HANWELL HOLDINGS: NET CASH 70% OF MARKET CAP



I finally had some time to resume writing my blog posts. Apologies for not updating my blog for the past 4 months, as I had been really busy with school activities.

Recently, I have added a new company to my portfolio - Hanwell Holdings Limited.





For the past month, Hanwell Holdings has undergone a sharp selloff, breaking the 30 cents support level for the first time since May 2017. At yesterday's closing price of $0.23, Hanwell's market cap currently stands at $124.5 million, compared to its cash and cash equivalents of $147.9 million, and $61.4 million in borrowings. This gives us a net cash figure of $86.5 million, which makes up 70% of its market cap.

However, because Hanwell has a relatively high proportion of non-controlling interest recorded on its balance sheet, it would be inaccurate for us to simply quote this net cash amount of $86.5 million. A significant portion of this cash is attributed to the non-controlling interest. For the year ending December 31, 2017, Hanwell had $336.6 million in total equity, of which $58.5 million is attributed to non-controlling interests. This non-controlling interest has to be considered when we value Hanwell's business. I would go a little more in depth into details about non-controlling interests point later in my post.

Business Overview

For FY2017, Hanwell recorded $464 million of revenue, a 16% increase over FY2016, and a net profit of $11.1 million.

Hanwell Holdings has two main business segments - the Consumer business and the packaging business. The Consumer Business distributes household necessities including rice, cooking oil and tissue paper, comprising of brands such as Royal Umbrella and Beautex, a brand of tissue paper that many of us would be familiar with. The packaging business mainly consists of Hanwell's 63.9% owned subsidiary, Tat Seng Packaging, which produces corrugated packaging products for customers in the F&B, pharmaceutical and biotechnology industries.

Valuation

When assigning a valuation to Hanwell, I believe that it is appropriate to separate Hanwell's Tat Seng stake and the remainder of the business, because of the significant contribution from Tat Seng's operations to Hanwell's group consolidated balance sheet. As mentioned earlier, Hanwell has a significant amount of non-controlling interest on its balance sheet, mainly attributed to the 36.1% of Tat Seng that it does not own. For some brief explanation of how group consolidated financial statements are prepared, firstly, under the group column, Hanwell would report the line items as if they owned 100% of Tat Seng. Subsequently, the 36.1% that they do not own would be recorded under non-controlling interest, and deducted from total equity, which gives us equity attributable to shareholders.

Therefore, using some figures as an example, if Tat Seng has $100 million in cash, Hanwell would first record this $100 million to their group consolidated balance sheet. Subsequently, the 36.1% that Hanwell does not own, of $36.1 million, would be recorded under non-controlling interest, and deducted from total equity. Hence, simply relying on the $100 million figure without taking into account non-controlling interest would be overstating the total amount of cash that actually belongs to Hanwell.





For Hanwell's stake in Tat Seng, Hanwell currently owns 63.9% of the company. From the chart above, Tat Seng Packaging has been trading within a range of $0.56 - $0.84 for the past year. Based on Tat Seng's 157,200,000 outstanding shares, this gives us a market cap of between $88 million and $132 million. Given Hanwell's 63.9% shareholding, the market valuation of Hanwell's stake would be between $56.2 million and $ $84.3 million. Based on Hanwell's 553 million outstanding shares, its Tat Seng stake would contributes a valuation of between $0.102 and $0.152 per Hanwell share.

As for the remainder of Hanwell's business, we can estimate its value by looking at their statement of financial position under the 'company' column. Do note that this is only an estimate, as this would disregard the value of the rest of Hanwell's subsidiaries. 

When we refer to the 'company' column, we realise that Hanwell itself does not have any borrowings. The Group borrowings of $61.2 million is entirely attributed to the borrowings by Tat Seng. Other key line items under the 'company' column includes $30.5 million in property, plant and equipment; $45.8 million in receivables; $86.8 million in cash and cash equivalents; and $14.2 million in payables.

Based on these key line items, I estimated the value of Hanwell's remaining business, by including a discount factor of 0.7 for the value of the PPE and receivables stated on Hanwell's balance sheet. The estimations are shown below, taking a range of prices for Tat Seng from $0.50 to $0.80.





Using a sum-of-the-parts valuation from the calculations above, I estimated that Hanwell's fair value should be between $0.31 and $0.37. Therefore, I believe that Hanwell's current price of $0.225 presents us with a considerable margin of safety.

Downsides

A potential downside when investing in Hanwell is its low profit margins. Due to the nature of the consumer business, its gross profit margins are rather thin, averaging at below 5%. Another issue is the relatively high remuneration that Chairman Allan Yap receives. There are shareholders who believe that the renumeration of $1.639 million for Mr Yap is relatively high compared to similar sized companies.

Additionally, if Hanwell continues to sit on a huge cash pile, and not return some to shareholders by increasing its dividend payout, investors are forgoing the opportunity cost of deploying that cash to higher yielding opportunities.

Conclusion

If you were to invest in Hanwell, please be prepared to stomach some volatility. At Friday's closing price of $0.225, a movement of half a cent in either direction means a 2% change. Apart from this, I believe that its current price provides a good margin of safety. I have a target price of at least $0.30 for Hanwell, within the next 12 months. Lastly, if this would interest you, Sam Goi, the Popiah King, recently increased his stake by 1.6 million shares at a price of $0.215.

Note: I own shares in Hanwell at an average price of $0.23, and received the latest dividend of $0.0025.


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3 comments:

  1. May I know what's the gradual fall in share price?

    ReplyDelete
    Replies
    1. Hi usurper,

      I believe your question is regarding the reason for the recent fall in share price. I do not know the reason that caused this steep decline, but from an asset based valuation perspective, it is an opportunity for me to accumulate shares at a lower price.

      Cheers,
      AlpacaInvestments

      Delete
  2. Tat Seng Packaging Group Ltd was fined for multiple offences of illegally discharging toxic industrial used water into the public sewerage system.

    ReplyDelete