Wednesday, 17 May 2017

Cogent Holdings - Growth Story Continues

Cogent Holdings is another firm that I had not written about for 2 consecutive earnings release. Given that the investment thesis was largely built on growth, it is high time to monitor their growth momentum. Interested investors can find their latest Q1'17 earnings here.

Revenue

Source: Cogent Financial Statements
(calculations by Author)

While growth has continued, top line growth rate has actually declined slightly. 

Warehousing, Container and Property Management has been the main growth driver on an absolute basis. Given that the gantry crane on top of Cogent 1 and the Jurong Island container depot are now both fully operational, I expect the trend to continue.

The S$2.5M contract from Land Transport Authority to supply and manage a vehicle pound won on 28th April 2017 should provide a boost for Automotive logistics management services for the rest of the year. Worryingly, revenue from Transportation management services continues to fall.

Bottom Line

Source: FT Markets

As seen above, 2016 was a strong year in terms of bottom line growth for Cogent. 

While Q1'2017 started with a headline 5% YoY increase in net profits, the result was actually a slight 5% fall QoQ fall. However, I believe the expected growth in revenue will reflect on the bottom line as Cogent kept a tight lid on her margins.

Conclusion

I expect both top line and bottom line growth to accelerate slightly in the coming quarters. Beyond FY2017, we can also look forward to the Jurong Island Chemical Logistics Facility's completion and Port of Singapore Authority's move to Tuas as potential growth catalysts.

EDIT:

For those interested, Philip Securities covers Cogent and issued a report on 17th May (here) with a Target Price of S$1.18. Analyst Richard Leow also provided some interesting tidbits of qualitative information which could be of great value to investors.

As a word of caution though, while the Analysts are indeed professionals, they can be (and have been) wrong. Occasionally, they can even be very or completely incorrect. While the TPs might be eye-catching, I personally don't put much thought into these figures bandied around and prefer to use these TPs as some kind of rough gauge. As always, I would suggest for all interested investors to do your own due diligence.

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, 15 May 2017

Keong Hong 1H'17 - 3rd Pillar to Strategy Introduced

Keong Hong recently released their 1H'17 earnings (here). Seeing that they have released 2 earnings reports since I last wrote on them, I thought it would be good to document some updates given that Keong Hong is an extremely dynamic company.

Keong Hong's 1H'17 earnings results have been largely in line with my expectations and therefore this update will be focused on their strategy execution. Since my last review (here), Keong Hong had been executing on a third pillar for growth:

A) Enter into Joint Ventures with 15%-20% stake and as the main contractor for property developments. This enables them to risk-share on development while earning from being the main contractor.

B) Diversify away from merely constructing and developing in Singapore and work towards building recurring revenue.

C) Investments for both horizontal and vertical construction synergy. (NEW!)

Here is an update for all of Keong Hong's projects completed/in progress for Sep16-Sep17 (FY 2017), and how they relate to the strategy.

Singapore:
Holiday Inn Express Katong (Operations Ongoing) - B
Hotel Indigo Katong (Operations Ongoing) - B
Raffles Hospital (Jul-Sep 2017 Target Completion) 
Parc Life (22% 40% sold , Jan-Mar 2018 Target Completion) - A
Seaside Residences (Design Consultancy Stage 51% sold) - A

Kori (15M shares, S$5M convertible loan) - C
Kori is a multi-national Singapore-based BCA-registered licensed specialist builder in structural steelworks, piling works, ground support and stabilization works. Keong Hong has an option to convert the S$5M loan into shares at a conversion price of $0.42. A conversion, which is currently in the money, will grant Keong Hong 24.2% ownership of Kori's enlarged share holdings. Kori will thus likely be considered an Associate of Keong Hong.

Nuform (30.6% ownership, S$1M loan) - C
Nuform is a company that supplies metal frameworks to the construction industry. Keong Hong paid a total consideration of S$5.6M for 30.6% of Nuform's equity interest. Based on my calculations, this values Nuform at a Price-Book Ratio of 0.9 and a Price-Earnings Ratio of 6.18 - a very decent price for an earnings accretive firm with Return on Equity over 10%.

Hansin (60% ownership) - C
Hansin is engaged in the supplies and installation of timber floorings and exterior timber decking, trellis and roofing for residential and commercial development projects in Singapore. Subject to the fulfillment of conditions, Keong Hong is offering S$4.5M (S$3M cash, 2.565M shares at $0.585 per share) for 60% of Hansin's ownership. Assuming that Hansin did earn at least S$2.5M in FY2016 (which is very possible considering they reported $0.86M profits for their latest quarter alone), Keong Hong is paying a PE of only 3 - a bargain for this earnings accretive firm!

Vietnam:
Nha Be, Ho Chi Minh City (Planning Stage) - AB

Japan:
Honmachi, Osaka (Commercial Rental, ongoing) - B

Maldives:
Mercure Maldives Kooddoo Resort (January Mid 2017 Target Completion) - B
Pullman Maldives Maamutaa Resort (end 2018 Target Completion) - B

Conclusion:

Exciting times lie ahead for Keong Hong with the integration of these new subsidiaries and associates. These new investments are readily earnings accretive and provide for synergy for both Keong Hong and Kori's businesses. Most importantly, Keong Hong bought ownership stakes at very attractive prices - Hansin's deal effectively values Keong Hong at an almost 22% premium to their last traded price of $0.48.

Furthermore, given Keong Hong's large investments in Maldives, I am also excited to see the results of their Maldivian ventures now that it is nearing completion. While I am hopeful for the resorts to also hit the ground running, I am aware that some start up losses might be inevitable.

Definitely keeping an eye out for further developments at Keong Hong!

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.

Sunday, 7 May 2017

12 things I learnt from Berkshire Hathaway 2017 AGM

Just as I did last year (here), I took some time out to watch Berkshire's AGM hoping to glean some nuggets of wisdom from Warren Buffett and Charles Munger. It amazes me how Buffett and Munger are still learning and adapting their methods at the combined grand old age of around 180!

Again, those who wish to view the whole AGM can do so here.

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1) Driverless Automotives are a threat to Berkshire's business

This is true both for Auto insurance (assuming driverless automotives are safer) and Rail operations (as driverless trucks become more cost-effective substitutes).

2) Buffett views Apple as more of a consumer product business

This is as opposed to a technology firm that he feels IBM is. On a related note, he also expressed disappointment in Berkshire's investments in IBM.

3) Berkshire regrets staying away from tech firms

Munger cited Google as an example, saying that Berkshire had the intelligence to suss out the fact that Google had moat and would be successful, but did not actively consider investing. It seems that going forward, Berkshire might be more inclined to invest in tech firms.

4) American Airlines industry is in better shape now

Buffett views that the airline industry (he classifies his bets on the 4 major airlines as a bet on the industry as a whole rather than bets on each individual airlines) has consolidated and should see better capacity. He also feels that pricing has matured, and days with suicidal pricing leading to bankruptcy have passed. Share buybacks among the 4 carriers were also cited as a significant plus.

5) Berkshire adds values to its subsidiaries

These subsidiaries are ran as if they are private companies - Berkshire shields them from the public eye so they are able to make decisions away from public scrutiny, enabling them to search for long term value instead of worrying about short term profitability targets. Naturally, being part of Berkshire also grants them quick and easy access to capital if required.

6) Berkshire doesn't actively use sector analysis

Buffett informed that that top down sector analysis is not normally practiced at Berkshire in response to a question asking for his views on sectors he is bullish or bearish at.

7) Online IS changing retail in a big way

While shopping online has yet to pose a significant change to Berkshire's furniture businesses, Buffett is under no illusions that it eventually will in a manner not too dissimilar for departmental stores today. Businesses will have to decide if they will sell online themselves or go through a business like Amazon.

8) Berkshire is ready for more renewable energy

Solar or wind, dependent on geography but regardless otherwise, Berkshire has both the will and the capital to grow its energy business by investing in renewable energy.

9) Formulas are not great ways to consider market valuations

Market Cap to GDP ratio as well as seasonally adjusted PE ratios are both not great because while they have some degree of meaning, the question is what to use for the variables. Qualitative judgement is required, which can be aided through experience of running bad businesses.

10) China has more value now

Munger was of the opinion that the Chinese stock markets offer more value than the American ones now.

11) Healthcare costs are too high

Buffett feels that medical costs are the main impediment of American businesses, not taxes. He cited medical costs at 17% of GDP as opposed to taxes at 2% of GDP as his main argument.

12) Free trade is good for everyone

While Buffett acknowledges that some people suffer when their jobs are displaced due to free trade, he argues that the overall benefit to society is far greater. It does not make sense to blame companies for moving production abroad as these companies will otherwise be unable to compete anyway. The onus is on society, likely through the government, to allocate some of these net benefits to aid those who suffer.

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.