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Powermatic Data Systems: The Penny Stock That Has Value Too
Featured, Perspective | 21 October 2014
By: Peter Ng
Articles (81) Profile

More often than not, when it comes to analysing a company’s stock, one would usually begin with the qualitative measures and qualities of a company before drilling into its technical aspects such as financials metrics and valuations.

This was in contrast with a full day session which I have attended with Big Fat Purse, where the two trainers have imparted a valuation technique to the attendees, coined as the conservative net asset value (CNAV) strategy.

The strategy seeks to identify companies that are trading below their CNAV where it is measured in a similar way as the common net asset value (value of total assets – total liabilities) but with adjustments made to only include the most liquid assets and assets that demonstrate the best abilities to hold their underlying value.

I will put the CNAV strategy in play with an example of a company, Powermatic Data Systems.

What It Owns

The CNAV strategy is centric towards valuing a company based on the most valuable assets that it owns after deducting its liabilities.

On its balance sheet as at FY14, Powermatic Data owns an investment property which comprises a freehold land and building located at 7 and 9 Harrison Road that has a combined worth of $18.6 million. In addition, it has a cash hoard of $18.7 million.

When summed up and deducted from its current liabilities of $3.6 million (Powermatic do not have any non-current liabilities as at FY14), the company yields a CNAV per share of $0.19, representing a 5.2 percent premium compared to the closing price of $0.18 on 20 October.

This means that the company can pay off all its current liabilities, be literally debt-free and at the same time still worth more than how much its shares are trading at.

On top of the property and cash, an investor would have acquired the company’s underlying business and other assets that are excluded from the calculation of CNAV essentially for free.

Powermatic Data's investment property located at 7 9 Harrison Road, Source: Google Maps

A Value Trap?

A question which an investor would ask himself would be, is this a potential value trap? The answer to this would lie in the earnings performance of the company.

Net profit has been maintained in the positive territories in all periods within a five-year period between 2010 and 2014, with a high of $2.1 million and a low of $670,000.

This is accompanied with a healthy level of cash flow from operations along the same five-year period except for FY13 where it registered a negative position of $1.2 million, which was attributed to rental expense which the group no longer incurred after scaling down its operations.

While its business performance is fair, the company’s operations are relatively stable as reflected from its operating performance and most importantly one that does not burn cash.

SI Takeaway

There is no doubt that the company falls within the small-cap space, established by its market capitalisation of $31.2 million and is certainly not suitable for an investor seeking for stability.

However, this is exactly the avenue where cheap deals could be found since small-cap companies receive the least coverage and are often overlooked.

At the current price, considering the discount to the value of the company which an investor could bag just from its investment property and cash pile, where the rest of the assets are bundled for free, this could be too cheap to ignore.

In addition, the company has maintained and paid out an annual dividend per share of $0.01 for the past five years since FY10 which represents a dividend yield of 5.6 percent based on the closing price of $0.18 on 20 October.

This means that an investor could sit aside and enjoy the dividend pay-out while waiting for the market to recognise its true value.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.

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