Friday, January 21, 2011

Koon - Undervalued

I am tempted to write a long prose but shall subject myself to write in a concise manner. This is an attractive investment and I encourage readers to take a closer look. Financial institutions arent able to touch due to its small size and laggard financial databases.

A firm with a long history in marine engineering, they did the Sentosa Cove, Pulau Tekong, Marina bay and  many other renown land reclamation and shore protection services. They are listed on both ASX and SGX and currently they have the following businesses.
  1. Engineering (Mainly Marine and coastal)
  2. Land based Rentals (Mostly for internal uses and rents out the excess equipment and trucks)
  3. Precast Construction (The pre built HDB rooms or highway tracks etc, ready to assemble on site)
  4. Western Australia Power generation (1 of 4 plants approved and ready by 2011, rest 2013)
  5. Marine vessels and barges (recently sold off) for S$14.6 mil in cash
Why buy?
  • Firm has 163.888 mil shares at S$0.28 or S$46 mil in mkt cap (after 1 for 1 bonus issue)
  • Cash is at S$40mil including ($1.78 + $3.7)m on precast and Tesla acquisitions. Conservatively including the capital outlay for the Australian power plant of around S$9m, that still leaves $30m. Note that subsequent outlays for the 3 other plants will be much lesser as a bulk of the fees go to land and design/fitting of the generators.
  • Firm earned S$10 mil in 2009 and this was when Marine was losing money
  • Recently acquired 2 pre cast firms out of 9 in Singapore (one from Sembawang Group) and hints at HDB precast contracts since they conform to government's regulations and standards
  • Precast production capacity of 1000 m3 per day (Including Malaysia Yard) and is currently at less than half utilization with room to expand. The other 7 goverment qualified yards are 400-500 m3 capacity each (implies a Koon market share of over 20%) and are operating at full or close to full load
  • Firm ventured into Aussie power generation with 4x 9.9MW diesel plants and brings recurring revenues when plants are idle. Potentially this plants can be used 20-30 years. Latest Pricing by IMO was at A$ 140,000 per MW per year so it means A$1.3mil per plant or A$5.5mil for 4 plants. And the reserve price is set to increase as the government sets it 2-3 years in advance based on various fuel, construction costs etc involved.
  • Firm also entered into building a port in Vietnam, Sao Bien for S$225 mil
  • Meeting with management was good, very candid, conservative people who focus on value rather than volume and it shows in their gross profits. 2009 for ex, revenue fell sharply but net profit/margins grew
  • Singapore is an island = much room for marine engineering. Koon as the largest and most specialized players, it is very very unlikely to go out of business, especially with PSA shifting out of Tanjong Pagar and into Tuas. Theres also new MRT lines yet built.
  • Vietnam port project is 90% of total engineering projects and is meeting delays as firm is seeking comfort to secure payments (In my opinion a prudent move and its a sweetener if it works, doesnt affect the underlying other businesses)
  • Order book may or may not grow fast for the pre cast (unlikely as currently they are contributing maiden profits, currently S$34mil order book even at half year 2010) 
  • Firm does not have a record of dividends (Fine as long they compound the cash better than I do which is not that hard to achieve!)
  • Forex risks - hedging is expensive for now and I expect impact to be positive over time and the exposure to AUD is very small for now.
Expectations (AUD SGD 1.2967)
  • Many of the engineering firms have a PER of between 6-9x.
  • Excluding the Vietnam port business (in terms of profits): 
    • Aussie power plants will generate S$0.16mil/0.67mil for 1/4 plants (10% margins assumed)
    • Pre-cast contributed S$0.6 mil for 1H 2010 and likely $1 mil (2011) and $2m normalized
      • Current utilization is low, can expect it to double (will still be conservative)
    • Land based rentals is consistent, generating about S$2 mil per year 
    • Construction was S$8mil in 2009. This figure is a large bulk and conservatively the firm can hit S$ 2-4 mil / yr
    • Total operations will yield S$5.67-8.67mil / yr profits on a normalized basis 
    • With a PER of 5, thats about S$28-40mil
    • Adding cash of about S$30mil, that works out to S$58-70 mil 
  • Adding the Vietnam port, assuming 10% margins will be S$22.5 (below industry average margins)
  • So its a total of S$80.5-92.5 mil firm value, potentially 75.4-101.5% upside and even if Vietnam port deal goes off, thats still 26-52.5% upside with virtually no downside! 
  • Don't forget, its 5x PER I'm using. The Australian plant runs 20-30 years (not 5 years implied by 5x PER).If the power plant is used, a higher kicker rate per MW will be charged on top of the idle rate.

Disclaimer: The Author owns shares of the above mentioned firm.

Monday, January 17, 2011

First post for the year

Dear Readers and Investors, this is the first post for 2011.
While last year was pretty much a bull hidden in the choppy prices, this year is set to be a consolidating market. There are definitely much less opportunities compared to last year and I have instituted the following:
  1. To start selling if the price is right 
  2. Demand more safety in valuations and not to venture into relative valuation buying (I.e, Co A & B not cheap but A is cheaper vs B so buy A)
Anyway, I have spotted yet a few quality firms but pricing remains an issue. Todays market has come down hard on many small caps and hopefully more so in the next few days and weeks. Ill start to post and write in time to come, my timing is bad so do not assume whenever I write, its the best time to buy. 

Answering some readers queries:
  1. Why did I buy Roxy and not Tuan Sing and Guthrie, since both are property plays?
    • Do note that Roxy is very undervalued and their hotel assets are not carried at market value
    • Tuan Sing, Guthrie or perhaps even Gallant Ventures as an extreme example has assets that are deeply under-reflected in their firm market value but requires a certain amount of effort/cost or both to unlock it. The hotel for Roxy is already there.
    • Last but not least, management of Roxy are locals and are conservative individuals, they think and act on behalf of shareholders, and are experts in the Joo Chiat area. This can be backed up by their historical purchase prices I have set out in my earlier posts.
  2. Should I buy Gold to hedge or perhaps miners?
    • This depends largely on individuals, to me - I subscribe to the thought that Gold itself serves little use except for storage and it is a relatively inert element (I.e, does not mix or react) and we can be sure the supply will be pretty constant. 
    • Further, inflation hedges may removes opportunity costs for your money. You may well buy good companies or unit trusts that gives good payments. Gold has also had quite a run up since
    • Miners - theres only one in Singapore and relatively new. Miners have inherent risks and their prices may not track the gold prices. Many factors such as transport, extraction costs etc will come into play. Miners are mainly listed in Australia, US and UK. There may also well be a case of USD/Pound depreciation and yet Gold prices will fall. Do full research to protect your capital.

Thursday, January 6, 2011

2010 - Year End Investors Summary

Dear Readers,

2010 was an eventful year.I am thankful for the people who encouraged and continued to believe in me. I did not have much interaction with the public except for a few emails exchanging pointers and learning from one another on investing and businesses. So feel free to keep those emails and phone calls coming in.

Hopefully the blog helped some people in their fight against poverty. It was enriching to get involved in managing a sum even though it is unofficial and as a one man show, tough challenges surfaced and were solved, lessons were learnt and I was pleased to know that the recommendations did well. I only started in March 2010 when market has already ran up from its 2009 lows and intermittently I had to work a few months. Effectively, I spent only 6 months on investments in 2010.

I always believed investment is 50% analysis and 50% execution. In 2010, I became more aware of my personality especially in buying or exiting positions and I must say while analysis is fine, my execution is not. I have spotted many opportunities but often unable to pull the trigger due to various reasons. This led to a less than satisfactory performance and missed chances. It is also not often there are chances and of course courage to double down and one should buy more irregardless of price movements if theres sufficient value left.

The year also taught me to look beyond numbers and understand business as it is, for example Parkway. Not excellent numbers but do understand the rationale, the bargaining forces involved. Management as well as industry factors is crucial and should be accounted for. I still remain pretty much a sector agnostic person who continues to look for cheap and good stuff, taking into account the occasional macro winds.

Lastly, there should be a lot of cash in the holdings only when the general market is overvalued.

Turning to the portfolio, I am pleased to put up the list as mentioned. Dates and positions are definitely not back-dated and follows the posting for each of the positions in chronological order. Mentioned in the blog positions are generally larger positions I have and others are small or miscellaneous positions I did not enter into and hence did not blog about but do contact me if you wish to view my write up on the position. I do have a write up for all positions listed here.


2010 saw the STI being up 10.09%. 
Mainly Roxy and AEI corp are carried over from 2010. Roxy had a good run due to some coverage (albeit lagged) by the institutions but I firmly believe there remains substantial value in the hotel as well as icing on the cake from the development projects. As mentioned, management is astute and are highly focused on value rather than volume and looks set to recognize another year of good earnings (Directors implicitly agreed too with their share buybacks and set up of new hotel subsidiary). AEI on the other hand is a leader in the Aluminium extrusion field and has a large collateral coverage from its loans to an external firm. Free cash flows are strong and firm was sold down on Aluminum derivatives losses. I subsequently bought down more on that and it turned out that losses became realized gains as the firm pared their derivatives stake. Management is young and continues to support the share price by buybacks. Only risk foreseeable will be Aluminium costs which I believe will be hedged out well.

Looking to 2011, I am sure macro will continue to be dominant and increasingly certain sectors like energy (especially coal), consumables and agriculture will be more in play. Also, your author will strive to focus all energy into investing and the blog since I have ended my work and left that role. We will continue to seek undervalued counters and beat inflation whilst making a modest annual return.

I enjoy and look forward to hearing more from you, the readers and investors and all the best to 2011.

Best Regards,
Mervyn Teo

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