Hock Lian Seng: Won a $221.8 million contract.

Despite a major contract win amounting to $221.8 million recently, Hock Lian Seng has not managed excite Mr. Market. Add this recent win to the $105.5 million win in February, Hock Lian Seng now has a very healthy order book.

If I were to hazard a guess, I would say that the lukewarm reception by Mr. Market stems from concerns about Hock Lian Seng's JV condominium development with King Wan and TA Corp, The Skywoods, which has seen a very slow take up rate. From what I know, it is less than 20% sold and it has been half a year since it was launched.

With the recent action by CapitaLand to implement a 15% discount on prices for its hard to sell Sky Habitat in Bishan, it is possible that more developers with hard to sell condominiums for various reasons might follow suit.

Analysts have estimated that The Skywoods has an average breakeven price of some $1,100 per square foot. Hock Lian Seng et. al. reduced the launch price to an average of $1,300 per square foot in September 2013, taking into consideration the more difficult conditions. So, the margin is less than 20%.



Source: www.stproperty.sg

However, given that things could get worse, prices could be dropped again. If it should be a 15% drop like what happened at Sky Habitat, then, average price falls to $1,105 per square foot. This is at break even price which means that Hock Lian Seng would spend a few years being busy on the project for nothing. In my opinion, this is an optimistic scenario and I hope that it would not get any worse than this.

So, if we think of The Skywoods as a zero contributor but, at the same time, being able to cover its own development cost (i.e. able to break even), then, we just have to focus on the rest of the business and see if Hock Lian Seng is still a good investment.

With the recent big contract wins, the civil engineering segment now has earnings visibility till 2020.  I have said a few times before that Hock Lian Seng, like Yongnam, is a natural beneficiary of the increased spending by our country on infrastructure development till 2030. So, more wins are likely in future. A stronger order book over time will overshadow Mr. Market's concerns about The Skywoods, perhaps.

Hock Lian Seng also has two development industrial properties which are mostly sold and these are due to obtain their TOPs sometime in late 2014 and early 2015. In the latest annual report, it has been stated that these will contribute significantly to Hock Lian Seng's results then.

The Skywoods is the burr in the side for Hock Lian Seng but even with a 15% reduction in asking prices, it could turn out to be a non-issue. Hock Lian Seng's business is more than just The Skywoods.

EPS, which has been declining, is likely to improve again with a healthier order book and with the obtaining of TOPs for its two development industrial properties in the next 12 months. Although a special dividend could be declared then, I would be quite happy if the conservative management continues to pay a dividend of 1.8c to 2.0c a share, which I believe is sustainable. NTA per share could increase by another 3c or so which would bump NTA per share to above 30c.

Hock Lian Seng is a sound investment for income although not a very exciting one for growth. For me, it has been a good investment so far and looks like a reasonably good investment for the future. The last time I bought more was in February this year at 25.5c a share. If share price should decline by 10% or more upon the counter going XD, I would probably add to my long position.

A 7% dividend yield? An investment that is likely to grow to be more valuable in future as NTA per share grows? Sounds good to me.

Related post:
Hock Lian Seng: DPS of 1.8c.

FSL Trust: An Asset Play with 80% discount to NAV?

FSL Trust was an investment in my portfolio that I considered to be a mistake and I blogged about it a few times before. I collected quarterly dividends when I was vested and I also made some money by using technical analysis to trade the stock but, overall, the investment performed badly.

However, always bearing in mind what Peter Lynch said, I looked at FSL Trust again as its unit price plunged to about 6c a unit before recovering to about 10c recently after its trading suspension was lifted. All investments are good at the right prices. So, the question is whether FSL Trust is now at the right price.

Going through the latest annual report with numbers correct as of 31 Dec 2013, there seems to be plenty of optimism with a dose of caution on the part of the management. They took on more impairment to more accurately reflect the values of the assets held by FSL Trust and they also bought units in the open market as the price plunged, believing that the future of the Trust is now brighter.




Looking at the numbers, however, I believe that FSL Trust, at the moment, is attractive only as an Asset Play. With a NAV/unit of US$0.41 and a unit price of about S$0.10, it is trading at more than 80% discount to valuation. However, we have to bear in mind that ships are depreciating assets. So, their values have been and will continue reducing.



Click to enlarge.

When Peter Lynch invested in Asset Plays, he asked:

1. How much debt is there? This is important because creditors are first in line.

2. Is the company taking on new debt, making the assets less valuable?

3. Is there a raider in the wings to help shareholders reap the benefits of the assets?




To address the questions:

FSL Trust's NAV/unit of US$0.41 suggests that if the ships were to be sold at 20% discount to their book values now, after paying off all debts, we could see S$0.25/unit distributed to unit holders. This is a huge 150% premium to current unit price.

FSL Trust is not taking on new debt. In fact, it has been paying down its debt.

In recent months, we have seen some analyses on how the shipping cycle could be bottoming although conditions are still difficult. If these analyses are correct, then, could there be a corporate raider or two who might be eyeing a possible Asset Play like FSL Trust?

With revenue already in decline and with more charters expiring, possibly not to be renewed, FSL Trust is unattractive as an investment for income at the moment or even in the next 12 to 24 months.




Even if FSL Trust were to resume a quarterly distribution of US$0.001, at S$0.10 a unit, we will get a distribution yield of about 5% only. For an investment with assets depreciating at about 5% per annum and with useful life of 25 years when newly acquired, a distribution yield of 5% per annum is sorely inadequate.

Without any improvement or deterioration in revenue, FSL Trust will take about 16 years to pay off the bank loans. 16 years is a long time and given the relatively short useful life of ships, as income generating assets, they would be more or less spent by then.

Of course, one could argue that it is unrealistic to assume zero improvement in economic conditions in that same period. Indeed, FSL Trust could become a compelling investment for income again if its revenue were to improve significantly.

To continue, at the end of the hypothetical 16 years, taking into consideration depreciation and if we are somewhat conservative, FSL Trust's portfolio of assets could still give us a NAV/unit of US$0.20. So, if no corporate raider came along, for someone who decided to invest in FSL Trust at 10c a unit today, he could possibly see a capital gain of 150%, all else remaining equal, if the ships were to be sold away at book value then. Is this realistic?

This leads us to another question we have to answer and that is how realistic are the valuations of the assets? FSL Trust has already taken on more impairment but will there be more to come? More impairment could happen if shipping rates were to decline again. Experts are of the view that this is unlikely to happen as the global economy improves ever so slowly.




For investors for income, FSL Trust is a rather poor choice now and in the near future. As an Asset Play, however, it could be rewarding. However, we wouldn't know whether the unit price will reflect more closely the value of the underlying assets and, if it should happen, when.

Remember that the assets are depreciating in nature. So, the longer we hold, the lower their values. As I would like to be compensated adequately while I wait, I will need a much higher distribution yield than 5% from FSL Trust before considering re-initiating a long position, all else remaining equal. What about 10% which was what Rickmers Maritime Trust offered a year ago during its 1 for 1 rights issue, all else remaining equal?

Bearing in mind that all else will not remain equal and that things could get worse with expiring charters, investors attracted to FSL Trust as an Asset Play should demand an even higher distribution yield. Therefore, without any chance of revenue improving in the near future, as an Asset Play, FSL Trust will become attractive only at a unit price that is much lower than what it is today.




Suggested reading:
"One Up On Wall Street"
by Peter Lynch.
The last I checked, they have 7 pre-owned copies left at US$6.98 each. Free shipping worldwide.

Related posts:
1. Rickmers Maritime Trust: 1 for 1 Rights Issue.
2. FSL Trust: Sold some at 48c.
3. FSL Trust: Reduced DPU to US 0.10c.