Monday, September 21, 2009

Corporate Updates

This post is mainly to update on the corporate developments for the companies I own thus far for September 2009, as I would not like my month-end portfolio review to get too cluttered with words. I shall ease off some of the news flow in my month-end report and just briefly go through some salient points there, while highlighting other issues of interest in both the broad economy as well as Singapore-related news. In addition to posting the news and updates, I will also provide a small commentary on my views on the news and how I feel about the prospects of each Company.

Ezra Holdings Limited – On September 11, 2009, Ezra announced that they had clinched new and renewal charters for three of their AHTS vessels in the range of US$152 million. These contracts are for 5.5 to 6 years and they will make positive contributions through FY 2010 (beginning September 1, 2009 as Ezra has an August 31, 2009 year-end). Then, on September 16, 2009, Ezra announced that they had contracted for 5 ROV (Remote-Operated Vehicles) with Triton Group for US$23 million to boost their subsea division. These ROV will be deployed along with three incoming subsea-capable vessels to provide a more complete range of services for their clients. Triton will provide Ezra with ship interface engineering and installation services from its support in Singapore from September 2009 till delivery in 2Q 2010.

Comment: It is heartening to know that Ezra can still manage to clinch contracts of long duration even as the financial crisis eases and the recession shows signs of ending. The long-term nature of their contracts gives revenue visibility and allows steady cash inflows over the specified period of time, so this is good news. EOC does have vessels which have charters ending soon, so hopefully there is good news on renewing the use of those vessels (heavy lift accommodation work barge) soon. The ROV contract was a surprise as it allows Ezra to further enhance and “beef up” its planned subsea division and goes along with their July 16, 2009 news release on their “Next Lap Growth Strategy”. The complete range of service offerings which Ezra is targeting to provide means that they are better able to secure higher-value contracts with better margins as they are able to package their services into a one-stop solution for clients. Management had actually been planning this for 2 years and the execution has proceeded smoothly thus far. Of course, I would expect some hiccups along the way but Lionel Lee seems to have planned for this way in advance and has already allocated resources for these corporate moves. That said, I believe there is unlikely to be a final dividend declared when Ezra announces its results in mid-October 2009 due to the capex required for their shipyard, new vessels and now the ROV. I am also awaiting news on a possible financing structure for the Chim Sao (Vietnam) FPSO Project, in which EOC was named as a front-runner for some time back; as well as news on their gas FPSO Lewek Arunothai which has started producing gas after protracted delays.

Boustead Singapore Limited – Mr. FF Wong of Boustead had been interviewed by Reuters on September 7, 2009 and Business Times then proceeded to write an article on the interview. Unfortunately, the article was factually wrong at some parts and omitted key details which would have given the report more clarity. Boustead then proceeded, on September 9, 2009, to clarify certain aspects of the interview. The key points to note are that FF Wong mentioned a rise in revenues of about 10%, but still maintains that net profit will NOT exceed that achieved for FY 2009. Also, enquiries made of Boustead’s oil and gas division amount to S$500 million, but how much of this translates into Boustead’s order book is unknown. A potential US$5 million acquisition by Salcon was still in negotiation and due diligence stage, and not “about to be finalized” as stated in the report. On September 14, 2009, Boustead announced that they were one of only 5 Singapore companies to be included under Forbes’ “Best Under A Billion” companies (of which Ezra was also 1 of the 5). An awards ceremony will be held by Singapore Business Federation in November 2009 to honour these 5 companies. The Company also made a minor announcement of the incorporation of a 100% subsidiary in the UK called Boustead International Steam Generators Limited with an issued capital of £5,000.

Comment: From the Reuters interview, a few issues were discussed and became clearer. The Group still expects to enjoy revenue growth for FY 2010 despite the severe financial crisis, which means all divisions are still doing relatively well and holding up. Of course, profits will dip as a result of the lack of any property disposals (which had been occurring at least once for the last five financial years); but core net profit from their divisions should be either stable or will dip just slightly, unless COGS rises much faster than revenues (this is possible as there was evidence of this from FY 2009’s and 1Q 2010 financial statements). But proper cost control should mitigate the risk of this dragging down the Group’s profits by too much, and if their operational cash inflows are healthy the Group should still be able to declare a decent interim dividend in November 2009. Enquiries made of their oil and gas division amount to about S$500 million, a surprising number given the slump in oil and gas activities since oil peaked in July 2008, and I would expect some contracts to materialize in the short-term as Boustead has a solid reputation for providing services to the oil and gas industry. The most interesting news by far is Salcon’s potential acquisition of a US$5 million company dealing with waste gas treatment. Even though the company clarified that this deal was still preliminary, at least it shows that Management is actively looking out for good M&A targets which are potentially earnings accretive and can exhibit synergies with their existing businesses. Salcon also needs a boost in the arm after suffering from losses for the past few financial years; and for FY 2010 it has a chance to turn around with the award of several large projects. Knowing FF Wong’s conservative stance and that he will not waver on his criteria for acquisition, I can rest assure that Management will thoroughly review this US-based company before making any moves.

First Ship Lease Trust – OK, there’s quite a handful of news for FSLT, so I will try to summarize them here. On September 2, 2009 FSLT announced waivers on their LTV (Loan to Value) Covenants, which means the banks (their lenders) are less likely to require forced sale of vessels to meet their debt obligations. The downside is that FSLT has to pay a slightly higher interest rate on their debt and they intend to prepay more of their debt; though they claim it will not affect DPU. The next day, FSLT announced in detail the set of requirements which the banks had imposed on them in order not to breach any of the covenants. Then, the following day, FSLT dropped a bombshell by announcing a placement of up to 100 million new shares, at an issue price of 10% discount to S$0.59. Eventually, only 80 million units were placed at an issue price of S$0.525, raising gross proceeds of S$42 million. Net proceeds amount to S$40.9 million after deducting expenses and fees. The funds raised are not for prepayment of debt, but was stated as being for potential acquisition of vessels or companies holding vessels. This move increases the number of issued shares to 598,665,077, which dilutes ALL shareholders. Because of this new issue, Management declared a “stub” dividend of 1.27 US cents to be paid on October 30, 2009 to separate the existing shareholders from the entitlements of the new shareholders. The new units will start trading on September 18, 2009.

Comment: While it is definitely good news to know of the LTV covenant waivers, it was not such good news to know that interest expenses had increased. But since FSLT Management had buffered for this by reducing payout to USD 1.5 cents per quarter, this move had no further impact on projected 3Q 2009 DPU. Even with the issue of the new units, Management is confident of sticking to its USD 1.5 cents DPU for 3Q 2009. The good thing about FSLT is their diversified fleet type and customer base and that they have no capital commitments for new vessels, unlike the case of Rickmers Maritime which has to raise funds in double quick time as they had committed to buying vessels. Even though the new units issued would be dilutive to DPU, the funds raised right now could still be used to purchased distressed vessels which are DPU-accretive as there is currently still a major over-supply of vessels which will not clear for the next 2-3 years (according to reports I’ve read). Thus, the proceeds from this fund raising could potentially be used for accretive purchases in order to enhance long-term DPU and ensure stability of DPU going forward. I am optimistic that the Management team know what they are doing (having spoken to several key executives before) and that they will be able to pull a rabbit from their hat. I had mentioned before that my investment in FSLT turned out to be a mistake as I had not anticipated the sharp downturn in the shipping sector; but then no one (even the industry veterans) could have foreseen the magnitude of the crisis and the collapse in vessel values. For this, maybe I can forgive myself slightly in not adhering to my often preached mantra of “capital preservation”. I am, after all, still a novice and learning more every day about investing and analysing.

Tat Hong Holdings Limited – Tat Hong received in-principle approval for the issuance of the RCPS and on September 14, 2009 despatched a circular to shareholders with details on this RCPS and also to convene an EGM (on October 6, 2009 at Fullerton, 11:30 a.m.) to approve this move and to amend the Company’s M&A of Association. I am still in the process of perusing through this circular as most of the details within are rather technical and require a lot of reading and re-reading to fully comprehend. On September 17, 2009, the Company also announced the disposal of mining equipment belonging to PT Tat Hong Energy Indonesia. While the good news is that cash of US$19.1 million will be coming back to the Group, it also means recognizing a loss on disposal of about US$1.1 million, which will hit the Income Statement for FY 2010.

Comment: The RCPS is old news by now, and after looking through the terms and conditions for conversion, I should think that the Management must be sufficiently confident of Tat Hong’s long-term prospects and their expansion in China to be able to agree to this deal. AIF Capital is also viewed as a strategic partner with contacts and network in China, and a non-executive non-independent director Mr. Andy Tse will be appointed onto the Board of Directors of Tat Hong. He is a managing director of AIF Capital with 14 years of experience in handling private equity deals in South-East Asia, so his experience and contacts should benefit Tat Hong over the long-term. The announcement of disposal of equipment is because Management did not want to expend further cash and resources to overhaul the machinery in order to enjoy a higher rental rate; thus the decision to divest and free up the cash for other uses. I see this as a good move as Management do not drag their feet when it comes to making painful decisions to recognize a loss, as the retention of old equipment will not benefit the Group in the long-term and their cash will be “trapped” inside these assets.

Overall, corporate developments have been numerous; and this is just to provide an update and some views on the latest. Results will be released in Nov 2009 (except for Ezra's results in Oct 2009) so it will be interesting to note if business conditions have turned up since the recession has technically ended.


simon said...

hey, i know this is totally unrelated, but does anyone know how to calculate the absolute cash burn rate per month/year of a company by looking at the financial statements?
i don't think operating cash flow is accurate, especially when it's positive (positive cash burn doesn't make sense). moreover, operating cash flow also includes the cash buildup component, and all i want is the absolute cash burn amount alone.
can i take the expenses at the p&l as cash burn per year? does that make sense?

can any of you value investors enlighten me?


Anchovies said...

Hi Simon

Found this in investopedia.
Dont know if it helps

simon said...

the link looks incomplete...

Anchovies said...

Hi Simon

Sorry about it.