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Tee International: Initiated long position at 22.5c.

Tuesday, April 3, 2012

Tee International is a mechanical and electrical engineering company and sometime real estate developer. As its engineering business accounts for more than 90% of its revenue, it seems like another logical beneficiary of the increase in expenditure on public building projects in the region.

As of 12 March 2012, the company has an order book of S$350.7m for its engineering segment alone. See: here.

Today, I bought some shares at 22.5c a piece as news that "Bertie Cheng, its chairman, and Phua Chian Kin, the group's CEO and managing director, are the subject of CAD investigations on the possible contravention of market rigging provisions in the Securities and Futures Act" (Source: CNA) for the period of July 2008 to March 2009 sent its share price tumbling from 25c to a low of 21.5c.

Do I think that 22.5c is cheap enough to long the stock? Fundamentally, I do not think it is cheap but, in nominal terms, it is cheaper than it has been in a long time. The last time the stock was traded at under 22.5c a share was in late 2010.

Technically, there is also some support at the price of 22.5c. Stronger support is to be found at 21.5c, however, and I could add to my position if it should be tested once more.

As I cannot see how investigations into alleged indiscretions which might have happened over a 9 months period in 2008 and 2009 could possibly derail the company's business in the current time frame, the sell off is probably a knee jerk reaction which presents an opportunity to buy in.

Fundamentally, Tee International's high gearing is something of a concern although it has come down substantially from the year before. A closer look reveals that its interest cover ratio is quite strong as its earnings could easily cover its cost of debt 8x. Expectations are for the company to continue paying down its borrowings over time. The current low interest rate environment is a boon for a highly leveraged company like this.

Half year EPS is at 1.7c. Annualising this gives us a PE ratio of 6.6x. NAV is at 17.9c per share. Assuming that the company maintains its dividend payout ratio of 30%, we could be looking at a dividend yield of 4.5% or so at a share price of 22.5c.

Arguably, however, investors are probably not interested in Tee International as an investment for income. They are probably more interested in its growth trajectory. Indeed, the analyst reports I have read so far expect the company to do much better in its second half and into 2013. If their expectations are correct, the numbers I have presented in the preceding paragraph would have underestimated the company's future performance by a wide margin.

Personally, I am interested in Tee International as a shorter term trade. Let's see if Mr. Market recovers from its initial panic and regains its composure. If the dragonfly doji formed today is anything to go by, it could indeed happen. Confirmation is required tomorrow.

I expect immediate support at 22.5c and immediate resistance at 24c. Gap closing at 25c could happen in time although the 100d MA could be a barrier as it acts as resistance at 24.5c.

On a lighter note, the fact that their largest shareholder who owns more than 50% of the company is someone called Phua C.K. puts a smile on my face.

See: 2Q and half year financial statement.

Analysis by SIAS Research: here.


Ray said...

pardon my ignorance.... who's Phua CK?

Ray said...

oh! Phua Chian Kin. So sorry, was speed reading... :P

Ray said...

Hi AK,

From SGX website, i see that Tee's past dividends are about $0.22 to $0.225. But you are estimating its dividends this year to be 30% of $0.17?

AK71 said...

Hi Ray,

Haha.. It was an attempt at being humourous. Phua CK. PCK. Phua Chu Kang? ;p

As for the dividend, the company's half year EPS is 1.7c. Annualise that and we get 3.4c. It pays out about 30% of earnings as dividends. So, that would be 1.02c which gives us a dividend yield of 4.5% based on a share price of 22.5c.

However, if its EPS for the second half comes in stronger, the dividend yield would be higher, everything else remaining equal. :)

Ray said...

hmm div dropping from 2.25c to 1.02c.
Forecast Earnings dropping?

AK71 said...

Hi Ray,

To be fair, I am just annualising its EPS in the first half. OCBC Research had this to say with regards to forecast earnings:

While TEE’s 1HFY12 results disappointed slightly, the YoY decline was largely down to its transition between projects and slower execution pace on newer projects. However, its order book remains fairly healthy and the latest wins show that TEE is capable of replenishing it with both local and overseas projects. Management expects to gather pace on projects in 2HFY12 and FY13, and we should expect better top- and bottom-line performance from the group.
9 Feb 12.

Ray said...

thanks alot AK.

How do these stocks get on your radar?
The Edge? Value Buddies?

AK71 said...

Hi Ray,

I am trying to be more regular with The EDGE and The Business Times these days. Then, there is CNA online which has feeds in my blog on the left sidebar together with The EDGE.

If something interests me sufficently, I would do more research on it. I am not averse to reading reports by analysts but I would pay more attention to the factual rather than opinions. There could be more current information that are not available in company financial statements, after all.

Additional research would help me determine if it is worth investing at the prevailing price. Sometimes, depending on my comfort level, it could be more suitable for a trade.

AK71 said...

Since I feel that my entry price was fundamentally not cheap and expecting immediate resistance at 24c, I divested at 23.5c today when given a chance. This bagged me a small gain of 4.44% over a 2.5 months holding period.

Ray said...

Hi AK,

In the trading platform, Tee Int is showing as Cum-Div (CD) but in SGX, I couldnt find any info on the dividends its handing out.
Do you know anything abt this?

Ray said...

oops, ignore my previous question. I went to SGX again today and its updated.

28 Dec 2012 SGD 0.005
3 Dec 2012 SGD 0.0125

AK71 said...

Hi Ray,

Seems that I should have held on. Haha.. Congratulations! :)

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