(Picture credit: "Home Alone" movie)

Following PCRD’s special dividend announced beginning this month, another one of our earlier deep value picks, Chuan Hup Holdings (“CHH”), has also followed suit by proposing an impressive payout of its own. CHH is aiming to distribute a massive S$0.09 per share to its shareholders, equivalent to a 26.5% yield based on its last closing price of S$0.34.

This follows the Company's decision in January to divest its entire 76.7% stake in cash-rich subsidiary PCI Ltd for S$203 million to private equity outfit, Platinum Equity Advisors. The deal is subject to the approvals of:

1. PCI shareholders under a court-sanctioned Scheme of Arrangement pursuant to the Companies Act of Singapore; as well as
2. CHH shareholders in an EGM to be held in the coming weeks.

 
However, with the undertaking from CHH to vote in favour of the scheme, the Peh family controlling more than 50% of CHH shares, as well as the sweetener of the dividend payout for CHH shareholders, we expect both sets of shareholders to vote overwhelmingly in favour of the deal.

Tracing back to the time we issued our initial report in early 2015 when CHH’s share price was trading at S$0.305, the minority-friendly Company has either proposed or distributed a total of S$0.17 in dividends to date.

​In this regard, we commend the Company’s efforts to consistently reward its shareholders and urge more cash-rich companies to follow suit.

Related: http://stockresearchasia.com/latest-recommendations/chuan-hup-holdings-ltd-deep-value-emerging

PCRD pleasantly surprised its shareholders on Friday by announcing an unusually large special dividend of 6.3 cts per share on top of a final dividend of 2.4 cts giving 8.7 cts in total. This follows last year’s payout of 2.2 cts per share, which was a nice reward in itself given that it was the first time since 2010 that the company had paid dividends.

We had argued in 2015 that should Richard Li opt not to privatise PCRD, the Company could possibly resume paying cash dividends to shareholders with the continuous stream of dividend income it receives by virtue of its holdings in PCCW and HKT. While it took three years before the company began to take affirmative action, the combined 10.9 cts paid/announced in the last two FYs should go nicely towards rewarding shareholders for their patience.
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Going forward, we do not expect a repeat of this year’s generous payout. However, the ~S$110 million of cash it receives from PCCW and HKT annually should comfortably support dividends of around 3.5 to 4 cts a share per annum, giving it a nice sustainable potential yield of 9.1-10.4% based on the last closing price of 38.5 cts.

Related: http://stockresearchasia.com/latest-recommendations/pacific-century-regional-developments-ltd-pcrd-will-richard-li-finally-privatise-pcrd

For many equity investors worldwide, 2018 turned out to be a year to forget. A combination of stretched valuations, Trump-fuelled US-China trade war and rising interest rates put paid to hopes of a historic global bull market continuing into its eleventh year. Even the previously impervious US equity market was hit with heightened volatility last seen in 2015 when bursting of the Chinese stock market bubble led to a global meltdown.
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After all the hullabaloo about how US stocks recorded one of the worst Decembers since 1931, the S&P 500 ended 2018 down a relatively mild 6.2% while all major Asian indices managed to register much larger declines. STI, for instance, fell 9.8% despite not running up as much comparatively over the previous 2 years. Hang Seng, Nikkei 225 and the Shanghai Composite, which slid 12.1%, 13.6% and 24.6%(!) respectively, fared far worse. 

Since we have covered the developments at both companies fairly regularly throughout the year and have no intention to rehash these notes, our updates on each will be brief.  

Hupsteel- Management moving in the right direction

Our interest in Hupsteel stems from our belief that management changes (Stepping down of co-CEO and change of Chairman) in the last 2 years would spur the company to unlock substantial value from its attractive portfolio of freehold properties. That remains pretty much the case.

Since our initial report in late 2017, the Company has already announced two major developments with respect to its property portfolio:

1. The redevelopment of 38 Genting Lane into a new 8-storey industrial building capable of being strata subdivided for use by multiple users; and
2. Successfully leasing out of its previously vacant industrial property at 6 Kim Chuan Drive

Further, Hupsteel’s management has also explicitly expressed its willingness both in its FY2018 annual report and in verbal communications during last October’s AGM to seek ways to unlock value for shareholders, for example, “through monetizing long term assets and returning the cash generated to shareholders by way of dividends.”

The market though appears to have completely ignored the company's efforts and intentions in this area. For despite the company raising its dividend payout for the 3rd year in a row to 4 cts a share for FY2018, representing an attractive yield of 5.1%, the stock continues to trade at a sizeable 32% discount to just the sum of its liquid assets (cash + listed securities) and value of investment properties. Nonetheless, should the management succeed in monetizing some of its investment properties, Hupsteel shareholders can expect happier days ahead.  

Sysma Holdings- Cash rich, price poor

As for Sysma Holdings, we have already provided multiple updates throughout the year. You might want to refer to the links at the bottom if you have not read them before.

Based on the last traded price of S$0.146, the stock still trades at a puzzling 27% discount to its fully cash-backed NTA. While the construction industry has been affected by the current lull in the property sector, Sysma’s order book of S$56.7 million as of 31 July combined with the latest S$18.6 million contract win in December should ensure that its core construction business remains sufficiently shielded against likely increasing headwinds.

Consequently, we do not envisage any deterioration in its financial position or a reduction of its dividend payout of 0.8 cts per share (good for 5.5% yield) in the near to mid-term.

Closing Note
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We enter 2019 slightly more optimistic than a year ago. This is not to say that we expect equity markets to turn positive anytime soon. On the contrary, we expect volatility to remain for an extended period of time. A global economic slowdown, continued trade protectionism and rising interest rates coupled with record high corporate debt all pose substantial risks to the equities. However, none of these present a greater potential threat than the man currently occupying the White House.

Starting a new trade war severe enough to cause a slowdown in the world’s second largest economy? Shutting down the US government down to try to fulfil a campaign promise he can’t keep and potentially shaving billions off the US GDP? Antagonising and subsequently romancing the leader of a nuclear power known for his erratic behaviour? Or casting doubts over the independence of the world’s foremost central bank?  Check, check, check and check. The bottom line is, with Trump at the helm, the next market-moving event is always just a tweet-from-the-hip away.

What this means is that there will be probably be more days in 2019 when the manic-depressing Mr Market (an apt description for Trump himself if I may add) will be kind enough to offer stocks of quality companies at substantial discounts to their intrinsic value. And for value focused investors with longer investment horizons, there can be no sweeter sounding music than this.  

Cliff

Links:
Hupsteel report and updates:

1. Initial report
2. Update (6 Dec 17)
3. Update 2 (3 Sep 18)

Sysma Holdings report and updates:

1. Initial report
2. Update (3 Mar 18)
3. Update 2 ( 18 Jun 18)
4. Update 3 (29 Sep 18)

 
Usual disclosure: The above views are our own and are not meant to be construed as an offer, or solicitation of an offer to sell or buy securities referred herein. Please refer to the section “Important Notice” at the bottom of our homepage for additional information.

Some notes on the full year financial report released last week:

1. Sysma’s FY18 profit came in at $4.0 mil, which was below its half year profit of $4.3 mil, meaning that it likely recorded a loss for 2H18. The main culprit was a non-recurring provision for defective work of $3.8 mil which we assume was for its property development projects.
2. Revenue continued to decline as expected to $75.2 mil. Out of this, about 60% or $42.6 mil was from property development and the rest from construction.   
3. With the bulk of its property projects fully sold and delivered, leaving behind only 4 shop units at 28 RC Suites, expect the group’s revenue for next year to be closer to this year’s construction revenue of $32.6 mil. The current construction order book of $56.7 mil should be sufficient to ensure this as all but part of the recently clinched Verandah Residences contract will be fully recognised next FY.
4. Company’s cash hoard continues to build up. It now has $71.5 mil or 28.3 cts per share in net cash and zero bank loans. NTA, which is essentially 100% cash backed, is at $52.6 mil or 20.9 cts per share.
5. Company declared a dividend of 0.8 cts per share which was 60% higher than last year’s 0.5 cts. At the last traded share price of $0.151, dividend yield is at a pretty decent 5.3%.

Sysma’s proposed dividend payout was higher than last FY but disappointing given the huge cash pile it sits on. The company can definitely afford a much higher payout of more than 1ct with perhaps an additional special dividend. Since neither materialised, we can only surmise that the management has much better uses of the financial resources at its disposal.

Going forward, the likely catalysts will probably be in the form of additional contract wins and earnings accretive investments the company can net with its war chest. In the meantime, the stock remains almost comically undervalued, trading at a 28% discount to its 100% net cash backed NTA.  

Last week’s full year results announcement was a welcome relief for Hupsteel shareholders as it probably confirmed that the worst is over for the Company. The improved performance was driven by increased demand for its steel products induced by a higher and more stable oil price. Some key highlights:

1. FY18 revenue of S$60.8 million represents a topline growth of 22% over FY17, the first upturn since FY2012.
2. Profit after tax of S$4.7 million is also a multi-year high, although it was aided by a net gain on investment property of S$2.3 million as well as certain tax credits.
3. Management’s decision to declare a final + special dividend of 2 cts per share brings total full year dividends to 4 cts, more than any in the past 3 years. Current yield stands at a respectable 4.6% based on a closing price of S$0.865.
4. However, amidst the positive news, the company also cautioned that its recovery could be weakened by the ongoing trade war and a stronger US dollar.

​Our Take
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Interestingly, at last year’s AGM, some shareholders complained that the dividend payout of 2 cts per share pales in comparison to the 5 cts which Hupsteel used to pay up until FY14. The management, in doubling this year’s payout to 4 cts, perhaps gave the clearest indication that it has paid heed to them. We are of the view that the Company would restore its dividend to 5 cts in the near to mid future should the macro environment hold up. 

​As we have stated in our original post, our investment thesis for Hupsteel has always been the deep discount it trades to the value of its cash, available for sale investments and investment properties. That has not changed. We remain optimistic that the current CEO will continue to take a proactive approach towards unlocking the substantial value of its investment properties and narrow the said discount. While waiting for that to happen, it certainly doesn’t hurt if the company decides to at least maintain its dividend payout going forward, as it should. 

Sysma just announced that it had won a $37.7 million contract, from an Oxley Holdings subsidiary, for the erection of  4 blocks of 5-storey residential flats and 3 units of 2-storey strata landed houses in Pasir Panjang. Based on the description, we think the construction work is likely for the popular Oxley development, Verandah Residences, which reportedly sold 76 per cent of its units in its opening weekend alone. 

This contract is notable for a few reasons:

1. Based on past company filings, this is the first non-landed project and also the largest construction contract Sysma has won since Nov 2014 when it won a $58 million contract to build a high-end mixed development project at Oxley Rise.
2. The Oxley Rise project was similarly awarded by Oxley Holdings, making it a repeat customer. 
3. This likely takes its current order book to comfortably above $40 million, reversing the declining order book trend which was a key concern with the Company. 

At the last AGM held in April this year, Sysma's management had struck a positive tone when asked about the prospects of its construction business. The optimism is fueled by an expected increase in demand for contractor services as more en bloc projects gets redeveloped. Should this translate into more contract wins for Sysma in the coming months, it would be hard to see how its shares can continue to trade at a sizeable 25% discount to its fully net-cash backed NTA (Last traded price of $0.151 vs Net cash of $0.22 and NTA of $0.20 per share). 

We continue to stay positive on Sysma.

(All currency above in SGD)​

Sysma just released its financial results for the 6 months ended 31 Jan 18 this evening. Some salient points to note:

1. Its half year profit after tax came in at $4.3 million or 1.71 cts per share. This is lower than last year’s $4.8 million but only because of the lower net write-back of provision for foreseeable losses ($0.7 million vs $2.8 million).
2. More importantly, as we previously indicated, its completed properties on hand have substantially been sold during the financial period and converted into cash. Company is now debt free, other than <$1 million of finance leases.
3. While NTA came in slightly lower than we expected at $50.5 million or $0.20 per share, its net cash has now more than doubled to $55.9 million from just $27.1 million 6 months back. This is equivalent to more than $0.22 per share and much more than we estimated, although not a major surprise since we had conservatively assumed an aggressive paying down of payables on hand.
4. Only negative is that the construction order book continues to decline to $34 million as at 31 Jan 18 from $38 million 6 months prior. (Refer to our initial report for more discussion on this)

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​Given that the company’s NTA of $0.20 is now substantially backed by cash, the current share price of $0.151 continues to significantly under-represent its value. We expect the gap between the two to close considerably going forward.
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We also reiterate our belief that barring new substantial investments, payment of a much larger annual dividend or a one time special dividend may be in store. Further catalysts to come from more contract wins for its high end landed construction business.

Sysma Holdings Ltd, a niche contractor cum developer, is an undervalued gem currently trading at 0.74 times book and less than 5x historical earnings. With its net cash position currently at 72% of its market capitalisation based on the last traded price of $0.149 per share, it already has a strong balance sheet that might draw interest from value investors.

However, we believe that the strength of its current balance sheet is still severely understated as a surge in sales at one of its completed property projects in the last 6 months should give a further boost to its already large cash pile. After taking into account the 0.5 cts dividend paid in November, we estimate its net cash position and NTA to be at least 17 cts and 20.5 cts per share respectively by the time the company releases its HY2018 results come mid-March (for the period ending 31 Jan 18).

Given that its niche construction business has been consistently delivering healthy pretax profits for the past 5 financial years since listing, we see no reason for its share price to trade at a discount to even its net cash position. Further, with the Executive Chairman cum CEO owning 66% of the total outstanding shares, there is added incentive for management to return a significant chunk of this cash pile to shareholders.

In short, we believe that Sysma is a stock that offers both compelling current value as well as a possible share price catalyst in the form of increased annual or special dividend payouts.

Background
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Listed on the SGX Catalist board in 2012, Sysma is a niche contractor focused on the construction of high-end landed housing projects such as detached houses and Good Glass Bungalows (GCBs). It is helmed by Executive Chairman cum CEO, Sin Soon Teng, a construction veteran with more than 50 years of industry experience under his belt.
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Since its founding in 1986, it has established an impressive track record and built over 150 bungalows in Singapore amongst other high-end projects.

One of Sysma’s impressive bungalow projects (Source: company)

In 2012, shortly after it made its Catalist debut, Sysma made its initial foray into property developments. In less than a year, the company acquired 3 different sites, in Little India, Serangoon and Mountbatten, which were eventually developed into the respective projects: 28 RC Suites, 18 Charlton and 8M Residences.
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Sysma’s property projects

In order to fund its new capital intensive property business, Sysma embarked on a series of equity fund raising exercises, which included a rights issue and two share placements, all less than 2 years after its listing. Inclusive of the IPO, the company generated collective net proceeds of $31.5 million, of which $21.2 million was put to use in property development. On top of it, Sysma borrowed more than $90 million from banks to finance these projects. However, the initial property sales disappointed and even resulted in Sysma taking a hefty write-off in FY2014.

Nonetheless, the company was able to sell the bulk of its remaining units in 28 RC Suites and 8M Residences gradually over the next 3 financial years and pare down most of its bank borrowings. As at 31 July 17, the company is sitting on a much stronger balance sheet including a net cash position of more than $27 million, equivalent to 72% its market capitalisation.

Its construction arm currently has an order book of $50 million after taking into account contracts won in the last 6 months. These orders will be progressively recognised over a period of about 2 years from 1 August 17.

Our Take

Property forays not well-timed but troubles a time of the past

As a relative newcomer to the property development industry, Sysma’s entry couldn’t be more badly timed as it acquired all the land needed for its projects just when property prices were peaking between Q4 2012 and Q3 2013. As a result, it was forced to take a $17.2 million provision for foreseeable losses at its property division in FY2014. That swung its full year profit after tax for that year into the red with a $11.8 million loss from a $6.6 million profit the year before. At the same time, because of the loans it took for the property projects, Sysma’s net gearing also ballooned to more than 2x at its peak in FY2014.

(Source: URA)

Since then, Sysma has recovered to post 3 consecutive years of profits. Gradual monetisation of its property inventory, especially units at 28 RC Suites and 8M Residences also helped it record strong operating cashflows, thereby enabling it to rapidly pare down its debts. As of 31 July 17, it has a net cash position of $27.1 million, a big improvement from its net debt position of almost $90 million just 3 years earlier.

(Source: company filings, stockresearchasia)
 
Surge in Charlton 18 sales should boost already strong balance sheet further; increased dividends possible

As at FY2017, Sysma carried on its balance sheet $44.1 million worth of development properties, reflecting the 4 remaining shop units at 28 RC Suites and 15 unsold terrace houses at Charlton 18. However, we note from caveats lodged at URA that the company has since sold another 13 units at Charlton 18 for a total of $36.8 million.

Although we do not expect the additional property sales to contribute more than $2 to 2.5 million to the bottom line, the cash proceeds should serve to reinforce an already strong balance sheet.  Subject to further working capital movements, we estimate that the company will have a net cash position of at least $43 million and zero debts by 31 January 18, giving it a net cash position of more than 17 cts per share or 14% above its last traded price of $0.149.

With the Executive Chairman owning 66% of the total issued shares, we also think that payment of a much larger annual dividend or even a substantial one time special dividend may be in store.

Dwindling construction order book a concern but stable GCB/landed market offers some comfort
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On the flip side, one area of concern for Sysma shareholders is its gradually dwindling construction order book. Its last reported outstanding orders as at 31 July 17 amounted to $38 million. If we take into account the 2 contracts it won recently for projects at Medway Drive (an IPT subject to shareholders approval as it was awarded by Executive Chairman’s son, Sin Ee Wuen) and Tanglin Hill, this figure would increase to $50 million. Still, this is less than half what it was 3 years ago.

Part of this decline may be explained by the gradual run-down of a $58 million contract Sysma clinched for the Oxley Rise project commencing November 2014. Since that win, its new projects have largely been smaller bread-and-butter GCB and other landed ones. These new orders though have not been sufficient to arrest the order book decline.
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However, we think that there may be a silver lining on the horizon: the GCB and landed detached resale market, which Sysma is highly dependent on, has been growing over the past 3 years. ​

Both resale volume and value of GCBs and landed detached (no-GCBs) houses within the GCB districts have been on the uptrend (Source: URA, stockresearchasia)

Based on URA caveats lodged, total resale volume and value of GCB and other detached houses in designated GCB districts (10, 11, 20, 21 and 23) have been on the rise. And since most reconstruction of GCBs and detached houses typically arise only when they change hands, this spells more opportunities in the market for Sysma. Coupled with the company’s strong track record in this niche segment, this gives rise to hope that the company may soon be able to replenish its order book and provide more earnings visibility going forward.
 
Recommendation

It is likely that Sysma’s missteps in the past 5 years- including a poorly timed entry into property development and a brief “deworsification” attempt into the petroleum products business, which does not offer any natural synergies- may have caused it to fly under investors’ radar.

Nonetheless, a rapidly improving and sterling balance sheet should warrant a closer look from value-oriented investors. At the last traded price of $0.149 and a net cash position estimated to exceed $0.17 per share, the market is effective paying investors $0.021 per share to buy Sysma shares and giving away free-of-charge a consistently profitable niche construction business to boot.
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While a dwindling construction order book could raise some concerns, ongoing strength in the GCB and landed detached resale market may open up more opportunities for the company to reverse the downtrend.

All in all, we believe Sysma currently offers compelling value. Possible near term catalysts include increased or special dividend payouts and contract wins. We are buyers at this price.

Key risks

1. Another “diworsification” attempt by the management- With the top two management staff of the company owning collectively 72% of the company’s shares, we believe the interests between management and minority shareholders are sufficiently aligned in this case to mitigate this risk. Furthermore, we believe that the management would be more cautious in assessing future opportunities after its experience with Sysma Energy’s petroleum products venture.  
2. Company committing its cash hoard to another poorly timed attempt at property development- Again, we believe that the company has learnt its lesson from its initial forays into this sector and will be extra cautious in its approach.
3. Failure to replenish its construction order book- The next 12-18 months could be key. Should the company fail to win significant contracts going forward, its bottom line may swing into the red. Our initial thesis may change in that instance.   

Earlier this month, Lippo China Resources Limited (“LCR”) and funds managed by and including Argyle Street Management Limited (“ASM”) jointly launched a voluntary unconditional offer of 57 cts for each TIH share pursuant to a consortium agreement signed on the same day. The offer is made through Kaiser Union Ltd ("Bidco"), an SPV wholly owned by LCR.

Of the 57 cts per share, 12.5 cts is to be paid in cash with the remaining 44.5 cts to be paid in the form of a 3 year 2.25% unlisted unsecured senior bond issued at par by the Bidco. ASM and its funds have already undertaken to tender a maximum of 110,732,656 TIH shares equivalent to 45.8% of the total issued share capital in acceptance of the offer. The number of shares to be tendered by ASM and its funds will be reduced by the aggregate number of shares tendered by minority shareholders and acquired through open market purchases made by the Bidco.

Based on the responses so far, it seems that the offer has not been received well by the minority shareholders. While it remains to be seen if shareholders have indeed been short-changed, we think one big winner has already emerged regardless of the outcome of the offer: the Lippo group.  

Firstly, due to the undertaking by ASM and its funds, LCR is already assured of acquiring an initial 45.8% controlling stake in TIH based on its 100% ownership of Bidco (although Bidco, LCR and ASM may transfer TIH shares between themselves to achieve their desired shareholding levels within 12 months of offer close). If Lippo’s intention is indeed to expand its securities and fund investment business in Asia through TIH, then this is certainly a cost effective way to do so. Afterall, based on the undertaking shares, LCR need only pay a maximum amount of $13.8 mil upfront for the entire stake with the remainder mostly paid 3 years later.
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Secondly, and perhaps more importantly, the move actually helps Lippo tighten its hold on OUE Ltd. To understand why, we only need to look at the simplified ownership chart  compiled below:

From the chart, we can see that ASM plays an integral role in Lippo’s control over OUE via the holding entities, Lippo ASM Asia Property Ltd (“LAAPL”) and Fortune Code Ltd (“FCL”).

In particular, ASM-controlled TIH currently owns a 7.95% stake in FCL which in turn controls more than 68% of OUE shares. Had ASM sold its stake in TIH to a 3rd party, Lippo would have to deal with a potentially unfriendly minority shareholder in FCL. The Joint Offer by ASM and Lippo’s LCR basically ensures that such a scenario would not happen.

On top of it, Lippo will now gain direct control over the stake in FCL held by TIH. All these for a upfront cash outlay which is unlikely to burn a hole in Lippo’s deep pockets.
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In our opinion, this makes them the biggest winner in this takeover exercise, by far. 

As 2017 came to a close, we find ourselves faced with a vastly different equity market landscape compared to the start of 2016 when we penned our first year review report. At that time, global equity markets were in the doldrums with many Asian market indices plunging to multi year lows. We expressed our optimism then through Herb Stein’s famous quote “If something cannot go on forever, it will stop.” 
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Almost 2 years on, that quote has proven to be more prescient than we originally envisaged as markets bottomed out shortly after with the STI surging 32% from 2577 to end 2017 at 3403. However, even this performance pales in comparison to S&P 500’s 40% gain and HSI’s even more impressive +57% run over the same period. As a result, equity owners should, by and large, be satisfied with the gains recorded over the last 2 years. Indeed, the ongoing bull market appears to be humming in global unison, backed by better than expected growth in top economies like the USA and Japan.

Our picks in the last 2 years have similarly done well and, with the exception of one, outperformed the market significantly. As we did not do a year-end review for 2016, we have included picks for that year in this report. In terms of benchmark, we have elected to use the SPDR STI ETF for the Singapore stocks that we covered instead of just using the STI Index as in the past in order to better quantify the impact of dividends on total returns [1].   
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Performance of our picks
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For the two years combined, our picks have collectively turned in a commendable performance, outgunning the benchmark by an average of 35.8%. However, this is largely skewed by the only recommendation (TSH Corporation) we made in 2016, which generated outsized returns of 129% over 9 months, handily beating the STI ETF over the same period.
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In 2017, our coverage was focused on 5 stocks, the last of which was Hupsteel. However, we will not be reviewing the latter given that our report on it was only issued little more than a month ago, making any comparison of its market performance over such a short period of time less meaningful.  

Among the other four 2017 stock picks, OKP Holdings sticks out like a sore thumb for being the only underperformer, down 8% from the time we made the opportunistic call on 17 July 2017 vs a 5% gain in the benchmark over the same period. On the other hand, Bukit Sembawang Estates, HG Metal and Yongnam performed much better, generating average gains of 29% since the start of their respective coverage till the end of 2017. We should, however, highlight that in Yongnam’s case, the outperformance was somewhat fortuitous as the major contract win that we had originally identified as a potential catalyst did not materialise. Nevertheless, even if Yongnam had been excluded, our 2017 picks would still have outperformed the benchmark on average.   

As usual, a summary of the performance of our stocks is tabulated below accompanied by key updates on selected companies:

Our picks have once again outperformed the market benchmark.

TSH Corporation- impending acquisition could transform it into a property play

Since completing the disposal of its remaining core business at the end of August 2016, TSH has been a cash company as defined under Rule 1017 of the SGX Catalist rules and remains so. As we have mentioned in the past, cash companies typically have up to a year to enter into a new core business or risk being delisted by SGX. In an attempt to preserve its listing status, TSH has entered into a non-binding agreement on 21 August 2017 with entities controlled by its largest shareholder, Teo Kok Woon, to acquire a chain of Australian properties targeted at business owners in the beauty and wellness industry. The preliminary consideration is based on the combined net asset value of these properties of A$8.0 million and is to be satisfied by the issuance of new TSH shares at $0.035 apiece. The terms of the proposed acquisition, though, will only be finalised upon entry into a binding sale and purchase agreement at a date currently expected to be no later than 28 February 2018.

Recall that in our initial report, we had singled out the controlling Teo family as shrewd property investors with a strong track record. In the event that Teo decides to make TSH a de facto holding company for his family’s property business, more acquisitions can be expected in future. We think TSH and minority shareholders as a whole will stand to gain from his expertise in property investment and management. For Teo, having TSH as a ready listed platform for future acquisitions provides him with additional funding options to tap on without having to go through the hassle of a lengthy listing process. Naturally, we see the proposed acquisition as a win-win for both TSH and its largest shareholder.   

For illustration, if the acquisition were to be completed based on the preliminary terms, we expect the NTA backing of TSH shares to increase to more than 2.9 cts per share from the current 2.4 cts.
 
Bukit Sembawang Estates- Market beginning to recognise its potential
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Since our February report on Bukit Sembawang Estates (BSE), the market seems to have suddenly woken up to this deep value play, sending its share price soaring to a multi-year high of $6.90, before closing the year at $6.27. Together with a generous dividend pay-out of $0.33 per share for the third year in a row, BSE clocked total returns of over 33% from 13 February till end-2017, outperforming the benchmark by a wide 21% margin over the same period.   
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We think part of BSE’s rise could be attributed to the sudden pickup in collective sales activities in Singapore as developers bid ever more aggressively for attractive sites such as Amber Park (won by CDL’s subsidiary for $907.7 million) and Normanton Park (sold to Kingsford Huray Development for $830.1 million). In some cases, optimistic winning bids appear to have already built in a minimum increase of 10-15% in property prices. This in turn begs the question: why are developers suddenly throwing caution to the wind?

For one, the gradual improvement in property market sentiments could have boosted developers’ confidence of a sustained recovery in property demand and prices. Two consecutive quarters of increases in URA’s Private Residential Property Price Index following declines in the previous 15 quarters suggests that this confidence may not be misplaced after all:  

(Source: URA, Stockresearchasia) 
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​In addition, the need for listed property companies to replenish their rapidly depleting land banks has also been touted as another possible reason. This seems to be supported by the fact that 6 of the top 10 largest residential collective sales in 2017 involve buyers controlled by listed companies: 

(Source: Stockresearchasia) 
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Regardless of the real reasons that might be fuelling it, it remains to be seen if the collective sales boom will continue in 2018. What is clear though is that, unlike most other listed property developers, BSE is sitting tight on a huge land bank carried on its books at historical costs and is therefore under no pressure to join in the current collective sales fever. This puts it in an enviable position to benefit from any sustained recovery in the property markets without having to pay top dollar for land.  

Going forward, we think that the impending launch of 8 Saint Thomas @ St Thomas Walk and Nim Collection @ Ang Mo Kio would likely provide the impetus for a further rise in BSE’s share price as well as the necessary cash flow to support its best-in-class dividend yield of over 5%. In particular, we estimate that 8 Saint Thomas could easily bump up BSE’s cash holdings by at least $500 million when fully sold, giving its already strong balance sheet a further boost.

As for Paterson Collection, BSE’s completed project near the plush Orchard Road area, there has been little update so far from the company. As we have mentioned previously, the project should already have been liable for QC penalties in October 2017 but BSE has yet to officially launch it. So far, the only sale made was for a single unit to the controlling Lee family in April last year for $3.3 million. Given that QC penalties could be much more substantial in 2018 and 2019 [2], we think the company’s management should do a much better job in communicating its plans for Paterson Collection to shareholders.
 
OKP Holdings- Delay in resumption of Tampines viaduct project an albatross around its neck

When OKP’s share price was punished for a fatal accident at its Tampines viaduct project worksite in July, we deemed it an opportunistic buy at $0.37 per share based on favourable factors such as its established track record, robust order book, strong net cash position, low valuations and an attractive dividend yield. At the same time, we warned that it is likely to face increased scrutiny in its current projects and future tenders and its share price could also be under short term downward pressure from the negative sentiments generated. Since then, OKP has languished mostly around the 33-35 cts range.

Despite previous indication from the authorities that the investigation will conclude by last October [3], results of the inquiry have not been released even as we come to the end of the first week of 2018. When we last paid a visit to the site in December, it was quiet and work did not appear to have resumed since the accident. A quick check with a few workers just outside the worksite confirmed this.

5 months after the accident, work has yet to resume on the Tampines viaduct project.

Needless to say, this puts a dampener into any hopes of OKP shareholders for a quick recovery from the accident as any further delays in the investigation process and pushback of subsequent work resumption would weigh heavily on OKP’s share price and financial performance for FY2018.

On a more positive note, OKP still managed to eke out a profit of $0.7 million for 3Q2017 despite recognising zero revenue and an additional $3.1 million cost for the Tampines viaduct project.
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Its 10%-owned property development project, Amber Skye, has also seen improving sales over the past 3 quarters. According to URA caveats lodged, the project has now sold 73 of its 109 total units, up from a paltry 14 units just nine months ago. The attractiveness of the project has been further enhanced by the recent collective sales of nearby sites at bullish prices- Amber Park, for instance, was sold to a CDL subsidiary at a land cost of $1515 psf ppr whilst Parkway Mansion was sold to a Sustained Land consortium for $1536 psf ppr. Both the latter projects figure to have breakeven costs of above $2000 psf and projected selling prices upwards of $2300 psf. By contrast, the weighed average transacted price for the 73 units of Amber Skye sold so far is a much more affordable $1887 psf.

​Despite being situated closer to the future Tanjong Katong MRT station, Amber Skye is currently selling its units at a discount to even the projected breakeven cost of future developments that might be built on recent collective sales sites of Parkway Mansion and Amber Park. 
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We think this bodes well for future sales at Amber Skye and reiterate our belief that the project should be on track to sell the majority of its units by mid-2018, when the near $20 million loan OKP had extended to the project company is due for repayment. Consequently, subject to any additional cost to be incurred arising from the delay of the Tampines viaduct project, we expect OKP’s net cash position during the year to improve to at least 30 cts per share, representing more than 85% of its last traded price of 35 cts.
 
Closing Note
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So what can investors look forward to for the rest of 2018? The outlook for equities appears to be largely positive, at least according to multiple global banks and investment powerhouses. Our views are somewhat less sanguine. While we do not profess to have the ability to predict where the markets will end up when 2019 comes around, our personal observation is that bargains are harder to come by now than on average in the last 3 years as a result of an across-the-board increase in valuations. Consequently, we anticipate taking on less new positions in 2018 as well as moderate our expectations on returns from these positions.  

NB 1: We have not included any updates on HG Metal and Yongnam as there has not been any notable development at either company since our last report on them in September.
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NB 2: The above views are our own and are not meant to be construed as an offer, or solicitation of an offer to sell or buy securities referred herein. Please refer to the section “Important Notice” at the bottom of our homepage for additional information and disclosures.