Last week, I went for a few interviews and guess what was the most common question asked to me during the process? It was definitely not "tell me more about yourself", rather "what do you think of the European sovereign debt situation?". Imagine being asked 3 times in one day? I got bored of the topic long ago and I do not wish to talk address this issue too much.
Thats why for this week, I have decided to pick a stock to recommend in this horrible market condition. I spent some time poring through the recent financial reports to try to find something that may be of interest or may even be a safe haven for us to hide in this current storm.
As fate will have it, this coming week I will be in Shanghai for a full week and the stock I have identified this week is doing a significant corporate action on their Shanghai operations. The company is no other than Asia Food and Properties.
Asia Food & Properties (AFP) is part of the stable of companies owned by the powerful Widjaja family in Indonesia. Its chairman Franky Widjaja is the son of the Indonesian tycoon Eka Tjipta Widjaja, who founded the conglomerate Sinar Mas Group.
The Widjaja family is also connected to local tycoon Oei Hong Leong, who is the son of Eka Tjipta Widjaja. Described as a maverick and a raider by the media, Oei Hong Leong has built a reputation for astute investments, including aggressive takeover bids of listed companies.
Besides AFP, the Widjaja family also owns Golden Agri-Resources and Asia Pulp & Paper, both of which are also listed in Singapore.
Actually, AFP used to own Golden Agri-Resources, which it sold off in 2006 as part of a capital reduction exercise. AFP's revenue since then has been much lower.
It still owns a property division in Jakarta, where it claims to have one of the largest land banks. In China, it is a property developer, hotel owner and noodle manufacturer. AFP also has country club and hotel operations in Singapore and Malaysia. Its Indonesian property business is its main revenue contributor.
Now, why do I think this company may be cheap. First of all, there is an existing corporate action proposing to distribute the their Bund Center Investment (BCI)business to their shareholders. The ratio will be 1 share of BCI to every 2 existing shares of AFP. Currently, BCI has a net book value of S$0.26 or so but the earnings have been falling over the past 2 years. Currently, it is earning about S$0.02 thus the valuation is pretty normal. The key value in BCI is its property value and the future potential for appreciation. For those that have been to Shanghai, they would tell you that the Bund Center office tower is located at a very choice location and is worth a ton. Secondly, they also own the Bund Westin Hotel that has 570 rooms. Total land area of more than 17 thousand square metres of prime land. With this proposed distribution in specie, it will provide a good support for the stock price in the short run.
Another significant transaction may be in the works for the company, with them announcing that they entered into a letter of intent with Golden Agri to negotiate the possible sale of their food business. This is another reason why the stock will be supported at this level. Their food business deals mainly in the business of instant noodles and snack noodles in China. The food business contributes 1/3 of AFP's revenues and profits. Any sale made on this segment will result in a large cash inflow into the company and add to its already large cash horde of S$380 million. Special dividend payout is a strong possibility, if not it may even take itself private.
Why do I like AFP? Because it is dealing in 2 of my favorite businesses. Food and Properties. Why do I like it even more? It's operations are in 2 of the fastest growing markets in the world, Indonesia and China. Did you know, Indonesia has the 4th largest population in the world? What makes business good? Lots of customers.
The company is fundamentally very sound with no excessive debt and no problems in servicing their covenants. Their operating cashflow is very strong, on a yearly basis, the company generates more than S$150 million per year in operating cashflow on more than S$600 million revenue. Profits range from S$150-155 million over the past 2 years, which only translates only to about 12 times historical P/E. Decent numbers but not overly attractive. However, the company is still trading at a discount to its NAV of S$0.71.
Buying at a company on a discount with plenty of assets, possible special dividend in the works and distribution of BCI shares. In times like this, you need to have a big cushion for the downside amd this stock will give it to you. I like it very much and believe that the sell down tomorrow gives everyone an entry point. I would be buying below $0.60.
Thats all for the week. I am sorry about not talking too much about the market because I really feel that its no point trying to explain the irrational market and rather focus on the making rational choices while others are making irrational ones.
Have a good week ahead and hope I have time to post another time while I am away.
Best,
SVI
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Some of the chinese food stocks look attractive here.
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