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Monday, May 31, 2010

Coastal Contracts (Current Price: RM2.26; Target: RM3.76): Extermely low PE, High Earnings Growth, Declining Gearing and Strong Orderbook


Valuation:
Coastal Contracts Bhd performance is nothing short of spectacular, chartering a massive annualized growth of 48.2% and 65% for revenue and earnings respectively over the past 5 years. Owing to its huge earnings growth, the company was awarded the "Forbes Asia's 200 Best Under a Billion. Latest quarterly net profit in 1Q2010 was RM43.3 mil. Margins are rising as well owing to increasing sales of high-value vessels. Net profit is expected to touch RM170 mil or 47 sen per share in 2010, its highest ever earnings, making it extremely undervalued at PE of 4.9x. Net gearing has been declining tremendously from 53% in 2006 to a mere 6.2% currently. By attaching PE of 8x only, its fair value should be at RM3.76.

Company business:
The company has been in the marine business for four decades and was listed in KLSE in 2003. It is principally involved in three business segments, namely shipbuilding, ship repair/maintenance and shipping/chartering, therefore providing a one-stop center for shipping activities. Most of its earnings come from shipbuilding, supported by ship repair and chartering businesses.

Their main services include building barges (used to transport goods like palm oil, timber, coal, steel etc), landing crafts (Transport goods from ships to shores/beaches), tug boats (towing and pushing other ships) and OSV (Offshore Supply Vessels: Used for offshore oil and gas industry in areas like anchor handling and transportation). It has two shipyards of more than 90 acres with capacity to build 30 ships at any one time near Sandakan, Sabah. Current utilization rate is 80%, with the remaining area earmarked for upgrading purposes to accommodate future offshore structure fabrication (Due to the possible tie-up with Ramunia?).

It has a large customer base coming from different countries and sectors including oil and gas players, logistics provider, navy, shipping agents and commodities provider coming from Indonesia, Singapore, Australia, China and right up to the Mideast such as UAE, Iran and Egypt. This would help the company to be not overly dependent on a single customer.

There is a substantial portion of construction costs that comes from steel. Nonetheless, we continue to see its earnings grow in the midst of surging steel prices in 2007-08, implying its ability to mitigate rising construction costs. In addition, steel prices are expected to stay on a steady uptrend and will not experience a sudden surge in steel prices like what happened in 07-08, allowing the company to handle rising costs better.

"Build then sell" concept:
As opposed to most industry players, Coastal adopted a 'build then sell' strategy since 2006. The reason behind it is that this concept could eliminate the long and different lead-time in shipbuilding which will complicate shipbuilding schedules. Usually, shipbuilders have to wait to secure contracts from customers and then only determine the yard space and equipments required. With this method, the services provided are more attractive to customers owing to shorter lead-time in new deliveries.

Concern of increasing inventories which might explain the stock's low PER:
I don't understand why this stock has been so undervalued despite its strong earnings growth. Part of the reason could be its increasing inventories due to its build-then-sell model which can be risky if customers default, lack of secured orders and strain on its working capital. To mitigate this, the company requires 30% upfront fees from customers prior to building ships in addition to the choice of customers which are financially strong to mitigate defaults and the increasing demand for OSVs amidst increasing deepwater exploration. Even in the event of default, the company could always sell the ships to other prospective buyers at competitive prices owing to its shorter lead-time. Note that there have been no recorded defaults by its customers till now. This build-then-sell method actually helped the company to decrease its debt tremendously, as shown in its massive cut in debts from 2006 onwards as the upfront fees from customers were used instead of loans to start shipbuilding.


Key drivers:
Among the key drivers to its business are higher oil prices which will support deepwater explorations, fleet upgrades & expansion coupled with ageing fleet (about 48% of AHTS globally aged more than 25 years according to Mantrana Maritime) which could be phased out, thus driving new demand for OSVs. It has about RM1.2 bil worth of orderbook which could last it for the next two years. Its earnings are more or less secured over the next two years.

Diversify into fabrication business:
Coastal Contract had just signed an MOU with Ramunia to undertake tendering, bidding and fabrication of offshore structures for the oil and gas industry. Ramunia is one of the 7 licensed major fabricators for Petronas besides other fabricators such as Kencana, MMHE, Sime Darby and Boustead Heavy Industries Corporation. This will be beneficial for both companies as Coastal could provide the yard space while Ramunia has the license to undertake fabrication projects. This venture could signal a new chapter for Coastal Contracts as it could diversify from shipbuilding business and start bidding for fabrication contracts from Petronas and its PSC contractors, which could potentially chart another spectacular earnings growth going forward.

Market Data:
Earnings for 2010 & 2011: RM170mil and RM200mil
Shares Issued: 362 mil
Market Cap: RM830mil
EPS for 2010 & 2011: 47 sen and 55 sen
PER for 2010 & 2011: 4.9x and 4.2x
Net Gearing: 6.2%
P/BV: 1.7x

Shareholders:
Ivory Asia S/B: 31.3%
Pang Fong Thau: 21.4%
Lembaga Tabung Haji: 6.8%


Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Friday, May 28, 2010

Sunway Holdings (Current Price: RM1.45; Target Price: RM2.00): High earnings growth, low PE, declining gearing and strong orderbook

Sunway Holdings Bhd is a conglomerate with most of its operations concentrated in construction. It is also involved in other business segments such as property development, quarry, trading (Hoses, fittings, heavy equipment and heavy equipment parts) and building materials (pipes, pavers and wall panels).

Valuation:
The company had just released its 1Q 10 results and earnings were fantastic, the highest ever recorded for the company. Net profit stood at RM39.9 mil (excluding derivative gains will make it approx. RM35 mil). Consensus estimates its earnings will touch RM120 mil and RM160 mil in 2010 & 2011 respectively. EPS for 2010 and 2011 will be 20 sen and 26 sen respectively. Therefore PE for 2010 and 2011 earnings is very low at 7.3x and 5.6x respectively, as compared to its peers i.e. Mudajaya, IJM, WCT and Gamuda which have an average PE of 14-15x. By attaching PE of 10x to its earnings, target price should reach RM2.00, representing 43% upside.

Cleaning up and get moving:
The company has been laden with losses from its venture into SunInfra in 2006-07. In 2008, it finally disposed of its stake in SunInfra, which would not drag the company earnings anymore. In addition, it divested non-core assets such as Plaza Masalam and Sunway Hanoi Hotel totaling RM133 mil and is planning divestments including Wisma Mas and Subang Square totaling RM76 mil. Its warrant conversion could potentially raise another RM320 mil (246 million warrants @ exercise price of RM1.30). Nonetheless, I think warrant holders will wait until the share price have moved up substantially to convert as current price is too near the exercise price. All the above are aimed at reducing its gearing. Consequently, Sunway's net gearing was pared down substantially from 112% in 2007 to 58% currently through its divestments and corporate exercise. It is targeting net gearing of below 50% which could be achieved easily from its earnings by FY2011.

Strong orderbook:
Sunway has approximately RM2.8bil worth of outstanding orderbook which could last them for more than 2 years. The projects and their respective remaining orderbook are as follow:

Local Projects:
1. Putrajaya (2 Government Office Buildings): RM297 mil
2. SKVE Highway: RM34 mil
3. Precinct 1, Putrajaya (Hotel & Office): RM144 mil
4. Impiana Hotel: RM88 mil
5. Sunway Office Tower: RM88 mil
6. Others: RM149 mil

Overseas:
1. India Highway: RM48 mil
2. Abu Dhabi Al-Reem Island: RM91 mil
3. Abu Dhabi Rihan Heights: RM1,490 mil
4. Singapore Precast: RM354 mil

It has tendered for a massive RM16 bil worth of projects with expected success rate of 10-15%. Annual replenishment of orderbook could reach RM1.5 bil. Among the project bids include LCCT, Putrajaya projects, Suncity projects, Indian roads, Legoland (Iskandar Malaysia) and Abu Dhabi projects of which it stands a high chance of winning owing to its construction experience in all these areas.

Other divisions to provide support:
Quarry, trading and property earnings have been providing consistent support to its earnings. Property launches are expected to be around RM800mil this year and it has about RM1.9 bil worth of outstanding GDV.

In conclusion, owing to its higher profitability (Its earnings have never been this high historically), healthier balance sheet, strong orderbook and strong prospects in contract flows from a variety of clients, the company deserves expansion in its PER.

Market Data:
Earnings for 2010 and 2011: RM120 mil and RM160 mil
PER for 2010 & 2011: 7.3x and 5.6x
Shares issued: 601.8 million
Mkt Cap: RM872.55 million
Net Gearing: 58%
P/BV: 1.1x

Shareholders:
1. Jeffrey Cheah: 45%


Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Tuesday, May 25, 2010

Some fantastic applications found on Bloomberg website

Maybe some of you would have known about applications available in Bloomberg website but I just found out today (Ya...I'm quite outdated) that I can actually track my own portfolio similar to how unit trust performance is tracked. The information displayed is something like the fund factsheets we find on unit trusts' websites. They display our portfolio allocation based on market capitalization, sectors and individual stocks. In addition, Bloomberg provides charting for our portfolio performance, realized/unrealized gains/losses, individual stocks information, news on stocks we own, a live market monitor (not sure about the delay time though - but will be handy for us who invest in overseas markets which have no live-monitor available here), currency conversion (if we own overseas stocks) etc etc.

If you want to start using this, sign up with Bloomberg first via Bloomberg website. After login, go to 'Portfolio Tracker' as shown in the figure below:

Edit your sales and purchases (Illustration Purpose only):

Portfolio Allocation:

Portfolio Performance:

Stock Info:


I find this application is nice to play around. If you want to know how good you are as a fund manager, this application could be a great help. Enjoy!!!

Sunday, May 9, 2010

Messy Euro caused by Dilly Dally

There's just too much indecision, too much debates, too much dilly dally and poor leadership that's causing a havoc in the Greek crisis. What takes them so long to firm up the details of the aid package when they started discussing since Jan? Even when EU and IMF agreed to support Greece with a 110 billion Euro aid package on last Monday, the Euro and market continued to slide and jilted markets globally. Looks like the investors just do not have confidence in their willpower and execution to see through the aid package. Stop wasting time and just do it. Lousy leadership.

Excerpts from Bloomberg. Looks like the EU is rushing to contain the crisis that they've created. Should have done it earlier.

By James G. Neuger and Gregory Viscusi

May 9 (Bloomberg) -- European Union finance ministers meet today to hammer out the details of an emergency fund to prevent a sovereign debt crisis from shattering confidence in the 11- year-old euro.Jolted into action by last week’s slide in the currency to the lowest in 14 months and soaring bond yields in Portugal and Spain, leaders of the 16 euro nations agreed to the financial backstop at a May 7 summit.

They assigned finance chiefs to get it ready before Asian markets open later today European time.“We will defend the euro, whatever it takes,” European Commission PresidentJose Barroso told reporters in the early hours yesterday after the leaders met in Brussels.Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro last week, the biggest weekly decline since October 2008.

It prompted the U.S. and Asia to urge broader steps to prevent a global sovereign-debt crisis from pitching the world back into a recession.“Europe is getting its act together,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Time will tell if this statement is enough to satisfy the European bond market vigilantes.”European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the EU’s central authorities with guarantees by national governments. Finance ministers will meet at about 3 p.m. in Brussels. A press briefing is scheduled for 6 p.m.

When the markets re-open Monday, we will have in place a mechanism to defend the euro,” French President Nicolas Sarkozy said. “If you don’t think that’s significant, you haven’t been to many EU summits.” Sarkozy cancelled a planned trip to Moscow today to deal with the crisis.Barroso said he wouldn’t push the independent European Central Bank to, for example, buy government bonds. ECB President Jean-Claude Trichetaccelerated the market selloff on May 6 by rejecting that measure.

With the euro facing its stiffest test since its debut in 1999, the summit -- called to discuss efforts to coordinate economic policies -- turned into a crisis-management session that dragged past midnight.The euro slid to $1.2715 from $1.3293 during the week, and is down 15 percent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18.

The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds rose to euro-era highs. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain.Europe came under pressure on a hastily arranged conference call of Group of Seven finance chiefs before the summit.

All agreed on “the need for a clear, timely and strong response,” Canadian Finance Minister Jim Flaherty, who chaired the call, told reporters in Ottawa. “We hope to see a strong, early policy response in Europe.”The spreading contagion also drew the attention of President Barack Obama, who said in Washington that U.S. regulators will examine the “unusual market activity” that on May 6 briefly drove the Dow Jones Industrial Average down by almost 1,000 points, erasing more than $1 trillion in wealth before the market bounced back.“There are impacts on financial markets, including share markets, from the events in Europe and in Greece more specifically,” Australian Treasurer Wayne Swan told reporters in Canberra. “We are urging as speedy a resolution as is possible in the circumstances.”

In Brussels, German Chancellor Angela Merkel stepped up German calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules, originally drafted by Germany in the 1990s.Europe will send “a very clear signal against those who want to speculate against the euro,” Merkel said.With the euro region’s overall deficit forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011, the vow to bring budget shortfalls back below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets.Plans for a European credit-rating authority are already under consideration at the EU Commission, the bloc’s Brussels- based executive agency.

It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments. Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, Barroso said “some of the points you have mentioned will be contemplated.”The political leadership of the $12 trillion economy also signed off on a 110 billion-euro ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens.

Germany, the biggest contributor with as much as 22.4 billion euros over three years, fell in line with endorsements in the lower and upper houses of parliament on May 7. A group of German academics filed a lawsuit to try to halt the payout. Germany’s highest court yesterday rejected the challenge.A day after whisking a three-year, 30 billion-euro program of deficit cuts through parliament, Greek Prime Minister George Papandreou ruled out further belt-tightening steps for the time being, saying the point of the summit was to “reaffirm our confidence in our economies and our common currency and this I believe is a very important message for the global economic recovery.”

Tuesday, May 4, 2010

China Property Market: Hard crash unlikely

China property market came to the limelight again when the Chinese government announced stricter regulations for the property market in mid April which were similar to the regulations back in pre-crisis levels in Sept 07. The announcement was made after Housing Price Index (HPI - Based on 70 major cities in China) continued to rise by 11.7% y-o-y in Mar 2010. On month-to-month basis, HPI retreated for the first two months of this year before rising again in Mar 2010. The government's tightening measures early this year appeared unable to contain the rising property prices.

Tightening measures announced in Jan 2010:
1. Deposit: Raised to 20%-30% for first time buyers and 40% for second buyers as opposed to 20% across the board.
2. Mortgage rate (% of BLR currently at 5.94%): 70%-85% for first time buyers and 85%-110% for second buyers as opposed to 70% across the board
3. Increase supply of properties to suppress prices
4. Prevent land and property hoarding; Outstanding land premium to be collected

Tightening measures announced in Apr 2010:
1. Rise in downpayment for second home from 40% to 50%
2. Rise in minimum mortgage rate for second home from 85% to 110% of BLR (5.94%).
3. Greater efforts to deal with violations such as keeping unused land, hoarding properties and price rigging.
4. Discourage lending to third home buyers and non-residents
5. Developers to launch all units which have obtained presale consent within a certain timeframe

What is actually the property market condition in China?
There are many ways to look at it. Some of the main methods used to evaluate include:
1. Housing Price / Income Ratio (Using Median House Price /Median Annual Income)
2. Mortgage Payment / Monthly Income
3. Rental Yields

Housing Price / Income Ratio (The lower the more affordable):
On a national level, China doesn't appear to be excessive and is close to the average. (I think KL is somewhere along that line as well) The highest are Singapore and Hong Kong (Too expensive).

However, on a closer look at the individual cities, Beijing topped the list while Shanghai was close to Singapore and Hong Kong. Based on this, actually the highish property prices are only concentrated on several cities like Beijing, Shanghai, Tianjin, Shenzhen and Guangzhou. Nonetheless, China is not just based on two or three cities unlike other countries like France or UK, but has about 160 cities which have more than 1 million population. Therefore, looking at China as a whole, China appear to be nowhere near bubble territory.

Mortgage payment / Monthly Income (Affordability Index):
Surprisingly, affordability index has been on a downward trend with only a slight uptick expected in 2010. A lower affordability index indicates higher affordability. This was due to the higher growth in household income as compared to property prices.

Rental Yields:
Nonetheless, rental yields are not painting a good picture on property prices. China's rental yield is only at 3.24% with Shanghai and Beijing dropping below 3%. The reason could be due to the loose monetary policies and regulations which encourage people to buy instead of renting. Such low rental yield might not be able to sustain the property prices.

Potential further measures by the Government:
1. Capital gain taxes
2. Property taxes
3. Prohibition of purchase from non-residents
4. Rate hikes in RRR and interest rates
5. Increasing supply of houses

Property market outlook:
1. Property sales will slowdown: Buyers might take a 'wait and see' approach to see how the government is tackling the issue and wait for property prices to drop.

2. Property prices might drop by 10-20%, but unlikely to fall below 30%. Most developers are sitting on strong cash position and limited supply, therefore not in a hurry to sell off their properties at lower prices. In addition, it is not the government's intention to lower the property prices but to quell speculation on property market.

3. Property market might turn to a buyer's market where supply exceeds demand in 2H2010. This is due to potential incoming supply of properties in 2H2010 as many projects were started in 2H2009. Usually, it takes 9-12 months lead time for projects to reach pre-sale condition.


Tightening measures good for long term sustainability of the property market:
Many investors are worried of tightening measures by government which could hurt corporate earnings and slow down the economy. However, it is actually good that the government is making efforts to cool down the property market to prevent any asset bubble from forming especially in the top 5 cities, namely Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen. Inflation for now is not really an issue as it is expected to be around 2-3% only with most of the inflation coming from food prices. On the other hand, there are worries that non-performing loans will surge on the back of possible property collapse which will cause a banking collapse. Non-performing loans might rise but will be cushioned by low leverage and high savings rate among China households and corporations. A banking collapse is also unlikely as domestic funding is largely controlled by the government and the government will not let bank runs to happen in China like what had happened in US and EU. This is in addition to Beijing's strong fiscal position to support the banking industry.

Therefore, property prices could drop, but will not be severe. Government will continue to introduce further measures to cool down the property market which will cause volatility to the equity markets. Nonetheless, the measures undertaken by the government will be good for the sustainability of the property market and prevent any asset bubble burst.

Yee Lee (RM2.53): Big timers accumulating? Liquidity to increase

From: William Koay

From the graph above, we can see that Yee Lee’s price moved from $1.45 to $2.55 over a 3-month period from Feb to April. The wonderful part is the gradual upward trend of its price movement showing some big timers are accumulating the shares or playing up the share in an orderly manner. The volume done on each week is very impressive for a small counter like Yee Lee which has only $62.5m shares , one of the smallest in KLSE. It made a net profit of $20.5m last year giving an EPS of 32 sen . Just base on last year result and its current price of $2.53, its PE is only 8x as compared to many other food companies which have PE of more than 10x. Some have more than PE of 15x like F&N or Nestle.

Now let us look at its business turnover and profit for the past few years below :

Year Turnover Net profit
2005 $371m $4.37m
2006 $423.3m $3.3m
2007 $507.9m $10.3m
2008 $694.1m $17.4m
2009 $703.1m $20.1m

Again, from the above data, we can see clearly that both its business and net profit increased over the past 5 years continuously.

In addition, despite a difficult year for the whole world economy in 2009, Yee Lee was able to improve its results. The reason being it is dealing with consumer staples. Products produced by Yee Lee are cooking oils, mineral water, plastic bottles, industrial boxes, detergents, oil palm, industrial and medical gloves.

For a small company which has a small paid-up capital to have business turnover of more than $700m last year is impressive enough and its business keeps on expanding.

Yee Lee just recently announced bonus and splitting of shares to improve its liquidity in KLSE. It is giving a bonus of 2 for 5 existing shares and then splitting of shares into 2 lots of 50ct will be done after the bonus (After bonus and splitting of shares, its number of shares will be about 175m). It means that if you buy 5 lots of Yee Lee at $2.53, you will ultimately get 14 lots of Yee Lee share at an average cost of about 90 sen only.

So, let see whether the Red Eagle will continue to fly higher and higher.

Just all. Good Luck and Happy Investing.

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