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

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:

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:

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:

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

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.

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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.

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My Thoughts On My Current Portfolio – July 2016

BBR Holdings

Since my previous post on increasing my exposure to BBR Holdings (BBR Holdings Investing Thesis) at prices between $0.165-$0.174, the company now has a new substantial shareholder: Dr Chiu Hong Keong

A quick google search would reveal him to be the founder of Pintaras Jaya berhad, interestingly, a piling and construction company listed in Malaysia. BBR’s top shareholder lists include several construction companies.

In my view, this can only be a good thing. Why would competitors take up individual stakes in your company with their own personal money otherwise?

BBR’s share price has also risen since my last bulk purchases. At the current price of around $0.185, the gain is approximately 10%  or so. Not something to be scoffed at time-weighted wise, as it’s only been 1 month or so.

Still, the volumes are too thin to be indicative, and anyway as a deep value investor, I’m looking for much much larger gains to justify the time spent analyzing.

Looking forward to the financials coming up in the next few quarters. If there are no surprise losses from the general construction arm, the gains should be quite substantial.

Boustead Singapore

Nothing much to say or add here. Boustead’s CFO, Mr Loh Kai Keong, just won the best CFO at the SGX Corporate Awards 2016, following in the foodsteps of FF Wong, who won the best CEO award back in 2009.

I don’t spend much time updating myself on Boustead’s activities. With FF Wong at the helm, I just trust his investing acumen. This guy’s track record is not to be scoffed at. He has proven to be value accretive, and most importantly, guards the company’s $$$ like his own.

It is telling that ever since the company introduced a scrip dividend scheme, I have not taken the dividends in cash, but instead permanently opted for scrip.

To paraphrase WB: I don’t think it’s my business to be telling Messi how to play soccer.

CDW Holdings

Again, not much to add here. CFO has previously answered all my queries. I’m eagerly awaiting news of how the latest guide panels are doing. There should be more info on that in the upcoming quarterly results.

Until then, I’m sitting tight in this position, without increasing or decreasing it.

Dutech Holdings

This is another company whose management I respect a lot. I have previously spent a lot of time analyzing hard, quantifiable data. I enjoy doing it, and it’s how my brain works. However, increasingly, I’ve started to realize that soft data like how strong is the management team is actually equally as, if not more important than data alone.

However, after the massive run up, I am not adding to my position. I haven’t reduced either, but will be monitoring the upcoming results.

I’d like to see more data that the integration of their acquisitions is proceeding smoothly. Dutech has grown by acquisitions in recent times, and the key thing with acquisitions, is to prove there’s synergy and show results from cost savings, cross selling products, sharing of client base etc.

Hock Lian Seng Group

Since my divestment, the share price has languished and remained largely flat. This is what I predicted based on both FA and TA (Post-mortem of Hock Lian Seng Divestment, Hock Lian Seng – Staying a step ahead of Analysts). I’m pleased with how this investment has turned out, as I can literally feel a direct correlation between the amount of work and the level of understanding, and the accuracy in predicting/guessing how the share price would react.

I’ll continue to study HLS’s financials, but I am unlikely to take a position again anytime soon.

King Wan Corporation

Obviously I’ve been occupied with this of late. Part III is still pending. The next step for me is to figure out what to do and this is turning out to be much much tougher than I expected.

CFO has been trying to answer my questions, but each time as I delve deeper and ask harder questions, I uncover more and more potential problems. At least now I know for a fact, that MD Chua Eng Eng knows of a number of shareholders (most certainly myself), who are not very pleased with her.

I hate to create trouble. I hate the limelight, and I value my anonymity greatly. My sole interest is to see the companies I have invested in, create value and do well. Unfortunately, in this instance, the management actions are so asinine that it really boggles my mind.

It’s very unlikely that I’ll go down this route, but I’ve done some back of the envelope calculations and with my capital, together with other deep pocketed investors’ capital that I do not directly control, but can strongly influence, and perhaps even adding in other disgruntled minority shareholders; together the position is sufficient to create some real problems for management.

Libra Group

Again, not much to add here. Just awaiting the next quarterly results. Mr Chu Sau Ben has articulated many grand plans for the company, it remains to be seen whether he can execute them.

Meanwhile, the valuations remain very attractive for me to stay vested. The good thing about bottom fishing is that you don’t need to get many big things right to realize a big gain.

Anyway, my position in this is rather small.

LTC Corporation

As I described in my thesis (LTC Corporation (Part I) & LTC Corporation (Part II)), this is a company where the SOTP is >>> the combined entity.

It’s going to be incredibly hard to take control of the company though, without the blessings of the Chengs. I don’t see any activist coming in anytime soon, although surely if I can see it, many “pros” should be able to see how easy it is to realize value simply by delisting and breaking up the company.

In my mind, LTC Corporation also forms like a mini insurance for my portfolio. At the current price, it is unlikely to drop any further. Both from a FA and TA perspective.

Which means the only other 2 scenarios are it remaining flat, or rising sharply.

I’ll take my chances with this.

Metro Holdings

I’m behind in my analysis with this. Still, based on my last analysis, I am generally not too optimistic about the company going forward. The company has done well, and is now incredibly cash rich.

This is a mightily under recognised company. Many people still associate Metro with retail, which is kinda ridiculous seeing that for several years, it’s retail accounts for <10% of net profits and in fact, has contributed losses in recent years.

Still, Metro’s expertise in investing in foreign markets, and focusing on it’s niche (Commercial properties including shopping centres and offices) is very respectable. They are also smart enough to find strong local partners.

King Wan needs to take a leaf out of Metro’s book.

Valeant Pharmaceuticals

I have quietly accumulated more of this since Brexit happened. (I now own 4,800 shares of VRX). So far it has been rather profitable. Today’s news of FDA’s approval of Valeant’s Relistor as well as Brodalumab didn’t come as a surprise to me.

The share price has rallied to around $24++, and I’m rather pleased with my recent acquisitions at $19++. Still, I am talking about a small tiny scale here. In reality, I’m awaiting much longer term data that will hopefully show that the markets have greatly undervalued VRX all this while.

I suspect that would take at least the next 3 quarters.

With regard to the FDA regulatory process, I did some prior work to try to understand this better. I spoke to someone who has experience in the equivalent drug regulatory process in Singapore. Being in the healthcare industry, I can understand this sector fairly well too.

Although this hoo ha about the FDA being concerned about Brodalumab’s 6 suicide cases in clinical studies kinda dominated the headlines, in reality FDA can only control VRX’s US activities. VRX would still be able to proceed with sales worldwide without FDA’s approval.

However, the regulatory process in many other places use FDA as a “Reference agency”. This means that FDA’s decision weighs heavily on their own agency’s decision. (Singapore’s equivalent is Health Science Authority)

The exception being the EU. Europe tends to have their own individual thought process and their approval (or rejection) seems to be more independent. Canada on the other hand, pretty much echos the Americans.

Hence, FDA approval is a big thing. I was confident of approval too, because FDA tends to be rather liberal. The drug approval itself is a big thing, because it does show that VRX has many hidden gems in its portfolio that are not valued at all currently by the markets.

Still, the key for VRX is not a couple of drug approvals. The key is the upcoming Q2 results (probably in early August).

I’ll be scrutinizing the results for any improvement in scipts for key drugs. If Q1 was meant to kitchen sink the results, Q2 should BEGIN to show a turnaround. This should be exciting, and hopefully rewarding.

Property

I’m in the market for a 3rd property in the next couple of years. My personal view is that it’s too early to start buying, and in any case I’m in no hurry to do so.

With this in mind, I do continue to follow up on the latest development, analyze, refresh my thoughts and look out for bargains.

At this point, I’d like to link to this fantastic article by Kyith over at Investment Moats:

http://investmentmoats.com/wealth-building-2/singapore-home-condo-landed-and-hdb-property-prices-grow-over-time/

The data in this article, and the conclusions are spot on. It tells me that the stories of astronomical gains from property investments are true…….. for a select few. It’s really not as common/often or as stable as one thinks.

As the article says, there are only that few periods where the property market showed massive falls, and it is a big question mark whether one can have the financial and mental capability to jump in during those periods.

The long wait in between these  periods would also have made several buyers jump in, leaving the lucky few with adequate capital to capitalize during the large falls.

Over the long term, and considering the general market as a whole, property would actually show gains similar to an equity portfolio.

Bearing in mind that the data presented doesn’t include all the other miscellaneous costs involved. Having gone through such a process, I can safely say that these costs add up to a very substantial proportion of the actual costs of the property. There are so many miscellaneous costs that I don’t even remember the names. Basically anytime anyone or any agency has to do something to verify, file, submit, approve, transact something for you, you gotta pay for it.

If it’s the agent, it’s called a commission. If it’s the government, it’s called a tax. If it’s the lawyer, it’s called legal fees. The result though, is most assuredly the same: you gotta pay.

I enjoyed this piece a lot. It’s informative, with substantial data for substantiation.

It also gave me a new perspective, which is surely the holy grail of reading.

SPY Shorts

I have gingerly started building a short position at this levels again (SPY is 217.32 right now). The position is still tiny, as I believe this false rally has legs to run a bit more.

I call it a false rally as, well, look at the corporate earnings and one gets the idea. The markets are rallying on the expectation of more easing from BOE, BOJ and basically everyone else.

On a TA side, the rally upwards has been on strong volumes. I’m starting a small short position via options, but will continue to add to it gradually. If the rally upwards starts showing much smaller volumes, I’d more likely go short more strongly.

Miscellaneous

I’m spending quite a fair bit travelling this year. The costs of this extravagance is getting racked up, and I’m planning to do a trip to Europe in Sept with my family. Travelling with one’s family has simply gotta be one of the greatest joy anyone can experience.

On a separate note, the “portfolio performance” page is in a mess. I still trying to figure out a way to present the information in a more readable way. I’ll get down to making it neater, yet still as transparent as currently. Eventually.

I’m still looking to deploy my relatively sizable cash holdings. I am in no hurry at all. (Many thanks to those who have sent me ideas, I do look into them.)

Finally, next month is earnings season again. It’s always fun  during earnings month.