Solid Group Inc. (SGI): A Potential NCAV Stock?
Besides looking for wonderful companies that trade below the intrinsic value, I also started looking for those unwanted and unpopular companies that trade below its Net Current Asset Value (NCAV).
The idea behind the NCAV strategy is that you’re basically buying a company below its liquidation value. So even though the company liquidate, you still make a profit from the sale after all liabilities has been paid off. But of course, liquidation is a very unlikely event.
Benjamin Graham mentions that he’ll buy a stock if it trades two-thirds of its NCAV.
In his book “The Intelligent Investor”, he said that;
It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone-after deducting all prior claims, and counting as zero the fixed and other assets- the results should be quite satisfactory. They were so, in our experience, for more than 30 years.
Benjamin Graham, Chapter 15 of The Intelligent Investor - Stock Selection for the Enterprising Investor
Warren Buffett calls this strategy the “Cigar Butt” approach. You get that one last puff before the cigar runs out.
The strategy has proven to be profitable for both investing legends. This is also why I’ve included it in my investing strategy.
You can read more about NCAV in this link here.
Looking for stocks using the NCAV approach is a simple process but finding one that looks profitable takes a lot of work. Without screeners that caters to Philippine stocks, you’re forced to do it manually for each and every stock you encounter.
Luckily, A friend told me about Solid Group, Inc. (SGI) and it piqued my interest immediately. I made some serious research about it.
In this post, I’ll discuss about the company and why is it a good candidate for the NCAV investing approach.
SGI’s Company Background
SGI is a holding company composed of different subsidiaries that operates in the consumer electronic industry, real estate and support services. One of their subsidiaries, My Solid Technologies & Devices Corporation (MySolid) engages in the sale of mobile devices under the my|phone brand. In fact, the latest quarterly earnings report mentions a Revenue increase of 79% for the first nine months of 2016 due to the sale of digital devices and technical support & solutions segment.
They also get revenues from the lease, development and sale of real estate properties from their subsidy Zen Tower Corporation (Zen), Precos Corporation (Precos) and Solid Manila Corporation (SMC).
The list of their thirteen subsidies are as follows:
- My Solid Technologies & Devices Corporation (MySolid)
- SolidGroup Technologies Corporation (SGTC)
- Solid Video Corporation (SVC)
- Solid Manila Corporation (SMC)
- Zen Towers Corporation (Zen)
- Precos Corporation (Precos)
- Kita Corporation (Kita)
- Omni Solid Services Inc. (OSSI)
- Solid Electronics Corporation (SEC)
- Brilliant Reach Limited (BRL)
- Solid Manila Finance Inc. (SMFI)
- Solid Broadband Corporation (SBC)
- MyApp Corporation (MC)
The management is composed by credible and trustworthy individuals led CEO Mr. David S. Lim. I haven’t found any management issues with anyone in the group in search engines. I’m pretty confident of the capabilities of the executives running the company.
Valuations
I calculated the NCAV per share on different periods. The current NCAVPS at 33% MoS is at Php 1.48.
Net Current Asset Value Per Share (NCAVPS) Formula
Net Current Asset Value Per Share (NCAVPS) = (Current Assets – Total Liabilities – Preferred Stocks) / Shares Outstanding
in Mil PHP | 3Q16 | 2Q16 | 1Q16 | FY2015 | FY2014 |
|---|---|---|---|---|---|
Current assets | 5,786 | 7,052 | 7,072 | 6,964 | 7,377 |
Total liabilities | 1,663 | 2,881 | 2,942 | 2,801 | 4,488 |
Preferred stocks | - | - | - | - | - |
Shares outstanding | 1,871 | 1,964 | 1,821 | 1,821 | 1,821 |
NCAV | 4,123 | 4,170 | 4,129 | 4,163 | 2,888 |
NCAVPS | Php 2.20 | Php 2.12 | Php 2.27 | Php 2.29 | Php 1.59 |
NCAVPS @ 33% MOS | Php 1.48 | Php 1.42 | Php 1.52 | Php 1.53 | Php 1.06 |
Tab. 1 SGI’s NCAV
I’ve learned that most of its current assets is composed of 48% liquid cash. At present, the company has P3.33B in bank savings and short-term investments; enough to pay off its P1.66B total liabilities. We can see that buying below the range of P1.48 to P1.52 per share pose an opportunity.
What’s even more interesting in SGI is that it’s also trading below its Net Net Working Capital (NNWC).
The idea behind this concept is that some accounts receivable might be doubtful accounts and inventories might be sold at a far lesser price for faster liquidation. Since current assets are composed of these type of assets, we can further break it down to find the NNWC.
Net Net Working Capital Per Share (NNWCPS) Formula
Net Net Working Capital Per Share (NNWCPS) = [Total Cash + (0.75 x Accounts Receivable) + (0.50 x Inventories) – Total Liabilities – Preferred Stocks] / Shares Outstanding
in Mil PHP | 3Q16 | 2Q16 | 1Q16 | FY2015 | FY2014 |
|---|---|---|---|---|---|
Total cash | 3,332 | 3,291 | 2,948 | 2,699 | 2,369 |
Accounts receivable | 1,364 | 1,348 | 1,566 | 1,278 | 1,438 |
Total inventory | 916 | 2,089 | 2,209 | 2,513 | 2,966 |
Total liabilities | 1,663 | 2,881 | 2,942 | 2,801 | 4,488 |
Preferred stocks | - | - | - | - | - |
Shares outstanding | 1,871 | 1,964 | 1,821 | 1,821 | 1,821 |
NNWC | 3,150 | 2,465 | 2,285 | 2,113 | 442 |
NNWCPS | Php 1.68 | Php 1.25 | Php 1.25 | Php 1.16 | Php 0.24 |
NNWCPS @ 33% MOS | Php 1.13 | Php 0.84 | Php 0.84 | Php 0.78 | Php 0.16 |
Tab. 2 SGI’s NNWC
Currently, the NNWCPS is at P1.68 per share and is still trading below its current price of P1.48 per share. To me, this is already a very high margin of safety.
Quality & Financial Health
Although the Cash Flow Statement show signs that it’s burning a lot of cash, the Piotroski and Altman Z-Score shows signs of a good quality business. NCAV stocks usually have distressed underlying businesses beneath them but this isn’t the case for SGI.
Piotroski F-Score Calculation (3Q16) | Values |
|---|---|
Profitability: 1: Net income 2: Operating cash flow 3: Return on assets 4: Quality of earnings | 1 0 1 0 |
Leverage: 5: Long-term debt vs. assets 6: Current ratio 7: Shares outstanding | 0 1 1 |
Operating efficiency: 8: Gross margin 9: Asset turnover | 0 1 |
Piotroski F-Score | 5 |
Fig. 3 SGI’s Piotroski F-Score
Altman Z-Score Calculation (3Q16) | Values |
|---|---|
X1: Working capital / Total assets | 0.4590 |
X2: Retained earnings / Total assets | 0.2711 |
X3: EBIT / Total assets | 0.1086 |
X4: Market capitalization / Total liabilities | 1.6201 |
X5: Revenue / Total assets | 0.7611 |
Altman Z-Score | 3.12 |
Fig. 4 SGI’s Altman Z-Score
Not only that, debt levels and the ability to pay off short-term obligations doesn’t seem to be a problem with SGI. It has maintained a very low D/E Ratio and very high cash reserves for the last 3 years.
Financial Ratios | 3Q16 | 2Q16 | 1Q16 | FY2015 | FY2014 |
|---|---|---|---|---|---|
Working capital to total debt ratio | 47.26 | 22.99 | 20.99 | 20.84 | 4.96 |
Cash to current assets ratio | 0.48 | 0.43 | 0.39 | 0.37 | 0.22 |
Current ratio | 9.23 | 4.16 | 4.04 | 4.34 | 2.31 |
Debt to equity ratio | 0.17 | 0.30 | 0.31 | 0.29 | 0.49 |
Fig. 5 SGI’s Supplemental Financial Ratios
Dividends
Another reason for the stock’s attractiveness is the Dividend Yield and Dividend Payout Ratio. Currently, it yields around 6.76% and the Payout Ratio at 30.30%. They are paying consistent dividend payments since 2012 and I think this will continue due to continuing earnings growth.
Final Thoughts
I must admit I liked the current valuations of the company especially if you’re doing the NCAV investing approach. I think SGI is a turnaround business and a reasonable stock to accumulate while it’s still cheap. Just be mindful of the risks that NCAV stocks have.
What do you think of SGI? Share your thoughts in the comments section below.
Happy investing!
Disclaimer: I currently don’t hold SGI shares as of this writing but I intend to buy and accumulate at a price I feel attractive.