Monday, February 23, 2015

[SGX Portfolio] Thank You Mr. Hock Lian Seng!

Check out dem recent price moves in Hock Lian Seng!

What's going on here? Hmm, I'm not sure, so this is just me thinking outloud.

Based on the SGX release of their Jul - Sep 2014 quarters results, we can pull out a bit of things.

Net Asset Value is 27.4c. Current Market Value is 38c. This is a premium of 38% of their book value. Market Cap of HLS is based on the total number of shares being 509,978,991 shares, which gives its a Market Cap of about SGD$193.8 million.

They have a very strong cash balance, which is $115.7M. This represents approximately 87% of their net asset value and 28% of their total assets.

Debt / Equity ratio is 232% which I don't particularly find attractive. So let's see what sort of debt they have. Most of their debt is in the form of payables (good debt) and progress billings (good debt?) which is the norm in their industry I suppose. So these actually make up the bulk of their debt.

I think their balance sheet looks pretty good actually.

Business wise, it's good to see that they are still getting business from LTA. Also read about an activist hedge fund entering into HLS hoping to shake them up to give better shareholder returns. I guess this news is quite neutral with a positive tilt.

Checking on valuations, simple P/E ratio based of their 1.4c for the past 9 months and extrapolating spits out a pretty high 20.4 P/E value.

Seems pretty high, so I'll be checking on the EV/EBITDA metric.

Enterprise Value of HLS would be stripping away all the cash, and adding all the debt to Market Cap.

EV = $193.8M (MC) - $115.7M (Cash) + $306.5M (Debt) = $384.6M

EBITDA (9 months) = $8,830,000 + $1,043,000 = $9,873,000
EBITDA (12 months) = EBITDA(9 months) / 9 * 12 = $13,164,000

EV/EBITDA = 29.2

Of course a possible reason for the elevated values can be due to a dry up in recent earnings. Full year earnings of 2011, 2012 and 2013 were 6.1c, 4.9c and 4.7c respectively. That is an average of 5.2c. Just extrapolating the 9 months EPS, we get 1.87c which is almost 3 times lower than the average previously seen.

This means to me that the EV/EBITDA ratio would actually be around 10 right now if it was a normal operating year. So will the stock be worth a lot more in the future once earnings pick up back to "normal" levels? Well, even in 2011 and 2012 and 2013 share price sat quite firmly under the 30c level. This means that the current valuations now are much much more rich and optimistic than it was just a few years ago.

Fundamentally, I think that this counter is a good one. However, based on valuations I feel that this pop in the stock is either a "new normal" for the stock, or just a euphoric moment. Either way, it seems like that just leaves me with downside if the market decides these valuations are not worth it.

I bought HLS last year in August at 27c. Since then, dividend yield has compressed from 6.9% to 5.1% today because of the run up in price.

I am selling HLS for a nice cool 41% capital gains. If I lock in these capital gains now, it is roughly worth 5-8 years of sitting and collecting dividends, depending if you take the starting or ending yield. I think that is pretty attractive to me.

I have to admit, it is never easy to sell. I had to write a whole post just to assure myself that I have some logic in my thinking when I sold CDW for a 46% gross total gain last month. I guess this is me doing that again.


  1. Congrats.

    This is indeed a good stock that has moved up now.

    1. Thanks B! If it comes back down, I definitely wouldn't mind going in again.

  2. Nice capital gain! Keep going... ;-)

    1. Thanks Richard! All the best to you too!

  3. This is one of the very informative posts I came across today and quite interesting.


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