Techcomp (Holdings)

[RBM]

Happy Easter to all forummers.

Thank you for your 14th March posting regarding Techcomp Musicwhiz – my apologies for taking so long to respond – not been 100% lately.

Before offering answers to your pertinent questions, and in the interests of transparency for VB forummers, I’ll be upfront that a) I’m vested in Techcomp’s Singapore shares and b) a narrative on another “investor forum” has criticised some receivables level related concerns that I registered in an earlier VB Techcomp posting, asserting that I don’t understand Techcomp’s business.

In respect of the latter point – may be the other “investor forum” is correct regarding my know-how………. but I’m sticking to my guns. While I’m vested, I believe there are some question-marks related to Techcomp, particularly regarding its escalating receivables levels and its acquisition track-record. I believe if Techcomp’s Management successfully addresses these concerns then it will have a beneficial impact on the share price.

If a listed company is perfect with absolutely no issues whatsoever, then everyone will rush to invest, won’t they? I believe share investment decisions are based on judgement of the balance between the positives and negatives of a counter. On balance, I invested in Techcomp and I’m not selling now, as I believe the Singapore share price has upside. I believe the other “investor forum” I refer to above has a habit of falling into the trap of only seeing and citing the positives in the counters it is egging-on (e.g. Hu An Cable, Eratat and…...Techcomp), IMHO. Of my favoured holdings such as Kingsmen, BBR, Zagro, LHT and Lee Kim Tah, each have issues ………….. but I’m vested since I believe their positives outweigh their negatives and I have confidence in the capabilities and capacities of their management teams to successfully address the issues that really matter.

Specifically, the facts are a) a review of Techcomp’s own Financial Reports will bring out a rising level of receivables, and Techcomp’s own management point to China when talking to how they have honed their focus for bringing such levels to heel, and b) the “jury is still (very much) out” regarding the success of Techcomp’s European acquisitions of 2-3 years ago – on its own admission, management has had to undertake restructuring of the acquired businesses and only this year are the acquired European business expected to breakeven on an operating basis. I am pleased and relieved that Techcomp’s management is focusing on the PRC and emerging Asian markets for future growth, rather than on European markets.

Coming to the points you raised regarding Techcomp Musicwhiz (you had quite a number of questions which I have tried to put into four buckets) ………………….

A. Some key financial and profitability indicators of Techcomp for the last nine years:

________________2002___2003___2004___2005___2006___2007___2008___2009___2010___2011
Revenue (US$ Mln)_22.9___38.8____41.9___44.6____54.8___65.8____81.0 __104.8__127.1___154.1
Net Profit (US$ Mln)__1.7____3.0____3.7____3.7_____4.4____6.0_____3.1____7.4____10.5____8.4
EPS# (US$ Cents)__0.84___1.48____1.83___1.83____2.15___2.87____1.33___3.17___4.52____3.61
Dividend (S$ Cts)________________0.95+__1.00____1.20___1.20____1.20___1.20___1.00*__~1.00
Dividend POR (%)_____________________________________22.8____39.8_________________22.3

I’ve gotten all the numbers in the above tabulation from Techcomp’s Annual Report’s (which are generally decent reads by the way - although I missed a comparison with previous years financial performance in the recently distributed 2011 Annual Report) and their recent FY2011 SGX disclosure. Regarding my annotations in the above tabulation (which I realise does not have the best presentation!!)......
# In calculating EPS, I have corrected for both the 2010 1-for-2 bonus share issue and the 2004 Restructuring Exercise – I hope I have made the conversions correctly.
+ Dividends for 2004 and before were in US$.
* Dividend per share decreased in 2010 (vs. 2009) due to a 1 for 2 bonus share issue in 2010; in reality the dividend was actually a year-on-year increase. Page 29 of Techcomp’s 2004 annual report also describes the 2004 “Re-structuring Exercise” (Techcomp’s words) better than I can; this explains the 2004 vs. 2003 NIAT/EPS ratio change.
- I will insert additional Dividend POR coverage data in due course - bear with me please.

I believe the numbers in the above tabulation demonstrate that Techcomp has delivered a strong and sustained track-record of underlying profit and revenue growth over the last ten years. During the period 2002 thru 2010 inclusive, Techcomp’s revenue stream grew at a CAGR of just under 24% and its net profit increased by a ~ 26% CAGR. As mentioned in my earlier posting, when the costs for the 2011 dual listing exercise and a 2010 divestment are taken into account, 2011 was actually Techcomp’s record year of underlying profitability. Only in 2008 (aka Lehmans Crisis) did Techcomp’s profitability see a marked downturn. I’ll rest my case on Techcomp’s strong growth track record!

B. Dividend payments have been consistent, although I would accept that the yields are nothing to write home about. Techcomp pay a moderate dividend – currently it is yielding 2.3% - of course, I would like that to be higher – and as the above table shows, Techcomp have the coverage to pay more.

C. MW - You enquired about my comparison with Techcomp’s peers in the manufacture of Scientific Equipment (SE). Techcomp’s Singapore shares are currently trading at a P/E of ~ 9.2. Rather than reading my ramblings on peer comparisons, I quote below from page’s 2 and 3 of a 15th March 2012 Yamaichi Securities Analyst Report…….. admittedly this is aimed at holders of Techcomp's Hong Kong shares but 99% of this (quite readable) report applies for Singapore based shareholders

QUOTE
As there is no ready comparable in the same business listed in Hong Kong, we compare the Company with the peers of manufacturers and distributors of science equipment mainly in the U.S. By looking at about 1800 securities in industrial sector listed in Hong Kong and the U.S., we have observed a 40% sector premium on FY12F PER for the peer group in the U.S. over Hong Kong peers. The top 10 SE producers (mainly in the U.S.) and other peers with similar market cap are trading at 15.2x and 16.9x FY12F PER, respectively. In our model, we take the top 10 SE producers into the peer comparison, as they are highly representative to the valuation of the SE sector and more conservative compared to the peer with similar market cap.

We set the target PER of Techcomp in line with the peer average with a sector discount. Although the market cap of Techcomp is small compared with the top 10 producers, the Company has relatively higher growth potential due to the high exposure in emerging markets, especially the PRC, achieving strong top-line growth. We expect the Company to have 20.7% CAGR for top-line with 20.7% 3-year CAGR with improving profit margins.
UNQUOTE

I am of the position that Techcomp’s current P/E multiple has upside - in P/E terms it is trading at the bottom of the pack.

D. The reality remains that Techcomp’s Hong Kong share price is trading at a premium to its Singapore share price – but this has narrowed considerably since my last posting in mid March – alas, this is due more to the Hong Kong price falling rather than the Singapore price rising. At Thursday’s closing, the Singapore share price was S$ 0.43 as compared to the Hong Kong share price closing of HK$ 2.77, equivalent to ~ S$ 0.45 or about 4.1/2% higher than the Singapore price. Yamaichi contends this differential is due to tighter liquidity of the Hong Kong counter. I believe the reality, whether we like it or not, is that counters will tend to get a higher multiple on the HKEX as compared to the SGX.

Apologies for yet another epistle.......... and my feeble attempts to include a legible tabulation!!

Vested (in the Singapore shares),

[Musicwhiz]

Hi RBM,

Many thanks for your detailed tabulation and explanation. Always very pleasing for me to read a detailed reply and supported with so many nice numbers and facts. It's a nice hobby I have to be able to enjoy numbers!

Was re-looking at the questions I asked the last time. From what you've posted, I have no doubts that Techcomp (TC) has been growing revenues steadily every year for the last 10 years. That's indeed very impressive, but net profit seems a little more patchy but as you said, the listing expenses in FY 2011 would have depressed profit such that reported net profit is "distorted" by this. Otherwise, it would look like it was growing nice and steadily. Noted net margins around 2002-2004 period were close to 10% but this has since dipped somewhat - any particular reason for this?

For me, EPS is not so important but ROE and ROIC are more important metrics. How has ROE and more importantly ROIC performed for TC over the years? I always find it interesting to study the interplay between debt and returns, as debt usually serves to magnify returns (as was the case with companies like Ezra and Swiber which can claim high ROE as their equity base remained low while it geared up significantly). A glance at TC's latest Balance Sheet (as at Dec 31, 2011) showed debts of around US$30.94 million (most of which are ST), with cash of just US$8.5 million, meaning debt exceeded cash by more than 3x. DE ratio stands at close to 50%. The Company seems to have geared up quite a bit compared to FY 2010 - and I assume this was for the recent M&A activities. This could dramatically affect their ROIC if the acquisitions are not earnings-accretive to offset the higher finance costs.

Understandably, debt is much cheaper currently than issuing equity, but would be interesting to enquire on their borrowing cost. Noted too that of the US$30.9 million debt, more than half are Trust Receipt loans and almost US$26.5 million of it was unsecured (Note 13).

Another area which I had not asked about was R&D - TC has to invest in R&D to ensure shorter product turnaround time and faster time to market. Would you happen to know their capital commitments in respect of R&D? Reading the MD&A gives me the impression that TC is looking out for more M&A and JV which I feel may entail more fund-raising or gearing in future - any thoughts on this?

With regards to Receivables, they are a concern due to their cash flow effect on the CFS using the "Indirect" method, leading me to conclude that OCF for FY 2011 was very poor (it was a negative US$13.8m). Though capex requirements seem low from a FY 2010 standpoint, it would be very interesting indeed to tabulate the FCF generation for Techcomp for the last 10 years and also their capex requirements, minus out any M&A which may distort the numbers. From this, you can see if the business is capital intensive and requires a lot of cash funding - a dollar of profit is only worth a lot if it takes much less than a dollar of capital (equity) to generate it.

The dividend track record does show that the Company can consistently pay out dividends, and payout ratio around 30% does show conservatism in retaining the bulk of profits for reinvestment. But moving forward, if capex requirements are much higher and more cash needs to be generated through financing rather than operations, one might have to review TC's dividend policy and dividend payout capabilities.

Sorry if I ended up long-winded. Haha.

[RBM]

Following upon my messages of a week or so ago on this VB Techcomp thread, the differential between Techcomp's Singapore and Hong Kong share prices is now less than 5%, with both prices dropping over the last five trading sessions. At Friday's close, Techcomp's share price was S$ 0.41 in Singapore (SGX) and the equivalent of S$ 0.43 in Hong Kong (HKEX) - I believe the difference is close to being within the noise.

Techcomp now trades on a P/E of ~ 9 and has a (low) dividend yield of ~ 2.4%.

I have also corrected a couple of somewhat sloppy but fortunately inconsequential typo's in my posting of 7th April.

Vested

[RBM]

The gap between Techcomp's Singapore share price and its Hong Kong share price has widened again. The Friday close on the HKEX was the equivalent of S$ 0.455, more than 12% higher than the close on the SGX, at S$ 0.405. The Singapore share price corresponds to a P/E of just over 8. Liquidity of the Singapore counter over the last week has improved from a very low level earlier in Q2.

Techcomp's results are seasonal, and the ~ US$ 1.5 Mln loss recorded in Q1 2012 was typical of past first quarter results, in fact slightly improved on the Q1 2011 performance. Looking forward, it is clear that much of Techcomp's performance will be driven by its ability to profitably grow in China and Asia.

Vested

[RBM]

Some interesting movements in Techcomp's share prices today.

- The Singapore share price increased by more than 7% to close at S$ 0.450 per share. Volume was high by Techcomp (Singapore) standards; some 150,000 shares were traded during today's SGX session.

- However, the increase in the price of the Singapore counter was not as marked as the increase in Techcomp's Hong Kong share price - during today's HKEX session, Techcomp's share price rose by just over 11.5% to close at HK$ 3.29, a 52-week high ........... this equates to S$ 0.531 at the latest mid-point exchange rate. Traded volume in Hong Kong was a hefty 410,000 shares.

- So while Techcomp's Singapore shares have done well lately, the reality is that Techcomp's Hong Kong Shares now trade at a whopping ~ 18% premium to the Singapore shares. Me thinks that there must be room for further appreciation of the Singapore counter ....... may be Techcomp's forthcoming Q2 results (traditionally a stronger quarter for Techcomp) will help propel this. Difficult to believe that such a share price differential is sustainable over the longer term. There have been no Techcomp disclosures during the last 3.1/2 weeks ........ so, other than expectations around Q2 results, it is not clear what is driving the recent positive share price movements.

Vested............ happy............. and perplexed.

[RBM]

Following on from my message of last Friday evening below, FYI....... Techcomp's Singapore share price closed down ~ 2% today, while on the HKEX, the Hong Kong share price closed down ~ 6%. Although the differential between the two share prices has narrowed, the Hong Kong counter still commands a double digit % premium over the Singapore share price.

Vested,

Some interesting movements in Techcomp's share prices today.

- The Singapore share price increased by more than 7% to close at S$ 0.450 per share. Volume was high by Techcomp (Singapore) standards; some 150,000 shares were traded during today's SGX session.

- However, the increase in the price of the Singapore counter was not as marked as the increase in Techcomp's Hong Kong share price - during today's HKEX session, Techcomp's share price rose by just over 11.5% to close at HK$ 3.29, a 52-week high ........... this equates to S$ 0.531 at the latest mid-point exchange rate. Traded volume in Hong Kong was a hefty 410,000 shares.

- So while Techcomp's Singapore shares have done well lately, the reality is that Techcomp's Hong Kong Shares now trade at a whopping ~ 18% premium to the Singapore shares. Me thinks that there must be room for further appreciation of the Singapore counter ....... may be Techcomp's forthcoming Q2 results (traditionally a stronger quarter for Techcomp) will help propel this. Difficult to believe that such a share price differential is sustainable over the longer term. There have been no Techcomp disclosures during the last 3.1/2 weeks ........ so, other than expectations around Q2 results, it is not clear what is driving the recent positive share price movements.

Vested............ happy............. and perplexed.

[RBM]

A worthwhile read on the "earlyish" results of the dual listing of Techcomp from NextInsight's web site ........ quite some tabulated data and interesting conclusions ......................

http://www.nextinsight.net/index.php/sto...r-techcomp

The norm for the results of dual listing exercises does not generally seem positive.

Techcomp's Singapore shares closed at S$ 0.440 on Friday evening - up > 11% since mid June. Techcomp's Hong Kong shares closed at HK$ 3.20 or the equivalent of S$ 0.512 at the current S$:HK$ mid exchange rate, a premium of > 16% on the Singapore share price. Incidentally Techcomp's Hong Kong share price has increased 27% during the last three months.

Vested (in the Singapore Shares)

[RBM]

Seriously interesting to note that substantial (and long standing) shareholder Kabouter have added - materially so - to their Techcomp shareholding in the past few days. There has been heavy trading activity of the Hong Kong shares (not nearly so much for the Singapore shares) so I suspect Kabouter have been buying at least some of their additional holdings on the HKEX.

Disclosure anouncements are still coming onto the SGX website as I am hitting the ivories ......... but it looks like Kabouter entities now own in excess of 12%.

Will be interesting to see what happens to Techcomp's share price when the markets open next week. This is a positive development for Techcomp's existing shareholders.

Vested (in the Singapore shares)

[Musicwhiz]

Hmm, RBM, interesting that there is activity in Techcomp's shares. Just wonder if you know whether the shares are transferable between HKEX and SGX? If yes there could be an arbitrage opportunity, considering there is a price difference once you convert the currencies.

Is there any reason why this SSH is increasing its stake? Was there a recent announcement by the Company, or any other updates?

Thanks!

(Not Vested)

[RBM]

Thanks for your posting of earlier this evening MW,

Taking each of your questions in turn...........

Just wonder if you know whether the shares are transferable between HKEX and SGX? If yes there could be an arbitrage opportunity, considering there is a price difference once you convert the currencies.

Answer: Yes, Techcomp's shares are transferable between the Singapore and Hong Kong exchanges. It costs and it takes time (weeks not days) - but I understand more than a few Techcomp investors have already followed this route and have been able to reap some of the premium of the Hong Kong share price over the Singapore share price.

Is there any reason why this SSH is increasing its stake?

Answer: None stated. Kabouter is a Chicago based investment company (http://kaboutermgmt.com) who initiated their Techcomp holding in 2007, building it up thereafter.

Was there a recent announcement by the Company, or any other updates?

Answer: Three disclosures were made by Techcomp to the SGX earlier this evening, in the standard form. I have not seen any other updates.

Was I predicting this? No!

Additional Note Added on Sunday 19th August 2012: At Friday's closing, Techcomp's Singapore shares closed at S$ 0.460 per share - whereas on the HKEX, Techcomp's Hong Kong shares closed at HK$ 2.920, or S$ 0.472 at the mid-exchange rate - the differential/premium has closed considerably and I would suggest it is now "in the noise".

Vested

Hmm, RBM, interesting that there is activity in Techcomp's shares. Just wonder if you know whether the shares are transferable between HKEX and SGX? If yes there could be an arbitrage opportunity, considering there is a price difference once you convert the currencies.

Is there any reason why this SSH is increasing its stake? Was there a recent announcement by the Company, or any other updates?

Thanks!

(Not Vested)