Deswell Industries is one of my longest held stocks. I bought my first shares more than six years ago on March 6, 2012 and sold my position last week after reviewing the latest annual results. The company isn’t exactly expensive, but it’s not longer a net-net since NCAV is $3.13/share while the current price is $3.25/share. If we take the value of all non-operating assets, and slap a 8x multiple on last years operating earnings we get a very similar value of $3.18/share. So right now Deswell isn’t expensive, but probably fairly valued, and after more than six years I think it’s time to move on to something else. I have always been a bit hesitant to sell this stock because of the years of continues insider buying which at some point in time will probably culminate in a going private transaction. But I don’t have unlimited patience…
Deswell Industries went up 53% in the more than six years that I held the position, and while that is not bad, you would expect a mediocre annualized return. But thanks to all the dividends ($1.04/share in total!) that the company paid in the meantime the internal rate of return was actually a pretty satisfactory 15.10%. Better than I expected before I did the math for this post.
No position in Deswell Industries anymore
I was thinking about adding some shares after the last earnings report. The top-line was impressive and the bottom line heavily impacted by items that are probably temporary (FX, raw material cost). I have no idea how sustainable the current top-line is (and if there is room for even more growth), but the insider buys up till 2.70 a share provide some comfort. Decided not to add until I see further insider buying. I agree with you that a going private transaction seems a likely scenario in the long-run.
I know that your calculation is a back of the enveloppe one, however looking a bit different at the numbers can have quite a big impact here.
– Value of PPE / rental income: The company leased part of their properties to third parties for 839k USD in FY17 and increased this to 630k USD in the last 6 months. Resulting in a run-rate rental income of ~1.2m USD. I think it makes sense to add the majority of this to the operating profit in your valuation.
– Gross margin (bullish view): mostly temporary suppression related to FX and raw material costs
Yeah, that a fair point. Adding rental income to operating income would be fair. No so sure about your view on future gross margins. Was 16% in 2018 which isn’t too bad considering it was around 10% in 2014, 2015 and 2016… and there is also the issue of taxes. They haven’t paid a lot in recent years, but I believe their theoretical tax rate should actually be 25%.