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:

489) STI ETF FY17Q1 returns.jpg

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.


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.

490) BCA steel price index in Feb 2017.jpg

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!

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.