Month: November 2016

Why I Divested Libra Group – 3 Red Flags That Should Catch The Attention Of Serious Investors

Libra Group

I divested all 90,800 shares of Libra Group on the 04/11/2016 at $0.192, recognizing a small profit in the process. Libra was a tiny, non-core holding, and I wasn’t intending to spend time to write about it, but on hindsight, there are some take-home lessons to be gleaned from this.

So why did I sell out? Aside from general portfolio management reasons (I’m in the midst of cutting down my holdings yet further. I forsee TTI’s final portfolio to be ultra concentrated, with sizable, large positions in a few companies, pretty much in line with the change in my investing style since 2015), I think there are 3 key red flags that stand out.

To sidetrack a bit, I think the traditional Graham and Dodd’s “buy and hold” strategy has been over -cited, over-copied and generally misunderstood. Particularly for small and mid caps, and particularly so in the local SGX markets, I think investors have to monitor closely their holdings in such companies. Buy and hold is not really buy and hold and forget about it.

This is the reality of it.

Unfortunately, our small and mid caps here don’t get much scrutiny, unlike in the other major markets such as NYSE, HKSE or SSE.

This means that many instances of iffy behavior, while not necessarily bad at first glance, pretty much flies under the radar. In fact, Libra is so low profile that I think this post probably won’t get much interest.

Anyhow, I’ll highlight 3 red flags here, it’ll apply to pretty much all other micro, small and mid caps companies. Do note that my definition of “red flag” isn’t necessarily bad. It’s just… well, a red flag. Something that should make the serious investor sit up and take note, reassess the situation, and possibly act on it.

1. Diversification into unrelated industries

This is kinda self explanatory. Long time readers of SG TTI would’ve known by now, my gripe with companies that do this. For sure, there are some companies that can successfully do this: Berkshire is a mish mash collection of companies. In the local context, one can argue that Boustead is one such company too: Oil, Geospatial tech and Industrial real estate don’t really have that much in common.

I think the evidence is pretty clear that the companies that can successfully span across industries, all have 1 thing in common: Strong management that thinks like an investor/capital allocator.

It’s probably not a coincidence that the management team is always helmed by a single star, key man that can make big decisions unilaterally. I mean, truly successful investing at it’s purest form, is pretty much a solitary activity. It’s hard to do it in a consensus, round table way.

WB prob understands this, which is why Berkshire’s succession is structured in such a way that a few managers, each individually handle a portion of their gigantic capital. He didn’t structure it in such a way that everyone comes together, discuss, and eventually make investing decisions as a team. It’s just hard to do so. Not impossible, but very hard.

I have no doubt that the management of such successful companies, would do equally as well if they were not running a business, but running a hedge fund. Anyway, at that level, most of them run their business like a hedge fund really. The operations are left to other key management personnel, while their focus is on deploying capital successfully.

Another hint: Management of such companies tend to focus on certain metrics in their ARs. WB hawks Berkshire’s NAV more than anything else. FF Wong focuses on the FCF generation of the company. Both have spoke about the ROIC or ROA figures in their presentations. The vibe I get is that stuff like EPS itself isn’t quite as important as compared to other companies.

Back to Libra. Libra was initially a M&E business, focusing mainly on manufacture of air conditioning ducts, and the installation and maintenance of ventilation systems.

In April 2015, the company acquired Cyber Builders Pte Ltd, and eventually expanded their repertoire of services. The company could install fire alarms and protection systems, electrical systems and sanitary and plumbing systems.

With more acquisitions, the company eventually could undertake entire construction projects. On top of that, they worked on getting their Building and Construction Authority (BCA) licensing expanded, such that they could undertake projects of larger size.

For eg. in Feb 2016, a subsidiary, Kin Xin Engineering, got it’s BCA classification upgraded from L5 to L6, which allows the company to tender for projects of unlimited size.

All this is organic expansion. All great. TTI approves of it.

The first hint of going off the rails, came in July 2015:

300) Libra diversification 22112016.jpg

Wow. Talk about diversification.

Suddenly, the company wants to expand to… everything. Man, this makes Tesla look like a dull company.

Property Development, Trading of construction materials, Hospitality (hotels), Tourism and even Aviation! Step aside Elon!

Needless to say, I was really disappointed to see this.

The company quickly followed up by announcing an acquisition of a Malaysian company, which gives Libra assess to 4 Boeing 737 aircraft:

301) Libra acquisition of Neptune Aviation.jpg

The acquisition was announced in November 2015. Yet, then the company to be acquired was a completely new one, holding just the abovementioned aircraft in it’s books.

“The Target has only commenced operations in November 2015 and accordingly has
no past track record and no historical financial performance attributable to it as at 31 October 2015.”

Weird, isn’t it?

What is lesser known, is that the Chairman, Mr Chu Sau Ben, is also the Chairman of a privately owned, little known tourism company in Malaysia:

http://www.yctravelntours.com/about-us/

This can be a good thing, it can be a bad thing, it can be a non event. Investors would’ve to assess the deal on it’s own merit. For me, I didn’t like it one bit.

2. Key personnel starts pledging personal shares in the company

It gets worse. Mr Chu Sau Ben started pledging his personal shares in the company to various individuals, as collaterals to secure personal loans.

This is just 1 of the instances:

302) Libra CEO personal stake pledged.jpg

While it’s perfectly within the rights of Mr Chu Sau Ben to do whatever he wishes with his stake, I think shareholders have to view this as a potential red flag.

Why does Mr Chu need the personal loans? And more importantly, what are the loans used for?

In the US, there are companies where the executive did something similar, and unfortunately, the loans turn sour and the lender had to offload the shares in quick succession, resulting in a tremendous drop in share price, which triggered further margin calls, resulting in other shareholders having their stake sold off etc. You get the idea.

At the bare minimum, having all these transactions tells me the Chairman is at least partially occupied with some of his personal finances, possibly with other ventures or businesses, instead of focusing on Libra. And that’s not good.

3. Depleted order books

303) Libra ongoing projects 22112016.jpg

Red = completed

Yes. It’s all in red.

Incidentally, I saw one of Libra’s trucks parked by the road near my place recently, and stopped the car to chit chat with the driver. He basically gave me the impression that things have slowed down tremendously, and that he isn’t doing much of late. I wouldn’t want to get him into any sort of trouble, so I shan’t talk too much about this.

For construction companies, obviously the order books tell us a lot about forward earnings. So having 0 active projects, is obviously not a good sign for the coming results.


So, there’s my 3 red flag lesson for Libra. I’m glad, and probably very lucky in fact, to exit with a small profit. This is one company that I probably won’t be spending much resources following up on in the near future.

Boustead Singapore -Boatloads Of Cash. What’s Next?

31) Boustead logo 29052016

I’ve done analyzing the latest earnings results of some of the companies I own, and others that I don’t, but am following.

Thus far, most have been within my expectations, with just 1 under performing and a couple out performing my expectations.

In my posts, I try not to talk repeatedly about the same company, and instead, try to mix it up. Since it’s been sometime since I wrote about Boustead, I thought to do an update here on my thoughts on Boustead.

As with all updates, there won’t be a discussion on the superficial stuff about the company and instead, I’ll dive right in. Here are some of my earlier posts about Boustead:

Boustead Singapore Part I

Boustead Singapore Part II

I do want to point out an error I made in the post. In Part II, I wrote:

“USD is also likely to remain strong or strengthen further compared to SGD or AUD. In short, Boustead will continue to swim against a strong current.”

From Boustead’s AR16 which was released after my post, a strengthening USD is negative for Boustead’s Geo-Spatial division only. As a whole though, a strengthening USD against SGD is actually a positive for the company.

Taken from page 146 of AR16:

294) Boustead AR16 Page 146.jpg

Alright, now that that’s out of the way, let’s move on to the latest FY17Q2 results for Boustead.


I was actually positively surprised by the earnings. Sure, it dropped, but much less than I was expecting.

295) Boustead FY17Q2 earnings.jpg

GPM has dropped for Q2, but it’s still in the 30s+% range, which is extraordinarily high for most other businesses. Won’t read too much into a quarterly drop.

Revenue has surprisingly, stayed the same, total profit has dropped only 1% for 1H17.

For the remaining 2H17 though, I think the drop will become much greater as the 1H had currency gains to buffer the results.

For FY17, for sure the results will be poorer compared to FY16.

But that’s not the main point of this post.

Check out Boustead’s BS:

296) Boustead's cash FY17Q2.jpg

The company now holds $297mil in cold hard cash. 

I have compiled and analyzed data on the company since FY04, and this is the highest amount of cash the company has ever held.

297) Boustead's long term cash holdings.jpg

And it’s not hard to understand why.

The business is incredibly FCF generative, a metric that I place strong emphasis on. Having had experience as both an investor and in managing businesses, FCF is something that I think is underrated.

And CF generation is something that Boustead does very well:

298) Boustead FCF generation from FY08.jpg

The company generates a ton of FCF every year. Without any major acquisitions or investments in the past couple of years, the cash hoard is now embarrassingly large.

How large is large exactly?

The total liabilities (both current and non current) is currently $332mil. Cash on hand is $297mil. The company also has some financial assets on hand that is equivalent to cash. That amounts to about $14.6mil. The company also increased it’s cash hoard by $37mil in just the 1H17.

If all these rates stay the same, this means that in another 6 months, the company can basically take the cash, and completely wipe out ALL liabilities. (not debt. I mean ALL liabilities).

Of course FF Wong won’t do that. That’s just to illustrate how much cash the company holds now.


Is this a good thing?

It depends on who you talk to.

On 1 hand, if you are looking at investing in Boustead, it sure is attractive. You know at least from a valuation perspective, your cash is buying… a lot of cash. You can’t really go wrong too much here.

On the other hand, the high cash hoard is taking a toll on Boustead’s ROE figures. The cash doesn’t return much, does it?

299) Boustead ROE.jpg

With multi year data like this, we can see that the ROE has steadily been dropping over the years, with a particularly steep drop in recent years.

In fact, in the last AGM, there was a surprisingly large proportion of protest votes against the reappointment of FF Wong, probably from large major shareholders who want to see the cash being put to use.

WB’s Berkshire Hathaway is famous for not distributing any dividends. WB has famously said that if the business can generate long term returns above par, why distribute capital? If the management is not able to find a use for the capital though, then it’d make sense to return cash to shareholders.

In the case of Boustead though, it’s not for lack of trying.

In the AR 16, Boustead explained 3 investment opportunities that they’ve tried to invest in, in the past year. All 3 ultimately failed to materialize.

“In FY2016, three potential acquisition and investment opportunities came rather close. The first was an announced proposed acquisition of a gas field with proven reserves in Indonesia. Its prospects were exciting and its risks manageable.

Unfortunately, we were outbid by a rival.
Sometimes, sellers lack integrity and sincere intention to conclude a deal, in this instance, trying to create a bidding war for an asset despite communicating otherwise. We decided not to engage in the bidding war although we certainly had the firepower to do so, as any additional premium paid may have significantly decreased our margin of safety and introduced unnecessary new risks.”

“The second potential acquisition (not announced) was a target in the energy sector providing engineering services for niche gas-related infrastructure. Thorough due diligence eventually uncovered that people could pose to be the biggest problem.”

“The third potential investment (also not announced) was a target in the real estate sector, where a cornerstone investor position was opened to us. Interesting as it looked, we pursued no further when detailed information was not forthcoming. Thorough due diligence is extremely important, otherwise we may end up blind-sided and that does not look pretty.”


MY THOUGHTS

If you try to read up or ask any analyst on Boustead’s business model, what would you get? Is it an O&G company? A real estate company? A tech company?

In my mind, Boustead is and behaves somewhat, like a hedge fund, with this guy being the hedge fund manager:

300) Boustead FF Wong picture on boat.jpg

The company makes prudent investments in anything that he understands, and has visibility on how the investment will turn out in the long run.

In short, Boustead Singapore is a capital allocator.

So what does this mean going forward?

The near to mid term headwinds don’t look good for the company. Earnings for FY17 is likely to come in below that of FY16. The 1H may hold up reasonably well, but as I have alluded to earlier, that’s taking into account currency gains.

On top of that, even FY18 may not see any recovery. Even FF Wong, with his immense experience in the industry, thinks that oil prices will likely remain low for a very long period of time, much longer than what most market participants are expecting currently.

The major revenue contributor for Boustead, the industrial property arm, is thus far holding up ok too, but we all know where it’s headed. I don’t think anyone expects the industrial property market to start shooting up on an uptrend soon.

The huge cash hoard the company has, is currently like a call option on investments. When an opportunity arises, one must have the financial firepower to capitalize on it. FF Wong is usually extra cautious, such that every investment he makes has a high likelihood of succeeding.

It does mean that one has to be extremely patient though, and endure prolonged periods of mediocre returns (aka relatively low ROEs).

Doesn’t all this sound familiar? It sounds like something that applies to myself as an investor. Which is exactly why I said Boustead is like a capital allocator/hedge fund.

So ultimately, should one buy Boustead right now?

In my earlier investing thesis posted about 6 mths ago in May 2016, I wrote this:

“As optimistic as I am about the strengths and the intrinsic value of the company, I do not think now is the right time to start going into Boustead in a big way.

I’ll be keeping 1, probably both eyes on Boustead though. I’ve missed the boat to get into Boustead in a huge way once, really don’t wish to miss it again. This becomes even harder to analyse as I’ll have to monitor BP as well, and at any 1 point of time, decide which has more value, before allocating capital.

While I’ve no intention to buy Boustead in the coming months, I’ve absolutely no intention to sell either. If the share price continues to drop, and valuations get even more attractive, I’ll be ready to pounce.

In the meantime, I’ll be paying attention to how Boustead utilizes it’s cash, and the types of acquisitions or deals it makes with them. Stay tuned.”

I have no idea how Boustead will perform in the next 1-2 years. My guess is that it’ll be ok, but not fantastic as long as O&G doesn’t recover. In the short term, anything can happen. If Opec is successful in it’s meeting at the end of Nov to implement production curbs, Boustead’s share price will likely react positively.

In the long run, I have pretty high confidence in the company.

So is this the right time to invest in Boustead? It all depends on one’s horizon. My opinion hasn’t changed much since May 2016. Near term headwinds are strong, but the long term future, will be very bright indeed.