JcbNext Bhd (KLSE:JCBNEXT): A Net-Net Bet on Capital Allocation

JcbNext is the holding company previously known as JobStreet Corporation Berhad, developer of Malaysia’s leading job portal, was sold in 2014 but the company is still managed by the founding CEO, CFO and CTO.

Management owns 55% of the float and is paid a modest salary.  The company has plenty of cash but management is frugal to the point of turning off the central air-conditioning in their office block in KL last year when their main tenant moved out. Management appears to be well aligned with shareholders.

Market cap is around USD 46MM. Daily average volume is around USD 20,000. That’s around 10% annual share turnover – not totally illiquid but definitely overlooked.

As of the end of September 2019 each share of JcbNext consists of the following items at carrying value:

  • MYR 0.59 of cash.
  • MYR 0.14 of commercial property (the Wisma JcbNext building in downtown KL).
  • MYR 0.79 of 104 Corp, a Taiwan-listed job portal.
  • MYR 0.09 of Innity Corporation Bhd, a listed adtech company.
  • MYR 0.28 of Lion Rock Group Limited, a publishing conglomerate listed in Hong Kong.
  • MYR 0.02 of Nova Pharma Solutions Bhd, a listed pharma engineering consultancy.
  • MYR 0.09 of managed equity funds and unlisted equity investments.
  • MYR 0.42 of money market funds.

Each share also comes with MYR 0.09 of carry-forward tax losses and MYR 0.10 of management overhead (capitalised at 10%), most of which is associated with the management of Wisma JcbNext.

The company’s share price is currently less than RM 1.45 (and getting cheaper by the day) so this is technically a net-net in that the share price is covered by easily-liquidated assets. Net cash is MYR 0.99 per share. Unlike a traditional net-net, the company lacks a large, undervalued operating division which could provide significant upside through a trade sale or liquidation. Whilst the business is cheap on an EV/EBIT basis (5.3x), that’s because the large cash balance reduces the EV not because the return on capital is high.  Corporate action in the form of a takeover or liquidation seems unlikely. JcbNext may not be a value mirage (the assets can be reliably valued) but it may be a value trap (the share price discount may persist and the dividend is small).

My first assumption is that management will do what they say they will do and buy shares in other operating businesses rather than hoard cash. In fact, you need to believe this in order to consider investing – the company is guaranteed to under-perform the market indices over the next 10 years if it continues to hold cash and the share price doesn’t re-rate.

Management are self-professed value investors. Their reporting suggests they are trying to invest in good quality companies at reasonable prices. They quote Warren Buffett, but then so do a lot of people. To evaluate their skills I’ve reviewed their main investment decisions to date below. The main thing I’m interested in here is whether or not I think they made a good decision, not whether or not the investment worked out.

Sale of JobStreet

The business was sold to Seek Ltd (ASX:SEK) for MYR 1.73 B in 2014. That’s an EV/EBITDA multiple of 22.2 or a P/E of 30.7 for a rapidly maturing business which was growing revenue at 10% whilst paying our 75% of earnings as dividends. That’s equivalent to around a 12% running return, assuming the business could keep growing at that rate. To me, that is not a cheap price given that most of the projected return is from growth in a business that is quite mature. If you compare that to the selling methodology that I wrote about previously, I would certainly have gone ahead with the sale at that price.

Management’s growth of from 2004 created a phenomenal amount of shareholder value – more than 26% CAGR in per share dividends and NAV growth for the period from 2004 to 2018.  Impressive, but that’s not the business model the business will be using in future.

104 Corporation (TW:3130)

The company began accumulating 104 Corporation shares in 2009 and continued buying during the GFC, reaching a 22.2% ownership stake in 2010. At that time, 104 was growing revenue at around 20% and paying a 6% dividend yield. Importantly, 104 has a business model that JcbNext’s management is very familiar with.

104 currently grows at around the same rate as Taiwan’s GDP and pays JcbNext around double the dividend that it did in 2010. I estimate it is worth around 25% more than the current carrying cost.  This position now makes up around ⅓ of JcbNext’s NAV which is fine considering 104’s entrenched market position.

Innity Corporation Bhd (KLSE:INNITY)

JcbNext bought a 23% stake in Innity at around the same time they accumulated their position in 104 Corporation. At the time they acknowledged that the advertising industry would struggle in the short term. The company paid a P/S ratio of 0.79 for a business that should have an operating profit in the mid-teens or higher. At the time Innity’s profits were depressed but the company was growing at 16% during an economic downturn.

Innity has since grown revenue by 11x and continues to have low single-figure percentage revenue growth. Despite the rapid growth and despite paying down the debt used to fund it, Innity sells for an even lower P/S (0.56) than it did 10 years ago. I believe this is because despite being consistently profitable, Innity hasn’t yet shown the kind of operating margins I expect from an advertising business. In terms of share price, Innity has been a four-bagger for JcbNext but I doubt it will contribute to JcbNext’s income until something is done to improve margins.

Lion Rock Group Limited (HK:1127)

Lion Rock’s story is a bit complicated. JcbNext bought 20% of Recruit Group Limited via a share acquisition and subscription in 2007. At that time Recruit Group was an online recruitment portal with legacy printing and publishing operations.

As part of the deal, JcbNext received a 7% dividend yield on the purchase price for the first three years. The purchase was priced at a P/S of 0.25 for a company with 22% operating margins growing revenue at 31%. That’s a staggeringly cheap price for a business model which is now known to be very profitable. I don’t know how obvious that would have seemed in 2007 but JcbNext’s management were well placed to judge.

Recruit Group was subsequently renamed and then span off its printing operations in 2013. These are what make up Lion Rock. I’m yet to spend a lot of time digging into Lion Rock but I do know that 8% of it is owned by David Webb.

Nova Pharma Solutions (KLSE:NPS)

I’m not as impressed with the decision to buy 9.45% of Nova in 2017. The company paid a P/S of 3 to buy a project-oriented company, albeit one with high operating margins (37%). This is only a small position (<1%) for JcbNext but I don’t know if the price paid was cheap enough to compensate for the cyclicality that I believe NPS will experience.  NPS does work in an industry that seems to have less competition than most so this investment may work out in the long run. Holdings Ltd

It’s not totally clear when JcbNext bought into AsiaTravel but they first mention their holding in the 2010 annual report. So we know they were happy to hold the stock at a P/S of 1.3 to 2. More mature online travel agencies were able to achieve operating margins of >30% at that time and AsiaTravel was growing revenue at 15%.

AsiaTravel has since been delisted and the investment (MYR 3.4 MM at cost) written down to zero by the company. This looks like a reasonable purchase decision that unfortunately didn’t furnish a good result.

What I can see from the above (small) selection of positions is:

  • Management tends to size positions in a way which matches the durability of the business.  Small positions such as 104 have been allowed to grow into larger positions as the underlying companies have grown and established resilient market positions.
  • Purchases of companies which are less robust have been sized smaller.
  • Management shows restraint in not paying too much for businesses.  They haven’t succumbed to the late-cycle practice of over-valuing growth.
  • There’s no tendency to buy deep-value businesses.  You could argue that Lion Rock falls into this category but this was not a deep-value play at the time of purchase.
  • In the absence of attractive acquisitions the company buys back its own shares at deep discounts to NAV.  These guys are not hoarders.

The above actions match management’s written intent – the letter to shareholders in the 2016 annual report is worth a read for a detailed list of the type of investments management plans to buy.  The only thing that is missing is evidence of their ability to buy large positions in suitable companies. Given recent market valuations I think this is fine – I’m looking in similar markets and not seeing anything that would meet their specifications (Note – I originally wrote this article in Jan 2020, valuations have obviously changed since then).

To summarise, JcbNext is an opportunity to pay less than MYR 1.45 for MYR 1.41 worth of productive assets (at book) plus MYR 0.99 of cash.  The return on the productive assets is currently less than the long-term market average but the evidence suggests that the cash will be deployed at rates of return which exceed the market, when suitable opportunities become available.

JcbNext currently has around a 4% EPS return, pays a small dividend (~2.7% yield) and buys back a little over 1% of the float each year.  In the short term the company will almost certainly underperform the long-term market average. But I don’t think I can match the long-term market average performance in the short-term either.  

Disclosure: The author holds shares in JcbNext at the time of writing.  This is not a recommendation to buy or sell any securities, nor is it financial advice.  All information presented is believed to be reliable and is for information purposes only.  Do heaps of your own research before purchasing any security.