Testing Newer Highs

MOS wishes to highlight SGX listed  micro-cap Global Testing Corporation (GTC).

GTC provides testing services, such as wafer sorting and final testing to the semiconductor industry. They focus on logic and mixed signal semiconductors used in consumer electronics and communication devices. Its major customer TSMC continues to do well. As articulated in its 1Q15 results guidance, GTC also remains bullish about its prospects. The stock has run up to $0.14 but we continue to see a lot of value in the name because thesis has just been confirmed at the recent AGM.

Measures indicating management's intent include:

• continuous share buybacks from which has reduced the shares issued quantum by a significant 25% from 2008 to 1Q2015.
• capital reduction of $0.075 which will now take place.
• given accumulated losses have been removed, there is finally affirmation to resume dividend payments in this FY15.

As evident from the results in the last two years, the intensive capex cycle of GTC is over and we are poised to reap the fruits from here. Reviewing the trend in the past years, we anticipate free cash flow per share of at least $0.02 - 0.025 cents in this and subsequent FY. Depending on their pace of anticipated share buybacks, your investment at these levels would be backed entirely by a full cash pile after about 2 - 3 years.

Note that a 20:1 share consolidation has been proposed. So investors may acquire in even lots for ease of subsequent transactions. 

Seeking a White Knight

MOS is disappointed by the recent developments at Sound Global. Our anticipated re-rating thesis has not played out. Instead auditor Deloitte has found a RMB 2 bil shortfall in the cash balance at its bank accounts at the end of last year compared to that recorded in its books.

The stock remains suspended on HKEx since 16 March. Instead of stalling or using the "usual" delay tactics, we are marginally encouraged that a professional corporate investigation firm has been tasked to review and issue a report by late May. There is further expectation that its results will be published in late June after the foregoing work is completed.

Founder Wen Yibo is cashed up to a tune of at least a billion dollars following his 30% stake sale in sister unit Beijing Sound Environmental to Tsinghua Holdings. So if the current issues at Sound Global are not of his doing, he could step in as a white knight to rescue the unit when trading resumes.

Sound Thirst Quencher!

Sound Global (967 HK) is a US$1.3 bil market capitalization company specializing in turnkey water and waste water treatment solutions. Its shares trade on the HK Exchange.

Despite favorable macro trends, the company only trades at c.15x PER (at HK$7.5). We anticipate the following to underpin its re-rating to peer multiples of over 20x earnings:

• Familiarization of the name as Sound Global's share was only consolidated to Hong Kong in late February 2014 - More investors are likely to compare its valuations against HK listed Chinese peers which are trading at multiples of 25x. Smaller SGX listed peers such as United Envirotech and Hankore are also trading at similarly healthy multiples.
• Further contract wins as China remains focused on improving the quality of its living environment - In Jan 2014, Sound Global netted two contracts in Xinjiang for the construction of sewage treatment plan in Yiling City and a BOT project in Tacheng City. Since then, it kept its momentum by winning projects in Urumqi, Jiangsu, Guizhou and Fujian. More could be in the pipeline.
• Re-structuring of its finance cost - There is scope to reduce the interest cost to boost earnings.
• Complete dissipation of the short term sales arising from the equitisation of convertible bond holders - Sound Global issued a redemption request on its convertible bonds  recently. Given these investors were in the money, they were likely to have converted their bonds and sold off the equity, causing near term weakness in Sound Global's share price. As at late March 2014, there are only c. RMB380 mil worth of convertibles which have not been converted.

We all know water is a vital source for life. Should the above reasons play out, Sound Global could well trade above HK$10 (implying over 35% upside), making it a critical source for financial returns too!

Who is Mispriced?

DKSH AG (DiethelmKellerSiberHegner) is a Zurich headquartered group which functions as an outsourcing partner to businesses seeking to expand in new or existing markets. They specialize in organizing and management of the entire product value chain - from research, sales, logistics to distribution. Their business activities are organized into four broad areas of expertise; namely: consumer goods, healthcare, performance materials and technology.


Leveraging on its nearly 150 years of experience, the group has a phenomenal global reach in 35 countries; including 660 locations in Asia Pacific. Having generated c. 8.8 billion in sales in 2012, DKSH AG is ranked as one of the top 20 Swiss companies (by sales and employees). The group also generated free cash flow of CHF249 millions in 2012.

DKSH AG went public in March 2012 on the SIX Swiss Exchange at an IPO price of CHF48 a share (or 18x of its 2011 net profit). Investors took favorably to the stock, probably due to its exposure to Asia. As on 26 May 2013, DKSH AG traded at CHF74.50, at 1.5x of its IPO price. Due to its management quality and history of growing its EBIT, the market accorded DKSH AG a 23x price to earnings multiple.

Interestingly, DKSH AG has a Malaysian subsidiary which listed on Bursa Malaysia in 1994. This entity, DKSH Malaysia contributes c. 14% to DKSH AG's total revenue. In Malaysia, it represents over 130 clients and distributes their products to over 13,000 sundry shops, hypermarkets and hospitals. Backing up its extensive network, DKSH's operations is supported by 18 regional offices, four distribution centres and seven regional warehouses scattered throughout Peninsular and East Malaysia.

Our Malaysian readers who live in Petaling Jaya will be familiar with the brands DKSH manages due its occasional warehouse stock clearance at Jalan University. For the uninitiated, the suite of brands it represents in Malaysia are testimony to DKSH's capabilities. They include Abbott, Boh Tea, Darlie, Ferrero, Indocafe, Mars, Quaker, Roche, Sanofi-Aventis, Wyeth. Its food segment also operates the Famous Amos Chocolate Chip cookie.

As it is essentially a distributor, its net margins is not large (c. 2%). However, it relies on pushing increasing volume through its very wide ranging and entrenched network. It also leverages on its global relationships to bring new products into emerging markets like Malaysia. For example, in Jun 2012, DKSH and Hershey's inked an agreement to provide sales, distribution and logistics services for the latter's chocolates and Bubble Yum gum in Malaysia.

For such an exceptional and storied company, DKSH Malaysia is trading at c. 14x of normalized earnings (stripping out exceptionals at RM860 million market capitalization) despite a strong run up. Given the quality of earnings and the segment DKSH Malaysia is operating in, applying a multiple closer to Swiss parent is not unrealistic. Assuming DKSH Malaysia trades at 23x, it would be a RM1.4 billion market capitalization on historical earnings. This implies a share price of RM9 per share (66% upside from current price of RM5.44). We had not factored in any earnings growth, a distinct possibility given its track record. Given the consumer and healthcare goods its handles, the resilience and growth potential of its earnings cannot be underestimated either.

Accumulating a large stake could be challenging as the stock suffers from low free float.  DKSH AG (75%) and Lembaga Tabung Angkatan Tentera (LTAT) (Malaysia Army pension fund) owns c. 85% of the company. LTAT is also DKSH Malaysia's bumiputera partner since 1991. Applying a liquidity and size discount on 20x earnings, DKSH Malaysia's fair value could be around RM7.80. Even at DKSH AG's IPO multiple of 18x, we are looking at RM7.06 per share fair value or 30% upside for DKSH Malaysia.

The above calculations obviously assumes DKSH AG is correctly priced at 23x. The converse could well be true, as in the valuations of DKSH AG is too high, rather than DKSH Malaysia being too cheap! That's the challenging of justifying using relative multiples. Perhaps, the truth is - where we believe it lies - somewhere in between 14 - 23x? Only time will tell. 

Soar Like Great Eagle

Langham Hospitality Trust (LHT), a fixed single investment trust, is anticipated to make its debut on HKEx on 30 May. Book building this week priced LHT at 6% a year, somewhat middle of the marketing range of 5.7 - 6.6%, implying a market capitalisation of c. HK$10 billion.

Its parent entity, Great Eagle (41 HK) should benefit from an uplift in sum of parts valuation. It is trading at a huge discount of 40% to book.

Post the spin off, Great Eagle would have net cash of HK$3.7 billion (assuming 51% ownership of LHT). The hotel management and licensing fees from LHT will also augment its recurring income stream from Champion REIT.

Furthermore, Great Eagle is anticipated to use part of the proceeds to fund its overseas hotel expansion plans. Great Eagle currently has four hotels in North America, including Langham hotels in Chicago, Boston and LA. One is under development in New York. The Singapore market has been receptive to its REITs holding offshore assets. For example, Ascott Residence Trust has assets in UK, Spain and other parts of Europe. Over the longer term, Great Eagle could inject its American assets into LHT.

In the nearer horizon, given its strong balance sheet at net gearing of 1%, Great Eagle should be in a good position to make a substantial payout. Its shareholders were rewarded following two earlier divestments (2006: 29% payout for Citibank Plaza to create Champion REIT and 2008: 53% payout when Langham Place mall and office was sold into Champion REIT subsequently).

The controlling Lo family still owns c 61% of Great Eagle, so we anticipate a sizable payout closer to the upper end of the range of HK$ 5 - 10 per share. Hence, Great Eagle at HKD33.70 remains a hold at least until its interim results in August 2013 when the special dividend could be announced.

Next Better Player

Margin of Safety suggested initiating a position in Lian Beng Group (LBG) in February 2012 at S$0.39 per share. LBG has since had a good run to S$0.515 (close of 11 May 2013). Whilst it is inexpensive from a PER perspective, it is now at a premium to its NAV of S$0.47 per share.

Looking ahead, LBG's recurring income will increase as its workers dormitory at Mandai fills up and it could still surprise with more construction contracts win. What we are uncomfortable about is its stakes in the property projects.  Whilst small by our sum of parts estimate to LBG, sentiment could weigh on the counter as we expect the Singapore residential market to weaken considerably from here for several years. Word on the possible spin off of its engineering and machinery division on the Taiwan Exchange has also gone cold.

Having rode out a total return of 37% (c. 32% capital gain + 5% dividend yield) in 15 months, we recommend switching into other construction counters to ride the development boom in Singapore.

Cash Laden with Catalyst

Lian Beng Group's results for the financial year ended 31 May 2012 were impressive. Its EPS rose to 9.8 cents from 9.1 cents. This was on the back of increasing its net profit margin from 9.6% to 11.6% yoy.


It also increased its dividend by 25% to 2 cents per share, from 1.6 cents. This outperformed our expectation of a base case dividend of 4.1%. Hence, investors who joined the register in February would be enjoying a yield of 5.3%. This hearty payout hardly makes a dent on its huge cash pile - approximately 40% of its current market capitalization is net cash!

Its construction order book of over $650 million remains full and is expected to keep the group busy until 2015. With the property and infrastructure projects still on track, Chairman Ong Pang Aik is keen to enhance share holder value further. In fact, Pang Aik's hard work thus far was recognised after being bestowed the award of "Best CEO" at the 2012 Singapore Corporate Awards (organised by The Business Times and supported by Singapore Exchange). The award was an affirmation of his leadership strategy, vision, execution abilities and the firm's corporate governance.

Since our call in February 2012 when it traded at S$0.39 a share, Lian Beng has only moved up marginally by 8% to S$0.42. In the near term, we expect LBG to trade at least to book value of S$0.44 a share. Further upside would come when it spins off the engineering and machinery division on the Taiwan Stock Exchange.

A steal at EV/EBITDA at less than 1x?

Lian Beng Group is a A1 grade general building and A2 grade civil engineering contractor listed on the Singapore Exchange. Its A1 certification implies that it is eligible to tender for contracts of all sizes in Singapore.

In recent years, Lian Beng had focused on private residential projects. In November 2011, it turned its sights back on the government market and won a S$13 million contract from the HDB. The contract in Tampines is expected to be completed by September 2013.

With 25,000 BTO flats which HDB has committed to pushing out in the next 12 months, we expect Lian Beng to continue to score its share of contract wins as the Group has over thirty years experience in building construction.

Competition in the sector is fierce but the firm managed an impressive net profit margin of 9.6% for FY2011. Its impressive order book which stands at S$772 million should keep the firm busy until 2014.

Lian Beng is aware of the need to build up a recurring income stream to cushion the volatility of contract work. Hence, it teamed up with Centurion to develop a foreign workers dormitory in Mandai. We project that the dormitory would be completed by June 2012 and can generate approximately S$11 million in rental income annually.

Valuation for the firm is very compelling. At S$0.39 per share, Lian Beng is trading at its book value despite boasting an impressive return of equity of 25%. On an EV/EBITDA basis, Lian Beng is trading at approximately 2x (FY2011) and 0.7x (FY2012F)!

About 44% of its market capitalization is net cash which stands at S$83 million. Hence, Lian Beng should have no issue paying out about paying out another 1.6 cents in dividends for every share at the end of FY2012. Hence, we are confident of a base case dividend of 4.1%.

Management which owns 25% of the firm is keen to unlock value for shareholders via a listing of ready mix concrete and engineering business on the Taiwan Stock Exchange. The exercise should release more cash back to Lian Beng and hopefully catalyze the stock to greater heights.

A Sound Investment (so far)

Soundwill Holdings, which was flagged out in June 2007 at HK4.40 per share, continues to scale the price chart as management unveils more value accretive initiatives. It closed today at HK13.60, which implies a gain of approximately 210% over the 3.8 years holding period, or about 50% per annum. To some extent, this pick has highlighted the importance of investing in companies with growing NAV per share.

The flagship property Soundwill Plaza remains nearly fully let in the prime Causeway Bay district. There was also positive rental growth of 9% yoy, bringing net income from the asset to HK$200 million. As we had flagged out earlier, Soundwill is developing another commercial building behind Soundwill Plaza at Tang Lung street. When completed in FY2013, rental income would likely be boosted by an additional HK$72 million. Including its property assembly / development business, Soundwill's fair value could be about HK$20.00.

When viewed in the context of the horrible global financial crisis which happened during our holding period, Soundwill has proven to be a performing and rewarding bet thus far.