Sunday, March 1, 2015

ISOTeam – surged 55% since my last writeup, any more upside?

With reference to my introductory writeup on ISOTeam dated 17 Jan 2014 (see article http://www.sharesinv.com/articles/2014/01/21/isoteam-%E2%80%93-defensive-recurring-business/), ISOTeam has soared 51% from $0.390 on 17 Jan 2014 to $0.590 on 27 Feb 2015. Inclusive of the dividend of S$0.01 / share payable on 14 Nov 2014, ISOTeam has appreciated a total of 55%.

Having jumped significantly in the course of 13 months, the next question which naturally comes to mind is whether ISOTeam is overvalued. Let’s take a look at the company’s developments since my last writeup.

Record 1HFY15 results

ISOTeam released a sterling set of 1HFY15 results on 12 Feb 2015. 1HFY15 revenue and net profit rose 22% and 92% respectively to S$39.0m and S$4.1m respectively. Gross margins improved sharply from 16.8% in 1HFY14 to 22.1% in 1HFY15 due to better profit margin of R&R completed projects. Management believes that gross margins are likely to be around these levels in the near term. (See Table 1 below)

Table 1: ISOTeam’s financial highlights


Source: Company, financial year ends in June

2HFY15 results likely stronger than 1HFY15

Historically, 2HFY15 results contributed about 55% - 65% for the past two financial years. In addition, ISOTeam has completed four acquisitions in Jan 2015 which are likely to post their maiden contributions to their 2HFY15F results. According to UOB Kayhian, these four acquisitions have a total adjusted net profit of about S$1.5m/year at the time of acquisition.

Strong order books and positive outlook

As of 8 Jan 2015, ISOTeam has an order book of S$70.4m, to be progressively delivered over the next two years. It is currently the lowest tenderer for four other projects collectively worth a total of S$30.9m.

Positive outlook

Outlook continues to be bright as there seems to be more projects to be awarded. For example, according to a Straits Time article dated 10 Jan 2015, the Ministry of National Development (MND) will set aside $20m to upgrade another 9 private estates under its Estate Upgrading Programme (EUP). EUP includes landscaping, construction of ramps for wheel chair uses and enhancing parks and playgrounds etc.

According to another Straits Time article dated 11 Sep 2014, the government will expand its neighbourhood renewal program (“NRP”) to include HDB blocks built between 1990 and 1995. Previously, only HDB blocks built in and before 1989 are entitled for NRP. In other words, another 100,000 households in more than 1,300 blocks will benefit from the programme. There will also be more features included in the NRP such as block repainting and other repairs.
The above measures should bode well for ISOTeam’s business prospects.

Potential beneficiary of general election

Most market watchers are expecting our Singapore’s general election may be held around late 2015 to 1H2016. In view of the preparations to the general election, it is not unreasonable to assume that there may be more of the aforementioned projects (i.e. NRP, EUP, upgrading of hawker centers etc) to be rolled out in the near term which should benefit ISOTeam to a certain extent.

A greater following & emergence of anchor shareholders

ISOTeam has come a long way since my first writeup in Jan 2014. Besides UOB Kayhian, it has since attracted DMG coverage. In addition, it has been featured more frequently in the media with the latest media release dated 23 Feb 2015 (See http://business.asiaone.com/news/diy-expert-builds-successful-firm)

Besides a greater following from the media and analysts, some reputable names have emerged as substantial shareholders of ISOTeam after my writeup. For example, Nippon Paint (Singapore) has increased their stake from 2.6% to 5.9% in Dec 2014. It is noteworthy that ISOTeam is the exclusive applicator for Nippon Paint (Singapore).  (You may have read that Mr Goh Cheng Liang, founder of Nippon Paint South-East Asia Group (Nipsea), is Singapore’s richest man with a US$8.2b fortune, ahead of Mr Wee Cho Yaw, second richest man in Singapore with a US$6.9b fortune.)

Besides Nippon Paint (Singapore), Singapore Tong Teik (Private) Limited, a natural rubber trading company, founded in 1964 and based in Singapore, took a 6.4% stake in ISOTeam in May 2014. For those readers who have followed the news on UE E&C, a construction / property developer, they should be familiar with Singapore Tong Teik (Private) Limited which has acquired a significant stake in UE E&C. Thus, acquisition of a substantial stake in ISOTeam is likely to be in line with Singapore Tong Teik (Private) Limited’s long term business interests.

Synergistic acquisitions

ISOTeam has completed the following acquisitions in Jan 2015. With reference to Figure 1 below, through the four acquisitions, ISOTeam has gained access to 200 sets of gondolas, 200 sets of boom lift / scissors lifts and increased their painter headcount to 400 painters. In addition, ISOTeam also expanded their capabilities into specialist areas in landscaping and architectural coatings. As a result, this is likely to open doors to new clients and sectors.

Figure 1: Four *acquisitions completed in Jan 2015


Source: Company
* In the latest announcement dated 27 Feb 2015, Accom, Accom International and Rong Shun have been renamed as ISOTeam C&P Pte. Ltd, ISOTeam Access Pte. Ltd and ISO-Landscape Pte. Ltd.

Online handyman service portal rollout in 3Q CY2015

ISOTeam is rolling out their online handyman service portal in 3Q CY2015 which should provide a one stop solution portal for plumbing, air conditioning, general repairs, tile works etc. This is a step forward to their vision of being a complete building and maintenance team.

Besides the usual risks which you can find in my previous writeup and ISOTeam’s prospectus, here are some of the risks which I deem to be more likely and noteworthy.

Risks


Illiquidity is still an issue

Based on its latest annual report 2014 which did not take into account of the recent placement and share issuance, the top 20 shareholders have about 90.4% of ISOTeam’s outstanding shares. Ave 30D and 100D volume amounted to around 285,000 and 212,000 shares respectively. This is not a liquid company where investors can enter or exit quickly.

Rising costs

Rising costs, attributed mainly to labour costs, are likely to rise in the medium to long term as our labour market is likely to be tight. However, in the recently announced budget, the foreign workers’ levies will be held off to next year. This eases rising costs in the short term. Notwithstanding the rising labour costs in the medium to long term, ISOTeam should be able to maintain their gross margins at around 21% due in part to their recent acquisitions and economies of scale. Furthermore, their R&R projects are typically short term in nature around 9-14 months where they should not be too adversely impacted by rising labour costs.

Seemingly high valuations vs. their construction counterparts

ISOTeam trades at an annualised FY15F PE of around 9.6x. This seems pretty high vis-à-vis some of the construction companies. However, ISOTeam’s core business is in building refurbishment and upgrading whereas some of their construction peers focus more on new build construction. Thus, this is not an “apple to apple” comparison. Furthermore, the business demand for building refurbishment and upgrading is also different from new build construction.

According to UOB Kayhian’s estimates, after accounting for the recent acquisitions and placement, ISOTeam is likely to have a strong net cash position of around S$13-15m. Stripping out the net cash position of S$13m, ISOTeam trades at an annualised FY15F PE of around 8.1x.

It is noteworthy that ISOTeam’s financial year end is in June, thus FY15F ends in June 2015. In addition, if ISOTeam continues to register earnings growth in FY16, coupled with a full year contribution of its aforementioned acquisitions (i.e. Accom etc), its PE should trend lower over time.

Technical outlook

ISOTeam with the last closing price of S$0.590, is near to its record intraday high of S$0.605 on 18 Feb. Based on Chart 1 below, ISOTeam exhibits a clear uptrend as depicted by its rising exponential moving averages. It has spent the month of February consolidating its gains between S$0.565 – 0.605. Any breakout to the upside / downside with volume expansion has an eventual measured technical target of S$0.645 / 0.525 respectively. As the prevailing trend is up, the probability of an eventual upside breakout outweighs that of a downside break.

Supports: $0.575 / 0.565 / 0.55 – 0.555

Resistances: $0.605 – 0.610 / 0.645 – 0.650


Chart 1: ISOTeam – consolidating after its strong gains


Source: CIMB chart as of 27 Feb 15

Conclusion

Although ISOTeam has appreciated 55% since my last writeup, its defensive and recurring business (mentioned in my previous writeup), potential record FY15F results, more contract wins and analyst coverage may be some of the possible catalysts for its share price.  Nevertheless, its lack of liquidity, seemingly high valuations relative to construction companies and sharp share price performance over the course of 13 months may be some noteworthy factors for readers to consider.

*Due to some technical errors, I am not able to post the images of Table 1, Figure 1 and Chart 1 on my blog. U can email me at crclk@yahoo.com.sg for the complete pdf writeup.

Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Saturday, February 14, 2015

GSS Energy – unique and interesting business model

Pursuant to my writeup on GSS Energy (formerly known as Giken Sakata) on 1 Oct 2014 (see writeup here http://www.sharesinv.com/articles/2014/10/06/giken-potential-oil/), GSS Energy has weakened from $0.315 to a low of $0.245 in mid January before closing at $0.270 on 27 January 2015. This was down 14% as compared to 1 October 2014. To put into perspective, Rex and RH Petrogas have fallen about 33% and 44% respectively over the same period.

At the time of doing this writeup, GSS Energy has been suspended from trading due to its proposed restructuring by way of a scheme of arrangement. It will resume trading under the name of GSS Energy Limited. It closed at $0.270 on 27 January 2015 before the suspension.

As one of GSS Energy’s main businesses is oil production, the >50% slump in oil price has led many investors to reconsider its business prospects.

Impact on oil price slump manageable

GSS Energy sells their oil to Pertamina and the selling price is fixed for a year, subject to an annual review by Pertamina. According to management, if Pertamina wishes to change the selling price, it also has to change the USD/IDR FX rate. In other words, Pertamina can either keep the selling price unchanged, or change both the selling price as well as the USD/IDR FX rate.

USD/IDR has appreciated approximately 41% from USD/IDR 9,000 (their last contracted rate) to 12,700. Thus, the favourable move in USD/IDR is likely to mitigate the possible fall in their selling price to some extent.

Senergy report on three oil fields – a near term catalyst

Senergy is likely to release the valuation report on GSS Energy’s three fields (Kawengan, Trembul and Gabus) in 1Q 2015. For their first two fields, namely D&W and Tunggul oil fields, Senergy valued them on the best scenario net present value of US$195m, or S$263m based on a 10% discount rate. (See Table 1 below)

Table 1: Projected net present value of D&W and Tungkul fields using a 10% discount rate

Source: Senergy report dated 26 May 14

Kawengan, Trembul and Gabus fields have at least 161 oil wells vs the 131 wells from the D&W and Tungkul fields. In addition, according to management, Trembul and Gabus fields have deeper oil wells than the other fields, providing greater potential for the production of oil. Thus, it is likely that the three fields should fetch a higher valuation (notwithstanding the drop in the oil price) than D&W and Tunggul oil fields.

With both valuation reports on GSS Energy’s five fields, this should shed some light on its reserves valuation and reflect the stark difference between reserves valuation and its market capitalization currently valued at S$128m as of 27 Jan 2015.



Takes delivery of three more rigs this year

As of end Nov 2014, GSS Energy produced about 1,070 barrels of oil per day. According to DMG report dated Jan 2015, GSS Energy has one land rig in operation and is expected to take delivery of three land rigs in 2015. This should increase their oil production in the months ahead.

Precision engineering business performed well in 2014

Giken’s FY14 revenue from its precision engineering business dropped 46% from S$126.8m in FY13 to S$69.0m in FY14. However, net profit soared 475% from S$446K in FY13 to S$2.1m in FY14. According to their FY14 results press release, management is positive on its contract manufacturing business which should bode well for their FY15F results.

1HFY15F and FY15F results likely to be strong

Besides the positive outlook on GSS Energy’s precision engineering business, there will be maiden contribution from its oil business in 1HFY15F results onwards. Ceteris paribus, FY15F should be a better year for GSS.

Valuation

After my writeup on GSS Energy on 1 Oct 2014, DMG Securities and Religare have initiated coverage with target prices of $0.650 and $0.510 respectively (See Table 1 below). Personally, it would be good if Senergy release the valuation report on the other three fields. This would serve as an alternative independent valuation yard stick for the investors.

Table 1: GSS analysts’ target price


Source: Bloomberg 11 Feb 2015

Giken’s chart analysis

Based on Chart 1 below, GSS Energy has been entrenched in a downtrend since Jun 2014. It has to breach the strong resistance around $0.290 – 0.300 with volume expansion for the chart to turn positive.
Near term supports and resistances are at $0.260 – 0.265 / 0.245 & $0.280 / 0.290 - 0.300 respectively.

Chart 1: GSS entrenched in a strong downtrend


Source: CIMB chart as of 11 Feb 2015

Conclusion – Unique business model, less affected by swings in oil price

In a nutshell, although one of GSS Energy business segments (i.e. oil production) is the least favoured sector now, there is some merit in GSS Energy oil business model. It is noteworthy that the >50% slump in oil price may not affect GSS Energy to such a large extent. However, in order for GSS Energy share price to re-rate, it depends on the company’s FY15F results, Senergy’s report on its three fields and management’s communication of their unique business model to the investment community.

Readers who are interested should take a look at their website for more information. You can also email me at crclk@yahoo.com.sg  for the analyst reports on GSS. 


Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Monday, December 22, 2014

QT Vascular – an overlooked potential health care play?

In one of the articles by Channelnewsasia dated 18 Dec 2014, it was reported that the general healthcare sector has performed well this year and prospects likely remain bright next year. The healthcare index, as measured by the SGX Healthcare Index, registered a year to date return of approximately 9-10% vs the 2% from STI. Factors such as the aging demographics and rising demand for quality healthcare etc. continue to bode well for the overall healthcare sector.

One of the stocks which has underperformed on a year to date basis is QT Vascular. Average analyst target is $0.665. Its price chart seems to be in the midst of a base formation, hence I decide to take a closer look in this stock.

Description of QT Vascular

QT Vascular’s value proposition to its customers is that’s its products (i.e. balloon catheters) are less invasive for the treatment of vascular disease without the use of permanent implants (stents). QT Vascular manufactures and sells two types of balloon catheters. They are used to treat either peripheral artery diseases or coronary artery diseases. The catheters are marketed under the Glider and Chocolate brands.

Readers can refer to the company website http://www.qtvascular.com/ for more information.

Investment merits

Industry prospects remain sanguine

According to QT Vascular’s prospectus, the market size for peripheral vascular devices is estimated to grow at a compound annual growth rate of 7.1% from US$4.8b in 2011 to US$7.8b in 2018. The coronary market is arguably larger than the peripheral market. With the aging population and change in healthcare coverage and amount spent etc, these factors are likely to underpin the demand for QT Vascular’s products.

4QFY14F results may be strong

4QFY14F results are likely to be buoyed by the ramp up of GliderXtreme PTA products in Asia as new shipment orders of Glider products from China and Japan in 4Q14 are expected to contribute to top-line growth. Secondly, QT Vascular announced on 15 Oct 2014 that it has signed distribution agreements for the sales of its Chocolate PTA® balloon catheter in Italy, Austria, Turkey, and Australia. This should bode well for its results in 4QFY14F and beyond. Thirdly, QT Vascular’s existing products, such as Chocolate PTA continue to grow as a result of a 300% year on year increase in U.S. hospital accounts.

Approvals from regulators provide another catalyst

Firstly, QT Vascular has applied for CE marking approval for its Drug Coated Chocolate Touch in Jul 2014. This approval, if obtained, is expected to be in the next 12 – 18 months. Secondly, QT Vascular may also secure the approvals for its Chocolate PTA from China CFDA and Japan Shonin in 2015. Such approvals, if materialise, bode well for QT Vascular. See Table 1 for its product portfolio and approvals.

Table 1: Product portfolio and approvals

Possible takeover target

In QT Vascular’s industry, it is a norm where established medical companies acquire smaller groups for their new and upcoming products. With reference to Table 2, QT Vascular has more products than the other firms which were acquired in the past four years. It is noteworthy that CVingenuity and Lutonix have not generated any revenue at the time of their takeover. As QT Vascular progresses on their products development and sales, it is likely that it may be able to command a higher valuation due to lower business risk and better earnings visibility.

Table 2: Peers who have been sold in the past few years

Source: Company

In addition, I will like to highlight QT Vascular’s CEO Eitan Konstantino’s past work experiences (See Table 3). Among his career history, he was the Founder & President, AngioScore, Inc and CEO & COO, Advanced Stent Technologies which were both acquired. Thus, this may a sign of his inclination to develop the company and subsequently sell it off. Nevertheless, I hasten to add that this is just my own personal (gut feel) observation.  

Table 3: QT Vascular’s CEO Eitan’s past work history

Source: Company


Stepping up on investor communication

According to a CIMB 18 Nov 14 report, it was reported that management is aware that investors require timely information so that they can track the company’s performance better. Management will be making more timely updates to keep investors apprised of the company’s development.

Notwithstanding the above, there are multiple risks that readers have to be aware of. For a comprehensive list of the risk factors, readers can refer to pg 37 of QT Vascular’s prospectus. Below are just some risks (out of the many risks) which I highlight for your reference.

Risks


Loss making company since 2010

QT Vascular has been making losses since 2010 and it is likely that FY2015F may still be loss making. In an interview with the Edge in Sep 2014, management pointed out that company is focused on spending on research and development (“R&D”) so as to build up its pipeline of products. Management believes that such spending increases the intrinsic value of the company over time. In addition, management mentioned that QT Vascular can become profitable quickly if they reduce their R&D expenses and focus on distribution.

Share moratorium

QT Vascular’s share moratorium ended in late Oct 2014 where the pre ipo investors, which own 77.4m shares, can sell a maximum of 50% of their shareholding. According to QT Vascular’s prospectus pg 76, these pre-ipo investors can sell the balance of their shares (if they wish) around 2Q2015. QT Vascular has dropped about 21% from $0.355 on 3 Nov to $0.280 on 19 Dec. It is likely that at least some of the pre-ipo investors have exited during this period.

Not familiar with QT Vascular’s products

I hasten to add that I am not fully familiar with QT Vascular’s products and the scientific data from trials which support the usage of its products.

Failure to obtain regulatory approval & / or obtain market acceptance

There is no guarantee that QT Vascular’s upcoming products will be able to obtain regulatory approval (e.g. FDA, CE Mark approval etc). Furthermore, after obtaining approval, market acceptance is not a done deal as QT Vascular will need to convince the hospitals and distributors to buy its products.

Limited operating history

QT Vascular has a limited operating history and does not have long-term data regarding the safety and efficacy of their products. Positive results from earlier trials may be negated by regulatory authorities or by later stage clinical trials.

Technical outlook

Based on Chart 1, the prevailing medium term trend for QT Vascular is down as depicted by the red line. However, for the past three weeks, QT Vascular seems to be in the midst of a base formation. A bullish double bottom formation will be formed if it can break the neckline at $0.295 with volume expansion. Measured technical target price is likely to be around $0.325. This formation is invalidated if it breaks $0.265 with volume expansion.  



Supports: $0.275 / 0.265

Resistances: $0.295 / 0.315

Chart 1: QT Vascular chart may be in the midst of base formation


Source: CIMB chart as of 19 Dec 14

Conclusion

QT Vascular seems to be a promising company with exciting products. Approvals from regulators, improved 4QFY14F and FY15F results and improved investor communication etc are likely to be some of the factors for re-rating. However, it is noteworthy that the lack of operating history, its loss making results since 2010, share moratorium and market acceptance are some of the factors to watch out for.

P.S: This is just an introduction to QT Vascular. Readers are encouraged to visit QT Vascular’s website http://www.qtvascular.com/ and refer to the analyst reports for more information.


Lastly, readers can email me at crclk@yahoo.com.sg for my pdf writeup, complete with charts and tables which i am unable to post here due to technical constraints.

Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Monday, December 8, 2014

Hi-P – a proxy to Apple and Xiaomi?

Hi-P recently caught my attention as it has been conducting several share buybacks in the past one month. Secondly, Hi-P’s chart formed a bullish double bottom formation with the breakout of the neckline at $0.690 on 24 Nov. Thirdly, Apple’s (Hi-P’s customer) market capitalisation hit US$700b on 25 Nov 2014 on optimism over iPhone 6 sales and new Apple products. Fourthly, an article dated 7 Nov 2014 on Financial Times reportedly cited that Xiaomi (Hi-P’s customer) is seeking to raise US$1.5 billion in new capital at a valuation set to exceed US$40 billion.  The above factors prompted me to take a closer look into Hi-P.

Description of Hi-P

Hi-P is an integrated contract manufacturer to customers in mobile phones, tablets, household & personal care appliances. It has 14 manufacturing plants globally located across five locations in China (Shanghai, Chengdu, Tianjin, Xiamen and Suzhou), and in Poland, Singapore and Thailand.

Readers can refer to the company website http://www.hi-p.com/ for more information.

Investment merits

4QFY14F results may be strong

Hi-P 3QFY14 net profit was S$10.8m, up 243% from S$3.1m a year ago. However, due to their weak 1HFY14, 9MFY14 registered a net loss of S$4.5m. Analysts are expecting that Hi-P’s FY14F net profit would be around S$12.3m – 12.5m. This suggested a strong turnaround in 4QFY14F net profit to be around S$17.0m, up 57% quarter on quarter (“qoq”).

Riding the coattails of Apple and Xiaomi

Although the smart phone industry is challenging where product life cycles are short, the entire industry is growing. According to Strategy Analytics, a total of 320.4m smartphones were shipped in 3Q2014, up 27% on a year on year comparison. Out of these 320.4m smartphones, Apple and Xiaomi shipped a total of 57.3m smartphones, up 47% from last year. This is likely to benefit Hi-P to some extent.

In addition, Hi-P is one of the two approved suppliers for the stainless steel body frame for Xiaomi’s Mi4. According to UOB Kayhian writeup on 4 Dec, Hi-P’s production yield for Xiaomi’s Mi4 has increased from 20-30% to the current yield of more than 60%. The successful ramp up is likely to gradually reverse the operating loss from manufacture of the stainless steel body frame for Xiaomi’s Mi4. Furthermore, it is likely to open more doors to new customers and business opportunities.

Other customers also gaining traction

Russian President Vladimir Putin gave China’s President Xi Jinping a dual-screen YotaPhone 2. What is significant is that Hi-P is the original design manufacturer (ODM) of YotaPhone 1 & YotaPhone 2. YotaPhone 2 was officially launched on 3 Dec in London. YotaPhone 2 will also be scheduled for launch in China & other Asian countries (in early 2015) and in 20 European countries by end 2015. If YotaPhone gains traction, this is likely to be another growth driver for Hi-P.

Share buybacks at increasingly higher prices

Hi-P has been doing several share buybacks since last month. Based on Table 1 below, total shares accumulated since last month amounted to 903,000 shares at an average price of $0.691 (including fees). The latest three purchases occurred in the last two weeks with average prices ranging from $0.702 – 0.714.



Table 1: Hi-P’s share buybacks since Nov 2014


Date
No of shares
Amt (S$)
*Ave Px (S$)
3-Dec-14
100,000
71,170
0.712
1-Dec-14
241,000
169,129
0.702
27-Nov-14
316,000
225,526
0.714
19-Nov-14
138,000
90,061
0.653
17-Nov-14
108,000
67,912
0.629





903,000
623,798
0.691
Source: SGX, Ernest’s compilations

Investment risks

Competition

Contract manufacturing industry is an industry with stiff competition where competitors compete on scale and cost. Hi-P has to constantly upgrade their manufacturing capabilities and increase efficiency and production yield in order to stay ahead of competition.

Smartphone industry - Fast changing industry

The smartphone industry is ever changing and customers’ preferences may change abruptly. Research In Motion’s (“RIM”) Blackberry smartphones was a case in point. It was very popular in mid / late 2000s before customers change their preferences to other smartphones. At that time, RIM comprised of around 25% of Hi-P’s revenue and as a result, Hi-P was affected by the dwindling demand for RIM’s blackberry smartphones.

Dependence on key customers / industries

In terms of revenue contribution, the smartphone segment contributed about 50-60% of Hi-P’s overall revenue for the past three years. Any adverse changes in the smartphone segment, especially to their large customers, will be negative to Hi-P.

Production yield for Xiaomi Mi-4 is key

According to UOB Kayhian writeup on 4 Dec, Hi-P’s production yield for Xiaomi’s Mi4 has increased from 20-30% to the current yield of more than 60% which is probably at or near breakeven levels for Hi-P. In order for Hi-P to register strong profits in 2015F, Hi-P has to increase the production yield further.

There are also other risks such as raw material cost or manufacturing costs which may crimp Hi-P’s margins. In addition, based on Chart 1 below, it is evident that Hi-P’s share price is pretty volatile and may not be applicable to everybody.

Technical outlook

Based on Chart 1, Hi-P seemed to have formed a bullish double bottom formation with the breakout of the neckline at $0.690 on 24 Nov. Measured technical target price was S$0.765 which was attained on 4 Dec. All the EMAs (21D, 50D, 100D & 200D) are trending higher with 21D EMA forming golden crosses with the rest. Although there seems to be some profit taking at this time, the overall chart outlook seems bullish.

Supports: $0.690 – 0.700 / 0.680

Resistances: $0.720 / 0.760-0.765



Chart 1: Hi-P chart looks bullish after the double bottom formation, coupled with golden crosses (not able to attach here)


Source: CIMB chart as of 5 Dec 14

Conclusion

Hi-P seems to be on the verge of a turnaround, fuelled by the popularity of Apple and Xiaomi products. Analysts are pretty positive on Hi-P’s 4QFY14F results. Successful delivery of a good set of results in 4QFY14F and bullish guidance in FY15F are likely to be the factors for re-rating. However, it is noteworthy that the fast changing industry, Hi-P’s dependence on key customers, stiff competition and production yield for Xiaomi Mi4 are factors to watch out for.

P.S: This is just an introduction to Hi-P. Readers are encouraged to visit Hi-P’s website http://www.hi-p.com/ and refer to the analyst reports for more information.

Disclaimer

The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Monday, October 13, 2014

Vallianz – An emerging OSV play

The first time that I came into direct contact with Vallianz Holdings (“Vallianz”) was in early Aug 2014 where Mr Ling Yong Wah, Executive Director of Vallianz did a presentation at CIMB Securities. My first impression of him was pretty positive as he went to great lengths to explain his company’s business and prospects. He was also candid and shared with us some of the potential investors’ concerns about his company. A week later, I met him on a 1-1 chat over coffee on his company to understand more about the company and also to clarify some of my queries.

Vallianz has fallen approximately 32% from its intraday high of $0.135 on 22 Aug 2014 to $0.092 on 13 Oct 2014. With the sharp decline in its share price, it seems to be time to take a closer look in this stock.

Description

Vallianz is a provider of offshore support vessels (“OSV”) and integrated offshore marine solutions to the oil and gas industry. They own a young fleet of over 29 offshore support vessels with an average fleet age of 2.3 years. Their fleet comprises of 19 anchor handling tugs (“AHTs”), six platform supply vessels (“PSVs”), two towing tugs and two other vessels. They cover markets in Asia Pacific, the Middle East and Latin America with their headquarters in Singapore.

Vallianz is listed on the SGX Catalist with a market capitalization of S$281m as of 13 Oct 2014. Please visit their website  http://www.vallianzholdings.com/corporate-profile.html# for more information.

Investment merits

Industry dynamics seem positive

Industry dynamics seem positive for Vallianz. Firstly, amid the delivery of new rigs in 2014 & 2015, the supply of rigs is expected to increase. This is likely to underpin demand for OSVs. Based on Figure 1 below, the OSV – rig ratio is likely to decline to 4.25x in 2015 (lower than that of 2013) and may decline to below 4x beyond 2015.

Figure 1: OSV – rig ratio


Secondly, according to Tidewater and Gulfmark, customers are placing more emphasis on younger vessels as these vessels typically have higher specifications such as dynamic positioning technology and better fuel efficiency. Based on Figure 2 below, more than 25% of the OSV fleet is more than 25 years old and likely to be less competitive vis-à-vis OSV owners with younger fleet. It is noteworthy that the average age of Vallianz’s fleet is about 2.3 years old. This compares favourably with the global average of about 11 years for AHTS and 18 years for PSVs. Furthermore, according to Vallianz, 17 out of 19 of their AHTs and all their six PSVs have dynamic positioning technology, which is increasing a pre-requisite for most offshore projects.

Figure 2: Age of OSV fleet


With reference to Figure 2 above and Figure 3 below, although there is an overbuilding of OSVs prior to 2008 where the AHTs and PSVs order book to fleet soared above 30%, this ratio has dropped to an average 8% for AHTs and 27% for PSVs. It is noteworthy that all of Vallianz’s vessels are below 7,999 BHP where the order book to fleet ratio is around 5%.

Figure 3: AHTs order book to fleet ratio

Vallianz’s order book of US$494m stretches to 2018 provides visibility

As of 30 Jun 2014, Vallianz has an order book of US$494m and is tendering for projects valued at around US$1.2b. According to the company, around 50% of the order book is likely to be recognized in 2HFY14F and FY15F. (See Figure 4 below)



Figure 4: Vallianz’s order book

Source: Company

Vallianz has executed several noteworthy initiatives in 2014

Firstly, Vallianz announced on 12 Apr 2014 that they have entered into a collaboration arrangement with a first class Chinese shipyard to build Vallianz – designed vessels. Vallianz has the right of refusal for up to 200 vessels. This is a strategic step to manage their asset base and fleet renewal.

Secondly, Vallianz announced on 22 Sep 2014 that they were acquiring a Singapore incorporated Jetlee Shipbuilding and Engineering Pte Ltd so as to establish their own marine base for docking and maintenance operations. According to the company, this should result in cost savings and enhance operational efficiencies. The purchase of Jetlee would be settled by issuance of 143.3m Vallianz shares at an issue price of $0.138 per share. It is noteworthy that the issue price of $0.138 was at a 24% premium to Vallianz’s volume weighted average price (“VWAP”) of $0.1116 per share. The owners of Jetlee Group are industry veterans and comprise of Mr Chan Kwan Bian (co-founder of Labroy Marine), Mr Teo Guo Ping (previously working at Pan-United Corp) and Mr Ng Chee Keong (founder of Jetlee through a joint venture with Pan-United Marine Limited.) As the consideration will be entirely settled via Vallianz shares, priced at a significant premium to the current price (then), it is likely that the Jetlee owners are confident in Vallianz’s business and growth prospects.

Thirdly, Vallianz announced on 30 Sep 2014 that they are acquiring OER Holdings Pte Ltd, a provider of manpower services to the offshore industry for US$27.7m. OER Holdings’ 2013 earnings before interest, tax, depreciation and amortization (“EBITDA”) was around US$5.6m. Thus, it was priced at approximately 5x 2013 EBITDA. According to management, this acquisition not only brings an additional source of revenue and income but is likely to open doors to new customers and geographical market, especially in Asia. It is noteworthy that this acquisition would also be settled solely by the issuance of 250m shares at an issue price of $0.140 per share. This is at a 27% premium to Vallianz VWAP of $0.1101 per share which undermines OER Holdings’ confidence in Vallianz.

All of the above initiatives seem to be part of Vallianz strategic move to grow its business over the medium to long term.

As with any company, there are noteworthy points to consider



Risks

Possibility of a delay in fleet expansion

As of 30 Jun 2014, Vallianz plans to increase their fleet by 72% to 50 vessels by end 2016.  Their current vessels are built by 3rd party shipyards. Any delay by the shipyards to deliver the vessels to Vallianz may have an adverse impact on Vallianz.

Contracts cancellation is possible in dire circumstances

Some investors fear that if the oil prices continue its decline, charter contracts may be cancelled. Despite Vallianz’s long term charter contracts, their customers are allowed to give a one month notice to Vallianz before they cancel their charter contracts. However, this practice is an industry norm for all players. A noteworthy point to note is that Vallianz’s vessels operate in shallow water, hence oil price may have to tumble below US$40 before their customers decide it is not worthwhile to continue drilling for oil.

Order book replenishment

Since the company’s announcement on 12 Apr 2014 that they were bidding for US$1.2b worth of contracts, they have only announced one Latin America contract worth US$82m on 15 May 2014. I understand from management that the contract award for some of their contracts is typically in 4Q which may explain the hiatus in the contracts being awarded.

Significant gearing is a sticky point for most investors

As of 30 Jun 2014, short term and long term totaled US$508m. This is significant vs. its total equity of US$169m. Vallianz’s loans are mainly USD denominated with floating rate obligations. This naturally brings up two issues especially with the strengthening USD and talk of rising interest rate environment.

According to management, although its loans are mainly USD denominated, its assets are also USD denominated. Furthermore, both earnings and expenses are USD denominated hence there is a natural hedge to a certain extent. It reports results in USD terms too. Thus, an appreciating USD is likely to have an overall muted impact on Vallianz.

As a corollary of its large debt obligations, Vallianz, in their 1HFY14 results, posted finance costs of around US$7.5m. This is significant as compared to its 1HFY14 net profit of around US$10.1m. It is logical that if interest rate rises in the next 1-3 years, (assuming that Vallianz’s debt quantum remains unchanged), its finance costs will rise further. However, if all the above initiatives and Vallianz’s confidence in securing contracts bear fruit, Vallianz earnings and cash flow should improve over time.

Chart outlook – All time oversold

Based on Chart 1 below, Vallianz has fallen approximately 32% from its intraday high of $0.135 on 22 Aug 2014 to $0.092 on 10 Oct 2014. Both Pacific Radiance and POSH have also dropped 26% and 28% respectively during the period. Thus, the sharp drop in Vallianz may be due largely to the weakened sentiment in the OSV operators.

Based on today’s close, Vallianz seems to have formed a *doji which may potentially be the start of a reversal. RSI closed at 14.6 last Fri. This is the lowest level since its trading history dating back to May 2001. The extreme oversold pressures are likely to limit any near term decline. Support is likely around $0.088 with strong support at around $0.085. Resistance is at $0.099 / 0.108 / 0.115.

*For doji to form, it is ideal but not necessary for the open and close to be the same price. In my opinion (chart interpretation is subjective), the candlestick formed on 13 Oct seems to fulfil a doji’s requirements.


Chart 1: Vallianz – all time oversold

Source: CIMB itrade as of 13 Oct 2014

Conclusion – This is just an introduction

In a nutshell, Vallianz seems to be in the right industry with bright prospects and they have executed several initiatives in 2014. If these are executed well, it should pave the way for continual growth in the medium to long term. However, it is noteworthy that contract replenishment, significant U.S. debt and finance costs, etc are some factors which readers should be aware of. If Vallianz continues to deliver on their earnings, contracts and their plans, it is likely that they may re-rate over time.

Readers who are interested should take a look at their website  http://www.vallianzholdings.com/corporate-profile.html# for more information. You can also email me at crclk@yahoo.com.sg  for the unrated analyst report on Vallianz (there is no rated report on Vallianz) and the informative industry reports. As I am not able to put in the above figures and chart, you can also drop me a note and I will forward a pdf writeup to you.






Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.