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Indian miners & Chinese banks: the cash piles unloved by the market
by Robert St George on Mar 20, 2014 at 10:23
Buying what frightens you is an old investment dictum, although one seldom seen in practice. But Margaret Weir, manager of the £95 million Eastspring Investments Asian Equity Income fund, has populated her portfolio with holdings to make anyone shudder.
Take NMDC, an Indian iron miner whose share price has halved over the past three years. The reason isn’t complicated: both the country and the sector have been decidedly out of favour.
Yet Weir cites a thicket of figures to explain why she is backing the company. It has 45 years’ worth of ore reserves. Those reserves enjoy a very high ferrous content, one to rival that of Australian ore. NMDC’s cost of production is around £17 per tonne, compared with approximately £19 in Australia. And the firm is operating at an 86% utilisation rate at the moment, affording considerable scope for growth.
Its financial metrics are impressive too. NMDC boasts a return on equity of 19%, which Weir believes is very conservative. It is artificially depressed, she claims, by the weight of cash the group has on its balance sheet – equivalent to 45% of its market capitalisation. Exclude that and NMDC’s return on equity surges ‘north of 70%’, according to Weir. The cash in any case supports a dividend yield close to 10%.
For Weir, NMDC is therefore both a ‘great’ cyclical stock and a play on India’s macro recovery. She acknowledges that that may not transpire imminently, but says ‘I have patience’.
Weir is similarly enamoured of Chinese banks, which she modestly admits are ‘unloved’ by most. China Merchants Bank trades on just four times its earnings, for example, and Agricultural Bank of China on 4.6x.
‘They are trading at the same levels as UK banks did in the financial crisis,’ Weir observed. ‘Are they teetering on the brink the way the UK banks were? We can categorically say they are not.’ She views them as profitable and able to regenerate capital very quickly, something the market is overlooking. ‘There is a lot of fear in the prices,’ she stated. ‘Will it be a quick fix? No, but we see the stars aligning.’
A third unusual position is Samsung Electronics, despite Korea being Weir’s largest country underweight given its minute 1% trailing yield and 10% payout ratio.
One result of that miserly rate is that Samsung has horded cash: with a market capitalisation of £105 billion, it has £27.5 billion of cash on its balance sheet. Weir observes that that even understates matters, since Samsung holds stock it has bought back in treasury rather than cancelling it. That, she calculates, is worth another £10 billion.
At a recent meeting with Samsung’s managers, Weir challenged them on that cash pile and was pleased to find that they subsequently tabled a resolution for their next AGM proposing higher dividends.
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