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Wednesday, March 30, 2016

Reits vs Developers Business Model‏

Investing in properties is a favorite pastime for Singaporeans because they have been rewarded well over the years in the past.

People are also attracted to property investing because they are able to leverage on their limited capital to buy something which is tangible and much “easier” to manage than dealing with equities. That is until the cooling measures kick in which hits the property market hard in recent years. 

Since then, investors have preferred to deal with the option of equities in gaining traction to properties through investing in developers or Reits since it is much more affordable for the retail investors. But are investing in Reits and developers the same?




Reits

Reits have been a popular investment vehicle since they were introduced as they have a business model that is relatively straightforward and catches the attention of investors who rely on passive income.

They are a clustered group of properties structured under an investment trust and is open for the retail investor to gain ownership through equities.

When investing in Reits, there are certain important factors which an investors have to think about which I have blogged previously (here). The idea is through the master or individual leases, the company receives rental income which is then distributed out to shareholders in the form of dividends after deducting administrative charges.

If you are someone who like to purchase properties and rent out the premise for rental income, then the business model would appeal to you.


Developers

Developers are a different beast altogether when we compare them to Reits and their business model are run differently.

The goal of a property developer is to source for cheap land, redevelop them into new projects and sell to prospective buyers. Their income tends to be lumpy in nature since property projects may take years to complete and selling them may again take time to happen. Even as the management tries to ladder time the completion of the projects, demand are usually much dependent on the economy and property cycle. 

Developers are not known to be a high dividend payer as they require the cash flow retained to tender or source for the next land bank to replenish their inventory. Take CDL for instance. They are able to pay dividends as high as Reits if they decide to pay out all their earnings but because they have to retain the majority of the earnings, their yield is low.

There are several good thing however about investing in developers. First, they are usually big market cap companies who has the power to tender for projects at cheap financing before redeveloping them and passing the costs to the buyer. Even as demand slows down, most developers are strong enough to hold inventory in their balance sheet and only chose to release or develop them in a rising market. 

Also, many developers are now moving their strategies towards investing in commercial properties to boost their recurring income so that their earnings will not be as lumpy. I think the way they are set up are almost similar to Reits now, with a much greater flexibility to transition in their business model.


Final Thoughts

Both are good investment options depending on what you are looking for in your investment.

With interest rates looming and cooling measures still in place, I think a lot of the negativity has much been priced in. Buying low selling high? Perhaps it's a good time to practice that.


Friday, March 25, 2016

Child Portfolio - "Mar 16 - SG Transactions & Portfolio Update"

I've made some small purchases lately for the child portfolio so I thought I made a quick update here.

In the past week, I've invested his share of money into the STI ETF (ES3) at $2.85 for 300 shares which I thought was reasonably priced here for the long term. This is in addition to the previous holdings he has in his current portfolio which I have updated almost a year ago (Link Here) when he was 1 year old. How time has flies.

The intention of the child portfolio was relatively straightforward.

Every year, he'll most likely receive his fair share of "ang bao" during the chinese new year and birthday occasion from relatives, grandparents and us (parents). Instead of putting this money into his savings account, which my parents did when I was younger, I decided to go ahead with the plan of placing it into equities. There are some others I know that has the same plan but to put this into endowment, unit trusts or even CPF. That works equally as well.

I am not overly ambitious with the projected returns with this portfolio and while my target is to hope for a 6% returns (inclusive of dividends) per annum and if I can do that for the next 20 years, I think I'll manage to churn out at least $100k by the time he turned 20. Again, everyone seems to think that $100k is a big number but it's just how the logic of compounding works. Start at 20, you'll be great by the time you are 30. Start at 0, you'll be amazed by the time you are 20.





Child Portfolio

No.
Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
ST Engineering
3,000
3.19
9,570.00
92.0%
2.
STI ETF
300
2.85
    855.00
  8.0%


Total


10,425.00
100.0%


Our idea of doing this is to instill a savings habit when he is young and as he grows older, I will be working with him on a lot more day to day habits on encouraging savings such as the dollar to dollar matching, delayed gratification and such. I think instilling investing will be far stretched but I wanted him to get the basic habits right in his mind first.

In the meantime, I'd like to again show the below example to others who has not seen on how compounding can actually works wonder.



Tuesday, March 22, 2016

Recent Action - Kingsmen Creative

This will be an update to my latest additions as I accumulated more Kingsmen shares at a price of $0.61 for 23,000 shares. This is now my 3rd largest holding in my portfolio.




The basic thesis to the company remains much similar to what I have previously written (Link here and here) so I will not repeat much of it. Obviously, my first entry to the company was near to the peak so it’s a really bad call and a lesson learnt to always consider for margin of safety – regardless of how much confidence you have in the business (point noted!!!). Since then, I have averaged down a few times as I remain confident in the business and management of the company. 

During these periods, I’ve also received plenty of updates from a prominent blogger who is vested in the company. I don’t want to take any credits from the work he’s done so out of respect I will not mention any of the details here. But all credits to him, I definitely had a greater understanding of the business and their customer segmentation and how the management run the company for the past few years. 




FY15 Results 

With FY15 results finally concluded, let’s first take a dive into their recent performance.

Revenue and Gross Profit Margin remains largely competitive compared to previous year as we’ve seen a much improved growth (26.3% yoy) from the “Exhibitions & Museums” segment offset by the drop (-26.0% yoy) in their “Retail & Corporate Interior” segment. “Research & Design” also managed to grow double digit while this is again offset by the drop in “Alternative Marketing” but the latter two contributions is small for now. 

Net profits came in higher at $19.1m for the year, which includes the $5.9m divestment of associate and financial assets. The recurring profits, without the one-off items, would come in at $13.1m, which translates into a 26% decrease year on year and explains why the shares is where it is today. This translates to a net margin of 4%, which is a new record low in the past 10 years. 

Cash flow from operations after changes in working capital is at $12.8m, while the company has spent a considerable amount of capital expenditure this year – both in the acquisition of land rights for their new HQ and a factory in Malaysia. Hence, free cash flow for this year is negative as compared to the previous couple of years where fcf generation is strong. 

In terms of current valuation, earnings yield based on current price is at 10.8%, a comparable representative for the past couple of years, which seems to indicate that the poor performance has been factored in the weakening of the share price. 

Dividends are cut to 3 cents/share for this year, which still indicates a decent 4.8% yield at this point.


Business Segmentation

The “Exhibitions & Museums” segment remain the main contribution to the company’s topline and they have continued to grow strongly this year by outperforming the previous year with a 26.3% growth. Management cited in the outlook that these segments will continue to do well as they have a few projects tendered and secured so it is likely that we will see a continue momentum upward growth in this segment. 

However, the management conceded that the “Retail & Corporate Interior” segment will be tough in this challenging environment as the company faces a double whammy of slowing economy and a generation shift in the definition of luxuries as the industry evolves. Whilst the slowing economy is cyclical and not structural in nature, the latter factor could shape the direction of how the company will move towards the new luxuries definition of age. With a brand establishment since 1976 and a team with vast experience, I think the company should be able to evolve with the needs of the industry.


Overhead

The company's overhead costs continued to provide pressure for the company's bottomline as depreciation costs increase due to the acquisition of the new factory in Malaysia while salary related also increase due to higher headcount required for new projects tendered, though remuneration was mostly controlled by tying them to company's performance.

With net margin coming in at the lower half of the spectrum, the only way for the company to improve is either to decrease their overheads or increase their topline. OVH / GP is something which I will be watching very closely as the quarter progresses.

In 2015, the company has also made an acquisition for land rights for their new HQ located at Changi Business Park. Construction is under way and once they are ready, we will be able to see a cost saving under the operating leasehold expenses which is currently at $3.8m/year. This currently contributes to 5% of the overall overhead costs in their book.


Valuation

From a valuation perspective, I happened to notice something which is interesting.

We know that most service provider companies like Kingsmen and Vicom would be best measured by discounted earnings or cash flow valuation method because they do what they do best and their services are considered “premium assets”.

Now if we think about most service provider companies, take for instance Vicom - it makes sense for them to trade at a premium to their book value because investors are not paying for the assets in their book but a premium for the services in this case.

But what if you could get a service provider company that is currently trading near the book value, with most of their assets that are either cash, receivable and productive in nature, and you are still able to get their niche services that they are rendering for future projects for free?

A quick look at Kingsmen’s full year statement shows that their NAV is at 56.5 cents and to dissect the balance sheet, most of the composition of their assets include cash, land, buildings, investments and Trade Receivables. We have not even talked about paying for a brand that is worth so much reputable in the industry all these years.

I think that's definitely one angle you can look at.

The other way to look at it is to use the DCF methodology model I've created below and I've put in some reasonable assumption.

- Net Income Growth - 2015 was a bad year and the last time they've been in this situation was during 2007 when they reported lower. Hence, I've made the assumption of 10% growth for the next 5 years. I know it sounds rather ambitious in this sort of environment but as a company I think that's a valid growth rate that they should be looking to bounce back.

- FCF Growth - FCF growth is expected to grow at 7.3% every year again mostly because of the expectation of the net profit growth. Depreciation, Working Capital and Capital Expenditure are all mostly based on actual at present.

- EBITDA Multiple - I think 10x is a fair multiple to value Kingsmen as they've been trading at this range for a long time now.

- WACC - Again, the rate to use here for WACC I have put them at 10% (+- 1% for sensitivity).



Summary

If I am expecting my investment to turn out well for this one, I'll have to expect them to bounce back and grow at a reasonable level in the future. It can be next year or it can be the following year. For as long as bottomline improves over time, the valuation model will show that this company is worth a look just based simply on their services they render alone.

Of course, to mitigate the downside, their NAV is at least worth 56 cents right now (take a look at my explanation above) so from a liquidation value point of view, I know that it should be highly unlikely that it will trade below their NAV, though crap things can happen when you least expect it.

Please do your own diligence and take my words with a pinch of salt, always.

Vested with 80,000 shares as of writing.


Saturday, March 19, 2016

Consider Every Single Aspect Before Leaving The Corporate World

For anyone who evolved from a salaried employee to an entrepreneur or business owner, the consideration for the loss of the total cost of employment needs to be evaluated and considered at some point in time.




As an employee worker myself, we are often over-represented by the amount of gross salary we earned, without factoring other remuneration or benefits which could be equally as important to making decisions. Other benefits that we should be factoring in our consideration should also include our performance variable bonus, annual wage supplement, medical, paid leave, allowances, social security employer's contribution and others. These are the monetary factors which can easily be converted and factored into the total cost of employment.

Then there are the non-monetary benefits which should also be considered - interaction with colleagues, social activities and corporate fighting mentality. Once we leave the corporate world, we leave all of these things behind us and start afresh to a new challenge.

For someone who wishes to leave the corporate world one day, I know things can get very difficult when I had to make the decisions one day. The idea of leaving the benefits the corporate world can get - both monetary and non-monetary, which I have enjoyed over the past decade will all be gone to start a new life afresh.

Kyith, the author of Investmentmoats, proposes in his recent article to try and test out our goals before we decide to make the leaps.

What this means is assuming you are ready to step out of the corporate rat race, do test whether your finances can hold without the need to depend on your monthly salary and whether your character can withstand the time without companion of your colleagues.

Further, also do a test on what you envision life is like after you leave the corporate world. For example, if you decide to spend your time on becoming a house husband - cleaning the house and cooking for the family - do try if it is something you can sustain and enjoy for long periods of time. If you decide to live in another country for an extended stay, do also try out if that is something feasible and worth the while in the long run.

Speaking to some early retirees from the corporate world, I usually get mixed reviews but a common theme. While some are enjoying their flexible time doing anything they could, some feels like there can be instances where you suddenly have too much time and if you are not discipline about it, it could soon turn out to become a lazy attitude.

I guess with potentially another 4 more years of corporate working on my side, it's prudent to test every scenario out from now on.

For those who has successfully "retired", how has the transition been?



Thursday, March 17, 2016

Should You Be Taking Profits In This Recent Rally?

The recent rally since we hit the bottom in Feb implies STI closes officially flat since the start of the year. 

If you have been buying aggressively when STI hits the low of 2528, you should be making quite a decent profit right at this moment. I was fortunate to participate in this small rally which has boosted my performance to date to +5.1% for the year so I am pleasantly pleased that the strategy of dipping more warchest into the market when everyone is not buying works well for me. 

When you had profited from the recent rally like this, the problem of taking profits immediately comes to mind because you think this is decent profits which is earned within a short span of time and these proceeds can be used to buy back the same stock when market goes down later. The issue of challenging yourself to be smarter than the market always revolves around, especially since the economy is so weak and there are plenty of bad news right now. I am tempted to do the same myself after seeing some of the counters I’ve bought rise up rapidly in a short span of a month.




However, thinking back of my plan, I decide against it.

My own investment strategy involves buying low on one leg and selling high on the other leg. Unlike some investors who adopts a buy and hold strategy, I believe there is a price to every businesses we own and that every investor should consider the selling aspects equally as important as the buying aspects. Whatever method is used for buying and selling is based on the investor himself, but we should be open to selling when the stars are aligned. 

So with the markets in the rally now, should you be taking a bite and locking in some profits? 

Based on my experience, it is never easy to do that. 

I’ve shared my previous experience about selling a couple of good fundamental winners such as Boustead and Comfortdelgro in the past and I’ve never had a chance to get it back at a cheaper price anymore. This is because a good company will progress forward as time allows and the share price would follow. There are many instances to such cases like Vicom and RMG whose share price has a clear uptrend over the years. It is difficult for an investor to buy back at the price they want if their decisions to sell are wrong. 

When you sell the shares in your portfolio, you would also need to think about how to best utilize the proceeds in a given environment or allocate them to a better investment. These are all not easy decisions for an investor to think about. If you sell and the stock goes up and up, then you’ll lose the opportunity to profit with the company. 

Ultimately, it is the investor’s decision on whether he should sell in this given rally. 

But if you are a long term investor with time on your side, I think it might be a worthwhile decision to sit with your winners and let the growth and earnings compound over time so that you’ll see a much better returns compared to the small profits you are locking in at this moment. 

I'll be trying to do that, at the very least for the winners in my portfolio, even though I could have regretted later on.

What about you? Would you take profits in this rally?

Tuesday, March 15, 2016

Recent Action - Ascott Reit

This will just be a short update to my latest portfolio additions.

This morning, I bought 10,000 shares of Ascott Reit at a price of $1.065.




This is following their recent placement exercise after announcing their recent latest acquisitions of property in New York for USD 158 million (SGD 218 million). The property acquired is the 369 unit Sheraton Tribeca New York Hotel located in Manhattan, with an occupancy of more than 90% in the previous year.

The acquisition is expected to be accretive and yield an EBITDA of 6.8%. Pro-forma DPU is also expected to increase from 7.99 cents to 8.11 cents following the placement exercise, which represents a 7.6% yield based on my entry price.

Readers of my blog would have remembered that I used to own this counter and managed to sell the same last year at $1.31 (link here). This represents a 23% discount based on my entry price this morning. Back then, the main reason why I decided to divest Ascott was because of it's aggressive expansion of their AUM towards their goal in 2020, while it means that there will be plenty of placement or rights exercise in the process of doing that. You can refer to my detailed explanation here.





Getting this back now doesn't mean they'll stop doing that. It just means that I am interested in their dividend yield which could stay in the meantime. Other risks pertaining to the hospitality industry such as competitive rev/par, short term duration stay, slowing economy and foreign exchange risk will remain, though Ascott is better than the rest in focusing on longer stay duration customers.

In summary, get this only if you are interested in the yield for income.


Friday, March 11, 2016

"Mar 16" - SG Transactions & Portfolio Update"

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
OCBC
6,000
8.80
52,800.00
14.0%
2.
Ho Bee Land
22,000
2.00
44,000.00
12.0%
3.
China Merchant Pacific
45,000
0.81
36,450.00
10.0%
4.
ST Engineering
12,000
3.11
37,320.00
10.0%
5.
Kingsmen
57,000
0.63
35,910.00
10.0%
6.
Fraser Centerpoint Trust
13,000
1.99
25,870.00
7.0%
7.
IReit Global
32,000
0.69
22,080.00
6.0%
8.
City Development
2,000
7.49
14,980.00
4.0%
9.
CapitaCommercial Trust
8,000
1.44
11,520.00
3.0%
10.
Keppel DC Reit
10,000
1.06
10,600.00
3.0%
11.
Nam Lee Metals
35,000
0.28
10,150.00
3.0%
12.
First Reit
8,000
1.22
  9,760.00
3.0%
13.
Neratel
13,000
0.55
  7,150.00
2.0%
14.
MTQ
6,000
0.55
  3,300.00
1.0%
15.
Warchest*
50,000.00
13.0%
Total SGD
371,890.00
 100.00%

The market has recently rebounded for the last 2 weeks to everyone surprise and suddenly you can see some bullish sentiments back in the air. While there are many people who thinks that this is a short term rebound in a bearish downtrend, there are the other group who believes that the bottom should be over. I don't really know who is the right one at the moment.

What I did from the last update is to continue my accumulation of shares which I think represents good long term play. Most of the accumulation are not new stocks so I didn't really have anything to update to the original thesis.




I continue to accumulate Ho Bee by purchasing another 1,000 share. This is a counter which I think represents deep value amongst the many other developers around and the recent couple of accumulation has made this my top 2 holdings at the moment. If you are new to my blog and are curious why I have kept on adding to this company, you may refer to some of my past article and thesis on Ho Bee.

I also used the chance to accumulate Kingsmen by purchasing another 20,000 shares since the recent share price weakness after they announce their full year results recently. My original thesis since I last blogged them last year still remains valid even though it is pretty obvious from the recent results that the landscape of their approach towards the luxury segment may have to change given the slowdown in demand worldwide. Nevertheless, I should be seeing some overhead reduction in the following year and I would be monitoring closely their OVH/GPM more closely.

This month, I have also added Neratel by purchasing 13,000 shares at a price of $0.55 which I have blogged here. I am still watching their development closely and may accumulate further to my position if there are opportunities to do so.

Last but not least, I have also divested my position in Dairy Farm before they announced their full year results, which I am planning to analyse closely. The intention is to add this back to the portfolio once I have clarified some items from their full year results which I am still taking time to analyse. With the sale, I have kept the proceeds at the moment as part of the warchest.




The recent rally has benefited the portfolio quite a bit and it has pushed the portfolio up from the previous month of $342,083 to $371,890 in Mar (+9% month on month; +27% year on year). This is currently the highest record I've ever achieved in my portfolio and I am relieved that the strategy is working well so far. Having said that, I'm not foolish enough to believe that the unrealised profits is permanent as market movement means that it can push it down the next day.

The current warchest available is at 13%, though I am expecting a very strong cash inflow in the month of April and May which would bump up the warchest in time hopefully for more opportunities.

Thanks for reading.

How are your portfolio doing in the recent rally?


Tuesday, March 8, 2016

How Do You Plan For Your Travel Itch?

One of my long term objective is to travel the world to learn and experience things. 

I like to travel because I can educate myself and my kids on things they will never experience in school while keeping abreast of constant learning on the go myself. In fact, I am always constantly challenged when I travel because there are simply so many different activities and preparations that need to be done before going and encountering the unexpected while I am on the go. For instance, we had fun traveling to Bangkok and Northern part of Thailand, Hua Hin last year and it ended up an amazing trip, minus the hefty costs. You can view our detailed trip here.

We also just ended our recent trip to HK which was again another amazing experience, filled with so many memories that we can look back years after. You can view our detailed trip here.

Similarly, many of my peers have fun traveling, one of them is author of Invest Openly, Richard where he blogged about his recent experience going to AU and NZ.




Traveling is an amazing experience and I believe there are hardly anyone that would dispute that but here’s the thing that weighs on everyone’s mind – It costs money, literally. For a person who does not has too much savings, this can be a pretty difficult situation to deal with. Do you use your savings for emergency funds, investment or traveling first? Some thinks emergency funds come first while the more adventurous thinks that traveling when young is a blessing. While there are many people who separates their savings into 3 different accounts each time for each purpose, there are others who finds the practice not conducive. For example, an employee who can only say barely save $200/month will need to break that down into $70 emergency funds, $70 investment and $60 travel funds. These will take a long time to add up. 

We all heard the common saying that experience is invaluable and everyone needs to travel to benefit from it. Researchers have shown that spending money on experiences (not just traveling in general) gives you a higher happiness index than those who spend on material possessions. Well, there may be some truth in that. 

However, there are naysayers who feel that traveling is over-rated. Let’s just say experiences can fade too. For instance, I remember my parents bringing me to Japan when I am about 8 years old but I have hardly any recollection at all. It’s good that we took many photos back then so I can recover back some of those memories but those memories are blurred if you ask me right now. So does spending on experience gets you any priority in your life or does the bread and butter comes first before we can think of these luxuries? 

All is good when you balance things up. When you have extra money, it is easy to navigate our lives on what we choose to do with these money. The conservative choice is always to buffer for the bread and butter issues before splurging on the more adventurous activities like traveling. 

What do you do in such a circumstances?



Friday, March 4, 2016

Observing The Market - "Fear of Missing Out"

The stock market has rallied very strongly to close the week at +188 points to end at 2,837.

Sentiments have certainly calls for more bullish as we can see from how different certain individuals behave. You can sense when there are generally more positive news coming out from the media and individuals who started to re-enter the market. It appears that for some people, the sky seems bluer than the one they saw last week. The bottom is over, momentum investing is in play, it's not a time to miss out on these runs. Well, only time will tell if that is the case.

Some of the actions we've seen from individuals this week can be described as "Fomo".




The Fear of Missing Out is a social angst characterized by a desire to stay connected to what the others are doing. They are largely accounted by the emotional pervasive apprehension that others may be having rewarding experiences that you miss out if you don't join the crowd.

Early last year, I wrote an article (link here) about the psychology of herd investing and why such interesting behavior exists. In the article, I shared a story about Joseph Kennedy and how he managed to sell off all his stocks on the cusp of the Great Recession crash of 1929 when he heard a shoe boy sharing tips on the street. That was essentially a bullish moment waiting for a bubble to burst. 

On the other hand, I also shared an article (link here) about the psychology of contrarian investing and they are certainly not easy to endure, especially for first time investors. 

When the stock market was entering a bear territory not too long ago, I've had friends who decides to sell off part or all of their holdings on fear that this scenario could play out to be worse than any recession we faced in the past decade. There are many "gurus" on the street who are calling for doom's day, just like there are always "gurus" who are calling for bullish sky when things are clear. The noises on the street make it very difficult for an investor to decide what he or she needs to do, especially if one does not has a plan to start with.

As the market is rallying this week, we've seen similar people who started re-entering the market on fear of missing out. Since the share price has somewhat rallied, some of the investors who has sold earlier at the low would obviously be feeling a bit regretful of their decision. Perhaps, these investors would "promise" that the next time such opportunities arise, it would be a straight easy decision this time round. But as you can see from the market volatility, it is not as easy as it seems when certain things happen at certain timing for certain reasons.

I've received quite a bit of congratulatory messages this week as the market has rallied. I think this is perhaps due to some people thinking that I am invested in certain stocks which has done well this week. I started to think if I was really happy that the market has run up.




Test once...

Test twice...

Test thrice...

Confirmation acceded that there is nothing to be happy about just because the market rallied up in the short term. I knew that for as long as these are merely paper profits, it could turn sour in the other direction. I had to be ready for it when that happens. 

In fact, I would have been happier if the company which I'm vested in increased their dividends sustainably by 1 cents than if I had made an extra $30K in paper profits. When markets are lower, I am able to allocate my capital more efficiently than if the markets have rallied. So I am just hoping another opportunities might present but that's totally out of my control anyway, so there's nothing I could fret about it.

The next time there are "gurus" trying to tell you things, question their motive why they want you to hear or follow what they ask you to do. Perhaps, you can get a better answer for yourself and decide to spend the time more efficiently by reading up on things that matters.



Wednesday, March 2, 2016

Recent Action - Neratel

I recently made a purchase of Neratel of 13,000 shares at a price of $0.55

This was not a company I was unfamiliar with as I have previously been vested with them in 2011 before a couple of takeover saga takes place and I divested the share thereafter at 76 cents early last year. 

In this post, I will not be writing about their fundamentals as much as I have done in the past as the purchase was made on a bet that if the share price drops low enough, a potential takeover bet might be in the offspring. In the meantime, I do still take a look at their fundamentals and assess their ability to pay 3 cents dividend (conservative estimate) while waiting, which represents a 5.5% yield at current price.




In Feb 2012, ST Electronics, a wholly owned subsidiary of ST Engineering, has proposed to acquire Neratel to complement their infocom business offering terrestrial and wireless broadband networks. The consideration for each Neratel share was proposed at $0.45 (comprising $0.39 in cash and $0.06 in dividends paid by Neratel to shareholders). Eltek ASA, which is the majority owner of Neratel at 50.1% holdings at that point in time, has given an irrevocable undertaking to vote in favour of the transaction, though it ultimately failed and did not go through at the end as most of the minority shareholders rejected the offer and it did not get through the required 75% approval from shareholders. 

The consideration at that time implies a PER of 12.1x of Neratel’s FY11 earnings of 3.7 cents/share, which coincidentally implies about the same FY15 earnings of 3.8 cents/share recently announced. Since the share price of 45 cents was strongly rejected back then, of course we can imply that no one was going to bid 45 cents again for another takeover bid, especially since the company has expanded much of their business since 2011. 

9 months later, Northstar Group, a Jakarta based equity fund, comes in and agreed to buy a controlling 50.1% stake in Neratel from the previous owner Eltek ASA. As a result of the deal, Northstar is launching a mandatory unconditional offer for all the remaining shares at $0.49/share. At the time, shares of Neratel traded above $0.49 after the announcement was made, again indicating that the offer was low ball and market suggesting that it expects a higher valuation than that. The privatization offer was not successful at the end, though what we do get is a change in a controlling shareholder from Eltek to Northstar and this is a big change in the future direction Neratel was going to go from there. 

The consideration offer of $0.49 at that time implies a PER of 13.2x of Neratel’s FY11 earnings of 3.7 cents/share and 9.1x FY12 earnings of 5.4 cents

Northstar’s ambition after taking control of Neratel was to expand into the different markets and double their earnings in 3 years. This aggressive growth since then implies tapping into markets of unchartered territories but with promising rewards and expanding their balance sheet by taking on more debt and incurring higher capex. We knew from then on Neratel was not going to be the same company in the past which has a nice offspring of free cash flow, stable dividends but with little growth in it. I don’t think that was the intention of them taking over Neratel. They want to grow this young company into a monster of the future. 

In Jul 2013, there was panics in the market when news came out that the CEO, Mr. Samuel Ang sold out his direct stake of 1m shares, leaving him with little stake in the company. The market sees this as negative as a sale from the Director probably means that something isn’t going right. Thereafter, there were further clarifications that came out indicating that the selling was misconstrued. Apparently, Mr. Ang exchanged his shares by selling and increasing his stakes in Canopus Asia, the company used by Northstar to hold its stake in Neratel. Effectively speaking, the transaction was done to align his interests that of Northstar. 


Final Thoughts

Being in the service oriented business, Neratel faces many competitions especially smaller retailers who are offering lower margins. The good thing about Neratel however is that they require little capital to operate and has generated significant amount of free cash flow until the decision in recent times to venture and expand. With these growth and expansion on the back of the mind, it is not difficult to think that dividends may be compromised in the short term, unlike in the past where they can generate high FCF, pay high dividends but with little growth element in it. 

My intended margin of safety comes from the fact that the company is still expanding well into different geographical areas and yet still able to pay an estimated 3 cents/share as dividends which would require them $10.8m at this point in time. Their cash equivalent, as of 31 Dec 2015, are still at $20.8m while net cash (after deducting all short and long term borrowings) are at $4.5m. The FCF is a bit struggling at the moment, but that’s because a lot of the money are pumped into working capital needs and those WIP receivables which they can only get once they have completed their service. 

Also, I think with the previous 2 failed takeover bids at $0.45 and $0.49, it gives an indication to potential offeror that the company is worth a lot more than what it used to be. Even though they may somewhat struggle to keep their margins due to smaller competitors, I do believe that the company has grown and expanded and they will be worth a lot more should there be any takeover bid in the future. 

Meanwhile, I'll continue to receive dividends in the pocket while waiting for someone to offer a suitable price to takeover Neratel one day.


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