Thursday, 20 April 2017

Kingsmen and Pico - Same Industry, Different Fate

Kingsmen (SGX:5MZ) and Pico (HKG:0752) are both widely recognized as leaders of Asia Pacific's corporate and events marketing field. However, these 2 firms have experienced vastly different fate in recent years.

Pico Up, Kingsmen Down

Source: FT Markets

Fundamentally, Pico has reported increased yearly net income since 2013. In contrast, Kingsmen's income has been stagnating since 2012 before suffering a big dip in 2016. To make matters worse, Pico has outperformed Kingsmen on all measures of returns efficiency.

Source: Google Finance, 2012 till date

Over the course of the long term, share prices inevitably collapse in line with businesses' fundamental performance. As such, it is of no surprise that Pico's share price has outperformed Kingsmen since 2014. Since 2012, Pico has logged a 120% gain in share price while Kingsmen's share price is hovering around 0% gain.

Naturally, Pico is also trading at higher multiples. Pico's PE and PB is around 13 and 2.15 respectively, while Kingsmen's PE and PB trades around 10 and 1 respectively. 

Reasons for Kingsmen's Downfall

Kingsmen was once many value investors' darling. As such, I found it worthy to devote some time towards understanding the reasons for their downfall.

Source: Kingsmen's Annual Reports
NOTE: All segment profits are not consolidated

Here are some points that we can glean from this:

1) While Retail and Corporate Interiors and Exhibitions and Thematic have always contributed the lion's share of Kingsmen's net income, the mix has changed vastly since 2013 with the former decreasing in importance and the latter growing in significance.

2) Kingsmen's problems are primarily driven by the fall in Retail and Corporate Interiors's net income since 2013. This, in turn, is caused by a reduction in profit margins to razor thin levels.

3) On the bright side, Exhibitions and Thematic has reported both increased profits and improved margins. However, worryingly, revenue from this segment fell in 2016.

Conclusion

Much of whether Kingsmen can turn their business around depends on their Retail and Corporate Interiors segment. At present, Kingsmen appear to be hopeful - they are adopting a policy to defend their market share by operating on lower margins.

In general, there is much uncertainty with Kingsmen's fate now. With the digital revolution ongoing, it remains to be seen if the retail sector will ever regain its future glory. Their failure to grow Exhibitions and Thematic's market share also hampers their pivoting strategy. Perhaps most importantly, Kingsmen are undergoing a change in leadership.

As for Pico, they have demonstrated much greater resiliency than Kingsmen in similar market conditions. The fact that they have defended and even grew their margins amidst this tough operating environment is particularly laudable.

I will continue to monitor both companies as I ponder on when to begin dabbling my fingers in foreign exchanges.

Regardless, here is to wishing everyone fruitful investments!

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, 17 April 2017

New Counter: Valuetronics

Given that Keong Hong's share price has taken off, I have been spending my time looking at other potential counters to invest money earned from my sale of Keppel T&T's stock. Happy to announce a new purchase this month. Here are some of my considerations -

Equity: Valuetronics (SGX: BN2)

Business: Electronic Equipments
Markets exposed: America, Europe, Asia Pacific
Stock exchange: SGX
Purchase price: 0.765
Purchase month: April

10% per annum thesis: 

Valuetronics is a turnaround that is now poised to be a fast grower. I also consider them undervalued as an asset play.

Introduction:

Valuetronics' profits have been stalling over the past 3 years due to their gradual phasing out of their previously core LED light bulb business. The LED light bulb business was suffering from increased competition and strong margin pressures.

Now that they have completed dropping their LED light bulb segment, they are poised to grow both their Consumer Electronics (CE) and Industrial and Commercial Electronics (ICE) business.

Considerations:

1) Decent Governance

I will begin with the customary inspection of Valuetronics' Corporate Governance. 

Valuetronics does not have the best corporate governance. They rank 328 in Singapore's 2016 Governance and Transparency Index, and their CEO doubles up as their Chairman.

On the bright side, 3/5 of their directors are independent or non-executive. They also boast a formal dividend policy and a formidable history of providing dividends.

2) The Turnaround is Real

Up till the end of FY2016 (ending March 31st), Valuetronics was surviving on their ICE business as their single engine of growth. Their CE business was sputtering to say the least, and struggling to put it bluntly.

Source: Valuetronics' Financial Statements
*full year results calculated via straight line run rate

However, following their complete ceasing of the LED light bulb business, they have managed to grow the CE segment once more. This is attributed to their expansion of product portfolio to include wireless lighting with smart control features.

Given that Valuetronics' CE results only surged in Q2, they should be able to achieve full year results calculated via straight line run rate. As a result, we are going to see Valuetronics grow their top line for the first time since 2014. Given the stronger margins, we are also likely to see growth trickle down to the bottom line.

Beyond FY2017, it seems that the general macro trend is rather favorable to Valuetronics - Singapore's increasing electronics exports and growing demand for their products.

3) Asset Play

Valuetronics currently trades at a trailing twelve months (TTM) PE of almost 12, which while not generally considered expensive, does not appear to be of particularly value. 

However, things begin to change when you take a look at their balance sheet - Valuetronics is actually sitting on a huge stockpile of cash.

Source: Various Financial Statements
Compiled with figures from 14/4-17/4 weekend

When compared with similar firms (I wouldn't say these firms are exactly comparables), net of the amount we are paying for Valuetronics' cash, I am only paying a PE of about 7 for Valuetronics. There is therefore a good margin of safety. (SIDETRACK - I do think the Spindex buyout offer is kind of a low ball)

More importantly, based on CAPM, I estimate Valuetronics' cost of equity to be around 5.8%. We can add whatever premium (liquidity, small cap etc) and we are still unlikely to reach my expected Return on Equity for Valuetronics of about 15% this year. Ergo, Valuetronics are actually still making significant economic profit despite sitting on a huge pile of unproductive cash!

Risks

I will simply list 2 of my most prominent concerns for interested investors to research more on:

A) Use of dilutive share options

B) High combined salaries for top 3 executives

Conclusions

I am expecting a strong set of results to be announced by Valuetronics in early May along with a bumper dividend of at least 20 HK cents.

Source: Yahoo Finance

Given that Valuetronics is already on an uptrend, this should prompt a successful breach of the $0.80 resistance in the near term. The bonus issue might be another short term catalyst for value recognition.

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, 5 April 2017

Procurri - Growth Story Gone Wrong?

It has been some time since I did a write up on some of the counters that I am looking at. Procurri is one such counter as I had been monitoring their fortunes since their IPO back in July 2016. Interested investors can read more about Procurri's IPO from Mr. IPO's review here.

Without further ado, lets dive into their first full year results which can perhaps best be summarized in one word - Disappointing.
Source: Procurri Full Year Results Release

There are 2 main points that I wish to address regarding their results:

1) Weak Revenue Growth

Procurri's revenue had only grown 10.5% year on year. While 10.5% is considered a pretty outstanding result for most firms, it is pretty abysmal considering that Procurri had boasted of a 108% revenue CAGR in their IPO Prospectus.

2) Declining Profits

While net profits are skewed by one-off IPO expenses, it is disappointing that Profit before tax and IPO expenses have actually declined. Again, this is pretty abysmal considering that Procurri had boasted of a 113% EBITDA CAGR in their IPO Prospectus.

The main cause of their disastrous performance is an increase in Administrative expenses.

Source: Procurri Full Year Result Release

Investors in Procurri will no doubt be upset to see that these "Administrative expenses" appear to be largely recurring.

Undeserving Valuations?

At Procurri's current share price of SGD$0.35 and based on their diluted and pre-IPO expenses FY2016 Earnings Per Share, Procurri is currently trading at a Price-Earnings multiple of 11.3.

Frankly, given that Procurri has not delivered on their growth story, this valuation can already be considered to be rather rich and undeserving. It is therefore no surprise that their share price has already decreased 37.5% from its IPO price of SGD$0.56.

(If one were to use Procurri's diluted and post-IPO expenses FY2016 Earnings Per Share, they will be trading at an even more exorbitant Price-Earnings multiple of 16.1!)

Long Term Potential

It is not all doom and gloom for Procurri. On the bright side, they are operating in an industry that has tremendous growth potential given the demand for cloud computing and the Internet of Things. Demand for services which Procurri provide is expected to grow throughout their footprint.

I will keep Procurri on my watchlist to see if the company can leverage on its recent acquisitions and/or joint ventures to grow its top line while reining in excessive costs. However. until Procurri delivers on their promised growth story, the share price is heading only 1 way - Down.

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.