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.

Avarga, a Potential Gem?

One company that got me interested is Avarga (U09 stock code). The company has three business segments in (i) Building Construction in Canada/US, (ii) Paper Mill business in Malaysia and (iii) Power plant business in Myanmar. 

(ii) and (iii) are stable business which have seen little growth and a fall in profits during the last COVID hit year. 

Taiga Building Products- a 69% owned subsidiary listed on Canadian Exchange

This segment interests me. Due to the bumper year in Canada and US housing starts, Taiga's profit grew tremendously and the company is trading at 3 time PE on the stock exchange. Analysts in Canada are predicting that Taiga Building products profit was only a one-off event. In the past, Taiga traded at a band of 6-8 times Price Earnings in the Canada Exchange. Its current market cap is valued at C$313 million.

However, I think Taiga is due for a re-rating soon because the housing market in Canada and USA is still booming and Taiga's latest quarter results showed no sign of slowing down with profits higher than the corresponding quarter of last year. This might mean that Taiga's elevated profits will remain for a period of time.

Avarga Share buyback

In the month of May 2021, Avarga had conducted share buybacks at s$0.305-0.315 in the open market. This is a signal that the company thinks its shares are cheap. This has been ongoing since the start of this year and despite the share price having doubled over the year.

In addition, Avarga's dividends has increased as well and it now stands at 1.9 cents based on the past 4 quarters of dividends. At a share price of 30.5 cents, this gives a dividend yield of 6.2%. While Avarga has a sustainable dividend policy where it pays only 40% of its earnings as dividends, it shows that earnings is a function of the dividend yield. Avarga had increased its dividends a lot due to the growth in earnings at Taiga Building.

Conclusion

I am bullish on Taiga's Building Products due to the housing boom in the US and Canada. I did not invest directly because I do not have access to the Canadian Market; hence my interest in Avarga. With Avarga's dividend policy and frequent share buybacks this year, it is a sign that the company is undervalued.

I have not invested in it but am likely to start investing capital due to its high dividend yield and share buybacks.

It is difficult to ascribe a valuation to Avarga because it depends on the North America housing market which has just started to expand. But assuming the housing market is as hot as it is now, this means Taiga can be re-rated to 6-7x PE, a doubling in share price. To avarga, it means an addition of SGD$220 million in value. This represents a 77% upside to Avarga's current market cap of SGD$285 million.

Are China Banks that Cheap?

One industry that intrigues me is China's Banking Sector. China banks are currently priced at dividend yields of above 6% with price earnings ratio of less than 8 times. In comparison, the Singapore banks, are priced at dividend yields of 3-4% and price earnings ratio of 14-17 times.  

Based on these metrics, if China banks are to be of the same valuation as Singapore banks, their share price has to double.

Reasons why China Banks have such low valuations

A quick review online shows many analysts are skeptical about China banks' assets and their "earnings". They point to the lending bubble in China with claims that the Chinese banks are financially engineering their loan portfolio to report a low "non performing loans (NPL)" ratio of 1+%; this ratio is similar to what Singapore banks report. This allows China banks not to report a large credit provisions which will affect their P&L annually.

Online sources claim that the NPL of China loans are in the region of 10%, as opposed to the 1+% reported.

The skepticism of China's banks financial reports are the main reason why these banks valuations are that low.

Do I believe the online sources? Financial Ratios vs Credibility

This is something I have to think: whether to trust China banks' financial reports while weighing against the attractive valuations of these banks at annual dividends of 6 to 8% (Bank of China is providing 8% yield, while the rest are giving 6% yields). In addition, I notice that the Chinese banks earnings are stable with slight growth in earnings year on year. My evaluation is that there is a 50% upside when more individuals start to believe the financials of the banks or are attracted to these bank stocks.

Therefore, I plan to position a maximum of 2% of my overall portfolio in the Chinese banking sector. Above this, it might be too much of a risk.

I have started investing in the largest two banks in China - ICBC and CCB from today. Currently I have about 0.5% of my portfolio in the Chinese Banking sector. It will serve as my dividend stocks with some upside to be gained.

How much is this Fast Growing Company Boustead Singapore Worth?

This is a thought exercise to determine the value of Boustead Singapore. The company is a conglomerate with operations in the 4 areas of: (i) Real Estate/Construction, (ii) Engineering in water treatment and offshore gas, (iii) Distribution in Geospatial Technology Solutions and (iv) Healthcare. Over time, the company has experienced profit growth due to the trend of increasing technology use and a booming Singapore Property Market. 

Boustead Singapore's FY 21 Results

I will try to determine the value of each business segment and then adding them.

Real Estate/Construction

Boustead singapore owns through its 53% stake in the listed subsidiary of Boustead Projects (BP). BP has captured investors attention recently because it injected some assets into an industrial fund which potentially means a future REIT. BP has a large number of properties such as Razer HQ, ALICE@mediapolis it owns and can be injected into the fund. All these properties amount to a billion dollar valuation and can be injected into the newly formed industrial fund to monetize. For its construction arm, despite a COVID year, the construction segment was still profitable; hence one can expect BP to be consistently profitable.

The company is now sitting on a net cash of 86% of its current market cap and with a billion dollar portfolio of properties to inject into the fund and strong construction order book due to Singapore's property demand, I personally expect BP to be worth $1.60 per share. This is because the RNAV of its remaining assets which it can sell to its fund is in the $2 range.

Hence BP is worth $542 million, and proportioning to Boustead Singapore's 53% stake, that is $288 million.

Engineering

Boustead provides engineering services to refineries as well as has water treatment plants worldwide. The company has been experiencing high revenue and profit growth over the years with the latest FY seeing an increase of 37% revenue growth ($198 mil vs $144.5mil) and its profits before income tax has tripled. Engineering segment profits is now $28 million, as compared to FY20's of $7.9 million

Annual Report for FY 20's Engineering Results

While this segment has lumpy revenue due to it being a book order based, the revenue and profit growth is still commendable. Based on a price earning ratio of 10 times at current profits of $28mil.  Its market value is $280 million.

Geospatial

The geospatial segment has been seeing constant growth and Boustead is the sole distributor of ESRI software in this region. There has been a mass uptake in the ESRI software Boustead is selling. Revenue has been growing year on year. For FY 21, revenue was $170 million with net profits before income tax of $40 million. This means since FY16, the CAGR for revenue and profits are 11% and 14%.

It is also the key profit contributor to Boustead Singapore in FY20 (contributed 45%) and this segment has been growing rapidly due to the move towards the increasing use of technology in this region. It has set another record revenue and profits for FY21.

                                                 Annual Report for FY 20's Geospatial Results

Its clients in the region are governments and MNCs; hence it is stable. With its continuing high digit growth in profits due to operating leverage, one can reasonably ascribe a 15 times price earning to account for this segment's continuous high profit growth. At 15x PE of $40 million PBIT, this segment is worth $600 million.

Healthcare

The healthcare is a new segment which is still making losses. It is difficult to value it now. For simplicity, I will consider its assets as zero value

                                                Annual Report for FY 20's Healthcare Results

Sum of Part Valuation

Adding (288+280+600) million, I expect the company to be worth $1.16 billion. Its current market cap is $568 million at a share price of $1.17. 

Based on the SOTP valuation, Boustead is worth $2.39 per share. It represents an upside of 100%.

<Author is invested in Boustead Singapore> 

Portfolio Addition (May 2021): Alibaba and Ascendas India Trust

 For the month of May, I have decided to venture into the Hong Kong to pick up Alibaba.

The investment thesis was less of a quantitative approach but of a qualitative reasons. Firstly, Alibaba's cloud provider segment has started to EBITDA positive and with operating leverage, this segment can be a billion dollar profit sector through revenue growth. Amazon Web Services, Amazon's cloud provider sector has been profitable and is now generating annual profits of $13 billion. Personally, I think China and its companies will choose Alibaba or other China Cloud Providers. However, it will be enough for Alibaba to have a billion dollar profit in this pie. This points to a potential 10% growth from current earnings.

Secondly, China's middle class disposable income is growing and this means a larger e-commerce market. This also means higher earnings. With that, I have taken some position in Alibaba through the Hong Kong Exchange.

Second Addition: Ascendas India Trust (AIT)

Without getting the ire of the local online community, I personally feel Ascendas India business park's business will continue to grow especially due to the growth of India's e-commerce segment and IT support industry. AIT's holds a few good assets in India's IT hub and has the space and financial capability to build more buildings to expand these business parks.

Once India has recovered from it current COVID situation, I expect the dividends per share to stabilize and be slightly higher than FY 20's (8.8 cents). I am expecting 9 cents dividends. At current share price of $1.38, the REIT is a 6.3% yield which is pretty good in the Singapore REIT's sector. While AIT is an industrial REIT, its current yield is higher relative to smaller and higher levered peers such as Sabana (about 6%) and ESR (6.1%). In my view, the assets held by AIT (while in India) are of better quality than Sabana's and AIT's tenants are of quality MNCs. 

It is probably due to the COVID situation in India that resulted in the beat down price. Otherwise, in my view, AIT is a 5% yield industrial REIT.

Portfolio Addition: Bought Boustead Singapore and Borr Drilling

 Just a simple post, recent additions to my Portfoilo: Boustead Singapore and Borr Drilling in NYSE

Boustead Singapore was an investment because of their strong operating cashflow as well as news of gains in disposal of investment properties in Boustead subsidiary. I am expecting a growth in dividends that will justify a permanent 5-6% dividend yield at current prices. 

The company is the sole distributor of the ESRI software in Singapore which is the main geo-spatial technology everyone uses here. Essentially Boustead holds a monopoly in the local geo-spatial software system. The company currently distributes 3 cents dividends at a payout ratio of about 40%. With higher earnings as a future REIT manager, increased usage of geo spatial software and water usage in singapore, it is possible boustead earnings will increase and along with it higher dividends.

The next purchase is Borr Drilling. They are listed in NYSE and own a fleet of new oil rigs. However, only 50% of their current oil rig fleet have contracts while the rest are idle laying in yards across the world including Singapore. My prediction is that with oil demand increasing, the utilisation of Borr's rig will increase and losses will turn to profits.

That's all I have, simple theory to my investing thesis!

Sembcorp Marine- Current NAV of 29.2 cents and losses of 4.6 cents LPS

Sembcorp Marine (SCM) has released its full year results, with a loss of 4.6 cents per share (after factoring the enlarged share base). The current net asset value per share is now 29.2 cents per share. This is shown in page 8 of its financial results.

What does the Future Hold?

I am maintaining my prediction that SCM will make 1.1 cent per share loss for 2021. This is because SCM has a few contracts left and does not seem to be fully utilising its yards (However i will re-evaluate the losses post 1HFY results to gauge the company's value).

Investors can expect SCM to deliver the last 2 Transocean Drillships this year because one of them has secured a contract to start operations in the fourth quarter of 2021 with Chevron. Cost of the 2 drillships stated in Transocean report is US$1.93 billion (S$2.56 billion). With delivery in FY21, a significant portion will be recognized as revenue, which I estimate is around SGD $1 billion. With other projects and ship repairs, SCM FY21's revenue will be at least on par or better than FY20.

Orderbook

Assuming a full workforce rate, SCM's orderbook will last until end 2022 based on extrapolation. It is likely SCM will cut its workforce to let its orderbook last longer. 

With the offshore drilling industry now recovering and more rigs put into work, it is likely SCM will get new rig orders secured in 2022. With the market leader, Keppel O&M's exiting, SCM will be able to command good margins for future contracts especially deep water rigs where it is now unrivalled.

Energy demand is increasing quickly now due to the consumption by crypto mining/transactions and growth in data centers. While some banks are predicting a commodity upcycle, similar to the $100 oil seen in 2011-2013, I am less sanguine and expect oil to be at only $80. However, this will result in increased drilling which will support the need to order more oil rigs. 

SCM too will win orders in windfarm installation and that will be another plus point. All in all, an increase in revenue will mean lower losses and eventual profitability for SCM. 

Valuation

At the current reported NAV of 29.2 cents and expected further losses of 1.1 cents (2021) with profitability from 2022, I expect SCM to have a NAV of 28.0 cents before turning its business around. Applying a 30% discount to FY22 forecasted NAV to factor for uncertainty of more losses, the fair value is 19.6 cents, or 25% higher than the current share price of 15.2 cents.

SCM also holds valuable land in Singapore in the form of the new Tuas Yard where Singapore plans to consolidate its trading activities at. The consolidation of port operations at Tuas means SCM ship repair segment will be getting the business of maintaining and repairing ships; after all Keppel Corp is also exiting this segment as well.

Should SCM turn profitable at a quicker pace, this will be a catalyst for the company to be valued at 28 cents as the certainty of continued losses is reduced.