Short Write up on AYN, Global Testing Corp

On the surface, this company looks really cheap, with a low PE, zero debt and a book value of about 1.8 dollars to a market price of 1.0x dollars.

Negatives are
-Lack of consistent dividend records
-customer concentration risk-- largest customer takes 33% of its revenue.
-declining book value per share.

Positive
-management does not seems to be greedy-- salary is actually really low
-large dividend payout last year, although i prefer a consistent payout.
-zero debts on its balance sheet!

I am still split in this company and I probably read the annual report (only 72 pages!) some more.

Update to Mum's Portfolio

An update to my mum's portfolio in an earlier post. As the price of Hong Kong Lands rose to my calculated Residual Income's book value of 6.8x, I managed to sold it for a good profit at over 100+ SGD. There is a certain amount of currency risk here so it is prudent to take profits. As of now, the portfolio is on a positive 3.82%, which is due to both luck and my belief in buying stocks on book value.

As expected, the small stocks that are not popular nor part of STI did not enjoy any movement. Part of liquidity issues.

Keong Hong: The 6.38% Yield. Stay Cautious

 I am sure plenty of us are after a company that pays good dividends with a low price to book ratio, increasing NAV as well as decent ROA.

Superficially, Keong Hong (5TT) seems to fit the bill.

There are a few things I find worrying about this company.

1) Highly paid CEO-cum-Chairman
Probably one of the highest paid CEO/Chairman around for its Market Capitalization. Do note that his salary increased at a crazy rate over the years.

2011, it was stated to be above 500K.
2012, between 1.25 and 1.5
2013, no change
2014, it gone up between 1.5-1.75
2015, it gone up to between 2.75 and 3M (!!!!!!!!)
2016, no change

2) Share Option (? not sure if this is anything to be worried about)
it says here there is about 7m share options not exercised at the highest price of 40cents. It has about 10m in treasury, and about 230m shares in total. I am not sure if this figure is something to be alarm at since I am inexperienced.

PB is about 0.8... okay discount. I don't see corporate or directorship buying back shares for 2016... so I guess current price, as of now isn't anything fantastic.

3) Balance Sheet Worries
Trade receivables makes up a large part of its balance sheet. This company seems to be making a huge investment this year. It says here in the cashflow statement that it loaned 60M to its JV. This is double of any amount it did, in 1 single year, over the last 5 years or so.

History of this company's ROA (net income divided by total assets)
2011- 9.96%
2012- 15.2%
2013- 15.6%
2014- 8.7%
2015- 11.6%
2016- 9.71%

NAV per share
2011- 19.62 cents
2012- 13.35 cents (!)
2013- 41.8 cents (incredible! reduction of 4m shares as well)
2014- 34.4 (rights issue, from 156m to 232.95m shares!)
2015- 49.86 cents (reduction of 6m shares or so)
2016- 59.4 cents (increase of about 3m shares)
This significant increase in NAV might be due to leverage?

Debt to Equity over the years (all bank borrowings + interest-payable financial leases)
2011- 5.2%
2012- 1.66%
2013- 6.93%
2014- 27.9% (!!!)
2015- 59.4% (!!!!!)
2016- 46.6%
Leverage is okay but is the finance cost managable?

Interest cover over the years. (net income / finance cost)
2011- 76.2 times
2012- 301.97
2013- 347.89
2014- 60.69 times
2015- 27.87 times
2016- 8.82 times (!!!!!!!!)

This indicate the company is pretty decent in its management (based on ROA), it is taking on an increasing amount of debt. Its ability to repay debt, from its interest cover, is dropping significantly in the last 3 years.

Trade receivables is worrying high, and customer concentration risk of receivables from 5 customers is about 70+ percent.

At its gearing ratio and that investors are probably at this company for its yield, I recommend a further discount to its current price before investing.

At the moment, there are better companies with lower debt that pays about the same dividends at a lower risk.

The Aztech deal: Was it possible to avoid such a situation?

Imagine we are now in June 2016 and we are looking for some stocks that are cheap based on its book value. Based on its earning report, Aztech had just release its quarterly report and its declared book value of about 99 cents. The share price was 45 cents at that point of time. This represent a good discount of 50%.

Fast forward a few months, the share price has dropped to 30 odd cents, but you refuse to average down... perhaps you want to diversify into other companies. But one day, the offer of 42 cents came in to privatize the company. No matter what happens, you stand to lose at least 3 cents a share.

Due to luck (and lack of capital) I did not invest in Aztech. But this deal could be a valuable learning session for me.

I did a quick and dirty look at its dividend payouts. Take note that the free cash flow component might be wrong.

Right off the bat, there were years that the company was indeed doing poorly but the management opt to pay out dividends. These years are 2008-2011. There were profitable years which I felt they could have paid a dividend, but chose not to. These are 2005 and 2015.

So with the dividend history giving you a mixed result... Are there  any warning signs out there?

Personally I can only come up with a few... but they are hit and miss

1) A history of poor Returns on Assets, Stagnant Current Ratios and Deteriorating Equity
If the ROA and ROE is negative, your book value naturally declines. Hence a bet on its reversion to book value is probably a little dangerous. What about those deep value companies? I guess it takes a different kind of person to be a distressed-asset investor...

The left most field is 2011, and the 2 right most fields refer to the 5 years and 1 year trend.
The 5 year trend average to a net negative... I guess you might be able to blame management for that...

The shareholder's equity has been plunging for the last 3 years, naturally from its negative ROE.


2) Diversification into vastly different fields
Aztech is primarily an electronic company, but have diversify into many different kinds of business.

 I think it might be difficult to see how they can achieve any kind of synergy nor economy of scale, and neither will it be easy to find someone who knows how to manage so many different industries...

3) Moderate to high debt
Most businesses are selling at a low P/B ratio due to bad earnings. It is no surprise that the company is probably facing headwinds, be it as a company or as a sector.  As such, a increasing debt means that the company is not given the luxury of time to recover.

Aztech's Interest Cover in its last profitable year of 2014, is only about 3.5. It's most profitable year, 2006, have a interest cover of about 10.

We are currently in a low-interest-rate environment. Companies and individuals who depended on leverage will definitely be in an unpleasant situation when the tide turns.

----
I guess I am extremely disturbed by this episode. Even though I am not vested, sooner or later, I might be caught up in this sticky situation.

What lessons can I learn from here?

1. Diversify so that blow ups like this will not hurt me too badly.
2. Invest in old companies with a consistent record in ROA. Aztech's ROA is a bit of a see-saw to be honest...
3. Low debt. Debt kills. Period.

Strategy for 2017

It will be the first day of trading tomorrow and nobody in the world has any idea where the market will go. After a year studying and researching companies, I surmise that the stock market and the economy are largely uncoupled. Hence, there is simply no point extrapolating market growth (or shrinkage!) from the economy indicators.

I started investing trading in late 2015 and give it up after a couple of months, only to start investing at the prelude of the correction period of Jan-Feb 2016. I saw one of my holdings go as much as 40% in the red. I had many walks around the reflexology paths (one of the free amenities that I am god-damn grateful for) confronting my inner self doubts.

I went for a few low-cost talks, and had a fairly expensive course about investing. I finished reading a few books that shaped my ideas about my investing. I still have no idea how to use derivatives, such as warrants and options, and I intend to keep it that way. I was tempted to short the banks with CFD, got myself an account, but pull out in the end.

I guess that is because I am extremely risk adverse.

***

I ended 2016 with a disappointing 0.75% gain, including closed positions and dividends. According to my report in SGXCafe, I have a time-weighted return of 6.89% so far, and have 2.03% in XIRR. Along the way, I participated in a couple arbitrage deals, namely SMRT and ARA Asset Management (which I hope will come to fruit by April). I made a couple of mistakes in selling stocks way too early based on charts, and tried to time market reversion on the telcos way too early (again!).

These mistakes will prove educational in the near future.

The investment strategy for 2017 will not be too different from 2016. I will remain focus on investing in cheap stocks by book value, while ensuring that dividends are sustainable, debts are low and management have OPMI's (outsiders, passive, and minority investors) welfare in mind. That is all is to it. I resolve to have an open, but independent, mind to the markets. It is about time to stop focusing on just the Singapore Stock Exchange. Value investing is about looking globally for opportunities, and having just local stocks is myopic.

Good luck to everyone for the next 52 weeks.