Wednesday, January 13, 2016


Bent out of shape

2015 turned out thusly [the weighted average portfolio allocations for the year are in blue]:

This was a year in which the results were driven by Future Bright Holdings. Its market cap halved -- and halved again. A market price at, in my view, a deep discount to the value of the business (see below) brings about its own risk of loss via privatization by the owner operator. Chan Chak Mo diluted his ownership stake at $4.30/share halfway through 2014; the shareholder base must, by now, have completely turned over so that there is no longer a constituency to howl in protest; and the potential for a "take under" is therefore not inconsequential. So I kept buying and allocating an ever increasing share of my portfolio to it. 

Given that both Macau and O&G sentiment turned south at the same time I was left with an ever diminishing slither of my portfolio to allocate to regular industrials. And that, in turn, meant greater turnover (the average trade in the third column lasted two or three months), underweighted positions in straightforward value propositions (Thorntons and Flybe in particular), and two execrable errors (Enterprise Group, Republic Airways) as I sought near term payoffs to recycle into Future Bright.

Keck Seng Investments Ltd

This is an opportune moment to mention my position in Keck Seng Investments, an opportunity written up very well by gvinvesting at the Value Investors Club. This is what I see:

One way of looking at Keck Seng from a public market valuation perspective is to reorganize the parts as follows and to apply a discount -- 20% to 30% -- customary on the property net asset value for assets of this quality:

Alternatively one might count the present value of dividends. Keck Seng pays out ~35% to 40% of earnings and has grown dividends at 20% to 25% per year over the long term. So we might say that the markets should be willing to accept a 2% yield -- decomposed into 7% income less 5% forward dividend growth rate. If so:

If Vietnam's anticipated legalization of gambling for its own citizens occurs within a reasonable time frame or, if Keck Seng decides that it doesn't want to repatriate its US earnings -- tax, anticipation of currency trends -- and opts to spin off its US subsidiary into a REIT, then there may be upside beyond what I have indicated above.  If China's VIP gaming troubles spill over into Vietnam -- and on balance I think they will -- there's likely some share price volatility ahead.

Future Bright Holdings

Here is my sum of the parts valuation of Future Bright. In contrast to Keck Seng SOTP analysis is not going to decide Future Bright's fate but is nevertheless useful as a guide to decoding just what has and hasn't happened to the business over the past year and a half.

These estimates did not and do not assume, incorporate or hint at any recovery in VIP traffic above the levels seen in the first half of 2015 -- and they attempt also to incorporate the effects of market share losses as Macau's center of gravity continues to shift from the peninsula to Cotai.

So what has happened over the past 18 months? 

The company has: 

1. Launched a food souvenirs business

It has purchased the right to use the 80 year old Yeng Kee Bakery brand* in Macau, issued share options to mainland celebrity brand ambassadors, spent up to $28 million in launch advertising, and a further $8 million in training retail staff.  It has rented thirteen shops -- in casinos, at the airport, in the high street, and at its own Yellow House property at the ground zero of fanny pack tourism in Macau. (The Ruins of St Paul is to Macau what the Tour Eiffel is to Paris. Its outline is overwhelmingly stenciled on Macau sold mooncakes. Yellow House is located in the shadow of the Ruins).

The company thinks that it can, over time, command a 4% share of the market for food souvenirs in Macau and the financial justification for this investment is therefore as follows:

Two existing Macanese franchises -- Koi Kei Bakery and Choi Heong Yuen Bakery -- are omnipresent and dominant in the food souvenirs space, controlling 85% of the market between them. Future Bright is competing for a share of the remainder and, if selling mooncakes, almond biscuits and boxes of chocolate is, in the end, a matter of visitor traffic, distribution channels, and branding -- in that order -- the company is in a privileged position in competing for that remainder.

By the end of this year the company will have spent ~$90 million for an implied expected return of $900 million in present value terms, give or take. It looks to me, at this as yet early stage, to be on its way. 

Given the seasonally adjusted sales per sq ft trajectory to date and management's stated intention to optimize the mix of storefronts over the next few months I expect this business to make further progress toward FCF breakeven (after admininstrive expense allocation) in 2016.

* The second generation owner managers of the Yeng Kee brand have used the proceeds of the sale of the Macau rights to fund an apparently successful foray into the mainland.

2. Added 32 catering outlets

Of these new openings the 19 food court counters have not worked out at all well and are responsible for most of the gross operating losses. These food court counters have now been closed.

3. Acquired various properties, including land in Hengqin

Future Bright was awarded the right to purchase a parcel of land in Hengqin. It issued 65.4 million shares in a private placement at $4.30 to finance this purchase. 

If residential property sales are currently transacted in the neighborhood of RMB 40K per Sq M and if things go on to appreciate from there, then

This is the way that the sell side analysts had chosen to assess the value of the Hengqin property. 

If, on the other hand, current retail rents are in the RMB 400/SqM range, then

The legacy business

The legacy business as existed in the first half of 2014 -- presumed by the market to be in disastrous shape (or perhaps I myself am presuming what the market presumes)  -- has performed as follows:

Much of the weakness in the legacy food business is, I suspect, attributable to the absolutely and relatively disastrous performance of SJM's Casino Lisboa in this downturn as well as to the presumably poor performace of the Hotel Lan Kwai Fong. The restaurant in the latter property has now been closed. 

A composite picture

The last 18 months for the company as a whole therefore looks something like this:

and, after adjusting for non-recurring items :

Looking forward

I think the next few years will look something like this, give or take a $20 to $30 milllion in either direction depending on all the usual variables -- macroeconomic, Macau-specific, timing of restaurant openings, relative market shares of Cotai and peninsular properties, etc:

I bought these shares at ~$3.30 and my abolute cost basis is now $1.48.

I have a position in another Macau-centered company -- Paradise Entertainment -- that I think is also misunderstood but I'll leave things here and deal with that in a separate post.

Disclosure: I own shares in Future Bright. No one is quite so crazy as an investor with a large underwater position in a stock he likes so please do your own research and draw your own conclusions.

Wednesday, December 2, 2015

Northgate Plc - Vehicle Rentals

I have both owned and written about this company in the past. It was then a good company with a bad balance sheet; it is now a good company with a good balance sheet.

The apparent cause of the recent decline in share price is the margin deterioration highlighted above. Management has explained the margin decline as attributable to 15 (now 16) new sites in the UK that take time to ramp up -- there are start up costs and vehicles are introduced slowly but steadily as each site matures. This is not an after-the-fact excuse; I owned the stock and was paying attention in 2012/3 when Bob Contreras explained that this was in the offing. 

From the section labeled "network" in the latest interim filing we can surmise the following, more or less:

So that 

And this before a proper recovery in Spain, its other market.

In any case, a 12,5x multiple on 2017 earnings would not surprise and it seems to me that, along with dividends collected along the way, these shares offer a 100%  return.

Disclosure: No position (yet)

Brammer Plc -- Distributor of MRO components

This company is the leading provider of MRO components to industrial companies in Europe. The business model is, I think, well known: it provides suppliers a direct route to market and offers customers a single interface for accessing vast choice of products. It matches the many to many in a hub-and-spoke arrangement. Market share gains enhance the network effect and thereby entrench the leader's competitive advantage. And so on, I won't belabor the point.

Brammer has been built by acquisition so it is worth taking note of whether it has created or destroyed value as it buys specialist distributors:

The conservative answer is that its acquisitions have thus far been value-neutral:

So one might value Brammer at 2.7x its net operating assets, thereby giving it no credit for growth: 

2.7 x 150 = 410; less 61 in net debt = 348 = 269p/share. This target approximates 11.5x run rate FCF.

Brammer's share price has fallen away because of its exposure to the Nordic area, the weak Euro relative to the Pound, etc. If these things correct themselves in two years then the path to a total return of 95% or so -- 80% from capital appreciation, 14% from dividends -- should be reasonably straightforward.

If not, MRO distributors tend to be cash generative in the downswing of a cycle as they shed working capital. A stylized illustration of that principle as applied to Brammer may look something like this:

Addendum Dec 3, 2015

Commenters below the line have expressed reservations about Brammer that I'll address in more detail here. The reservations raised thus far fall into the following categories:

1. It does not compound value / acquisitions are dilutive / there's no operating leverage.

These are historical questions and this is the long term record. 

Let's say that one bought a share of Brammer in 2004 at 6x underlying earnings. (I'll turn to the exceptional items further down). These are the returns that one would have received:

In and out at the same multiple returns 15%. One can infer, roughly speaking, that the way to have lost money would have been to either pay a higher multiple or, worse, to have applied a higher multiple on peak earnings.

My argument: (a) It is not likely that this is peak earnings per share. (b) It is not likely that 6x earnings is as high a multiple as we are likely to see over the next 2, 5, or 10 years. 

2. It does not convert earnings into cash

This is also a historical question and, again, the long-term record is as follows


3. What about all those XO items?

The XO items are acquisitions related. Therefore I treat them as CapEx items as follows:

Again, the XO items have not disappeared and are not being ignored. They have been reclassified in order to make things easier to understand. Like this, for example:

Lever it up (see below) and the marginal return on invested equity is >20%.

4. It doesn't manage its balance sheet well

Prior to 2007 it had no equity to speak of. Since then it has effectively had a policy of using a ~ 60:40 Debt:Equity ratio  in order to generate 20% returns on equity.

5. There is no downside protection

In case of a cyclical (rather than secular) downturn, I suppose. 

We've had one major cyclical downturn in the last 10 years and working capital reversals came through as the business model would predict.

6Potential future threat of online distribution

This is the most important issue, in my view, and there are no definitive answers. What I can say is that the business most like Brammer that I know of -- Fabory -- with similar exposure to explosive growth in Eastern Europe, was acquired by Grainger at a multiple of 1x sales in 2011. 

So the question becomes, if Brammer is unable to develop its own online distribution capability, would it be cheaper to replicate its 1 million item stock list, its dozens or well-placed distribution centers, and its list of tens of thousands of customers? Or would it be cheaper to buy it at, say, 0.5x sales? I think the latter.

That's all I've got for the moment. 

Disclosure: No position (yet). 

Sunday, November 22, 2015

Global Testing Corporation -- Semiconductor testing services


Global Testing Corporation is a Taiwanese company listed on the Singapore Exchange. It provides testing services -- e.g. wafer sorting, final testing services, test program development, conversion and optimization services, load board and probe card design, and leasing of testers -- to the semi-conductor industry, focusing on logic and mixed signal semi-conductors used in consumer electronics and communication devices. 

Its main testing facilities in Hsin Chu, Taiwan and Sunnyvale, CA service customers such as Taiwan Semiconductor, United Microelectronics, Marvell Technology, ALi Corp, Realtek Semiconductor and Sunplus Technology Co Ltd.

There top line declines seen above are a indicative of the secular decline in consumer electronics over the period and, as one can see from the Return on Invested Capital line, this is not a wonderful business.

The Investment Case

1. Depreciation rates in excess of its maintenance capital expenditure requirements have caused GTC to accumulate large accounting losses since its incorporation in 2004.

2. Singapore incorporated businesses with retained losses are restricted from paying out dividends. One way around this is to instead buy back shares sufficient to reduce the equity capital of the company by (at least) the amount of the accumulated losses. Capital  reduction  in this way enables  the company write  off  its  accumulated  losses  by  cutting  an  equivalent  amount of stockholders’ stakeholding.

From GTC's Letter to Shareholders prior to its capital reduction excercise this year:

and from the 3Q 2015 Financial Statements (the left hand column is at Sep 30, 2015):

3. Given the state of play in GTC's end markets -- and given also the capital allocation practices at Yageo Corp, also owned by Pierre Chen -- it is more likely than not that it intends to return the lion's share, probably 100%, of its free cash flows to shareholders by instituting a dividend policy and opportunistically buying back shares.

From the Letter to Shareholders

4.  GTC's free cash flows can likely support  payouts in excess of SGD $10 million per year, implying a payout yield of > 35% 

Disclosure: I own some shares in Global Testing Corporation

Sunday, November 15, 2015

Singapore Shipping Corporation -- Pure Car and Truck Carriers

Business model

This company operates in two segments. Via its shipping segment it is what is known a "gross tonnage provider" for major car and truck carrier operators. That's just what it sounds like: SSC buys ships that it immediately leases to, for example, Wallenius or NYK Line for fifteen year terms or longer. These operators in turn carry Toyotas, Mazdas and the like from the places where they are manufactured to the places where they are sold. 

The gross tonnage provider -- SSC in this case -- benefits by locking in stable, long term cash flows albeit at lower average daily charter rates than it could command in the short-term charter market. This allows it to finance the purchase of the ships using lots of very low cost debt.  The charterer, in turn, benefits by earning a spread between the rates at which it charters the ships from SSC and the rates that it charges the auto manufacturers in the shorter term (usually one year or two year) market. 

Relationships between charterers and PCTC ship owners tend to last for decades and ships are often chartered for back-to-back 15 year terms. Entering the market in the absence of such a relationship is unlikely to succeed.

SSC also has an agency and logistics segment that I won't be discussing here (though I'll address any questions in the comments).

Earning power

The above values are in US dollars, SSC's operating currency. Capricornus, Centaurus and Taurus Leader are new enough acquisitions that their impact on SSC's earning power has not yet been fully felt.  

So the market's valuation of SSC is offering what looks like a 15% earnings yield when the weighted average cost of SSC's debt is in the 2% range and the equity risk premium for the SGX composite is ~6%. On that basis alone, SSC is trading at half its value.

SSC is an 80+ year old company now chaired by the second generation and managed by the third, and it prides itself on returning cash to shareholders -- $200 million since 2008, 5.5c per share over the last ten years and so on.  If it were not for its growth plans the year ahead dividend yield would be 15% -- attractive when adjusted for the risk, which is far below average.


SSC's owner managers have also earned a reputation for doing what they say they will, and what they have been saying over the last year is that they are committed to doubling their fleet within three or four years. 

I think that SSC can pay out roughly 1/3 of free cash flow in this period as dividends and will use 2/3 to provide the equity portion of its investments in new PCTCs. If so, it can buy one $US 80 million ship per year. Again, these purchases are made once under contract to the charterer and use very low cost debt financing. Taurus Leader, SSC's latest purchase was financed by >96% LTV debt at sub 2% interest rates. I am modeling 80% debt financing at 2% interest. 

In any case I think it reasonable that the earning (and value) progression should look something like this:

and therefore


The principal attraction of this idea is on the risk side of things. The upside is fine -- the stock is, in my view, worth north of $0.60/share today and will likely be worth ~$1/share in two or three years. But is the relative brevity of the list of things that can go wrong that stands out most. 

These are quality owner managers running a company contracted to receive  fixed, multiyear cash flows from blue-chip counterparties and who have made credible promises to return excess cash to shareholders.

The one wrinkle that one ought to think about is the recent price-fixing charges brought against a number of players in the RORO charter industry. If price fixing were a necessary part of the charterer's business models then SSC's growth beyond the immediate 3 or 4 year period may not be all that it could have been.


The no-growth scenario implies a value in excess of $0.60/share.  As a point of reference, the present value of the contracts in place and the residual value of the ships at the end of these contracts is in excess of $0.40/share when discounted at 8%.

The no-growth scenario may notbe fully appreciated because the full impact of the recently acquired ships is not reflected in SSCs trailing 12 month results.

The growth scenario implies a valuation in the $1/share range.

Disclosure: I own some shares in SSC