Saturday, 21 July 2018

The Curious Case of Sino Grandness

There is one SGX company which has constantly baffled me and that is an S-Chip Sino Grandness.

About Sino Grandness (SFIG)

Basically SFIG is a food and beverage company. Its main product is the selling of a canned beverage product line called "Garden Fresh" which claims to be distributed and consumed by consumers in China and Hong Kong. SFIG is a very "profitable" company churning about 7.5 Singapore cents per share in earnings. This means SFIG is now trading at about 2.8x PE. By all valuation metrics of finance textbooks, SFIG is a value gem because it trades at a P/E of 2.8, Price book of 0.3 times and from its operations it generates a cashflow annually at the rate of its current market capitalization.

It makes it one of the most (if not THE most) undervalued Gem in SGX. Going by my own valuation metrics, the company is worth in the region of 70 cents, an upside of 341% returns from its current price of 20.5 cents.

Its full year results can be read here: Link

The Curious Case of Sino Grandness

There are two aspects which intrigues me: its beverage business (which makes up 70% of its business) and the extension of debt it had with lenders)

Beverage Business

SFIG beverage business has been growing it's profitability and expanding. In FY 2017, its beverage business recorded a revenue of RMB 2,692 million in revenue and and a gross profit of RMB 1,077 million. Translated to Singapore's term, this means a revenue of SGD 541 million and SGD 216 Million In revenue. Its beverage business is helmed by its product lines under the brand of "Garden Fresh"


Figure 1: SFIG Segment Results (FY2017)

It got me thinking about the average price of a Minute Maid Can Drink (a fruit Juice product distributed by the Coca Cola Company in China) that retails about 2 yuan in china. This means Garden Fresh is likely to be selling close to 1 billion units of Garden Fresh product in Guangzhou and the few China Provinces where it claims its business is situated in. Given that Garden Fresh is making so much profits (RMB 1 billion), it should have been well known among its competitors or even among investment funds who will be eager to snap it up to gain exposure into China. 

Debts

The recent debt extension of its RMB 20 million is another interesting fact. The interest rates is going at a rate of 15% per annum. Given that the company has a reported cash & equivalent of RMB 923 million, shouldn't it use its funds to retire the bonds? After all, its beverage business is no longer growing at a rate of 15% annually unlike before. More business sense will it be if it retires the bonds- which takes up only 2% of its cash reserves. That applies too to some of its other bonds 

Conclusion

It will be interesting to see what the eventual valuation of SFIG will be in the future. Will Mr. Market recognise the profitability and cash flow generation ability of its company? It is worth noting that our largest local bank, DBS, should be well aware of the profitability of this company. This is because the bank's China Division is a lender to SFIG as well as being involved in the abandoned IPO of Garden Fresh in Hong Kong. 

It also boils to another question, given that SFIG is made known to #DBS, why is DBS vickers research not covering such an undervalued gem whose price earnings ratio, price book and cash flow generation ability is greatly unappreciated by the Singapore market.

This is something I am still pondering about.

Tuesday, 29 May 2018

First Ship Lease trust (FSL Trust)

A few major developments has happened on FSL- one of it is the securing of three loans which in my opinion secures the survival of the trust.

Refinancing Concerns- Cleared

Mr. market has been concerned by the syndicated term loan FSL has. Due to the clause in the term loan, all bankers in the loan has to agree to an extension before it can be renewed after Dec 2017. However, FSL hit a road block when not all parties agreed to extending it; as a result the trust is under court protection and this has spooked investors.

As of now, FSL's debt stands at US$110 million. However, recently FSL has secured three loans - totaling US$108 Million. These 3 secured loans are agreed in principle and should FSL and these bankers put pen to the paper, the amount is sufficient to repay the syndicated loan. FSL has current cash reserves of about US $7 million. 

Cash Flow Viability

The next question is how much cash flow will FSL generate as it continues as a going concern. Given the weakening tanker market, FSL has been able to generate US$10 million in cash flow per quarter. Based on an estimated interest rate of 5.5% on its US$108 million loan and 7% interest on its US$7.5 million convertible bonds. It will probably take FSL until 2022 to repay it based on its current cash flow. After which, its cash flow should be available to unit holders as dividends.

Dividends

In my opinion, it will be based on how the 3 loans are structured.

If these 3 loans are amortized with straight line repayment, unit holders will probably have to wait until 2022 to get some sort of dividends. Tankers have about 20 years of operating lifespan. Based on an assumption that FSL is only about to generate US$7 million per quarter of cash flow (older ships will secure lower charter rates) and scrap value of about nett US$40 mil for scraping of its entire fleet, unit holders can reasonably expect about US$180 million ($240 million) in cash flow from 2022 to 2027. Per unit holder, this means about 37.6 Singapore cents of cash flow available. This is of course based on the assumption that the tanker market does not worsen or improve from its current conditions ("ceteris paribus")

If we are to present value this amount to today's value based on a 8% discount rate, this means the trust is worth about 17.4 Singapore cents now.

Similarly, if the three new secured loans are packaged similar to the current syndicated loan structure where small quarterly pay downs are made with a large sum to be repaid at the end of the tenure, unit holders may enjoy dividends from the trust as soon as 2019; however, this might affect the ability of FSL to repay all its debts before 2022.

<Author is vested in FSL Trust>

Monday, 21 May 2018

What Twice taught me about Share Prices

This was a post I had pondered about writing since Dec 2017, but stopped short due to the fear of ridicule from the Investing community; but since Twice's popularity has grown ever stronger. I shall take the plunge. So hope you all will "Likey" this post.

For K-pop fans especially boys, no introductions is needed. For those not into K-pop, avid readers of investing, Twice is probably definitely the hottest (and loved by a certain gender) Korean girl group. Debuting in 2015, the group gained popularity in 2016 with their Single "TT". In Oct 2017, they released "Twicetagram" and since then their popularity has grown strength to strength and probably still growing after their latest single "What is Love" in April 2018 with teasers in March 2018. They are managed by JYP entertainment

Their legions of die hard boy fans at events are definitely more vocal than our ardent PAP supporters and probably numbers greater than 70% of our voting population (Gee I wonder how I managed to be so sarcastic).

So let's break it down into a timeline:

i) Debut in 2015 and gain immense popularity near end 2016
ii) Released Twicetagram to much fanfare (Oct-Nov 2017)- Popularity gaining
iii) "Won many boy's heart" with "Heart-shaker" and "What is Love"(Jan 18 - Present)

Let's compare it to JYP's share price. If one notices the movement of JYP's entertainment share price follows the success of Twice in close resemblance (4,000 KRW in at start of 2016, 4,800 KRW in 2017, 15,000 KRW in 2018). 




In fact, prior to that, JYP did not have any breakout artiste group in their stable. With all these hype, JYP's entertainment P/E is now at 44 P/E based on last trading price of 22,100 KRW.  JYP's profits has grown 200% from FY16 and an amazing 500% from FY15.

Let's compare in a Price Earning chart:

Based on fundamentals, many of us would have said at start of 2016: Buying JYP would be crazy at a price of 4,500 KRW (P/E 44) and buying JYP at 10,000 KRW in Nov 2017 at P/E of 38 (based on EPS of 266.2) would be tremendously insane. But then investors would have reaped a 100% gain holding the stock for only 6 months and seen an earning results which has doubled. In fact, if you do a case study of another popular girl band (Girls' Generation and their listed agency, SM Entertainment), you will notice the share price of SM Entertainment follows the rise and fall of Girls' Generation.

Looking back, if we had bought JYP then at 44 P/E at 4,500 KRW, we will eb holding a stock yielding 9 times P/E based on our cost price. Currently, the share prices are again trading at close to 44 P/E (current share price is 22,000 KRW). I believe the market is pricing for JYP's profit to probably double into the future given Twice's popularity. Not an indication to buy/sell please*.

Lesson Learnt

The lesson learnt is simple: very often share prices of companies are indicators of what lies ahead and is not based on past release financial data (aka trailing earnings). Hence, when we invest, solely relying on past financial results is not a good indicator/valuation.

To do well in the stock market, it seems our success is linked significantly to our ability to judge the future earnings of a company and reap benefits by investing early. A lot is based in investing on qualitative factors that may or may not happen (aka speculating). The past is only a image in the side mirror, we are more interested as car drivers to know where the road takes us to.

Monday, 9 April 2018

New Portfoilo Addition: MTQ

I have bought 50,000 MTQ rights at $0.018 which can be exercised at $0.20. I intend to exercise and thus will be investing into MTQ at a price of $0.218.

Background

MTQ is a relatively unknown in the investment community due to its small cap and that it is in the O&G support industry which is now unloved. MTQ has 2 core divisions - Oilfield Engineering and Engine Systems. Due to the recent downturn in the O&G space, the company has been burning cash and making losses. My investment thesis is simple- I am buying and hoping that MTQ turnaround and becomes profitable.

Balance Sheet

MTQ has a gearing level of about 17% based on its latest quarter results. However, this will fall because of the recent rights issue of $12 million. With the rights and warrants, MTQ is likely to be able to weather the O&G storm for another 2 years.

Post Rights and warrants, the company's reported NAV will be $0.41. Hence buying at $0.218, I have a good margin of safety as the company continues to report quarterly losses of about $0.02 each quarter.

With only 247,220,000 shares after this equity round, a simple turnaround to an annual profit of $15 million will mean an EPS of 6 cents- 3.7 times PE. This is possible given that MTQ's gross margin is about 15.0%. What is needed is for MTQ to begin getting more order book and in turn increase in revenue. MTQ will need about 200 mil in revenue to hit there again. The first milestone though is for MTQ to report a positive EBITDA.

Management

MTQ is being run by the Kuah family who have been fairly prudent. One of their actions was to suspend their dividends when the industry turned to conserve cash. MTQ used to give out dividends in the yield of 5% region.

Sunday, 8 April 2018

What Competition Commission Singapore should really be tackling instead of Uber/Grab Merger

Many of us are probably aware of Uber/Grab's merger; some of us may also be aware of Competition Commission Singapore's (CCS) decision to commence investigation into the merger on grounds of a "substantial lessening of competition". It is good that CCS is attempting to preserve a competitive landscape for us consumers, however this whole episode raises one question.

Before Uber and Grab arrival into Singapore

Prior to the arrival of Uber and Grab, Singapore already had a taxi industry that competed intensively among themselves. Under the Public Transport Council (PTC) and LTA's mandate, taxi companies were also forced to adopt a unified taxi fare structure where only some parts of their fare could be varied. All in all, there was a fair and transparent competitive landscape in Singapore, that was until...

Arrival of Uber and Grab in Singapore

The arrival of Uber and Grab was probably the best gift to the public. Their entry intensified the competition to the extent consumers switched from taxi to private hire vehicles as they were cheaper and a readily available source to the "constantly missing" taxis. Taxi companies were forced to reduce rental rents and gave subsidies to keep taxi drivers from moving over. In basketball terminology, it was like Uber/Grab showing other teams (taxi companies) how to shoot 3-pointers when all along the rest of these taxi companies had been only capable of shooting two pointers. 

Are we barking up the wrong tree?

Right now, because Uber is leaving, CCS is worried about a substantial lessening of competition. While that is definitely true, it begs the question whether taxi companies have even been competing at all against Uber and Grab these few years. 

The Private Hire Vehicle (PHV) and Taxi industry belong to the same segment of the transportation industry. This means the PHV had competitors all along, which were the dominant Taxi Companies. 

Grab and Uber were focused on competing against the fare system of the taxi industry; their dynamic pricing system was better than the regulated fare system, which was set forth by LTA and PTC. 

Hence the whole episode shows how outdated and noncompetitive the current taxi fare structure is due to technological progress. It is worrying that despite Uber/Grab's entry for such a long time, our taxi companies have not adapted to be competitive at all. In fact, taxi companies like CDG are still making profits from renting out taxis. In my opnion, such taxi companies should do more to help their drivers.

Just because Grab is the only team left who can do three pointers, it doesn't mean that 3 pointer shots should be banned.



Sunday, 11 March 2018

Why Singapore actually has a housing oversupply

At the start of 2015, I posted an observation on a forum that Singapore has a ratio of 4.14 people to housing units based on 2014's population numbers. These numbers included foreign workers, students, maids etc.

So how then did it fare now based on 2017's stats? Here are the figures now
^HDB 2017 figure were based as of end March 2017, hence there is a slight underestimate
*Data from HDB, URA and Singstats 2017 data  







As of 2017, this ratio has fallen to below 4. It shows housing supply in Singapore has increased (7.0%) at a much faster rate than our population (2.5%). I find this number ridiculous because it means for every housing unit, there are 3.96 people staying in it; the 296,700 foreign construction workers in Singapore will be heartened to know that four of them can comfortably stay in a 4 room HDB flat instead of having to squeeze in a dormitory room. 

If you look at it objectively, it means a lot of housing units only has 2-3 people staying in them. So to a certain Minister, do not worry, Singaporeans in fact have a lot of "space to do XXX things".

Is there a cause for concern?

HDB's resale and private property prices have remained flat from 2014 to 2017 with a slight decline in experienced. 

However, should Singapore persist with its slow growth of population, there is a high likelihood that we will see a drastic fall in property prices. HDB is likely to maintain its trajectory of building 17,000 flats each year to help young couples, while URA is projecting a 42,000 private housing growth in the next 5 years. This means until 2022, we can expect about 127,000 more housing supply. Based on a 4 to 1 ratio, we need to grow our population by 508,000 to maintain the wretched housing market we have now. This means a 6.1 million population in 2022.

Can we hit 6.1 million in 2022? 

To hit 6.1 million, we will need to grow our population by 10%, or 200,000 more people annually. Singapore's population only grew by 130,000 for the entire past 3 years. This means we may have to return to the less stringent immigration policy we had in the early part of this decade.

In addition, it is important to realize that Singapore's has an ageing population with a significant proportion being the baby boomer generation (age range 50-70). There are about 1.2 million people in this group. Hence 20-30 years down, this generation will age and die; eventually leaving their houses to their descendants. As HDB does not allow owners to have more than 1 HDB unit, it means more resale units will be released into the market. Furthermore, the passing of a person also means a fall in demand for housing. 

To replace this 1.2 million people, we will need 1.2 million people. However, based on our current population demographics, there are only about 800,000 people in the age range of 0-20 years old. It points to a shortfall of 400,000 people.

To summarize, based on our current slow population growth; in the short run (until 2022),expect property prices to decline because housing supply will outstrip housing demand. Conversely, if we are to look into the long term (say 2050), the ageing and eventual death of our baby boomers is likely to cause a drastic fall in housing demand and create a housing oversupply.

The only way forward is perhaps for the government to buy back housing units when the aged passes on. However, this will be a huge budget expenditure which will be a severe strain on government's finances.

Sunday, 18 February 2018

Review of Starhub - Be Prepared for Another Reduction in Dividends

Starhub has revealed another terrible set of performance. This is because of the declining revenue in Mobile and PayTV segments, as a result, Starhub's cashflow generated for the second half of the year has fallen to only $280 million. This can be seen using a comparsion of the cashflow statements of Q2 and Q4 of FY 2017.


First Half of Starhub Cashflow
Full Year of Starhub cash flow


Declining Deterioration

With zero1 coming on with its unlimited Data Plan at $30 per month, the arrival of virutal telecos are going to affect the profitability (in turn cashflow) of traditional telecos (E.g. Starhub and M1).

In addition, in its PayTV segment, Starhub is facing intense competition from OTT companies such as VIU (which is a subsidiary of Pacific Century, a SGX-listed company). In fact, Pacific Century has reported a growth of user base by 4 times last FY. The cost of VIU membership to watch TV content costs $6/month vis a vis that of Starhub which costs $20+ each month

All these point to a high probability that Starhub's cash flow and in turn dividends are likely to be cut.

How much dividends can Starhub give?

To support a 12 cents dividends, starhub needs to have free cash flow of $208 million.

Based on the outlook of its segments, Starhub is likely only able to generate $570 million on a full year basis. Netting off cash outflows such as:

i) Maintenance Capex - s$290 mil (based on past data)
ii) Income Tax of about s$50 mil
iii) Finance Expense of s$32 mil 

iv) Annual distribution to perpetual holders of s$7.9 mil 
v) Government Grant of $10 million (cash inflow)

Starhub has only about $200.1 million to distribute a sustainable cashflow. That actually means a 10 cents dividend is sustainable. However given that Starhub recently had built its cash reserves from issuing perpetuals, 12 cents dividend is sustainable for a short period. Beyond that, it is up to Starhub's management capability to improve its cash flow generation ability

Terrible Acquisition


In my opinion, the current Starhub management has not been making good use of its cash proceeds for acquisitions. One such purchase was in MM2 Asia, which is producing very little positive cashflow for its shareholders. Only time will tell if I am right about it.

2022 bonds

It is worth noting that Starhub has a $220 million 3.08% bond tranche due in Sep 2022 (4.5 years time). Given that these bonds were issued in 2012, way before Central Banks stopped their QE and shrunk their balance sheet, it is difficult for Starhub to reissue new bonds at such low rates. Since 2012, we have seen 5 rate hikes of 0.25% each, Starhub is likely to need a coupon rate of 5% to roll it over in 2022 - barring another economic recession from now to then. This is going to be another cash burn aspect

Conclusion 

All in all, given the deteriorating conditions, Starhub definitely has to cut its dividends to a sustainable level. As a dividend stock, asking for a 5% yield is acceptable given that its perpetuals is already yielding 3.95% per year. Furthermore, given how much cash burn Starhub has, I feel it is unlikely Starhub will redeem its perps; but instead let it shoot up to 4.95% after 10 years. Hence, a 5% yield demanded by common shareholders is reasonable.

This puts Starhub at a fair value of only about $2.00 to $2.40.