This article was recently published on A Path to Forever Financial Freedom, and is republished with permission. The writer (left), who is in his late 20s, has a MBA degree.
IN A BULLISH market, it is often difficult to find companies that provide long term value with a sufficient margin of safety to shareholders.
Because of such difficulties, we often see investors pumping up their investment in commonly sought-after blue chip companies, causing their price to earnings ratios to rise to record highs these few years.
However, the stock that I will be highlighting is currently trading at a massive discount. In fact, it is trading at less than the cash value on the book. I will explain in further detail later.
To give a bit of background, the company was started in 1978 and listed on the SGX in 1995. The company is in the business of moulding, fabrication and assembly and is a pioneer as a major plastics manufacturer.
I will not be doing a thorough review of the company’s foundation. Please conduct your own due diligence on the company.
The company reported its full year 2014 results recently on the last day of February.
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Balance Sheet Strength
The one thing that stands out is the huge cash and cash equivalent balance which amounted to $83 million, which is equivalent to 11 cents / share. The current share price is trading at 10.8 cents, which is already a discount to the cash on the book.
The company has also positive net working capital excluding cash. This means that current assets (excluding cash) are able to cover the provision for current liabilities, mostly through their trade receivables.
The other thing which stands out on the balance sheet is the zero (or very minimal) borrowings. With an impending interest rate increase, the non-leverage factor is definitely a plus to have on any company’s book now.
The NAV of the stock is currently 23.23 cents / share.
 Fu Yu (share price 11 cents) has a trailing PE of 8.1X and a market cap of 82.83m SGD. Chart: FT.com
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 Sign of Value or Trap?
With such a strong balance sheet, you wonder why the company is trading at a massive discount to its worth.
One main reason is due to its volatile business nature, which has seen the gross profit margin for its core business going up and down over the past few years.
The business has also been suffering net losses from 2006 to 2009 as well as in 2011. The company started to turn profitable only from 2012 onwards. Obviously, this is a turnaround play but we still need to see if it can sustain the profits.
Despite the massive cash on the book, the company has not paid dividends to shareholders since 2007.
My guess is probably in view of the recent losses and volatility, the management wants to wait it out until profitability is sustained before resuming the dividend payout. Nevertheless, the key is to look out for the margin of the business.
In terms of cashflow, the company seems to operate in a competitive industry where it needs to spend quite a bit of cash to ramp up on capital expenditure. A quick look at the PPE (property, plant and equipment) figures will show how much equipment they are using to operate the business.
Return on assets doesn’t look extremely fantastic; it's relatively reasonable given the industry it is in.
This is a stock on my watchlist. I'll be watching out for news regarding project orders and margins.
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