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

This post was republished on NextInsight:

https://www.nextinsight.net/story-archive-mainmenu-60/938-2016/11103-ltc-corp

I spent the past couple of days dissecting LTC Corporation’s recently released Annual Report 2016. This post is about what additional information I have gleaned from the report. Since this is an update, I won’t be spending any time on the basic characteristics of the company. I reckon unvested readers who have not previously looked at the company, will probably find this irrelevant and very dry. Anyhow, here goes.

4) ltc-logo 13052016

To put some context in place, here are related earlier posts about LTC:

LTC Corporation (Part I)

LTC Corporation (Part II)

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

1. Strong start to CF generation in FY17

Under “Current Assets”, within the “completed properties held for sale”, the company’s balance sheet recorded $27.9mil. This $27.9mil includes properties in malacca, JB and the 7 Crescent bungalows. The 7 Crescent bungalows had 4 unsold units recorded.

Details of this are found in page 65 of the AR:

259) LTC completed properties held for sale 23102016.jpg

BTW, the company has a June year end.

Since the AR was compiled though, LTC has successfully sold off the remaining 4 units of the 7 Crescent project. In fact, they were sold right after the AR was compiled.

Here are the relevant, lodged transactions caveats:

260) LTC 7 crescent property caveats lodged.jpg

The remaining 4 units were sold at the end of June and July 2016, at a price of $3.6mil each.

This means that the project is fully old, and we should be seeing the effects of this in the upcoming FY17Q1 results to be released, probably in a couple of weeks from now.

While I do not know with certainty if the company is making $$$ from selling at $3.6mil, I do know that this is a great start in terms of CF generation, to FY17.

In my earlier report, I surmised that LTC has been using it’s FCF generated to pay off debt, and that starting FY17, the FCF will truly… be free. It’d be interesting to see how the management utilizes it.

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

The CF from this ($3.6mil x 4), is thus, a nice start and reaffirms the points I made in the earlier report.

Again, I’d emphasize that I do not know how profitable or unprofitable this whole project is to the company. In my earlier guesstimate done 2 years ago, I’ve worked out the  total developmental costs to be in the range of $50mil or so. This would be excluding transactional costs such as legal fees, taxes and agent fees. If so, the sale of these 4 units would be done at almost cost price, not sure if it’d contribute much to earnings.

2. Poor returns from USP acquisition

Again, in an earlier post, I’ve explained why I was disappointed with the… I believed I used the word “asinine” deal.

USP is the holding company for a 90% stake in the SOGO departmental stores in Malaysia. As I’ve explained, with corresponding figures, it seems the management over paid for the acquisition.

On top of that, it hardly seems wise to use CF from a very tough steel industry now, to jump both feet into another, probably even tougher industry. (Retail)

The figures basically confirm my fears.

Under “Share of results of a joint venture” in the income statement, USP contributed $506k.

To be fair, USP has contributed only 3 quarters of earnings, and it’s hard to gauge how it’d perform without longer term data.

Also, as of Q3 results, USP recorded -$171k, hence, in the 4th quarter, they actually earned (506k + 171k).

Still, the ROE figures are not great. Let me be generous and assume that in FY17, USP contributes 2x what it did for 9M16. That’s about $1.01mil.

The 50% stake is carried in the BS at $24.07mil.

This means that USP generates an annualised ROE of 4.2%

Hardly something to be proud of eh.

Well, LTC’s ROE figures were equally as shabby: 3.52% in FY14, 4.04% in FY15 and 2.75% in FY16. But if you’re going to spend $$$ to acquire unrelated assets to “expand” or “diversify revenue stream”, common reasons managements give to justify going into uncharted territory, I’d think the 1st thing you want to do is to make sure it pulls up your overall ROE figures. Which is why I said it’s asinine.

3. Account for goodwill when determining valuation based on BS

To add on to why USP acquisition is dumb, the company paid up massively more than the book value of the acquisition.

261) LTC USP balance sheet 2016.jpg

Of the recorded $24.07mil in the BS, about $10.5mil comes from “goodwill on acquisition”.

That’s jargon for “additional money paid above the market price of the assets of the company”.

I get that sometimes, we do have to have goodwill payment. But not for retail. Not for retail in Malaysia. And certainly not for retail, in Malaysia, in the present climate.

Anyway, my take home message here is that when determining intrinsic value, I would write off the goodwill portion completely.

4. Minimal impact from FRS109 implementation

To summarize, basically LTC has to implement FRS109 by 1 Jan 2018. FRS109 basically states that you’d have to mark to market price, any unquoted equity investments that the company has.

Currently, LTC carries these unquoted equity investments at historical cost.

The company doesn’t release any info about what these “unquoted equity investments” actually are, so there’s no way to evaluate if the current market value is more or lesser than the historical cost.

In any case, it’s not that important as there’s only $3.69mil of these unquoted equity investments carried under long term investments. Don’t think it’ll make much of an impact.

5. Associate company, Kairong developments, has paid off a chunk of the shareholder loans

This is certainly a good thing. Always nice to see shareholder loans to associates been repaid. From my previous experience with King Wan, this is a metric that’s very important to track.

If $$$ starts getting repaid, everything is great. If not, start worrying and digging deeper.

265) LTC Kairong developments 23102016.jpg

This is taken from page 61 of AR16.

As highlighted, I noted the drop in shareholders loan by just over $10mil.

This shows up accordingly in LTC’s CFs (Page 36 of AR16)

266-ltc-cf-partial-statement-23102016

Hooray.

To kinda sidetrack a bit, I love tracking these figures in various statements. If it all adds up, it’s very satisfying. Like putting in the final pieces of a puzzle.

Collectively, the numbers tell a story.

6. Value and rent of the industrial investment properties has held up in 2016

Self explanatory. The value (as determined by Knight Frank), has remained constant at $118mil. The rent has decreased very very slightly in FY16.

While all these have held up thus far, it is hard to say how they’d perform in FY17. My best guess is that we’d again see fairly constant valuations and rent in FY17, without much change y-o-y.

7. Fx is favorable for the company thus far

LTC is exposed to currency risks. Fx though, has thus far been kind to the company.

A strengthening USD-SGD is good for the company.  Every 3% increase in USD-SGD results in an increase of PBT of $1.42mil

A strengthening MYR-SGD is bad for the company. Every 2% increase in MYR-SGD results in decrease of PBT of $39k

Surprisingly, the ringgit doesn’t have too big an impact on the company. Only $39k for every 2% change. The USD impact is much much stronger, and thus far it’s been all good. We all know how strongly the USD has performed versus the SGD.

8. Big shareholders have increased their stake in the company in in FY16 compared to FY15

Again, self explanatory.

Top 20 shareholders list in 2015:

262) LTC major shareholders 2015.jpg

The same list in 2016:

263) LTC major shareholders 2016.jpg

Morph Investments Ltd in particular, is interesting. They’ve increased their stake quite a lot in the past year, from just under 1.4mil shares, to 2.16mil shares as of FY16. I have zero knowledge of Morph Investments, but I did notice them in many undervalued companies that I have studied over the years.

These guys obviously practice a very strict, warren buffett inspired “cigarette butt” type of investing style, going for deeply undervalued companies, with ultra long holding periods. I don’t think they’ve ever over paid for anything. They’re the kinda guys who go straight to the bargain bins when shopping.

Can’t be a bad thing at all to see them increasing their stake.


Finally, I stress-tested the valuations (based on the BS), just to have a sense of how ridiculously low the market is pricing the company currently.

The equity attributable to owners of the company is currently $251,539,000.

This is the latest asset side of the BS:

264) LTC corporation BS 23102016.jpg

Let’s start taking a chainsaw and cutting away big chunks of the assets to “Stress test” the company and incorporate a big MOS.

  1. Investment Properties – These are FH, but let’s assume the property market undergoes armageddon. The lowest in the past 8 years is $76,000,000, so let’s take that figure instead of the recorded $118,000,000.
  2. PPE – Let’s put a 50% write down to the $29.8mil figure.
  3. JV company – As mentioned above, I’d write off all of the goodwill of $10.5mil. But let’s be even more conservative and assume that even after writing off the goodwill, USP can only be sold at BELOW the net assets. So I’m taking off $14mil from this figure.
  4. Associated company – This refers mostly to Kairong developments. The figure has dropped as they’ve paid back the loans to LTC. But let’s be crazy and put a 50% write off to what remains.
  5. Long term investments, FDs, tax assets – Figures are not significant. Let’s write off EVERYTHING.
  6. Properties under development – another 50% write off.
  7. Completed properties held for sale – As mentioned above, the 7 crescent bungalows are all fully sold. All relevant QC charges have been paid (I forgot to add above that the AR also shows that they’ve reversed the overprovision for QC charges as well, so this project is def over for sure). Let’s just write off everything here. Assume whatever properties are worth 0.
  8. Inventories – well steel prices have really fallen, and these figures are weighted average figures (Explained in an earlier post). Let me assume the steel price market goes into another severe depression from the current already depressed figures, and drops another 50% again.
  9. Prepayments, trade debtors etc – OK, this is one hell of a crazy stress test. Let’s assume nobody pays back any debt, and we write off EVERYTHING.

So after the above mad scenario, we are left with equity of $99,322,500.

That means the book value per share is: 63.48 cents

The current share price is hovering between 50 – 55 cents.

This means that after the above scenario where the whole market has gone to hell, the world is facing the end of humanity type of crisis, Mr Market is still willing to give you 63.48 cents worth of value if you give him 52 cents or so. 

Oh, and did I mention that of the 63.48 cents, approximately 22 cents is in cash?

Crazy stuff.


CONCLUSIONS

I am expecting continued strong CF generation in FY17. In my earlier posts, I have mentioned that the CF is something that I’m monitoring closely, and I’ve shown how the company actually does generate a ton of FCF. It’s just that this has been used to pay down debt in the past years.

It’ll be interesting to see what management does with the FCF in subsequent years. FY16 was the turning point, FY17 onwards would be instructive.

On the other hand, the earnings picture will likely remain ugly. ROE figures are terrible, and will likely stay terrible.

In short, great on the BS/valuation front, great on the CF front, terrible on the earnings front.

This company smacks of the very traditional value investing, Benjamin Graham investing characteristics. Deep discount to BV, not paying for growth but focusing on value, strong CF.

I feel comfortable enough to continue holding on to my current stake. I have a moderate position sizing on LTC: Don’t intend for this to be excessively large, neither will it be a small/insignificant position. Haven’t added in 2016 as I think I can find more compelling situations. The upcoming results will be really interesting to study.

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6 comments

  1. Hi TTI
    Tempted to vest in LTC after reading your detail analysis. Wondering how you guys acquire the skills to dissect the AR, are you financially trained?

    I enjoy reading and wow by the efforts you guys put in, how you manage it between blogging and your FT job or you are retired ?
    I just ride on the outputs and see if gel and make sense…. Whether right or wrong, only time can tell. :)
    Anyway, thanks for the sharing again, you are one of the few blogs I am following now.

    Cheers.

    Like

    1. Hi Capricon
      Thanks for being a regular reader and commenter.
      As mentioned in the “About” page, I have had no formal “financial training”. I work in the healthcare sector. I’m not retired either, and I don’t think I ever will be. Don’t believe in retirement, it’s quite boring actually. I do know of some retired guys and I don’t really envy them.
      Regarding LTC, an easy and fast way to gauge is to ask the simple question: Is LTC’s share price most likely to:
      1) Rise
      2) Fall
      3) Stay the same?
      Nobody knows the answer for sure, but if one does an in depth analysis, I think in terms of PROBABILITY, the answer would be: 3), followed by 1), followed by 2).
      Which is why I’m allocating it an average position sizing. In the short to mid term, the massive discount to book value will support the share price. If it drops any further, I think hedge funds or wealthy individuals can easily come in to try to privatize the company. There is certainly a lot of room to do so. My investment thesis for a catalyst is the generation and accumulation of FCF, starting from FY17. Thus far it looks promising, we’ll see if it’s true when the FY17Q1 results are released in the next few weeks.

      Like

  2. Hi TTI,

    That’s another great detailed analysis.

    I can hardly write so detailed than you.

    From my message, sounds like its great I am part of the shareholders of LTC too.

    Let’s hope for a better share price in the year ahead.

    Regards,
    TUB

    Like

    1. Hi Capricon,
      To be honest… I wasn’t really intending to write an analysis on LTC Q1 results because nothing much has changed from my earlier post on the LTC AR16 results. As discussed and expected from the previous post, FCF generative, cash hoard starting to build up now that the debt is gone.
      I’ll expect cash to build up every quarter, and what’ll be interesting is how the management utilizes the $$$.
      They have said they’ll use it to expand the retail business, thus far now major moves yet. When there is, the next logical thing to track is how successful the retail business is, and the nature of it. Is it something that needs a lot of capital (capital intensive business)? IMO, the best metric to track for the retail business is the ROI figures.
      In my previous post, i’ve mentioned how I’ve tracked how the CF was used to pay down debt all these years, and this quarter is the 1st time in a looong while where there isn’t really any debt to pay down. So the cash hoard is building, and eventually management will have to use it somehow.
      If they use it wisely, the company’s share price will shoot up.
      If they use it poorly, the share price will languish/stay the same.
      If they don’t even use it at all and just let it accumulate, I believe sooner or later the markets will realize what I’ve identified.
      Finer details like the FCF generation and what it’s used for, is not that readily picked up by the general market, so I’m hoping to capitalize on this.
      Since you asked, I may write this up in a post… but there’s just so many things to analyze right now. It’s earning season.
      Cheers
      TTI

      Like

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