With prices rising past RM2.05 over the past week, we could be certain that a re-valuation has happened based on smartphone sales especially looking at the iPhone 11.
A review from DBS showed that it is expected that the revenue would climb again in FY2020. Just not at the moment. The recovery is intact and this is why we see volatility at the current moment.
Our Take
We believe that the time has come to start collecting once again seemingly the price had broke the trend. We believe that although AMS offer for Osram might be failing, the effect for GTRONIC shouldn’t be that huge.
The risk is next quarterly report. You could split your buying leaving room to buy after the next quarterly results release.
Plenty of cuts in the government’s construction plans but the Penang Transport Master Plan seems to be the shining star for this year’s construction sector.
Public Transportation
Starting with public transportation, SRS Consortium got the award as the project delivery partner for the LRT in Penang.
GAMUDA comes into mind with its 60% shareholding in SRS Consortium it is definitely a positive factor for them moving forward. Furthermore, the expertise of building urban rail network seems to be specific only to Gamuda at such a huge scale. Tunneling expertise are one of the uniqueness for them.
IDEAL on the other hand holds 20% of SRS Consortium and this is something that we can look out for. If the project continues and the payment comes in the form of land given to them by the government. It is likely that we see new reclamation of lands popping out on the right and bottom of the Penang island.
On completion, the project would produce lines which looks something like this.
New Highways
VERTICE and VIZIONE would be the highlight as they have already started the construction of the elevated bypass from Air Itam connecting to the main highway named Tun Dr Lim Chong Eu.
Undersea Tunnel
Consortium Zenith Construction had gotten the contract and the feasibility study itself had been paid out with two parcels of land in Tanjung Pinang.
The RM6.3 billion project which consist of roads and the tunnel itself would be 110 acres more of reclaimed land in Tanjung Pinang and 30 year concession for the company operating the tunnel.
Overall, MRT projects in Kuala Lumpur would likely continue by with a price revision but the projects in Penang seem to be moving forward quickly as the price was set by the current Pakatan government.
No doubt political factors might be the catalyst moving things forward quickly up north but it is definitely not a lackluster year for the construction projects in Penang. The spillover effect from this benefits non related but Penang based operators as well.
IJM who have a project stuck would likely see that it resumes with plenty of positive catalyst coming into place.
We became very interested when Thong Guan (TGUAN) reported the highest revenue ever yesterday. Many aren’t that interested in growing revenue but focused more on profits, but to us, the revenue increase signifies an expansionary business rather than merely profits which can be caused by other externalities other than business expanding.
The share price is currently trading at 45% off from its historical high and we felt that this is a good correction. In fact, it seems though the bottom is likely here with a couple of prospects in place.
Prospects Going Forward
Additional Production
A quick check on the quarterly report tells us that an additional stretch film production line would come in place in the fourth quarter of 2018. We would likely see a bigger revenue expansion to be reported for Q4 2018.
“An additional stretch film production line is expected to be commissioned during the fourth quarter. With the additional capacity coming on stream, the Group is optimistic to continue to growth its sales volume and revenue.”
– Prospects Q3 2018 Report
Although it is hard to tell if this turns into additional profit in the end, growth in getting the business larger is priority. Profit might not increase the same percentage but eventually, some efficiency management can be implemented to the factories and that can be a factor that improves profit margins.
Most businesses tend to see revenue rising and with a little cut here and there would eventually rise profits. We think that this might be the case this time around.
Resin Price Down
Plastic resins would be TGUAN’s primary raw material feed and we think that with the recent drop in resin price, the profit margin might improve somewhat similar to Q3 2017.
We do not have a HDPE historical chart and we represent the price changes for plastic resins with crude oil chart below.
In reference to the chart above, margins created by TGUAN was high up to Q3 2017. Later, the margins started to decline badly from Q4 2017 up to this quarer itself. Evidently, the region shown in red is when oil sky rocket to $84.
Meanwhile from the start of October which is also the reporting period for Q4 2018, we begin to see price dips for crude oil. Resin prices would follow suit as HDPE it is a form of petrochemical product.
We expect margins to improve for Q4 2018 results which would be reported February next year.
Foreign Exchange Factor
With USD trading at 4.18 against ringgit today and stabilizing at this region. The profit for TGUAN would continue to stay strong due to foreign currency gains.
Although we felt that if a sudden drop in USD would turn this positive factor into a problem, we are confident that with China continuously lowering the value of RMB, Ringgit would continue to see this price against the dollar.
Beating Q4 2017 is Easier
The market likes to compare the profit versus what it was one year ago. The Q4 2017 could be considered one of the lowest recorded in terms of Earnings Per Share.
At only 2.24 cents EPS, a mere RM 5 million in net profit next year would have top it off easily. Coupling this with the expected rise in revenue from the new line of stretch film, we felt it can be achieved easily.
Conclusion
With so many factors pointing the prospect upwards, we felt that it is fair to be buying at current price. In addition to that, we felt that the share price has yet to move or react to the expected growth in the future.
Low liquidity is a concern for many but also an indication of a counter which isn’t covered by many. That explains the ‘no reaction’ from upcoming growth.
Straight forward we know what Sapura Energy is doing. The goods news of rights issue approval added with more and more selling of assets to pare down debt remains the key factor in turning the business around.
Obvious reasons are the major shareholders who are also the country’s key investment body wouldn’t want to bankrupt Sapura Energy as well as the big boss Tun M back in office, the son’s company should be a very supportive path by bodies like PNB.
We think that good news would continue to flow after rights issue. We expect the day rights goes ex will see the bottom for this counter and we think that it is time to be buying again. Up till then, we shall wait and see what’s coming for this company.
Note that this is still not a long term investment call but merely a trading position for less than 1 year of holding.
Could almost bet that a lot of assets would be sold to pare down debt and only strong assets would be held in the end.
Hold on to your bullet first, it is still not time to fire.
IPO prospectus generally average around 300 pages which consist of words and diagrams that provide you with all the info to attract your investment in them. But not everyone could find the time and the attention span to go through every page of the prospectus in detail and scrutinize every expect of the business.
In fact, some prospectus could amount to something like 500 – 700 pages depending on how big the corporation is. The bigger the business, the more info that it needs to provide to the public about its operating segments.
Since that’s the case, I’ve prepared an IPO cheat sheet that you could use in valuating any upcoming offering.
1. Check the industry
The most important thing to do before you even start turning the first page of the prospectus is to know the industry briefly. If we could steer ourselves away from a ‘sunset’ industry, we might have won half the battle.
If you’re still keen on investing in a company which you aren’t familiar with the industry, it’s not the end of the world. You could find some basic information about the industry included in the prospectus.
2. Basic IPO information
Basic information like allocation of shares is important for an IPO. The availability of shares on float would determine the trading liquidity.
If 30 of its substantial shareholders are holding to 95% of the total issue, the low liquidity in day to day trading might cause irregular spikes and drops for the share price. The best is still the mix of 70% substantial and 30% free float.
Beyond that, major IPOs would show you the allocation to institutional investors. These parties are heavyweights where they could leave an investment immediately at their will. You can expect stock price to trade at a higher premium if the percentage of institutions are more than its directors.
Common ones are Lembaga Tabung Haji, Employee’s Provident Fund or Khazanah.
3. Utilization of Proceeds
I believe this could be one of the most important information where every investor is interested in. Think of it this way, we want our investment to grow and the only way for our investments to grow is to grow the business itself.
Companies get money through IPO in order to grow its business. Most businesses could use debt financing but IPO seems to be a way to obtain huge amount of funds in a short period of time. IPO isn’t only quick but it puts the company’s name on news creating some ‘brand awareness’ to the public. It’s a form of free marketing for the company when it goes on IPO.
Finally, be very cautious with companies who take IPO proceeds to payoff debt. This is a common case in most IPO. It is best that only less than 30% of the proceeds went into debt repayment.
Some would state that it uses proceeds to increase working capital. This is also another way to say “use proceeds to clear off current liabilities” since… Working Capital = Current Assets – Current Liabilities
Extracted from LKL Prospectus
4. Financials
Do a basic financial analysis like would you would do with most companies checking margins, revenue growth and the level of debt. This allows you to compare it with its peers to get an idea how others are doing.
You could estimate the Price to Earnings that your are paying for since you already have the ‘number of shares to be listed’ and the ‘profit attributed to owners of the company’ from the most recent financial year. PE is also a good way to know how ‘cheap’ or ‘expensive’ a stock is compared to its peers.
Like what everyone says, an alternative meaning to IPO is “It’s Probably Overvalued”, that is why we see companies going for an IPO when market is having a huge rally. Our aim is to buy something which isn’t valued at the expensive end.
Just remember to cancel out extraordinary items and if the profit after tax is unstable, find away to estimate using Profit Before Tax and put in a standard corporate tax rate to derive the Profit After Tax.
5. Understanding The Business Better
If all else checks out, it is best to go deeper in understanding the business better. Some business comes with its own uniqueness where the growth obtained over the years are highly attributed to its uniqueness. It could come from product, operations, people, partners and many other aspects. In similar ways, its like trying to identify a company’s moat.
Some companies have that in their prospectus and some don’t. But it is always good to know about these info.
6. What should you left out?
Well if you’ve came across any prospectus, you might find a lot of sections talking about risk. They tend be there just to tell investors the risk that the business faces. Even worse is that a conglomerate’s IPO have tonnes of risk to go through since they have several business section to address
I try to ignore this part since risk are always there. There isn’t a company that could be operating risk free. I would classify these as unforeseen circumstances but put faith in the the management to lead the company through a crisis.
Take for example, its pretty obvious that investing in an oil company would eventually face risk of commodity price decline, risk of foreign exchange and risk of probably refineries blowing up. Definitely not single person in the world wants a refinery to blow up (maybe ISIS do) and if that really happens then a well managed company could weather off this problem having a good backup plan. The business segments might be designed in a way that it isn’t too reliant on the performance of one.
In conclusion, I find risk factors to be annoying and if something goes wrong, there isn’t anything that you could do to stop it. My thinking is that companies have that in their prospectus to avoid being sued in case something happens.
I believe that evaluating an IPO isn’t this simple but these are the most common things you should look at once the prospectus is in your hands. I really wish I could simplify this further into a simple checklist but similar to a business, one is different than the other.
Try to master these few things and see your valuation against the outcome of an IPO.
O'Mighty Capital 