Wednesday, June 30, 2010

June 2010 Portfolio Summary and Review

Call this an extremely slow and boring month, which June has traditionally been in terms of corporate news flow and updates. Add the fact that no companies are releasing any financial results this month and you can somewhat get the idea of how stagnant things can get. The World Cup, which began on June 11, 2010, has furthered shifted attention from the stock and financial markets to the television and newspapers (and maybe even the football betting outlets!). However, I have no cause to worry as I am confident that the companies in my portfolio are managed by competent managers who are adept at maximizing value for their shareholders. In other words, the businesses should be chugging along just fine even in the absence of material corporate developments.

In terms of economic news flow, the sporadic and conflicting news reports oozing out of the USA seem to paint a contradictory picture of whether the economy is slowly recovering, or still mired in quicksand (i.e. sinking slowly but surely). A huge amount of data is churned up by USA and other nations on an almost daily basis and the amount of information and news is staggering and mind-boggling. From what I gather, the psychological effects from the European debt contagion seem to have subsided somewhat, which implies that markets are acting more “rationally” now, if such a word can be used to describe it. This is not to say that the Euro Zone is out of the woods, but it simply seems to imply that people have “acclimatized” to these facts and so are not in “panic” mode anymore. Of course, if any sudden news comes out to report that another member of the Euro Zone is in dire straits, you can be sure there will be renewed panic and fear once again. Such events should be perceived by the astute investor as opportunities to accumulate shares in stable companies for the long-term.

Locally, the property market turned up rather subdued news, even though prices of resale private flats hit another new high. There seems to be a general feeling that prices are flat for now, and buyers and sellers are playing a cautious game as each does not want to budge. Caveats lodged in May 2010 was down 41% month on month and though developers are now gearing up for more launches, it remains to be seen if prices can hold up and maybe even hit new all-time highs. Even our Minister Mentor has come out to say that he believes there is “probably no property bubble here yet”, as housing prices are underpinned by real demand and foreigners still find our property here cheap. It remains to be seen if he is right on his assessment, and only time can prove if property prices are indeed “cheap”.

Inflation as reported for May 2010 inched up to 3.2%, and one can see that inflation is once again rearing its ugly head, while our local banks continue to pay extremely pathetic interest rates on savings account, ranging from 0.125% to 0.5%. In other words, even if you parked your money in the “best” savings account, your money is still losing about 2.7% of its value, slowly but surely. Therefore, let me take this opportunity to once again reiterate my stand – an investor should invest in companies with good dividend yield which exceeds inflation rate so that he can continue to grow his money to at least keep pace with inflation.

A very small mention on car COE prices in Singapore, which have crept slowly upwards as dealers and the public anticipate a further supply cut due to Mr. Raymond Lim’s new formula. Apparently, the Open category COEs are already breaching the S$40,000 mark, and look unlikely to come down anytime soon. In fact, when August 2010 arrive I’d expect them to rise even further. So my view is that anyone who can own a car in Singapore has to be somewhat rich, as even a simple Toyota Corolla can cost about S$80,000. Somehow it feels like owning a car in Singapore is becoming more and more of a lofty ambition, that is if you really want to retire with some smidgen of wealth left behind. Just my two-cents though, car owners please do not get offended!

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

1) Boustead Holdings Limited – It was a generally quiet month for Boustead, except for the announcement on June 15, 2010 that they were involved in a potential M&A transaction to purchase 1% Convertible Notes in Bio-Treat Limited for S$42.7 million. This deal is still subject to financial and legal due diligence although the preliminary due diligence (i.e. inspection of the physical assets) had already taken place. As this deal may or may not go through, I await more news from the Company in due course, and will evaluate the merits/demerits of this decision when more information is available. Just as I thought the month was going to close quiet, Boustead announced on June 29, 2010 that Salcon had been awarded a S$21 million (AED 55 million) contract to build the first New Water Recycling Plant for Abu Dhabi in UAE (United Arab Emirates). The salient details are in the press release so I will not say too much, but the contract also comes with a 5-year operations and maintenance agreement.

2) Suntec REIT – There was no news from Suntec REIT for June 2010.

3) First Ship Lease Trust – June 2010 was probably one of the most nerve-racking for FSL Trust shareholders, as the Trust announced that both VERONA I and NIKA I were “arrested” as they had not paid up for bunkers supplied to them. This caused the share price to subsequently plunge to lows not seen since the bear market, and sort of affirms my belief that this is really one heck of a mistake! Counting in dividends, the loss will amount to about 35%, but the psychological impact and lessons learnt are really priceless. A small piece of “good” news was announced on June 18, 2010 when FSL Trust managed to secure the release of VERONA I after paying up US$1.6 million. The vessel will then be deployed on the spot market to continue generating some cash flows (estimated at about US$13,000 per day). The Trust is focusing on securing the release of NIKA I from a Chinese (Qingdao) court. Somehow I am not optimistic that all these issues will be resolves anytime soon, and forecast a drastic cut in 2Q 2010 DPU, which means my yield may drop even further. Lesson learnt – next time, go for sustainable yield rather than high yield.

4) Tat Hong Holdings Limited – There was no news from Tat Hong for June 2010 apart from a minor announcement on June 15, 2010 that they were incorporating a Joint-Venture company in China called Tat Hong Zhaomao Investment Co., Ltd with intended paid-up capital of US$30 million. Tat Hong have contributed initial capital of US$9 million and the monies were provided by the RCPS raised.

5) MTQ Corporation Limited – MTQ had announced on June 9, 2010 that UOB had granted them 2 Term Loans of US$9.8 million and US$9.2 million. These loan facilities are intended to part finance the construction of the Bahrain facility. Other than this minor announcement, there was no other news from MTQ for June 2010.

6) GRP Limited There was no news from GRP for the month of June 2010. A very quiet company indeed with its financial year ending this month, and results are likely to be announced by late Aug 2010.

7) Kingsmen Creatives Holdings Limited – There was no news update or corporate announcement from the Company. A recent report dated June 25, 2010 by Kim Eng does provide some updates on the contracts and business prospects of the Company, but in my opinion the analyst is, as usual, too optimistic. Read the report for the facts, rather than believe the interpretation and the optimism. Another report by OCBC came out on June 29, 2010 and essentially mentions the same facts and prospects; but is worth a read because there is some in depth research into various aspects of the Company (except Cash Flows, I feel).

Portfolio Review – June 2010

Realized gains continue to remain at S$54.0K in the absence of any of my companies going ex-dividend (and also with no transactions during the month), and the AGMs of Tat Hong, Boustead and MTQ can be expected in July 2010. Note that for this month’s portfolio review, I have added in this month’s portfolio XIRR gain compared against STI’s gain, and also the YTD June 2010 XIRR gain (adjusted for withdrawals, further investments and dividends) against STI’s performance YTD June 2010. A rather surprising result was that my investment (according to Excel’s XIRR function) has appreciated by +31.4% since Jan 1, 2010 against the STI’s -4.3% loss, and I feel there must be some sort of mistake as I could not possibly outperform the STI by such a wide margin*. My investment cost has remained at S$175.4K as at June 30, 2010, my unrealized gains now stand at +8.5% (portfolio market value of S$190.3K).

July 2010 should be a relatively quiet month as none of my companies are expected to report results; and corporate news is also usually slow during this period. Besides attending the AGMs (if I can make it), I will probably be doing more reading on investing, personal finance and life in general; and building up my war chest in the meantime.

My next portfolio review will be on July 31, 2010 (Saturday).

*Note: If there is anyone who can clarify on how to use and compute XIRR, I would be most appreciative. I do not want to perpetuate the fallacy that I have done much better than the index just because of a possible erroneous computation.

Saturday, June 26, 2010

Tat Hong – FY 2010 Analysis and Review Part 1

Tat Hong was pretty badly affected by the global economic slowdown for FY 2010, as can be seen from the recently released FY 2010 results in which revenue fell significantly, and where net profit attributable to shareholders plunged even more. Amid a difficult year though, there were some bright spots emerging for the Group; and hopefully for FY 2011, as the economy turns up, their business should also improve. One positive point is that they have managed to continue to pay out twice-yearly dividends, though of course these are greatly reduced as compared to prior years such as FY 2008 and FY 2009. Part of the reason is also because of the enlarged equity base due to the issuance of the RCPS (which are also entitled to all dividend declarations).

My analysis will take on the usual 3 parts, with Part 1 covering the financial statements, Part 2 covering the various business divisions and margins for each division, and then part 3 touching on prospects and plans as well as covering a little on Tat Hong’s crane fleet in terms of crawler and tower cranes.

Income Statement Review

For 4Q 2010, revenues actually showed a rise year-on-year of 18%, but the problem was this was more than offset by the higher COGS of 31%, effectively making the increase in gross profit more muted at just +2%. The reason for this was because of higher equipment sales as compared to crane rental, and though this gives better sales volume, it also translates into worse gross margins as this division traditionally has lower gross margins. Gross margins for 4Q 2010 stood at 37.1%, which was noticeably lower than the gross margin achieved for 4Q 2009 of 43.1%.

Cost control wise, distribution expenses were kept fairly stable but administrative expenses surged 54% to S$3.3 million. Other operating expenses (of which the bulk of expenses lies) fortunately managed to dip 15% to S$26.4 million in spite of the increase in revenues. One big bugbear of mine is that contributions from associates and joint ventures have all but shrunk as a result of the sharp financial crisis, to just S$400K from last year’s figure of about S$4 million (a 90% drop). This was one of the critical factors for the drop in net profit before tax of 14% for 4Q 2010 against 4Q 2009. Income tax expenses also ballooned 280% and caused net profit attributable to shareholders to slip 33% to just S$9.8 million, capping off a dismal quarter.

Looking at the full-year results, they were no less disappointing. For FY 2010, there were revenues of S$495.4 million, down 22% from last year’s S$631.8 million. The decline in COGS was in line with the drop in revenues; hence gross profit dropped 21% to S$190.9 million. Gross margin managed to remain fairly constant at 38.5% against 38.2% (showing a marginal improvement). This was largely due to the shift to a “rental” business model for Tat Hong which helped to cushion revenues and also allowed gross margins to stay high as rental margins are traditionally much higher than that of equipment sales. Distribution and other operating expenses fell in line with the drop in revenues, but there were higher finance costs of S$15.6 million (+26%) as more bank loans were drawn down to purchase equipment on hire purchase, and this also included a hedging loss. I realize that this is the problem with businesses armed with leverage; during bad times it certainly “cuts like a knife”!

The main culprit responsible for the fall in net profit was the 92% drop in share of profits from associates – this fell from S$12.9 million in FY 2009 to a mere S$1 million in FY 2010! For share of profits from JV, the situation was made worse as FY 2009 registered a share of profit of S$2.1 million but this was reversed to a loss of S$3 million for FY 2010. These two items alone dragged down net profit before tax for FY 2010 by 40% to S$58.3 million, while profit attributable to shareholders decreased by 44% to S$38.6 million.

From the above, it can be seen that there was a “perfect cauldron” of negative events and factors which served to pummel the Group’s top and bottom line and left it with a dismal performance for FY 2010. I myself was pretty horrified by the extent of the damage wrought on the Group, as I had thought that their business was fairly resilient due to the shift to “rental” model. However, it should be noted that Tat Hong is in a cyclical industry as their business tracks the rise and fall of the economy very closely, and also the status of the construction, oil and gas as well as infrastructure industries. Without a significant pick up in economic activity over the next 18 months, Tat Hong’s business could continue to come under severe pressure.

Balance Sheet Review

Tat Hong’s Balance Sheet, sad to say, is not exactly in the pink of health either. PPE increased significantly as Tat Hong shifted their cranes from inventory stock to fixed assets as they sought to boost their rental fleet. As a result, inventories amount fell a little from S$217.7 million to S$201 million. Trade Receivables climbed 15.4% from S$97.7 million to S$112.7 million, probably due to the upturn in sales volume towards the tail end of FY 2010 (i.e. 4Q 2010). Cash balance actually improved to S$76.6 million, but a more in-depth analysis on this increase shall be provided in the Cash Flow Statement analysis later on.

Current ratio stood at 1.41 as at March 31, 2010 compared to 1.29 as at Dec 31, 2009. The improvement came mainly from the increase in cash balances, rather than a drop in financial liabilities (i.e. bank loans). In fact, short-term bank loans had risen from S$85 million to S$91.2 million. Total loans stood at S$245 million as at March 31, 2010, significantly higher than the cash balance of S$76.6 million. Net debt stood at S$168.4 million, and on hindsight it would be disappointing to know that I had selected to invest in Tat Hong back in Oct 2008 even though it had a weak Balance Sheet as my focus then had not shifted from Income Statement to Balance Sheet and Cash Flows. Sensing that the nature of the business model is as such, and armed with a sufficient margin of safety in my purchase price, I will continue to monitor the Group for the next few quarters to see if the Balance Sheet improves, and if cash flows revert to being positive.

Cash Flow Statement Analysis

The Cash Flow analysis shows a positive operating cash inflow of S$29.3 million for FY 2010, and this was a significant improvement from the S$8.8 million cash inflow registered in FY 2009. The reason was that the increase in inventories was not as high as for FY 2009, which resulted in lower negative working capital changes being reflected.

However, a quick glance at investing activities shows that capex spending hit S$79.5 million for FY 2010, significantly higher than the S$28.2 million for FY 2009. As a result, there was negative free cash flow of about S$50.2 million for FY 2010, and this was another disappointing aspect of the Group. One would note that for FY 2006-FY 2008, there was consistent FCF generated but for FY 2009 and FY 2010, the negative FCF was very glaring. Whether this was due, in part, to the shift to the “rental” model and therefore is a temporary phase, or if it will be a permanent aspect of their cash flows, remains to be seen. However, I shall flag this out as a potential red flag to be addressed at the next upcoming AGM.

Under Financing activities, S$63.7 million worth of cash came from the issuance of RCPS to AIF Capital, while another S$94.4 million was obtained from bank loans. Hence, the bulk of the cash inflows still came from financing, and this was another big body blow for me. Considering the Group intends to aggressively expand into China’s booming tower crane market, perhaps this year is an anomalous one as they sought to raise both equity and debt in order to finance this expansion, which arguably will only bear fruit in many years to come. Obviously, with this new business focus, dividends have taken a back seat as dividends declared have dropped off from a year ago. This can only be interpreted as a good thing IF the ROE from investing such cash into new business ventures exceeds the cost of borrowing and equity (the dividend yield in this case). Apparently, Management is confident that it will succeed, otherwise the tie-up with AIF would not even have taken place. At this juncture, I do not share Management’s optimism as everything is still opaque and the benefits of this China expansion cannot be readily ascertained.

I would expect cash flow to come under more pressure in the coming quarters, as the recovery is tentative and the problems in the Eurozone still threaten to destabilize the global recovery. Maintaining realistic expectations is key to investing with a margin of safety and I shall watch over developments closely, while waiting for the Annual Report and AGM to arrive.

Part 2 of the analysis shall touch on business unit analysis, including reasons for the apparently dismal performance, and I will also comment on trends for each division moving forward.

Tuesday, June 22, 2010

Sun Tzu - War On Business Part 8 (Skoda Cars)

Part 8 comes back to Singapore again, and James Sun tackles a very “hot” issue amongst Singaporeans – that of cars. With recent news that COE prices have sky rocketed, this has not made it easy for cars to get sold, especially the smaller, lesser known brands. Though I suspect that this episode could have been filmed some time in 2009, when COE prices had not yet increased to such crazy levels. Still, the principles as articulated in the episode still hold true.

For this episode, James pays a visit to Daniel Au, who is in charge of the distribution of Skoda cars in Singapore. Skoda has a 104-year history and their cars consist of top German engineering, yet brand awareness is weak in Singapore. Skoda gives the impression of being a second-tier brand of car even though technically, it is a continental car and other European car brands have enjoyed immense popularity here in Singapore (e.g. Peugeot and Volkswagon). James mentions that “If you are much weaker than your enemy, avoid him” – implying that Daniel should not compete head on with the stronger competitors, but should instead seek to carve a niche out for Skoda in the local market.

Daniel believes that it is a case of lack of brand awareness, which sounds similar to the problem highlighted in last episode on Zak’s Surfboards. A visit to the showroom finds it pretty deserted, and a simple chat with one of the salespeople (Peter Chin) reveals that he is not confident and the car also does not match up to what was seen on the Internet. The reviewer gave the salesman a 2/10 but the salesman complains that there is a lack of product training and they were only given 2.5 months of training, which was insufficient.

Daniel says Skoda is expanding its range of cars and is bringing in 5 new models next year (I would assume this meant 2010), including sporty ones which should appeal to Singapore’s market (this is true as I see a lot of yuppies driving 2-door model European sports cars). James conducted a simple blind testing and let several car enthusiasts try out the Skoda car (with the brand name and logo concealed), and most of them were very positive on the car and guessed it was either Volkswagon or BMW. They showed surprised when it was revealed to them that the car they had driven was, in fact, a Skoda.

Dennis Foo, the owner of Saint James Power Station (a pub cum disco) was invited to be the local entrepreneur to have a look at Daniel’s business. The first impression he got when he stepped into the showroom was that there was an absence of a receptionist. Another point he brought up was the marketing ads which Daniel was running, which are all produced in Germany and which featured families instead of yuppies and young people. Hence, the ads were targeting a different market segment in Europe and weer not suitable for use in Singapore’s context. However, Mr. Foo was impressed with the car itself, and commented that it had the prestige of a European brand but was priced below that of normal European cars. He suggests targeting young singles by stepping outside the comfort zone, and to create a brand new marketing campaign. This new campaign will focus on the target market which is the younger demographic (for the new lines of sporty cars to be released into the Singapore market in 2010).

A branding expert was called in to do demographic profiling, and a suggestion was to design decals from NAFA students to be put on older Skoda models. Social marketing would be used (e.g. creation of a Facebook profile) and the marketing manager (Marie Tang) mentioned that the aim was to look for a design which fits the Skoda’s image in terms of brand positioning.

At the end of the program, we see James telling the audience that Daniel has added a new dimension to the Skoda brand by appealing to the younger generation, but then the program ends too abruptly and we cannot see any effects of this new marketing campaign on whether it had succeeded in improving Skoda’s profile.

Nevertheless, there are still valuable lessons to be learnt:-

1. If you have a good product, tell the world about it – This is basically the same problem as Zak’s surfboards. Skoda is a high performance car and has all the characteristics of good quality and engineering, but all it lacks is marketing and brand awareness. Hence, a strategy to increase brand awareness would do the brand and product a lot of good.

2. The importance of Sales Training – Based on the poor salesmanship of the Skoda salesperson, Daniel would probably need to invest a lot more time and effort into sales training, as a competent sales force is key to increasing sales and driving business top-line growth.

3. Marketing Campaigns differ across continents – It’s important to realize that when you become a sole distributor for an overseas brand, their ad campaigns and banners may only be designed to be catered to their own home country and market. Hence, these materials may be unsuitable for use outside the country of origin and a customized campaign has to be designed to cater to the local market, as they may target different demographic market segments and thus require different positioning.

Basically, the crux of the episode was on the branding and ad campaign, as there was also a competition held by Skoda to bring out the best of the brand in terms of how it should be perceived by the general public. It was an interesting episode on the whole but not as insightful as some of the previous episodes.

Watch out for Episode 9 which brings us to Mumbai, India to have a look at Meru Taxi Company!

For more details on the Skoda competition itself, and the winners, please check out this PDF file.

For information on Skoda Cars, please visit the company’s official website:-

Friday, June 18, 2010

Boustead – FY 2010 Financial Analysis and Review Part 1

Boustead released their FY 2010 results on May 27, 2010, and followed this up with an audiocast of the results along with a presentation and question and answer session. The results were in line with what I had expected and also what the CEO Mr. FF Wong had mentioned early on during 1Q 2010, that FY 2010’s performance will not surpass that of FY 2009 and make it an eighth consecutive year of record revenues and net profit. This is part of business reality – companies do experience dips in revenues and profits as a result of economic activity which directly and indirectly affects their core business. However, if the company and run and managed well, it should emerge stronger after a global crisis and may even take the opportunity to consolidate its resources. Boustead would seem like a good candidate for this, though thus far no progress has emerged on their M&A talks.

This analysis will be somewhat in depth and broken up into 3 parts – it will tackle Income Statement, Balance Sheet and Cash Flow issues (as well as dividend), move on to divisional analysis and margins; and finally I will post up a transcript of the audiocast and discuss Boustead’s future plans including M&A and organic growth for FY 2011.

Profit and Loss Analysis (all numbers are based on FY 2010, not 4Q 2010)

Revenue for FY 2010 dipped 15% from S$516.6 million to S$438.4 million, and this was relatively modest considering the sharp downturn. Part of the reason for the dip was also due to the “lumpy” project nature of Boustead’s businesses, which means revenue may be recognized at different stages if a project depending on % of completion. Mr. FF Wong did caution that using quarterly numbers would not be representative of the Group’s performance, which was why I left out using 4Q 2010 for all my analysis and computations.

The good news was that COGS fell more than the drop in revenue, decreasing by 18% to S$305.8 million. As a result, gross profit took a more minor tumble of just 7% to S$132.6 million. Gross margin was 30.3% for FY 2010 against 27.7% for FY 2009, an improvement of 2.6 percentage points.

The drop in Other Income was due to the absence of gain from the sale of a leasehold property which was concluded within FY 2009. Going down the Income Statement, one should note that selling and distribution expenses had decreased 13% (roughly in line with the drop in revenues); while administrative expenses took a healthy tumble of 22% from S$55.4 million to S$43.2 million. Finance costs dropped by 54% to just S$1 million, and these two items reflected better and more efficient cost control as well as lower reliance on short-term debt financing by the Group. As an aside, I would like to remind that cost-cutting and cost-saving measures should be implemented all the time within any company, and not only when costs begin to spiral out of control. In Boustead’s case, FF Wong has traditionally ensured the Group operates in a lean fashion, whether during good times or bad.

Profit attributable to shareholders dipped by 28% as a result of the absence of the share of results from associate for FY 2010 (in FY 2009, GBI Realty concluded the sale of a property and recognized a one-off gain). Net profit margin stood at 13.4% against 15.8% last year, but note that last year’s net profit margin included several exceptional items. If the S$22.7 million were removed from FY 2009’s results, net margin would be just 7.2%.


As can be seen from the figure above, Boustead’s dividend track record has not only been consistent, but it is also increasing steadily over the years. This is despite the acute sub-prime crisis and subsequent sharp and protracted global recession which crippled many companies and caused many reputable banks to collapse. Last year (i.e. FY 2009), Boustead paid out a total dividend of 4 cents/share consisting of 1.5c interim and 2.5c final. For FY 2010, Boustead has maintained the same dividend quantum, but added in a sweetener – a 1.5 cent/share special dividend. This brings total full-year dividend to 5.5 cents/share and at the last done price of about 80 cents, this translates to a yield of about 6.875%. At my purchase price of 55.8 cents, it represents a yield of about 9.86%. The reasons for the ability to sustain and increase dividends shall be elaborate on in the Cash Flow Statement analysis section below.

Balance Sheet Review

Boustead’s Balance Sheet remains solid with gross cash balances of about S$223 million, and net cash of S$199 million. Trade Receivables had increased by about S$16 million despite the drop in revenues due possibly to the lumpy project nature of their contracts, which means possible timing differences between billings and collections. Properties held for sale increased from S$37.4 million to S$69.5 million as this was one of the properties being constructed for a Fortune 500 company; the associated credit entry went to deferred income instead of revenues because the construction is not yet complete. Once completed, a reversal entry would be made to reverse out the current liability (in Trade and Other Payables) to revenue in the Income Statement. As a result of these, total current assets increased from S$375.9 million to S$473.3 million (+25.9%).

Under current liabilities, bank loans decreased as less financing was needed, while contracts work in progress amounts also dipped as more projects neared completion. Trade and Other Payables increased by about S$66 million but this was mainly contributed by the increase in property held for sale as previously mentioned. As a result, total current liabilities increased from S$218.6 million to S$265.6 million (+21.5%).

Adjusted current ratio (net of properties held for sale) stood at 1.5 as at FY 2010, against 1.55 in the previous year. The slight dip was due to the increase in property held for sale and the associated deferred income on the current liabilities side. Overall however, this ratio has remained healthy.

ROE was about 21.2% for FY 2010, dipping lower than the 30.9% due to the exceptional gain as described above, and also due to the dip in profits as a result of decreased business activities. However, an ROE of 21.2% is still very good considering Boustead had minimal leverage and was in a net cash position.

Cash Flow Statement Analysis (all numbers quoted refer to FY 2010 versus FY 2009 only)

As can be seen in the above table, cash flows for Boustead continue to be strong in spite of the lingering recession and slow global recovery. Mr. FF Wong has always been a prudent and conservative businessmen who likes to have lots of cash by his side to tide him over difficult periods, and it is apparent that this attitude is showing positive results as Boustead’s cash pool has been growing for the last 5 financial years; and shows no signs of slowing down! Of course, one must balance cash build up with appropriate and efficient cash deployment and utilization, for cash can end up being a drag on ROE. A realistic expectation (and challenge, no doubt) would be for Boustead to start to tap on its cash hoard for M&A activities or at least to generate a better-than-inflation return for shareholders.

Cash flow from operations was a healthy positive S$52.6 million, against $S44.8 million the previous year. Capex was just S$4.4 million for FY 2010, which means there was free cash flow (“FCF”) of S$48.2 million; FY 2009’s capex was S$14.6 million, and for FY 2009 the FCF was S$30.2 million. This has further increased their cash hoard to S$199 million, and because of this burgeoning cash stash, the Group has declared an additional 1.5 cents/share special dividend.

In fact, for FY 2010 investing cash flows was also positive at S$17.7 million, as the cash proceeds from the disposal of property by GBI Realty (concluded in late FY 2009) came flowing in (total of S$41 million).

As for Financing activities, Boustead spent about S$4 million doing share buy-backs for FY 2010, and the bulk of the cash outflows (S$20 million) was for the payment of dividends. Later, in Part 3, I shall discuss some of the potential uses of this cash stash as highlighted by Mr. FF Wong. He has also committed to paying out and maintaining the 1.5 cents/share interim dividend for 1H FY 2011.

Part 2 of the analysis cover the business divisions analysis (including margins) and discuss a little about the divisions, their plans and also their prospects.

Monday, June 14, 2010

Buy and Hold is Overrated

At this juncture, as the news flow from pundits and economic forecasters grows more and more shrill and jarring, an ever-present “die-hard”, core group of investment believers continues to espouse the (seemingly) timeless wisdom of “Buy and Hold”. They proclaim loudly and in a resounding tone that one should simply buy and hold and ride through the intense and increasingly frequent bouts of volatility, with the expectation that at the end of the day (some 5-10 years later no doubt), one will come out ahead with gains eked from patience and perseverance. My take on all this is – it’s overrated and very misleading. I will proceed to explain why in the next few paragraphs.

The concept of “Buy and Hold” (BAH) relates to buying shares of companies and holding them through thick and thin, all the while with the belief that as long as one maintains a long-term view, one will emerge unscathed. However, the concept is flawed due to the fact that an investor cannot simply BAH (which I call Buy and Forget), as the business of the company may not be able to withstand the vicissitudes of time. In case any reader thinks that I am referring to small or mid-cap companies, this holds true as well for blue chips. Just ask those people who purchase shares of Creative Technology during the boom in 1999-2000; as Creative was then the bell-weather technology stock and was one of the blue chips. Yet, competition from Apple in recent years has eroded their market leadership, and after the success of their Sound Blaster Pro, they had never managed to come up with a world-beating invention. Instead, Apple Inc. has now taken over as the tech company of choice, as their world-beating iPod and current iPad take the world by storm. An investor in Apple’s shares would also have to follow the company closely to see if future inventions and products can emulate the success of their previous products; otherwise the lofty valuations placed on the optimistic expectations may just crash back to earth.

A more proper term which I have come up with should be “Buy and Monitor” (BAM), instead of BAH. Holding a portfolio of different stocks is akin to investing in a myriad of different businesses (recall that shares represent part ownership of a business), thus one should constantly keep abreast of the latest developments relating to the business and industry surrounding these companies, in order to ensure that your original intention for investing in them remains sound. The underlying business should be healthy and generating good profits and cash flows to qualify to remain as a sound investment, as espoused by the timeless principles of value investing. If the business does well, it becomes more valuable and people will be willing to pay more for a piece of the business; hence this will all eventually translate into a higher share price.

BAM is seldom mentioned in great detail because most publications and newspapers prefer to talk about the economy or the stock market, rather than individual companies. Anything newsworthy is featured for a day or two and then promptly forgotten, but the investor should remember that he does not need constant news feeds and updates in order for his investment to do well. In fact, I dare say that a lack of news may actually represent good news, as this means the business is on track and not experiencing any mind-numbing hiccups or difficulties.

As an example, I monitor the business fortunes of the companies in which I own shares rather closely, and I definitely do a quarterly check on their financials and business health (where possible, as some do not release quarterly numbers). In addition to all this, one must also constantly read up news on the industry affecting one’s investments, and also personnel movement as this may also impact how one’s investment performs. For example, MTQ recently announced a leadership shift as Mr. Kuah Kok Kim stepped down as CEO, to be replaced by his son Mr. Kuah Boon Wee.

In conclusion, BAH is seriously over-rated as many commentators and tired pundits continue to extol the same advice over and over again, seemingly mindlessly. If we delve a little deeper, we would realize that BAH was responsible for many people losing their fortunes due to laziness and sloth, as they simply bought shares without due care and concern for the underlying business, and let these shares languish for the next few decades. This is not just a lost cause, but is also responsible for tying up capital which could otherwise be re-deployed for better growth.

Thursday, June 10, 2010

MTQ – FY 2010 Analysis and Commentary Part 3

We have come to Part 3 of my MTQ analysis, and I hope the previous 2 sections have been useful thus far in reviewing the company. I was hoping to get some constructive criticisms but thus far there have been no comments given on either Part 1 or Part 2; so now I am pressing on with Part 3 which is much more qualitative in nature.

Part 3 will discuss the prospects of each division (i.e. Oilfield Engineering and Engine Systems), as well as comment on the prospects and likely business climate for each division and for the Company as a whole in the next 6 months (till MTQ release their 1H FY 2011 results). I will also touch briefly on MTQ’s capital structure in the near-term and their likely cash flow and dividend stream.

Oilfield Engineering Division

Oilfield Engineering has always been the mainstay of MTQ’s business, as my analysis of purchase had described, they are one of the few played in the region which can provide timely and quality service to customers, thereby resulting in repeat business with a loyal customer base. Looking at the results for FY 2010 though, one can see the damage done by the global financial crisis on this division, as oil majors had drastically decreased their spending on E&P amid tight financing conditions; and also because most of these majors have become cautious on spending too much in case they were unable to sufficiently recoup their investments. Note too that oil prices had collapsed from a high of about US$148 per barrel to the current US$70 per barrel, and there could be further weakness moving forward due to the current Euro crisis. MTQ are, to a certain extent, exposed to this risk as they are servicing clients in the South-East Asian region where the players are more sensitive to oil prices. However, there may be light at the end of the tunnel in terms of managing the volatility of the revenue stream for this division (see next para).

In Jan 2009, MTQ announced that they were venturing into Bahrain, a country in the Middle East, and were planning to build a new facility there up to 3 times the size of their Singapore Pandan Loop operations. Since then, they had awarded a contract to build Phase I of the development to a contractor, and work has since begun and is targeted to be completed by early 2011. Assuming the facility starts to attract customers and generates revenues, the revenue stream would be far more stable as the oil majors in the Middle East region are not so affected by fluctuating oil prices; rather their cost of production is probably just US$1 to US$2 per barrel! MTQ would also be able to capture a new base of customers there (barring strong competition from incumbent players, of course) and perhaps also extend their existing business relationships with their current pool of customers to service their Middle Eastern operations. Of course, at this juncture there is still no clarity on business prospects and potential revenues as the facility is under construction; but if assuming all goes well, this new facility could significantly boost MTQ’s business in the long-term.
Another thing to note about this division is its high barriers to entry (in terms of service quality and services offered) and thus it can garner sufficiently high margins of up to 24%. Assuming the Bahrain workshop can command the same premium pricing, and barring fierce price wars initiated by competitors, MTQ should be able to maintain their margins for this division. However, I would expect contributions to only flow in from 2H FY 2012 earliest.

Engine Systems Division

A quick recap on this division – Engine Systems had shown surprising resilience during the downturn and turned in a respective set of results. Part of the reason for this may be attributed to the Bosch Superstore concept which was part of the deal which MTQ signed with Bosch (starts Nov 1, 2009). Therefore, if we extrapolate the positive effects on the division’s business, revenues and margins, I can safely conclude the FY 2011 would be a year of growth, or in the worst case scenario, revenues would remain flat (if compared year-on-year as FY 2010 only had 5 months where Bosch Superstores were operating). The margin improvement to 3.2% was a pleasant surprise and as the legacy units are being divested within MTQES, net margins could rise further; this coupled with synergies from cross-selling Bosch and MTQES’ own automotive parts and diesel engine systems may mean better economies of scale, with minimal additional capital expenditure. Of course, this is assuming that the Euro crisis and subsequent fallout does not have a sharp negative impact on MTQES’ business and throw a spanner in their engine (mind the pun).

With the acquisition of Premier Fuel announced back in March 2010, MTQES has now expanded their Australian coverage to include 10 outlets (inclusive of the one in Northern Territory occupied by Premier). At this point, it is unsure if the Company will channel more of their funds into the Bahrain construction or if they plan to reserve some to acquire more companies to boost MTQES’ capabilities and reach. I can only speculate that Management seems to be want to take a pro-active approach to improve MTQES’ margins and also their competitive capabilities, and this is a good sign as it implies they do not let a business division languish just because it has lower margins and revenues than a more profitable division. A Company must act as a holistic entity and manage its resources well; and thus far this has been demonstrated by Management as they astutely avoided debt and generated good cash flows.

The upcoming AGM would be a good opportunity for me to question Management on their intentions for MTQES, and whether there are plans to grow it further. I shall also wait for the Annual Report commentary by the Chairman to see if there is any MD&A on MTQES; and also browse through the operations review. The AGM should be held sometime in July 2010.

Changes in Capital Structure

MTQ had announced their Bahrain expansion plans and for now, Phase I will make use of internal cash flows and cash reserves to fund. This would also include paying for costs and staff salaries to recruit suitably qualified personnel and train them to appropriately deliver quality service which is in line with the service levels at its Singapore branch. All these activities will mean that substantial expenses will need to be incurred, and it may be quite a while before we can observe the positive effects of such spending on productivity and quality which would translate into revenues, earnings and cash flows.

However, per Management, Phase I will not involve a dramatic change in MTQ’s capital structure as the upfront cost is only about US$9.6 million. Phase II, which will probably commence work in early 2011, will involve much more (though no exact figures were given); and so MTQ will most likely have to fund this phase of expansion through the use of bank financing (i.e. bank loans). With current gearing being very negligible, this increase in bank loans will result in more financing costs and the net cash position which the company enjoys now may also be threatened, depending on how well they can generate operating cash inflows into the future.

On a positive note, in the current low interest rate environment, it may be better for MTQ to take up some financing (paying low rates), and deploy their cash reserves to better effect to maximize returns for shareholders. I believe this is what the Chairman, Mr. Kuah, intends to do in order to conserve cash resources, as he is confident the bank will lend them the money as MTQ has a strong balance sheet and healthy cash flows. Assuming Management knows how to deploy the cash to enhance returns, I would think this is a good strategy to adopt.

Cash Flows and Dividends

That said, cash flows and dividends may take a temporary hit due to the above-mentioned events taking place; and as MTQ uses more cash to fund its new facility and also to expand MTQES’ networks. For FY 2010, MTQ managed to sustain its dividend payment at 1c/share interim and 2c/share final; but for FY 2011 I highly doubt the company can maintain this payout unless operational cash flows turn out to be much stronger than anticipated. Although Mr. Kuah sounded an optimistic note in his interview with NextInsight that dividends at current levels can be sustained, I have a tendency to be more pragmatic (call it “pessimistic” if you wish) and assume the worst – that the Company will have to drop it dividend or in the worst-case scenario, stop paying dividends altogether if the macro-economic environment continues to deteriorate. Although this is an unlikely possibility, it still must be considered as I am currently enjoying a decent yield of 4.37% on my investment in MTQ (based on 3c/share full-year dividend).


I remain cautiously optimistic about the company’s prospects and Management’s capability to grow the business, though I am also mindful of the potential slowdown should the global economy be hit by another “whammy” delivered by the European debt crisis. As to whether I should add to my position or simply to sit and monitor, I am also contemplating my next course of action. Above all, I must strive to maintain a margin of safety on my purchase and to enjoy a decent yield. Capital preservation remains the cornerstone of my investment philosophy.

My next review of MTQ will be after the release of 1H FY 2011 results sometime in late October 2010, or if there are any material corporate developments along the way.

Saturday, June 05, 2010

Sun Tzu - War On Business Part 7 (Zak Surfboards)

Part 7 of this series is an interesting one, as it focuses on a sport which is not very familiar to me and can be considered “niche”. This sport is surfing and the business in question is one of selling surfboards in Melbourne, Australia. The business is owned by a guy called Zak Koniaris (“Zak”), who is an avid surfer himself. His shop sells everything surfing related, from the surfboards itself to the associated paraphernalia. The shop also repairs and “enhances” surfboards, so it provides such value-added services to customers too.

Zak is interested in expanding his business but he does not really know how to go about it. He maintains that if the business falls apart, he will go look for a “real” job. He was asking James to help him on certain areas, specifically on systems, strategy and “what’s next” in terms of moving up the value chain. James did a simple test to find out the value of Zak’s brand, by visiting a nearby town called Thorngrey and if the people in that town had heard of Zak. It would seem he has a somewhat loyal following in this small town, with people mentioning good things about him and his surfboards. Considering he shapes his own brand of surfboards (branded “Zak”) and also provides advice on surfing and other repair services, I would say Zak’s store can be considered a one-stop shop for surfing enthusiasts.

There are a few competitors in the region, namely Surf City and Ripcurl; but since surfing is an intensely personal sport, it was possible for Zak to build up a loyal base of “fans” in spite of the competition around him. Michael Van Der Klooster gives his opinion on Zak’s surfboards, saying that it is a great brand but that Zak will need to create more awareness in order to further boost sales. James Sun highlighted that a very famous surfboard maker, Maurice Cole, had exactly the characteristics which Zak would like to emulate and learn from – a high profile clientele base, high quality products and unique designs. Thus, Zak needs to start planning his strategy, as simple questions posed to Zak from James shows that he doesn’t even know the exact value of his inventory! He is a boss who gets along well with his employees but has no idea of the margins or revenues, and this cannot go on if the business is to expand and grow. (A consultant Matt Rockman, was brought in to observe Zak’s business, and commented that there was no proper strategy in place, with the shop feeling “congested” and stock lying around “everywhere”).

In the War Room, James then advises Zak to form a partnership with Maurice Cole, and to learn from him in how to organize and market his business. Zak took up the challenge and engaged a business consultant to come in and help. Firstly, the inventory was keyed into a computer system to better track and manage, and there was also a written P&P (Policies and Procedures) manual to elucidate all systems, so that the whole organization was more formalized. Zak’s best friend, Tim, helped to price-tag all items and now all inventory is segregated neatly on the shop floor (with some hung up on hooks for better display). Inventory is all properly labelled and the staff are now no longer confused as to which surfboard to repair, as tracing can also be done through the computer system.

To sum up the episode, James Sun mentions one of Sun Tzu’s teachings: “The Good General Cultivates His Resources”. Zak had the resources, talent and tenacity to grow his business, and the partnership with Maurice Cole can only mean positive news as he learns more on how to develop his business into a professional outfit in order to attract a wider base of customers (the more well-heeled, the better!).

The lessons to learn from this interesting episode include:-

1) Ensure adequate brand awareness – Brand awareness was not high on the list of Zak’s customers, as only a few towns knew of his products and the reputation he had built up. Zak’s products were of good quality and innovative, but the marketing was insufficient to extend brand awareness to the next level (i.e. throughout Australia).

2) Formal systems must be in place – Witness the confusion and disorganized arrangement of Zak’s shop before the changes took place, and one can immediately see how much more efficient and effective it becomes to get things done! Employees also feel less frustrated and have higher morale at work as a result of the better systems in place.

3) A leader must understand his business well – Zak’s lack of coherent knowledge about the intricacies of his own business was a major deterrent in getting the business to expand and grow. He managed the business more as a surfing enthusiast, rather than a true businessman. That was actually well and good if he just expected to subsist, but to enable growth to be achieved, he needed to have the key info at his fingertips.

4) Importance of Arrangement of Inventories – This is one rule which I learnt in marketing, and it’s that inventory, when arranged optimally, can enable customers to quickly zoom in on products which they are looking for an reduce the hassle and frustration of shoppers. Some examples are supermarkets which display popular brands at eye level or department stores which tend to carry a wider range of items from popular brands, or to put higher margin items at the forefront. Zak needed to rearrange his inventory so that customers knew where to find the goods, and this would encourage repeat patronage (a neat store is always preferred to one with a messy, cluttered layout).

5) Exploring partnerships – Sometimes, it may be a good idea to explore partnering with either suppliers (to improve supply chain management) or competitors (to establish synergy and work together instead of against each other). As can be seen from the episode, Zak partnering with Maurice was a win-win situation as Zak’s innovation would be useful to Maurice, while Maurice has worked with high profile clients and knows what it takes to build an international brand name.

Watch out for next week’s episode 8 on Skoda Cars in Singapore!

Have a visit at Zak’s Surfboard’s website at