One of the cheapest stocks in our All Investable Stock Screener is Silvercorp Metals Inc (NYSEMKT:SVM).
Silvercorp Metals Inc. (Silvercorp) is a silver-producing Canadian mining company. The company is engaged in the acquisition, exploration, development, and mining of silver-related mineral properties in China. The company’s segments include Mining, including projects, such as Henan Luoning, Hunan, Guangdong and Other, and Administrative, which includes Beijing and Vancouver. The company is the primary silver producer in China through the operation of over four silver-lead-zinc mines in the Ying Mining District in Henan Province, China, including SGX, HZG, TLP, Haopinggou (HPG) and the LM mines. The company also has commercial production at its Gaocheng (GC) silver-lead-zinc project in Guangdong Province. Silvercorp’s principal products and source of sales are silver-bearing lead and zinc concentrates and some direct smelting ores. The company sells all its products to local smelters or companies in the mineral products trading business.
A quick look at Silvercorp’s share price history over the past twelve months shows that the price is up 346%, but here’s why the company still remains undervalued.
The following data is from the company’s latest financial statements, dated March 2017.
The company’s latest balance sheet shows that Silvercorp has $96 Million in total cash and cash equivalents consisting of $73 Million in cash and $23 Million in short-term investments. Further down the balance sheet we can see that the company has zero debt. Therefore, Silvercorp has a net cash position of $96 Million (cash minus debt).
In addition to the company’s strong balance sheet, all financial strength indicators show that Silvercorp remains financially sound with a Piotroski F-Score of 8, an Altman Z-Score of 3.54, and a Beneish M-Score of -2.74.
If we consider that Silvercorp currently has a market cap of $487 Million, when we add the minority interests of $55 Million and subtract the cash totaling $96 Million that equates to an Enterprise Value of $446 Million.
If we move over to the company’s latest income statements we can see that Silvercorp had $67 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.65, or 6.65 times operating earnings. That places Silvercorp squarely in undervalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Silvercorp generated trailing twelve month operating cash flow of $80 Million and had $36 Million in Capex. That equates to $45 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 10%.
Something else that seems to be overlooked is that Silvercorp’s current revenues of $163 Million (ttm) are the highest in the past five years with the exception of 2013 when revenues were $182 Million. However, closer inspection of the 2013 financials also indicate that the company had just $27 Million in net income in that year compared to the $44 Million (ttm) that we see today. Additionally, 2013 free cash flow was negative ($4 Million) compared to the $45 Million (ttm) that we see today. This is due to a significant reduction in the company’s capex.
Lastly, its also worth taking a look at Silvercorp’s annualized Return on Equity (ROE) for the quarter ending March 2017. A quick calculation shows that the company had $246 Million in equity for the quarter ending December 2016 and $263 Million for the quarter ending March 2017. If we divide that number by two we get $254 Million. If we consider that the company has $44 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending March 2017 of 17%.
It is therefore difficult to understand Silvercorp’s current P/E of 11.2 compared to its 5Y average 24.9* when you consider that the company is currently trading on a P/B of 1.9 compared to its 5Y average of 1.3*, a P/S of 3.1 compared to its 5Y average of 3*, and a Price/Operating Cash Flow of 6.3 compared to its 3Y average of 6.8*. While all other valuation metrics are around average the company’s P/E ratio remains 55% below its 5Y average at a time when the company is generating its highest free cash flow in the past five years.
Silvercorp is a company that remains undervalued despite the 346% increase in its share price over the past twelve months. In terms of the company’s current valuation, Silvercorp is currently trading on a P/E of 11.2 compared to its 5Y average of 24.9*, a FCF/EV Yield of 10%, and an Acquirer’s Multiple of 6.65, or 6.65 times operating earnings. The company has $96 Million in cash and zero debt, and an annualized Return on Equity (ROE) for the quarter ending March 2017 of 17%.
* Morningstar
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