Description

Hi, guys –

Warning, micro-cap with 20% float, this is for personal accounts only.

APWC is a NASDAQ-listed, filing, profitable company trading for ~25% of book. That alone makes it one of the cheapest things I've seen in 20 years of messing around with stocks. Underappreciated events over the last few months and potential short-term catalysts over the next few could drive the stock somewhere between “higher” and “much higher” over the next few months or years.

I wrote up APWC back in 2014:

https://www.valueinvestorsclub.com/idea/ASIA_PACIFIC_WIREandCABLE_CORP/121000

I'm resubmitting rather than updating because I think the idea is worthy. APWC produces and installs wire and cable in Asia and the Pacific; for further background, check my previous write-up

Here's a little outline to keep us all on track:

I: Changes

    A: Dividend Policy

    B: Land Sales/Exits

    C: Copper

II: Implications

    A: Long Term -- Investability

        1: Economic Rationality & Rule of Law

        2: DDM

    B: Short-Term -- Speculative Appeal

III Other Stuff

I: Changes Since 2014

    Operations have been unprofitable.

    In August 2015, PEWC, which controls APWC, bought out Michael Dell's 10% stake at $5.1/share.

    Over the the last 12 months:       

• APWC announced they would dividend out at least 25% of earnings, subject to the usual constraints and their dependence, as a holidng company, on         distributions from their subsidiaries. Note that's “announced”, not “initiated”; I'd expect an initation to accompany their year end earnings release, which should happen over the next couple of weeks.

• They closed down a Chinese sub that was losing $1.6MM a year, selling the land and building for  $8.8MM, leading to a $4.2MM gain on sale.

• In Q2, Charoong Thai, their Thailand subsidary, had a gain on sale of $4.6MM from disposing of some unused land.   

• Thailand seems to have stabilized a bit and is ramping up it's infrastructure spending.

• The price of copper, their main raw material, stopped going down, and is actually up nicely, starting even before Trump's election and associated reflation/infrastructure speculation.

II: Implications

A: Long Term

Look, the valuation here is nuts and has been nuts for years. But “Nuts” doesn't necessarily mean “wrong”. As an outside passive minority investor, you're relying not just on the performance of the business, but even more on management's economic rationality and respect for the rule of law. If management are nuts, then no valuation is sane; if they're crooks, then of course you can't invest at all.

There was never any evidence of insanity or peculation here, but now there's evidence to the contrary. I don't want to overstate things. This is not a good business. APWC is really a subsidiary of Pacific Electric Wire & Cable, it's being run for PEWC's benefit, not for the benefit of US penny stock speculators. Management are not – well, they're Taiwanese businessmen, not outsider CEOs laser-focused on shareholder value.

But at least there are some signs of rationality. They're willing to shut down a money-losing operation. They're willing to withdraw capital from the enterprise -- legally! – by dividending it out instead of finding some sneaky way of squirrelling it back up to the parent. There's no reason to think that this is just uninvestable. Untradable? Sure! But not uninvestable.

And now that they're (hopefully) going to start paying a dividend, and have shown thay they're not determined to reinvest every baht back into a crappy business, it's possible to have to conversations about valuation that go beyond, “25% of book is cheap, maybe it will go up some day.”

Let's try some kind of dividend discount model. Total return = dividend yield + dividend growth. Dividend yield = dividend / price. Dividend = earnings * payout ratio. Earnings = equity * return on equity. Dividend growth = equity * (1- payout ratio) * return on equity. Given shareholder equity, ROE and payout ratio, you can then solve for a price that gets you your desired return. Using $11 book, 7% ROE, 25% payout ratio, and a 10% total return, I get:

$4 is greater than $2.80. Where did the inputs come from? Book = “Around there”, ROE = generic crappy emerging market ROE (note that historical ROE is more like 2%; that'll happen when you have a decade with a financial crisis, biblical flooding, political instability and your profitibality is tied to the collapsing copper price), payout ratio assumes they follow through on their announcement. The point of the exercise is that, at 25% of book, as long as they don't piss all the money away, and there's some kind of capital return, you do OK.

The 25% payout ratio -- if they follow through at all -- is a floor. Charoong Thai, a publicly traded sub, has a similar policy, and has lately been at more like 50%, albeit off a very low base. The point here is not this is some sort of "dividend play", but rather that at this level, sucking as much capital out of the enterprise as quickly as possible is good for US penny stock speculators. Sticking 50% into the above calculations gets $6/share as fair value.

The recent dispositions highlight the asset value and the valuation discrepancy. They closed an unprofitable sub and sold some land that was on the books for nothing for something like a 1-year $12MM cash swing on a $40MM market cap. Valuing their other real estate at cost instead of after depreciation adds some $2/share to liquidation value. Not part of thesis, but check out the Nam Tai story to see how "we built some factories on some farm land 50 years ago" can work out.

B: Short Term

Thanks mostly to the land sales, I've got APWC at around $0.80 EPS for 2016. If they pay out 25% of that, we're looking at a company with increasing earnings, a 3.5 PE and 7% dividend yield trading at 25% of book. Thanks to the rise in copper, I'm got run-rate Q4 earnings ex-items is also around $0.80, not that my Q4 estimates are worth much. Q1 earnings, which should be released late next month, are also likely to be good -- I'm not going to venture an estimate --as they benefit from a full quarter of higher copper prices and increased Thai infrastructure spending. The next chance to hear any bad news from these guys will be in August, which is a long time in penny stock land. Given some luck in the rest of 2017, I could see this hitting $10 -- I'm not saying it's worth $10, but sure, it could trade there, and still look cheap.

III: Other Stuff

I just want to submit this and go to bed. I'll note that if I were younger and crazier I'd own a lot more this than I do. Oh, and that this is selling for a huge discount to a public listed sub despite having substantial other assets. Oh, and that the reason for the dividend announcement is that Lonsin Capital sent them a couple of letters asking for one: http://www.lonsincap.com/news-3/

Yours,

Bowd

Catalyst

Earnings, dividends, valuation.