TTI’s New, Puny Position – S i2i

March has been an absolutely crazy month for me thus far, work-wise. Probably cos it’s sandwiched between 2 holidays, and I’m paying for my travel sins. It’s almost the end of the month, and I have not had a weekday lunch in the whole of March. That’s really not very healthy.

It’s screwing up my GI system, and I’ll probably see the consequences 2 decades from now. But it’s just 1 of those things. That’s life. I hope that by then, someone has figured out a way to grow a whole new GI tract with genetic engineering.

484) image.jpg

On the investing front, I’ve recently opened up a new, absolutely puny position in S i2i.

I’ve previously posted a well written analysis by a reader Alain T, and written about my thoughts on the company, so this would be a continuation of that:

S i2i Investing Thesis

TTI’s Follow Up On S i2i

My new investing thought process necessitates a certain level of predictability before I take up a sizable position. I think that has served me well thus far, and I’m hoping S i2i is a continuation of the most recent 2 successes in Dutech Holdings and Geo Energy Resources.

In short, I’m willing to forgo a potentially good investment opportunity, if my analysis deems it to be good, but yet I don’t have relative visibility on it’s immediate to mid term prospects.

At the time of writing this, I’ve only an absolutely puny position of 2,000 shares of Si2i, bought at $2.45 last week. I’ve deliberately kept my position very very small, and it’s unlikely I’ll cross 5,000 shares. This is mainly because of the extreme illiquidity and the wide spreads. It’s just going to be very difficult to build up a large position, or liquidate one without getting affected by the spread in this instance.

As per my previous posts, Alain T has done really well with his investment in S i2i. I’ve also mentioned in my previous post, my personal opinion. And thus far, it seems that it’s played out as I described:

The company did fail to exit the watchlist by meeting the requirement of having an average market cap of $40mil over 6 months, by March 2017.

I got that right.

But they managed to get a time extension from SGX, and will now have until March 2018 to meet this requirement:

485) Si2i time extension.jpg

The share price as it stands now is about $2.45. For a market cap of $40mil, the share price has to be maintained at an average of $2.92 for 6 months.

So this means that from now till March 2018, either the share price rises another 19% to meet this requirement, or it doesn’t.


Along the way, a saga broke out.

S i2i received a letter from Blue Ocean Capital, claiming to represent some clients, and collectively they own 1.73% of the company, which is really too small a stake to do anything actually.

These guys are demanding that Dr Modi either buys out the company and privatizes it, or liquidates the company to recognize (close to) the NAV for the company.

Both outcomes, would be good for minority shareholders. Privatizing the company, or liquidating the company, would mean that shareholders would get to exit at a minimum of the NAV value. That’s $3.86 currently, which is a 58% premium to the current share price!

What makes this letter a “saga” though, is that one of the guys at Blue Ocean Capital, has a “related interest” in that his father is a director at Globalroam, which is the same company that Si2i is currently suing.

Globalroam converted a loan of $3.88 million (The loan is actually $5.5mil, back in 2014, but Globalroam has paid back partially, and this $3.88mil is what remains of the loan + interests) from S i2i into equity in Globalroam, instead of repaying the loan. It is S i2i’s position that this conversion is illegal. So this issue is now in the courtrooms.

I’m curious about this, because isn’t a convertibility issue clearly spelt out in a loan agreement? Either it is convertible, or it is not convertible. Wouldn’t the lawyers draft out something that’s iron clad and NOT up for interpretation? This is really curious to me.

Plus based on the initial loan announcement back in 2014, it does seem like there is a convertibility feature to the outstanding loan. I guess the dispute arises from WHO exactly, has the right to determine if the loan should be converted.

486) S i2i loan convertibility.jpg

So is the right to call the conversion with Si2i? Or Globalroam? We’ll let the courts decide that.

Also, try as I might, I can’t find where in the balance sheet is this loan parked under. Is it written off? Or is it parked under receivables? It’s not explained in any of the annual reports so there’s no way of telling.

In any case, like Alain T, I view this whole episode with Globalroam and Blue Ocean capital as a side show. It’s a neutral event, or a slight positive for me as a minority investor. It’s a slight positive because Blue Ocean is applying pressure on S i2i’s management, and both outcomes they’ve suggested, would suit me very well.

Plus this is getting personal. What’d you think this does to the egos and reputations of Si2i’s management and Dr Modi, if Si2i fails to meet the requirement to exit the watchlist?

If I am part of Si2i’s management, and/or Dr Modi, the 1st thing I’d want to do, is to exit the watchlist, and simultaneously, bring this dispute to the courtrooms and try to get back the $3.88mil + interests.

That scenario, would be a big win for both Si2i and Dr Modi, and a slap in the face for Globalroam (and a smaller tap on the wrist for Blue Ocean since they’d benefit directly from their equity stake)

At this stage, I don’t think it’s likely that Dr Modi would privatize the company. Again, that conclusion comes from the fact that there’s animosity between the parties, and well, it’s just human nature that you don’t let your adversary win right?

Privatization would only occur if the company truly is unable to meet the requirements to exit the watchlist.

So in my mind, there are 3 scenarios:

  1. Si2i fails to meet the requirements and eventually gets delisted by force. Alain T has worked out the dynamics of this scenario, and I think shareholders would get to exit in this scenario at a good price. (Pls go read the intial investing thesis). This is not my favorite scenario though, cos there’s a chance I might end up holding shares in an unlisted company.
  2. Si2i meets the requirements and exits the watchlist and stays listed. That’s a 19%+ gain from now to March 2018. It’ll likely be more than 19% gain, because the $2.92 is an average.
  3. Dr Modi accepts Blue Ocean’s recommendations and either buys out the company, or liquidates it. This is an unlikely scenario in my mind, but a highly profitable one for minority shareholders. The gain would be around 58%

Along the way, there’d be the smaller side show of the lawsuit. If Si2i wins the suit, that’s a positive because they’d get back the $3.88mil in cash. If Si2i loses, well, it’s currently expected by the markets. I don’t think there’ll be much impact.

So there are 3 potential scenarios, all of which seems good for the other minority shareholders. That’s what I mean by relatively high predictability.

On the business front, the company’s FY16Q4 results again turned out to be as I expected. In my earlier post, I’ve described how it seems like the company is improving, but they’ve thus far done that only by cutting costs, and not by growing their topline.

In Q4, we see that happening as the company slipped into losses, as the effect of cost cutting becomes diminished each quarter (There’s only so much fat you can cut)

487) S i2i FY16Q4.jpg

CONCLUSION

This is a unique scenario. I hesitate to call it an arbitrage situation because it’s not, but it’s not the typical deep value scenario I’m used to looking out for either.

It’s simply a calculated risk whereby I view the most likely scenarios going forward, to be favorable.

As mentioned earlier, I am not a fan of their new business directions (electric vehicles). I didn’t work it out in this post, but in Q4, that new direction contributed to the losses (not making profits yet, which is expected for a new venture)

Dr Modi has continued to buy up shares, even recently, which leads me to believe scenario 2 is currently the most likely. The fact that they’ve applied for an extension to the deadline also tells me that the management wants to exit the watchlist and keep the company listed.

I can live with a 19% gain a year from now.

In any case, this is a puny position, and even 5,000 shares would not account for 1% of my total portfolio by value, so I’ll just grab a popcorn and enjoy the ride. After Dutech and Geo Energy though, I’m hoping this would eventually grow to become the 3rd success for TTI for 2017.

Stay tuned for a good show.

Addendum!

That’s the problem when you start writing a blog post, save it halfway, and come back to finish it a few days later. Earlier, in this post, I talked about the loan convertibility saga with globalroam. Well apparantly, it’s not the most updated, cos just a couple of days ago:

488) court judgement Si2i.jpg

As described above, there is a convertibility feature attached to the loan based on the initial agreement back in 2014. I am curious why Si2i’s management thinks they had a case to begin with. No mention on the specifics, so I guess I would never know.

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8 comments

  1. Hi TTI

    Since there’s limited opportunity to build a sizeable position, why would you even bother buying shares in this company? Keeping up with the developments out of interest is one thing, but once you purchase you’d HAVE to (or maybe not) dedicate time to a company which doesn’t move the needle for you.

    Btw, what’s your opinion on the recent developments in Valeant and do you think your original investment thesis holds? The share price is at a new low.

    Like

    1. Hi
      I will be keeping abreast with S i2i, regardless of whether I have a position. I’ve already previously explained why I think it’s instructive to follow and monitor a company/industry over a long period of time. Which is why I still analyze and follow companies that I have since divested eg. AEH, HLS, Metro etc.
      Quality/in depth knowledge beats quantity/scope. IMO.
      So buying a position or not doesn’t mean extra work if that’s what you’re suggesting.
      It doesn’t move the needle for me either way, for sure, because of the illiquidity and the tiny position sizing. But this is not a hopeful punt, neither is it altruistic either. I’ve already explained why I expect the share price to trend upwards. I’d judge this position in Si2i based on ROI, as I judge all other positions. Not based on quantum gain.
      Which recent developments in VRX are you referring to? Ackman leaving?
      PDUFA date for glaucoma med Latanoprostene? Pearson suing the company for his inflated compensation?
      My original thesis revolves around the FCF generation paying down the debt. I misjudged how strongly negative sentiment can affect the share price of US listed companies, I don’t think it’d be a similar situation if hypothetically, VRX is listed on SGX instead. But yes, my original thesis still holds. The FCF has dipped in y-o-y, but it is still $1.8bil/year. Outstanding debt is currently $28.5bil ++. Refi has pushed back debt profile without increasing quantum, so there’s breathing room till end 2018 at the earliest.
      In the meantime, the valuations and sentiment surrounding VRX is so terrible currently, that any non-core asset divestures at just practically ANY reasonable valuations, would accrue positively to the market cap. And, this would take some time, but I think the markets are not giving any credit to VRX’s pipeline. Despite my professional background, I’d admit their pipeline is incredibly hard to fully comprehend, because it is so varied, and in many cases, are at the end stage phases awaiting FDA approvals. And US healthcare, as we all know, is not an easy environment currently to understand.
      (I added to my VRX position in March at the lows btw)

      Like

      1. That’s quick! Thanks for the reply.

        Yes, I meant not having to keep such a close eye on an investment that isn’t part of a core holding. That’s part of the reason for a concentrated portfolio right? Nevertheless, I too like to keep up with developments in many companies that I don’t hold. Allows one to pull the trigger faster and recognise any irrational drop in prices to market noise.

        Valeant – More the mgmt. guidance, refinancing and share price drop. To me, Ackman leaving is neutral-positive and Pearson’s lawsuit is just a sideshow. After all, how large could the financial impact be from the issuance of the shares and/or repayment of his fees? FWIW, there’s great opportunity when prices swing to such extremes and I’ve recently bought in VRX due to the (in my opinion) asymmetric payoff.

        Like

        1. Yep, as I’ve explained previously, I think it makes more sense to know a company very well, rather than many companies not so well.
          There are companies that I’ve previously spent time analyzing, or have owned but divested, and will NOT be monitoring. The reason for chucking these aside is if I think management does not act in the best interests of the company (cos humans rarely change on their own accord), or if there’s something critically wrong, or if it’s simply something that I think is very hard to understand without being in the industry, or if I am not interested in understanding.
          VRX- I wished I got in big time only now. Was 18mths too early. I think with FY17Q1 figures, we’d have a clearer picture of which direction VRX is heading.

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          1. It’s never possible to perfectly time the bottom, unfortunately. :) Yes, the next quarter’s announcement would be useful to see if mgmt. is on track.

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  2. But what about the scenario where si2i shares drop to a low (maybe due to weak markets somehow) and dr modi takes the chance to try and privatise on the cheap below nav? Minority shareholders may be spooked and start to accept the offer. Then it becomes a game of who blinks first.

    I guess I am saying I am not sure of the certainty you have in your 3 scenarios. Maybe I am missing something?

    Like

    1. Hi Robert
      There are a million scenarios that can happen, not just with Si2i but for every company.
      The scenario that you just described, would be true for almost ALL companies with majority shareholders or management/founders with large enough stakes.
      Weak markets, share price drops, try to take over the company and delist, minority shareholders give in blah blah blah
      Does that mean that we avoid all such companies? If so, that’d be the bulk of all small and mid caps!
      Or if I exaggerate, how about a scenario whereby Dr Modi decides he’s old and wants to be altruistic, and decides to make a GO of $1000/share to privatize? Should we put some weightage into this in our consideration of scenarios?

      My point is, barring black swan events, then one of these 3 scenarios is the most obvious and most likely. We can’t use a specific, unlikely scenario, and use that to exclude an investment. We can consider the consequences if that happens, but as I’ve mentioned above, the scenario that you’ve painted would hold true for almost anything.
      Also, if Dr Modi has to now wait till a market crash to make a GO, then I’d say his thought process is really weird. Cos the share price just a few months ago, or a year ago, was much much much lower. If he truly wanted to “privatise” at a low price below NAV, he should’ve done it then, not now when the share price has risen a lot. In fact, if he wanted to privatize at substantially below NAV, he could’ve done so just a year ago at around the trading price (Which was much lower than NAV)
      At this point, I think we can safely conclude that the management’s plan is to get the company off the watchlist and keep the company listed.

      Cheers
      TTI

      Like

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