Overseas Education Limited OEL Review

https://links.sgx.com/FileOpen/OEL%20Financial%20Results%20Q3%202019.ashx?App=Announcement&FileID=585222

3Q19 financial statement.
>100 MM loan. total 2 mil of interest + capital repayment requirement every quarter while company is making ~2 MM of net profit. coverage ratio is on low side and without much margin.

The debt is for financing their new campus which is largely completed and they have shifted to new campus. Dividend payout is large with 8% yield. If business turn sour, they will have to cut dividend.
Need to look at cash flow to ascertain the safety

Capitaland C31.SI Review

https://links.sgx.com/FileOpen/CL%20Investor%20Day%202019.ashx?App=Announcement&FileID=587892

Link to Capitaland 2019 investor day. Shows company long term planning and fact book of its business. No longer a property development but mainly as a fund manager managing private funds or REITS. Generate recurring income which is the main income contributor. Top 10 real estate manager globally with Blackstone at the TOP.

With the merger with Ascendas, Capitaland has grown in scale and harder to fail if properly managed. Currently integrating both business together to achieve the forecast synergy. This explains the merger between Ascott REIT and Ascendas hospitality trust to become a large hospitality trust which will be included in a REIT index and potential for trading at higher multiples.

With its REITs vehicle, its a good avenue for divesting its properties for gains. Debt/equity is ~0.7 which is acceptable.

https://investor.capitaland.com/newsroom/20191105_070643_C31_GDOVJM12R2G5FJSU.2.pdf

3rdQ 2019 financial results

Profit from operation = 941M vs finance cost of 234M. Coverage is 4x. Net profit is 527MM. Coverage is 2.2x.

Coverage ratio is typical for a REIT though the dividend yield is much lower but has much diversified holdings in different sectors and geographical area.
Cash in hand is 5.6B vs short term debt of 5.5B and long term debt of 27B.
Investment properties is 48B and investment/JV is 13B while development properties for sale is 7.7B
Equity is 39B. Company is not leveraged compared to Fraser properties.

Exposure to China is large at around 30-40%. Singapore is another 30%. REmaining is Europe and other developing countries. Good entry point if its stock price tank to ~$3 which is its long term average.

New Toyo Review

Looks interesting with recent price correction. Check it out.

Recent 2 quarters making losses. Unable to cover interest expenses with the losses. short term debt of 30M + long term debt of 40M with cash of 30M. Total equity is 200M. debt/equity around 40%. Balance sheet looking stretch. Avoid until the debt has been paid off.

Jardine Matheson Holdings

Conglomerate with exposure to greater China and Southeast Asia. Basically it’s an ETF that holds dairy farm, Jardine c&c, Hong Kong land, mandarin oriental, astra and other non listed business. It is widely diversified and take part in Everyday business which a typical economy will need such as retail property automobile finance construction hotel etc. Pays a decent dividend out of its cash flow. Current yield is 3 percent and historical trend points to a growing dividend policy. Price is corrected from recent high. Trading at below book value. 40B market cap. Not easy to fail since it is prudently managed. There is some debt but not so high. If want to buy a Jardine company, this should be the one to go.

Jardine C&C (C07.SI) Review

Historical good dividend growth. Dividend almost doubled for the past decade. However, dividend growth slowed in recent years.

Exposure to ASEAN emerging markets, predominantly in Indonesia with strategic investment in Siam Cement and 10% holding in Vinamilk (F&N is 20%). Vinamilk is high growth company which pay dividends to C&C.

Poor valuation despite recent correction in price. The valuation model appears to be quite accurate in the sense that the fair value is around $35 which the stock price approaches for the past 1 year with peak at $37. Recent low is at $28 at 2015. The stock last seen $25 at 2009/2010 with its bottom at around $9. Unless we are expecting another 2009 GFC type of event, the price should not drop drastically.

reasonable debt/equity ratio excluding its financial subsidiaries. Interest coverage is > 10x with net financing charges of 161MM vs profit of 2B.

Total debt of  4.5 + 2.8 (long term) vs equity of 13B. Non financial debt is 2.7+1.1 (long term).
OP Cash flow is 2B vs dividend of 0.3MM while investment is also 2B. To finance increasing dividends, they need to generate more cash or cut investment. They are holding more investment to support future growth.

Its historical fair value margin is ~20%. Based on this margin, the entry price is ~$28.5 which is another 10% discount from current price. If price drop to this level, it  may be an interesting entry point. However, current PE is 30x and dividend yield of <3%. Abit on the rich side. If the growth rate does not support the large PE, there will be price correction.

Far East Orchard Review

Price drop to 1.1 with yield of 5 percent. Fixed dividend payout of 6 cents for the past 8 years regardless of good and bad performance. Defensive balance sheet with low debt ratio.
Nav is 2.8 vs price of 1.1 indicating low valuation. Dividends largely financed by recurring income from its property investment and hospitality business and not from its property development arm.

Their developed properties are almost done and ready for launch. For example in Singapore wood square and UK west minister. Expect to turn these holdings into cash once they commence selling at a profit. Properties in overseas are freehold so they can hold long without worry.
 Current debt of 400MM will be refinanced to longer tenure. Interest coverage on the low side at ard 5-6 times (5mm interest expense vs net profit of 30mm) which is near our requirements of at least 5x. If we consider interest income of 3mm from their cash holding, the coverage will be much higher. Hence, we don’t see significant debt financing issue.

 Moreover they can pay off debt easily by selling off their assets. Cash on hand is 260MM while properties held for sale is 160mm. Investment properties and JV total around 1B. Not concern of liquidity.
Current yield of 5% is attractive which pay investor to wait for future upside.
Potential candidate to be take provide. With the large discount from NAV, chances of upside is high. Market Cap is 500mm while cash on hand is 260mm.
Control shareholder owns 60% of company. To pay off minority shareholders, they need to pay 300MM. Basically they only need to top up 40 MM to pay off minority shareholders. They can easily finance it with debt. With the recurring income from their business, the debt can be paid off easily and there is no need to pay dividends to minority shareholders once it was taken private.

Potential risk/red flag that company may not pay a premium to prevailing stock price during a market crash (for example down to $0.5 compare to $1.15 now) and take company private as they are major shareholder.  Recent privitisation deals indicate a 20-50% premium. Refer to Hupsteel and Memtech. We expect such premium should FEO be taken private.

If company not taken private, it remains an attractive yield play given its track record of consistent payment though not increasing. Dividend is sustainable based on its recurring income.
If there is bad year and recurring income not sufficient to cover dividend, it can be finance from its cash holding of 260mm vs yearly dividend of ~30mm which  explains why they can pay dividend every year.
Ability to pay dividends is confirmed. With its defensive balance sheet and easy to understand business model of buying properties to rent out for  yields, we felt we can invest more into this business.

Estimated fair value is $1.5. Entry price @ 30% discount is $1.05. However, historical fair value margin is 13% while current discount is ~21% indicating a value gap to be realised by the market. Current price of $1.15 is interesting. Potential entry in general weak market conditions.

Straits Trading Review --> Balance sheet and Interest Coverage not strong

2 Main divisions: Property development/investment and Tin smelting

Income predominantly comes from property development and recurring income from its property investment portfolio which includes:

1) 20% of ARA management ($ 80B portfolio)
2) 90% Straits Real Estate
3) 30% Far East Hospitality Group
4) Freehold land from their existing smelting plant to be redeveloped. Near prime location at Penang

Company initially was net cash position 5 years ago but with its investment in various assets, the company is now in net debt position with debt to equity ratio of close to 40% and interest coverage < 5x on a profit before tax basis. $27M interest expense vs $100M profit before tax.
However, based on cash flow statement, the actual finance cost paid is 14M versus operating cash flow of 12M. The base business is not cash flow generating enough. There is dividend payout from associates but the coverage is <5x.

Majority of its revenue still comes from its tin mining and smelting division. only 5% comes from property. It is receiving dividend and interest income of $30M per year. The company is very sensitive towards commodity price in view of its large exposure to the tin industry.

Tin revenue is 430M vs cost of 380M with gross margin of 50M which is ~10%. Essentially, very thin profit margin available for this business. Any time may swing into loss and impact the whole business.

5-6% of dividend yield from its investment securities and 3% from its investment properties.
Cash on hand is 245M vs current debt of 247M and long term debt of 617M and total equity of 1.6B

There is a reason why market is valuing them at ~40% discount to their NAV of 3.6 and market price of 2.2. Probability not a good time to buy now though company is actively buying back their shares indicating their confidence in the business.

We would prefer a company with lesser debt and higher coverage ratio to fill comfortable especially in current market trend with overprice equity and low interest rate environment. Company may make loss and unable to pay dividend and leading to large price drawdown.

Wait and KIV.

Dairy Farm Review

20% correction from 52 week of ~$US 9.2 to ~$US 7.5. The all time high is $S9.75.

Weak SEA hypermart and supermart business (Mainly Giant) is suffering and not performing well compared to the other business. Groceries comprises of highest percentage of sales but deliver the lowest profit margin compared to its Beauty & Care, Convenience store, Home furnishing and Restaurant business which average a margin of 7-10% compare to groceries of ~1-3%.
While there are growth in almost all sectors except for the groceries business, Beauty & Care register the faster growth and contribute to 50% of profit despite sales contribution of 10-20%.
Company has installed a new CEO with a new transformation plan with 5 key initiatives that is focus on China expansion, maintain HK business, Strengthen and revitalize SEA business and better adoption of digital technology. Company acknowledge that they have been slow on adopting digital technology and install a CTO and CIO to address this issue. Goodwill impairment has been done on the SEA food business to give it a fresh start.

Going forward, expect more CAPEX on digital technology investment. Profitability and cash flow maybe reduced. Current payout ratio is still low dividend of 21 cents vs underlying EPS of 31cents.
Company has been prudent in dividend payout.
Currently in net debt position due to investment in Chinese business Yonghui which is growing well.
Current borrowing is 1B vs long term borrowing of 14.5MM and cash of 300MM. Company need to ensure liquidity availability to refinance its current debt of 1B. This appears to be always the case to maintain current debt level high vs long term debt. Company should have some liquidity arrrangement with their bankers based on certain caveats of interest coverage and debt/equity ratio which is still appearing to be fairly reasonable where debt/equity < 1 and interest coverage is >10x on net proft basis and 15x on operating cash flow basis (interest expense is ~$40MM)

Operating cash flow is 600M vs  dividend of 284M. Payout ratio is less than 50%. CAPEX investrment is ~ 220M per year. In that sense, the cash flow can sustain cAPEX and dividend payout and paydown of long term debt if any. The current revolving credit of 1B  appears to be working capital financing.

Detail analysis to be performed to look into its historical valuation trend and current valuation metrics in next posting.

Analysis indicated fair value range of $US 6.6-10 versus current price of $7.1 (07th Aug 19). There is no steep discount to make this a compelling investment case. We will wait for more price correction before entry price of $6 which is near its 2014 lows.

2019-08-21: Historical fair value margin is 16% versus current margin of  13%. Price is not discounted enough. Further correction required.

Sarine Technology Updates

This is a painful one. we initiated BUY at roughly ~$1 after evaluating that it is undervalued compared to historical valuation and price. Indeed, our hypothesis was validated initially within 6 months when the share price rise ~30%. Never did we imagine the market change their view point so fast with the on-going china trade war and the competition with man-made diamonds etc, that the share price keep tanking. We keep holding the position, thinking it is temporary but the market keep hitting us back. As of today, the share price is $0.3, a 70% drop from our buy price! Indeed, this is a tasting of our patience and conviction towards of strategy.
As of 1Q 2019, the balance sheet is still very sound with no debt and cash in place. The losses make so far are NON-cash in nature comprising of depreciation and amortization. If dividend is not cut, the yield is very attractive at > 10%. However if current loss making trend continues, we believe at some point, the dividend will be cut when cash flow generation is not sustainable.
We will closely monitor and wait.

We reiterate, this is a painful waiting process...

Lippo Group Impact on First Reit and Lippomall trust

Both REITs price correction due to parent company lippo group financial issues. Since then lippo group has began initiatives to shore up the group balance sheets. First reit tenants which are laretely lippo owned hospitals should not have issues paying the rental going forward. The rating agencies also upgrade the ratings with the plan in place. First reit and Lippomall trust price have corrected a lot and are not rising compared to the rest of the S REITs which have their yields compressed. Indicating a potential entry opportunity at current larger yields. Take note of upcoming quarterly performance to check for further developments.

SG Stock Actions 2019-07-17: Selling for Risk Management

With recent US markets going all time high, the risk for overvaluation and future low returns is increasing. Although SG market has not reach all-time high, if the US market corrects leading to a world wide market correction, SG cannot escape. Moreover, the REITs has increased sharply ~15-20% this year while the underlying business does not change much; ie income does not increase proportionally. We believe this is an increase in market multiplier and yield compression rather then improvement in business fundamental. 

Although some of the holdings are still in RED, it has rise from its LOWs along with the general market REIT's rise. Some of the holdings are seeing good profits after holding for a couple of years.

The capital gains realised is equivalent to 3-6 years of dividends. We believe we can buy back these companies at a lower valuation subsequently when the market corrects.

The opportunity cost is lost of dividends and potential price appreciation should this hypothesis of a potential future market correction fails to materialize. However, if the hypothesis is true, we will be spared from the potential 15-30% market correction.

Cash gives you a piece of mind and flexibility to buy the market at discount.