Month: April 2016

Libra Group

Libra Group.jpg

Libra Group is a small caps company that’s relatively easy to analyse. In this blog post, I’ll explore the merits of this company, and relate the derived intrinsic value to the price. Do note that Libra Group only releases financial results every half year, and not quarterly.

Firstly, some background:

“Libra Group Limited (“Libra”) is a Singapore-based integrated building solutions company with its core businesses in: (i) mechanical and electrical engineering (M&E) services, (ii) manufacturing and sale of air-conditioning and mechanical ventilation ducts (ACMV) and trading of ACMV related products, and (iii) building and construction solutions. “

In addition to that, in 2015, Libra fully acquired Cyber Builders Pte Ltd and hence, is now capable of undertaking complete construction projects, as opposed to just being a sub-con previously. As of the most recent financials, Libra has also managed to upgrade Cyber Builders and another subsidiary, Kin Xin’s BCA classification from C1 to B1, and from L5 to L6 respectively. What this means is that Libra can now tender for projects from the government that are worth much more. (L6 has no tender limit).

Libra Group now has 4 fully owned subsidiaries:

  1. Kin Xin Engineering Pte Ltd – M&E services, including the manufacture, supply and installation of air-conditioning and mechanical ventilation ducts (“ACMV”) systems, fire alarms and fire protection systems, electrical systems as well as sanitary and plumbing systems. In Feb 2016, BCA classification upgraded from L5 to L6 under ME05 (no tender limit) (mechanical and electrical workhead)
  2. Libra Engineering Pte Ltd – Manufactures ACMV ducts and related products
  3. Libra Building Construction Pte Ltd – Previously known as Ai-Build. Main Con arm, undertakes building projects
  4. Cyber Builders Pte Ltd – Undertakes construction projects and public sector building projects

In short, Libra Group is the typical construction play. Most of their revenue comes from sub-con work: supplying and installing air conditioning systems and fire prevention systems. They manufacture the air conditioning ducts and vents themselves too. Moving forward, Libra now has a construction arm too and has already won contracts and executed them.

Libra Group was founded by Mr Chu Sau Ben, who later left Mr William Lee in charge of the day to day operations as the CEO while he himself remained as the Executive Chairman. Unfortunately, the company floundered and results were poor for several years. Mr Chu Sau Ben took over the reins again as the CEO and Executive Chairman of the board in Feb 2014 and since then, results have been markedly different.

This is how Libra’s income statement looks like for the past 4 years:

(SGD’000) FY12 FY13 FY14 FY15
Revenue 28,672 31,528 63,667 90,610
Cost of Sales -21,303 -26,053 -49,238 -72,841
Gross Profit 7,369 5,475 14,429 17,769
Gross Profit Margin 25.70% 17.37% 22.66% 19.61%
Other income 161 1,410 262 871
Administrative expenses -10,172 -6,329 -8,938 -10,335
Finance costs -274 -385 -482 -1,702
Profit before taxation -2,916 171 5,271 6,603
Income tax (expense)/credit -17 206 -28 -325
Profit after tax -2,933 377 5,243 6,278
Net Profit Margin -10.23% 1.20% 8.24% 6.93%
Earnings per share (cents) -2.93 0.52 5.16 5.32
Earnings growth rate (%) -466.25% 892.31% 3.10%
Average earnings, past 3 years   -0.54 0.92 3.67
Other comprehensive income:
Foreign currency translation 8 -42 -26 -40
Total comprehensive Income -2,925 335 5,217 6,238
Profit net of tax attributable to:
Owners of the company -2,925 521 5,318 6,238
Non-controlling interests 0 -144 -75 0

What stands out obviously is the EPS. In FY12 and 13, earnings were languishing. Suddenly, in FY14 and FY15, earnings were looking a lot better at 5.16 cents and 5.32 cents respectively.

The share price is $0.142 at the time of writing. At this price, assuming a conservative EPS of 5 cents, the PER is 2.84!

This PE ratio is kinda ridiculous. But it does indicate that either the market hasn’t paid enough attention to Libra (Libra is afterall a small company with little fanfare) or the market doesn’t think it’s recent earnings in the past 2 years can be repeated on a longer term basis. PER 2.84 means if you own the company outright, and if earnings stay the same, you will recoup the price you paid for the company in 3 years.

Libra has 3 divisions:

  1. M&E division that is involved in the supply and installation of ACMV systems, fire alarms and fire protection systems, electrical systems as well as sanitary and plumbing systems
  2. Manufacturing division that manufactures the ACMV ducts
  3. Main Construction division that handles construction projects

Here is the breakdown of the various division’s contributions to revenue (in millions):

REVENUE BY SEGMENTS
YEAR M&E MANUFACTURING MAIN CONTRACT
2013 17.58 13.95
2014 46.03 16.21 1.46
2015 60.39 16.59 13.64

As you can see, M&E  has been steadily improving, and in 2015, there’s a significant contribution from the main con division.

Lets move on to the balance sheet.

The NAV in the past 5 years:

FY11: 13.33 cents

FY12: 10.39 cents

FY13: 10.89 cents

FY14: 15.52 cents

FY15: 19.88 cents

This coincides with the what we see in the earnings as well. Libra has really performed in the past 2 years, since 2014. Currently, it is trading at a 29% discount to NAV, which is significant but not unusual in the construction sector.

Debt has increased substantially too. The current portion of the bank borrowings has increased from $10.9mil in FY14 to $21.7mil in FY15, largely due to the purchase of a property at Sungei Kadut Loop. This property is also partially used as a workers’ dormitory. They also have another property loan due to a property at Link@AMK, arising from the acquisition of Cyber Builders. This property is currently being earmarked in the balance sheet as an asset to be sold. (Valued at $1mil on the balance sheet)

Dividends:

2011: nil

2012: nil

2013: 0.3 cents

2014: 0.5 + 0.7 cents (total 1.2 cents)

2015: 0.5 + 0.7 cents (total 1.2 cents)

 At the price of $0.142, the dividend yield is a very enticing 8.45% currently.

Actually, its a bit higher time-weighted wise, since 0.5 cents is given out as an interim dividend.

Other developments:

In Oct 2014, Libra Group issued 15 million new shares at $0.20 to raise gross proceeds for operations.

In Apr 2015, Libra Group acquired Cyber Builders by issuing 4,545,000 shares at $0.22 per share, without coughing up any cash. The vendor also has a lock in period of 2 years. As mentioned earlier, Cyber Builders’ BCA classification has been upgraded.

The company did share buybacks in Dec 2015 at $0.145

The company has announced its intention to diversify into related industries, and held an EGM in July 2015 to obtain shareholder mandate to do so. These industries are:

  1. Property development
  2. Trading of construction materials
  3. To extend M&E services to the marine industry
  4. Hospitality services
  5. Tourism business

Following the EGM, Libra announced the acquisition of an option to purchase shares in Neptune Aviation Pte Ltd, which in turn is  a holding company that will own 4 Boeing 747 plane.

On-going projects and recently completed ones (Red ones are completed, Blue ones are ongoing):

  1. SH Design & Build Pte. Ltd – Proposed major addition and alteration to an existing four-storey industrial building (for Philips Electronics Singapore Pte. Ltd.) Delivery, installation, testing and commissioning of the whole of electrical, air-conditioning and mechanical ventilation system and fire protection system works. Worth S$22,500,000. Completed in Dec 2015.
  2. SH Design & Build Pte. Ltd – Delivery and installation of the architectural works, worth approximately S$12,999,968. This contract was terminated by SH Design. Compensation of $350k given to Libra for the termination. Incidentally, I found out that SH Design was suspended by MOM from Sept – Dec 2015 for incurring >25 demerit points during their workplace safety inspections.
  3. Cyber Buildings Pte. Ltd Proposed addition of one block of a four-storey ancillary office building to an existing shipyard at 15 Benoi Road. Worth S$12,100,000. Completed in July 2015.
  4. Nanyang Technological University Worth S$6,014,000. BBR Holdings, another company that I own, is the main con for this project. The 1st government tendered project in Singapore utilising the PPVC (Prefabricated Prefinished Volumetric Construction) method. Completed by 30 January 2016
  5. Temasek Polytechnic ProjectWorth S$4,145,000, to be completed in August 2015
  6. Sin Ming Sub-Contract – Worth S$4,180,000, completed by 30 November 2015
  7. Selarang Sub-Contract – sub-contract by Deenn Engineering Pte. Ltd. for the supply and installation of air-conditioning and mechanical ventilation works for a proposed construction of multi-storey vehicle storage and support facilities. Worth S$9,000,000, completion by October 2016
  8. SCC Sub-Contract – sub-contract by Kim Seng Heng Engineering Construction Pte. Ltd. for a proposed erection of an 11-storey Singapore Chinese Cultural Centre. Worth S$5,432,500, to be completed by August 2016
  9. Condo project at Tampines by China Jingye EngineeringWorth S$5,350,000, scheduled to be completed in July 2016

Share Price History in the past 2 years:

Libra Group

My Analysis:

+ve:

  • Libra Group would appear on the radar of most strict value investors, solely on a valuation basis. Extremely low PER, large discount to book value, high ROE in the past 2 years (29.87% and 26.81%). Rapidly rising NAV too.
  • Current management, led by Mr Chu Sau Ben, seems capable. Mr Chu said in an interview with TheEdge earlier in 2015 that “Libra’s management is optimistic about delivering top- and bottom-line growth this year” and they have indeed delivered in 2015.
  • Libra did share buybacks at $0.145 in Dec 2015, and is now currently seeking shareholder approval in an EGM to renew share repurchase mandate. Mr Chu himself bought a chunk of shares back in mid 2014 at around $0.08-$0.09

-ve:

  • Mr Chu has pledged a substantial number of his shares to various individuals in turn for loans. I am not sure why he needs these loans, and although this may be considered his personal affairs, if in the event of a margin call, the shares may be sold quickly and this will in turn affect the share price. We’ve seen this play out most recently with OKH Global, and with Michael Pearson of Valeant.
  • Order books are depleting fast. If I am not mistaken, the remaining 3 projects in blue above, are the only ones that Libra is working on currently. Even then, part of the revenue has already been recognised in 2HFY15. Libra needs to win some contracts to replenish order books fast.
  • Management has articulated grand plans for Libra: Aside from the usual property development, trading of construction materials and extending M&E services to the marine industry, Libra is supposedly going to expand into Tourism and Hospitality sectors. This is where a real risk is present as these are in unrelated industries. Libra may raise funds to go into these sectors by doing share placements or rights issues, which would be dilutive to current shareholders
  • As articulated by management, the operating conditions are likely to remain tough or get even tougher, especially with rising staffing costs due to government levies on their workers. Previously, I communicated with Libra’s CFO and queried about the GPM of the ACMV segment. Steel is one of the major costs for the ACMV segment, but while steel prices have fallen off a cliff, the GPM of the ACMV segment has actually fallen, instead of rising. Why is this so? (21.0% in 2013, 18.4% in 2014). Libra’s reply:” As per our 1H2015 results announcement, decrease in GM% for our manufacturing segment is due to rising foreign worker levy and wages as the Group strived to gain market share”

My Thoughts:

Libra Group currently has a fairly wide margin of safety because of the low share price, and improving fundamentals of the company as evidenced by the earning improvement over the past 2 years. My estimate of the intrinsic value would be closer to $0.20, which is pretty much at the current book value. Even then, the PE would be merely 3.8.

$0.20 though, would be a nearly 40% return from current prices. In the meantime, the yield of 8.45% is very respectable while we wait for the markets to re rate this company.

The key catalysts to look out for would be contract wins to replenish order books, as well as successful execution of management’s stated plan to expand and diversify into tourism and hospitality sectors.

The key risk would of course be a failure to execute the plans, and the accompanying costs such as dilution from share or rights issues.

The risks reward ratio is currently favourable enough for me to make Libra a part of my portfolio, but I would not give it a huge allocation without visibility of the key catalysts.

 

 

Valeant Pharmaceuticals

This company single handedly dragged down my returns in 2015.

The share price in the past year looks like this:

valeant

-86.80%!

Fortunately, the selling of some options served to buffer the drop for me. Still, it hurts.

At this stage, Valeant is as contrarian as it gets. Once they get past the 10-k filing, and the previously released results are validated, Valeant would be valued at a very much higher price than what it is now.

The latest news today is has sent the share price rocketing upwards. Valeant’s special committee has concluded their investigation into Philodor and found that there’s no need for any further restatements.

I’d be expecting Valeant to file their 10-K before 29th April as they have guided for, and that should send the share price shooting upwards further.

After Bill Ackman got on the board of Valeant, suddenly huge progress is made. Within a couple of weeks, the board composition has changed, the CEO is leaving and now the investigations are concluded.

This guy sure works fast.