On Friday, Hupsteel’s controlling Lim family announced an offer to take the company private after more than 25 years as a public listed company. The $1.20 per share offer is conditional upon the offeror holding at least 90% of the shares as at the close of the offer. (Announcement here)

The Lim family currently controls 54.16% of Hupsteel shares. This means that it needs to receive acceptances or acquire another 35.84% for the offer to go unconditional. Incidentally, Buttermere Capital, which recently emerged as a substantial shareholder with a 6% stake acquired seemingly at an average price of below 80 cts, becomes a key player to watch here.

The offer price exceeds the highest price traded over the past 6 years and implies a discount of 10.7% to Hupsteel’s NAV as at 31 Mar 19. If we take into account the latest valuation of the company’s portfolio of freehold properties, the discount to RNAV would have been a less compelling 29.1%. Taken together, this means that even if the offer does not fairly reflect the true value of the company, it does provide existing shareholders an excellent opportunity to exit their investments at a price last hit when crude oil prices were still at hovering around US$100 per barrel.

We first zoomed in on Hupsteel 2 years ago as a potential beneficiary of increased attention on then undervalued fellow steel stockist, HG Metal. We then followed that up with a strong recommendation report on the stock on 22 Nov 17 as an intriguing deep value play when the share price was at 89.5 cts, arguing that it provided better value at that time than HG Metal. At $1.20 per share and including the 4 cts dividends paid since then, the offer price would represent a total return of 38% over the 19-month period. While that does not exactly qualify as a home run, the returns are nonetheless satisfying especially when a similar investment into the benchmark STI ETF would have produced next to nothing (1%) over the same period.

More importantly, for the 3rd time in the last 4 months, after PCRD and Chuan Hup both announced big one time cash payouts, the value based investing approach that we have religiously honed over past decade and a half has once again been validated. Maybe value investing isn’t dead after all.

Related: http://stockresearchasia.com/latest-recommendations/hupsteel-ltd-discount-to-deep-value-looks-set-to-narrow

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.  

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)

​
​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.
​
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
​
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.
​
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
​
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.
​
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.   

​Previously in June, we cited the possibility of a renewed interest in steel stockists like Hupsteel and Asia Enterprises following the intriguing developments at HG Metal. While Hupsteel’s share price has returned 12% since then (14% if dividends are included), it is still trading at a substantial 28% discount to just the sum of its net cash, available for sale financial assets and investment properties alone and an even more attractive 48% discount to its revalued NTA of $1.71 per share. Furthermore, recent signs that the Company’s management is turning its attention towards maximising the returns of its investment properties has us increasingly positive that this big discount it is trading at will narrow considerably in the near to mid future. We are buyers at the last traded price of $0.895.
 
Valuable investment properties portfolio- more action in store with new sole CEO at helm?
 
To recap, Hupsteel owns, under its property division, a relatively sizeable portfolio of freehold commercial and industrial investment properties that it had held substantially unchanged from the time of its IPO in 1994. On 29 Jun this year, however, the Company announced that it had sold one of its two long-held Jalan Besar shophouses at a price of S$5.2 million, booking a handsome profit of $4.5 million in the process.
 
This came as a surprise as prior to this sale, the only significant activity Hupsteel undertook with respect to its investment properties in the last 23 years had been the redevelopment of 6 Kim Chuan Drive into a 7-storey industrial building in 2015. 

Hupsteel’s remaining investment properties
 
Although the sale generated little fanfare, we posit that it could mark the beginning of a series of developments signifying the Company’s intentions to maximise returns from its investment properties. Our views are reinforced by telling disclosures in the latest annual report and comments made by the management during last month’s AGM.
 
Besides promising that “more action will be taken on its remaining properties in anticipation of a recovery in market conditions” in its latest annual report when reporting the sale of the said Jalan Besar shophouse, the management also presented some updates at the AGM with respect to the rest of the portfolio, namely:

• The Company is in advanced talks to lease out the majority of 6 Kim Chuan Drive, the largest property in its portfolio, to a single MNC client;
• Rising en bloc activities especially in the nearby Jalan Besar Plaza[1] could stir increased interest in their office units in Hoa Nam Building which is similarly zoned as a mixed development and that may in turn lead to opportunities for the Company to cash in; and
• The Company may consider plans to redevelop its aging 7-storey industrial building at 38 Genting Lane to optimise its potential

 
We think it is no coincidence that the above developments are taking place less than a year after Mr Lim Bor Chuan, the 3rd generation member of the controlling Lim family, took over as sole CEO of the Company, a role previously shared with his uncle Lim Kim Thor. After all, the younger Lim has a degree in Estate Management and has been in charge of managing the Company’s real estate portfolio since IPO. With him at the helm, we are optimistic that Hupsteel will be more proactive in managing the portfolio, which should be music to shareholders’ ears.
 
Given that the remaining investment properties have a total market value of $75.2 million[2], any attempts to maximise the potential of this portfolio could go a long way towards closing the gap between its share price and revalued NTA.

Core business turning a corner
 
The positive developments with respect to Hupsteel’s property division also comes at a time when its core business seems to be finally stabilising after a multi-year decline.
 
Hupsteel’s core business is in the supply of steel products and industrial hardware to industries such as the oil and gas, chemical and petrochemical, energy, infrastructure, marine, etc., with the majority of its revenue derived from Singapore. Perhaps unsurprisingly, it was badly affected by the downturn in the marine and oil and gas sectors in the last few years. In fact, between FY2012 and FY2016, Hupsteel’s revenue collapsed almost 80% while its profit after tax swung from a positive $7.2 million in FY2012 to a loss of $19.1 million in FY2016, mainly due to write-downs in both its inventory and receivables. 

By FY2017, however, its core business appears to have finally stabilised and that momentum continued into 1Q2018 when it announced its fourth consecutive quarter of profits[3]. 
 
A large part of this recovery should be credited to the Company’s efforts to better manage its inventory “by making small regular purchases to avoid being saddled with the burden of holding large quantities of slow moving inventory and making sure that commonly required sizes were readily available to meet customers’ needs”[4].
 
In addition, the Company also revealed that it is actively seeking collaboration opportunities with some of its customers to work together on tendering for projects in a bid to broaden its revenue stream. If successful, we reckon this could lead to an increase in both revenue and profit margins. Nevertheless, regardless of whether it succeeds in its new approach, we think the worst is likely over for its core business. 
 
Strong net cash balance can support increased share buyback and dividends
 
On the back of the welcome stabilization of its core business and a strong balance sheet with net cash balance of $61.5 million[5] as at 30 Sep 17, Hupsteel has also been stepping up both its share buyback and dividend payout. For FY2017, it paid a dividend of 2 cts per share, giving it a dividend yield of 2.2%. This is an increase from the 1 ct and 0.5 ct declared in FY2016 and FY2015 respectively, although it is still a far cry from the 5 cts per share it paid in the years prior to FY2015.
 
Meanwhile, it has resumed its share buyback activities in FY2017, after a break of 2 years. Although the amount of cash it typically spends on buybacks is still insignificant (<$1 million per year), it nonetheless signifies the management’s confidence in the Company’s outlook especially when taken together with the increased dividend payout.

​Going forward, we think there is scope for the Company to increase its dividend payout even further for FY2018, possibly  funded by the proceeds from the disposal of its Jalan Besar shophouse. 
 
Recommendation
 
We expect further actions by Hupsteel in the coming year to drive increased returns from its valuable investment properties. These could include:

• Sale of the smaller properties within its portfolio such as its remaining shophouse at 365/365A Jalan Besar and the office units in Hoa Nam Building
• Entry into a lease agreement for substantially the entire 6 Kim Chuan Drive building. The lease agreement would also likely enhance the attractiveness of the building as an investment and consequently, we also would not rule out its sale if the right offer comes along.

 
That said, we see the redevelopment of 38 Genting Lane as less probable in the near future as the management is likely to be extra cautious in pulling the trigger having already experienced an uncomfortably long 2-year (and counting) wait to rent out or dispose of the redeveloped Kim Chuan Drive property.
 
With the worst of the downturn facing its core steel trading business likely over, any actions taken by the management to enhance returns from its investment properties should have a positive effect on its share price. Consequently, we expect to see the large discount it trades at to its revalued NTA to narrow significantly.
 
As it is, even if we were to value the Company conservatively based on the sum of its net cash, available for sale financial assets (which consists primarily of listed securities) and investment properties alone and discount its core business entirely, we would still arrive at a value of $1.24 per share, implying a 39% upside from its last traded price of $0.895.
 
Following HG Metal’s 30% run-up over the last 5 months, we are also of the opinion that Hupsteel now offers better value as well as more share price catalysts than HG Metal. We are buyers at this price.
 
Key Risks
 
Another prolonged decline in oil price could lead to an extended downturn for its core steel trading business. However, we think the Company has learned its lesson and would continue to exercise caution in managing its inventory to avoid future losses arising from write-offs.

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.

(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.

(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:

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.

(Source: MOM)

​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.   

(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.

(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. 

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.

(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.
​
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.

As one of the grand old dames among property developers in Singapore, Bukit Sembawang Estates Ltd’s (“BSE”) origins can be traced as far back as 1911 when it started as a rubber company. Ever since it changed its focus to property development, it has developed and sold more than 4,000 homes comprising largely of landed properties in the northern part of Singapore.

While a recent surge of interest has seen its share price rally 9% in 3 weeks, we think investors still do not fully appreciate how undervalued it truly is. With its legacy land bank carried at a historical cost determined more than 60 years ago, a best in class dividend yield of more than 6.7% and a net cash balance sheet that is the strongest it has been in at least 20 years, BSE is our top pick to ride out the current trough in the property cycle.

Just revaluing the legacy landbank at close to current market prices and without taking into account any future development profits should see the Company add another $2.29 per share to its NTA, giving it a base NTA of at least $7.21 per share, or 46% above its last closing price of $4.94. This is not even taking into account any potential gains from BSE’s recent moves to resolve its long running dispute over its land along Ang Mo Kio Ave 5 (Lot 12949A Mk 18) by surrendering its 999 year lease for a fresh 99-year one in order to convert it fully into residential land without restrictions or the bulk sale of its non-landed projects built on land acquired at attractively low prices.

Background

Long history as one of the largest land owners in Singapore backed by prominent shareholders

BSE, in its current form, started out as a developer to build and sell properties on large tracts of legacy rubber plantations owned by OCBC Bank’s founding Lee family. In the 1950s, BSE owned as much as 172 million sq ft (16 km2) of land. To put this in perspective, this is approximately 2.7% of Singapore’s total land area at that time [i].

Over the years, however, its landholdings have shrunk greatly, largely because of compulsory acquisitions by the Singapore government as well as BSE’s own development projects. By 1998, a year after BSE had another 1.7 million sq ft of land acquired by the government, they were left with just 5 million sq ft of legacy land. While still a massive landbank by all accounts, it was a far cry from their original landholdings. From then on, most of the depletion has been a result of their own development projects. The largely freehold/999-year leasehold legacy landbank today stands at 3.2 million sq ft, which excludes a couple of development phases currently in the works.

Legacy landbank carried at miniscule cost price

Although it is no secret that BSE’s legacy landbank is carried on its balance sheet at historical cost, there is little clarity among the investing public as to what this cost might be. Part of the problem lies in BSE’s lack of disclosure in its own results announcements and annual reports as it had stopped providing an annual breakdown of its development properties from 2004.

To get a better understanding of what this cost might be, we studied BSE’s annual report filings to as far back as 1995. Our findings indicate that:

1. BSE’s legacy land cost stated in its earlier annual reports were in fact based on its historical book value as at 1953. In 1995, its close to 7 million sq ft of land was carried at a mere cost of around $862,000, less than what it would normally cost for a 1,000 sq ft condominium today; and
2. Inclusive of development charges it had paid, we deduce that the carrying cost of the legacy landbank could be as low as $50 psf.
   

For comparison purposes, in 2011, a JV controlled by City Development won a government tender for a 99-year leasehold plot of land meant for landed housing development in Serangoon Garden Way -not too far from BSE’s own Seletar Hills land- for approximately $343 psf. We think the largely freehold/999-year leasehold legacy landbank should be valued conservatively at a minimum of $350 psf.

Excellent track record in land acquisitions

In addition to its legacy landbank, BSE has also proven to be very adept at timing the market in its land acquisitions. For instance, all its major land acquisitions in last 20 years have come in a 2-year period between the 3rd quarter of 2005 and 2nd quarter of 2007, when it shelled out more than $900 million to acquire 9 different non-landed development sites, majority of which are in the prime districts 9 and 10. This acquisition spree came at the tail end of a long property lull which lasted from 2000 to 2006. As a result, it was able to replenish and expand its landbank during a period when property prices were either at or below even the lows of the 2008-2009 global financial crisis. 

Source: URA data, Business Times, Company, Stockresearchasia

Our Take

Strongest balance sheet in at least 20 years supporting a best in class dividend yield of 6.7%

As a result of its well-timed land acquisitions, BSE has been able to generate strong profit numbers and cashflow over the past 5 financial years. This has culminated in a balance sheet that is the strongest it has been in at least 20 years, with a net cash position of $383 million as at 31 Dec 2016 even after deducting the $85 million in dividends paid in the quarter prior. This net cash forms as much as 30% of both its current market capitalisation and NTA, which is unusual for a property developer.   

(Source: Company) 

On the back of its balance sheet strength, BSE has also taken steps to reward its shareholders, paying an annual dividend of 33 cts per share in each of the last 2 years. Based on its last traded price of $4.94 per share, this translates into a dividend yield of 6.7%, the highest by far among SGX listed mid cap developers. 

Going forward, with the last of its major non-landed projects having achieved TOP (Paterson Collection, Skyline Residences) or nearing completion (St Thomas Walk), meaning that most of the construction costs has already been capitalised, we do not expect a significant deterioration in BSE’s balance sheet in the near future. The Company thus has sufficient cash resources to continue its current level of dividend payment should it wish to. In addition, any bulk sale of units in these projects will likely result in a major boost to its already strong balance sheet.

Limited supply for landed properties should augur well for BSE

While BSE has a good track record of developing non-landed properties, its bread and butter is in the landed developments. Its large landbank and long track record in the northern part of Singapore has earned it the nickname “King of Seletar Hills”. According to the Company, it has over the past half a century built more than 2,500 houses in Seletar Hills, 1,000 in Sembawang and 500 elsewhere.

(Source: URA, Stockresearchasia)

Unlike non-landed properties, landed properties can only be bought by Singaporeans and selected foreigners approved by the Singapore government. Despite this, prices of landed properties have outperformed non-landed by a wide margin in recent years according to URA’s Property Price Index (PPI). A large part of this can be explained by the much tighter supply of landed properties in land scarce Singapore.

New landed sites, the main supply of landed properties besides development/redevelopment of existing sites, awarded by URA have shrunk over the years. Only around 403,000 sq ft of land was awarded for landed developments in the last 5 years and a total of 2.4 million sq ft over the last 20 years, comprising entirely of 99-year leasehold land. In contrast, BSE alone has more than 3.2 million sq ft [ii] as at 31 Mar 2016, with close to two-thirds either 999-year leasehold or freehold land.

The decline in supply of new landed properties was confirmed in a report by Knight Frank published on The Business Times in August last year which claimed that over the past decade to Q1 2016, total available stock of landed properties grew by only 5.9 per cent to reach 72,205 units island-wide, while in the same period, non-landed properties expanded by 58.7 per cent to 258,098 units. We expect this trend to continue as Singapore’s population continues to grow towards the government’s projected 6.9 million[i] by 2030. This should augur well for BSE’s future prospects.  

BSE has sufficient options to allay QC concerns for its non-landed projects

In an effort to curb the then runaway property prices, the Singapore government had in recent years introduced a slew of property cooling measures, including requiring all foreign property developers (defined as all developers with shareholders or directors who are not all Singaporeans) to be issued a qualifying certificate (“QC”) whenever they buy land for residential development. Once a QC is issued, a foreign developer will be bound by the QC rules. One of these rules states that the foreign developer has 5 years to complete a project after land purchase with another 2 subsequent years after completion to sell all the units in the project. If it fails to meet this deadline, it may have to forfeit a banker's guarantee worth 10 per cent of the land purchase price. The foreign developer can extend the QC for another 3 years by paying a fee that goes from 8 per cent of the purchase price for the first year to 16 per cent for the second year and 24 per cent for the third. 

As a listed company, BSE falls under the definition of a foreign developer with respect to the QC rule. Hence, it faces pressure to complete the sale of all its units in completed projects as well as soon to be completed projects. The projects likely to be affected include Skyline Residences in Telok Blangah, Paterson Collection in Orchard and St Thomas Walk in River Valley. We examine below how each of these projects could potentially be affected.

BSE projects that are likely to be affected by QC rules

Skyline Residences: According to a report in July on The Edge quoting URA’s Realis database and property agents, BSE has had some success moving the remaining units at Skyline Residences by offering discounts to buyers as well as a “Stay then Pay” scheme and that only 30 units remain as at 5 July 16. This suggests that close to 90% have been sold. Given that BSE had more than a year between 5 July 16 and the August 2017 QC deadline to move the remaining 10% units, we believe BSE’s exposure to potential QC penalties for Skyline Residences should be low.

St Thomas Walk: With the TOP set for the 3rd quarter this year and the QC deadline only in Q3 2019, we believe there is still sufficient time for the Company to market and sell these units even though it has yet to launch the project. There is also the possibility that the government could loosen the QC rules by the time St Thomas Walk’s QC deadline approaches. We estimate that the project has a breakeven price of $1,400 psf vs $1,750 psf [iv] average selling price achieved for nearby comparable projects such as St Thomas Suites.

Paterson Collection: Perhaps the most at risk to QC penalties given that the project’s QC deadline is in October this year and that the project is yet to be launched. However, with low land cost and an estimated breakeven price of $1,600 psf vs an average price of around $2240 psf [v] for Paterson Suites (also by BSE) just across the road, we believe the Company has plenty of flexibility in achieving a positive outcome prior to the QC deadline.

One possibility would be for a bulk sale of the project to a non-related party at a discount to market prices. We believe a conservative discount of 25% would be more than sufficient to attract buyers. Even at this discounted price of approximately $1680 psf, we estimate that BSE would be able to generate a profit of over $10 million and most importantly bring in over $200 million in cash. As the project had already achieved TOP in 2015, meaning all its costs have been capitalised with zero borrowings, all proceeds net of tax from such a sale would accrue to BSE’s already impressive cash pile.

Recent bulk deals were transacted at discounts of between 16% and 23%:

Another option would be for the controlling Lee family to acquire the project, similar to what Hiap Hoe’s controlling shareholder, Hiap Hoe Holdings, did in acquiring Treasure on Balmoral for $185 million from the listed company. However, this would require minority shareholders’ approval as it is deemed an interested person transaction (IPT) exceeding 5% of the Company’s NTA.

A third option would be for the Lee family to privatise the entire company. Despite the Lee family having no shortage of resources to do so, we see this as being a less likely option. For a start, at a market capitalisation of $1.3 billion, privatising the entire company at a premium would cost several times more than the amount needed to just buy all the units in Paterson Collection. In addition, the Lee family is not known for privatising listed companies it controls even when valuations are low, e.g. in 2003 or 2009. Both takeover attempts by the family for Straits Trading and then WBL in 2008 and 2013 respectively were exceptions and came in the form of counter-offers to rival bids by the Tan family. A privatisation offer is probably more likely to come in the form of an attractive external bid, particularly by a land hungry developer.

Recommendation

BSE is a deep value play trading at around 1.0x NTA. However, carrying its legacy land at historical cost pegged to 1953 prices has resulted in a severely understated book. Just valuing the freehold/999-year leasehold legacy landbank at a conservative $350 psf would bring its NTA up to $7.21 per share. 

This does not even include:

• Potential upside from new launches on its low cost legacy land along Ang Mo Kio Ave 5 (Lot 12949A Mk18) for which it has announced that it will pay SLA a differential premium and surrender the 999-year lease in order to be re-issued a fresh 99-year lease without building restrictions; and
  
• Any surplus generated from potential bulk sale of units in Paterson Collection or the soon to be completed St Thomas Walk, keeping in mind that the plots of land on which these projects are sited were acquired at low prices in the period from 2005 to 2007.

It is notoriously difficult to predict exactly when the property market will improve given the current headwinds including the slowing economy, the property cooling measures in place and the spectre of an US-led interest rate hike. Until a more pronounced uptrend happens, BSE’s results in the coming quarters could stay subdued, just as the recently announced 3Q17 results has shown with profit down 78% YOY. That said, its strong balance sheet with a net cash position of $383 million should provide sufficient buffer to see it through the lull period and protect it against any interest rate shocks. In the meantime, investors would still be able to enjoy a best-in-class dividend yield of 6.7%, far higher than any of its mid-cap property developer peers. We thus think BSE’s current share price of $4.94 offers compelling value to value investors and yield seekers alike. We are buyers at this price.

Key Risks

A prolonged downturn in the property market coupled with inaction regarding its non-landed projects at or near TOP could see the Company being hit with hefty QC penalties. However, as we have pointed out, the Company with a financially strong controlling shareholder has enough options to mitigate this risk.

Payment of the yet to be disclosed differential premium for the land at Ang Mo Kio Ave 5 may see a large chunk of cash depleted leaving shareholders with the possibility of a lower dividend payout in immediate years. Having said that, shareholders should eventually be compensated as the Company starts monetizing the site via new project launches.   

(All currency in SGD unless otherwise stated)

Since our initial write-up on TSH, the share price has surged, returning a total of 86% in less than 2 months. Our initial estimates pegged the value of the shares to the sum of its existing net cash and short-term securities position of S$0.077 rising to S$0.139 (S$0.0107 and S$0.169 respectively before adjusting for the 3 S cts dividend it had earlier paid) should the freehold property be successfully disposed. Recent developments, however, suggest that our views have been too conservative.

We now see a strong likelihood of the company monetizing all its assets and distributing the resultant proceeds in the mid to near future. Shareholders should realize total proceeds of at least S$0.151 per share should that happen. This represents a further 29% upside from the last traded price of S$0.117. We remain long at the current price.  

Key developments since our report

1. TSH announced on 28 April 2016 following its AGM that it had entered into a sale and purchase agreement with Exact Solution Management Ltd to dispose of its Consumer Electronics business carried out under its wholly owned subsidiary, Wow Technologies (Singapore) Pte Ltd. The consideration is US$2.4 million or S$3.24 million. It intends to distribute 100% of the net proceeds from this sale to shareholders. 
2. Concurrently, the Company has entered into a non-binding term sheet with its CEO, Anthony Lye, for the disposal of its Homeland Security Services business, consisting of its wholly owned subsidiary, Starmo International Ltd as well as subsidiaries under Starmo. The consideration shall be in cash and is to be agreed by the Company and Anthony  subject to a valuation report to be prepared and issued by an independent valuer. 
   
3. Company revealed in its annual report for FY 2015 in regard to its 26.5% stake in Unilink Development Limited that “Following the plan of the Company in 2015 to dispose of the investment in Unilink, the Company has followed up with a concrete plan to locate buyer and is of the view that the sale is highly probable to be completed within a year.” Consequently, the value of the Unilink stake has been written down to S$3.127 million as an estimated recoverable amount based on discussions with third parties. 
   

Our Take

Twin disposal of Consumer Electronic Business and Homeland Security Business leaves TSH with no core businesses and removes key cash drain risk

Coupled with the company’s decision not to actively pursue any property development projects after the disposal of its Australian properties, TSH is set to become a cash company upon the completion of the twin disposals of Wow Technologies and Starmo.

We previously flagged out the consumer electronics business, which incurred a loss of S$2.73 million in 2015, as the prime risk to TSH’s cash pile. Thus, we see its proposed disposal as positive news for shareholders even though the consideration of S$3.24 million would result in a non-cash disposal loss of S$0.37 million. The resulting cash distribution from this sale is estimated to be 1.3 S cts per share, representing 11% of the last traded price of S$0.117.

At the same time, we think the disposal of its Homeland Security Business, Starmo, should generate proceeds no less than the net carrying value of its tangible assets given that this division has consistently generated profits, albeit declining, over the last 3 financial years.

However, net realisable value of Unilink stake may be lower than book value

Although the Company has estimated that the recoverable value of the 26.5% stake in Unilink to be S$3.13 million, we note that Malaysia-listed Metronic Global Bhd recently disposed of a 17.7% stake in the same company for just US$551,724. Should the sale of TSH’s stake in Unilink be transacted at a similar valuation, the consideration it eventually receives may be closer to S$1.15 million (US$:S$=1.380), representing an S$1.98 million deficit over its current book value. 

Net Breakup Value is likely to become key share price driver going forward

With the latest announcements, we think that TSH will eventually dispose of all its key assets and businesses and return the proceeds to shareholders. As such, the focus for shareholders should shift towards TSH’s net breakup value as its assets will eventually be converted into cash.

Recommendation

Even though the share price of TSH has surged since our initial report, recent developments suggest that more upside may be installed for its shareholders. The pace of the disposals and distributions would likely drive share price going forward. Nevertheless, shareholders should eventually realise no less than our conservative estimate of TSH’s net breakup value of S$0.151 per share, representing an upside of 29% over the last traded price of S$0.117.

Further upside could come either in the form of a higher selling price of TSH Centre, Starmo or the stake in Unilink as we have assumed undemanding considerations for each of these assets. As an example, should TSH sell its property at say 909 psf which is the current lowest asking price of comparable properties in the vicinity, the net breakup value could rise to S$0.169 or 44% above the current share price.

We continue to be buyers at this price. 

We believe that low profile SGX listed microcap TSH Corporation Ltd (“TSH”) should be on the immediate radar screen of investors. Not only does it trade at a steep 20% discount to its net cash position of S$0.099 per share, it recently declared a dividend of S$0.03, which in itself makes up 38% of the last traded price of S$0.079. On top of these, the company has also announced its decision to dispose of its freehold property near Tai Seng MRT, a building it acquired shortly after the GFC in 2009. Our conservative estimates show that if the company successfully disposes of the said property even at a significant discount to current asking prices of similar properties in the vicinity, its net cash position would balloon to S$0.169 or 2.1 times the last traded price! With the company choosing not to take an active approach in the capital-intensive property development business for now, we see limited risk of excessive cash drain threatening its cash pile.

At the current market price of S$0.079, TSH is significantly undervalued. We think it should, at the very least, trade at its existing net cash and short-term securities position of S$0.107, or a 35% premium to its last traded price. An even bigger upside could be realised if TSH succeeds in disposing of its freehold property at our assumed price or better.

Background

Brief summary on TSH

TSH operates in 3 main business segments: Homeland Security Services, Consumer Electronic Products and Property Development, the last of which is effectively dormant following the recent sale of its Australian property developments. 

TSH’s Homeland Security Services business, which is largely project-based in nature, provides the following services: 

- Defence related materials disposal and recycling;
- Land remediation;
- Security consultancy;
- Civil defence shelter; and
- Supply and choreography of pyrotechnic and firework displays.

Its Consumer Electronic Products business consists of the design and development of electronic products such as headphones, earphones, speakers and accessories for mobile phones and tablets as well as original design and manufacture of digital imaging products.

Prominent controlling shareholder

The largest shareholder in TSH is the family of late hotelier Teo Lay Swee, whose stake is held through family holding company Cockpit International Pte Ltd and Teo Kok Woon. The low key Teo family has a long history of shrewd property deals, the most prominent being the disposal of Cockpit Hotel (which has since been developed into Vision Crest Commercial and Residential buildings) together with the adjacent House of Tan Yeok Nee to WingTai for S$380 million[i] back in 1996, several times the total amount the senior Teo paid for them in 1983 and 1991 respectively.  Others include selling Ibis Novena for S$118 million at a reported a profit of over S$40 million 2 years after developing it. That said, the family appears to be a rather passive controlling shareholder with Teo Kok Woon himself happy to remain as a non-executive director in TSH for the past 10 years. 

Low key results announcements including dividends and property disposal

On 29 February 2016, TSH released its annual results for the year ending 31 December 2015. Its results were unremarkable as it recorded a pre-tax loss of S$7.1 million largely due to one off exceptional items including impairment losses and loss on disposal of property of S$4.5 million and S$1.9 million respectively. Excluding all exceptional items, the loss before tax would have been a much more benign S$0.2 million, reversing from a gain of S$1 million the year before.

Despite the loss, however, TSH unexpectedly announced a bumper dividend of S$0.03 per share or almost 38% of its last traded price of S$0.079. Interestingly, this is the first time the company announced a dividend in the last 5 years. As part of the announcement, the management also revealed its intention to dispose of its freehold property at Burn Road.

Freehold Property to be put up for sale

The freehold property in question is a 7-storey detached freehold industrial building named TSH Centre located within a short distance of Tai Seng MRT station and with an estimated gross floor area of 23,508 sq ft and land area of 10,623 sq ft. It was acquired at a bargain price of S$8.8 million close to the bottom of the property cycle in 2009. URA has zoned the area in which the property is situated as a B1 industrial zone with a maximum plot ratio of 2.5.

Our Take

Market is effectively paying you to buy TSH shares even if property sale does not happen…

TSH currently trades at a discount of 20% to its net cash value (giving it a negative enterprise value) and a discount of 26% to the total value of its net cash and ST securities. This means that if you as an investor were to buy S$1000 of TSH shares at the current price, you would get back in value: net cash of S$1255 and another S$101 in short term securities. Yet more bonus value comes in the form of the freehold property (S$459 if measured by book value alone) and S$285 in other net assets.

…but potential reward increases significantly if property sale goes ahead

The sale of TSH Centre looks set to provide an even bigger boon to shareholders as it will unlock value in the property. We estimate that the property is currently carried on TSH’s books at a cost less depreciation of S$8.7 million or just S$378 per square foot of gross area. To estimate how this compares with the actual realisable price in the event of a sale, we did a search on publicly available commercial property platforms for B1 Industrial properties in the building’s vicinity. Our search yielded two freehold properties:

(Source: Map from URA, pictures by stockresearchasia.com)

Figure 1: Table and map showing plot ratio and key statistics of TSH Centre and nearby freehold properties listed for sale on commercial platforms

Both properties are being listed for sale at above S$900 psf, with a plot ratio close to the maximum permissible of 2.5. While both properties are broadly comparable to TSH Centre, they are also much newer and display different characteristics in terms of size, proximity to public transport facilities like the MRT station and frontage. Further taking into account that their actual transacted prices could be lower than list prices especially given the challenging market conditions, we choose to err on the side of caution and peg the value of TSH Centre at S$727 psf of gross area, a 20% discount to the lower psf of the two properties. This would yield potential sale proceeds of S$16.8 million or almost double its book value. Consequently, TSH’s net cash position could balloon to S$40.6 million or about 2.1 times the current market capitalisation.

Using our earlier example of the investor buying S$1000 of TSH shares to illustrate, should the company succeed in selling TSH Centre, the investor would be getting in value S$2138 in cash in addition S$101 in short term securities and S$285 in other net assets. This is not even taking into account the proposed dividend of S$380 that the investor should receive by May 2016.

Given that the company will not be actively seeking new property development projects, we posit that the management might even choose to reward shareholders with more bumper dividend payments in future.

Figure 2: TSH is trading at a steep discount to just its current net cash position; discount set to increase even further if property is disposed as planned by management

Possible target for shareholder activists?

The Company’s shareholdings are fairly loosely controlled with the three biggest groups of shareholders, namely the Teo family, CEO Anthony Lye & his spouse and non-executive Chairman John Wong holding 48.2% in total, leaving the public free float at 51.8%. With more than 50% in the hands of the public, small market capitalisation and a cash loaded balance sheet, we think that TSH could potentially be targeted by activist shareholder groups. In the event this happens, value realisation could be expedited. We stress, though, that this should not be a primary reason for investors to buy into TSH. 

Figure 3: Top 3 shareholders own less than 49% of TSH’s total outstanding shares

Recommendation

With the stock trading at such a significant discount to just the value of its net cash and short term securities, TSH is a compelling buy. The buy case gets even stronger if the company manages to sell its freehold property even at the conservative price we have assumed. Add to the fact that a dividend of 3 S cts per share is set to be paid in the coming months, we believe the risk reward for an investment in TSH is too favourable for investors to ignore. The current price presents an excellent opportunity to accumulate its shares with limited downside risks. We are definitely buyers at this price.

Key Risks

Further deterioration in the company’s consumer electronics business could put pressure on the company’s cashflow and consequently its cash pile. However, this should be partially mitigated by the more stable homeland security business. The company has also generated on average positive free cash flows over the past 5 years which provides us with some comfort in its cash flow generating powers.