Thursday, February 24, 2011


  • Roxy posted a solid set of results and a S$0.01 dividend (2.2+%)- AGM 31 Mar 2011
    • 33% rise in revenue and 53% rise in profits 
    • Profit is S$31m from property devt and S$12m from hotel, property investments and S$10m from revaluations of property. Ex revaluation, profit rose 19% 
    • Developments averages 90+% sold
    • cash at S$157m and total debt of S$357m (taking on debt to finance the new developments which have seen very strong take ups)
    • Significant improvement in AOR and ARR for hotels segment
    • Most importantly, the hotel property is now valued at S$ 326.6m vs. 232.4m at Dec 2009.This is carried on the books for S$70.4m 
    • NAV on books is S$169.8m or S$0.266 per share
    • Hotel revalued alone will bump it to $426m or S$0.669 per share (excluding all misc revaluations from development property and the Kovan centre).
  • AEI posted a 50% dip in FY 2010 results and a S$0.01 dividend (6.6+%)  - AGM April 2011
    • Remain focused on electronics and precision engineering, revenue (bulk of total group sales) declined 27%
      • China auto part production to start (final stages)
    • Construction faced cheaper imports and a stronger dollar (expected), revenue declined 50% 
    • Cash decline mainly S$4.6m in PPE, S$1.7m share buybacks. 
    • Total cash and investments = S$26.9m  while current market cap is S$39m (approx 68%)
    • Probably need to head down for AGM to find out more about expansion plans
  • Koon is slated to release FY2010 results today - (To be updated)
    • Expect to see stronger income from the precast as well as construction
    • Probably a lower cash amount due to capex on their Aussie power plant
  • 1 March 2011 Updates and a S$0.01 dividend (3.5+%)
    • Revenue at S$74m, fell 41.8% in line with revenue subtracted for the marine business (Sold off) which made a loss of S$0.122m on S$4.5m revenue 
    • Operating profit up 34% to S$13.5m and NPAT up 20% to S$12.7m from S$10m a year ago
    • Remember my estimates of consistent S$5-8m / year operating profit? LINK HERE
      • Cash is at S$22m, in line with what I put out to be less than S$30m [Including acquisition of associates (Tesla) and with a capex of S$6m, it works out to be S$22m]
      • The firm has outperformed my estimates for this year as there was a gain of S$1.5m from buying Econ at below book value and gain of S$4.1m from Tesla and disposal of equipment and machinery. Ex that, NPAT will lie in the range of S$5-8m as stated.
      • With concerns earnings may not be recurring, order book is now S$60m (excluding the Vietnam project) and precast order book of S$31m. Precast is loss making due to start up costs involved as mentioned earlier and expected to contribute meaningfully for 2011
  • Upside remains favorable and in the worse case scenario of no vietnam project + declining construction revenues, earnings will converge to the S$5-8m / year level as stated, especially with higher depreciation from the new equipment and machinery acquired in 2010. So that means even in the worse case, there is still upside of approx 20-25%. Bullish upside scenario remains likely

Wednesday, February 23, 2011

Olam concerns (SGX)

Decided to write a post on this firm after a CLSA analyst wrote up on it. 
Many have known that I have expressed concerns with this firm since 2005 and amazingly it is a market darling and still garners much support from the market especially institutions. (Just look at its credit ratings).
  1. Firm has pretty weak cash flows (see diagram below) and high leverage (Net debt/equity is over 1.8x, gross over 3x) due to using leverage to plug the shortfall in FCF
  2. Firm is an acquisition machine, adding that to capex will mean free cash is ..literally not there
  3. Heres the funky part, the firm uses GC/NC or gross/net contribution (approx 300% of NPAT) to measure firm performance. Net profit is what it is, no 2 ways about it. You do not hold a weight loss competition by measuring volume changes.
    1. GC = Sales less COGS (ex all exceptional, interest income and change in FV of convertible)
    2. NC = GC less finance costs (ex finance cost for capital investments)
    3. It may be argued GC/NC are used for segmental measurement, however capital cost are still costs that needs to be matched to revenues, as well as changes in FV of derivatives. Especially so when a bulk of acquisition of companies and their fixed assets are from taking on more debt.
    4. The funky stuff are for firm strategy, probably for performance measurement and remuneration of the senior management. 
  4. Compensation is relatively high to speak the least for the performance they are showing
  5. Complex business - I only vaguely understand the business after repeated reading of the annuals
  6. Margin accounts is (of 2010 figures) 10% of revenues, 1.5x of profits, 33% of derivatives held, 19% of inventory and 89% of cash. Given we do not know the margin split attributable to whichever assets, rising commodity prices will nevertheless mean more cash needed in margin accounts which already has a high level of working capital tied in it.
  7. Company management was sensitive to questions on risks, performance measurements etc
  8. Valuation wise, Olam is US$ 5 billion, smaller than peers of US$ 9- 20 billion. Putting faith in their figures, Olams PE and EV/EBITDA is about 30x/15x vs peers of 17x / 13x (From CLSA report). This is despite ROA and ROE not being significantly higher. That is pricey!
  9. Export incentives are substantial - read below. Do note that governments can remove it.
Source: CLSA report, my comments in red 
CLSA also recently did an negative opinion report, I was curious and took a read. Surprisingly, the management replied back in a tone that was very similar to what we saw in 2000 where many tech firms rebutted. 
  1. Olam said Nigeria government incentives are not 30-40% of profits but 15-20% of total export sales revenue and that it does not directly flow to profits.
    • 2 things come to mind - Firstly, Olam bases the figures all on revenues and not profits. Secondly 15-20% of revenue is still substantial isnt it, and on a profit basis will be even larger?
    •  The incentive is equivalent to a direct cash profit that adds on to gross profits (sets off expenses). Incentives are on a FOB sales value basis. Olam claims it passes a bulk of the incentives back to the suppliers and farmers. The validity of the claim in terms of amount and proportion is beyond me to check.
    • For 2010, incentives receivables are added to income statement is S$104m / 95m and on balance sheet S$ 96m / 133m . To give you an idea, net profit for 2009/10 is S$252m / 359m.
    • Nigeria contribution to revenue is 5% small yet to profit is larger,so it backs up the above point.
  2. Differences between unaudited and annuals for inventory, cash, capex, COGS and margin accounts.
    • Olam mentioned in the rebuttal 
      • For incentives, cash accounting instead of cash accounting which CLSA claims should be used and therefore annual reported figures should not have differences. That also means the incentives can be applied with discretion
      • Differences in capex / PPE was reclassification (Acquisition to business combinations)
      • Differences in comprehensive income due to reclassification (Subsidiaries in various jurisdictions and/or between line accounts within group account). 
      • Did not explain the differences in interest expenses 
    • It seems like although numbers are likely to be correct and accurate as claimed by Olam, the figural changes may hint at loss of information between the auditors and the firm itself as well as the firm strong reliance on short term funding and acquisitions to fund growth.
While the CLSA analyst may seem to have not have been precisely accurate, a majority of the hinted discussions do shed some light on the firm and raises many points to think about. Kudos to the analyst.

Disclaimer: Author does not hold any position in the above related counter.

Tuesday, February 15, 2011

Longcheer SGX

Longcheer is a China based mobile handset designer and manufacturer.
It is seeing odd volumes and share price has fallen precipitously from S$ 0.70+ to currently S$0.305.
Some facts I am seeing gives me negative vibes.
  1. Tao Qiang, Non exec director and co founder of firm has his shares forced sold on market by a financial institution. Does this sound familiar or what? 
  2. CEO sold shares too
  3. Over half of sales are in India and is expected to see bad sales since the firm's key product (low to mid end feature phone) is being taken over by the higher end smart phones. 
  4. China's massive inflation --> Wages too 
  5. Theres a put option liability with strategic investors. So its a pseudo private placement with conditional hurdles which Longcheer did not fulfill. Im just wondering why not a plain vanilla private placement?
I have not taken a closer look but at first glance not too positive about this firm. Will dig deeper and find out more. 

Disclaimer: The author does not hold a position in this counter yet.