Looking at the year's biggest fallers can sometimes prove fertile ground for the bargain hunter. However, equally often, share price plunges are well deserved and the companies aren't an opportunity. Here's my take on whether these 3 are an attractive prospect today:
Dongfang Modern Agriculture Hldg Gp Ltd (ASX: DFM) – down 63% to $0.82
This Chinese fruit and flower grower appears ridiculously cheap at first glance – Net Tangible Assets of 95 cents per share, the equivalent of ~A$70 million in cash at bank, a Price to Earnings (P/E) ratio of 4, and a 6% dividend. This is a common state of affairs for the typical Chinese ASX-listed company, many of which have been accused of 'unusual' accounting.
I looked at Dongfang on the assumption that it is a legitimate business and indeed, the dividend payments (albeit with a low payout ratio) imply a legitimacy that many Chinese listed companies lack. However, there are many things I would want to back check before considering a purchase, including:
- If the output of the company's orchards matches up with the company's costs and the sale price of fruit in China
- Why the company earns such little interest on its cash, and
- Why the 'independent auditor's report' provided in 2016 is a letter from the CEO to the auditor telling the auditor that the company is legitimate
- The legal mechanics of getting a complete tax exemption, like Dongfang has (and situations in which one could be revoked)
In this situation, I believe the onus is on the would-be shareholder to first attempt to prove that the company is not fraudulent, rather than accepting that the business is predominantly legitimate as can safely be done with most large Australian companies.
CSG Ltd (ASX: CSV) – down 68% to $0.44
Printing business CSL saw its shares smashed after profits dived and the company cut its dividend following weak performance at the recent half year. In January I wrote that the company's dividend was unsustainable, and opined that management was improperly incentivised – I note that, despite the cut dividend and the woeful 10-year performance, management still received $1 million in long-term incentive payments.
CSG is now cheap enough that I would consider looking at it with a view to benefiting once the company resumed dividend payments. However, I would first have to determine whether the company is in a position to turn itself around.
Reject Shop Ltd (ASX: TRS) – down 66% to $4.43
I wrote just over a week ago that I'd prefer to buy Reject Shop 20% cheaper. About an hour after that article, the company released a profit downgrade and shares plunged 46%. Despite the cheaper price, I'm not a buyer of Reject Shop shares. That is mainly because the advice the company provided, and the cut dividend, suggest that it is both losing cash and not generating a profit.
At this point I suggest that readers wait and see the annual report to evaluate if the situation is salvageable. While shares do look cheap, priced at 10x first half profit, they're only cheap if Reject Shop returns to its former level of profitability, and at the moment it is difficult to know if that is the case.
