It’s been close to two months since I’ve written about a potential investment on this blog. That’s not to say I haven’t been in the markets each day, rather the opposite. As you know, some things just don’t change about a person. I’ve been passionate about the markets since I was 13, well before I started writing this blog. Now, I just realize the gaps between when I document my research and when I don’t. Nevertheless, I found a company that really perked my interest, mostly because I thought the valuations were closer to the side of “ridiculously inexpensive”. I had to dig in. Before I dive in, I would like to mention that I am doing another portfolio review coming up in the next couple of weeks or so, so be on the lookout for that!
Asia Pacific Wire & Cable Corp, Ltd. feels like a Benjamin Graham net-net, and on the surface it looks like it. However, after checking out recent quarterly statements and annual reports, the company appears to be heading back towards positive free cash flow. Trading at 4x earnings, 0.21x book, and an EV/Revenue ratio of 0.23x, Asia Pacific Wire has the potential to be an extremely valuable play if revenues can equate back to positive FCF. The company has also been buying back shares over the last few years, and sports an earnings yield of 19.64%. Finally, Asia Pacific Wire sports an NCAV per share of $12.37, meaning if the company went completely solvent, sold off all its assets and its debt, it would be worth around $12/share. It is currently trading at $2.55.
Asia Pacific Wire & Cable Corp Ltd. (APWC from here on out) was formed in 1996 as a Bermuda exempted LLC. As a holding company through its subsidiaries, the business is engaged in manufacturing and distributing telecommunications cables, power cables, and enameled wire products in the Asian Pacific region. These products are used in a multitude of ways; from infrastructure projects on commercial / residential properties, to electronics, building automation, and audio products. The company also acts as the main distributor of copper rod and wire products for Singapore. Also, in 1997, the company began offering SDI project engineering services for their products in Singapore.
Back in 2013, the Company underwent a transition of their operating segments. After recognizing that under the old operating segments, manufactured products represented nearly 90% of total revenues, the company decided to split their operating segments into three categories: Thailand region, North Asia Region, and Rest of World (ROW). The company owns majority stakes in Asian countries such as Hong Kong, Singapore, Korea, as well as other non-Asian countries, namely Australia.
A Sticky Business Model
Along with the manufacturing and distribution of their wire products, the company recently started the SDI Project Engineering Services avenue of their business. This peaked my interest, because the company recognized that not only can they generate revenues through the outright sale of their products, but by entering into contracts to develop, supply, and then install the products, they make their business more sticky with their customers. In essence, the SDI Project Engineering Service segment of the business creates a virtual one-stop-shop for telecom cable customers.
Watching Out For Copper
Before diving into the valuations, metrics, and trends of revenues / sales, it should be noted that copper is the biggest commodity the company uses. A majority of their products (and telecom products as whole, for that matter) use copper as a main raw material input. That the price of copper should swing any which way in a dramatic / volatile fashion makes this play a bit more difficult, but not impossible. The company acknowledges this in their latest 10-K, and uses commodity trading, as well as baking in the rise or fall of the price of copper into their selling price to reduce the hit it takes on the underlying margins of the business. PEWC is APWC’s leading copper supplier, and has been since the company’s founding. Although APWC receives a majority of its copper material from PEWC, it has made strides to diversify where it buys its copper in an effort to get the most competitive price. I like this because it shows the company recognizes the danger that can come from a sole dependence on one input supplier.
Recent Company Trends
Besides a tumultuous 2015 in which the company recognized negative net income due to what they claimed to be a material weakness in their ability to adjust foreign exchange rates (the company claims to have resolved this issue), revenues and net income appear solid. Over the last year, the APWC’s revenue increased 10.57%, with a 35% increase in Thailand, an 8% increase in North Asia, and a 14% decrease in ROW (Rest of World). Through this 10% increase in revenue, the company recognized a 25.56% increase in Gross Profit.
Cause of Revenue Growth
The company experienced tremendous growth in Thailand mainly because they were able to snag more government contracts, which is great because once a company gets those contracts, its hard for them to give them up if they perform well and get the job done (barring any company from coming in and undercutting significantly). Revenues were also encouraged upwards due to an appreciation of the Baht against the USD. North Asia increased sales by 8.1% primarily due to increased orders that were transferred to APWC due to other wire and cable manufacturers closing shop because of “environmental issues”. Finally, revenue growth for ROW was negative primarily due to a 25% drop in revenue from the company’s product Sigma Cable in China. With the quarter drop in revenue from the cable product put aside, the company did recognize a revenue increase of 21% in APEC due to an increase in sales of their Distributed Products.
Gross Margin %
Gross Margin improved across all domains over the last year. Thailand increased GM from 8.78% in 2016 to 9.77% in 2017. North Asia increased GM 2% YoY, and ROW increased close to 1%.
Assessing the Competition
The company acknowledges that the cable and wire industry in the Asian Pacific Region is high competitive, however, due to a more state-centered style of government, there are a few caveats to that highly competitive market. In Thailand, APWC is one of the five largest producers of cable and wire products. This is important because only these five producers are approved by the Thai Industrial Standards Institute. Why is this important? Only companies that are approved by the TISI are allowed to bid for government-commissioned projects. Talk about a significant barrier to entry for the competition, the moat is deepening.
Singapore offers a natural moat from new competition due to what the company claims as high capital costs of operating within Singapore. The company says they don’t presently anticipate any new competition on the domestic front in Singapore, going so far as to say their market share should not in any way be damaged over the next year or two, but claim they are in stiff competition with Chinese imports.
Australia is arguably the most “moaty” subsidiary the company possesses. Besides APEC (their subsidiary in Australia), there are two major players in the wire and cable production business: Olex Cables & Prysmian Cables. With respect to cable imports, Australia’s two main players are General Cables & Electra Cables. However, despite increasing their market share relative to APWC’s subsidiary APEC, there is one item of business the company has on its competition: Location, location, location. APEC is the only power cable producer in the State of Queensland. Using this geographic power, the company seeks to take advantage of its comparative proximity to Queensland-based customers. Other barriers to entry for their Australia business include strict import duties and stringent Australian cable specifications standards.
Finally, China is occupied by the company’s subsidiary PEWS, which manufactures enameled wires for video & audio products in South Chinese markets. PEWS is the only major enameled wire producer in the Shanghai region and supplies mainly to transformer, motor and coil manufacturers. Outside of domestic dominance, it faces competition from importers in other provinces.
Do The Numbers Back It Up?
For its small size (using market cap), APWC has a surprising amount of moat around its business. I will be the first to tell you that I came into this research assuming this would be a typical Ben Graham Net-Net, where the business is basically worthless, and the company should just declare bankruptcy to fulfill value for its shareholders. However, the more I dug into the company, I started to pull the strings into a business that dominates in local arenas while sheltering itself from outside competition. Most importantly, the numbers back up the qualitative story previously painted (all of these ratios are out of 8 competitors).
APWC shines compared to its peers in many categories. It leads its competition in Current Ratio (279.46%), sports the lowest debt ratio at 33.45%, highest ROA with 4.04%, third highest ROE at 6.07%, third highest Profit Ratio (Net Income / Net Sales) of 3.18%, and finally, sports the third highest EPS of $0.63. To boot, the company has $46.1MM in liquid cash on its balance sheet.
APWC has a NCAV value of $12.37, or around 400% higher than its current market price. To calculate NCAV per share, you take total current assets and subtract total liabilities and preferred stock, then divide by shares outstanding. In essence, this is the company’s liquidation value. However, upon digging into the company, I believe there could be value in continuing the operations of the business, expanding and deepening its already existing moats, while at the same time expanding into new regions and establish markets outside its main three.
Reading the Tape
Shares are not easily available to buy or sell, so the best way to look at this chart is through the lens of monthly candlesticks. The price I am looking at for an entry would be around the $3.00 – $3.05, with stops placed below the bottom of the wedge formation.
Where Is My Fallibility?
A small-cap Asian wire manufacturer with little liquidity and a stiff eye on copper prices, what could go wrong? Frankly, a lot. Copper prices, if exposed to bouts of extreme price fluctuations could have tremendously negative consequences for the company. Internally, if the company fails to generate free cash flow from its operations, or if it decides to finance its business through the issuing of shares/debt, these would be signals to hop off the bullish train.
Furthermore, tariffs imposed by the United States could have a material impact on the business, depending on what type of tariffs and on what goods. On top of that, if the company fails to expand and deepen its existing moats, it could provide an opportunity for other smaller businesses to come in, undercut their prices, which would lead to a squeezing of margins and an evaporation of profits from revenues.