Quick review
ARA surprised on the upside because some risks I highlighted didn't materialize and certain development(s) were more positive than expected and certain development(s) were not captured even though it should have been.
Things that Were Not Expected
1) AUM
I was concerned that there could be downward revaluation when year-end came. There wasn’t. So base fee was not going to drop as I was afraid of. Good.
Moreover, ARA managed to increase the AUM for private funds. Totally not expected.
2) Real Estate Management Arm
I screwed up here. I forgot to take this into account when doing the analysis. Because it was not captured in the 3Q09 results, doesn't mean it will not be in captured in the 1Q10. It was publicized. It was in press releases. I should have read those a bit more thoroughly. And if I did, I would have realize how earning accretive this move will be. Luckily, this was a surprise on the upside – S$2.9m in 1Q10. If it was a surprise on the downside, I would be slapping myself silly. SERIOUS BLINDSPOT. READ THE NEWS ABIT CLOSER.
3) Other income/ Gain on disposal of REITs units
I was aware of this. And I highlighted that this will help pull earnings up. But what I didn't realize is that this could potentially be a key swing factor on the earnings. Mainly because this is pure profit. There is no cost base for this. So it feeds straight down to the bottom line. WOW. Expect this to persist as the prices of REITs have strengthened. But note that this is a double-edged sword even markets turn.
4) Bottoming of rents
Expect to bottom sometime in 2011. But according to DTZ, has already bottom in 2Q10. Exceed expectation.
So performance fees may not drop as much as expected.
Things Expected
1) Cache Logistics
That was spot on. The key catalyst for re-rating.
2) Increase in market cap and thus attract greater institutional interest
Didn't write that down previously. But was a key secondary hypothesis I was waiting to verify. This particular experiment on ARA seem to provide a positive response.
3) Bottoming of Capital Values
Spot on.
4) Increased investment activity in ADF private fund.
As expected, ARA is trying to invest a major portion of the fund by this year, to hit the 75% target that will release them from the clause which prevents them from raising a new fund.
Conclusion
Despite the MAJOR blindspot, I got a few of the major points right (Cache Logistic, office market turning). That was important. Important to be right on the critical points. Makes you money even if you were wrong on the minor points.
However, I was overly conservative on some points (e.g. AUM revaluation) and was off on the timing (e.g. rental bottoming). Which is good because my BUY analysis of ARA is not based on the most optimistic outlook and therefore somewhat prudent. But is bad because being overly conservative makes you lose out by not buying more – mistake of omission. Not clear if it is possible to improve significantly on this because of the risk/return trade-off.
As a result, the above factors led me to underestimate profit growth. So instead of a growth of 8 – 15%. I now expect a higher growth rate because the negative pressures have reduced and the positives have exceeded expectations. It is probably somewhere closer to 15 – 25%.
2010年8月8日星期日
2010年8月4日星期三
C&O
Dear Readers
I recommend you all to take a closer look at C&O. I believe that this may be a profitable venture for those who pay attention. The signal of unusual activity, in my opinion, is the high dividend payout YTD.
I may write more when I have the time and effort to. In the meantime, go mull over it :)
I recommend you all to take a closer look at C&O. I believe that this may be a profitable venture for those who pay attention. The signal of unusual activity, in my opinion, is the high dividend payout YTD.
I may write more when I have the time and effort to. In the meantime, go mull over it :)
2010年7月28日星期三
VICOM - Part VIII (Misc)
Miscellaneous
They have a new side business – emission testing. Please see below for extract from company’s website.
VICOM Emission Test Laboratory (VETL) is a state-of-the-art laboratory dedicated to fuel emission and fuel economy testing. Set up by VICOM, VETL provides a comprehensive range of testing services pertaining to vehicle emissions and fuel efficiency.
As the first of its kind in South-east Asia, VETL offers the foremost in vehicle emission testing technology for cars, motorcycles and commercial vehicles. The facility has the capability to carry out testing up to Euro 5+ and other international standards. We provide an exhaustive range of testing needs for our customers. Also, with nearly 30 years of establishment in the vehicle inspection market, we provide our customers with an unmatched track record in reliability and professionalism.
They have a new side business – emission testing. Please see below for extract from company’s website.
VICOM Emission Test Laboratory (VETL) is a state-of-the-art laboratory dedicated to fuel emission and fuel economy testing. Set up by VICOM, VETL provides a comprehensive range of testing services pertaining to vehicle emissions and fuel efficiency.
As the first of its kind in South-east Asia, VETL offers the foremost in vehicle emission testing technology for cars, motorcycles and commercial vehicles. The facility has the capability to carry out testing up to Euro 5+ and other international standards. We provide an exhaustive range of testing needs for our customers. Also, with nearly 30 years of establishment in the vehicle inspection market, we provide our customers with an unmatched track record in reliability and professionalism.
VICOM - Part VII
Conclusion
The company is the clear market leader in the vehicle inspection business with a market share that has consistently been >70%. The business is driven by the LT secular trend of a growing vehicle population and the inevitable need to inspect your vehicle. This provides the business with a stable growth characteristic.
It has also displayed a clear track record in growing the non-vehicle testing business independent of the economic environment. The expansion of current facilities is a positive. Moreover, the presence of overseas facilities makes me believe that it might eventually grow to be a regional powerhouse in non-vehicular testing. But that will take a really long period (think 10 years).
Hence, at current valuations, this is a fair price to pay for a good quality business that has consistently achieve top and bottom line growth with a >15% ROE while paying out half of earnings in dividends. In fact, I note that if you have invested in 2005, you will have seen a 100% in share price (it hardly dropped in the market downturn) and have received another 33% worth of dividends. So you will have seen a 20+ return in your earnings
The company is the clear market leader in the vehicle inspection business with a market share that has consistently been >70%. The business is driven by the LT secular trend of a growing vehicle population and the inevitable need to inspect your vehicle. This provides the business with a stable growth characteristic.
It has also displayed a clear track record in growing the non-vehicle testing business independent of the economic environment. The expansion of current facilities is a positive. Moreover, the presence of overseas facilities makes me believe that it might eventually grow to be a regional powerhouse in non-vehicular testing. But that will take a really long period (think 10 years).
Hence, at current valuations, this is a fair price to pay for a good quality business that has consistently achieve top and bottom line growth with a >15% ROE while paying out half of earnings in dividends. In fact, I note that if you have invested in 2005, you will have seen a 100% in share price (it hardly dropped in the market downturn) and have received another 33% worth of dividends. So you will have seen a 20+ return in your earnings
VICOM - Part VI
Risks
Regulations
Changes in regulations that affect growth of vehicular population and more importantly, inspection requirements can impact earnings significantly. Regulations will also affect the non-vehicular testing business as less stringent requirements will lead to lower level of testing needed.
This is a huge underlying risk of this investment. In fact, so much so that I will call this a regulatory play on sustained need to test more things so as to increase safety and quality.
Execution risk
Growth in non-vehicular testing may slow if company is unable to continue expanding scope of items tested, acquire new business and maintain/grow margins.
Liquidity
The stock is tightly held by ComfortDelgro and has a low daily volume traded. So you may not always be able to exit at the current quoted price (liquidity discount). Neither are you able to buy a huge amount at any point in time. Hence, you CANNOT place a huge amount in this stock.
Things Which Are Still Unclear – ALSO A RISK!
What are drivers of non-vehicle testing business? / What’s the huge other payables in the balance sheet?/ Sustainable Margins?
I note that the only information I have are from the annual report and the company’s website. Hence, there might be blind spots and faulty conclusions reached. For instance, I had to come up with the drivers of non-vehicle testing business. With no confirmation from management of my understanding, I could very well have got it wrong.
I also could not identify what constitute the huge “other payables” in the balance sheet. It is unclear why other payables are consistently more than trade payables.
Neither could I confidently ascertain the growth and sustainability of the margins. I suspect operating leverage is at play and maybe (just maybe) improved pricing power and billing for finished work done for the integrated resorts. But I note that all these are merely my suspicions.
Why cash not given out? Why hold so much cash?
Why give out only 50% when cash generation capabilities have continued to increase? I propose the following hypotheses:
1) Earning figures are fake so they can't give out as much
a. Evidence 1 – margins jump too crazily and is faked
b. Counter Evidence 1 – Why would they lie when they are not covered by any analyst? Maybe ComfortDelgro wants wants to boost their earnings and thus pressured Vicom to fake the earnings. However, Vicom’s contribution to their earnings is insignificant compared to their overall earnings (S$220m in 2009). Hence, ComfortDelgro has little incentive to manage earnings and would desire accurate reporting instead. In fact, I propose the notion that ComfortDelgro will want to see more cash being sent back up to them instead.
2) Margins at this level are not sustainable so current cash generation capabilities is unsustainable. Hence, want to manage expectations by not giving out too much dividend, so that they can show DPS growth next year
3) They need the money to expand the non-vehicle testing biz - like building a new extension and to buy new equipment.
I believe that hypothesis 2 and 3 are more likely than 1.
I note that they don't pay out all when they face certain uncertainties and when they want to grow the business by buying eqpt (e.g. 2005 – Idacs business slowdown, 2008 – recession, 2009 – construction for new extension) But then, the current payout ratio is low compared to average of past 10 years where they pay at least 60% of earnings. With sufficient money (30+m of cash) set aside for the construction, I believe there is a good chance that they might not need to retain so much more cash. Hence, the payout ratio is likely to increase.
There is nothing wrong with giving out less if they can use the $ more productively and return 20% ROE on the money retained. In fact, if they can grow the money at 20% IRR, I will rather that they keep it because I sure can’t find many 20% IRR opportunities myself!
Regulations
Changes in regulations that affect growth of vehicular population and more importantly, inspection requirements can impact earnings significantly. Regulations will also affect the non-vehicular testing business as less stringent requirements will lead to lower level of testing needed.
This is a huge underlying risk of this investment. In fact, so much so that I will call this a regulatory play on sustained need to test more things so as to increase safety and quality.
Execution risk
Growth in non-vehicular testing may slow if company is unable to continue expanding scope of items tested, acquire new business and maintain/grow margins.
Liquidity
The stock is tightly held by ComfortDelgro and has a low daily volume traded. So you may not always be able to exit at the current quoted price (liquidity discount). Neither are you able to buy a huge amount at any point in time. Hence, you CANNOT place a huge amount in this stock.
Things Which Are Still Unclear – ALSO A RISK!
What are drivers of non-vehicle testing business? / What’s the huge other payables in the balance sheet?/ Sustainable Margins?
I note that the only information I have are from the annual report and the company’s website. Hence, there might be blind spots and faulty conclusions reached. For instance, I had to come up with the drivers of non-vehicle testing business. With no confirmation from management of my understanding, I could very well have got it wrong.
I also could not identify what constitute the huge “other payables” in the balance sheet. It is unclear why other payables are consistently more than trade payables.
Neither could I confidently ascertain the growth and sustainability of the margins. I suspect operating leverage is at play and maybe (just maybe) improved pricing power and billing for finished work done for the integrated resorts. But I note that all these are merely my suspicions.
Why cash not given out? Why hold so much cash?
Why give out only 50% when cash generation capabilities have continued to increase? I propose the following hypotheses:
1) Earning figures are fake so they can't give out as much
a. Evidence 1 – margins jump too crazily and is faked
b. Counter Evidence 1 – Why would they lie when they are not covered by any analyst? Maybe ComfortDelgro wants wants to boost their earnings and thus pressured Vicom to fake the earnings. However, Vicom’s contribution to their earnings is insignificant compared to their overall earnings (S$220m in 2009). Hence, ComfortDelgro has little incentive to manage earnings and would desire accurate reporting instead. In fact, I propose the notion that ComfortDelgro will want to see more cash being sent back up to them instead.
2) Margins at this level are not sustainable so current cash generation capabilities is unsustainable. Hence, want to manage expectations by not giving out too much dividend, so that they can show DPS growth next year
3) They need the money to expand the non-vehicle testing biz - like building a new extension and to buy new equipment.
I believe that hypothesis 2 and 3 are more likely than 1.
I note that they don't pay out all when they face certain uncertainties and when they want to grow the business by buying eqpt (e.g. 2005 – Idacs business slowdown, 2008 – recession, 2009 – construction for new extension) But then, the current payout ratio is low compared to average of past 10 years where they pay at least 60% of earnings. With sufficient money (30+m of cash) set aside for the construction, I believe there is a good chance that they might not need to retain so much more cash. Hence, the payout ratio is likely to increase.
There is nothing wrong with giving out less if they can use the $ more productively and return 20% ROE on the money retained. In fact, if they can grow the money at 20% IRR, I will rather that they keep it because I sure can’t find many 20% IRR opportunities myself!
VICOM - Part V
Valuations
Assuming margins shrink to 24% (because the sharp rise in margins may not be sustainable) and sales grow at 7% (which is not unreasonable given they have grown faster previously), at S$2.83, you are buying at ~12x P/E, which is 8.3 E/P. FCF is ~11x P/FCF and is a FCF yield of 8.9%. Dividend yield at the historical 60% payout ratio gives you a decent 5% yield.
This is my “prudent” case. I believe these assumptions are prudent and won’t fall too far short of it. And thus even if I get it wrong, the results of the company, supported by the previously mentioned growth drivers, will grow at a fast enough clip to erase any folly of mine on the valuation level which I am entering into.
Assuming margins shrink to 24% (because the sharp rise in margins may not be sustainable) and sales grow at 7% (which is not unreasonable given they have grown faster previously), at S$2.83, you are buying at ~12x P/E, which is 8.3 E/P. FCF is ~11x P/FCF and is a FCF yield of 8.9%. Dividend yield at the historical 60% payout ratio gives you a decent 5% yield.
This is my “prudent” case. I believe these assumptions are prudent and won’t fall too far short of it. And thus even if I get it wrong, the results of the company, supported by the previously mentioned growth drivers, will grow at a fast enough clip to erase any folly of mine on the valuation level which I am entering into.
I note that dividend payout prior to 2005 is ~60%.VICOM - Part IV
Financial Analysis
Using a Dupont analysis, ROE has been increasing across time, driven mainly by net profit margin expansion. Net profit margin expansion was driven mainly by operating margin expansion and partly by lower tax rates. Leverage is nil because no debt is employed. Asset turnover fell largely because of increased holding of cash.
Growth in 2009 has been propelled by a sharp increase in margins. One suspect if it is sustainable, though it is hard to establish a conclusion either ways without additional information.
Using a Dupont analysis, ROE has been increasing across time, driven mainly by net profit margin expansion. Net profit margin expansion was driven mainly by operating margin expansion and partly by lower tax rates. Leverage is nil because no debt is employed. Asset turnover fell largely because of increased holding of cash.
Growth in 2009 has been propelled by a sharp increase in margins. One suspect if it is sustainable, though it is hard to establish a conclusion either ways without additional information.
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