Dynamic Colors takeover offer of 22.5 cents is a lowball

(Its a jaw dropping offer)

Having talked about the company in my previous posts,i will not go deep into the analysis again.

But this offer of 22.5 cents is a minority shareholder unfriendly offer. 

Unfortunately, this offer will most likely go through.

1) The undertaking stands at 86.88% which means that only 3.12% is needed for the 90% hurdle for the take over to go through




2) If anyone has seen the top 20 shareholders, one will realise that Goh Seok Kee has 3.26% of the shares. If he/she has not disposed them (which is unlikely given the volume traded for the stock since 17 march has never been in millions), then the takeover offer will likely go through if he/she agrees to it.

When your name is just one word away from the executive chairman...its hard for others without any information to believe you are not affiliated.......




Why is the offer a lowball?

1) Company has 19 million cash and 9 million of liabilities, so the company has roughly 6 cents per share of spare cash. This offer kinda values the company at 16.5 cents when the company's continuing operations made 1.56 cents is a multiple of 11 is not really a good offer of a company which has good cash flows and the offer is just barely at its net value.

2) The company has not booked the profits that it will make from the compulsory land acquisition
This is expected to book another 3.9 cents per share of profits and increase the cash position of the company even further. This just further justifies that the cash used in dynamic holdings can be used for the purchase of the company itself.



Closing Words

Sometimes life is as such, the offer is definitely bad for OPMI investors and the fact that the shareholding structure is as such has made it very easy for the take-over offer to happen. I am curious to see what the appointed independent financial advisor has to say........

Short Post: The listing of Yuba Hut on HKEX

 

Yuba Hut would be making its IPO on the Gem Board of HKEX on 18 May under the company named SG Food Holdings (HKEX:8496). The company includes brand names of Yuba Hut, Proofer, 300 BC Bakery and Laura Restaurant. Proofer is the brand that generates the most revenue for the company.

Basic Details as follows

Net Profit in 2019: 1.4m SGD

Adjusted Profit (excluding listing expense): 2.7m SGD

Listing Price: 0.9 HKD

Shares Issued: 240,000,000

PE: 15.1 (excluding listen expense PE)

The prospectus can be found here.

What I Dislike about the listing.

1)      The net proceeds from the listing would be roughly 27m HKD but the listing expense if roughly 30.1m HKD. It kind of makes no sense listing since most of its gross proceeds is used to pay its listing.

2)      Pre-IPO investors are not prevented from from selling their shares at opening. Pre-IPO investors got in at 0.56 Hkd per share and hence its way cheaper than the listing price. Lastly, the price they got in was based on an adopted PE of 7.1 times, which should be a more indicative PE than the listed PE.

Key Highlights

1)      Revenue from March 2020 to June 2020 would be expected to be 28.1% lower. That is probably an indicative of how business would be affected during the covid-19 period but I think it might be higher

2)      The company is expected to receive 1.5m SGD in rebates and supports. This is from rental rebates, Jobs Support Scheme and Foreign Worker Levy. This is roughly 16% of its operating expenses in 2019. My feel is that the Covid 19 impact is likely to last more than 3 months and hence the supports the company is receiving is probably insufficient

3)      Yuba Hut has shown positive same stores growth of 5.8% from FY 18 to FY19. Probably displaying a decent demand for its food

4)      Proofer, its largest revenue generator has displayed same store growth of 2.4% from FY 18 to FY 19.

5)      Revenue increase of 70% from FY 2018 to FY 2019, this is followed by a similar increase of profit of 68%.

6)      The FnB landscape took a downturn ever since 1 March 2020. From 1 March to 14 April, operating losses were seen in 4 of the company’s restaurants and 12 of its bakeries.

Final Thoughts

Although I think Yuba Hut serves good food, I feel that the fact that some of its restaurants and bakeries has been on operating losses since early March is not a good indicator of its business prospects.

The listing net proceeds of 27m HKD is also not far away from its adjusted net profits of 14m HKD in its most recent financial year. In other words, the listing reasons is dubious and the amount raised is rather low to be raising money for growth.

This Ipo probably depicts the negative impacts of Covid 19 on the bottom-line of FnB, which is particularly important since most companies in the SGX are switching to a half-yearly report.

April 2020 Portfolio Review + Personal Thoughts

Probably my reaction to the whole of April

Overview(Year to Date)
S&P 500 Index Fund -8.36%
Straits Times Index Fund -19.71
Tracker Fund of Hong Kong -13.31%
My Portfolio -4.34% 

Transactions 
Added nothing in April

Updates from companies that are in my portfolio as of End April

Mainland Holdings- Profit warning, 1Q 2020 is comparable to 1Q 2019 but 2Q will be severely affected due to lock down in Bangladesh and orders by European and American companies being withhold-ed/delayed. However unable to ascertain impact as of end April.

Comments: Not entirely surprising, with consumption for sports events and global supply chain being affected, this definitely would affect demand and eat into profits.

AAG Energy Holdings- 1Q 2020 to be 7% lower than 1Q 2019. Net cash of 0.402 hkd against the current traded price of 1.21 hkd its roughly 1/3 of its market cap. Yield is roughly 9%

Comments: 7% drop in profits for 1Q is remarkable as China was busy with Covid-19 and Govt has implemented lower selling price policies as well. With the huge amount of cash on hand and good yield, i am not really worried.


Personal Thoughts on the markets

Predicting when Covid-19 ends would probably be a tougher thing to do than striking a consolation Ibet hence as of end april i feel that we are pricing in things to return to normal in June. 

Perhaps some of the companies(E.g Straco, SIA, Sats)  that are more badly hit due to higher tourism exposure would definitely take a much longer time to get back on track which leads to their share prices being more depressed than the general market

As for Reits, commercial reits are the ones retailers can experience the profitability by sensing the covid 19 fears among the public and the crowd in the malls. As we have seen from the  result of some reits, they are cutting distributions for now due to uncertainty hence if one is expecting cashflow in the upcoming half year, they should reconsider their purchase.

Personally i would prefer to buy companies who are cash rich at this point / have operations that are functioning despite the covid 19 concerns and circuit breaker measures.

2 Companies I have in mind currently for adding a position

1) Hanwell Holdings
-Distributes Consumer goods like Tissue Paper, Rice, Coconut Water, Tofu and many more(hence operations unlikely to be affected by circuit breaker)
-Cash + Trade receivables net of liabilities is 17.6 cents sgd against the current traded price of 18.7 cents sgd
-The wild card would be Tat Seng Packaging, while operations in China have went on, the impact is unknown yet. Probably a 20-30% fall in revenue would be norm.

2) Powermatic Holdings
-1H results is 84% of last year's full results
- Cash+Investment Property net of liabilities is 1.70 sgd against traded price of 2.14 sgd
-This means that the business on a normal operating scale is trading at less than 5 PE
-Has announced that its China operations has been operating albeit expecting disruptions in demand
-From a balance sheet point of view, its definitely a safe company even if no growth is factored in. It has one of the most straightforward balance sheet i have seen.

Adding that to the list from the previous post, there is quite a few on the watchlist already.


2 Companies people have asked me about and i would not even consider adding a position

1) SIA
-SIA would likely survive but that does not mean the share price will not be depressed, unless one is betting in short term fluctuations then it could look good for speculators but from a investing point of view i would not be any much interested in it.
-The rights issue is just too dilutive. Post rights issue, the number of outstanding shares would be roughly 6.4 billion shares assuming the convertibles are converted. SIA had earnings of 551.6 million in 9 months of 2019/20. Assuming SIA earns annual earnings of say 900 million in a non-covid setting, at the share price of $3, the market cap is 19.2 billion. The PE will be 21.5, which is still a very high PE for a company that is very susceptible to global economy fluctuations.



2) Sembcorp Marine
-3 Full years of losses (I believe the impact of oil prices even before the flash crash has done enough harm to the company)
-With oil prices being even more depressed, the company would more than likely suffer even more
-Company turn current assets positive to negative in 2019.(Current liabilities more than current assets as of end 2019)
-For the full year in FY 2019, gross profit margin is actually negative, which indicates that it probably has some business fundamental flaws. 
-On a closer look, EBITDA is positive, generating 103 million in 2019. However, depreciation cost is 238 million in 2019 and borrowings cost 130 million in 2019 (although its offset by 93 million of interest income from customers which cannot be assumed to be stable and recurring). As a whole the EBITDA is not sufficient to pay off its borrowings.
-Apart from the long long long time rumours one hears of a merger might interest the speculators, I do not think that the company is attractive at all.

Considerations of buying stocks in recent times

It definitely has been an unprecedented past 2 months with prices fluctuating largely day in day out amidst a longer downwards trend since the start of the year. (The picture above probably describes long-term participants in the market somewhat)

In such times, i do get the rare few messages that ask about buying stocks and I take that as a sign of people paying more attention to participate in the market.

Before actually buying stocks there are a couple of considerations that I feel are more essential to answer before making the final move. I would try to give my personal inputs although these are just my thoughts only and could be very wrong or subjective.

Q1) Timeframe. Are we buying for the long run or are we buying for a short-term trading position?

A1) If it’s the short-term then the person possibly already has an aim in mind, if he/she does not then its advisable not to execute.

If it’s the long-term then the person has to ask him/herself if that amount of money that the person has put in will not be touched in the foreseeable future despite job loss or any crisis. If say you only have 10k cash but you do not have the job security then its more advisable to not put that 10k in stocks. Putting into something less volatile like Singapore Saving Bonds would be better.

Q2) Choice of Equity. Assuming Q1 did not deter us from investing, should we buy an Index ETF or a specific counter.

A2) It’s a tough question to answer personally, I feel that if you are ok with market returns an Index ETF is always safer as it’s a basket of stocks and it won’t go bankrupt unless the whole basket of stock bankrupts.

Specific stock picking always entails a higher risk and most specific stocks require monitoring as well. Which is why when people ask me about Singapore individual counters, my general advice is that apart from Banks in the STI, the rest would require reading of its financials and news related to the counter.

To cite a biased backwards example of STI ETF (ES3) vs a bank stock DBS (D05) vs a well-known household name Sheng Siong (OV8)

	1 Feb 2016	31 Jan 2020	Dividends Collected	Total Return*	Simple Average Return per year
STI ETF (ES3)	2.596	3.205	0.376	37.94%	9.49%
DBS (D05)	13.506	25.37	4.43	120.6%	30.15%
Sheng Siong (OV8)	0.841	1.23	0.14	62.9%	15.72%

*Assumes that the user is like me who spends the dividends on leisure and anything he/she likes apart from investing it back.

The point of the example is to show that returns largely differ between individual stocks and index etfs but that’s because the risk is different as well.

Say if I had bought DBS/Sheng Siong in 2016 instead of the STI ETF, I would probably be still somewhat more comfortable currently.

Q3) Sizing. How much should I be firing into assuming this amount of money I have decided that its definitely safe and not affected by other factors?

A3) Sizing is an art, personally I feel that this really depends on how a person perceives loss of money vs gain of money in the mental state of mind. In reality when you lose a dollar vs when you gain a dollar it should be -1 and +1. But a lot of us including myself are not as mentally strong yet for a variety of reasons. Example: Lack of investing experience, Aversion to loss, Thrill of gains.

If your ‘lose a dollar’ is more than a -1 to yourself and you know it, its better to break the amount into 3-5 parts and slowly purchase at every 10% it falls. Sure, enough you might not get to fire everything but at least you don’t feel that bad when your first few purchases start losing money.

Do bear in mind how many counters you are holding because sometimes you might start having to average some of them and you might realize you have run out of money more quickly than you have expected.

Q4) What are the SGX counters you have been looking at?

A4) Just looking of course. Will list down the counters I’m looking at and short 1 liner explanations.

Sheng Siong – Should it fall even further by another 20%, it should be quite interesting

SBS Transit- Already fell like 50% from its peak? The upside is winning the bus packages in 2H of 2020 but the downside is lockdown. Ridership is expected to decrease in this period but assuming 1 quarter brings in about 6-7 cents eps the fall in profit should not trigger such a huge sell down.

Tat Seng Packaging – Considering some foolish sense of averaging and buying back into China just seems a little safer at the moment.

SingHoldings- With Parc Botannia TOP likely in 2021, this counter will most likely be cash rich which does not reflect its current valuations although there is risk of buyers defaulting and lack of visible projects that will affect its earnings in 2021 and beyond. As of end March 727 units seems to have been sold, that leaves 8 units left assuming 735 units on the internet is accurate.

Powermatic Data- When in doubt, a cash-rich company and really good balance sheet company like Powermatic Data is always a solid pick.  

Tat Seng(Sgx: T12) 4Q Results write up – A good 4Q but cut in dividend remains puzzling

(My reaction after seeing the dividend declared)

Tat Seng released its full year results on 27 Feb 2020, I appreciate the 4Q results but it seems like the price has continued to slide after the release of the results

Pros

-4Q profit came in at 5.898 million compared to 5.516 million last year. That is an improvement of 6.9%. This is commendable as corrugated paper prices have been higher last year and traditionally Tat Seng shines in the 2H of the year.

-Adding to that, the depreciation this year has been significantly higher than last year, Q4 2019’s depreciation came in at 2.736 million while in Q4 2018(which had lousier results) only had depreciation of 1.762 million. This means that the additional investment had been able to generate better profit and margins to overcome the depreciation of the capex.

-4Q 19 Gross and Net Profit Margins came in at 20.6% and 7.75% respectively 4Q 18 Gross and Net Profit Margins came in at 18% and 6.68% respectively. Selling more (Higher revenue) in 4Q 18 has not seen higher gross and net profit in terms of both margins and actual figures.

-In terms of liability to asset ratio and current ratio. As of 31 December 2019, the ratios are 0.46 and 1.72 while in 31 December 2018, the ratios are 0.54 and 1.48. Clearly the company is in better financial health.

- Borrowings have greatly dipped across the year. As of 31 December 2019, the company had borrowings of 57.477 million while in 31 December 2018, the figure was 87.169 million.

-Lastly sales volume increased 3.2% from 2018, 4Q definitely recorded a larger than 3.2% volume increase as the 1Q to 3Q increase was 2.1%. The growth is encouraging.

Cons

-Final Dividend of 1 Cent, no explanation was given for the cut in dividend. The only reason I could have thought of would be fears of Covid 19 might drive down results and its better to keep more cash in the books. Otherwise it might be that the cash might be required to fund its new factory equipment in Hefei.

You would have to go back to 2015 the last time it paid 2 cents of dividend for FY 2014 which it earned 9.6 million. In contrast, the company earned 14.8 million this year.

Also, a dividend of 3 cents was paid in 2016 for FY 2015 when it earned 13.1 million. So it made really little sense why the company is paying 2 cents this year apart from Covid 19

-Cessation of Quarterly Reporting, while such reporting might incur more cost, the scrapping of the reporting is bad in my point of view as this means that retail investors would have more lag time and unable to ascertain how the company is doing particularly when Covid 19 is affecting china and there is no mention of whether the China Operations have resumed or have been halted since the outbreak.

Final Words

If there is no delay to the AGM this year, it would be one that I have to attend at there are a lot of question marks after the results was released. I believe the current headwinds should they continue, should drive the price of the shares down as operations continue to suffer.

Meanwhile the company trades at 4.25% dividend yield, PE of 5.15, PB of 0.55. 

Dynamic Colours Limited (SGX: D6U) (Dynamic results with decent value?)

Dynamic Colours Limited(SGX: D6U) posted its results on a Sunday Morning (strangely enough)

Profit came in at 107.3% higher than previous year, with 1 SGD cent dividend declared

Valuation in Numbers based on closing price of 0.179
PE: 9.72
Dividend Yield: 5.5%
Price to Book: 0.8
Cash per share: 13 cents
Cash per share net of liabilities: 6.4 cents

With more than 1/3 of its current market cap being cash, the business is trading at low valuations.

Counting in only continued operations, the net cash PE comes at 7.6.

With core earnings coming in at 1.5 SGD cents, I believe the company has the ability to pay the dividends of 1 cent as well.

Looking at the cash flow statement, it has performed tremendously well.
 
The depreciation is high and the capex is low, which means cash flow generation has been good. Though there is still a need to keep a look out for future capex.

The key value comes in the announcement that their china plant and land has been compulsory acquired by the government

From the announcement, it has stated that the company will receive $12 million USD and  the estimated gains will be $5.8 million USD or 3.9 SGD cents per share.

From its cash flow statements, it has received $5.1 million which means there is half of the gain to be recognized.

Adding that to the cash it already has, it should mean that at current price at least half of the market cap is cash.

That to me is a really cheap business, though we would have to keep an eye on the Polyethylene Packaging business which had lumpy earnings


A key reason i believe for the lumpiness will be the price of Polyethylene


It has decreased in 2019 and probably has lead to a better bottom-line.

Closing Thoughts

• It is a company i have been tracking since September last year but there really isn't much selling going on for me to purchase it. 
• It is a cheap company as of now but as its FY 2018 and 2019 results have shown, it is susceptible to fluctuations. 
• Though the recent compulsory acquisition would definitely have added more cash to the company and made it a much safer and value buy. 
• It is worth noting that the company has given out special dividend before back in 2016 when they disposed their factory in Yishun.
• Pulling the trigger is not the issue, the issue is would there be one for me to pull?

Stocks on my watchlist are not cheap enough for me yet...

It has been a very bad week for investors who are vested.

To me adding is always an art because you have to balance with what you have in stocks already and your cash levels while thinking if repeated adding would be effective against your portfolio. Of course how fast you replenish your cash levels matters as well.

The urge to add more has always been there this week but its really not cheap enough yet.

HSI as of 1 Feb 2019 was  27930
HSI as of 31 Jan 2020 was 26312.

Going by rationale the 1 year performance would be roughly down about 5%

Will go over the watch list vaguely




China Property Coys (KWG Grp), Cement Coys (Conch Cement, Asia Cement)
- Its not anywhere near its 1 year lows yet.

Macau Concept Stocks (Galaxy Ent, Shun Tak Hold)
-3% down from 1 year price is not really an attractive entry for Galaxy Ent
-Shun Tak being a holding coy of SJM, is not near its 1 year lows as well.

Counters that I already held (1100, 610, 2686, 8502)
-610 not at 1 year low
-2686 is at a 1 year low but having added through out the past 12 months, would probably want a lower price to add more
-8502 only initiated in past 2 months
-1100 being the only counter i would want to add as it has really corrected in the past 12 months. The only reason i have not added is because the 3 months return and the 1 week return difference is roughly 4% which i feel the 'virus' effect has not kicked in on this counter.

NWS Holdings (44% down in 1 year)
-This is quite interesting as the company has found a new low once again. Being a mid/large cap definitely does have its implications of moving with the market trends and industry trends.
-Its possibly one of the companies that you would buy if you bet that the virus and protest are short term problems.
-Roads (Likely traffic affected due to lesser travels and possibly companies stopping work)
-Aviation( Plans to tap into the China Leasing Market a real bane as air travels in China should be at an all time low)
-Duty Free Shops, Convention Centres (Tourism double whammy, Virus + Protest. Possible cancellations of Exhibitions, Concerts and Shows)
-Transport (Some operations affected such as Macau HK connecting buses and Ferries Operations)e
-Construction (Should be fine but order books under threat if prolonged situations result in lesser expansion)
-Insurance (Should be fine as well but have to see the numbers.)
-Logistics (Likely affected due to lesser business activities by companies resulting in lesser demand for ports and storage operations)
-Environment (Should be fine)

The headwinds are plenty for this company. The impacts are most likely going to be reflected in its full results in September instead.
Though the results briefing in Feb for its half year and its reports should give some clue.
Estimating the impact is quite difficult for this company such that one has to just keep averaging if the long term belief is things will be better.


I believe the upcoming week should see some purchasing opportunities. I would be terribly surprised if i don't see any.