Feeling a sense of peace and calm in my life currently, I felt it was time for another article. The hustle of life does get to one sometimes . The chaos, the noise, the incessant flow of the river of life and meaningless, unnecessary unproductive going on’s drain my limited life force. Until I find my centre again. And this is my centre. This is it right here. I am living the life I want. Oh! The annual reports. The daily chatter in my mind of earnings, assets, balance sheets and dividends. I start to love my life again immediately. I was born to do this! I love counting and the deepest echoes of my soul tell me this : That I Am Aware Once Again.
I start to feel my body. I hear the voice in my head. I see my thoughts as they arise and fall. Clarity becomes peace and peace becomes soulfulness. Whatever that means to you or to me, it is important to do what one loves to do, to express oneself honestly and so here I writing this article.
And a lot of times, I have no fixed destination in my mind. It is not as if I set myself a target of reading 5 annual reports a day like some do. I just read. And really let the internal dialogue take over from there.
And I want to talk about a company I bought briefly a while back at 12 cents per share. The name of the company is CosmoSteel Holdings Ltd(B9S). I think so far, it is evident that I am not your typical Warren Buffett type of investor. I do not look at moats. I am not able to predict that a competitive advantage that a company has will translate to growing earnings over 10 years. But I do use certain mental models that really aid me in my investment decisions. And mental models as a way of thinking about and framing things has really helped me in my investing journey.
Cosmosteel like many of the companies which I have invested in are beaten down, unloved, unsexy stocks that never seem to get featured very much by the media or by the investment community. But it is these very hunting grounds that make investments exciting as a career and a hobby, at least to me. Let us have a look at the charts. You will see what I mean by ‘unloved’.
Charts are not an indication of cheap or not. Charts only tell you visually if a company has been beaten down or not. The securities analyst has to look at the reported numbers to determine if a company is cheap. And by cheap, I mean a price that is trading at a steep discount to the intrinsic value.
Cosmosteel, in my opinion, is one such company.
Cosmosteel and its subsidiaries are engaged in the business of supplying piping system components.Since its founding in 1984, it has grown its distribution footprint from Southeast Asia to Middle East and Japan. Some of the segments that it operates in is Energy, Marine & Trading.
I think you can see where this is going. This is one depressed company. Considering that oil prices have taken a beating, the knock on effects on support industries worldwide have been unprecedented. One of the measures of cheapness is the price to book ratio. The ratio of of price to book is only 0.4. At current levels, the price seems cheap relative to the net asset value.
Of course, this is an oversimplification of determining cheapness. There are other metrics which I look at as well which help me determine cheapness. But for this article, let me just make it simple here.
Growing Book Value
If one were to look at shareholders’ equity figure, one will find a growing book value.
The book value is growing except for a glitch in the latest reported financial year. That seems like a company that is creating value for its shareholders even though the dividends are not fantastic.
This case study will not be an in depth one. Remember, do your own research. Take me with a pinch of salt and trust only yourself.
However, one thing may be of concern to investors which I have to highlight here.
In 2014, the CEO, Ong Chin Sum and the executive director, Ong Tong Yang were called in by CPIB over a possible offence on the giving of an illegal gratification. As such, the investment case is not as straightforward and one has to consider the risks associated with management.
I actually think about it this way. In December 2014, the company has raised capital from Hanwa Co Ltd with interest in expanding its distribution. The raised capital will be used to increase its plant, property and equipment assets and to pay down debt. As a result, CosmoSteel’s debt to equity is what I would consider low, at less than 20%.
I can live with the risks here and i believe that possible downside risks have already been priced in. The most possible case for an upside here is the industry taking a turn for the better. When that happens, one may see the price going above what its is currently now.
At the end of the day, when it comes to investing, we have to contend with the fact that we don’t know everything. Anyone who tells you otherwise is simply lying to others and themselves. No one knows everything about a company. If you know enough and you see a downside that is limited and the upside that is attractive, one should invest. There is an attractive risk reward ratio here.
Although CosmoSteel is a “commodity” type business, I think that the industry may take a turn for the better in the future. For one I feel that the market has sort of priced in the negative events surrounding the industry. The other thing is that Hanwa’s injection of capital has been used to pay down debt. While the market rarely sees this as a positive immediately, think about what a reduced debt does for a company. An increased book value and reduced interest expenses. I like that. The bottomline will also be impacted positively.
I wish I had the time to elaborate with real numbers and projections. But I will probably leave this to another time as I am celebrating with loved ones Mother’s Day at Shangrila over a heck of a buffet spread in front of me. May all mothers be happy! May all my readers be prosperous!