Saturday, 13 September 2014

Tek Seng: Power Up Toward The Sun

Current hot stock Tek Seng's share price has surged 157% in less than 2 months from 33sen to 85sen.

On 11 Sep 2014, Tek Seng announced that it has entered into an MoU with Taiwan-listed Solartech Energy Corp (SEC), who will invest RM100mil in Tek Seng's 86.1%-owned subsidiary TS Solartech.

       TS Solartech @ Penang Science Park

Tek Seng is primarily a manufacturer of PVC & plastic related products. It officially diversified into the manufacturing of solar photovoltaic cells in 2012 through its initially 60%-owned TS Solartech. Apparently Tekseng has increased its stake later to 86.1%.

I have written about Tek Seng earlier in July 2011 when it announced its decision to diversify into solar PV cells. I had a strong intention to bet on this stock, as I thought solar power will become something common like LED and smartphone. I even went to its new factory construction site at Penang Science Park a few times to see its progress.

Tek Seng's initial plan is to start with one production line in the first quarter of 2012, and gradually increase to 6 lines by 2016. 

According to The Star report in 2011, TS Solartech is expected to generate RM130mil to RM170mil revenue in year 2012.

If it can achieve RM130mil revenue, and if we assume a conservative net margin of 5%, it will be RM4mil net profit for Tek Seng with 60% stake. This will be more than half of its RM7.1mil net profit from its existing business in 2011.

I did not invest in Tek Seng straight away, as I wish to see the actual contribution from its solar division first.

       Tekseng's PVC flooring products

Tek Seng's solar PV cells production started only in June 2012. So for FY2012, it achieved revenue of merely RM0.21mil, which was a far cry from its "expected" revenue of RM130-170mil. It suffered RM7.65mil pre-tax loss as a result.

When TS Solartech contributed fully in FY2013, its revenue increased to RM12.4mil, but pre-tax loss has widened to RM13.9mil.

For the latest first half of FY2014, revenue from solar division jumps significantly to RM20.7mil (cumulative 6 months period), while PBT turns green at RM1.15mil.

However, if it is not because of "other income" of RM6.9mil, its solar division actually still suffers pre-tax loss of RM5.7mil in 1HFY14. I'm not sure what makes up "other income" here.

The good sign is that revenue in solar division has picked up greatly, and the loss has narrowed a bit, though it is still far behind its expected revenue of RM130-170mil.

If TS Solartech achieves greater economies of scale later as it ramps up its production capacity, it can anytime turn the tables in style.

In early March 2013, Tek Seng announced its plan to expand its 60MW plant to 640MW (production capacity) by 2015, with a target of eight production lines by 2016. It is more than 10 times increase in capacity!

It has already spent RM120mil on its plant and will need another RM480mil for expansion. This should be the purpose of SEC's RM100mil investment in the MoU.

Tek Seng is a small company with shareholders equity (net assets) of just RM134.6mil. The investment in its solar division seems to be massive. Even after its share price has more than doubled, its market cap is only at RM200mil.

Anyway, Tek Seng's stake in TS Solartech will drop after the investment by SEC.

       Solartech Energy Corp, Taiwan

Nevertheless, it is hard to predict Tek Seng's financial performance and fair value at the moment. 

It might have increased its production capacity but I'm not sure regarding the demand of solar PV cells and its factory utilization rate. It was earlier reported that there was an oversupply of solar cells mainly from China, which has caused a drop in its selling price.

For those who have taken position in Tek Seng in the past 1-2 years, they are surely handsomely rewarded from their patience right now.

At current share price of 84.5sen, is Tek Seng still undervalued or overvalued? I don't know. Can its bottom line explode next year? I don't know.

As usual, higher risk higher return. I do not have enough patience and I am not willing to wait and take the risk earlier, so I can only punch my chest now.

Thursday, 11 September 2014

Head-To-Head: OSKProp vs Huayang

In contrary to some analysts who do not expect a good year for property sector this year, property sector actually does quite well in term of sales and stock price performance.

Since the beginning of this year I have removed those property stocks from my watchlist. Now I know that it is a mistake. The consolation is, property stocks still take up quite a big percentage in my portfolio.

One of the stock I missed dearly is Huayang. 

I think not many investors will deny that Huayang is a great stock to own for long term. I am "craving" for it for quite some time but I don't know why I didn't buy it. 

Perhaps when the stock price keeps on breaking new high, it kind of stops you from buying.

I was very tempted to buy its shares when it dropped to below RM2 early this year. However at that time, I think I have to be disciplined enough not to add more property stocks. Furthermore, its high gearing also further strengthen my decision not to buy.

Now I can only regret my stupid decision.

At the same time, OSKProp started to catch my attention after it released its full FY2013 result. Nevertheless, I'm not sure why I did not have any urge to study it further, perhaps because it is also a property stock.

Now OSKProp has already released its financial result for the first half of 2014, and it is just too hard to ignore it.

Both Huayang and OSKProp are small-mid size property developers that are growing at the moment. This can be seen from their latest financial results.

As OSKProp financial year ends on 31 Dec and Huayang on 31 Mac, for easier comparison I will consider Huayang's FY14 to be 2013 and similarly for earlier financial years.

Throughout the last 5 years, in general both Huayang & OSKProp achieve consistent growth in revenue and PATAMI.

However, Huayang's revenue and PATAMI are higher compared to OSKProp, especially its PATAMI.

The PBT margin of both companies are almost similar. So the relatively lower PATAMI for OSKProp might be due to more profit to minority interest (Sutera Damansara is 51% owned), while all recent Huayang's projects are 100%-owned.

Because of bonus issues in 3 consecutive years in 2011, 2012 & 2013, Huayang's EPS is declining slightly for the last 2 years despite increasing PATAMI. Meanwhile OSKProp's EPS is in a steady climb.

How about the future earnings of both companies? We can look into their recent sales figures as this will give some earning visibility for the near future.

OSKProp locked in more new sales compared to Huayang every year for the past 3 years. So, unbilled sales of OSKProp are higher as well.

In the last 3 years combined, OSKProp has generated total new sales of RM2.03bil compared to Huayang's RM1.65bil.

This means that OSKProp's revenue for year 2014 & 2015 will probably overtake Huayang. I predict that OSKProp's PATAMI may also surpass Huayang in 2014. These can be seen from the latest financial results by both companies.

Nonetheless, Huayang can still prevent this with more aggressive new launches in the second half of 2014.

For ROE, Huayang is excellent at above 20% mark, most probably in 2014 as well. However, do expect OSKProp to break above 20% in 2014.

High gearing is Huayang's main "problem" at the moment, due to aggressive landbanking activity since year 2011, especially the purchase of Puchong's land that cost RM158mil.

OSKProp looks like it can become a net cash company if it does not buy land this year.

Table below shows recent land acquisition of OSKProp & Huayang (might not be accurate)

Date Location Size (acres) Cost (RM mil) Project

Sep 2011 Cyberjaya 16 86.5 Pangaea
Feb 2012 Shah Alam 13.73 45.4 Gravitas
Sep 2012 Bandar Sri Damansara 1.06 12 Opus
May 2013 Shah Alam 2.91 15.2 Emira


May 2011 Kuala Lumpur 1.55 32 Sentrio Suites
Jun 2011 Shah Alam 3.73 13 Metia Residence
Aug 2011 Johor Bahru 2.1 10.7 Citywoods
Apr 2012 Hulu Kinta 21 15.2
Oct 2012 Puchong 29.2 158
Jun 2013 Seri Kembangan 3.73 56.9
Aug 2014 Hulu Kinta 7.2 25.1

For the past 3 years, Huayang spends almost 2 times more than OSKProp for land acquisition. OSKProp needs more cash to construct its Atria shopping mall I guess.

In term of dividend, generally Huayang pays more dividend per share due to its superior earning.

However, OSKProp also pays good dividend historically if we look at its dividend payout ratio from net profit. Both OSKProp and Huayang are quite even in dividend payout for the past 3 years at around 40%.

At current share price, Huayang has a decent dividend yield of 5.0% (RM2.42), while OSKProp's dividend yield is at 3.1% (RM2.78).

       Metia Residence (Huayang)

As mentioned earlier, base on last 3 years' sales figures, OSKProp might overtake Huayang in term of revenue and profit. However, this will also depend on their respective sales this year and in the future.

Who has a brighter future?

As Huayang has acquired more new lands, it is not a surprise that it plans to launch lots of projects (up to RM1.09bil) for its FY15 which ends in Mac 2015. So far this year it still hasn't officially launch any projects.

The table below shows recent and future new projects launch of OSKProp & Huayang. (might not be accurate)

Year OSKP Huayang
Project GDV Project GDV
2011 Mirage By The Lake 466 Parc (OneSouth) 154

Mirage Residence 175 Gardenz (OneSouth) 160

Atria SOFO 200

2012 Vale (Sutera)
Flexis (OneSouth) 183

Paragon (Pangaea)
Pulai Hijauan

Solstice (Pangaea) 340

2013 Eclipse (Pangaea) 398 Greenz (OneSouth) 194

Almira28 (Sutera)
Metia Residence 156

Vale II (Sutera)
Sentrio Suites 213

2014 Roseville (BPJ)

Gravitas 150

TBA Emira 250 Citywoods 248

Opus 75 The Gardens 64

Kepler (Pangaea) 338 Cube (OneSouth) 185

New phase P/Hijauan 127

First phase Puchong 300

Ridgewood 90

Greenview Residence 12
TBA = To Be Annouced
BPJ = Bandar Puteri Jaya

It is clear that Huayang depends a lot on its successful One South project in Seri Kembangan, while the near future earning of OSKProp will be hugely supported by its high-GDV Pangaea in Cyberjaya. Both projects will probably enter their last phase this year.

After this, Huayang has Puchong West (GDV RM1.35bil) as One South's successor. However, it seems like OSKProp doesn't have a successor yet for its Pangaea.

       Pangaea (OSKP)

OSKProp has small pieces of prime land in Bandar Sri Damansara (Opus) & Shah Alam (Emira), while Huayang matches it with land at Seri Kembangan (Mines South) & Johor Bahru (Citywoods).

Both companies have huge township development. OSKProp has Bandar Puteri Jaya in Sg Petani, with remaining landbank at approximately 1,200 acres. Huayang has ongoing township at Bandar University Seri Iskandar in Perak (about 400 acres remaining) and Taman Pulai Hijauan in Johor (about 92 acres remaining).

Coincidentally, both companies also have lands in Seremban, where OSKProp has 15 acres while Huayang has 35 acres, both freehold.

Besides, Huayang has an ongoing commercial project Senawang Link in Seremban which has 20 acres remaining, as well as more small land parcels in Ipoh for both commercial & residential development. (from latest annual report).

       Cube @ One South (Huayang)

Nevertheless, OSKProp recently sold 108 acres of land in its BPJ for RM56mil to PR1MA, and will be given the responsibility to construct 1,395 units affordable houses on it.

Protasco gets similar project worth RM88.1mil earlier this year to construct 1,144 units of PR1MA houses. So I think OSKProp's PR1MA project might worth about RM110mil.

OSKProp expects its Atria Mall (470,000 NLA) at Damansara Jaya to be ready by the end of this year. So it should contribute as a recurring rental income to OSKProp from year 2015, which can more or less "protect" the company from property market slowdown.

Furthermore, OSKProp plans to build the largest shopping mall in Sg Petani in its BPJ which might mean more recurring income in the future.

Belleview Group (not listed) also said that it will build the largest shopping mall in Sg Petani. Who will be larger then?

       Atria SOFO & Shopping Complex (OSKP)

Meanwhile for Huayang, its landbanking activity might be limited due to high gearing, even though it has recently taken up a RM250mil Sukuk program. It has to pray that its property projects sell well to generate enough cash to pay the debts.

Anyway, Huayang does not seem to stop here as the management eyes further land acquisition in mainland Penang and Kota Kinabalu.

Development lands are crucial to a property company so I think Huayang's move is good for its shareholders. 

       Sentrio Suites (Huayang)

Both companies seem to be undervalued at the moment base on fair PE ratio of 10x.

OSKProp Huayang
Current Share Price (RM) 2.78 2.42
Projected PATAMI (mil) 100 100
Projected EPS (sen) 41 38
Actual PE 12.2 7.8
Projected PE 6.8 6.4
Diluted Projected PE 9.6 6.4

OSKProp's current actual PE (base on latest full FY result) may be higher but it will drop for sure if its 1HFY14 PATAMI is to be annualized. 

The projected PE is base on projected PATAMI of RM100mil for both companies in their next full FY (similar with Tambun!). 

At the moment OSKProp and Huayang have paid-up shares of 244mil & 264mil units respectively. OSKProp has 105mil outstanding warrants expires in Aug/2017. 

       Mirage By The Lake (OSKP)

In term of management team, Huayang has a good one for sure, who has grown the company tremendously besides giving good dividends and bonus issues without diluting shareholder's shares value.

As for OSKProp, I'm not too sure but it can't be too bad as it has successfully raised the company's earning and value to a higher level.

Anyway there is a possibility that OSKProp might be injected into OSK Holdings by its major shareholders. I think this might be a double-edge sword to OSKProp's minor shareholders. If OSKProp is valued cheaply, then it's not good.

In May 2011, OSKProp was attempted to be taken over by major shareholder Ong Leong Huat at 87sen per share. Its share price was traded around 75sen at that time and surged to 79.5sen a day before the announcement.

OSKProp's FY2010's EPS stood at 6.3sen, so 87sen offer price represented a PE ratio of 13.8x. However, its net asset per share at that time was RM1.74. 

As a result, the takeover offer didn't go through.

In 2013, Ong also attempted to take over both OSK & OSKVI with offer price significantly lower than their net asset per share. So both have failed as well.

OSKProp's latest net asset per share stands at RM1.87, which is below its share price of RM2.78 at the moment. However, it still has Atria mall & is yet to revalue its land. What should be OSKProp's fair price? 

Anyway, OSKProp might not be injected into OSK in the first place.

Is it still safe to invest in property sector now? If it is, OSKProp & Huayang, which one is more attractive? Why not both?

Tuesday, 9 September 2014

Stocks Valuation Methods

There are many ways to valuate a stock or investment. I search the internet and here are what I found and learned so far.

Stock valuation involves basically fundamental analysis. Some might say that technical analysis can be used to valuate a stock but I think it is more like to valuate stock price.

Whether it is fundamental or technical, there is no right or wrong as long as you know crystal clear what you are doing. Investors should find out themselves what really suit them.

For me, I believe that fundamental is the way to go.

Valuation methods from fundamentals can be divided into two groups:
  • Absolute valuation method
    • To find out the intrinsic (true) value of a company, and no need to compare with others
    • Eg. dividend discount model, discounted cash flow model, assets based model etc
  • Relative valuation method
    • To compare companies in the same sector, to find out which is more "undervalued" relative to others
    • Eg. P/E ratio, P/B ratio, PEG ratio, ROE, ROA, ROIC, EVM etc

Absolute valuation method

Dividend Discounted Model (DDM)
  • Basis: Dividend represents actual cash flow that will return to shareholders from an investment, ie. we put in our money and get our return in the form of dividend.
  • DDM uses predicted dividend growth rate to arrive at a present stock value
  • Only suitable for companies that pay consistent dividends
  • Dividends payout should be stable and predictable
  • Formula:

Discounted Cash Flow (DCF)
  • Basis: Free cash flow (FCF) represents actual return to shareholders from an investment
  • DCF uses future FCF projections and discounts them to arrive at a present value
  • FCF should be positive and predictable (not so suitable for growth companies with large capex)
  • Formula:

Net-net / Net Current Assets Value (NCAV)
  • Basis: Valuate a company solely on its net current assets
  • Introduced by Benjamin Graham
  • Formula

Book Value / Net Tangible Assets (NTA)
  • Basis: Valuate a company base on its net assets
  • Some investors include & some exclude intangible assets
  • Book value  = Total Assets - (Intangible Assets) - Total Liabilities
  • Book value should be compared to share price

Revalued Net Assets Valuation (RNAV)
  • Basis: Valuate a company base on market value of its assets such as land, buildings, business, investment etc.
  • Total market value of assets divided by outstanding shares to get RNAV per share.
  • Commonly used for property stocks

       Example of RNAV

There is another valuation method which is commonly mentioned when I read analyst reports, which is the Sum-Of-Parts valuation (SOP).

Sounds like Son-Of-XX?

It is suitable for companies with 2 or more business divisions, in which every divisions are valuated separately and then combined. The valuation method used for each divisions can be different.

I think it is best explained with example (by MIDF Research)

       Example of SOP Valuation

According to experts, there is no single best valuation method. However, some method may be more suitable for certain types of companies or businesses.

As many of those valuation methods are base on assumption and prediction of future earning, future cash flow, future dividend etc, it may not be very accurate.

Thus, investors usually set a discount rate or margin of safety to minimize the downside risk when making an investment.

For example, if you calculate a company to have an intrinsic value of RM1, and set a margin of safety of 30%, then it means you will buy if the stock price is 70sen or below.

Similarly analysts will always give a discount rate to RNAV of a property stock.

Finding the intrinsic value using DDM and DCF is not that simple actually. There are more complicated calculation and models that branch out from it. They are just too complicated for me to understand.

These are all what I know so far. Surely there are many other valuation methods not mentioned here. If there are any mistakes please feel free to correct me.