Ming Fai announced today that the company sold their investment property in Hong Kong for a consideration of HK$263 million. These properties were valued at HK$198 million as at December 31, so this is pretty good news. It’s however not unexpected news. On the 31st of May this year Ming Fai already announced that they were looking to sell the property, and on the 1st of August they signed a letter of intent to sell the property for HK$263 million.
What will be done with the cash that is generated with the sale remains an open question for now. I like that they have sold an investment property that has nothing to do with their main business: the manufacturing and distribution of amenity products. But based on the following language I don’t expect that a lot of capital will be returned to shareholders soon. This is unfortunate since Ming Fai’s history of investing outside their core-business is a bit spotty.
The net proceeds to be received by the Vendor from the Disposal will improve the overall cash position of the Group for general working capital purpose as well as for future opportunities that may arise
While the stock price is up roughly 13% since the company announced the signing of the letter of intent I think Ming Fai is still very attractive today. If I update my valuation model of Ming Fai for the HK$263 million sale price I get the following picture (with a HK$1.04 stock price):
Author is long 3828.HK
Based on this sale, the market is currently value the amenities business at around $200mm with their cash value now over $500mm. Clearly, this is an extremely prudent valuation for a business that’s been able to produce decent and positive consistent FCF.
The reason I am still somewhat confident in this business is that even if they squander all $500mm of their cash, at a 10x valuation of the amenities business, Ming Fai is still 30% undervalued based on your estimates — I think that leaves a great margin of safety. Do you have confidence that the market will ever realize this value? Management has shown 0 ability to invest excess cash and has consistently invested in negative cash flow and return businesses — how will the market actually realize this value w.o some large capital return? It seems like they really need to buy back shares and / or pay a large dividend, which as you mentioned, they seem reluctant / unable to do.
I think saying that management shows zero ability to invest excess cash is a bit harsh. This investment property thing worked out pretty well, and some things they tried that didn’t work out they shut it down pretty fast. Not everything you try will work out, but pulling the plug when it doesn’t work is perhaps an even more important skill.
A large capital return would be the easiest and fastest way to realize value, but I think that eventually fair value will be realized one way or another. I don’t know how or when, but with enough patience something good will probably happen. And they might pay a reasonable sizable dividend this year anyway. Usually they pay out roughly 50% of earnings, so with the big gain on the real estate this years dividend might also be larger than normal. But we’ll have to see if that will indeed happen.
What do you think about the interim results? The valuation is clearly prudent so we can still generate a great return with less than spectacular amenities performance, but the 9% revenue and operating profit decline is somewhat concerning.
Their margins are still ok though. FWIW I wouldn’t be surprised if results got even worse. Apart from the declining revenue (which may or may not continue), what I don’t understand about Ming Fai is: how the hell do you maintain a 9% net profit margin selling generic towels and soap bars?
The good thing is they now have ~550m in excess cash on a ~720m market cap. They will probably pay out a decent dividend for 2016 and no matter how you slice or dice it the amenities segment made about 100m / year of net income before taxes the past five years and surely it is worth more than 500m.
Whether is is worth 500m or 1500m – I have no clue and I don’t really care.