SHH (7412) - SHH Resources Holdings Berhad - A 'must have' for your 2016 Portfolio

As we bid so long to 2015 and welcome 2016, I am sure that many questions linger on the minds of investors: Are there any hidden gems left to be discovered on Bursa? Should we all just follow some senior investors' picks as they did very well in 2015? What are the themes in play for 2016? Any fresh stock ideas?
Well, let me start off by sharing with you a stock which I have discovered after much filtering, and studied thoroughly. The reason I have chosen to present this stock is because it meets my investment criteria of having both value and growth characteristics with high margin of safety. Yes, as my blog name suggests, I will be presenting you with value + growth stock picks from now onwards as and when I discover them and perhaps the stock performances can speak for themselves.

1. VALUE:
   

• SHH’s current price implies a forward PE ratio of only 5.5x. Calculated by annualizing 1QFY16 Core EPS (removing unrealized FX derivative losses). It is the cheapest among its rubber wood furniture exporting peers Latitud, Liihen and Pohuat.
  

• Forward EV/EBITDA of only 3.1x indicating that at its current price, if a company were to acquire SHH, it would only need 3 years for it to recover its investment. This explains why there was interest by Heveaboard earlier in 2015 which could very well be revisited in the near future or a new bid initiated by its larger competitors, i.e.  Latitud, Liihen or Pohuat. At its current price, the acquisition would be value accretive as SHH trades at a lower PE ratio compared to its peers.
• Net cash position of 54 sen or 26% of market cap. This allows SHH to do 3 things: 1) Become an acquirer of smaller furniture companies thus allowing for inorganic growth; 2) Embark on an expansion drive should capacity be unable to meet demand; 3) Pay out special dividends such as the 10 sen special dividend announced recently in October.

2. GROWTH:

• Revenue grew 47%yoy while core net profit surged 1096%yoy in 1QFY16. The increase in both top and bottom line were due to increased orders from customers and weakening Ringgit which I expect to continue going forward. We already have a look into the future that the next quarter should perform well as evident in Malaysia’s latest external trade performance in October 2015, where timber and timber-based products, which accounted for 2.8% of total exports, expanded RM468.3 million or 28.5%yoy to RM2.1 billion.

• SHH’s business exposure is centered on the US economy. Thus, any slowdown in the local economy will not affect the performance of the company. Meanwhile, the US economy is currently buoyant, with US Housing Starts (new houses need furniture), US disposable personal income (ability to purchase furniture) and US consumer spending (willingness to spend) all on a very healthy uptrend.

• Furniture theme remains in play with sales expected to be healthy in 2016. Furniture is considered a consumer discretionary item, meaning goods that are nonessential. In light of recent economic resurgence as shown in my previous point, strong demand for consumer discretionary goods have pushed companies and along with it, the entire sector to become the best S&P500 performer in 2015. This, along with the FED’s willingness to hike interest rates is a strong indication that the demand for furniture will continue to be strong in 2016. In addition, SHH is a good stock to hedge against a drop in oil prices as lower pump prices in the US will leave more disposable income to consumers to spend on discretionary goods.

3. TARGET PRICE:

• SHH’s should be worth RM3.61 (76% upside) by end-May 2016 after 2 quarterly results which should grab investors' attention. My target price is based on an inexpensive average peer PE ratio of 9.6x. This also implies EV/EBITDA of 6.1x which is still very reasonable considering that shareholders would normally only consider selling out at the range of between 8-10x EV/EBITDA.
• Expect next quarter results to show 8-10 fold increase in earnings yoy. Based on the trend of revenue and profits, coupled with Malaysia's external trade data and US economic data, I believe there is a strong possibility that SHH’s past 2 quarter earnings trend will continue to show in the following quarterly results.
• Good time to accumulate as share price consolidating at RM2.00-2.10 level. In addition, it is off its highs of RM2.30 after announcing a special dividend of 10 sen. It is safe to say that a lot of hot money, speculators and weak holders have most likely exited their positions leaving only the serious investors in the stock.

Disclaimer: The purpose of this blog is to share some of my findings with fellow blog readers and should not be construed as an invitation or offer to buy/sell any stock. All information presented should be verified independently by the reader and any decision to buy or sell should be based on the reader's own judgement.

SHH (7412) - SHH Resources Holdings Berhad - A 'must have' for your 2016 Portfolio
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SHH, SHH (7412), 7412, EN7412, KLSE:7412, Investing, ValueGrowthInvestor