- Haw Par Corporation (SGX:H02) is currently trading at a discounted price, providing an attractive investment opportunity.
- The company has a strong balance sheet, efficient working capital management, and a strong dividend policy, which all contribute to its free cash flow generation.
Haw Par Corporation (SGX:H02) is one of the oldest stocks in Singapore and has a long history of success in the stock market. The company is currently trading at a discounted price and has potential for long-term growth. The company’s diversified portfolio, strong management, and resilient business model make it an attractive investment. The investment thesis lies in the company’s undervalued market position, potential for long-term growth, and steady dividend payouts. The company is well-positioned to benefit from the long-term growth of the Singaporean economy, and its current discounted price makes it an attractive investment opportunity.
I have written about this company a few years ago and I think it is time to revisit this company. I will not elaborate on its business model in this post. However, you may click on the link below to understand more.
Financials
Income Statement
The outbreak of COVID-19 pandemic impacted the Group’s performance in 2020 and 2021. The lockdown of countries and travel restrictions had an adverse knock-on impact on the Group’s operating businesses. Earnings decreased due to lower operating profit and lower dividend income from strategic investments. Healthcare’s profit dropped significantly mainly due to lower demand for Tiger Balm products. Sales dropped significantly from government-imposed travel restrictions and domestic lockdowns.
However, we see that business is starting to recover in 2021. Group revenue for the year increased 27.2% to $141.2m due mainly to recovery of its Healthcare’s business. We still see weakness in its Leisure segment as tightening of movement restrictions both internationally and locally has adversely affected Underwater World Pattaya’s operations.
In 2022, we can see encouraging results from its 1H22 financial report.
The trajectory of its recovery may be hampered by inflationary measures, as they may experience higher cost of raw materials, labour and the volatility of the markets could also have a detrimental impact to the valuation of its investments and dividend income.
Balance Sheet + Cash Flow
Cash & cash equivalent stood at $600m currently. This equates to about $2.71/share.
Short term investments is valued at $2,542m, which is $11.49/share. (Info extracted from FY221H Financial Statements) In total, Haw Par’s Cash and short term investments is worth $14.2/share. Haw Par is trading at $9.35 as of 20th Jan 23. What is means that if we only consider its cash and investments, it is trading at a 34% discount.
From the chart above, Haw Par is free cash flow positive for 20 years since 2001. Their strategic assets have provided the Group with a stable source of recurring dividend income and financial strength over the years. This allows them to grow their cash hoard. In addition, they do not have any long term debt.
Dividend Yield
Haw Par pays a annual dividend of $0.30/share. The dividend yield is currently about 3.2%. It may not look attractive given that the current Singapore Treasury Bills have a yield of 4%. This could also be the reason why share price fell in the current interest rate environment. Considering their large cash reserves and increasing dividend payouts from their investments, there is a chance that Haw Par could start to increase their dividends.
Fun fact. In 2019, Haw Par issued a special dividend of $0.85 to mark Haw Par’s 50th anniversary.
Valuation
There are a few ways to go about doing a valuation for Haw Par Group .
Most people would go for a SOTP and derive the valuation of its cash hoard, investments, properties and healthcare separately. Using this method, we will know that it is trading at a huge discount. However, I feel that it is not the best way to value this company as the large cash and investments are not contributing much to its topline and bottomline. It only gives us a margin of safety at most. If Haw Par is not utilizing their cash, then it is not really generating any value to their shareholders.
We we look back, Haw Par has an average PE ratio of about 15x. Other than the few years when share price went up or down, it always revert back to PE of about 15x. So it seems that Haw Par is currently fairly valued.
If this is the case, I still find Haw Par attractive. This is because the main revenue and profit driver of this company is their healthcare segment. This segment is only starting to recover and is still eons away from its FY2019 performance. As such, I think that if Haw Par manages to execute their business well, I expect share price to follow in tandem.
Hypothetically, if they can produce an EPS of 80cts next FY (FY2019 EPS is 82.4cts), a PEx15 ratio will value Haw Par at $12, about 28% upside from here. Meanwhile, we collect 3.2% dividend so that we can continue to buy Taro Bubble Milk Tea from Koi (not sponsored post).
Their large cash and investment portfolio also serves as a sort of downside protection. (unless we see a major crash like 2008, we’ll never know)
Conclusion
Haw Par is supported by their consistent growth, driven by their healthcare segment and huge dividend income from their investments as well as capital appreciation all these years. The pandemic has thrown a wrench into their growth plans and now the company is revving up its engines to catch up lost time.
I feel that Haw Par is an attractive investment due to its high growth healthcare segment and large investment portfolio which gives them consistent cashflow. I see that their portfolio holdings have increased their dividend and hence, I also hold a small hope that Haw Par may increase their dividend as well.
Cheers, wishing everyone a Happy Chinese New Year 2023.
