Month: October 2016

TTI’s Follow Up On S i2i

This post was republished on NextInsight:

https://www.nextinsight.net/story-archive-mainmenu-60/938-2016/11100-si2i-can-it-create-value-at-an-amazing-rate-to-exit-sgx-watchlist

This post is about my thoughts from the earlier analysis of S i2i. (The actual name of the company has a spacing between the “S” and the “i2i”, the S stands for “Spice” btw, but for simplicity sake, the rest of this post will just refer it to as Si2i without the spacing.  Cos I keep forgetting to type the space)

In my earlier post, I mentioned that I agree largely with Alain T’s investing thesis, yet I personally do not own a stake, and if I ever do, I said it’ll be a very small allocation. Why the contradiction? Why agree with a positive investing thesis, yet not feel confident enough to allocate capital to the idea currently?

I feel I need to justify my comments.

1stly, the investing thesis was written by Alain in the early part of June (I think), or before. With the benefit of hindsight, if you had invested in the company then, the share price has done this:

278) S i2i share price since June.jpg

On top of that, at the end of June, the company did a 1-off capital reduction exercise and returned a cool $ 0.729/share to each shareholder. So if one took up a position then, the returns now would’ve been a real pretty sight. I won’t even do the math here, but if you’d just add ($0.729 + capital gains of about $0.1) / intial vested price of around $1.65, and then annualize the return…. the ROI figure should be eye popping.

But if this was a “buy and hold” kinda investment, and you got in a few yrs ago, well, that’s just too bad:

279) S i2i share price long term.jpg

The company did a 400 to 1 share consolidation on the 30th June 2015. Yes, 400 to 1!

If you were one of those who had 400 shares converted to 1, it’s almost impossible to recover from that.

What I am trying to say is that the timing of investing, in this case, makes a world of difference.

Yet, all this is with the benefit of hindsight. The most important question is how the future of the company looks like, going forward. And herein lies the reason why, after eating/drinking/thinking/dreaming Si2i the past week, I am reluctant to take up a sizable position.

IMO, it’s absolutely terrible to buy shares in Si2i before June 2015, it’s absolutely great to buy shares between June 2015 and June 2016, and buying shares now, in Oct 2016, is somewhere in between terrible and great.

Let me try to explain myself. I will add a disclaimer here: Si2i’s business is in a field that I have absolutely minimal knowledge in. In fact, I am pretty much an IT idiot in real life. No kidding. I have no Facebook, no Twitter, no Instagram, none of the stuff that the whole world seems to need.

While it’s not difficult to understand the main business of Si2i (Distribution of prepaid phone cards in Indonesia), the other 2 arms confuse me totally. I mean, I can read the words in the description, yet… I still don’t quite understand how it really works. From start to end. From the initial contact with clients, how the services are carried out, revenue is recorded and recognised and collected, what are the costs needed to achieve this revenue etc.

280) S i2i divisions.jpg

Ok, so for an absolute IT idiot, what exactly does the description mean?

This alone, makes me highly reluctant to invest. I mean, I know what’s “hardware infrastructure”, but… what exactly is that?!  “Service integration business”. BLAH. English please.


So let me recap: The main idea in the investing thesis is that this is a company that’s currently on the SGX watch list. It was churning up massive losses for several years, but has since turned around and in the last 4 quarters (FY15Q3, Q4, FY16Q1, Q2) has been profitable.

To exit the watch list, the company would’ve to fulfill 2 criteria by March 2018:

  • Be profitable in the last financial year
  • Maintain a market cap of a 6 month average of at least $40mil

The company is already profitable for the last 4 quarters, and will likely remain profitable for 2016. The market cap of $40mil works out to be about $2.92/share, and the author used this figure to determine the potential upside if the company manages to exit the watch list.

I really liked how Alain considered the possibility of NOT exiting the watch list and being forced to delist. I went through that portion with a fine comb and it was obviously very detailed, can’t disagree with any part of that.

So what really caught my attention for this thesis, is that it has a real tangible, hard catalyst. The need to exit the watchlist is the catalyst. If the management achieves that, the upside is huge from here.

Alain has shown that even if management fails to do so, the potential exit offer (not compulsory but “highly encouraged”) would be substantially higher than the current share price.

My reluctance in investing though, stems from the fact that my personal analysis indicates that there is a real possibility, and in fact, currently it is not just possible but probable, that the company actually fails to meet the targets and gets delisted.

Although the author has shown how an exit offer would still be profitable, in my limited experience with exit offers, it’s really unpredictable. I prefer to have hard figures backing me up, not rely on a potential exit offer 1.5 years from now.

To put it another way, if in my analysis, I believed the company has a high likelihood of exiting the watch list by achieving the above mentioned 2 points, I’d not only take a stake, my position sizing would be moderate to perhaps even a core.


133) surprised-1184889__180

So the next logical question is, why do I think the company is more likely to fail to meet the 2 criteria mentioned above?

Let me explain.

  1. Show a profit before tax in a single financial year.

Let me start with this simple equation:

INPUT – OUTPUT = PROFIT FOR SHAREHOLDERS

Input = Revenue

Output = Cost of goods sold, all sorts of expenses, taxes etc.

So to turnaround the company and have profit become positive, we need Input > Output right?

So for a turnaround story, the management either has to:

  1. Increase “Input”
  2. Decrease “Output”
  3. Increase “Input” + Decrease “Output”

The best way to turn around the company is obviously by 3. Followed by 1. And finally, by 2. This is because increasing “input” is kinda like being long: the upside is unlimited. Decreasing “output” is kinda like being short: what you can possibly achieve is limited, and in fact, in this instance, the company can’t possibly have 0 expenses so the limit is even closer.

So to understand how the company’s profitability is improved, I went into detail to find out which scenario it is, and in this case, it’s obviously 2.

In all my earlier analysis, I always compile full year data. This is because for long term, deep value investors, it makes more sense to figure out the big data first. It’s kinda like if you wanna know if Messi is a good player, you’ve gotta look at his career statistics. Stuff like how many goals he’s scored per minute of game time he’s played, how many assists, what’s his average sprint speed, how much % of accurate passes etc.

It makes no sense to look at data from a single game or even a single season and try to determine if he’s a good player. He could’ve had an off day, as we all do. He could’ve been nursing a cold for that game. He could’ve worn a new pair of boots etc.

BUT in this analysis, I did the reverse: I placed emphasis on quarterly data rather than full year. This is because I am tracking a turnaround story. I wanna investigate the fine details of what’s happening, if I have monthly data, I’d use that instead of quarterly ones.

It’s kinda like if a patient did a major surgery, the surgeon would want to track closely the healing process. The reviews could be daily, or even hourly, to assess every step of the healing process, making sure there’s no infection, wound hygiene is good, no post operative complications etc. If the patient is in for a normal health check up though, that can be done annually. The clinician only needs to look at a snap shot in time annually, not a series of data sets in close proximity to each other.

OK I’m digressing. Let’s get back.

Here’s a table I’ve compiled showing Si2i’s revenue/turnover in recent quarters:

281) S i2i Revenue record.jpg

As we can see, starting from FY15Q4, the revenue dropped substantially and in the past 3 quarters, the drop is between 25%-30% from the preceding year, although the drop has decreased. (Decreasing y-o-y at a decreasing rate)

Looking at compiled data like this is very useful, as we can conclude that FY16 full year would likely show a drop in revenue of something like 24%-27%.

As mentioned in the earlier investing thesis, the drop is because of the consolidation in clusters by the client, resulting in Si2i having less clusters (to sell prepaid cards)

The company also breaks down the revenue, so let’s take a look at the breakdown for the mrq:

282) FY16Q2 revenue breakdown.jpg

The “distribution of operator products and services” is the main arm for Si2i, and there’s a 27% decrease y-o-y for 1H2016, pretty much in line with the above data.

The “ICT distribution and managed services” remained fairly flat. Can’t comment much on this since it’s the technical jargon stuff.

The “Mobile devices distribution and retail” relates to their Nexian brand of handphones. I’d conservatively write off the revenue from this segment totally in my longer term calculations, as the company is in the midst of closing physical stores and switching to an online model.


Thus far, we know that Si2i’s revenue has dropped about 27% or so every quarter. How does it’s profitability look like?

283) S i2i net profit record.jpg

That’s interesting… the company’s net profit increased and turned positive for the 1st time in a long while in FY15Q3, at a time when revenue dropped about 27% or so.

How did the company become profitable from loss making, when the revenue has dropped rather significantly?

Answer: By cutting expenses at a rate that’s greater than the drop in revenue.

I’ve compiled a table of the quarterly “Output” here:

284) S i2i expenses data comparison 2Q16.jpg

Now it becomes a lot easier to track quarterly figures and observe the trend. Let’s try to make some sense of this.

As we can clearly see, the turnover (“Input”) has dropped every quarter, except for 3Q15.

In 3Q15, the turnover actually increased 5.67% from the preceding quarter, but “Output” actually increased only 2.78%. No wonder the quarter became +ve for the 1st time. Remember the equation above:

Input – Output = Profits

Subsequently, in 4Q15, turnover dropped 26.99%, but “Output” dropped even more at 28.69%.

Herein lies the substantiation for my statement above: The company became profitable despite the drop in revenue, by cutting expenses more aggressively.

What is a worry though, is the mrq (2Q16). From the data, we derive 2 conclusions:

  1. The turnover dipped slightly by 0.61%, but the “Output” actually increased (not drop!) by 1.01%.
  2. Both the % changes for turnover and total “output” has decreased and leveled off.

Is this a sign that in subsequent quarters, the amount/leeway to cut “output” is limited? Or is this just a temporary blip in the cost cutting and elimination of non profitable arms?

Bearing in mind that this is just a single quarter, we’ll need more data in further quarters to answer that question.

To sidetrack a bit, the next quarter results may be misleading as the company has recently divested 3 Indonesian properties that are non core. The divestment, taken in it’s totality, had a net positive effect on the NAV and profitability. Hence, this one-off, extraordinary item has to be eliminated to have a true assessment of the finances of the company next quarter.

IMO, the row to track so as to get a quick and simple idea of how the company is lowering expenses, is the “Operating expenses” (highlighted in green)

Again, the data corroborates with my statements thus far. Broadly speaking, we see a lowering of operating expenses over the quarters. In my personal analysis, I went further back to much earlier quarters (not shown in this table), and the operating expenses were even higher, reaching $12mil or so in many instances.

And again, we can observe the uptick in operating expenses in the mrq.

(BTW I assumed readers understood the abbreviations since Yahoo! uses it as well, but if you didn’t, mrq = “most recent quarter”)

My conclusion here, is that although the company did well swinging back to profitability, practically all of it is done by taking a chainsaw to operating expenses. There’s a diminishing effect to doing so, as the expenses drop. Afterall, there’s no way it can ever reach 0 as long as there’s turnover.

And although I think the company will stay profitable for 2016 and 2017, hence fulfilling the 1st criteria to get off the watch list, the profits will likely stagnate and level off in 2017 onwards, unless the company can find some new revenue streams aside from distributing prepaid phone cards (and that provision of hardware infrastructure stuff that I don’t understand)

The management probably knows what I know too.

Which is why, they have expanded into a new field: Electric Vehicles (EV).

This was not mentioned in the earlier report by my friend Alain, as this development is fairly recent. In Sept 2016, the company acquired 15 electric cars and charging stations from BYD (of Warrren Buffett fame) for a total consideration of $1,123,500.

Now, if you’re thinking, $1,123,500 for 15 electric cars and stations doesn’t sound like a lot, it’s just a tiny venture, probably to test things out, that’s what I thought too. In fact, I was thinking wow I didn’t know it’s so cheap initially. It works out to be about $75k for each car.

But after digging further, I found that to get each of these BYD e6 cars operational, one has to include the taxes and COE, and that results in each car costing about $200k, substantially more than the $75k mentioned in the statement release.

On top of that, more costs have to be sunk to set up the infrastructure, do marketing etc, so I’ll expect the capital that has to be committed, will be much greater than $3mil ($200k x 15)

The company intends to utilize the EVs as a commercial fleet for transportation, and has set up a subsidiary called “S Dreams”, utilizing the ride hailing services of Uber.

I am rather skeptical of this new venture. It sure sounds and looks sexy, but if I break it down logically, I cannot see any competitive advantages that S Dreams has, over other conventional petrol fueled transport services like Grab or Uber itself.

I think the company is smart to link up with Uber, as this saves a lot of start up costs, and helps them to avoid the pitfalls of entering a new venture on their own. But if I am going to hail a ride, I wouldn’t necessary choose an EV, would I? Would you?

The only touted “benefit” is that the EVs would offer free Wifi. Not really a deal maker or breaker IMO.

285) S i2i S Dreams.jpg

Alright, so in the long run, they may expand to providing transport to businesses and not just to consumers. Possibly distributorship of EVs. Perhaps maintenance and repair of EVs too.

All nice and sexy, but like I said above, in real life, I am a low tech guy who loves unsexy stories. No fancy jargon, no clutter, no stuff that doesn’t serve a purpose. (Entertainment is considered a purpose)

So all I am interested in is, how much $$$ can this make the company, and by extension, me if I am a shareholder. I simply see no real competitive advantage here. My worry is that the company tries too hard to move “towards a strategy of ‘Information’ to ‘Innovation’.”

The words in italics are in the company’s own words.

The problem here is that I don’t really want “Innovation”. I want profits, I want FCF, I want a rising share price. If you can get that by planting bean plants and that beats EVs, I much prefer the bean plants please. When I eventually become a billionaire (hopefully possibly), and have nothing to do with my life (unlikely), maybe I’d want innovation then.

So my point here is that, it remains to be seen what happens of this new venture. Management could prove me wrong by conquering the transport market here. But right now, based on what I’ve found and my understanding of the data, I’m prescribing a value of 0 to this new venture. In fact, it’s a slight negative IMO because the management has had a terrible record with new ventures.

Let me move on to the 2nd point to exit the watch list:

2. Achieve an average 6 month market cap of $40mil

Market cap of $40mil works out to be a share price of $2.92 if the current number of shares remain the same. Considering the share price is $1.75 now, that means the share price has to rise about 67% between now and March 2018, and stay approximately there for 6mths minimum.

That’s a 67% ROI in approximately 18mths, or an approximate annualised ROI of 45%.

That’s a herculean task.

What puzzles me is that if management is trying to achieve that sort of ROI and hit the required market cap, why distribute $0.729 to shareholders?

Won’t keeping the cash, which works out to be $10mil, a quarter of the market cap that’s needed, make it so much easier to reach that goal?

As it stands, currently, the management has to create value at an amazing rate for the next 18mths to exit the watchlist. 67% rise from here…. I don’t think anyone would disagree with me when I describe it as “herculean”.


Let me recap what I’ve shown thus far.

I have shown how the profitability is due to cutting of expenses, not growing the topline. Hence, there is some doubt in my mind as to whether profits can grow much more from here.

I have also shown that just based on statistics, it’s not likely to reach the required market cap.

Thus the next logical thing is to work on the premise of a forced delisting. Alain has shown how it can still be highly profitable for existing shareholders. The work is amazing, I’d be proud if I did that. And in all likelihood, that may very well be the scenario that pans out.

Well, I wouldn’t use the maximum end of the range when calculating possible ROI just based on the likely delisting offer price, as like I said above, in my experience, delisting offers are really touch and go.

The owners taking the company private are not going to be thinking of the little guy. The offer price is not more generous than what he can get away with. So stuff like the market conditions at that point in time, the financial position of the company, the media coverage and attention it gets all comes into play.

None of these are stuff that anyone can evaluate currently.


CONCLUSIONS

As I stated earlier, the turnaround story is alive and kicking, but I have my doubts regarding the rate/pace of it in the coming quarters. Unless management has a new trick in their play book, other than just simply cutting costs. (Stuff like expanding into related businesses, acquiring related businesses, expanding current businesses organically by winning more clusters etc)

The management’s actions are thus far very encouraging. (CEO voluntarily accepted $1 annual pay when the company was losing money, and gave up all his stock options after his pay was reinstated to $240k. Dr Modi has also been quietly buying up the company’s stock).

I do think they miscalculated in doing the 400 to 1 consolidation though. That’s way too excessive and now the company suffers from having way too little shares outstanding.

My view as of the current data, is that it is difficult for the company to meet the requirements to exit the watch list.

Whether this means that the company will get delisted or not, remains to be seen. The SGX rules are relative new, and the consequences and implementation are fluid. Maybe the company may get a time extension. Maybe by 2018, this watchlist thing may even be scrapped. Nobody knows.

But since I don’t have that visibility, I concluded that I’d currently either pass on it and monitor first, or take a puny stake if I so wish to have some teeth in the game while I grab some popcorn and watch what transpires.

Oh and well, it’s not like I have much of a choice anyway. This stock is highly illiquid and the spread is humongous. I would have much difficulty building up a sizable position even if I wanted to.

Anyway, I’m glad this interesting company is brought to my attention. I’ll be monitoring in the coming quarters, if nothing else, just for pure interest.

S i2i Investing Thesis

This post is going to be different.

For the 1st time, I’m going to post an investing thesis… that’s not mine. This comes from a reader of SG TTI.

I have had many readers who have emailed me, many have shared their own personal investing thesis. Thank you for all the ideas. Whether I agree with them or not is not important, I enjoy understanding the thought process of others. I greatly appreciate them.

I enjoy discussing any ideas, particularly if I have some knowledge of the company and/or industry.

This investing thesis is one such example. It intrigued me enough to drop everything else, and dive deep to analyze this company.

For those of you whom I’ve promised to write an investing thesis on a particular company, I’ll get down to it. I apologize for the delay.

This investing thesis is written by Alain T.

Reproduced here, of course, with permission.

Executive Summary
Si2i is a Singapore-based telecommunications company. The company operates in three business segments, two of which are loss-making, but a third (sale of prepaid mobile cards in Indonesia) has consistently generated ~S$4-6m/year in EBITDA.

In aggregate, Si2i was profitable in 2015, and management is aggressively cutting costs and divesting/shrinking non-profitable businesses.

The company has S$2.11 per share in net cash vs the company’s last traded price of S$1.32. As such, there is an opportunity to purchase cash at 62 cents on the dollar and receive Si2i’s profitable operations for free, with the free call option that management continues to shrink Si2i to profitability and return excess capital (as it did recently, distributing S$0.729 in cash vs a pre-announcement market price of S$0.87).

Lastly, the SGX’s listing rules provide a hard catalyst to this idea as Si2i is currently on the SGX’s watch-list and thus has until March 2018 to double its market cap and remain profitable or face delisting.

Even in a delisting scenario, Si2i’’s intrinsic value could be unlocked as non-controlling shareholders should receive an exit offer per the SGX’s listing rules.

Business Description
Si2i is a Singapore-based telecommunications company. The company operates in three business segments: 1) Sale of prepaid mobile cards in Indonesia, 2) IT services, and 3) sale of mobile phone.

Si2i’s recent history began in 2009 when the Spice Group, a conglomerate controlled by telecommunications mogul Dr Bhupendra Modi, bought a controlling stake. Si2i was to be the vehicle for Dr Modi’s vision of building a low-price phone manufacturer to compete in the developing world.

Consequently, the company raised S$288m in capital via rights issues in 2010 and 2011, and snapped up domestic champions in the region, culminating in its US$175m purchase of “Nexian”, Indonesia’s 2nd most popular mobile phone brand with over 20% market share.

However, Si2i was slow to adapt to the feature phone to smart phone transition, ultimately ending up a casualty of the commoditization of smart phones. The subsequent destruction of value as the company discounted inventory and shuttered most of its mobile phone business has left the company a shell of its former self, having once boasted ~US$1bn in sales and a market cap of over S$350m.

Investment Thesis
Recent capital reduction exercise is the latest and most emphatic of a series of shareholder friendly events.

Si2i recently completed a capital reduction exercise whereby shareholders received a S$10m cash distribution. The rationale for the exercise was that Si2i had capital in excess of its immediate needs. This is a huge positive because: 1) it evinces a shareholder friendly board, and 2) alleviates concerns that Si2i may be a “cash box” value trap. This is but a continuation in 2016 of a series of positive developments in 2015, including: 1) The company’s continued shrinking to profitability bearing fruit as Si2i has posted three consecutive profitable quarters after years of losses, 2) Dr Modi’s return to the chairmanship, and 3) Management and the Board de facto forgoing pay in 2015 until losses were stemmed.

Non-profitable businesses hide a consistently profitable prepaid mobile card business.

Si2i’s non-prepaid mobile card businesses lost a cumulative S$2.1m in 2015, obscuring a prepaid mobile card business that consistently earns ~S$4-6m per year in EBITDA. As management continues to shrink or sell off unprofitable businesses, the strength of this segment should begin to emerge. Even accounting for the loss of clusters in Indonesia (see key risks section), the unit should be able to throw off ~S$3m in EBITDA, and at a conservative 4x multiple would alone be worth 68% of Si2i’s market cap.

Controlling shareholder has been purchasing shares in the open market.

Dr Modi purchased S$98.4k worth of shares over the last three weeks at an average of S$1.88/share. Whilst small relative to his net worth and stake, it is significant when one considers the stock’s illiquidity as these trades accounted for 22% of total trading volume during the period.

Threat of delisting presents a hard catalyst for value creation.

On March 2015, Si2i was placed on the SGX’s watch-list for having recorded pre-tax losses for three consecutive years and having an average market cap of less than S$40m.

The company has until March 2018 to exit the watch-list by recording a pre-tax profit and having a trailing 6-month market cap of S$40m, failing which the Exchange may either delist Si2i or suspend it with a view to delist. As per Rules 1306 and 1309, if the Exchange exercises its power to delist Si2i, the company or its controlling shareholder “should” make a “reasonable” exit offer, “normally … in cash” to its shareholders which “may include … liquidation of … assets and distribution of cash”.

Si2i’s entry into the watch-list may thus be a blessing in disguise as it creates a hard catalyst, ensuring Si2i does not end up a value trap. Furthermore, in either of two scenarios, the stock is a potential double within ~2.5 years.

In the first scenario, management successfully achieves its 2017 target of exiting the watch-list, resulting in a double from today’s prices. This assumes minimal dilution in the interim, a not unreasonable assumption given that management has actually been returning excess capital. Dilution would also hamper such efforts as investors would penalize the company’s valuation. Exiting the watch-list could also lift a big overhang for the stock.

In the second scenario, Si2i fails to exit the watch-list and is delisted. This triggers a potential exit offer to minority shareholders. In this scenario, based on past transactions, a 0.85x P/NTA offer would not be unreasonable, resulting in 135% upside.

Si2i is likely to remain profitable going forward, which is key to a valuation rerating.

Si2i has lost money over the last three years and burnt through S$288m raised via rights issues. As a result, investors have soured on the company’s stock as evident by its 38% discount to net cash as investors discount the value of cash in a) the hands of management with a history of destroying value, and b) a company that as recently as 2014 was loss making.

Thus, establishing a track record of profitability is key to Si2i rerating over time. There are three main reasons to believe that Si2i can achieve sustained profitability. Firstly, management intends to exit the SGX watch-list, which requires a full year of pre-tax profit.

Secondly, Si2i’s CEO and Board voluntarily reduced their annual salary and fees respectively to S$1 in 2015 following years of losses. These remunerations have since been restored following Si2i’s return to profitability.

This is prescient of future profitability as slashing compensation was a line-in-the-sand statement about the intolerance for further losses. It would also be a public relations disaster to restore such compensation, only for Si2i to slip back into the red.

Lastly, management is in the process of aggressive cost cuts and has been shrinking, restructuring or selling unprofitable businesses. Such initiatives have thus far yielded a promising three straight profitable quarters.

Valuation

SOTP valuation yields ~S$3.00/share intrinsic value. A conservative SOTP valuation ascribing $0 value to Si2i’s two unprofitable business units and a 4x EBITDA multiple to the prepaid mobile cards business still suggests 128% upside.

Net cash valuation yields S$2.11/share price target. Si2i currently trades at 62 cents on the dollar of its net cash alone.

Mandatory delisting scenario yields S$3.10/share price target. A study of exit offers for past mandatory delistings show that the most commonly used valuation methods to justify an exit offer price are P/NTA and premium to last traded price and VWAP. Based on a sample of precedent transactions, shareholders could receive a 0.85x P/NTA exit offer.

Key Investment Risks/Bear Case Arguments

Business risk of the company cash cow.

The prepaid mobile card business is currently Si2i’s only profitable segment, and is thus key to the investment thesis. In October 2015, it was announced that Telkomsel – with its 60% market share, and of which Si2i was one of its three largest distributors – had completed a consolidation exercise of its exclusive distribution clusters, reducing its clusters from 204 to 130, and the number of its distributors from 155 to 100.

Si2i’s allocation of clusters was reduced from 12 to 4, a net decrease even factoring in the effects of consolidation. Segment revenues have been down 27% YoY since. While management intends to reduce associated costs and plans to grow the company’s share of clusters with other operators, investors should be alive to such renewal risks.

Potential for mismanagement of cash pile via further value destroying ventures.

One of management’s stated initiatives going forward is to “plan for new areas of growth to reenergize the company”. Whilst sub-optimal given management’s past history of poor capital allocation, any new venture should be judged on its own merits and the investment thesis may change depending on the nature of any new business, price paid, and source of capital.

Nano cap risks.

Firstly, as an S$18m market cap company, Si2i suffers from extreme illiquidity and has an average daily volume of ~10k shares.

Secondly, there is outsized potential for minority shareholder abuse. However, Si2i is in the rare position (for a nano cap) of having a high profile chairman and major shareholder. Dr Modi is Singapore’s 39th richest person, worth an estimated US$615m, and is thus unlikely to risk his business reputation over a 32% stake in Si2i.

Dr Modi’s current tenure as Chairman also only dates back to September 2015, having handed the role to his son in 2013. The younger Modi resigned in March 2015, citing tax reasons.

The recency of Dr Modi’s second go-round helming Si2i is key as he would not have returned to the role if there was an expectation of future mispractices.

Lastly, an investor may be concerned about the reporting reliability and tangibility of cash in a nano cap company, especially when the thesis so heavily hinges on the value of net cash.

However, Si2i’s recent capital reduction exercise is strong evidence of the materiality of its cash pile as 25% of reported net cash was distributed. The company’s 1.3% effective yield on cash also passes the eyeball test and appears in line with its disclosed mix of cash investments and their range of interest rates

270) S i2i trading statistics.jpg

271) S i2i thesis.jpg

272) S i2i presentations.jpg

273) S i2i SOTP valuation.jpg

274) S i2i Mandatory delisting scenario.jpg

275) S i2i delisting rules.jpg

276) Enforceability of Exit Offers for S i2i.jpg

277) S i2i valuation summary.jpg


I currently do not own any position in S i2i, although I may take up a position anytime. If I do, it’d likely be a small position sizing. I have my own thoughts on S i2i and may add to this in a subsequent post.

I will say that I mostly concur with Alain in his investment thesis.

There have been new developments in the company, that is not mentioned in this thesis as the thesis is dated June 2016. I am not privy to the author’s position or entry price into the company, but it is safe to say that if one bought in June 2016, the returns would’ve been sizable right now.

Many thanks to Alain for allowing this to be shared, it’s been fun having this discussion.

Happy Deepavali!