As of 20 October 2016, Khong Guan Flour Milling Limited (SGX:K03) has a market capitalization of S$58.9 million.
The company trades wheat flour and other edible products. It is also involved in wholesale of biscuits and other related products. Among their classic product ranges are the Iced Gems and the Creamer Crackers.
For FY2016, the Company reported S$58,000 which was a huge dip compared to previous year (FY2015) profit of S$1,235,000 because of weakening ringgit and the company was hit by a loss of $582,000 in short-term investments.
Currently, its trailing Price-to-Earnings ratio is over 1,000x! Does that sound crazy to you?!
In value investing, there is a category of company that we termed as “asset play”.
An asset play is a unique situation where the company might be potentially undervalued because the current share price does not take into consideration of the market appraised value of their assets. This happens when their assets (properties, etc) are recorded based on historical value.
There are two properties bearing the name “Khong Guan” located in Singapore. They are located at (Khong Guan Biscuit Factory) 2 MacTaggart Road and (Khong Guan Industrial Building) 20 MacTarggart Road respectively.
(credit: Street Directory)
As of 31 July 2016, their Khong Guan Biscuit Factory is valued at $5.11 million (investment property) on the listed company’s balance sheet. It is a 3-storey building which will be redeveloped into an 8 storey light industrial building. It is likely that the property will be revalued after redevelopment.
How about the Khong Guan Industrial Building with a gross floor area of 57,019 sq ft? On 17 October 2017, Lian Beng Group announced their acquisition of Khong Guan Industrial Building for S$31 million. While it is not part of the listed company, this may provide some indicative valuations on the redeveloped Khong Guan Biscuit Factory.
Ultimately, you have to decide whether you are buying Khong Guan Flour Milling Limited (SGX:K03) for its earnings or its assets. Whether from an asset or earnings perspective, you have to decide whether there is sufficient Margin of Safety.
Do you want to learn how we value companies? Find out more by attending our Value Growth Workshop!
PS: For our MIP graduates, we will guide you to find out the true underlying earnings power of business and ignore one-off items that may distort the earnings power in our “Profit and Loss” tutorial. It’ll help you to find out a different P/E (excluding one-off) of Khong Guan!
*disclaimer: This article and its contents contain opinions and ideas of its author. It is not a recommendation to purchase or sell securities of any of the companies or investments herein discussed. The article is written with the understanding that its author is not engaged in rendering legal, accounting, investment or other professional services. If the participant requires expert financial or other assistance or legal advice, a Competent Professional should be consulted. The author will not guarantee the accuracy of the information contained in the article. The author has no vested interest in the above company.