(Aug 21): Corporate earnings for 2Q2017 were not great. Of the Straits Times Index’s 30 component companies, 14 missed market expectations, while 11 outperformed, says Margaret Yang, an analyst at CMC Markets, citing Bloomberg data. The remaining five companies did not have a consensus forecast.

Among the ones that reported especially weak numbers were those in the offshore and marine sector as well as the commodities sector. In particular, Keppel Corp, Sembcorp Industries and Wilmar International posted poorer results against the backdrop of muted crude oil prices and challenging operating conditions. On the other hand, local banks DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank delivered strong results for the quarter, as did property developers such as CapitaLand and UOL Group.

Our Singapore Market Portfolio suffered its share of weak results. Notably, gold miner CNMC Goldmine Holdings continued to be hit by lower ore grade from its sole operating mining concession in the Malaysian state of Kelantan for the third straight quarter. In its 2QFY2017 results ended June 30, the company sold 3,835.5oz of gold, down 60.9% y-o-y. That led to a 61.5% y-o-y drop in revenue to US$4.9 million ($6.7 million). In addition, the company’s all-in costs rose to US$1,115 an ounce from US$500 an ounce last year. As a result, earnings plunged 89.8% to US$478,381 from US$4.7 million a year ago.

CNMC has been one of the worst performers in our portfolio, but we are holding on to the stock for now, as we think the company will be able to turn things around. CNMC has said it is building a carbon-in-leach facility that will extract gold from ground ore more efficiently. The CIL method has recovery rates of as high as 95%, compared with an average of 65% at CNMC’s existing heap leaching facility. Construction of the CIL facility is underway and expected to be completed in 4Q2017. Trial runs will then be conducted for quality control, which could take a few weeks.

“If all goes well, we can move in full swing,” says Chris Lim, CEO of CNMC, at a recent results briefing. In the meantime, CNMC has started to mine in areas identified as possessing higher ore grade. Ore from these areas will be processed immediately by the CIL facility when it comes online. This will help minimise delays, says Lim. The company’s heap leaching plant will continue to run, but it will process lower ore grade to maximise production.

Lim declines to disclose the cost of construction of the CIL facility. He says the figure will be announced once construction is completed, and that the capital outlay is affordable. “We have more than enough cash.” As at June 30, the company had cash and cash equivalents of US$21.7 million, down 33% y-o-y from US$32.5 million. Its total debt stands at US$806,371.

Hits and misses There were hits and misses elsewhere in our portfolio. For instance, Memtech International reported a positive set of results in 2QFY2017 ended June 30. The components manufacturer returned to the black with earnings of US$4.8 million versus a loss of US$1.4 million a year ago. Its gross margin widened to 17.3% from 8.6% in the same quarter last year. Revenue grew 20.1% y-o-y to US$37.8 million from US31.4 million, owing to an increase in sales in its consumer electronics segment.

Shares in Memtech sank after the results report, however, falling 7.3% in the week to Aug 15. The stock is now trading just below the level at which we bought it. We expect the company to continue reporting good numbers, and the stock to rise eventually.

Results at lubricant specialist AP Oil International were more lacklustre. For 1H2017, the company’s earnings almost halved to $1.5 million, from $2.8 million in 1H2016. Revenue jumped 16% y-o-y to $44.3 million from $38.3 million, owing mainly to an increase in manufacturing and trading volume. Shares in AP Oil sank 5.6% in the week to Aug 15, but they are still almost 11% above the level at which we got in.

Second Chance to unlock value? Inspired by a story in The Edge Singapore last week, we have decided to add 38,400 shares in Second Chance Properties at 26 cents apiece to our portfolio. Second Chance runs an apparel and jewellery retail business under the First Lady and Golden Chance brands, respectively. A significant number of its First Lady outlets are located in Malaysia, while its sole Golden Chance outlet is located in Singapore.

The real value in the company is in its portfolio of strata-titled commercial property units scattered around Singapore. Three years ago, the company had tried but failed to monetise some of that value. Its shares have since fallen considerably. Now, the company might get a second chance to monetise some of these property units.

According to news reports, owners of strata-titled units at City Plaza are organising an enbloc sale, targeting a price tag of between $800 million and $1 billion. Based on its annual report, Second Chance owns 17 retail units within the mall, covering a total of 837 sq m, or 9,009 sq ft. These are equally spread between the ground and second floors, and carried on its books at $40.25 million, or 5.4 cents a share. This works out to 15.4% of Second Chance’s net asset value (NAV) of 34.81 cents a share as at May 31.

The risk with this stock is that its revenue and earnings have not been great. In fact, the company slashed its dividend for FY2016 ended Aug 31 to just 0.2 cent, from 3.55 cents in FY2015. For 3QFY2017 ended May 31, the company posted a 7.7% y-o-y drop in revenue to $9.4 million, as both its retail sales and rental income fell. However, earnings increased 27.7% to $8.6 million, as the company booked profits from the sale of an investment.

Still, we think the downside to the stock is limited. For one thing, it is already trading at a 25.3% discount to its NAV. Moreover, Mohamed Salleh Marican, founder and CEO of Second Chance, has been accumulating the stock in the market. According to a report by The Edge Singapore last week, he had been buying shares almost every other day from the market for the last two months. He owns about 67.6% of the company.

Since inception on Jan 4, our portfolio has generated a total return of 9.9%. During the same period, the STI has gained 15.9%.

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