To me, personally, I acquire new knowledge through stock investment almost everyday.

It is fortunate to have helpful forum members like JTYeo, Noby and KcChong.

Now we are on the same page.

Fastener sector

Fasterners are a hardware device that mechanically joins objects together.

They are used in industry, commerce, and household. Therefore, there is sustainable demand for fasterners.

Raw materials for fasteners include stainless steel, aluminium, and copper. Prices of these raw materials have been declining, and touched a base of five-year low. 

Most Malaysian made fasterners are exported to the West. Local fastener companies should benefit from RM depreciation.

There is a good chance that Chinwel and/or Tongher offer a deep value investing idea.

Stock performance of companies

It seems like investors have, so far, disagreed with the prospect of both fastener companies.

Financial statements and simple anlyses

It is noted that Tongher's net profit in the latest quarter was affected by the negative earnings of its associate.

Theoretically, companies should not consolidate the share of results (profit/loss) of associates (with only 30% shareholding) in their incme statement. However, many companies do so and 'wash' their net profit.

Consequently, the reported net profit does not reflect the operating profit of a particular company.

We, in deep value investing, focus on the cleanest operating profit (EBIT) that derived purely from the company's operating business.

Note: 6-month cash flow is used here.

Investors are concerned about their USD denominated borrowings. Their ability to meet the obligation is, of course, backed up by their healthy financial position and on-going free cash flow.

For Chinwel, its USD currency loans were reduced from USD73.138 mil (as at 30 June 14) to USD53.011 mil (as at 30 June 2015).

For Tongher, its USD currency loans were parred down from USD48.30 mil (as at 30 June 14) to USD40.98 mil (as at 30 June 2015).

In addtion, these two companies have used forward exhange contracts to protect them from fluctuations in currency pries. As stipulated in the contracts, Chinwel and Tongher agree to buy or sell a certain amount of foreign currency on a specific future date.

Simple valuation

At first, based on PE ratios, Tongher seems to be more expensive in transacton for lower ROE.

Nevertheless, Price-Book Value ratios suggest otherwise.

The contradiction prompts us to compare the two companies on a standard basis without being affected by their capital structures.

Deep valuation

Now it is clearer.

Tongher's invested capital is smaller, and it is more efficient in employing its invested capital to generate ROIC 13%.

Most importantly, Tongher remains cheap. It is trading at Acquirer's Multiple 3.72 or Earnings Yield 27%.

Its 'cheapness' is reinforced by the inverse of free cash flow yield: Tongher is now selling, at a steep discount, of approximately 50% of Chinwel's valuation. The estimate (4.32) also suggests that Tongher can pay back our cost of acquisition or generate cash to reinvest in its business at a significant faster pace than Chinwel.

All these evidences perhaps explain why Tongher bought back 750,300 units of its stock in the open market from 1 Sept to 7 Oct 2015.

Kc Chong has also written about Tongher. Read here.