The Intelligent Investor is one of the most recommended books to read for prospective investors. In this book, Benjamin Graham, the father of value investing describes how he would invest in stocks by two different profiles of investors – defensive and enterprising.
The “defensive” investor is an approach for investors who are unable to dedicate much time to the process or inexperienced with investing.
And the “enterprising” investor for those with greater market experience and more time for portfolio management.
Graham felt defensive investors should focus their investments to the shares of large, prominent, and conservatively financed companies with long track record of profitable operations.
While enterprising investors can expand their universe of stocks outside of the “large and conservative” companies as they are more experience and have more time to do in-depth research. Despite its name, enterprising investors are not only limited to growth plays but bargain issues and special situations as well.
In other words, this person is willing to put in the extra effort necessary to obtain a better than average return on investment.
So what stocks would an enterprising investor buy? Broadly, they are as follows:
- Revenue greater than $100mm ($500mm adjusted for inflation)
- Strong financial position ( Current ratio greater than 1.5)
- Earnings stability (positive EPS in the last 5 years)
- Dividend track record (Consistent dividends paid in the last 5 years)
- Earnings growth (Earnings growth in the past 5 years)
- Price to earnings (less than 10)
- Price to book (less than 1.2)
So which SGX-listed stock fits this criteria?
Yanlord Land Group (Z25)
Business segments and profile:
Yanlord Land Group engages in the property development activities in China. The company operates mainly through property development, property Investment. It develops residential properties comprising apartment complexes and villas; and commercial and integrated properties, such as offices, serviced apartments, and shopping malls for sale and lease.
Despite steady growth in book value, earnings and margins, Yanlord is still trading at an attractive valuation at 2.5x TTM PE, which is attractive compared with its historical trough level of 5.0x PE.
This was largely due to a shortfall by Yanlord’s inability to secure presales approval for its Shenzhen project, which was estimated to generate Rmb3bn+ presales for the year.
For 10M18, the group recorded presales at Rmb20.3bn, up 2% y-o-y. The sell-through rate remained steady at 73%. Yet, the group only achieved 68% of its full-year presales target of Rmb30bn.
Therefore, the group has lowered its presales target to Rmb27bn for the year. Presales target for FY19 is yet to be finalised but is expected to record decent growth as Yanlord plans to have Rmb 80bn of saleable resources in 2019 and launch projects at government guided price which are likely to achieve good sale through rate.
As gearing ratio edged up higher to 91.3%, it could be a cause for concern. Adding to the anticipation of slower presales, Yanlord intends to moderate its land acquisition pace and take on a more conservative approach on land banking in the near term.
That said, Yanlord is trading at distressed valuations despite sound fundamentals and may present a bargain opportunity. Key risk to look out for will be its inability to obtain timely pre-sale approval at a reasonable price may pose downside risks on the Group’s profit margins and affect its ability to achieve pre-sales targets.
Hongkong Land (H78)
Business segments and profile:
Hongkong Land engages in the investment, development, and management of real estate properties in Greater China, Southeast Asia, and internationally. The company operates in two segments, Investment Properties and Development Properties. It owns and manages approximately 850,000 square meters of office and luxury retail property primarily in Hong Kong, Singapore, and Beijing.
HongKong Land has been undervalued for some time now, and if you look at per share statistics, dividends and earnings has been stagnant for the last 5 years. While book value appears to grow year on year, book value per share has been on declining trend since 2014.
This is largely due to the increase in share float since 2014 which saw Hongkong Land’s outstanding shares jump almost 300% in the last 5 years. In my opinion, this could be a contributing factor to its stagnant share price over the past few years.
That said, there are some positive developments in the company to consider. According to the press, China Merchants Bank has agreed to take up four floors for business expansion based on market sources. Reportedly, new monthly rent reached HK$160psf, 15% higher than those currently paid by HNA. This reflects sustained leasing demand for Central office space among Chinese financial institutions. This could potentially increase its earnings over the next few years.
According to Jones Lang Lasalle, office vacancy in Central remained tight at 1.5% in mid-2018. With solid demand from Chinese firms on one hand and tight vacancy on the other, it should not be difficult for the market to absorb the remaining space surrendered by HNA.
Hongkong Land’s investment properties are primarily located in Singapore and Hongkong, with HK covering approx 4.8mm sq ft net leasable area while SG over 1.7mm sq ft net leasable area of the total 9.2m sq ft. In HK, office supply is expected to remain tight as vacancy remains low with positive rental reversion.
Similarly in SG, vacancy rates remains low with office rentals expected to hold steady.
However, key risk remains as stock options remuneration and rights issue will likely cause further dilution of shareholders.
Hour Glass (AGS)
Business segments and profile:
The Hour Glass retails and distributes watches, jewellery, and other luxury products in Singapore, Malaysia, Australia, Vietnam, Thailand, Japan, and Hong Kong. The company also invests in properties. It operates approximately 38 boutiques.
The group’s major shareholders are the Tay family through their investment company, TYC investments owns 48% of the company and Dr Henry Tay (Chairman), the 2nd largest shareholder who owns 11%.
Hour Glass’s operating performance seems to be growing steadily over the past few years with earnings, margins and ROE increasing. The group has no long-term debt and is in a strong financial position with Cash and cash equivalents at $159.8 million.
Revenue for 2Q FY2019 increased by 1% to $174.7 million compared to $173.0 million achieved in the same period last year. Gross margin improved to 25.4% which resulted in higher profit after tax of $13.7 million, a 26% increase compared to $10.9 million for 2Q FY2018.
The luxury watch market has enjoyed a strong recovery in 2017 – driven by a strong global economy and revived demand from Chinese.
This positive uptrend continued in 2018, with luxury watch exports rising 10.1% in the first quarter.
The swiftness of this market recovery appears to have caught many watchmakers and retailers by surprise which lead to shortages for the most desired models. This was supported by higher than expected retail prices in the secondary market which are at the highest levels in a decade.
Going forward, the group predicts that the watch sector will continue to remain challenging in the midst of global economic uncertainties. With a slowdown in China, luxury spending in Asia might fall due to slow consumer spending sentiment.
The enterprising investor screener is a good system to spot stocks that undervalued and financially strong at the same time offers long-term growth potential. To ensure stable long-term returns, investors can have a good mix of an “enterprising portfolio” and a “defensive portfolio”.