Monday 26 July 2021

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.

Sunday 25 July 2021

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.


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. 

Sunday 4 July 2021

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.


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.


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