June 2009 Portfolio Summary and Review

June 2009 could possibly go down on record as one of the most boring months in terms of corporate activity, as well as stock market activity. There were hardly any updates with regards to the companies I own, the entire economy is still lurching around in a listless, zombie-like state, and the searing heat in Singapore just made everything all seem even more surreal.

Despite the sporadic news on the “green shoots” theory interspersed with news on the various aspects of the Singaporean and USA economy, the general sentiment was one of indifference and sluggishness, if those words could be used to describe reactions to news. I believe the general mood can be more aptly described as “corpulent”, which makes one just feel like wilting in front of the TV or computer amid the incessant and sometimes incoherent babbling from the newscaster as he regurgitates facts and figures in an equally tired voice. It could be argued that the most “sensational” news to come out this month was not on the economy or the stock market, but on Michael Jackson’s sudden death last Thursday; may he Rest In Peace (I was not a fan, but I liked his choreographed dance moves and his slick and well-directed music videos).

As mentioned above, no juicy opportunities presented themselves for me to average down on my holdings, and I am still in the midst of researching companies for potential investments. The rally has paused for a good cause of course, as guarded optimism now replaces the previous (irrational) exuberance. This can be seen as a positive thing because investors who wish to accumulate slowly can do so, despite the low volumes and high bid-ask spreads sometimes observed. However, there is a very slim chance of valuations going back to distressed levels as seen from October 2008 till April 2009, as most would agree that the worst of the economic crisis is now behind us. Right now, the issue is one of the slow and painful recovery from the sharpest recession to hit us since the Great Depression. Most analysts and economists are of the view that the recovery will be long and tedious, and years of excesses will give way to years of de-leveraging before we can work the kinks out of the system.

With most of my time spent analyzing Tat Hong and Boustead this month, I did not devote much time to updating readers on value investing principles or posting other investing-related content. However, I can happily say that I had spent most of June 2009 reading up more on Singapore’s property news and monitoring the property market, as well as brushing up on some aspects of personal finance and money management.


For June 2009, corporate updates and result announcements for my companies are as follow:-

1) Ezra Holdings Limited – There was no significant news from the Company this month. I would be expecting their 3Q 2009 financials to be released some time in the middle of July 2009.

2) Boustead Holdings Limited – There was no news from the Company during June 2009.

3) Swiber Holdings Limited – On June 17, 2009, Swiber announced a re-structuring of the Board of Directors and senior Management positions, in order to grow the Company to the next step. On June 19, 2009, it made a quiet announcement on the disposal of shares in an associated company (in which they hold 20% of). The associated company in question is Perfect Motive Sdn Bhd and is 20% owned by Swiber’s wholly-owned subsidiary Swiber Marine (Malaysia) Sdn Bhd. Based on the book value of RM 324,000 and the sales proceed of RM 200,000, this meant that there was a loss incurred of RM 124,000. It was not disclosed as to the rationale for this divestment, but judging from recent corporate activities, the Company seems to be building up its cash reserves. Thus far, there is still no news of any contract wins or significant LOI secured year-to-date, which is a very disappointing development. I remain optimistic that the recent re-shuffling of personnel is a sign of better things to come and that the Company may be working on securing some new contracts to boost their oder book for FY 2009 and beyond.

4) Suntec REIT – There was no news from the REIT during June 2009.

5) China Fishery Group Limited – There was no significant news from the Company during June 2009.

6) First Ship Lease Trust – There was no significant news from the Company during June 2009. Results and distribution announcement for 2Q 2009 should be made in late July 2009.

7) Tat Hong Holdings Limited – There was no significant news from the Company during June 2009.

Portfolio Comments – June 2009

June 2009’s portfolio value saw a decline compared to May 2009. It has fallen from a total gain of 25.6% to a total gain of 11.3%. Someone did suggest using the XIRR function in MS Excel to compute my CAGR gain adjusted for additions and subtractions of capital, but unfortunately I do not have this XIRR Function within my Excel (probably mine is a little outdated ?). So I admit there is a better way to judge my real return rather than what I've put up, but please bear with me until I can find a way to compute using XIRR Function.

There is nothing much to comment for this month except to say that I am still sticking to my policy of building up more cash reserves should I see a need to deploy my capital into the stock market, and I remain committed to achieving a savings rate of about 40% of net take-home salary. In the meantime, in the absence of significant news, I shall read up even more on property to understand it and also to brush up on more personal finance concepts.

My next portfolio review will be on Friday, July 31, 2009.

Boustead – FY 2009 Financial Analysis and Review Part 3

In this last section Part 3, I will present Boustead’s FY 2009 audiocast and also briefly discuss their future plans and prospects. Suffice to say that for this year’s audiocast, there were much less questions posed and less was discussed if compared to FY 2008. One reason could be that there was much less clarity with respect to the future as the global financial crisis tore through the world, rendering the immediate future bleak and downcast. Another reason could be the significant slowdown in orderbook and order flow which was already evident in the late part of FY 2009, and which was expected to carry on into FY 2010. Except for the contracts already clinched by Boustead in FY 2008 and FY 2009, it is not expected that many more deals will come their way. This is something to be expected as the Company cannot be immune to the economic downturn.

Note that after the text of the transcript, I shall be discussing the prospects and plans for Boustead, so please be patient and go through all the questions herein.

Boustead FY 2009 Audiocast Transcript

Question: Please give more details on “Allowance for Forseeable Losses” of S$5.77 million (Note 2). Would we be seeing more of this in future ?

FF Wong: This refers to provisions for principally 3 projects. One is the litigation in Manila (MWSS – Municipal Water Project) – this is going through arbitration and we have not lost any money as yet and forsee a reasonable chance of success. For Olam, this is a provision where we will have difficulties recovering. The third is for Libya. This is a new project and we have not commenced work as yet, however there have been overheads incurred and in order to be prudent we have made provisions for this.

Question: Regarding your order backlog, you have an order backlog of about S$580 million. Given the current situation, what kind of visibility do you have regarding the recognition of this order book in the upcoming FY 2010 ?

FF Wong: Haha you are asking us to do a forecast ? Obviously we will try to do our best. Those projects in Singapore and South-East Asia have seen smoother execution so we tend to be able to recognize this earlier. Those in Middle East and Libya, from time to time we do experience delays – not so much of payments but more of unforeseen circumstances which are beyond our control. We will always try to anticipate and prepare ourselves and ensure we are able to manage within the budget.

Question: I understand that after climbing up Mount Everest in FY 2009 (7th year of record revenues and profits), the Company will have to return to “base camp” (experience a fall in profits) due to the unprecedented financial crisis. So in your opinion where is base camp located ? FY 2007 profits?

FF Wong: It’s a bit difficult for me to pinpoint what the “base camp” should be. I guess what you are trying to look at is for FY 2010 what are the profits going to be like ? We do expect that we would not be able to match FY 2009’s performance but we are trying very hard to achieve somewhat near this level or not too far away. Mentally, you have to be prepared that we would not be able to match FY 2009’s performance; nevertheless we will continue to remain profitable and the bottom line will be healthy. I believe that we should be able to do at least FY 2007 and we are targeting to out-perform FY 2007. (Note: in FY 2007 net profit attributable to shareholders stood at S$35.2 million. This would signify a 41.4% fall in net profits should we use FY 2007 as a “base camp” scenario).

Question: Are you able to elaborate on the allowance for foreseeable losses relating to Olam ?

FF Wong: We do not expect any more foreseeable losses relating to Olam. This is well-provided for.

Question: With the expected downturn, and with such a large cash hoard, what are your intentions for future dividend payouts ?

FF Wong: I believe we are paying rather generous dividends. Right now, for 4 cents per share for FY 2009, with the number of shares in the market, we are paying out a total dividend of about S$20 million. Our after-tax profits are S$60 million, so we basically paying 33% of after-tax profits. In the current market, I believe this is the right strategy and will keep shareholders happy. Given the current market downturn, there should be M&A opportunities and we should keep a fair amount of cash in the kitty so that we can react and respond quickly should there be opportunities. We have to move fast. Another consideration (earlier pointed out) is that in the Industrial and Real Estate Solutions, there will be less Design and Build projects; instead there is a stronger pipeline of Design, Build and Leaseback projects which would require us to invest our own money. The good thing is that we can enjoy recurring rental income, but from a cash flow point of view we will have to invest our own money though it would not be a problem raising funds from banks.

Question: There has been much talk about “green shoots” emerging especially in the last 2 months. What is your personal view or the Team’s views on the ongoing dynamics in the global economy ? What are the strategies to be adopted by the Group in response to such views ?

FF Wong: I am not an economist but from time to time I do talk as if I do know something about the economy ! But much of what I said is the result of what I had read from the newspaper and the financial news. Green shoots, I do not know but given the severity of the market downturn and loss of wealth around the world; even though there are green shoots emerging, it is not going to be significant enough to warrant a “V” or even a “U” shape recovery. My own feel is that the downturn is going to last longer than we all thought. That’s my personal view. Hence, we have to be prepared for a long-drawn downturn. Even if my assessment is wrong, we are well-prepared for the worst. That is a better proposition rather than taking too much of an optimistic view. From a strategic point of view, we will make sure that we have a cash hoard to cushion ourselves and to keep lean and mean. In the meantime, we will keep looking out for opportunities resulting from the current fall-out. I believe shortly we should be able to see some depressed assets and investment opportunities. Right now, in the emerging economies I have not seen that many attractive M&A opportunities; but in the developed countries like the USA and UK where the loss of wealth is greater amid the fallout from high leverage, we should be able to see a lot more distressed sales. But over here, we have not seen any.

Question: Regarding forex, are there any plans to hedge in the future ?

KK Loh: With regards to forex hedge, our two major overseas subsidiaries namely BIH (Boustead International Heaters) and ESRI Australia, they are adequately hedged in relation to their exposure (i.e. their cost could be in USD or Euro and in terms of Australia, it is mainly in USD as the supplies come from principles in USA). From a group point of view, for our exposure to the GBP and AUD, we are reviewing the possibility of NAV hedge. It is pour policy to flow up dividends from these two profitable subsidiaries. So in terms of the buildup of the NAV, initially it was negligible but now it is beginning to take significance and we will be reviewing such hedges in future.

Question: With regards to water and wastewater division, there have been many years of trouble. Going forward, what is the updated potential in this current climate ?

FF Wong: I am ashamed myself to say that actually for this division (which I have promised the market of a turnaround in years), it has been false hope and if you look at it, much of the losses were due to legacy problems. I must say this was not due to the current Management; but having said that I won’t run away from the responsibility. Perhaps what I should have done was to change the Management a lot earlier. Moving forward, for FY 2010 we have cleaned up the legacy problems and we have made 2 consecutive provisions which the previous person had asked about (2 out of 3 provisions were for waste-water – we have not lost the money but for prudence sake we have made the provisions. We should be able to recover these monies, if not in FY 2010 then in FY 2011). Principally, the Balance Sheet is cleaned up and there is a healthy pipeline (of projects). We are bringing in better quality staff and of course, also pulled in better monitoring systems and processes. I definitely expect that in FY 2010, we should expect some profit. How big it is I am shy to commit myself to give you a forecast.

Question: With regards to your Industrial Real Estate Division, it appears that Boustead is re-emerging to be another land lease to position for another upturn in the medium-term. Is that correct and should Boustead take on such contracts ? I think the team must be relatively confident of the credibility of the underlying clients. Would it be fair to say that ?

FF Wong: I think you got to have a bit of faith in the Management (laughter). Our track record speaks for itself. We have not suffered any fall out or bad debts in this division – in other words, taking risks with our clients. At the moment, all the clients which we take on such contracts with (i.e. leaseback), they are multi-nationals. In fact, some of them are such big names that if they go under, the world will go under anyway !

Question: Mr. Wong, I know that whenever you look at a project, you have a minimum and very specific margin and ROE criteria that you would accept. Given the current downturn going forward, will your parameters change or do you think there are enough good projects out there which would meet your strict and stringent criteria? I am very happy with the previous dividend answer.

FF Wong: The criteria of our investment, of course, would move with the market clearly. The competition is clearly different. Today, we do not see much competition in the leaseback business. Clearly, money is more difficult to come by and we have raised our benchmark (standard and criteria) which is a lot more stringent now. Just to give you an idea on what kind of criteria we should be happy with should we take on a project (on leaseback for multi-nationals) – it would have to be minimum 12% and we will be happy with 15-17% un-leveraged.

Question: With regards to Libya, after a thunderous start it seems that there has been little rain thus far. Are your team disheartened by the initial setback so far or do you think that Libya remains a fertile ground that Boustead has built a head start over the rest of the competition ?

FF Wong: Never say die ! Obviously there has been a thunderous start with little rainfall so far. We always say that we long as you have the stamina and are persistent and if you take the bull by the horns and solve the problems (which are not really insurmountable), the payback will come (I am sure it will come). We just have to devote more time in order to move faster than we are able to do. Partly, this has to do with the local conditions and the local obstacles which were a lot more than we had anticipated. That said, the problems would not have been foreseen not just for our part of the world but also for other parts of the world. This is really a virgin land. The Libyans themselves have no idea of how they can execute the project with established norms and procedures. They are on the learning curve as well. Fortunately, they are rich and can pay, the only thing is that we have sit down and talk and that is frustrating.

END OF TRANSCRIPT

Future Plans and Prospects

In the interview above, it was stated that Boustead would NOT be able to repeat the success of FY 2009’s financial performance, and that seven successive years of record revenues and profits would probably signal the longest track record of growth for the Company before it succumbed to the crisis as well. This is not altogether surprising – but what is important is whether the Company can use its cash hoard to spring some surprises in the M&A Department, of which FF Wong had alluded to more than once. While negotiations for contracts will lengthen and the size of contracts will probably be smaller and scaled down due to the uncertain economic environment, Boustead can reasonably be expected to garner some contracts due to their stellar track record and their extensive global reach. Let me briefly touch on each department and relate what we can expect.

Energy-Related Engineering Division

So far, this division had secured S$64 million worth of contracts in late 4Q 2009, and to date there have been no announcements of any new contracts, which clearly shows that the momentum of contract wins is slowing. Of course, one might argue that as at the time of writing, 1Q FY 2010 is just under way and it may be too early to pass judgement as to whether this division can clinch more contracts. However, with the press release mentioning that negotiations will be more drawn out, the prospects do not seem particularly bright and as a shareholder, I remain cautiously optimistic. One factor which is helping is the oil price which has managed to remain steady at between US$68 to US$72 per barrel these last couple of days. This at least helps to revive the possibility of more contract wins as oil majors and companies continue to invest in E&P spending, albeit cautiously.

Boustead Maxitherm should have completed its re-structuring and should finally be able to clinch sizeable contracts. The ongoing crisis has dampened the prospects of this sub-division but if the re-organization works out well, it may boost the overall performance of the Energy-Related Division.

Water and Wastewater Division

This division has secured three very significant contracts which should keep the division afloat (no pun intended) through FY 2010. Apart from these, it has also cleared up its legacy issues as is evident from the interview transcript above. Even though FF Wong has embarrassingly admitted that the division has failed to turn a profit till now, there is some light at the end of the proverbial tunnel as stated by the man himself. With the provision for foreseeable losses out of the way (in FY 2009), it is not envisaged that there would be any other obstacles to this division achieving profitability for FY 2010. It would also be an extra boon and boost to the business if the new technology which is being explored at the Chinese textile factory turns out to be workable on a large scale, and can be applied to future project tenders. That said, it should be emphasized that wastewater itself is a very competitive industry and margins are thin; thus costly R&D must be undertaken in order to sustain a competitive edge. Thus far, I note that Hyflux, widely considered the market leader in wastewater treatment, has been more successful in its forays into the Middle East, with their presence in Algeria and more recently with the General Desalination Company of the Great Socialist People's Libyan Arab Jamahiriya. If Salcon were to try to replicate the success of Hyflux, I think they may still have some way to go; even though admittedly when FF Wong acquired this division, he knew of its potential and its competitive edge. There was some talk of listing the division some years back but it eventually died down when the division could not turn in a profit (you need at least a three-year profit and revenue growth track record to even consider an IPO). Suffice to say that should an IPO for Salcon materialize, it would certainly unlock a lot of hidden value in this division, but this possibility is extremely remote in the light of current circumstances.

Real-Estate Solutions Division

This division experienced very strong growth for FY 2009 with revenue of S$265.5 million, as they clinched many design and build contracts under Boustead Projects. However, the environment for such design and build projects is expected to slow significantly, and Boustead had communicated that they are sourcing for design, build and lease projects in order to ensure a more consistent and recurrent income stream. Although such projects are unlikely to be as lucrative in terms of size or margins, they will provide steady cash inflows and a more stable revenue flow for the division. In each of the last five financial years, Boustead had managed to sell at least one leasehold property; but this is unlikely to materialize for FY 2010 due to the financial crisis. Hopes are now pinned on the new division Boustead Infrastructures which had clinched the deal to build the S$300 million Libyan township. To date, the many snags and thorny issues had been settled and more than 10% of the project had been completed, which signals that the bulk of revenue recognition and cash inflow would occur in FY 2010 and beyond. Even though this division is unlikely to repeat the performance of FY 2009, the ongoing revenues from the Libyan project should be able to provide sufficient cash inflows to enable a decent performance. From what I understand, the agreement was for a cost-plus pricing model which can protect the Company in the event of sudden raw material cost escalations. Whether this model can be adhered to strictly or not depends on the implicit agreement with the Libyan authorities on passing on cost increases, and whether it is in good business interest for them to do so.

Geo-Spatial Technology Division

This division has been the gem of Boustead with steadily growing revenues and customers which are financially sound, thus reducing the likelihood of bad debts and uncollectible amounts. Demand for this division’s services should remain strong as location intelligence solutions and infrastructure management systems are more or less “recession-proof” and should not be subjected to the same slowdown seen in the Energy-related engineering and real estate solutions divisions. I think that from the track record displayed by the Division and Management’s prudent handling of its growth profile, it is reasonable to expect a 5-10% year-on-year increase in revenues.

Future Plans – Merger and Acquisitions (M&A)

It was already highlighted in the FY 2008 audiocast that Management was on active lookout for M&A opportunities. This was, in part, due to their ballooning cash balance and was also driven by the desire for a more recurrent and predictable revenue flow as compared to the current “lumpy” contract-based revenues for all its divisions (except Geo-Spatial). An attempt was made to evaluate an M&A opportunity back in FY 2008, and about S$1 million was spent doing the necessary and requisite due diligence; but sadly, the investment did not pass the filters which Boustead set and thus nothing materialized.

Moving forward, FF Wong has mentioned that he expects to see more distressed assets in the UK and the USA, where the sub-prime meltdown has been most acute, and where assets there have been marked down to low levels due to pervasive pessimism. He also mentioned that he has not seen much evidence of depressed asset prices in South-East Asia as the impact of the economic crisis has been indirect (in terms of exports and demand). To fulfil Management’s criteria for M&A, the investment would have to be offered at a good value (price-earnings wise as well as in relation to the NAV of the Company in question) and also have the ability to integrate itself into Boustead’s current business model and divisions. Based on FF Wong’s view of distressed assets and the fact that Boustead’s cash hoard is expected to grow even further with the receipt of monies from the sale of leasehold property by GBI Realty, I think it would be reasonable to expect a sizeable acquisition in the coming months. I have faith that Management would not compromise on their strict screening criteria for M&A, and they have shown their ability to reject even though they had spent S$1 million on due diligence. To resist the institutional imperative is not an easy task, but judging from FF Wong’s conservative style and prudent stance in building up Boustead, I have no doubt he will continue to add value for shareholders.

Boustead – FY 2009 Financial Analysis and Review Part 2

Part 2 of my analysis shall look at Boustead’s various divisions and their performance, as well as briefly discuss their prospects and order book as of this writing. It is important to note though, that some of the divisions had achieved record profits for FY 2009 which are not likely to be repeated, thus it is good to keep a realistic view of Boustead and not get too carried away with optimism. Realism should be the benchmark for an investor as he seeks an objective, rational picture of the Company.

Segment Revenue and Contribution


Engineering services saw a 20% jump in revenues for FY 2009 to S$438.8 million. Geo-spatial did not do so badly either with a 9.4% increase in revenues from S$67.8 million to S$74.2 million. Most of the contributions to Engineering Services came from the energy-related engineering division and real-estate solutions, with water and wastewater division showing yet another dismal financial year. I shall briefly examine and summarize the performance for each division and comment on its prospects.

Energy-Related Engineering Division

The order flow for oil and gas contracts was still steady, and thus Controls and Electrics and Boustead International Heaters got its fair share of business for the year. It was mentioned that negotiations for contracts would be slowed down in the coming financial year due to the global economic crisis; but the good news was that the rise in oil prices recently to about US$72 per barrel meant that oil majors and customers were willing to negotiate contracts again. It was also good news to hear that this unit secured its maiden contract in the United States, showing that it still had the ability to expand its geographical and customer base amid lean times. However, the ongoing re-structuring at Boustead Maxitherm also meant that it would take a while to contribute meaningfully to the entire division’s profits.

Water and Wastewater Engineering Division

Revenue for this division declined from S$35.9 million to S$26.8 million, mainly due to the slow start-up of major projects clinched and also because the division had to clear off legacy issues (discussed under Boustead’s audiocast in Part 3). The division will be working on three major projects, most of which will be recognized in FY 2010 and beyond. This division had been struggling to break even for the last 5 financial years, and FF Wong had expressed disappointment that it could not happen sooner, as too many legacy issues had to be cleared up before any meaningful and significant contribution could take place. Recall from FY 2008’s audiocast that Salcon was also exploring some new R&D initiatives in a China textile company that if successful, would give the Company a sustainable competitive edge which could see this new technology being applied to other projects as well, enhancing Salcon’s competitiveness and increasing chances for winning bids for new major projects.

Real-Estate Solutions Division

This division had a record year, which was expected since it had built up a large order book. Revenues ballooned from S$193.3 million to S$265.5 million in FY 2009, up an impressive 37.4%. This division made up 60.5% of the total revenue contribution of Engineering Services, up from 52.8% a year back. Boustead had signed contracts with many reputable blue-chip companies, some of whom were from Fortune 500, to design and build state-of-the-art facilities in various parts of Singapore. With Singapore attracting more and more such multi-national companies to open their plants and offices here, it is envisioned that this division would continue to garner contracts, though at a slower rate. Some examples of the projects done included the Singapore Freeport, a contract for an Aero Engine Services Facility as well as a S$67 million contract for a Semi-Con Manufacturing Facility. Boustead had indicated that they are moving slowly towards more design, build and lease jobs which would provide a steady recurring revenue stream, as design and build jobs would become harder to come by as the global financial crisis took its toll. The S$300 million township project in Libya will also begin contributing more in FY 2010, as progress has been slow due to teething problems at the start-up phase (quite succinctly expressed in FY 2008’s audiocast). To date, only more than 10% of the township has been constructed, thus there is still 90% more (about S$270 million) to be recognized.

Geo-Spatial Technology Division

I had always commented that this division was the “cash cow” of Boustead as well as the steady grower, and I was proven right once again as revenue increased a slight 9.4% to S$74.2 million, showing a consistent trend of about 10% increase year-on-year for the last 4-5 years. Since most of the customers belong to Government agencies across Australia and South-East Asia, the risk of non-payment (bad debts) is very low; and such customers will also ensure a constant need for the division’s services and products. I would expect this division to grow about 5-10% in the current financial year as well.

Divisional Profitability Analysis


Interestingly, this is the first financial year in which Boustead released their margins for each division, presumably upon the requests of shareholders which had been pestering them for such information for quite a while now. The information is interesting as it gives us an insight into the divisions which are more profitable, and shows up the poor performance of Salcon in even more stark terms.

Energy-related engineering did not have very high margins, as both years averaged about 11-12%. Surprisingly, real-estate solutions had very decent net margins of 22%, even though this was down from 31% in FY 2008. From what I remember about this division, a lot of it was charged on a cost-plus basis and this helped to mitigate the rise in the cost of raw materials (and construction costs); hence even though cost-plus ensured lower margins than would be charged on a tender basis, it helped to preserve margins at a time when costs had escalated wildly in the middle of FY 2008 (the time oil hit peak US$147 per barrel). I will not be commenting much on Salcon’s performance as the loss of S$8.4 million before tax is disappointing, to say the least.

Finally, it can be seen that Geo-Spatial commands more than decent margins of 28.3% and 24% respectively for FY 2009 and FY 2008. Had exchange differences not come into play, revenues (and hence profits) for this division could have been even higher. This also reinforces my understanding of this division being a cash cow, as the steady revenues and high margins ensure a steady inflow of operating cash flows, with low risk of debtors not paying as most are government agencies.

In Part 3, I will discuss the prospects and plans for Boustead moving forward, as well as post the FY 2009 audiocast transcipt. Stay tuned !

Boustead – FY 2009 Financial Analysis and Review Part 1

Boustead released their full-year 2009 results on May 28, 2009 and the Group had achieved a seventh record year of revenues and profits. All divisions except water and wastewater showed growth and the Balance Sheet was further bolstered by a net cash balance of about S$150 million. In addition, for FY 2009, Boustead had also released the net profits for each division, which enables me to compute the net margin for each division. This information will be shown in Part 2 of the analysis. This analysis will be similar to the one I did for Tat Hong – Part 1 tackles the Profit & Loss, Balance Sheet and Cash Flow Statement; Part 2 discusses the divisions and how they performed while Part 3 shall cover future plans and prospects for the Company. There will be a separate post on the audiocast provided by Boustead for their FY 2009 results, which I will transcribe as I did for FY 2008.

Profit and Loss Analysis

Cost pressures can clearly be seen nibbling on Boustead’s performance, with 4Q 2009 COGS increasing 77% against a 53% increase in revenue year-on-year. For FY 2009, the effect was more muted, with an 18% increase in revenues to S$516.6 million offset by a higher increase in COGS of 24% to S$373.6 million. As a result, gross profit only increased 5.4% for FY 2009 to S$143 million. Note that part of the COGS included an S$8.7 million provision for foreseeable losses, or else the gross profit would have improved to S$151.7 million. For 4Q 2009, gross margin was 24.8% against 4Q 2008’s 35%, due to higher cost of materials. For FY 2009, gross margin hovered at 27.7%, lower than FY 2008’s gross margin of 31.0%. If we remove the one-time provision for foreseeable losses for FY 2009, gross margin would improve to 29.4%, which is just marginally lower than FY 2008.

For FY 2009, admin and selling and distribution expenses increased at a higher rate than revenues, up 36.6% and 34% respectively. This shows that Boustead still has some way to go to streamline their cost structure to ensure their operations remain lean and mean. On the other hand, “other operating expenses” only increased 7.2% which shows good cost control. If not for the S$24.2 million gain on sale of leasehold property completed by 40% owned BGI Realty during 4Q 2009, Boustead’s results would have been much poorer due to a combination of higher COGS, unfavourable forex movements, higher staff costs due to expansion of roles to handle a wider variety of projects and higher selling expenses.

Thus, it would be prudent not to expect such a performance from FY 2010 onwards, as the Company had already warned that it would not be able to sell any leasehold properties though it has been doing so for each of the last 5 years. Assuming Boustead can keep their costs under control, I would probably expect a 35-40% dip in profit attributable to shareholders for FY 2010, barring other unforeseen circumstances; and in the absence of any significant project wins or M&A announcements.

A final dividend of 2.5 cents per share was declared for FY 2009, bringing the total full-year dividend to 4 cents per share. Based on my purchase price of 55.8 cents, this represents a dividend yield of 7.2%, which easily beats inflation. The dividend is payable on August 20, 2009.

Balance Sheet Review

The point about Boustead which continues to impress me is their strong Balance Sheet, even if their Income Statement does look somewhat fragile and weak at the seams. With a cash balance of S$180 million (and more to come from the completion of the sale of leasehold property) and just debts of about S$30 million, the Company has a net cash reserve of S$150 million, which can comfortably cushion it against any adverse macro-economic headwinds. Contract work in progress has also tripled due to un-invoiced billings on the new Libyan Township business which will be billed in later periods (a timing difference). Other receivables and prepayments also increased as a result of the increase in business activities. The Group’s current ratio for FY 2009 stood at a healthy 1.66 against FY 2008’s 1.68. Quick ratio is virtually the same as current ratio as inventories made up just S$8 million of current assets of S$300 million+. The bulk of current assets comprise cash and receivables; and as at this point in time, Boustead has not indicated that there are collectability issues arising from any customers due to the economic downturn.

One thing to note is that Boustead’s long-term bank loans had jumped from S$8.7 million in FY 2008 to S$25 million in FY 2009, which I suspect is the result of borrowings to finance certain projects which have high initial capex requirements. Even though long-term loans has increased, Boustead’s net cash position is still very strong and is expected to improve once the remainder of the monies come in from the sale of their leasehold property.

Cash Flow Statement Analysis (using FY 2009 versus FY 2008)

Boustead has again demonstrated that it is able to generate very healthy operating cash inflows of S$43.9 million for FY 2009, though this was lower than FY 2008’s S$81.4 million. Free Cash Flow (Op cash flows less capex) stood at S$29.3 million for FY 2009 and is an indication that a lot of the cash generated is being ploughed back into the business to grow it, without the need for much external financing or heavy capital expenditures.

Cash used in investing activities amounted to a mere S$10 million in FY 2009, similar to FY 2008. For financing activities, the previously mentioned proceeds from bank loans helped to add S$19.8 million cash while this was offset by the payment of dividends of S$28.7 million. It’s good to note that for FY 2008, the bulk of cash outflows for financing activities comprised payment of dividends (S$18.8 million), so this is a true demonstration of how the Company is consistently returning cash back to its shareholders. With such a healthy cash position and cash flow, it is very likely that Boustead can continue to pay dividends twice per financial year, though the magnitude may be adjusted to reflect the current trying times.

For Part 2 of the analysis, I shall be touching on Boustead’s divisions and how they performed, as well as discussing something new to my analysis – the net margins achieved by each division.

Tat Hong – FY 2009 Financial Analysis and Review Part 3

For this third and last part on my analysis of Tat Hong’s FY 2009 financials and prospects, I would like to touch a little on their fleet profile as well as prospects moving forward. As readers are probably aware, the global financial crisis has yet to recede and many companies are still struggling to cope with declining orders and reduced demand for their goods and services. Tat Hong is no exception to this and they have not escaped unscathed from the carnage wrecked upon the economy. However, my analysis and discussion shall touch on how the Company is able to weather the storm and maintain a decent level of cash inflows and profitability till the dark clouds clear; and perhaps also snag some good M&A opportunities at the same time.

Fleet Profile and Utilization


For their total fleet profile, it can be seen that they are slowly increasing their total units as well as total tonnage. Their fleet of higher tonnage cranes has increased significantly over the years, as I believe this category of cranes command better rental rates, though there has also been a sizeable increase in the lower tonnage category as these cranes are used for more general purpose work (i.e. not specialized). However, one negative observation is that utilization level has been steadily falling since 2007 (the year the sub-prime problems broke out and led to the sharp recession). Utilization hit a high of 83.5% as at June 30, 2007 and has declined till the current 65.3%. For FY 2010, I would expect utilization levels to fall even further (though probably not below 60%) as the recession is still ongoing and there is no let-up in sight. Tat Hong is still active in the oil and gas sector in Australia and the mining sector in Indonesia, and is increasing their presence in China through their tower cranes segment. Even if utilization levels remain steady, utilization rates may fall as customers negotiate for lower fees amid the downturn. Roland Ng, who is the CEO of Tat Hong, projected a 5-10% fall in utilization rates for FY 2010. Thus, the effects of the drop in utilizaton levels and rates may cause continual depression of earnings for Tat Hong, though the shift in sales mix as discussed in the previous part 2 should mean that there will be a cushion for gross margins (and hence gross profits). Rental profits will make up a larger portion of the pie but the pie itself will shrink due to less business being available to the Company in the near-term. In the medium-term though, I expect the situation to be alleviated once the effects of pump-priming and fiscal stimuli kick in.

For Tat Hong’s Tower Crane Division, the fleet has been steadily increased over the last few quarters (the division was only set up during FY 2008). The total units have increased from 216 as at March 31, 2008 to the current 262 units; with total tonnage-metres increasing from 35,462 to 49,040 (an increase of 38%). Utilization levels have dropped as well as per the global financial crisis, from 83.9% to the current 73.3%. The Group’s plan is to continue to expand their Tower Crane fleet as China will be spending a huge amount of money on fiscal stimulus.

Future Plans and Prospects

Singapore

With the local Government pouring in S$18 billion to S$20 billion this year to revive infrastructure works and projects, the construction industry is expected to remain buoyant for the next 2-3 years. For the next 2-3 years, another S$15 billion to S$17 billion will be pumped in for building and infrastructure projects. As the effects of the pump priming take effect, it should see a steady demand for crane rentals which would ensure Tat Hong receives a steady stream of cash inflows. As mentioned previously, gross margins for rental are very high (>60%) and Tat Hong’s aim is to derive 75% of its gross profit from rental in time to come.

China

Tat Hong’s next organic growth engine division is that of China, with their two JV with Fushun Yongmao as well as Beijing Tat Hong Zhaomao Equipment Rental. China’s economy is one of the most resilient in the South-East Asian region, as it does not depend too much on exports. Local consumer demand can ensure the country continues to grow at least 5-6% per annum, even during this severe economic climate. This, plus the fact that the Government has announced that it would introduce a stimulus package which would cover 10 areas, including construction of new railways etc, has brightened prospects for Tat Hong in pursuing this growth avenue. China will spend about US$200 billion on infrastructure development alone. Since the tower crane rental business model is still relatively new in China, Tat Hong is trying to get a first-mover advantage by partnering with one of the largest tower crane manufacturers there. It is therefore envisaged that this division would continue to show growth in FY 2010, along with high gross margins.

Australia

Tat Hong are mainly involved in the O&G and LNG projects in Australia, through their 70%-owned Tutt Bryant Group, which features its own range of cranes and heavy equipment for these industries. These projects are likely to continue even in the face of uncertainty, as much capital needs to be locked in advance before the projects can commence. The Australian Government had also announced a massive stimulus package involving construction and replacement of old infrastructure, so this will continue to benefit Tutt Bryant (and hence Tat Hong).

In addition, Australia had recently shown themselves to be resilient in the face of the global economic downturn. 1Q 2009 GDP showed a growth of 0.4%, reversing a contraction of 0.6% in 4Q 2008 and helping the country to avert a technical recession. Consumer confidence in Australia had also gone up to 100.1 as the effects of the fiscal measures increased domestic spending and helped the economy here to grow, albeit marginally. The AUD has also strengthened considerably against the SGD after hitting a low of 0.92 to the SGD; it is now close to 1.20 to the SGD. Thus, the forex troubles which plagued Tat Hong during 3Q and 4Q 2009 should probably not recur again in 1Q 2010.

Summary and Conclusion

Tat Hong will continue to maintain their crane rental fleet in order to grow their rental division. The Equipment sales division is very likely to continue to contract during FY 2010, but the other 4 divisions’ stability should provide significant buffer to revenues and to earnings. Note too that gross margins are higher for crawler and tower crane rental as compared to equipment sales, so this will provide an added boost as well. That said, it bears repeating that crane rental utilization levels and rates will probably continue to fall as the effects of the financial turmoil sweep through the world; thus I would expect FY 2010’s profit after tax to dip as compared to FY 2009.

The Company had also mentioned that they will trim down their trading stock as and when appropriate, in order to convert some of it to much-needed cash. The mistake which Management made during the 2000-2002 period was hoarding too much inventory at high cost amid slumping demand, which resulted in significant write-offs and leading to a net loss.

On a positive note, the Group will continue to look out for M&A opportunities amidst a very depressed market which may see some companies and assets being offered at distressed levels. The Company is on the lookout for possible M&A opportunities in the Australian crawler crane and general rental markets.

Tat Hong – FY 2009 Financial Analysis and Review Part 2

For Part 2 of my analysis for Tat Hong’s results, I will be focusing on their business divisions and analysing the performance of each, as well as highlighting the sales mix which has changed from FY 2008 to FY 2009. It is hoped that through this analysis, it will be possible to pinpoint whether Tat Hong is able to continue to maintain their gross margins and also whether they can sustain themselves with cash until the downturn has eased. Pump-priming measures introduced by the various Governments will be discussed in Part 3, including prospects for each division and how Tat Hong will change its focus gradually over the next few years as their China division grows stronger.

Business Unit Revenue Contribution, Sales Mix and Performance Review


From the above diagram and breakdown, it can be seen that for 4Q 2009, crane rental took up a more significant portion of revenues at 40.6% (combining crawler and tower crane rentals), compared to just 22.6% a year ago. Granted, this was based on a lower revenue base (total revenue dipped from S$183.7 million to S$110.7 million for 4Q 2009 against 4Q 2008, a 40% drop) but it illustrates how Tat Hong are slowly but surely moving towards a “rental” business model, and how it can help to sustain revenues and cash flows. If we dig deeper, it can be seen that crawler crane rental revenues barely dipped for 4Q 2009 compared to a year ago, with revenues holding steady at S$38.6 million. By contrast, sale of cranes fell 68% as the global downturn sucked up financing for companies and left them high and dry and unable to commit to more capex, hence hurting this division severely. Revenues from sale of cranes for 4Q 2009 fell from S$92.6 million to just S$29.7 million, and from the looks of things, is likely to worsen even further for 1Q 2010. Tower cranes, on the other hand, show good growth prospects as they now occupy 5.7% of Tat Hong’s total revenue pie (for 4Q 2009) and saw a 119% year-on-year revenue growth. General Equipment rental suffered a decline due to the discontinuance of the waste management division and heavy haulage New South Wales Division. As reported by the Company, the extended wet season in North Queensland in 4Q 2009 also affected sales. Interesting to note is that for the first time, the % contribution from equipment sales fell below that of crawler crane rental, registering 26.9% compared to 34.9%, which very clearly shows the shift from equipment sales (a low margin business division) to crane rental (a much higher margin business division).

If we look at the numbers on a full-year basis, crawler crane rental has managed a respectable 13% growth year-on-year, while tower crane rental revenues shot up 178% from S$8.9 million to S$24.7 million (the division was only set up in FY 2008 and expansion of the tower crane fleet was only carried out in FY 2009). What is eye-catching is that for FY 2009, both crawler and tower crane rental divisions made up 32.3% of total revenues of S$631.8 million, while for FY 2008 both these divisions only made up 26.2% of total revenues of S$639.9 million. The sales mix is thus shifting towards rental as Tat Hong has promised, as this can help them to buffer their revenues in the event of an extended downturn, as CEO Roland Ng had previously mentioned that during downturns, more companies choose to rent, rather than buy. It is objective evidence of this shift taking place and moving into FY 2010, I foresee more revenues shifting towards crane rentals as Tat Hong continues to bolster its Tower Crane Fleet (the fleet profile will be covered briefly in Part 3).

With the drastic decline in equipment sales for 4Q 2009, this translated into a full-year drop of 17% for this division, with revenues falling to S$254.5 million from S$306.2 million. Equipment sales now contribute 40.3% to total revenues for FY 2009, down from 47.9% a year ago. I expect the % contribution and magnitude to continue to fall for FY 2010 as the global crisis takes its toll on companies and constricts financing (banks are still afraid to lend normally). The shortfall in revenues from this division should be compensated for by the increased revenues from crawler and tower crane rental, though I suspect it may not be able to fully compensate. Therefore, FY 2010 will probably see a drop in total revenues from FY 2009 as mentioned by Roland Ng in a recent Reuters interview. The cushion will be the higher gross margins coming from the rental business, which I shall analyse in the section below. This will help to prop up gross margins and ensure net profit does not fall too sharply; as well as ensure steady operational cash inflows. Parts and Services division should remain relatively stable as companies still need to buy booms and hydraulic parts for the cranes they own, and Tat Hong also receives revenues from the myriad training courses it conducts.

Business Unit Gross Margin Breakdown and Analysis


By referring to the chart above, it can be readily seen that for 4Q 2009 against 4Q 2008, most business divisions saw a dip in gross margins. This was probably due to the fact that customers wanted more competitive pricing as they are facing financial difficulties, and that rental rates are also softening due to lower demand for crane rentals. Roland Ng did previously mention a possible 10-15% drop in crane rental rates, and the effects are probably reflected in the dip of 4.6 percentage points for crawler crane rental and the more drastic 24.7 percentage point dip for tower crane rentals. That said, both divisions still sported very high gross margins of 66.6% and 58.7% respectively. This was in contrast to the equipment sales division which had gross margins of just 14.8%, even though it contributed 26.9% of revenues for 4Q 2009. As mentioned earlier, this change in sales mix will help the Group moving forward, as it can help them to recoup lost revenues from equipment sales and maintain gross margins by shifting more of their sales towards rental instead of buying/selling. In fact, a quick glance shows that for 4Q 2009, gross margins actually improved by 5.8 percentage points to 43%, from 37.2% a year ago. I see this as a positive sign that 1Q 2010 gross margins will continue to get better as Tat Hong shifts more towards crane rentals, but the dip in overall revenues would be a dampener though. However, in the long-term, a more stable and dependable source of revenues and cash flows will exist for the company which is less subject to volatility of economic conditions.

For full-year numbers, Tat Hong managed to maintain their gross margins at 38.2% as their crane rental business grew strongly. The revenue drop was offset by the stable margins and if not for the exchange losses and the write-offs, net profit would not have dropped so drastically. For FY 2010, as the exchange rate for AUD is now 1.18 at time of writing, revenues will be boosted as most of it comes from their 70%-owned Tutt Bryant Group which translates its revenues to SGD. A weak AUD:SGD rate thus impacts revenues recognized on a Group basis. Crane rental margins continue to remain high at 62.7% for crawler cranes and 42.1% for Tower Cranes, while parts and services (seen as a stable division) also registered impressive gross margins of 54.3% for 4Q 2009 and 58.4% for FY 2009 (higher than FY 2008’s gross margin of 55.8%).

It should be noted too that high utilization rates will underpin good gross margins and high revenues from the rental business, and these are likely to fall amid the global financial crisis as some projects get put on hold in the construction, infrastructure and oil and gas industries. However, with Tat Hong’s continued participation in the oil and gas activities in Australia (Gorgon Project) and the power plant sector in Indonesia, this does provide some visibility for crane utilization rates. Utilization has dropped to 65.3% for overall fleet compared to high 70+% to low 80+% for most of FY 2008. More will be covered on this in Part 3 when I will discuss briefly on the fleet profile and utilization rates.

Tat Hong – FY 2009 Financial Analysis and Review Part 1

Tat Hong released their FY 2009 results on May 28, 2009. A first glance would show the severity of the impact of the financial crisis, as their 4Q 2009 numbers were much worse year-on-year when compared to their 4Q 2008 ones. Net profit dropped 50% for 4Q 2009 if we compare year on year and revenues fell 40%, but this was hardly surprising given the extent of the financial havoc wrecked by the crisis. These are other aspects will be reviewed in several parts and will be structured as follows: Part 1 will touch on the Profit and Loss, Balance Sheet and Cash Flow Statement. Part 2 will talk about margins for each division and a divisional analysis will be performed (based on Tat Hong’s current five divisions). Part 3 will discuss prospects for the Company and the general economic climate, including the fiscal measures undertaken by the countries in which Tat Hong has a major presence in.

Profit and Loss Analysis

A revenue decrease was registered for 4Q 2009 of 40% year-on-year at S$110.7 million compared with S$183.7 million. This drop in revenue was mainly due to weakness in the equipment sales division, with sale of cranes dropping sharply by 68% to S$29.7 million as a result of tighter credit from banks and the slowing economy making companies hesitate to spend on capex. Parts and Services and General Equipment Rental also saw dips as the crisis worsened in 4Q 2009, and this will be fully reviewed in Part 2. However, with the change in sales mix, gross margins actually improved to 43% from 37% a year ago. Unfortunately, admin and other operating expenses did not dip in tandem with the drip in revenues and gross profits; hence net profit actually fell 50% from S$30.8 million in 4Q 2009 to S$15.5 million in 4Q 2008.


For FY 2009, revenues only dipped 1% (from S$639.9 million to S$631.8 million) as the 1H 2009 saw strong revenues which offset the weaker 2H 2009. Gross margins only remained fairly constant at 38% due to the change in sales mix, and even though 4Q 2009 registered a much weaker performance. Moving forward, I expect gross margins to stay strong or even improve and I will justify this in Part 2. Due to the 3Q 2009 forex losses adding on to other operating expenses, net profit was significantly weaker at S$76.7 million, down 24% from S$101.5 million. Only S$3.2 million of the forex losses could be reversed out in 4Q 2009, thus Tat Hong ended FY 2009 with a total net exchange loss of S$16.1 million. Looking at the chart above, net margin for FY 2009 was 10.9%, respectable considering the very weak 4Q 2009 results. Net margin for FY 2008 was 14.0%.

EPS based on issued share capital of 506 million shares is 13.6 Singapore cents. Taking the closing price of S$1.04 gives a historical PER of 7.65. Since Mr. Roland Ng mentioned a further weakening in economic conditions which may impact the business in FY 2010, there could be a profit drop of about 20-30%. Taking 30% pessimistic scenario, we arrive at a net profit after MI of about S$48.2 million. Using closing price of $1.04 and EPS of 9.51 Singapore cents, forward PER would be about 10.9x and this does NOT afford margin of safety. Hence, it would be prudent to be patient and wait for better valuations before deciding to increase my holdings.

Dividend per share is 5 cents for FY 2008, down from 7.6 cents for FY 2008 and 10 cents for FY 2007 (includes special dividend). Seeing that cash flows may be a constraining factor, I am prepared for even more dividend cuts in FY 2010, and total dividend for FY 2010 may even be reduced to 1-2 cents per share. At the current price, dividend yield is a respectable 4.9%. At my purchase price of 68 cents, dividend yield would be 7.4%.

Balance Sheet Review

Tat Hong’s balance sheet weakened for March 31, 2009 compared with a year ago. Notably, cash balances have decreased from S$75.4 million to S$46.3 million, while inventories have risen slightly to S$217.7 million, possibly reflecting difficulties in clearing off inventories in order to raise more cash. However, they are still in a better position than they were during the dot.com crisis, when the Company was stuck with inventory it could not sell and had to make significant write-downs. This is also because of its policy of converting the Company into a “rental” company; hence its inventory consists of cranes which can be leased out, instead of just bought and sold. It should also be noted that current and non-current financial liabilities (the Company groups them all together) have increased as well by about S$60 million, and this could be due to higher loans taken up to finance purchases of more expensive equipment as the JPY had strengthened from 3Q 2009.

Current ratio stands at 1.29 for FY 2009, a drop from 1.39 for FY 2008 mainly due to the lower cash balances and receivables and a higher financial liability amount (partly offset by lower trade payables). Quick ratio dropped too from 0.66 to 0.51 as a result of higher inventories making up the portion of current assets for FY 2009. Debt equity ratio was 0.57 and has been increasing over the years, which is not a good sign. The Group have to think of ways to reduce their inventory in order to pay off more loans so as to reduce financial expenses. ROE was a respectable 17.7% even though it was below FY 2008’s level of 24.1%.

Cash Flow Statement Analysis


Cash outflows were poor for FY 2009 due to the global financial crisis, and although cash generated from operating activites was positive (i.e. cash inflow and not outflow), it had dipped significantly from S$64.7 million to S$8.8 million. The large drop was mainly due to the increase in inventories (additional cash outflow of S$13.5 million), a decrease in trade payables (resulting in a cash outflow of S$20 million compared to a previous cash inflow of S$34.4 million) and higher income taxes paid (S$10 million extra compared to FY 2008).

Cash outflows from investing activities dipped to S$20 million from S$44.3 million a year ago, mainly due to decreased spending on capex, lower payments for associated companies and lower cash outflow on disposal of subsidiaries/businesses. This alleviated the cash flow situation somewhat and balanced out the drop in cash inflows from operating activities. However, FCF was a negative S$20 million as compared to a positive FCF of S$25.8 million a year ago, a sign of the drastic turn of events due to the global financial crisis. Considering that the last few financial years have seen Management generate positive FCF, this could be one of the few instances where they were unable to avoid the severe effects of the downturn. Based on Management’s experience and track record, I am confident they should be able to leverage more on their rental business to generate more recurring FCF in the months to come.

A lot of cash was used up in financing activities in order to pay off bank loans (S$33 million), repay finance lease obligations (S$38 million) and dividends to shareholders (S$37 million). This was balanced by additional bank loans taken up (which increased gearing to 0.57) and proceeds from new finance lease obligations. All in all, there was a net cash outflow of S$20 million from financing activities, in contrast to the S$9 million cash inflow for FY 2008. However, it should be noted that for FY 2008, S$57 million was raised through the issuance of shares. If we strip this out, there was actually a net cash outflow of S$48 million which is twice the outflow for FY 2009. Granted, part of the reason was due to higher gearing which the Company took up in FY 2009, but the steady and consistent rental income from crawler and tower cranes should be able to provide the Group with much needed cash inflows. Thus, I will closely monitor the Cash Flow Statements of subsequent quarters to see if this is so.

In Part 2 of my analysis and review, I will touch on Tat Hong’s divisional performance, analysis of margins as well as sales mix; and this will carry forward to its prospects.

May 2009 Portfolio Summary and Review

If April 2009 was the “Month of Reflection”, then perhaps May 2009 can be aptly described as the “Month of Green Shoots” ! The start of the month saw a sudden improvement in business sentiment and the theory was put forward that “green shoots” were being observed which slowed the pace of decline in the real economy. Other horticultural terms were being flung around as well, with some saying that there were equal amounts of “brown weeds” and that a recovery was not clear at all despite signs that some areas of the US Economy were bottoming out. The situation was echoed back here in Singapore as well, with prominent MPs giving divided and conflicting views over the economic situation.

The result of the sudden burst of optimism was the biggest one week jump in global stock market indices I had seen so far in my limited years of investing. It was just back in March 2009 when STI hit a low of 1,456, and as of this writing, the STI is close to the psychological resistance point of 2,300. That’s almost a 58% jump in the Index within just two short months, and does illustrate the point that when valuations revert to the mean, they can do so suddenly, sharply and without prior warning. Suffice to say almost all the people I spoke to were taken completely by surprise, and many are somehow convinced that this is a bear market rally and not the “real” recovery. Whether this is so will only be known on hindsight.

My divestment of Pacific Andes this month has returned some capital back to me to be recycled to other worthy investment opportunities. Suffice to say I am devoting some time to research and studying some potential companies right now, and admit I was rather slack and lazy over the past few months and thus was only comfortable in adding to my existing positions (back in October 2008 and March 2009). It would be splendid indeed if I could find another value investment when conditions have not totally improved, and sentiment continues to be depressed. Once valuations revert fully back to the mean, it may prove difficult to find sufficient margin of safety.

With the FY 2009 reports for Boustead and Tat Hong released on May 28, 2009, I shall be busy in the coming weeks doing some in-depth analysis for each company and its prospects, and will post these up separately when they are available.


For May 2009, corporate updates and result announcements for my companies are as follow:-

1) Ezra Holdings Limited – Ezra had done a placement of 78 million new shares at $1.185 to raise capital for paying down debt and possible M&A. This was detailed in a previous blog post of mine, therefore I will not give further details here.

2) Boustead Holdings Limited – Boustead released their FY 2009 results on May 28, 2009. Revenues for FY 2009 rose 17.9% from S$438.3 million to S$516.6 million. Gross profit, however, increased by a smaller 5.4% due to higher COGS booked. Net profit attributable to shareholders increased by 16.8% to a new record S$60.1 million, as Boustead celebrated their seventh year of record revenues and profits. A final dividend of 2.5 cents per share was declared, payable on August 20, 2009. My dividend yield was 6.63% after taking into account my additional purchase of Boustead in March 2009 (based on a total dividend of 4 cents/share for full-year 2009). I will be doing a detailed analysis and review of Boustead’s financials and prospects in a separate blog post, but I have to caution that FY 2010 will definitely not be as good as FY 2009 as the global economic crisis hits home for Boustead.

3) Swiber Holdings Limited – Just yesterday, on May 29, 2009, Swiber announced a share placement of 84 million shares at 88 cents each, raising about S$71 million (after deducting expenses). The fund raising was done through CIMB GK Goh and was stated as being for general working capital purposes. The new capital raised is about 20% dilutive, which represents an exercise similar to Ezra (incidentally, at least Ezra got a better deal with 78 million shares at $1.185). Oil prices have been trending up to US$66 per barrel at the time of writing and the prospects for the industry look bright with more deepwater E&P taking place in the years to come.

4) Suntec REIT – There were no updates from Suntec REIT for this month, and I received the dividend on May 29, 2009. There was a proposal from MAS, however, which mentioned that REITs should conduct AGM from FY 2010 onwards. That would indeed be a welcome change with respect to improved corporate governance.

5) China Fishery Group Limited – CFG released their results on May 15, 2009 and reported a 40% increase in revenues year-on-year, but only an 8% increase in net profit due to higher COGS and also higher selling expenses. As this is a 1Q 2009 results release, I will not go in detail on the analysis. Readers are welcome to visit SGXNet to obtain relevant information on CFG’s latest results and press release.

6) First Ship Lease Trust – I received the dividend of US 2.45 cents per unit from FSL Trust on May 29, 2009. It was converted at an exchange rate of 1.458 to the SGD. Conditions in the shipping market appear to have improved, as evidenced by the BDI jumping to the 3,200 level; its highest level since Sep 2008 on higher demand for iron ore from China. However, my feel is that there is still a long way to go before the shipping industry recovers, thus all shipping trusts would still face significant headwinds moving forward. As long as the cash flows from lessees are steady, I do not feel overly worried about my investment in this Trust.

7) Tat Hong Holdings Limited – Tat Hong released their FY 2009 financials on May 28, 2009. Revenue for FY 2009 was flat at S$632 million, while gross margins stayed constant at 38.2%. However, net profit attributable to shareholders declined 23% from S$89.8 million to S$68.9 million, mainly due to a S$16.1 million forex loss, impairment of goodwill and disposal of associated company, as well as provision for losses. A final tax-exempt dividend of 1.5 cents per share was declared, bringing my yield to 2.2% based on my purchase price of 68 cents. The dividend will be paid on August 18, 2009, subject to shareholders’ approval at the upcoming AGM. Taking into account my additional purchase in March 2009, average dividend yield for FY 2009 was 6.31% (using a total dividend of 5 cents/share for FY 2009). I will be doing a detailed review and analysis of results and prospects for Tat Hong in a future post.

Portfolio Comments – May 2009

My portfolio for May 2009 is not directly comparable to April 2009 as there was a divestment of Pacific Andes, which lowered my cost of investment. However, one thing I can conclude is that with the recent reversion of valuations towards the mean, I also saw a substantial increase in the value of my portfolio. It has now turned positive for the first time since October 2008 and is up 22%. The loss from the divestment of Pacific Andes had reduced my realized gains from S$12.8K to a mere S$4K. If this is added on to the unrealised gains, the total gain on my portfolio cost is 25.6%.

May 2009 itself has proven to be an amazing month as my net worth has increased substantially due to the rise in market value of my portfolio. This is the fastest and most drastic increase since I began embracing the concepts of value investing, and it is a small testament on how investment principles can help one to preserve capital and give one a decent return on investment. However, I must remind myself not to be overly complacent as my focus is still to closely monitor my companies to ensure they adhere to my original purpose for investing in them. After all, the financial crisis is far from over and recovery still seems remote as of this writing, so the companies I own may face further headwinds and difficulties in the months to come. While I do believe that most of them will be resilient, it is an undeniable fact that they would still be negatively impacted in one way or another.

On a separate note, the companies I owned had seen a total of two placements (Ezra and Swiber) and one rights issue (PAH) for the month of May 2009 alone, and this itself proves that my method for selecting companies needs to be fine-tuned and improved. Companies should be using most of their internal cash flows to sustain and grow their businesses, and should also be paying out a healthy dividend to their shareholders. That said, one must keep in mind that the balance between growth and income is tenuous, and my investments in Swiber and Ezra are considered “growth” investments; hence the fund-raising itself does not come as a surprise, though it is admittedly unwelcome. My screening process in future will account for high gearing and cash inflows as being a critical and pertinent part of the decision-making, and I will be more rigorous and demanding in my selection criteria as well.

My next portfolio review will be on Tuesday, June 30, 2009.

Pacific Andes - Rationale for Divestment

I sold off my entire stake in Pacific Andes today, capping a three-year long investment which saw one round of capital injection; and which resulted in a significant 38% loss. Even though the Company had announced a decent set of full-year (FY) 2009 results, with net profit attributable to shareholders up 38% to HK$664 million, the nail in the coffin came with the announcement of a fresh rights issue, coming hot on the heels of a previous one in March 2007. The offer this time was a 1-for-1 rights issue at 15 cents per share (a 50% discount to the last closing price of 30.5 cents) with additional warrants attached (1 warrant for every 5 rights shares subscribed for, exercise price 23 cents). The rights were supposed to raise about S$228.6 million while the warrants could potential add another S$70.1 million to the Company's coffers.

So one might ask - why is this the "nail in the coffin" ? Presumably, if I had wanted to increase my stake in PAH, I could have done so at 18 cents back during March 2009, but hesitated from doing so. In fact, a cursory glance at PAH's business model and financials would not leave one surprised as to the timing or magnitude of the rights issue. While I had previously added more PAH back in 2008 at a price of 44 cents, I had failed to take into account the inherent business model flaws which would precipitate a full-scale rights issue, and apparently Management also "forgot" about the massive dilutive impact of such a fund-raising exercise on both earnings and (future) dividends per share. Some of the reasons for my divestment are stated below in point form for easy reading and reference.

1) Paid too high a valuation - This fact was apparent right from March 2006, when I first purchased the company at a high price of 81 cents (pre-rights). It was probably valued at around 8-9x historical PER at the time, and I had neglected the fact that it was in SCM and trading and was a high volume-based business, but more on that later. The rights shares issue back in March 2007 were offered at 52 cents, seemingly a juicy offer since my purchase price was a high 81 cents. In August 2007, I continued to purchase more at 61 cents to further average down my cost. This was till July 2008 when I added my last round of PAH at 44 cents, giving at least 8 good reasons for doing so. Since I could justify my purchase so succinctly, I could also figure out what I had omitted to make this such a glaring error. All my reasons and rationale had not accounted for the Balance Sheet weakness of PAH and its business model which I shall elaborate on later. Taking the FY 2009 net profit of HK$664 million, it's about S$132.8 million. Dividing this by 1.391 billion shares gives an EPS of about 9.54 Singapore cents. At the current price of 35.5 cents, the PER is about 3.72. This may seem undemanding at first but considering the dilutive effects of the rights issue, the share capital base will "expand" to 2.8 billion shares and EPS will be halved. Thus, it does not seem like such a bargain any longer.

2) Holding Company Effect - PAH suffers from this effect which means it derives most of its value from their investment in another company, namely China Fishery Group Limited (CFG), in which I am also vested. It holds a 64.1% stake in CFG and works closely with CFG in its SCM and Trading business. However, PAH itself does not have the hard assets which CFG has. This means that much of its valuation is derived from the valuation of CFG; and CFG is the main downstream revenue generator as it is the Company which catches the fish. Hence, PAH is involved in a very high volume-based business (not unlike Noble or Olam) in which net margins are very thin. In fact, it can be readily observed that PAH has a net margin of less than 10% based on FY 2009 results, while CFG has a net margin of 26% based on 1Q 2009 results.

3) Lack of Tangible Assets limits collateral for loans - The rationale for PAH to raise funds is to provide for working capital needs (see point 4 as well). Notice that the company had NOT managed to secure any funding through bank loans and the CEO commented that it was difficult to do so during this harsh credit crisis. Yet, a quick glance at CFG shows that CFG had recently (in 1Q 2009) obtained a US$60 million bank loan to finance its expansion into the South Pacific Ocean. The reason for this is the lack of tangible assets belonging to PAH which can be used as collateral for loans. Previously, PAH would have used shares in CFG as collateral to banks, but during this severe credit crunch, banks are more cautious when lending and would prefer tangible assets such as fishing vessels and inventory (such as fishmeal) as collateral, all of which are owned by CFG and not PAH.

4) No clear objective for Fund-Raising - Most companies which issue rights have some specific objective in mind. Capitaland and its REITS CCT and CMT raised funds to pay down debts and to act as "pre-emptive" capital for M&A opportunities (or so they claim). Other companies raise funds to (presumably) capture opportunities for expansion and growth as there are many assets out there selling at distressed levels. Such cash is vital for taking advantage of opportunities. PAH only said that the cash was to be used for working capital, which I assumed to be for normal operating expenses and for daily use. This implies that the Company was short on cash for the normal operations of the Company, and did not have a specific objective for the cash, which makes the fund-raising all the more suspicious. It is CFG which has the clear growth strategy, with its elongation of vessels, deployment of vessels to the South Pacific, as well as introduction of ITQ. Therefore, it can be clearly seen that CFG's business model is very different from PAH as it has high net margins, high cash generation ability and has clearer scope for expansion.

5) Lack of Catalysts for Growth - As mentioned before, much of PAH's "growth" can be attributed to its 64.1% stake in CFG; hence its "value" hinges upon the value of CFG. This in itself is a very risky proposition for investment as the Company itself has no objective, clearly-derived value for which one can make a value proposition. Its SCM business can be likened to a commodity business as SCM models are essentially the same, are volume-driven and suffer from thin margins. This fact, coupled with the lack of tangible assets and the Company's excessively high gearing, made for a poor investment choice.

Unfortunately for me, I had to learn from this mistake the hard way - by taking a substantial loss by selling at 34 cents per share. But this mistake actually offers me better insights as to how to value a company, what to avoid, things to watch out for and more facets to consider when assessing if a company is suitable for long-term investment. The cash call was a timely reminder to me that this mistake had been made 3 years ago, and finally the time has come to divest of this mistake before it became a full-blown debacle. The opportunity cost of NOT divesting can sometimes be greater than the actual financial loss from divesting sooner (rather than later). Because of my reluctance to take a larger loss on this earlier (Oct 2008 through March 2009), I also omitted the chances to recycle the cash to other more promising companies like Boustead and Tat Hong. Thus, my mistake is two-fold and I feel mortified.

Moving forward, I will seek out more opportunities to purchase under-valued companies at attractive prices and a decent margin of safety; and will pay special attention to Balance Sheets and business models, as well as the fact that the companies I own are supposed to provide me with money (through dividends) and NOT keep asking me to pump in money instead ! I shall endeavour to pick myself up from this mistake, dust myself off and move on. I treat this as a good (though painful) learning experience, and promise not to make a similar mistake in future.

Note: This realized loss will be reflected in my May 2009 portfolio review as an offset against realized gains (currently standing at S$12.8K) and I shall cease all coverage of Pacific Andes from now on. Readers can access archives for PAH but all further updates shall be confined to CFG (which I still own).

Ezra - Share Placement of 78 Million New Shares

The announcement of Ezra's share placement caught me by surprise, frankly, for I had thought from their 1H FY 2009 press release that they had already enough cash to fund their MFSV purchases as well as expand their Vietnam Yard. For those who are unaware of the details of the above transaction, Ezra placed out 78 million new shares at a price of S$1.185 per share to raise gross proceeds of S$92.4 million. Considering their issued share capital is now about 580 million shares, this exercise will be pretty dilutive (about 13%) as it enlarges the share capital base to 658 million shares. Suffice to say that as a shareholder, I am unhappy about both the exercise and the rationale. However, I am willing to objectively and rationally analyze the underlying reasons for this corporate action.

With previously announced capital commitments of US$350 million, Ezra had mentioned that they had secured sufficient bank lines and would use internal cash flows to finance their expansion. It was also stated in several analyst reports that growth for Ezra would not be vessel-driven from FY 2011 onwards; instead the Company would re-package its services by combining Energy Servicess Division to provide customers with an all-rounded solution, thus commanding higher customer retention and loyalty and also garnering higher-value (and hopefully higher-margin) contracts.

The rationale for this fund raising exercise was stated as lowering their gearing from 0.5x to about 0.26x as at end-February 2009. One then wonders if Ezra had prudent capital management policies in place to ensure it had sufficient working capital, as raising money during an era of low/depressed valuations (as in this bear market) is usually not a good idea. Perhaps, of course, this exercise had already been on the cards; but news was NOT allowed to leak on the proposed share placement ahead of time, otherwise it may jeopardise the share price and cause a lower placement price to be set. Since the volume-weighted average price is used for the determination of the final placement price, leaking such news beforehand would be tantamount to asking for lower prices; thereby leading the Company to issue even more shares just to raise the required amount.

That said, one must also question if the Group had considered debt financing instead of equity financing and if they had weighed the pros against the cons. Apparently, having a high gearing of 0.5x and a somewhat fragile Balance Sheet meant that getting additional loan commitments (even with standby collateral) would not be easy. The cost of debt is also much higher during these troubled times as we are in the midst of a credit crisis which has yet to fully abate. With more difficulty now in securing needed funds through financial institutions and the higher cost of such capital, Ezra may have then decided to raise monies through capital markets instead; hence the secondary issue. One should also note that in the long-term, such capital is cheaper as Ezra has no obligation to pay dividends on the new shares, unlike debt where there is a clear obligation to pay interest. However, the downside is to the shareholder (including the major shareholders Mr. Lee himself) as they all suffer from shareholding and earnings dilution of 13%. All future dividends must now be divided amongst a much larger pie than before, and the thought rankles.

Incidentally, the previous fund-raising exercise (aside from listing EOC on Oslo) was held during Feb 2007 when they sold 15 million shares at S$5.18. If we take the split adjusted share price, it's like selling 30 million shares at S$2.59. That's about 100% higher than today's placement share price announcement. So they are issuing more than double the number of shares (78 million) at half the price ! Not a very good deal in my opinion, and it may indicate that they are starved of working capital.

Another issue which cropped up in my mind is whether the Management had anticipated such a working capital requirement and whether they had thoroughly planned for such a fund-raising, or was it an off-the-cuff reactionary corporate action predicated by unusual circunstances ? By now, the recession would have swept through most companies and left visibility in tatters. The lack of direction in terms of the future may mean that a Company like Ezra is left to flounder in deep waters (no pun intended) for meaningful direction when it comes to corporate strategy. This has been the case for many players in the oil and gas industry, and it perhaps a probable reason for this fund raising.

Yet another perspective I can offer is that the Group has somehow identified distressed assets or a good M&A opportunity, and are hurriedly raising funds (through Credit Suisse) to take advantage of the situation before the opportunity is lost. Note in the announcement that funding possible M&A takes up a 5-50% allocation, while paying down debt and funding capex takes up 10-50% and 10-70% respectively. This could perhaps hint that there is something out there for the Company to capitalize on, and obviously they cannot make their intentions too apparent through a public press release, otherwise it may alert potential bidders that something may be stirring.

That said, this whole exercise may just be an attempt to lower their gearing and ensure they have sufficient funds for opex and capex without straining their Balance Sheet further. Disclaimer: The scenarios which I have run through above are meant to be discussive, and are in NO WAY insinuating that Mamagement are either inept or are attempting to hide anything. I am also not implying that there is any other intention than the one stated in their press release, but it bears mentioning that a number of plausible scenarios may arise as a result of today's fund-raising which are worthy of contemplation.

So dear reader, please also air your views on how you feel about Ezra's placement, and about share placements in general. Are they "better" than having rights issues (e.g. Keppel Land and Capitaland) ? Is this an indication of poor financial management or a case of being "pre-emptive" and raising capital to take advantage of opportunities which may be lurking ?