As a value investor at heart, I’ve always sought for undervalued companies to invest in. These companies tend to be small cap value stocks and are often mis-priced by Mr. Market due to several reasons such as lack in analyst coverage as they are mainly small caps, low share price causing investors to assume it is a poor penny stock that is bound to be de-listed or simply because the company had gone through a rough downtrend in earnings. These companies tend to be priced at ridiculously low valuations, allowing you to buy $1 at 50cents. As such, in this article, I’d like to share the top 3 small cap value stocks in my watchlist for 2H2020.
P.S. The giveaway ends in 4 days ! Don’t miss out on it !
The first company on my watch list for small cap value stocks is Frencken.
For readers who know about my recent trades, you would know that I invested in Frencken back in April when I found out about the company. It was simply too cheap to miss out and as expected, Frencken soon saw a spike in interest as they had a relatively good earnings report as well as analysts covering the company. I shared the buy call with the members of my group and as you may know, it went very well.
Frencken Group Limited is a Global Integrated Technology Solutions Company that provide comprehensive Original Design, Original Equipment and Diversified Integrated Manufacturing solutions for world-class multinational companies in the automotive, healthcare, industrial, analytical & life sciences and semiconductor industries. They offer end-to-end solutions to customers across the entire value chain – from product conceptualization, integrated design, prototyping and new product introductions, to supply chain design and management, state-of-the-art value and volume manufacturing and logistics services.
5 Year Performance
Note : Chart figures are in S$’000
As we can see, Frencken has a very healthy growth for the past 5 years, growing its top and bottom line consistently.
Note : Per share data is in S$ cents
We can also see that Frencken has been able to healthily grow in terms of its profitably in the past 5 years. We can see that its return on equity has steadily grown to a remarkable 15.1% in FY2019. It has also managed to grow its EPS, DPS as well as NAV per share consistently over the past 5 years.
Based on its current valuation @ $0.94, Frencken is still undervalued with a PE ratio of 9.21x, Return on Equity of 14.87% and a relatively attractive dividend yield of 3.19%.
Putting aside all the valuation ratios, Frencken is still undervalued due to the rising demand in the semiconductor industry as Frencken has good exposure of 30% revenue to the growing semiconductor segment. Frencken also has business with companies across a few industries such as healthcare, industrial, automotive and life sciences. As such, the increase in demand for these industries will also be beneficial for Frencken’s growth.
The Hour Glass (SGX:AGS)
The second company on my watch list for small cap value stocks is The Hour Glass.
The Hour Glass Limited is one of the world’s leading specialty luxury watch retail groups with an established presence of 40 boutiques in 11 key cities in the Asia Pacific region. You might have seen some of their stores in Singapore at malls such as VivoCity and ION Orchard.
I’ve talked about this company previously in this article : 2 Cash Rich Growth Companies To Invest In.
5 Year Performance
Note : Chart figures are in S$’000
The Hour Glass has also managed to increase its top and bottom line in the past 5 years, with a slight downtrend from FY2016 to FY2018 but things picked back up in FY2019 and FY2020. Being a cyclical industry, The Hour Glass’s performance is highly related to the state of the economy. When there is more spending, it’ll do better whereas when there is lesser spending in the economy, it’ll see a slowdown in performance.
Note : Per share data is in S$ cents
The Hour Glass has managed to grow its NAV at a very fast and consistent rate over the past 5 years. The return on equity has been pretty consistent hovering around an average of 12%. The earnings per share has been consistently growing as well at a slow and steady pace.
What makes The Hour Glass one of the stronger small cap value stocks is because its business is simple to understand. They sell watches. If you own watches or you know a thing or two about watches, you will realize that watches range from the normal day to day ones you use and luxury ones you buy to show your status in society. The luxury ones can cost a huge fortune and some of them even grow in value as time passes because it becomes a rare item.
The best part about owning a business like The Hour Glass is that if it trades under book value, you are already buying it at a huge bargain because its assets can grow in value over time. Based on its current valuation @ $0.70, it’s trading at a PB of 0.82 and a PE ratio of 6.57x. Not to mention the 2.82% dividend yield you get just for holding this company.
The third company on my watch list for small cap value stocks is Valuetronics.
Valuetronics Holdings Ltd is an electronic manufacturing services provider based in Huizhou, headquartered in Hong Kong. The company provides integrated manufacturing, design, and development services. It operates in two key segments, the Consumer Electronics segment, and the Industrial & Commercial Electronics segment. The CE segment accounts for 39% of revenue while the remaining 61% of revenue is derived from the ICE segment.
5 Year Performance
Note : Chart figures are in HK$ million
Valuetronics has seen great growth in its top and bottom line across the past 5 years. The growth soon saw a peak in FY2018 and FY2019 and in FY2020, there was a small drop in overall revenue performance. This is not something to be worried about as I’ll be sharing my thoughts on that in the “Rationale” section.
Note : Chart figures are in HK$ cents
As we can see, the NAV per share has been growing consistently for the past 5 years. The earnings per share and the return on equity per share grew rapidly and reached a peak in FY2018 and has since had a small decline. It’s good to note that the dividends per share might seem inconsistent due to the special dividends given out in each year. If we were to take out the special dividends, we can see that the dividends grew marginally from 13 cents in FY2016 to 15 cents in FY2017 – FY2019 and then a small decrease to 14 cents in FY2020.
Ultimately, Valuetronics has seen a small decline in its profitability in the past 2 years due to the protesting in Hong Kong that has been going on for a year as well as the COVID-19 pandemic which affected FY2020. These 2 events are not going to last forever and Valuetronics will soon see a recovery in its operations when these events are no longer relevant.
Based on its current valuation @ $0.56, it’s trading at a PE ratio of 7.68x and a very attractive PS ratio of 0.58x. You are also getting a dividend yield of approximately 6.35% while waiting for the business to recover to its former highs.
I love small cap value stocks simply because of 2 reasons. Firstly, you are buying stocks at a huge discount to their intrinsic value, at times a 40-50% discount. Secondly, the fact that they are small caps leave plenty of opportunities for them to be undervalued because they lack in analyst coverage and many investors don’t like to invest in companies that have a lower share price because they are perceived to be “cheap” stocks that will not grow their wealth.
I have made a big portion of my gains from small cap value stocks and I will continue to look for more as time progresses. When the market is still giving me good prices on the high quality assets, I will go for those first. I will only start moving into small cap value stocks when Mr Market stops presenting me with great deals and offers to buy high quality assets at an attractive valuation.
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