I was searching for deep value stocks that are trading at 52-week lows when I chanced upon Hor Kew Corporation Limited, a building construction group that provides an integrated range of construction and related services.
From a statistical standpoint, Hor Kew Corp looks cheap as it was trading at 0.18 price to book value with manageable debt. So I was curious to know why this company which owns several investment properties is trading at a discount and decided to look deeper into it.
Focusing on what works
Hor Kew Corp operates in four segments: Property Investment and Development, Construction, Prefabrication, and Investment Holding. The Property Investment and Development segment is involved in the development, sale, and leasing of residential, commercial, and industrial properties. The Construction segment constructs residential, institutional, industrial, and commercial properties as contractor. The Prefabrication segment designs, manufactures, and sells prestressed and reinforced concrete building components, as well as prefabricated architectural metal components. The Investment Holding segment holds investments in unquoted securities.
Operationally, the business has been affected by a subdued Singapore property market which resulted in a slowdown for its property development, investment and construction divisions.
However, the precast and prefabrication division supported its bottom line with a 60% YoY growth in revenue. The management will remain cautious with regards to property development and investment ahead of the gloomy property market outlook. Hence, they have decided to shift focus on precast and prefabrication with aim of making it the main revenue driver.
Personally, I think that the management is right in doing so. In the current property landscape which has been highly challenging and competitive, the business needs to streamline its operations and focus on what works.
Management has faith in the company
Hor Kew Corp is controlled by the Aw family, headed by Dennis Aw, its Executive Chairman and CEO and joined by Benjamin Aw and Elicia Aw as Executive Directors of the company.
Noticeably, Benjamin Aw has been adding on to his stake in the company based on transactions between Aug 2016 to Sept 2016. Including the estate of late Dr Aw Leng Hwee (former Chairman), together they own 30.39% direct interest and 32.83% deemed interest via Hor Kew Holdings Pte Ltd under Dennis Aw.
Mr Market undervalue its assets?
Based on the latest Q2 unaudited results of 2016, its book value is worth SGD 94.02 mil. of which SGD 38.05 mil is in Cash and Cash Equivalent.
Hor Kew Corp owns 2 investment properties valued at SGD 35.58 mil, property 1 comprises commercial office units located in Quanzhou, China and property 2 comprises a portion of 8 storey industrial building located at Kallang.
The company also owns various freehold properties, leasehold land and buildings located in Johor and Singapore together valued at SGD 44.09 mil.
By conservative measure, the accumulated valued for these assets alone are worth SGD 117.73 mil less all liabilities (SGD 92.9 mil) that value works out to be SGD 24.83 mil or 48 cents per share. As of 2 Nov 2016, Hor Kew Corp had a market capitalization of SGD 17.18 mil (33 cents per share).
Do note that this calculation excludes operational assets such as development properties, inventories and trade receivables all valued at SGD 64.2 mil.
Watch out for these
Based on these figures, Hor Kew Corp seems to be undervalued, however, there is possibility that intrinsic value may erode due to these factors:
- Persisting decline in Singapore property market.
- Level of debt becomes unmanageable.
- Certain properties own by the company are mortgaged for bank borrowings, if the value of those properties decline or the company can not afford to pay off its loans, this will have a significant impact on its balance sheet.
A conservative valuation of the business has given Hor Kew Corp a significant margin of safety thus suggesting that it is undervalued. However, there are notable downside risk involve as mentioned. Investors should keep an eye on the performance of its precast and prefabrication divisions and conduct due diligence before investing in it.
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