Purchase of Memtech International, HRNet Group, Nordic Group & Sale of QAF Ltd

Over the past two months, I have made a couple of purchases in the market. Firstly, on 11/8/17, I bought into Memtech International at $0.965 when it retraced a little from its highs. My purchase of Memtech’s stock is purely on a valuation perspective, as I felt it was still relatively undervalued compared to its other manufacturing peers. It was trading at a PE of ~8 and PB of 0.85 at my purchase price. The company is expanding in the automotive industry, where it is said to be a supplier of plastic parts to Tesla. Its consumer business, where it supplies to the earphone maker Beats, is also growing. However, as I feel I am sufficiently exposed to the manufacturing industry through other holdings, this position is not core and I might sell once the market recognises its value.On the 27/9/17, I bought shares in HRNet Group at $0.72. HRNet IPO-ed at a price of $0.90, which I felt was too richly valued at that point in time. Thankfully, it dropped a couple of months later and I was able to pick up some shares at a price which I felt had value to me. The company is Singapore’s largest HR recruitment agency, owning many popular brands like Recruit Express and Search Asia. I believe that the HR recruitment landscape is a competitive one, where many firms vie for a slice of the pie. In this scenario, scale gives one a huge competitive advantage. At my purchase price, HRNet was trading at a ex-cash PE of ~12. The company has operations in many countries, mostly within Asia Pacific. I nibbled at this purchase as it was in a downtrend, and I wanted to space out my buys. The price has seen recovered a little, but I am monitoring this as I hope to increase my stake in the future.

On 6/10/17, I bought into Nordic Group at $0.51. Nordic was a classic case of a well managed company which I waited too long to act on. I had been monitoring it when it was trading at $0.38, but failed to pull the trigger as I wanted a bigger margin of safety. I think Chang Yeh Hong is a prudent and good allocator of capital as shown in his investments made: (1) Multiheight in 2011 for around S$29 million, (2) Austin Energy in 2015 for around S$26 million, and (3) Ensure Engineering for around S$17 million in April this year. All three investments have added a different dimension to Nordic’s business profile and made it a stronger business as a whole. Furthermore, all three have “contributed profits from day one”. Chang also said in an interview that Nordic’s acquisition strategy “revolves around at least one area of familiarity – either the target acquisition has the same customer footprint and a new product or service, or there is a different customer footprint, with the same product or service.” Nordic has taught me once again that quality management is the foremost driver of a company’s prospects in the long run. One may buy low, but if the management is not apt, the company may go to the doldrums still. Good management will help to compound the earnings over the years, in which case the stock only gets better with time to come. Value stocks on the other hand, require one to consistently deploy one’s capital into another value stock after a successful sale of an undervalued company. As the valuation is a tad high for my liking at a PE of ~14.5, I only nibbled and will be waiting for an opportunity to further add onto my position.

I also made the decision to cut my losses in QAF Ltd at $1.24 on 6/9/17. Total losses from this trade stands at -9.49%. My original thesis did not pan out as the company has mentioned that it is looking at listing its agricultural business instead of selling it. I still feel the agricultural business is a drag on the company’s returns, and the company would be better without it. Returns from investing its capital into the bakery business seem much brighter. I will still be watching this space in time to come.

In addition, I took advantage of the weakness in the share prices and increased my positions in InnoTek on 28/9/17 at a price of $0.28, ISEC on 2/10/17 at $0.305, Jumbo on 5/10/17 at a price of $0.555. My annual portfolio review is due at the end of this month, let’s see how my performance matches up against the STI index then.

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Updates to my Portfolio

                                                                                  

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.