is our independent opinion and we write with your interest in mind.
Article Summary
In Singapore, Small Caps have outperformed Large Caps in the past 1, 2, 3, 5, and 10 years
1. Ho Bee Land
2. Valuetronics Holdings
3. Avi-Tech Electronics
The InvestQuest View
Small Caps have outperformed Large Caps
Did you know that there are approximately 700 stocks listed on SGX? However, if you ask your relationship manager what to invest in, a likely response would be the three local banks, SingTel and a few of the large-cap REITs.
Many investors focus solely on blue-chip stocks because they are deemed less risky, and with a proven track record.
Ironically, this mindset creates an opportunity for active small-mid cap investors. Despite having solid business models, some high quality small-mid cap companies may be less followed, resulting in cheaper valuations. As a result of this mispricing, savvy investors may potentially be able to receive higher returns.
Small caps outperforming large caps. In the 1990s, Nobel laureate Eugene Fama and researcher Kenneth French published their Fama-French three-factor model, positing that small caps stocks outperformed the broader market on a regular basis. From a local context, we do see evidence of this happening, with the MSCI Singapore Small Cap Index outperforming the Straits Times Index in the past 1, 2, 3, 5, and 10 years (see table below for details).
Of course, higher returns come hand in hand with higher risks. With small-mid cap stocks, there is a higher risk of fraud due to less scrutiny from investors and research analysts. Trading liquidity might also be thinner, making it more difficult to enter or exit the stock position. Investors might also find it hard to gather information on these stocks.
Online Resources to Use
Fortunately, there are online resources that investors can use to retrieve stock data, such as Investor-One. The site started out in 2017, supported by SGX with the intention to bring more awareness to Catalist-listed stocks. The site has since expanded to include Main Board stocks as well with a focus on small and mid cap companies.
Investor-One sets itself apart with the following features:
- For investing ideas, check out “Company Features” (weblink). These are basically short articles on stocks across various sectors, particularly small and mid cap companies. Examples of articles:
- Also for investing ideas, take a quick look at “Performance” (weblink). This is essentially a snapshot of the market, with a summary of the top 5 most actively traded stocks, stocks at 52-week low, stocks with lowest P/E, highest dividend yield, lowest P/B, etc.
- Before you subscribe to an IPO, check out “IPO Insights” (weblink). This page shows the performance of recently listed stocks post-IPO and can be a useful gauge of the market sentiment towards listings in certain sectors (e.g. tech, REITs, medical companies).
- When you’re analyzing a stock, look at the “Insider Trades” function on “Quick Facts” (weblink). By ticking the “Insider Trades” box above a company’s share price chart on Quick Facts, you can see a timeline of the stock’s insider transactions overlaid against its share price history. Typically, share purchases by management & substantial shareholders, and well as share buybacks signal confidence in the company. When I was working as an analyst, I had to read the individual announcements from SGX! It’s a relief to have this function. See video in next section for a demo.
In this article, we will look at three mid-cap companies that’s on our watchlist and show how Investor-One might come in useful as well.
Ho Bee Land
Ho Bee Land: Overview of Business
Ho Bee Land (“Ho Bee”) has two business segments:
- Property Investment: Ho Bee’s main business segment. The investment in properties.
- By geography, Ho Bee’s property investments are 50% in Singapore, 42% in the United Kingdom, 7% in Mainland China, and 1% in Australia (by valuation, as of FY19).
- By sector, Ho Bee’s property investments are 76% Commercial, 23% Residential and 1% Industrial (by valuation, as of FY19).
- Property Development: The development and trading in properties.
- By sector, Ho Bee’s property developments are all residential/mixed-use properties in Singapore, Australia, Shanghai, and London.
Ho Bee Land: Why We’re Interested
Answer: Privatization Potential
- Trading at a low valuation multiple of 0.47x P/B and 0.43x-0.44x P/RNAV (according to analyst estimates). For those who are unfamiliar, RNAV stands for revalued net asset value. It refers to the estimated net asset value of the company after the analyst has “revalued” all the properties to what he/she thinks is a fair market value. This exercise is important because properties are often valued at cost on the balance sheet (which may be way lower than their market value).
- Significant majority stake held by founder. According to the latest regulatory filing, Chairman and CEO Chua Thian Poh has a deemed interest in 75.47% of all ordinary shares of the company.
- Why would it make sense to privatize? At today’s market cap of S$1.59bn, the substantial shareholder could acquire all remaining shares of the company for ~S$470m (assuming a 20% premium to last traded price). In return, he would gain the remaining ~S$890mm of Ho Bee’s net assets that he doesn’t own, as well as all future rental/operational returns from Ho Bee. It is also worth noting that analysts believe Ho Bee’s assets are undervalued on its balance sheet, suggesting that this S$890m of net assets may be worth more in reality.
In addition, we noticed that there’s been insider buying even at around Ho Bee’s current share price. Using the insider buying overlay function on Investor-One, we can observe that the substantial shareholder has bought recently increased his stake. We take this to be a sign of the founder’s confidence in the value of Ho Bee Land’s shares.
See video for a walk-through of Investor One’s insider buying function.
Ho Bee Land: Risks to watch out for
Given that Ho Bee’s investment portfolio is mainly commercial, we are concerned that the structural changes that Covid has wrought on corporate work arrangements (i.e. greater reliance on remote work, greater acceptance on WFH arrangements) may result in decreased demand for office space in the coming few years.
Furthermore, a significant proportion of Ho Bee’s investment portfolio is located in the United Kingdom, and with many of the Brexit rules having taken effect only on 1 Jan 2021, we note that there remains a great deal of uncertainty as the situation unfolds.
Valuetronics Holdings
Valuetronics: Overview of Business
Valuetronics has two business segments:
- Industrial and Commercial Electronics (“ICE”) – Valuetronics manufactures printers, sensing devices, communication products (telephones, GPS), as well electronic products for the automotive industry.
- Consumer Electronics (“CE”) – For this segment, Valuetronics manufactures Printed Circuit Board Assembly (PBCA) for Shavers and Electric Toothbrushes as well as Smart Lighting with Internet of Things (IoT) features.
Valuetronics: Why We’re Interested
Answer: Trading at very cheap valuations
- Significant cash balance compared to market cap. As of end-Sept 2020, Valuetronics has HK$1.1bn in cash and cash equivalents as well as no debt. This cash balance is around 72% of Valuetronics’ market capitalization of S$265m as of today.
- Cheap valuation versus peers. It is currently trading at 9.4x FY21F P/E, while peers trade at P/Es of mid-to-high teens.
- And really cheap valuation if we strip out the cash balance. According to our estimates, Valuetronics’ ex-cash P/E is ~2.6x. The key question for investors to ponder is whether this severely depressed P/E is fully justified by the firm’s poor operational outlook (see next section).
Valuetronics: Risks to Watch Out For
Ramifications from US trade war. According to analyst reports, ~90% of Valuetronics’ manufacturing capacity is located in China. In light of the trade tensions and tensions, this has negatively affected and continues to pose a risk to Valuetronics as its US-based customers may seek to source from manufacturers based outside of China. We note that in response to the plans of several corporations seeking to diversify their supply chain, the Group had started expanding its manufacturing operations to Vietnam in early 2019.
Avi-Tech Electronics
Avi-Tech: Overview of Business
Avi-Tech has three business segments:
- Burn-In Services – Avi-Tech’s most important segment. Burn-In is a process for detecting early failures in a population of semiconductor devices.
- Burn-In Services are especially important for end-use industries that require fail-safe or high reliability semiconductor devices (e.g. automotive and networking industries)
- High Margin Business. In FY20 (end-Jun 20), segment contributed 38% of Group’s revenue, but 75% of Group’s operating income
- Manufacturing and PCBA Services – Involves the design, manufacture and assembly of equipment for Burn-In Systems and for other types of reliability tests.
- PCBA stands for Printed Circuit Board Assembly.
- Demand comes from the automotive, networking, cloud computing, data security, mobile communications and medical sectors
- Lower Margin Business. In FY20 (end-Jun 20), segment contributed 48% of Group’s revenue vs. 33% of Group’s operating income
- Engineering Services – Involves the design, development of turnkey outsourced manufacturing and system integration of semiconductor equipment.
- Industries serviced: Life sciences and biotech industries.
- Frequently Loss-Making. In FY20 (end-Jun 20), segment contributed 14% of Group’s revenue vs minus 8% of Group’s operating income
Avi-Tech’s customers are semiconductor manufacturers in automotive, networking, and industrial products.
Avi-Tech: Why We’re Interested
Answer: Recent set of poor results was due to a situation that’s expected to be temporary.
- The Situation: Worldwide shortage of auto-chips. Semiconductor chips are used in automotives for infotainment systems, power steering and brakes. Due to disruptions caused by the Covid-19 pandemic, there is currently a worldwide shortage of auto-chips.
- Fewer chips means fewer burn-in services needed. So the shortage resulted in lower revenue for Avi-Tech’s most profitable segment, Burn-In Services.
- As a result, 1HFY21 net profit dropped by 62.8% to S$1.2m. This is in contrast with FY20’s positive net profit growth of 29%.
- Since the results were released, Avi-Tech’s share price has dropped by 13% in a matter of days.
- Analysts expect for the auto-chip shortage to persist for a few months. The lead time for auto-chips is around 26 weeks.
- Avi-Tech’s net profit is expected to improve by 21% in FY22 (financial year ending Jun 2022) onwards. See chart in prior section for analyst projections.
Avi-Tech: Risks to Watch Out For
Avi-Tech’s management has highlighted the following as concerns: 1) the impact of the Covid-19 pandemic on automotive and electronics industries and 2) ongoing uncertainties in the semi-conductor supply chain stemming from the trade war between the United States and China. As a semiconductor services player, we note that Avi-Tech’s operational health ultimately remains tied to global economic growth.
The InvestQuest View
We find Ho Bee Land, Avi-Tech and Valuetronics to be interesting counters to look at, though we will need to do greater due diligence before deciding whether or not to invest.
As for the Investor-One platform, we really like the insider trading overlay function as well as the IPO performance page. Do take a look at Investor-One.com and you might just stumble across the next hidden small-mid cap gem.
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