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.