Wednesday, 15 February 2017

ISOTeam HY 2017 Results

Results overview


*Operating profit derived after deducting COGS, Marketing and Distribution Expenses, General and Admin Expenses, Finance Costs

Bright spots
  • Increase revenue in A&A, C&P and other business segments by 77%, 67% and 41% that picked up the slack for the fall in R&R segment
  • First contract for HDB Improvement programme of $17.5m– higher profit margin job with usually bigger contract size
  • Single largest renewable energy project at $6.3m
  • Improved GP margin and largely consistent OP margin. Probably mean good cost control and effective integration of acquired businesses

Areas of Concern
  • Big drop in R&R revenue, the main business segment.
  • Still no announcement on major contract in Myanmar
  • Shrinking new orders obtained in this half compared to previous result announcement although total order book at historical high

For ISOTeam, investors are looking at realisation of growth potential in the form of more contract wins translating into improving numbers. Such is the nature and characteristics of a company in a growing market especially in Singapore underpinned by many public sector civil engineering, infrastructural and building maintenance/upgrading projects. Management has also been openly optimistic about the prospect in the industry. Hence a lot of hope has been built into the share price.

It’s a double edged sword. Market optimism will push share price higher, but if the company growth stopped or show signs of slowing, share price will drop more in anticipation that the growth expectation may not materialise.
What are some of the possible reasons for the disappointments mentioned above?
  • Management mentioned of the change in revenue recognition from R&R to A&A. Not entirely sure of how did this work out and its exact impact.
  • I speculate that it could be due to increase competition for the R&R segment with a lot of small players bidding for public sector projects at very competitive price price
  • Discussion in Investing Note revealed that some public sector project was put on hold, or delayed awarding contract

Looking ahead, I need to pay close attention to the following areas, to vindicate that ISOTeams growth trajectory is still intact:
  • Clinching first major contract in Myanmar
  • More contracts for HIP that signify further inroads in this new segment. With bigger contract value, this could give the company better cost efficiency and asset utilisation
  • Continuous contract wins from R&R and A&A, or clear indication that order book is maintained and not shrinking

Valuation wise, according to Shareinvestor, its TTM PE is 12.79, and FY16 PE is 12.51. Compared to Engineering and Construction Industry average TTM PE and FYPE of 17.98 and  20.7, ISOTeam seems to be valued on the cheap side. Of course this just shows us a very rough indication of how is it being valued compared to its peers. Historically, its PE ranges from around 12 – 19.

The industry is growing no doubt. The pie is getting bigger, with the massive number of HDB flats constructed past few years turning 5 years old soon, and the government emphasis in sprucing up old estates, refurbishing old buildings, efforts in building maintenance, aggressive push into renewable energy etc. But concurrently, there is fierce competition from the smaller companies and increasing cost pressure (manpower cost, reduction in foreign workers quota etc.). I feel ISOTeam should gradually shift its focus to the contracts at the upper spectrum of the building maintenance/upgrading value chain, with larger contract size and better margin, putting their expertise and knowledge to better use. Example should be HIP, installation of renewable energy fixtures etc.  Compete on values and expertise for larger jobs, no point fighting over small contracts with the smaller players. 

Overseas market especially Myanmar is critical too due to the much bigger market, and any major contract win is evident of management’s ability to expand overseas, opening up new engine of growth. 

Growth takes time. It may be premature to discount the quality of this company based on one half-yearly results. Investors should be patient to let the management work its magic and grow the company. This is where I choose to place my confidence on the management, given their track record in the past, rich experience in the industry, and clearly aligned interest with the shareholders as company founders with major shareholding. 

Nevertheless we need to pay close attention to subsequent result announcements.

Vested in ISOTeam

Sunday, 25 December 2016

What Has 2016 Taught Me/Reminded Me

It is year-end again, and typically, people review their life, thinking about what could have been done better, what went wrong, what good things happened. People also always look forward to a better year ahead. Such is human nature, no matter how bad (good) the year has been, we always remain optimistic and hope next year will be good (better).

Market had its fair share of exciting events and experienced some volatility. In perspective,  some of the market drops were significant, but not catastrophic. In Jan STI was down around 25% from recent peak of 3,500. Significant no doubt, but not that uncommon and catastrophic as some people or media described. I mean, compared to 08/09 this is quite mild.

With the wild-swinging market in 2016, it is even more important to hold on to solid investment principles or philosophies firmly, as these principles will guide us and help navigate through the choppy market. The more wild-swinging the market is, the more we need these principles to anchor us down, and keep us grounded. Our investment themes of the day may change; approach may change; tactical bets may change; but investment philosophy and beliefs should remain.

I begin to sound like a broken recorder, keep talking about the same things. But.... they are still crucial to our investment success. So here are the 2 key lessons (re) learnt with a deeper meaning.

Investment Decisions cannot be Based on Market Predictions

I think this year really epitomizes the horrendous ability of human in making market predictions, and the futility in investing based on these forecasts. I mean, look at these events and how had people been caught with pants down trying to predict the outcome and market’s reaction?

  •          No one expected Brexit, but it happened; people were predicting crash, but market recovered quickly
  •          Majority predicted Hillary to win, but Trump won; the market plunged (as per predicted), but only for a few hours within one day, and shot through the roof after that
  •          Oil price was forecasted to drop to $25. But it bounced off from $35 (or $30?) and today its at around $55

The media get it wrong. Even the experts were caught wrong footed.

  •          Mr Lim Say Boon said in Sunday Times today that he joined the selling early in the year by encashing a large part of his banking stocks, and never bought back
  •          Straits Times yesterday had article on factory output rised in last month caused by a ‘surprised’ surge in electronics and biomedical production

And numerous economists or analysts interview on tv and news regularly expressing surprise on some economy figures, NODX, pharma/logistics/manufacturing output grown, after previous gloomy forecast (yet they continue to forecast next quarter’s performance. Ok I know they are paid to do that, and not penalized for wrong predictions).

If we invest based on these 2016 predictions and their supposedly smarter prognosis of how will market react later, the results, quite clearly, will not be good. Instead of counting our earnings, we will be busy buying, selling, switching between asset classes or securities reactively. Each change will bring losses, incur trading costs, bring about more questions, and shake your confidence. The point is not the legitimacy or justification of these actions, but the fact that they are always taken on a reactionary basis, one step behind the market. 被市场牵着鼻子走, 下场就是累死。

Which brings me to my next principle.

Be Disciplined with The Pre-Set Rules and Abide by It

Do you have investment rules at the tactical level that steer your buy and sell decisions? Qualitative reasons or observations that prompt you to sell out? Lock in profits at certain percentage? Stop loss price for short term trading? Trailing stop loss price? If you have, they should not be changed haphazardly due to news, press articles, hearsay from friends etc.

The criticality here is two folds. Firstly, they remove emotions from your investment decisions that are usually impulsive, hot-headed and illogical. Secondly, it is about consistently following your rules over a long period, which raise the probability of successful investment dramatically should these rules are logical, well-thought through and based on individual experience that suits their style.

Do not get me wrong. I am not saying that all these economists and analysts’ opinions are always wrong and hold no value at all. Their comments do have values in enabling investors to assess the broad economic conditions, and be aware of the big picture that may impact macro indicators. But these are in no means definite predictor of the performance of your counter. Don’t let them dictate your buy/sell, change your rules, or even just arousing self-questioning regarding your guidelines.

Personally, I have benefited much this year from the strict adherence to my investment rules. This reinforced my conviction in this principle further. For example, convinced myself to buy telcos at bottom price as a short term trade, and selling out at the target price and avoided subsequent loss; bought Sembcorp at bottom price range based on strong belief that its business may turn around soon etc.

So, thats it. 2016 has almost passed, in a blink of an eye. It has certainly been an eventful year. With big changes coming up in my career in 2017, possibly a complete change of industry, i certainly need to hope for the best, prepare for the worst, and work like a mad man. 

Lastly, wish all readers a better 2017 ahead. Merry Christmas and Happy New Year! 

Thursday, 24 November 2016

Sembcorp Industries turning around soon?

The recent plunge in oil price has affected the oil and gas sector badly, which has rocked Semb Marine’s corporate performance. That, in turn, has dragged Sembcorp Industries’s earnings too, as marine business still contribute a significant chunk of Sembcorp’s revenue (about 45% as of Q3 2016). Sembcorp’s share price has not been spared and dropped more than 50% from $5.5 to $2.5.

However, under the doom and gloom has been a common narrative running behind the investment merit of Sembcorp: it is more than just a Marine company and it has a promising and growing utilities business that is well-positioned to capture the rising demand for energy and water treatment services among the emerging economies.

So, if an investor wished to capitalise on Sembcorp’s current depressed valuation/share price and profit from its turnaround in future that’s envisioned to be led by the utilities business, he needs to study the  performance of its utilities segment up till 9M 2016 to determine whether there are green shoots and signs of improvement, and if possible, form an opinion on the sustainability of its utilities segment growth into the near future.

Let’s look at the most recent Q3 report and go back 8 quarters to study the numbers:




Based on the table, the group figures show that:
  • Its revenue, gross and net profit has improved in the latest quarter
  • Net ops cash flow improved from 67m Q1 2016 to 838m in Q3
  • Free cash flow turned positive at 632m after 7 quarters of negative cash flow
  • Utilities revenue and profit have grown compared to last 2 quarters, which seem to be at the bottom over the examined time range

We go deeper into the utilities segment for the most recent 3 quarters:











  • Utilities PFO has grown from $154m Q1 2016 to $211m Q3 2016 (37%)
  • Net profit wise, Q2 didn’t show any growth over Q1, while Q3 has grown to $108m from $74m in Q2 (46%)
  •  Q3 PFO and net profit grew 31% and 21% respectively over Q3 2015
  •  China revenue, PFO and net profit only started showing meaningful q-on-q growth in Q3. Year-on-year, its PFO and net profit improved significantly in Q3 2016 (65% and 72% respectively)
  •  India seems more promising:
o   Year-on-year, revenue for the 3 quarters grew by at least 100%. Q3 revenue is also more than 3x Q2 revenue
o   PFO had sustained q-on-q growth over the 3 quarters. Compared to 2015, all 3 quarters grew in excess of 100%
o   From sustained loss in 2015 and Q1 2016, it turned around to record profit in latest 2 quarter, with significant earnings growth to $18m from $4m in Q2

I sense that the utilities business may finally be seeing some light at the end of tunnel, particularly in the emerging markets shown by the encouraging results in latest quarter for China and India. The overall revenue, gross, net profit have improved in latest quarter. It is also finally seeing positive free cash flow, with much improved net ops cash flow this quarter.

Of course one needs to be aware that there continues to be pressure in other parts of the utilities business. For example its biggest revenue contributor Singapore still faces intense competition that drives down the power price. Not to mention that marine business will continue to face a long winter ahead with depressed performance.

The above analysis only touches on the business side of things and its figures. Investors have to make a judgement call here to decide if Sembcorp Industries is a worthy company to consider at this juncture. For those that have been monitoring Sembcorp results closely and believe in the potential of its utilities segment, they may be able to make a decision. Some may have other questions and need more data to consider next course of action. Seldom can a company’s investment decision be based on such simple analysis at a superficial level for a totally new investor.

However, as I am vested and have been monitoring Sembcorp for quite a while, these information are sufficient for me to form a more positive outlook for its business going forward. I will probably pay much closer attention to its next quarterly results, and be able to decide whether to buy more in near future. I also leave readers with a table summary of major milestone and contract announcements for its utilities segment in the recent quarters, which should be useful as a guide to assess future utilities performance. 



Saturday, 5 November 2016

Frasers Centrepoint Trust Latest Acquisition

FCT acts fast. Hot on the heels of its quarterly results announcement 2 weeks ago where management hinted that they will be looking at acquisition of asset held and managed by their sponsor, they announced yesterday that they will be buying the Yishun 10 Cineplex from Bonvest Holdings.

Yishun 10 houses the only Cineplex – Golden Village in Yishun, and several other retail shops such as Koi, Singpost, Arnold’s Chicken etc. It is located just across the road from Northpoint. It is not a big property and acquisition to be honest, as its NLA is just 10k square feet, about 5% of Northpoint’s NLA. And it cost FCT $37.75m to be paid fully in cash to the seller. The property is valued at $40m and enjoyed 99.5% occupancy.

As a Yishun resident that frequent the cinema there, I am excited to hear this news. I was just commenting to my wife few weeks ago that how good will it be if FCT can buy over Yishun 10, integrate it into part of the enlarged Northpoint City by dovetailing into its ongoing AEI at Northpoint, it will be a great and big shopping mall in the north. Certainly it benefits the northerners, and further cement FCT’s strong position in the north.
Northpoint, Northpoint City, Yishun 10. If all integrated together, it will be huge.
Source: FCT Corporate announcement

As a long term FCT shareholder, I am also excited to witness the rejuvenation of FCT’s assets, especially the developments happening in the north side. I blogged about FCT and Yishun’s potential long time ago, and it seems that vision back then is slowly turning into reality. Not just the better performance of FCT in future, and also tangible benefits in form of better shopping experience and one more weekend destination for me in future.

Not sure if FCT will redevelop Yishun 10 to be seamlessly connected to Northpoint? That should increase its NLA by at least 10%? And hope its next acquisition will be the Waterway Point – another great shopping mall I like over at Punggol. 

Sunday, 16 October 2016

Some Thoughts on Collecting Good Stuff

In my earlier post, I blogged about having the 'collector' mindset to view stocks of strong companies as collectors item worthy to be collector slowly and patiently during market mini crashes like the ones we had in Jan-Mar this year - COLLECT GOOD stuff at CHEAP price.

More recently during the Brexit vote, market dropped again and I viewed it as a good opportunity to deploy some cash to collect some shares. So what have I got this round?

Comfort @ 3.65; UOL @ 5.4; SPH reit @ 0.935; M1 @ 2.42; HSBC @ HKD 50.5

Fortunately, these holdings are are all in the green with varying profitability. Sometimes when the market rise higher and I looked at them with large amount of earnings it does feel good and I give myself a pat on the back. Other times when market is down and I know their value would drop in tandem too then I will just look at them less often to minimise emotions of regret.

There are a few things I would like to share my thoughts on regarding this 'Collection' mindset.

Patience is important
i can never over-stress or over emphasise how important patience is. Patience is the ability to sit tight and do nothing when you see your cash piling up, stocks in your watch list keep rising, your portfolio grow bigger, individual share's profits growing.

You must be able to resist the temptation to use your cash out of fear that it is not being put to good use and being eroded away by inflation; to buy companies in watch list that are getting expensive at high PE for fear that you will miss out; to sell some of your shares and take profit as you worry that they may drop later.

The key is really to hold your gunpowder dry and only buy when the market has shown a meaningful drop. Not the kind of 1.5% drop in STI we seen this week or the 45 points drop in single day. These are really minor compared to the kind of fall we seen last Aug, this Jan or even during the Brexit. Its really about having a  long term and broad view of the market, on a 2 year time frame, and only buy when market has dropped like 15% from recent peak. When you compare current price with maybe half year ago or one year ago, it is cheaper by 20% now so its worth it.

After all we are investing to increase our net worth and assets sufficiently to provide for us 15 20 years later. Why bother about the few days drop of 1-2%. This is a note I have been trying to drill into my brain and investment process.

And think about it this way. The more patience you have to only buy at significant market drop, the more frequent and longer period you will enjoy you portfolio and individual shares showing a profit. This is a strong enough motivator for me.

How much to buy each time
Generally I will look at the nature of the company to determine how big a portion it should take up in my portfolio. If its a blue chip I would not mind it constituting about 10%; if its a blue chip reit it can be as high as 15% to augment the cash flow. If its a smaller growth company I will usually make it a 6-8% weightage.

Based on this rough number, I will at least use half of that amount to buy during the first tranche. I may use even 65% for blue chip. The rest will be left for next round addition when market drop quite a fair bit, or individual share price drop around 20% or so.

My thought process is I am already buying at a rather good price during meaningful market correction. That puts me in a good position, and gives me mental comfort to buy in a meaningful amount enough to make a difference to my portfolio.

In essence, buy an amount significant enough to make meaningful positive difference to your portfolio, and an amount comfortably small to not burn a hole in your portfolio when it drops another 20%. 

But if the market crash big time next 2 months? Like the GFC period? I still have my 20% cash buffer to buy cheaper, plus the dividends that flow in regularly.

After all, when your investment time horizon is 15 or 20 years, one should not worry about big plunge in portfolio value when the next GFC comes because throughout all the crashes in history, market has been able to bounce back. We instead should be worried about whether we have cash to buy during crash.



Saturday, 23 July 2016

How Do I Decide To Sell

Personally I am faced with less problems when buying a share, compared to selling. As shared in an earlier post, I try to buy at a price so low that I do not have to worry about selling.

However, it does not mean that you are spared from the mental struggle or sense of uncertainty experienced when you try to sell. Kim Iskyan discussed about “Stockholm Syndrome” in this article, which is basically a buyer-remorse condition where one  questions himself whether the purchase was a right decision, and whether the buying could have been executed better, after the purchase.

I don’t usually experience the Stockholm Syndrome. Not that I am expert at valuing a company, or I have some divine ability to always buy at the rock bottom price. It is because I do not look at the share price often after I buy, hence do not have much opportunity to experience the buyer remorse. Also mentioned before, I intentionally not check the share price frequently, and instead just have a sense on the STI level to quench my thirst of knowing the share price.

But selling, it’s a totally different ball game. The uncertainty comes from different dimensions:
  • From purely a fundamental investing perspective – has the share reached its fair value?
  •  From a technical investing perspective – does the share price has further momentum to rise?
  • From a portfolio management perspective – is the counter occupying too big a portion in my portfolio?
  • From an investing psychology perspective – will it rise further after I sell? What if it still has another 80% upside and I miss it?
Fundamental Investing Perspective
While the share price has reached its fair value, one has to re-visit the fair value again relative to the duration between his buying and selling decision. If few years had passed, has there been positive growth that warrants the increase in fair value? Is there a need for the fair value to be raised?

Also, no matter how extensive or in-depth one’s calculation on the fair value is, there can never be 100% accuracy. It would at best be a narrow price range, and how wide the range should be is up to individual’s comfort level. So, with a range of price, it makes determining what price to sell at trickier.

Without mentioning, all other ratios and company growth are important considerations too.

Technical Investing Perspective
We look at technical indicators to figure out if the price will go higher. Is it poised to break the resistance? Is the MA showing a nice golden cross? Is the RSI overbought?

Portfolio Management Perspective
This is a broader, more strategic level of considerations that look at the whole portfolio. One considers the pre-determined portfolio weightage that is assigned to a stock, and decide whether to sell, taking into account his risk profile, size of portfolio, size of share position etc.

Investor Psychology Perspective
This is where your mind plays tricks on you to generate fear of missing the possible rally post-selling and whether you are maximizing profits. And what should you do if there is really a rally? Many questions, many inner voices.

So How?
All these factors from different dimensions rarely influence your decision-making in silos. They act up all at the same time, and make you unsure and confused about whether to hit the sell button. And they are inter-linked at times. For example, you assessed that the share price has not much room to rise further, but when you look at its weightage of just 5% out of the entire portfolio, you may not sell since it’s a negligible position and selling now will not earn you much anyway. Concurrently you may also hope that it will rise further and do not want to miss the ensuing rally.

There are no clear solutions to this conundrum. If there were, I will not be writing this, and investors will not have headache over selling so often.

After multiple encounters with selling difficulties, especially in current market which shares are rising fast, I had decided to approach selling by asking only several questions, distilled from my experience and stock value determinants that are aligned to my investment philosophy. They are not intended to illicit deeper analysis, or trigger further tinkering. Just simple, straight-to-the-point questions to help one decides. 



More importantly, I would make a conscious effort to be contented with my profits, and not invalidate the decision process flow, by checking the share price right after selling. If the price rises, seller remorse kicks in and I may question the decision making process. If the price falls, I feel good about myself and this will bring emotions into my investment process, affecting my analysis in future.

I prefer to keep selling short and simple. After all, majority of the work is done before buying, and now one is already in-the-money and there is really no point dwelling too much on it as a happy problem to have.

Saturday, 12 March 2016

Collect the Good Stuff

Past 2 months were indeed a wild ride for investors. We witnessed a very volatile start for the year, continuing from last year’s fall stemming from oil rout and worries about China’s economy hard landing and the collapse in China A Shares.

But all of a sudden, the market sprang back to life past 3 weeks. And it came back strong, rising fast and furiously to end at 2828 yesterday, an almost 12% rise from the low point of 2528 few weeks ago.

It was at this time that investors, including myself, found that their investment philosophy, hypothesis about a company’s merit of investment, and their decision to buy, sell, or hold specific counters get tested to the max. The reasoning, conviction, and course of actions laid out in advance, that were supposed to guide you through the bear market, get thrown out of the window. Some people hide, some people sold all out, some people added more. Different mental make-up and attitude, different reactions.

I managed to pick up some counters like UPP, ST Engine, MGCCT and others at depressed price. Some of their prices rose together with the general market; some are still languishing at the low range; luckily none had big fall.

But besides picking up bargains during market low, I feel what is equally important is the way we organise and steel up our brain to handle the market fall well. Because this mental habit, once acquired and etched in our invest DNA permanently, follow us through the journey and can be activated once the next bear arrives, enabling us to make the right decisions, including buying during market despair. And we know market fall is as common as afternoon rainfall in Spore.

The thing is the more I invest, the more I feel that investment success is 70% or even 80% dependent on your temperament and mental state. Analysing company strength, weaknesses, reading the accounts, coming up with numbers, ratios are not difficult to pick up. You just need to study and practice. (Understanding the business model and the competitive strength it has over industry peers is hard, but that’s another issue).

Something I learnt from this episode, although nothing new, but now with a deeper level of appreciation, is the relevance of an investment mental approach of accumulation  – COLLECT GOOD stuff at CHEAP price. Think people buying rushing to buy gold when its cheap; primary school students collecting rare stamps or magic cards.
  • When you collect, you do it slowly. you are not in a rush. you do it leisurely at your own pace. and the more bought at cheap price, the merrier. 
  • U judge how wu hua is the purchase based on your deduction of reasonable price range of that company
  • Once you buy, u ignore the gyration in price. You resist with max effort the temptation to look at the price on your mobile app or website
  • You block your mind from referencing the current price to last week’s or 3 mths ago; or anchor against recent low or 52 weeks high. You always refer to your own calculation of that reasonable price range and decide based on that
  • You also block your mind from feeling elated or sad about the gyration in price after your purchase, because that will cloud your judgement  and affect your decision making
  • You further block your mind from imagining the windfall or the earnings that could come when you eventually sell at much higher price. You dont project, you dont calculate, you dont yearn.

In essence, it is to maintain a stoic, zen-liked mental state and just keep buying during market low. KEEP CALM AND KEEP BUYING THESE GOOD STUFF

Well, easy to say, damn difficult to do. But have to work on it. Start collecting on Monday!