Hai Leck

(10-11-2010, 06:09 PM)dydx Wrote: You are quite right on the cash numbers, provided of course the company does not spend the existing cash reserve and the additional cash coming in from the warrants, on some fixed assets or new investments which do not contribute to earnings any sooner. If and when this happens, you will have to drastically adjust your assumptions on cash per share and "Adjusted PER, nett of cash".

Hai Leck just got listed no too longer ago, and does not yet have a proven generous dividend payment track record. Besides, management will likely spend at least a portion of the existing cash reserve and of the additional cash coming in from the warrants, on expansion projects. So is it wise for us to attach full value on the cash in the company? Probably not.

The coming conversion of the 130.0m warrants - and the resulting dilution impact on EPS and earnings for existing shareholders - does add a dynamic factor and a degree of uncertainty to investing into Hai Leck or holding on to the counter in the next 12 months.

A few more things.

1. The controlling shareholders collectively hold about 78% of the company issued capital. If dilution from the conversion of outstanding warrants is of any bad, they will be the ones hardest hit. Most importantly, they hold the key to whether or not such dilution will occur.

2. The conversion price of $0.26 is the same as the IPO price. The warrants were not issued with a "discount", at least to the IPO price. Together with the $0.01 that was already paid in for taking up the warrants, minority shareholders should not feel that they have been shortchanged.

3. Although Hai Leck has a short history as a listed company, its Chairman and CEO were sitting on the board of Hiap Seng Engineering before the former disposed a substantial stake in the latter prior to the IPO. I think it will not be too farfetched to assume the continuation of the dividend "habit". The dividend payments for the first few years after listing do not support the rejection of such assumption.

4. Capex. Scaffolding traditionally contributes one third of Hai Leck revenue. It is also the most capital intensive because of the need to be equipped with scaffolds and equipment. Insulation and Maintenance run on labour and expenses. If the company sticks to its core, the capex to watch will be on the scaffolds. Indeed, in the prospectus, they indicated to use only $2m (out of the $22m IPO proceeds) for scaffolds but they added $18m of it instead. The good news is that scaffold depreciates on the book real fast , as fast as writing it to zero as soon as the project ends. In essence, project based capex should be considered as project expense. An experienced manager simply prices that in during the project bid. If the scaffolds can be reused or survived after 5 years (max depreciation), then it will be a bonus. The risk of over committing in excess scaffolding capex is very much manageable.

(10-11-2010, 10:05 PM)cif5000 Wrote:

(10-11-2010, 06:09 PM)dydx Wrote: You are quite right on the cash numbers, provided of course the company does not spend the existing cash reserve and the additional cash coming in from the warrants, on some fixed assets or new investments which do not contribute to earnings any sooner. If and when this happens, you will have to drastically adjust your assumptions on cash per share and "Adjusted PER, nett of cash".

Hai Leck just got listed no too longer ago, and does not yet have a proven generous dividend payment track record. Besides, management will likely spend at least a portion of the existing cash reserve and of the additional cash coming in from the warrants, on expansion projects. So is it wise for us to attach full value on the cash in the company? Probably not.

The coming conversion of the 130.0m warrants - and the resulting dilution impact on EPS and earnings for existing shareholders - does add a dynamic factor and a degree of uncertainty to investing into Hai Leck or holding on to the counter in the next 12 months.

A few more things.

1. The controlling shareholders collectively hold about 78% of the company issued capital. If dilution from the conversion of outstanding warrants is of any bad, they will be the ones hardest hit. Most importantly, they hold the key to whether or not such dilution will occur.

2. The conversion price of $0.26 is the same as the IPO price. The warrants were not issued with a "discount", at least to the IPO price. Together with the $0.01 that was already paid in for taking up the warrants, minority shareholders should not feel that they have been shortchanged.

3. Although Hai Leck has a short history as a listed company, its Chairman and CEO were sitting on the board of Hiap Seng Engineering before the former disposed a substantial stake in the latter prior to the IPO. I think it will not be too farfetched to assume the continuation of the dividend "habit". The dividend payments for the first few years after listing do not support the rejection of such assumption.

4. Capex. Scaffolding traditionally contributes one third of Hai Leck revenue. It is also the most capital intensive because of the need to be equipped with scaffolds and equipment. Insulation and Maintenance run on labour and expenses. If the company sticks to its core, the capex to watch will be on the scaffolds. Indeed, in the prospectus, they indicated to use only $2m (out of the $22m IPO proceeds) for scaffolds but they added $18m of it instead. The good news is that scaffold depreciates on the book real fast , as fast as writing it to zero as soon as the project ends. In essence, project based capex should be considered as project expense. An experienced manager simply prices that in during the project bid. If the scaffolds can be reused or survived after 5 years (max depreciation), then it will be a bonus. The risk of over committing in excess scaffolding capex is very much manageable.

Well said cif5000, many thanks for your in-depth analysis .

(10-11-2010, 10:05 PM)cif5000 Wrote: 1. The controlling shareholders collectively hold about 78% of the company issued capital. If dilution from the conversion of outstanding warrants is of any bad, they will be the ones hardest hit. Most importantly, they hold the key to whether or not such dilution will occur.

I think the controlling shareholders may be concerned and should be thinking hard about how and when to come up with the extra money to convert their chunks of warrants. It may well turn out that they may choose to convert only a portion of their warrants, and assuming most of the minority warrantholders choose to convert theirs, the controlling shareholders may end up getting diluted instead. They may not mind this, as they now own a massive 78%, and the cost of their shares is presumably very low.

(10-11-2010, 10:05 PM)cif5000 Wrote: 2. The conversion price of $0.26 is the same as the IPO price. The warrants were not issued with a "discount", at least to the IPO price. Together with the $0.01 that was already paid in for taking up the warrants, minority shareholders should not feel that they have been shortchanged.

I feel minority shareholders should be asking: For the negative dilutive impact on EPS and costs to shareholders (including the $0.26/warrant) of the warrants issue, why have it in the first place?? Putting in more capital to create a bigger cash reserve, and having a bigger share base, are not good reasons!

(10-11-2010, 10:05 PM)cif5000 Wrote: 4. Capex. Scaffolding traditionally contributes one third of Hai Leck revenue. It is also the most capital intensive because of the need to be equipped with scaffolds and equipment. Insulation and Maintenance run on labour and expenses. If the company sticks to its core, the capex to watch will be on the scaffolds. Indeed, in the prospectus, they indicated to use only $2m (out of the $22m IPO proceeds) for scaffolds but they added $18m of it instead. The good news is that scaffold depreciates on the book real fast , as fast as writing it to zero as soon as the project ends. In essence, project based capex should be considered as project expense. An experienced manager simply prices that in during the project bid. If the scaffolds can be reused or survived after 5 years (max depreciation), then it will be a bonus. The risk of over committing in excess scaffolding capex is very much manageable.

Please note that per its existing accounting policies, Hai Leck depreciates its scaffolding materials (apart from those designated for specific projects) over 20 years on a straight-line basis. Please refer to p40 of the latest FY10 AR.....
http://info.sgx.com/listprosp.nsf/07aed3...a00178bfc/$FILE/Hai%20Leck%20AR%202010_full.pdf

As no project will last 20 years, we should assume that going forward there will be time gaps between projects that some of the scaffolds bought in FY09 will not be employed and still depreciation expenses have to be incurred on them. We must not forget that in typical scaffolding contracts, there is the usual one-month rent-free periods before the start and after the end of the official contract period.

We should not assume that project profitability in the O&G space will remain good forever, as the oil majors now have many choices (Rotary, Hiap Seng, PEC, etc.), and they will 'squeeze' as they now can see the profits of their service providers. Take a look at the rather disappointing Q2-FY11 (ending 31Mar11) results of Hiap Seng just released......
http://info.sgx.com/webcoranncatth.nsf/V...700180E4B/$file/HSELQ2FY2011_announcement.pdf?openelement
The BIG SQUEEZE by Shell, Exxon Mobil and the likes, may have already started!

I use back the same points.

1. To fully convert ALL warrants requires $33.8m. If the controlling shareholders have not squandered away their dividend resulting from the divestment of Hiap Seng, they should have sufficient money.

2. One advantage that I can think of for such an arrangement is that the controlling shareholders have in effect produced a "share placement scheme" for themselves (and the minority). If business opportunities arise, before the warrant expiration, and require them to quickly pump in the capital, they can do so with the conversion of warrants into shares. That is with the assumption that they want to maintain their stake and do not wish to take up debts. Minority shareholders are offered the same opportunities. In fact, those who had subscribed to the warrant offer are now sitting on a neat profit , $0.01 cost versus $0.05 market value.

4. Depreciation for scaffolding materials is 20% (i.e. 5 years) and not 20 years.

After going thru the AR and the financials of HaiLeck ,feel cif5000's analysis were pragmatic and insightful. Well done.

1Q result out;
EPS: 1 cent
NAV:$26.5 cents.

Activities update by Chairman;

"Over recent months, we have been busy with a number of ongoing infrastructure construction projects in the Oil & Gas and Petrochemicals sectors, with some that have been completed and delivered to our clients, and some that are nearing the end," said Mr Cheng.

On the maintenance front, the Company continues to work on a number of contracts from Oil & Gas majors.

"Looking at the business from a longer term perspective, we remain confident about the Company's business fundamentals. In recent months, we have been actively prospecting in the region as well as in the Middle East with the intent of growing our geographic footprints to enhance long term profitability and growth prospects; we will focus on converting these opportunities into firm contracts to build up our order book, going forward," added Mr Cheng.

(13-11-2010, 08:30 PM)valueinvestor Wrote: 1Q result out;
EPS: 1 cent
NAV:$26.5 cents.

Activities update by Chairman;

"Over recent months, we have been busy with a number of ongoing infrastructure construction projects in the Oil & Gas and Petrochemicals sectors, with some that have been completed and delivered to our clients, and some that are nearing the end," said Mr Cheng.

On the maintenance front, the Company continues to work on a number of contracts from Oil & Gas majors.

"Looking at the business from a longer term perspective, we remain confident about the Company's business fundamentals. In recent months, we have been actively prospecting in the region as well as in the Middle East with the intent of growing our geographic footprints to enhance long term profitability and growth prospects; we will focus on converting these opportunities into firm contracts to build up our order book, going forward," added Mr Cheng.

During the AGM, the management hinted the huge war chest of cash was readily to be deployed for these expansionary plans, money must be ready for business, business can't wait .
Believe there will be announcement from HL , any time from now .

This is one of the most illiquid counters on SGX. Free float 16-17% only.
If fundamentals are good and possitive news keep coming , then market will price it right very fast due to its small base.

what I see from the warrant is:

the warrant was issued for the uncertain future opportunity. the management and controlling shareholders did not want to commit the fund too early for potentially nothing. from the expiry of the warrant, what I can see is that the possibility is quite low. if the potential never materializes, the management and controlling shareholders may just let the warrants expire given that the company has enough cash for general working capital.

The original cost of the warrant was 1 cent , to convert ,0.01+0.26= S$0.27.
HL should be able to maintain its EPS of 0.04/share for the next FY. If the DPU is only one cent , the retained EPS will be 0.03.
The present NTA is 25.5, plus the retained EPS of 3 cent , the NTA will be 28.5.
It is highly unlikely the major shareholders will not convert the warrant into ordinary share if the share price is around 0.29.