SINGAPORE (Jan 17): Throughout 2019, we wrote about many investing ideas. We had six conviction picks based mainly on valuation and business outlook, and a seventh, Great Eastern Holdings. The stocks were picked from screenings through various sectors so it was more of a top-down approach. The screenings involved various valuation metrics. There was no specific theme, but some ideas were based on balance sheet strength, and others on business outlook. The common theme was that the stocks were undervalued relative to their share price at the time.
The convictions picks were Deutsche Post DHL (DPDHL), Hainan Meilan International Airport, Shangri-La Asia, Spindex Industries, Playtech and XLMedia.
We have examined how these stocks performed from the date of our investing idea story to the end of the year (see table), and compared the performances to a relevant index. For instance, DPDHL was compared to the Deutsche Boerse Index, and Spindex Industries was compared to the Straits Times Index.
Great Eastern underperforms index
Great Eastern Holdings (GEH), listed on the Singapore Exchange (SGX), underperformed significantly relative to the benchmark Straits Times Index (STI). As at year-end, GEH’s P/E was 12.2 times, which translates to an earnings yield of 8.2%. GEH’s P/E was slightly less attractive compared to the regional insurance industry average of 11.8. GEH’s dividend yield was still attractive at 2.76% compared to the risk-free rate of 1.74%, though there were more attractive companies in the industry based on this metric. The P/B was 1.25 times, slightly lower than the industry’s average of 1.40 times but very much above the benchmark of 1.
Although the 2019 share-price performance of GEH was underwhelming, the company is a long-term value play, and the investment horizon ought to be more than five years. However, investing is about opportunity costs, and ideally money should mostly be channelled into the most attractive investments, not just mediocre or decent ones.
Proxies to online gaming Playtech and XLMedia had volatile year
Playtech and XLMedia are both listed on the London Stock Exchange. The former provides software to both the online and land-based gambling industries, while XLMedia is an online performance marketing company for the gambling sector. Playtech’s performance was rather erratic but not as volatile as XLMedia’s. At its peak, Playtech was up 16% at mid-July, while XLMedia was up 70% around the same time. Playtech’s and XLMedia’s P/Es were 51.0 and 6.9 times respectively, compared to the industry average of 26.8 times.
Both Playtech and XLMedia are attractive compared to the industry average for other financial metrics; with P/Bs of 1.1 times and 0.7 times, respectively, against the 4.5 times peer average; along with enterprise value to Ebitda (EV/Ebitda) ratios of 4.9 times and 3.7 times respectively against the industry average of 13.1 times. Free cash flow yields of the two companies are at 13.7% and 33.8% respectively, which are very attractive compared to the riskfree rate of 0.83%. Both companies are growth stocks, with XLMedia much more volatile than Playtech. So it is important to monitor the company’s fundamentals more frequently, at least on a quarterly basis. These two stocks are not for the faint-hearted.
Deutsche Post DHL outperforms index
Frankfurt-listed Deutsche Post DHL Group (DPDHL) performed strongly against the benchmark Deutsche Boerse for 2019. Including dividends, DPDHL returned 15.4% for the fivemonth period. DPDHL’s P/E as at 2019 year-end was 16.3 times, which is slightly less attractive than the industry average of 15.6 times. The rise in price has also caused its P/B to increase to 3.4 times, above its peer average of 2.4 times.
However, free cash flow yield and dividend yield at 4.35% and 3.38%, respectively, are attractive compared to the risk-free rate of -0.19. DPDHL is a blue-chip dividend stock, but after the recent price rally it appears to be fairly valued. Dividend yield is still attractive, though.
Hainan Meilan Airport is best
Among the listed airports, Hainan Meilan International Airport (HMIA), listed on the Hong Kong Exchange, remains undervalued despite rallying since our story was published. The other two listed Asian airports – Airports of Thailand (AOT), listed on the Stock Exchange of Thailand, and Malaysia Airports (MAHB), listed on Bursa Malaysia – are expensive. In a period of slightly more than 21⁄2 months, AOT, MAHB and HMIA had returned 1.7%, -11.0% and 7.6% respectively, dividends included. The P/Es of AOT and MAHB were overvalued at 42.2 times and 27.6 times respectively, compared to the industry average of 21.3 times.
As at end-2019, after a price gain, HMIA remained attractive at just 4.5 times.
The P/B for the airport sector was 2.4 times. AOT’s and MAHB’s P/Bs were 6.9 times and 1.5 times respectively. The standout remains HMIA at just 0.5 times. Dividends are surprisingly low for airports. AOT’s dividend yield of 1.41% and MAHB’s at 1.81% as at end-2019 were not particularly attractive. HMIA does not pay a dividend. Airport stocks are usually long-term value plays; and as at year-end valuations, AOT appears to be slightly overvalued, MAHB fairly valued and HMIA significantly undervalued.
Shangri-La Asia outperforms index, remains cheap
Hong Kong-listed Shangri-La Asia’s performance was mediocre against the benchmark Hang Seng Index. But on an absolute basis, it did well in the two-month period, netting a 5.5% return. As at 2019 year-end, Shangri-La’s P/E was 24.1 times, marginally less attractive compared to the industry average of 20.9. The EV/Ebitda of the company was 17.1 times, which makes it considerably expensive compared to the industry average of just 11.8 times.
The P/B of Shangri-La was still extremely attractive at just 0.6 times compared to the industry average of 2.5 times. Yields-wise, compared to the risk-free rate of 1.86%, both dividend yield and free cash flow yield were lucrative at 2.70% and 3.67%, respectively. Considering how important the balance sheet is to real estate-related businesses, particularly the valuation of assets, Shangri-La is very much undervalued and cheap given this metric.
Spindex remains undervalued
Spindex Industries is listed on SGX, and has matched the benchmark STI’s performance as at year-end. With a current P/E of 7.3 times against the industry average of 14.6 times, a P/B of 0.94 times compared with its peer average of 1.00 times, and EV/Ebitda of 2.7 times against the industry average of 6.6 times, Spindex is very much an undervalued stock. As at 2019 year-end, Spindex’s yields were also significantly more attractive than the risk-free rate of 1.74%. Its dividend yield and free cash flow yield stood at 3.40% and 14.85% respectively.
Overall, Spindex remains an undervalued stock with an attractive long-term growth outlook. As a result, the downside is limited. On the upside, it could potentially be a takeover target.
