Recently, there have been some updates to my portfolio. On 16/5/17, upon waking up, I made a hasty decision and bought into Golden Energy Resources at $0.44 after its positive earning release. I intended to do a short term trade as I thought the market would react positively to the results. I was proved wrong and the share price dipped below my purchase price. Fortunately, I was presented the opportunity to exit a few days after on the 19/5/17 at $0.445, giving me a minute loss of 0.47% after taking into consideration commissions. I will have to be more disciplined in my trades, and stick to what works in the long run rather than wild guesses at where the stock prices will head in the short term. I guess Howard Marks did make his impression on me, especially in the area of risk management. In the same regard, I sold off Alliance Mineral on the 25/5/17, pocketing a small gain of 4.06% at a price of $0.37. I realised that investing in these two commodity plays caused unrest within me, and I often found myself continually checking their share prices within the day, hoping for a quick gain. Perhaps my temperament is not suited for highly volatile stocks, of which commodity companies are a large part of. Upon further introspection, I realise that a main reason why I fretted over Alliance Mineral was because of the uncertainty that shrouds it. The company might continue to rise sharply in the next few months if things work out in its favour, but there is nothing currently set in stone; which makes it so risky. I guess the litmus test for me in ascertaining whether or not to hold onto a stock is to see whether I find myself worrying over it as I go to bed. Having sold off these two stocks, I did actually breathe out a sigh of relief.On 22/5/17, I bought into InnoTek Ltd at a price of $0.37. InnoTek is a precision metal components manufacturer serving the consumer electronics, office automation, and mobility device industries. The company was loss making in 2014 and 2015 and had turned around in the previous year due to a change in management. Profits were growing from quarter to quarter in FY16 and I was interested in the company as it was trading at a PB ratio of 0.68, PE of 7.3, and an ex-cash PE of 4.9, which was attractive to me. Moreover, its turnaround does look legit, and its ROE in the last FY was around 9.23%, which is encouraging considering it is net cash and holds a significant amount of cash on its balance sheet. At a distribution of $0.005 per share, it is yielding around 1.35% at my purchase price. The company had also given its first dividend in 3 years, as it was loss making previously. I am looking forward to a better FY17 under the leadership of Mr Lou Yiliang, who is the current CEO of the company.
On the next day, I purchased shares in Boustead Projects at $0.86 as I felt it was undervalued after analysing a report by CIMB. I will not go too much into details as the report is comprehensive and talks about the moat that the company possesses in the industrial design space. The firm is the market leader in the industrial real estate D&B field, with a solid track record in delivery of high spec built-to-suit industrial facilities to MNCs and local customers across industries including aerospace, pharmaceutical, high-tech manufacturing and logistics. It has amassed a portfolio of 18 cashflow generative industrial assets and secured partnerships with investment funds to develop industrial projects in Singapore and China. As mentioned in the report, “Being a knowledge-based business with all construction works carried out by subcontractors, the D&B business of BP carries very little fixed assets and does not have large overhead expenses (it has no foreign labour quota issue as faced by many construction firms); this allows BP to manage its cost efficiently. Apart from the flexible cost management, we believe another advantage of the D&B model is the self-financing feature of its projects – BP typically receives upfront payment from clients before it pays its subcontractors based on work performed. As such, we think BP’s payment terms are more favourable than those of general construction contractors, which usually have to put aside a sizeable amount of cash for project financing purposes.” As a result of its high value adding design services, the company has been able to command strong gross margins, ranging from 14%-20% as compared to single digit margins of general construction companies.
If the report is indeed accurate, then the market may not be recognising the full potential of the company which possesses a superior business model yet trading at a significant discount to developers and REITs. Based on my entry price, and using CIMB’s RNAV of $1.73, it is trading at a price to RNAV of ~0.5. The company is also net cash, which is something one would hardly see in developers or REITs. It is giving total dividends of $0.025 a share, comprising of a final dividend of $0.015 and a special dividend of $0.01. There might be plans to launch a REIT in the near future, but I am not banking on that. In summary, the company is attractive to me mainly due to its undervaluation despite having a much stronger business model as compared to its peers.
Disclaimer: The author owns shares in the abovementioned company. The ideas expressed in this blog should not be construed as an enticement to buy or sell the securities, commodities or assets mentioned. The accuracy or completeness of the information provided cannot be guaranteed. Readers should carry out independent verification of information provided. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.