Thursday, 23 March 2017

Portfolio Update: Divesting KTT for 21% profits after 8 months

I have divested my holdings in Keppel Telecommunications and Transportation (K11) at $1.85 per share to record a healthy 21.0% total profits.

(prices include transactional costs)

Divestment Thesis:

This is a case whereby business fundamentals had deteriorated and I believe that $1.85 is a fair price for Keppel T&T for the current situation that it finds itself in now. 

Interested readers might recall that I had provided a target price of $1.98 when I wrote my investment thesis on Keppel T&T (here). Here is what I think has fundamentally changed for Keppel T&T:

M1 is going down

I described M1 as a "stable, recurring income player" and I stand corrected. 

Revenue fell, Net Income fell, Return on Equity (ROE) fell and even dividends fell. To make matters worse, this terrible performance was before the 4th Telco even began operations in Singapore. The share price duly tanked following this lacklustre showing.

You know things are bad when even the news of a possible sale fail to lift M1's share price by much.

Source: Yahoo Finance
Note: July 27th was the post date of KTT investment thesis

Given that Keppel T&T's investments in M1 forms more than 1/3 their market capitalization, this is clearly a material change. I have therefore adjusted my target price downwards and find $1.85 within my acceptable range of prices.

Future Upside

I continue to like Keppel T&T's Logistics and (especially) Data Centre divisions. While both divisions performed below expectations in FY2016, I have strong conviction in their long term potential.

I will therefore continue to monitor this counter for potential re-entry either at a lower price or when the divestment of M1 is successful. Perhaps the divestment of M1 will also reduce the "conglomerate discount" placed on Keppel T&T.

Adopting a "wait and see" mode for this counter.

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

Monday, 20 March 2017

New Counter: Sapphire Corporation

In a bid to reach my target portfolio size of 8 counters, I will spend my bonus on acquiring 2 more stocks. Sapphire is the first of the 2.

Equity: Sapphire Corporation (SGX: BRD)

Business: Rail Infrastructure Construction
Markets exposed: Primarily China, increasingly Developing Asia
Stock exchange: SGX
Purchase price: 0.335
Purchase month: March

10% per annum: 

Sapphire Corporation is a turnaround that is now poised to be a fast grower.

Introduction:

Sapphire has been reworking their business model since 2014. They sold their steel business, bought the mining business Mancala, bought Ranken, and recently sold 81% of Mancala. With the sale of 81% stake in Mancala, Sapphire Corporation's business is now primarily concentrated in Ranken, a rail constructor.

In terms of Geography, China is currently Ranken's biggest revenue contributor. The company is branching out into other parts of developing Asia such as Bangladesh.

Considerations:

1) Strong Governance

As usual, corporate governance is top of my list. Sapphire Corporation comes in at 346 on 2016 SGTI Index. While Sapphire has an independent Chairman, only 3/9 of Sapphire's directors are independent. These statistics thus far suggest that Sapphire's governance is perhaps merely passable.

However, having observed the actions of Sapphire's board and management over the past year, I have come to realize that Sapphire's directors update shareholders frequently and deliver on their promises more often than not.

From selling the steel business to buying and selling Mancala, the directors have always provided forward guidance on their decisions.

2) Growth

2.A. Short Term Growth Driver - Disposal of Mancala

Sapphire Corporation had sold a 81% stake in Mancala for HKD$63,200,000. This effectively values Mancala at about S$14.2 million. While Sapphire is still awaiting to finalize the costs of acquisiton for Mancala (as the 2nd and 3rd tranche of payment depends on profits filed in 2015 and 2016), I opine that they have probably made a profit on the sale of Mancala given that management estimated payables for Mancala equivalent to only S$13.1 million. This is therefore clearly not a fire-sale.

Mancala had made a loss of S$1.7 million in 2016. Ceteris paribus, the sale of Mancala would therefore automatically increase Sapphire's bottom line by S$1.4 million. As an added bonus, if the new controlling shareholders do turn Mancala's business around, Sapphire will stand to benefit with their 19% equity stake. Mancala was profitable as recently as FY2015, so the possibility for a quick turnaround is sizeable.

2.B. Long Term Growth Driver - Developing Asia's infrastructure push

While Ranken might have had a bad end to their year, there remain reasons for optimism.

Source: Sapphire's Financial Statements
*Ranken's first full contribution is in 4Q'15

Sapphire's main business of Ranken is gaining traction. Sapphire's order book stands at S$478 million, which is more than 4x their market capitalization. I believe Sapphire has shown sufficient execution prowess in the past 5 quarters to expect them to fulfill their obligations.

As an added bonus, they have unbilled fees worth approximately 1/3 of their total 2016 revenue to be billed in the coming year - revenue to be billed without lifting a finger!

Source: Sapphire's FY2016 Financial Statement

As developing Asia embarks on its infrastructure push, I think rail development is a rather safe bet in the longer term.

3) Fixed Asset Light

Sapphire operates a non-current asset light model, thus giving them flexibility to change their strategies according to different circumstances. They will also require lower CAPEX.

Source: Sapphire's FY16 Financial Statement

4) Insider Purchase

Sapphire's CEO Mr. Teh Wing Kwan had bought 300,000 shares in Sapphire on 1st March 2017 - just a day after Sapphire's result release. I interpret this as a strong signal of management conviction and commitment in the business.

Source: SGX Announcement

Risks

A) Worsening Days Sales Outstanding

As with all construction firms, trade receivables present a challenge. Ergo, it is worrying that Sapphire is seeing an increase in debtors' turnaround time.

Source: Sapphire's FY16 Financial Statement

While Sapphire might still be seeing relatively strong operating cash flow, the situation is worth monitoring. On a related note, investors can seek comfort from the fact that most rail projects are backed by the local government in some ways.

Conclusion

Assuming the following base case scenario for FY17:

1) Ranken maintain's FY16 revenue (executes less than half of order book) and net profit margin
2) Mancala maintains FY16 performance (i.e. clocks S$1.7m loss again)
3) Sapphire bills half of unbilled revenue

Sapphire will clock a minimum EPS of 4.17c, translating to a 41% increase in bottom line in FY2017. Based on a PE valuation of 11 (a slight decrease from my purchase PE of 11.3), they should trade at around $0.46 in one year's time. This provides a sizeable safety margin over my required 10% per annum.

Any improvement in valuation will further raise Sapphire's share price in the scenario described here. Naturally, any improvement in performance will also likely raise Sapphire's bottom line.

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

Wednesday, 8 March 2017

Kimly IPO - Exciting Stuff?

(you may find the IPO prospectus here. in this post, I list some of my thoughts on the IPO)

About Kimly

Kimly has a total of 64 food outlets, including 56 coffee shops, 3 industrial canteens and 5 food courts. They claim to own a 5.8% market share in Singapore's food outlets as of 30th September.

Apart from being a master leaseholder, Kimly also operates 121 food stalls and a Central Kitchen.

This IPO is underwritten and placed by UOB KayHian.

IPO Valuation

First of all, the IPO details are confusing due to the vast difference in bottom line between the Audited results and the Pro Forma results.

This difference is due to Kimly consolidating minority shareholders' interests recently in preparation for the IPO. The Audited results are un-consolidated as they were prepared prior to consolidation, and thus profit attributed to owners of the company is vastly different. 

Interested investors may find more information on this in Appendix B.

Using Pro Forma Post IPO results listed on page 39/40 (calculations can differ quite vastly if you use different results), Price-Earnings Ratio is 12.43, and Price to Book ratio is 5.51. As far as I know, there are no comparable "Kopitiam operators" currently listed in SGX.

The Good:

A. Good Profit Growth Record

Kimly has a good record of growing both top and bottom line in the past 3 years

Source: Kimly IPO Prospectus

They also have big plans for growth using IPO proceeds

Source: Kimly IPO Prospectus

B. Strong Cash Flow

Kimly has strong operating cash flow which flows through as free cash flow. Do note that the Free Cash Flow numbers for 2016 are impacted by some one-off payments in preparation for IPO.

Kimly IPO Prospectus

Kimly's strong cash flow should not be surprising given the nature of a their business - they receive cash mostly on sale of their goods/service. This fact is reflected in their cash conversion cycle, which stands at a very enviable -32 days.

Kimly IPO Prospectus
C. Solid Balance Sheet

Kimly is in a net cash position. 

Source: Kimly IPO Prospectus

If one was to take into account their net cash position when considering Kimly's valuations, you will find their PE ratio even more enticing.

Risks 

1) Pre-IPO Jitters?

Kimly sought Pre-IPO investors in December:

Source: Kimly IPO Prospectus

The Pre-IPO investors committed a capital of S$5M, which is rather insignificant and hardly reassuring considering that Kimly is seeking a market valuation at above S$250M. 
Source: Kimly IPO Prospectus

Our "Pre-invitation Investors" also converted their loans into shares at a 20% discount - S$0.20 per share. Again, the large size of the discount does not provide for confidence.

2) Execution Risks

It seems to me that Kimly's growth plans are built primarily inorganically. Singapore's coffee shop and food court industry is rather mature as land allocated for these premises are limited. Kimly might therefore find it hard to acquire new food outlets at attractive prices.

Concurrently, Kimly has to defend their existing leased premises. It is worrying that they have already reported a failed tender to continue at Ngee Ann Polytechnic, and will have to give up the premises in April 2017.

Conclusions

Kimly's business is one with moat - Everyone needs food, and there are limited places near our homes that sell food. Many of these places in the heartlands happen to be owned by Kimly.

Even if Kimly were to maintain their current EPS, and assuming they uphold their intention to provide dividends equivalent to "not less than 50% of net profits attributable to shareholders", shareholders should still get at least S$0.01 of dividends every year. This translates to a minimum of 4% dividend yield at the IPO price - not too shabby.

Personally however, I am probably going to sit this one out. My feeling is that there are better buys out there in the market. I suggest for interested investors to do their own due diligence - after all, both Ben Graham and Peter Lynch had cautioned against IPOs (you may read my reviews of their books; highly recommend their books!)

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.