Case Study: Solid Group, Inc. (PSE: SGI)

The investment thesis is simple: SGI’s one time gain would generate SGI an EPS of above P.51 for 2012 which suggest an intrinsic value of P5.10 [.51 x 10 PE ratio].

SGI sold its subsidiary Solid Broadband Corporation (SBC) to Skycable Corporation for P1 billion cash on May 11, 2012 generating a one-time gain of P450 million and an EPS of .51 on the third quarter of 2012.

A similar case is JG Summit Holdings, Inc. (JGS). JGS sold Digital Telecommunications Philippines, Inc. (DGTL) to Philippine Long Distance Telephone Company (TEL) resulting to a one-time gain of P11 billion and an EPS of P3.19 for the year 2011. Using a price to earnings multiple of 10, JGS intrinsic value should be at P31.90 (P3.19 x 10) at that time.

On the date that the financial statements were released JGS’ stock price traced its intrinsic value.

SGI1

The reason for this event could be the Market’s confidence JGS management has the capacity to utilize excess cash. The Market believes that the Management can utilize excess cash to add shareholder value.

SGI with its additional cash flow from sale of its subsidiary may utilize the excess cash to take advantage of the weakened peso and participate in the strong domestic spending of the Philippines. SGI’s business model is mainly the importation and sale of mobile phones here in the Philippines.

SGI’s revenue growth is mainly driven by their distribution of the Myphone brand. A business opportunity for SGI’s excess cash is their possible participation in the construction industry through its subsidiary SolidGroup Technologies Corporation (SGTC). SGTC signed an exclusive 3-year Distribution Agreement with Yahgee Modular House Co., Ltd. in 2011 under the MyHouse brand. SGTC will import and sell prefabricated modular house and office units opening the doors for SGI in the construction industry.

Red flags:

Increasing inventory obsolescence:

SGI2 SGI3

Comments:

Red flags are not that red and investment thesis is very plausible with the MyHouse brand starting to introduce their product to the masses by sponsoring shows like Kanta Pilipinas of TV5.

Acknowledgement: This case study is a product of my conversation with a reader, Nosteng.

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

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