TTJ: Voluntary Conditional Offer

Objective

This post attempts to fulfill two objectives. First, it seeks to demonstrate that the value in TTJ ("company"), even when conservatively considered, is leaps and bounds higher than the conditional cash offer. The exercise does not involve by plainly looking at the Net Asset Value stated in their books, but a practical and simple way of assessing things.

The second, is how I felt about the whole situation, what one should realistically expect as a shareholder, and what I had learnt from this episode.

Back of the envelope valuation of TTJ

As we go along, keep in mind, the offer from THC Ventures is 0.23$ a share, or a total consideration (for 349.5m shares), 80.385m.

The value of TTJ are primary in 3 areas, liquid assets, properties, and the structural steel business.

Liquid Assets

	Stated value (31-Jan-2022)	After Discount (Discount %)
Cash and equivalent	29.152	29.152m
Trade and Receivables	24.2m	20.6m (15%)
Contract Assets	34.7m	27.7m (20%)

The first step is to consider the more liquid assets of the company, namely cash, receivables and contract assets. Then, we proceed to apply a discount to each asset according. In case of cash, there is zero need to discount it-- after all, cash is cash. As for receivables ($ owe to the company by customers), 15% is applied in case of counterparty risk. (Do take note: no discount is applied to any liabilities, include account payables.)

But what are contract assets? According to the latest annual report in 2021, it states:

"The contract assets are for entity’s rights to consideration for work completed but not billed at the reporting date on the contracts; 

costs incurred to obtain or fulfil a contract with a customer; costs to obtain contracts with customers; 

pre-contract costs and setup costs; 

and the amount of amortisation and any impairment losses recognised in the reporting year. 

The contract assets are transferred to the receivables when the rights become unconditional. 

The contract liabilities primarily relate to the advance consideration received from customers. The entity recognises revenue for each respective performance obligation when control of the product or service transfers to the customer  "

Since there is a fair amount of judgement needed, a 20% discount to the value stated is reasonable.

The sum of these assets, discounted, is 77.452m

Properties

TTJ has property (both leasehold and freehold), that are either in the books, or disposed. For asset not sold, the acquisition cost price of the asset would be used. After all, if the price is not reasonable, why did management purchase it?

We will omit the property at 57 Pioneer Road as there is only 2 years left on lease, although I recognize that there is definitely value in it, and hence left out in this exercise.

1) Disposed factory at Johor Bahru
valued at 13.377m SGD

Source: https://links.sgx.com/FileOpen/T%20T%20J%20-%20Disposal%20of%20Assets.ashx?App=Announcement&FileID=670523

2) Factory in Chachoengsao District, the Kingdom of Thailand

for the purpose of wood pellet business which is suspended.

Acquired at cost: 5.95m

Source: http://www.ttj.com.sg/newsroom/yr2018/TTJ_Proposed_Acquisition_of_Assets_in_Thailand.pdf

3) Factory in 51 Shipyard Crescent

for the purpose of wood pellet business which is suspended.

Acquired at cost: 16.81m

Source: http://www.ttj.com.sg/newsroom/yr2018/TTJ_Proposed_Acquisition_BFI_announcement.pdf

Total value: 36.137m

Structural Steel Business

Due to the cyclical nature of the business, it is more prudent to look at long term earnings of the company. Figures below are extracted from annual reports of each year, usually classified under Note 4 "Financial Information by Operating Segments."

Profit Before Tax for Structural Steel business

2009     15.891m

2010     6.244m

2011     12.818m

2012     14.042m

2013     9.297m

2014     14.630m

2015     5.152m

2016     19.562m

2017     9.894m

2018     9.898

2019     5.022m

2020     -3.526m

2021     10.952m

Average: 9.99m

Median: 9.89m

Applying a tax rate of 17%, it is 8.217m, and applying a conservative multiple of 7 times, the structural steel business is worth about 56m. Even at the worst year earnings of 5.022m (post tax: 4.17m), it is worth about 28m.

Take note that Mr Teo has always run his business prudently, outlasting many of its peers. It has an order book of 187m, which are projects that will run between this year till 2024. 

Summary

	Stated value (31-Jan-2022)	After Discount (Discount %)
Cash and equivalent	29.152	29.152m
Trade and Receivables	24.2m	20.6m (15%)
Contract Assets	34.7m	27.7m (20%)
Sales/Disposal/Acquisition of factories/offices
JB factory	13.37m (disposed)	13.37m
Thailand factory	5.95m (at cost)	5.95m
Singapore (51 Shipyard Cresc)	16.81m (at cost)	16.81m
Total Assets		113.582m
Total liabilities	26.695m	26.695m (no discount)
Value of TTJ (without accounting for structural steel business; and 57 Pioneer Road leasehold property)		86.887m or $0.248 per share
Estimation of Structural Steel Business		a) Based on worst year earnings: 28m b) Best on median year earnings: 56m
Value of TTJ with Structural Steel Business		a) Based on worst year earnings: 114.515m or $0.329 a share b) Based on median year earnings: 142.515m, or $0.409 a share
Stated Net Asset Value (from half yearly result, announced Mar 2022)		128.582m, or $0.3679 a share
Voluntary Conditional Cash Offer		80.385m, or $0.23 a share

My Opinion

A reasonable assessment of the company's value, even without considering the structural steel business, is at least modestly more than the offer.

Mr Teo has been widely thought of as shareholder friendly, honest and forth-coming. This move to buy out, using a company to circumvent takeover codes, is very surprising and disappointing. 

Surely he wouldn't want his company, in the many years to come, to be quoted as the reason why a certain Singapore Exchange rule was birthed, out of the need to patch a certain loophole? Reputation is priceless.

I would be very fair and say that as minority shareholders, it is not reasonable to expect 40 over cents (that is the value, in my head, for optimal price + premium for control. Your value might differ.). Firstly, Mr Teo could have carried on status quo for as long as he likes. Secondly, he assumed the risk and effort in building up the company. Sure, as a listed company, there is a a minimum amount of public shareholders required, and credit is easier to access as a listed entity. 

Meeting at middle ground is a far more balanced and fair approach to both shareholders and management, leaving both parties feeling that nothing is lost or taken away. I note that in the offer document, under note 2(e), that the offer is not fixed. So I am hopeful.

Lastly, as a note to myself, this episode reminded me that cigar butt investing is fraught with danger. Cheap companies (even with asset value modestly discounted), with low returns on equity, required countless injection of capital over the years, as the price keep falling.

When one pursues this approach, he or she will feel immense unease-- that prices will remain depressed for years, or worse, got acquired with an offer as unsatisfactory as this. I have success with this approach in the past, but this is not one of them. However, it is a very good lesson.

-as of writing, TTJ weighs 9.81% of the entire portfolio. I have been a shareholder since 2017.

Self Reflection: the desperate need to get rich.

A good friend of mine was deep into his bible studies and shared this little piece of wisdom with me some time ago. (I do not subscribe to any religion but I like this part)

He that is without sin among you, let him cast the first stone

***

According to the Gospel of John, the Pharisees, in an attempt to discredit Jesus, brought a woman charged with adultery before him. Then they reminded Jesus that adultery was punishable by stoning under Mosaic law and challenged him to judge the woman so that they might then accuse him of disobeying the law. Jesus thought for a moment and then replied, “He that is without sin among you, let him cast the first stone at her.” The people crowded around him were so touched by their own consciences that they departed. When Jesus found himself alone with the woman, he asked her who were her accusers. She replied, “No man, lord.” Jesus then said, “Neither do I condemn thee: go and sin no more.”

***

Simply put, none of us are faultless in our ways. 

With the recent cryptocurrency crash, as well as significant plunges in stocks (tech, medical, etc) in mind, this is a timely reminder. I know many of us, who deem such risk taking behaviour as foolish, might feel very vindicated for being a naysayer. 

"I told you so," are words that many of the didactical ones could easily utter.

It is far too easy to criticise, and far too easy to mock people on the receiving end, for being naive. 

"There is a reason for such high yields"

Lets take a deep breath and self reflect.

Deep within, I think most, if not at least a good majority of them, wish to get rich. Being a poor lad myself, I cannot relate to those who already have a good sized fortune, but still choose to bet the farm on risky assets. So this post is dedicated to my fellow low-middle-to-low earning class readers out there.

I have a friend who is also stuck in the current cryptocurrency mess himself. He have a sizeable amount of his net worth, staked in a certain crypto asset. The maturity to his lock-up stake period is still a distant future away. So he is looking at his portfolio wasting away as time passes. A terrible situation.

This isn't his first time getting into the wrong end of a trade. He was also involved in the Tesla selldown (not the recent one), a covered call cock up by the trading platform he dealt with (which he ended up having to cover with prices bid way up due to a short squeeze) and a few others.

I do feel very exasperated and wished that he would listen to me.

Despite my efforts to advise him to stick to conservative indexing practices, his rejoinder then shook me. Not because of its wit, but because it reflect how helpless we, the generally not that well-off, all are. 

"My index funds are my long term, but I need something for short term too."

At that moment, I took a deep breath, and had mentally organized a set of replies (which were said in the past), but they were stuck in my throat. I think this is not the best time to say harsh words. Thinking back now, all I have is a deep sigh.

As I am writing this post, my mum, at a ripe old age of 69, is coughing. She had two tiger balm plasters pasted on both her knee caps, which were hurting after having to cover for her colleague. My mum is a cleaner, and my dad is a retiree, and before that, he was a ship fitter (repair man).

I am not born into a rich family, and none of them know anything about investing. Saving money is all my mum knew. At her age, she have type 1 and 2 diabetes, and we are still waiting to undergo more tests, which might reveal more worrying problems.

My mum have never say it but I know she kept working because she is worried that she might run out of money for her late years of sickness. Her workplace offer her insurance, which we claim on a regular basis. So that is another reason why she is afraid to quit and retire.

Although the market has treat me well over the last few years, giving me way more than market average returns, the sad fact is that I do not have a lot of money to begin with. I am far from the sum that I need to retire, and other unforeseeable circumstances.

I do feel very helpless and trapped. I earn a very modest amount of salary (<5k). Even if my conservative investing ways were to work out, it will take some years. By then, perhaps my parents will no longer be around. I am not even 70% confident that I will do well in my investments. 

I do feel that I have let my parents down a lot, and have failed as a son.

To that friend of mine, and many others hurt by the markets recently, I genuinely feel for you. 

To my younger readers, I wish you will start earlier. do not end up like me. Index early, concentrate on your career, and you do not have to take undue risk.

May 2022 Portfolio Update

As of 12-May-2022:

S&P 500 Index Fund: -4.32% -> -14.49%

Hong Kong Tracker Fund: -5.53% -> -14.91%

Straits Times Index Fund: 8.26% -> 3.02%

My portfolio: -4.22% -> -11.64%

Results would have been more respectable if OKP, TTJ and Alibaba have not fall 6% today... Nevertheless, I am glad my portfolio is still a little ahead of Hong Kong and America indices.

Transactions:

There were four transactions of special situation nature, they are:

a) Oversubscribed to the rights of Lendlease REIT and was allocated full.
The use of perpetual securities, which pays a pretty high interest rate, as a source of capital to purchase JEM is not the best of news to share holders. I have just finished a zoom presentation and a Q&A by the CEO. He does sound down-to-earth and genuinely have unit-holders' interest in mind. Despite the share price going back down to 72 cents a share (rights-offering price), it might be worthwhile to hold on.

b) Initial arbitrage investment in Activision Blizzard
There is a good 21% or so gap between today's price, and the going private price of 95$. This is a copy of Berkshire's trade, and the unlikelihood that anti-trust will bring the stock down.

c) Slight increase in Embecta
Since my last post, the stock has given up the 10% or so of capital gain. With a small discount of about 8.8% from my initial buy price, I choose to inject another round of modest capital. I have also wrote a put contract, strike price 25$.

d) Initial investment in Yangzijiang Financial Holdings (CPF)
There are three main reasons why I have inject a small sum of capital into this company.

i) This is a spin-off play. It does look like the market prefers the less uncertain (but cyclical) shipping arm and sold off YZJ Financial without much discourse. I do believe that investors, who have YZJ shiparm invested via CPF, was unable to unload their shares. They could only look on helplessly in recent days until 11-May, and are also contributing to the sell-off

ii) The investment portfolio, consisting of mostly corporate bonds is not the most savoury, but I believe about 70+% of it is secured by assets of some form (real estate, land use rights, etc). 

Quote: As at 31 December 2019, 2020 and 2021,approximately 60.9%, 78.4% and 70.5% of our Debt Investments were secured by collaterals, respectively. We mainly accept land use rights, building ownership rights or other securities as collateral for our loans and Debt Investments granted.

Assuming that all unsecured debt goes bad, that would be a proper write off of maybe 25% of the book value. This company has lost more than 50% of its book value, which means that there is a small amount of margin of safety between price and risk. Hence, current capital injected is small, but rationally sized.

iii) There is no indication (at least to me) that this spin off is the trash. The moratorium of 6 months will be revealing, but still feels like a distant future away. Any uptick in sentiments of the Chinese market would bring relief to this stock. The CEO seems abled and had sold his company, GEM Asset Management to YZJ (related transaction beware). Any insider purchase by the CEO would be taken seriously in the future.

The possibility of improved earnings, by the way of asset management contracts, is a hidden plus, but would take time.

Other transactions of this month involves:

d) Increase in purchase of Alibaba (9988.hk) at 88 HKD. As of writing, the market appraise Alibaba at 80 HKD per share. Losses are mounting in this stock but I am remaining patient. Return on capital has to be reassess there and then.

e) Increase in IGG due to falling prices

f) Increase in Centurion (in CPF), as fundamental data suggest that the business is improving, but the share prices seems to be beating a retreat.

g) Slight increase in Fu Shou Yuan due to falling prices. FSY remains a moderate growth company and falling prices means lower risk. Currently, the FCF yield is about 6%, so it does feel timely to make additional purchases.

***

In view of the amount of selldown experienced this week, I am re-posting my answer to a question posed by a fellow telegram group member. Basically, it is a standard list of "easy buys" during market selldowns.

When market crash, should add to current holdings or initiate new ones? I am already holding 7 business Liao.

Personally, I will run through my list of holdings to determine if I want to add on to those positions, since I have some basic understanding of it.

I do not subscribe to a belief that one must have a minimum amt of stocks to be diversified, and neither is the market that kind to provide you so many bargains.

At times, I do not add to my existing positions because my stocks are very iliquid, or the selldown in the stock is nowhere as bad as the market drop (as in, my stock drop 2% but market drop 5%).

If you have been diligent, you should have a list of stocks in a watchlist, but you have yet to acquire because the price is not attractive (or in my case, some stocks only have liquidity during market panics)

Obviously some stocks, during market corrections of 20% and beyond, are easy buys (in no order)

a) Singapore banks trading at way below book value; the CET scores of our banks are safe as it can be. Banks are easy business to grow at a slow/moderate pace.

b) Stocks that are undergoing privatisation— i.e. risk arbitrage stocks, e.g. Activision Blizzard

c) Blue chip stocks that were already reasonably priced (to cash flows or to books). Blue chip stocks are usually recover the soonest during recovery periods.

d) Stocks that are cheap to liquid assets (cash+investment, acct receivables net of payables). These stocks usually are pretty illiquid and market panics usually provide liquidity.

****

Looking Forward:

We are 5.5 months into this year and I have already way more capital than any single year in the last 5 years of investing. I have always inject capital pretty organically-- all my years, I am a net buyer except for 2017 (the Singapore market was pretty bullish then). I do not look at the market and decide that this is the amount of capital I am going to put in.... I merely look for opportunities.

Portfolio level, at cost, is at all time high.

The last two days saw crypto market in fearsome correction territory. Major coins lost 20% of the value intraday, after Terra USD, a coin allegedly used to support the price of BitCoin, collapsed after losing peg value to USDT. Understanding the whole ordeal is way beyond my intelligence and I am glad that I do not have a single cent.

The mood in the market has clearly soured. The darlings of yesteryears has been clearly forsaken. Sell down of 20% and more intra day is becoming commonplace. Perhaps the market is seeking repentance from all the freewheeling option traders, or casual growth stock buyers, I wouldn't know...Every single winner of 2020 is getting plummeted to the ground, but I would still put them on the "Too Difficult" tray.

But I know this is where the wheat gets separated by the chaff... either I relentlessly acquire stocks as the market goes on a freefall... or I pare down on my less convicted holdings to raise cash. This is suppose to be the time where I work under my desk lamp and look for ideas. Looking at the record amount of cash spent this year, I am worried that I could be deploying capital with too much pace.

-end