Tuesday, August 31, 2010

August 2010 Portfolio Summary and Review

August 2010 was indeed an interesting month for me in terms of portfolio changes; as I made the somewhat painful decision to divest of my entire stake in FSL Trust (as I had previously blogged about in this post). The decision was a mixture of relief and regret, as the funds from this investment can finally be freed up to be redeployed into a more promising investment. What I dislike most is “deadweight” in my portfolio, and I will not hesitate to cut loss on a position in order to re-allocate the funds to another position should I objectively conclude that it would be in the best interests of my portfolio.

I had mentioned that I expected August to be a relaxed month; but it was not to be so as I spent quite a bit of time researching and poring over Annual Reports for my latest purchase – SIA Engineering Company Limited (“SIAEC”). In order to do a more comprehensive analysis as compared to my previous one on Kingsmen Creatives, I spent a lot more time dwelling on the Annual Reports, doing deeper analysis on each division, poring through SIAEC’s many associated companies and joint ventures; as well as doing a detailed competitive analysis for three of SIAEC’s competitors. The result is a rather lengthy report to justify my purchase of SIAEC which I will split into five separate sections (in order to keep each section readable). The full report is about 32 pages (along with 14 tables of figures) and it is my intention to post up as much of the analysis as I can in its entirety; as this is the first blue chip company (SIAEC is, incidentally, part of the Straits Times Index’s 30 component stocks) I have seriously researched on and I will need to get some feedback so that I can improve for future research and analysis work.

The five sections will cover aspects such as Financial Analysis, Divisional Review and Historical Progress, SIAEC’s myriad associated companies and joint ventures, cash flows and share of profits from these ventures, competitive analysis, the MRO industry; as well as prospects, plans and a pros and cons breakdown. These will be posted progressively (not consecutively) over a period of about 2 months, and also as I intend to compile the information to make it suitable for posting up. Note that this may be the first and final time I post such a comprehensive analysis of purchase on this blog; as subsequent purchases may simply rely on my own private research which I will justify in a succinct summary.

In addition to the above analysis, I also spent time attending AGMs for MTQ, Tat Hong and Boustead. Suffice to say I had made useful notes for all 3 AGM, but due to the fact that these notes are brief and summarized, I will not post them up on the blog.

I will not be commenting much on economic and local news as there’s just more of the same thing in general, and this news can get dreary and boring if repeated ad nauseum. One interesting event which had been held in our little red dot of a country was the Youth Olympic Games (YOG), which was very widely covered by our local media. The reason I mention this is because Kingsmen Creatives happens to be one of the main sponsors; other than this I am not really too interested in watching sporting events!

Interestingly, our local Straits Times also had back to back articles on August 24 and 25 on cars and smart phones, respectively. They state that more and more Singaporeans now own 2 or more cars, even though cars in Singapore are the most expensive in the world! Also, smart phone penetration rate is about 40% in Singapore, as compared to the worldwide penetration rate of only about 23%; implying that Singaporeans are simply tech-crazy/hungry. I somehow suspect that this % is misleadingly low as almost 7-8 out of 10 phones I spot on the MRT and bus are smart phones (majority being Blackberries and iPhones); so perhaps the % will be revised to 70-80% in time to come. And these articles came just after I blogged about C&C under my Personal Finance series; which I felt was pretty coincidental as it highlights (once again) how materialistic we are as a nation, as newspaper articles regularly exhort people who own 2 or more cars, and who carry the latest gadgets. It’s not easy for the average man on the street to try to be thrifty when they are constantly bombarded by such articles in which interviewees claim that they “need” two cars and that a smart phone is “an essential item”. It’s a pretty sad state of affairs to see this culture of conspicuous consumption being so firmly ingrained in our society.

A late announcement by Ezra Holdings (one of my prior holdings which had been divested a year back) during lunch today stated that the Group plans to issue 1-for-5 rights at S$1.18 per rights share, which is a 33.3% discount to the last done market price of S$1.77. Somehow the announcement does not surprise me as Ezra’s Balance Sheet is already very heavily geared and the only route to raising more cash is through equity (as the Group has consistent negative free cash flows). However, what surprised me was the discount of 33.3% which is very significant and will increase the dilution in EPS and DPS (if any). However, a counter-argument is that if the rights shares had been offered at a higher price, it would not be enticing enough for existing shareholders to subscribe for them. Hence, I believe the discount had to be present to make the whole offer attractive; disregarding what the Group says about “strategic growth”. More comments on this as details emerge and after the Group reports their FY 2010 results in October 2010.

Below is a snapshot of my portfolio and associated comments for August 2010:-


1) Boustead Holdings Limited – Boustead announced their 1Q FY 2011 results on August 12, 2010; and not surprisingly, their results showed a major improvement over 1Q FY 2010. This was mainly due to the completion of the sale of IBM Singapore Technology Park. Revenues were up 101%, gross profit was up 100% while net profit attributable to shareholders rose 237% from S$9.5 million to S$31.9 million. Stripping away the profits from the sale of this property, Boustead would have earned S$10.4 million for 1Q FY 2011, which is a 10% rise in net profit and is quite decent. Their order book as at June 30, 2010 stands at S$580 million which should stand them in good stead to tide through any potential double-dip recession or another economic slowdown. In addition to the results announcement, on August 5, 2010, Boustead announced back to back contract wins for its 91.7%-owned Boustead Projects. This division clinched a S$12 million Design and Build contract for a specialized cold chain logistics facility from World Courier Singapore Pte Ltd, as well as a Design, Build and Lease contract from Hankyu Hanshin Express for a logistics facility of 12,000 square metres to be completed in the second quarter of 2011. Together, these contracts will not only boost the order book for Real-Estate Solutions division, but will also increase Boustead’s recurring income as they had bagged yet another design, build and lease project. Separately, on August 12, 2010, Boustead also signed an agreement with TT International Limited to take over the construction of “Big Box”, which was a S$95 million development project at Jurong East MRT which was abandoned by TT International due to lack of funding during the financial crisis. Boustead will pump in S$150 million for a 60% stake in this transaction, and TT International will be the Master Lessee. It is envisaged that this project will greatly increase the recurring income for Boustead Group; though the salient details have yet to be worked out. Boustead’s final and special dividend of a combined 4 cents/share was received on August 20, 2010.

2) Suntec REIT – There was no news from Suntec REIT for the month of August 2010. The dividend of 2.528 cents/share was received on August 27, 2010.

3) Tat Hong Holdings Limited – Tat Hong released their 1Q FY 2011 results on August 13, 2010. Suffice to say that even though revenues rose by 24%, gross profit only rose by 15% due to overall lower gross margins (sales mix leaned towards lower margin equipment sales compared to higher margin crane rentals). Unfortunately, distribution expenses increased by 26% while other operating expenses increased by 30%, which resulted in net profit attributable to shareholders falling 2% to S$10.4 million. In spite of what analysts claim was a sequential quarter on quarter growth in net profit and sales, I fail to understand why the Company cannot control their costs well enough to at least demonstrate some profit growth year on year. All divisions showed growth though, except equipment rental. While I am not too pleased with the results, I am cautiously optimistic about Tat Hong being able to grow their earnings base and cash flows over the next few quarters as the economy picks up. Also, their purchase of the remaining shares in Tutt Bryant may be a sign that things are starting to pick up in Australia and hence they want 100% of the company to consolidate its earnings into the Group’s Profit & Loss. For their China Tower Crane operations, it will take a while before it can significantly contribute to top and bottom line, so this should be at least a 2-3 year wait. There will be no further analysis as this is only the 1Q results. The final dividend of 1.5 cents/share was received on August 20, 2010.

4) MTQ Corporation Limited – On August 26, 2010, MTQ announced that their wholly-owned subsidiary, MTQ Engine Systems (Aust) Pty Ltd, had acquired the assets of a fuel injection service business located in Brisbane, Australia called Highway Diesel. According to the announcement, “Highway Diesel is primarily engaged in the diagnostics and servicing of diesel fuel injection and holds service dealerships with major brands such as Bosch, Denso and Delphi. The acquisition of Highway Diesel would enable MTQES to further expand its range of service and repair capabilities as well as its business network within Brisbane”. The upfront consideration will be A$1.5 million, with another potential A$500,000 payable upon certain EBIT milestones being met within a year. Interestingly, the book value of the business assets acquired was just A$1.069 million, implying that MTQ paid a substantial premium of about 2x book value. My feel is that this acquisition should be pretty attractive in terms of synergy for Engine Systems for MTQ to pay such a premium for the company. The final dividend of 2 cents/share was received on August 17, 2010.

5) GRP Limited GRP released their FY 2010 results on August 20, 2010. I had already done an analysis on their FY 2010 results in my previous post and thus will not say any more here.

6) Kingsmen Creatives Holdings Limited – Kingsmen released their 1H FY 2010 results on August 12, 2010; and it was a pleasant surprise to note that revenues had increased by 25.5% for 1H FY 2010 year on year; while net profit attributable to shareholders had increased by 17.2% from S$5.9 million to S$6.9 million for the half-year. The reason for this was a much stronger 2Q 2010 (as compared to 1Q 2010), which saw revenues rising by 21.9% and net profit attributable to shareholders rising by 30.2% (for 2Q 2010 year-on-year comparison against 2Q 2009). Debt levels remain low and the Balance Sheet is still healthy, while there were positive operating cash inflows of S$14.6 million for 1H 2010 and FCF of close to S$9 million, boosting cash and bank balances to S$32 million from S$21.4 million a year ago. An interim dividend of 1.5 cents/share was declared, similar to 1H FY 2009. The ex-date for this dividend was August 27, 2010 and it will be paid on September 15, 2010; thus I have included it under “Realized Gains” in my portfolio review. Interestingly, the latest issue of The Edge has a one-page write-up on Kingsmen and their prospects; and the September 2010 issue of Pulses magazine also has a 4-page spread on Benedict Soh and Simon Ong. I grabbed them just to enhance my knowledge of the Company and its founders.

7) SIA Engineering Company Limited – There was no news from the Company for August 2010, other than a minor announcement on August 5, 2010 that SIAEC would be giving out S$0.6 million to staff in productivity share gains as a result of the “Cheaper, Better, Faster” initiative. SIAEC hope to save S$10 million in Phase I of this initiative.

Portfolio Review – August 2010

Realized gains have dipped significantly from S$56.7K to S$46.4K due partly to the realized loss on FSL Trust; but the decrease was offset by the 1.5 cent/share interim dividend declared by Kingsmen Creatives for 1H FY 2010. On an annualized basis, the portfolio has gained by +8.6% against the absolute gain of +1.8% for the STI. As a result of the divestment of FSL Trust and the purchase of SIAEC, my investment cost has increased from S$175.4K to S$202.4K as at August 31, 2010. Cost of investment has finally surpassed the S$200,000 mark, which was my intention for FY 2010. Unrealized gains stand at +15.9% (portfolio market value of S$234.5K).

September 2010 is expected to be a very slow month with no corporate results and usually no corporate announcements as well. I expect to find myself taking some time off investing to reflect on life, love and relationships; while waiting for the November 2010 reporting season to arrive.

My next portfolio review will be on September 30, 2010 (Thursday).

19 comments:

financiallyfreenow said...

Hi MW,

Thanks for the info on Kingsmen's articles in The Edge and Pulses. Gonna grab them tomorrow!

Also, I'm looking forward to ur SIAEC post. Personally and incidentally, I'm in the MRO industry. SIAEC is a major brand in the MRO industry. Also, being tied with SIA, they are poised to benefit from the recovery in the airline industry. As long as planes are flying, maintenance is needed. However, the industry is competitive but big boys like SIAEC have a large share of the pie.

Createwealth8888 said...

Finally, a warm welcome to blue chips party. You are not late for the party.

Musicwhiz said...

Hi FFN,

Thanks for the info on SIAEC. From the research I've done, it seems they do have a significant slice of the pie; and they are also growing their operations, and have been doing so for the last ten years.

Thanks,
Musicwhiz

Musicwhiz said...

Hi Createwealth8888,

Haha, well if there's a party I want to come well-prepared; and I also want to make sure that I get a decent return on my investment. SIAEC looks like a safe bet, though of course at this point in time there's still uncertainty about the economy.

Then again, uncertainty is certainly a good friend for those with a long-term horizon.

Cheers,
Musicwhiz

Mike Dirnt said...

Even though i bought SIAEngg prior the crisis, my losses have been compensated by dividends collected in just 3 years. Im willing to hold SIAEngg for many more years. :P

MW the annualized return for STI should (1.018)^12/8 - 1 = 2.7%

financiallyfreenow said...

Hi MW,

What irks me is that SIAEC has high capex. I every thought of buying it but the high capex put me off. What's your take on this?

Did you consider buying ST Eng before?

financiallyfreenow said...

Hi MW,

Hmmm, is SIAEC a value investment?
Cashflow was negative even though revenue increased from previous year. The NPM is also slim at 3.4%. Debt-to-equity ratio is around 3.

Hopefully, your post on SIAEC can shed some light on these perplexing issues.

Musicwhiz said...

Hi Mike!

Ah, ok I didn't realize you have some SIA Engineering as well. When did you make your purchase and at what price? It gave very good dividends from FY 2008 through FY 2010 even though the world was going through a severe crisis. I think it should be safe to keep, as long as your yield is decent.

As for the actual returns and annualized returns, I read a book called "The Business of Value Investing" by Sham Gad who said that value investors should focus on absolute returns rather than relative returns; and on this I am more particular about registering a gain and decent return, rather than to bother too much about the technicalities of comparing against an Index.

Thanks,
Musicwhiz

Musicwhiz said...

Hi FFN,

I hope we're looking at the same company! I am not sure where you got all your facts and numbers from, but was hoping you can justify them. If you want some numbers, I can provide them ahead of the posting of my detailed analysis....

1) Capex is actually very low as a % of revenues, hovering at an average of just 5% of revenues over ten years. For your info, there was FCF for every financial year since FY 2001 (listing year).

2) Net profit margin (NPM) was 23.5% for FY 2010, and improved to 24.6% for 1Q FY 2011. Am not sure where you got your figure of 3.4%. Even operating margin was higher than that at 11% for FY 2010, and 12.5% for 1Q FY 2011.

3) The Group has absolutely no debt (yes, ZERO debts). So there is no gearing to speak of.

I hope this clarifies on the "perplexing" issues. Do your numbers come from some other company instead?

For info, I had looked at ST Engineering before but was not comfy with the debt level.

Regards,
Musicwhiz

financiallyfreenow said...

Hi MW,

My bad! I looked at an entirely wrong company. I use Shareinvestor and I think I had several tabs open. This might have caused me to look at another company instead of SIAEC.

Yes, SIAEC seems pretty impressive for a MRO company. Their financials are strong with no debt like you said.

JW said...

I ever considered SIA Engg and ST Engg when both were at the same price of $2.28

In the end, I end with ST Engg :X


SIA Engg is still on my watchlist though.

Musicwhiz said...

Hello FFN,

Haha no worries. It's good to know we are referring to different companies!

Cheers,
Musicwhiz

Musicwhiz said...

Hi JW,

Well, to be honest I did compare ST Aerospace (a unit of ST Eng) against SIA Engineering. And I have found some very interesting insights which I will share in Part 4 of my analysis of purchase. Too bad though that I could not buy ST Aerospace by itself; rather I could only buy it through ST Eng and the gearing was too high for me to consider it a viable investment target.

Regards,
Musicwhiz

Singapore Stock Picker said...

i agree with your view on Ezra.. it remains to be seen how it will use the money and for what purpose... feel the company has been over geared and prone to the down swing... just my opinion, but it will underperform despite all those positive analyst report

Musicwhiz said...

Yes, I would think that the Company has to closely watch its gearing as it seems to be aggressively spending on capex. This seems to be the norm for the industry rather than the exception, as Ezra has been heavy on capex ever since its listing in 2005. There was a time when I thought the Company would stop its aggressive expansion and allow FCF to be generated; but then I realized it was a pipe dream as they need to keep investing in order to remain competitive....which means if they stop spending then the business may eventually stagnate and fall behind the competition.

Just my 2-cents,
Musicwhiz

ss88 said...

hello MW,
Thanks for your article. with regard to ur SIA Eng, which is a blue chip counter, would u consider SingPost? Have been eyeing both counters for a while but still waiting for a good price to enter...not sure if I have missed the chance...Regards...ss88

Musicwhiz said...

Hi ss88,

Thanks. I can't comment on SingPost as I do not know much about its business model or financials.

As for right now, I will not be looking at potential purchases as I need to build up my cash reserves first.

Regards,
Musicwhiz

hyom said...

Hi Musicwhiz,

I applaud you for your courage to put your portfolio publicly on display. In a bear market, some people may criticize your choices and end up demoralizing you. Hindsight brilliance can be done by anybody. In a bull market, like-minded people will talk up your choices and we fall into the trap of groupthink together. Either way, it is not healthy to the psychology of an investor. Unlike you, I never had the courage to openly talk about my stocks on my blog because of self-acknowledged weak psychology. Investing is best done as a solitary activity, at least for me.

By the way, I own Boustead in my portfolio too. However, based on the price you acquired Boustead, you are way smarter than me:). I would love to believe that was a smart choice. Falling into the trap of groupthink?

Musicwhiz said...

Hi hyom,

Haha thanks. Yes in a bear market the amount of noise was amazing! Similarly in a bull market, people all tend to assume the best is going to happen. So it's a big problem if we, as investors, listen to such comments and take them too seriously. You are right to say that independent thinking is the best; yet sometimes there is the advantage of having value investing experts talk about their point of view which may allow us to learn something worthwhile. I myself have learnt a lot from other astute value investors.

As for Boustead, I don't think it's such a simple matter of "groupthink". If you have an objective and rational reason for buying shares in the Company, then I would say it's a good decision regardless of what others do. And you shouldn't be comparing entry prices, either! Haha!

Regards,
Musicwhiz