BBR Holdings [BBR SP Equity]

Synopsis on Company

BBR is a specialist engineering company in Singapore with a bit of property development on the side.  Market cap is currently SGD86.30n or SGD 0.28/share

I am investing in this stock because (i) low price to book, low price to earnings, (ii) increase in order book not captured by market, (iii) property development not recognized fully on the balance sheet and (iv) BBR buying back shares

(i)                  Attractive valuation

As at September 30, 2010, net assets total SGD71.72m, implying a  P/B of 1.2x.  Cash on hand is SGD44m, more than 50% of market cap.

(ii)                Increase in order book not captured by market

Order book stands at SGD520 but fails to take into account the National Art Gallery contract announced late December 2010, which stands at SGD413m.  BBR holds 25% stake in this contract via its subsidiary, Singapore Piling & Civil Engineering P/L.  This adds approximately SGD103m to the order book or 20%.  I believe the market has yet to factor this in.  Prospects for the construction sector in Singapore look decent, especially public works, which BBR star is looking bright.

(iii)               property development not recognized fully on the balance sheet

I believe the accounting treatment of the development properties are not fully recognized in terms of their value, indicating a cost basis, rather than a percentage completion.  The upside on this is not treated properly.  Note this is a hypothesis based on what I read on their financial statements, not confirmed with the CFO.

(iv)              BBR is buying back significant shares recently

BBR and its CEO, Tan Kheng Hwee, have been buying back shares recently.  This offers a great comfort to me as their most recent purchase of SGD0.27/share has been above my entry price.

The risk identified is

(i)                  Losses on the order book due to higher expenses

Orderbook is merely revenues but operating costs could be signigicantly higher than anticipated, especially labor.  I note that BBR has been shifting to higher margin work, namely specialist engineering services and increased focus on project cost monitoring.

(ii)                Losses on the property development

I am not sure if property development is the right way to go for BBR but note that the costings are probably understating the value of the developments.  Also, the projects tend to be on the higher end, i.e. Nassim and Holland, which tends to hold the value better.  Problem for all smaller tier developers is the usage of cash.  In this case, this company has more than 50% market cap in cash, which provides a good degree of comfort.  Cash levels are to be monitored on a quarterly basis as trigger points.

The probability of return is SGD0.33 x the probability of return  at 90% (Given the strong fundamentals.  I would believe the target price is a little bit understated, given the share buybacks and strong cash base.) less the 0.02 (0.27-0.25) ~ P/B at 1x = 0.25 

Value of my decision is SGD0.28 versus my investment of SGD0.265

Conclusion:

I would say the valuation is understated and I see considerable upside to this share.  Reason being the order book is significant and I expect more to come, given the cash holdings.  I am happy with this investment and would hold it for 12 months or more, if this firm continues its performance so far. 

Coastal Greenland Limited [ Stock code 1124 HK]

Coastal Greenland is a mainland Chinese property developer.  Market cap is currently HKD 1.395m or HKD 0.50 /share.

I am investing in this stock because
(i)  Extremely low price to book valuation and (ii) under valued on associates held

As at September 30, tangible book value is  HKD 3.315m. The company also owns 21.3% of  Shanghai Fenghua Group Co. Ltd, (listed on Shanghai Stock Exchange and currently valued at HKD 2.205m).  At market price, Coastal Greenland's holdings in Shanghai Fenghua is valued at HKD 470m.  However, book value in Coastal Greenland is HKD 139m according to the annual report 2009.   This indicates a buffer of HKD 331m which can be added to tangible book value, which gives us an adjusted tangible book value of HKD 3.646m.  Price/adjusted book value is 0.38 times.

(iii) Steady expansion and strong uptick on revenues

The company has steadily expanded its revenues from HKD355m to HKD3,922m over 2001-2010 period, representing a CAGR of 27%.  [According to the research "Guodu Hong Kong", we can expect to see earnings increasing 4.2x to HKD887m in FYE2011 (this implies March 2011... we shall see).  I will try to make my own projection if time permits. [Prepare for edits]


The risk identified is
(i) numbers could be fake or delayed.
Given that this is China, the numbers could be fraudulent but comfort is taken from the auditors being Deloitte.  The chairman, Mr Chan Boon Teong, is a director of Kowloon Stock Exchange, TPV Technology Limited and Cathay United Bank.  There are some major names in the senior management ranks which gives me some assurance that this is not a fly by night operation.

ii) There are quite a number of China property developers whose market caps are priced at these levels, below 0.30% even.  So there is no guarantee that that the company will not be re-rated below.  Maximum loss, all things being equal, is 40%, inferring at P/B ratio of 0.27.  However, I judge this to be unlikely given the China property market is already in its doldrums, with plenty of bears talking about over heating etc.

ii) Leverage
Total bank loans is HKD 6.160m, however, there are additional HKD 4.828m in contingent liabilities in form of guarantees.  I will try to find out more...  Total equity are HKD3.400m, this implies D/E ratio of 1.8x or 3.23x if contingent guarantees are included.   This implied leverage is HUGE and is a risk that I will take into mind if I am going to increase my position.

iii) Warrants cap.

The shares are subject to 111.623m warrants exercisable at HKD 1.23.  This implies 4% dilution to the current shareholder base of 2,791m.  However, noting that free float is 988.61m, this represents 11.3% of the traded stock.  Which really means, I would want to sell before it comes anywhere close to it. 

Conclusion:

Overall, I am unhappy with my investment decision as I did not factor in the huge gearing.  Reading the investment thesis of the broker, I feel the projections are somewhat exaggerated (which I would want to verify).  More importantly, I did not check the comps.  There are other companies out there which trade low P/B values as well but more importantly, have better gearing levels.  I would not have invested after a more thorough analysis.  Fortunately, my investment in this stock is very small and there is enough downside protection in terms of near term catalyst and P/B margin so that my threat of loss is small IMHO.


Amount of return is 0.64 (unless re-rated) X the probability of return is 80%
Less
Amount of capital loss is 0.2 (Assume my P/B is 0.27) X Probability of loss is 20% (Assuming the chinese property market tanks further)

Value of my decision is HKD 0.472 versus my investment of HKD 0.50, implying a loss of 5.6%.

Update and time to get serious

Ok, its been a really long time since I blogged on this website.  No, I have not been lazy but rather I have been quite active trading stocks.  This blog will be more active henceforth as I believe it will do me good to articulate my investment ideas.  Below is a synopsis on the lessons I have learnt.


1) Do not sell the stocks that make you money
2) Sell the stocks that you lose money
3) Never go all in.  If you feel good about a stock, put in 10% of your intended investment as a feeler
4) Your perspective changes the way you examine a stock once there is money involved
5) Save time by having filters.  If it does not pass any of the filters, do not waste your time.

• Filters are (i) reliable and competent management, (ii) are the margins good? and (iii) low leverage

6) Always look at the stock as a business, not a stock.  Is it a good business? Is it cheap? Why is it cheap?

• I am investing in this stock because (i), (ii) and (iii)...  the risk identified is (i), the probability of return is ... and the risk of capital is ...

7) Every investment decision is stepping into the UFC ring.  Go in prepared because your opponent will be.
8) Create a watchlist of stocks and assign a FAIR VALUE

8 Step Process by Dr Doug Hirschhorn

1) Identify if it’s one of three types of days: is today a day to make money, limit losses, or do nothing? Now, after you’ve been trading for a couple of months, you’ve pretty much been able to identify which one of those types of days it is. It’s not secret information, nothing mysterious. Traders get a feel for whether it’s a day for them to make money, limit losses or do nothing.

2) Build macro-awareness! Look around and identify what current market events are in play.  Are there any news releases that are coming out that are important and relevant? Are there any current events going on in the world that could affect the market unexpectedly?

3) What is the current trading thesis or game plan?  Are the trades that I have in my portfolio (a) in-line with the theme that I have for the market and (b) are they sized correctly?

4) Look at what they did well that day. And I want them to examine their performance objectively.  Did you size into trades correctly? Did you stick to loss limits? You could have lost money all day long, but if you took smart, good losses, then you actually did something well that day and you traded optimally.

5) What did they do poorly that day? This is where they can become critics of their performance. Did they get distracted? Did they put a trade on because someone else had it on? Did they trade out of fear or anger? Did they become over-confident and put on a sloppy trade?

6) The next step, I have them do is to look at what’s actually making money in the world. Which markets? Which products? What type of style? Are the markets range bound? Are they trending? Are commodities making money? Are equities making money? I want them to look around and see where and what money is flowing into.

7) What’s not making money in the world. This helps them open their eyes to the reality. For example, if my client is great at trading trending FX markets but range bound fixed income markets are getting paid, then that’s a huge indicator to the traders that they need to size things down and wait until their strategy is getting paid and the markets are in-line with their trading edge. Having that patience and discipline are skills anybody can learn to do. It is just a matter of having the self-discipline and awareness to do it and the journaling process creates that for the trader.

8) What lesson did I learn today? Every day that they trade they need to retain some new piece of information, some new approach, some new thought and take note of what lesson the market is teaching them.

Trading notes

Who are the shareholders? Look for big fund names
New IPOs, 2 weeks before announcement, they cannot sell
Always look at the individual forecasts to eliminate anomalies
Always buy stocks with earnings GROWTH
How much you make versus how much you lose is more important
Do not chase prices