Diving into the companies of Peter Cundill's Screen

18 companies but only three will pass....

Good Sunday everyone!

Last week, I screened for stocks the Peter Cundill way. To quickly recap the criteria were the following:

• Price to Book under 0.6

• Dividend Yield over 6%

• Price to Earnings under 6x

• Earnings growth

• Current Assets > Total Liabilities

• EV/EBIT < 4x

• ROE > 10%

• Companies that doesn't dilute you outside of big mergers. 

That leaves us with 18 companies.

Man King Holdings

A company that does construction in Hong Kong and China? How much more macro risk could you take? At least that's what I thought when I read the initial company description. However, not all is what it seems. First the company is really small at around USD$16m market cap, and what is more important - they don't built residential real estate in China. Instead they built public projects for the city of Hong Kong and they are developing projects in Pakistan for the Belt and Road Initiative (also knows as One Belt One Road). The Belt and Road Initiative is a strategy by China to strengthen trade partners and the Chinese influence over them, by investing in them. This strategy is hugely important for China, and as a result - I doubt that they reduce their spending there. While the construction business always comes with the risk of not getting a contract, at least the big macro risk of falling Chinese real estate prices and the following rut of construction isn't affecting Man King.

From this One Belt One Road project in Pakistan, the company received a USD$1.9m dividend or HK$15 -  a big part of their 36m net income. Furthermore the company gained two important contracts, increasing their revenue by over 50% in the last year.

The company also has a negative enterprise value and trades at less than cash and cash equivalents. This company looks super interesting so I put it into the "more research" basket.

Tak Lee Machinery Holdings

Another small company with just USD$ 27m market cap that sells and leases heavy machinery for the construction and mining business. This makes the company much more cyclical than Man King who mostly do government funded projects. Furthermore according to the latest management reports, they are losing contracts. For that reason, I pass.

EFT Solutions Holdings

The smallest company so far with just USD$10m market cap is a payment solution service provider. They are basically a reseller of payment solutions for small companies. The company has a complicated corporate structure being incorperated in the Cayman island, with its parent being in the British Virgin Islands that is controlled by the CEO and the properties are rented from another company that is owned by the CEO and his spouse. For that reasons, I pass.

K&P International Holdings

With USD$17m market cap it is another company in the nano cap category manufacturing electronic calculators, alarm clocks and silicone rubber products. The first thing that I don't like, is that their earnings the first six months of 2022 are one third than the were the year before and they cut the dividend in the first half as well. The dividend is higher only because they paid out a special dividend to celebrate the company's 25th anniversary as a listed company. They justified the drop in earnings due to many customers requesting a delivery delay due to microchip shortage, but if there are more delays, the company might take a big hit. For these reasons, I pass.

Lubelski Wegiel Bogdanka

The first Polish stock in our list. And it is a coal company that also provides mine services. With a market cap of USD$287m it is our biggest company so far. Just like most coal companies it is exceptionally cheap and has actually increased production in 2022. Coal is by far the most important electricity source for Poland and will be for the foreseeable future. After comparing it to other coal companies like Peabody, Whitehaven Coal and Yancoal, I pass. The company is not a lot cheaper than others and has worse reserves from what I have seen.

Tat Seng Packaging Group

This Singaporian paper package provider has a market cap of USD$76m. One potential red flag is that the CEO is CEOs and Director in several other companies as well, most of which didn't do too well in terms of shareholder returns - one of which is an investment company and owns big part of the Tat Seng Packaging. Furthermore, the previous CEO declared bankruptcy and the company was repeatedly fined for discharging waste into the public sewers. The last half year report wasn't too great as well, with operating income falling more than 15%. For all these reasons, I pass.

Goodfellow Inc

Goodfellow is the only Canadian company on the list and in a sector, that grabbed a few headlines due to its meteoric rise and fall the last two years: Lumber. With USD$77m market cap it is rather small, especially compared to the big players like Resolute Forest Products. Despite falling lumber prises, the earnings of the company have been very stable, with revenue barely decreasing and earnings being identical to the previous year. However looking at their industry, the company is higher valued than others - and that despite having historically lower margins. For that reason, I pass. 

Anhui Conch Cement Company

Just as the name suggest, the company sells cement. With USD$20b, it is also by far the biggest company so far. In their latest quarterly report, earnings nearly halved being linked to the Chinese real estate boom and bust. Given that their payout ratio for the dividend was 55% last year, annualising the last two quarters, would mean that the dividend falls under 6%. The company has been decently managed in the past, but since it is impossible to forecast how the Chinese real estate market will develop (at least for me) -  I pass.

Base Resources

Base resources is a mineral sand producers in Africa, that is listed in Australia. Their operations are in Kenya and in Madagascar. EBIT increased significantly from 2021 to 2022 due to the rising zircon and ilmenite/rutile prices. The Madagascar government suspended the on-the-ground activity in 2019, so the company only has income from the Kenya. At the same time, the main operation there has the mine life end in 2024. While the company explores further options in Tanzania and is pushing to start production in Madagascar, for me the risks are too high here. So I pass.

Crystal International Group

Another Hong Kong stock at around USD$700m market cap. It is a holding company that manufacturers and trades garments in Asia. The numbers are impressive. In the first half of 2022, the companies earnings and sales rose 17% compared to 2021.

However this has been mainly due to sportswear and intimate rising quickly. The founder and his wife hold 80% of the company. Inventories have gone up quite a bit, which is worrying. The thing is that while there are no immediate red flags, I find the garments and fashion industry to be extremely complicated. For this reason, I pass. 

Kingboard Holdings

The biggest HK stock so far with a market cap of USD$3b is Kingboard Holdings, which manufactures laminates and printed circuits boards. The company sold properties to a director, which isn't a good look. Furthermore earnings have come down due to Impairment losses on the bonds the company holds. Nearly all of those bonds are from Guangzhou R&F Properties, a Chinese Property Developer. Given the added risk on their balance sheet and the ballooning inventory levels I pass.

Kupiec S.A.

The smallest company by far with just 1.28m $USD is this Polish transport company. Due to the size of the company and the deteriorating fundamentals, I pass.

Zaklady Azotowe Pulawy S.A

This USD$310m big Polish company manufactures and sells fertilisers worldwide. With the high gas prices in Europe, I am not sure how long this company can compete against fertiliser that comes with cheaper gas from the US companies - who all try to ramp up production. I have tried to forecast prices, but as I found it impossible to do so, I pass.

Lion Rock Group Holdings

With just USD$69m market cap this company provides printing services. The company has good sales and revenue growth in the past, partly founded by acquisitions that still continue to this day. 

While the first half of the year was very strong, the company expects the second one to be more muted as retailers will work through the high inventory they built up over the last year. The company looks very interesting operating in a legacy sector. Furthermore David Webb, an activist investor is involved with the company. For this reason I will look more into the company. 

Stellantis

By far the biggest with over USD$45b market cap is this car company who owns Fiat, Dodge, Chrysler, Alfa Romeo, Citroen, Jeep, Maserati, Lancia, Opel, Peugeot and Ram. While there are a few great Lancia cars in the past, these are all brands that are on my avoid list when buying a car. While I might be negatively biased towards their cars, their earnings are impressive and the valuation is cheap. It looks like we enter a down cycle for cars and earnings will come down, but it is still extremely cheap. Furthermore Peugeot has considerably upgraded the looks of their cars going from ugly to ok. For this reason, I will do more research into the company. 

Build King Holdings

The company mainly does construction for civil engineering in Hong Kong. New contracts have been going down and they are missing several to keep earnings in tact. Additionally the company isn't as diversified as Man King Holdings, and very reliant on contracts from Hong Kong. For this reason, I pass.

E-Commodities Holdings

Another coal company, who follows the industry trend of slightly lower volumes, but increased revenues. The volume decrease is due to Chinese steel production slowing as the housing demand goes down. But just like the Polish coal company, it is not cheap enough in my opinion given the lower quality of the assets.

PC Partner Group Limited

This company mainly produces graphics cards under the Zotac brand. With demand slowing due to the crypto winter and rising inventories, there is a lot of uncertainty around it. Searching4Value mentioned in his blogpost that when the companies goes back to it's historically 2% net margins, it isn't nearly cheap enough. I agree, and for that reason I pass.

Conclusion

Out of the 18 companies, I will only investigate three companies. These could not be more different. A Hong Kong Civil Engineering company with allocation to the Belt and Road initiative, one small printing company and a giant car manufacturer. The companies based in Hong Kong are very small, with USD$18m and USD$69m respectively, while Stellantis is more than 600x the size of Lion Rock Group Holdings with  $45b market cap. 
I look forward to analyse these companies more in-depth and will update you if I initiate a position in one of them. 

If you have any info on Stellantis, Man King Holdings or Lion Rock Group -  feel free to comment!