Wednesday, August 31, 2011

August 2011 Portfolio Summary and Review

August 2011 was by far the most interesting month thus far, not just for the stock market but also in terms of economic news, upheavals and other alarming news. As I am much busier these days with family and work, I shall not comment too much on news events which I am sure most readers can peruse through in the daily newspapers. Instead, I will focus more on the companies within my portfolio and the portfolio itself.

In a previous post, I had written about my portfolio changes already, so I will be not be repeating it again my portfolio section but will merely detail the usual gains and losses, as well as dividends received. The refund for my daughter’s hospitalization has arrived, thankfully, and the money has been encashed and is ready to be deployed. Dividends have also been very healthy for August, with money flowing in from SIAEC, Boustead, Suntec REIT as well as newly-acquired VICOM.

Below please find my portfolio as well as corporate summaries for August 2011:-

1) Boustead Holdings Limited – On August 10, 2011, Boustead announced that its Energy-Related Engineering Division had secured $22 million worth of contracts from the oil and gas industries globally. These involve the design, process engineering and construction of key large-scale process systems and waste heat recovery units for downstream oil refineries and gas processing plants in Australia, Canada and the United Kingdom. On August 12, 2011, Boustead Projects announced a Design & Build Contract worth $42.45 million for Kerry Logistics to build a logistics facility at the Tampines LogisPark in Singapore. The Facility will have gross floor area of 34,500 square metres and is expected to be completed in 4Q 2012. Also, on August 12, 2011, Boustead released its 1Q FY 2012 results. Revenue was down 53% while net profit attributable to shareholders plunged 73%. The reason for this was that 1Q 2011 saw the sale of a leasehold property of $67.8 million. Adjusting for this, revenue and net profit would have decreased a smaller 27% and 18% respectively. The key reason for this was the slower recognition of revenue on contracts which had only been secured in 4Q 2011. Otherwise, the Balance Sheet remained strong with net cash balance of about $200 million and FCF amounted to $34 million for just 1Q 2012.

The final dividend of 2 cents/share and special dividend of 3 cents/share was received on August 19, 2011. On August 19, 2011, I had increased in stake in Boustead after an absence of about 2.5 years, raising my average cost to 62.3 cents/share.

2) Suntec REIT – On August 12, 2011, Suntec REIT announced that the REIT had entered into a share sale agreement with several parties to acquire 51% of the issued share capital of Harmony Partners Limited (HPL). HPL owns an 80% indirect stake in Suntec Singapore International Convention & Exhibition Centre (Suntec Singapore). This acquisition will raise Suntec REIT’s stake in Suntec Singapore from 20% to 60.8%. The purchase consideration is $114.75 million and will be funded by bank borrowings; and this will form part of the asset enhancement plans which Suntec REIT has.

The dividend of 2.532 cents/share was received on August 29, 2011.

3) MTQ Corporation Limited – There was no announcement from MTQ for August 2011, other than to fix the issue price of the new scrip shares at 82 cents/share. I have chosen scrip to be received on September 16, 2011.

4) Kingsmen Creatives Holdings Limited – Kingsmen released their 1H 2011 results on August 11, 2011. Revenue fell 15% to $93.6 million in the absence of mega-projects like the Shanghai Expo pavilions during the same period last year, while net profit also dipped 15% due to a comparatively weaker performance by the Museums and Exhibitions Division. Gross margin, however, improved to 29.7% for 1H 2011 against 27% for 1H 2010. Interiors continued to perform well with revenue increasing 6% for 1H 2011 against 1H 2010, while revenue also increased by 47.6% and 27.7% for Research & Design and IMC divisions respectively. Cash flow was healthy for 1H 2011, with Kingsmen generating $4.6 million of OCF and spending $1.4 million on purchase of PPE, resulting in FCF of $3.2 million. Though this is far below what was generated in 1H 2010, Benedict Soh is confident that business will pick up in 2H 2011. An interim dividend of 1.5 cents/share was declared (similar to 2010) and will amount to about $2.84 million (i.e. it can be sustained by the FCF generated). If I have time, I will discuss more on Kingsmen but after my 5-part comprehensive analysis, I decided to take a break for a while.

5) SIA Engineering Company Limited – There was no news from SIA Engineering during the month of August 2011. The final dividend of 14 cents/share and special dividend of 10 cents/share were received on August 11, 2011. I raised my stake in SIA Engineering on the same day, bringing down my average cost to $3.97 from $4.064.

6) VICOM Limited – VICOM released no news for August 2011, except to report its 1H 2011 results. Revenue for 1H 2011 increased by 8% to $44.7 million, while net profit attributable to shareholders increased 10.5% to $12 million. This represents a net profit margin of about 26.8%. The Balance Sheet remained solid with no debt and OCF amounted to $9.8 million, while capex was $7.65 million due to the construction of the new facility for Setsco at Teban Gardens. FCF thus amounted to $1.15 million for 1H 2011. Capex under “normal” circumstances would only amount to about $1.3 million (using 1H 2010 as a guide), and thus FCF would have been much more at $8.7 million last year. An interim dividend of 6.9 cents/share was declared and paid on August 31, 2011, up from last year’s interim dividend of 6.3 cents/share.

Portfolio Review – August 2011

Realized gains have increased to S$65.2K due to Boustead and VICOM going ex-dividend this month. A total of $5.5K was received in dividends for the month of August 2011.

For the month of August 2011, the portfolio has decreased by -2.5% (using XIRR in MS Excel to compute) against a -9.6% fall in the STI; thus my portfolio performance has outperformed the STI by +7.1 percentage points. This was a much better performance compared to July 2011, when the portfolio out-performed the STI by just +0.5%. Cost of investment has increased from S$219K to S$238.7K and unrealized gains stand at +7.8% (Portfolio Market Value of S$257,200).

September 2011 is anticipated to be a slow and boring month with no results released by any companies within my portfolio. Analysis of existing results shall carry on, as well as reading up more on value investing and companies.

My next portfolio review will be on September 30, 2011 (Friday).

Friday, August 26, 2011

MTQ – FY 2011 AGM Highlights Part 2

Part 2 of the MTQ AGM Highlights will touch on Neptune Marine Services, Oilfield Engineering’s recent acquisition of PSL and PEMAC, as well as elaborate on Engine Systems Division.

Neptune Marine Services (NMS)

Naturally, quite a few pointed questions were asked about the recent NMS acquisition, as the Group had pumped in a substantial sum of money into this investment. MTQ was even buying up more shares from the open market recently in order to reduce their cost of investment further from A$0.05 to A$0.0467; but the recent market turmoil has actually pushed down NMS’ share price to as low as A$0.026. No questions were asked during the AGM proper but it was after the meeting that one or two shareholders (myself included) approached Mr. Kuah Boon Wee (KBW) to find out more about NMS.

One shareholder’s concern was that NMS was a micro-cap stock (below 10 AUD cents) and therefore it would be very difficult for valuations to rise and hence the share price would stay depressed for extended periods of time. KBW acknowledged this but maintained that the reason for MTQ investing in NMS was that the restructuring left them with a very clean Balance Sheet and that the divestments meant that cash would be raised and the business model would be very much more streamlined as compared to previously (before the rights issue). KBW was also questioned on how experienced the new CEO Mr. Robin King was in managing such a company, and the reply was that he was sufficiently competent. Another query was – why would MTQ invest in NMS unless synergies were to be obtained, and do the businesses of MTQ and NMS overlap in any way? KBW’s reply was that NMS’ business was subsea, and MTQ was also dealing with subsea business as it was repairing equipment relating to subsea operations; hence there was overlap and both companies are essentially serving the same industry.

My concern was that NMS would take significant time to turn around as the divestments did not ensure that the core business would be profitable and cash-flow positive. KBW mentioned that the current financial year ended June 30, 2011 would look terrible due to the rights issue and significant write-offs, while the next financial year ended June 30, 2012 would look similarly disastrous because of the various other divestments of non-core assets and streamlining of the business. I took that to mean that the business of NMS would only “stabilize” in the financial year ended June 30, 2013; and this also implied that MTQ would take a long-term stance on NMS in that they had the patience to sit through the restructuring to ensure their investment bore fruit. Note also that in the interim, NMS would not be paying a dividend at all, thus unlike Hai Leck, MTQ would not enjoy any yield at all for their waiting.

It will be interesting to continue to monitor the business of NMS and their periodic announcements on ASX to follow the progress of the restructuring, and to see if they eventually bear fruit. Thus far, Mr. Market has been less than kind to NMS and has accorded it a very low valuation; time will tell if Mr. Market was right, or if he had been overly pessimistic.

Oilfield Engineering Division – Acquisition of PSL and PEMAC

Besides the issue of Bahrain, the other major talking point about Oilfield Engineering was the recent announcement of Premier Sea and Land (PSL) and its workshop division called PEMAC. I broached this topic with KBW as well and he mentioned that it was acquired cheaply at about 4.7x PER and 1.29x P/B (I provided him with the numbers which he agreed with). He also mentioned that the business was cyclical in the sense that last year’s earnings for PSL of US$4.1 million was considered one of its “lowest” points, with other years registering much higher net profit. Therefore, it would make it look as if MTQ had capitalized on this temporary blip to acquire this company cheaply.

When quizzed by another shareholder on why the parent would want to divest PSL when it was profitable and had an unleveraged Balance Sheet, the reply was that the parent was a US-based company with operations and revenue derived from North America; while PSL was the only Asian arm with most of its revenue derived from South-East Asia. Hence, there was a mis-match and the parent considered divesting it to focus more on its core regions. KBW also mentioned that MTQ had been aware of PSL for a long time as a competitor and was simply waiting for a good and ripe opportunity to come along to acquire the Company; thus killing two birds with one stone – integrating PSL’s business and product range with MTQ’s, and also eliminating (i.e. buying out) the competition!

I was also asking the CFO about PSL’s half-year performance ended June 30, 2011 (it had a December 31 year-end), but he declined to give exact figures; only saying that it was “better than budgeted”. I guess there was a certain amount of sensitivity in revealing such numbers as PSL is not a listed company; therefore there is no onus for disclosure of such information. As long as PSL is doing well, I have no worries about not knowing the exact numbers; in fact all I wish is that Management know how to integrate it well with MTQ’s core Oilfield Engineering Division and in time to come, produce positive synergies and tangible benefits for the Division.

Engine Systems Division – Acquisitions and Margins

The final aspect to ask about was the Engine Systems Division, which was rather neglected during the course of the meeting as no one was particularly interested to ask about it. Most attention was (of course) directed at Bahrain, PSL and even NMS and I guess most shareholders assumed that Engine Systems Division would just “chug” along like a well-oiled engine (no pun intended). My concern was whether the division’s margins were improving and the CFO assured me that they were working on this. My important question to them was whether the division generated positive cash flows and the reply was in the affirmative.

I also expressed concern that one of the recent acquisitions (three of them as detailed in the AR FY 2011) was loss-making, while the other two were acquired too close to the end of the financial year for any positive impact to be seen. The CFO took a different tack when answering this question – he mentioned that for Engine Systems, scale and coverage were very important. In fact, MTQES was the only Company in Australia which had nation-wide coverage in terms of branch locations; and the acquisitions had helped to make this a reality. With this enlarged coverage, MTQES would be more effective in engaging customers all over Australia, and I took it to mean that this would be positive for the Division over the medium-term (and that the effects would not be immediately apparent).

I had to admit that Engine Systems had come quite a long way since I looked at it three years ago, and even though margins were still thin, they had improved quite a bit since then and I believe it can be attributed to the Management Team’s focus on the Bosch partnership, expanding its range of products such as turbochargers, as well as extending its reach so that it could more effectively serve its customers. These measures take time to show results and therefore, I am willing to be a bystander and observe this Division further before making more conclusions.

This concludes my AGM highlights for MTQ, and I will probably not blog about MTQ for quite a while until it releases its 1H FY 2012 results in late October 2012. Meanwhile, the issue price for the scrip dividend has been announced at 82 cents/share, and my decision would be to take up 100% scrip as I believe in the growth prospects for MTQ.

Note: For a good write-up on MTQ’s AGM, please also refer to this article by Next Insight.

Monday, August 22, 2011

Portfolio Changes - Divestment of GRP and Addition of VICOM, SIAEC & Boustead

It’s been a while since I made some major changes to my portfolio, but this month seems to be a good month for it as Mr. Market went through a rather wild mood swing due to the historic downgrading of US Debt, which caused markets worldwide to tumble sharply and valuations to become more attractive. This event, coupled with debt problems in Europe and runaway inflation in China, served to unnerve the world and caused many bouts of forced selling and margin calls. The result, of course, was that the STI fell about 13% in 7 straight days of blood-letting, and this opened up very good opportunities for me to purchase shares. But before I go on about the additions, I have to declare my divestment of GRP and also the underlying rationale for it. Fortunately for me, the timing of the divestment was just right for me to pick up some shares of VICOM, which does vehicle inspection and testing in Singapore; as well as to average down on my cost for SIA Engineering. At the same time, I also bought some more Boustead to add to my current holdings. In the sections below, I shall elaborate on the reasons for the divestment and addition, and also give a brief account on the addition of SIA Engineering. All portfolio changes will be reflected in my month-end portfolio review, though I will provide some details within this post itself of the movement in cost, and also any dividend effects.

Divestment of GRP – Reasons and Rationale

I guess of all the companies within my portfolio, the one which was the most stagnant and which had a declining business had to be GRP. The original rationale for purchase was to enjoy a yield of 10% due to GRP’s large cash hoard and also its ability to generate free cash flows (FCF) due to the presence of rental income derived from its Bukit Batok industrial property. However, do note that the rental income from its property had ceased with effect from May 2010 following the expiry of the lease agreement in April 2010, thus 1H FY 2011 (ended December 31, 2010) did not include the effects of this rental income. As a result of the absence of this item, net profit fell 47% year on year. This was not the only thorn in GRP’s side – gross profit margin had also declined from 35.9% to 31.9% due to more intensive competition in its divisions. Though administrative expenses had fallen 23.8%, the more worrying factor was the erosion of gross margins, which was witnessed in Tat Hong and which also portended a slow but painful decline in its core business.

However, the above was not the only reason for the divestment. In the May 2, 2011 issue of The Edge Singapore, director Han Hai Kwang was quoted as being on the lookout for “synergistic” acquisitions to halt sliding profits, as GRP’s core business divisions suffered from competition and saw its profits eroding. Its PVC business in China, in particular, was suffering as a result of intense competition and the business itself was a commodity one in which GRP itself had no firm competitive edge. It would seem that throughout the years in which I was vested in GRP, Han had been continually looking out for such M&A but without much success, and this resulted in the cash building up into a hoard of about 9.5 cents/share. No special dividend was declared though, as I believe the Company saw that their business was vulnerable and therefore they wished to retain more cash for working capital.

What was more alarming, however, was that GRP’s operational cash flows for 1H FY 2011 had dropped to just $559,000, while capex was $95,000, resulting in FCF of just $464,000. The current dividend of 1 cent/share every half year amounts to $1.4 million, and this represents a shortfall of $1 million. Note that while rental income was still flowing, and using 1H FY 2010 as a comparison, FCF amounted to $$2.24 million, which would have been sufficient to pay out a dividend of $1.4 million and still retain roughly $800,000 for working capital. Looking at GRP’s balance sheet as at December 31, 2010, cash stood at $13.3 million and if they were to carry on with their current dividend policy, the cash would be depleted within 6.5 years ($2 million deficit per financial year), and that is not even counting in working capital requirements. Hence, my conclusion was that the current dividend policy was unsustainable (at 10% yield), and thus the original rationale for purchase was now invalidated; thus requiring an action to divest.

Another related point which I should mention was GRP’s announcement, on July 13, 2011, that it would be disposing of 63.5% of GRP (China) Pte Ltd, its uPVC business, for a cash consideration of $1.92 million; and will also, at the same time, book in a gain on disposal of $313,327. The reason for the disposal was the cash burn and losses suffered by this division for three consecutive years. On the surface, it looked like a good decision; but I have to question why Management took so long on their decision to divest, and also whether there are underlying unspoken reasons for wanting to divest for cash. One possibility (uncorroborated, no doubt) which crossed my mind was that the Company was foreseeing declining business and needed the money for additional working capital; and that they would also concurrently lower their full-year dividend from FY 2012 onwards (I am still expecting a final dividend of 1 cent/share for 2H FY 2011; as of this writing, GRP’s FY 2011 results ended June 30, 2011 have still not been released).

On August 3, 2011, I sold off my entire shareholding in GRP at 20.5 cents/share, realizing a capital gain of 2.5%. If I factor in dividends of $4,000 received since I first purchased GRP on October 28, 2009, then the total net gain on GRP rises to 22% (net of brokerage). Using XIRR on Excel, I have computed that the annualized return on investment amounts to 13.5% per annum.

Purchase of VICOM

The proceeds from the divestment of GRP were then used to purchase VICOM at an average cost of $3.40833 on August 8, 2011. VICOM is a company listed on SGX (68.19% owned by Comfort Delgro) which is involved in vehicle testing and inspection services (for all cars in Singapore). Revenue for this division hit $25.5 million (a 10.7% increase) for FY 2010 (it has a December 31 year-end) and 438,454 vehicles were inspected during the financial year. This division has seven testing centres spread out over Singapore, and include Sin Ming (lease just renewed for another 30 years), Changi, Bukit Batok, Yishun, Kaki Bukit, Pioneer and Ang Mo Kio. As of June 30, 2011 (based on 1H 2011 results), the Vehicle Inspection Business took up 30.5% of revenues, and had operating margin of 35.7%.

VICOM also has a wholly-owned company called Setsco Services Pte Ltd (Setsco) which provides non-vehicle testing and inspection. This includes construction material testing, certifications, calibration, training, inspection and consultancy. It has its headquarters at Changi but VICOM is in the midst of building a new four-storey building at Teban Gardens due to be completed by 3Q 2011. Revenue for this division hit a new high of $51.4 million (a 7.6% increase) for FY 2010. The division also has operations in Selangor (Malaysia) and Ho Chi Minh City in Vietnam. In FY 2010, Sestco formed a JV in UAE with Dubai-based Ali Omran Al Owais Investment Company to form a 49%-owned associated company called Setsco Middle East Laboratory LLC. This remained dormant for FY 2010, registering a loss for the year. As at 1H 2011, there was still no share of profit from this associated company, which implies that operations had yet to fully commence. For 1H 2011, the proportion of revenue from Setsco was 61.6%, and operating margin stood at a respectable 20%. The remainder of the revenue came from leasing and other related businesses.

I had already stated at the end of m SIA Engineering’s five-part analysis of purchase that I will not be doing a very detailed analysis of purchase for new purchases subsequent to SIA Engineering, thus I will be very brief on the reasons I purchased VICOM. VICOM has a captive market in its vehicle inspection business, as all cars in Singapore have to be periodically inspected as part of compulsory requirements to own a vehicle. As COE prices remain high (as of this writing a Cat A COE costs $49,000 while a Cat B one costs $65,000), fewer people will scrap their cars and thus will hold on to them longer, requiring more inspections. VICOM also has a clean Balance Sheet with no debt, and generates strong FCF every year. In its recent 1H 2011 results, VICOM declared an interim dividend of 6.9 cents/share, up from 6.3 cents/share a year ago. Assuming final dividend remains unchanged at 6.9 cents/share as per last year, total dividend for FY 2011 would be 13.8 cents/share, translating into a yield of 4% at my purchase price. Incidentally, I did not buy VICOM very cheaply; it was priced at about 12.2x PER and about 3x P/B; but this is to be expected since the business model is sturdy and it generates consistent and predictable FCF every year. A total of about $20,000 was spent purchasing shares of VICOM.

Addition of SIA Engineering

As Mr. Market was feeling particularly panicky in those seven days of decline, I decided to deploy more cash (about $10,000) to purchase SIA Engineering, and managed to average down on my initial purchase by buying at $3.51 on August 11, 2011. A quick analysis of SIAEC’s cash generation ability showed that since listing in 2000, it has only dropped its dividend once (in ten years) from FY 2008 to FY 2009 (20 cents/share to 16 cents/share), not counting special dividends. Even if we assume a drastic cut in dividend of 40% from 20 cents/share to 12 cents/share due to another global economic meltdown (crisis), that still represents a yield of 3.4% at my purchase price. With cash flows from associated companies and JVs remaining strong, I would expect SIAEC to at least maintain their dividend policy as they should have baseline cash balance of $400M after paying their recent final + special dividends.

As a result of the averaging down, average cost for SIAEC has fallen from the previous $4.064 to $3.97, and this will be reflected in my next portfolio review.

Addition of Boustead

Even more cash was deployed to purchase more shares in Boustead, at a price of 85 cents. The Company is sitting on a cash hoard of about $39.75 cents/share and has been paying consistent, increasing dividends over the last five years. This effectively values the rest of its business at a mere 5x PER ex-cash, and considering it is a global mid-cap company this “conglomerate discount” was not justified. It has a strong balance sheet with negligible debt (mostly, it is used to finance their real-estate portfolio) and generate very strong FCF every financial year. The strength of its business lies in Geo-Spatial and Real-Estate Solutions Divisions. For the former, it has a PBT margin of around 22-23% and is cash-flow positive, with Government agencies forming the bulk of their customer base (hence, bad debt probability is very low), while for the latter, Boustead is steadily building up its Design, Build and Lease portfolio to just above 90,000 sq metres currently. This is reflected under “Investment Properties” in the Balance Sheet, and the recurring income and cash flows will provide a stable base against the turbulence experienced these couple of weeks in Europe’s and America’s economies.

At my current purchase price, projected yield based on 4 cents/share is about 4.7%; and my average cost has increased from 55.8 cents to 62.2 cents.


The above transactions had the net effect of increasing my cost base from $220,000 to $238,700, as $20,000 was divested from GRP and re-deployed into VICOM, $10,000 was spent acquiring shares of SIAEC and another $8,600 to acquire shares in Boustead. This represents another new high for my cost, and I shall endeavour to continue to put more money to work if Mr. Market continues to offer me opportunities.

Wednesday, August 17, 2011

MTQ – FY 2011 AGM Highlights Part 1

I attended MTQ’s AGM held on July 22, 2011 at 10:00 a.m. at Carlton Hotel conference room (new wing). This was my second time attending MTQ AGM since I became a shareholder in late 2009, and last year’s AGM was also held at Carlton Hotel. The difference was the location within the hotel, as the old wing had a cosier environment as compared to the conference rooms in the new wing. One of the directors had complained that it was as noisy as a “fish market” as there were many teenagers and youngsters running around along the corridors.

As I was one of the earliest to arrive, I managed to take a photo of the AGM while there was no one seated (see pic above). We were given an attendance slip stating out IC number and number of shares held, and there were not many shareholders attending the AGM this time although the number of shareholders had increased significantly (overheard this from one of the directors). This could probably be attributed to the Company’s rather aggressive corporate actions throughout FY 2011, which included three acquisitions for Engine Systems Division, a significant investment into an Australian-listed company called Neptune Marine Services; as well as the recently announced major acquisition of PSL and Pemac.

I shall sub-divide this AGM update into two separate parts as putting it all down in one post would be too lengthy, but I will not specifically state the questions that I had asked during the AGM. Since many of my questions did not receive direct responses (I merely deduced the replies from speaking and chatting with Management and steering them towards providing some clarity on various issues), I shall simply narrate the gist of what was mentioned and pass my own judgement accordingly. Also note that there are no hard and fast rules for getting answers at an AGM, even if you ask a direct question during the meeting proper, as Management are likely to want to take it “offline” (more on this in my AGM Part 2 coming up).

Summary of Bahrain Situation – Mr. Kuah Kok Kim

Mr. Kuah gave all shareholders an update on the situation in Bahrain before reading out the resolutions proper. After all, with the news and rumours swirling around Bahrain in the past few months, one cannot blame shareholders like myself for feeling jittery and concerned. He started off by saying that the situation in Bahrain had somewhat stabilized, and that the initial reports of death and destruction had been greatly exaggerated by the media. Of course, he did acknowledge that there were deaths and rioting, but maintained that these occurred mainly on major highways and in larger shopping malls. As the new facility was located in an industrial park far away from the troubles, there was no immediate danger to lives or property and business carried on as usual.

MTQ was, however, affected in the sense that everything got delayed and slowed down a lot due to the riots and trouble. Originally, the first 80% of the construction cum commissioning of the facility went on smoothly without a hitch. The final 20%, however, ran into delays due to the problems surfacing in the Middle East. Though everything has been resolved as of the date of the AGM, the two main delays came from the starting up of power at site (despite submission of applications to the Government, power was only turned on in July 2011), as well as the certifications required from the American Petroleum Institute (API) as many of MTQ’s principals and customers had been driven out of MTQ in the interim due to the violence, and were slow to return to the country.

In the meantime, MTQ focused on in-house training and therefore managed to limit the amount of start-up losses due to the delays; however on this point I feel that Management is trying to cushion the blow as there will be significant start-up losses due to the operational delay of the facility. The Bahrain facility will experience cash burn and unless things get up to speed soon, this may severely impact 1H FY 2012 financials.

A shareholder did ask Management on when break-even can be achieved for Bahrain, and the reply was “not too long”, which basically isn’t telling you much. What this means is simply that Management “expects” the new facility to be up and running soon and thus generating income, but the time frame for this would be uncertain as business reality is also uncertain! In fact, some positive news actually came out of this whole Middle Eastern debacle, in that Bahrain had stepped up their oil and gas exploration activities (this was an unexpected positive development which Management had not anticipated); by drilling more new wells and reworking old wells.

In addition, Saudi Arabia has also been pouring money into Bahrain in order to prop up its economy, due to the large proportion of Sunnis within Bahrain (Saudi Arabia is predominantly Sunni). US$10 billion has been pumped into Bahrain with the help of the Gulf Cooperation Council (GCC). These actions demonstrate that MTQ’s investment in Bahrain was sound, and that their many years of research had paid off as they were buffered from the worst effects of these adverse events.

On another note, Chairman Kuah also mentioned that transfer of duties from himself to Kuah Boon Wee the CEO was essentially complete, and that the new CEO has managed to cope with market demands as a result of the Deepwater Horizon disaster.

Cash and Debt Levels

My main concern with MTQ’s cash balances was that they seemed to be spending quite a lot of it, even as they were gearing up their Balance Sheet for their Bahrain expansion. With their purchase of 68,455,000 additional shares in NMS for about $3.34 million, as well as the $7.24 million cash outlay for the acquisition of PSL and Pemac, it seems that cash is being spent at a pretty alarming rate! Assuming a scrip dividend conversion rate of 45% of shareholders (as was the case for MTQ’s 2 cent/share interim dividend declared back in October 2010), another $950,000 will be paid out. Coupled with the additional $6.3 million capital commitments as disclosed in their Annual Report FY 2010/2011, this means a total outlay of about $17.8 million, out of their cash and bank balances of about $23.8 million as at March 31, 2011. Borrowings stood at $27.3 million as at March 31, 2011 as a result of borrowings to construct their new facility in Bahrain, including hiring new workers, shipping over new machinery and obtaining required certifications to commence business activities. Additional borrowings for Premier would come up to $16.9 million for a one-year loan, and total borrowings would go up to as high as $44.2 million by September 30, 2011.

From the above description, it is worrying to me whether MTQ can maintain a healthy cash balance and have sufficient cash flows for working capital and operational activities. When I quizzed Management on this, the following pointers were mentioned:-

1) MTQ has been generating healthy positive operating cash flow all these years, and the addition of Bahrain will contribute to this cash flow, but of course only after the initial start-up losses and cash burn have been overcome (through some time).

2) Interest rates on new loans now are at historic lows, and MTQ’s Term Loan 6 is denominated in USD which is, at the moment, depreciating against the SGD (which means each instalment payment will become cheaper for MTQ).

3) There is an intention to push some of the debt onto Premier’s books as Premier’s Balance Sheet is un-geared.

4) MTQ’s Engine Systems and Oilfield Engineering are both cash-flow positive, and Premier is also cash flow positive as well as profitable; hence there is not much worry that the finance costs cannot be sustained.

So, the above points do somewhat support Management’s assertion that cash levels would be sustained and that debt levels, though high, are still manageable. However, it would be extremely prudent for me as an enterprising investor (by Graham’s definition) to closely scrutinize the next set of financials for MTQ coming out for September 30, 2011 (1H FY 2012) to review if things are going as planned, or if something is drastically wrong.

Thus concludes Part 1 of the AGM highlights. Watch out for Part 2 soon which talks about NMS, acquisition of PSL and PEMAC as well as the Engine Systems Division.

Thursday, August 11, 2011

Kingsmen Creatives – FY 2010 Comprehensive Analysis Part 5

Part 5 of my comprehensive analysis is long overdue, it seems. My apologies for truncating my comprehensive analysis so abruptly, but somehow I get the feeling no one really missed Part 5? Haha. Or perhaps no one even remembered that there was supposed to be a Part 5! Anyhow, there still remained some points which I had yet to address in the first four sections of this analysis, and over the months nothing much has occurred to change my perception of the Company or have a different opinion on its business model and modus operandi. Hence, I shall push on with the final part of this analysis, which includes some qualitative aspects, prospects and plans as well as other pertinent issues.

Qualitative Aspects – Management Quality

Management, which includes the founders Benedict Soh and Simon Ong, have had 35 years of experience in running the Company, and have built it literally from scratch to the scale it is now. They thus have intimate knowledge of how to run Kingsmen and also a very in-depth understanding of the industry in which Kingsmen operates – that of MICE and also the Interior Fit-Out and marketing segments. These two guys also used to design and therefore they know how to look out for good talent and to hire such talent in order for Kingsmen to grow further. Much emphasis is placed on retaining quality designers and suitable talents for taking the Group to the next step, and the communication which I received at the recent AGM was that Management is committed to staff welfare and making the staff feel at home and that they are part of one big family.
This will definitely heighten staff morale, and the interesting designs of the office environment also make it a more lively and engaging workplace.

Prospects and Plans – Formula One and USS

There has been news that the current Formula One Grand Prix, of which Kingsmen has signed a five-year contract to build the spectator stands since 2008, may continue its run for another three years or more if the Government gives the green light. Till now the announcement has yet to be made as a committee is still “deliberating” on the pros and cons, but Andrew Cheng of Kingsmen is quietly confident that the Formula One will carry on, as it has already boosted tourist revenues and made the whole island abuzz with talk of F1 racing and the performances which come along with it annually. If the extension were to come to pass, this would represent more recurring revenue for Kingsmen’s Museums and Exhibitions division.

On the Universal Studios Singapore (USS) front, it is also anticipated that theme parks such as USS will hand out frequent variation orders (VO) to companies such as Kingsmen to refurbish their existing attractions, while fabricating new ones. Shrek’s castle and Madagascar were two recent parcels of work completed by Kingsmen, and for 2012 USS would have to update its attractions to ensure it remains relevant (Transformers 3, or Harry Potter, perhaps?) and thus will enlist Kingsmen for these VO. These parcels of work are expected to come in phases but will still be an almost annual or biennial affair, so it should represent a form of recurring income for Kingsmen as well, assuming they can continue to build up their theme park portfolio outside of Singapore.

Prospects and Plans – Packaged Solutions for Customers using IMC

Right now, R&D and IMC divisions are minor contributors of revenue to the Kingsmen Group, the bulk belonging to Interiors and Museums and Exhibitions. This may change in the next few years as Kingsmen intends to leverage on offering a packaged complete solution to its existing and new clients; and IMC will be at the forefront of this new packaging. Integrated Marketing Communications basically includes new media like outdoor display panels featuring adverts, as well as new forms of marketing media which Kingsmen will utilize to achieve its intended effect(s) for the client. Andrew Cheng mentioned that this division could see its revenues soaring if the new media is readily accepted by new clients, and Kingsmen is trying its best to roll-out these new medium in order to capture a growing slice of the market for innovative advertising.

R&D also has its place in that clients can engage Kingsmen’s services to find out more about different advertisement styles or to brainstorm on creative ways to market their products or to reach out to a mass audience. With Kingsmen’s intention to drive these two divisions to capture more market share, it will probably take some time and patience before their efforts bear fruit. Nevertheless, it is heartening to note that Management is not just casting aside these two smaller divisions and neglecting them.

Prospects and Plans – Sports Events and Signage Business

Kingsmen could potentially tap into another related area of business which is close to their Museums and Exhibitions Division, and that is sports marketing and sports event-related marketing. In my previous analysis of Cityneon Group, I noted that one of their business divisions handles sporting events and related signage for the events. Kingsmen thus far have not ventured into this area, and I feel there is good potential for them to broaden their range of services and to leverage on their Kingsmen branding to penetrate the market for sporting events. Note that the Sports Hub will be completed by the year 2015, and as such major sporting events would be able to be held in Singapore; thus the business could become a lot more lucrative in future. Kingsmen can start planning and building up their capabilities and competencies in this area so as to capitalize on opportunities once the Sports Hub is completed.

Others – Management Re-Shuffling Jan 1, 2011

On December 29, 2010, Kingsmen announced a slew of Management changes and shuffling in order to take the Group to the next level of growth. The changes are summarized as follows:-

• Mr. Anthony Chong (former executive director, Kingsmen Exhibits since 1999) – He will be promoted to Managing Director of Kingsmen Exhibits and will remain as Board Director. His new roles and duties include sourcing and identifying new business opportunities and businesses to drive the Museums and Exhibitions Division, including Thematic works.

• Mr. Alex Wee (former executive director, Kingsmen Projects since 2000) – He will be promoted to Managing Director of Kingsmen Projects and be responsible for growing the Group’s retail and corporate Interiors business.

• Mr. Simon Ong (founder and Group MD) – He will be promoted to CEO as well, and oversee the Group’s operational aspects, chart its strategic direction and be in charge of the creative direction and standards of the Group.

• Mr. Benedict Soh (founder and Executive Chairman) – He will transition out of his day-to-day roles (handing over to Mr. Simon Ong) and be in charge of business development and Kingsmen’s overseas operations.

All the above changes will take place on January 1, 2011. I believe the aim of the internal re-structuring is to place more attention on Kingsmen’s overseas businesses, which have been lagging somewhat; and also to sharpen their focus on Interiors and M&E divisions. I guess the results will only show up in the next 6 to 8 quarters, as I believe the Group is steering itself to clinch the mega theme park projects in the region. Since Kingsmen keeps a tight lid on news (because of confidentiality clauses), and can only report their order book four times a year, it is difficult to do any meaningful projects of revenue and of deal flow. Kingsmen is expected to release their results in one or two days time, and it will be 1H FY 2011 results, so it is critical to assess if their business development efforts have bore fruit; and to also assess the healthiness of the cash flows of the Group. I will be looking forward to the same 1.5 cents/share interim dividend as per 1H 2010.

Others – Privatization Target?

It is interesting to note that Kingsmen may be a potential privatization target, as it has a proven business model, is selling very cheaply (in terms of valuations) and is also generating very healthy and consistent free cash flows. Cityneon was actually privatized by Laviani Pte Ltd (a wholly-owned subsidiary of Star Publications Sdn Bhd) back in November 2008 at a historical PER of 12.7x (the revised offer at the time was 62 cents/share, up from the original 58 cents/share). Interestingly, the original offer for Cityneon was madeby Yellow Pages back then at 55 cents/share.

Kingsmen is currently trading at a historical FY 2010 PER of 7.2x (EPS of 7.93 cents for FY 2010, last done price at 57 cents/share). Assuming the same valuation was accorded to it as the Cityneon buy-out 3 years ago (at 12.7x), Kingsmen’s fair value should therefore be in the range of $1.007. This would value the entire company at about $190 million (189.381 million issued shares), which still seems cheap compared to its cash generation potential, strong track record and capable Management Team. Of course, Mr. Benedict Soh did allude to suitors asking to buy over the Company at lower valuations, and his reply was naturally to reject such offers as he did not see Kingsmen’s value being fully realized or appreciated. His aim was to double Kingsmen’s revenues by 2014 compared to FY 2010’s revenues. This would make EPS higher, and coupled with a proven business model of requiring low working capital; these factors would make the Group more attractive for sale by then.

Another reason for potential privatization (besides the fact that Mr. Soh had been approached before on more than a few occasions) is that neither of the founders have their children working for the Group. Mr. Soh, who is 63 this year, has three children who are pursuing their own professions – one is a legal counsel, one is in medical school while the youngest is in law school. Mr. Ong, who is 59 this year, has two children (both daughters) – one is studying in the USA while the other is an architect (information courtesy of Pulses Magazine Sep 2010 Issue). This would imply that the founders would wish to sell off the business if their intention is to retire, and since they have no direct descendants who are going to manage the business. Assuming Ben Soh’s vision of doubling revenue really comes true by 2014, he will be 66 years old while Simon Ong will be 62 years old. If Kingsmen proves to be such a valuable business, I am sure Mr. Market will, in time to come, price the Company accordingly as well. Considering the fact that Kingsmen has a much more established client base and international reach as compared to Cityneon, it might even be justified to accord it a much higher valuation premium than the 12.7x which was offered for Cityneon three years back.

Until the day comes, I will, in the meantime, continue to enjoy healthy dividends from the Company (1.5 cents interim, 2 cents final and 0.5 cents special for FY 2010).

This concludes my comprehensive analysis for Kingsmen, and the usual disclaimers apply. I will probably only do another review and analysis of Kingsmen after the release and digesting of the 1H FY 2011 results (tonight).

Saturday, August 06, 2011

Porter’s Five Forces Series Part 3 – Threat from Substitutes and Customer Power

In this third part of the Porter’s Five-Forces series, I shall be combining two of the five forces into one post as the threat from substitutes is very short and sweet, while customer power has more to elaborate on. This continues the series on Porter’s Five-Forces which was left behind some time back as I concentrated on doing corporate analyses. Now with those behind me and the two recent AGMs of MTQ and Boustead concluded, it’s time to dive back into some academic discussions.

Threat from Substitutes

Substitutes are products or services which perform essentially the same function, and this can arise to become a serious problem for companies should their product be substituted for either a cheaper alternative, or a more efficient one. The example given in the book was that of the beverage packaging industry, whereby consumers do not differentiate between plastic, aluminium or glass. Imagine your Yeo’s Soya Bean Milk – it can come in an aluminium can or tetra-pak but the contents are still the same. Hence, those packaging companies have to be wary of materials which can eventually replace their own material to such an extent that it will become obsolete. History has shown that some products seemed invulnerable to substitutes, until one actually appeared and took away market share (and profits) by storm. One example is Eastman Kodak who were too slow to switch to digital photography; and ended up being left behind in the dust.

Even some companies which seem to be doing very well in their own industry may be vulnerable to a newfound discovery which would stun experts and revolutionize the way we live. An example would be petroleum (oil) – it seems almost impossible to envisage a world not using oil, and many industries and companies have sprung up to capitalize on the continued demand for black gold. Currently, other technologies such as nuclear power and solar energy are still not viable due to high costs and inefficiency (energy emitted), and so they lag behind as potential substitutes. But should the day come when these technologies improve by leaps and bounds, oil companies will start to sweat, and with good reason. I also recently read another article from BBC about Graphene, which is an amazing material as it can conduct electricity, is just a layer of atoms thick and has a host of other interesting properties. The article also mentioned that it could eventually replace silicon in semi-conductor wafer chips. Though this new material’s research is still in its infancy (compared to more established materials), it still goes to show how threats from substitutes may render an entire industry obsolete once it can be mass-produced commercially in a cheap way, and offers either the same or even better functionality.

Admittedly, the threat of substitutes is made even worse when switching cost for the buyers is low, and the ratio of price to performance is better; meaning that even though the substitute may not work as well as the original, it is so much cheaper that people still embrace it.

Buyer (Customer) Power

Buyer power enables customers to negotiate for better terms, prices and materials and can force down prices in an industry. Buyers are in a strong bargaining position if one or more of the following apply:-

1) There is a concentration of buyers – In an industry where there are only a few major buyers, this puts most of the purchasing power in the hands of the customers, rather than the supplier. The supplier is in a weak position if there are not many customers for it to supply to, and they can become beholden to the buyer if the buyer exerts pressure on them.

2) Product is standardized or commoditized – If the product features are much the same across all suppliers, then the buyer has the choice to freely switch between suppliers who give them the best rates. Thus, the supplier is in danger of losing business from the buyer if it fails to price competitively.

3) If the product accounts for a large percentage of the buyer’s costs – Buyers are more likely to push for bulk discounts for items which make up a large proportion of their cost of goods sold.

4) If the buyer has low switching costs – If it is costly for the buyer to switch suppliers then the supplier’s power is enhanced.

5) Buyers suffer from low profitability – If the buyer suffers from poor margins and low profits, they may continually pressurize the suppliers to co-operate with them to lower prices together, in effect cutting their gross margins down.

6) If buyers can integrate backwards – If buyers can threaten to integrate backwards and make the product then they can use this to threaten the supplier. These involve “make or buy” decisions and if the buyer can make the product without much hassle or almost at the same cost as purchasing from an outside vendor, then they are deemed to have power over the supplier in negotiating prices or terms and conditions.

7) If the consequences and risks of product failure are low – If the product or service is crucial to the buyer in terms of their system of operations then the buyer is less likely to haggle on price. A very good example of this is the Blowout Preventer (BOP) for MTQ. The costs of failure of the BOP are very high (in terms of $ and human lives as a result of the Deepwater Horizon disaster), thus the customers of MTQ are not likely to haggle if MTQ raises the price of repairs and maintenance of their BOP.

8) Buyer has plenty of information – It goes without saying that if the buyer has a lot of intimate knowledge of the supplier’s cost of operations and margins, then they are in a better position to bargain since they will be aware of how low prices can be set before the supplier makes a real loss.

This concludes Part 3 of my Porter’s Five-Forces analysis. The next part of this analysis will focus on Supplier Power.