[Eye Candy]: Tiong Seng, a sleeping giant?

Recently, I have been trying to look at sectors that have been through a rough patch to see if I can find any hidden gems within this depressed sectors. One sector that pops up is the construction industry. Property prices have been stuck on the ground for some time now. As property developers grapple with the cooling measures imposed by the government, this means lesser construction demand by property developers which affects the construction industry as a whole. I feel it is in times like this we are able to look for promising companies that are strong enough to weather this storm and thrive when the sectors eventually recovers. One such company that came across is Tiong Seng Holdings Ltd.

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A little bit about Tiong Seng. Tiong Seng is a homegrown construction and civil engineering company with  58 years of track record. JTC@Tuas, Mediapolis@One North the new home of MediaCorp, SIM Campus were just some of the projects that Tiong Seng have undertaken. They are also into property development in China, mainly with projects in the second and third-tier cities like Suzhou and Yangzhou.

1) Fundamentals

– Debt level –

Tiong Seng’s debt is a bit on the high side. It have a 92m dollars cash & cash equivalent but debt of about 175m dollars (ST+ LT).

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That’s about 2 times its cash & cash equivalents. As the construction industry is a very competitive industry that require high upfront costs, I wanted to see if this figures are considered over-leverage. Hence, I decided to do a comparison across some of the big construction companies listed in the SGX. I chose 4 companies with comparable market cap to Tiong Seng and did a comparison of their debt levels.

TS compare debt

Hence, in my opinion, Tiong Seng debts/CCE of about 2 times seem to be acceptable for a construction company.

– Cash Flow –

Managing cash flow in a construction company is rather challenging. There’s always a risk when any business take on a huge capital to finance a project. Furthermore, earnings in the construction industry are usually lumpy in nature as they receive their earnings in phases. This could lead them into a huge debt spiral if they borrow huge amounts and are unable to repay them in time due to unsuccessful project tenders, costs overrun etc.

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It has recorded positive cash flow from operations for 4 out of 5 years. Net change in cash is positive for 2 out of 5 years. It’s cash flow is still considered decent in my opinion.

– Management –

Tiong Seng was founded by the current CEO’s father, Pek Ah Tuan. Peck Tiong Choon which is a company founded by the current CEO’s father and his brothers. Peck Tiong Choon have a 59.8% stake in Tiong Seng. One of the non-executive director, Lee It Hoe also deemed to have about a 63.1% stake in the company.

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What I think it means is that members in the board like Mr Lee It Hoe have Tiong Seng’s shares through Tiong Seng Shareholdings. Furthermore, the current CEO being the son of Mr Pek Ah Tuan should have a vested interest to advance the business started out by his father. Of course, that is hard to say. Family business can be prone to infighting and can fail as well. But I have to say I have been rather happy with the management’s decisions so far. I will share with you why below.

2) Prospects

– Technology focused –

The adoption of technology in the construction industry have been a long drawn process. In an environment where competition to offer the best tender is strong, it is hard to see these companies adopting technology to aid productivity. However, Tiong Seng have a different approach in this. For instance, Tiong Seng invested in the very first Precast Automation Hub in Singapore where they have experienced a significant 70.0% reduction in manpower while raising output and maintaining consistency. They also use computer software programs to ensure that their buildings are well designed before starting actual construction reducing wastage. Tiong Seng also employ the use of PPVC and PBC where a portion of the building are fabricated off-site. Building Construction Authority (BCA) have also been encouraging the use of such approach.

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In my opinion, Tiong Seng’s innovation to the construction industry will put it in good stead to provide not just quality but also efficiency. Being one of the few construction firms in Singapore to focus so heavily on technology, I think this factor should play out well in favour of Tiong Seng in the future.

– Construction industry to be boosted by public sector demand in 2017 –

Given the current property outlook, private demand for construction remains soft. However, the government have announced more public construction work in 2017, valued to be around $24 billion. Tiong Seng have the highest A1 grade from BCA for both civil engineering and general building which allows it to undertake public sector projects with unlimited value. To illustrate how prestigious that is, take a look below.

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BCA grades the construction sector in two categories, General Building and Civil Engineering. To be able to obtain A1 for both categories is certainly not an easy feat. Most companies only have 1. Hence, with public sector demand rising, Tiong Seng should be in a nice position to grab a share of the pie given its strong track record. Besides, it is becoming a common practice for the government to award contracts to companies that may not be the lowest bidder in tender exercises.

 

3) Risks

– China Property Bubble –

Property prices in China have been running sky high. In the short term, that could definitely be a boost to Tiong Seng’s revenue. However, like every bubble, there will be a correction coming. China’s government have put in place many cooling measures like tighter loan restrictions to simmer down the property market.

china house price

As we can see a top has formed, and a correction will definitely not be good for Tiong Seng’s property developments business in China. Revenue will definitely be affected. However, in my opinion, the main issue with China property prices, is speculation. Prices can raced up about 23% in a year.

An article in Business Insider also explains that the Chinese government is looking for healthy developments of the real estate market.

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Hence, I believe that although Tiong Seng’s China venture will be impacted when the property bubble burst. Their strategy to only develops in 2nd and 3rd tier cities will help them in the long run as China embraces the OBOR initiatives to connect more of their cities together through building infrastructure. Furthermore, by developing in the 2nd and 3rd tier cities, it can translate to lower costs compared to a 1st tier city. We shall see how their China venture pans out, hopefully they have learn their lesson from their overseas venture debacle in 2014.

– Execution risk –

And like all construction companies, execution risks remain the most probable. Having to deal with rising labour costs, material costs, safety etc etc. It is important that a construction companies do not run into a Stop Work Order, which will be no good to the company. However, given Tiong Seng’s track record, that risk should be relatively smaller compared to other construction firms.

 

In conclusion,

Tiong Seng’s PE stands at 7.7 as of today with a price of $0.260 per share. Tiong Seng’s PE don’t really tell much as most construction firms are undervalued at the moment. Also, the construction industry being a lumpy in nature, we may experienced very wild fluctuations in their earnings and hence their PE ratio. A better indicator would be their Net Asset Value (NAV), it stands at $0.594 with $0.164 cash in hand per share.

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Also, based on the chart, it has been consolidating at a rather low price for some time now, which provides a favourable entry point. If Tiong Seng can achieve more contracts in 2017, there will be a strong reason to believe an upward break out in price can be achieved. Currently, I am not vested yet as I am still observing the price movement of the stock. Do always remember to DYODD! Cheers! 🙂

[Eye Candy]: Nordic Group riding on O&G recovery?

Nordic Group have long been in my eye candy list for some time now. Not only does it have a good fundamentals, it has been able to withstand the chaos in the O&G sector while posing earnings growth during this period of time. A company that can withstand headwinds in the industry are certainly poised to do well when the sector recovers.

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Nordic Group is a global systems integration solutions provider serving mainly the marine, offshore and oil & gas industries. Their business segments include 1) system integration, 2) maintenance, repair, overhaul and trading, 3) precision engineering, 4) scaffolding services 5) Insulation services. Most of their businesses are in the O&G sector but they also do serve the aerospace and medical industries. (But to a small portion)

Fundamentals

1) Strong earnings record

As I mentioned earlier, Nordic have managed to grow their earnings rather significantly over the past few years. Even when many O&G companies (their customers) are cutting budget and hence spending, this company have punched above its weight. Here’s a snapshot of its financial highlights.

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Various indicators of earnings are all pointing upwards, which shows the strong earnings momentum the company has. Also 2016 being the year where O&G sector faced many unpredictable headwinds, like falling oil prices. Nordic have still managed to grow its revenue.

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Despite challenges, revenue for FY 2016 increase 2%, profit net of tax increased 21%. If Nordic can weather the storm in the industry, it should present a good growth opportunity when eventually the industry recovers and O&G companies start to spend again.

2) Strong balance sheet and cash flow

Current ratio of 1.74, with cash and cash equivalents covering its debts. Nordic have also been registering positive cash flow from operations for the past few years.

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3) Insider ownership

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All 3 executive directors of the company are part of the 20 largest shareholders in their own company. Furthermore, company have been doing regular share buybacks. Latest one being at $0.24 a share.

Catalysts

Going forward there are a few catalysts that could propel the stock further.

1) More contract wins and possible acquisitions

With oil prices stabilising around $50 per barrel, compared to the atrocious $30 per barrel at the start of 2016. A recovering 0&G sector can be beneficial for Nordic as more of their customers start spending more to upgrade or improve their facilities. This should lead to more contract wins for Nordic given the strong reputation it has in the industry. With Nordic low debt, they could also possibly look to acquire companies in similar industry to boost their source of revenue, just like the acquisition of Austin Energy in 2015.

2) Going into pharmaceutical industry

In the AR of 2015, the Chairman also mentioned going into the pharmaceutical industry. This should open up new form of revenue stream and allow Nordic to grow their business out of the O&G sector.

austin-energy

Technical

Based on the chart, this gem have already been discovered by many investors.

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Clear and nice uptrend. Currently, Nordic have reach upper channel line and I am hoping the pull back will hit the support at $0.270. This will present a rather lucrative price to enter given the upside potential.

In conclusion,

this is a rather straight forward company to analyse. Strong fundamentals and possible tailwinds to promote growth should the O&G sector improves. $0.270 will be a great price to enter!

 

[Eye Candy]: Addvalue Tech, a turnaround play?

Greetings, pardon my corny title above. Haha! Recently, I have been browsing through some companies that could provide great investment opportunities in the near future. My rationale for doing this is so I can put all them on a watchlist and enter them when the time is right. Haha I decided to name this segment “Eye Candy” to remind myself that for now I can only look at it and not take any actions. Haha! Also, I don’t intend to share this on Facebook, as this is purely for me to understand my own line of thinking and for those who chanced upon it on my blog. Alright, let’s dive straight into this company that I found rather interesting. Addvalue Technologies.

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Before we go into the nitty-gritty of the company. Let me give you a brief summary of what the company does. For simplicity sake, I will call the company AT in the remaining part of the thesis. AT is a company that provides satellite based communication terminals and solutions for a wide range of  voice and Internet protocol (IP) based data applications. To put it simply, their business revolves around getting you connected to the communication network (internet data, voice calling etc) in places that communication network are not available. For instance, ships out at sea do not really have a fix communication network they could tap on. AT creates a dongle-liked thing which allows you to serve your internet and make phone calls out at sea. They IPO in 2001 when they were in the consumer telecommunication business. Due to strong competition, they sought new growth area and ventured into their current business in 2006.

What I like about this company is their spirit of innovation to venture into a new business when things aren’t doing well. Of course, spirit or not doesn’t matter if their results do not show. Let us then take a look at the fundamentals of the company.

Fundamentals 

To get a holistic view of the company, let’s take a look at the financial report for the past 4 years.

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Sorry for the bad alignment!! Haha my first time trying this. As we can see that the company earnings have not been consistent. There has only been 1 profitable year which is in 2014. So I was curious what has caused the company to record losses in FY 2015 and FY2016 when FY 2014 was in the black.

FY 2015

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From AT Annual Report

Profitability was hampered by once off kick ups like buying more expensive materials and R&D efforts.

FY 2016

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As we can see FY 2016 was impacted by 2 delays which are both related to their working partners. AT ‘s business depends a lot on satellite telecommunications companies like Inmarsat and Thuraya which AT have long partnership with. AT creates the satellite terminals and use their satellite systems to provide connections to consumers who buy their products. Also it’s expansion into China have also been met with some problems cause by economic headwinds.

Balance Sheet wise, AT do not fare well too. It’s borrowings are high. Current ratio do not look good. Very little cash on hand.

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FY 2016 Annual Report

Hmm not a very good sign…

Cash flow from operating activities have also been in the negative for the past 4 FY except FY2014. Fundamentally this is a company that I would avoid at all cost. But after examining the potential catalysts and the earnings for the 2Q in 2017, I feel that the company could be at its inflection point.

These are some potential catalysts for this company.

1) Earnings growth for first 2 Quarters of 2017

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A 136% increase in gross profit in 1Q 17. (I think there was a typo in the report, but the values on the left usually represents the latest Q)

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A 141.6% increase in gross profit in 2Q17. For the HY, a 139% increase. Comparing 1Q17 to 2Q17, the gross profit also grew 14.5%. That shows an increase rate in earnings as well. That is an encouraging sign.

2) Stronger foothold in China

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This MOU is announced in 26 Oct 2015. AT is required to design and supply products for the “One Belt, One Road” project. AT also entered into a strategic alliance with Zhong You Century a govt linked company in China.

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The deal came in after FY 2016 which will benefit FY 17. If you have read about China’s ambitious “One Belt, One Road” initiatives, you will realise that these deals will keep coming given the vast scale of the project itself. Also, if AT have anchor their working relationship in China, future projects in China will more or less be awarded to them. This will provide a form of stable revenue less likely to be impacted by economic headwinds given the strategic importance the One Belt One Road initiative is to China.

3) New product pending commercialisation

AT who have been engaging in R&D and constantly coming out with new products could see their latest product being a game changer. The new product named the Inter Satellite Data Relay Terminal (IDRS). Basically, this product will address long standing issue of communication with Low Earth Orbit Satellite (LEO). Normally a LEO satellite is used to collect data on several information about Earth ranging from climate to land information. Currently, sending data from LEO requires its orbit to meet with the location of where the observer is. In lament terms, there are only certain window of opportunities whereby information from LEO can be sent to the observer. With this new product, AT have circumvented the problem and their new product allows the LEO satellite to be able to communicate with the observer 24/7. This is a first in the industry, and will definitely provide a new form of revenue to AT.

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Just recently, AT announced a MOU signed with Inmarsat to commercialise the IDRS. This will be an exciting development to watch. Whether or not, it will contribute to FY17 revenue will really depends on the rate of commercialising this new product. Just like any first of its kind product, this will give AT an early mover advantage into this market.  Furthermore, if this is patented (I’m not sure if the AT is intending to) it strengthens their market share in the market.

4) Disposal of Addvalue Communications Pte Ltd

The planned disposal of AVC was announced in 2014, but the deal has since been delayed till today. The disposal price is a cash offer of $308 million dollars. If successful, this should help improve AT’s balance sheet and give it enough cash to further expand their operations.

5) Restructuring efforts

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AT is trying to restructure their business model to include avenues for recurring income from airtime etc. This should provide some stability to earnings in the future. rebrandin.png

They will be focusing more on emerging markets like China.

In conclusion,

I feel AT is company that is daring in their approach and not afraid to fail. Being the one of the few listed company in Singapore to venture into the space and satellite industry in 2006 is certainly a bold move. On many occasions, the management have also shown that the company is capable of innovating new products. Although for many years their earnings and balance sheet have not been outstanding, the current list of catalysts should benefit AT favourably in the near future.

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AT is currently trading at $0.037, which is around the lowest it ever recorded in its entire listing history. (Lowest was about 0.027). Of course, that doesn’t mean that the stock cannot continue to go down and eventually hit 0. However, given the limited downside risk and the upside potential. This could be a favourable entry point. However, I would still prefer to wait for the upcoming earnings report for more earnings stability before taking any decision. If I am going into this one. It should be a long position. Ultimately, the appreciation of the company stock price on the stock market is more often marked by the increase in earnings. Will Addvalue Tech eventually turnaround their company? Only time will tell.

That’s it from me. This is probably my longest post ever haha! Ohh rmb to dyodd and this post does not in any way promote you to buy this stock. It’s just my own humble analysis. 🙂