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Felicity Investing

Author: Felicity75   |   Latest post: Fri, 9 Oct 2020, 4:27 AM

 

JcbNext Bhd (KLSE:JCBNEXT): A Net-Net Bet on Capital Allocation - by Oceania Value Investing

Author: Felicity75   |  Publish date: Fri, 9 Oct 2020, 4:27 AM


JcbNext Bhd (KLSE:JCBNEXT): A Net-Net Bet on Capital Allocation

 
By oceania value
 
 

JcbNext is the holding company previously known as JobStreet Corporation Berhad, developer of Malaysia’s leading job portal, JobStreet.com. JobStreet.com was sold in 2014 but the company is still managed by the founding CEO, CFO and CTO. 

Management owns 55% of the float and is paid a modest salary.  The company has plenty of cash but management is frugal to the point of turning off the central air-conditioning in their office block in KL last year when their main tenant moved out. Management appears to be well aligned with shareholders.

Market cap is around USD 46MM. Daily average volume is around USD 20,000. That’s around 10% annual share turnover – not totally illiquid but definitely overlooked.

As of the end of September 2019 each share of JcbNext consists of the following items at carrying value:

  • MYR 0.59 of cash.
  • MYR 0.14 of commercial property (the Wisma JcbNext building in downtown KL).
  • MYR 0.79 of 104 Corp, a Taiwan-listed job portal.
  • MYR 0.09 of Innity Corporation Bhd, a listed adtech company.
  • MYR 0.28 of Lion Rock Group Limited, a publishing conglomerate listed in Hong Kong.
  • MYR 0.02 of Nova Pharma Solutions Bhd, a listed pharma engineering consultancy.
  • MYR 0.09 of managed equity funds and unlisted equity investments.
  • MYR 0.42 of money market funds.

Each share also comes with MYR 0.09 of carry-forward tax losses and MYR 0.10 of management overhead (capitalised at 10%), most of which is associated with the management of Wisma JcbNext.

The company’s share price is currently less than RM 1.45 (and getting cheaper by the day) so this is technically a net-net in that the share price is covered by easily-liquidated assets. Net cash is MYR 0.99 per share. Unlike a traditional net-net, the company lacks a large, undervalued operating division which could provide significant upside through a trade sale or liquidation. Whilst the business is cheap on an EV/EBIT basis (5.3x), that’s because the large cash balance reduces the EV not because the return on capital is high.  Corporate action in the form of a takeover or liquidation seems unlikely. JcbNext may not be a value mirage (the assets can be reliably valued) but it may be a value trap (the share price discount may persist and the dividend is small).

My first assumption is that management will do what they say they will do and buy shares in other operating businesses rather than hoard cash. In fact, you need to believe this in order to consider investing – the company is guaranteed to under-perform the market indices over the next 10 years if it continues to hold cash and the share price doesn’t re-rate. 

Management are self-professed value investors. Their reporting suggests they are trying to invest in good quality companies at reasonable prices. They quote Warren Buffett, but then so do a lot of people. To evaluate their skills I’ve reviewed their main investment decisions to date below. The main thing I’m interested in here is whether or not I think they made a good decision, not whether or not the investment worked out.

Sale of JobStreet

The JobStreet.com business was sold to Seek Ltd (ASX:SEK) for MYR 1.73 B in 2014. That’s an EV/EBITDA multiple of 22.2 or a P/E of 30.7 for a rapidly maturing business which was growing revenue at 10% whilst paying our 75% of earnings as dividends. That’s equivalent to around a 12% running return, assuming the business could keep growing at that rate. To me, that is not a cheap price given that most of the projected return is from growth in a business that is quite mature. If you compare that to the selling methodology that I wrote about previously, I would certainly have gone ahead with the sale at that price.

Management’s growth of Jobstreet.com from 2004 created a phenomenal amount of shareholder value – more than 26% CAGR in per share dividends and NAV growth for the period from 2004 to 2018.  Impressive, but that’s not the business model the business will be using in future.

 

104 Corporation (TW:3130)

The company began accumulating 104 Corporation shares in 2009 and continued buying during the GFC, reaching a 22.2% ownership stake in 2010. At that time, 104 was growing revenue at around 20% and paying a 6% dividend yield. Importantly, 104 has a business model that JcbNext’s management is very familiar with.

104 currently grows at around the same rate as Taiwan’s GDP and pays JcbNext around double the dividend that it did in 2010. I estimate it is worth around 25% more than the current carrying cost.  This position now makes up around ⅓ of JcbNext’s NAV which is fine considering 104’s entrenched market position.

Innity Corporation Bhd (KLSE:INNITY)

JcbNext bought a 23% stake in Innity at around the same time they accumulated their position in 104 Corporation. At the time they acknowledged that the advertising industry would struggle in the short term. The company paid a P/S ratio of 0.79 for a business that should have an operating profit in the mid-teens or higher. At the time Innity’s profits were depressed but the company was growing at 16% during an economic downturn.

Innity has since grown revenue by 11x and continues to have low single-figure percentage revenue growth. Despite the rapid growth and despite paying down the debt used to fund it, Innity sells for an even lower P/S (0.56) than it did 10 years ago. I believe this is because despite being consistently profitable, Innity hasn’t yet shown the kind of operating margins I expect from an advertising business. In terms of share price, Innity has been a four-bagger for JcbNext but I doubt it will contribute to JcbNext’s income until something is done to improve margins.

 

Lion Rock Group Limited (HK:1127)

Lion Rock’s story is a bit complicated. JcbNext bought 20% of Recruit Group Limited via a share acquisition and subscription in 2007. At that time Recruit Group was an online recruitment portal with legacy printing and publishing operations.

As part of the deal, JcbNext received a 7% dividend yield on the purchase price for the first three years. The purchase was priced at a P/S of 0.25 for a company with 22% operating margins growing revenue at 31%. That’s a staggeringly cheap price for a business model which is now known to be very profitable. I don’t know how obvious that would have seemed in 2007 but JcbNext’s management were well placed to judge.

Recruit Group was subsequently renamed and then span off its printing operations in 2013. These are what make up Lion Rock. I’m yet to spend a lot of time digging into Lion Rock but I do know that 8% of it is owned by David Webb.

Nova Pharma Solutions (KLSE:NPS)

I’m not as impressed with the decision to buy 9.45% of Nova in 2017. The company paid a P/S of 3 to buy a project-oriented company, albeit one with high operating margins (37%). This is only a small position (<1%) for JcbNext but I don’t know if the price paid was cheap enough to compensate for the cyclicality that I believe NPS will experience.  NPS does work in an industry that seems to have less competition than most so this investment may work out in the long run.

AsiaTravel.com Holdings Ltd

It’s not totally clear when JcbNext bought into AsiaTravel but they first mention their holding in the 2010 annual report. So we know they were happy to hold the stock at a P/S of 1.3 to 2. More mature online travel agencies were able to achieve operating margins of >30% at that time and AsiaTravel was growing revenue at 15%.

AsiaTravel has since been delisted and the investment (MYR 3.4 MM at cost) written down to zero by the company. This looks like a reasonable purchase decision that unfortunately didn’t furnish a good result.

 

What I can see from the above (small) selection of positions is:

  • Management tends to size positions in a way which matches the durability of the business.  Small positions such as 104 have been allowed to grow into larger positions as the underlying companies have grown and established resilient market positions.
  • Purchases of companies which are less robust have been sized smaller.
  • Management shows restraint in not paying too much for businesses.  They haven’t succumbed to the late-cycle practice of over-valuing growth.
  • There’s no tendency to buy deep-value businesses.  You could argue that Lion Rock falls into this category but this was not a deep-value play at the time of purchase.
  • In the absence of attractive acquisitions the company buys back its own shares at deep discounts to NAV.  These guys are not hoarders.

The above actions match management’s written intent – the letter to shareholders in the 2016 annual report is worth a read for a detailed list of the type of investments management plans to buy.  The only thing that is missing is evidence of their ability to buy large positions in suitable companies. Given recent market valuations I think this is fine – I’m looking in similar markets and not seeing anything that would meet their specifications (Note – I originally wrote this article in Jan 2020, valuations have obviously changed since then).

To summarise, JcbNext is an opportunity to pay less than MYR 1.45 for MYR 1.41 worth of productive assets (at book) plus MYR 0.99 of cash.  The return on the productive assets is currently less than the long-term market average but the evidence suggests that the cash will be deployed at rates of return which exceed the market, when suitable opportunities become available.

JcbNext currently has around a 4% EPS return, pays a small dividend (~2.7% yield) and buys back a little over 1% of the float each year.  In the short term the company will almost certainly underperform the long-term market average. But I don’t think I can match the long-term market average performance in the short-term either.  

Disclosure: The author holds shares in JcbNext at the time of writing.  This is not a recommendation to buy or sell any securities, nor is it financial advice.  All information presented is believed to be reliable and is for information purposes only.  Do heaps of your own research before purchasing any security.

http://oceaniavalue.com/jcbnext-bhd-klsejcbnext-a-net-net-bet-on-capital-allocation

 

Summary 

  • Management owns 55% of the float and is paid a modest salary.  The company has plenty of cash but management is frugal to the point of turning off the central air-conditioning in their office block in KL last year when their main tenant moved out. Management appears to be well aligned with shareholders.

  • The company began accumulating 104 Corporation shares in 2009 and continued buying during the GFC, reaching a 22.2% ownership stake in 2010. At that time, 104 was growing revenue at around 20% and paying a 6% dividend yield. Importantly, 104 has a business model that JcbNext’s management is very familiar with.  I estimate it is worth around 25% more than the current carrying cost.  This position now makes up around ⅓ of JcbNext’s NAV which is fine considering 104’s entrenched market position.

  • Management tends to size positions in a way which matches the durability of the business.  Small positions such as 104 have been allowed to grow into larger positions as the underlying companies have grown and established resilient market positions.

  • Management shows restraint in not paying too much for businesses.  They haven’t succumbed to the late-cycle practice of over-valuing growth. There’s no tendency to buy deep-value businesses.  You could argue that Lion Rock falls into this category but this was not a deep-value play at the time of purchase.

  • In the absence of attractive acquisitions the company buys back its own shares at deep discounts to NAV.  These guys are not hoarders.

  • To summarise, JcbNext is an opportunity to pay less than MYR 1.45 for MYR 1.41 worth of productive assets (at book value) plus MYR 0.99 of cash. The return on the productive asset is currently less than the long term market average but the evidence suggests that the cash will be deployed at rates of return which exceed the market, when suitable opportunities become available.

     

 

Labels: JCBNEXT
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Philip ( buy what you understand) Hi Felicity, a good sharing. But I think you are only listing the rewards of investing in JCB, without posting the risks. If you can allow me to put in context. If we compare 2019 annual reports,

1. The lowest risk investment is to buy fixed deposit, which yields 2-3% in 2019. This is followed by buying keep, which yields 6.3%, and lastly buy sp500, which last year yielded 13.6%. these are investments which have very low failure risk compared to active investing. By buying these passives, you can concentrate on your day job, not worry and doing other things that interest you. So if you want to invest actively buying stocks, your long term results must justify aka beat these results: otherwise why risk your capital when you can find a better deal at lower risk elsewhere?
09/10/2020 6:23 AM
Philip ( buy what you understand) 2. Last year for an investment of 1.45, you received 4 cent dividend, which is 2.8% in dividend yield. Is this a good return? Last year you can buy fixed deposit where the value of your investment is guaranteed at par rm1, and you still get the same dividend yield. If so, is it worth having the share price drop from 1.45 to 1.18 during the period for a "fixed deposit" return? Is it worth taking the risk of 22% drop in the value of your investment for a measly 2.7% dividend yield? How is that low risk tempered by high returns? One should always try to maximize return and minimize risk, which JCB doesn't seem to be able to offer.
09/10/2020 6:29 AM
Philip ( buy what you understand) 3. In terms of usage, the ability of a company to maximize returns of capital is very important. Why jobstreet was so successful is because they free by 26% cagr over a long period of time. Which is very exciting for the buyer. How about today? How much is the return on equity over the assets employed? I think it's a horrible waste of investment dollars. With 300+ million in assets (2.40) it is only making around 10 million in returns or year. 3% growth yoy?? If a company is earning 3 cents in the dollar, it is a very poor use of shareholder investment indeed. If we take sp500 for example, the cagr is 13 cents to the dollar for passive investing. How do you justify putting money into the shares of a nonperforming company? Just because it is cheap we buy it hoping for revaluation of assets to the 2.40 price? Using that as a basis of value is not very rational in my opinion.
09/10/2020 6:41 AM
vvcb Thanks Philip for a sanity check.
13/10/2020 12:51 PM

This stock equity portfolio outperformed the market for 10 years but share price selling way below its NTA!

Author: Felicity75   |  Publish date: Sun, 4 Oct 2020, 12:39 AM


JcbNext Equity Portfolio Performance

10-year CAGR 11.4% vs 5% for KLCI

 

 

 

Mark Chang, The Warren Buffet of Malaysia

 

LETTER FROM THE FOUNDER & CHIEF EXECUTIVE OFFICER

Dear shareholders,

For 2016, we saw the exit of some of our larger shareholders. After holding on for a couple of years since the sale of the JobStreet.com operation, SEEK was keen to sell their shares and some other substantial shareholders through the years thought it was a good time to exit as well. Albert (Wong Siew Hui) and I decided to buy their block of shares which triggered a Mandatory Take-Over Offer to the rest of the shareholders. As the result of this exercise, management (including myself) now emerges as the majority shareholder of JcbNext. Hopefully, shareholders will now have extra comfort knowing that, being the majority shareholder, the management's interest will be more aligned with the rest of the shareholders. With this corporate exercise, it also allows management to focus on longer-term and not short-term results.

The aspiration of JcbNext moving forward is to be a listed company that can continuously distribute dividends to shareholders every year and for many years to come. For that, our investment focus is on companies that are able to generate good free cash flow and willing to distribute those free cash as dividends back to shareholders. We are also mindful and conservative with our finances - we don't have much debt and prefer not to have any debt at all. Debt always increases the risk to our Company and has a higher chance to interrupt our future dividend payout. As management of this Company, our ultimate performance goal is the dividend payout to our shareholders. Revenue, profit, book value, share prices and others are secondary objectives.


 

 

As for the type of companies we are looking at, we look for both listed and unlisted companies and we don't mind buying a minority interest or 100% of companies.

 

The criteria we look for will be:- 

 

1) Good business. We define good businesses as businesses that have good loyal customers, do not require a lot of capital reinvestment, a healthy profit margin, relatively stable business in operations for a number of years, and not in an overly competitive industry. Good businesses will generate good free cash flow that can be returned to shareholders as dividends. 

 

2) Shareholder-friendly management. Good management is a given criteria for any good company. Equally important is having a shareholder-friendly management so that when there is extra profit, those profit will be managed to the best interest of all the shareholders. Those extra profit can be reinvested in the company for future growth or returned to the shareholders as dividends. Non- shareholder-friendly management will use those extra cash for the benefit of their personal interest first. So the company could be a good business but as a shareholder, we receive only a small portion of our rightful share of the gain or potentially none at all. 

 

3) Right price. Even for a good business with a shareholder-friendly management, our investment will still be bad if acquired at a high price. It is important that we are conservative in our valuation of businesses so that we have a good margin of safety in our investments. As our main goal is investment for future dividend, we can compare the potential dividend return from an investment opportunity presented to us, versus returns from alternatives like S&P 500 ETF, KLSE Index ETF or money market fund. We could be busy evaluating all the various business ventures everyday but if the price is not right, we will not do any investment and we don't mind waiting for years to find the right company at the right price. This is an advantage JcbNext has as compared to other companies such as fund management companies where they have pressure to invest all year round even when the market is near its peak.

 

 

 
 
 
 
 
 
Share price has diverge from that underlying value of its assets significantly 
 
 
 
 
Share buyback as management believes JcbNext shares are undervalued at a substantial discount to book value 
 

		

 

 

Paying 50 Sen for RM1 Bill 

Cash-rich JCBNext trades at  mindblowing 50% discount to its net asset value! Market price RM1.45 and there is RM 2.93 of net assets where majority are in cash and investments in liquid assets. Put another way, you are paying only for its investment in associates 104 Corp ( Jobstreet of Taiwan) and Innity Berhad (refer Appendix). You get the rest for free - cash and cash equivalent, liquid assets and investment property worth RM 1.50 per share. What a bargain.

 

Cash and Cash equivalents: RM 95 million 

+ Investment in associates and other long term investments (fair value): RM 280 million

+ Investment properties: RM 19 million 

+ Other assets: RM 2 million

- Total liabilities: RM 2 million 

= Net assets: RM 404 million 

/ Shares outstanding: 135 million

Net assets per share: RM 2.93

 

 

Insider buying and share buybacks

 Independent Director and former major shareholder of Jobstreet.com Lim Chao Li has been accumulating shares lately. JCBNext also buying back shares aggressively.  JCBNext has good track record in share buybacks and cancellations which really create value for shareholders. The management had indicated share buybacks as a way to return value to shareholders. Jcbnext had cancelled more than 2 million shares and expect more cancellation as it aggressively buying back shares. 

 

 

Labels: JCBNEXT
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Probably the most undervalued stock on Bursa Stock Exchange. A takeover target? - Felicity Investing

Author: Felicity75   |  Publish date: Sat, 19 Sep 2020, 9:30 PM


 

1) Cash-rich JCBNext trades at  mindblowing 53% discount to its net asset value! Market price RM1.38 and there is RM 2.93 of net assets where majority are in cash and investments in liquid assets. Put another way, you are paying only for its investment in associates 104 Corp ( Jobstreet of Taiwan) and Innity Berhad (refer Appendix). You get the rest for free - cash and cash equivalent, liquid assets and investment property worth RM 1.50 per share. What a bargain.

 

Cash and Cash equivalents: RM 95 million 

+ Investment in associates and other long term investments (fair value): RM 280 million

+ Investment properties: RM 19 million 

+ Other assets: RM 2 million

- Total liabilities: RM 2 million 

= Net assets: RM 404 million 

/ Shares outstanding: 135 million

Net assets per share: RM 2.93

 

2) Insider buying and share buybacks. Independent Director and former major shareholder of Jobstreet.com Lim Chao Li has been accumulating shares lately. JCBNext also buying back shares aggressively.  JCBNext has good track record in share buybacks and cancellations which really create value for shareholders. The management had indicated share buybacks as a way to return value to shareholders. Jcbnext had cancelled more than 2 million shares and expect more cancellation as it aggressively buying back shares. 

 

 

 

3) Proposal to venture into healthcare services. At its 13th AGM, Management had indicated they are looking into the healthcare services as a potential investment. There are also proposal to venture into retirement homes. With RM 95 million cash and RM 48 million short term investment, JCBNext can put cash to work immediately.

 

 

Source; 13th AGM Summary of Key Matters - JcbNext Berhad 

 

——

Appendix

 

Company Overview

JcbNext Berhad is an investment holding company. It owned and operated the JobStreet.com online job portal business from 2004 to 2014. In 2014, the job portal business was sold to SEEK Ltd for close to RM2 billion with the net proceeds paid as dividends to shareholders.

 

JcbNext Berhad has stakes in associates, 104 Corporation, the largest job site in Taiwan and Innity Corporation Berhad, a leading provider of interactive online marketing platforms and technologies in Malaysia. It also has a majority stake in a small consultancy business in Japan and operates the Autoworld automotive classifieds and stake in a small consultancy business in Japan and operates the Autoworld automotive classifieds and content website. JcbNext also has quoted investments in Malaysia, Hong Kong and Singapore and owns a 8-storey office building in Kuala Lumpur and a 2-storey shoplot office in Johor.

 

Total market value of JCBNext equity portfolio had nearly doubled to RM 227 million in 2019 vs cost of RM 118 million.

 

 

JCBNext paid special dividend of RM 2.65 per share after the job portal business Jobstreet.com was sold to SEEK Ltd. today it’s investment portfolio is worth RM 280 million. Should the company decides to liquidate the portfolio, shareholders may expect a special dividend of RM 2.08 per share.

 

 
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Sslee Thank god. Now Insas is no more the most undervalued stock in Bursa.
20/09/2020 9:37 AM
CharlesT Pirated version of Felicity???
20/09/2020 10:30 AM
stockraider Jcb a Much better choice than icap loh...at least u get a decent dividend mah....!!
20/09/2020 1:50 PM
speakup never heard of value trap?
21/09/2020 3:55 PM
Philip ( buy what you understand) Wow!!!! Must buy stock!!!
22/09/2020 6:12 PM

5 things I learned at JCB's 2017 AGM

Author: Felicity75   |  Publish date: Sun, 6 Aug 2017, 2:46 PM


 

1. JCBNext's equity portfolio greatly outperformed the benchmark KLCI over the last 8 years. Based on presentation slides by CFO Greg Poarch, the equity portfolio achieved annualised return of 12.4% from 2008 to 2016 vs 5% for KLCI. Total market value of JCBNext's equity portfolio had doubled to RM 222 million in 2016 vs cost of RM 113 million.

 

 

2. JCBNext's largest equity investment is 23% stake in 104 Corp which had market value of RM 149 million as at 31 December 2016 vs cost of RM 75 million. The Chief Investment Officer of 104 Corp was present to give a presentation on the company background and expansion strategies. 104 Corp is the largest online job portal in Taiwan with over 70% market share. 104 Corp has very good track record, pay dividends every year since listed, and has over RM 270 million cash with zero debts. Here is the track record of 104 Corp's dividend payment. (JCBNext should receive around RM 10 million cash dividend from 104 Corp this month.)

 

 Source: 104 Corp

 

 

3. Would JCBNext share part of its earnings in the form of dividends? JCBNext has very good track record of dividend payment. The management mentioned they will preserve cash for acquisition so that they can pay more dividends in the future. The company had paid over RM 2 billion dividends since 2000.

 

4. JCBNext is looking to acquire operating businesses that can generate good free cash flow and distribute dividends back to shareholders. The management said they have looked into many investment opportunities but the high pricing prevent them from making investments. CEO Mark Chang said they are glad that they did not invest because prices have come down a lot. They will continue to look for good investment opportunities but only at the right price. Recently, they have looked into the healthcare services as a potential investment.

 

 

5.  The stock trades at a substantial discount to revised net asset value. Market price is RM 1.78 per share and there is RM 2.65 per share of net assets with the majority in cash and investments. The management will consider share buybacks as a way to return value to shareholders. JCBNext has a good track record in share buybacks and cancellations which create value for shareholders.

 

Cash and investments in money market funds: RM 132 million 

Investment in associates and other long term investments (fair value): RM 222 million

Investment properties: RM 20 million 

Other assets: RM 1.51 million

-Total liabilities: RM 2.37 million 

Net assets: RM 372 million (RM2.65 per share)

 

 

I think JCBNext's book value will grow steadily over time through the growing earnings of its investments and the cash that it can deploy into new investments and/or operating businesses. Another thing is Mark Chang owns 54% stake worth roughly RM 140 million. He is well known as a shrewd investor and a frugal CEO. I am confident he will do what is right and good for the shareholders as he had done for the shareholders of Jobstreet.com. 

 

 

 
Labels: JCBNEXT
  2 people like this.
 
Nadalchong I like Mark Chang. Made tons of money investing in jobstreet. Mark is one of the top CEOs in Malaysia. Good price to buy more.
06/08/2017 9:00 PM
MrPauper Revenue and profit are secondary objectives. Dividend is the priority. If the management is too conservative and not enough revenue thus profit are generated, how will there be justifiable dividend return be paid out?
06/08/2017 9:15 PM


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