Health Checkup For TTI’s Portfolio, IPO Madness, S i2i Updates

Last week, I sat down with a super investor one evening, who took the time to look at TTI’s strategy and results thus far, and shared his thoughts on how to “improve my productivity” (As he so gently and succinctly put it)

Long time readers would know who I’m talking about. Apparantly, his friends are readers of SG TTI too.

I can tell the said super investor spent some time understanding what I’ve done, as well as thought about what’s appropriate for me going forward. (Not every good strategy is appropriate!)

That’s something I appreciate greatly.

Subsequently, I’ve had the entire weekend to ponder about the discussion, and trying to figure out some stuff. I drew up a list of follow up questions initially, but curiously, the more I thought about it, I found myself answering these same questions.

It does require some “major surgery” with regard to my thoughts though.

The suggested strategies for me going forward, isn’t difficult to understand. No high science here (I suspect the said super investor purposely made it so). In fact, the large bulk of it, is what I’ve already been doing.

But I did overlook 1 important caveat.

And that relates to my options strategies. Instead of choosing something stable and relatively predictable, I did the exact opposite, thinking the high implied volatility would mean higher premiums. To make things worse, I compounded the mistake by opting for options that are far out of the money ONLY.

On hindsight, that’s literally like taking 2 steps forward and 3 steps back, isn’t it?

OK, I’m not supposed to talk about what’s been discussed here, or share it freely, so I shall stop here. All I can say is that going forward, I’ll be adapting these new thoughts, and it seems like my activities in the US markets will be taking an increasingly important role.

It’s all been very enlightening, and very good fun, to be honest.

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This week saw the 1st trading day of a hotly anticipated IPO: UnUsUaL

MM2 Asia hived off this division in an IPO on catalist. And the share price simply went ballistic on the 1st trading day:

http://www.businesstimes.com.sg/stocks/hot-stock-unusual-more-than-doubles-from-ipo-price-in-trading-debut

I don’t really bother with IPOs usually.

But I was reading this week’s TheEdge and a paragraph in an article about UnUsUaL jumped out at me:

“For the nine months to December last year, UnUsUaL’s revenue fell 28% to $16 million. Earnings, however, grew 38% to $3.8 million. Revenue was lower as the group had organised more one-off events in 2015 during the SG50 celebration period. But earnings rose as gross profit margins improved owing to less outsourcing for projects. It also recorded a $1.6 million gain, mainly from equipment sales.”

I pulled out my calculator and did some quick calculations.

Earnings grew 38%, this means it was $2.75 million before.

This current $3.8 million in earnings though, includes a $1.6 million gain from equipment sales.

Since UnUsUaL isn’t in the business of buying and selling equipments, I’m assuming this is a one off gain. So normalized earnings (backing out one off gains) would thus be $2.2 million.

This means that true earnings actually DROPPED y-o-y from $2.75 million to $2.2 million.

Revenue dropped y-o-y as well, as they’ve acknowledged.

But dropping revenue and earnings do not make for a good IPO story. So it’s time to cue for some “equipment sales”, which changed the earnings picture from a drop y-o-y to a very respectable “Earnings, however, grew 38% to $3.8 million.“

Wonder if anyone bothered to ask why the equipment sales has to occur JUST BEFORE IPO? 

Yet, despite all that, the share price jumped more than 100% in a single day. PE now is something like 50 times! That’s a fact. It happened. Period.

So perhaps even if one KNOWS this fact about the earnings, it’d have been smart to still get into this IPO madness.

Just don’t be the last one holding onto the bomb when the music stops. Ah, the craziness of the markets.

Of course, my thoughts above are just from reading a single article. No DD. So perhaps there’s something that I don’t know about, something that’d justify paying PE 50 times earnings, and if so, please feel free to correct  me.

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As stated here, I took up a position in S i2i about 2 weeks ago:

TTI’s New, Puny Position – S i2i

It’s not a game changing idea because of the small quantum, but as I wrote previously, I’m looking at the ROI, % wise. Not the quantum. And I’m hoping this would turn out to be the 3rd big winner for me in a row, following the successes of Dutech Holdings and Geo Energy.

Thus far, things are going as expected as the share price has appreciated 6%+ since just 2 weeks ago, and looks set to continue to race towards the target price I’ve mentioned, in order to exit the watchlist.

Interestingly, the company released an announcement:

Now, I’d admit, I was initially negative about the proposed acquisition of the E-commerce business. But as more details are revealed, increasingly, it seems like the management managed to pull off a coup.

The acquisition is an “asset transfer” as the prior announcement put it. No cash involved, just equity dilution.

But this announcement is what got me puzzled.

Even after the asset transfer is completed, the vendor SB ISAT Fund, which is transferring the E-commerce business to Affinity, a subsidiary of S i2i, is responsible for taking care of the financial requirements of the Affinity Group.

Huh? That sounds like a very good deal for S i2i.

The financing (to be taken care by SB ISAT Fund), cannot dilute S i2i’s stake, and in fact, is totally excluded from the liabilities of the Affinity Group. This basically means that the E-commerce’s business funding, will probably come in the form of some loan from the SB ISAT Fund to the Affinity Group.

SB ISAT Fund takes on the risks and liabilities of the loan effectively, since the loans cannot dilute S i2i’s stake so there shouldn’t be any convertibility attached to them.

All this is very interesting; S i2i’s management continues to come up with weird, innovative deals. Ultimately though, the execution and subsequent results would be the key.

I’m still holding on to my puny stake while I grab some popcorn and watch the show. Dr Modi himself has continued with his share purchases, so he’s definitely putting his money where his mouth is.

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TTI is off travelling for the Easter weekend coming up (again!) and I’m really looking forward to it.

Time with family is always precious.

Overheard : “Someone wise told me that 90% of stock investors lose money, while 95% of forex investors lose money. So I choose stocks.”

LOL. That gave me a good chuckle.

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TTI’s Portfolio Review – FY17Q1

Before you know it, Q1 came and left. TTI’s portfolio generated an internal rate of return of 15.78% annualized. Total net assets under management grew by $105,937.67, from $943,815.80 at the end of FY16Q4 to $1,049,753.47 at the end of FY17Q1. These figures are nett of all fees.

Looking at the AUM, a gain of about $100k in the 1st 3 months of this year isn’t too bad. Plus most of the companies I own have their financial year ends in March. This means that I haven’t received any dividends and would expect most of my dividend collection to take place sometime in the next few months. These figures also mean that if my portfolio continues growing at this rate, I’ll end FY17 with a 15.78% return, which is not super fantastic, but certainly not too bad either. I wouldn’t mind a long term, multi year compounded return of 15.78%.

On top of that, I could’ve grown AUM more rapidly in Q1 if I wanted to, by capital injections. But as I’ve explained previously, I’m considering a property purchase probably in late 2017 or 2018, so I’ve decided that most of my capital injections for 2017 will go into my property fund instead. That’s separate from SG TTI’s portfolio.

Well, at least those were my happy thoughts initially.

Until I saw what STI ETF did.

And I had to re-check these figures a few times to be sure I’m not doing it wrongly:

Freaking 49.97%!

STI ETF started the year at $2.94, gave out dividends in Feb, and ended Q1 at $3.19.

This means if it grows at it’s current rate, STI ETF will return a massive 49.97%. Of course, this means that STI ETF has to continue growing at this rate for another 9 months, which is a pretty tough feat.

Now, I’ve always maintained that it’s useless to look at your portfolio’s individual returns. A gain is nothing to shout about, unless it beats a passive instrument. So I’m walking the talk here and doing the comparison.

I think most people don’t think of it that way though. I’m concerned as now, I see many people touting their returns and feeling good about it. It always feels good to see a capital gain. But in the context of a passive benchmark, I suddenly don’t feel that great.

I am encouraged though, by the results of my most recent picks. Dutech has been a steady performer thus far, and I’m sitting on 6 digit returns. Geo Energy has been phenomenal since my initial entry on essentially any metric. I’m already profitable in my position in S i2i, despite initiating it barely less than 2 weeks ago.

I’m hoping this streak continues while I implement some of my new thought processes in future investments, while cutting out the legacy issues with some of my previous companies.

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Here are my quick thoughts / breakdown of the companies that I own:

LTC Corporation – Nothing much has changed. LTC rose somewhat in Q1, their financial performance improved and more importantly, my initial thesis of continued FCF generation and accumulation remains.

BCA’s steel price index remains steady compared to Q4. And as I’ve explained multiple times in previous posts, LTC’s as well as other steel middlemen’s accounting is such that the earnings grow exponentially when steel prices increases.

I’m optimistic about FY17’s performance in this regard.

BBR Holdings – I’ve previously documented my annoyance with BBR’s management. That does not reflect how the company would perform in FY17 though. My thesis has always revolved around the fact that they’ll eventually complete the loss making general construction projects, while new projects will show better margins and hopefully, better project management execution.

TOP of the Lakelife EC proceeded smoothly and on time, and they’ve already recognized profits partially. This will continue to contribute to earnings in FY17.

The Wisteria project is doing rather well, and as of now, is already >90% sold. So that’s a massive +ve for the company as well.

The main key though, is the completion of all the loss making projects that they’ve undertaken previously. I monitor their projects closely, and I’m pretty confident there are no more losses to be made, or at least minimal losses from this general construction sector.

The share price has risen quite a lot in Q1, but it’s still way below what I value the company at.

King Wan – Terrible. I’m disappointed with the company’s management. There’s no easy way to put it, but they’ve been terrible stewards of the shareholder’s capital. As mentioned previously, the key lesson I’ve learnt with KW, is to not trust management to execute investments. I’d much rather trust my own capital allocation skills and my own due diligence.

Having said that, they’ve reinstated dividends, and the yield is rather juicy at this current share price. I’m not keen to sell out now as they could be in the midst of turning around. I’ll be waiting for more data in the next earnings release.

Boustead Singapore – Now THIS is one company that I can actually kinda ignore. FF Wong is as shrewd a businessman as they come. Add to that is a healthy dose of integrity and a long standing reputation for capital allocation. Boustead gave up chasing 3 investment opportunities in the last FY. I’m actually a bit surprised that they still haven’t done any major acquisitions.

In the meantime, the cash hoard is getting a bit errr embarrassing. I did sell out somewhat in Q1, mainly because I have had odd lots from the acceptance of scrip dividends previously, and yes, I know it’s not good investing practice but I hate to see odd lots.

Also, I’m optimistic about Boustead Projects and think that Boustead Singapore is a good proxy for BP’s fortunes.

Geo Energy Resources – I’m sitting on >100% returns in 6 months. Yep. Wow. The company has recently announced acquisitions of a new mine. I did some digging up on this latest acquisition recently. Geo Energy is entering into the high calorific value coal market with this new mine. This helps to diversify their coal story, as their previous mines were all in the low calorific range.

High calorific value coal though, runs the risk of having generally, a higher sulfur content. Sulfur is the main pollutant for thermal coal, and we all know that China is looking to clamp down on polluting industries now:

Typical Sulfur Content in Coal

• Anthracite Coal : 0.6 – 0.77 weight %
• Bituminous Coal : 0.7 – 4.0 weight %
• Lignite Coal : 0.4 weight %

Anthracite coal is the high calorific coal. In any case, the sulfur content is still below 1% which is the limit imposed by China.

At the current coal prices, the PE for Geo Energy on an annualized basis, still extremely low. Even after a 100% gain in 6mths, I’m still seeing more gains on the table.

Dutech Holdings – Another massive winner thus far. I’m pretty confident in my due diligence done for Dutech, and I intend to make this a long term core position. Dutech will need some time to consolidate their latest acquisition (Metric), but Johnny Liu has a long term track record of doing so successfully.

Hot rolled coil steel prices has also come down substantially since the start of the year, so that further helps their margins.

S i2i – My newest, latest position. Also the smallest by far. Share price continued rising since I bought, I’ve just written about this recently so nothing much to update.

The shares are currently being suspended while a shareholder’s dialogue is scheduled for tomorrow.

It’ll be interesting to see what transpires. This doesn’t affect my overall portfolio much because of the small position sizing, but it’s still very satisfying to see an idea do well because it reinforces my analytical processes.

US listed equities Chesapeake Energy and Valenat Pharma – I haven’t really written about my analysis of foreign companies. It’ll probably be many many posts long if I really do so, but since I don’t think there’s that much interest, I shan’t.

Broadly speaking though, both CHK and VRX have been a drag on my portfolio returns in Q1. VRX in particular, has been in the news constantly for all the wrong reasons.

I’m optimistic though, now that Bill Ackman is out of the way. I’ve spent quite some time understanding VRX’s drugs and products, and I think the market is WAY WAY WAY underestimating the value of VRX’s portfolio and future pipeline.

I don’t even think it’ll take another year for the markets to figure this out. I think with another 2 quarters’ results, we’ll know how well the FCF generation turns out.

Ok that’s all I have for this quick post.

As always, happy hunting!