Sold 800 Super Holdings (ESH:SP)

This is an update on one of my portfolio positions, 800 Super Holdings, which I have held since late 2015. I was perusing their latest set of results and checking profitability. On the surface everything looked fine, revenue was slightly down but profit margins expanded to give a full year profit of S$17m compared to S$16.7m last year. Compared to the current market cap of $219m, this seems to put them on quite a fair valuation given the growth and I was happy to continue holding.

However, a closer look at the cash flow statement showed something worrying.

I was a little suspicious of the highlighted red line so I dug a little further. At first I presumed it was rental of equipment for services, but such payments should go as expenses yet there is no line reconciling net profit to net cash from operating activities that relates to this. Debt levels increased by around S$16m from 2016 to 2017, which roughly relates to the net of proceeds and repayment of borrowings, so what happened to this S$8m repaying finance leases? Could it be capitalised as Property, Plant, Equipment on the balance sheet?

I suspect it’s being capitalised somewhere, but this seems to reflect a genuine expense of the business which shouldn’t be ignored. Deducted from net profit of $17m, it leaves a meagre S$9m.

I decided that my valuation should be based on something closer to S$10m net cash profit for the business per year, which gives it a very rich valuation and hence I decided to sell. It has been a very successful investment for me, returning 208% including dividends & FX, or 80% on an annualised basis. This was only a small position for me given that it is based in Singapore, so the returns although spectacular didn’t contribute an enormous gain to my portfolio as a whole.

Disclosure: Author has no position in 800 Super Holdings

Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.

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