margin of safety

Testing Newer Highs

2015-05-09T22:16:00.000+08:00

MOS wishes to highlight SGX listed micro-cap Global Testing Corporation (GTC).

GTC provides testing services, such as wafer sorting and final testing to the semiconductor industry. They focus on logic and mixed signal semiconductors used in consumer electronics and communication devices. Its major customer TSMC continues to do well. As articulated in its 1Q15 results guidance, GTC also remains bullish about its prospects. The stock has run up to $0.14 but we continue to see a lot of value in the name because thesis has just been confirmed at the recent AGM.

Measures indicating management's intent include:

continuous share buybacks from which has reduced the shares issued quantum by a significant 25% from 2008 to 1Q2015.
capital reduction of $0.075 which will now take place.
given accumulated losses have been removed, there is finally affirmation to resume dividend payments in this FY15.

As evident from the results in the last two years, the intensive capex cycle of GTC is over and we are poised to reap the fruits from here. Reviewing the trend in the past years, we anticipate free cash flow per share of at least $0.02 - 0.025 cents in this and subsequent FY. Depending on their pace of anticipated share buybacks, your investment at these levels would be backed entirely by a full cash pile after about 2 - 3 years.

Note that a 20:1 share consolidation has been proposed. So investors may acquire in even lots for ease of subsequent transactions.

Seeking a White Knight

2015-05-09T22:10:00.003+08:00

MOS is disappointed by the recent developments at Sound Global. Our anticipated re-rating thesis has not played out. Instead auditor Deloitte has found a RMB 2 bil shortfall in the cash balance at its bank accounts at the end of last year compared to that recorded in its books.

The stock remains suspended on HKEx since 16 March. Instead of stalling or using the "usual" delay tactics, we are marginally encouraged that a professional corporate investigation firm has been tasked to review and issue a report by late May. There is further expectation that its results will be published in late June after the foregoing work is completed.

Founder Wen Yibo is cashed up to a tune of at least a billion dollars following his 30% stake sale in sister unit Beijing Sound Environmental to Tsinghua Holdings. So if the current issues at Sound Global are not of his doing, he could step in as a white knight to rescue the unit when trading resumes.

Sound Thirst Quencher!

2014-03-31T16:42:00.001+08:00

Sound Global (967 HK) is a US$1.3 bil market capitalization company specializing in turnkey water and waste water treatment solutions. Its shares trade on the HK Exchange.

Despite favorable macro trends, the company only trades at c.15x PER (at HK$7.5). We anticipate the following to underpin its re-rating to peer multiples of over 20x earnings:

Familiarization of the name as Sound Global's share was only consolidated to Hong Kong in late February 2014 - More investors are likely to compare its valuations against HK listed Chinese peers which are trading at multiples of 25x. Smaller SGX listed peers such as United Envirotech and Hankore are also trading at similarly healthy multiples.
Further contract wins as China remains focused on improving the quality of its living environment - In Jan 2014, Sound Global netted two contracts in Xinjiang for the construction of sewage treatment plan in Yiling City and a BOT project in Tacheng City. Since then, it kept its momentum by winning projects in Urumqi, Jiangsu, Guizhou and Fujian. More could be in the pipeline.
Re-structuring of its finance cost - There is scope to reduce the interest cost to boost earnings.
Complete dissipation of the short term sales arising from the equitisation of convertible bond holders - Sound Global issued a redemption request on its convertible bonds recently. Given these investors were in the money, they were likely to have converted their bonds and sold off the equity, causing near term weakness in Sound Global's share price. As at late March 2014, there are only c. RMB380 mil worth of convertibles which have not been converted.

We all know water is a vital source for life. Should the above reasons play out, Sound Global could well trade above HK$10 (implying over 35% upside), making it a critical source for financial returns too!

Who is Mispriced?

2013-05-26T14:22:00.001+08:00

DKSH AG (DiethelmKellerSiberHegner) is a Zurich headquartered group which functions as an outsourcing partner to businesses seeking to expand in new or existing markets. They specialize in organizing and management of the entire product value chain - from research, sales, logistics to distribution. Their business activities are organized into four broad areas of expertise; namely: consumer goods, healthcare, performance materials and technology.

Leveraging on its nearly 150 years of experience, the group has a phenomenal global reach in 35 countries; including 660 locations in Asia Pacific. Having generated c. 8.8 billion in sales in 2012, DKSH AG is ranked as one of the top 20 Swiss companies (by sales and employees). The group also generated free cash flow of CHF249 millions in 2012.

DKSH AG went public in March 2012 on the SIX Swiss Exchange at an IPO price of CHF48 a share (or 18x of its 2011 net profit). Investors took favorably to the stock, probably due to its exposure to Asia. As on 26 May 2013, DKSH AG traded at CHF74.50, at 1.5x of its IPO price. Due to its management quality and history of growing its EBIT, the market accorded DKSH AG a 23x price to earnings multiple.

Interestingly, DKSH AG has a Malaysian subsidiary which listed on Bursa Malaysia in 1994. This entity, DKSH Malaysia contributes c. 14% to DKSH AG's total revenue. In Malaysia, it represents over 130 clients and distributes their products to over 13,000 sundry shops, hypermarkets and hospitals. Backing up its extensive network, DKSH's operations is supported by 18 regional offices, four distribution centres and seven regional warehouses scattered throughout Peninsular and East Malaysia.

Our Malaysian readers who live in Petaling Jaya will be familiar with the brands DKSH manages due its occasional warehouse stock clearance at Jalan University. For the uninitiated, the suite of brands it represents in Malaysia are testimony to DKSH's capabilities. They include Abbott, Boh Tea, Darlie, Ferrero, Indocafe, Mars, Quaker, Roche, Sanofi-Aventis, Wyeth. Its food segment also operates the Famous Amos Chocolate Chip cookie.

As it is essentially a distributor, its net margins is not large (c. 2%). However, it relies on pushing increasing volume through its very wide ranging and entrenched network. It also leverages on its global relationships to bring new products into emerging markets like Malaysia. For example, in Jun 2012, DKSH and Hershey's inked an agreement to provide sales, distribution and logistics services for the latter's chocolates and Bubble Yum gum in Malaysia.

For such an exceptional and storied company, DKSH Malaysia is trading at c. 14x of normalized earnings (stripping out exceptionals at RM860 million market capitalization) despite a strong run up. Given the quality of earnings and the segment DKSH Malaysia is operating in, applying a multiple closer to Swiss parent is not unrealistic. Assuming DKSH Malaysia trades at 23x, it would be a RM1.4 billion market capitalization on historical earnings. This implies a share price of RM9 per share (66% upside from current price of RM5.44). We had not factored in any earnings growth, a distinct possibility given its track record. Given the consumer and healthcare goods its handles, the resilience and growth potential of its earnings cannot be underestimated either.

Accumulating a large stake could be challenging as the stock suffers from low free float. DKSH AG (75%) and Lembaga Tabung Angkatan Tentera (LTAT) (Malaysia Army pension fund) owns c. 85% of the company. LTAT is also DKSH Malaysia's bumiputera partner since 1991. Applying a liquidity and size discount on 20x earnings, DKSH Malaysia's fair value could be around RM7.80. Even at DKSH AG's IPO multiple of 18x, we are looking at RM7.06 per share fair value or 30% upside for DKSH Malaysia.

The above calculations obviously assumes DKSH AG is correctly priced at 23x. The converse could well be true, as in the valuations of DKSH AG is too high, rather than DKSH Malaysia being too cheap! That's the challenging of justifying using relative multiples. Perhaps, the truth is - where we believe it lies - somewhere in between 14 - 23x? Only time will tell.

Soar Like Great Eagle

2013-05-26T12:43:00.002+08:00

Langham Hospitality Trust (LHT), a fixed single investment trust, is anticipated to make its debut on HKEx on 30 May. Book building this week priced LHT at 6% a year, somewhat middle of the marketing range of 5.7 - 6.6%, implying a market capitalisation of c. HK$10 billion.

Its parent entity, Great Eagle (41 HK) should benefit from an uplift in sum of parts valuation. It is trading at a huge discount of 40% to book.

Post the spin off, Great Eagle would have net cash of HK$3.7 billion (assuming 51% ownership of LHT). The hotel management and licensing fees from LHT will also augment its recurring income stream from Champion REIT.

Furthermore, Great Eagle is anticipated to use part of the proceeds to fund its overseas hotel expansion plans. Great Eagle currently has four hotels in North America, including Langham hotels in Chicago, Boston and LA. One is under development in New York. The Singapore market has been receptive to its REITs holding offshore assets. For example, Ascott Residence Trust has assets in UK, Spain and other parts of Europe. Over the longer term, Great Eagle could inject its American assets into LHT.

In the nearer horizon, given its strong balance sheet at net gearing of 1%, Great Eagle should be in a good position to make a substantial payout. Its shareholders were rewarded following two earlier divestments (2006: 29% payout for Citibank Plaza to create Champion REIT and 2008: 53% payout when Langham Place mall and office was sold into Champion REIT subsequently).

The controlling Lo family still owns c 61% of Great Eagle, so we anticipate a sizable payout closer to the upper end of the range of HK$ 5 - 10 per share. Hence, Great Eagle at HKD33.70 remains a hold at least until its interim results in August 2013 when the special dividend could be announced.

Next Better Player

2013-05-11T10:10:00.004+08:00

Margin of Safety suggested initiating a position in Lian Beng Group (LBG) in February 2012 at S$0.39 per share. LBG has since had a good run to S$0.515 (close of 11 May 2013). Whilst it is inexpensive from a PER perspective, it is now at a premium to its NAV of S$0.47 per share.

Looking ahead, LBG's recurring income will increase as its workers dormitory at Mandai fills up and it could still surprise with more construction contracts win. What we are uncomfortable about is its stakes in the property projects. Whilst small by our sum of parts estimate to LBG, sentiment could weigh on the counter as we expect the Singapore residential market to weaken considerably from here for several years. Word on the possible spin off of its engineering and machinery division on the Taiwan Exchange has also gone cold.

Having rode out a total return of 37% (c. 32% capital gain + 5% dividend yield) in 15 months, we recommend switching into other construction counters to ride the development boom in Singapore.

Cash Laden with Catalyst

2012-09-16T17:48:00.003+08:00

Lian Beng Group's results for the financial year ended 31 May 2012 were impressive. Its EPS rose to 9.8 cents from 9.1 cents. This was on the back of increasing its net profit margin from 9.6% to 11.6% yoy.

It also increased its dividend by 25% to 2 cents per share, from 1.6 cents. This outperformed our expectation of a base case dividend of 4.1%. Hence, investors who joined the register in February would be enjoying a yield of 5.3%. This hearty payout hardly makes a dent on its huge cash pile - approximately 40% of its current market capitalization is net cash!

Its construction order book of over $650 million remains full and is expected to keep the group busy until 2015. With the property and infrastructure projects still on track, Chairman Ong Pang Aik is keen to enhance share holder value further. In fact, Pang Aik's hard work thus far was recognised after being bestowed the award of "Best CEO" at the 2012 Singapore Corporate Awards (organised by The Business Times and supported by Singapore Exchange). The award was an affirmation of his leadership strategy, vision, execution abilities and the firm's corporate governance.

Since our call in February 2012 when it traded at S$0.39 a share, Lian Beng has only moved up marginally by 8% to S$0.42. In the near term, we expect LBG to trade at least to book value of S$0.44 a share. Further upside would come when it spins off the engineering and machinery division on the Taiwan Stock Exchange.

A steal at EV/EBITDA at less than 1x?

2012-02-12T17:41:00.003+08:00

Lian Beng Group is a A1 grade general building and A2 grade civil engineering contractor listed on the Singapore Exchange. Its A1 certification implies that it is eligible to tender for contracts of all sizes in Singapore.

In recent years, Lian Beng had focused on private residential projects. In November 2011, it turned its sights back on the government market and won a S$13 million contract from the HDB. The contract in Tampines is expected to be completed by September 2013.

With 25,000 BTO flats which HDB has committed to pushing out in the next 12 months, we expect Lian Beng to continue to score its share of contract wins as the Group has over thirty years experience in building construction.

Competition in the sector is fierce but the firm managed an impressive net profit margin of 9.6% for FY2011. Its impressive order book which stands at S$772 million should keep the firm busy until 2014.

Lian Beng is aware of the need to build up a recurring income stream to cushion the volatility of contract work. Hence, it teamed up with Centurion to develop a foreign workers dormitory in Mandai. We project that the dormitory would be completed by June 2012 and can generate approximately S$11 million in rental income annually.

Valuation for the firm is very compelling. At S$0.39 per share, Lian Beng is trading at its book value despite boasting an impressive return of equity of 25%. On an EV/EBITDA basis, Lian Beng is trading at approximately 2x (FY2011) and 0.7x (FY2012F)!

About 44% of its market capitalization is net cash which stands at S$83 million. Hence, Lian Beng should have no issue paying out about paying out another 1.6 cents in dividends for every share at the end of FY2012. Hence, we are confident of a base case dividend of 4.1%.

Management which owns 25% of the firm is keen to unlock value for shareholders via a listing of ready mix concrete and engineering business on the Taiwan Stock Exchange. The exercise should release more cash back to Lian Beng and hopefully catalyze the stock to greater heights.

A Sound Investment (so far)

2011-04-15T00:21:00.003+08:00

Soundwill Holdings, which was flagged out in June 2007 at HK4.40 per share, continues to scale the price chart as management unveils more value accretive initiatives. It closed today at HK13.60, which implies a gain of approximately 210% over the 3.8 years holding period, or about 50% per annum. To some extent, this pick has highlighted the importance of investing in companies with growing NAV per share.

The flagship property Soundwill Plaza remains nearly fully let in the prime Causeway Bay district. There was also positive rental growth of 9% yoy, bringing net income from the asset to HK$200 million. As we had flagged out earlier, Soundwill is developing another commercial building behind Soundwill Plaza at Tang Lung street. When completed in FY2013, rental income would likely be boosted by an additional HK$72 million. Including its property assembly / development business, Soundwill's fair value could be about HK$20.00.

When viewed in the context of the horrible global financial crisis which happened during our holding period, Soundwill has proven to be a performing and rewarding bet thus far.

On a rising tide

2011-04-08T14:40:00.001+08:00

Jaya Holdings (S$0.63) was the subject of a takeover bid recently. We are of the view that it was a technical bid by the new controlling shareholder Cathay because it had to satisfy the rules of the Takeover Panel. As expected, the independent financial advisor Kim Eng had recommended minorities not to accept Cathay's offer. The takeover has since lapsed. As this poor sentiment dissipates, we expect the price of Jaya shares to quickly breach its book value of S$0.68 and next settle at least in the S$0.70s range. Following its restructuring, we have no issue with the fundamental prospects of the company and estimate its fair value to be substantially higher given the buoyant prospects of the oil and gas industry as well as the new builds in progress. Street estimates its RNAV to be north of S$1.00.

Show Me the Money

2011-04-07T22:38:00.002+08:00

Asia Enterprise Holdings hit an intra day high of S$0.375 as excitement returned to the oil and gas sector. Despite its cash laden balance sheet, the stock closed at S$0.34, below its NAV. Our other recent name Selangor Properties also advanced to RM4.36 from RM4.20 as regional investors take note of the steep discount to NAV of RM5.11. Looking at how the counter is stirring, more upside could be in store.

Innotek which was flagged out a year ago at S$0.50 surged too. It closed at S$0.615. Note that management has consistently doled out a 5 cent per share dividend annually. Hence, it represents a capital gain of 23%. Given its 10% yield on cost, the total return over this 1 year holding period is approximately 33%. If Innotek maintains its cash horde and does not deploy into acquisitions, the current 8% yield is sustainable. Even at S$0.615 per share, it trades at a steep 28% discount to NAV (S$0.85). The upcoming annual general meeting would be held on 28 Apr 2011, where the dividend is likely to be ratified for a pay out in late May 2011. Expect shareholder approval for this sizable payout to bring about further interest in the name.

On the Right Track

2011-04-03T11:53:00.004+08:00

Malaysians will readily tell you that one of the most prime plots of real estate in KL is in Damansara locality. The area has also received a further boost with the government's plans to put up a MRT line through the locality.

One of the prime beneficiaries of the above developments is Selangor Properties (SP), a sleepy KLSE listed company (current price of RM4.20) with a substantial land bank in Damasara.

SP owns about 20 acres of land adjacent to the proposed MRT Blue Line Pusat Bandar Damansara station. Future projects is likely to be integrated with the station, thereby increasing attractiveness and consequently, its selling price.

SP also has a strong balance sheet with a net cash position of about RM200 million (RM0.58 per share). This is because it has a strong recurring cash flows from being a landlord of assets such as the 25 storey Menara Millenium. The capital values of these assets (including Wisma Help, Kompleks Pejabat Damansara) should also increase in future when the MRT stations are completed. These assets are located in close proximity to the Pusat Bandar Damansara and Sematan stations.

SP had been able to consistently grow its book value per share in the last five years. Its last report BV per share is RM5.11. A broker has issued a report on SP in March 2011 titled "Sitting on a Gold Mine". The analyst's estimated RNAV per share is RM7.31 per share.

The group also intends to launch its high end Batai project in the second half of 2011. Strong pre-sales could be a catalyst for price to move closer to BV of RM5.11 per share. Its major shareholder Kayin Holdings obviously sees value as it raised its stake from 61% to 66% recently. A take out by Kayin cannot be ruled out due to the past failed privatization attempts on the group.

Hence, with the numerous catalysts above, this sleepy company may well have its day in the sun soon!

Nerves of Steel

2011-04-03T11:27:00.000+08:00

Asia Enterprise Holdings (AEH) continued to perform credibly in FY2010. The group registered EPS of 3.52 cents, extending its track record of profitability to 38 straight years.

With over 50% of its inventory gearing towards supplying the shipping industry, AEH is likely to benefit from the boom in the marine and offshore sector in 2011. In fact, the Group reiterated its bullishness by indicating that the Group "stands to benefit from rising steel prices".

AEH continues to maintain a strong balance sheet with 38% of its NAV being a net cash position of 14 cents.

Valuations wise, the Group remains compelling. At the market price of 34 cents, it trades at a 14% discount to its NAV of 38 cents. On a PER basis, it trades at 9.6x earnings. Excluding its cash horde, the PER dips to only 5.4%.

Hence, valuations does not look overstretched even though it has run up over 20% from our call on 21 December 2010 (when stock was trading at S$0.27 per share).

A Year Older, but None the Wiser?

2010-12-21T21:18:00.004+08:00

What a year it has been! Liquidity remains abound and asset prices, particularly that for real assets, have continued to remain resilient.

It is also looking like a bifurcated world; in terms of growth prospects and asset prices for the developed and emerging economies. That said, never forget that the entry price is vital in determining investment return regardless of how rosy economic prospects can be. If it is already in the price, the return is likely to be mediocre.

Despite these peculiar market conditions, MOS feels value investing remains the way to go although having an idea of the macro picture is tantamount to avoid big mistakes.

Several of the stocks profiled have continued to perform. Whilst its investment into a REIT remains questionable, Innotek remains above the March 2010 price. It also appears on track to pay out another 5 cent dividend.

We all like companies which we can hold through cycles. But by and large, we are not "buy and hold investors" because very few firms possess the competitive advantage to merit investors holding them through market cycles.

For firms in cyclical industries, it is paramount to know when to exit before things go pear shaped. We continue to like Innotek because it yields 10% at our entry price and remains under NTA. That is not to say that we would not hesitate to trim/exit the position when the price-NAV gap shrinks. Likewise with Asia Enterprise Holdings. Trading at S$0.27 on the Singapore Exchange, it has grown its NAV and has a very long track record of profitability. Mindful of the fact that it operates in a cyclical industry where demand can vaporize quickly, management has prudently maintained a strong balance sheet. Trading under NTA, it offers a good 4-5% yield at current price. MOS also see a potential catalyst in the coming year. Investors have placed bets on Keppel and Sembcorp Marine on potential large contracts from Petrobras. Placing money in Asia Enterprise which derives a significant chunk of its revenue from the local marine industry is a bet on both horses. Seems to be a two in one proposition which we could live with. Unfortunately we cannot delve into details for more portfolio holdings or provide more update for this is meant to be a strategy piece.

The high yield of Innotek brings us to the next characteristic which exemplifies our portfolio - importance of dividends. To go to the upcoming Christmas cocktail party and tell people that you are into dividends instead of the next solar stock may not make for exciting conversation. However, for excitement and attention, we recommend you put on a loud red, green and pink garish outfit and stick to picking out high yield names. In markets with increased volatility, MOS feels that going for yield will make a significant difference in the long run.

Besides the obvious reasons where it is usually companies with good strong business models or excess free cash flow which can afford dividends, it is not usually highlighted that dividend income makes up approximately 30% of total return in many global studies over extended periods of time. So with reports suggesting that the recent whipsaws in markets are unprecedented, having high yield as a cushion is a strategy which MOS is pursuing. Not rocket science, not the most sexy but one which being a hare could far outstrip the rabbit if the return on capital is sensibly compounded.

The market volatility also brings into spotlight arbitrage techniques. Capital structure arbitrages, TDR/cross listing trades, spin-offs are event driven techniques which are independent of market direction. Hence, their contribution to the overall portfolio return is important if market is directionless. So investors should actively seek opportunities like Lion Asiapac where the return is more dependent on corporate events rather than broad market movement or sentiment.

Another year has flashed by but the market prognosis remains challenging. The future will always remain inherently uncertain. The fundamental concepts of value investing may be simple but no one would say that applying them is easy.

Lion Asiapac declares a 15 cents special dividend.

2010-03-30T17:47:00.002+08:00

“First they ignore you, then they laugh at you, then they fight you, then you win.”

Mahatma Gandhi

Perhaps MOS was premature in expecting a payout as early as Feb 2008. Even though we are value investors accustomed to the long journey, this has been a particularly interesting one. We also offered several updates in Sep 2009 and Dec 2009. But ultimately, we are just glad that that the minorities are having their day in the sun.

Never Ask a Barber if you need a Haircut

2010-03-27T09:52:00.002+08:00

MOS almost fell off the chair laughing after reading comments made by leaders on the Asian property space.

One director from a prominent HK developer argued that bubbles are good for the market. Another appeared to suggest that the non release of sites at low prices to developers in government auctions has contributed to the exuberance today.

These remarks remind us of Chuck Prince's 2007 comment. Prince, the former chairman and chief executive of Citigroup said in July 2007 that "as long as the music is playing, you’ve got to get up and dance. We’re still dancing.".

We always like to say that it is never wise to ask a barber if you need a haircut. Or the fruit seller if his oranges are sweet. The wider implication to all this is that it is tantamount to establish one's interest or agenda behind each pitch.

For so long as interest rates are low and the apparent recovery is taking root, demand for apartment units will continue to move quickly. Developers who are in the business of selling units will, understandably, launch units to feed the frenzy.

So investors/individuals have to be discerning. Shrewd property investing requires one to have a very long time horizon and a through analysis of demand and supply conditions; and not just buying shoe box size units because they are affordable at today's low rates. Examining "what ifs" are necessary too: What if the unit cannot be rented out? What if rates go up? etc etc.

Whilst we are at it, we would like to draw attention to the first line of Prince's complete quote which is less often run: “When the music stops, in terms of liquidity, things will be complicated."

How far out do you look?

2010-03-23T13:31:00.002+08:00

Investing, by definition, means forgoing present consumption for future returns. It is worrying how far we, as a market, has strayed from this definition. The average holding period of securities listed on NYSE has, from memory, been falling over time. The recent holding period for a stock could be as short as six months.

This plays into the hands of value investors who truly are able to cast their return expectations further out into the future. The telling statistic also suggests that true blue value investors will continue to hold their own, when their performance is measured over an entire market cycle.

We are strong proponents of time arbitrage. In January 2007, MOS highlighted the gross undervaluation of Malaysia listed Keck Seng. As pointed out then, the failure of the market to recognise its hidden value of its assets which, as we wrote then "is obfuscated from the casual eye.". These assets include:

not marking to market its securities portfolio;
holding its property assets at cost which goes back nearly 20 years old.

Then, it was speculated that the catalyst to unlocking the value would be a REIT although we had surmised that "the REIT is unlikely to occur in the foreseeable future". For those who have a longer time horizon, the development of the Iskandar Development Region would play into the hands of Keck Seng as it holds several plantation plots in Southern Johor, albeit away from the "action" currently.

Besides the tax credits which has to be used by 2013, the more immediate catalyst driving the stock up today is the need for the company to comply with revised accounting rules that require it to mark to market its securities portfolio.

Under FRS139 which has been effective since Jan 2010, listed companies are required to fair value their equity investments and reflect unrealized gains/losses in their quarterly statements. This will make the earnings more volatile if the securities portfolio, when classified as trading securities, is large compared to the core business.

In the case of Keck Seng, examining the notes to its financials show that the market value of its securities portfolio is RM672 million. This translates to an uplift to book value of about RM1.80 per share. This implies a RNAV of about RM6.80.

As you would imagine, this takes into account only the revaluation of the marketable securities portfolio. The bulk of the revised value lies, however, in the property portfolio. In 2005, Keck Seng sold 180 acres of plantation land in Ulu Tiram to the government at RM251,000 per acre. If its entire land bank in Ulu Tiram, Bandar Baru Kangkar Pulai, Pasir Gudang and Tanjong Langsat (carried at 1980 prices) is simply revalued to those 2005 prices, Keck Seng's NTA would increase by another RM9 per share!

Its commercial properties are also grossly understated on the books. Menara Keck Seng at the prime Bukit Bintang stretch is likely to be carried only half of current market values. We can probably say the same for its properties in Singapore (last valued in 80s), and hospitality assets in Canada and Hawaii. The hotels were last revalued in 1997 and 2000.

Standing at 2007, reflecting our conservative self, we wrote that there may be "up to 40% upside" from RM3.50. The current market price of Keck Seng has way surpassed our estimates. In fact, from the above analysis, it does suggest that the RNAV seem wide - from a range of RM6.80 to even a whopping RM16 if the property portfolio is completely revalued. What intrinsic value that will eventually be crystallised perhaps lies in the investor's time horizon.

Run Keck Seng Run

2010-03-22T22:08:00.003+08:00

Bursa Malaysia listed Keck Seng, whose core businesses include managing oil palm plantations and property development, has been surging of late. Market watchers are anticipating the conglomerate to dole out more dividends soon. At end 2009, the firm had cash of RM332.6 million and is debt-free. It reportedly also has high unutilised tax credit of RM427.6 million to be franked as dividends before end-2013.

Welcome to the "World of Innovation"

2010-03-21T16:45:00.003+08:00

Innotek specializes in precision component manufacturer. The SGX listed firm produce small tiny metal components which are building blocks for numerous devices which we use daily.

The group was known as Magnecomp previously. It has restructured heavily in recent years. One of the moves was to acquire the remaining 17% in Mansfield Manufacturing in April 2008. Following this acquisition, Innotek, through Mansfield owns ten modern manufacturing facilities, including eight in China, one in Netherlands and one in the Czech Republic.

Currently, Innotek serves customers in the consumer electronics, office automation and automotive industries. It recently reported full year results for 2009. For the full year, Innotek reported a 14% decline in revenue to S$361 million.

What analysts, however were looking out for was confirmation of a bottom line turnaround. Innotek delivered. Net profit surged sharply into the black to S$9 million compared to a loss of S$6 million in 2009. This follows from the return to profitability of Mansfield. With EPS at 3.24 cents per share, its PER is 15x. Whilst this multiple appears high, note that further compression will occur as the business improves out of the trough. So paying what appears to be peak multiples for trough earnings and on a before ex-cash basis appear reasonable.

With stock price only at S$0.50 and NTA at S$0.86, Innotek is trading under book at less than 0.6x. Management appears determined to correct this.

For the second year in a row, shareholders are rewarded with a 5 cent dividend. With the stock at 50 cents, this translates to an astounding 10% yield! This is paid out of its huge cash pile of approximately S$0.28 per share. Whilst this may drop as the group seeks acquisition targets, management is likely to retain sufficient cash for working capital requirements as well as for future payouts.

Second, management has also embarked on a share buyback program. The completion of the program is likely to drive the NTA per share to over S$0.90 share, thereby steepening its discount further.

Analysts are also increasingly engaged as management seek to correct the steep discount. For example, it was recently shared that Innotek intends to pursue opportunities in the automotive and medical related sectors which offer higher margins.

In a nod to Innotek's tagline "World of Innovation", buyers now are, by virtue of its fat dividend, paid to wait for the sharp discount to close. As value investors, we find that certainly most inventive!

Will the Lion Roar?

2009-12-18T00:14:00.003+08:00

MOS last wrote about Lion Asiapac (LAP) in late Septembe r. Following the disposal of its entire stake in the Chinese automaker, LAP had attempted to takeover an Australian listed mining firm Polaris Resources. The bid has since fallen through after a competing bid was deemed to be more attractive by Polaris shareholders.

The failed bid raises the possibility that LAP may return more cash to shareholders in the coming year. Besides embarking on a share buyback program, shareholders are likely to demand more than the usual 1 cent per share dividend if the cash continues to sit on the LAP's balance sheet.

We estimate that the net cash per share to be approximately S$0.47. As a result of the cash laden balance sheet, buying interest has returned to the stock, leading it to close at S$0.36 today, near its 52 week high of S$0.37. LAP has doled out special dividends before. Of note was in 2006 where a payout of 5 cents was paid that financial year. Assuming a total payout of 5 cents at the current market price of S$0.36, LAP would have a dividend yield of 13.8%. Hence, expect LAP to trade substantially higher if there is more certainly of a special pay day.

Christopher Browne passes on

2009-12-15T14:55:00.002+08:00

Legendary value investor and principal of value investing firm Tweedy Browne, Christoper Browne, has passed away. Barton Biggs of Traxis Partners once called him "one of the best value investors in the world". He was in his 60s when he passed away on Sunday.

In the early days, Tweedy Browne had brokered trades for Benjamin Graham and helped Warren Buffett acquire Berkshire Hathaway. Although the firm currently manages only about US$10 billion in assets, Christopher is better known as the genteel portfolio manager who brought down media baron Conrad Black. He started questioning the accounting of Black's Hollinger International in 2001. Subsequently, it was revealed that Hollinger's shareholders were bankrolling Black's lavish lifestyle including his Rolls Royce's refurbishment to the tips doled out by his wife on shopping trips.

Christopher has also authored "The Little Book of Value Investing", a book which MOS consistently recommends as an excellent introductory primer to this craft.

Our heart goes out to Christopher's family. The value investing community has lost a scion.

Running on Empty

2009-11-01T11:19:00.002+08:00

This post is at least a week late. Various committments had conspired and led to what should have been a late October post to turn into a 1 Nov one.

About ten to eleven months ago, we asked whether "we can have a last flutter?". Many readers were astounded and questioned our sanity. Fortunately, equity markets have heeded our request and delivered one of the most stunning recoveries since the Great Depression. The recovery in price performance is so strong that it seems detached from the underlying economic and market fundamentals. So it is worthwhile to check back to ascertain whether this is inherently sustainable.

First, it is important to understand why we wrote that in Dec 08 that we "cannot rule out the possibility of the largest ever January effect taking place". Our call was made on the back of the direct consequence of the monetary easing and fiscal expansion; actions coordinated by all global economies. Hence, the strong subsequent surge in equities was due to the flood of liquidity or easy money in the system, not an actual recovery in fundamentals.

Fast forward nearly a year. Things are indeed looking up but it would be foolhardy to think that we are out of the woods yet. A debt deleveraging crisis is inherently debilitating and countries like the US still have a ton of debt, including that in commercial property space that remains yet to be tackled. However, a lot of emergency stimulus measures put in place last October at the height of the crisis expired in end October this year. Whilst the market does not require some of these measures such as those designed to restart money markets, due to the inherent recoveries, liquidity in the system cannot be said to be as abundance as before.

Likewise, in China, whilst Premier Wen may be asserting that headline monetary policy stance remains loose, folks on the ground are reporting otherwise. Bank lending in 4Q09 are not as easy as that of the record RMB 7 trillion extended in the first nine months.

Also, certain governments such as that in Australia are mindful of inflation, and have started hiking rates.

We write this with the STI closed at 2651 and S&P 500 at 1036. At these levels, we feel that the downside risk outweights the upside potential because (a) liquidity conditions are not as strong as before, (b) fundamental recovery has not taken root to support current equity valuations. In plain English, MOS expects markets to correct in the months ahead.

Despite the bold assertion in the preceding paragraph, we have to stress that we do not possess any magic crystal balls. It is just an outcome we believe should happen given our analysis of fund flows and market dynamics. If we are right, MOS will be in a much better position to capitalise on the resulting carnage. As net buyers in the long run, we welcome any correction in the market as we plough through company after company in search for fundamental value. This is also not a recommendation to short markets as they can stay irrational for longer than one can stay solvent. It however should represent an opportunity for an investor to trim or unload any fundamentally weak positions into this period of strength, given that we expect rougher waters ahead.

We had a good time last night, indulging in the various "Trick or Treat" festivities that characterize Halloween. But without future government intervention, we leave the month of October with a niggling suspicion that the haunting and spooking of markets could linger on for much further, into the weeks and months ahead.

The Wayward Son?

2009-09-26T09:18:00.004+08:00

In February last year, Margin of Safety pointed out the special situations opportunity in Lion Asiapac Limited (LAP). LAP was trading at S$0.265 then. The value proposition was that if LAP were to dispose of its stake in Shanghai listed Anhui Jianghuai Automobile (AJA), the NET CASH on its balance sheet will swell to S$0.44 per share, a whopping S$0.17 above the then market price.

The ensuing financial crisis meant that LAP failed to dispose of the AJA shares above the price floor of RMB7.50. However, the recent recovery in global, in particular, Chinese equity markets have given LAP much cause for cheer. AJA has traded back up above the floor price, thereby allowing LAP to partially dispose of its stake.

As on 15 Sept, LAP has disposed approximately 2% of its 6.16% stake in AJA. The sales netted total consideration of Rmb189.46 million.

By our updated estimates, the net cash per share on the balance sheet increases to S$0.21 per share (assuming the 2% were all conservatively sold at S$0.21). Completing the entire disposal program means net cash per share of at least S$0.41, still way above today's market price for LAP at S$0.32 a share.

Enthused by the recent strong property sales in Chinese market, LAP had proposed to go into property development in China. The mandate, however, was wisely (in our opinion) thrown out by minority shareholders at an EGM yesterday. This effectively leaves the possibility of LAP being a company trading under net cash when the remaining stake in AJA are progressively disposed in the days ahead. Whilst management do not have a track record of doling out special dividends, there is little reason for a company to trade under its net cash value when it is not under any particular duress.

In recent meetings, minority shareholders have increasingly made their presence felt and views ahead. Besides vetoing the mandate to do property development, many have also loudly articulated the need for a special dividend. We expect increasing media focus on this tussle in the days ahead as the small investor turns up the heat on management for a special dividend from a company which will soon trade under its net cash value. Perhaps if you are convinced about the merits of our argument, you may wish to pick up several lots of LAP and make your voice heard too.

A Return to the Gold Standard

2009-09-24T22:19:00.005+08:00

October beckons and what an amazing twelve months it has been. Vindicating our golden call since July to go into S-REITs, we note that S-REITs as a basket are up about 17% in the past month, 36% in the past 3 months, outperforming both the property developers (+3% and +14% respectively) and STI index (+6% and +21% respectively). In July, we had lamented that "it is surprising that the S-REITs have not re-rated more strongly." In early August, we maintained our similarly bullish stance saying that S-REITs, "despite the run-up, still offer a very healthy spread to the risk free rate." and REITs are, "by and large, still very cheap".

The performance in last month was indeed robust as S-REITs are benefiting from a chase for yields. If fixed deposits are yielding a paltry 1% tops, perhaps CMT at 4.5% yield is still attractive. So there can still be upside remaining but we don't like to bet when the odds are only marginally in our favor. So choose judiciously if you still want to play this game because going forward, rates can only go up from here.

We continue to be bullish about high yielding equities in the near term. US rates are likely to remain on the floor as the authorities attempt to revive employment. Consequently, this results in a lot of cheap and easy money in the global system seeking returns. The run up in asset prices in HK is a case in point. A rich businessman has reportedly paid HKD40,000 psf for a one bedroom unit in Kowloon (not HK island!). The monetary policy mismatch brought about by the HK dollar peg is certainly fuelling a bubble in HK. Easy money from China is also flowing into HK. The situation is certainly worrying the local authorities who have warned the HK banks to tighten their lending standards. We suspect the pleads will continue to fall on deaf ears. So, in the next few months, residential prices will continue to rise in HK, Singapore and key gateway Asian countries, despite the currently half hearted efforts by the authorities to rein it in. Looking ahead, we wonder whether the HK property bubble would result in a de-pegging of the HKD to the USD? After all, both economics are structurally different today as night and day. No inflation will ensue in the US because they are still battling deflationary monsters. But in Asian countries like HK and China, it is inflation worries that is keeping us awake at night.

North of HK is of course China, the country touted as the new locomotive of the world. It is such a misnomer to label them a communist country when their citizens are probably amongst the most capitalistic and enterpreneurial in the world. It is also here in China where we find the comment made by the CIC chairman Lou Jiwei in late August most fascinating: “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose."

Certainly reminds us of the title of one of our past posts - Forever Blowing Bubbles, isn't it? Judging from CIC's recent investments into Noble Group, Poly HK, etc, his view also ties in to the lament in our last post: "Yes, the market is irrational. It may not really matter if we don't have understand why it is irrational. We just want to be able to profit from it."

So in the paper currency system, it is plain obvious that it is possible to monetize our way of problems. But will everyone raise their hands up and say they have had enough with the USD and Euro in the longer term? If the Yuan is still not ready to step up to the plate, perhaps what's in store for the world is a return to the Gold Standard. So perhaps it may be wiser to persuade your loved one that gold jewellery would make a better gift with the cash made from your S-REITs investments.

We will all laugh at Gilded butterflies

2009-08-02T12:10:00.001+08:00

Come, let's away to prison:
We too alone will sing like birds I' the cage;
When thou dost ask me blessing I'll kneel down
And ask of thee forgiveness; so we'll live,
And pray, and sing, and tell old tales, and laugh
At gilded butterflies...

-- King Lear to daughter Cordelia, King Lear, Act V, Scene 3

Following our positive call on S-REITs on 20 Jul 09, the sector has continued to re-rate strongly. It is our belief that we are now in a bull leg of a bear market. It is not hard to figure it out why equities are the default asset class for investors today. Are we convinced that there will not be a double dip? No, but alternatives to equities are yielding close to nothing. Cash returns close to zero. Ten year Treasuries give a pathetic two per cent and one bears the risk of capital loss if yields move outwards under inflationary pressures. So, its our view that equities will continue with its sizzling run.

As our title posits, we may all laugh at gilded butterflies. But we still cannot help and admire their beauty nor resist touching them. So for investors who missed out on the strong surge which we pointed out could happen as early as Dec 08, the small and mid cap space should be where opportunities remain. As usual, the strategy would be to buy value and move nimbly.

Also, REITs are, by and large, still very cheap. M-REITs are trading around 9 per cent yield and S-REITs, despite the run-up, still offer a very healthy spread to the risk free rate. Likewise, the property funds in Thailand still offer double digit yields. We continue to be positive on them.