SINGAPORE (July 15): On July 8, construction company Lian Beng Group announced that it had won contracts worth $235 million to build a logistics centre at Boon Lay. The company’s net construction order book now stands at about $1.5 billion. That is about 58% higher than the $947 million at the end of its last financial year ended May 31, 2018.
Two days earlier, Lian Beng had been the topic of a presentation by Goh Tee Leng, portfolio manager of Heritage Global Capital. Goh, who had recommended the company at The Edge Singapore’s investment forum last December, said at the most recent edition of the forum held on July 6 that he remained favourable on the stock. He attributes this to the fact that construction demand is expected to grow as the government spends billions on major infrastructural projects such as the Punggol Digital District and Changi Airport Terminal 5.
Goh highlights an interesting data point: Two hundred new construction jobs were created in 1Q2019, following declines in the previous 11 consecutive quarters. “This shows that the construction industry has bottomed out, and that things are starting to improve,” he says. Lian Beng’s stock, meanwhile, is still trading at 0.35 times book value.
For this year, Goh is also bullish on the local banks. He prefers United Overseas Bank and Oversea-Chinese Banking Corp to DBS Group — the key reason being that DBS’s price-to-book valuation is higher than the other two banks’.
Goh notes that OCBC and UOB, both of which are family-controlled, tend to be more conservative in their lending than DBS. As such, he believes that in the event of a downturn, they are likely to be more resilient. For example, following the 2007/08 global financial crisis, UOB and OCBC took just one year to recover their price-to-book value, and emerged stronger than before. In contrast, DBS required more than three years to do so. In a market up cycle, however, DBS’s share price tends to run up more than the other two’s, says Goh.
In recent years, banks have been aggressively growing their fee income. This typically involves packaging and selling structured investment products and services to their wealth management clients. However, as Goh observes, these clients are beginning to complain that they have either not reaped returns or, worse still, lost money, as in the case of bonds issued by troubled companies such as Hyflux and Swiber.
“Instead of buying the products, why not align your interest with the bank? Is Mr Wee Cho Yaw buying his UOB bank products, or is he buying his own bank’s shares? That’s just some food for thought,” Goh quips, referring to the bank’s former chairman.
Havard Chi, head of research and director at Quarz Capital Asia, is also bullish on the banks. He prefers UOB, given that it has the largest exposure to the robust economies of Southeast Asia. “We have this supply chain shift to Southeast Asia,” says Chi, referring to how manufacturers are relocating operations away from China as trade tensions with the US continue.
By contrast, DBS has greater exposure in Greater China, including Hong Kong. Chi, however, has his reservations on how much success it can have there. “What can you do better than the Hong Kong guys? If you want Greater China exposure, buy HSBC, buy ICBC.”
Sunningdale versus Fu Yu
Apart from the banks, Chi is bullish on plastics component manufacturer Sunningdale Tech. He says Quarz is among the top five shareholders of Sunningdale, having acquired the stock at an average price of $1.35 each. The company has two main customer segments: consumer products and automotive products. They include components for Dyson’s hairdryer, as well as car parts for manufacturers such as Mazda and BMW.
Sunningdale’s share price has declined from $2 to $1.30 recently because its automotive segment has recorded much lower earnings. Forecasts are that earnings in the coming third quarter are unlikely to rebound, given the trade tensions in particular.
Chi says the higher costs recorded recently are a result of the relocation of its factories from Shanghai and Guangzhou to the less expensive inland city of Chuzhou. But this also means that Sunningdale’s future capital expenditure will be lower. This will lift margins and generate cash especially when businesses recover.
Chi sees this as a buying opportunity. “Basically, what we are buying is next year’s earnings. What can go wrong? If next year, the automotive segment doesn’t come back, we will still be buying cheap because that’s the price of just one business: the consumer segment,” he says. In addition, Sunningdale has been consistent and relatively generous with its dividends. “We get paid 5% to 6% [in dividend yield] just for sitting and waiting. So, this is quite a trade off.”
Sunningdale, according to Chi, is a potential privatisation bet. Many of its competitors, such as Spindex Industries, Fischer Tech and Memtech International, have been bought out, delisted or in the process of being so. In 2011, Meiban, which had a business similar to Sunningdale’s, was privatised. Recently, the family that owns Meiban sold half its stake to investment firm Dymon Asia at a valuation double the level Sunningdale trades at now. “We don’t want to say it will be privatised, but in the worst case, if nothing happens, you collect your 5% dividend; in the best case, [the company is privatised], you win. That’s the kind of risk-reward payoff we like,” says Chi.
“We are waiting for earnings to trough in 3Q. We are very, very disciplined. We know there’s a trade war, and we will accumulate at $1.35 and below during this period. We look forward to FY2020, when there is more clarity on the trade war, and when the new factory becomes operational,” he adds.
Terence Wong, another speaker at the forum, favours Fu Yu Corp. But while Fu Yu and Sunningdale have similar businesses, the latter has invested considerably in capital expenditure, while the former has held back. “They are a ‘super miser’,” Wong says. “They don’t spend anything at all — that’s because in 2004 and 2006, they were spending crazy amounts building humongous new factories,” adds Wong, who is CEO of Azure Capital.
Partly because of that expansion binge, Fu Yu has suffered from underutilisation for years. The company’s revenue has been flat during that time. Yet, earnings have gradually increased, as the focus in recent years has been on efficiency. Revenue has started growing in recent quarters, suggesting that Fu Yu has won new customers or existing ones have been placing higher orders.
At current price levels, Fu Yu’s cash balance is equivalent to 75% of it s market value. Wong believes the company can be expected to pay 1.6 cents in dividends as it did last year, which translates into a yield of around 7%. “This is not too shabby for you to wait for a possible privatisation,” he says. Year to date, Fu Yu shares have gained 13.6% to close at 21.5 cents on July 9.
Privatisation play
There is also a privatisation angle to Fu Yu — Wong believes its controlling shareholders may be keen to sell and retire. “My bet is that this company is the next to go. They’ve been marketing for a while now. Many people say 30 cents is what the owners want, but I don’t think this is what they are going to get.”
Wong also likes HRnet Group, noting that the company’s management is extremely dedicated to the business. Many job placement agencies are “two-, threemen sweatshops” operating out of shabby offices. By contrast, HRnet is a well-established regional operation with multiple brands and branches serving different market segments. Wong also acknowledges that while the company’s recent earnings were not great, its strong balance sheet is a safety net for investors. HRnet is generating free cash flow of close to $50 million a year, which adds to its cash pile of nearly $300 million — which in turn is equivalent to nearly 40% of the company’s market value.
This story first appeared in The Edge Singapore (Issue 890, week of July 15)
