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Stock Investment Research with an Asian focus

2017 in review- Outperformance continues in years 2 and 3

4/1/2018

 
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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:
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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:  
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(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: 
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(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.
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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.
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​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. 

[1] STI ETF pays actual dividends which approximate the dividend yield on the STI Index and has since inception tracked closely to the benchmark index. Refer to this link for more information: http://www.spdrs.com.sg/etf/fund/ref_doc/Fact_Sheet_STTF.pdf
[2] First year penalty for extension of Qualifying Certificate is 8% of land purchase price. This goes up to 16% and 24% respectively in years 2 and 3.
[3] As indicated by Senior Minister of State for Transport, Mr Lam Pin Min, and reported in the Straits Times on 1 Aug 2017

OKP Holdings Ltd- Is the latest Tampines accident sounding of the death knell or a buying opportunity in disguise?

18/7/2017

 
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SGX listed OKP Holdings Ltd (OKP) suffered a major setback last Friday when a worksite accident took the life of a worker and injured 10 others. The project in question was awarded by the Land Transport Authority of Singapore (LTA) in November 2015 for the designing (undertaken by its project partner CPG Consultants) and building of a viaduct from the Pan Island Expressway to Upper Changi Road East. Scheduled to be completed by November 2019, it was also the largest LTA contract the Company has won in recent years. This follows another fatal accident on one of its sites two years earlier when a worker was killed, resulting in the company being fined $250,000.

While the unfortunate accident is bound to trigger thorough investigations by the authorities with the definitive conclusion yet unknown, OKP being the main contractor is unlikely to escape culpability.

The stock market has likewise responded by pushing OKP’s share price down from 43 cts to 39.5 cts before trading was halted early last Friday and further to 37 cts on Monday, after the halt was lifted over the weekend. Over the last two trading sessions, OKP has lost 14% or S$18.5 million of its market capitalisation.

The extent of public backlash is understandable given that a precious life was lost in addition to multiple other casualties suffered. However, is the Company’s safety record really as atrocious as it is currently construed?  And is it all gloom and doom for OKP as its share price plunge suggests or can the company get its act together and emerge from the challenges it faces?   

OKP- A public infrastructure specialist with a proven track record and LTA as its major client

OKP is an established player in the local civil engineering sector, having participated in numerous infrastructure projects over the past 51 years since establishment[i]. While it has undertaken projects awarded by private sector companies such as ExxonMobil and Changi Airport Group, its bread and butter is firmly in public infrastructure works, especially road works. Naturally, LTA is one of its key clients.

According to its annual reports and SGX filings, OKP has won a total of 30 contracts worth $879 million from 2012 to 2017 year to date. Of these, LTA contributed 9, making up slightly more than half of the total value at $444 million. PUB is its next biggest client with 15 contracts worth $323 million.
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(Source: Company, Stockresearchasia)

In addition, poring over LTA’s data over the past 5 financial years[ii], we estimate that OKP has won roughly one out of every six major contracts it has tendered for. With an average of 7.8 bidders for each of these tenders that OKP participated in, this translates into a better than average success rate in tendering for LTA projects.
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(Classifications as per LTA annual reports. Source: LTA, Stockresearchasia)

Taken together, the above clearly illustrates LTA’s importance as a client to OKP. Hence, any setbacks such as the last which could potentially impede OKP’s ability to tender for future LTA projects is likely to adversely affect the Company’s prospects going forward. That said, we think It is important to look beyond the latest accident and examine OKP's longer term safety track record in order to get a better feel of the potential impact.
 
Safety track record in focus
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According to its website, the Ministry of Manpower (MOM) adopts a demerit points systems for the construction sector as a means of regulating workplace safety. Under the system, contractors will be issued demerit points according to the following categories of safety infringements:
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Punishments are meted out in the form of debarments from hiring foreign workers. Since most of the construction firms in Singapore are heavily reliant on foreign workers for their projects, such punishments severely handicap their ability to operate normally and serve as useful deterrents against worksite safety infringements.
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(Source: MOM)

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While the individual contractor’s historical demerit point record does not appear to be publicly available, MOM’s record of Stop Work Orders (SWOs) issued over the past 10 years provides a telling clue as apart from major accidents that lead to public prosecution, SWOs contribute the bulk of the demerit points. A careful analysis of OKP and its fellow SGX listed contractors’ SWO records thus provides a good indication of their safety track record.   
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(Source: MOM, Stockresearchasia. Full listing of SWO can be found on MOM's webpage)
 
From the table we compiled above, we note that:
  • The total number of SWOs issued on a yearly basis ranges from 79 to a surprisingly high 130, perhaps indicating that the construction industry as a whole still have some ways to go when it comes to taking adequate workplace safety measures.
  • Within the select group of listed contractors, Tiong Seng appears to be the most frequent offender, chalking up 55 demerit points alone from 9 SWOs received. Three others have 5 or more. Incidentally, Tiong Seng also has the dubious honour of topping the most current list of contractors with demerit points at 55.
  • At the other end of the spectrum, two companies have performed relatively well: Hock Lian Seng only had one partial SWO in the period under study and Sim Lian had gone 10 years since its 2 partial SWOs in 2007. Needless to say, other listed contractors that did not have a single SWO in the whole 10 year period performed better still.
  • Interestingly, OKP only received 2 partial SWOs in the 10 year period, the second of which was for the aforementioned fatal accident in Sep 2015. Prior to that, it had gone 8 years from Jun 2007 to Aug 2015 without getting an SWO.

Based on the criteria of the demerit points system and OKP’s track record, it is likely that the 25 demerit points it currently has is solely due to the September 2015 accident. Prior to the recent two fatal accidents, OKP’s track record in safety had been relatively good compared to other listed contractors as further evidenced by the multiple safety awards and certificates of recognition it has won since 2006, ironically mostly for its LTA projects. This could partially explain LTA’s willingness to continue awarding it contracts even as recently as 2016.

Nonetheless, we are of the view that worksite safety should be a paramount concern for all and if found culpable, OKP should deservingly be dealt the appropriate punishment. The Company clearly has to step up its efforts in this regard to restore the confidence of its government agency clients. The silver lining is that it has shown itself capable of doing so previously in the period of June 2007 to August 2015. 

Despite latest setback, OKP’s robust order book, stellar balance sheet strength and resilience should see it through

OKP currently has a strong order book of $326.6 million[iii] which translates to a book to bill ratio of close to 3x based on FY2016’s full year revenue of $111.1 million. This should ensure earnings visibility through to 2019 even though its near term margins are likely to be hit with possible delays to the Tampines project and potential associated liquidated damages.

The latest accident may also cast a temporary pall over OKP’s ability to successfully tender for future LTA projects. As each demerit point is valid for 18 months, the latest accident could bump its demerit point total to 50 or 75 depending on the final fatality count[iv] and timing of the point issuance. This could prevent OKP from hiring new foreign workers for up to 1 year but is not expected to keep it from renewing existing workers’ permits. OKP’s capacity to execute its current order book should therefore remain intact.

OKP has also proven in the past its ability to operate in tough environments such as during the 2009 GFC and 2003 SARs outbreak. Its bottom line has consistently been in the black ever since its listing in 2002. This is despite lumpy revenue recognition by nature of its project-based business and the cyclical construction industry.
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(Source: Company, Stockresearchasia)

In addition, OKP is sitting on a large net cash position of $83.3 million[v] (or $0.27 per share) representing a hefty 73% of its market capitalisation. It currently trades at an attractive dividend yield of 5.4%. Given its strong cash generating capability (>$20 million in operating cashflow in each of the last 2 financials years), its near to mid-term earnings visibility underpinned by a robust order book and large cash position, we expect the Company to at least maintain the dividend yield going forward.

Current valuations are undemanding compared to peers

At the last closing price of $0.37, OKP trades at an FY16 PE of 8.0x, below its peers’ average of 9.4x. However, on an ex-cash basis, this works out to be just 2.2x FY16 earnings, significantly lower than the next higher 3.9x Hock Lian Seng is trading at. Despite the current negative sentiments, we think OKP should trade at a minimum the same level as Hock Lian Seng, which would translate into a price of at least $0.45 per share, representing an upside of more than 21% from current levels. 
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Further upside might be in store as improving sales at Amber Skye could bump cash pile up another $20 million by mid-2018

Besides its core civil engineering business, OKP has in recent years ventured into property development. Its current exposure to this segment is limited to 10% stakes in each of two maiden development projects: Lake Life at Yuan Ching Road and Amber Skye in District 15.  

Lake Life, an executive condominium project, has been fully sold and recognised in OKP’s accounts as at 31 March 17. Amber Skye, though, is a different story. As a 109-unit luxury condominium developed together with 90% majority partner China Sonangol Land, it has performed poorly since launching in September 2014. In the 2.5 years from launch to end of 1Q2017, it sold a paltry 14 units at an average psf of $1802.
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However, on the back of better property sentiments, sales have accelerated in 2Q2017. During the months of April to June this year, the project managed to sell another 32 units at a much higher psf of $1917, according to caveats lodged with URA. Together with the lone sale in early July, the project has now sold 43% of its total available units. It may be early days yet but should the upward momentum be sustained, the project would be on track to sell the majority of its units by early 2018.
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(Source: URA, Stockresearchasia) 

With the estimated breakeven cost of the project at around $1550 to $1600 psf, Amber Skye is likely to contribute at most $2-4 million to OKP’s bottom line over the next 12 months. The bigger impact instead, will come from the repayment of $19.7 million in shareholder’s loan that OKP has extended to the project company. The loan is currently repayable in full by 26 June 2018 and had previously been written down by $1.4 million due to poor sales performance. If Amber Skye succeeds in selling the majority of its units by the repayment date, OKP should get back more than $20 million in cash (including its share of profits) giving its already strong cash position a major boost to around $0.335 per share even if we fully discount any additional cash to be generated from its operations.

Recommendation

Amidst the extensive media coverage on its latest mishap, OKP is likely to face increased scrutiny from its public sector clients, particularly LTA, in its current projects and future tenders. At the same time, its share price could also face short term downward pressure from the negative sentiments generated.

However, we think that its solid fundamentals buttressed by a robust order book, strong net cash position (which could potentially get even stronger by mid-2018) representing 73% of its market capitalisation, low valuations and attractive dividend yield should see it through the current challenges.

As for its mid to long term prospects, much will depend on the Company’s success in convincing these public sector clients of its efforts to improve its worksite safety. We believe that LTA and other government agencies will take OKP’s overall track record, including the 8-year run when the Company succeeded in avoiding any MOM-issued SWOs, into account in assessing its future tenders.
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Given the above, we think the selling is overdone and that the current depressed share price offers a good opportunity for value investors to accumulate OKP shares with a potential upside of at least 21%. Further upside over the next 12 months might be in store should its 10% owned Amber Skye project continue its strong sales momentum. We are opportunistic buyers at this price.

[i] Or Kim Peow Contractor was first established as a sole-proprietorship in 1966 before Or Kim Peow Contractors (Pte) Ltd was incorporated as an exempt private company to take over the sole proprietorship’s business.
[ii] From 1 Apr 11 to 31 Mar 16 based on LTA’s financial year ending 31 Mar.
[iii] As per announcement on 20 Jun 2016
[iv] It has been reported in the media that 2 of the 10 injured workers are still in critical condition at time of writing
[v] After adjusting for dividends of 1.5 cts per share paid in May
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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.