Wednesday, June 17, 2015

2 interesting charts to watch out in the next few weeks


1.     Guocoleisure

With reference to my writeup on Guocoleisure (“GLL”) dated 27 May 2015, http://www.ernestlim15.blogspot.sg/2015/05/guocoleisure-potential-chart-breakout.html, I wrote that the measured technical target price was S$1.050, should it break the four month trading range of $0.910 – 0.980 on the upside. In line with my expectations, GLL reached 1.045 on 8 June 2015 (one bid away from my target) before profit taking set in.

With reference to Chart 1, GLL has been consolidating around $0.990 – 1.045 since 28 May 2015. Its exponential moving averages have been rising and have formed golden crosses in the last two weeks of May. This is supportive of a medium term uptrend. The price seems to have found support around $0.990 – 0.995. The next push (if it happens) is likely to take it to around $1.075 – 1.100. Supports are at $1.000 / 0.990. Resistances are at 1.020 – 1.025 / 1.050. GLL closed -$0.005 to $1.005. Day range was $1.000 – 1.015.

The bullish setup of the chart will be negated if it breaches S$0.970 with volume and on a sustained basis.

Other noteworthy points on GLL

a) GLL is hosting a corporate presentation tomorrow (18 Jun 2015) to update the investment community of its developments;   

b) Mr Quek Leng Chan has bought back 350,000 GLL shares at an average approximate price of $0.950 over the period of 21 – 25 May 2015. This was the first purchase since Oct 2012;

c) According to the analysts, the average analyst target is around 1.180; RNAV is around 1.68-1.80.

d) GLL has been giving S$0.02 dividends annually for the past four years. Financial year end is in June hence the dividend payout is likely to be announced in Aug and payout in Nov.

Chart 1: GLL has been consolidating around $0.990 – 1.045


Source: CIMB chart as of 17 Jun 2015



2.     Resources Prima

Since 17 Apr 2015, Resources Prima (“RPG”) has traded within a potential flag formation (See Chart 2 below). RPG has dropped around 19% since the intraday high of $0.141 on 4 Jun 2015 to close $0.114 today. The weak ADX, coupled with relatively low readings of MFI, RSI and oversold indicator such as MACD likely indicate that the selling pressure (if any) is unlikely to be strong. In addition, the recent drop is typically not accompanied with much volume on a relative basis. Support is around 0.110 - 0.114. Resistance 0.122 / 0.130 - 0.132.

Notwithstanding the above, the chart outlook is still uncertain with a tinge of bearishness, especially with the declining EMAs. It will be positive if RPG can breach $0.137 on a sustained basis. On the flip side, if it breaks below $0.110 with volume and on a sustained basis, the outlook is likely to be bearish from a chart perspective.

Other noteworthy points on RPG

a) Mgmt outlined four major steps in getting the IPPKH2 licence in their 4QFY15 financial results. They have completed the first three steps and have commenced the final step with an application submitted to the Ministry of Forestry. According to RPG, the first two steps were the most difficult to clear. Based on personal estimate, I would think we should be able to hear from RPG in the next 2-6 weeks if they are successful.

b) Although the coal industry remains in the doldrums, there are reasons to be optimistic in RPG.

- Based on an Apr 2014 JORC report, RPG has coal resources and reserves amounting to about 24m tons and 6.9m tons respectively for the *309 ha of land available for mining. Once the IPPKH2 for the remaining 1,624 ha is approved, RPG’s coal resources and reserves are expected to jump.

*309 ha includes the logistics aspect e.g. coal loading conveyor, stockpile etc. Current effective area for mining is around 280ha +.

- Cost reduction effects – more significant in FY16F than FY15. The reduction in waste mining rate which results in a potential cost saving (including value added tax) of between US$2.70 – 3.40 per MT will be applicable in FY16F.

- Provision of coal mining facilities to 3rd party mine owners expects to gain traction in FY16F with at least another one coal mining owner likely to lease their facilities in 1HFY16F.

- High coal content allows blending opportunities: RPG’s high calorific value of 5,600 places it at an enviable position to cooperate with other mine owners whose calorific values are lower by blending both coal together to get an acceptable quality. It is noteworthy that there is a likelihood that the remaining 1,624 ha may contain coal of higher calorific value than **5,600.

** Indonesia coal has typically five coal grades viz. 6,500 (ICI 1), 5,800 (ICI 2), 5,000 (ICI 3), 4,200 (ICI 4) and 3,400 (ICI 5) kcal/kg GAR. ICI1 is the most premium coal. RPG’s coal is at ICI2 level.

- Depending on management’s schedule, there may be a site visit for analysts to their Indonesia coal mine in the next 1-3 months.

Chart 2: RPG has dropped around 19% since 4 Jun 2015


Source: CIMB chart as of 17 Jun 2015

Disclaimer

The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Wednesday, May 27, 2015

Guocoleisure – potential chart breakout amid interesting developments (Written 26 May 2015)

Since 5 Jan 2015, Guocoleisure has been trading within a range of $0.910 – 0.980. With reference to Chart 1 below, Guocoleisure's exponential moving averages (“EMAs”) seem to have formed golden crosses. ADX has also risen from the low of 11.2 on 9 Apr 2015 to 28.9 on 26 May 2015. This signifies that the trend seems to be strengthening. Price action also seems bullish. Barring unforeseen circumstances, there is an increasingly high likelihood that it may stage an upside breakout from its four month plus trading range of $0.910 - 0.980 in the next couple of months. Measured eventual technical target is S$1.050. Guocoleisure closed at $0.960. Day range was $0.955 – 0.960.

Supports: 0.955 / 0.935 - 0.945

Resistances: 0.970 / 0.980 / 1.00

Chart 1 – Range trade since 5 Jan 2015


Source: CIMB chart as of 26 May 15

Some noteworthy events

Strong committed management with solid reputation

Michael Denoma was first appointed as CEO of Guocoleisure's hotel business in 2012 and was promoted to Group CEO in 2014. Denoma has an excellent track record and is best known for his role in Standard Chartered's global consumer bank. In his 10 year stint at Standard Chartered, he grew their customer base from five million to 14 million and the division's revenue by S$4b. He also “globalised” Standard Chartered's consumer business across Africa, Asia and the Middle East. Denoma’s plan is to bring Guocoleisure to the same level as major international hotel chains such as Hilton Worldwide and Starwood Hotels and Resorts Worldwide.

According to Lim & Tan, Denoma and his team have around 75m share options at an exercise price of 86 cents, thus it is likely that the management’s interests and shareholders are rather aligned.

Significant interest savings

Guocoleisure has refinanced its GBP138m 10.75% mortgage debenture to below 4% in Dec 2014. According to management, this will result in an annual cost savings of around US$14m per year. Such annual interest cost savings are substantial, especially if they were to be compared against FY14’s group profit of US$39m.

Sale of non core assets

According to Guocoleisure’s FY2014 annual report, management indicated that they are looking to exit non core business such as their real estate interests in Fiji. Lim & Tan postulated that Guocoleisure may sell other non-core assets such as Molokai Island and The Casino biz which are loss making

Recent share purchase by Mr Quek Leng Chan – A positive sign

After the close of trade today, Guocoleisure announced that Mr Quek Leng Chan has started buying back 132.6K Guocoleisure shares @$0.94952 on 21 May. He last bought 667K Guocoleisure shares @$0.64875 on 18 Oct 2012. In my opinion, this is a positive and significant sign and should (likely) cap any potential downside in the near term. Based on my own observation, I believe there is a chance that Mr Quek may continue to accumulate some more shares. Mr Quek has 66.7% interest in Guocoleisure after his purchase on 21 May.

Guocoleisure plans to update the investment community in June

Guocoleisure is planning to do a corporate presentation (likely) in June 2015 to update the investment community. It will be interesting to observe the matters discussed in the corporate presentation.

Valuation

According to Figure 2 below, analysts’ target prices for Guocoleisure range from S$1.18 to S$1.43. Its NAV / share is approximately around S$1.120 but according to the analysts, Guocoleisure’s RNAV can be as high as S$1.80.

Figure 2: Analysts’ target price for Guocoleisure


Source: CIMB chart as of 26 May 15

Conclusion

The above is a brief writeup on Guocoleisure with the emphasis more on its technical chart and its recent interesting developments. Readers who are keen to know more on Guocoleisure should refer to Guocoleisure’s financial statements. U can email me at crclk@yahoo.com.sg for the analyst reports.

P.S: I have sent out a short writeup on Guocoleisure to my clients on 7 May and 13 May to inform them of Guocoleisure's recent developments.

Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Friday, May 22, 2015

Chart alert: Resources Prima Group’s potential chart break out

Resources Prima Group ("RPG") was actively traded with total volume done 17.8m shares yesterday. This was the highest volume last seen on 15 Apr 2015 which was the recent peak. It closed +0.004 to 0.135 on Friday. Day range was 0.130 - 0.137.

Based on Chart 1 below, RPG seems to be in a flag formation for a month. At $0.135, it seems to have breached the flag formation with an upside breakout. The flag formation should be confirmed if RPG can breach $0.137 on a sustained basis with volume. An upside breakout from the flag formation points to an eventual technical target of $0.215. This is an eventual technical target and may not be reached soon.

Readers who are interested to know more about RPG can email me at crclk@yahoo.com.sg for the analyst reports. UOB analyst's target for RPG is $0.295 and CIMB Securities has an unrated report. You can also refer to my writeup http://ernestlim15.blogspot.sg/2015/03/resources-prima-group-what-attracts-me.html which was published on 30 Mar 2015 when RPG was trading around $0.103. Readers can also take note of RPG’s upcoming 4QFY15 results to be released next week.

Supports: $0.134 / 0.130 - 0.132

Resistances: $0.136 - 0.137 / 0.142 / 0.149 – 0.151

Chart 1: RPG’s potential chart breakout




















Source: CIMB complimentary chart as of 22 May 15

P.S: This is an updated version to the writeup which I posted yesterday afternoon. I have done some minor amendments such as update the chart with end of day chart and price etc.


Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Friday, May 15, 2015

Stratech – Key takeaways from an exclusive meeting with CEO


Some of you would have remembered the terrible Concorde Crash on 25 July 2000 where Air France Flight 4590 met with an accident while departing from Paris airport. The accident was attributed to a titanium alloy strip left behind on the runaway from the previous departing Continental Airlines DC-10. This strip was not removed as an originally scheduled runway inspection was not carried out. This “preventable” accident caused 113 fatalities. (Source: http://en.wikipedia.org/wiki/Air_France_Flight_4590 )

How can the above accident be prevented? With Stratech’s iFerret system, the debris would have been spotted, removed and the accident would have been prevented. Their system seems to be superior to the other incumbents and have garnered recognition from various large airports.

After looking into the company, I decided to email Stratech to request for an exclusive meeting with Dr David Chew, Executive Chairman of Stratech. To my pleasant surprise, Dr David promptly replied (even though he was overseas) and agreed to an exclusive meeting.

Below are my key takeaways

Foreign object debris is potentially a US$67b market

There are more than 7,400 IATA registered commercial international airports around the world with an estimated US$67 billion market solely on Foreign object Debris (“FOD”) Detection Systems for runways. In addition, such FOD contracts have a maintenance portion where there is recurring revenue equivalent to about 10% to 15% of acquisition cost for the maintenance every year.

Moreover, according to Stratech’s management, this figure of US$67b could increase by at least 50% if other airfield surveillance capabilities are included.

FOD market is just taking off

Previously, there were no technology or / and financing for FOD market. The practice of manual FOD sweeps two to three times a day is inadequate and inefficient. With the issue of FAA Advisory Circulars (“AC”) in Sep 2009 & Sep 2010, 3 fixed base and one mobile FOD Detection systems / technologies were certified.

Table 1: Four systems certified by the FAA

Source: Various, FAA, Philip Securities

Financing mechanism / Funding is made available through the AIP (Airport Improvement Program) & PFC (Passenger Facility Charge). The catch is that for airports who wish to utilize the above grants will need to use the above certified systems.

How is Stratech system different from the other players?

With reference to Table 1 above, Stratech uses high resolution intelligent vision whereas the other three systems use radar. There is a likelihood that the use of radar technology may interfere with the performance of other equipment in the airport. Although Stratech’s systems incur higher up front costs, they typically require less maintenance due to its reliability, resulting in lower life cycle costs.

It is noteworthy that the iFerret contract awarded by the Dubai Airport in Jan 2014 was significant on two fronts. Firstly, according to figures from Airports Council International, Dubai Airport was the busiest airport for international travel in 2014. Thus, a contract win from such an established airport bore testament to the superiority of the iFerret system. Secondly, it was significant because Stratech has beaten the Xsight FODetect and replaced the incumbent QinetiQ Tarsier.

Intellectual property valued at S$249m - S$810m vs current market capitalisation of S$51.7m

Stratech has spent more than 25 years in investing and creating intellectual property (“IP”). According to an independent valuation report conducted by Stone Forest Corporate Advisory, Stratech IP may be worth between S$249m to S$810m. It is noteworthy that notwithstanding the recent spike in the share price, Stratech’s current market capitalization as of 15 May 2015 is S$51.7m.

Inroads to military airport & airfield surveillance

In Sep 2013, Stratech announced that its iFerret has been selected by one of the top air forces. iFerret is equipped with the RADAS (Rapid Airfield Damage Assessment System) capability which can rapidly detect, locate, categorise and measure the severity of damages and hazards on the runways and taxiways. In peacetime, iFerret can be deployed for FOD Detection.

Stratech also won a contract from our Singapore government to upgrade the iFerret infrastructure to include airfield surveillance. This is noteworthy on two fronts. Firstly it marks the entrance of iFerret into Airfield Surveillance. Secondly, the FOD market / size of FOD contract could increase by at least 50% if other airfield surveillance capabilities are included.

Potential turnaround play

Stratech posted a net profit of S$1.4m for FY14 (financial year end in Mar), compared with a net loss of S$9.4m for FY13. For the 9MFY15, Stratech registered S$10.5m revenue and –S$1.7m loss. There is still a likelihood that Stratech may narrow its losses or become profitable in 4QFY15F.

According to management, Stratech is bidding for several airport contracts and they believe FY16F should be a good year, should they secure the tenders. For example, according to The Edge, Stratech is currently in negotiations to install the iFerret in six runaways at a major airport.

Risks

Adoption of FOD systems by the airports is not mandatory

The aforementioned AC guidelines are not mandatory for airports. For airports which have not decided to use the funding from AIP and PFC are not required to use the above FOD systems. Stratech is cognizant of this and it is first targeting the top airports such as the Dubai Airport in Jan 2014, Hong Kong airport in Feb 2015. Once the top airports start to adopt iFerret, the other large airports may feel “compelled” to adopt this technology. Over time, 2nd tier airports may start to adopt iFerret.

Acceptance of iFerret by airports is key

Stratech’s potential turnaround investment thesis revolves mainly around the success and acceptance of its iFerret by the airports. In the event that it did not win any of the contract tenders which they are bidding for, it may have an adverse impact on their results.

Inclusion in the watchlist is a concern

Personally, the largest risk to this company is that it has been on the Singapore Exchange watch-list since 5 June 2013, after recording 3 consecutive years of net losses. Based on my simplistic understanding, Stratech has to be profitable before tax and maintains an average market capitalisation in excess of S$40 million for the past 120 days.

Stratech has posted a pre-tax profit in FY2014, and its market capitalisation is above S$40m since 4 May. Based on my pure simple guess, there is a chance that SGX may grant an extension to them pending their discussions with SGX.

In the event that Stratech could not be removed from the watchlist or unable to get an extension from SGX, it may be delisted. Thus, this is an important point which readers should be aware.

The above are just some of the risks which readers should take note. Please refer to the Philip Securities unrated reports dated 12 Nov 2014 and 6 May 2015 for more information.

Valuation

According to a Philip Securities research report dated 6 May 2015, they estimate that Stratech may be able to trade between S$0.040 (steady state) to S$0.069 (high growth stage).

Chart

Since 10 Apr 2015, Stratech has appreciated around 100% from $0.016 to $0.032 today. Its recent share price performance has been spectacular. However, if we pull back the chart to a ten year period, Stratech 10 year high and low price (after accounting for corporate actions) were approximately S$0.110 and $0.010 respectively.

With reference to Chart 1 below, Stratech seems to be consolidating between S$0.030 – 0.039 after its hefty gains. Measured eventual technical target for an upside / downside break points to S$0.048 / 0.021.

Supports and resistances are at $0.030 / $0.025 and $0.034 – 0.035 / $0.039 – 0.040 respectively.



Chart 1: Stratech has appreciated recently as it garners more investors’ attention


Source: Shareinvestor 15 May 2015

Conclusion

This is just a brief introduction on Stratech. Readers should be cognizant of Stratech’s watchlist status, volatile share price, dependence on the acceptance of its iFerret. However, the recent significant contract wins, coupled with the positive industry outlook should make it an interesting stock to keep it on the watchlist.

P.S. Readers should refer to the company website http://www.thestratechgroup.com/ for more information and can email me at crclk@yahoo.com.sg for the informative unrated Philip Securities research reports.

Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Monday, March 30, 2015

Resources Prima Group – What attracts me to take a closer look

Resources Prima Group (“RPG”) has been on the restricted “online list” for a few brokerage houses such as CIMB Securities, OCBC Securities and UOB Kayhian (i.e. clients are not able to trade online but have to call their broker to execute). This restriction is typically for more speculative stocks. So what attracts me to take a closer look and do a writeup?

First glance - What attracts me…

1.     Chart formation seems positive

I have pointed out in my article dated 23 Mar 2015 “Selective stocks may have some small near term technical rebound” http://www.sharesinv.com/articles/2015/03/23/selective-stocks-may-have-small-near-term-technical-rebound/ that RPG seemed to be building a base. RPG closed at $0.083 on 20 Mar, Fri and was trading around $0.082 – 0.084 on 23 Mar, Mon. It closed at $0.082 on 23 Mar.

Since 23 Mar, RPG jumped 23% to close at $0.101 on volume expansion. Based on Chart 1 below, RPG surged 11% & 10% with 10.7m & 14.6m shares traded on 26 Mar & 27 Mar respectively. The volumes transacted were significantly above its 30D & 100D average volume of 3.6m & 12.8m shares.

Based on my personal observation, RPG’s has completed its base formation and it seems to be on the verge of a new uptrend. 21D exponential moving average (“EMA”) has turned up. Indicators such as RSI and MACD have formed bullish divergences and they seem to be strengthening. Although the RSI was a 15 month high (RSI closed at 57.7 last Fri), it is not overbought yet. Near term supports and resistances are at $0.097 / 0.094 / $0.090 and $0.109 – 0.111 / 0.122 / 0.136. The “bullish feel” of this chart will be negated if RPG falls below $0.090 on a sustained basis.

Chart 1: Base formation completed

Source: CIMB itrade complimentary chart (27 Mar 15)

2.     Negatives seem to have been largely priced in

Firstly, the price for thermal coal has slipped to a six year low. According to a Bloomberg article dated 24 Mar 2015, the prices for a coal-supply deal between Glencore Plc and Japanese utilities may be set at a six year low. The low coal prices have already prompted Glencore to plan to reduce its Australian output by 15m tons in 2015, equivalent to about one fifth of its production from Australia. Glencore also plans to trim output by shutting some mines in South Africa.
Notwithstanding that coal prices may have slipped to an approximate six year low, World Bank forecasts that coal prices are likely to hit bottom in 2015 and rebound thereafter (See Chart 2). Other renowned institutions such as IMF and Economist Intelligence Unit also predict that 2015 is likely to be the bottom for coal prices.

Chart 2: World Bank coal price forecast through 2020

Source: World Bank

Secondly, the massive 70% RPG’s share price drop from an intraday high of $0.265 on 4 Dec 2014 to $0.079 on 18 Mar 2015, coupled with a three week long base formation should have exhausted the selling. Coupled with the online trading curbs by various brokerage houses and the current bearish news on coal, it should be quite safe to assume that most sellers have already exited. It is likely to be an “under owned” stock for both retailers and institutions / funds. UOB Kayhian is the only brokerage house which is covering RPG with a target price of $0.295.

Thirdly, RPG has incurred a few one off expenses in 9MFY15 results such as the following.

a)     Professional fees of US$1m under Admin Fees in 3QFY15 incurred in relation to completion of the reverse takeover;

b)    The immediate recognition of the entire historical depreciation costs of US$11m which should otherwise have been amortised over a few years;

c)     Arranger fee of US$15.7m & goodwill of US$45.9m written off in 3QFY15F in relation to the reverse takeover;

According to management, the above are one off expenses and are not expected to be incurred in future. In other words, going forward, ceteris paribas, RPG’s financials are likely to be better without the above non recurring expenses.

Company description

RPG (formerly known as Sky One Holdings Limited) was listed on SGX Catalist Board on 14 November 2014 via a reverse takeover. RPG is a mine owner and primarily engages in the business of coal mining and coal exploration operations in East Kalimantan, Indonesia. Additionally, RPG also owns and provides coal mining facilities such as coal hauling road, coal stockpiles, coal crushers, coal conveyor system, jetty and barge loading facilities to third party mine owners. RPG is 54.67% controlled by Madrone Enterprises Limited, a company which is 100% owned by the family of Executive Chairman and CEO Mr Agus Sugiono.



Company developments to watch out for

Major catalyst – Potential award of the 2nd IPPKH permit

RPG currently has a “borrow-use” permit to mine 309 ha out of its total mining concession area of 1,933ha. Based on RPG’s 19 Jan 2015 press release, RPG has submitted an application to secure the “borrow-use” permit to mine the remaining 1,624 ha of total mining concession area. This, if approved, should have a positive impact to its reserves and future earnings. UOB Kayhian estimates that the award may be given to RPG by June 2015.

Cost reduction measures

In their 3QFY15 press release, RPG mentioned that it has commenced a cost reduction programme covering areas such as waste mining rates; heavy equipment requirements and fuel supply arrangements. In my opinion, as the rates with their waste mining operator, PT Cipta Kridatama (“CK”) were last adjusted and reduced in July 2013 (i.e. almost approaching two years), there is scope for reduction in 2015. It is noteworthy that waste mining costs comprised approximately 45% of the cost of goods sold.

Sales volume ramp up

With reference to Chart 3 below, sales volume surged 59% from 0.82MT in 9MFY14 to 1.30MT in 9MFY15. Barring unforeseen circumstances, it is likely that company will further ramp up its sales volume in FY16F, albeit at a slower pace (on a percentage basis).

Chart 3: RPG’s sale volume since FY13

Source: Company (Year ends in Mar)

Contracts from coal logistics kicking in FY16F

According to the company, RPG leases its excess capacity in its coal logistics facilities, such as crushers, conveyors, stockpile, jetty etc to nearby concession owners. This business segment is lucrative and likely enjoys good margins.

Till date, RPG has signed contracts with five concession owners. RPG priced such contracts on a “use per basis” and by distance and tonnage. One concession owner already started to lease RPG’s logistics facilities which contributed to RPG’s 9MFY15 facility usage revenue of around US$1.7m. Barring unforeseen circumstances, it is likely that three other concession owners may start to lease RPG’s logistics facilities in FY16F.



Possibility of M&A

Besides organic growth, company is also looking to accelerate growth through acquisitions, joint ventures and/or strategic alliances. Acquisitions are particularly interesting as the current depressed prices offer an opportunity to make acquisitions at attractive prices.  Company is interested in projects that are located near their existing mine in order to achieve synergies and also for ease of management. 

As of 9MFY15, RPG only has US$1.9m of debt. Thus, there seems to be scope for the company to take on more debt to finance the above inorganic growth.

*Some noteworthy points

Concentration risk

RPG has concentration risk on a couple of aspects. Firstly, it only has one mine thus any problems in the mine will have an adverse impact on RPG. Secondly, due to its current small sales volume, it only has one customer, namely PT Anugerah Bara Kemilau (“ABK”). It is noteworthy that RPG signed the offtake agreement with ABK in Jun 2013 and this agreement will expire on Jun 2015. According to RPG, ABK has offered a 2 year extension at RPG’s option.

Notwithstanding the above, management is cognizant of the customer concentration risk and plans to diversify its customer base when they further ramp up their production.

Dependent on coal price

Any drop in coal price due to an increase in supply or a drop in demand may have an adverse impact on RPG’s operations.

Regulatory risks in Indonesia

RPG’s Rinjani mine is in Indonesia. Any adverse change in regulations may affect their approval for the “borrow-use” permit for the remaining 1,624 ha of total mining concession area and their existing business.

*For the full range of risks, readers should download Skyone’s circular to its shareholders (available on SGX) and the UOB Kayhian analyst reports.

Conclusion

This is just a brief introduction on RPG. Readers should be cognizant of RPG’s volatile share price, concentration risk and its dependence on coal price. However, the bullish chart formation, and my view that most negatives have been priced into the share price, coupled with the aforementioned company developments should make it an interesting stock to keep it on the watchlist.

P.S. Readers should refer to the company website http://resourcesprima.com.sg/ for more information and can email me at crclk@yahoo.com.sg for the UOB Kayhian rated research reports. I can also forward the above writeup in pdf form (which includes the charts as I am unable to attach the charts herein.)




Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Sunday, March 1, 2015

ISOTeam – surged 55% since my last writeup, any more upside?

With reference to my introductory writeup on ISOTeam dated 17 Jan 2014 (see article http://www.sharesinv.com/articles/2014/01/21/isoteam-%E2%80%93-defensive-recurring-business/), ISOTeam has soared 51% from $0.390 on 17 Jan 2014 to $0.590 on 27 Feb 2015. Inclusive of the dividend of S$0.01 / share payable on 14 Nov 2014, ISOTeam has appreciated a total of 55%.

Having jumped significantly in the course of 13 months, the next question which naturally comes to mind is whether ISOTeam is overvalued. Let’s take a look at the company’s developments since my last writeup.

Record 1HFY15 results

ISOTeam released a sterling set of 1HFY15 results on 12 Feb 2015. 1HFY15 revenue and net profit rose 22% and 92% respectively to S$39.0m and S$4.1m respectively. Gross margins improved sharply from 16.8% in 1HFY14 to 22.1% in 1HFY15 due to better profit margin of R&R completed projects. Management believes that gross margins are likely to be around these levels in the near term. (See Table 1 below)

Table 1: ISOTeam’s financial highlights


Source: Company, financial year ends in June

2HFY15 results likely stronger than 1HFY15

Historically, 2HFY15 results contributed about 55% - 65% for the past two financial years. In addition, ISOTeam has completed four acquisitions in Jan 2015 which are likely to post their maiden contributions to their 2HFY15F results. According to UOB Kayhian, these four acquisitions have a total adjusted net profit of about S$1.5m/year at the time of acquisition.

Strong order books and positive outlook

As of 8 Jan 2015, ISOTeam has an order book of S$70.4m, to be progressively delivered over the next two years. It is currently the lowest tenderer for four other projects collectively worth a total of S$30.9m.

Positive outlook

Outlook continues to be bright as there seems to be more projects to be awarded. For example, according to a Straits Time article dated 10 Jan 2015, the Ministry of National Development (MND) will set aside $20m to upgrade another 9 private estates under its Estate Upgrading Programme (EUP). EUP includes landscaping, construction of ramps for wheel chair uses and enhancing parks and playgrounds etc.

According to another Straits Time article dated 11 Sep 2014, the government will expand its neighbourhood renewal program (“NRP”) to include HDB blocks built between 1990 and 1995. Previously, only HDB blocks built in and before 1989 are entitled for NRP. In other words, another 100,000 households in more than 1,300 blocks will benefit from the programme. There will also be more features included in the NRP such as block repainting and other repairs.
The above measures should bode well for ISOTeam’s business prospects.

Potential beneficiary of general election

Most market watchers are expecting our Singapore’s general election may be held around late 2015 to 1H2016. In view of the preparations to the general election, it is not unreasonable to assume that there may be more of the aforementioned projects (i.e. NRP, EUP, upgrading of hawker centers etc) to be rolled out in the near term which should benefit ISOTeam to a certain extent.

A greater following & emergence of anchor shareholders

ISOTeam has come a long way since my first writeup in Jan 2014. Besides UOB Kayhian, it has since attracted DMG coverage. In addition, it has been featured more frequently in the media with the latest media release dated 23 Feb 2015 (See http://business.asiaone.com/news/diy-expert-builds-successful-firm)

Besides a greater following from the media and analysts, some reputable names have emerged as substantial shareholders of ISOTeam after my writeup. For example, Nippon Paint (Singapore) has increased their stake from 2.6% to 5.9% in Dec 2014. It is noteworthy that ISOTeam is the exclusive applicator for Nippon Paint (Singapore).  (You may have read that Mr Goh Cheng Liang, founder of Nippon Paint South-East Asia Group (Nipsea), is Singapore’s richest man with a US$8.2b fortune, ahead of Mr Wee Cho Yaw, second richest man in Singapore with a US$6.9b fortune.)

Besides Nippon Paint (Singapore), Singapore Tong Teik (Private) Limited, a natural rubber trading company, founded in 1964 and based in Singapore, took a 6.4% stake in ISOTeam in May 2014. For those readers who have followed the news on UE E&C, a construction / property developer, they should be familiar with Singapore Tong Teik (Private) Limited which has acquired a significant stake in UE E&C. Thus, acquisition of a substantial stake in ISOTeam is likely to be in line with Singapore Tong Teik (Private) Limited’s long term business interests.

Synergistic acquisitions

ISOTeam has completed the following acquisitions in Jan 2015. With reference to Figure 1 below, through the four acquisitions, ISOTeam has gained access to 200 sets of gondolas, 200 sets of boom lift / scissors lifts and increased their painter headcount to 400 painters. In addition, ISOTeam also expanded their capabilities into specialist areas in landscaping and architectural coatings. As a result, this is likely to open doors to new clients and sectors.

Figure 1: Four *acquisitions completed in Jan 2015


Source: Company
* In the latest announcement dated 27 Feb 2015, Accom, Accom International and Rong Shun have been renamed as ISOTeam C&P Pte. Ltd, ISOTeam Access Pte. Ltd and ISO-Landscape Pte. Ltd.

Online handyman service portal rollout in 3Q CY2015

ISOTeam is rolling out their online handyman service portal in 3Q CY2015 which should provide a one stop solution portal for plumbing, air conditioning, general repairs, tile works etc. This is a step forward to their vision of being a complete building and maintenance team.

Besides the usual risks which you can find in my previous writeup and ISOTeam’s prospectus, here are some of the risks which I deem to be more likely and noteworthy.

Risks


Illiquidity is still an issue

Based on its latest annual report 2014 which did not take into account of the recent placement and share issuance, the top 20 shareholders have about 90.4% of ISOTeam’s outstanding shares. Ave 30D and 100D volume amounted to around 285,000 and 212,000 shares respectively. This is not a liquid company where investors can enter or exit quickly.

Rising costs

Rising costs, attributed mainly to labour costs, are likely to rise in the medium to long term as our labour market is likely to be tight. However, in the recently announced budget, the foreign workers’ levies will be held off to next year. This eases rising costs in the short term. Notwithstanding the rising labour costs in the medium to long term, ISOTeam should be able to maintain their gross margins at around 21% due in part to their recent acquisitions and economies of scale. Furthermore, their R&R projects are typically short term in nature around 9-14 months where they should not be too adversely impacted by rising labour costs.

Seemingly high valuations vs. their construction counterparts

ISOTeam trades at an annualised FY15F PE of around 9.6x. This seems pretty high vis-à-vis some of the construction companies. However, ISOTeam’s core business is in building refurbishment and upgrading whereas some of their construction peers focus more on new build construction. Thus, this is not an “apple to apple” comparison. Furthermore, the business demand for building refurbishment and upgrading is also different from new build construction.

According to UOB Kayhian’s estimates, after accounting for the recent acquisitions and placement, ISOTeam is likely to have a strong net cash position of around S$13-15m. Stripping out the net cash position of S$13m, ISOTeam trades at an annualised FY15F PE of around 8.1x.

It is noteworthy that ISOTeam’s financial year end is in June, thus FY15F ends in June 2015. In addition, if ISOTeam continues to register earnings growth in FY16, coupled with a full year contribution of its aforementioned acquisitions (i.e. Accom etc), its PE should trend lower over time.

Technical outlook

ISOTeam with the last closing price of S$0.590, is near to its record intraday high of S$0.605 on 18 Feb. Based on Chart 1 below, ISOTeam exhibits a clear uptrend as depicted by its rising exponential moving averages. It has spent the month of February consolidating its gains between S$0.565 – 0.605. Any breakout to the upside / downside with volume expansion has an eventual measured technical target of S$0.645 / 0.525 respectively. As the prevailing trend is up, the probability of an eventual upside breakout outweighs that of a downside break.

Supports: $0.575 / 0.565 / 0.55 – 0.555

Resistances: $0.605 – 0.610 / 0.645 – 0.650


Chart 1: ISOTeam – consolidating after its strong gains


Source: CIMB chart as of 27 Feb 15

Conclusion

Although ISOTeam has appreciated 55% since my last writeup, its defensive and recurring business (mentioned in my previous writeup), potential record FY15F results, more contract wins and analyst coverage may be some of the possible catalysts for its share price.  Nevertheless, its lack of liquidity, seemingly high valuations relative to construction companies and sharp share price performance over the course of 13 months may be some noteworthy factors for readers to consider.

*Due to some technical errors, I am not able to post the images of Table 1, Figure 1 and Chart 1 on my blog. U can email me at crclk@yahoo.com.sg for the complete pdf writeup.

Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.