Selling of Global Invacom and searching for other turnaround companies

<A short post update due to G Invacom recent update on 4 Aug>

Due to the latest profit warning which shows that 1H 2021 is not doing well, I have sold off G Invacom at a price of 11.7 cents.

This is due to my previous investing thesis not being met where I expected a turnaround in earnings which didn't happen and the company is trying to restructure in order to reduce cost.

Searching for other Turnarounds

With the markets now at their highs and COVID situation has started to improve (except for SEA), it is time to source for other companies who have a potential turnaround in earnings.

Wei Yuan Holdings- Potential Turnaround in Profits

While listed in the Hong Kong Exchange (Stock Code:1343), Wei Yuan is a Singapore business who operates in the cable installations for power grid and telecommunication companies in Singapore. They also have a minor business segment in road surfacing. Their geographical business is in Singapore and are in the civil engineering industry.

The company is a mid tier industry in the civil engineering segment of Singapore holding a 5.7% market share based on its IPO prospectus. 

Observations on Profits

Looking through the company's FY20 profits, it can be seen how Singapore's covid measures have affected its profitability and operations.

During the first half of 2020, Singapore issued a stop work order in a bid to stem the covid spread among foreign workers, as a result, Wei Yuan registered a loss of $4.5million on the back of $23 million revenue. However, as Singapore re-opened in the second half of 2020, they registered a profit of $1.2million on the back of $34 million in revenue.

What do I expect for 2021

First off we have to explain what happened in Singapore for 2021. For the first 4 months, thing went as per normal. However in May 2021, Singapore severely restricted the travel movement of countries which we were relied on for foreign labor. Hence, I expect the company to report the same profit of $1.2 million for the first half

As Wei Yuan projects run roughly 2 years in duration, I expect the company to be hit by labor cost over run for the remaining of FY21 and FY 22. After this, the company should start turning profitable again. 

Track Record of Company Tender

Based on its IPO prospectus, the company has been able to sustain a good profit from its contracts. This shows the tendering team has placed in adequate buffer in case of cost overrun. This is a good sign as there are some civil engineering companies in Singapore (think Yongnam) whose projects have always been loss making over the past years, likely due to poor projections by the tendering team. The companies with good tendering track record, I have encountered thus far is TTJ holdings and perhaps Wei Yuan (if they maintain their record)

Valuation

In my view, the company is likely to register a $1.2million profit for 1HFY2021. This is because it enjoyed 4 months of unrestricted access to labor as well as a good domestic situation of COVID handling. Furthermore, the construction industry grew during the 1Q of 2021. For the remaining half, it is likely to be loss making, but Wei Yuan should still be able to turn in a small profit due to its good track record in tendering. Hence for FY2021, I expect the company to fully turnaround in profits with a $1.0 million profit.

Post 2022, profits should return to pre-COVID levels of $5 - $8 million. The closest comparable to Wei Yuan is TTJ holdings (though they do different civil engineering types). TTJ is trading at 14-18 times P/E on forward earnings. Wei Yuan holdings is of a similar size company to TTJ and has a slightly higher revenue base; hence I have estimated Wei Yuan to be in the value of forward 16 times P/E.

Hence, Wei Yuan will then be priced as a $80-$110 million company on the HK Exchange (TTJ market cap is s$63 million). At current SGD/HKD exchange rate, the market cap of Wei Yuan should be HK$460-HK$632 million.

Will Singapore follow China's method of lowering child-rearing cost?

Over the weekend, the investment community will have heard and felt the impact on China's drastic policy in banning weekend enrichment classes and control over the education industry advertising. 

This brought fear and destroyed the market value of many listed China Education companies. While many have covered on the totalitarian implementation of the policy by the Chinese government, the undercurrent is due to China's aim of increasing the low TFR it faces now. It saw that rising education cost and stress in the education rat race was affecting TFR and hence nipped the root cause in its bud.

Will Singapore do the Same?

Singapore faces a similar issue in which education cost has been rising as parents compete in this education race. This has given rise to a large number of enrichment centers popping out and because of the fees they can command on parents, they are able to afford and moved to centralized locations in transport nexus such as retail malls in recent years.

Since the start of 2016, one will notice shop directories of malls having enrichment centers listed. This particular segment starting to rent retail spaces have helped to mitigate the rise of e commerce and ensure retail/commercial properties maintained their valuation on the balance sheet. Enrichment centers has been filling the void left behind by brick and mortar retail outlets, ensuring that the retail vacancy has been hovering at the 8-9% level.

It will be interesting to see if Singapore decides to follow the footsteps of China's policy direction of reining tight on enrichment centers. Due to the unique structure of Singapore economy where the property sector dominates, such a move will affect the valuation of retail/commercial properties. If the government does indeed move in the direction, I will be less sanguine on the local REITs market.

A turnaround in Earnings: Global Invacom

The company is in the business of selling satellite communication equipment. My investing premise is on a turnaround in the company's profits from potential cost savings in manufacturing efficiencies.

Earnings

In 1HFY20, the company recorded only a US$300k net profit. However for the full FY20, it had a US$2.6mil profit. 

Revenue wise, 1HFY20 was $52 mil vs 2HFY20 of $50 mil

Gross profit, 1HFY20 was $12.3 mil vs 2HFY20 of $13.3 mil

This means its margins improved in 2HFy20 and its partly due to the relocation of its manufacturing operations, which was completed in the first half of FY20.

Expectation of FY21

With the Covid recovery, I expect revenue for Global Invacom to improve. At USD$104 million revenue level, it can be expected to clock a full year net profit of US$4.4 million, assuming 2HFY20 margins. The current market capitalization is SGD$36 million (USD $26.6 million). Therefore, purchasing this company at a current P/E of 6 times is a worthwhile investment.

There is some room for revenue to grow because in FY20, G Invacom saw a decline of revenue to $104 million from US$134 million. Assuming a 20% growth in revenue (its 5 year revenue average), I expect future profits to be at US$5.4 million. 

Cashflow Quality

The company has been generating free cashflow over the years (including during Covid periods). Free cash flow yield is in the 20% region as compared to market capitalization. Usually companies only trade at a low free cash flow yield of 10% and below.

As the company is trading at a low price earning ration and high free cashflow yield (above 20%), I have invested in it. Unfortunately, I was not lucky enough to spot it early on and had bought it at 11.7 cents when it had a run up in prices last week. I am projecting the company to be worth SGD $60 million (USD$44 million) at 10 time P/E to FY21 profits. Forecasted FY21 profits should be US$4.4 million with further profit growth as revenue recovers. 

2 Palm Oil Companies that may benefit from the Palm Oil Rally

The world is on a commodities rally where prices of raw materials have increased by double digits over a 1-year period. This is largely due to the economic recovery post COVID as well as monetary accommodative environment.

Besides the oil rally, there is another produce that is abundant in South East Asia which has rallied. On a one year basis, the price of palm oil has grown by at least 40%. Hence I took a view of searching for SG-listed companies in the palm oil planation business; two businesses appeared - Golden Agri Resources (GAR) and Bumitama Agri (BA). Their business is simple, grow palm fruits, extract the oil and sell them.

Both companies have seen profit growths and I expect with the higher CPO prices, the revenue recorded will remain elevated which in turn means higher profits.

P/E Ratio- In terms of P/E, GAR is selling a high P/E due to its tax expense last year. However, this year's Q1 profits is already higher than the entire FY reported earnings, hence i suspect the tax expense is also a one-off line item. Hence, GAR is likely trading at a forward single Digit P/E. BA on the other hand, has consistently been trading at a single digit P/E over the past year. This is something interesting as I thought markets would price in future earnings given the rising CPO prices.

Plantation Age- Both companies have a relatively large proportion of mature palm oil plantation with GAR having a slightly older plantation age. However given that many of their plantation are in the peak oil yield stage; I am not sure why the market is ascribing such a low valuation.

Risk

Forward Sales (hedging)- It seems BA has done quite badly in hedging because it hedged some of its future palm oil at a low price and had to be pay the difference for the recent hike in Indonesia export levy. This could explain why profits are not growing as fast as GAR.

Indonesia Export Levy- Indonesia has increased its export levy. A risk is another higher than proportion hike especially when the government needs money to rebuild post COVID

CPO prices fall- It's the end of the commodities cycle and CPO prices falls back.

Conclusion

All in all, I think the commodities rally will still continue and am interested in investing in at least one otherwise both of these companies. Current CPO prices are at US$3500 per ton and I expect levels to be maintained. This will ensure FY21 profits will be higher than FY20's profits when CPO prices were at US$2500/ton.

I am not invested in any of them but will be taking a further look at weighing their plantation age vs their forward sales (hedging) strategy

Letter asking about Sembcorp Marine's pricing of rights- to SIAS

Reflecting on Sembcorp Marine's recent price action, I have sent a letter to SIAS as they are the only authority to help retail investors. 

Below is my letter to SIAS, for Sembcorp Marine Shareholders, please feel free to send it to SIAS as a form of collective action against Sembcorp Marine's Corporate Action

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I will like to request your assistance to raise a query to Sembcorp Marine due to its recent Corporate Action.

 

Sembcorp Marine has announced a rights issue of 3 rights for every 2 shares at 8 cents. I find this share issue unfair to minority shareholders and would request your team to raise it.

 

Firstly, while we understand Sembcorp Marine is raising money for its business, I question the huge discount required for 2021’s right issue. In this round of rights, the discount to TERP for the last day (35.7%) and 5- day VWAP (36.2%) is much higher than 2020’s; in 2020, it was 35.1% and 21% respectively. This does not make sense because SembCorp Marine is (i) now in a stronger financial position than its pre-2020 rights issue, (ii) the industry has become better and (iii) Sembcorp Marine has a higher net cash balance. All these points to the fact that TERP could have been done at a 20+% discount value.

 

Secondly, while Sembcorp Marine may argue that 2021 rights issues had to be priced lower due to investor’s fatigue in the company’s frequent rights, it points to the question of the need to raise $1.5 billion. The cash burn rate for SCM in FY 2020 was not high (about $850 million) during a disastrous COVID year. With SCM, recently raising $500 mil in green bonds for its projects and a cash balance of $770 million, it is definitely plausible SCM could have raised $850 million and be able to last to end 2022. SCM could have staggered the cash raising to smaller tranches on an annual basis. This would allow minority shareholders (who do not have the financial backing of a country’s past reserve) to participate in SCM’s rehabilitation.

 

Based on these two pointers, I hope SIAS could flag them as a query to SembCorp Marine about (i) how its has priced the discount to TERP and (ii) on the amount raised.

 

Thank you.

Semb Marine Latest Rights- Bitter For Shareholders but Sweet Money Making Opportunity for Temasek

 Today, SCM announced an unexpected 3 rights for every 2 shares at the price of $0.08.

In my view, this rights exercise is an unnecessary corporate action and a maneuver by Temasek Holdings to profit off minority shareholders.

Why is it unnecessary

Sembcorp Marine has a strong balance sheet since its previous rounds of rights raising since balance sheet is not massively over levered and has a cash pile of hundreds of million.

Rights Exercise

Existing Shareholders are going to be fatigued by the amount of rights and be constrained by their own financial resources.

In 2020, SCM did a shares issue of 5 new shares at $0.20 for every one share held. In 2021, it is now proposing 3 new shares for every two shares held at $0.08. Let's break it down with an example. Assuming in April 2020, you bought 10,000 shares at $0.70 at a cash outlay of $7,000. After the first rights issue, you would have 60,000 shares and have to fork out an additional $10,000. 

With the upcoming round of rights, the 60,000 shares results in 90,000 more shares to be subscribed at the cost of $7,200. Therefore, for just a $7,000 initial outlay, you have to put an additional $17,200. That is throwing another 250% more cash into your initial SCM investment. It is very difficult for investors to fork out so much cash in just one year.

2021 rights issue is priced at a higher discount than 2020 Rights Issue which dilutes Shareholders

In this round of rights, the discount to TERP for the last day (35.7%) and 5- day VWAP (36.2%) is much higher than 2020’s; in 2020, it was 35.1% and 21% respectively. This does not make sense because SembCorp Marine is (i) now in a stronger financial position than its pre-2020 rights issue, (ii) the industry has become better and (iii) Sembcorp Marine has a higher net cash balance. All these points to the fact that TERP could have been done at a 20+% discount value.

 Many Ordinary Investors wont be able to keep putting in money unless you are....

Temasek. No doubt SCM is issuing new shares at a discount to the tangible book value; however, I don't think many small time investors will be able to benefit from it due to the limited cash they have

It will only benefit Temasek who has deep pockets and the reserves of Singapore. Temasek has the opportunity to subscribe to the excess cheap shares, up to 67.0% which tells you how willing they are to buy additional SCM shares on the cheap.

All in all, this is a bad rights exercise where SCM is doing it from a position of strength. It is totally unnecessary. The latest corporate actions benefits Temasek tremendously and I will definitely vote against it.