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.

Cheap Stocks Investigation: China Haida

This post is made in reference to an earlier blog post. Basically, it is a list of stocks that has last closed prices at a significant discount to its tangible book value.

The first item on the list is China Haida, which is an S-Chip. Reputation wise, s-chips get a really bad name. But I believe in keeping an open and critical mind when investigating value stocks. Can this s-chip, penny stock be worth the risk?

Apparently SGX has been monitoring and the key concern is Interested Party Transactions. One of the easiest way to move capital out from a company is to write off account receivables, and hence buying a stock like China Haida is a risky venture.

I shall pass.

Investigating Cheap Stock by Book Value

This list of stocks is unlikely to appeal to many people. Some of these are s-chips, and all if not most of them are experiencing problems, usually no profits at all. As you can see, most of them have next to no debt, and are selling at lower than its tangible assets per share.

More importantly, some of them are value traps, which refers to stocks that look cheap but isn't because of a variety of reasons-- management could be one of them.

I find this list of stocks intriguing and will be working to go through all of them. Diversification is the key, and over a long period of time, it will work to my favor.

A Small Sum of Money

With a small sum of savings generating next to nothing interest in banks, my mum and I decided to close the account and invest this in some stocks. Since this money isn't really mine, I take on a much more prudent approach.

I diversified the capital in 4 stock at the moment and is disappointed not to be able to get to the 5th today, but I will wait
1) Hong Kong Lands- This company is the only one in the list that has a moat and is probably also the riskiest due to currency risk. However capital protection is assured and looking at charts, we are not at the high side/resistance. With its record of growing its NAV and also its properties, which are not easily replaceable in good times, it is pretty safe.

Dividend Yield is not fantastic at 3% but I imagine with its pretty low debt and brand name (most of its debt are unsecured, that is how much banks trust them).... I think it is safe.

2) Capitaland Retail China Trust
I believe in the management in overcoming its current problems. At 1.37, the book value of it being 1.55 and gearing at 36%, I think it is not the safest security but it is fine.

3) Chuan Hup
Low debt and good record increasing its book value. At the moment its subsidiary Finbar isn't doing too well but I believe sooner or later, in 4 years, things will change. Dividends at 4% will pay off.

4) Frasers Centrepoint Trust
Selling at book value and low gearing (28.3%). Good yield at 6%. I believe that malls serves as valuable meeting point for heartlanders as the city gets crowded.

I was looking at adding Nam Lee Metal but the stock rose too quickly today. I estimate that this company has a safe book value of 0.42 and we are looking at a 6 percent increase today. Nam Lee Metal is another company with little debt.

I am also monitoring the price of Mapletree Industrial Trust and will add if there is significant discounting.

A Short Look at ISOTeam

ISOteam is a stock that has done very well. From about 15cents in 2013, it has since went up to 38.5 cents today. Fundamentally, any company can be solid, but just as likely expensive. The charts indicate that 'investors' are adopting a wait and see attitude most of the time.

Interestingly enough, the management decided to buy back some shares today. For the uninitiated, buying back shares mathematically increase Earnings Per Share (EPS), since there are less shares to go around. However, the amount bought back, 55000 shares, represent a small drop in its ocean of 280++ million shares!

Share buybacks could be used for stock options. I do not think that the stock prices are cheap and there is a pessimistic air about its stock (yet!), hence I question the timing of buying it now.

Reading the annual report, the Myanmar growth story so far yields only a $110,000 project, which is also a drop in the ocean of its 9million or so revenue the entire last year. The annual report mentioned that it has yet to get any new projects locally. This is another warning sign.

Let's take a look at my calculations of its ROIC for the last 4 years. I believe in ROIC-- it prevents me from being blind by exciting revenue growth.
2012- 18.11%
2013- 32.05% <-- mighty good year, but probably abnormal. Should discount for statistical use.
2014- 20.98%
2015- 16.77%

I think ISOTeam definitely needs new projects locally and more importantly overseas, since I believe it isn't cheap on cashflow. Another thing that worries me is the unbalance of power in its Board, since all 3 of the co-founders are in it, and for some reason, they are always around during board meetings that does not require their presence ("by invitation," haha).

The last thing that one should take note of is its acquisitions-- it seems to have overpaid in goodwill for one of them-- but that is my opinion...

In short:

• fair average board with no political links to harness.
• not too convinced of its growth story overseas, and it is possibly running into heavy competition locally.
• dropping ROIC.
• possibly overpaying in acquisitions (acquiring companies is bad enough).

I am not vested, and this isn't a stock I will purchase during a bear market.

Volatility and Dangerous Opportunities

While the votes were counted for the US Presidential Elections, the singapore stock market experienced frightening declines. Banks stocks were sold down heavily, and gold and companies dealing with the precious commodity got bid up a little too quickly.

The obvious opportunity is to buy gold or these companies as a hedge against a downturn. I refuse to subscript to this theory because of some well-known arguments, such as:
1) You can't analyze the value of gold. It is entirely speculative.
2) Even if the value of gold is ascertainable, you are not paid to wait (no dividends) while the market corrects itself.
3) Prices of gold mining company stocks move along with these gold prices and even if they are deem cheap by book value or discounted cash flow, it is not worth it due to (2), as these companies usually will not pay a dividend.

That said, it came as a shock to me that equities "recovered" (I loathe to use this term because only stock prices moved, companies function normally during this event), the prices of gold plunged very quickly and so was the prices for these gold-related companies. I do have a friend right now which is stuck with a gold mining stock. Personally, I think the fair value of this company is 0.510, and that is the case right now. However, I subscript to view (3) and (2) and think that Singtel is a better bet.

***
I am blessed to be consuming bit and pieces of wisdom from John Templeton's book, Investing the Templeton Way. Hopefully I will finish the book and write a review of it.

Does M1 Deserves it Current Predicament?

Many months ago, I calculated the book value per share and debt-to-equity, as well as ROE of the three telcos, and surmised that the balance sheet of Singtel is the strongest of them all. It was also the cheapest company based on book value per share.

I shared this little piece of information to a forum and was pointed out, by a rather senior member of the forum, that Starhub was trading at a huge price over its book value because most of its assets had been written down to zero. Part of them could be the cable business.

As such, I shelved my interest in all telcos, but recognize the attractive dividends that Starhub and M1 paid to their shareholders. However, Singapore is a small market for a mature industry.

Recently M1 announced a dramatically decrease in revenues compared to its quarter last year. I think perhaps a comparison over the Return of Invested Capital (ROIC) over a period of 10 years would be a fairer means of checking which is a better telco, since their balance sheet composition are, possibly, vastly different.

My method of calculating ROIC would be

taking Net Operating Profit after Tax (NOPAT), without taking into account interest charges,
and taking this sum,
divide by Invested Capital, which is all Debts + Equity

M1's annual reports are available at
https://www.m1.com.sg/aboutm1/investors/annualreports

and the figures used would be from 2006 to 2015, in thousands unless specified.

2006
NOPAT = 174839
Invested Capital (IC) = 631968
ROIC = 27.67%

2007
NOPAT = 171801+ 9472 = 181273
Invested Capital = 201,911 + 250,000 + 35,000 = 486911
ROIC = 37.23%

2008
NOPAT = 157687
IC = 473232
ROIC = 33.32%

2009
NOPAT = 156764
IC = 525113
ROIC = 29.85%

2010
NOPAT = 162901
IC = 618894
ROIC = 26.32%

2011
NOPAT = 170021
IC = 625847
ROIC = 27.17%

2012
NOPAT = 151991
IC = 619914
ROIC = 24.51%

2013
NOPAT = 164665
IC = 645096
ROIC = 25.53%

2014
NOPAT = 179821
IC = 696570
ROIC = 25.82%

2015
NOPAT = 183400
IC = 767013
ROIC = 23.91%

2016 (3 quarters announced so far.)
NOPAT = 117.9M + 4.7M = 122.6M
IC = 772.4M
In order for M1 to maintain last year ROIC,
Assuming it maintains its debts and equity,
it must post 62.08M of profits in the last quarter this year...

One would take note that it was performing well in 2006-7, and dip dramatically from 2008-10, didn't perform too badly between 2010-4, but started sliding down for the last two years.

In summary, this year's ROIC could well be the worst performing year for M1 in a decade. Perhaps, in the next post, I will look at Starhub's.