Sunday, 16 September 2018

Review of Silverlake Axis

In recent times, Silverlake Axis's share price has fallen from its 50-60 cents range to that of 41.5 cents as of today. The question on people's mind is probably, if the current share price reflects the value of the company. As a start, let's recap on the business of Silverlake.

Brief description of Silverlake Axis

Silverlake Axis's main competency lies in the core banking system industry and insurance. It produces software which is used to run the operations of financial institution. As the core banking system is a critical system for the bank, there is a high risk and high cost nature involved if banks switch from one core banking system product to another. Hence, this is where Silverlake's business moat lies- It is difficult for its customers to switch out. 

Silverlake adopts a business model where it sells the software to financial institutions and then charges a recurring annual maintenance fee as a vendor. This model is similar to Sarine Technologies. 

Given its business model, Silverlake has been able to generate a consistent EPS and cash flow making it easy to estimate the value of the company because it is least affected by economic cycles.

Business Fundamentals

So let's now look at its Balance Sheet and cash flow. Its latest Financial results can be found here.

In the previous financial year, Silverlake had an abnormally high profit because it did a one time sale of its China stake. Otherwise, its earning per shares will be only 5 Malaysian cents (or about 1.6 SG cents). This means at at current prices, SIlverlake is priced at about 14x P/E.

On the cash flow front, the company is generating about 160 Million in Ringgit after accounting for investments into its software development. It means Sivlerlake is able to support about 6 Malaysian cents or 2 SG cents Dividends. Silverlake too still has about 300 Million Ringgit in cash. Most of the stated cash are in deposits in China because of China's restriction of capital movement; silver lake has to slowly transfer the cash out of china.


Given that Silverlake's business model is fairly consistent and resilient, we can estimate that shareholders will get 2 SG cents of dividends annually. This will be further supported by its strong cash reserves which it is trying to take out from China.

In my opinion, Silverlake can be valued as a dividend stock which will give shareholders an annual dividend of 2 SG cents. At a price of 41.5 cents, the company is at a 4.8% yield. In my opinion, Silverlake is fairly priced and investors may consider the company whenever its share price places it in the 5% yield. 

Tuesday, 14 August 2018

Is Ezion Turnaround in Sight?

Ezion Holdings is in the business of chartering out its liftboats, service rigs and barges etc. The company recently underwent a financial restructuring to save itself. It led to a massive dilution of old shareholders who are unlikely to recover their cost price.

What went Wrong and its Financial Restructuring

Ezion's management made the big mistake during the oil boom days to borrow money extensively to buy oil support equipment thinking that chartering rates will continue to be that high. In 2015, oil prices went down and Ezion's equipment were chartering at much lower rates and the company was unable to service its massive debts.

The company underwent a financial restructuring in 2017 where i) Banks agreed to lend them money at a lower interest rate but received a large number of shares as part of the agreement, ii) Most bondholders and perpetual bonds agreed to convert their bonds into shares; likely selling it off thereafter and losing a large part of their capital. It resulted in a dilution of shares where Ezion's share capital increased from 2 Billion shares to 3.7 Billion Shares

Turning Around of Ezion

In Q2FY2018, Ezion posted a terrible set of financial results:

Ezion's business is still in terrible shape with a quarterly gross loss of $10.9 Million before other expenses. If we were to factor in other expenses and ignoring its one off fair value  and exchange rate gain due to the strengthening US Dollar (recorded as other Income); Ezion is likely to have made a loss $30 Million Losses in the past 3 months.

So how can Ezion Turnaround about $30 Million in Quarterly Loss?

Firstly, Ezion has secured and refinanced its $1+ billion debts on 2 July 2018. This is likely to reduce its quarterly finance expense from $7.8 Million to about $2.0 Million in expense. The arrangement will allow Ezion to enjoy low interest financing until June 2024.

Secondly, many of its lift boats are still idle despite the upturn of the oil industry. According to a DBS brokerage report on Ezion, it is expected 2 more lift boat will be chartered out this quarter at a rate of USD 30+k per day. The chartering of these 2 Lift boats is likely to raise Ezion's revenue by about US$6 million. 2 more lift boats will also be chartered out in Q4 FY2018.

With the increase in lift boats utilization rates and lower finance expense, I am still expecting Ezion to report losses for the next few quarters. It is only during the next financial year would I expect to Ezion to break even.

Given the scenario described above, Ezion is likely to be worth slightly below its book value of US 12.17 cents (SGD 16.6 cents). Ezion's fair value is likely only SGD 15 cents.

What Happens in 2024?

Another dark cloud is Ezion's ability to repay its debts in 2024. By 2024, Ezion will have to refinance its $1.2 Billion of Low Interest Bank debts and $170 Million of Bonds. Given that at a charter rate of $40k USD per day for its 13 liftboats, Ezion is likely to only earn USD$190 Million in annual revenue. It shows that Ezion is likely to have a cash shortfall in 2024 of about $200 Million.

However, I personally doubt it will be a big issue if (i) oil markets don not deteriorate from then and (ii) ezion's management do not foolishly indulge in huge capital expenditure. What I would like to see is that the management does their job of running daily operations carefully, not to dream big of massive expansion again and pay themselves high salary which amounts to a few million like during those boom times.

Past Shareholders and Bondholders have already made the financial sacrifice and trust that the management will turn things around. It will be incorrigible for Ezion's management to again betray this trust and second chance offered to them. Will Ezion's management be sincere enough to correct their mistake or decide to take advantage of peoples' trust? Who knows.

<Invested in Ezion Holdings>

Thursday, 9 August 2018

Is There Something Wrong with Singapore's Accounting Practices?

With the recent spate of SGX companies taking huge write down of assets and frauds still happening as frequently, it got me wondering- Does Singapore have a weak financial regulator or is it there something wrong with our accounting practises?

Case 1- Noble Write Down

Many of us will be aware of Noble's huge write down on its financial derivatives and the subsequent loss in shareholder value.  All these while, an independent research house, Iceberg, has been indicating that Noble had over-valued its financial derivative assets. What made it worse was that Noble's own external auditor, Ernest & Young, had for years been giving Noble the clean bill of health. While it is true the methodology is sound, the inputs/estimates Noble had given was unrealistic.

This begs the question: Are our auditors really looking at the authenticity of numbers by thinking on the inputs or are senior partners just blindly signing off? After all, many university students have learnt of the idiom - "Rubbish in, Rubbish Out"; hence I wonder if many of our practicing auditors do take heart of this idiom when doing their work. This brings me to the second case.

Case 2- Hyflux and Tuaspring.

This is another classic story of  "Rubbish in, Rubbish Out". Hyflux is now in financial limbo and at the heart of it is its largest asset- Tuaspring which is worth $1.4 billion in book value with a lifespan of 20 more years. How did Hyflux value $1.4 billion? Well Hyflux had based it by estimating the total economic value its power plant will bring based on 2011's electricity price of $200+ per unit and extrapolated it until the duration end of 2038.

Fast forward to its completion in 2015, prices hit its low points and in 2016 it went down to below $70+. One may argue that electricity prices will rise back to $200+ to match Hyflux's estimates, but common sense and Google searching would have showed that Singapore's power industry was oversupplied where power output supply was double that of demand. Even if the upward reversion is true, it will take time. Hyflux definitely could have taken an impairment n for the poor outlook that is happening now.

Unsurprising Hyflux's external auditor, KPMG, are still giving the OK for Hyflux's stated book value until FY2017. With the recent need to sell Tuaspring to rescue itself, I am pretty sure Hyflux will be booking an impairment on its own and not because KPMG has realized the inputs to Hyflux's valuation model does not hold true.

It makes me wonder if our auditors are indeed verifying the authenticity of the reported balance sheet numbers of our companies. In addition, with recent times, we have noticed how many companies with overseas operations have been found to report non-existent cash balances in their balance sheet. The most recent example was Midas Holding (External Auditor: Mazars)

It makes one wonder the robustness of our auditors in conducting their due diligence on overseas operations of listed companies here. In fact, if I am in to indulge in my clairvoyance ability, my crystal ball says a listed company starting with "S" is dodgy. The company's market capitalization is much lower than its stated net asset value and will easily pass any CNAV analysis value investing model; surprisingly no hedge fund or investment fund is invested in it!

Conflict of Interest

It is worth noting that under Singapore's current financial regime, companies themselves have to hire the auditors who will be checking on them. This is a potential conflict of interest because the current practices means Audit firms have to rely on these companies for their livelihood. Hence should audit firms give a bad report on their own customer (these listed companies), it is likely the auditors will lose their business.

In Pritam Singh's word, it iscalled "Ownself Check Ownself"

So naturally if an auditor feels that a certain company is giving dodgy inputs to makes its balance sheet look great; would auditors flag it out to warn the public knowing that they will lose a potential source of income? I think you and I know the answer. 

Instead we should consider asking companies to pay their audit fees to a central regulatory body who will then appoint an auditor on their own for a period of time (e.g. 5 years). Extra Financial Incentives can be given to auditors should they spot a fraud or dodgy practices done by their audited company; and if a fraud or massive impairment happens during their watch, they face a financial penalty.

Friday, 27 July 2018

Hyflux Sale of Tuaspring and the Financial Damages - Part 2

In my previous post, we discussed about the possibility of Hyflux taking s$600-$750 million impairment for the sale of Tuaspring. The next order of question is to find out the effects of the impairment on vested interests in Hyflux.

If Hyflux Closes Shop

Basically Hyflux has 4 vested parties. Should all of Hyflux's assets be sold off (cease to be a going concern), below is the order in which these parties will have a share of the proceeds:

(i) Firstly, secured lenders (e.g. Banks such as Maybank)
(ii) Unsecured Bondholders (who collectively hold $265 million of Hyflux bonds)
(iii) Perpetual and Preference Shareholders (collectively having a $900 Million Stake)
(iv) Lastly Ordinary Shareholders (who have $100 Million in equity left in the balance sheet).

Hence should Hyflux take the $600-750 Million impairment and is able to sell off the rest of its assets and projects at their stated value. Hyflux Ordinary shareholders will get nothing, Perpetual and Preference shareholders are likely to lose close to 70% of their capital; while Bondholders and Secured lenders are likely to walk away unscathed.

What happens if Hyflux takes the Impairment and continues Operating with its other assets?

In my opinion, this scenario has a higher probability to occur. Hyflux will continue its oeprations after selling Tuaspring for a cash proceeds of about $700-850 Million.

However, Hyflux has to first pay off Maybank the $400 million loan it took. This leaves Hyflux with about $300 million - $450 Million cash. Hyflux currently has about $18.6 million in cash reserves in June 2018. With a $100 Million bond it has to pay this year and bank loans due this year, $165 million of bond due next year, it is difficult for Hyflux to repay all its bondholders and continue funding its projects which are burning cash as they are not under construction.

Should Hyflux be unable to sell off its other assets, i expect Hyflux to propose a financial restructuring where bondholders (ii) , and investors of group (iii) and (iv) will have to undertake a conversion to share exercise like what Ezion did.

Ezion Case Study

Ezion is a unique case because bondholders, perpetual shareholders all agreed to a conversion to share deal. However one key difference is that Ezion bond and perpetual holders knew that should Ezion cease as a going concern, they were likely to lose their entire capital. However, in Hyflux's case, bondholders are probably aware they will get a significant amount of capital back if they demand the closing down of Hyflux and liquidation of its assets.

The Damage

Should Hyflux decide to save itself and fight for a financing restructuring, it mean bondholders have to be offered either more shares per $1 capital or converting Hyflux shares at a lower price than perpetual holders.

As for ordinary shareholders, they have no choice but to be massively diluted. After all, getting even 0.01% of your capital back is better than getting none at all.

In my opinion, it is likely that groups (ii), (iii) and (iv) of the vested parties will be financially impacted should Hyflux attempt to keep itself afloat by restructuring.

However, should Hyflux be forced to closed down, it is likely group (iii) and (iv) will be impacted the most, while group (ii) are likely to get their bond principal back- minimal financial damage to them.

The whole Hyflux restructuring will be decided on the outcome of Hyflux Bondholders vote, will they vote for (a) converting to shares in an ailing company or (b) will they try to preserve their capital; which as a result will cause massive financial damage to perpetual, preference and ordinary shareholders (mom and pop investors).

Sunday, 22 July 2018

Hyflux Sale of Tuaspring and the Financial Damages - Part 1

To inform investors on its financial restructuring, Hyflux held two townhall sessions on 19 and 20 July 2018. One of interesting fact is the presentation on the book value of their projects, reproduced below. The link to their slides can be found here.
Figure 1: Stated Book Value of Hyflu's Projects

The Elephant in the Room - Tuaspring Project

Hyflux's financial restructuring revolves around the sale of Tuaspring. The sale value of this project will determine how much losses investors will take. During the court hearing in June 2018, Hyflux's lawyers said they are hoping to close a deal of no less than s$1.3 billion in book value if time is on their side. Tuaspring is owned by Hyflux until 2038, after which it is no longer owned by Hyflux.

In my opinion, it is difficult, if not impossible, for Hyflux to fetch a $1.3-1.4 Billion Price Tag based on the following fact-findings:

Fact 1 - Overcapacity of the Power Generation Sector.

Singapore has an overcapacity of power generation plants. Quoting from the business times, the Singapore Power Generation Sector has a total capacity of 13,350 MW, while in 2017, Singapore only consumed 7,000 MW. Even with an annual growth of 3%, Singapore's power consumption will only grow until 13,000 MW in 2038 (which is the last year Hyflux owns Tuaspring). So until then we are likely to face oversupply.

Hyflux had built Tuaspring in 2012/2013 when Singapore did not have an overcapacity problem. Because Hyflux and other companies started building power plants at the same time, this resulted in the supply glut. It resulted in Singapore electrical prices falling by half. This is similar to what happened in the oil rig glut situation Keppel and Sembmarine faces now.

Fact 2- The loss making aspect of Tuaspring

In the latest FY 2017 results, Tuaspring made s$80 Million in losses for the full year, while in Q1FY2018, it already made losses of s$23 million for only 3 months. To explain, every loss a company makes, it has to record the same fall in numbers in the book value. For example, Hyflux book value of Tuaspring is $1,470 million. If it makes s$80 million of losses in 2018, Hyflux has to record s$80 million in decrease of book value. It results in Tuaspring having a new book value of $1,390 million.

AQ of Valubuddies [Link found here] highlighted an interesting fact and that is the LNG contract Generation companies have here. The price and volume of Genecos with LNG have been fixed until 2020 or even till early 2020s. This means Genecos like Hyflux have to continue to honor the agreed LNG prices and volume despite the depressed electricity prices. Hyflux is likely to continue bleeding $80 million a year assuming a 4 years period until it is able to renegotiate and get a new LNG contract.

Fact 3- Valuation of Tuaspring

The $1,470 million book value of Tuaspring is based on Hyflux's projection of the amount of benefit it will derive until 2038. Given the depressed electrical prices and prolong overcapacity in Singapore, potential investors will be questioning on the validity of Hyflux's inputs towards its valuation model. This is an area of contention.

Impairment of Tuaspring Project

With the Tuaspring likely to bleed a total of s$320 million for the next few years, bidding companies want to have a positive return for investing into a water/power plant that is in an oversupplied power industry; I would expect offers of about $700-$850 million in book value. 

My own estimate is that Hyflux may have to take a write down or losses close to s$600-$750 million with the Tuaspring sale.

In my next post, I will cover how a s$600-$750 million impairment affects the 4 different type of parties involved with Hyflux - i) Secured Bank Lenders, ii) Note Holders, iii) Perpetual and Preference Shareholders and iv) Ordinary Shareholders. [Link to Part 2]

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. 


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 


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.


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>