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Saturday, 20 February 2021

(Tradeview 2021) - What I Learn of Fundamental Arbitrage Through Sri Trang Agro


Last year August 2020, I wrote a piece about Sri Trang Agro as a long term value stock due to the strong fundamental nature of the company which meets all my metrics as a long term investment. As of Friday 19th February 2021, 7 months since I wrote about the company, Sri Trang Agro hit all time high at $ 1.97 and THB 43.50 (Sri Trang Agro is the holding company of Sri Trang Gloves and is dual listed in Thai Stock Exchange and SGX). For those who missed my earlier write up for Sri Trang Agro, feel free to revisit here :

Most readers would known by now that Sri Trang Agro is one of my favourite Thai listed company. I have written extensively and believe it is a well managed company. The problem have always been the question of Sri Trang Agro versus Sri Trang Gloves. When I first highlighted Sri Trang Agro, many were asking me why didn't I choose Sri Trang Gloves instead which was all the rage. Many told me to focused on a pure play glove maker like Sri Trang Gloves instead of Sri Trang Agro which would be susceptible to holding company discount. In fact, at a quite a long stretch, Sri Trang Gloves valuation was far ahead of Sri Trang Agro. The biggest frustration came from the huge valuation gap and the subpar share price performance of Sri Trang Agro which was sideways for a long time. This concern is valid and indeed a deterrent for investors. 

However, my rationale was simply, there is deep value in Sri Trang Agro because of the arbitrage difference between Sri Trang Agro which is trading at too steep a discount to Sri Trang Gloves considering Sri Trang Agro still hold more than 50% of Sri Trang Gloves. Also, the diversified nature of its business between upstream and downstream (from plantation to finished goods) and the strong management team would protect the downside of the company. In essence, Sri Trang Agro was punished because of the dismal commodities price where natural rubber price was low from Covid-19 because of suffering automotive sector and industries that require natural rubber raw material (besides latex glove).

Now with the huge interest in glove stocks dissipating due to the unwarranted fear of ASP falling off the cliff as a result of the pandemic ending, Sri Trang Gloves and other glove stocks have been impacted irrationally. Sri Trang Agro on the other hand buck the trend and broke new record high in terms of the share price movement. This is because of their diversified nature of being a full upstream and downstream player. Natural rubber being a commodity have trend upwards in line with commodity "upcycle". This will directly benefit Sri Trang Agro bottom line especially when the investors are flocking towards recovery play and economic reopening. On top of that, their gloves division will continue to provide strong earnings visibility. Another reason is their exposure to hemp plantation. With the Thai Government recently legalising cannabis, this have led Sri Trang Agro being given attention although this venture have yet to kick off or bear fruits.

This is why I find investors at times behave irrationally. They move with news flow of potential future earnings (unproven) rather than actual solid earnings track record with earnings visibility. Nonetheless, despite the noises and emotional turmoil, I know many fundamental investors held on although some were anxious when they emailed me to enquire. To all my readers who believed and held on to Sri Trang Agro, a well deserved returns for you all after going through all the ups and downs. 

For those who thinks that fundamental investing or value investing is dead, this is a proof yet again that you do not need to do active trading daily to do well in the stock market. Finding good stocks, holding on and sitting through, letting the passage of time and value to be realised is the key to building wealth over a sustainable period of time. Active short term trading is fun, exhilarating and give a sense of thrill. Just like gambling. Whilst some would argue its the way to make money from Bursa, not long term investing, I beg to differ. Such short sightedness is a way for Bursa and brokerage houses to make money, through transaction fees. Time and again, history has shown for fundamental investing all it takes a good selection of quality companies, the returns would be astronomical. Likewise, for all the accumulated short term trades, one mistake is enough to wipe out a portfolio. 

The beauty in finding a company which is undervalued, both fundamentally and via an arbitrage would provide a base or “defence” against any potential selloff. The downside is protected. Arbitrage investing is one of the many strategies that seasoned investors adopt along the likes of  earning yield investing, dividend investing and others. I often adopt this method in 2020 to determine whether to invest in stocks because of the volatility and uncertainty. This have resulted in outcomes which exceed expectations for my private portfolio in 2020 with the likes of Wilmar International Limited, BIMB-Wa and APB Resources Berhad outperforming many stocks and the larger market albeit at a gradual and slower pace. Of course, the downside is the waiting time. One ought to be patient. Just like reading an article, if you are only willing to read the first 3 paragraphs and not finish the article, you would miss the most interesting bit at the tail end. Back to the topic on hand, if investors ever come across fundamental arbitrage opportunities, one should not hesitate to take it even if it requires a little more time waiting. Remember, wealths is built over time, not overnight. 


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