Companies

LTC Corporation – FY17Q2 Results. Let’s Analyze…

LTC Corporation just released it’s FY17Q2 results today.

Yes, yes, I know I’ve finished analyzing and am writing an update report on LTC… on Valentine’s Day. But I’m married with 2 kids so V-Day is just another day to me, without the fancy dinners and flowers. Just a quick dinner at home, exchange presents (I only paid for the present, didn’t even have to actually buy it…), and it’s back to work for me. I hate the crowds anyway.

So LTC becomes my Valentine for tonight.

In any case, I am really excited to analyze the earnings release. I’m excited to share some of my thoughts too, cos I know there are some readers here who have done quite a bit of homework on LTC too. (From the emails I received previously)

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Take a look, and please let me know anything that I may have missed out.


This is a continuation of my previous analysis of Q1 results:

My Current Thoughts On LTC Corporation – FY17Q1 Results

Just to give more background, the post before that comparing LTC vs Asia Enterprises Holdings is also rather relevant:

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

And if that’s not enough, these are older but all related:

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

LTC Corporation (Part I)

LTC Corporation (Part II)


Gross Profit increased by… … 1,634%?!

Yup. That’s not a typo. Check this out:

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GP, OP and PBT all increased by thousands of % points!

Now, that’s not a sight you see everyday. That really made me sit up.

Now, steel prices have gone ballistic in calendar Q4 of 2016. I was expecting this to be a positive for LTC, since the price they can sell their rebar steel at, is fixed by BCA, and the BCA figures reflect a massive hike up too:

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Also, the net effect of a rising steel price means the inventory they are holding suddenly becomes more valuable, with 0 costs involved to achieve this gain.

Yet this massive jump in the form of thousands of % increase, is a surprise to me. It basically reflects what I’ve mentioned in the earlier posts.

Because LTC records the steel inventory via a weighted average price,

What this means is that in an environment of falling steel prices, losses get magnified.

The converse is true: in an environment of rising steel prices, gains get magnified.”

On a different note, this kinda shows how much the steel prices have gained in Q4 2016. That’s obviously a good thing for LTC Corporation, but NOT good for Dutech Holdings, one of my other key holdings.

Ah, they are all linked one way or another. I’d like to think there’s a natural hedge inbuilt.


FCF Generation Thesis Is Still Intact

The whole investing thesis is centered around the fact that LTC’s business is actually generating a ton of FCF every quarter, but previously it used the FCF to pay down debt. Going forward, the FCF should accrue. I’ve described that in the later part of this earlier post: LTC Corporation & Asia Enterprises Holdings – What Are Investors Missing?

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For FY17 Q1 & Q2, the company generated operating CF of $16.8mil, with pretty much negligible capex of around $100k.

FCF generated in 6 months = $16.7mil.

And all this FCF is starting to show up in LTC’s balance sheet:

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FY16Q4 – Fixed Deposits $16.85mil, Cash $17.52mil. Total: $34.37mil

FY17Q1 – Fixed Deposits $26.96mil, Cash $25.11mil. Total: $52.07mil

FY17Q2 – Fixed Deposits $31.43mil, Cash $18.45mil (see BS below) Total: $49.88mil

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Yes, I’m aware that the cash and cash equivalents actually dropped a little bit comparing FY17Q1 vs FY17Q2, but we have to take into account the massive increase in “trade debtors” from $16.4mil in FY16Q4 to $26.67mil in FY17Q2.

This means that LTC has been doing brisk business of late, we see the value of the inventories dropping while the debtors increasing. LTC doesn’t have a track record of writing off bad debts, so we can safely assume all this trade debts will eventually be collected and converted to $$$. Credit terms given is usu 6 months (I think. It’s in the AR)


Writing Off Of Goodwill Incurred From USP Acquisition?

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This JV company is the 50% stake in USP. The value carried in the BS has been dropping every quarter.

The JV is recorded at $24.07mil as of FY16Q4.

Since the net assets of USP at the point of acquisition is given as $27.16mil, the 50% stake is worth $13.58mil on a net basis. The rest of this $24.07mil is made up of a goodwill amount of $10.49mil.

It is this $10.49mil that is being amortized each quarter. As of FY17Q2, the value has dropped by $1.55mil, so I am expecting the remaining goodwill portion to be $8.94mil.

Actually, all this is my assumption/postulation. LTC didn’t provide a breakdown or an explanation for the decrease in the value of the JV carried in the balance sheets.

Logically, it should be due to the write down of the goodwill portion. If it is, I’m happy. I like to be conservative. Keep writing down all the useless “goodwill” please.

There is a small chance though, that part of the drop is from the writedown of the net assets of the company itself, if the economic conditions are such that there is a material and permanent change in the assets of the company. (Better not be!!!)

I guess I wouldn’t know for sure until the AR17 is out in 6 months.


USP 50% Acquisition Still Sucks

Now for the bad news part. I’ve previously railed about how lousy the acquisition of USP is. Thus far, the results unfortunately, proved me right.

Oh, how I wish I’m wrong on this. How I wish USP can suddenly show tremendous profits and make me eat my words.

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Yup. The 50% stake contributed… $6k of profits in the past 3 months. So the entire SOGO business earned $12k profits in the past 3 months. Right.

For the past 6 months, the 50% stake LOST $636k.

Zzzzzzzzzzzzzzzzzzz. Come on!

And this is basically the conundrum I mentioned previously. The business generates a ton of FCF each quarter. Debt is pretty much gone. Yet, how the management utilizes this FCF is the key. Thus far, it’s not been very inspiring.


CONCLUSION

Alright. That’s my dissection of the LTC FY17Q2 financials. Nothing earth shattering really. The massive jump in gross profits is nice, it remains to be seen if it can be maintained.

What I’m more interested in though, is how the management utilizes the cash hoard that’s fast building up in the coming quarters.

For those who think that the cash will be distributed, don’t count on it. I’ve been watching these guys for some time and somehow, I know that’s going to be really unlikely.

Let me know if I missed out anything.

As always, happy hunting. And happy Valentine’s.


Best Quote I’ve Read This Week:

Poonified: A reminder every time I speculate on stocks:

“Even if you survived after running through a burning building, you’re still an idiot”

TTI’s Options Strategy – Results Thus Far In 2017

2017 has been kind to me thus far. Both my large positions in my recent investing ideas came out tops and their share prices exploded significantly.

Dutech Holdings is up about 85% since I bought it a year+ ago. I wrote about the company in June 2016, and  most recently updated my thoughts in a comprehensive series.

Dutech Holdings Investing Thesis

Dutech Holdings – What’s Next? Realize $117k Profit, Hold Or Add More? (Part I)

Massive FY16Q4 For Dutech Holdings – Digging Deep To Understand The Impact Of Metric Group Acquisition (Part II)

Dutech Holdings – What Lies Ahead? Part III

Dutech Holdings Part I’s title is no longer relevant. Cos the profit is no longer $117k with the run up. It’s more like $180k as I type this. Yet, I haven’t sold a single share.

Geo Energy Resources also performed spectacularly well, and is up a massive 75% since I bought it just 3 months ago

Geo Energy Resources Investing Thesis – Part I

Geo Energy Resources Investing Thesis Part II

Right now, I’m eagerly awaiting the upcoming earnings season to kick in (sometime this or next week), then it’s going to get real busy as I dive in to digest each result. I feel like a parent waiting for my kids’ PSLE results. These “kids” of mine are genuises. The rest of the market just hasn’t realized it yet. But they will come around eventually. Starting with PSLE.


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I’ve also had a series of nice wins in my options strategies. I’ve utilized an option strategy for the US and other larger markets for the past 3 years or so now.

It’s been a long journey, but I’ve since developed my personal brand of strategy which has thus far (*touch wood) been working like a gem, generating consistent cashflow of between $3k-$8k USD every month for me, while putting $200k USD of capital to work.

When I started utilizing options, for a couple of months I had a series of nice wins. It encouraged me to commit more capital, and I got bolder and bolder, choosing contracts with high volatility and their accompanying large premiums, until 1 big fine day, 3 months into utilizing options, the markets turned against me and I pretty much lost ALL the gains I made… in a single night. (All thanks to Herbalife!)

Ouch.

That was extremely painful. I’m not used to a realized 5-digit USD loss in a SINGLE night.

Needless to say, I dived deep into analyzing my strategy and developing over the past 3 years, and now I’ve a certain brand of options strategy that is probably not commonly used, but is probably not unique to myself either. Anyhow, it works for me, and that’s all that matters.

I have previously mentioned about options in a simple guide, so if you’ve no idea what I just said, here it is:

TTI’s Basic Guide To Stock Options


Honestly, I’m not sure why very few people (to the best of my knowledge at least) utilize some form of option strategy. I guess people fear what they don’t know or understand.

But, IMO it’s really not that difficult to understand, although the specific nuances of it would probably need some experience too grasp, yet the rewards can be disproportionately large.

Best of all, I like the time decay portion. When WB bought Gillette, he said he likes to think that as America slept, there would be millions of guys waking up the next day with a bit more facial hair, needing Gillette’s products.

Well, that’s what I feel about options too. As I sleep, the liabilities (ideally) gets reduced by time decay, while I pocket the nice fat premiums and am free to re-invest the premiums.

I know that I’m not the only guy doing this, because in some of the Straits Times news feature on some investors, they mentioned something similar. There are some very wealthy individuals whom I know do something similar to what I’m doing too.

Sure, our strategies will probably differ a bit, but just from the simple few sentences they mentioned, I can tell we’re all probably on the same page somewhat.

Some of my friends have asked me to teach them in a cursory manner, and while I’ve attempted to, they don’t seem to really understand or dare to try.

I guess it’s not hard to see why. Options are derivatives with possibilities of leverage. And leverage, is akin to a bad word for many investors. It’s scary. Sure. There are horror stories everywhere when it comes to leverage.

Which is why, in my thinking, it’s all about managing risk. In fact, I had to seek advice and read some books on statistics recommended by my friend, who is an actuary. She also kindly explained to me what goes on behind the scenes when insurance companies come up with policies and how they determine their premiums. All very interesting to me.

Because, in a nutshell, my option strategy, means I’m essentially the insurance company selling insurance to anyone in the world who wants it.

In fact, my option strategy is even better. Because I can even choose to pass on the liability for the “insurance contract” to someone else, if there’s a likelihood of a claim on the insurance. Insurance companies can’t.

Of course, once in a while, stuff happens and as an “insurance company”, you’ve to start paying out. But the premiums you receive are supposed to far outweigh the payouts in the long run.

It’s all really just about stats and managing risk.


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I track my options in a table that looks like this.

The “unshaded” rows are contracts that are still active, while the “shaded” ones are inactive/expired.

The coloured codes are for contracts that are related, i.e. selling and covering the same contract.

In Jan 2017, I collected a total premium of $6,819.54 USD

Amongst all the contracts, I’ve only had to cover 1 that was unprofitable. That’s the pink one for Valeant, in which I lost $43.10 USD. The rest were all highly profitable, with many contracts with high premiums totally expiring, which is kinda like an insurance policy that expired without a claim on it: the insurance company pockets the premium and kindly asks if you’d like to extend your coverage.

I’ve had 3 options assigned, resulting in a net purchase of 9,000 shares of Chesapeake Energy, and 400 shares of Valeant Pharmaceuticals.

The 9,000 shares of Chesapeake Energy though, are shares that I’ve held, and previously sold in another option contract that got exercised in Dec 2016. So I’m just sorta buying back what I’ve been contracted to sell previously.

All this while collecting premiums on both the buy and sell contracts. Fine piece of business I’d say.

The 400 shares of Valeant is a new addition to my existing position. I wasn’t contracted to sell previously. But I already have the intention to add to my Valeant position (this is recorded in the “Transactions” page) anyway, so getting this exercised is fine with me, plus I get to pocket the premium and I’ve swung to sell a Call Option on this (As shown in the table) (On a related note, I’m still getting whacked on my Valeant position, but I’m a damn stubborn guy and I still think I’m going to come out tops. We’ll see.)

You might also notice that practically all my options activities revolve around just these 2 companies.

This is because I believe that for it to be done safely, options still require the usual deep value analysis, and thorough investigation; no different from what I’d do before I’d buy the equity of the company.

Afterall, options ARE derivatives. And their intrinsic value is derived from the equity.


On a different, yet related note… (and I’m trying to illustrate something here with a real life example, not trying to identify anyone)

Around the time when my Dutech Holdings Part I thesis was posted, the share price then was around $0.45. Someone told me that I’d better sell cos the “trend is very bearish”. I very politely begged to differ. He ended with an ominous “All the best then”. (He meant it genuinely, I believe)

Now, I’d be an abject failure if my months of research into the company can’t provide me with the confidence or arrogance to dismiss naysayers. Particularly those who rely solely on the stars and godly celestial beings in the form of squiggly lines to tell them their fortune.

When the share price rose to $0.48 or thereabouts, the same guy screamed “its always wise to lock in profits when you can!”

When the share price rose yet further to $0.50, there’s a sudden change. Suddenly, he’s telling me “looks like it’d breakout! watch for it! If it does breakout, it may go higher!”

Wow. Seriously wow. That’s like a sentence only Donald Trump makes. Lots of words with absolutely zero meaning. Maybe I can come up with some of these myself:

“If it doesn’t breakout, it may go lower! But there’s also a chance it can stay flat here to provide some support! Be careful if it goes past this support though, because there’s a likelihood of it going much lower!”

Anyway, to conclude the story, finally, at $0.535 (today), he’s saying “Very bullish! This is going to go higher and higher! Likely to make new highs! Target Price: $0.XX <–“XX” is some new crazy large number that I think the gods told him.

The net effect of all this, is that NOW I’m starting to getting cautious about my Dutech position if even the gods think it’s going straight up to heaven…

The above is a true story. As ridiculous as it sounds. I edited the comments so that it’s not exactly the same, cos I don’t want to identify the individual.

In his defence, even the pros make such statements.

There’s a long statement by El-Erian some months ago about his outlook on the economy. And it’s so long it took up like 4 lines of the Bloomberg article, and basically it says “the economy can go up from here, but I won’t be surprised if it goes down either. There’s a small chance it can also flatline and trend, which investors would be wise not to discount…. blahblahblah.”

Well, not exactly like this, but similar. I tried finding the article to substantiate but it’s some time ago and I can’t pinpoint the exact title so can’t find it. But I remember sending that to some friends and we totally had a good laugh at it.

Imagine if doctors can act like that:

“There’s a chance that this radio-opaque lesion is cancer. We have to monitor it closely, but don’t be too worried because it may not even be cancerous either. It can grow and spread quickly, although I won’t be surprised if it stays the same when we take a review x-ray in future. We gotta remain vigilant though, and not forget that there’s always the likelihood of metastasis with this being fatal eventually, although at this stage this likelihood is not high.”

So when you’re on your deathbed, the doctor can tell you “I told you it can grow and spread quickly right? I told you there’s a chance it can get fatal right?”

How reassuring.