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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Purchase of ISEC Healthcare & Valuetronics Holdings

On 2/6/17, I bought into ISEC Healthcare at a price of $0.34. International Specialist Eye Centre (ISEC) is a comprehensive medical eye care service provider based in Malaysia and Singapore, whose vision is to provide high quality, compassionate, world-class eye care at affordable level. It is a net cash company (~$21m) with no debts, and is currently trading at a PE of 26x FY16 earnings. This may seem high at first glance, but I like the management’s opportunistic acquisitions at pretty decent prices, eg. the acquisition of JLM GP and aesthetic clinics at a PE of 12 to complement its current operations. From my interactions with medical professionals, eye surgery is seen as a lucrative business, and this is reflected in ISEC’s strong net margins of ~20% compared to the estimated industry average of ~13%. The company has seen increasing revenues in the past 5 years, but this has not necessarily resulted in rising profits due to the firm’s loss-making Mount Elizabeth Novena Specialist Center. With the cessation of operations in 2015 along with contributions from new acquisitions like SSEC (Southern Specialist Eye Center Sdn Bhd) in Malaysia, profits in 2016 rebounded strongly from $2.8m in 2015 to $6.4m in 2016. ISEC intends to continue expanding in Malaysia and into the region. Countries like Vietnam, Myanmar, Indonesia, Taiwan, Philippines and China are targets. At an annual dividend of $0.011 per share, the company is trading at a 3.23% dividend yield at my purchase price of $0.34.

On the same day, I bought more of QAF at a price of $1.355 as I still felt it presented value, especially with the ongoing strategic review of its primary production business underway. With the purchase, QAF is one of the more significant holdings in my portfolio.

On 12/6/17, I purchased shares of Valuetronics at $0.765 after its shares were sold off sharply, possibly due to the drop in US tech shares the night before. I have been eyeing Valuetronics for some time, but its recent gains have made it hard for me to pull the trigger, especially from the valuation perspective. Valuetronics is an integrated electronics manufacturing services (EMS) provider with key businesses in consumer electronics (CE), and industrial and commercial electronics (ICE). Honestly, I still feel I lack the competence to understand the semi conductor and electronics industry, and these include my investments in Micro-Mechanics and InnoTek. However, I find comfort in their management, especially Micro-Mechanics’. As for Valuetronics, I am optimistic as I believe it is a beneficiary of two major trends in IOT and autonomous driving. In 2016, there was a steep fall in revenues and earnings due to the exit from the low margin CE LED business. This used to be a big business for the company. However, it was not long lasting, as management steered the company back to growth with the introduction of new products, like smart lighting with Internet-of-Things (IOT) features. I must admit that the comeback and return to growth was indeed quick. At my purchase price, the company is trading at a PE of ~12 and a yield of 5.2%, based on a FY17 dividend of HKD$0.20. The company is net cash, with around ~$130m in cash. Valuations are not exactly compelling for an OEM provider,  Let’s see how this company performs in the coming quarters.

With the recent purchases, I am around ~80% invested based on my investment portfolio, and around 60% invested based on my total portfolio, which includes my emergency savings. I am still building up my cash cushion, so I will need to save more in the coming months.

 

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.

Sale of AEM Holdings and Purchase of QAF Limited

On 9/5/17, I sold off most of my stake in AEM Holdings at a price of $2.63. Due to the 1 for 2 bonus issue, my average cost was $0.58. This gave me a return of ~352% in a span of approximately 4 months. AEM had a really good run, and was my first 4-bagger. I sold most of my shares off as it made up a significant proportion in my portfolio and I wanted to rebalance it. With that, the remaining shares in AEM are free-of-cost.

On the same day, I bought a small stake into QAF at a price of $1.38. Not many would know of the company, but I’m sure many would have heard or eaten its “Gardenia” brand of breads. I have always wanted to own a piece of QAF, having been a consumer of its products since young. However, I have always steered away as I was not comfortable with its business in primary production. Rivalea, its business unit, is the largest producer of pork meat in Australia, and also a large exporter of pork products internationally. I admit there are economies of scale being the largest in the country and also by having a vertically integrated operation, but I feel that the business is afterall a commodity business. It is still a price taker, and the volatility in feed and sow prices can make or break a quarter. Returns on agricultural businesses aren’t fantastic, as usually huge assets (land, machinery) are required to make such an operation sustainable. Thus, when the company announced that it was conducting a strategic review pertaining to Rivalea through a full sale or a listing, my eyes lit up. I believe QAF would be a leaner and stronger business if it focuses more on the expansion of its bakery business in the near future. Competition is intense, but I’m confident the strong brand of its Gardenia products would help it grow. At my purchase price of $1.38, the company is trading at a PE of 13 and yielding 3.62%, assuming a yearly distribution of $0.05. I nibbled for this stock, as it is still not considered cheap to me. Nevertheless, I’m sure the bread would taste even better now. 🙂

 

 

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.