Tuesday, November 2, 2010

Simple case study of an asset play

An asset play is a stock which is a good investment because of solid asset backing. If the company were liquidated today, the money recovered from its assets will reap shareholders a satisfying profit after paying down all its liabilities. In other words, the liquidation value is way above the market capitalization traded on the exchange.

Stocks with assets composed of intangibles and inventories are not suitable as asset plays. In fact, when the situation is dire enough to warrant liquidation, the value of such assets can collapse to near zero.

The most suitable candidates for asset play are those with assets that are easy to value and hard to defraud - cash, marketable securities (traded on public exchanges where prices are transparent) and real estate properties.

Tuan Sing is a straightforward case study of an asset play which is composed of these sort of easy-to-value and hard-to-defraud assets. As of 29 Oct 2010, it has a market capitalization of SGD281m. After divesting one of its investment property (Kallang Mall), it has a massive cash hoard of SGD207m which is >70% of the market capitalization. This cash cushion allows one to sleep well even if the 2008 credit crisis returns.

On top of this cushion, its crown jewels are the investment properties like Robinson Towers, International Factors Building which are worth SGD261.65m. These properties are in located Singapore. You can physically see and touch these assets. There is no room for fraud.

Its subsidiaries consist of companies like Gultech and SP Corp which are publicly listed on the Singapore exchange. You can obtain the asset values of these listed companies on a real-time basis.

Below is a breakdown of the assets backing this company worth SGD281m. Assets like inventories, intangibles, plant and equipment whose value will be deeply marked down in the event of liquidation are ignored (assigned a value of zero). To provide for a comfortable margin of error, we shall halve the value of assets whose values cannot be ascertained with comfortable certainty like cash and marketable securities. This is the reason why certain asset values will look significantly lesser than what is stated on the latest balance sheet (2010Q3)

Cash holdings: SGD207m
Subsidiaries: SGD157m
Investment properties: SGD262m
Trade and other receivables: SGD26m
Development properties: SGD55m
Total assets: SGD707m

Total liabilities: SGD281m

Liquidation value = Total assets (conservatively estimated) - Total liabilties = SGD426m

The market cap of SGD281m is only 48.6% of the conservatively estimated liquidation value. This is adequate margin of safety for a risk-averse investor like me.

For a good asset play, the assets alone should already provide adequate backing for the price you are paying. Therefore, as long as there are no future losses, it is okay for the asset play to have no future profits. Zero profit growth will not endanger the margin of safety. Any profit growth is viewed as a desirable bonus.

Tuan Sing's profit growth in 2009 and 1st 9 months of 2010 is a big bonus. Profit in 2009 is more than 16 times higher than 2008 (actually an indication of how bad 2008 was, not how good 2009 was). 2009 earnings were good enough to reduce the PE ratio down to a only 6.1

For the first 9 months of 2010, profit grew 53% compared to same period in the previous year. Last quarter earnings were disappointing. Again, earnings growth is not a major consideration for asset plays. Of course, profits are always good to have.

Dissenting views are most welcome.

Disclaimer: I am not a qualified financial adviser. I have no formal training in any finance-related course. It is highly possible for me to make analytical errors, even factual errors which I will be grateful if readers help to correct. I am just an ordinary engineer dipping into the world of investment. The writer has vested interests in the analyzed stock, therefore readers should be wary of non-objective analysis.


  1. Thank you very much for your article. I am so glad to see Tuan Sing rise almost 20% today after a Business Times article commenting that it is undervalued.

    Those who read that article should have read your blog one month ago. Then, they could have gotten it cheap. To think that I am the first one to post a comment. Haha.

    Thanks again!!

  2. Nice call! Tuan Sing rose 23.4% on 22 Dec on record high volume, then rose another 8.62% on record volume again.

    Thank you for bringing this to my attention before the price upsurge. It is a wonderful Christmas present!! Unfortunately, more people will be reading your blog now.

  3. I really appreciate your post and you explain each and every point very well.Thanks for sharing this information.And I’ll love to read your next post too.

    Money Maker

  4. Indeed the Asset play has to do with determining the relationship between a given stock and the other assets that are in the possession of the stock issuer.

    Well, an incorrectly valued stock that is attractive because its combined asset value is greater than its market capitalization.

  5. It is a good idea to plan for the future so that you can maintain your lifestyle even if you are unable to work. That is why I got myself Disability Insurance.

  6. You mentioned that real estate property is an asset that is easy to value and hard to defraud. I would like to argue about this point. This real estate I assume is the commercial real estate. Its value depends on the cash flow that it is generating which, in turn, depends on 2 things which are the monthly rent and performance rent. When economic crisis come, the performance rent might be hit because customers are not spending. Prolong economic crisis might force retailers to close shop and thus, its monthly rent will be hit as well.

    Consequently, its value will be marked down. Moreover, customer spending does fluctuate rapidly and thus, it is hard to predict its cash flow. Thus, I argue, the value of its property might not easy to value.

    But, I would not say that it is not a good buy. Quantitatively, it is good but perhaps you should add qualitative analysis before buying. Perhaps you can visit its mall and see if it contains a high percentage of good name retailers.

  7. Hi Vocus,

    Thank you for your comment. I wondered why Blogger mistook your thoughtful comment as spam.

    Qualitative analysis is always welcome. There is no qualitative analysis for this particular stock because I do not know enough about the company qualitatively to provide one.

    What I know is from the financial statements only. The margin of safety calculated from quantitative analysis in this case was sufficient to convince me to invest despite not knowing the company qualitatively. Luckily, the outcome was not too bad.

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