• Home
  • Investor Education
    • Essential Tips for Stock Investors
    • Using Passive Investing to Beat the Market
    • Recommended Investment Books
    • Key Things to note in Rights Issues
    • Understanding Reverse Takeovers
    • Stock Split vs Bonus Issue
  • Latest Recommendations
    • Abric Berhad
    • Kejuruteraan Samudra Timur
    • Chuan Hup Holdings
    • Falcon Energy Group
    • Memstar Technology
    • Pacific Century Regional Developments
    • Singapore Healthcare Stocks
    • Macquarie Int Infrastructure Fund
    • IPC Corporation
    • Tiger Airways
    • TSH Corporation
    • Bukit Sembawang Estates
    • HG Metal Manufacturing
    • OKP Holdings
    • Global Investments Ltd
    • Baker Technology Ltd
    • Yongnam Holdings
    • Hupsteel
    • TIH
    • Sysma Holdings
    • Sembcorp Industries
Stock Investment Research with an Asian focus

2015- Our encouraging first year scorecard

25/1/2016

 
Picture
It has been a little more than a year since we set up stockresearchasia.com in early 2015 to provide Asia based investors with proprietary stock research. While we did not envision it at the beginning, 2015 has turned out on hindsight to be a tricky year for investors to navigate in Asian equity markets. And 2016, for now at least, has proven to be far worse. Many Asian markets have plunged in tandem with the global markets to levels last seen in 2012 or earlier, led by China and exacerbated by an oil price collapse. It is hard to predict when the malaise would end except it inevitably will. As Herb Stein famously remarked and we agree, “If something cannot go on forever, it will stop.” In the meantime, we should see the market throw up good buying opportunities, ones that we hopefully can continue to exploit to our advantage.

It is against this backdrop that we are proud to say that our calls in the last year or so have mostly been spot on.  To recap, we have made outright recommendations on six stocks, five listed on SGX (Memstar, Chuan Hup, PCRD, MILF, IPC) and one on Bursa (Abric). We have also, when deemed fit, made a few situational analyses (Falcon Energy, Kejuruteraan Samudra Timur, Tiger Airways), giving investors some insights into ongoing corporate actions or potential strategic options from a corporate finance perspective.

Performance of our picks

Overall, our recommendations have outperformed the benchmark indices on an absolute basis by an average of 23% as at 31 December 2015. The outperformance would have been more pronounced if annualised but we see the computation of such data misleading and academic in nature at best. The 5 buy recommendations generated an average total return (including dividends) of 13.9%. This includes the short term arbitrage of MIIF where profits were locked in after just 2 weeks. Excluding MIIF, the buy recommendations generated average returns of 16.5%. Memstar, our lone sell recommendation, was down 55.0% as at end 2015 before getting suspended for being unable to complete its reverse takeover of Longmen Group, the transaction risk of which we have flagged out multiple times over the course of the year. 

A summary of our performance is presented below accompanied by key updates on selected companies that we have covered:
Stockresearchasia's recommendations have performed well vs benchmarks
Figure 1. Our recommendations have outperformed benchmark indices by a significant margin

Abric Berhad- cash realised from impending delisting

Following a year during which Abric has failed to find a suitable acquisition opportunity for it to extend its Bursa listing, the company has announced on 18 January 2016 that it will be going ahead with a delisting exercise. In conjunction with the delisting exercise, the company has announced a cash distribution of RM0.43 per share (vs last traded price of RM 0.48), which we estimate is roughly equal to its cash holdings less all liabilities as at September 2015 on a fully diluted basis. This does not include the approximately RM0.07 cash it was due to receive 12 months after the completion of disposal in December 2014 (i.e. December 2015).

As Abric has already announced its decision to dispose of its remaining assets and voluntarily wind-up, shareholders are expected to be entitled to a further cash distribution post delisting. We think that shareholders should also be able to realise an eventual amount close to the Company’s NAV of RM0.64 per share. With a finely balanced shareholding structure (controlling Ong family owns 35%, super minority Pui Cheng Wui 23% and others 42%, fully diluted assuming full conversion of warrants), minority shareholders can also take heart that their interests should be fairly taken care of post delisting. 

Memstar Technology- RTO woes not over

Memstar’s troubles in trying to complete the acquisition of Longmen Group continues unabated. In our previous report, we questioned Memstar’s over optimistic valuation of the target, then valued at US$420 million. Following the umpteenth supplemental agreement, the acquisition price has been revised downwards first to US$323 million in July, then to US$200 million in December, translating into an eye-popping 52.4% in reduction in value in less than a year! This is accompanied by a loosening in the conditions precedent of the acquisition particularly those pertaining to the Target group’s fund raising obligations. However, given the difficult current market conditions, we are still not optimistic that the conditions can be met even with the significantly lowered bar. And to add to shareholders’ woes, Memstar has suspended trading of its shares yet again on 6 January 2016. 

The only silver lining in all these is in SGX’s decision to grant the Memstar additional time (until end May 2016) to complete the acquisition. We can only hope that Memstar shareholders have taken heed of our multiple warnings and disposed of their holdings in time.

Chuan Hup Holdings- hit mainly by FX losses

When we first recommended Chuan Hup, it was on the back of its extremely robust balance sheet, under-appreciated assets and the possibility of a bumper dividend arising from its disposal of CHO shares to Falcon Energy. While Chuan Hup’s financial strength and asset backing have remained largely unchanged, we were disappointed in the board’s decision not to reward its shareholders with a bigger payout. It did announce and pay a total dividend of 3 cts though for its financial year ending 30 June 2015, representing a yield of almost 10% of the prevailing price when our report was first posted.

Results wise, Chuan Hup continues to be hit by the effects of a strengthening US dollar against both SGD and AUD even if its units’ underlying businesses have not deteriorated as much. PCI, its SGX listed electronics manufacturing arm, for example, recorded a 62% plunge in its latest 1Q16 profit after tax from US$1.6 million to US$0.6 million, largely due to a US$1.5 million foreign exchange loss (vs +US$0.1mil the year before). Strip that out and adjusting for mark-to-market profits/losses and the core profit would have remained almost the same as the 1Q15’s. Similarly, a US$6.1 million hit from foreign exchange losses was the main culprit for Chuan Hup reporting a loss of US$3.9 million for 1Q16 vs a profit of US$3.0 million in 1Q15.

For its joint venture property development projects in Australia, the results have been mixed. Toccata, which has been completed is almost fully sold. We estimate that only 10-15% of the sales have yet to be recognised. Meanwhile, Concerto, the largest of the 3 projects by development value, has sold an additional 50 units over the past 11 months to achieve 68% in total sales. With completion due only in 2017, we believe there is still enough time for the JV to ramp up sales to 80-85% or more, similar to what Toccata achieved at its completion. Sales in Unison on Tenth, however, has made little progress in the last few months in particular and 48% of its units remain unsold despite the fast approaching completion deadline. That said, as we have stressed in our previous report, we do not expect any negative cashflow impact from these projects as Chuan Hup’s main obligations in these is in injecting the land while Finbar contributed the working capital. 
Picture
Figure 2. Sales performance of Chuan Hup’s JV development projects have been mixed

As at the latest balance sheet date of 30 September 2015, we estimate that Chuan Hup still holds, after accounting for dividends paid after, adjusted net cash and short term securities worth S$0.194 per share or almost 73% of its last traded price of S$0.265, which should provide a strong buffer against the current market volatilities. 

Pacific Century Regional Development- delisting imminent if share buybacks continue

Since our report highlighting PCRD’s aggressive share buybacks and suggesting that this may be a prelude to majority shareholder Richard Li potentially privatising the company, PCRD has not shown any intent to restrain its share buyback activities. In the past 9 months, the company has acquired a further 89.1 million shares, shrinking the public float to a precariously low 10.2%. We estimate that the company can only acquire and cancel a further 5.1 million shares before its trading has to be halted pending a delisting decision to be made.
PCRD's share buybacks have boosted Richard Li's stake and shrunk public float
Figure 3. Aggressive share buyback from PCRD has shrunk public float precariously close to 10% threshold

To recap a point made in our update report on 5 May 2015:

“Under the current regulatory regime, there are a few ways that PCRD's privatisation could take place: through a general offer, a scheme of arrangement, a voluntary delisting or a forced delisting by SGX due to low free float (<10%) coupled with an exit offer. Based on current circumstances, we see the last two as the most likely options. Both would require a reasonable exit offer to be tabled and the appointment of an independent financial adviser ("IFA") to opine on the fairness of the offer as stipulated in the SGX listing rules. We note that IFAs tend to benchmark fair value of a company's shares to the market prices of its underlying assets where such values are available as in the case of PCRD. As such, we do not expect any exit offer, if it materialises, to deviate greatly from the fair value computed using this methodology in order to obtain a positive recommendation from the IFA.”
Share prices of PCCW and HKT  have held up well vs Hang Seng Index
Figure 4. PCRD’s key underlying assets, HKT and PCCW, are up 6.9% and 3.5% respectively in the last 3 months and has held up well vs HSI, which declined 17% over the same period.

As at 22 January 2016, PCRD’s stakes in PCCW and HKT, both of which shares have held up well despite the recent market turmoil, is worth a total of S$0.61 per share. While it remains to be seen if the “reasonable” offer by Richard Li comes close to matching the market value of PCRD’s underlying assets in the event the mandatory delisting and exit offer is triggered, we believe that that any IFA appointed will use this as a benchmark to base its recommendation on. Richard Li would thus find it hard to justify offering an amount that is significantly less. With the shares trading at $0.37 as at 22 January 2016, we believe PCRD still has significant upside. 

Closing note

While our first year scorecard has certainly been encouraging, our focus is solely on longer term returns. In that regard, we do not expect our picks to be able to outperform the markets by such wide margins year in year out. However, we are confident that with a relentless focus on value and our core competencies, we would be able to generate a positive return on our picks relative to the market over the long run. 

IPC Corporation Ltd (Update)- Nice positive surprise with bigger than expected cash distribution of S$1.600 per share

18/12/2015

 
In our report posted on 30 November 2015, we highlighted that IPC, pending completion of the sale of its seven business hotels in Japan and proposed capital reduction, remains grossly undervalued at S$1.750 per share. We also conservatively estimated after taking into account the net proceeds of the Divestment and repayment of all yen denominated borrowings tied to these properties, that the Company would have up to S$0.957 per share for distribution to its shareholders.  

Company distributing more than the net proceeds from the Divestment

On 17 December 2015, however, the Company announced the successful completion of the Divestment along with a much higher than expected cash distribution of S$1.600 per share! This is a pleasant surprise to us as we have assumed that the Company would only distribute proceeds from the Divestment and retain the remainder of its cash hoard for future reinvestment purposes. The market meanwhile has reacted positively to the surprise move, with the share price spiking up almost 10% to S$2.07 before closing at S$2.03 on the same day.

Picture
Figure 1: IPC share price has appreciated 16% since our initial report published on 30 November 2015

Recommendation

While we think that IPC can easily afford the cash distribution S$1.600 per share, given its extremely robust net cash position of S$1.633 per share post Divestment in addition to S$0.136 per share worth of listed bond funds, we see the latest corporate move as possibly heralding the Company’s exit from the real estate business altogether. To recap, the value of IPC's remaining assets lies largely in a major mixed development (Xu Ri Wan Huan Yuan) in China. From a strategic perspective, IPC thus has the option to remain as a single asset play, which we think is unlikely. Alternatively, it could either continue its expansion in China and other markets (note that it has more or less exited from both the Japan and US markets) or exit completely. The move to distribute substantially all its excess cash seems to suggest the latter.  

Should the Company go down this path, we posit that there could be further divestment and cash distribution exercises in the future. The gradual monetisation of its assets could well see the share price of the company approach its estimated NTA value of S$2.813 or more.  At the last traded price of S$2.030, IPC remains pretty much undervalued.  

IPC Corporation Ltd: Oei Hong Leong’s undervalued asset play

30/11/2015

 
IPC logo
Picture
The recent decision by SGX mainboard listed IPC Corporation Ltd to dispose of its remaining Japanese hotel assets (the “Divestment”) warrants a closer look at the stock by value oriented investors. Although its share price has risen by 26% since the announcement was released, it still remains grossly undervalued.

Assuming the successful completion of the Divestment, we estimate that the company will have a balance sheet stuffed with net cash and fairly liquid bond fund holdings amounting to S$1.769 per share, which by itself is already more than the last traded price of S$1.750 per share. Even if we further assume very conservatively that the remainder of its assets consisting mainly unsold Chinese property developments are written down by as much as 40% in value, the shares would still be worth S$2.311 per share or 32% above its last traded price.

As the company had already announced that it will pay out the net proceeds of the Divestment by means of a capital reduction, we think that its shareholders could stand to reap a cash bonanza of S$0.957 cents a share, which should provide further near term boost to its shares. We think that IPC offers compelling value at this price.   

Background

IPC Corporation Ltd (“IPC”) is a property and hospitality group controlled by Singapore based billionaire Oei Hong Leong, son of Indonesian tycoon Eka Tjipta Widjaja of the Sinar Mas group.

On 6 November 2015, IPC announced that it had entered into a sale and purchase agreement with Tokyo-listed Ichigo Group Holdings Co., Ltd (“Ichigo”), for the sale by the Company of its collection of seven business hotels in Japan for a total sale consideration of JPY 14.9 billion or approximately S$172.2 million. Ichigo, which recently upgraded its listing to the First Section of Tokyo Stock Exchange, is a diversified real estate group with a market capitalisation of approximately S$1.9 billion.
Two of IPC owned Japanese business hotels
Figure 1: Two of the seven business hotels due to be sold to Ichigo Group

The seven hotels are located throughout Japan in the following cities: Tokyo (2), Okayama, Matsuyama, Kumamoto, Naha and Osaka, and carried on the company’s books at JPY10.4 billion (S$119.4 million). IPC is expected to generate a net gain of JPY2.7 billion (S$31.1 million). This translates into net proceeds of JPY13.1 billion (S$150.5 million). While the Company did not explain the significant difference between the gross and net proceeds, our guess is that a large part of it could be attributed to Japan’s capital gains tax which could cost well over 30% for assets held for less than 5 years. 

Completion of the transaction is expected to take place on 17 December 2015. The Divestment follows the sale of its two Sapporo hotels, incidentally also to Ichigo, for S$29.6 million in December 2014 and heralds IPC’s exit from Japanese hospitality assets, representing a turnaround from the Company’s stated aim of expanding its Japan hotel portfolio in its FY2013 annual report.

Our Views

This latest corporate action did not come as a surprise. Afterall, IPC had been mulling the sale since at least as early as March 2015 when it announced that it was in negotiations for the proposed disposal for a then total consideration of S$150 million. The Company subsequently announced in June 2015 that it will not proceed with the sale under those terms. With the latest agreed consideration at a significant premium to both the previous consideration as well as the market valuation of S$119.4 million, we believe this represents a good opportunity for IPC to cash in on the assets it had amassed between June 2010 and October 2013 at a healthy profit.

Equally motivated buyer should ensure successful deal completion

On the other hand, Ichigo may appear to be getting the short end of the stick having to fork out an additional JPY4.5 billion (S$52.8 million) over market valuation for the acquisition. However, we note that Ichigo had in October established a new hotel J-Reit, Ichigo Hotel REIT, scheduled to be listed on TSE on 30 November 2015. Ichigo Hotel REIT’s initial portfolio consist primarily of 9 hotels that Ichigo sold to the REIT, includng the two Sapporo hotels which it had earlier acquired from IPC. We further note that these two hotels were sold at a combined valuation of JPY3.6 billion, a significant premium over the JPY2.7 billion it paid IPC just 10 month prior. Similarly, we expect Ichigo to inject the seven hotels into Ichigo Hotel REIT in due course at favourable valuations. At a total consideration of JPY 14.9 billion, the seven hotels would also provide a significant boost to Ichigo Hotel REIT’s portfolio, currently worth about JPY 20.4 billion. It is thus also very much in Ichigo’s interest to see the transaction through. 

Our belief that both parties are motivated to complete the sale is further reinforced by the presence of a significant JPY 0.5 billion (S$5.8 million) break fee for the transaction, which should serve as a sufficient deterrent against potential deal default by either side.

Balance sheet to strengthen considerably post completion, shares are currently undervalued

IPC has typically maintained a strong under-geared balance sheet. Its net debt to equity over the last 10 quarters has not been more than 25%, with the latest figure at 5.3% as at 30 September 2015. 
IPC cash and net gearing chart
Figure 2: IPC has consistently held high levels of cash coupled with a low net gearing on its balance sheet (Source: company, stockresearchasia)

  Post completion, we expect its balance sheet to strengthen even further to a net cash position of S$139 million or S$1.633 per share. In addition, IPC also holds S$20.3 million of financial assets consisting mainly listed bond funds and unlisted debt investments in a China property company. We estimate that the listed bond funds, which should be fairly liquid, amount to about S$11.5 million or S$0.136 per share, giving the company S$1.769 per share of value in net cash and listed bond funds alone.

The remainder of IPC’s assets consist largely of:
  • Xu Ri Wan Huan Yuan (completed in 2014 and comprising hotel, kindergarten, club house and car park) 
  • Minority investments in three property investment in China, including Aenon International Plaza and Ju Ren Da Sha.
  • Unsold Oiso Condominium Units in Japan

Amongst the above assets, Xu Ri Wan Huan Yuan is by far the most sizeable with a net book value of S$77.4 million[i]. As little information on the status of this property has been disclosed, we conservatively assume that it is currently 100% unsold and illiquid. 

All in, the other assets held by IPC amounted to S$107.0 million or S$1.254 per share, giving the company an adjusted NAV post DIvestment of S$2.81 per share.

However, in order to satisfy ourselves with a conservatively derived value for IPC, we decided to apply a stress test[ii] to the value of these other assets which we deem to be largely illiquid by applying various discounts of between 20% to 40%. The results show that even at a maximum discount of 40% which should provide us with a healthy margin of safety, IPC would still be worth about S$2.311 per share.
Picture
Figure 3: IPC’s intrinsic value is still significantly above the last traded price even if its other property assets were heavily discounted

IPC shareholders to be rewarded with cash bonanza estimated at S$0.96 per share

Aside from trading at a steep discount to its intrinsic value, we also expect IPC’s share price to be given a near term boost once the Divestment is completed as expected by 17 December 2015. This is largely due to the fact that the Company had already announced its intention to distribute the net proceeds to its shareholders via a capital reduction exercise. With the net proceeds at approximately S$150.5 million, we estimate conservatively that upon repayment of its borrowings related to the seven hotels, IPC will have S$81.6 million available for distribution to shareholders. This is equivalent to S$0.957 per share representing a sizeable 55% of the last traded price of S$1.750.

Bullish purchases by Oei Hong Leong further reinforces our views that the shares are undervalued  
Oei Hong Leong
Figure 4: Oei Hong Leong, IPC’s controlling shareholder, made bullish purchases this year (Source: Forbes)

  On 1 April 2015, Oei Hong Leong, the controlling shareholder of IPC and one of the most watched investors in the Singapore stock market, acquired 6,319,200 shares (pre-consolidated basis, equal to 631,920 shares after the 10 to 1 consolidation on 9 June 2015), thereby triggering the mandatory conditional takeover offer of IPC at S$0.17 per share (equivalent to S$1.70 post consolidation). The mandatory offer is triggered when a shareholder first takes his shareholding across the 30% mark in a SGX-listed company. The offer ultimately did not succeed and Oei’s stake remained at 30.56%.

On 3 August 2015, Oei further acquired 850,000 post-consolidation shares albeit at a lower average price of S$1.53 per share, thus bringing his holdings to 31.56%. We note that this is the maximum amount that Oei can acquire within any six month period without triggering another takeover offer. The bullish purchases by Oei further reinforces our view that the shares are undervalued.

Recommendations

We believe IPC to be grossly undervalued. At the latest closing price of S$1.750 per share as at 27 November 2015, it is trading at below the value of its net cash plus listed bond holdings of approximately S$1.769 per share assuming the successful completion of the Divestment. Even if we were apply a very conservative 40% discount to the book value of all its other assets, the shares would still be worth at least S$2.311 per share or 32% above the current share price.  

With the Company announcing that it will distribute the net proceeds from the Divestment to its shareholders in the form of a capital reduction estimated to be as much as S$0.957 per share, we think that the share price could also be due for a near term boost. Still further upside could come from positive developments from its China properties.

With a healthy margin of safety, we see compelling value in IPC at S$1.750 and are definitely buyers at this price.

Key Risks

Non completion of the Divestment or lower than expected distribution from the Divestment could have short term adverse impact on the share price.

[i] As at 31 December 2014, company does not provide breakdowns in its quarterly filings.
[ii] We note that in the offeree circular sent to its shareholders on 30 April 2015, the Independent Adviser had indicated a valuation surplus arising from latest open market value of Xu Ri Wan Hua Yuan of S$96.6 million. Our conservative valuation has not taken into account any potential valuation surplus that this property may generate as it is currently unsold.  

[iii] Exchange rate used S$1 = JPY86.75
    Like our Facebook page for the latest updates:
    Follow @StockResearchA
    RSS Feed Widget

    Author

    StockResearchAsia Team

    Archives

    June 2020
    November 2019
    July 2019
    June 2019
    March 2019
    January 2019
    September 2018
    June 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    September 2017
    July 2017
    June 2017
    February 2017
    September 2016
    May 2016
    March 2016
    January 2016
    December 2015
    November 2015
    September 2015
    August 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015

    Categories

    All
    Abric Berhad
    Asia Enterprises Holding Ltd
    Bukit Sembawang Estates Ltd
    Bursa
    Ch Offshore Ltd
    Chuan Hup Holdings Ltd
    Corporate Action
    E2-Capital Holdings Ltd
    Falcon Energy Group Ltd
    Finbar Group Limited
    Healthcare Sector
    Health Management International Ltd
    HG Metal Manufacturing Ltd
    Hkt
    Hupsteel Ltd
    Ipc Corporation Ltd
    Ipos
    Irving Kahn
    Jaya Holdings Ltd
    Kejuruteraan Samudra Timur Berhad
    Keppel Corporation
    Macquarie International Infrastructure Fund
    Memstar Technology Ltd
    OKP Holdings Ltd
    Pacific Century Regional Developments Ltd
    Pccw Ltd
    Pci Ltd
    Pcpd Ltd
    Privatisation
    Raffles Medical Group Ltd
    Rtos
    Scomi Energy Berhad
    Sembcorp Industries
    Sembcorp Marine
    Sgx
    Singapore Airlines Ltd
    Singapore O&G Ltd
    Special Situations
    Sysma Holdings
    Takeover Offer
    Talkmed Group Ltd
    Tiger Airways Holdings Ltd
    TIH Ltd
    Tsh Corporation Ltd
    Value Investor
    Year End Review
    Yongnam Holdings Ltd

    RSS Feed

IMPORTANT NOTICE
We put money where our mouth is. As such, we do take positions in the securities mentioned on this website or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. The research materials provided on this site is for information only. Investors should seek the assistance of a qualified and licensed financial advisor in making their investment decisions. The research reports/notes are compiled based on information, which we believe to be reliable. Any opinions expressed reflect our judgment at as at the date of the reports or notes and are subject to change without notice. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive or access this research material. Our recommendations are not to be construed as an offer, or solicitation of an offer to sell or buy securities referred herein. The use of this material does not absolve you of your responsibility for your own investment decisions. We accept no liability for any direct or indirect loss arising from the use of this research material. This research material may not be reproduced, distributed or published for any purpose by anyone without our specific prior consent.