Thoughts On Current Portfolio – 16/08/2016

With today’s CDW Holdings’ results release, that concludes the quarterly financial statements release for my portfolio. I obviously have not looked in-depth into all of them, but have gone through some of them. Here are my thoughts.

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General  Thoughts

The SG & global economies are much weaker than what is reflected by general sentiment.

S&P grinds higher by the day while the results do not reflect that. PER of S&P is now 25.37 and rising. I am convinced that practically all the gains comes from money printing, which is happening at an alarming pace all around the world.

How does one invest in an environment of low yields, low demand and high liquidity? I have no idea. I have researched this for quite some time, it seems there is no real good way to capitalize (on a global macro way).

Traditionally high liquidity = high inflation at some point, and with that, inflationary assets like property, collectibles etc comes into mind. But in a low demand, poor corporate results environment, inflationary pressures are far far away.

The only conclusion I have derived thus far, is to prepare to capitalize on large disallocations between price and value by holding a higher proportion of cash, and by ensuring no leverage is used.

As I have mentioned in an earlier post (can’t recall which post and I’m lazy to link it up here), but the good times for leverage is gone.

I have positioned my portfolio according to my thoughts. Currently, I hold a relatively high proportion of cash (mostly in SGD and USD, and some GBP). I also utilize zero leverage, and have cut debt very substantially. The only debt I hold is a single property mortgage at levels that are very very comfortable. In fact, the one property that I’ve rented out, fully pays for the mortgage of the other property. 

That’s it. No other debt in such an environment. No car loans, no share margins, nothing.

I wish there’s a better way to capitalize on such an environment. It seems holding high cash etc would be a way to prepare for opportunities that arise, but not exactly profit from such an environment.

I’m not sure how much higher the markets can grind higher, but I do know that with all this liquidity, volatility in global markets will be much higher. I’m expecting occasional major shocks, kinda to the extent of Black Friday.

One thing that I appreciate about my portfolio currently, is that I’m seeing a lot of “links” between my investments. This helps me understand each company better, and hopefully, provides me with a competitive edge over a typical investor.

For eg. Hock Lian Seng and King Wan are JV partners in The Skywoods. “Results from a JV” for HLS would give a hint of how KW’s would look like.

BBR Holdings is the main con for the NTU hostel project. Libra Group is one of the sub-con doing the M&E, awarded by BBR Holdings.

Low steel prices have benefited Dutech Holdings (raw material), but at the same time, it’s impacting on the profitability of LTC Corporation (steel distributor) and Asia Enterprises Holdings (AEH)

Strong USD is great for Dutech Holdings and CDW Holdings, but bad for AEH.

Portfolio

BBR Holdings – FY16Q2 results were not good. As mentioned, I was expecting continued losses in the general construction segment, but the magnitude surprised me. I have since “engaged” management. Their replies were lengthy, but short of any real information. (read: useless). Surprisingly though, the share price has risen substantially since the $0.165 call I made. It has stayed fairly resilient.

This is probably reflective of the severe undervaluation to begin with. Now… imagine if they stop reporting losses at the general construction side. Not even profitability, just no losses in that 1 segment.

My personal guidance is that there’d be still some more losses to come in Q3, but Q4 and FY should be ok. The forward guidance in FY17 should be much better as I’m expecting the losses for the general construction part to stop, and contributions from their JVs to come through. The Wisteria project is coming along just fine.

Boustead Singapore – It is telling that the scrip dividend scheme is scraped. Like I said, I have ALWAYS collected scrip since the implementation of the scheme, without taking any $$$. This shows my confidence in FF Wong.

The elimination of the scheme tells me that the company thinks further issuing of shares at this level would serve to destroy value as the shares are undervalued.

I can’t comment too much as I have not done an in depth analysis, but a brief look at the financials and it is encouraging, especially in this current environment. I’ll be spending more time on Boustead soon, as this is one company that I may add to my holdings soon.

CDW Holdings – Results just released, can’t comment too much either. But what is disappointing to me is the fact that there are still no orders for the new generation light guide panels. The 0.1 US cent dividend is much lower than prior years, but it did surprise me as I was expecting it to be cut totally.

Dutech Holdings – Great set of results as usual, kudos to Johnny Liu. This is what strong management in a niche industry can do. IMO, his track record long term is going to be like FF Wong’s at this rate. Although the share price has shot up substantially from the $0.275 that I accumulated at, I’m still holding on to my 570,000 shares.

With the media spotlight, the undervaluation has corrected somewhat, but this is a company that has strong growth and management. It is extremely difficult to find companies like this. I’d usually divest once it’s not longer a deep value situation, but with Dutech Holdings, I’m likely to hold on for much longer.

I’m holding on to too much cash currently anyway, and opportunities to invest are few and far in between.

Simply by virtue of the definition of “Deep value”, if one finds opportunities to allocate capital easily, then it sure isn’t as deep value as you think, isn’t it?

The one thing that popped out for me is the sudden increase in impairment losses for trade receivables. Before FY16, the impairment is negligible but this has risen to RMB1.9mil as of FY16Q2.

The other point I’ve noted is the impact of low steel prices on their margins. Dutech is focusing on bulking up the “Business Solutions” segment. With the acquisition and current integration of Krauth, this segment has grown substantially. As the margins for this segment is lower than that of the “High Security” segment, I was expecting to see some margin compression.

Instead, the margins rose slightly. This is due to the low steel prices and it is enlightening to me as it shows me the impact of steel prices on Dutech’s margins. Going forward, there may be some headwinds as steel prices have recovered somewhat in the most recent quarter.

King Wan – An improved set of results, as I expected them to be. As mentioned in an earlier post, the contribution from associates reflected in HLS’s results, is positive and that’s reflected in King Wan’s as well. Still, I’ve yet to look deeper into the results.

Libra Group – Nothing exciting here. No news on the purported expansion and diversification. I’m not keen on the diversification into the aviation industry, so I don’t mind if the options lapse and Libra gets back the advance paid and don’t proceed with the acquisition. Mr Chu Sau Ben has a good track record, but I’m not keen on management that tries to do something new. King Wan has shown how there can be numerous minefields.

Somehow, these M&E players feel there’s a need to diversify.

LTC Corporation – Oh. Not all companies have released results. LTC hasn’t.

Chesapeake Energy – Thus far, I have not written about the intensive work I’ve done on my 2 US listed companies as this blog is supposed to be SG centric. I will say that I am very pleased with how it’s progressing thus far. Lawler has done a fantastic job righting the company, and the increase in share price is reflecting that.

Both my US investments are as deep value and contrarian as it gets. I don’t think anybody can dispute that. CHK continues to improve operationally in a very very tough environment. I’ve focused on their operational results rather than the negative hype or the share price per say. I’m waiting for the markets to realize that CHK is one of the most efficient players in this sector.

The most recent divestment is disappointing though, in the sense that CHK received no $$ for them, but I think the impact is far reaching. There is almost no doubt now that CHK has what it takes to survive and the bonds are now trading at close to parity indicating bond holders confidence.

I believe the share price has not reflected the operational strengths of CHK yet. Sure, it’s an extremely tough environment, but unless you think the natural gas and oil industries are going to completely disappear, someone has to be the market leader. There has to be a winner. The winner will be the one who’s the most efficient and CHK is moving towards that.

Valeant – The wild ride continues. My portfolio increased greatly in value after the results release as VRX gained 27% in a single day. It gave back some of the gains the next day, but has since risen again. I’m happy thus far with how Joe Papa has started to right the ship.

I believe that if they can get the 1st asset sale done at a fair valuation, we’d see a huge jump in VRX’s share price. VRX accounted for the bulk of the fall in my returns in 2015, but will likely account for the bulk of the rise in the near future.

What really helped is a massive bulk sale of call options that I made on the day when it rose 27%, betting that the rise is too fast and too much. These options are likely to expire, and I’m collecting nice, fat, free premiums happily. It has since reduced my average purchase price greatly.

Every $10 rise in VRX’s share price adds almost $70k to my AUM.

Thus far the returns are looking very promising due to contributions from VRX, but I’m expecting the wild ride to continue for the next 2 quarters.


These companies are no longer in my portfolio but I still monitor them:

Hock Lian Seng – Won a $1.1bil order from Changi Airport Group via a JV just yesterday. Ironically, I found out about this from an email a vested reader sent to me, asking for my thoughts.

While the order is undoubtedly great for the company, I’d have to douse the enthusiasm of the said reader a bit. IMO, adding to your stake right after the release of good news, is hardly ever a good investment move. It smacks of emotional bias.

More importantly, let’s look at the merits of this project. We’d be expecting revenue recognition of (60% of $1.107bil) for HLS. That’s $664mil. The project is slated to be completed in “early 2020s”. Let me assume it’s say, 2022.

That means $664mil gets split up over 6 years. That’s a contribution of $110 mil/year for HLS. While this is for sure good for the company, by breaking it down, it suddenly doesn’t look that fantastic either, does it?

Let me be clear: I am not saying that this contract win is not good for the company. It is good. Their order books were getting rather thin. On top of that, the fact that it’s awarded by CAG shows that their current runway project with CAG is going well. It adds to the reputational capital of HLS. If you want expertise and dependability, HLS is who you go to.

I am just trying to temper expectations. If you value the company at say $0.3 before this announcement, the notion that it’s suddenly worth $0.35 after the announcement, is simply ridiculous.

Lastly, the breakdown I made above is just for illustration purposes. In reality, HLS is not going to recognize any revenue in FY16, and from my experience in civil engineering projects like these, they’d recognize a minimal 5-10% in FY17.

In short, what I’m saying is that what drives the share price and enables it to stay there at the end of the day, is results. (Well, sentiment drives it in the short term but that’s not what I’m talking about here). And the results will only possibly show up in 15 months from now.

Still, this project piques my interest. This is because for all projects, there is a “S curve” yield (learnt this from a CFO of one of the construction company I invested in). If the “peak gradient” of this S curve coincides with the “peak gradient” of the other projects (Such as the dorm project) that HLS is involved in, it’d make for some eye catching earnings in certain years.

This is just a thought, I haven’t looked too much into it yet.

Oh, and 1 more thing: In my previous post, someone made a comment about HLS’s provisions for their ark @ KB and Gambas projects. The over provision does seem excessive and we may see “earnings” from reversals in the coming quarters. I thought that’s an astute observation. It is not possible to postulate when the reversal may occur though.

Metro Holdings – Won’t be talking too much about this as I have only recent divested. I would say though, that The Crest is still not moving units fast enough, and worryingly, there doesn’t seem to be any articulated plan by the management. I don’t think they plan on getting hit by the ABSD so something has to be done soon.

GBP continues to weaken as we speak, and this is probably not going to be good for Metro as well.

Lastly, the other thing that I haven’t mentioned, is key man risk. With the demise of Jopie Ong, nobody knows how the future negotiations and JVs will turn out. JO has always been paid ridiculously well, and if the pay reflects his importance to the company, that’s not going to be good for the company now that he’s gone.


Miscellaneous

Property – All the signs (both global macro and local factors), point towards a continued decline in the overall market. I think the CCR region is flatlining, and in fact, the index shows an uptick since the lows recorded 2 quarters ago. The CCR has also shown the sharpest and steepest drop amongst the 3 segments.

My strategy is to focus only on the CCR (D9,10,11). This ties in with my belief that it’s always better to know something very well, rather than many things at a mediocre level.

As mentioned, my focus thus far has been to hold cash and lighten on debt. I’ve no obligations except for a single property mortgage, but the rent from the other property covers this completely.

I am acutely aware though, that in this environment, rent is not a given. I may not be able to renew the rent, and even if I do, it may not be at the same rate. Hence, I’ve made sure that the mortgage is extremely comfortable.

I am still on the lookout for another property to invest/stay in. I don’t expect to acquire anything this year though. 2H2017 increasingly looks like a possibility. I’m exploring all venues, including auctions. Contrary to popular opinion, I personally find the greatest bargains are actually NOT via auctions, but that’s just my personal experience.

The one characteristic with property investments though, is that it is kinda like hunting elephants with a shortgun with a single bullet. You get to fire once, and you better make it count. All-or-none phenomenon. Nothing in between.

OK, I’m exaggerating but it’s along those lines.

Forex – I have had some mild success with the GBP-USD and USD-SGD currency pairs. My strategy is just to bet on extremes. I’m patient (and anyway this is not the bulk of what I do), and if something has fallen/risen far enough such that I think it looks ridiculous, then I’ll take the opposite position.

Thus far the results are pretty good on a ROI basis, but on a quantum basis it’s hardly worth mentioning.


I’ll probably spend the next 2 weeks analyzing the remainder of the results release before I leave for my long Europe holiday (again!). I’m taking so many long holidays this year that I’m honestly starting to feel guilty.

Holidays with family is one of the very few expensive indulgences I have. In fact, it’s probably the ONLY expensive indulgence I have, and IMO, the ROIC of this indulgence is well worth the investment.

Oh, and lastly, just a note of thanks to those who have emailed me with suggestions on where to deploy my capital. Some have been very successful. Someone (I won’t mention names as I have not gotten permission to) recommended Auric Pacific, which has since risen 10%? in a very short period of time after the results release.

Sadly (for me), I have not capitalized on these amazing recommendations as the way I invest is at a tortoise’s pace. I will not be able to make an informed investment within a week or 2. It’s just the nature of how I’m proceeding.

Still, I greatly appreciate the suggestions, and some will be on my “to-do-list”.

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6 comments

  1. Hi TTI,

    Great blog – one of the best in our local investing scene because your analysis is always comprehensive, and you are always willing to share your thoughts.

    Thoroughly concur with your view on HLS here. I am long HLS and this tender award caught me by surprise a bit since I was was only expecting to recognise gains in FY1718. Looks like there is a small window to make some money from an overblown market expectation (as margin compression should continue to show in next Q earnings).

    On a side note, there is another interesting stock that I have been keeping track of – AP Oil. Was wondering if you have had time to share your thoughts on it? Prob not as shareholder friendly as one would like, but their net cash holdings and solid BS makes it tantalizing.

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    1. Hi M,
      Thanks for the compliment, it’s greatly appreciated.
      I wouldn’t be able to comment on AP Oil as I have not done any research on it. Thus far, I’d say my circle of competence revolves around the property and manufacturing sectors (because these sectors traditionally have low PE ratios across the board)
      However, I am currently hunting for opportunities and many signs are currently pointing me towards the O&G sector. This is something that I’m currently looking at. I don’t think it’d take long for me to do an analysis of a specific company, but what is challenging is to relate the company’s status to the particular industry as that means I’d need to find out a lot more about the particular industry. O&G is a very difficult industry to understand very well as there are many players with different characteristics along the supply chain.
      I’d put AP Oil into my list of things to look at.
      My initial thoughts about the O&G industry though, are that we’re not going see any meaningful recovery in the near future. The rout has continued for a couple of years, but I think this will last much longer than many people expect. So I’m looking out for companies within the sector that is showing resilience in their operations (improving operational metrics).
      Interestingly, some mths ago during the Boustead FY conference call that I listened in to, FF Wong was asked to speculate on how long he thinks this industry wide downturn will last, and he replied that his best guess is that it may last another 5 years (from May 2016)
      Of course, it’s his personal speculation, but as you might notice, I’ve a lot of respect for FF Wong and with his experience in the industry, I don’t think he’ll be too far off in his opinions.
      Thanks for pointing out AP Oil to me.

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  2. Hi!, I’m just starting out and looking to get into deep-value investment (actually investments in general) and reading your posts helps me learn the process alot! I have just a quick question (please don’t shoot me down if its a stupid question lol)

    Looking at Boustead’s annual report, I noticed that, not just the revenue in energy related engineering shows a decline (along side the o&g industries) but the -margin- also dropped to about 7%. (I’m assuming they’re reducing their margins to keep the revenue numbers perhaps?) It also seems like they’re rebalancing their profile into real estate.

    Assuming FF Wong’s forecast wont be too far off, how far do you think they will go to continue this shift to keep profits up if o&g keeps the trend? Do you think it’ll put an upper limit to their revenue numbers in the near future?

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    1. Hi
      Thank you for your comments. There are no such things as stupid questions here.
      However, if you are just starting out investing, looking specifically for deep value may be very very difficult. I don’t mean the analytical and the FA part; anyone can do that and if you are diligent enough, one can do that very comprehensively from day 1.
      The emotional part is the very tough things to master for deep value investing. I have switched to looking specifically for deep value as of 2015. As you can see from my very transparent portfolio, my highly red returns in 2015 is testament of how painful it can get. (Thanks to Valeant saga). The intensive due diligence I did, allowed me to be highly confident of my thesis though, and since 2015, I have continued adding. As I type this, Valeant is recovering very strongly of late, but that’s another story altogether.
      (Comments on Boustead below…)

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      1. About your Boustead question:
        Here are Boustead’s margins for the energy related engineering division only:
        FY16: 7.1%
        FY15: 17.6%
        FY14: 13.1%
        FY13: 10.3%

        Do note that before FY14 (inclusive), the energy engineering and waste water divisions were separate, but were merged together in FY15 hence when calculating, you’ve to add these 2 divisions together (for FY14 and before) to get an apple vs apple comparison.

        These figures are pretty consistent with what we see in the energy markets currently. Margins have been decimated. I wouldn’t say they are reducing their figures to maintain the margins. I’d say that the market is forcing these margins and revenue figures on them.

        I think you must have looked at the recent FY17Q1 figures (margin of about 7% too) for the energy division and saw that the revenue has been maintained somewhat. Well, if you look in detail, a very large bulk of the revenue comes from recognition of forex gains. So unfortunately, the margins have been reduced, but the revenue has NOT been maintained.

        The energy market is in a very severe contraction currently, FF Wong in his last annual conf call, said this is the 2nd most or the most severe contraction he has ever experienced (I can’t rem what did he cite as the most severe).

        Unfortunately, I’m expecting the FY17Q2 figures to show that the energy division margins AND revenue to be totally whacked. Going into details, the PBT for the energy division is 1.8mil, vs 1.9mil last year. However, if you back out the currency gains, the PBT is actually 0.7mil only!

        With these figures, you can work out what is the true margin for this division without extraordinary items. If you look carefully, the FS did state that this currency gains is due to Boustead having transferred their GBP from their UK subsidiaries to other currencies just before Brexit, as a precaution.

        Well FF Wong and his team’s foresight just saved shareholders $1.1mil with such a manoeuvre.

        IMHO, deep value investing entails exercises like this. Peering deep into the figures and tracking everything, forming an opinion about everything and monitoring every change. This is a great example of how just looking at the figures may be misleading, afterall, I’m always reminded that there are many many eyeballs looking at these same figures. If the market assigns this price currently, there must be a reason.

        The only way to get truely outstanding results in the long run, is to go for deep value opportunities. The only way to succeed in deep value opportunities, is to do things that most normal people, would not bother to do.

        By definition, this must be hard and/or unusual.

        With regards to your 2nd question, like I said, I think Boustead, like all other downstream O&G players currently, have no choice but to accept lower margins and revenue and profit. This IS the great depression for the sector.

        When you ask whether this will keep a lid on their revenue in the future, I guess what you are saying is whether these margins will become entrenched with their clients and they will find it hard to raise them.

        I do not think so. Boustead has been through many many crises. I’d put up their long term margins here and it’d be self explanatory, but that’d really make my comment into a mini post by itself. You can do the math yourself, but their GPM, NPM and ROE figures have always been eye popping as far back as FY04 (cos that’s the furthest back that I included in my analysis)

        They can control and maintain their margins when the market recovers. Now though, it is prudent to lower margins and just take on any work they can find. If your boss asks you to take a pay cut in lieu of getting retrenched during the Great Depression, I think you’d gratefully accept it. (But you’d ask for a pay raise when recovery comes right?)

        Hope I’ve answer your questions adequately.

        Thanks for reading and commenting.

        TTI

        Liked by 1 person

        1. Thank you for taking time for the extremely detailed reply! I did miss quite a few things that you mentioned and I think, despite acknowledging the effect of the industry on them, I overlooked the severity of the situation for them ( missing contributions from forex gains and others).

          I guess at the same time, investing into it (or any other I suppose) would entail digging deep enough to find enough historical reasons to firmly believe that they can continually sidestep in a similar way, so that I can hold investments. I assume this is the emotional part that you mentioned. (doesn’t help that I’m an indecisive person by nature haha) But thanks again for the reply and I’ll continue looking:p

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