DAIMAN

Source: http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/35908.jsp

Daiman Development Berhad and Graham Net-Net Investment Strategy

In 1932 at the bottom of the Great Crash, Ben Graham wrote an article on Forbes about the cheapness of the market and how companies are being quoted in the market for much less than their liquidating value, as if they were all destined to be doomed. He called these types of stocks, "net nets", companies that sell for less than its net current asset value, or net net working capital. Graham used the following formula to compute the liquidation value of a company.

Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities

It's the lowest form of valuation you could possibly do because it ignores everything about the business and just focuses on tangible assets. The formula states that;
cash and short term investments are worth 100% of its value
accounts receivables should be taken at 75% of its stated value because some might not be collectible
take 50% off inventories, due to discounting if close outs occur

The business

Daiman Development Berhad is in property development and investment holding. The Company operates in five business segments: property development, which is engaged in the development of residential, commercial and industrial properties; property investment, which is engaged in management and operation of buildings; non-property investment, which is engaged in overseas investment; trading, which is engaged in the sale of building materials, and leisure and recreation, which is engaged in the operation of sports, golf and recreation clubs, and bowling center.

The 5-year share price performance of Daiman

Figure 1 below shows the share price performance of Daiman from 2008 to to-date.




The share price of Daiman has been hovering between RM1.5 to RM2.00 for at least four years before it started to break out at the middle of March this year. It briefly touched the high of RM3.00 intraday and closed at RM2.60 on 28 August 2013. It reported its final year 2013 results ended 30 June 2013 a day ago.

Daiman and Graham net-net

Referring to Daiman’s latest balance sheet as at 30 June 2013, the liquidation value of Daiman is computed using the net net working capital formula above. Besides cash, the land and properties it owns are also taken as 100% of the value. This is a fair assessment as it is believed that these assets are likely to worth more than their book value than otherwise. Note that the value of its property, plant and equipment and other assets of 120m are taken as worth nothing. Table 1 below shows the detail of the assets, their weight used in the net-net assessment and per share value.

Table 1: Graham net-net valuation of Daiman

Table 1: Graham net-net valuation of Daiman

Graham net-net	BS value	Wt	Liq value	Per share
Cash and cash equivalent	261313	100%	261313	1.23
Property development costs	82182	100%	82182	0.39
Land held for development	389780	100%	389780	1.84
Investment Properties	279880	100%	279880	1.32
Inventories	4045	50%	2023	0.01
Trade Account Receivables	54862	75%	41147	0.19
Property, plant and equipment	194040	0%	0	0.00
Other assets	22917	0%	0	0.00
Total assets	1289019		1056324	4.98
Total liabilities	258875	100%	258875	1.22
Total equity	1030144		797449
Number of shares	212192		212192
Net tangible asset per share	4.85		3.76	3.76

The table above shows that the net tangible asset (NTA) of Daiman is RM4.85. At this morning’s closing price of RM2.60, it is traded at a huge discount of 46% to its NTA. The net-net valuation of Daiman is shown to be RM3.76, which is still a substantial 45% higher than its price.

Isn’t Daiman a deeply undervalued stock as shown above? Wait until we check if the company is a cash burner. If a company is a cash burner, whatever assets it has can be burned away before shareholders can enjoy them.

3 Basic Checks to Perform for a Net Net

For a net net to be investable, it should have
a solid balance sheet, preferably more cash than inventories and receivables.
is not bleeding cash. At least breaking even or positive in net profit.
positive EBITDA

The first check shows that Daiman has most of its net-net assets in high quality assets in cash and cash equivalent (RM1.23 per share), investment properties (RM1.32), and Land held for property development (RM1.84). The poorer quality net-net asset of inventories and receivables amount to just 20 sen. Hence we can safely confirm that the quality of the assets is excellent. Next to check is “Is it bleeding cash”?

The latest annual financial results ended 30 June 2013 shows Daiman’s revenue and net profit increased by 12% and 78% respectively to 190m and 69m respectively, or a EPS of 32.5 sen per share. At RM2.60, the PE is only 8.0. Cash flow from operations amounts to 61.6m with free cash flow of 43.7m. This FCF is a high of 23% (>10%) of revenue. I don’t remember Daiman has even a single year of losses since listing. It has positive CFFO all the time. In fact, Daiman also easily qualified as a value stock standing on its own on financial performance.

Conclusions

Daiman qualifies as Graham net net investment strategy with a wide margin of safety. It can also stand on its own as a value investment stock as a going concern with stable earnings, healthy balance sheet and cash flow. For this I have added Daiman as another stock in my new portfolio.