Posted by: donmihaihai | July 19, 2008

Cheap stocks in fallen Angels?

Fallen Angels like Inter-Roller, HTL International and perhaps Aussino and Stamford Tyres were being the talks of cheap stock back in 2007 because they were seem as good opportunities to pick up cheap stocks because their businesses are still intact. I have the fortune to go through them, bought and sold Aussino and Stamford Tyres without losses and never touch Inter-Roller and HTL International. Together with the sinking market, have these “cheap stock” become “cheaper stock”?

Inter-Roller : Row, row, row your boat.

At $0.315, Inter-Roller is cheaper by >50% since I looked at it and wrote a post in 2007. So Inter-Roller sink together with other small cap., being a “cheap stock” does not protect its share price. With a P/B of 1.4X, Inter-Roller is much cheaper than 3.4X of it equity back then when it was trading around $0.70 to $0.80. Looking at P/E is not useful as 2008 will likely to be a loss making year for Inter-Roller. Beside that, dividends cut and dead of contracts won do the trick. I know that Inter-Roller had announced that they won $21.4 million of contracts recently but if it looks dead when all contracts are added up.

So what really happen? Interesting, like striking toto, all the concerns that I penned down in my post ” Inter-Roller strives to be a living company” happen. Someone actually re-writes it and posted it elsewhere and interesting too, he “deleted” all the concerns and painted a bright future for Inter-Roller. Now, this teaches us a lesson from other people pain which is — Concerns or negative factors are important in stock investing. Bruce Berkowitz keeps saying he will only purchase the stock if he can’t kill the company. Next people always like to look at the bright side and ignore the dark side, so good stock investment results usually don’t follow.Those 6 concerns that I wrote will still be there and some turn into even a bigger concerns like my estimation of minimum revenues of $60 million for Inter-Roller before it can make a profit is way too low, it looks like it is going to be at around $80 million of revenues before Inter-Roller can be profitable. The “fixed cost” is higher.

Beside that, a new concern is the new management team does not seem to be as good as the old one. Not because of the sinking profit as it may be the same if the old management team is still around but because they are starting to sue their customer/potential customer which colluded with Inter-Roller competitors, costing Inter-Roller to lose out in contract bidding despite putting a better bid. Will you want to work with someone might sue you in return or having a reputation of doing so? Since Airport are mostly control by government of the country and many countries, unlike Singapore, corruption can be/is common, using legal force can only damage perception and causing more losses of contracts in the future. Even if Inter-Roller wins this case and the centre government change people and award the contract to Inter-Roller, it may not be good because it is all about how Inter-Roller being views as by every country airport operator.

At the current price of $0.315, Inter-Roller become really interesting but it is not the only one available, and I like to watch the management further.

HTL International : The migrator

I think it is justified to call HTL a forgotten fallen angel. It stock price reflects that as well as at $0.32, lost making without dividend payout, it is trading about 0.6X of it book value. While I already forgotten HTL share price at the time while I was looking at it, HTL must dropped >50%. While I do not like HTL business, I likes it share price and consider it a cheap stock, net-net stock that interests Grahams-style value investor. Not just that it is trading at 0.6X book value, its B/S sheet is pretty strong with a good amount of working capital and HTL is valued at 1.2X working capital minus all liabilities which include long term debts.

Its business model does not seem to be broken because contract manufacturing for sofa will still be working and currently, beside a slow down in the industry, HTL need to control cost. Freight expenses are one of the biggest headaches for HTL currently but like a migrator and a survivor by migrating to cheaper countries in the past, HTL will continue to do so in the future. Cheaper labour countries or near customer if de-globalisation happen.

HTL is currently undergoing a restructuring where Malaysia operation is shift out. This will impact on the profit but after that, I won’t be surprise if HTL become profitable again. It will be better if HTL conclude defeated and sell away domicil.

Aussino : growing fatter.

Aussino share price is more defensive dropping about 30% compare to Inter-Roller and HTL and at $0.265, it is trading at 1.1X book value. Perhaps because of a local value fund loading them up. While profit is sinking, it is still profitable and will continue to be profitable as long as Aussino does not become too fat. There is no question on its financial status because it B/S is even stronger than HTL. But is going into retailing, operating outlet selling Aussino brand of bedsheets workable?

Since Aussino starts to expand operating their own outlets, Aussino is getting fatter and fatter, all expenses go up year after year. It was CEO comment in 2007 about reviewing stores and controlling costs that attract me but well it seem like Aussino is going the opposite way. While many expenses are uncontrollable, then it come to the question why not sell at a higher price or does the brand command a higher retail price. If not then the whole business model is not working.

So is Aussino cheap? Yes, if it can control expenses and no if it can’t.

Stamford Tyres : profit too little, dividends too much.

Stamford Tyres share price is also defensive and dropped about 30%. This time it is the CEO buying that seems to be supporting the share price. But at $0.32, it is trading at 0.83X book value. Pretty cheap. I must admit that I like Stamford Tyres more than Aussino because Stamford is getting slimmer by controlling cost. Beside that revenue is growing as well. The only problem at the profit level is long lead time before any price increment can be pass to customer and high level of interests payment due to increasing debt.

Despite the fact that Stamford Tyres generated the 1st positive cashflow after 4 years of negative cashflow, those cashflow are still not enough for expenditure. Stamford Tyres is still generating ZERO free cashflow, this plus huge amount of dividends paying to shareholders, make Stamford Tyres a company that lives dangerously in the environment of higher credit term. Despite that, I like Stamford Tyres business model, possible the best among these four fallen Angels. But Stamford Tyres need a better B/S. Stamford Tyres stop paying dividend, can you?

Last year, this year.

Last year, I have to take shelter and look at fallen Angels for stock that possible selling at cheap. Testing and buying/selling stocks like Aussino and Stamford Tyres, coming out relative in one piece without any losses. It is not a good playground because determining whether their woes are temporary or permanent is not easy.

This year, I get what I wish for, so there is no need to take shelter at fallen Angels as the flood gate has been open and I am at heaven dancing with Angels. Their wings are strong and intact.

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