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GEM Exclusive- Trading Idea-Hong Fok
Hong Fok
Mkt cap: $750m; Price: $0.87; P/B: 0.32x, Dividend yield: 1.1%, Net D/E: 29.5%
About: Primarily engaged in property investment, property development and construction, property management, investment trading and investment holding and management.
Trading idea- we love trading a stock with fundamentals. While there is deep value for the stock, value trap is always a concern. Hence, we are recommending this as a trading idea (till there is a clear path demonstrated to monetise its deep value)
Quick glance: Hongfok is a well-known value stock, given it is trading at only 0.3x P/B, and backed by investment properties such as the likes of International Plaza, Concourse and Yotel at Orchard.With its attractive valuation, a free float of only 29%, it is also a potential privatisation target. However, there are concerns that it may be a value trap, if there are no other way for shareholders to realise the deep value within Hongfok (other than the 1.1% dividend yield), which may also explain its depressed P/B. A 0.4-0.5x P/B will imply a TP of S$1.10-1.38
By the charts: After its surge earlier in the year, prices have corrected more than 20% before forming higher highs and higher lows. Stock seems to be currently supported at $0.85 as well as active share buybacks and repurchases from management/major shareholder. Assuming stock can break above its recent high of $0.895, hopefully it will be trending towards $0.94. On a weekly chart, if the stock is able to retest its previous high of $1.01, and break above, it may potentially chart towards $1.165 which will still put it within our “fundamental TP” range.
Stop loss $0.83
TP 1: $0.94
TP 2: $1.165
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GEM Exclusive- Investment Idea-INNOTEK
INNOTEK Ltd.
Mkt cap: $118m; Price: $0.52, P/B: 0.77x, 2018 P/E: 5.8x, Ex-(cash+financial assets) 2018 PE: 2.4x; ~2-2.4x EV/EBITDA, Dividend yield: 2.9%
About: Precision metal components manufacturer serving mainly Office Automation, Automotive, TV & Display with over 40 years of operational history; Customers include major MNCs such as Ricoh, Canon, Continental, Sony, Innolux, Epson, Bosch, Innolux
Nearly 100% of Valuation backed by hard assets= Cash (S$0.257) + Investments (S$0.053) + Investment properties (S$0.120) + buildings and land only in PPE (S$0.07) = S$0.498
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Net cash of S$0.257/share as at 31 Mar 19 (after adjusting for S$0.01 dividend paid on 22 May 19)- forming about 50% of market cap-S$39.6m cash, S$20.7m in structured deposits (a combi of deposit and investment product, investors will receive 100% of principal if held till maturity). If you include the investment portfolio (equities, trusts, bonds etc) of S$12m, it will boost net cash + financial assets = S$0.310 (about 61% of mkt cap)
Strong Free cashflow generation- average S$0.043 of free cash generated/year in the last 3 FYs – notwithstanding any dividend payment and if innotek maintain its cashflow generation, it will take about 5 years for Innotek’s market cap to be fully backed by $.
Huge Turnaround attributable to savvy management- who came on board in late 2015, and the turnaround has almost been immediate, with Innotek successfully reversing from a loss in 2015 to a profit in 2016, before nearly doubling in profit (from 2016) to S$20m in 2018. It is always reassuring to see Management who are always adapting to market trends and not resting on their laurels, as in the case of Innotek – With good foresight, Management had diversified into heatsinks, automotive displays earlier on, which had helped to soften the impact of a declining trend where tradition metal TV bezels are being replaced by plastics. Similar can be said by management’s decision to set up a new facility in Thailand to be nearer to its customers (short term pain, long term gain), regaining market share for its office automation. Innotek is now looking to be an even more integral part of its customer’s supply chain as it transits from single component supply to assembly.
Management put his money where his mouth is. In 2016, Mr Lou (CEO) owns about 5.3% stake in innotek. He doubled his stake in the group in Jul 18 to 11.5% by acquiring shares in the group at S$0.40/share- tying his fate even more closely to shareholders.50% rise in dividends With the improvement in profit, Innotek has also rewarded shareholders with a 50% rise in dividends to S$0.015 for FY18, (a needle in its haystack of S$0.31 worth of $$)
Stellar 1QFY19 results with a 29% rise in gross profit, and a surge in net profit (amidst a low base) to S$3.9m. Free cashflow generated was super strong too (S$0.054/share). However, share price has fallen 15% since, on concerns of a weaker outlook from a slower Chinese economy and greater macro uncertainty.
What we think: While the outlook is more murky for cyclical stocks such as Innotek, its low valuation (one of the lowest among its peers, and also happened to be backed nearly 100% by hard assets (thinking from a liquidation perspective), gives Innotek a high margin of safety for investors. Investors can also sleep with a peace of mind that the company is currently run by a savvy management who have proven themselves over the last 3 years (including their ability to adapt to market trends) and also put his money where his mouth is, riding the up and downs with shareholders. With its cash flow generative nature, innotek will only get “cheaper” as time goes by as cash accumulates.
GEM Exclusive- Investment Idea-PEC
PEC Ltd.
Price: $0.60; Mkt cap: $152.5m;
NAV: $0.898, Net cash/share: $0.255
P/B: 0.67x, 2018 P/E: 14.6x, Ex-cash PE: 8.4x,
Dividend yield: 3.3%
Free float: 33.4%
Value play- At 0.7x P/B, of which $0.255/share is net cash, $0.024 is investment property, $0.202 for accrued income (revenue from services earned but not invoiced yet), PPE of $0.304.
Receivables more than offset payable – Accrued income has been increasing from S$0.08/share (S$20m) in FY16 to currently S$0.184/share (S$47m) at end of FY18.
Maintenance income has been rising over the years- Rose by 50% from 2016 to $226m in FY18, 67% of total revenue. EBITDA margins for it has been stable to rising at 24.2% at 2018. The contracts due date maybe a risk to the Company
Solid order book of $279.4m as at end of 2018– This excludes maintenance contracts which form 67% of FY18 revenue. if we assume substantial of the order book will be recognised in 2019-2020, will translate to about $125m of annual revenue, (at least safely comparable to 2018). Orderbook is highest at least over the last 3 years. PEC recently secured another S$100m in new contracts in Apr 19.
A very positive outlook- Citing investments in Refining and Petrochem projects to come onstream in Asia and Middle east in next 5 years, and IMO decision to reduce bunker sulphur levels to 0.5% to result in investment by refiners to comply to the regulation.
Price supported by consistent share buybacks, In the meantime, 3% dividend yield to wait. Additionally, shareholders be rewarded with a small mini special dividend happened in 2016/2017, of 0.005 or 0.01, translates to 4-5%
Chartwise, after correcting from as high as $0.74, seem to have found a base at $0.56, amidst all the positive development and earnings, are prices ready to go higher? Prices have already broken higher with greater than average volume. If we assume profit revert back to about $18m (average of 2017 and 2016), it will be about 5-6x ex cash PE.
So far, profit has surged in 1H19, revenue +33%, GP +18%, Net profit +74%- attributable to revenue increase from project works and maintenance.