My Current Thoughts On LTC Corporation – FY17Q1 Results

4) ltc-logo 13052016

Firstly, let me start off by making a correction. A reader brought this to my attention some time ago actually, but I haven’t addressed it here yet.

In an earlier post I wrote back in May 2016 :

LTC Corporation (Part II)

I worked out how the acquisition of the 50% stake in USP is an asinine move based on a company net profit of $3.144mil and a purchase price of $24mil, the PE ratio is 15+, which is really high for a retail operation in Malaysia.

Well, SIAS (which stands for Smart Investors Always Succeed, cool name) must’ve either read the announcement and made the same mistake as me, or they read my report and fired off the same question to LTC’s management. I’m inclined to think it’s the latter.

Anyway, bless the guys at SIAS for asking. Seriously, can you guys look at some of the companies that I own and ask more of such hard questions please?

367) SIAS question to LTC.jpg

The company has since clarified that the $3.1mil profit is already attributable to the 50% stake, not the whole company.

This cuts the PE ratio paid for the stake by half, to about 7.6 or so.

This makes the valuation paid for the acquisition more reasonable.

That’s the good news part.

The bad news part, is that the lowered valuation doesn’t make the acquisition any better in terms of forward results.

This is the amount of profit LTC has achieved with the 50% stake since the completion of the acquisition:

FY16Q2: $460k

FY16Q3: -$631k

FY16Q4: $677k

FY17Q1: -$642k

So based on ttm, the net profit attributable to the 50% stake in USP is…

-$136k. 

Uh huh. Suddenly, even a much reduced PE of 7.6 looks to be way too expensive. PE is actually negative!

In my last analysis, I’ve already flagged up the USP acquisition to be a poor one (I did include a caveat that the business is newly acquired and that we should give management some time to prove themselves.)

So naturally, when FY17Q1 results came out, I was interested to see how USP would perform. Afterall, it is the start of the 1st full official year since it came under (partly) LTC’s fold.

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(Under “Share of results of a joint venture”)

I was rewarded with a -$642k loss attributable to USP. Ouch.

Imagine there isn’t this $642k loss. The profits would be much more impressive isn’t it?

To SIAS: If I may be so bold, the next qn you guys should ask, is obvious:

Why was the profit attributable $3.1mil in the year prior to acquisition, and now, it’s a fraction of that? In fact, YTD it’s -ve. Not even a fraction.

But then, I can already envision how the company would reply. Business conditions have changed, they’re working on a turnaround blah blah blah.

In their reply to SIAS, LTC did mention that the GST implementation in Malaysia in 2015 did impact greatly on the sales. They didn’t mention this, but obviously the steep fall in the ringgit vs SGD is a big factor as well.

So unfortunately, my gripe still holds true: LTC paid too rich a valuation for the USP stake.

It’s better than PE15+, but ask yourselves this simple question: Would you pay 7.6 times previous year’s earnings for a business that is subsequently going to be loss making IMMEDIATELY after you acquire it?

Sure, the management can give a ton of excuses for why the profits literally tanked right after acquisition, but isn’t all this stuff supposed to have been discussed, deliberated on and incorporated when bargaining for an acquisition price?

The GST implementation is not new. It has been raised in the media way before the acquisition so I find it hard to accept that as a reason.


180) Steel bars

In my earlier analysis, I’ve described how FY17 is an interesting turning point for the company. The company has long been FCF generative, but has used the $$$ for debt repayment.

Info That I Have Gleaned From LTC Corporation’s AR 2016

LTC Corporation & Asia Enterprises Holdings – What Are Investors Missing?

I also described how we’ll be expecting to see an increase in FCF, and a reduction in overall debt, since LTC’s Seven Crescent properties were divested.

Thus far, no surprises in FY17Q1 results. All my previous predictions were reflected in the results.

369) LTC Asset side of balance sheet FY17Q1.jpg

Cash and cash equivalents has risen from $34.4mil to $52.1mil in the last 3 months!

That’s an increase of $17.7mil in 3 mths.

The company has largely paid off debts and borrowings as of last quarter, with only a mere $47k outstanding. This means that any future FCF generated will accrue to the FD and cash balances.

I’ll expect the cash holdings to increase in the upcoming quarters, although at a significantly slower pace than this Q1.


So what’s next going forward?

As the cash holdings accrue from the generation of FCF, I’m interested to see how management utilizes the cash. It’s obvious that the bulk of it will go into trying to turn around the USP business.

If they’re successful, that’ll be a nice growth area for LTC in future. If they’re unsuccessful, the consequences would be just terrible for shareholders. We’d simply be pouring money into a really deep pit for nothing, spending precious FCF on expensive acquisitions, on maintaining and running operations for a retail business where the general environment is against the industry.

Aside from the utilization of cash, I’d be monitoring the steel prices. There’s no point monitoring the international steel price index. LTC’s clients are mostly local, so the key parameter to look at is BCA’s steel price index.

Here’s the latest BCA rebar steel price:

370) BCA rebar steel index Oct 2016.jpg

The rebar steel price is important because as I’ve explained in an earlier post, the way the inventory is accounted for (average weighted method) results in “magnified” profits when steel prices rises, and losses when it falls.


As it stands currently, the valuations are just too attractive. I am unlikely to accumulate though, as my position sizing for LTC is just about right currently. I’ve said repeatedly, as far as in my initial thesis way back, that the downside is limited from here, and thus far it’s been true. LTC’s share price wouldn’t go under $0.5.

If management can utilize the cash that the steel business generates going forward efficiently, the company is going to do very well. The effect of good capital management for LTC cannot be emphasized enough.

Every quarter as the FCF accrues, the effect of good OR bad cash management is applied to this newly minted cash. For this reason, I think the key parameter to look out for is the ROI figure.

LTC traditionally has a low ROI (Steel business is asset intensive), but we can focus on the ROI specifically for the USP  JV, not LTC itself, by considering the profits it generates for LTC, as a function of the price paid by LTC ($24mil SGD thereabouts)

I’ll be watching what LTC does in the coming quarters with its cash.

I Did Something Fun As A Kid… And Now It’s Worth 6 Digits!!!

Oh boy. This is going to be a picture heavy post. And probably the most fun post for me on SG TTI thus far.

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As a little kid some 25 years ago, I used to collect stuff. There were 3 things that I was really serious about for several years: Currency (Coins & Notes), Stamps and Phonecards. (Yes, phonecards for public pay phones! No, NOT SIM cards!)

If you have no idea what are phonecards… well congrats. You have a ton of what’s probably the most valuable resource in the world.

Recently, in the midst of doing some year end packing, I found my collection lying in the dust and got them valued professionally. Despite it being a “down market” (that’s what I was told anyway), the entire collection, valued separately, but in it’s entirety, is worth north of 6 digits!!!

Like WOW.

OK, if at this point, you’re feeling a bit underwhelmed, that’s totally understandable. Afterall, I’ve heard of single stamps that’s worth 7 digits so my entire massive collection being worth 6 digits isn’t much to shout about.

The “Penny Black” for example:

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How much is this baby worth? Priceless probably.

Anyway, I was really really really super surprised. To put things into context, this  is kinda the stuff that sits in the corner of the storeroom, you bring it along whenever you shift house but never really pay attention to it. As a kid, I used to diligently catalog them. It was not so easy to find out more details about my currency and stamp collection because back in those days, there wasn’t even the internet. (yes, serious!)

Turns out that a quarter of a century ago, I was a “buy-and-hold” Graham and Dodd type of investor, before I even knew what that was. Better yet, I didn’t actually buy any of these.


Phonecards

Phonecards, for the uninitiated, belong to the era when public pay phones are everywhere. They mostly look like this too:

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Notice the phone books at the bottom. Nostalgic eh.

I have a ton of phonecards, mostly unceremoniously kept in old, dirty namecard holders like these:

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Some of you guys may own Singtel. I dont. But I have Singapore Telecom.

309) Phonecard 1 back.JPG

The back of each phonecard would have a ticker bar of some sort. Notice the tiny little puncture holes on the ticker bar? That indicates how much value is left in your card. Most of the cards in my collection have a puncture at the $0 mark. Why? Cos I used to hang around and wait for people to finish making their calls and discard their cards, before swooping in to collect them.

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Fuji Film doesn’t even exist anymore

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1996. The “First Of Its Kind” is now probably  on it’s way to being the  last of it’s kind.

337-phonecards-5National Day 1994… These kids should be in their mid 30s now, probably with kids of the same age when they took this photo.

Again, another now defunct company: Kodak

Defunct = good for my collection. Nobody can produce Kodak phonecards anymore because 1) Kodak is defunct

2) Phonecards are defunct

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SMRT commemorative set with the flimsy old MRT cards! Ironic that many yrs later, it’s now a private company

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And of course, Coca Cola collector item phone card. Coca Cola stuff tends to be very well collected worldwide for some reason.

Currency

This should catch the attention of most readers. Everyone likes to look at money.

310) Sg Currency Collection.JPG

Part of my SG old notes collection. Some keen eyed readers may notice that hey, there’re $2 and $10 and $50 notes that are “current” and not exactly old, why are they there?

So let’s play a little game of “spot the difference”:

311) different signature notes $10 - Copy.JPG

Spot any differences between a “current” note and the notes in my collection?

…………………………

…………………

………..

Answer: The signature!

Both the 2nd notes are signed off by Lee Hsien Loong when he was the Chairman of Board of Commission Of Currency Singapore. Since he’s probably never going back to that role again, you won’t have new notes with his signature on it. Most people are not going to bother or even realize this minute detail, so over time, the supply of such notes will go down as they get destroyed or replaced and taken out of circulation.

Then I’ll be one of the few holding on to a substantial supply.

Deep value, long term, buy and hold investing at it’s best. :)

312) different signature notes $2 - Copy.JPG

More variants in my $2 collection.

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How much is one of these bird series $1 notes worth?

How much is a stack of 1,000 such notes worth?

How much is a stack of 1,000 such notes, but in crisp, mint condition worth?

314) Bird series $1 notes in running order.JPG

How much are several stacks of these, each with 1,000 notes, all unfolded and in crisp mint condition, and with serial numbers in running order worth?

Too bad I don’t have the series starting from 000000 – 001000. I’m guess that’d be worth a lot a lot more.

Some other notable mentions:

315) Orchid series note.JPG

316) $50 with hologram.JPG

I remember spending 1 of these $50 notes with a hologram of Yusof Ishak on MacDonald’s. LOL. Damnit.

 317) old $10 comparison.JPG

1st July 1941. These are much older than me. The 1st note looks the cleanest, last looks the oldest.

Which of these are the most valuable, and why?

Answer: The last is the most valuable, followed by the middle, with the top one the least.

Why so?

318) 1st $10 note.JPG

1st note’s “lion head” hologram. That’s the normal one.

319) 2nd $10 note.JPG

The 2nd note’s hologram is misprinted to be lower than it should be.

320) 3rd $10 note.JPG

The 3rd note’s hologram is completely facing the wrong direction!

When there’s an error like this, it tends to be more valuable because it’s unique and much more rare.

These are some of my favorites:

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Banana Notes (Currency when Malaya was occupied by the Japanese)

322) Jap gov currency 2.JPG

1st July 1941!

327) $10 coin.JPG

Ever seen a Singapore $10 COIN before?

328) Macau handover to China commerative set.JPG

1999 Macau’s handover to China commemorative set. I’m betting that some ultra wealthy Chinese history and nationalistic fanatic will take this off my hands some day.

332) SG old coins.JPG

All of these coins are older than me.

332) old manchurian coin.JPG

I have like 1,500 of these 1909 Manchurian coins. This coin was minted 10 yrs before the Titanic sunk. Imagine that.

Found good info about these coins here:

http://ykleungn.tripod.com/north3e1.htm

Digging up my treasured collection is itself a hell of an experience… but THIS is my absolute favorite:

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A bunch of ancient envelopes that I used to store some of my notes!

The 1st envelope was back in Sec 1. I was a pretty good student, and won a couple of “book prizes” for certain subjects. Back then, winning a book prize gives you…. errr like $30 in book vouchers. Real cheapo considering how hard it is to win.

Anyway, since I really liked History then, I used the envelope that my prized $30 came in to store my notes.

The 3rd envelope says “Brunei Cannot Use Notes”. Let me explain. As a kid, I was thinking of accumulating at least 1 of EVERY SINGLE NOTE of every single country in the world. I figured that as long as I have a single one of it, any additional copy will then go into my other trading pool, which I can use to trade and/or sell to eventually swap it for new currency notes or coins that I don’t have under the “cannot use” category.

Some kids trade basketball cards, some trade pokemon, some trade erasers.

I trade currency.

Many of the old envelopes are from “Mercury Freight” as my dad used to work there. I remember his work involved driving around everywhere, which is great for me as a kid, as dad would be able to come pick me up from school anytime. (Petrol is paid for by the company too!)

The last envelope… lol that’s one of favorites. It holds only 1 single coin:

Front and Back of coin.

At that time, I asked my parents why does it say “Malaya and British Borneo 1961”, together with a picture of the British queen at the back

So is it Malaysia’s, Singapore’s or British’s currency?

Well, I tried to write the explanation as best as my young mind could comprehend on the envelope. “CONQUAR”!! LOL!

Please don’t judge. I think I was around 10 then.

Stamps

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I used to spend countless hours cataloging these and grouping them nicely in albums. There are like 30(?) such albums all full, plus boxes more of uncategorized stamps.

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Even now, there are some stamps who’s country of origin remains unknown to me. Like this one above. Where’s that from?!

The more valuable uncut stamps were kept in the more expensive albums

The more valuable ones though, aren’t exactly stamps but 1st day covers! Most of the 1st day covers were kept in large plastic boxes like the one on the left. I have like 12 of those boxes full.

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This is one of my favorite:

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These aren’t 1st day covers, they’re stamp collectors compilations. Each one inside has limited edition stamps along with detailed explanation of the concept for each stamp design. Here’s 1 example:

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International 1st day covers:

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I like the Prince William one a lot. Pretty arty farty looking

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I also have an enormous chunk of really old 1st day covers.

As far as I know, in those days, if you’d like to get the 1st day covers stamped (with the date and stuff), and you should because that’s what makes it valuable, you’d need to have a name and address on the 1st day cover.

Which is why the older ones all look like this:

365-stamps

There’s a name and address on the envelope.

BUT, because I have some 1st day covers from that era, with stamps but WITHOUT any names or addresses on it, those are supposedly worth a lot more:

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Because in those days, it’s supposed to be illegal to stamp the envelop without the relevant address. Well, not illegal. Just not allowed, I guess. That’s my understanding anyway.


Alright, this concludes my post. There’re a lot more unique stuff in my collection, but it’s getting way too image intensive. Plus I’m tired of taking photos so I’ll end here.

Who says investing has to be limited to equities and bonds?

I reckon that the way the whole world is printing $$$, at some stage, the inflationary pressures will be massive. And with that, the collectibles and other hard assets would be the ones that perform well.

I’ll probably keep these, maybe give them to my kids eventually. This must be what WB thinks… except that instead of stamps and phonecards and notes, he’s thinking of whole companies.

“Oh, I just realized that I own listed company ABC. Ah well, might as well keep it for Howard Buffett!”