This follows from the previous post, which shows how a 1.5m investment turned out to be worth 40m in 11 months. This post looks at a larger scale – how 8I Holdings could be valued at $300+ millions when its core operating profit is less than 5m.
8I Holdings (8IH) is involved in the business of 1) education and event (teaching value investing), 2) stock investing 3) private equity investing, 4) real estate development. It aims to be Berkshire Hathaway + Blackrock of Asia.
This is the breakdown of the revenue and profit for each of the businesses for financial year 2016.
Source: 8I Holdings’ FY16 Financials report
1. Education and Event Business
The Company was founded in 2008 to run education and event business in Singapore. It conducts financial education and training seminars in Value Investing to the public. In FY16, this business generated revenue of 11m and PBT (profit before tax) of 3.2m (revenue of 5.3m and PBT of 921k in previous year).
The chart below shows the training courses that they conduct. Millionaire Investor Program (MIP) is a three-day seminar that could cost nearly SGD $4,000 for one person to attend. Multiply that by 1236 attendees in FY16, we get revenue of 4.9m from this course alone.
Source: 8I Holdings’ FY16 Financials report
2. Investment business in listed securities
They are practicing what they preach. Since they are teaching Value Investing, they apply this skill to their own portfolio of securities. The IPO prospectus showed their individual securities holdings, but the latest financial accounts have omitted this information. This business generated PBT of 1.2m in FY15 and loss of 1.33m in FY16. As at 31-March-16, the held-for-trading financial assets are worth 19.56m (vs 12.1m in previous year).
3. Private Equity Investing
This is the business that has generated extraordinary gains from the transactions in CPA, the topic from previous post. This business generated profit of 3.59m in FY15 and 17.2m in FY16. A significant part of the profit is from CPA transactions. We’ll discuss how the profit was booked in 8IH’s account in a section below.
Basically, this is the business that has really changed financial performance significantly after recording outsized gains in the two past financial years. From CPA transactions, it recorded gains of 3.88m in FY15 (vs Group PBT of 5.7m) and 18.6m in FY16 (vs Group PBT of 20.2m). Removing the gains from CPA transactions, the Group PBT for FY15 and FY16 would be 1.82m and 1.6m respectively, a huge drop from the reported figures.
In FY16, the Private Equity business also recorded a gain of 1.67m from disposal of subsidiaries’ shares. The footnote explains that the Group swapped all of its interest in its two subsidiaries, Vue at Red Hill Pty Ltd and Fusion 462 Pty Ltd, for shares in Velocity Holdings Pty Ltd, resulting in a gain of 1.67m from the share swap. Notice something familiar? Share swap again. This happened to CPA and Digimatic, which increased the valuation of their stake in CPA.
Since January 2015, the Private Equity business has invested:
- SGD $2.448m for 51% stake in Hemus Pacific Pte Ltd (a property and event management business in Singapore with net profit of S$700k for FY14)
- AUD $2.3m for 49.9% stake in Velocity Holdings Pty Ltd (see Real Estate Development business below)
- SGD $2.04m for 51% stake in Financial Joy Institute Pte Ltd (financial and investment education business teaching Value Investing, a competitor to 8I Holdings)
- RM 3.8m (or SGD 1.29m) for 49.99% stake in CT Hardware Sdn Bhd (wholesale and retail business selling power tools, equipment and machinery with revenue of RM 17.5m and net profit 650k for FY15).
Each PE investment above is quite small, ranging from 1.3m to 2.5m only, with the total investment 8.1m.
4. Real Estate Development
It ventured in real estate development in Australia in 2015, by acquiring 49.9% of Velocity Holdings Pty Ltd for AUD $2.3m. Velocity is currently engaged in three property development projects in Brisbane. This business recorded PBT of 9k in FY15 and 1.28m in FY16.
We have covered briefly the four businesses that 8IH is involved in. Does it make sense that the Company is valued at 314m today?
Valuation of 8I Holdings
Let me be clear. I have no interest in 8IH and have no intention to buy or short the shares. The reason why I write this post is to continue from my earlier post, which uncovered a series of transactions that raised the price of a Company (CPA) to a ridiculous level in less than 1 year, and the general public made huge losses from it. If the general public had been rational, they would have avoided the losses. The Company that initiated and benefited the most from those transactions is 8IH. When I see the financials of 8IH, I also see the same overpriced situation at play. That’s why I write this post.
In my previous post, I did not do my own valuation on Digimatic because I have no interest in their business and have no intention to buy nor short the shares. The grossly overpriced shares and dubious transactions just caught my eyes naturally. I will not do my own valuation on 8IH for the same reason. But I will share why I think 8IH is overpriced.
Valuing Education and Event business
The Education and Event business is indeed doing very well. There are a growing number of people attending their seminars, and they have expanded the seminars to Malaysia and China. The revenue grew from 5.3m in FY15 to 11m in FY16, while the PBT grew from 921k to 3.2m. In FY16, the revenue came from 7m program sales and 4m event site rental and event organization income. I don’t have the details on the program sales and events that they do, but let’s just do a quick behind the envelope estimation.
Let’s look at several listed companies in education and training business and their P/E multiples:
|GP Strategies Corp||21x|
|Franklin Covey Co||28x|
|New Oriental Education & Tech Group||28x|
|Tarena International Inc||21x|
|Nord Anglia Education Inc||82x|
|Grand Canyon Education Inc||14x|
|DeVry Education Group inc||34x|
|Capella Education Company||16x|
|China Distance Education Holdings Ltd||21x|
|New Oriental Education & Tech||28x|
This list has excluded those loss-making companies. Many of the companies in this list are priced at high multiples, some of which at 82x and 46x P/E. Others are mostly priced in the range 20-30x P/E. So, the list is certainly very biased. This gives the benefit of doubt to 8IH’s education business and its growth potential. We are not trying to value this Company at what we think is fair value, but to show that even at high optimism, 8IH is overvalued at 314m.
With latest PBT of 3.2m, if we apply corporate tax rate of 17%, we get 2.65m net profit after tax. Multiply that by 30x P/E, we get the value of ~80m for their Education and Event business.
One comment on this education business. In their website http://www.valuegrowthworkshop.com/new/, they use this copywriting to attract people to attend their workshops:
Experienced investors will understand that consistent 20 – 25% returns per year are only achieved by super investors at Warren Buffett level. Even for these super investors, their results are not consistent over the years. The website is really misleading novice investors into thinking that they too could achieve such high returns over the years.
Some attendees shared in their testimonials that after attending the seminars, they managed to achieve double digit returns in few months, some achieved 100-200% return in 1-2 years. Bear in mind that if 1000 people attend the seminars and 200 of them do their own trading, a handful of them are likely to pick up some good stocks at low prices. The same thing applies to many other financial trading courses, such as forex trading, commodity trading, technical trading, etc. Only the best news are shared. In the end, it’s the aggregate that matters. None of the financial training companies, including 8IH, will share their average results over the years. Similarly, if you have traded 50 stocks, some of your stocks are likely to achieve double digit returns in a year. But, it’s the overall returns that matter.
It does not mean that 8IH’s education business does not create value. I believe they do create value to the general public. You just have to be aware that the testimonials are likely to be cherry-picked, and if you do understand investing, you wouldn’t believe consistent 20 – 25% returns per year when the market in general achieves 8 – 10% return per year and professional mutual funds and hedge funds achieve less than that on average.
Valuing Investment business in Listed Securities
This business held 19.56m worth of listed securities as at 31-March-16. This business should be valued based on the assets they held and potential return they could make. They made PBT of 1.2m in FY15 but loss of 1.33m in FY16. I’m being kind to their investment team and assume they could really achieve 20-25% return like they mentioned in their workshops. They held 18.7m cash and I assume they could invest all these with 20 – 25% return. For total investment of 19.56m + 18.7m = 38.26m, I put a 25% premium and value it at 48m now.
8IH will share some of the best stock picks they made in their workshops, though they never release the average returns they make over the years. Among the best stock picks are Hartalega Holdings Berhad, listed in Bursa Malaysia, and Major Cineplex Group Public Co Ltd, listed in Stock Exchange of Thailand.
Look at Hartalega’s price chart. It’s indeed impressive. 1280% return since April 2008. From its IPO Prospectus, 8IH bought it on 9-May-14. The price was RM 2.87 at that time (adjusted for split) and has appreciated to 4.20 today, achieving 46% return in 2 years before adding the dividends. That’s very good result, but note this. It owned only 258.6k shares (or 129.3k shares before 2:1 split), worth only RM 742k. In 2016 interim report, it’s stated that Hartalega held only 1.6% weight in the portfolio of stocks. What’s so great about making an outstanding % return in a stock when it’s only allocated 1.6% of the fund?
Similarly, Major Cineplex has been a good stock pick. 8IH bought it on 26-Feb-14. The price was around THB 18 that time and has appreciated to 32 now, giving nearly 78% return in slightly over 2 years. But again, it’s allocated only 3.9% of the fund as stated in the 2016 interim report. The great return on this stock will only make a marginal impact on the overall portfolio return.
I’m not taking any credit away from 8IH’s investment team. They did make a good stock picks on Hartalega and Major Cineplex. However, now you should understand that everyone can have the best stock picks, but it’s the overall return that matters.
Valuing Real Estate Development Business
They invested only 2.3m for 49.9% stake in Velocity Holdings Pty Ltd. While doing due diligence, they lent 7m to Velocity at 12% interest rate. My first question is why would Velocity borrow at 12%? Business loan interest rate in Australia is not that high. A quick online check on business loan interest rate in Australia shows that it’s in the range 5% to 8%. In FY16 report, these loans were fully repaid.
8IH made its 2.3m investment on 30 June 2015. Subsequent to the acquisition, again, they made share swap for 49.9% stake in Velocity, resulting in a gain of 1.67m. In just a few months, the 2.3m investment made a gain of 1.67m. I am really suspicious of what is going on. This is my second question. What is this share swap that has resulted a gain of 1.67m in just a few months after the 2.3m investment? That’s 72.6% return in few months (of course, this can’t be compared with the return of CPA).
It’s very difficult to put a value on this real estate development business without knowing the details and being so suspicious of the loan and share swap. Many listed real estate developers in Singapore are being valued at below their book value (P/B below 1.0). Let’s assume 8IH is really so good at picking up undervalued investment, and they will invest only at one third of the intrinsic value So, the initial investment of 2.3m is worth 3x more at 7m now.
Valuing Private Equity Business
The PE investment they have made in Hemus Pacific, Financial Joy Institute and CT Hardware totaled around SGD 6.1m. They initiated these investment only in the last 1.5 year. I guess share swap could happen to any of these investments, making an outsized gains in few months after the initial investments. I can’t, however, put a figure on what return they could achieve. Like valuing its Real Estate business, I assume 8IH is good at picking undervalued stocks and will buy only at one third of the intrinsic value. So, the aggregate 6.1m PE investment is worth 3x more at 18.3m.
I’m being ridiculous here. For whatever PE investment they make, I multiply the value of their initial equity stake by 3x. So, if they invest 1m in another company tomorrow, that 1m will immediately be valued at 3m. This does not make any sense, just like the CPA deals. But at this ridiculous valuation, the share price is still grossly overpriced.
Now, let’s sum up all the values:
|Education and Event||30x P/E||80m|
|Investment business in listed securities||1.25 x Assets||48m|
|Real Estate Development||3x Equity||7m|
|Private Equity||3x Equity||18.3m|
This values 8IH at 153m in aggregate (at optimistic case), still less than half of current market cap of 314m.
Since 8IH aims to be Berkshire Hathaway + Blackrock of Asia, let’s compare them on P/B. 8IH’s latest net assets are worth 52.5m. At a market cap of 314m, the P/B is 6x. This is way higher than Berkshire’s and Blackrock’s. I wont compare them on P/E because 8IH has just recorded one-time 18m outsized gains from the sale of CPA, which makes no sense to me why the buyer was willing to pay so much.
In my optimistic back-of-envelope estimation, I always give 8IH the benefits of doubt and put a high premium on all their investments. However, the optimistic scenario could value it at 153m (if we do the valuation fairly, I believe the intrinsic value is probably less than half of this). I won’t be surprised if 8IH’s share price follows the same fate as Digimatic’s. Hundreds of millions of dollars could be wiped out in that case.
Question: since the Company is at fast-growing stage and can invest high at rate of returns, why would the Company pay dividends?
From 2015 to May 2016, it paid the total dividend of SGD 1.5 cent per share, amounting to 5.36m. This is not aligned with what they said about their fast growth prospect.
Question: At P/B of 6x (market cap of 314m and net assets of 52.5m), why would the Company buy back their own shares?
Share buy-back is a good sign that Management views the Company’s share price as being undervalued. However, share buy-back creates value only if the purchase price is below the intrinsic value. It destroys values when the purchase price is above the intrinsic value. I certainly think that current price is way overpriced. Even if the Management sees it as undervalued, the share buy-back was only for 250k shares, costing SGD 247k. This is just 0.7% of the total shares, having meaningless impact on the overall Company. This SGD 247k could have been invested at the high rate of return as they claimed or, even better, invested in another CPA-like company to generate more than 10x gains in few months.
I have too many questions about the Management, their private equity transactions, share swaps, their claims on consistent 20 – 25% returns, and many others. The Motley Fool also wrote a post to raise red flags on 8IH. You can see the post here.