Hock Lian Seng

It has been a while, but I have finally gotten down to writing another piece. And this time the focus is on Hock Lian Seng Group!

The Group has released results yesterday, and it all looks rather prudent and promising at the same time. Hock Lian Seng has been continuously profitable since it was listed on the SGX in 2009, and that includes during the covid period! So I believe prudent is the right word to use.

With a market capitalisation at S$138m (S$0.27 per share), the company holds S$132m and that balance is expected to continue to rise. Would a special dividend be in store for FY2024? In the meantime, I am going to enjoy the 1.5 cents per share dividend that was announced which gives it a 5.6% dividend yield.

https://www.thesquirrelsdrey.com/post/ho...value-trap

https://links.sgx.com/FileOpen/Unaudited...eID=787328

(10-10-2023, 09:37 AM)ksir Wrote: At price S$0.25, HLS has market cap of around S$128M.
Its net cash is about S$129M.
There are also below assets:
* Securities (listed equities & corp bonds) S$26M.
* JV S$25M (the fully sold Antares condo project).

* Development Properties S$78M.
* Contract Assets S$40M.
* Trade receivables S$11M.

Total Liabilities S$100M.
If we knock off the Development Properties, Contract Assets & Receivables with Total Liabilites, we left with S$180M as compared to S$128M market cap.
Good enough Margin of Safety?

On going projects mainly won on Nov-2021 (S$320M) & Jan-2022 (S$454M).
Those are won after Covid stabilised and hopefully they have sufficient time to factor in the higher labor cost.

<vested>

Continuing from the above, based on its 2023 full year result:
https://links.sgx.com/1.0.0/corporate-an...b22ae67b54

* Dividend is upgraded to 0.015 (from 0.01), 6% yield, 
* Net Cash S$132M
* Securities (listed equities & corp bonds) S$29M.
* JV S$14M 
* Development Properties S$71M.
* Contract Assets S$50M.
* Trade receivables S$17M.

Total Liabilities S$82M.
If we knock off the Development Properties, Contract Assets & Receivables with Total Liabilites and just considering the Net Cash + Securities, we end up with S$160M as compared to S$141M market cap.
Good enough Margin of Safety?

Order book stands at S$708M, 410% of the FY2023 Civic Engineering revenue of S$170M. They have at least 4 years to "pick"/rebuild the orderbook with projects that as quoted below from Management comment:
"to bid for upcoming infrastructure projects which the group has expertise and competitive edge" 

Property Development's gross margin seems to be unexpectedly high in FY2023.
Not sure if it's due to Shine@TuasSouth, as quoted from Management comment:
"The Group’s industrial building project, Shine@TuasSouth, has sold 34% and leased 63% of the total units to date. The interest for industrial building units has picked up since early 2023. The management will continue to promote the sales of units."

<vested>

HLS@28cts

@Squirrel, nice to see you coming back and you latest blog post on HLS is a really a G.E.M. (link to HLS - undervalued or value trap?)

Thank you.

Looking back, the star for HLS was aligned nicely sometime in late 2021 and I made my initial purchase soon after.

Actually, HLS was mooted from one of my colleagues, sometime in 2017.

I recalled vividly on that day, we were inside a MRT and was just chit-chating in general. Of course, me being me, our chit-chating turns into an investment/opportunity discovery session.

Again, I recalled vividly that our conversation was comparing HLS with OKP. Since this is a HLS track, I shall not says about OKP. 

We went thru HLS business in particularly, Construction projects.

How it started was - this colleague of mine, mentioned that he is very familiar with Singapore Road, especially bus routes.

I then says that HLS constructs MRT stations which worth $200m.  He said that Maxwell MRT station is rather challenging.  It's deep underground and required high technical skills.  Oh... ok.

I then says that HLS also has a Changi Airport project which is worth $1b.  He said blar blar blar.

After that, he took out his handphone and googled HLS projects.

He then rattled off numerous HLS projects which I don't even recall/remember and he just tell me what he think about where is this project and what are the interesting landscape in this areas. 

A rather unique person with such a strange hobby. 

Of course, I didn't do anything because the stars were not aligned at that time.
Gratitude.

Enjoy:

(23-02-2024, 11:38 AM)Squirrel Wrote: It has been a while, but I have finally gotten down to writing another piece. And this time the focus is on Hock Lian Seng Group!

The Group has released results yesterday, and it all looks rather prudent and promising at the same time. Hock Lian Seng has been continuously profitable since it was listed on the SGX in 2009, and that includes during the covid period! So I believe prudent is the right word to use.

With a market capitalisation at S$138m (S$0.27 per share), the company holds S$132m and that balance is expected to continue to rise. Would a special dividend be in store for FY2024? In the meantime, I am going to enjoy the 1.5 cents per share dividend that was announced which gives it a 5.6% dividend yield.

https://www.thesquirrelsdrey.com/post/ho...value-trap

https://links.sgx.com/FileOpen/Unaudited...eID=787328

Hi Squirrel,
Thanks for the write up. Special dividends are special and so i thought it would be nice to specially look at potentially how special history could repeat itself specially.

(1) The base scenario: There are many extended family members holding individual stakes in the business. As only Towkay Chua and his architect daughter SP Chua hold executive positions in the company (at least >100k annual salary kind that warrants a disclosure), the rest of family primarily benefits from dividends. As VB dzwm87 mentioned - can't keep family starving.

(2) The base assumption: Excess capital will be returned as special dividends, when there is excess capital. I will attempt to define excess capital as below:

Net Cash = Cash - debt
Working Capital = development property + receivables/contract assets - advances payables - contract liabilities
Excess Capital = Net Cash - working capital

Taking FY15, the sandwiched year between FY14 and FY16, where both years enjoyed good dividends.

FY15 ('000)
Net Cash = 141,353
Working Capital = 12,593
Excess Capital = 141,353 - 12,593 = 128,760

FY23 ('000)
Net Cash = 132,464
Working Capital = 77,648
Excess Capital = 132,464 - 77,648 = 54,816

So it seems like FY23 is still 129mil - 55mil ~ 74mil away from hitting "special levels"

(3) How to make it special: So how does Towkay Chua close the 74mil gap? The gap is broken down into the component parts below:

+40mil contract assets (not favorable)
+25mil development properties (not favorable)
-20mil less cash (not favorable)
+10mil payables (favorable)

In essence, Towkay Chua needs to (1) send out its invoices and then collect the money from LTA, and (2) have the same amount of sales for Shine@TuasSouth in FY24, as has happened in FY23.

P.S This is purely my imagination of how Towkay Chua may think.

(19-03-2024, 12:56 PM)weijian Wrote:

(23-02-2024, 11:38 AM)Squirrel Wrote: It has been a while, but I have finally gotten down to writing another piece. And this time the focus is on Hock Lian Seng Group!

The Group has released results yesterday, and it all looks rather prudent and promising at the same time. Hock Lian Seng has been continuously profitable since it was listed on the SGX in 2009, and that includes during the covid period! So I believe prudent is the right word to use.

With a market capitalisation at S$138m (S$0.27 per share), the company holds S$132m and that balance is expected to continue to rise. Would a special dividend be in store for FY2024? In the meantime, I am going to enjoy the 1.5 cents per share dividend that was announced which gives it a 5.6% dividend yield.

https://www.thesquirrelsdrey.com/post/ho...value-trap

https://links.sgx.com/FileOpen/Unaudited...eID=787328

Hi Squirrel,
Thanks for the write up. Special dividends are special and so i thought it would be nice to specially look at potentially how special history could repeat itself specially.

(1) The base scenario: There are many extended family members holding individual stakes in the business. As only Towkay Chua and his architect daughter SP Chua hold executive positions in the company (at least >100k annual salary kind that warrants a disclosure), the rest of family primarily benefits from dividends. As VB dzwm87 mentioned - can't keep family starving.

(2) The base assumption: Excess capital will be returned as special dividends, when there is excess capital. I will attempt to define excess capital as below:

Net Cash = Cash - debt
Working Capital = development property + receivables/contract assets - advances payables - contract liabilities
Excess Capital = Net Cash - working capital

Taking FY15, the sandwiched year between FY14 and FY16, where both years enjoyed good dividends.

FY15 ('000)
Net Cash = 141,353
Working Capital = 12,593
Excess Capital = 141,353 - 12,593 = 128,760

FY23 ('000)
Net Cash = 132,464
Working Capital = 77,648
Excess Capital = 132,464 - 77,648 = 54,816

So it seems like FY23 is still 129mil - 55mil ~ 74mil away from hitting "special levels"

(3) How to make it special: So how does Towkay Chua close the 74mil gap? The gap is broken down into the component parts below:

+40mil contract assets (not favorable)
+25mil development properties (not favorable)
-20mil less cash (not favorable)
+10mil payables (favorable)

In essence, Towkay Chua needs to (1) send out its invoices and then collect the money from LTA, and (2) have the same amount of sales for Shine@TuasSouth in FY24, as has happened in FY23.

P.S This is purely my imagination of how Towkay Chua may think.

Hi weijian,

I am afraid I don't follow your line of thought. I don't know why you are subtracting your definition of "working capital" (development property + receivables/contract assets - advances payables - contract liabilities) from net cash to arrive at excess capital. Just to not confuse with the general definition of working capital, let me call this "working capital" definition as near-cash amount. I assume that excess capital means what the company can afford to give out and is not required for future company expenditure. By your definition above, the higher in contract assets and receivables the company holds would mean the less cash a company would be able to hand out in dividends? That doesn't sound intuitive? I would imagine the amount of "near-cash" is cyclical and goes up and down? The more "near-cash" on the balance sheet would imply that some of it would likely be realised as cash in the near future?

Let me cite a simple example below.

Company ABC on average for the last 10 years has $40m of "near-cash" amounts.

Company ABC at point X in time:
Net Cash: $100m
"near-cash": $10m

Company ABC at point Y in time:
Net Cash: $100m
"near-cash": $70m

by your definition

Point X in time will have $90m of excess capital to distribute
Point Y in time will have $30m of excess capital to distribute

That's counter-intuitive to me. At point Y in time, the company definitely has more capacity to distribute cash than point X in time. As management of the company at time X, I would set aside more cash for future expenditure.

Since we are on the topic of how much excess capital the company can return to investors, I would like to propose a slight alteration to weijian's methodology in looking at it.

FY2016 was the year of the big special dividend. The dividend would be paid out in FY2017. Thus let's assume that the amount of operational capital (assumed as level of capital the management is comfortable with to ensure smooth operations, including buffer for fluctuations). Please don't mind me tweaking some of your definitions.

Net Cash = Cash - debt
"near-cash" = development property + receivables/contract assets - advances payables - contract liabilities
"operational capital" = Net Cash + "operational capital"

FY2016 (before payout)
Net Cash = $205,971
"near-cash" = $13,538
"operational capital" = $219,509

FY2017 (after payout)
Net Cash = $132,081
"near-cash" = $27,245
"operational capital" = $159,326

FY2023
Net Cash = $132,464
"near-cash" = $75,928 (I got slightly different number from yours maybe due to excluding other receivables)
"operational capital" = $208,392

As you can see above, it's pretty clear that HLS was comfortable to pay out $60m in cash ($63,747k to be exact) as special dividends for FY2016 (actual payment happens in calendar year 2017) to reach a lower amount of available capital in FY2017 that the management see as sufficient for day to day use and to buffer for bidding for projects and risks etc. If we see it that way, we can see that FY2023's level of "operational capital" is already significantly above the comfortable level the management requires in 2017, and approaching FY2016 level. Perhaps including inflation, management would require more buffer, or management would like to see more "near-cash" being converted to real cash (getting money from LTA like what weijian mentioned) before doling out the money. In any case, I am speculating that the level would be reached in FY2024. Time will tell.

There are other parts that could be adjusted to the definitions (eg. short term securities) but I would just leave this out since this illustration was plainly because I couldn't follow weijian's train of thought.

(20-03-2024, 05:32 PM)Squirrel Wrote: Hi weijian,

I am afraid I don't follow your line of thought. I don't know why you are subtracting your definition of "working capital" (development property + receivables/contract assets - advances payables - contract liabilities) from net cash to arrive at excess capital. Just to not confuse with the general definition of working capital, let me call this "working capital" definition as near-cash amount. I assume that excess capital means what the company can afford to give out and is not required for future company expenditure. By your definition above, the higher in contract assets and receivables the company holds would mean the less cash a company would be able to hand out in dividends? That doesn't sound intuitive? I would imagine the amount of "near-cash" is cyclical and goes up and down? The more "near-cash" on the balance sheet would imply that some of it would likely be realised as cash in the near future?

Let me cite a simple example below.

Company ABC on average for the last 10 years has $40m of "near-cash" amounts.

Company ABC at point X in time:
Net Cash: $100m
"near-cash": $10m

Company ABC at point Y in time:
Net Cash: $100m
"near-cash": $70m

by your definition

Point X in time will have $90m of excess capital to distribute
Point Y in time will have $30m of excess capital to distribute

That's counter-intuitive to me. At point Y in time, the company definitely has more capacity to distribute cash than point X in time. As management of the company at time X, I would set aside more cash for future expenditure.

hi Squirrel,

For your example of company ABC, it simply has more capital at point Y (100+70mil = 170mil), compared to point X (100+10 = 110mil). So, of course it can distribute more, isn't it? So this example of yours assume Company ABC has earned +60mil at point Y and hence it should distribute 60mil more than at point X. But with some much capital tied up at point Y, would it dare to do so?

So if we use your example, the apple-to-apple comparison would be to add a point Z that has same capital at point Y.

Company ABC at point X in time
Net Cash: $100m
"near-cash": $10m

Company ABC at point Y in time
Net Cash: $100m
"near-cash": $70m

Company ABC at point Z in time (same total capital at point Y)
Net Cash: $160m
"near-cash": $10m

You are right that at point X, they have to keep the cash if there is a 70mil working capital project coming. But between point Y and Z, which has a better chance to give out the cash if there is another 70mil working capital project coming?

P.S. actually using ratio might be less confusing here but my main reason for using the minus formula was to allow me to accentuate the differences and be able to numerically break down them down into parts (which a ratio cannot do) like I did in my post. In essence, this is how I would think of it if I were operating a business myself - gauging the working capital requirements vs the cash I have.

(20-03-2024, 09:13 PM)weijian Wrote:

(20-03-2024, 05:32 PM)Squirrel Wrote: Hi weijian,

I am afraid I don't follow your line of thought. I don't know why you are subtracting your definition of "working capital" (development property + receivables/contract assets - advances payables - contract liabilities) from net cash to arrive at excess capital. Just to not confuse with the general definition of working capital, let me call this "working capital" definition as near-cash amount. I assume that excess capital means what the company can afford to give out and is not required for future company expenditure. By your definition above, the higher in contract assets and receivables the company holds would mean the less cash a company would be able to hand out in dividends? That doesn't sound intuitive? I would imagine the amount of "near-cash" is cyclical and goes up and down? The more "near-cash" on the balance sheet would imply that some of it would likely be realised as cash in the near future?

Let me cite a simple example below.

Company ABC on average for the last 10 years has $40m of "near-cash" amounts.

Company ABC at point X in time:
Net Cash: $100m
"near-cash": $10m

Company ABC at point Y in time:
Net Cash: $100m
"near-cash": $70m

by your definition

Point X in time will have $90m of excess capital to distribute
Point Y in time will have $30m of excess capital to distribute

That's counter-intuitive to me. At point Y in time, the company definitely has more capacity to distribute cash than point X in time. As management of the company at time X, I would set aside more cash for future expenditure.

hi Squirrel,

For your example of company ABC, it simply has more capital at point Y (100+70mil = 170mil), compared to point X (100+10 = 110mil). So, of course it can distribute more, isn't it? So this example of yours assume Company ABC has earned +60mil at point Y and hence it should distribute 60mil more than at point X. But with some much capital tied up at point Y, would it dare to do so?

So if we use your example, the apple-to-apple comparison would be to add a point Z that has same capital at point Y.

Company ABC at point X in time
Net Cash: $100m
"near-cash": $10m

Company ABC at point Y in time
Net Cash: $100m
"near-cash": $70m

Company ABC at point Z in time (same total capital at point Y)
Net Cash: $160m
"near-cash": $10m

You are right that at point X, they have to keep the cash if there is a 70mil working capital project coming. But between point Y and Z, which has a better chance to give out the cash if there is another 70mil working capital project coming?

P.S. actually using ratio might be less confusing here but my main reason for using the minus formula was to allow me to accentuate the differences and be able to numerically break down them down into parts (which a ratio cannot do) like I did in my post. In essence, this is how I would think of it if I were operating a business myself - gauging the working capital requirements vs the cash I have.

Hi weijian,

I am using the examples at point X and Y simply to illustrate why I cannot follow your train of thought.

Under your definition mentioned in your post which I will replicate here

===========================
Net Cash = Cash - debt
Working Capital = development property + receivables/contract assets - advances payables - contract liabilities
Excess Capital = Net Cash - working capital
===========================

Point X in time
Excess Capital = $100m - $10m = $90m

Point Y in time
Excess Capital = $100m - $70m = $30m

The above scenarios are substituting numbers like algebra and the outcome doesn't make sense to me. Like you said Point Y have higher capital, so of course it can distribute more. However, your formula states the exact opposite and states that Point Y in time has less excess capital!

(20-03-2024, 11:42 PM)Squirrel Wrote: Hi weijian,

I am using the examples at point X and Y simply to illustrate why I cannot follow your train of thought.

Under your definition mentioned in your post which I will replicate here

===========================
Net Cash = Cash - debt
Working Capital = development property + receivables/contract assets - advances payables - contract liabilities
Excess Capital = Net Cash - working capital
===========================

Point X in time
Excess Capital = $100m - $10m = $90m

Point Y in time
Excess Capital = $100m - $70m = $30m

The above scenarios are substituting numbers like algebra and the outcome doesn't make sense to me. Like you said Point Y have higher capital, so of course it can distribute more. However, your formula states the exact opposite and states that Point Y in time has less excess capital!

Hi Squirrel,

Let me try to clarify further again. The context I used for "excess capital" is not about how much total capital there is, but accounting for how much capital is tied up in "unsold properties, un-invoiced work, uncollected invoices etc".

My "algebraic formula" is only a way to allow me to quantify the parts down on what needs to further happen to facilitate Towkay Chua's return of capital by end FY24. If I put on my thinking cap as a business owner and with the quantification, more Shine@TuasSouth units need to be sold in FY24 (at least as much as had happened in FY23) and also LTA needs to ensure it accept/pay invoices on time. If these things don't happen, and HLS then wins more projects, then the odds are lower for a special payout in FY24, IMHO.

Of course, this is only 1 consideration. Another thing to note is that the special dividends were given when Spore construction started going into "stagflation" in 2nd half 2010s. The situation then is abeit different with now in 2024 as BCA is flagging a new elevated level of construction demand in the coming few years. It is anyone's guess how much cash needs to be retained to give Towkay the ability to increase their order books.

P.S. If my imagination doesn't make sense, then so be it

Hi weijian,

It’s all good. Everyone is entitled to their own methodology and views, which is what makes a market. I was trying to understand your approach because it sounds like you are thinking that there is some way to go to meet that excess capital for distributing a special dividend to shareholders, whereas I feel that the company is on the cusp of doing it.

But I believe both of us agree that the company is well capitalised and it’s a matter of time.