End-October 2007 Portfolio Review
During the half-month ended October 31, 2007, Ezra Holdings released its FY 2007 results on October 16, 2007. The results were mostly in line with expectations and I have done a review of Ezra’s financials in my previous few posts. In addition, Suntec REIT has also announced its FY 2007 results and declared its quarterly dividend distribution. The market continues to bob at a relatively high level, giving me no chances to buy at a decent margin of safety. Thus, I am patiently waiting for my chance to buy while surveying and analyzing companies at the same time.
Below is the summary of my investments and related news as at October 31, 2007 (STI at 3,805.70 points):-
1) Ezra (Vested since October 6, 2005) - Buy Price $1.30 (bonus adjusted), Market Price $6.90, Gain 431%. On October 16, 2007, Ezra announced their FY 2007 financials and announced a dividend of 7.1 cents per share (3.55 cents per share post-bonus), giving me a dividend yield of 5.5% based on my buy price. At the same time, Ezra has also announced that Saigon Shipyard has won US$130 worth of contracts for fabrication projects, to be completed by FY 2010. On October 29, 2007, they announced that their 100%-owned subsidiary, Lewek Shipping Pte Ltd, has contracted to purchase a second MFSV from Karmsund at a cost if S$167.4 million. The counter is currently on cum-bonus for the 1:1 bonus announced on April 9, 2007 and the ex-bonus date is next Monday, November 5, 2007.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.42, Gain 86.9%. There was no news from Boustead in the half-month ended October 31, 2007. Boustead is expected to report their 1H FY 2008 results some time in November, after which I will be doing an analysis and review.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.66, Gain 262.4%. There was no news from Swiber during the half month ended October 31, 2007. Their 3Q 2007 results announcement is expected during the middle of November 2007, and I will be keeping an eye on their 3Q margins as well as their cash flow usage, as well as looking out for further updates from the company on its plans and strategies for FY 2008.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.81, Gain 63.1%. Suntec REIT announced their financial results for FY 2007 (their year-end is on September 30) and declared a DPU of 2.122 cents per share to be paid on November 28, 2007. For the entire financial year FY 2007, the total dividend declared amounted to 8.15 cents per share, which represents a dividend yield of 7.34% based on my purchase price. Moving forward, the REIT expects to increase its DPU further through its acquisition of a one-third stake in One Raffles Quay; as rental rates for office and retail space continue their upward trend.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.81, Gain 23.7%. There were no updates or news releases from CFG or PAH during the half-month ended October 31, 2007. PAH should be releasing their 1H FY 2008 results some time in mid to late November 2007. This is the first quarter in which they will account for their recently acquired 63.9% stake in CFG (increased from 28.8%) and I am hoping the earnings accretion is enough to offset the dilutive impact of the rights issue. I am also hoping for a decent dividend to be paid out.
Overall Portfolio
My overall portfolio has increased by 143.0% from an adjusted cost of S$43.2K as at October 31, 2007, as compared with 146.9% as at October 15, 2007. The market value of my portfolio is S$105K. Realized gains remain at S$3.9K as the recently declared dividends have not been received yet.
Comparison against STI
The STI was 3,037.74 on January 3, 2007. It is currently at 3,805.70 today, representing a gain of 25.3%.
Adjustment of cost to ensure consistency of comparison – My cost and market value were S$33.9K and S$46.0K respectively as at Jan 3, 2007 while my current adjusted cost (after selling Global Voice) is about S$43.2K. My adjusted market value will be about S$58.6K. The market value of my holdings as at today is S$105K. This represents an increase of about 79.2%.
Thus, as at October 31, 2007, my portfolio has risen by a gain of 53.9 percentage points higher than the STI.
My next portfolio review will be on Thursday, November 15, 2007 after market close.
Wednesday, October 31, 2007
Monday, October 29, 2007
Investment Mistakes Part 9 - Selling Too Early
One of the most classic investment mistakes is selling too early, in what is also known as "short-termism". This occurs when one does not take a long-term view of a company, and attempts to "trade" a small gain, or maybe one sets a specific target price which is 10-20% higher than their buy price, and subsequently sells when it hits the trigger point. Both methods are price-dependent, rather than being business-dependent. Again, I reiterate that if you have bought into a good company at a fair price, then why in the world would you want to sell ? So begins my analysis of my mistake below....
Please also note that an investment mistake does NOT necessarily consist of transactions which resulted in losses. In fact, this mistake had resulted in a gain, but the opportunity cost is so tremendous that on hindsight, the paltry gain is hardly enough to justify the act of selling so early ! The company in question is Labroy Marine, which is a prominent ship-building company in Singapore and which had recently also ventured into building rigs. Just today, on October 29, 2007, the company announced that it was being acquired by Dubai Drydocks LLC (DD), the same company which took Pan United Marine private in May 2007. DD is offering S$2.8425 per Labroy share and they are planning to take the company private. The chairman Mr. Tan Boy Tee and executive director Mr. Chan Sew Meng have already agreed to sell their combined 65.49% stake in Labroy to DD, effectively making the deal unconditional.
Way back in April 2005, I purchased shares in Labroy Marine at a cost of 64 cents per share, which looks amazingly cheap now eh ? The problem was that at the time, I had nary a clue about value investing, and even less knowledge about how to properly value a company and see its potential. To me, it was all about making a quick gain from the sale of the shares (I did not use contra) at a set price. In the end, I sold at 70 cents in May 2005 for a miserable gain of 9.4% (6 cents) and totally missed the upside as the company grew and the share price ran into S$1, then surpassing S$2. That was one of the hard lessons I had to learn about the essence of long-term investing, and even Warren Buffett had made the same mistake when he sold his first investment too soon. The painful fact is that if I had held on to Labroy till now (when DD announced the acquisition), I would have made a cool 344% profit.
The mistake and subsequent lesson to be learnt is that one should NEVER set a pre-determined target price to exit if one is investing in a company. This is because a company is always growing and its business is dynamic, thus placing a target price on it (like the analysts always do) seems to imply that the growth will terminate when it hits that price. In the end, one may very well sell for a profit but miss out on the huge potential which the company has to offer.
Since that mistake was made, I have held on very tightly to shares in Ezra Holdings which I purchased in October 2005, as I recognized that the company was growing very rapidly and that its earnings were scaling up tremendously. A mistake was made and a lesson was learnt; Ezra has since grown into a different animal altogether, to the extent of reporting 5 years of consecutive revenue and net profit growth and also listing a subsidiary in Norway. Thus, I now approach every company with the view that I am buying a piece of a good thing, and who wants to let go of a good thing to exchange it for something which may not be so good ?
One of the most classic investment mistakes is selling too early, in what is also known as "short-termism". This occurs when one does not take a long-term view of a company, and attempts to "trade" a small gain, or maybe one sets a specific target price which is 10-20% higher than their buy price, and subsequently sells when it hits the trigger point. Both methods are price-dependent, rather than being business-dependent. Again, I reiterate that if you have bought into a good company at a fair price, then why in the world would you want to sell ? So begins my analysis of my mistake below....
Please also note that an investment mistake does NOT necessarily consist of transactions which resulted in losses. In fact, this mistake had resulted in a gain, but the opportunity cost is so tremendous that on hindsight, the paltry gain is hardly enough to justify the act of selling so early ! The company in question is Labroy Marine, which is a prominent ship-building company in Singapore and which had recently also ventured into building rigs. Just today, on October 29, 2007, the company announced that it was being acquired by Dubai Drydocks LLC (DD), the same company which took Pan United Marine private in May 2007. DD is offering S$2.8425 per Labroy share and they are planning to take the company private. The chairman Mr. Tan Boy Tee and executive director Mr. Chan Sew Meng have already agreed to sell their combined 65.49% stake in Labroy to DD, effectively making the deal unconditional.
Way back in April 2005, I purchased shares in Labroy Marine at a cost of 64 cents per share, which looks amazingly cheap now eh ? The problem was that at the time, I had nary a clue about value investing, and even less knowledge about how to properly value a company and see its potential. To me, it was all about making a quick gain from the sale of the shares (I did not use contra) at a set price. In the end, I sold at 70 cents in May 2005 for a miserable gain of 9.4% (6 cents) and totally missed the upside as the company grew and the share price ran into S$1, then surpassing S$2. That was one of the hard lessons I had to learn about the essence of long-term investing, and even Warren Buffett had made the same mistake when he sold his first investment too soon. The painful fact is that if I had held on to Labroy till now (when DD announced the acquisition), I would have made a cool 344% profit.
The mistake and subsequent lesson to be learnt is that one should NEVER set a pre-determined target price to exit if one is investing in a company. This is because a company is always growing and its business is dynamic, thus placing a target price on it (like the analysts always do) seems to imply that the growth will terminate when it hits that price. In the end, one may very well sell for a profit but miss out on the huge potential which the company has to offer.
Since that mistake was made, I have held on very tightly to shares in Ezra Holdings which I purchased in October 2005, as I recognized that the company was growing very rapidly and that its earnings were scaling up tremendously. A mistake was made and a lesson was learnt; Ezra has since grown into a different animal altogether, to the extent of reporting 5 years of consecutive revenue and net profit growth and also listing a subsidiary in Norway. Thus, I now approach every company with the view that I am buying a piece of a good thing, and who wants to let go of a good thing to exchange it for something which may not be so good ?
Sunday, October 28, 2007
Ezra - A Brief Update and Commentary
I had followed up with Management on several queries I had on the company and they were happy to respond to clarify. Below are some of the points which I clarified, and I also give a personal view of how I think the company might perform in the coming years:-
1) Presentation Slides for FY 2007 results - According to Management, there will be NO slides for FY 2007 results, unlike during the 1H FY 2007 results release. Thus, it is now difficult to get a quick summary of Ezra's existing fleet and also their vessel delivery schedule for FY 2008. The only way is to wait for their Annual Report, which most likely will contain some important information on their fleet size, strategies and future direction. In the meantime, Management has assured that they remain committed to their asset-light plans which were formulated in FY 2005. They have advised me to look through the reports written by the various brokerages in order to get a clearer picture of what is happening, as the analysts remain in regular contact with the Group. Thus far, I have the latest reports from DBSV, OCBC Research, JP Morgan, Kim Eng Research and CLSA.
2) Cost of MFSV versus 30,000 bhp AHTS - I did bring up the subject of why the cost of the MFSV ordered recently was nearly 4 times as high as the previous newbuilds. Management has advised that the cost of the AHTS (being S$49 million each) did not include equipment and machinery that was supposed to be installed into the vessel. Thus, I assume that the total capitalized cost would increase significantly after this was done. Moreover, the MFSV has many additional capabilites (described in the press release) as compared to an AHTS, and is able to work in waters greater than 3,000m deep. This justifies the much higher cost. The purchase will be funded from the proceeds from the divestment of EOC Limited as well as debt financing.
3) Option for additional 7 MFSV - In the article in The Edge Singapore magazine, it was mentioned that Ezra would exercise the option to purchase an additional 7 MFSV by the end of the year, thus boosting their fleet size to 45 by the end of FY 2010. Mr. Lionel Lee also mentions that capex will hit US$1 billion by the end of FY 2010, as Ezra plans to scale up its fleet significantly. Through email, Management has clarified that there was no express intention to represent that they would incur the US$1 billion. Much depends on whether their current capex and future capex plans will proceed as planned, and it will be better to rely on the press releases which the Group regularly posts on SGXNet to get a better idea of the Group's capex requirements.
4) Clarification on 2nd Fabrication Yard in Vung Tau, Vietnam - According to Management, the current yard in HCMC (Ho Chi Minh City), Vietnam called Saigon Shipyard is expected to be fully operational by FY 2008. The majority of the yard is still under construction and the announcement of the US$130 million worth of contracts relate to delivery by FY 2010. Thus, the earning will not materialize so quickly. The second yard in Vung Tau is just a greenfield now (i.e. empty piece of land on which nothing sits on !), and the Group has plans underway to develop it into a second yard. There have been estimates (some too bullish) by brokerages on the potential revenue contribution from these 2 yards hitting about S$400 to S$500 milllion per year by FY 2010, but I prefer to stay conservative and monitor the progress of HCMC Logistics (which owns Saigon Shipyard) first. I am sure the Group will duly inform shareholders if there is any further progress in developing the Vung Tau site.
5) Quarterly Reporting - Management has cofirmed that they will be practising quarterly reporting from FY 2008 onwards, in order to comply with requirements set by Oslo Bourse for EOC Limited. Thus, any timeline for EOC Limited for the announcement of results should also apply to the Ezra Group. With this in mind, I anticipate that 1Q FY 2008 results should be released sometime in early January 2008 (for period ending November 30, 2007).
My opinion of the Group is that they are rapidly trying to scale up their deep-water vessel fleet in anticipation for FY 2010, when they expect global demand for deepwater vessels to exceed spply significantly. There is an inherent risk in all this, of course, if it fails to materialize. Current charter rates for AHTS are hitting record highs in the North Sea (according to JP Morgan and CLSA reports), and this trend is expected to continue into the near future with oil prices hitting record highs of US$92 per barrel.
The Group may engage in further sale-and-leaseback transactions (S&L) with Pareto or another financier in order to remain "asset-light" and to recycle the cash back into purchasing more vessels. If the option for the additional 7 MFSV were indeed exercised, then the Group would need a lot of cash and funding in the near term, and the options I can think of include S&L, EOC doing a placement of shares (diluting parent Ezra Group in the process), additional debt financing (through banks), additional debt financing through issuance of company bonds or additional equity funding through Ezra Group (direct dilution to existing shareholders). I will monitor Management's decisions with respect to fund-raising to see if they can manage this well without straining the Balance Sheet too much, and give updates on my blog accordingly.
As for the additional business of fabrication and construction, it remains to be seen if the Group can scale up their operations and clinch more contracts to addd to their maiden US$130 million one. Even then, Mr. Lee has mentioned that margins are much thinner (at 10%) as compared to their main business of chartering. Thus, even though revenues may be higher in the future, lower margins may means that profits do not increase proportionately.
One more possible avenue for growth is if EOC manages to clinch their second FPSO contract (as it was mentioned that they were bidding for FPSO contracts right now). Once again, funding becomes an issue even if they manage to do this.
Thus, although the future looks bright for the Group, there are still many uncertainties regarding its growth and I will be closely monitoring developments as time goes by.
I had followed up with Management on several queries I had on the company and they were happy to respond to clarify. Below are some of the points which I clarified, and I also give a personal view of how I think the company might perform in the coming years:-
1) Presentation Slides for FY 2007 results - According to Management, there will be NO slides for FY 2007 results, unlike during the 1H FY 2007 results release. Thus, it is now difficult to get a quick summary of Ezra's existing fleet and also their vessel delivery schedule for FY 2008. The only way is to wait for their Annual Report, which most likely will contain some important information on their fleet size, strategies and future direction. In the meantime, Management has assured that they remain committed to their asset-light plans which were formulated in FY 2005. They have advised me to look through the reports written by the various brokerages in order to get a clearer picture of what is happening, as the analysts remain in regular contact with the Group. Thus far, I have the latest reports from DBSV, OCBC Research, JP Morgan, Kim Eng Research and CLSA.
2) Cost of MFSV versus 30,000 bhp AHTS - I did bring up the subject of why the cost of the MFSV ordered recently was nearly 4 times as high as the previous newbuilds. Management has advised that the cost of the AHTS (being S$49 million each) did not include equipment and machinery that was supposed to be installed into the vessel. Thus, I assume that the total capitalized cost would increase significantly after this was done. Moreover, the MFSV has many additional capabilites (described in the press release) as compared to an AHTS, and is able to work in waters greater than 3,000m deep. This justifies the much higher cost. The purchase will be funded from the proceeds from the divestment of EOC Limited as well as debt financing.
3) Option for additional 7 MFSV - In the article in The Edge Singapore magazine, it was mentioned that Ezra would exercise the option to purchase an additional 7 MFSV by the end of the year, thus boosting their fleet size to 45 by the end of FY 2010. Mr. Lionel Lee also mentions that capex will hit US$1 billion by the end of FY 2010, as Ezra plans to scale up its fleet significantly. Through email, Management has clarified that there was no express intention to represent that they would incur the US$1 billion. Much depends on whether their current capex and future capex plans will proceed as planned, and it will be better to rely on the press releases which the Group regularly posts on SGXNet to get a better idea of the Group's capex requirements.
4) Clarification on 2nd Fabrication Yard in Vung Tau, Vietnam - According to Management, the current yard in HCMC (Ho Chi Minh City), Vietnam called Saigon Shipyard is expected to be fully operational by FY 2008. The majority of the yard is still under construction and the announcement of the US$130 million worth of contracts relate to delivery by FY 2010. Thus, the earning will not materialize so quickly. The second yard in Vung Tau is just a greenfield now (i.e. empty piece of land on which nothing sits on !), and the Group has plans underway to develop it into a second yard. There have been estimates (some too bullish) by brokerages on the potential revenue contribution from these 2 yards hitting about S$400 to S$500 milllion per year by FY 2010, but I prefer to stay conservative and monitor the progress of HCMC Logistics (which owns Saigon Shipyard) first. I am sure the Group will duly inform shareholders if there is any further progress in developing the Vung Tau site.
5) Quarterly Reporting - Management has cofirmed that they will be practising quarterly reporting from FY 2008 onwards, in order to comply with requirements set by Oslo Bourse for EOC Limited. Thus, any timeline for EOC Limited for the announcement of results should also apply to the Ezra Group. With this in mind, I anticipate that 1Q FY 2008 results should be released sometime in early January 2008 (for period ending November 30, 2007).
My opinion of the Group is that they are rapidly trying to scale up their deep-water vessel fleet in anticipation for FY 2010, when they expect global demand for deepwater vessels to exceed spply significantly. There is an inherent risk in all this, of course, if it fails to materialize. Current charter rates for AHTS are hitting record highs in the North Sea (according to JP Morgan and CLSA reports), and this trend is expected to continue into the near future with oil prices hitting record highs of US$92 per barrel.
The Group may engage in further sale-and-leaseback transactions (S&L) with Pareto or another financier in order to remain "asset-light" and to recycle the cash back into purchasing more vessels. If the option for the additional 7 MFSV were indeed exercised, then the Group would need a lot of cash and funding in the near term, and the options I can think of include S&L, EOC doing a placement of shares (diluting parent Ezra Group in the process), additional debt financing (through banks), additional debt financing through issuance of company bonds or additional equity funding through Ezra Group (direct dilution to existing shareholders). I will monitor Management's decisions with respect to fund-raising to see if they can manage this well without straining the Balance Sheet too much, and give updates on my blog accordingly.
As for the additional business of fabrication and construction, it remains to be seen if the Group can scale up their operations and clinch more contracts to addd to their maiden US$130 million one. Even then, Mr. Lee has mentioned that margins are much thinner (at 10%) as compared to their main business of chartering. Thus, even though revenues may be higher in the future, lower margins may means that profits do not increase proportionately.
One more possible avenue for growth is if EOC manages to clinch their second FPSO contract (as it was mentioned that they were bidding for FPSO contracts right now). Once again, funding becomes an issue even if they manage to do this.
Thus, although the future looks bright for the Group, there are still many uncertainties regarding its growth and I will be closely monitoring developments as time goes by.
Thursday, October 25, 2007
The SembCorp Marine Saga
Hot on the heels of the Uni-Asia fiasco is yet another scandal which makes Uni-Asia’s case pale in comparison. The company in question this time is SembCorp Marine (Sembmarine or SM) and they had revealed on October 22, 2007 that their finance director, Mr. Wee Sing Guan, had engaged in unauthorized foreign exchange (forex) transactions and caused the company to lose an amount to the tune of about US$248 million. The amount includes US$83 million which was already paid to a bank through Jurong Shipyard Pte Ltd (JSPL), while the remaining amount is still subject to confirmation as the positions are still “open”, meaning that the losses have not been realized yet. SM has said that it will engage a special audit from Ernst and Young and also lawyers from Drew and Napier to see if it can contain the losses and to assess the extent of the damage. The announcement by SM that it had sold 39 million shares in Cosco Corp for S$272.2 million is widely seen as a move to stem the losses, and is regarded as a form of "damage control".
Consider the numbers involved here and it will be readily apparent to the average observer that US$248 million is a huge sum, as their FY 2006 net profit amounted to S$238.4 million (yes, it’s SGD, not USD !). This means that if taken in context, it would mean that the unrealized losses in question already more than wipes out FY 2006’s profit, and leave extra losses to boot. Assuming that SM’s profit for FY 2007 grows 50% (just an assumption), it would amount to S$357.6 million, which is still lower than the S$362.8 million loss (using an exchange of 1 USD: 1.463 SGD) from the illicit forex transactions. Of course, such a shocking revelation from the world’s second largest oil rig builder sent its share price reeling and it closed 86 cents (15.4%) down to S$4.74 on the release of the trading halt. A full S$1.8 billion worth of market capitalization evaporated in a single trading day, and this is testament to the magnitude of the damaging announcement made by the company.
Several issues arise as a result of this stunning news, which have also been discussed on ST and BT as well as online share forums. Still, it pays to revisit these issues to discuss what went wrong, the implications on corporate governance and whether confidence can (ever) be restored to this blue chip company. Firstly, the glaring issue of corporate governance comes into play again, and one would have thought that after the likes of CAO, ACCS (now MDR), Citiraya (now Centillion) and Informatics, the entire corporate world would have been more guarded about possible fraud or unauthorized risk exposures. SM must delve deep into the reasons for this lapse of internal controls, resulting in one of the most damaging losses since the CAO back in 2003. Considering that it is a company which prides itself of risk management (as disclosed in its Annual Report) and which recently won an award for transparency given out by SIAS, this latest piece of news seems all the more ironic. All I can say is that SM’s directors and top management have to get their act together to ensure that loopholes are plugged, and to carry out a thorough investigation into how such transactions could have been entered into without their knowledge or authorization.
Another issue at hand is also the question of how the losses became so massive. According to SM, they do normal hedging against possible adverse currency fluctuations, such as entering into forward contracts to “lock in” a favourable exchange rate (they earn in USD but report their financials in SGD). However, it was pointed out by analysts that a loss of this magnitude could only be perpetuated by risky forex speculation, by making heavy bets in the billions (probably) on the direction of exchange rates. As the greenback has depreciated only about 7% against the Singapore dollar in recent months, this has led to even more speculation of how these losses came about. SM needs to clearly explain itself after the inquiry and give full and honest disclosure on the entire debacle. If not, then it will be a classic case of a “crisis of confidence”, which will be very difficult to recover in future. As Warren Buffett has said: “You take a lifetime to build a good reputation and only five minutes to lose it all.”
A final note to add for this post and something I wish to highlight yet again are the inherent risks in investing in quoted equities. Even a value investor who had purchased SM based on fundamentals and growth prospects could not have seen this coming. It is one of those anomalies which can hit a diligent investor and cause him to lose a substantial amount of capital, akin to an “Act of God” incident which can cause freakish damage. After all, how is one supposed to even fathom the possibility of a blue-chip Temasek-linked company being embroiled in a scandal of this scale ? It all boils down to whether an investor had made adequate provision for losses stemming from “unforeseen events” such as these, and whether he has adequately hedged his own exposure by diversifying his investment types (e.g. in gold, commodities, real estate). By investing in equities, all of us have to take up a proportionate amount of risk and it is this risk which we manage every single day as we entrust our monies in the hands of the Management of the companies which we invest in.
Note: I will post more updates and opinions on the SM saga as events unfold and more information becomes available.
Hot on the heels of the Uni-Asia fiasco is yet another scandal which makes Uni-Asia’s case pale in comparison. The company in question this time is SembCorp Marine (Sembmarine or SM) and they had revealed on October 22, 2007 that their finance director, Mr. Wee Sing Guan, had engaged in unauthorized foreign exchange (forex) transactions and caused the company to lose an amount to the tune of about US$248 million. The amount includes US$83 million which was already paid to a bank through Jurong Shipyard Pte Ltd (JSPL), while the remaining amount is still subject to confirmation as the positions are still “open”, meaning that the losses have not been realized yet. SM has said that it will engage a special audit from Ernst and Young and also lawyers from Drew and Napier to see if it can contain the losses and to assess the extent of the damage. The announcement by SM that it had sold 39 million shares in Cosco Corp for S$272.2 million is widely seen as a move to stem the losses, and is regarded as a form of "damage control".
Consider the numbers involved here and it will be readily apparent to the average observer that US$248 million is a huge sum, as their FY 2006 net profit amounted to S$238.4 million (yes, it’s SGD, not USD !). This means that if taken in context, it would mean that the unrealized losses in question already more than wipes out FY 2006’s profit, and leave extra losses to boot. Assuming that SM’s profit for FY 2007 grows 50% (just an assumption), it would amount to S$357.6 million, which is still lower than the S$362.8 million loss (using an exchange of 1 USD: 1.463 SGD) from the illicit forex transactions. Of course, such a shocking revelation from the world’s second largest oil rig builder sent its share price reeling and it closed 86 cents (15.4%) down to S$4.74 on the release of the trading halt. A full S$1.8 billion worth of market capitalization evaporated in a single trading day, and this is testament to the magnitude of the damaging announcement made by the company.
Several issues arise as a result of this stunning news, which have also been discussed on ST and BT as well as online share forums. Still, it pays to revisit these issues to discuss what went wrong, the implications on corporate governance and whether confidence can (ever) be restored to this blue chip company. Firstly, the glaring issue of corporate governance comes into play again, and one would have thought that after the likes of CAO, ACCS (now MDR), Citiraya (now Centillion) and Informatics, the entire corporate world would have been more guarded about possible fraud or unauthorized risk exposures. SM must delve deep into the reasons for this lapse of internal controls, resulting in one of the most damaging losses since the CAO back in 2003. Considering that it is a company which prides itself of risk management (as disclosed in its Annual Report) and which recently won an award for transparency given out by SIAS, this latest piece of news seems all the more ironic. All I can say is that SM’s directors and top management have to get their act together to ensure that loopholes are plugged, and to carry out a thorough investigation into how such transactions could have been entered into without their knowledge or authorization.
Another issue at hand is also the question of how the losses became so massive. According to SM, they do normal hedging against possible adverse currency fluctuations, such as entering into forward contracts to “lock in” a favourable exchange rate (they earn in USD but report their financials in SGD). However, it was pointed out by analysts that a loss of this magnitude could only be perpetuated by risky forex speculation, by making heavy bets in the billions (probably) on the direction of exchange rates. As the greenback has depreciated only about 7% against the Singapore dollar in recent months, this has led to even more speculation of how these losses came about. SM needs to clearly explain itself after the inquiry and give full and honest disclosure on the entire debacle. If not, then it will be a classic case of a “crisis of confidence”, which will be very difficult to recover in future. As Warren Buffett has said: “You take a lifetime to build a good reputation and only five minutes to lose it all.”
A final note to add for this post and something I wish to highlight yet again are the inherent risks in investing in quoted equities. Even a value investor who had purchased SM based on fundamentals and growth prospects could not have seen this coming. It is one of those anomalies which can hit a diligent investor and cause him to lose a substantial amount of capital, akin to an “Act of God” incident which can cause freakish damage. After all, how is one supposed to even fathom the possibility of a blue-chip Temasek-linked company being embroiled in a scandal of this scale ? It all boils down to whether an investor had made adequate provision for losses stemming from “unforeseen events” such as these, and whether he has adequately hedged his own exposure by diversifying his investment types (e.g. in gold, commodities, real estate). By investing in equities, all of us have to take up a proportionate amount of risk and it is this risk which we manage every single day as we entrust our monies in the hands of the Management of the companies which we invest in.
Note: I will post more updates and opinions on the SM saga as events unfold and more information becomes available.
Tuesday, October 23, 2007
Ezra – FY 2007 Financial Results Analysis (Part 2)
To continue the financial results review for Ezra, I will continue with the review of the Cash Flow Statement and also the future prospects and strategies for the Group. Unfortunately, there were no presentation slides released by Ezra relating to their results announcement, which is rather uncharacteristic of the company because they are traditionally known to be very shareholder-centric and they have a habit of keeping shareholders updated on the status and progress of the company. Thus, the future prospects of Ezra are compiled from data and information obtained from sources such as the Business Times, Channel Newsasia, The Straits Times as well as The Edge Singapore Magazine.
Cash Flow Statement Review
Ezra reported net cash inflows from operating activities of S$33.5 million for FY 2007, which is a strong indication of recurring cash flows from their core business. This was a 67.5% increase from the cash inflows generated for FY 2006 of S$20.0 million. Starting from a higher net profit before tax base of S$115.1 million, non-cash items such as the gain in dilution of interest in subsidiary and profit from disposal of AFS (available-for-sale) investments had to be removed from the cash flow statement. Depreciation on fixed assets almost doubled from S$4.6 million to S$9.2 million and had to be added back as it was a non-cash expense. Operating profit before working capital changes actually amounted to S$58.7 million for FY 2007 as compared to S$27.8 million for FY 2006; registering a gain of 111.1%. The main culprits for the cash outflow were the huge increase in trade receivables (from S$1.4 million to S$48.0 million) as a result of the scaling up of their business from their enlarged vessel fleet. This was partially offset by the decrease in other receivables but the net effect is still a S$28 million outflow resulting from changes in receivables. This prompts the question of whether the company can maintain a good cash collection cycle as it seems that much of their receivables may yet be uncollectible as at year-end. Fortunately, this factor was mitigated by the cash inflows from the increase in trade and other payables of about S$30.7 million which enabled the company to maintain a healthy overall net cash inflow. Interest and taxes paid also increased as compared to prior year as a result of higher interest on more loans taken up to finance the purchase of new vessels; as well as higher taxes from the overseas taxation of a subsidiary company (which I suspect is HCMC Logistics in Vietnam).
Cash flows from investing activities showed a huge net outflow of S$314.6 million, mainly due to the purchase of fixed assets which came up to a whopping S$300 million. This was more than double of FY 2006’s purchase amount of S$117.5 million and clearly shows Ezra’s commitment to building up its fleet rapidly to take advantage of the buoyant oil and gas industry. Assets purchased and held for sale also increased from S$55.6 million in FY 2006 to S$92.3 million in FY 2007, while the S$22.1 million worth of cash outflow from the purchase of AFS investments would include the 21.83% stake in Ezion Holdings Limited. Although the impact on cash is worrying if one looks at the net cash outflow for FY 2007, note that most of Ezra’s fund raising comes through in the “financing activities” section, which will be explored below. Also, do note that Ezra’s stake in Ezion Holdings has appreciated more than 450% from their purchase price of 33.1 cents per share to S$1.49 as at October 19, 2007. This means that their stake in Ezion is now worth S$74.5 million which is realizable in cash should they wish to sell their stake for cash.
The cash flows from financing activities is where all the “action” is. Ezra has been busy during FY 2007, as they have obtained more banks loans of S$223 million, procured cash of S$62.2 million from the sale of 12% of their subsidiary EOC Limited and also placed out 15 million shares at S$5.18 per share to raise S$76.6 million (net of placement fees). These activities have no doubt managed to generated sufficient amounts of cash for operating purpose and also for fleet expansion, but there is of course a price to pay. Taking up additional bank loans means increasing their gearing and debt-equity ratio; and it also increases interest expenses. Diluting their interest in a subsidiary would mean the recognition of lower profits from as part of the profits belong now to minority interests; while the issue of new placement shares to strategic investors dilutes existing shareholders and lowers EPS. All these moves were undertaken with the implicit assumption that fleet expansion would lead to higher revenues and hence profits, in order to offset the dilution from sale of subsidiary and issue of new shares. An expanded fleet should also generate increased recurring cash flows which would be used to service the higher interest expenses and to eventually pay off the principle amount of the additional loans.
As can be seen from the above analysis, there are inherent risks moving forward into FY 2008 about Ezra’s cash flows, as most of the current inflows are generated from financing activities, and not operating activities. Thus, if their expansion should stall in any way or if charter rates go on a downtrend, the Group could possibly be “squeezed” in the middle as they will end up having lower revenues but higher loans to service. This is the risk of rapid expansion which all shareholders have to bear; and if the company is on track to take advantage of buoyant conditions, then the cash flows would be sustainable in the long run. Do note that subsequent to the financial year-end, Ezra had sold off another 39.1% of EOC Limited to generate gross proceeds of USD 177 million (about S$259 million at today’s exchange rate). This is in part to finance the purchase of deepwater vessels which Ezra has placed orders for; but the company will have to think of other ways of raising more cash if it intends to scale up its fleet, as I perceive that this amount will be insufficient moving forward (see future prospects and strategies for my ideas on how Ezra will make up this shortfall in cash).
Future Prospects and Strategies for FY 2008
In writing about the future prospects and strategies to be used by the Group, do note that some of my opinions may contain forward-looking statements which may or may not represent fully the direction to be taken by the company. Thus, my disclaimer is that I am neither recommending nor discouraging anyone from buying or selling their stake in Ezra.
1) Fleet Expansion and Fund Raising - Ezra plans to continue to expand its fleet to take advantage of buoyant conditions within the oil and gas sector. They have already ordered two 30,000 bhp AHTS for deepwater exploration, a second pipe-lay barge and a multi-functional support vessel (MFSV). It was mentioned that the Group has the option to purchase 7 more MFSV and that this option will be exercised before the end of 2007. Since one MFSV costs S$162.4 million, this would imply that 7 more would cost close to S$1.14 billion ! Mr. Lionel Lee (MD of Ezra Group) had mentioned that the Group will be spending close to US$1 billion from now till FY 2010 to expand its fleet, but he did not give details on how this was to be funded. One option I can think of offhand is for EOC Limited to do fund-raising exercise through the issue of new shares of EOC Limited, thereby diluting Ezra further but in the process raising enough capital to take over the new assets. Similarly, Ezra itself could also draw down more debt or issue new shares in order to raise funds from the capital markets here in Singapore. Another attractive option would be to engage in yet another round of sale-and-leaseback transactions for the newbuild vessels, which was the asset-light method employed by Ezra that enabled it to grow its fleet from FY 2003 till now.
2) Fabrication work to be undertaken by Saigon Shipyard – Ezra is now expanding its scope of business by venturing into the platform fabrication business spearheaded by its 100% owned HCMC Logistics Pte Ltd, which owns Saigon Shipyard in Ho Chi Minh City, Vietnam. On October 16, 2007, the Group announced that the shipyard had won US$130.2 million worth of contracts. Mr. Lionel Lee expects that this area of business could potentially generate “S$150 to S$200 million worth of revenues” by FY 2009, but conceded that margins were lower as compared to their more lucrative vessel chartering business. With the recent contract win, HCMC Logistics seems poised to capture more contracts in future and generate higher value for the Group. Separately, it was also revealed that another shipyard was being built and readied at Vung Tau (a 2-hour drive from HCMC) to handle the additional capacity as the Saigon yard would be running at full capacity by FY 2009. There is much optimism from myself that this area of business could potentially contribute more recurring cash flows for the Group to fund their working capital requirements.
3) Clinching of more FPSO deals – EOC Limited’s other growth driver will be the clinching of its second FPSO deal, after the Group became the first Singaporean company to manage an FPSO. The company is looking to add one new FPSO to its fleet per year and according to The Edge Singapore, they are currently bidding for such contracts worth S$1.18 billion. If they manage to clinch one in FY 2008, delivery will most likely be in late FY 2009 or early FY 2010 (recall that they announced their first FPSO in late CY 2006 and it will only be delivered in 2H FY 2008). Though financing it will be an issue, albeit not a very worrisome one as EOC can raise its own capital in Norwegian markets, the earnings accretion for the Group should still be significant even if it only owns 48.9% of EOC Limited.
4) Charter Rates for Deep-water vessels – Charter rates are projected by Mr. Lee to be on an uptrend for deepwater vessels as there is currently a shortage and the first few such vessels will only be delivered in FY 2009. He predicts that demand will outstrip supply and therefore gross margins should be very good when these vessels are delivered to Ezra.
5) Role of Ezion Holdings – Up till now, the exact role of Ezion Holdings in Ezra’s game plan is still unclear. The question is how is this little-known company going to create synergies for Ezra’s core business; or will it be used to undertake other forms of work which EOC or Ezra will contract to it ? Hopefully, more will be revealed soon.
The next update from Ezra should come when there is more news of the bonus issue and/or dividend payment dates. Also, the Annual Report can be expected some time in December 2007 as well as the AGM.
To continue the financial results review for Ezra, I will continue with the review of the Cash Flow Statement and also the future prospects and strategies for the Group. Unfortunately, there were no presentation slides released by Ezra relating to their results announcement, which is rather uncharacteristic of the company because they are traditionally known to be very shareholder-centric and they have a habit of keeping shareholders updated on the status and progress of the company. Thus, the future prospects of Ezra are compiled from data and information obtained from sources such as the Business Times, Channel Newsasia, The Straits Times as well as The Edge Singapore Magazine.
Cash Flow Statement Review
Ezra reported net cash inflows from operating activities of S$33.5 million for FY 2007, which is a strong indication of recurring cash flows from their core business. This was a 67.5% increase from the cash inflows generated for FY 2006 of S$20.0 million. Starting from a higher net profit before tax base of S$115.1 million, non-cash items such as the gain in dilution of interest in subsidiary and profit from disposal of AFS (available-for-sale) investments had to be removed from the cash flow statement. Depreciation on fixed assets almost doubled from S$4.6 million to S$9.2 million and had to be added back as it was a non-cash expense. Operating profit before working capital changes actually amounted to S$58.7 million for FY 2007 as compared to S$27.8 million for FY 2006; registering a gain of 111.1%. The main culprits for the cash outflow were the huge increase in trade receivables (from S$1.4 million to S$48.0 million) as a result of the scaling up of their business from their enlarged vessel fleet. This was partially offset by the decrease in other receivables but the net effect is still a S$28 million outflow resulting from changes in receivables. This prompts the question of whether the company can maintain a good cash collection cycle as it seems that much of their receivables may yet be uncollectible as at year-end. Fortunately, this factor was mitigated by the cash inflows from the increase in trade and other payables of about S$30.7 million which enabled the company to maintain a healthy overall net cash inflow. Interest and taxes paid also increased as compared to prior year as a result of higher interest on more loans taken up to finance the purchase of new vessels; as well as higher taxes from the overseas taxation of a subsidiary company (which I suspect is HCMC Logistics in Vietnam).
Cash flows from investing activities showed a huge net outflow of S$314.6 million, mainly due to the purchase of fixed assets which came up to a whopping S$300 million. This was more than double of FY 2006’s purchase amount of S$117.5 million and clearly shows Ezra’s commitment to building up its fleet rapidly to take advantage of the buoyant oil and gas industry. Assets purchased and held for sale also increased from S$55.6 million in FY 2006 to S$92.3 million in FY 2007, while the S$22.1 million worth of cash outflow from the purchase of AFS investments would include the 21.83% stake in Ezion Holdings Limited. Although the impact on cash is worrying if one looks at the net cash outflow for FY 2007, note that most of Ezra’s fund raising comes through in the “financing activities” section, which will be explored below. Also, do note that Ezra’s stake in Ezion Holdings has appreciated more than 450% from their purchase price of 33.1 cents per share to S$1.49 as at October 19, 2007. This means that their stake in Ezion is now worth S$74.5 million which is realizable in cash should they wish to sell their stake for cash.
The cash flows from financing activities is where all the “action” is. Ezra has been busy during FY 2007, as they have obtained more banks loans of S$223 million, procured cash of S$62.2 million from the sale of 12% of their subsidiary EOC Limited and also placed out 15 million shares at S$5.18 per share to raise S$76.6 million (net of placement fees). These activities have no doubt managed to generated sufficient amounts of cash for operating purpose and also for fleet expansion, but there is of course a price to pay. Taking up additional bank loans means increasing their gearing and debt-equity ratio; and it also increases interest expenses. Diluting their interest in a subsidiary would mean the recognition of lower profits from as part of the profits belong now to minority interests; while the issue of new placement shares to strategic investors dilutes existing shareholders and lowers EPS. All these moves were undertaken with the implicit assumption that fleet expansion would lead to higher revenues and hence profits, in order to offset the dilution from sale of subsidiary and issue of new shares. An expanded fleet should also generate increased recurring cash flows which would be used to service the higher interest expenses and to eventually pay off the principle amount of the additional loans.
As can be seen from the above analysis, there are inherent risks moving forward into FY 2008 about Ezra’s cash flows, as most of the current inflows are generated from financing activities, and not operating activities. Thus, if their expansion should stall in any way or if charter rates go on a downtrend, the Group could possibly be “squeezed” in the middle as they will end up having lower revenues but higher loans to service. This is the risk of rapid expansion which all shareholders have to bear; and if the company is on track to take advantage of buoyant conditions, then the cash flows would be sustainable in the long run. Do note that subsequent to the financial year-end, Ezra had sold off another 39.1% of EOC Limited to generate gross proceeds of USD 177 million (about S$259 million at today’s exchange rate). This is in part to finance the purchase of deepwater vessels which Ezra has placed orders for; but the company will have to think of other ways of raising more cash if it intends to scale up its fleet, as I perceive that this amount will be insufficient moving forward (see future prospects and strategies for my ideas on how Ezra will make up this shortfall in cash).
Future Prospects and Strategies for FY 2008
In writing about the future prospects and strategies to be used by the Group, do note that some of my opinions may contain forward-looking statements which may or may not represent fully the direction to be taken by the company. Thus, my disclaimer is that I am neither recommending nor discouraging anyone from buying or selling their stake in Ezra.
1) Fleet Expansion and Fund Raising - Ezra plans to continue to expand its fleet to take advantage of buoyant conditions within the oil and gas sector. They have already ordered two 30,000 bhp AHTS for deepwater exploration, a second pipe-lay barge and a multi-functional support vessel (MFSV). It was mentioned that the Group has the option to purchase 7 more MFSV and that this option will be exercised before the end of 2007. Since one MFSV costs S$162.4 million, this would imply that 7 more would cost close to S$1.14 billion ! Mr. Lionel Lee (MD of Ezra Group) had mentioned that the Group will be spending close to US$1 billion from now till FY 2010 to expand its fleet, but he did not give details on how this was to be funded. One option I can think of offhand is for EOC Limited to do fund-raising exercise through the issue of new shares of EOC Limited, thereby diluting Ezra further but in the process raising enough capital to take over the new assets. Similarly, Ezra itself could also draw down more debt or issue new shares in order to raise funds from the capital markets here in Singapore. Another attractive option would be to engage in yet another round of sale-and-leaseback transactions for the newbuild vessels, which was the asset-light method employed by Ezra that enabled it to grow its fleet from FY 2003 till now.
2) Fabrication work to be undertaken by Saigon Shipyard – Ezra is now expanding its scope of business by venturing into the platform fabrication business spearheaded by its 100% owned HCMC Logistics Pte Ltd, which owns Saigon Shipyard in Ho Chi Minh City, Vietnam. On October 16, 2007, the Group announced that the shipyard had won US$130.2 million worth of contracts. Mr. Lionel Lee expects that this area of business could potentially generate “S$150 to S$200 million worth of revenues” by FY 2009, but conceded that margins were lower as compared to their more lucrative vessel chartering business. With the recent contract win, HCMC Logistics seems poised to capture more contracts in future and generate higher value for the Group. Separately, it was also revealed that another shipyard was being built and readied at Vung Tau (a 2-hour drive from HCMC) to handle the additional capacity as the Saigon yard would be running at full capacity by FY 2009. There is much optimism from myself that this area of business could potentially contribute more recurring cash flows for the Group to fund their working capital requirements.
3) Clinching of more FPSO deals – EOC Limited’s other growth driver will be the clinching of its second FPSO deal, after the Group became the first Singaporean company to manage an FPSO. The company is looking to add one new FPSO to its fleet per year and according to The Edge Singapore, they are currently bidding for such contracts worth S$1.18 billion. If they manage to clinch one in FY 2008, delivery will most likely be in late FY 2009 or early FY 2010 (recall that they announced their first FPSO in late CY 2006 and it will only be delivered in 2H FY 2008). Though financing it will be an issue, albeit not a very worrisome one as EOC can raise its own capital in Norwegian markets, the earnings accretion for the Group should still be significant even if it only owns 48.9% of EOC Limited.
4) Charter Rates for Deep-water vessels – Charter rates are projected by Mr. Lee to be on an uptrend for deepwater vessels as there is currently a shortage and the first few such vessels will only be delivered in FY 2009. He predicts that demand will outstrip supply and therefore gross margins should be very good when these vessels are delivered to Ezra.
5) Role of Ezion Holdings – Up till now, the exact role of Ezion Holdings in Ezra’s game plan is still unclear. The question is how is this little-known company going to create synergies for Ezra’s core business; or will it be used to undertake other forms of work which EOC or Ezra will contract to it ? Hopefully, more will be revealed soon.
The next update from Ezra should come when there is more news of the bonus issue and/or dividend payment dates. Also, the Annual Report can be expected some time in December 2007 as well as the AGM.
Sunday, October 21, 2007
The Uni-Asia Fiasco
As many market watchers and investors would know by now, the company Uni-Asia is currently in the middle of an investigation by SGX, brought about by 33 retail investors who stormed towards SGX to complain about possible share price manipulation. This action is unusual in that there have been previous cases of share prices soaring and crashing within weeks for no apparent reason, yet somehow, for this case a group of people actually stepped forward to protest ! So what’s going on actually and what can we learn from this incident ?
First, the background scoop on the company. Uni-Asia is a company an Asia-based structured finance arrangement and alternative assets direct investment firm. The company provides transport-related finance arrangement and investment/management of alternative assets such as ships, distressed assets and real estate. In other words, this is a finance company which earns income based on returns from asset investments and divestments. It is not in a “sexy” industry and neither does it have a compelling growth story; but it does have pretty high margins of abut 50% when I reviewed the IPO prospectus prior to listing. Still, with no definite growth prospects, I had a desire to monitor the company first to see what it planned to do post-IPO.
Suffice to say that Uni-Asia made a relatively lackluster debut on SGX, dropping at one point to 50 cents versus its 55 cent IPO price. However, in the recent 3 weeks or so, the price (for apparently no reason at all) skyrocketed nearly 400% to a high of about S$2.79, then crashed about 30-40% to the current S$1.59. SGX had queried the company on two occasions regarding the surge in the share price, but of course the company replied in the negative because after all, they were NOT the ones trading their own shares, but rather institutional investors, retail investors as well as brokerage firms. Investors and punters were totally in the dark about what was happening, and someone even asked me on another forum a week ago (before the crash) what I thought about the company and its share price. Lacking suitable catalysts, I replied that this kind of “greater fool game” was bound to end someday and the price would crash. Sure enough, brokerages such as Kim Eng and CIMB GK Goh started to institute trading curbs to control speculation in the counter, causing a massive crash of 60 cents in a single day ! Subsequent to that, the share price has lost nearly 50% of its value from its peak, leaving many punters and speculators with massive losses.
There are several points to note in this entire fiaso:-
1) Brokerages seem to have an amazing amount of “control” over trading curbs and one trader even commented that this was standard practice for counters which have been traded to “speculative proportions”. Brokerages are thus assuming that they know best and that such trading curbs will reduce volatility in prices and “force” people to think of why they are buying into a company in the first place. Thus, it seems that investors will be left to their own devices when such fiascos break out.
2) SGX has the “normal” practice of querying a company when its share price goes north too suddenly or rapidly. This is standard procedure on the part of SGX and is part of its corporate governance code but usually, such queries do not lead to any form of enlightenment of information for the retail investor. The companies concerned are in the dark about their share price (which they should rightly be) and no one wants to take the “blame” should anything bad occur. Regulators could do more to come up with more stringent procedures to ensure there is no price manipulation or insider trading. At the least, this issue should be discussed and debated amongst an expert panel to review existing procedures to see if they could be beefed up.
3) Finally, the burden lies on the retail investor himself to ensure that he is not paying for more than he can handle. As mentioned in a report in BT, most of those who complained were CONTRA TRADERS. Hence, they intended to make money from price movements within the T+3 period without having to cough up capital for their shares. Such speculative and dangerous practices should be labeled as highly risky, thus these “investors” should not cry and complain when prices suddenly slump. I had warned of the many dangers in engaging in contra trading, even during a bull market when any share you buy seems to be rising. A further point is that it was mentioned that some of these “investors” were on margin, and any further drop in price may render them bankrupt. This is another point I cannot stress further; do NOT gamble on margin for contra purposes ! It’s like you already stab yourself in the foot (by doing contra), and now you proceed to take a gun and shoot yourself further in the same foot (by using margin to contra). It’s double damage when the price suddenly plunges, and can leave a speculator licking his wounds for many months of years to come.
Comments will be welcome regarding this highly controversial saga. I think we will soon see more news on Uni-Asia in the coming weeks before the curtain is finally closed on this drama.
As many market watchers and investors would know by now, the company Uni-Asia is currently in the middle of an investigation by SGX, brought about by 33 retail investors who stormed towards SGX to complain about possible share price manipulation. This action is unusual in that there have been previous cases of share prices soaring and crashing within weeks for no apparent reason, yet somehow, for this case a group of people actually stepped forward to protest ! So what’s going on actually and what can we learn from this incident ?
First, the background scoop on the company. Uni-Asia is a company an Asia-based structured finance arrangement and alternative assets direct investment firm. The company provides transport-related finance arrangement and investment/management of alternative assets such as ships, distressed assets and real estate. In other words, this is a finance company which earns income based on returns from asset investments and divestments. It is not in a “sexy” industry and neither does it have a compelling growth story; but it does have pretty high margins of abut 50% when I reviewed the IPO prospectus prior to listing. Still, with no definite growth prospects, I had a desire to monitor the company first to see what it planned to do post-IPO.
Suffice to say that Uni-Asia made a relatively lackluster debut on SGX, dropping at one point to 50 cents versus its 55 cent IPO price. However, in the recent 3 weeks or so, the price (for apparently no reason at all) skyrocketed nearly 400% to a high of about S$2.79, then crashed about 30-40% to the current S$1.59. SGX had queried the company on two occasions regarding the surge in the share price, but of course the company replied in the negative because after all, they were NOT the ones trading their own shares, but rather institutional investors, retail investors as well as brokerage firms. Investors and punters were totally in the dark about what was happening, and someone even asked me on another forum a week ago (before the crash) what I thought about the company and its share price. Lacking suitable catalysts, I replied that this kind of “greater fool game” was bound to end someday and the price would crash. Sure enough, brokerages such as Kim Eng and CIMB GK Goh started to institute trading curbs to control speculation in the counter, causing a massive crash of 60 cents in a single day ! Subsequent to that, the share price has lost nearly 50% of its value from its peak, leaving many punters and speculators with massive losses.
There are several points to note in this entire fiaso:-
1) Brokerages seem to have an amazing amount of “control” over trading curbs and one trader even commented that this was standard practice for counters which have been traded to “speculative proportions”. Brokerages are thus assuming that they know best and that such trading curbs will reduce volatility in prices and “force” people to think of why they are buying into a company in the first place. Thus, it seems that investors will be left to their own devices when such fiascos break out.
2) SGX has the “normal” practice of querying a company when its share price goes north too suddenly or rapidly. This is standard procedure on the part of SGX and is part of its corporate governance code but usually, such queries do not lead to any form of enlightenment of information for the retail investor. The companies concerned are in the dark about their share price (which they should rightly be) and no one wants to take the “blame” should anything bad occur. Regulators could do more to come up with more stringent procedures to ensure there is no price manipulation or insider trading. At the least, this issue should be discussed and debated amongst an expert panel to review existing procedures to see if they could be beefed up.
3) Finally, the burden lies on the retail investor himself to ensure that he is not paying for more than he can handle. As mentioned in a report in BT, most of those who complained were CONTRA TRADERS. Hence, they intended to make money from price movements within the T+3 period without having to cough up capital for their shares. Such speculative and dangerous practices should be labeled as highly risky, thus these “investors” should not cry and complain when prices suddenly slump. I had warned of the many dangers in engaging in contra trading, even during a bull market when any share you buy seems to be rising. A further point is that it was mentioned that some of these “investors” were on margin, and any further drop in price may render them bankrupt. This is another point I cannot stress further; do NOT gamble on margin for contra purposes ! It’s like you already stab yourself in the foot (by doing contra), and now you proceed to take a gun and shoot yourself further in the same foot (by using margin to contra). It’s double damage when the price suddenly plunges, and can leave a speculator licking his wounds for many months of years to come.
Comments will be welcome regarding this highly controversial saga. I think we will soon see more news on Uni-Asia in the coming weeks before the curtain is finally closed on this drama.
Friday, October 19, 2007
Ezra – FY 2007 Financial Results Analysis (Part 1)
On October 16, 2007, Ezra reported their FY 2007 financial results for the year ended August 31, 2007. I shall split my analysis of Ezra’s financials into two separate postings, namely one focusing on the Income Statement and Balance Sheet while the other posting will concentrate more on the Cash Flow Statement and future strategies and prospects of the Group. A brief analysis of EOC Limited’s (listed on Oslo Bors) results will also be done in due course.
Income Statement Analysis
Please refer to the table below for a summary of the salient points within the Income Statement:-
As can be seen, revenues surged 98.3%, mainly due to contributions of 12 months from 3 AHTS Lewek Stork, Lewek Snipe and Lewek Heron and one AHT named Lewek Ruby. The inclusion of a few months of operation of 7 new AHTS had also boosted up revenues for 2H FY 2007. On the EOC side, revenue contributions came from a few months of recognition of Lewek Chancellor (Accommodation barge), Lewek LB1 (Launch Barge) and Lewek Champion (pipe-lay barge). Since Ezra has now sold off 51.1% of EOC Limited, the profit contributions from the barges and the future FPSO will only be limited to 48.9% and will be equity accounted for as “share of profits from associates”. Since only a few months of profits were recognized for FY 2007, coupled with the fact that the new FPSO will come on board in FY 2008, the impact to profits from the sale of 51.1% of EOC should not be material (incidentally, this was also mentioned by Mr. Tan Tat Ming during the EGM but I now understand it more fully). Revenues from the Marine Services division also increased due to increased activities in engineering and contribution from Ezra’s 100%-owned subsidiary Saigon Shipyard. With the clinching of contracts worth US$130.1 million, this division is set to grow even more in FY 2009 and beyond (more on this in a separate posting).
Gross profit margin had fallen from 36.6% in FY 2006 to 34.9% in FY 2007, which represented a 1.7 percentage point decrease. This was due to some third-party charter of fabrication and construction expertise as Ezra’s Saigon Shipyard is not fully operational till FY 2009. Other than this fact, gross margins should have stayed fairly constant, which implies that all Ezra needs to do is to ramp up their top line in order to increase their gross margin by the same %. Mr. Lionel Lee had projected that day rates for charters of deepwater vessels would be on an uptrend as these vessels are in great demand (with short supply) and there are very few new vessels of such builds (i.e. 27,00 bhp and higher) in the market currently. The increased day rates would be a positive catalyst for the Group to improve their gross margins even further. Also, once Saigon Shipyard is fully operational, margins will start to improve as the Group is able to deliver the entire value chain by vertically integrating their operations.
Exceptional items made up quite a large chunk of the net profit of the Group, and must be removed in order to get an accurate representation of the Group’s performance with respect to recurrent net profit. After stripping away the exceptionals, it appears that Ezra’s core net profit grew about 42.5% from S$24.2 million to S$34.5 million. While this may not sound very impressive, remember that most companies can only manage to consistently increase their bottom line by about 20-30%; also, Ezra has only recognized a few months of contribution from the larger vessels such as the pipe-layer and the accommodation barge. In addition, their largest asset to date (Lewek FPSO 1) will only come on-stream in FY 2008 and begin contributing about half a year’s worth of revenue and profit for FY 2008 (through 48.9% owned EOC Limited). As long as there is consistent recurring profit growth of at least 20-30% per annum, I will be satisfied as a shareholder. Of course, Management must also endeavour to increase gross margins and reduce operating expenses all the time in order to achieve even better net profit margins.
Taxation increased by a whopping 340% mainly due to taxation of an overseas subsidiary (I suspect this refers to Saigon Shipyard as it has recently started contributing to the Group’s bottom line). The other vessels are operating in international waters and are only subjected to withholding tax.
Balance Sheet Review
A quick glance reveals that available-for-sale investments amount had increased by nearly ten-fold from S$10 million to about S$102 million. Recall that on April 10, 2007, Ezra acquired a 21.83% strategic stake in SGX-listed Ezion Holdings (formerly Nylect Technology Limited). This was made up of 50 million shares at S$0.331 each for a total of about S$16.55 million. By right, Ezra should equity account for Ezion in its balance sheet as investment in associated companies; but it could also be classified as available-for-sale if it is meant to be a long-term investment (as opposed to held-for-trading where marked-to-market gains have to be taken to profit and loss account). As at the balance sheet date of August 31, 2007, Ezion’s closing price was S$1.91, effectively valuing Ezra’s stake in the company at S$95.5 million. This may be the reason for the almost ten-fold increase in AFS investments.
Current ratio stands at 1.43 for FY 2007 as compared to just 1.16 for FY 2006. This is mainly due to increases in assets held for sale and also the addition of the assets of EOC Limited (which have been classified under a separate category of “disposal group assets” due to Ezra’s disposal of its 51.1% interest). The MD did mention in an interview that the Group was planning to make capex of up to US$1 billion in the next 2-3 years; thus Ezra needed a strong balance sheet moving ahead in order to successfully carry this out. Excluding EOC’s assets, current ratio would only be 1.13 for FY 2007, comparable to that of FY 2006. However, after the unlocking of value from EOC Limited, this should increase the current ratio significantly and help to reduce gearing further. Debt-equity ratio stood at 0.9 times before the disposal of EOC and is set to be reduced further to 0.5 times in FY 2008. Note: the impending sale of their 3 million treasury shares (at a minimum price of S$5.60) should also provide a small boost to their current assets and can be used for working capital requirements.
In Part 2 of my review, I will comment on the Cash Flow Statement as well as Ezra’s future plans and strategies for growing their business. Hopefully, the company can come up with some presentation slides which will assist me in analyzing their strategies ! Also, I plan to do a review of EOC Limited’s financials and future plans but this is tentative at the moment.
On October 16, 2007, Ezra reported their FY 2007 financial results for the year ended August 31, 2007. I shall split my analysis of Ezra’s financials into two separate postings, namely one focusing on the Income Statement and Balance Sheet while the other posting will concentrate more on the Cash Flow Statement and future strategies and prospects of the Group. A brief analysis of EOC Limited’s (listed on Oslo Bors) results will also be done in due course.
Income Statement Analysis
Please refer to the table below for a summary of the salient points within the Income Statement:-
As can be seen, revenues surged 98.3%, mainly due to contributions of 12 months from 3 AHTS Lewek Stork, Lewek Snipe and Lewek Heron and one AHT named Lewek Ruby. The inclusion of a few months of operation of 7 new AHTS had also boosted up revenues for 2H FY 2007. On the EOC side, revenue contributions came from a few months of recognition of Lewek Chancellor (Accommodation barge), Lewek LB1 (Launch Barge) and Lewek Champion (pipe-lay barge). Since Ezra has now sold off 51.1% of EOC Limited, the profit contributions from the barges and the future FPSO will only be limited to 48.9% and will be equity accounted for as “share of profits from associates”. Since only a few months of profits were recognized for FY 2007, coupled with the fact that the new FPSO will come on board in FY 2008, the impact to profits from the sale of 51.1% of EOC should not be material (incidentally, this was also mentioned by Mr. Tan Tat Ming during the EGM but I now understand it more fully). Revenues from the Marine Services division also increased due to increased activities in engineering and contribution from Ezra’s 100%-owned subsidiary Saigon Shipyard. With the clinching of contracts worth US$130.1 million, this division is set to grow even more in FY 2009 and beyond (more on this in a separate posting).Gross profit margin had fallen from 36.6% in FY 2006 to 34.9% in FY 2007, which represented a 1.7 percentage point decrease. This was due to some third-party charter of fabrication and construction expertise as Ezra’s Saigon Shipyard is not fully operational till FY 2009. Other than this fact, gross margins should have stayed fairly constant, which implies that all Ezra needs to do is to ramp up their top line in order to increase their gross margin by the same %. Mr. Lionel Lee had projected that day rates for charters of deepwater vessels would be on an uptrend as these vessels are in great demand (with short supply) and there are very few new vessels of such builds (i.e. 27,00 bhp and higher) in the market currently. The increased day rates would be a positive catalyst for the Group to improve their gross margins even further. Also, once Saigon Shipyard is fully operational, margins will start to improve as the Group is able to deliver the entire value chain by vertically integrating their operations.
Exceptional items made up quite a large chunk of the net profit of the Group, and must be removed in order to get an accurate representation of the Group’s performance with respect to recurrent net profit. After stripping away the exceptionals, it appears that Ezra’s core net profit grew about 42.5% from S$24.2 million to S$34.5 million. While this may not sound very impressive, remember that most companies can only manage to consistently increase their bottom line by about 20-30%; also, Ezra has only recognized a few months of contribution from the larger vessels such as the pipe-layer and the accommodation barge. In addition, their largest asset to date (Lewek FPSO 1) will only come on-stream in FY 2008 and begin contributing about half a year’s worth of revenue and profit for FY 2008 (through 48.9% owned EOC Limited). As long as there is consistent recurring profit growth of at least 20-30% per annum, I will be satisfied as a shareholder. Of course, Management must also endeavour to increase gross margins and reduce operating expenses all the time in order to achieve even better net profit margins.
Taxation increased by a whopping 340% mainly due to taxation of an overseas subsidiary (I suspect this refers to Saigon Shipyard as it has recently started contributing to the Group’s bottom line). The other vessels are operating in international waters and are only subjected to withholding tax.
Balance Sheet Review
A quick glance reveals that available-for-sale investments amount had increased by nearly ten-fold from S$10 million to about S$102 million. Recall that on April 10, 2007, Ezra acquired a 21.83% strategic stake in SGX-listed Ezion Holdings (formerly Nylect Technology Limited). This was made up of 50 million shares at S$0.331 each for a total of about S$16.55 million. By right, Ezra should equity account for Ezion in its balance sheet as investment in associated companies; but it could also be classified as available-for-sale if it is meant to be a long-term investment (as opposed to held-for-trading where marked-to-market gains have to be taken to profit and loss account). As at the balance sheet date of August 31, 2007, Ezion’s closing price was S$1.91, effectively valuing Ezra’s stake in the company at S$95.5 million. This may be the reason for the almost ten-fold increase in AFS investments.
Current ratio stands at 1.43 for FY 2007 as compared to just 1.16 for FY 2006. This is mainly due to increases in assets held for sale and also the addition of the assets of EOC Limited (which have been classified under a separate category of “disposal group assets” due to Ezra’s disposal of its 51.1% interest). The MD did mention in an interview that the Group was planning to make capex of up to US$1 billion in the next 2-3 years; thus Ezra needed a strong balance sheet moving ahead in order to successfully carry this out. Excluding EOC’s assets, current ratio would only be 1.13 for FY 2007, comparable to that of FY 2006. However, after the unlocking of value from EOC Limited, this should increase the current ratio significantly and help to reduce gearing further. Debt-equity ratio stood at 0.9 times before the disposal of EOC and is set to be reduced further to 0.5 times in FY 2008. Note: the impending sale of their 3 million treasury shares (at a minimum price of S$5.60) should also provide a small boost to their current assets and can be used for working capital requirements.
In Part 2 of my review, I will comment on the Cash Flow Statement as well as Ezra’s future plans and strategies for growing their business. Hopefully, the company can come up with some presentation slides which will assist me in analyzing their strategies ! Also, I plan to do a review of EOC Limited’s financials and future plans but this is tentative at the moment.
Thursday, October 18, 2007
The Folly of Target Prices
Looking at the dearth of analysts reports being churned up daily, one can only wonder about the accuracy of such forecasts and predictions. I had commented once before previously about the utility and usefulness of analyst reports, since most of the time brokerages are being paid to produce churning in shares. Remember that the more churning of shares there is (i.e. frantic buying and selling, contra, short-selling and punting), the more money brokerages (not the retail investor !) will make. Brokerages thus have a vested interest in writing such reports, even though on the surface it would seem that they are "helping" investors by recommending what to buy and sell.
What I must add is that the analysts themselves are not to be blamed; most of the time they take instructions from their bosses who are eager for a report to be written so as to “promote” a particular company. This in turn can create an “avalanche” effect as other brokerages also jump on the bandwagon to issue reports on the same company, thus creating a domino effect on prices. For better or worse (usually worse), punters and speculators will jump on every newly released report as a sign that it is the “next hot tip” and that the stock will either move up or down by 10-20%. Exacerbating this problem is that fact that almost all (95%, with the exception of some OCBC) research reports come with target prices for companies.
What is my issue with target prices ? If you noticed for my previous postings, I do not mention or bother about having target prices for the companies I own. A business is dynamic by nature and the concept of having a target price simply implies that there is already a set PRICE at which one has targeted to sell, which actually contravenes value investing principles. Recall my previous posting about “Knowing When To Sell”, where I mentioned that a value investor would sell under four stringent conditions involving the judgement of the intrinsic value of a company, or if fundamentals were eroded to such an extent that no margin of safety exists. The very act of setting target prices for buying and selling seems to imply that the reports are heavily price-driven, instead of being driven by the underlying fundamentals and prospects of the company.
This is the chief reason I do not bother about target prices for selling or exiting an investment. If one has intimate knowledge about a business and knows the future potential of a company within an industry, the cue to sell would only come from a slowdown in the industry (an erosion of fundamentals) or an errorneous judgement call with respect to the intrinsic value of a promising growth company. After all, the intrinsic value of a company changes almost daily as business activities within the company are in constant motion and change, so how can one comfortably settle on a price for a company on any given day, let alone a “one-year price target” preached about by so many brokerage firms ? The entire world out there is so price-centric that most people would rather ask about a company’s share price BEFORE asking about the company’s principal business, target customers and profit margins. It is this pervasive and persistent focus on price which we have to avail ourselves of before we can drill down into the true value of an outstanding business; as value investors we should strive to be business analysts, and not price analysts.
Thus, one should look at analyst reports for the possible insight into the business fundamentals and assumptions used by the analyst in projecting earnings flow. Since analysts do have better access to company resources and can meet up more regularly with company Management than the average retail investor, this does give them more insights into the business and latest assertions made by Management. All one needs to do then is to ignore the target prices set by analysts and absorb the facts; this will then make reports useful and eliminate the price-centric bias.
Looking at the dearth of analysts reports being churned up daily, one can only wonder about the accuracy of such forecasts and predictions. I had commented once before previously about the utility and usefulness of analyst reports, since most of the time brokerages are being paid to produce churning in shares. Remember that the more churning of shares there is (i.e. frantic buying and selling, contra, short-selling and punting), the more money brokerages (not the retail investor !) will make. Brokerages thus have a vested interest in writing such reports, even though on the surface it would seem that they are "helping" investors by recommending what to buy and sell.
What I must add is that the analysts themselves are not to be blamed; most of the time they take instructions from their bosses who are eager for a report to be written so as to “promote” a particular company. This in turn can create an “avalanche” effect as other brokerages also jump on the bandwagon to issue reports on the same company, thus creating a domino effect on prices. For better or worse (usually worse), punters and speculators will jump on every newly released report as a sign that it is the “next hot tip” and that the stock will either move up or down by 10-20%. Exacerbating this problem is that fact that almost all (95%, with the exception of some OCBC) research reports come with target prices for companies.
What is my issue with target prices ? If you noticed for my previous postings, I do not mention or bother about having target prices for the companies I own. A business is dynamic by nature and the concept of having a target price simply implies that there is already a set PRICE at which one has targeted to sell, which actually contravenes value investing principles. Recall my previous posting about “Knowing When To Sell”, where I mentioned that a value investor would sell under four stringent conditions involving the judgement of the intrinsic value of a company, or if fundamentals were eroded to such an extent that no margin of safety exists. The very act of setting target prices for buying and selling seems to imply that the reports are heavily price-driven, instead of being driven by the underlying fundamentals and prospects of the company.
This is the chief reason I do not bother about target prices for selling or exiting an investment. If one has intimate knowledge about a business and knows the future potential of a company within an industry, the cue to sell would only come from a slowdown in the industry (an erosion of fundamentals) or an errorneous judgement call with respect to the intrinsic value of a promising growth company. After all, the intrinsic value of a company changes almost daily as business activities within the company are in constant motion and change, so how can one comfortably settle on a price for a company on any given day, let alone a “one-year price target” preached about by so many brokerage firms ? The entire world out there is so price-centric that most people would rather ask about a company’s share price BEFORE asking about the company’s principal business, target customers and profit margins. It is this pervasive and persistent focus on price which we have to avail ourselves of before we can drill down into the true value of an outstanding business; as value investors we should strive to be business analysts, and not price analysts.
Thus, one should look at analyst reports for the possible insight into the business fundamentals and assumptions used by the analyst in projecting earnings flow. Since analysts do have better access to company resources and can meet up more regularly with company Management than the average retail investor, this does give them more insights into the business and latest assertions made by Management. All one needs to do then is to ignore the target prices set by analysts and absorb the facts; this will then make reports useful and eliminate the price-centric bias.
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