LIIHEN (7089) - (VGI) No Brainer Investments Part 1 : SHH Resources Holdings Berhad

Many may not know this but Warren Buffett's Berkshire Hathway actually has sizable investments in furniture companies which generate lucrative cash flow to fuel many of its other investments. This is because the low profile furniture business which is highly tied to the US economy does not receive as much publicity as the railroads, energy, insurance and consumer businesses that have over the years been headline favorites for media outlets.
If its good enough for Warren Buffett, it should be good enough for yousu! But which one should we choose among the many listed on Bursa?
My pick is SHH Resources, a very under the radar company with close to no coverage and attention given by the media and investors. Throughout my post, I will be comparing SHH to Liihen who engages in similar business. Liihen's share price has increased by 22% ytd while SHH has decreased 16% which is nonsensical! Let me explain why:
1) Earnings growth. The company saw its earnings grow more than 300% in 9M2016 and more than double in the latest quater. The good growth in earnings is due to a stronger USD (which remains above 4), higher orders from its US customer Ashley Furniture which is opening 100 new stores in 2016 alone and better profit margins from automation and better product mix. Meanwhile, Liihen's earnings at most only doubled from the year before.

2) Price-to-earnings ratio (P/E ratio) The company is trading at a very attractive P/E ratio of only 5.48x, based on a discount to Liihen at 8x, the company should be worth RM2.57, a 46% upside from its current price. This is more than justified as SHH has better earnings growth compared to Liihen.

3) Potential dividend per share of RM0.22 based on 70% payout ratio, lower than 2015's 75% payout implying a dividend yield of 13% Even after paying ot the dividend, the company will still be in healthy cash per share position of RM0.38. There is no reason for the company to not pay out dividends as their capex requirements is less than RM2m per year anyway and their cash flow is strong with free cash flow per share of RM0.24. If we were to assume that 8% dividend yield is fair for the company, the company should appreciate to a price of RM2.81, an upside of 60%.

4) Realisable net asset value a 53% premium over book value Most are not aware that SHH owns a massive 16.6 hectare industrial land in Pagoh where it houses its operating facilities. What's interesting about these land are that they have not been revalued since 1994! Since then, major developments have taken place including Sime Darby's Bandar University Pagoh project with the building of 5 university campuses with GDV of RM8bil.
If I were to take the company private and break up the company and sell its parts, I would sell off all the land for RM81m which is roughly similar to the current market cap. Then, I would still pocket the company's net cash of RM29m (maybe RM20m net of all fees, of course I have not included the value of its machinery and buildings yet). A hefty profit for doing basically nothing!