Of the 5 stocks, 4 of them, readers should be familiar with. We will discuss a little more in detail on why we like Overseas Education. OEL operates an international school in Singapore. The economics behind the foreign school system in this part of the world is highly recession-proof and low price sensitivity with high predictability in revenue. We wish we have discovered it early in February when it was newly IPOed at $0.48, but we only learnt about the business a few months later when it was selling for $0.69. But even at $0.69, it is only priced at 13.8x for last year earnings, and about 12.3x for our expected this year earnings. At a low teens multiple for a business that has high to low teens growth potential, we think it is a very good bet. In the latest quarterly report, OEL is increasing school fees by 8.5% starting from August for the new academic year. OEL has historically been able to increase fees over and above the general inflation rate as demonstrated by 1) about 10%, 7% and 6% increment for academic year 2012, 2011 and 2010, respectively.
We also took advantage of one opportunistic situation (besides Starz) during the first half:
- 1) McGraw Hill - Stock plunged when the AG sued MHFI for a reported $5b. We bought some at $45.8. We have since sold at $62 sometime after the first half. But even at $62, it is not expensive, in fact, we think it is still cheap and that we may have made a mistake selling too early. So we may buy it back. At $62, although based of price to earnings multiple, it is about 16x for next year. But if we based on EV/EBITDA, it is selling way too cheap at below 9x (MCO is 12x, Equifax, Dun & Bradstreet are all way over 10x). So, even if MFHI is liable to pay $5b without being criminally indicted of course, MFHI will not disappear. They already have about $1.5 to $2b net cash, so if they raise all the rest through debt, the EV/EBITDA would brings them roughly in line to the rest as mentioned at 11 to 12x. So if any fine that is less than $5b or none at all, MFHI is really undervalued by a fair bit.
7) Thai Beverage - THB has been very volatile of late. Our initial purchase was $0.40 late of 2012. It went up all the way to a high of $0.70. Within the past two months, the stock drops like a stack of potatoes, to a low of $0.415. In all of this drama, so what is the true worth of THB and the risk? From the many views from the media and also individuals' comments from forums online, the risk of the most concern seems to be the high debt and leverage taken on by THB to acquire a stake in F&N. And coupled with that, the poor financial performance in the last quarter exacerbated the decline and was further push over the cliff with recent worries on emerging markets. So what are the numbers behind THB? First on THB's acquisition on F&N and related debt. In some of the comments online, we saw that a number commended that THB is underwater since its purchase of FNN. But I think they have wrongly assumed that THB had paid $9.55 per share for FNN. Instead, the average price paid by THB is $8.77, not $9.55. The figure $9.55 was paid by TCC, not THB. THB was the party that bought into FNN before TCC came into the picture last year. So since the acquisition, FNN had return a total of $3.435 (both capital reduction and dividends) to shareholders. Currently, the last transacted price for FNN was $5.72, so if we add $3.435, the total comes to $9.155, a gain of 4.4% for THB. Now on debt, although debt has increased significantly compared to the pre-FNN acquisition, it is still manageable for a consumer stock type of business. Moreover, the current market value for THB's stake in FNN is worth about Thai Baht $58.8b, this is compared to about net debt of Thai Baht $67b (after THB repaid a portion of loans with the FNN's capital reduction). THB's ebitda is probably going to be in the Baht25b range which is about 2.7x net debt to ebitda - a pretty manageable ratio for a consumer business. Now, what are we paying $0.415 for? The crown jewel in THB is the spirits business. Although this year, it is poised to decline by at least teens level, it should be still able to earn $0.025 a share - so it is 16.6x just based purely on the spirit business. Of course, this is the simple way of valuing by not taking into other aspect of the business. But since it was listed, the market has priced THB from 11x to 21x of its spirit business. So 16.6x is at the mid range.