TTJ Holdings

[smallcaps]

Actually now its total of 130m shares as deemed interest which are/were probably used as collateral for loans. 50m is the recent increase.

Sent from my Redmi Note 2 using Tapatalk

[Hayden]

Hi valuebuddies. First took notice of TTJ when I realized CityFarmer changed his signature from "monitoring" to "vested".
Contributing some pointers in addition to those discussed previously.

The unusual huge cash holding is causing a public misunderstanding between its value and business. And when there is misunderstanding, there is often value. Let's not forget that during the low liquidity days of GFC, TTJ had to take up bank loan at interest rate as high as 6.2% and probably one of the reasons behind their cash hoarding (keep in mind that the management is cost-conscious and may not like taking up debt and paying interest charges).

1. ROE. Excluding portion of net cash that was retained to capture future opportunity, ROE would be higher than reflected on book even without contribution from dormitory business unit.
   
2. Re Gzbel on PE ratio. The funny thing about PE ratio is that the valuation get distorted with unusual high net cash or net debt. EV to EBITDA or EV to FCF would be a better option to evaluate TTJ. Let's see how high net cash distort market perceived valuation. TTJ $0.29 market price is made up of underlying valuation $0.12 and floor price $0.17 (net cash). If today, the management chose to return half the net cash $0.085 and assuming the market price rise in accordance to this dividend and subsequently falls back to $0.29 market price (similar scenario took place during the 8c dividend payout period though recurrence not guaranteed), the new component is now made up of $0.205 and $0.085 (net cash). Excluding earnings from dorm business, average EPS is about $0.03 in accordance with Gzbel's calculation. The market perceived PE ratio remain unchanged at 9.67x, but the underlying valuation has increased from 4x to 6.8x. Of course such scenario is not guaranteed but I am just trying to show how misleading PE ratio is. 
   

Re Cityfarmer. Another plan that did not materialize was the plan to enter property development announced in year 2011? Circular distributed, EGM held, but no news nor explanation given thereafter. But consider that blessings in disguise as the government came in with cooling measures.

Re BlueKelah on his view on construction demand in sg. For the past 3 decades, the construction demands have been supported by (1) government infrastructure development during recession/ slowdown and (2) private sector during expansion and it is safe to assume that government will continue to adopt such approach to drive the economy forward. This is a very rational approach as during recession, labour cost & material cost are lower and justified the spending of taxpayer money. It is during this period that we face fiscal deficit as government embark on infrastructure development to counter the drop in consumer spending and business investment. It had been the case for the past and will likely be the approach for the future of singapore.

How does this affect TTJ? Cyclical changes in construction demand hurt short term earnings but do not reduce a company intrinsic value. Unless Singapore choose to stop their infrastructure development and stagnant on their productivity, we will then face secular changes which lead to reduce earnings and also reduce intrinsic value. I prefer to adopt the former opinion.

You are right to highlight the limitation in TTJ expansion and even the management motivation to expand. In my opinion, TTJ is an above average business but not a very "wonderful" business as it is unable to grow. Peter Lynch once said that "a company with 20% growth selling at 20 times PE is better 10% growth selling at 10 times PE." thereby emphasizing the importance of sustainable growth. Still, TTJ is a profitable business in a dull and no growth industry that is less susceptible to technological disruption.


(vested, highly biased)

[Hayden]

DCF valuation focusing only on structural steel business.

• The 5yrs average operating cash flow was $10.9mil as retrieved from segmental info
  
• Subtract it with 5yrs average depreciation of $1.66mil. Why did I choose the depreciation expense over the capex? First because it excludes the growth capex and second because their capex has been low in recent years. A company can delay their capex for few years, but eventually, they will need to invest in new equipment.
  
• So there's $9.29mil in average free cash flow.
  
• Using DCF, discount rate of 15% (we may have differing perspectives on this figure but its up to your preference), a conservative constant growth rate of 3% equivalent to that of historical inflation give us a valuation of $79.7mil or $0.23 per share
  
• The earnings from remaining dorm lease would contribute another $0.035 to its valuation. Though very unlikely, a bonus of estimated $0.078 should the lease be extended by another 3 years.
  
• Comparing that to current EV of $40mil or $0.12 per share, it is undervalued with ample safety margin
  
• Can a business like TTJ that is profitable, producing reasonable margins and ROE with low capex goes for 4.3x EV/free cash flow? Yes, if it is in the inefficient part of the markets where it is illiquid, not covered by analyst nor own by institutional funds and surrounded by the uncertainty of its expiring dorm lease.
  

Management. Mixed reviews.
Good that the management has been rational on keeping debt low, cost efficient and remuneration tied to performance.
Bad that the management has not been candid to explain about their failure to expand oversea. Nor do they explain minor details such as the $2.2mil inventories written off in FY2015. And management could be facing difficulty retaining talents/ key executives.

Possible catalysts:

1. undervaluation is simply a catalyst by itself
   
2. additional cash flow from dorm lease extension
   
3. probability of one-off gain from sale of dorm should BCA have no intention of redeveloping that land and the dorm will be operated by another company. At what price? I have no idea. Terusan Lodge will be fully depreciated and fair value at zero when lease end.
   
4. removal of foreign labours levy and supply curb to facilitate infrastructure development and support of SME during current tough time
   

Business risks:

1. Management ability to retain talents. Few key executives have quit in recent years.
   
2. Fatality or safety matters resulting to stop work restriction and future loss of contracts. No past incidents but I ranked it as my worst case scenario as you lose your track records, trust from customers and downgrading from government. 
   

All said, I still see a margin of safety. While the share performance till end of the year may be in doubt, the risk for permanent loss of capital for long term holders appears extremely low.

Differing views appreciated. If I am wrong, I prefer to know it early.


(Vested)

[brattzz]

Just a thought,

1) Continue cash distribution dividends for 2016, keeping enough cash for gov projects only...
2) Sale of TTJ to competitor as Boss is of retirement age and rich enough already..

[smallcaps]

Ya still waiting to see wat Mr Teo wans to do: Borrow money to buyout or for other purpose like personal investments. I suppose if its others then would need to make a withdrawal through dividends...

[dydx]

Just a thought,

1) Continue cash distribution dividends for 2016, keeping enough cash for gov projects only...
2) Sale of TTJ to competitor as Boss is of retirement age and rich enough already..

TTJ has paid a final dividend every year since listing on SGX. Assuming continued profitability in the group's 2 well-established businesses - structural steel and dormitory - it is reasonable to believe that such dividend payments will continue. Since Chairman/MD Teo used all of the funds from last FY's $0.08/share jumbo dividend to buy up TTJ shares, I guess there is a high possibility that another big final dividend for this FY16 (ending 31Jul16) could be made.

I doubt very much Chairman/MD Teo is about to retire soon, as he appears to be in good health. Therefore, it is reasonable to expect him to manage TTJ's businesses as well as before, and he may even add to them new related and profitable activities.

[CityFarmer]

DCF valuation focusing only on structural steel business.

• The 5yrs average operating cash flow was $10.9mil as retrieved from segmental info
  
• Subtract it with 5yrs average depreciation of $1.66mil. Why did I choose the depreciation expense over the capex? First because it excludes the growth capex and second because their capex has been low in recent years. A company can delay their capex for few years, but eventually, they will need to invest in new equipment.
  
• So there's $9.29mil in average free cash flow.
  
• Using DCF, discount rate of 15% (we may have differing perspectives on this figure but its up to your preference), a conservative constant growth rate of 3% equivalent to that of historical inflation give us a valuation of $79.7mil or $0.23 per share
  
• The earnings from remaining dorm lease would contribute another $0.035 to its valuation. Though very unlikely, a bonus of estimated $0.078 should the lease be extended by another 3 years.
  
• Comparing that to current EV of $40mil or $0.12 per share, it is undervalued with ample safety margin
  
• Can a business like TTJ that is profitable, producing reasonable margins and ROE with low capex goes for 4.3x EV/free cash flow? Yes, if it is in the inefficient part of the markets where it is illiquid, not covered by analyst nor own by institutional funds and surrounded by the uncertainty of its expiring dorm lease.

Based on the working, the EV/FCF is $0.12/($0.23+$0.035)? instead of the 4.3x? The result is <0.6x, right?

Which part I have interpreted wrongly?

[smallcaps]

DCF valuation focusing only on structural steel business.

• The 5yrs average operating cash flow was $10.9mil as retrieved from segmental info
  
• Subtract it with 5yrs average depreciation of $1.66mil. Why did I choose the depreciation expense over the capex? First because it excludes the growth capex and second because their capex has been low in recent years. A company can delay their capex for few years, but eventually, they will need to invest in new equipment.
  
• So there's $9.29mil in average free cash flow.
  
• Using DCF, discount rate of 15% (we may have differing perspectives on this figure but its up to your preference), a conservative constant growth rate of 3% equivalent to that of historical inflation give us a valuation of $79.7mil or $0.23 per share
  
• The earnings from remaining dorm lease would contribute another $0.035 to its valuation. Though very unlikely, a bonus of estimated $0.078 should the lease be extended by another 3 years.
  
• Comparing that to current EV of $40mil or $0.12 per share, it is undervalued with ample safety margin
  
• Can a business like TTJ that is profitable, producing reasonable margins and ROE with low capex goes for 4.3x EV/free cash flow? Yes, if it is in the inefficient part of the markets where it is illiquid, not covered by analyst nor own by institutional funds and surrounded by the uncertainty of its expiring dorm lease.

Based on the working, the EV/FCF is $0.12/($0.23+$0.035)? instead of the 4.3x? The result is <0.6x, right?

Which part I have interpreted wrongly?

EV/FCF = 40 mil / 9.29 mil = 4.3x

The 0.6x more like EMOS (Enterprise Margin of Safety)

[smallcaps]

...

1. ...
   
2. Re Gzbel on PE ratio. The funny thing about PE ratio is that the valuation get distorted with unusual high net cash or net debt. EV to EBITDA or EV to FCF would be a better option to evaluate TTJ. Let's see how high net cash distort market perceived valuation. TTJ $0.29 market price is made up of underlying valuation $0.12 and floor price $0.17 (net cash). If today, the management chose to return half the net cash $0.085 and assuming the market price rise in accordance to this dividend and subsequently falls back to $0.29 market price (similar scenario took place during the 8c dividend payout period though recurrence not guaranteed), the new component is now made up of $0.205 and $0.085 (net cash). Excluding earnings from dorm business, average EPS is about $0.03 in accordance with Gzbel's calculation. The market perceived PE ratio remain unchanged at 9.67x, but the underlying valuation has increased from 4x to 6.8x. Of course such scenario is not guaranteed but I am just trying to show how misleading PE ratio is. 
   

...

IMO, EV can be misleading too (a.k.a Value Trap).

Maybe sometime like this would be better for investors like us who can't buy the whole company outright:

MEV (Minority Enterprise Value) = EV + (Cash that would probably be hoarded forever or simply lost somehow)

Luckily things seems to be in our favor from the recent events that can be observed...

[CityFarmer]

EV/FCF = 40 mil / 9.29 mil = 4.3x

The 0.6x more like EMOS (Enterprise Margin of Safety)

Yes, silly me for the confusion.

One extreme of shareholder structure, an orphan company i.e. no major shareholder exist, is undesirable. The other extreme is an oversize major shareholder, in this case >80%, should be also undesirable for OPMI. A discount on valuation should be applied, IMO

(vested)