B16 | The Sunday Times | Sunday, October 13, 2019

Research reports are a good starting point for any investor as they con-tain a wealth of information to help investors navigate their financial journey, particularly during the present volatile investment climate.

It is worthwhile studying these re-ports to understand the underlying characteristics and business model of a company and ascertain the vari-ous drivers of sectors.

Before making an investment, consider the upcoming opportuni-ties and risks, and formulate a view on the macro and sector outlook vis-a-vis company-specific informa-tion and performance. These re-ports are an important avenue for retail investors to gain financial know-how and make informed in-vestment decisions.

These reports are produced by eq-uity analysts who have at their dis-posal a tremendous amount of infor-mation and historical data that they can use to make objective assess-ments of companies. The analysts also typically interact with the man-agement in order to gain a first-hand understanding of what’s hap-pening in a company.

In recent months, this series has offered information on the differ-ent types of research reports, given tips on global macros and small caps, highlighted how to formulate a view on a specific stock, and helped retail investors put together a Singapore strategy.

In this instalment, The Sunday Times looks at value investing and provides tips on uncovering hidden gems.

VALUE INVESTINGSmartKarma insight provider Nico-las Van Broekhoven notes that con-sumers usually carefully consider the purchase of any goods or ser-vices. They visit different stores, or websites nowadays, and hunt for the best possible price and/or qual-ity for the goods received.

“When analysing stocks for in-vestment, much of the same princi-ples should apply,” he says.

In fact, the founding father of value investing, Mr Benjamin Gra-ham, wrote books about it in the 1930s while he was a professor at Columbia University. His most-read, The Intelligent Investor, is the best investment book ever written, according to one of the world’s most successful investors, Mr War-ren Buffett.

Mr Van Broekhoven says the term value investing was invented by Mr Graham to describe the process of buying equity below the intrinsic value of the shares after careful con-sideration of all elements impact-ing the company. These would in-clude the competitive positioning of its products or services, their mar-ket position versus their peers, how much revenue and profit the com-pany could generate and how much dividends it would return to its shareholders.

“If the stock price of a company was deemed to be trading substan-tially below its estimated intrinsic value, the margin of safety was large enough and the shares should be purchased until the gap between the share price and its estimated in-trinsic value closes,” he adds.

Value investing has a long track record of outperforming other in-vestment strategies, but it has to be noted that over the last decade, value has markedly underper-formed versus growth-investing strategies.

Applying value investing princi-ples often means being contrarian and buying what is out of favour. Re-cently, several US technology com-panies have been in high demand, which has seen their share prices reach very high valuations, while en-ergy-related firms have been out of favour and would have attractive val-uations, notes Mr Van Broekhoven.

“The biggest risk in applying value investing is that one buys a value trap. These are businesses

that have often seen large share price declines and optically, look cheap on price-to-book ratio (for ex-ample), but have structural busi-ness issues that have not been ade-quately recognised by investors,” he says.

“Value investors are often at-tracted to companies that pay divi-dends, but this is not a require-ment.”

The Singapore market has many attractively priced shares that have been neglected by market partici-pants as they trade far below a con-servative estimate of their intrinsic value.

Particularly, many companies with market values outside of the Straits Times Index and with mar-ket capitalisations below $2 billion would be considered attractive by the value investing definition de-scribed above.

One such example, says Mr Van Broekhoven, would be Procurri, an IT hardware distribution business and life-cycle service provider to data centres of multinational clients. Procurri has been listed since July 2016, and saw its share price decline from 56 cents at its ini-tial public offering to 33.5 cents on Friday.

He noted that while the share price declined, revenues have grown by 78 per cent, from $123 mil-lion in 2015 to more than $220 mil-lion last year. During the same pe-riod, earnings before interest, tax, depreciation and amortisation (Ebitda) was just over $10 million in 2015, and reached almost $20 mil-lion last year.

Ebitda is a way to evaluate a firm’s operating performance without hav-ing to factor in financing or account-

ing decisions or tax environments.“While no sell-side consensus ex-

ists, we expect revenue and Ebitda to grow at least 15 per cent annually this year and next year. Despite this attractive growth outlook, the com-pany trades only at less than four times its Ebitda,” says Mr Van Broekhoven.

The severe mispricing in Procurri was noticed by Singapore-based pri-vate equity investor Novo Tellus, which took a 29.6 per cent stake in February at 33 cents a share. Novo Tellus is best known for its home-run investment in SGX-listed AEM Holdings, which has delivered a more than 1,000 per cent return to its investors the past four years.

“While we don’t think Procurri will increase 10-fold, it would not be unreasonable to expect the share price to double to at least 64 cents by next year as earnings continue to grow and the multiple expands mod-estly,” Mr Van Broekhoven adds.

“If public market investors fail to reprice Procurri, we feel the com-pany could be privatised at a sub-stantial premium to the current share price.”

HOW TO UNCOVER HIDDEN GEMSMr John Cheong, head of retail re-search at UOB Kay Hian, says there is no hard and fast rule to uncover-ing hidden gems.

He believes in the power of leg-work and spends much of his time meeting companies via results brief-ings and visits. Doing so helps him assess if any of these firms tick the boxes on his checklist.

These visits have included glove makers in Malaysia, cord blood banks in China and high-tech manu-facturing plants in Singapore.

There are different selection crite-ria for a research analyst to deter-mine the buy/hold/sell rating and target price of a stock. He notes that one of the key criteria is to identify companies with “deep value”.

This refers to high net-cash bal-ance, low ex-cash (price-to-earn-ings ratio, or PE) and high dividend yield. Such information is usually available in the financial state-ments of the company’s report.

Another criterion would be the possible near-term catalysts, which include unexpected earnings or div-idend announcements or potential takeovers that could present oppor-tunities for investors.

“The third criterion to look at is the operating track record (such as steadily growing revenue and prof-its), to evaluate whether the com-pany has the ability to withstand business cycles,” says Mr Cheong.

Another criterion is a firm’s busi-ness model. Mr Cheong prefers companies with strong competitive moats or niche business models that allow them to deliver good growth in a sustainable manner.

Finally, he noted that it is impor-tant to track commodity prices and peers’ performance to anticipate an upcycle for companies operating in a cyclical industry.

Mr Cheong advises investors to look at the first paragraph of the re-port, which is often overlooked, as it serves as a summary highlight of the key messages. It usually in-cludes the key selling points of the company, whether there are changes in rating or net profit revi-sion and a valuation summary. This part of the report sets the tone for the targeted performance of the company.

Investors can then refer to the stock rating, target price and valua-tion methodology in the report to decide whether to buy or sell the stock.

Small cap stocks: Mr Cheong’s top picks in the small cap space are:• Koufu (target price of 95 cents) Reason: It runs highly defensive foodcourt and coffee shop busi-nesses, and is focused on providing competitively priced meals trans-acted in cash terms. Koufu is trad-ing at a PE of 10 times and offers a 3.6 per cent dividend yield.• BRC Asia (target price of $1.75) Reason: It commands the largest market share of 60 per cent to 70 per cent in the supply of steel prod-ucts used in construction.

Construction demand has picked up over the past year and is on an up-trend. Mr Cheong expects its net profit to grow by 149 per cent.

BRC is trading at a PE of 10 times and offers a 3.8 per cent dividend yield.

lornatan@sph.com.sg

The ST-SGX Research Leaders’ In-sights Series features 10 research experts who take turns to offer their views each month. This week, The Sunday Times meets Mr John Cheong, head of retail re-search at UOB Kay Hian.

He started as a management as-sociate in Maybank in 2011 before taking on an equity analyst role in Maybank Kim Eng two years later. He joined UOB Kay Hian last year.

Mr Cheong, 31, obtained a mas-ter’s in accountancy and finance from Birmingham City University in 2011.

A Singapore permanent resident from Malaysia, he is married with a 10-month-old child.

Q Are you a saver or a spender?A A saver. I believe this is due to my background from growing up in a thrifty family, and I think “a dollar saved today will be more than a dollar spent”.

Q What’s a typical day at work like for you? A My work begins at 7.45am when I attend an internal meeting. Throughout the day, I will be look-ing at news and announcements, as well as meeting companies. My work ends at around 6pm during the lull periods.

During the results periods,

which take place four times a year, I will work till as late as 10pm as I have to prepare the results review report for the following morning. The unique opportunities for ana-lysts are access to C-level manage-ment, pitching of investment ideas to fund managers, and overseas site visits.

Q What is your approach and style towards assessing a company or sector? A I look at the track record of a com-pany, its growth prospects and its current valuation. The macro indi-cators and industry’s performance also play a crucial role in my finan-cial forecasts.

Q What advice would you like to share with investors with regard to using research reports?A Pay attention to the net profit forecast, valuation methodology and our recommendation. Net profit forecasts are typically gener-ated through a combination of in-puts, including the industry growth rate, extrapolation and management’s expectations. The typical valuation methods are price-to-earnings valuation, price-to-book valuation and discounted cash flow method.

Lorna Tan

Unlock value from hidden gems in stock market

Spotlight on ST-SGX Research Leaders

Assessing firms based on track record, prospects, valuation

Sales manager Teo Kay Leong has a preference for guaranteed returns and yet would like to make his savings work harder. B11

Mr John Cheong from UOB Kay Hian says macro indicators and industry performance play a vital role in his financial forecasts. PHOTO: UOB KAY HIAN

ST-SGX Research Leaders’ Insights Series

Me & My Money

Value investing has a long track record of outperforming other investment strategies, but it has to be noted that over the last decade, value has markedly underperformed versus growth-investing strategies.

The ST-SGX Research Leaders’ Insights Series is a collaboration between The Straits Times and Singapore Exchange to help investors understand equity research reports to guide investment decisions.

Lorna TanInvest Editor

Publishedandprinted bySingapore Press Holdings Limited. Co. Regn.No. 198402868E. Amember of AuditBureauof CirculationsSingapore. CustomerService (Circulation): 6388-3838,circs@sph.com.sg, Fax 6746-1925.