In his Aug 28 note, Advanced Holdings (ADV) and Koyo International are deemed as "compelling opportunities among the deep-value players. ADV and Koyo International appear in at least two out of the three deep-value metrics.”
Market cap to net cash
Tiruchelvam’s first rubric is to assess a company’s market cap to net cash. Should a company’s net cash exceed its market cap, Tiruchelvam writes that this implies investors are “effectively paying nothing”, or even receiving a discount for the core business.
He writes: “A stock trading below its net cash value is similar to buying cash at a discount. The rest of the business is thrown in for free. This offers an exceptional margin of safety.”
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Consumer health company Cordlife Group has a net cash ratio of 0.95 times, with its $58 million net cash almost equal to its market cap of $55 million.
Tiruchelvam notes that Cordlife thus “ranks near the top” of peers like Trek 2000 and CFM Holdings, suggesting the market is valuing the business close to its cash pile.
“This may signal undervaluation if operations are stable or improve. These companies are, by any classic definition, net cash bargains. If their businesses are wound down tomorrow, shareholders could plausibly recover more than the current share price,” writes the analyst.
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Despite this, he adds that investors “should be wary of traps”, as certain deep cash discounts are a result of legacy issues. These include litigation, poor capital allocation or management entrenchment.
Cordlife has been embroiled in a years-long scandal over its mishandling of cord blood units, forcing the Mainboard-listed company to pay out refunds to its customers.
Tiruchelvam notes that it is therefore “essential to go beyond the numbers” and assess the quality of cash, management intentions and potential catalysts.
Market cap to net working capital
Tiruchelvam’s second valuation method is to determine whether a company’s net working capital, which includes receivables and inventories, exceeds its market capitalisation.
“This suggests that even in the event of liquidation, the shareholders could recover well above current prices from short-term assets alone,” he writes.
He sees that several listed small- to mid-caps trade at market cap to net working capital ratios of 0.63 to 0.91 times, implying strong balance sheet support and meaningful downside protection. These include Baker Technology, Cordlife Group, Gallant Venture, Koyo International, Sing Holdings and AP Oil International.
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Although Tiruchelvam notes that these firms would deliver value even if liquidated at book value, thus offering investors both safety and upside optionality, “caution is warranted”.
Excessive inventories or weak receivables, he adds, could reduce the quality of net working capital and limit actual cash conversion.
Market capitalisation to net-net
The analyst’s third metric, market capitalisation to net-net, is “one of the strictest measures” of value, which entails current assets minus total liabilities.
Tiruchelvam notes that this method assumes fixed assets and intangibles are worthless and focuses only on current assets net of all liabilities.
He writes: “Companies trading at or below this level are considered deeply undervalued. There are potential liquidation gains even in worst-case scenarios.”
In this space, he once again identifies Sing Holdings, AP Oil International and Koyo International, as a large share of their market caps is backed by liquid assets after liabilities. This offers strong balance sheet resilience and margin of safety.
Tiruchelvam writes: “These elevated ratios suggest ample liquidity and a strong margin of safety. It positions itself for potential re-rating as markets begin valuing underlying business fundamentals beyond liquid assets.”
“By contrast, firms with ratios above 1.0 trade below their net-net value may carry hidden risks from long-term liabilities,” he adds.
Other ways of realising value
Beyond pure metrics, Tiruchelvam also sees that recognising stocks for their “intrinsic worth” could come about from a “contrarian or asymmetrical approach” by investors. This could include factors such as a company’s corporate actions, sector recoveries and balance sheet monetisation.
One of the most consistent avenues for unlocking value has been through corporate actions, he adds.
Privatisations are a recurring feature of the Singapore market, particularly among family-controlled or state-linked firms, says Tiruchelvam.
He cites the privatisation of shipping and logistics provider Goodpack by the US-listed private equity firm KKR & Co in 2014 at an enterprise value (EV) to earnings before interests, taxes, depreciation and amortisation (ebitda) ratio of about 12 times an example of “crystallising value for shareholders” who had “endured years” of undervaluation.
“Similarly, Singapore Press Holdings (SPH) underwent a high-profile restructuring in 2021, spinning off its media assets before being taken private by the Cuscaden Peak consortium,” adds Tiruchelvam.
The unlocking of assets can also act as a catalyst. He notes that Boustead Singapore, which has historically traded at a “steep” discount to its net asset value (NAV), successfully spun off Boustead Projects in 2015, thus “allowing the market to assign a clearer valuation” to its industrial real estate portfolio.
He adds: “Shareholder returns can also be boosted through buybacks and special dividends, as demonstrated by UOL Group, which bought back stock in 2020 when it was trading at approximately 0.6 times book value, helping to narrow the discount.”
Recoveries
Another way to value realisation arises can come from sectoral recoveries and cyclical upturns.
“Depressed cyclicals on SGX have often rerated sharply when industry conditions improved. Yangzijiang Shipbuilding illustrates this dynamic. The company traded at less than five times earnings in 2019 to 2020, only to more than double in value as the global shipbuilding cycle turned upwards,” writes Tiruchelvam.
Another example is Keppel Corporation, “long burdened” by its exposure to the offshore and marine sector, has since benefited from restructuring efforts and the rebound in oil services.
Policy tailwinds can provide an additional catalyst, with the analyst citing public works contractors OKP Holdings with its order book expansion and share price support during the 2016 to 2019 surge in infrastructure spending by the Land Transport Authority as a beneficiary.
Of course, the strength of a company’s balance sheet is another “vital lever” for value unlocking, with Tiruchelvam noting that many deep value companies on SGX possess “hidden asset bases” that are not adequately reflected in market valuations.
According to him, real estate player Ho Bee Land is one such company, trading at around 0.4 times book value. The company owns a high-quality portfolio of London office assets that “could be monetised” to close the gap with NAV, he adds.
Tiruchelvam writes: “Hwa Hong Corporation followed a similar trajectory. It was long neglected by the market despite trading at a steep discount to its assets. It was eventually privatised in 2022 at a premium.”
At the same time, companies with large net cash balances also offer downside protection while providing optionality for future growth or capital return. Technology players Frencken Group and Valuetronics fit this profile, as both traded close to or below net cash levels during the Covid-19 downturn, offering investors “asymmetric upside” as operations normalised.
Improved governance and market recognition have also served as catalysts for certain stocks.
Enhancements in corporate disclosure, transparency and alignment with minority shareholders can lead to increased institutional interest, notes Tiruchelvam.
He writes: “Yangzijiang Financial’s spin-off in 2022, which separated its investment management arm from its core shipbuilding operations, exemplifies how structural changes can strengthen governance and unlock value.”
Finally, index inclusion provides another avenue for re-rating, with the analyst noting that Frasers Logistics & Commercial Trust (FLCT) enjoyed greater liquidity and valuation support following its entry into the FTSE Straits Times All-Share Index, a market capitalisation weighted index that tracks the performance of companies listed on SGX that are within the top 98% by market capitalisation.
Correction note:
An earlier version of this article mentioned Sing Investments and Finance. Following a check with the author of this research report, we have removed mentions of this company.
