BBR Holdings

BBR Holdings – TTI’s Analysis Of The Latest Happenings

1stly, something unrelated to BBR Holdings.

An article in this week’s TheEdge caught my attention:

http://www.theedgemarkets.com/article/shareholders-move-oust-usp-chairman-li

The physical copy of the article has the said activist minority shareholder, Joshua Huang’s photo.

It caught my attention as Joshua is my school mate back in NJC, almost 2 decades ago. We used to run and train together in the track team during college days.

I’ll have you guys know that Joshua is a fierce competitor and a very determined chap, so I think USP’s chairman and ED would have a hard time with him. He just doesn’t give up easily.

Having said that, based on what the article wrote though, it does seem like he’s fighting an uphill battle. His fellow ally, Teng Choon Fong, has suddenly become uncontactable to him. And at least from the content of the article, it seems like his only gripe is that the management has made a poor investment decision with regard to Huan Hsin, and that this decision is not in the best interests of USP’s shareholders.

I have not done any relevant DD on any of the mentioned companies, but just based on the information from the article, it doesn’t look like there’s much for Joshua to act on. There is some hint of the directors acting with other interests in mind, other than the company’s……. but it’s usually hard to prove that. How do you prove that a director has neglected his fiduciary duties as a director? And even if you could, it’s always a grey area. Is it neglect? Or is it just incompetence? Or is it just market conditions?

Look at the recent happenings with Kingboard Copper Foil and with Sabana REIT. The odds are stacked heavily against the minority shareholders, regardless of how convincing you are or how much the actual facts actually back your position up. The rules are just tailored towards those with a large enough stake.

So my personal opinion is that Joshua is fighting a losing battle, but I wish him all the best. And if there’s any character that will bring such a battle to a head, it’d be someone like him. That much I know.


Alright. On to BBR Holdings now. It’s been sometime since I updated on BBR Holdings, and my investing thesis was based on the fact that the company should stop recognizing losses on the general construction sector, starting in FY17 and the markets were not pricing in this fact.

Thus far, my thesis has been playing out as planned.

Since the start of 2017, BBR Holdings has done pretty well, share price wise:

502) BBR Holdings YTD 2017.jpg

The share price has since risen a very respectable 19.44% in 2017 thus far. On a TA basis, the share price has now crossed both 50 and 150 dma, and there is an established uptrend.

BBR continues to attract the attention of Dr Chiu Hong Keong, the founder and Managing Director of Pintaras Jaya Berhad. So much so that he has quickly accumulated a stake in a very short period of time, that’s now more than that of the CEO Andrew Tan himself:

503) Dr Chiu stake in BBR.jpg

TTI’s own 1.8mil shares are parked inside Hong Leong Finance Nominees.

Anyway, it’s nice to know that someone with obvious experience and insider information, and a fellow potential competitor to boot, has been accumulating a substantial stake in the company. Let’s just say that I don’t think Dr Chiu is a fool.

Aside from that, the other news for the company is their recent acquisition of the remaining 20% in their Malaysian subsidiary that they don’t own:

504) BBR acquisition of BBRM.jpg

Since I’ve returned from my holiday, I’ve had time to now sit down and look in depth into this latest development.

So here are the details of the acquisition:

BBR Holdings is buying the 20% stake, to make BBR Construction Systems (M) fully owned.

They are paying S$5,115,000 for the stake. The book value of this 20% stake is given as S$3,856,000, and the net profit attributable to this 20% is S$1,152,000 for FY16.

BBR is paying for the stake in the form of new shares issued though, and not by cash. The new shares will be issued at a price of $0.31, which works out to be 16,500,000 new shares.

Seeing that the current share price is around $0.21 or so, this exercise price is favorable to existing shareholders. The “true” price that BBR is really paying is thus actually (16,500,000 shares x $0.21) = $3,465,000

So on paper the deal price is $5,115,000, which is a premium to the book value, and works out to a PE ratio of about 4.44

In reality, the real price that the company’s shareholders are paying (based on current market share price) is much lower.

That works out to a P/B of 0.9 and a P/E of 3

That seems reasonable, and in fact, rather cheap. Also, 50% of the shares will be locked up for 6 months, so the seller cannot sell out quickly. All this indicates to me that the seller believes there is still significant upside to BBR’s share price.

1 little snag though.

I did a little digging, and the figures given in the acquisition announcement, does not match what’s given in the AR 16.

Taken from AR16 page 75:

505) BBR AR16 page 75.jpg

506) BBR AR16 page 75.jpg

It clearly says that the profit attributable to the NCI (20%) is $790,000

The 20% NCI share of the book value is 20% of $18,793,000, which works out to be $3,758,600.

But in the announcement, the net profit is S$1,152,000, while the book value is S$3,856,000.

Now, I cannot figure out why there’s a discrepancy, since the AR16 figures should be audited figures, and the announcement clearly says it’s based on FY16 figures. I tried crowdsourcing this query on valuebuddies.com but it seems like nobody knows either. I was hoping there’d be more intelligent value folks who can help me with this.

Anyhow, it’s not too big a game changer. Even based on the lower profit of $790,000, the PE ratio of the acquisition would be 4.39, which is a tad higher than 3, but still dirt low.

It’s just that it irritates the hell out of me when I can’t reconcile numbers. They’re supposed to add up! It plays on my mind and I hate it, but I have to waste precious time trying to figure it out, even if it’s relatively irrelevant. I’m still waiting for a genius to enlighten me, so if you’re the one, pls email me or put it in the comments below.

Alright, so we’ve thus far ascertained that the deal seems sufficiently cheap, and that BBR is not overpaying. (BBR has had a previous history of over budgetting and getting into cost overruns so it’s not an exaggeration to monitor their acquisitions, particularly the PRICE)

How about the prospects of their Malaysian operations? With regard to this, after doing the necessary sniffing out, I’m pretty optimistic about where it’s heading. No wonder Dr Chiu is getting into the action.

In the AR16, in a little paragraph:

507) BBR announcement on MRT2.jpg

It seems like BBR is making good headway in the malaysian markets. On top of that, their malaysian subsidiary has had a good track record, making profits the past few years, even whilst BBR’s general construction arm has been bleeding money from cost overruns.

Now, Malaysia is currently undergoing a massive infrastructure boom. The government is spending huge sums on infrastructure, particularly on transportation, in a bid to boost the economy just before the elections.

Many local Malaysian builders have already profited tremendously, and it seems like BBR would be set to benefit as well.

Now, it says that BBR has “secured 2 out of the 10 MRT2 projects” in the AR16 paragraph above, but that’s a bit of an exaggeration.

I did a little digging to verify, and it seems that, at best, BBR is merely going to be a sub-con for these projects. Not the main con. This is the list of awarded contracts for SSP (MTR2):

508) SSP awarded contracts.jpg

509) SSP awarded contracts.jpg

510) SSP awarded contracts.jpg

511) SSP awarded contracts.jpg

None of the contractor names on the right hand column are related to BBR (Malaysia). BBR(M) has a fully owned subsidiary, SP Piling Sdn. Bhd., so I was looking out for that too but it doesn’t show up in any  of the awarded contracts.

Which leads me to believe they are just sub-cons and did not really “secured 2 out of the 10 MRT2 projects” as stated in the AR.

Anyhow, it’s not a bad thing. But thought to temper expectations a bit. There’s been no news release on the size of the contract, or the type of work to be done, much less the time line and the expected date of completion.

In fact, there’s been no single announcement on this aside from that puny paragraph in the AR giving a hint of what’s happening.

If we take this development, and put it in the context of Dr Chiu taking up a sizable stake, plus the latest move to fully acquire their Malaysian subsidiary…… well, you can form your own conclusions.

Now, a bit of background. What exactly is MRT2? It’s a new drive to improve on the train connectivity, and is defined by the building of 2 massive new MRT lines.

One of these lines, is the one that BBR has reportedly won 2 contracts from. It links Sungai Buloh to Serdang to Putrajaya. Which is why it’s called the SSP line. This is the timeline for the project:

512) SSP timeline.jpg

So it all looks rather promising for BBR.

BBR has also won contracts for the West Coast Expressway and the East Coast Rail Link, both of which are huge massive infrastructure projects. I won’t talk about it too much here yet, until more details are released.

It is difficult to say whether BBR will derive a good profit and/or margin on these projects. Afterall, no details have been released, except that from my personal digging, I can only conclude that BBR will be a sub-con and not the main con.

BBR(M) though, has had a good past track record in profitability the past few years, so I’m optimistic that these projects will be carried out with good margins. Afterall, shareholders want profits. Not activity.

On a different note, BBR’s other projects are progressing well. The Wisteria JV is doing very well actually, much better than I initially expected. The condo is now probably fully sold. The last I checked with an agent, there was like 10 units remaining. But since then, more caveats have been lodged in April 2017, so I’d assume all or most of the units have been sold.

The Wisteria condo is definitely profitable, and fully sold way ahead of time.

The linked Wisteria mall is thus, likely to do well. As explained in my earlier post, the mall and the residence have fates that are linked (as with any mixed development). By focusing on the condo project first, they can now get tenants to come in to the retail side by marketing the fully sold condo part.

Where there are residences, there is demand. Where there is demand, there will be retailers coming in the commercial part.

And since the Wisteria Mall is going to be single strata titled owned, the JV would continue to manage and lease out the project, giving rise to a nice recurring income. I am convinced their retail side (Wisteria Mall) will do very well simply because there really has been a lack of supply in Yishun.

The residents have been under served thus far, and Wisteria Mall will fulfill this need. The location and timing of the mall has been simply perfect.

BBR Holdings has an effective 25.05% in this JV.

In another related development, BBR’s other JV project, Lakelife has achieved TOP, and they’ve already recognized profits in the last earnings (FY16Q4)

There are still 250 units of Lakelife which are not recognized, and will likely be recognized in FY17. With a simple extrapolation, that works out to be approximately $7.9mil worth of profits.

Now, putting into context that the NPs of BBR in FY16 and FY15 are $1.1mil and $2.3mil respectively, you can see why I am optimistic about FY17 results.

The reason why FY16’s NP is as low as it is, despite recognizing partial gains from the Lakelife project, is mainly from the losses from the general construction segment.

So if the general construction segment stops bleeding in FY17, we can see the profits accrue and the jump should be quite magnificent.


Now I’ll change topic here and talk a bit about Valeant Pharmaceuticals (VRX)

My DD of course, goes way beyond what I’m going to share here, but it’s really too much to write it all out. So I’m just sharing this tidbit of info.

It’s no doubt, been one of my biggest losers thus far. It’s not much of a comfort, but it’s in the news constantly, and there are far bigger and more acclaimed investors like Bill Ackman, Bill Miller and the supposed professor of valuation, Prof Aswath Damodaran who have been wrong (thus far at least)  on this.

At some point, if I’ve the time, I’d share more of my DD on VRX.

One of the biggest bears of VRX has been David Marris, an analyst with Wells Fargo (WFC).

You can say he’s been right all this while, seeing how the share price of VRX has performed. Interestingly, WFC took up a new short position back in May 2016 by owning puts in VRX:

513) WFC short on VRX.jpg

At that time, and all the way till now, David Marris has been a huge vocal short on VRX.

And he’s been absolutely right.

514) VRX share price in May 2016.jpg

The share price in May 2016 was approximately US$29, and right now, even after a little rally, it’s still around US$9.50. Marris has been short on VRX way before that, so you could say he’s been right even earlier.

So congrats to Marris and WFC.

Interestingly, I noticed that for the 1st time in years, WFC’s position has changed:

514) WFC turns positive on VRX.jpg

(Green = new positions, Red = closed positions)

I’m sure these positions are taken on behalf of clients.

I just can’t wait for David Marris to suddenly change track and issue a HOLD or BUY call.

Oh boy. That’ll be fun to watch.

BBR Holdings FY16 Results – The Good & The Bad

This is a continuation of my earlier posts on BBR Holdings, so I shan’t go into the basic stuff. This post should be a quick update.

The company released it’s FY16Q4 results, and I’ve torn into it. Again, nothing too surprising in there, everything is within my projections. I have lightened my stake in the company a little this month, but that’s not because of the financials, but simply because of portfolio allocation reasons. It’s simply too large a proportion. And more importantly, I’ve been working on a new idea (brought to my attention by a reader some time ago), and would like to have more capital ready if I decide to enter.

123) modern-analyst-1316900__180

Let’s start with the good stuff first.

EMERGENCE OF A NEW SUBSTANTIAL SHAREHOLDER

The share price has increased rapidly of late, mainly due to the emergence of a new substantial shareholder buying up shares in the market. Dr Chiu Hong Keong, who is the Chairman of Pintaras, a fellow construction company in Malaysia, and his wife Mdm Khoo Yok Kee have bought a chunk of shares at around $0.190+, and have continued their buying spree up to $0.2. As a result, the share price has done this:

455) BBR share price 23022017.jpg

Since the start of the year, the share price has gained something like 17%. I took the chance to sell a bit into the rally, again, simply because of portfolio allocation reasons. I sold at a price that’s still below my ave. price, but this batch of shares were bought just recently in June 2016 at around $0.17+, so I’m happy to take some money off the table first and lower my average price.

Obviously, I’m not privy to the thoughts of Dr Chiu, but as the Chairman of a peer in the same industry in Malaysia, I’m glad to see him appearing in the substantial shareholder list. Note that he’s using his personal cash to buy, not Pintaras’ $$$. I don’t see any scenario whereby this can be a bad thing.


RECOGNITION OF PROFITS FROM LAKELIFE JV

As expected, Lakelife JV finally started contributing to profits, upon TOP. They only recognized partial profits, so there’s still some meat left for FY17, and it’ll most likely be recognized in Q1.

456) BBR FY16Q4 press release.jpg

The $9.4mil recognition has been a real lifesaver for BBR, single handedly dragging BBR’s FY results to become profitable.

I’ve previously tried predicting the profitability of this project:

BBR Holdings Investing Thesis Addendum

Based on the $9.4mil recognized for 296 units, there’s still approximately $7.94mil left to be recognized for FY17. (This is very approximate. I’m assuming a straight extrapolation is enough, but in reality the profitability for the remaining units may be different from the ones that’s recognized thus far)

That gives total earnings (based on their 35% stake) of $17.34mil, which is about 5.63 cents EPS.

I’ve previously estimated about 6.5 cents EPS:

“This means upon TOP, BBR’s income statement will show a nice boost to earnings of approximately 6.5 cents, and the balance sheet will have a mega boost to cash and cash equivalents of ($19.9 mil due to it’s 35% stake + $19.3mil due to loans extended to the JV) = $39mil approximately.”

This means that earnings came in a bit below my projections, but not too far off either. The reasons for that, I’ve since discovered, is that some of the units were not handed over to their owners at TOP as they were not eligible (it is an EC project), these units have since been resold, but at lower prices. Don’t ask me how I found this out. I have my sources :)


MASSIVE BOOST TO CASHFLOW COMING UP…

457-bbr-bs-fy16

Upon completion of the Lakelife project, BBR should be collecting the loans to the developer. We can expect $20.1mil coming in when the loans get repaid, which will mean that FY17 would likely be CF +ve.

Of course, it may be premature for me to say this as it depends on where BBR will end up sending this cash to.

But it’s nice to start FY17, before a single financial is released, knowing that there’s like 2.6 cents to be recognized, and about $20mil + to be collected.

Earnings boost + CF stability. I like.


WISTERIA JV DOING FINE THUS FAR

As of January 2017, 180 units out of 216 units have been sold. Which is like 83% sold. Not too bad huh?

But it gets better. They stepped up their game further in Feb 2017:

458) The Wisteria URA figures Feb 2017.jpg

OK. Resolution is not great.

But basically an additional 14 units had their caveats lodged with URA. The selling price PSF was maintained and in fact, even rose a bit. Currently, The Wisteria is approximately 90% sold.

Now, a bit of background info on mixed developments. Ever wonder why there’s thus far, no news on the commercial units yet? Aside from the fact that they got an anchor tenant already. Can’t rem off hand now but I think it’s either Koufu or NTUC.

The reason is simple. The developer can market and ask for higher rent when the residential part is fully sold and likely to be well occupied. This translates to more footfall, more traffic, more visibility for your brand blah blah blah.

In my (daytime) work, I’ve had some experience liasing with mall landlords. Kinda know how it works.


ALIKA PROPERTIES 

BBR incorporated a fully owned subsidiary, Alika properties. Alika has been active, bidding on a land parcel site at Perumal Road. They failed to win though, and in fact, came in 2ND LAST amongst all the bidders:

459) Alika properties.jpg

Wait… TTI!

They failed to win the tender, came in 2nd last, and you’re including this as a “good thing”?

HELL YES, I AM!

BBR’s main problem is getting their fingers into too many things, but failing to be a master at any one of them. I have a compiled list of their recent projects, and just look at how many projects they have to handle:

463) BBR project list.jpg

464) BBR project.jpg

465) BBR project list.jpg

466) BBR project.jpg

467) BBR project.jpg

Compare that to some of the builders that I’ve previously analyzed, and BBR is over stretching themselves.

It’s like when Michael Jordan decided to play golf competitively at 1 point. He didn’t do very well then huh?

In my previous (nasty) correspondence with the management:

460) BBR sharing.jpg

They indicated that they’ll complete the loss making projects, and going forward, exercise caution in their bids:

461) Profitability BBR.jpg

Imagine they won the bid by a large margin. I’ll panic.

On a side note, and there’s no official announcement on this so don’t bother looking up SGX announcements, but one of the “2 new senior personnel”, is Dr Jeremy Wu, who joined the company as Executive Director and director of corporate development in May 2016.


INCREASED DIVIDEND

BBR declared a special dividend, so the total dividend for FY16 would be 0.6 cents.

While it’s an increase from previously, the yield is still miserably low at around 3%. I guess a growth in dividends can be classified as a good thing.

I wasn’t expecting a dividend raise so can’t complain here.


Now the BAD STUFF:

NO SUCCESS IN REDUCING OPERATING COSTS

Let me quote from the reply above:

“………… implemented appropriate cost cutting measures on a consistent basis”

Now, look at the most recent income statement:

462) BBR FY16 income statement.jpg

Operating, admin and finance costs for 2015: $23mil

Operating, admin and finance costs for 2016: $23.92mil

Wait. Let me get this straight. And these are facts I’m sprouting here:

The company spent $23mil, to achieve $425mil in revenue in 2015. The management says, OK this isn’t good enough. We’re going to (and I’m quoting here) “implement appropriate cost cutting measures on a consistent basis”, and after that, they spent $23.92mil (even more!) to achieve $277mil in 2016 (reduced revenue)

As I always say, don’t bother with what the management says. Watch what they do.

But here, I’ll add a caveat. It’s probably too superficial to look at these figures and conclude that they didn’t or failed to do any cost cutting. They’re lagging figures anyway. The revenue is locked in periodically, so some of these costs could be incurred now, and the revenue will come later.

Plus a lot of their activity is via the JV and associates, and that does NOT show up in revenues. So, while I utilize figures to substantiate a point, I’m just adding a caveat to say that, well, they’re not 100% reflective either.


GENERAL CONSTRUCTION STILL BLEEDING $$$

This is the biggest disappointment for me. Will this EVER stop? They are still bleeding money fixing up past issues. Management has, for obvious reasons, declined to reveal which projects are loss making.

And I quote from the press release:

“Gross profit for FY2016 was lower at $13.4 million during the year compared to $25.2 million for FY2015 and this was mainly due to decrease in revenue and cost overruns incurred for certain general construction projects.”

Now, my opinion here, is that the bloodletting is now finally over. Management didn’t guide for it, but I derive this conclusion by tracking their projects and comparing it to the quarterly statements.

My belief is that losses from general construction segment ends in FY16. We shouldn’t see more project losses in FY17.

From the projects that are completed in FY16, I surmise that the losses came from the HDB projects, and possibly the government tenders such as the Keppel viaduct project.

I’ve tracked this for some time now, and it seems their problems first started in FY14Q3 (or at least, it was first mentioned in that earnings release).

2 years+ should be enough for these projects to run it’s course.


CONCLUSION

I’ll stick my head out for BBR here, and state that I personally think the worst is over for the company.

FY17 should show improved financial metrics across the board compared to FY16.

Their current ongoing projects would be profitable, and the fact that they’re looking for more work has not been lost on me.

I hope the management stick to what they say they will do, and adopt a more disciplined approach to project management. If you’re not going to earn a margin on the project, forget it. Downsize if you have to, but don’t commit to stuff that will come back to haunt you later.

I am optimistic that the company will do better going forward compared to the previous 2 years.