Thursday, December 31, 2009

December 2009 and FY 2009 Portfolio Summary and Review

December 2009 was generally a quiet month, as is generally the case as Fund Managers and traders go on long leave and take vacations due to the Christmas season (it’s after all a big festival and event in the Western World). Over here in Asia, the mood was also muted and stock market action was generally lacklustre, with trading volumes at multi-month lows and there was a general lack of interest all around. Even though the Straits Times Index managed to break new highs for 2009 in the last month of the year, there was hardly much cheer and excitement as problems in Dubai World and Greece’s debt crisis threatened to stall the global economic recovery and grind it to a temporary halt.

Surprisingly, in the USA, things had begun to look up, with home sales rising to their highest levels (November home sales up 7.4%) in over 3 years as the Obama Stimulus Package took effect. GDP growth for USA in 3Q 2009 was also 2.2%, which was considered surprisingly strong after the worst recession in 70 years ravaged the US economy and sent unemployment rate soaring past 10%. These bits and pieces of positive newsflow managed to keep the DJIA above the 10,000 level, when just 9 months ago it was hovering at the 6,500 level. Indeed, what a difference 9 months makes! No one could have foretold that the rebound in equities would be so sharp and sudden (well many did mention it on hindsight, but somehow no one had predicted it beforehand haha).

HDB prices continued to moderate with the completion and official opening of The Pinnacle @ Duxton, with MM Lee officiating the ceremony and mentioning that HDB prices will continue to rise to ensure Singaporeans are able to enjoy capital gains on their property purchase. Rules were also changed to ensure first-time home buyers had a higher chance of securing a flat, and more BTO sites were released, including the Dawson plot which saw prices for 4-room flats hit S$350,000 to S$500,000 for an 84 square metre unit! To me, it’s still an affordability issue because when the crunch comes, these couples may have over-leveraged and have nothing left in their CPF (remember the salary cap is still S$8,000 for HDB flats).

As the year draws to a close, all I can say is that it has been a very remarkable year for me in terms of increasing my investment experience and knowledge. In just one year alone, I have learnt a lot about how companies operate, and been through several mistakes which would leave deep impressions on me for the rest of my life. My learning through the divestment of Ezra and Swiber, as well as insights into their capital structure, Balance Sheet and Cash Flow have revealed insights to me which I had never known before as a value investor. Thanks to the explanations from investors such as Donmihaihai as well as contributions from experienced value investors dydx and d.o.g. on Wallstraits forums, I have intensified my reading and analysis and moving forward, will apply these principles more stringently and rigidly in search of a worthy investment which comes along with adequate margin of safety.

In searching for suitable investment opportunities this year, I came across MTQ as well as GRP. By using a framework which was more focused on Balance Sheet strength as well as stressing the importance of cash flows, I had narrowed down these two companies as good investment targets. Gone are the days when I focused more on the Income Statement and contracts, as evidenced by my prior purchases of Ezra and Swiber. The fact of the matter was that earnings can continue to grow due to high leverage, and contracts are useless if one does not exercise prudent cost control. I had to learn these the hard way but I am glad for the opportunity and cherish the experience.

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

1) Boustead Holdings Limited – Parts 2 and 3 of my analysis have been posted earlier this month. On December 10, 2009, Boustead announced the sale of an industrial building (yet to be completed) in Tampines Industrial Avenue 5 for a consideration of S$67.8 million, of which S$17.3 million will be recorded as profit from the sale of property. This transaction will only be completed in FY 2011 but it shows that Boustead is able to sell a leasehold property even though it had projected that such sales would be slow during this period. As a result of this sale, they will be left with 4 design, build and lease projects. On December 22, 2009, Boustead announced that 91.7% owned Boustead Projects had secured its largest contract to date of S$107 million to design and build an integrated manufacturing and support facility for one of the world’s leading power systems corporations, to be located at SeletarAerospace Park. This contract is expected to contribute positively only in FY 2011. The following day on December 23, Boustead announced two disposals – one of its 30% stake in PT SMAC for US$600,000 and the other of its 95.6% stake in Batam Logistics for S$955,556. In total, these transactions will net them cash of about S$1.8 million (using 1 USD = 1.40 SGD) and allow them to recognize a profit of S$1.12 million. The interim dividend of 1.5 cents per share was received on December 18, 2009.

2) Suntec REIT – Suntec REIT announced a “stub” dividend of about 2.44 cents per share as a result of a private placement of 128.5 million new units at S$1.19 each, to raise a total of S$152.9 million in gross proceeds. This move was done to reduce their gearing and to bolster their Balance Sheet. There was also news of Suntec REIT suing Popular Holdings because of Harris Bookstores moving out of Suntec City Mall much sooner than their tenancy agreement required, and this will most likely escalate into a lawsuit as Harris has no intention to pay any damages to Suntec REIT.

3) China Fishery Group Limited – There was no news on China Fishery for December 2009, and the AGM is will be held on Jan 22, 2010 ay Suntec City Convention Centre Level 2 at 2:30 p.m.

4) First Ship Lease Trust – Regarding the November 23 announcement of a potential issuance of senior notes, FSL Trust has decided not to proceed with it as news of Dubai World broke out just as they were promoting the Notes during a road show, which resulted in weak demand and very bad pricing terms (rumours mentioned a yield of about 11-12%). Management were prudent enough to recognize that these terms would be extremely prejudicial to the interests of unit-holders, and so wisely released an announcement on December 7, 2009 to state that they would NOT proceed with the offering, but are keeping their options open to perhaps offer the notes again at a later date, once sentiment improves further.

5) Tat Hong Holdings Limited – There was no significant news from Tat Hong during December 2009, except a minor announcement on December 7, 2009 which stated that Tat Hong Plant Leasing Pte Ltd had disposed of a piece of land and Tat Hong would recognize a small gain of S$118,000 on disposal of fixed assets. Tat Hong should be announcing 3Q 2010 results some time in Feb 2010. Meanwhile, the interim dividend of 1 cent per share was received on December 16, 2009.

6) MTQ Corporation Limited – Predictably, there was no news from MTQ for the month of December 2009. They can be considered to be a very quiet, nondescript company.

7) GRP Limited – GRP is another quiet company, with no news for December 2009. Their 1H 2010 results will be released in early Feb 2010, and I would be expecting a decent dividend from them (hopefully another 1 cent per share as per 1H 2009).

Portfolio Comments – December 2009

December 2009 was another quiet month with no changes to my portfolio. Realized gains have increased from S$28.4K to S$28.8K as a result of the receipt of dividends from Boustead and Suntec REIT (stub dividend). Unrealized gains remain low at +13.4% as a result of recent purchases (up from +7.6% the previous month), but overall gain has increased from +28.4% to +34.6%. Share prices inched up slowly but steadily (and somewhat reluctantly I would add) due to increased confidence in the global economy, but some pessimism over Greece and Dubai dampened spirits a little.

Special Year-End Review for 2009

I would say the year had started off innocuously enough, with the STI hovering close to 6-year lows and pessimism at a high. The feeling and sentiment at the time, I recall, was one of deep despair and it felt as if an impending doom was on its way, with the news full of predictions about the collapse of the global financial system and a 10-year recession in which the world would see zero to negative growth. Economists really outdid themselves and tripped over one another to come up with more and more dire forecasts, and of course everyone believed in the ultimate Prophet of Doom (Nouriel Roubini) as he was arguably the one who forecast the entire sub-prime mess back in 2007.

Despite harbouring these dark thoughts and feeling fearful, I did manage to keep some wits about me and continued to research for good companies to invest in. As this was my first true bear market, the fearsome spectre had well and truly enveloped me in its embrace and I did feel fear and trepidation as keenly as any other investor who was unused to seeing valuations fall off a cliff. While I was warned by experienced investors in SI forums about how severe and savage a bear market could be, I must admit one really has NO IDEA until one has lived through a bear market; and the shock and horror of it all was not lost on me. Till this day, I willingly admit that my previous aura of invincibility had crumbled around me as share prices literally melted. It is not easy to survive a bear market and on hindsight, the most money can be made in a bear market if you know how to deploy capital wisely and assuming you HAVE capital on hand to deploy. A good savings habit really helped me out in that it gave me valuable capital to average down on positions in which I felt confident about, even though these positions later turned out to be flawed (as was the case with Ezra and Swiber). I did what seemed right at the time, putting more money into positions which I had fully researched and was comfortable to hold for many years; hence I increased my positions in Tat Hong and Boustead as well.

Looking back at the wreckage of the bear market, I am saddened to report that not everyone had got out of it alive and well. There are friends who entered close to the peak of the bull market of 2007, and they were too scared to average down and too much in despair to cut losses (when you are 90% down, it’s rather hopeless to cut losses). But the importance of this bear market has got to be the lessons it has handed down to me – in that valuations matter a lot when choosing companies to invest in; and nothing short of thorough research is needed to help one stay alive and preserve capital. I may have survived the mauling this round, but there is no room for complacency as there will be many more bear markets and many more chances to lose capital. Therefore, I have to persevere and stick to my principles in value investing, and continually seek to improve myself. Only then will I be able to be assured of consistent returns on my investment, over the long-term.

The search goes on for under-valued companies in 2010, and my mistakes in 2009 have changed my perception of “risk” and made me much more cautious. My next step is to read “Security Analysis” by Benjamin Graham and David Dodd, and it is one of my resolutions for 2010. The path to becoming a better value investor is fraught with difficulties, but I have many more years to hone my knowledge, and this blog will continue to act as a diary of my investment journey.

Personal Finance Review for 2009

I just wanted to add a short note on my personal finance journey, as I am tracking my total assets, HDB loan and net worth every month. Currently, I am continuing to save about 45-50% of my take-home salary, and my net worth position has dramatically improved since Jan 2009 because of the huge rally in May 2009.

Total assets have about doubled since Jan 2009 (counting in cash balances, equities and insurance policies), while my HDB loan has been reduced from about S$127K to the current S$112K. If my projections are accurate from my loan amortization table (which extrapolates using a concessionary rate of 2.6% per annum for the whole of 2010), the HDB loan should break the S$100K mark in late 2010, and I shall have about 6 more years to clear the loan completely. Until then, I shall continue to save, invest and insure. My next personal finance update will be at the end of 2010 (once a year).

My next portfolio review will be on Sunday, January 31, 2010.

Wishing all readers a Happy and Prosperous New Year! May 2010 be a year of good luck and good health for all!

Thursday, December 24, 2009

GRP – Analysis of Purchase Part 2

Part 2 of my Analysis of Purchase delves into the business unit analysis for GRP. Most companies have one very strong division which carries the whole company through and is the mainstay cash cow, just like MTQ’s Oilfield Engineering division with its high margins and steady cash flow compared to the low margin Engine Systems division. For GRP, the same scenario plays itself out again for Hoses and Marine versus uPVC Pipes and Fittings.

Business Unit Revenue, Gross and Net Margin Breakdown (2002-2005)

Interestingly, one can observe that for FY 2002 and FY 2003, Measuring Instruments division made up the bulk of revenues as compared to later years when the Hoses and Marine division was more established. But for the bulk of FY 2002 to FY 2005, measuring instruments still made a significant impact to revenues, as a result of GRP’s representation for several international brands such as Imada, Vision and Motic. They had also represented Mitutoyo in the ASEAN region for 44 years, and thus had built a strong track record in this industry.

In terms of gross profits however, it is hoses and marine which still took up the bulk of it, and the gross margins are apparently much higher for Hoses and Marine (at 40.9% for FY 2004 and 53.7% for FY 2005) as compared to Measuring Instruments (26.9% in FY 2004 and 23.6% for FY 2005). uPVC Pipes, it seems, was an under-performing division which contributed little to gross profits and also had a low gross margin of average 18% over FY 2004-FY2005.

When we come to net profit, this is where the kicker comes in. Hoses and Marine consistently, over the 4 years under review, had the larger proportion of net profit compared to all other divisions, even though in terms of revenues, metrology outperformed for all 4 years. This was because of the strong net margins which Hoses and Marine generated – on average it was 20.7% over the 4 years under review. On the other hand, Metrology’s average net margin was just 6.8% over the 4 years. China’s uPVC pipes division performed the poorest with a net loss margin of average –1.4%, as this was a cutthroat competitive business with poor pricing power.

Business Unit Revenue, Gross and Net Margin Breakdown (2006-2009)

Looking at FY 2006 to FY 2009, Metrology division seems to be taking up the lion’s share of the revenues as well, at always around 50+% of total revenues. Yet, going by the analysis in the preceding section, it shows clearly that Hoses and Marine has the best margins. Hoses and Marine took up on average about 36.6% of revenues from FY 2006-FY 2009, and this division has stable revenues hovering around S$11 million. However, both divisions are stable cash cow businesses with not much room for growth. There is only the possibility of acquisitive growth but this depends on the opportunities presented to Management. As at the date of writing of this report, there are no plans by Management for organic growth or acquisitive growth.

Hoses and Marine continued to generate very high gross margins of on average 48.4% for the 4 financial years, and was comparable with the prior two financial years. Metrology had an average of 28.9% gross margins and though respectable, it still lags behind the margins for Hoses and Marine. Overall, net margins for Hoses and Marine continued to remain high at above 30%, while Metrology maintained net margins at around 15% over the 4 years. Frankly, uPVC Pipes has terrible gross margins and the division is suffering from net losses all the way, so I do not understand why Management continues to put up with this division without at least considering divesting it for some cash. After all, looking at its performance, I dare say it’s probably cash flow negative, and is being “subsidized” by the other profitable divisions.


Dividends have been fairly consistent for the Group since FY 2005, and one can see from Part 1 that this was the time when their cash balance started to increase, and the increase is still ongoing over the last 5 years which culminated into the current balance of S$13.26 million as at June 30, 2009. A special dividend of 3 cents per share was paid out in FY 2007 mainly due to the sale and leaseback of their property; but seeing how the cash is literally just building up without much use for it, and without plans to deploy it to suitable M&A, perhaps another special dividend could be on the cards in either FY 2010 or FY 2011. As a shareholder, I am keeping my fingers crossed!

Purchase Decision

To keep things really short and simple, as a result of the above analysis; and taking into account the stability of revenues, niche position for GRP, decent gross margins for its Hoses and Marine and Metrology division, prudent use of cash (as evidenced from its Cash Flow Statement) and strong Balance Sheet, a decision was made to purchase GRP purely for yield. Considerations for yield would include sustainability as well as potential yield appreciation in future.

Just for comparison sake, I did consider other high-yield companies like Starhub (about 10-11% yield) as well as some REITs but noted that for Starhub, I did not understand the business as well as I would have liked, and Government regulations could also upset some of the “monopoly” power which the telcos have with regards to consumer practices and pricing. Furthermore, their Balance Sheet is leveraged and thus I would prefer a non-leveraged entity with a stable and predictable business. As for REITs, most of them are leveraged and would need to refinance by 2010 or 2011, plus office rentals and property prices may also come down, adding to the uncertainty risk. Suffice to say I do not understand property well enough to make an intelligent bet on a REIT; hence I chose GRP instead.

Seasons Greetings

Before I forget, here’s wishing all readers and their families a very Merry Christmas! Watch out for my year-end portfolio review which should be out on Thursday December 31, 2009.

Saturday, December 19, 2009

Boustead – 1H FY 2010 Financial Analysis and Review Part 3

Part 3 of this Boustead analysis will focus on future plans and prospects for the Company, amid the worst economic downturn in the last 70 years. Adding to the global problems is the recent news of a default for Dubai World, which has sought halting of repayments for their loans for 6 months while they re-structure. Fears of a contagion effect in the Middle East are still fresh, and as of this writing news is still uncertain about whether Dubai’s problems are mainly confined to the country itself and the bankers who lent it money, or if it is part of a more widespread regional problem affecting other Middle Eastern nations.

Energy-Related Engineering Division (C&E, BIH and Maxitherm)

Contracts are coming in much slower in recent months, as evidenced by the pace of contract win announcements from C&E and BIH. Contract values are also smaller and according to Management, this is due to the lengthy negotiation process as a result of the lack of financing due to the global downturn. From what I understand, most oil and gas majors have already kick-started their E&P activities as the recession passes; but most companies still expect significant cost savings and are pushing for vendors like Boustead for better terms, which has led to the longer negotiation times. In the next 6 months at least, I do not see much improvement in this division in terms of securing large contracts, as the macro-environment is still very uncertain and recovery remains tentative.

Over at the solid-waste recovery business (Boustead Maxitherm), ongoing re-structuring will limit the contribution of this division at least in the near future. It has taken a long time to re-organize this unit and my view is that Management should consider if the potential for this division to contribute outweighs the trouble and ongoing costs required to do a proper re-structuring. More details need to emerge on the exact nature of said re-structuring and the plans for this sub-division moving forward. The lack of clarity at the moment is disconcerting, to say the least.

Water and Wastewater Engineering Division (Salcon)

This division, headed by Salcon, recorded a weak performance but despite this, Management sounded a tone of optimism that FY 2010 will see Salcon finally turning around after years of being in the red. The division has been plagued by problems over the past few years such as intense competition eroding its competitive edge, and now the possibility of cancellation of its wastewater project in Libya due to disagreements with the client’s contractor. FF Wong did mention in FY 2008 podcast that Salcon was doing a trial run for a new technology at a China Textile Factory, and if this was successful it would greatly enhance Salcon’s competitive advantage and allow it to compete with the “bigger boys” such as Siemens. Thus far there has been no further news on this initiative. I am not optimistic on this division as I see it having razor thin margins and somehow Salcon’s global reputation has failed to garner it larger and more prominent contracts. One possibility could be that Boustead is a small player and does not have the scale of Hyflux, for example, to compete for very large projects. Thus, it is limited in terms of negotiation and bargaining power as a result.

Real-Estate Solutions (Boustead Projects and Boustead Infrastructure)

Boustead Projects has managed to clinch a healthy pipeline of projects, as reflected by recent announcements to build Charles and Keith’s facility and also another for Singapore’s first private cancer hospital. However, the division’s revenue remains contract-based, which in my opinion is a weakness. It was mentioned previously in FY 2009 podcast that the Group wished to explore Design, Build and Lease contracts which could lock in recurring revenues and cash flows, but which offered a smaller margin compared to Design and Build contracts. Considering that Singapore’s real-estate sector is just emerging from the recession, there may be opportunities in time to come for REITs to buy over properties which are developed by Boustead Projects, thus ensuring the continuity of recognizing at least one sale of leasehold property transaction per financial year. In the meantime, prospects for the division should remain muted amid the uncertain global backdrop.

The main cash cow for this division is Boustead Infrastructures, which is in charge of the Libyan township project (Al Marj). Being about one-third done, this has managed to boost the revenues for Real Estate Division and provided healthy cash flows as well. Moving forward, though progress has been reportedly slow, I would expect another one-third of the project to be completed by end FY 2010, and the remaining one-third to be recognized in FY 2011. After that, it remains to be seen if they can clinch a similarly large project, though FF Wong had hinted early on that this was extremely unlikely. It could be that he has other plans in mind for this division once the Al Marj project is successfully completed.

Geo-Spatial Technology (ESRI)

Geo-Spatial has a stable customer base consisting of government sectors and large organizations which use the software for mapping. Besides the currency loss which was registered for 1H FY 2010, this division should see slow but steady growth over the years and will likely remain the principal cash cow of Boustead Group.

Future Plans – M&A

With Boustead’s current net cash hoard of S$163.4 million as at September 30, 2009 (which represents net cash per share of 32.3 Singapore cents), the potential for M&A keeps growing every quarter. Management had mentioned time and again that they were on the lookout for good acquisition opportunities, and it must be a business which was going at a fair price and which could create synergies with their existing business. I suspect Boustead are also trying to “break free” of their current business model of orderbook and contracts, which can make revenues and cash flows “lumpy” and uncertain. Hence, the target should also be a business with a regular income stream (such as MTQ for example), without the need for contracts or orderbook.

Fortunately, Boustead’s Management Team has revealed itself to be cautious, prudent and discerning when it comes to assessing companies for acquisition. Just last year in their FY 2008 podcast, it was mentioned that the Group spent about S$1 million conducting due diligence on a potential company for acquisition; but decided against it when it failed to meet their criteria (for details on FF Wong’s criteria, see FY 2009 podcast transcript). In a recent Reuters interview, FF Wong again mentioned that the Group was at a very early evaluation stage for a potential acquisition in the range of S$5 million, for a company in the wastewater industry; but no further details were given and the disclaimer was that such negotiations were preliminary and may not come to any result. These two examples illustrate that Management take due care in sourcing for the right target to acquire, and have a strict set of criterion and guidelines with which they adhere to stringently. This may be the reason why there is still no news on any M&A activity even though several quarters have passed with the cash kitty building up. One more factor is that the selling prices of owners of companies continue to be out of touch with reality and the gap between buyer and seller is still as wide as a chasm; hence it is difficult to deal under such circumstances.

Closing Remarks

With the global economy still in the slow stages of recovery, Boustead will most likely still trade at depressed valuations due to lack of clarity for projects and contracts to be clinched by each division. I take comfort in the fact that the Company has a generous dividend policy and pays out dividends twice-yearly. Assuming they can maintain their full-year dividend of 4 cents per share, this represents a yield of 7.16% for me, which is more than satisfactory.

Monday, December 14, 2009

Personal Finance Part 15 – The Evils of Gambling

After reading some news and forum letters in the Straits Times recently about gambling, and also after the tragic case of a man who killed his two children then committed suicide (presumably because of gambling debts), I felt compelled to write something about this topic as I feel very strongly about it. What’s more, the Integrated Resorts (IR) are about to open soon in Singapore, the first being in FY 2010 and the other in FY 2011; and this will surely add to the burgeoning problems with gambling which are already being experienced by our society. Let me delve into the details of this vice, how it can destroy people and families, and perhaps discuss what we and the Government can do to reign in this social evil.

Gambling itself is not perceived to be a vice in Singapore due to the nature of the Chinese race, where the game of mahjong has been commonplace in most households. This is treated as a game in which social ties are built and relatives and friends get to mingle and share stories, even as money is being exchanged and small fortunes are won and lost. Eventually, one “graduates” from mere mahjong to other more insidious forms of gambling such as 4-D, Toto, soccer betting and horse racing. One might argue though, that a little punting now and then should be considered harmless and can be perceived as a form of leisure, especially for retired folk who have nothing much to do with their time. It is also seen as a lottery game where a little is staked in order to win a large windfall payout. Hence, the attraction in gambling is that you can bet a small amount and the reward is large by comparison, never mind the odds. People get a quick thrill and adrenaline high when the results are announced; thus this produces endorphins which stimulate repeat behaviour. This is when someone is considered “hooked” to gambling and betting.

Many people can be classified in terms of how often they gamble, and the amounts they stake per bet. These factors are used to determine if a person is a “light”, moderate or habitual (problem) gambler. Statistics show that only about 5% of people eventually turn out to be compulsive gamblers, but the light and moderate gamblers also end up losing substantial amounts of hard-earned money over time. This is due to the previously discussed “Gambler’s Fallacy” article which I wrote, and the fact that gamblers can never seem to remember the pain of losses (I call it “selective amnesia”), but only retain the sweet memories of huge windfalls. It is the problem gamblers which form the bulk of social problems, as they are unproductive at work (as they keep wondering which numbers to buy for 4-D or Toto), not close to their family (they are shunned because of their habits) and possibly also suicidal (chased and hounded by loan sharks for excessive borrowing for gambling). Sadly, every now and then a case pops up in the newspapers about someone killing himself or getting in trouble with the law (stealing or robbery) because of their uncontrolled gambling addiction. These people do not see themselves as having a problem and frequently refuse to seek help, thus compounding the problem.

One forum letter recently criticized the Government because of the prevalence of betting outlets (there is one located conveniently in almost every HDB housing estate and heartland area); and also the “expansion” in the array of products one can bet on. It used to be just Big Sweep, 4-D and Toto; but now includes F1 racing as well as soccer betting. The Government’s stance is that it is much better to legalize these forms of gambling, rather than leave it to illegal bookies to collect bets and for unlicensed gambling dens to proliferate. While this argument does hold some merit, I question the rationale for the inclusion of so many betting avenues and the fact that such outlets are viewed as being “socially acceptable” to the general public. Generally, you won’t begrudge your friends, relatives or colleagues if they take a punt, and so there is a general reluctance to discourage someone from gambling as it is viewed as something harmless and within control. With the impending opening of the IR casinos, can families still view gambling as a suitable social activity and outlet for relaxation? If you want social life go to a club, do jogging, go swimming or meet for coffee. If you want to relax then go for a spa or massage session or just read a book and sip a milk shake. Gambling is an excuse for brain stimulation which ultimately ends in debilitating losses as the odds of winning the jackpot are so minute that almost 99% of the people will experience negative ROI. This is conveniently ignored by the adrenaline rush which accompanies each bet, as well as the aforementioned fallacy.

So what can we do as individuals to curb this unhealthy habit and ensure our money is put to better use? One method is to use education – ensure that schools teach students about the dangers of compulsive gambling, and to help them to realize that gambling is betting on an uncertain outcome, and that the odds of winning are very low. Simple examples can be used to illustrate this concept, and to help the youth understand that gambling can lead to social ills if uncontrolled. Parents and family members also play a role in this – if any of them are compulsive gamblers it becomes harder to discipline the child and prevent him/her from going astray. A supportive spouse or children can also help an errant person to mend his ways once he sees the destructive nature of his habits.

On the Government’s part, they had set up the National Council on Problem Gambling ( which they hope provides an outlet for families to seek help. Individuals and their families can also ban themselves from the IR if they feel they are problem gamblers. They should also set up more voluntary welfare organizations (VWO) to handle family problems stemming from gambling, and also offer more financial help to these families who have been ravaged by gambling debts, instead of letting them turn to illegal loan sharks. Hopefully, these measures will be sufficient to combat the rising incidence of problem and compulsive gambling within our society; and over time help to nip the problem in the bud.

Wednesday, December 09, 2009

GRP – Analysis of Purchase Part 1

This is not meant to be a long rambling post and in-depth analysis of GRP Limited, though of course any justifications and basis for my purchase should be rendered in at least enough detail to provide readers with sufficient information about the company and its merits/demerits to enable them to delve further on their own. I had set out to look for a company which provided good and steady yield, instead of a combination of yield plus growth, and GRP stood out with its fundamentals, boring but steady business and strong Balance Sheet and dividend policy. Note that since GRP can be classified as a dividend yield company, I will not go into too much details on the prospects and future plans section, as these are as yet unknown anyway and cannot be articulated with any clarity.

Background (taken from GRP’s website)

GRP stands for General Rubber and Plastics Limited. The Company was established in 1977 as a supplier and manufacturer of high-end quality hoses and fittings for the marine and oil and gas industries. In 1990, an office and production facility at Tanjong Penjuru Crescent, Singapore was acquired for the purpose of machining, fabricating and warehousing Hose & Fittings close to our customers.

In 1993, Region Suppliers, an international supplier of Precision Measuring Instruments, was acquired as a wholly owned subsidiary of the GRP Group. In the same year, GRP (China) was formed to take advantage of the opportunities being presented in China, particularly uPVC Pipe and Fittings Manufacturing for the local construction industry. The Company is also Master Distributor for brands like Dunlop, Goodyear and Elaflex.

In 1996, construction of an 11,000 square metre Industrial & Commercial Office Facility in Singapore was initiated. It was completed in 1997.

The Company thus has 4 main divisions as follows:-

1) Hose and Marine
2) Metrology and Measuring Instruments (Region Suppliers)
3) China’s uPVC Pipes and Fittings
4) Industrial and Commercial Property Leasing

I shall do a cursory review of GRP’s financials, without going into nitty-gritty specifics for each of the three statements (refer to summary table and trends table). Next, in Part 2, I will be providing some numbers on the performance of each business division by revenue, as well as a breakdown of the gross margins and net margins for each division, based on information gleaned from historical Annual Reports provided by the Company. I had to request for the older annual reports to be mailed to me (e.g. FY 2005 and FY 2006) as they were not available either on SGXNet (which keeps only the last 3 years’ annual reports FY 2007 to FY 2009), or the company’s website (which is spartan, to say the least). I shall, at the same time, try to squeeze in some information on the dividend history of the Company. Forgive me for not doing much competitive analysis as I was concentrating more on their revenue trends, divisional reputation (to be elaborated on) as well as their financials.

Financial Review and Analysis

From the table above, revenues have shown remarkable resilience over the years, through booms and recessions. The 8-year analysis shows that revenues have hovered around the S$20 million to S$30 million mark for all this time, averaging about S$27.6 million over the 8-year period under review. Considering FY 2002 till FY 2009 included part of the bust, SARS and the fallout from the sub-prime financial crisis, this represents a very stable and consistent pattern of revenues for the Company, and says a lot about demand for its products and services. The numbers imply that demand does not fluctuate much with economic conditions and that their products are “staple”. Of course, one must also see if gross and net margins can hold out in spite of almost constant revenue levels, and I will explore this in Part 2 of this analysis of purchase.

Overall gross profit margins have been rising in the last few years, but that is mainly due to the recent sale-and-leaseback deal inked in 2007 whereby GRP sold their 16,000 square metre industrial office facility in Bukit Batok for a period of 3 years commencing April 19, 2007. This lease ends on April 19, 2010 and will NOT be renewed, thus the cash flows from this division are likely to run dry in FY 2010 (the company has a June 30 year-end). In spite of this, it is clear from the Balance Sheet that the company is oozing cash from its ears, as evidenced by the very high current ratio of 4.77 as at June 30, 2009. As to what Management intends to do with this cash hoard, it is unclear but they will be looking out for suitable M&A opportunities to enhance the Group’s top and bottom-line. In a way, it is good that Management are taking it slow and steady while looking for a target. At most, if none is found, then the excess cash can be paid out as a special dividend to shareholders.

Notice too that the Company had ungeared itself since FY 2007, when it performed the sale and leaseback transaction for its Bukit Batok property. In spite of this, its return on equity has remained high for the last five years, with the most recent FY 2009 registering a commendable ROE of 17.5% (without debt!).

11-Year Trend Analysis

From the above table, it can also be seen that revenues display surprising stability in spite of the many ups and downs in the local and global economy. However, one should note that the Company had been making losses from FY 1999 till FY 2001, and only turned profitable in FY 2002 onwards. FY 2004 saw a blip because of a write-off due to impairment loss of S$2.4 million on their industrial property, but which otherwise would have been a profitable year. Other than the anomalous FY 2004, FY 2005 till FY 2009 has seen comfortable profit levels.

A glance at the above table also reveals that cash has been building up since FY 2002 (no records prior to that). Of course, bank loans were also very high at S$17.3 million in FY 2002 and it was only with the sale of the property in FY 2007 that ALL debts were cleared, and the Company stood in a net cash position of S$10.3 million (or about 7.36 cents per share). Subsequently, the cash built up to S$13.6 million or about 9.76 cents in FY 2009.

Trade Receivables has not gone up noticeably over the years; in fact it has even gone down a little which shows that collections are healthy. Inventories have built up steadily over the years and this may be a potential cause for concern in time; but so far cash generation ability has not been hindered or hampered by this slow buildup, so it could be attributable to holding a larger range of products to service customers.

Cash Flows

The reason for a special section mentioning cash flows is due to the consideration for this purchase, which is focused mainly on sustainable high yield. At my purchase price the historical yield works out to be 10%, and it is my job to ensure that the factors are present to justify that this yield is sustainable for the foreseeable future.

Operating cash flows have been positive for every single financial year since FY 2002, which is very rare for a company. Another noteworthy aspect is that Free-Cash-Flows (FCF) has also been consistently positive for the last 8 financial years, and lends strong credence to the belief that this trend will carry on as the business of the company is essentially unchanged and they still occupy a niche market. Cash outflows for financing activities for FY 2008 and FY 2009 consisted ONLY of payment of dividends, so it was an extremely clean Cash Flow Statement which greeted me when I first saw it and it caught me by surprise. Notwithstanding any unforeseen and major event occurring which may adversely affect the Company, it is reasonably safe to say that the Company can and will continue to generate FCF every financial year, and be able to maintain or even increase its dividends moving forward.

Part 2 shall continue on with some business unit analysis, and end off with a simple summary of my purchase decision.

Friday, December 04, 2009

Boustead – 1H FY 2010 Financial Analysis and Review Part 2

Part 2 of my analysis of Boustead will focus on their revenues by division and also each division’s PBT margins. Boustead has now provided shareholders with the breakdown of PBT by division and how each division is doing in terms of profitability; which is good because it helps us to evaluate how well each division is doing in terms of profitability and not just based on growth in revenues. Efficiency is an important aspect of a company though it often escapes notice; and some companies do not stress enough on profitability but tend to harp too much on revenue growth alone, which I feel is totally missing the point.

Divisional Revenue Analysis

As can be seen in the table above, Engineering Services managed to grow divisional revenues by 15.9% for 1H 2010, and this constituted 83.7% of total revenues compared to 80% in the previous period. When one looks more closely at the breakdown, it becomes apparent that the increase was due mainly to a 70% increase in revenues from the real estate solutions division, whereas the other two divisions of energy-related engineering and water and wastewater engineering posted fairly steep declines in revenue. Geo-Spatial, being Boustead’s cash cow, managed to keep revenues fairly steady as most of their contracts and customer base consists of governments and municipal townships, hence this is a stable market which will not be much affected by the global financial crisis. In fact, the 9.2% dip in revenues for this division could be almost solely attributed to the weakening of the Australian Dollar against the Singapore Dollar (which has by now reversed).

For Energy Related Engineering, apparently queries have been coming in rather slow according to the company, as oil and gas companies tighten on their spending for E&P amid a backdrop of tight financing. Negotiations are taking longer to conclude and contract size has also shrunk, with the last announced contract on November 10, 2009 being just S$14 million. Prior to this, there was a contract announcement as far back as July 27, 2009 (nearly 3.5 months gap) worth S$27 million. If one looks even further back, Jan 12, 2009 was the date of announcement of 5 contracts worth S$64 million (implying each contract is worth S$13 million on average). From this evidence, it seems the contracts for BIH and C&E are only coming in sporadically, and so far for 1H 2010 has amounted to only S$54.3 million of revenues compared to S$73.2 million for 1H 2009. Another problem is that of Boustead Maxitherm – it seems to be going through a never-ending period of “re-structuring”, which I have read about in almost every Boustead announcement so far. This begs the question: what exactly is going on with Maxitherm and why is the restructuring taking so long? So far no answers are forthcoming from the Management on this, and is something to raise up during the next AGM as it is dragging down the performance of this division.

Water and Wastewater Engineering Division (represented by Salcon) was dismal once again, registering revenues of just S$7.9 million, a 53.3% drop against S$16.9 million in the previous period. The reason provided was that revenue recognition on existing projects was “slow”, with another ominous announcement that the S$175 million Libyan Water Project (of which Boustead had taken a 65% stake in) has met with teething problems due to disagreement with the client’s consultant and hence may not even proceed. It was originally slated to be completed by 1Q 2011 but seeing how things are moving, Salcon may have to give up recognizing any revenues on this entirely. From these developments, one must start asking if the effort involved in turning Salcon around is akin to flogging a dead horse; for it has been nearly 3-4 years of restructuring and selling off unprofitable aspects of the business and yet the division has yet to show a profit. While FF Wong has been candid and up-front about this persistent failure to turn this division around, he nevertheless doggedly hangs on and expends considerable effort in realizing his dream of having 4 profitable divisions within Boustead, instead of just three. My feel is that without a strong competitive edge, it may be very tough for Salcon to secure significant contracts with high enough margins to ensure a turnaround. Recent unfortunate developments have further exacerbated the old problems and dampened shareholders’ hopes that a turnaround can be achieved in FY 2010, even though Management sounded a note of optimism.

For the real estate solutions division, it is helmed by Boustead Projects which is 91.7% owned by Boustead Group, as well as the newly formed Boustead Infrastructures which is in charge of the S$300 million Libyan Township Project in Tripoli, Libya. This division registered a very healthy growth of nearly 70% in revenues from S$78.2 million to S$132.9 million, and this was largely due to increased completion of the Libyan township project (about 1/3 done), rather than Boustead Projects securing more Design and Build Projects. In fact, in the next section, it is revealed that PBT margins actually fell even though revenues surged, probably due to higher costs involved. If one takes a quick glance at recent business developments for Industrial Real Estate Solutions, one would notice that so far for 2009, Boustead have been awarded just 3 projects; as compared to four each in 2008 and 2007. Management has also reiterated that FY 2010 will not see a sale of leasehold property, and so profits will be lower solely due to this as there had been a sale of at least 1 property in each of the last five financial years. More will be discussed in Part 3 regarding the prospects for this division.

Geo-Spatial is the only division within Boustead which is not contract-based, and represents the Group’s cash cow as it has steadily growing revenues, a captive customer base and high margins. The technology is used by Governments for satellite mapping and 3-D event modelling and ESRI Australia is in charge of marketing the software in Australia, while ESRI South Asia markets it to the rest of South-East Asia. The revenue decline was minimal in this case due to the factors described.

Analysis of Divisional PBT Margins

From the table above, it clearly shows that while some divisions seem to be doing “worse” compared to the previous period, in terms of PBT margins they are actually better off. This is why an analysis of revenues alone is insufficient to determine the strength of each division and also to assess its potential moving forward. Though trend analysis for margins can be used to project and extrapolate into the future, one must take note that changes in business and operating environment can result in changes in PBT margins which may either surprise on the upside or downside.

For Energy-related Engineering, though revenues dropped 25.8% PBT only fell a modest 4.6% and PBT margins actually increased from 11.9% to 15.3%, which is positive news. This implies that though the Group was taking on lesser projects as a result of the global financial crisis causing negotiations to lengthen and some clients to defer spending, they have managed to make up for this by reducing costs on the projects which they did take up; and probably this was as a result of stringent cost control and definite guidelines on which projects to accept or reject.

Water and wastewater engineering was a major disappointment despite the repeated promises by the Chairman to turnaround this division. Revenues dropped by 53% due to the slower completion of projects, but higher costs caused net loss to increase by 33% (even though technically lower revenues should result in lower costs). I am not sure why Management is confident enough to assert that this division would register a profit by FY 2010; but this is something I would like to see with my own eyes instead of believing time and again that they can turn things around. My opinion is that if they are unable to turn this division profitable, perhaps they should consider selling it away and channelling the cash for other more profitable pursuits instead of letting it bleed away.

Real-Estate Solutions division saw an encouraging 70% increase in revenues, mainly due to the progressive recognition of revenues for the Al Marj project in Libya; but PBT margins had dropped from 14.2% to just 11.3%; probably due to higher sub-contractor and raw material costs. While the project has been reported to be proceeding smoothly, Management needs to keep an eye on costs to ensure the increase in revenues is not more than wiped out by the increase in costs.

For Geo-Spatial, PBT margins have dropped as well from 28.5% to 24.9%, probably as a result of higher costs due to the exchange difference (costs incurred in SGD, revenues in AUD). Still, the division managed a decent PBT of S$9.1 million on revenues of S$36.6 million; and moving forward the AUD:SGD exchange rate have stabilized somewhat, so this should smoothen the fluctuations in revenue recognition for this division, and also minimize the impact of exchange losses.

Part 3 of my Boustead analysis will focus on the Company’s plans and prospects in the next 6 months, and also comment on how they can create more value for shareholders.