Tuesday, August 11, 2009

Investing in Adaptability

I was reading my usual dose of Business Times when I came across a rather interesting article (or rather, set of articles). Basically, these articles (called “The Secret to Corporate Longevity”) were written on the longevity of companies and the secrets behind them being able to survive through thick and thin, through booms and downturns; through world wars and periods of economic turmoil. The companies which were mentioned included SPH, Eu Yan Sang as well as Boustead. The articles can be accessed either through Business Times archive or through Boustead’s website at http://www.boustead.sg/ (Media); but what I wish to highlight is something Mr. FF Wong (CEO of Boustead) mentioned and the context in which it applies to investing in companies. He speaks about adaptability and evolution in the following paragraph:-

"A highly successful product or service today may not be successful tomorrow. A stubborn company will try its best to hold on to products and services, even when they are irrelevant. Companies that enjoy longevity do things differently. They evolve. They create a different business and adapt to prevailing times.”

I think the above embodies the essence of corporate survivability in the long-term and what it takes for a company to remain successful amidst a rapidly changing global landscape; and also as events become more fast-paced in today’s computer-driven environment. Mr. Wong touches on evolution, adaptability, corporate culture (resistance to change versus embracing change) as well as succession planning and “AQ” or what he terms “Adversity Quotient”. Companies which can adapt well to the changing needs and wants of their target consumers will be able to survive and thrive, while companies which stubbornly hold on to past glories (e.g. Creative and its “Sound Blaster Card”) but cannot innovate are left behind in the relentless pursuit for profits in our capitalistic society.

Adaptability represents a company’s ability to read the changing landscape and adapt its business model to fit the new realities, and to package its products or services in different and more innovative ways in order to continue to retain their target consumer segment. In marketing parlance, this involves “re-branding” and “re-positioning” and a company must be ready to alter and evolve its culture gradually to account for changing mindsets, trends and fashions. Change Management is also an integral part of an organization and it involves galvanizing the staff to take up the mantle to lead in terms of changing the way things are done, or challenging long-held beliefs which may be antiquated. Such a culture fosters an environment of continuous improvement and can only benefit the organization in the long-run, while also keeping staff highly motivated and driven to perform.

Succession planning is another aspect of a successful corporate culture, as it represents a conscious effort undertaken by Management and the BOD to instill a the same kind of culture and drive which caused the company to be so successful in the first place. This is akin to having a Disaster Recovery Plan in place in case something drastic occurs and the organization may be left in tatters or unable to function normally; hence severely disrupting operations and curtailing sales and other functions.

The above are just a summarized list of some of the points brought up by Mr. FF Wong in explaining what makes an organization survive through adversity; but in a future post I will touch on other salient aspects which also contribute to a successful company – and all these are qualitative and not quantifiable on a Company’s Balance Sheet. As a value investor, one must engage in appropriate scuttlebutt to discern if a Company has the above positive traits, and whether Management and BOD are candid and are of unquestionable integrity.

I would, at the same time, also wish to highlight some of the strategies which my companies had undertaken in recent months to demonstrate the essence of evolution and adaptability in the face of changing circumstances:-

1) Ezra Holdings Limited – Ezra announced their next lap growth strategy last month and if one read it in detail, they would immediately notice that this represented a significant shift away from their previous growth culture. The main difference is that from 2003 till 2008, the focus was on growing their asset base through newbuilds and taking on debt, placing out shares and arranging for sale-and-leaseback transactions. However, their next 5-year growth plan stretching till 2014 involves using their existing assets and package them into innovative services for their customers in order to enjoy higher margins and larger contracts. Thus, they are adapting their business model to focus less on capex and more on bundling their service offerings and going into a new and sustainable segment called deepwater subsea services. Whether this plan turns out well or not is unknown at this point in time, but at least the Company embodies the idea of change and evolution in its business model to ensure continued growth, and to stay ahead of competitors.

2) Boustead Singapore Limited – Boustead had, in its FY 2009 Annual Report, announced that due to the unprecedented global financial crisis, it had affected the property market and sentiments relating to capex in property; thus negatively impacting its 91.7%-owned Boustead Projects, which deals with Real-Estate Solutions. Recall that in the last 5 financial years, Boustead had managed to sell at least one leasehold property per year from its design and build orderbook. This created a good stream of income and cash inflows but Boustead has since tweaked this model to move from Design and Build (D&B) to Design, Build and Lease (DB&L). Though margins are smaller on DB&L projects, they will ensure a good recurring cash inflow and steady revenue recognition which is what Boustead wishes to build as its current projects are too order-book driven (especially so in O&G Projects and also Salcon). Future acquisition targets are also geared towards sustainable revenues and cash flows which is a departure from its traditional project-driven revenue; and this demonstrates adaptability and evolution from its old business model.

3) Tat Hong Holdings Limited – Tat Hong had communicated its intention to shift its focus from being a crane and heavy equipment re-sale company to one doing rentals; and this stemmed from Management’s experience from the previous crises which had caused wildly fluctuating profit and loss levels. To ensure a more stable revenue and cashflow base, Management has subtly but surely modified its business model to one of being a “rental” company, as detailed in my previous post on Tat Hong’s FY 2009 AGM. By adapting their business model to become more resilient, it has managed to weather the current sharp downturn relatively well, and in the process is also in the planning phase for their China expansion.

4) China Fishery Group Limited – Though not much has been written or reported recently about the Company, it was highlighted in previous interviews that Management are exploring new sources of fish in South Pacific (new region) as well as considering possible harvesting of krill (tentative plan). This also showcases Management’s commitment to exploring additional sources of revenue, as well as tweaking and adapting their business model to ensure sustainable fish sources are maintained and that their revenue stream is not rudely disrupted.

The above are just a few examples of corporate adaptability in the face of changing economic and industry conditions. There are, of course, many other successful companies which had undergone changes and emerged stronger; but there are almost an equal number which have failed to adapt and gone under.

The moral of the story is that for a company to survive through adversity, its “adversity quotient” or “AQ” should be high and the Management Team should be prudent and experienced. This involves taking calculated risks and not to over-extend themselves. It’s not an exact science but it is something the avid investor should still attempt to judge on his own, as it will significantly affect his decision to invest or not.


Wedding Planner said...

Your investing writing has been always fascinating..

Thanks so much for your writing.. I believe in Boustead as well and got FSLT. Do you think FSLT worth keeping?

By the way, Can I also have your portfolio excel file so that i can put in my stocks like yours?

Thanks again for your advise and help..

My email add is : egpark27@gmail.com.


musicwhiz said...

Hi Wedding Planner (Ken),

Thanks very much for visiting. Yes I think for FSLT, with its lower DPU of 50% of cash flows, has a higher chance of long-term survivability as compared to when it was paying out an unsustainable 100%. I had highlighted this to Management during AGM but was rather unhappy that it was brushed aside, only for them to (suddenly) declare a payout reduction when they should have taken such feedback into consideration in the first place. It does say something about their ability to think longer-term! But since the Trust is generating regular cash flows and they have no need for fund-raising, I do not see the point in divesting at a substantial loss.

As for my spreadsheet, I am afraid I do not have a blank template for it and therefore regrettably cannot send you a copy. To be honest, it is quite easy to come up with a spreadsheet to track your portfolio returns, and you can use MS Excel for this and customize it the way you want. :)


Lemizeraq said...

Hi Music Whiz,

You have an interesting and well written blog about investment.

Thanks for visiting and I've already added your blog to my "Blogs of Note".

Looking forward to seeing more posts on investment from you.


Musicwhiz said...

Hi Lemizeraq,

Thank you for visiting and thanks for adding a link to my blog.

You have a good day !