Monday, November 30, 2009

November 2009 Portfolio Summary and Review

November 2009 was an interesting month – not for the stock market but for news coming out regarding the economy, inflation and jobs. There was a lot of debate as to the strength of the recovery and whether it would be able to carry the economy to a weak, but fragile rebound. Everyone from top economists and analysts rushed to give their views, and the result is a rather tangled mish-mash of half-baked opinions on the strength of the economic recovery. I personally think one could not find a more motley crew of people commenting about something in the future they could not possibly know about; but then lots of people get paid top dollar this way, so who am I to complain?

Foremost on the list is that USA’s economy has rebounded and it definitely on the mend, even as unemployment rate continues to creep up and housing starts continue to drop. Lagging indicators are often used to determine if the recovery is truly under way, and if an investor is trying to pre-empt the recovery by watching out for such news in order to determine when to purchase shares, he will feel left out and sorely disappointed. As we have witnessed, both USA and Singapore had exited the recession in 3Q 2009; but the stock market rebound occurred in May 2009 and was sharp and sudden; hence the idea of properly timing the market as to when to enter is again rendered moot and futile. Nevertheless, I do know of friends and peers who continue trying, and I wish them luck in finding the “Holy Grail” in market timing.

In Singapore, it was reported that sales of private residential properties hit just 811 units for October 2009, down from 1,143 units in September and 1,805 units in August. While market watchers agree that October is usually a slow period, I cannot help but wonder if the recent measures taken by the Government to cool the market by increasing supply had anything to do with it. It is also in my interest to see prices for HDB resale move downwards as I have friends and relatives who are searching for an affordable HDB to buy but are being priced out of the market by the high COV levels. Higher private residential property prices also means that buyers who purchase such units have to take up higher leverage and financing, which may lead to problems 5-10 years down the road should interest rates rise. An article in the Sunday Times November 22, 2009 highlights this issue of affordability and prudence in purchasing a home, which many young and excited couples may not have planned or considered before-hand.

Just to comment on cars, COE prices have remained super-high (in my opinion at least), with cars up to 1,600 cc ending at S$17,189 and for cars above 1,600 cc ending at S$18,389. This makes it quite impossible for me to even consider a buying a car as the prices are simply amazingly high. I recently read about the newly launched and heavily promoted Volkswagon Polo, which is a 1.4L car and selling for a hefty S$63,000+. It seems Singapore continues to hold the record for being one of the most expensive countries to own a car. In line with my strategy to watch my cash flows, I am unable to reconcile (to myself) how I can own such cars as the cash flow drain would be enormous.

Anyhow, my portfolio did not see any changes for November 2009, as I was busy building up more cash through dividends while continuing my research for a suitable investment opportunity. I received dividends from MTQ, GRP, Suntec REIT and FSL Trust this month, amounting to about S$1,500 in total. Next month, dividends from Tat Hong and Boustead are due and will provide a boost to cash flows as well.

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

1) Boustead Holdings Limited – I am in the midst of doing a detailed analysis on Boustead, part 1 of which was posted 5 days ago. Parts 2 and 3 should follow-up soon so watch out for it, but I may blog about other issues along the way as well. An interim dividend of 1.5 cents/share was declared.

2) Suntec REIT – There was no significant news for Suntec REIT for November 2009. The dividend of 2.92 Singapore cents per share was received on November 26, 2009.

3) China Fishery Group Limited – China Fishery released their FY 2009 results ending September 28, 2009 on November 26, 2009. I will be doing a detailed analysis and review but only after I finish up with Tat Hong and Boustead (too many things on my plate haha). In other related news, Pacific Andes International Holdings (PAIH) listed in Hong Kong mentioned that finishing touches were being put on their new super-vessel The Lafayette, and it was ready to set sail to the South Pacific along with 5 super-trawlers and seven catcher vessels. It is able to operate all-year round as it can freeze the fish on board once the vessels bring in their catch, and can re-fuel itself too. According to estimates from PAIH, profit margins for CFG may increase from 35% to 50% as a result of the increased efficiencies. The Group had spent US$100 million on the vessel, so I’d say it better be as good as they claim! There is also the question of sustainability of fish resources in the South Pacific once this vessel is deployed there, and in the interests of conservation and “saving the earth”, I may also have to consider if this could be a potentially “non-green” initiative which the Group has taken on.

4) First Ship Lease Trust – On November 23, 2009, FSL Trust (FSLT) announced a proposed issuance of US$200 million in senior notes due 2016. They are using the rest of the month to market the notes to international investors, and will keep shareholders updated on material events. The dividend of 0.23 US cents per share was received on November 26, 2009. There are some sources which state that FSL Trust is asking for "just below 12%" yield on the bonds, which are supposedly callable after 4 years.

5) Tat Hong Holdings Limited – Tat Hong released a very dismal set of 2Q 2010 results during the month, and saw their Balance Sheet and Cash Flow Statement deteriorate further. I guess it was quite a tall order for me to expect them to be immune to the financial crisis, but the drop in revenues and even larger fall in earnings was shocking and bewildering, to say the least. I had expected them to be able to hold up better as they had invested in a “rental” business model and were supposed to have learnt their lessons from past financial crises. An interim dividend of 1 cent/share was declared for ordinary shareholders and for holders of the RCPS. I shall be doing a review of the 1H 2010 results in subsequent posts.

6) MTQ Corporation Limited – There was no news from MTQ for November 2009. The interim dividend of 1 cent/share was received on November 24, 2009.

7) GRP Limited – There was no news from GRP for November 2009. The dividend of 1 cent/share was received on November 19, 2009.

Portfolio Comments – November 2009

November 2009 saw no changes at all to my portfolio, and I have been happy to remain vested and building up cash in the meantime. Realized gains have increased from S$26.6K to S$28.4K as a result receipt of dividends from Tat Hong, MTQ, GRP and Suntec REIT. Unrealized gains remain low at +7.5% as a result of recent purchases, but overall gain has remained steady at +28.4% of adjusted cost of S$135.4K. This was mainly due to increases in realized gain due to dividends which offset the drop in unrealised gains due to market weakness across second-liner companies.

My year-end portfolio review will be done on Thursday, December 31, 2009. At the same time, I will also be doing a special full-year review of my investment decisions and comment on the investment performance of my portfolio. It’s time to get candid and honest about my mistakes and misconceptions.

Wednesday, November 25, 2009

Boustead – 1H FY 2010 Financial Analysis and Review Part 1

Boustead released their 1H FY 2010 results on November 12, 2009. Suffice to say that I was pleasantly surprised that even though revenue had fallen by 12.7% for 2Q 2010, net profit attributable to shareholders actually increased 12% to S$10.8 million, and was up 33.4% to S$20.2 million for 1H 2010. The table below offers a quick glance at the results of Boustead for 2Q 2010 and 1H 2010, and a comparison against the corresponding period last year.

Profit and Loss Analysis

One would immediately notice that gross margin has weakened considerably for 1H 2010, as the 10.8% rise in revenues was more than offset by the 17.2% rise in COGS, resulting in a decrease in gross profit of 3.3% from S$66.2 million to S$64.0 million. This can be attributed to margin erosion as costs are now higher and margins are also depressed as contracts are harder to come by, and customers have had to bargain for lower prices in order to accept jobs as financing is also tight. Gross margin contracted from 31.4% to 27.5%, and a closer look at each division will be done in Part 2 of this analysis, as well as offering a peek into PBT margins and I will provide possible explanations for the margin erosion, and whether I think it will persist in the medium-term.

Other income had also dipped by 40% from S$3.3 million to S$1.9 million as result of lower interest income and rental income. Fortunately, Boustead’s focus on cost controls managed to reduce selling and distribution expenses by 7.8% from S$12.8 million to S$11.8 million, and administrative expenses by 16.7% from S$22.9 million to S$19.1 million. Financing costs also fell by 52% as the Group had repaid some long-term bank loans during the 6-month period ending Sep 30, 2009. All these measures helped profit before tax to rise by 10%.

Income tax expenses also decreased by 16.2% in spite of the increase in profit before tax due to non-deductible items being present in the previous period and also due to difference in tax jurisdictions for their various subsidiaries. The result was a healthy net profit attributable to shareholders of S$20.2 million against last year’s S$15.2 million, up 33.4%.

Balance Sheet Review

Boustead’s Balance Sheet remains solid, with debt levels slightly down, net cash and sufficient liquid assets to tide it through a protracted downturn. Cash and Bank balances managed to rise by another S$10 million during the 6-month period to hit S$190 million, though the increase was attributed to investing cash flows rather than operating cash inflows (elaborated on in the next section on Cash Flow Analysis). Nevertheless, net cash now stands at S$163.4 million as at Sep 30, 2009 against S$150.6 million as at March 31, 2009, an increase of 8.5%. This represents a net cash per share of 32.3 cents, based on issued share capital of 505,512,000 shares. If we strip out net cash per share, this means the rest of the business is being valued at just 41.7 cents per share (last done market price of 74 cents minus 32.3 cents), effectively this means PER is just a low 5.2x based on an annualised EPS of 8 cents per share.

The increase in trade receivables is in line with the increase in revenues, so there is not much to get worried about here. Trade payables however decreased by about S$10 million and this represents a worrying sign that the company may be paying off its creditors quicker than it should, thus resulting in negative operating cash flows. Bank loans dipped slightly as Boustead had made repayment of loans during the 6-month period. Current ratio improved from 1.72 as at March 31, 2009 to 2.01 as at Sep 30, 2009. Quick ratio (defined as current assets less inventories and properties held for sale) rose from 1.51 to 1.78 over the same period.

Cash Flow Statement Analysis (all numbers quoted refer to 1H 2010 versus 1H 2009 only, and NOT 2Q 2010 versus 2Q 2009)

Boustead has traditionally had healthy operating cash flows but for the half-year ended Sep 30, 2009, operating cash flows were a negative S$12.7 million against a positive operating cash inflow of S$6.6 million in the prior period. This was due to the combination of an increase in receivables, coupled with the decrease in payables of roughly S$15.6 million and S$12.5 million respectively. If capital expenditures are factored in (see table above), then FCF is a negative S$13.8 million for 1H FY 2010. Better cash control should be exercised by Boustead to ensure it does not pay its creditors faster than it can collect from its debtors, otherwise it would lengthen their cash conversion cycle and this could become a problem.

Most of the cash came from investing activities, and as can be seen there was a net cash inflow of S$39.1 million for 1H 2010, as opposed to an outflow of S$18.4 million for 1H 2009. This can be attributed to the repayment of loan by an associate (GBI Realty) and dividends from the same associate of S$20 million and S$20.1 million respectively. Thankfully, capex was kept low for 1H 2010 with a cash outflow of only S$1.2 million for PPE, as compared to S$8.7 million outflow for 1H 2009.

Cash outflows for financing activities were mainly made up of share buy-backs worth S$3.75 million as well as payment of dividends worth S$12.7 million. The Group also paid off more bank loans than it took up, resulting in a net cash outflow of about S$1.4 million here. By comparison, in the previous year, higher dividends were paid out but there was absence of share buy-backs. It remains to be seen if the Company will use its excess cash to buy back more shares; or if they are saving up the cash for a suitable M&A opportunity.

The effects of the cash movements led to an increase in cash of about S$11 million to S$190 million as at Sep 30, 2009. This cash hoard still awaits deployment and I certainly hope the Management Team is scouting around for suitable investment opportunities, as holding too much cash can be a drag on returns.

Part 2 of the analysis shall be up after my November 2009 portfolio review, and will consist of an in-depth analysis, breakdown and explanation of Boustead’s divisions and how they are faring. Part 3 will end off with me giving my prognosis of the situation, prospects for each division and also to discuss where Boustead is headed for the remainder of FY 2010.

Friday, November 20, 2009

Recycling and Reallocating Capital

As investors, it is important to regularly review our shareholdings and to ensure our money is being put to productive use. This is because the enemy of inflation is always out there and will constantly and consistently erode the value of your cash holdings, making them worth about 3-5% less than the previous year. The insidious effects of inflation have been discussed in many economic textbooks and therefore one cannot afford to leave their money idle in bank accounts earning a very miserable and paltry 0.5% per annum. This brings me to the topic of recycling and reallocating capital, and I shall touch on each in the following paragraphs.

Recycling capital is one method whereby one can ensure one’s capital is always growing and put to productive use. This method involves selling shares which one feels has not much further potential for capital gains, and moving the capital to an undervalued investment with more potential for capital gains in future. Of course, this is predicated on the fact that one will be able and willing to look for undervalued gems to park his money in, and to adopt a patient attitude to be able to recycle his capital. One also has to be able to determine (according to his own personal prescribed philosophy), what is meant by “over-valued” and “under-valued”. Thus, this method of recycling capital may sound easy but is in fact fraught with considerable risk. Take for example an investor who invests $1,000 in Company A. Company A grows over the years and his investment becomes $2,000 over 4 years. The investor then recycles the new capital of $2,000 into Company B which he feels has a growth rate of 20%, compared to say 10% for Company A as its period of rapid growth is over. Thus, the investor wishes to grow his capital by 20% to $2,400 instead of being content with $2,200. Capital additions along the way can also assist to grow one’s portfolio and ensure one has a larger “base” with which to compound; and this is why the savings habit is of critical importance to building financial stability. Only when your capital base is significant does compounding start to work its magic; hence recycling of capital should be done on an adequately large capital base (of say 6-figures). What one can do early on in his investing days is to aggressively add to his capital base through savings (from salary) and bonuses (one-off windfalls) rather than through gains from investing.

Reallocation of capital is different in the sense that I am segregating the two terms based on capital gains and dividend yield. I use the term “reallocate” to mean shifting capital from one low dividend yield company to one which is paying a higher, sustainable dividend yield. For example, one may wish to reallocate some capital from REIT A (paying 5% yield per annum) to REIT B (which is paying 10%), thus effectively doubling your yield. Of course, it’s never so simple on paper and one has to evaluate the salient aspects of both REITs including the probability of capital loss should one decide to conduct the reallocation. In contemplating the merits or demerits of this kind of exercise, one has to also investigate the underlying fundamentals behind the high yield and to justify to oneself that it is sustainable and that the risk-return trade-off is favourable. No use exposing yourself to 4x the risk just to double your yield.

I can give two personal examples of the above using my own portfolio to illustrate. In August and more recently in October, I had divested Swiber and Ezra and recycled the capital from those investments into MTQ, as I believed that the growth prospects for these two companies were limited due to their heavily-geared nature, and their propensity for raising capital through financing activities rather than through operations. In addition, the two companies were (I felt) richly valued and thus appeared to be risky, because if growth failed to materialize there might be a collapse in valuation metrics and I could suffer a permanent loss of my capital. Hence the decision to recycle the capital to MTQ which has a much better Balance Sheet, a steady business generating positive operating cash flows, and which is valued at just 4-5x PER and which has potential to grow further in the medium-term due to initiatives undertaken by Management (Bahrain investment and Bosch superstores in Australia).

During October 2009 itself, I reallocated some of my capital from the previously mentioned divestments into GRP Limited, as the latter was paying an attractive dividend yield of 10% and was supported by a stable business, good cash flows and a strong Balance Sheet. The reason for the reallocation was because Ezra was paying a paltry dividend, and Swiber and Pacific Andes are probably going to suck up more cash than pay it out. Therefore, rather than keeping the money in a bank account earning a miserable 0.5% per annum, I chose to park it in GRP over the long-term to enjoy the higher yield. Of course, one can argue that there are also correspondingly higher risks involved, but this is to be mitigated through a prudent and thorough analysis of the business of the company to ensure no substantial permanent loss of capital occurs.

It is important for the investor to constantly seek better investment opportunities and to do portfolio re-balancing and review from time to time. Recycling and reallocating capital is vital to ensuring one gets a steady return on their investment; and not to let any investment sit idle and erode over time. This, of course, also involves cutting losses decisively on companies which are below par and shifting the capital to a more worthwhile company. This process necessarily entails painful decisions and determination and is thus easier said than done. But it must be done in order to ensure one’s portfolio does not become cluttered with last season’s “duds”, where useful capital simply wastes away from inflation and share price erosion.

Sunday, November 15, 2009

MTQ – 1H FY 2010 Financial Analysis and Review

MTQ released their results for 1H FY 2010 (they have a March year-end) on October 28, 2009. Since the company only releases results every half-yearly instead of quarterly as they are below the S$75 million market capitalization threshold, this means that I will only be able to review the company’s performance every six months, barring any updates which the company may provide in the meantime. A pleasant surprise I got was a newsletter which the company sent out to all shareholders to provide updates on the Company – most companies I know do not do this and MTQ is certainly very shareholder-friendly in this respect. This is even though its shares are not very liquid and the company is relatively unknown.

My analysis will be split into the usual 3 sections as per my other analyses for my companies; and at the same time I will discuss briefly on prospects and plans.

Profit and Loss Analysis

As expected, revenues dropped 12% year on year from S$45.3 million in 1H 2009 to S$39.8 million in 1H 2010. This was due to softer demand for the Company’s oilfield engineering services as many oil and gas projects were put on hold as a result of the financial crisis and subsequent recession. Engine systems, however, remained relatively resilient and managed to slightly increase its revenue level (in AUD), but with a forex translation loss the net effect was a S$0.2 million decrease in revenue in SGD terms.

The revenue mix has also changed slightly as a result of the weakness in Oilfield Engineering versus the resilience shown by Engine Systems. Previously, and in my analysis of purchase, I had stated Engine Systems as one of the “cons” as my analysis had thrown up the fact that operating margins were low and revenue was flat over the last couple of years. However, it was a pleasant surprise to learn that revenue from Engine Systems stayed fairly constant at S$19.5 million (down S$0.2 million from 1H 2009’s S$19.7 million), compared to Oilfield Engineering’s revenue drop to S$19.7 million from S$25.4 million. As a result, the revenue mix for Oilfield Engineering versus Engine Systems shifted from 56%:44% to 50%:49% (remaining 1% came from “others””).

Gross margin had actually improved from 39.5% to 41.4% even though revenue fell, and this was due to the reduction in COGS by 15% against the 12% drop in revenues. Gross profit, as a result, fell only 8% from S$17.9 million to S$16.5 million. Other income rose substantially from S$705K to S$2.3 million, and this was mainly due to one-off transactions of about S$2 million comprising realized gain on disposal of available-for-sale investments as well as the Singapore Government’s Jobs Credit Scheme. Staff costs actually fell about 7% but other operating expenses increased 15% due to an exchange loss booked for the Engine Systems division. The result was PBT of S$8.5 million for 1H 2010, flat against the previous year. Lower taxation meant that net profit after tax improved 3% from S$7 million to S$7.2 million. Net profit margin was 18.1% against 15.4% last year. However, stripping out the one-off gain of S$2 million, MTQ would have reported a net profit of just S$5.2 million, a drop of 25% from prior year. Net profit margin would have been 13.1% in the absence of the one-off gains, due to the higher other operating expenses amidst falling gross profits.

Balance Sheet Review

One fact I wish to mention is how much analysts have “hyped up” MTQ’s NAV of 82 cents as at Sep 30, 2009, and using this as a basis for recommending a BUY on the company due to the fact that it is trading below book value. The truth is that this adjusted NAV (up from about 66.5 cents as at March 31, 2009) is a result of the increase in fair value of available-for-sale securities, as reflected under “Long-Term Assets” in the Balance Sheet. Investment securities rose 140% from S$4.1 million as at March 31, 2009 to S$9.9 million as at Sep 30, 2009; mainly as a result of the across the board increase in market prices of quoted equities for most bourses around the world. Thus, the NAV is predicated on market values and should not be relied on without due consideration on the nature of composition of the NAV.

Inventories remained relatively stable, with only a slight 6.5% increase mainly due to forex translation differences. Debtors increased 12% to S$18.3 million, and this was marginal and could be a result of slower payment by customers due to the credit crunch. However, overall cash and bank balances increased 26% from S$22 million to S$27.7 million, and net cash increased even more by 32.4% from S$17.6 million to S$23.3 million. Overall, current assets had increased due to the inflow of cash, and current ratio stood at 3.1 as at Sep 30, 2009 against 2.6 as at March 31, 2009. Quick ratio had also improved from 1.94 to 2.3 during the same period.

Total borrowings remained fairly constant at S$4.45 million as at Sep 30, 2009 against S$4.44 million as at March 31, 2009. Current liabilities actually fell slightly due to marginally lower trade payables and also lower provision for taxation, while being slightly offset by a marginal rise in long-term liabilities from S$6 million to S$6.18 million due to a rise in deferred tax liabilities and provisions.

Overall, the Balance Sheet is healthy as the company has sufficient working capital of S$43.4 million, high current and quick ratios and a net cash position.

Cash Flow Statement Review

In my analysis of purchase of MTQ, I had highlighted the nature of their cash flows and how MTQ had consistently positive operating cash flows for the 5-years under my analysis (from FY 2005 to FY 2009). This has not changed with 1H FY 2010 registering a healthy positive operating cash flow of S$5.75 million. What’s different this time though is that capital expenditure amounts to just S$990,000, which means there is FCF of about S$4.75 million for 6 months ended Sep 30, 2009. This was a contrast to my 5-year analysis showing just 1 year of FCF and 4 years of negative FCF due to the need for investment in fixed assets to keep up with the Oilfield Engineering Division. However, one should also note for comparison sake that for last year, there was capital gains tax paid on disposal of RCR Tomlinson which pushed operating cash flows into the negative. Without this one-off tax, cash flows for 1H FY 2009 would have been positive.

Under investing cash flows, there was a net inflow of S$1.5 million due to the timely divestment of quoted shares, raking in S$2.5 million. If one compares the cash inflow of S$2.456 million from this sale against the gain on sale of S$1.863 million, it would be apparent that MTQ had made a gain of 314% over their cost of S$593K. Thus, Management have once again demonstrated that are adept in timing the disposal of their investment in quoted equities, similar to the timing of disposal for RCR Tomlinson back in FY 2008. Note that there was also a minor purchase of quoted shares worth S$172K, against last period’s cash outflow of S$4.16 million from subscription of shares in Hai Leck’s IPO.

Financing activities was relatively muted and the main movements were for dividends paid out and small amounts of repayment and taking up of bank loans. Net cash outflow was reduced from S$3.8 million last year to just S$1.79 million due to the absence of share buyback for 1H FY 2010.

It is worth noting that with the 1 cent per share interim dividend being declared, this represents a cash outflow of just S$880,600, which comprises just 3% of their total cash reserves of S$27.7 million. Note that dividends are NOT paid on the treasury shares of 7.48 million, and this can be verified by glancing at the cash outflow of S$1.761 million for 1H 2010 – it was the payment of the final dividend of 2 cents per share on 88,059,117 shares (which excluded the treasury shares). The Company is probably retaining the bulk of their cash for their Bahrain expansion, which they estimated would need US$20 million (about S$27.6 million using SGD 1.38 to the USD). This is already adequately covered by their current cash balance without them having to take on additional loans, and since their business is cash flow positive this cash balance will rise further throughout FY 2010 and part of FY 2011. I will discuss more on the Bahrain project in a later section.

Bosch Superstores

Along with their 1H FY 2010 announcement came the press release for what MTQ terms “Bosch Superstores”, which is a collaboration with world-renowned Robert Bosch Group to sell Bosch products in Australia, using MTQ’s network of 9 outlets throughout Australia. MTQ will be awarded distribution rights to all of Bosch’s product range in Australia, and will act as a “one-stop shop” for customers looking for Bosch products. In addition, the company would be able to cross-sell their existing products too.

This arrangement will be effective from November 1, 2009 and according to an interview Mr. Kuah gave to NextInsight, the incremental cost for the Engine Systems division will be small (in the range of just S$200,000 to S$300,000) because the infrastructure is already in place. All that is needed is to add more shelf space and to hire more sales staff. However, the potential revenue boost will be significant, and as MTQ puts it, they expect the turnover to “increase substantially” in the near future. Partnering with Bosch also means that MTQ can substantially increase their current customer base, and Mr. Kuah expects MTQ to double its Engine Systems customer base from the present 1,250 to 2,500. The reason for the partnering was because Bosch was unable to effectively distribute their products throughout Australia using their present supply chain.

One thing to note, however, is that margins for the Engine Systems division are very low. In my Analysis of Purchase Part 2, I highlighted that EBITDA margins for this division for FY 2009 were only 3.6%, compared to Oilfield Engineering’s 28.5% EBITDA margin. Net margin was even more dismal at just 1.4% for FY 2009, and prior to FY 2009 Engine Systems consistently recorded a net loss. While one can argue that the partnership with Bosch may allow them to increase the selling prices of their products as they are now offering a one-stop solution for customers, it remains to be seen if this division can sustain profitability and even if so, what the margins will be moving forward. Readers should note that increasing revenues significantly without keeping COGS under control will amount to nothing. One mitigating factor is that Mr. Kuah mentioned that the incremental cost of selling Bosch products will be small compared to (presumably) the potential revenue boost, and we shall have to wait for subsequent years to hopefully see the positive financial effects of this collaboration.

MTQ Bahrain - An Update

MTQ had announced back in Jan 2009 of their intentions to set up a facility in the Kingdom of Bahrain, similar to their Pandan Loop facility but three times larger. I had also discussed this at length in my previous post on Analysis of Purchase Part 3. The latest update as obtained from the NextInsight interview and MTQ’s presentation slides states that everything is going as planned, and the design has been finalized and construction will take place in early 2010. The facility should be operational by early 2011. What was not mentioned, however, was how the project would be funded; whether through internal funds or through bank borrowings as well. I suspect it’s a mixture of the two, since MTQ can generate operational cash inflows of about S$3.7 million (average for FY 2005 through FY 2009) per year. With their current cash balance of S$27.6 million as at Sep 30, 2009, and their previously stated requirements of about US$20 million, I expect they should not have to gear up too much.

Prospects - Oilfield Engineering

With the recession slowly easing, oil and gas projects are also re-starting, albeit slowly. Note that Keppel Corp has not announced any significant rig contract for some time now, but the industry news I’ve read about indicates that oil and gas E&P spending will start to rise again from the sluggishly low levels of 2008. This fact, coupled with many ageing rigs out in the market, should provide MTQ’s Oilfield Engineering Division with a decent volume of business in their Singapore branch, though the rates they can charge may still be depressed due to the fragile nature of the economic recovery. Mr. Kuah himself had mentioned that activity was expected to pick up from 2H 2010, and with the building of the new Bahrain facility, there would be potential for further growth. Mr. Kuah did caution that the Bahrain facility will be a green field project and thus may not contribute to profits for at least 2-3 years.

Prospects – Engine Systems

With the above section discussing the MTQ-Bosch deal, I guess nothing more needs to be said about the prospects for Engine Systems till we can see some tangible results. But the overall feel is that this deal by the Company is very positive and will enable the division to achieve steady long-term growth and better margins.

Prospects – Other Long-Term Investments

With Management’s astuteness being demonstrated in RCR Tomlinson and more recently, Hai Leck; it is reasonable to assume that they would be able to identify other suitably attractive investment opportunities. They can thus put their cash hoard to good use as stock markets have not fully recovered as at this point, and bargains are still out there. It will be heartening to know that Management has used their sharp insights to purchase under-valued companies, and to divest them at a suitably appropriate future time.

My next analysis will be 6 months later when MTQ releases their FY 2010 results some time in May 2010, as they do not do quarterly reporting. I will only do an update if there are any further material developments relating to the company.

Wednesday, November 11, 2009

MTQ – Analysis of Purchase Part 3

This is part 3 of my analysis of purchase for MTQ and it will discuss dividend history, share buy-backs, insider purchases and prospects in Bahrain. A pros and cons analysis will follow to show how this led to my final decision to purchase shares in the company.

Dividend History

From the available records, it shows that MTQ has been paying dividends consistently since FY 2001, starting from 1.25 cents and increasing this to 2.5 cents per share yearly. Dividends started being paid from FY 2001 onwards (there were no dividends declared for FY 2000). Twice-yearly dividends have been declared since FY 2003 and have been continuing since then.

As for FY 2008, the 24-cent special dividend was declared due to the exceptional gain from the sale of RCR Tomlinson. Subsequently, gross dividend per share was raised to 3 cents per share for FY 2009.

With the onset of the global financial crisis and the expected slowdown in MTQ’s business, FY 2010 may see dividend falling to 2 cents per share. Coupled with their proposed investment in Bahrain of US$20 million, they may decide to conserve more cash. The mode of financing for the Bahrain expansion has yet to be worked out, but will consist of a mixture of internal cash flows and bank borrowings.

One wild card is their investment in Hai Leck (5.02% currently). Seeing Management’s savvy divestment of RCR Tomlinson makes me believe that they may have enough foresight and acumen to know when to divest Hai Leck and to recognize a decent gain, and a special dividend may be declared in future based on this.

Share Buybacks and Buying by Mr. Kuah Kok Kim

MTQ has bought back a total of 7.48 million shares to date and started out buying in FY 2007 with 4 million shares accumulated. With the planned expansion into Bahrain, it is unlikely that MTQ will continue buying back shares. However, Mr. Kuah himself might carry on buying back shares through his own account. The total issued share capital now stands at 88,059,000 shares (an amazingly small number compared to most listed companies having issued shares of a few hundred million).

To date, Mr. Kuah has a stake of 25.42% in MTQ (about 22.381 million shares). His very last share purchase was recorded on August 17, 2009 when he bought back 100,000 shares at 68.5 cents per share (see Table). Looking at SGXNet records, it seems that Mr. Kuah has been actively buying since June 2009 at prices averaging 65 to 68 Singapore cents, in small amounts and at regular intervals, to slowly increase his stake in the Company. This does signal confidence in the company’s prospects and it is implied that this share price range is a good entry price since his purchases have centred around this range. Though it was noted that business had slowed in the final month of FY 2009 (i.e. March 2009), the fact that he is buying shares in June, July and August 2009 implies that business conditions should have improved somewhat and this signals his confidence in the business. (See table below)

Prospects - Overseas Expansion In Bahrain

On January 5, 2009, it was announced by MTQ that they had obtained in-principle approval from the Ministry of Industry and Commerce of the Kingdom of Bahrain to set up a company and legal vehicle to provide services to the oil and gas industry in Bahrain and the Gulf states. It plans to set up a 100% owned venture (not a joint venture!) to serve customers in the Middle East, and this company will be located in an industrial park called the Bahrain International Investment Park.

The new facility, once completed, will provide engineering, repair and refurbishment services to a wide range of oilfield equipment used in oil drilling operations around the Gulf and surrounding region. The total cost of investment is expected to be US$20 million, including purchase of new capital assets and construction cost. It will be funded by external borrowings and shareholders’ funds.

The rationale for investment is to service clients in the Middle East, which MTQ is unable to reach out to because of geographical distance and also because its current Singapore facility only caters to customers in China, India and Australia (closer proximity). This new company can service clients from the Gulf Cooperation Council (GCC), which is made up of Saudi Arabia, Kuwait, Qatar, the UAE, and the Sultanate of Oman and Bahrain.

The investment is not expected to be profitable in the near-term as it is a green field start-up company, but over the long-term, this start-up is expected to show more potential for growth and may be a steady cash flow generator in time to come.

On June 7, 2009, MTQ obtained official approval from Ministry of Industry and Commerce (in Bahrain) to register a wholly-owned company called MTQ Oil Field Services W.L.L (MTQ Bahrain). This will start off with an initial capital of USD 100,000 and is 99% owned by MTQ and 1% owned by MTQ Engineering Pte Ltd (which is in turn wholly owed by MTQ). The new facility will take up 40,000 square metres, about 3 times the size of its existing operations at Pandan Loop. Staffing is expected to be about 250 people for this new facility (opex as yet undetermined).

Key Merits of Bahrain Expansion

A) Only country in the Middle East allowing for 100% foreign ownership of companies,

B) MTQ will not need to pay corporate taxes (incentive from the Bahrain Government),

C) This is an opportune time as construction and staffing costs are lower due to the global financial crisis, and construction time is also shorter

D) Half an hour away from Saudi Arabia’s main oil production area, and Bahrain is building a causeway to Qatar, which is one of the top gas producers in the world

E) Widespread use of English in Bahrain and sizeable local workforce,

F) Established good long-term relationship with customers who have operations in the Middle East.

G) But has 2 key rivals in Saudi Arabia, one small one in Oman and one in Abu Dhabi

H) Costs for investment in Bahrain would be relatively small for FY 2010, but will jump significantly for FY 2011.

I will require updates from MTQ on this investment, and costs incurred so far to build their new facility. UPDATE: MTQ is proceeding well with the plans for this new facility, and expects it to be operational by early FY 2011.

Pros and Cons Review and Analysis for MTQ


1) The Company is operating in a niche industry for oilfield repair and services well-known clients in the oil and gas industry. Thus, it has high barriers to entry as it has been in this field for over 30 years and has established long-term relationships with its customers, and is well-known for being efficient, reliable and competent.

2) The fact that most of its customers are oil majors means there is a very low chance of bad debts or slow payment.

3) Consistent and steady profitability in oilfield engineering division with high EBITDA and net margins as well as good cash-flow generation capabilities.

4) Cash flow positive for 5 consecutive years with an un-geared Balance Sheet and in a net cash position. This is a significant turnaround from MTQ’s days in the late 1990’s when it was bleeding cash and making losses from a string of questionable investments.

5) A strong, capable and competent Management team headed by Mr. Kuah Kok Kim (Chairman). He has shown himself to be savvy at streamlining operations (from loss-making to profitability) and also in investments (e.g. in RCR Tomlinson and now in Hai Leck).

6) Dividends have been consistent and stable over the years, and historical yield is about 4.5% at last done price of S$0.665, which is much better than inflation and any current bank deposit.

7) The absolute amount of issued share capital is low, and the Company has been buying back shares with available cash, and MTQ is also tightly held by ex-CEO Mr. Kurt Lindblad and Mr. Kuah himself (about 25% held by Mr. Kuah and 20.3% held by Mr. Lindblad as at June 15, 2009 – from FY 2009 AR). Ownership is more valuable when the amount of shares issued is low, rather than owning shares of a company which has a billion issued shares, for example.

8) Mr. Kuah himself has been buying back shares at the 65c to 68c range from June 2009 through August 2009, demonstrating confidence in the long-term prospects of the Group.

9) Historical PER is undemanding at 5.3x, and though this is likely to rise if MTQ’s profits dip in the near term, it provides sufficient margin of safety due to their expansion plans and their good cash reserves of about S$0.20 per share.

10) Good prospects in terms of their planned Bahrain investment, and their track record and close client relationship should ensure long-term sustainable profitability and cash flow generation.

11) With shares being so tightly held and liquidity for the stock being very low, there is also a chance of privatisation at a significant premium to net asset value of 66.5 cents as MTQ is a player in a niche industry which may attract the gaze of larger players who may wish to consolidate their operations and achieve economies of scale.

12) Investment is Hai Leck has so far shown good paper gains, and this is a long-term investment just like RCR Tomlinson was; with a probability that MTQ knows how to exit with good gains (wild card). Hai Leck is also paying decent dividends of 1 cent/share (amounting to S$162,700 for MTQ’s Violetbloom Investments Pte Ltd) so this should add to MTQ’s cash stash. From Hai Leck’s 1 for 3 warrants issue at 1 cent, this implies a cash outflow of just S$54,237; and the warrants are exercisable at 26 cents. The premium on the warrants is now 24.5 cents and the potential cash inflow for MTQ from the sale of ALL warrants is another S$1.33 million.

13) Management’s candour is very much appreciated – not afraid to admit they made errors and are willing to admit and learn from mistakes.


1) Engine systems division is a headache as it has very low EBITDA margins and net margins and this shows quite clearly. Since FY 2005, the division has not performed well and has been a consistent drag on MTQ Group’s total performance and profitability.

2) Management has demonstrated that they make mistakes like when they invested in the Subsea Robotics (i.e. ROV) business in FY 2001. It turned out to be loss-making and sapped a whole lot of cash before it was finally divested in FY 2006.

3) There is constantly a need to invest in capex due to the nature of the business, but this is expected to moderate for Singapore operations as the CEO has mentioned that most of the upgrading work has already been done.

4) Risk is involved in their Bahrain venture in case the business there does not take off to the size and scale which they originally anticipated, or if their competitors rob them of market share and depress revenues. There is thus no guarantee that after investing US$20 million, this facility will eventually be profitable and cash flow positive.

Based on the above analysis of 13 pros versus 4 cons, and considering the fact that Management have been shareholder-friendly and are competent in allocating capital and resources, a decision was then made to purchase part-ownership of the company. However, since there is persistently low trading volume in this counter, accumulation would have to take place through a series of purchases. This was done over 6 trading days and my total investment in MTQ at this point in time amounts to about S$27,000.

Following this last post on analysis of purchase, I will be posting up my review and analysis of MTQ’s 1H FY 2010 results at a later date, pending the results announcements of the other companies in my portfolio such as Boustead, Tat Hong and China Fishery.

Friday, November 06, 2009

Personal Finance Part 14 - Scams, Trickery and Dodgy Behaviour

Recent news on the trial of the founders of the dodgy Sunshine Empire had highlighted to me the dangers of falling prey to scams and trickery, and also left me surprised as to how many people got caught in this web of deceit; with some experiencing an almost total wipe-out of their retirement savings. It is a sad fact but a reality that a lot of people out there are simply out to con your money, and hardly are interested in helping you to grow it (in fact, they are more concerned with growing their own pot of gold). This mantra also applies to salespeople, brokers, remisiers and all those who seek to earn commissions through selling you financial advice. The term “caveat emptor” or “buyer beware” has never rung more true, and recent cases such as the Madoff and Satyam scandal only serve to highlight this problem which retail investors face. In the case of Sunshine Empire, it is my opinion that it was obvious that it was a scam, though the people who got swindled obviously could not see it as such.

One classic characteristic of scams is their ability to prey on one’s greed and desire for quick wealth. The Sunshine Empire office was beautifully decorated with expensive furnishings and the staff there were impeccably dressed and very polished in speaking (but obviously, not in delivering). The staff are trained to feed gullible investors with grandiose claims of spectacular returns and impressive-sounding projects (e.g. underwater hotel in Malaysia), in the name of conjuring up images of being vested in something lucrative and successful. Many of the victims had admitted that they were seduced by the Dark Side and gave in to greed, neglecting to do their due diligence and to check if the claims were for real. It is strange that educated people can fall prey to scams which offer a return of more than 300% per annum consistently, but I have realized that when it comes to greed and the lure of quick money, almost anyone is inclined to believe anything!

Any reasonable person on the street would be able to vouch that a return of such a high magnitude would be impossible to sustain for an extended period of time. This is because in the sale of goods and services, all businesses have to follow the basic laws of economics, which dictate demand and supply. Even if there was sustained demand for a company’s products, they have to ensure that this cannot be easily replicated by competitors and their profit margin eroded through competitive pricing. Consequently, most companies can grow at most 20-30% on average over the long-term, though in initial phases grow can be as dramatic as 100-150% per annum. Sunshine Empire did not provide a detailed prospectus or Fund Sheet or even financial statements and status updates on the projects they were (supposedly) doing. This is as good as investing your money in a hedge fund where the activities are enclosed in a black box and all you see are the reported returns. To me, this is never a comfortable way to invest when all available information is not readily supplied.

It would also have been obvious that it was a scam due to the fact that no real products were being sold, but instead rebates were given for introducing new members, giving the instant impression of being an unsustainable pyramid scheme. This is the case where new entrants pay for the profits of the older participants, who are lucky enough to exit at the top of the pyramid with supernormal returns. But the vast majority of those involved in pyramid scheme (also known as a Ponzi scheme named after the notorious Charles Ponzi) lose all or a substantial portion of their “investment”.

Ultimately, the question of human psychology comes into play. Why do human beings choose to abandon rationality and sanity when they encounter such get-rich-quick schemes, and throw all caution to the wind? I believe it boils down to the desire (in Singapore at least) to keep up with the Joneses, to get something for almost nothing, and for instant gratification. It was mentioned that a lot of undergraduates in their early 20’s and late teens fell victim to Sunshine Empire’s scam, and sad to say I believe this is the generation which has grown up to believe that money is easy to come by, and who have also been influenced by ideas of instant gratification, conspicuous consumption and “living it up”. All these may contribute to a false sense of security and a feeling of invulnerability and may make these youngsters too bold and careless when it comes to investing their money (and their parent’s money as well). Perhaps I am being too judgemental, but I feel that financial literacy and basic financial education should prevent these people from being conned. An ability to control emotions is also essential to prevent yourself from being “swayed” and influenced by these smooth, suave conmen.

So the phrase buyer beware really applies in such a situation. It is your responsibility to be careful and aware of where your money is going, and though a lot of Singaporeans claim that the Government has a fiduciary duty to protect the vulnerable retail investor, there is certainly no protection for ignorance and greed. Whether it be Sunshine Empire’s Ponzi Scheme, dubious land banking claims (from Profitable Plots) or questionable business models (e.g. Oilpods); what these have in common is that they promise a lot, but deliver precious little. It is always much better to promise a reasonable return but deliver in excess to that, than to promise spectacular returns only to burst the proverbial bubble of exuberance.

Sunday, November 01, 2009

October 2009 Portfolio Summary and Review

I would describe October 2009 as the month in which I had the most portfolio changes since a long time ago! This was due to ongoing additional purchases of MTQ in early October 2009, a full divestment of Ezra due to the aforementioned reasons as stated in my previous 3 posts on Ezra; as well as the addition of another company called GRP Limited in late October 2009. The latter was a result of the deployment of funds from the divestment of Ezra and was researched by me in the last 2 weeks of October 2009. Fundamentally, GRP’s business was simple, easy to understand and the financials were clean. I will be posting a detailed analysis on the rationale for purchase of GRP, and it will be simpler than the analysis for MTQ though no less detailed; but because the company has a cleaner balance sheet and simpler to understand structure (and long operating history), it should take much time and effort to post up.

October 2009 was also the month where USA companies released 3Q 2009 results; and most of them were above expectations. Oil had also hit a new year to date high of US$82 per barrel, but is still way down from its peak of US$140+ last year. High oil prices will spur oil majors to make more investments in oil rigs and O&G projects and this will eventually flow down to benefit MTQ as they are in the oilfield engineering segment. In Singapore, most of the news flow was positive as well; but since Mr. Market had already factored most of the optimism in a few months back, there was low trading volume and nary a movement in market prices. This actually represents an opportune time for an investor to collect shares in the companies he is eyeing.

US GDP also reported surprisingly strong growth of 3.5%, officially ending the recession in which the USA reported four consecutive quarters of negative growth. Still, many obstacles remain as growth is expected to be bumpy and unsteady even as the economy lumbers along.

Property prices had increased 15.8% quarter on quarter for private properties in Singapore, while resale HDB flat transactions also saw a marginal increase in prices to a new record high. COV (Cash Over Valuation) also increased from $3,000 to $12,000, according to the newspaper. Scarily, COE for cars also hit a 4.5 year high of about S$19,000 for cars below and above 1,600cc; and this is testament that prices seem to be rising even though we had just been through the worst recession in 70 years. This is indeed uniquely Singapore!

For MTQ, I have lowered my cost to 68.5 cents from 68.6 cents by purchasing additional shares on October 2 and October 5. My total investment in MTQ is about S$27,000. For GRP, I view it more as a yield company as its growth is in the “mature” stage and it is basically a cash cow generating lots of free cash flows. The declared dividend is 1 cent per share and is for the year ended June 30, 2009 (it has a June year-end). Based on prior year’s dividend history and my purchase price, the yield would be a very attractive 10%. The Company’s business is also stable amid the sharp recession and it can still grow its cash stash; so there is a significant chance of a special dividend (as per FY 2007) if they cannot deploy the cash for yield-accretive M&A. As at October 31, 2009, I had invested about S$20,000 in GRP.

Though I had added 2 new companies to my portfolio within 2 months, there is no reason to rest and I am in the process of screening another company for potential investment as there is still some opportunity fund left over which I hate to see sitting in a bank account earning 0.5% per annum. The focus is to look for companies with sound management, steady growth and good cash flows (so as to earn a steady income from dividends). My hope is also for a decent year-end bonus for me to add to my cash stash, so that I may have more funds to deploy to worthy companies run by astute Management.

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

1) Boustead Holdings Limited – There was no significant corporate news from Boustead, except that they were awarded the most transparent company by SIAS. On October 16, 2009 there was a minor announcement of them entering a JV in an Internet-based mapping and location services business (Geologic) of which Boustead will hold an 80% stake.

2) Suntec REIT – Suntec announced their 3Q 2009 results on October 27, 2009 and declared a DPU of 2.921 cents per share. Although this was lower quarter on quarter, it still represents a decent payout and a yield of 10.5% based on my purchase price of $1.11.

3) China Fishery Group Limited – There was on news from China Fishery for October 2009. Results are expected for FY 2009 by the end of November 2009.

4) First Ship Lease Trust – FSL Trust announced their 3Q 2009 results, and declared a dividend of USD 0.23 cents, in addition to the stub dividend announced last month of USD 1.27 cents, making a total of USD 1.50 cents. Separately, on October 29, 2009, they also announced that they had finalized the loan covenant agreements with their bankers. I received the dividend of USD 1.27 cents on October 30, 2009, giving me an effective yield of about 6.4% based on my purchase price.

5) Tat Hong Holdings Limited – There were no significant updates from Tat Hong, except a minor announcement to state that the RCPS have been fully issued to AIF Capital. A corporate update was released on October 6, 2009 together with an analyst briefing and EGM which updated shareholders on the latest developments with the Company. Readers are free to access this through SGXNet, and I will not elaborate too much as most of it is self-explanatory. Suffice to say their expansion into China to grow their tower crane segment is proceeding as planned.

6) MTQ Corporation Limited – MTQ reported a decent set of results for 1H FY 2010 on October 28, 2009 during lunch break. Revenues were down 12%, gross profits down 8% while net profit was up 3%, mainly due to divestment gain of S$1.9 million on partial divestment of long-term investment (I suspect this is Hai Leck). The Balance Sheet was strong with S$23.2 million in cash, up from the same period last year, and there were positive operating cash inflows as well. An interim dividend of 1 cent per share was declared, payable on November 24, 2009. In addition, MTQ also announced a partnership with global brand Bosch to distribute Bosch products as part of their “Bosch Superstore” concept, which offers a one-stop solution for automotive parts. MTQ has 9 branches in Australia and Bosch is leveraging on their network to grow; thus MTQ is expecting the Engine Systems division to benefit from this mutually beneficial partnership.

7) GRP Limited – GRP had announced a dividend of 1 cent per share, and this was approved at their recent AGM held on October 26, 2009. Moving forward, GRP’s business should stay resilient against the global downturn and still be able to maintain a cash flow positive position. Balance Sheet is very strong with current ratio at 4.77 times as at June 30, 2009. With a cash hoard of S$13.2 million (cash per share of 9.47 cents), there is a good chance of GRP paying a special dividend unless it can find good M&A opportunities. Currently, at my buy price, this represents a full-year dividend yield of 10%.

Portfolio Comments – October 2009

October 2009 saw the most changes made to my portfolio since the start of the bear market in late 2007. I collected more MTQ in early October, while divesting my entire stake in Ezra as detailed in previous posts; as well as collecting shares of GRP using the proceeds from the divestment of Ezra. As a result, my cost has been adjusted to S$135,400, while my unrealised gain is +8.9%. Realized gains have increased from S$9.4K to S$26.6K as a result of gain on divestment of Ezra and also dividends from FSL Trust. As a result, total gain is +28.5% of new adjusted cost.

In my previous portfolio review, I mentioned that I had expected MTQ to declare a dividend, and they did with a 1c per share interim dividend; managing at the same time to remain relatively resilient in the face of falling demand for oil and gas services. GRP was purchased mainly as a yield play as their business is very stable (I had compiled data from 9 years of Annual Reports on their revenue stream), Balance Sheet is strong and cash flows are positive and consistent. I do not expect capital gains from GRP, but it gives a yield that is way above bank deposits and unless there is a material change in the business; continues to give me peace of mind.

My next portfolio review will be on Monday, November 30, 2009.