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.



Excellent presentation

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