Background

Sembcorp Industries (SCI) and its 60.96% owned subsidiary, Sembcorp Marine (SCM) jointly announced a recapitalisation and demerger exercise consisting of:

• A 5-for-1 rights issue at $0.20 per share to raise S$2.1 bn.
  1. SCI has undertaken to subscribe up to S$1.5 bn worth of rights shares by offsetting the subscription amount it has to pay with an existing S$1.5 bn subordinated loan it extended to SCM in June 2019.
  2. However, SCI’s full entitlement under the rights issue amounts to only S$1.27 bn with the remaining S$0.23 bn commitment coming in the form of excess rights shares subscription should there be any left after allocating to minority shareholders.
  3. SCM will also pay back to SCI any amount outstanding from the S$1.5 bn loan after setting off SCI’s total subscription amount (entitlement plus excess rights)
  4. The remaining S$0.6 bn of rights shares will be underwritten by DBS Bank, and ultimately sub-underwritten in full by Temasek Holdings, SCI’s parent company.
  5. SCM will pay an underwriting fee of 0.15% of the underwritten amount to DBS Bank but DBS Bank will not be paying any sub-underwriting fee to Temasek.
• A distribution in specie by SCI of all the SCM shares it holds after the SCM rights issue.
  1. Temasek Holdings is expected to end up with at least 29.9% of SCM’s shares post the rights issue and distribution in specie by virtue of its 49.3% shareholdings in SCI currently.
  2. Temasek’s shareholding may increase up to 58% if it ends up having to subscribe for the entire S$0.6 bn amount of rights shares. This maximum shareholding scenario is only possible if not a single minority shareholder subscribes to his/her entitlement, unlikely given the steep 31% discount to TERP based on last 5-day VWAP.
  3. SCI will not hold any SCM shares post-demerger

 
Our Take- Winners, Losers and future implications

Winners- SCI and SCI shareholders
One of the biggest beneficiaries from this exercise is obviously SCI. Not only will it rid itself of SCM, which has been an albatross round its neck and a negative drag on the group’s earnings the past 2 years, it also gets a chance to claw back part of the S$1.5 bn it extended to SCM in June last year, thereby improving its own liquidity. That said, SCI will now have to tap onto other sources to repay the 5-year bonds of the same amount it issued last year to finance the SCM loan.

SCI shareholders should find even more reasons to rejoice because on top of standing to reap all the benefits the company enjoys, they get free SCM shares which they can then choose to encash in the market.

Losers- SCM shareholders
The same cannot be said for SCM shareholders though. Not only are they asked to stump up cash for the rights issue, hopes of a cash exit offer for their shares have now been put on ice. In addition, given that one of the stated benefits of the demerger is to create two separate focused companies, the possibility of SCM being outright taken over by Keppel Corp in future is now less likely.

Nonetheless, a potential merger between SCM and Keppel Offshore and Marine cannot be completely ruled out. Afterall, post the ongoing partial offer for Keppel Corp and this demerger exercise, Temasek will still be the controlling shareholder in both entities. It is just that it might come in the form of a combined entity separated from Keppel Corp’s other businesses instead. Regardless, this is likely to be scant consolation for existing SCM shareholders.  

In less than 2 years, PCRD has transformed from an ugly cash hoarder to become a beautiful golden goose who can’t stop laying generous dividends. The latest was another surprise 5.5 cts dividend (2 cts interim + 3.5 cts special) declared on 11 Nov, adding to the total 8.7 cts dividend distributed just earlier this year. This was in turn preceded by a 2.2 cts dividend announced in Feb and paid in May last year, the first dividend declared in eight long years.

Altogether, this gives a total of 16.4 cts worth of dividends announced in the space of 21 months. Based on the closing price of $0.355 as at 9 Feb 18, just prior to the announcement of the 2.2 cts dividend, the company has now declared dividends worth an impressive 46% over the said period.

As we have mentioned in a note in March, annual dividends of more than 3.5-4.0 cts is probably not sustainable. However, shareholders will probably not be complaining about the Company’s sudden generosity.  
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PCRD 3Q results: https://bit.ly/33CthpX

Two notable developments happened in the past week:

Firstly, Sysma Holdings announced last Tuesday (9 Jul) a fresh contract win worth $4.9 million to build a bungalow in District 10. 

Then, just barely 3 days later, Sin Ee Wuen, Deputy CEO and son of Sysma's Executive Chairman and major shareholder, Sin Soon Teng, acquired more than 7.6 million or 3% of all Sysma shares from various parties and in the open market last Friday at between $0.16 and 0.17 per share.  

While it is hard to know exactly the intention of this seemingly bullish insider purchase, we note that it also comes very close to Sysma's financial year-end of 31 July. The average purchase price of $0.166 is also at a substantial discount to the company's 100% net cash-backed NAV of 22.3 cts per share.

Hence, the purchase could be taken as a possible sign of positive news flow from its upcoming results announcement or simply a shrewd move to acquire the shares at a bargain price. 

Either way, we remain convinced that the shares deserve to trade at a price closer to its NAV.  

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

(Picture credit: "Home Alone" movie)

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

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

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

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

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

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

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

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

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

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

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

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

Hupsteel- Management moving in the right direction

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

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

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

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

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

Sysma Holdings- Cash rich, price poor

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

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

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

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

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

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

Cliff

Links:
Hupsteel report and updates:

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

Sysma Holdings report and updates:

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

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

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

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

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

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

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

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

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

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

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

This contract is notable for a few reasons:

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

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

We continue to stay positive on Sysma.

(All currency above in SGD)​