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>

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.


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.


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


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.

Saturday, 20 January 2018

Update on First Ship Lease Trust (FSL)

A few major developments has happened at FSL Trust. Hence, it is time that a review of FSL's performance and financial strength be done to determine if the trust is still a viable investment.

Recent Developments

The recent sale of 3 ships (FSL Tokyo, FSL Santos & FSL Santos) was a major development. FSL is estimated to receive a cash proceed of 26 mil which will be used to lower their debts to 132 mil. Based on the past three quarters of financial results, the 3 ships have produced for the trust about US$2.2 mil in BBCE. Annualising it, it means FSL was selling an asset that was yielding about 10% in cash yield. The three ships contribute about 6.7% of FSL's revenue.

Given how hard FSL is trying to refinance its current debt facility, I feel it is a compromise FSL has to take. After all, the 3 ships are likely to have only about 9 years in service left before they have to be scrapped.


A major concern for shareholders now is that FSL is in the process of obtaining the renewal for its debt facility. Not all bankers being in favor of a renewal. This has resulted in the refinancing moving on to a scheme of arrangement of stage which involves a court meeting. It remains to be seen if the banks will agree to an eventual renewal of debt facility. In my view, the recent 3 disposals of ships is likely to make renewal of the debt facility easier to achieve.

Evaluation of FSL

It is important to see how much is FSL worth now in the current Tanker climate. In this part, I will be evaluating on an asset based level and on a cash flow.

Asset basis

KGI securitites did an estimation of the second hand market value of FSL's assets by a ship by ship breakdown, Based on the past three transactions, KGI's valuation of the ship has been below the price which FSL has sold. This means KGI's estimation are conservative and perhaps is a good benchmark to evaluate. 

Based on KGI's, the remaining ships are deemed to be worth US$199 million. Netting off FSL's debt of US$132 million, interest accumulation of US$5 million and estimated disposal fee of US$6 million, shareholders are likely to get back US$56 million for the ships. And with US$16 million in cash holdings, the current value of FSL is US $72 million or 14.9 cents per share.

Cashflow basis

From the past 3 quarters of financial results, FSL has generated US$32.6mil in BBCE revenue. BBCE is the revenue that goes to FSL after netting off all relevant cost. Taking into consideration the loss of US $2.2 mil BBCE from the disposal of 3 ships and a 10% discount on future BBCE revenue due to ageing ships etc, FSL's BBCE generation ability is US$37 million per year until 2021.

After 2021, the lucrative US$20mil in BBCE from the Yangming contracts will expire and this means, the 3 containerships' BBCE revenue is likely to be about US $4mil per year. Hence from 2021 and possibly to 2026, BBCE for FSL is US$21 million per year.

At a debt level of US$132 mil and constant repayment of US$44 mil per year based on existing cash holdings and BBCE generation until 2021, it will take FSL until 2022 to repay all debts. From 2022 to 2026, the cashflow generated as well as the scrap value of the ships will be for shareholders. Based on current scrap metal prices, the ships are worth about US$65 million. This means shareholders will receive a total cashflow of about US$170 million, or about 26 cents per share.

Discounting it to present value at a 10% discount rate, the current value of FSL is coincidentally about US $72million or 14.9 cents per share.

Monday, 1 January 2018

World Precision Machinery - Undervalued Gem or another "S-cheat"?

Shareholders of World Precision Machinery (WPM) have suffered a torrid time owning this company. Since 2013, shares of WPM have tumbled from a price of $0.40 to $0.196. That’s a decline of 51% (before accounting for dividends).
What it does
In one sentence: WPM makes metal stamping machines for hundreds of customers in China ranging from automotive plants to household appliances brands. Stamping machines are machines which bends/folds/presses metal sheets into the desired form required by the user. There are two types of machines manufactured by WPM – i) Conventional stamping machines and ii) High end stamping machines.
Decline of business
So what contributed to WPM’s decline in share price? Well the answer is because of a deterioration in orders for its stamping machines. While China is “growing”, it seems the manufacturing side of China is in contraction mode. Many stamping plants including WPM have experienced a decline in orders for their stamping machines.

From its Annual Report 2016, we can see that demand for WPM conventional machines are declining, fortunately, its high end machines demand has been fairly constant. Table 1 and 2 are extracts of WPM's revenue and the demand for its conventional and high end stamping machines.
Table 1: World Precision Revenue/Profits and Conventional Machine Demand

Table 2: World Precision High End Machines Order and Dividend payout
Based on its AR16, we can see that the fall in WPM's revenue and profits is due to the a decline in demand for its conventional stamping machines.
Has the decline stopped?
This is a question which I posed. Based on WPM’s revenue and profit for the first 9 months of FY17, WPM’s revenue has grown by 16% as compared against the same period while it net profits has grown by 13.8%. It signals that the decline in profitability for WPM has stopped and perhaps one can start valuing WPM based on its current financial results.
I do not think WPM will continue to experience a drop in demand for its conventional stamping machines.
Strengthening Balance Sheet
One thing which attracted me to WPM is how the company has reduced its debts even during tough times. From a FY13 debt level of RMB 300mil, the company has reduced its debts to only RMB 38 million. The company’s cash level has reduced by about RMB 30 mil during this time (35mil to 5mil).
This was largely due to the cash flow generating ability of the company:
Operating Cash flow (RMB)
Investing (RMB)
Free Cash Flow
273.6 mil
(125 mil)
148.6 mil
210 mil
162.8 mil
194 mil
(56 mil)
138 mil
150.8 mil
(38.6 mil)
112.2 mil

The strong cash generating ability of the company has been used to pare down debts and as dividends r shareholders.
Current results
As of now, WPM has RMB 38 mil of debts. In the current 9 months, WPM has already generated RMB 124 Mil in CAPEX with a cash outflow of RMB 44mil.
Extrapolating its current 9 month cash flow results, one can expect WPM to generate about RMB 100mil in free cash flow for this financial year. Translated to Singapore dollars, this means WPM’s business is generating about 5.1 Singapore cents per share. With such a strong cash flow generation ability, I am quite optimistic that WPM will be debt free by the end of FY2018.

As of Q3FY17, the net asset value of WPM is 54 Singapore cents; this means it is selling at a rather low book value of 0.36. What is more tantalizing is the cash flow yield one can get now from acquiring this company. At a share price of 0.196, the cash flow yield for owning a share of WPM’s business is 26%.
Liquidity of WPM shares
WPM is a fairly illiquid shares on the company with 87.43% of the shares are held by the major shareholders. This makes purchase of the shares rather difficult. For me, I had to patiently monitor the buy/sell bids of the shares before purchasing it. Fortunately for me, I was able to obtain some at 0.196.
While it is an S-chip, what surprised me was the amount of dividends WPM has been returning to shareholders. From Table 2, it can be seen that WPM has been constantly giving out dividends on shareholders since 2010. FY16 was the anomaly where dividends were stopped. Since it's listing in 2006, WPM has returned more dividends than the cash amount it raised during its IPO. This is a good sign for a Chinese Listed Company.

Given the cash generating ability of the company and low debt, I believe WPM will resume its dividends soon.
Is it an S-Cheat?
This to me is another issue. Being a Chinese company and the terrible reputation Chinese listed entities have here, one does not know if its financial accounts are real. However, given that the modus operandi of "S-cheats" is to raise money on the SGX and run away with the money, it does not make much sense that WPM has paid more dividends than it had raised nor the large shareholdings of its owners unlike the other frauds whose owners had a less than 50% stake.

In my opinion, it may be worth staking a small percentage of your portfolio; Sometimes you have to take a leap of faith first, the trust part comes later.

<The author is vested in World Precision Machinery>