There are many models of stock investing and deep value investing is one that Warren Buffett has previously adopted. It’s an investment strategy that was introduced by Benjamin Graham where one purchase a stock at a price way below its book value. The rational is that when the stock price will eventually reflect its book value, provided the book value of the stock is valuable. Does Star Media Group Berhad (“STAR” or “the Company”), KLSE: 6084; falls into this category?
For STAR to falls into this category, it must fulfil below criteria:
#1: Book value consists of hidden assets that are valuable;
#2: Plans to unlock the value of the said assets has been executed or announced;
#3: Healthy financial position (e.g. net cash position);
#4: Management has a track record of distributing the value to shareholders; and
#5: Share price is trading at below its net book value.
Here are 5 things you need to know about STAR before investing in it:
#1: Disrupted by Internet
The STAR is a media company engaged in the publication, printing and distribution of newspapers and magazines. As at 30 Sep 2018, its largest revenue contributor segment remains to be “Print & Digital” which is their newspaper (e.g. “The Star Newspaper” and “The Star Online” website) which accounts for approx. 86% of the company’s total revenue.
However, its business model has been disrupted since the introduction of Apple’s iPad in year 2010. Sales have been on a declining trend since year 2013 as news can be easily available on the internet for free. In other words, business was not good, and it’ll continue to be worst.
#2: STAR has 48 acres of Real Estate
According to The Edge Prop (30 Oct 2018), the company has 48 acres of real estate and more than half of it are undeveloped land. Below is a list of vacant land that we compiled from the company’s Annual Report 2017:
Something to note is the industrial land in Bayan Lepas, this was previously the company’s printing operation which has been ceased and left vacant since September 2018. CIMB IB Research estimated the market value of the real estate, including the above vacant land, is amounted to RM519 mil which translate to RM0.70 per share.
#3: Net Cash Position
As at 30 Sep 2018, the company is in a net cash position. It has a total cash of RM313 mil while its borrowing is at RM 1.75 mil (both long-term and short-term borrowings). This translate into a net cash per share of 42 sen. This is significant as it accounts for 60% of the company’s market capitalisation.
#4: Management’s Track Record
When it comes to deep value investing, we need to pay attention to the management. If the vacant land is sold to third party, do the Management transfer these gains back to shareholders? Because if they don’t, then there is no point for shareholders to be excited about the hidden asset in the company.
The STAR’s Management seems to have this traits of distributing any one-off gains back to the shareholders. The recent ones being the sale of Cityneon which the company declare special dividend of 30 sen per share in FYE 2017.
As at 30 Sep 2018, the company has a net asset of RM1.14 per share while its share price trades at RM0.70 per share (at the time of writing). This gives a price-to-book (“PB”) ratio of 0.61 times. Such low PB ratio was mainly due to its poor business performance which led to the drastic fall of share price.
One of the valuation method in deep value investing is to determine the liquidation value of the company and compare against the share price. The rationale behind this is that, in the event where a company liquidates, the stock price will reflect the liquidation value.
Considering STAR business performance is poor and they could go out of business if it continues to be bad, the liquidation value would be as follows:
The above is calculation of liquidation value is before revaluation of vacant lands. It would seem to be undervalue if the vacant lands are revalued and sell.
So, does the STAR falls into the category of deep value stock? Yes, but the Management must know how to unlock its assets. I, personally, believe that the shareholders will be benefitted if the STAR choose to sell its vacant land. This means more special dividend!!
However, it appears that the Management is planning to diversify into property development. This could be a potential risk given the current property market condition is negative and no signs of recovery yet. Furthermore, property development is an entirely new business model which is unrelated to what the STAR is currently doing. Peter Lynch called this “Diworsification”.
The way I see this is that it may bring more harm than good to the existing shareholders.
In terms of sustainability of dividend, the company can still sustain its dividend payment of 18 sen per share but not for long. For the FYE 2017, the dividend has actually reduced to 12 sen per share (Note: there is a special dividend of 30 sen per share declared as a result of the sale of Cityneon business). Considering the current business model has been bad, the dividend payout could be reduced further.
But assuming the Management declare a significant reduced dividend of 5 sen per share due to poor business performance, this could still give an attractive dividend yield of 7% at current share price of RM0.70 per share (at the time of writing).
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